Tag: Tyler Durden (page 1 of 2)

Weekend Reading: You Have Been Warned

Authored by Lance Roberts via RealInvestmentAdvice.com,

Investors aren’t paying attention.

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week.

On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.

Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.

This deflationary pressure further showed up on Thursday with a -0.3 decline in Export prices. (Exports make up about 40% of corporate profits)

For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above.

When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally. If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings.

The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs. The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t.

More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers. The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000, debt was able to support a rising standard of living, which is no longer the case currently.

With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.

If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

Don’t say you weren’t warned.

In the meantime, here is your weekend reading list.


Trump, Economy & Fed


VIDEO – It’s A Turkey Market


Markets


Research / Interesting Reads


“The only function of economic forecasting is to make astrology look respectable.” – Sir John Templeton

http://WarMachines.com

Weekend Reading: It’s The Debt, Stupid

Authored by Lance Roberts via RealInvestmentAdvice.com,

As I noted last Friday, the recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

 

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.”

I then followed this up this past Monday with “3 Myths Of Tax Cuts” stating:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.

 

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.”

On Thursday, Fitch confirmed the same in their dismal report on the reality of what the effect of the “tax cut”

“Such reform would deliver a modest and temporary spur to growth, already reflected in growth forecasts of 2.5% for 2018. However, it will lead to wider fiscal deficits and add significantly to US government debt. As such, Fitch has revised up its medium-term debt forecast. US federal debt was 77% of GDP for this fiscal year. Fitch believes the tax package will be revenue negative, even under generous assumptions about its growth impact. Under a realistic scenario of tax cuts and macro conditions, the federal deficit will reach 4% of GDP by next year, and the US debt/GDP ratio would rise to 120% of GDP by 2027.

 

Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate. The cost of capital is already low and corporate profits are elevated. In addition, the effective tax rate paid by large corporations is well below the existing statutory rate.

 

Fitch expects US economic growth to peak at 2.5% in 2018 before falling back to 2.2% in 2019. The US will enter the next downturn with a general government “structural deficit” (subtracting the impact of the economic cycle) larger than any other ‘AAA’ sovereign, leaving the US more exposed to a downturn than other similarly rated sovereigns. The US is the most indebted ‘AAA’ country and it is running the loosest fiscal stance. Long-term debt dynamics are also more negative than those of peers, with health and social security spending commitments set to rise over the next decade. “

There is nothing “good” in any of the statements above,  and drive to the same conclusions I discussed last Monday.

You can’t solve a debt problem, by issuing more debt. 

While Congressional members continue campaigning that the “tax plan” would give an $1182 tax cut to most Americans, and boost wages by $4000, such has never been the case. A recent study by the Economic Policy Institute suggested the same in a recent study:

“Cutting corporate tax rate cuts would do very little to boost employment generation. In fact, cutting corporate tax rates ranks as the least effective form of fiscal support for employment generation, since corporate tax cuts primarily benefit rich households—who are less likely to increase their consumption than low- or middle-income households when they receive tax cuts.”

This is a point I have made previously. Corporate tax rate cuts will unambiguously redistribute post-tax income regressively. The corporate income tax is a progressive tax, with the top 1% of households accounting for 47% of the corporate income tax.

Don’t be bamboozled by the idea that tax cuts and reforms will lead to sustained economic growth. There is simply NO evidence that such is the case over the long-term.

However, there is plenty of evidence to suggest that further costly reforms and run-away budgets will lead to an increase of the current national debt and the ongoing low-growth economy that has plagued the U.S. since the turn of the century.

In other words….“it’s the debt, stupid.”

In the meantime, here is your weekend reading list.


Trump, Economy & Fed

 


VIDEO – Tax Cut/Reform Discussion (Real Investment News)


Markets


Research / Interesting Reads


“In investing, what is comfortable is rarely profitable.” – Rob Arnott

http://WarMachines.com

Growth In China Is Slowing: What Does It Mean For Commodity Prices

By Gordon Johnson of Axiom Capital

CHINA MACRO ANALYSIS: Growth in China is Slowing… Will it Continue, and What, if Any, will be the Impact to Commodity Prices?

While steel prices have firmed to start this week on rumors that steel mill production cuts, particularly in China’s biggest steel-producing city Tangshan, have failed to meet targeted levels (link), we see this as temporary – steel prices are following iron ore and coking coal prices higher to start the week, driven, we believe, by speculators; because, if more steel supply is coming, the exact opposite should be occurring (i.e., steel prices should be falling).

So why are we so concerned about cooling credit growth in China? Well, with economic growth slowing in China, the question is will it continue into 2018, and will it lead to bulk commodity prices deflating? In short, due mainly, we believe, to slower overall credit growth vs. prior mini-bubbles (i.e., 2009, 2013, and 2016), a material slowdown in economic growth or asset values in China’s market is inevitable – barring another massive ramp-up in credit issuance (which doesn’t appear to be “in the cards” near-term) – it’s simply math.

Stated differently, mathematically explaining why slowing credit growth in China is a big deal, we note that if an economy is 50 and credit is 100, and the economy grows 10%/year, while credit grows 30%/year:

  • At the end of year 1, the economy is 55 and credit is 130. Total demand is 55 + 30 (i.e., new credit created) = 85;
  • At the end of year 2, the economy is 60.5 and credit is 169. Total demand is 60.5 + 39 = 99.5, up 17.1%;
  • At the end of year 3, the economy is 66.6 and credit is 219.7. Total demand is 66.6 + 50.7 = 117.3, up 17.8%;
  • At the end of year 4, the economy is 73.2 and credit is 285.6. Total demand is 73.2 + 65.9 = 139.1, up 18.6%.

However, similar to what we’ve seen recently in China, if credit growth were to slow from 30% in years 1-4 to 15% in year 5, at the end of year 5 the economy would be 88.6 and credit would sit at 328.5. That’s total demand of 80.5 + 42.8 (i.e., the change in credit), or 123.4, representing a -11.3% fall Y/Y. Thus, as detailed in Exhibit 2 below, where China’s credit growth has slowed from +20% Y/Y as of 6/30/13 to +12.3% Y/Y as of 9/30/17, we see a material weakening in China’s total demand as fated – we feel the inevitable reckoning here has been delayed by pre-19th Party Congress distortions, which effectively “outlawed” select economic indicators from falling, as well as certain companies from reporting bad results, in an successful effort by President Xi to consolidate his power (via both government mandate and fiscal/monetary stimulus) – yes, you heard that right  – link.

In summary, as observed by Tyler Durden, and supported by our work, thanks to ~$4 trillion (at least) in credit creation in 2017 – more than the rest of the developed world combined – China has been the proverbial (and debt-funded) "growth" dynamo behind the recent period of "coordinated global growth". Yet, with the pace of credit growth slowing throughout 2017, and likely to slow further looking ahead, we see outsized risk to both Chinese bulk commodity demand, and, by a process of elimination, global bulk commodity prices. 

ANALYSIS: Chinese GDP was recently reported for 3Q17; and, as many expected, at +6.8% Y/Y (Exhibit 1), it was spot on Consensus estimates. However, we contend that the recent slowing in China’s credit growth (Exhibit 2), a sizeable risk to the country’s continued economic growth, is a byproduct of both: (a) more debt in China going toward rolling existing credits and recapitalizing interest vs. finding its way into the real estate/construction markets (we estimate that China’s banking system boasts ~$40tn in debt at present, up from just ~$3tn in 2006 [i.e., +1,233%] – against just ~$2tn in equity and ~$1tn in liquid reserves; by comparison, at the height of the global financial crisis [“GFC”], the US banking system had ~$16.5tn in debt and ~$1tn in equity), and (b) the Chinese government’s crack-down on runaway credit issuance (link).

In short, while not a Consensus call at present, we believe the slowing in China’s Y/Y credit growth (Exhibit 2), more recently, likely means a further slowing in a number of economic indicators crucial to commodity prices – China’s October data deluge, due out in 1-to-2 weeks, we believe will be a negative catalyst for bulk metals prices. Furthermore, with: (a) Y/Y credit growth in China slowing (defined as Total Social Financing [“TSF”] + local government debt issuance), and as a result (b) the partials that contribute to GDP growth in China slowing, (c) deteriorating new construction start growth, (d) falling home price growth, (e) spiking debt costs, and (f) limited signs of cooling steel output, we see the rest of this year being defined by overall headwinds for global bulk commodity prices, driven by a government-coordinated slowing in China’s economy. As this unfolds, we expect a number of bulk commodity prices in China to move lower, spilling over into the global markets.

Yet, with our conversations with a number of pundits leading us to the conclusion that the Consensus among the “smart money” is that bulk commodity strength in emerging markets will continue, we see the potential for weaker commodity prices to surprise many, driving a number of metals and mining stocks lower. On this theme, our top short ideas consist of: FMG (SELL), CLF (SELL), X (SELL), GATX (SELL), TRN (SELL), and to a lesser degree RIO (SELL).  

Exhibit 1: China GDP – Quarterly Y/Y % Growth

Source: Bloomberg.

Exhibit 2: China Total Debt Growth vs. Commercial Bank Asset Growth, %Y/Y


Source: Peoples' Bank of China (PBOC), Axiom Capital Research.

A CLOSER LOOK AT GDP. When observing the partials that contribute to China’s GDP, while mixed, the data that support China’s construction economy were notably weaker. That is, as detailed below (Exhibit 3), for the month of September, fixed asset investment at +7.5% Y/Y was the weakest result since 12/31/99 (i.e., the height of the global financial crisis), followed by industrial production at +6.7%, which has remained subdued for some time, and finally retail sales at +10.3%, marking the only Y/Y “bright spot”. Furthermore, as detailed in Exhibit 4 below, in October, China’s manufacturing PMI tumbled from a 5-year high, due, we believe, to officials: (a) attempting to rein in debt, (b) clamping down on housing market speculation, and (c) focusing on pollution limits.

Exhibit 3: Growth Internals – China (FAI, Industrial Production, & Retail Sales)


Source: National Bureau of Statistics, Axiom Capital Research.

Exhibit 4: China PMI Readings Turn Down


Source: China Federation of Logistics and Purchasing, Axiom Capital Research.

WHAT ABOUT CREDIT/DEBT? According to our checks, at the 19th Party Congress a few weeks back (i.e., China’s once-in-every-five-year leadership transition), China’s top policymakers reiterated their efforts to contain excessive risk-taking in the financial system beyond 2017. More specifically, as detailed here, China leadership pointed to a continuation of efforts aimed at limiting debt, with hints of more regulation targeted at the interbank and wealth management product (“WMP”) arenas. And, as would be expected, on the back of these comments, the yield on three-year AAA notes in China – the most common grading for Chinese corporate debt – spiked higher, now up 20bps over just the past 3 weeks; stated differently, over the course of October, the cost of AAA-rated corporate debt in China increased 29bps, or the highest level in nearly 6 months. And, while the spread between these notes and government debt (i.e., the China 10yr bond) has recently climbed to 102bps (from just 86bps in early July), we are still a long way from this year’s peak of 134bps set in May.

In short, while we see an outright cash shortage as unlikely, with waning bond issuance (Exhibit 6) weighing on credit availability in China – following acute support in 2015 and 2016, incremental bond issuance in China has become a headwind to credit growth – we feel the “smart money” should be betting on a continued slowing in China’s economy over the near-term (although, based on discussions with a number of our clients recently, this is not Consensus thinking at present). This will likely invite weaker bulk commodity prices, which contrasts with the viewpoints from many of our peers at present.

Exhibit 5: China AAA Corporate Bond Yield – Moving Higher Since Congress Meeting


Source: Bloomberg.

Exhibit 6: China Bond Issuance – Sharp Downturn in 2017 (weighing on credit)


Source: Chinabond.com.

SO WHAT? Interestingly, in our discussions with investors over the past several weeks, the response we get to slowing Chinese data is simply… “so what, stocks don’t fall, and China growth will be strong next year”. While, in general, we acknowledge this sentiment is widespread, we notice a number of troubling trends that bear watching, including: (1) China construction new starts (i.e., China residential + commercial + office construction) slowed to +6.8% Y/Y YTD through September (marking the third consecutive month YTD new start growth has fallen Y/Y, and the weakest number in 10 months) – Exhibit 4, (2) completions fell to -1.9% YTD through September Y/Y, or the lowest level since mid-2015, and (3) space sold fell to +7.6% YTD through September Y/Y, or the lowest level since late 2016.

So what’s the big deal you ask? Well, when considering residential + commercial + office construction activity accounts for nearly half of China’s steel consumption, and China represents roughly half of the world’s steel consumption, with growth in these areas in China slowing, it seems that the outlook on global steel demand could be in much worse shape than many steel market pundits are predicting (i.e., Cleveland Cliffs [CLF; SELL], Steel Dynamics [STLD; NC] & Nucor [NUE; NC]).

Exhibit 7:  China Residential + Commercial + Office Construction Starts


Source: National Bureau of Statistics, Axiom Capital Research.

WHAT ABOUT HOME PRICES IN CHINA? In September, China home prices slowed further, rising +0.19% M/M (or the weakest growth since late 2015) and +6.40% Y/Y (or the weakest growth since mid-2015) – Exhibit 8. Furthermore, when looking at the data segmented by Tiered city, headwinds are being felt everywhere, with Tier 1 cities’ growth seemingly set to go negative Y/Y, Tier 2 not that far behind, and lower Tier cities now beginning to feel the pinch of falling prices – Exhibit 8. And, with the historical correlation seen in falling Y/Y home price growth in China and weakness in bulk commodity prices (Exhibit 9), we see the deterioration in China’s residential values as a harbinger of bulk commodity price deflation ahead. Caveat emptor.

Exhibit 8: Avg. Price Change of New Residential Buildings, by Tiered-Cities, %Y/Y (rhs)


Source: National Bureau of Statistics (NBS), Axiom Capital Research.

Exhibit 9: China New Home Price Growth Y/Y% vs. Iron Ore Port Inventories


Source: Bloomberg Intelligence, Shanghai SteelHome, Axiom Capital Management.

HOW DOES ONE GAUGE STEEL DEMAND IN CHINA? In September, amid environmental restrictions and weaker-than-expected demand, Chinese crude steel production was weak (up 5.3% Y/Y to 71.83mt, but down -3.7% M/M). Furthermore, when adjusting for induction furnace production of ~50mt/year (which was shut down in 2017, although these figures were not previously reported in China crude steel output, making 2017 production look higher than it actually is), crude steel production in China was roughly flat YTD through September 2017, and down Y/Y for the month of September 2017. Along these lines, after falling -4.2% M/M in July 2017, September 2017 CISA-member mill inventory is down -9.8% through 9/20/17 M/M (Exhibit 10). Thus, with inventory down M/M, as well as production, we believe demand is also likely suffering at present. That is, in our view, with both crude steel output unexpectedly down in September M/M, and CISA-member mill inventories also falling M/M in September (i.e., displaying, in our view, a lack of confidence by traders inside China on any sustained steel price increase over the near-term), we believe steel demand in China is currently in retreat (a potential negative for steel prices for the rest of this year).

Exhibit 10: CISA Members' Daily Crude Steel Output & Inventory (mn m.t.)


Note: Days inventory takes 10-day avg. member-mill inventories divided by 10-day daily mill output. Source: CISA, Mysteel, and Axiom Capital Research.

http://WarMachines.com

What would an anonymous, open-source, distributed-network, outlaw-gang look like?

“All my life, my heart has sought a thing I cannot name.”

Remembered line from a long-forgotten poem. 

– Hunter S. Thompson

 

This is the second article in a series about building a community of like-minded individuals, above and beyond what we already have, here, in the comments section of ZeroHedge.  We first began to assess this idea in terms of starting an Intentional Community in my article, “What if some like-minded people on ZeroHedge decided to create a new community?”  In this article and the comments, below, I hope we can continue the discussion, but with the focus instead being on a widely-distributed modern-day club, tribe or gang, like Freemasons or The Knights of Columbus, rather than a geographical location such as a rural town in Texas.  I have not given up on the idea of an Intentional Community.  In fact, there has been a tremendous amount of interest.  I am merely broadening the discussion as we assess the realities of the world we live in.

One of my favorite books on this topic is Hunter S. Thompson’s great work, Hell’s Angels: The Strange and Terrible Saga of the Outlaw Motorcycle Gangs.  If you have never read it, and have any interest at all in the concept of freedom, or you simply like reading a truly gifted author at the top of his game, then pick up a copy.  It is fantastic!

What do most widely-dispersed yet successfull, “fraternal orginizations,” have in common?  I think I have identified at least five things:

  1. Common beliefs
  2. Rights of initiation
  3. Means of identification
  4. Shared enemies
  5. Regular gatherings

Are there others?

The Hell’s Angels motorcycle club of the 60’s believed in chopped hawgs, initiated new members by pissing on them, were identified by their filthy Levis jacket with the sleeves cut off and the gang’s emblem on the back, fought absolutely anyone, “all on one,” and went on frequent runs where they would take over a bar or small town to party, fuck, and fight.

Do we ZeroHedgers have any, some, all, or none of these characteristics?  It is an important question to ask, and answer, if we really want to build a tight community, and I hope it will be the focus of the discussion in the comments section.  Could and should we develop some of these?  Maybe bring back CAPTCHA as initiation?  Tyler Durden tattoos, anyone?   Who is going to Marfa next year?  

I recall that I first wanted to be a member of a gang after watching The God Father movies as a kid.  Then, more recently, after reading Dmitry Orlov’s super book, The Five Stages of Collapse, especially the section on the Pashtuns. 

Political collapse as a steady state condition is described through the example of the Pashtuns—one of the world’s largest ethnic groups inhabiting parts of Afghanistan and Pakistan—whose code of honor (Pashtunwali, or the Pashtun Way) has allowed them to fight off (and, in some cases, help destroy) every empire that ever blundered into their habitat. (They are known to the consumers of Western propaganda primarily as the Taleban.) The Pashtuns allow us to clearly see the dividing line between a hierarchical, imperialist, collapse-bound society and that of a steady-state, entrenched, well-organized anarchy.

 

http://cluborlov.blogspot.com/p/the-five-stages-of-collapse.html

However, now, this desire for fraternity is very much tempered in me by Frederic Bastiat’s work, The Law.  In it, Bastiat argues that forced fraternity will always destroy liberty.  

The Seductive Lure of Socialism

 

Here I encounter the most popular fallacy of our times. It is not considered sufficient that the law should be just; it must be philanthropic. Nor is it sufficient that the law should guarantee to every citizen the free and inoffensive use of his faculties for physical, intellectual, and moral self-improvement. Instead, it is demanded that the law should directly extend welfare, education, and morality throughout the nation.

 

This is the seductive lure of socialism. And I repeat again: These two uses of the law are in direct contradiction to each other. We must choose between them. A citizen cannot at the same time be free and not free.

 

Enforced Fraternity Destroys Liberty

 

Mr. de Lamartine once wrote to me thusly: “Your doctrine is only the half of my program. You have stopped at liberty; I go on to fraternity.” I answered him: “The second half of your program will destroy the first.”

 

In fact, it is impossible for me to separate the word fraternity from the word voluntary. I cannot possibly understand how fraternity can be legally enforced without liberty being legally destroyed, and thus justice being legally trampled underfoot

 

Legal plunder has two roots: One of them, as I have said before, is in human greed; the other is in false philanthropy.

 

http://bastiat.org/en/the_law.html

 

If a tribe, gang, or group has liberty or freedom as the core common belief, like the Hell’s Angels in Thompson’s book seemed to have, and as I also believe we here on ZeroHedge do also have, is it really possible that the gang’s bylaws can be such that fraternity is not forced and will allow for individual liberty?  How might we structure our gang to assure that individual freedom will always trump brotherhood?  Is it as simple as allowing people to join and leave at will…or maybe just continuing our tradition of anonymity?   

“The first rule of Fight Club is you do not talk about Fight Club.”

What would an anonymous, open-source, distributed-network, outlaw-gang look like?  What would y’all want it to look like?

Do we have other core beliefs?  What are they?

Peace, prosperity, liberty, and love,

h_h

 

http://WarMachines.com

Weekend Reading: Will Tax Reform Deliver As Expected?

Authored by Lance Roberts via RealInvestmentAdvice.com,

As I noted last Friday, the recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

 

While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt.

 

Make no mistake – this is a defining moment for the Republican party. After years of passing balanced budgets and calling for fiscal responsibility, the GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform and failing to act on the pressing need to reform our largest entitlement programs.”

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.

As the CFRB concludes:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”

That is absolutely correct.

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.

However, the most likely unintended consequence of the proposed tax “cut” bill is that it will likely translate into a “hike” on middle class Americans. Take a look at the proposed tax bracket chart below.

Now, compare that with the actual breakdown of “who pays taxes.”

“The bottom 80% currently pay only about 18% of individual taxes with top 20% paying the rest. Furthermore, the bottom 40% currently have a NEGATIVE tax liability, and with the new tax plan cutting many of the deductions currently available for those in the bottom 40%, it could be the difference between a tax refund and actually paying taxes. “

“Of course, those in the top 20% of income earners are likely already consuming at a level with which they are satisfied. Therefore, a tax cut which delivers a few extra dollars to their bottom line, will likely have a negligible impact on their current levels of consumption.”

Given the newly designed tax brackets compresses individuals into fewer groups, it is quite likely a large chunk of the bottom 80% will likely experience either a hike or an inconsequential change. With the bottom 80% already consuming at max capacity, as discussed yesterday, a tax increase will hit the economy right where it hurts the most – in consumption expenditures. 

 “As the chart below shows, while savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of ‘disposable income’ for that same group. As a consequence, the inability to ‘save’ has continued.”

But while Congressional members were campaigning yesterday that the “tax plan” would give an $1182 tax cut to most Americans, it should not be forgotten that since they failed to “repeal and replace” the Affordable Care Act, any tax cut will only be diverted to offset a substantial rise in health care premiums in 2018.

Regardless, the proposed tax bill is just the first step.

Let the “horse trading” begin.

In the meantime, while we await the actual tax reform bill, here is your weekend reading list.


Trump, Economy & Fed


Markets


Research / Interesting Reads


“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations which do not meet these requirements are speculative.” – Benjamin Graham

http://WarMachines.com

The Biggest Ponzi In Human History

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

Here’s the story in a nutshell: Ultra low interest rates mark a shift away from people’s wealth residing in their savings and pension plans, and into to so-called wealth residing in their homes, which are bought with ever growing levels of debt. When interest rates rise, they will lose that so-called wealth.

It is grand theft auto on an unparalleled scale, and it’s a piece of genius, because while people are getting robbed in plain daylight, they actually think they’re winning. But as I wrote back in March of this year, home sales, and bubbles, are the only thing that keeps our economies humming.

We haven’t learned a thing since March, and we haven’t learned a thing for many years. People need a place to live, and they fall for the scheme hook line and sinker. Which in a way is a good thing because the economy would have been dead without that ignorance, but at the same time it’s not because it’s a temporary relief only and the end result will be all the more painful for it.

Whatever Yellen decides as per rates, or Draghi, it doesn’t really matter anymore, this sucker’s going down something awful. This is a global issue. Housing bubbles have been blown not only in the Anglosphere, though they are strong there, many other countries have them as well, Scandinavia, Netherlands, even Germany and France. It’s what ultra low rates do.

First, here’s what I said in March:

Our Economies Run On Housing Bubbles

What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.

 

Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It’s of course not just the banks that are kept alive, it’s the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.

 

That’s right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.

What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we’re doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.

 

This is today’s general economic dynamic. It’s exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it’s just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it’s paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.

Australia’s housing boom has been a thing of beauty, with New Zealand, especially Wellington and Auckland, following close behind. UBS now says the Oz bubble is over. Prices are still rising quite a bit though.

Fresh New Zealand PM Jacinda Ardern has announced new policies to deter foreign buyers from purchasing more property in the country. She may not like what that does to the country’s economy. Most new Zealanders can no longer afford property in major centers, and forcing prices down this way will expose many present owners to margin calls and foreclosures.

Moreover, because Australian banks own their New Zealand peers, if the Aussie boom is really gone, these banks are going to get hit so hard they’ll take down New Zealand with them. Close your eyes and put your fingers in your ears.

Australia’s Housing Boom Is ‘Officially Over’

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report. “This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

 

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates. The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

But perhaps a bigger, and more surprising, story is shaping up in the US. Looks like the American housing bubble is back with a vengeance. It’s always amusing to see claims that this is due to a lack of supply. The real problem is not supply, but artificially fabricated demand. Fabricated by low rates. Though the NAR is not known for its accuracy (it’s a PR firm), this Bloomberg piece is still relevant.

Homes Are Getting Snapped Up at the Fastest Pace in 30 Years

Homes are sitting on the market for the shortest time in 30 years, according to an annual report on homebuyers and sellers published today by the National Association of Realtors. The typical home spent just three weeks on the market, according to the report, which focused on about 8,000 homebuyers who purchased their home in the year ending in June. That was down from four weeks in the year ending June 2016 and 11 weeks in 2012, when the U.S. housing market was still reeling from the foreclosure crisis.

 

It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987. Buyers are snapping up homes quickly at a time when for-sale listings are in short supply, forcing them to compete. The number of available properties declined in September, according to NAR’s monthly report on existing home sales, marking the 28th consecutive month of year-on-year decline in inventory. In addition to moving fast, buyers also had to pony up to close the deal. 42% of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.

Where the fine bubble plan runs astray is in affordability. Ultra low rates can encourage sales, but that also raises prices, and if and when wages do not keep up there must be a point where you hit a wall. In the US that wall is fast approaching, suggests Tyler Durden:

US Homes Have Never Been More Unaffordable

Just under a year ago, US home prices finally surpassed their prior all time highs, one decade after the 2006 bubble… and haven’t looked back since. Which, all else equal, would be great news for America, where the bulk of middle-class wealth is not in the stock market contrary to conventional wisdom, but in its biggest, and most illiquid asset-cum-investment: one’s home. There is just one problem: while house prices are once again hitting new all time highs every month, household incomes have failed to keep up; in fact, as the Political Calculations blog shows, in the past two years there has been a distinct trend in home affordability, or lack thereof.

[..] starting in September 2015, the TTM average median new home sale price in the U.S. has been rising at an average rate of $906 per month. That’s the good news; the bad news is that in terms of affordability, the ratio of the trailing twelve month averages of median new home sale prices to median household income in the U.S. has risen to an all time high of 5.454, which following revisions in the data for new home sale prices, was recorded in July 2017. The initial value for September 2017 is 5.437. In other words, the median new home in the US has never been more unaffordable in terms of current income.

Never more unaffordable is a bold statement, but it’s probably correct. The graph only goes back as far as 1987, but that should do. Another angle on the same issue, also from Tyler:

Home Prices In All US Cities Grow Faster Than Wages… And Then There’s Seattle

US national home prices are up 6.07% YoY in August – the fastest rate since June 2014. We note this data is for August – before the hurricanes. Seattle (up 13.2%), Las Vegas (up 8.6%), and San Diego (up 7.8%) were the top three cities in terms of year-over-year price appreciation; all cities showed gains of at least 3%. Pushing home prices to a new record high…

 

“Home-price increases appear to be unstoppable,” David Blitzer, chairman of the S&P index committee, said in a statement. “At the same time, “measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking, and the Fed’s interest-rate hikes are likely to push mortgage rates higher over time, “removing a key factor supporting rising home prices,” he said.

There’s nothing anyone can do to raise wages, and while Yellen may claim not to understand why wages and inflation refuse to shine, it’s not that hard. Whatever is called a job these days is America didn’t use to be labeled that. We’ve all been conned into redefining what a job is, but the benefits and security and all that have still vanished. So what can people afford? They can’t even afford to rent anymore:

Renting In The US Has Never Been More Unaffordable

Over the weekend, when looking at the record high ratio in median new home sale prices to household incomes in the US, we concluded that US homes have never been more unaffordable for the average American. What about renting? Isn’t it intuitive that if buying a house has never been more expensive, then at least renting should be cheap(er). Unfortunately no, because not only is renting not cheap(er) in either absolute or relative terms, but when observed through the prism of the only thing that matters, namely disposable income, renting – just like buying a house – has never been more unaffordable.

Now remember what I said before: millions upon millions see their savings and pensions melt away before their eyes, while at the same time they are forced to spend ever more on housing costs. And when that scheme hits the wall, the economy will remember it’s alive only because of the housing bubble, and then croak. Leaving both renters and owners without jobs and eventually places to live.

A lovely example of where all this is heading comes from a Statista report on the Netherlands 3 weeks ago. The Dutch have tons of interest-only mortgages, just like the Australians, but you can take this graph as a general model for what many of not most countries that have low interest rates and thus housing bubbles, will face:

Heading Towards A Mortgage Crisis In The Netherlands?

Bank it or bust. In October 2017, the Dutch Central Bank (DNB) issued a warning on mortgages in the Netherlands. They claimed that almost 55% of the aggregate Dutch mortgage debt consisted of interest-only and investment-based mortgage loans, which did not involve any contractual repayments during the loan term. As prices in the the European housing, or residential real estate, market increase and mortgage rates decrease due the Asset Purchase Programme (APP) of the ECB, interest-only mortgages became more and more popular.

 

In addition, the Dutch government encouraged home ownership for many years, offering tax exemptions on Dutch mortgage payments alongside other benefits for homebuyers in the Netherlands. Consequently, the total mortgage debt from households in the Netherlands increased from approximately €548 billion in 2006 to approximately €664 billion in 2016. However, the debts must still be repaid when the interest-only mortgages expire.

 

The DNB stated there could be a risk that the households in question may not have the means to repay their debts before or when their loans expire, risking a new mortgage crisis. Lenders, they say, must actively alert customers to this risk and help them find a suitable solution. Unfortunately, the value of mortgages in 2017 is forecasted to increase with approximately 3.9% compared to 2016.

The debt accumulation is insane. Combine that with the wholesale erosion of savings and pensions, and you have an economy with either a lot of foreclosures and homelessness in its future, or a bankrupt banking system. More people should, before purchasing property, be shown graphs like that. But that would kill the bubble scheme, wouldn’t it?

Is there a way out of this mess? Well, there is in theory. Just grow your economy, and your wages etc., by let’s say 6.8% per year for decades on end. Problem with that is it’s possible only in a country like China, and that only because whatever Beijing says the growth rate is, goes. But that doesn’t make it real. Still, it entices Chinese grandmas into buying apartments.

What Beijing doesn’t tell them, or us, is how much debt the grandmas have gone into by now to buy all those new nice and shiny apartments. But since stocks and bonds are still not their thing, it’s all they have. Property in China is all on red. In the US about one quarter of household wealth is in housing, in China it’s three quarters.

 

So no, there’s no way out. My best guess is the first country to deal with this in an aggressive manner will be the -relative- winner. All others are goners. The governments and politicians who’ve lured their people into this biggest Ponzi in human history will probably be long gone when the house comes down, and if they know what’s good for them will have moved to some street with no name in a land far away.

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Weekend Reading: Markets Love Central Banks – No Matter What They Do

Authored by Lance Roberts via RealInvestmentAdvice.com,

I discussed yesterday, the apparent “myth” of the Fed’s proposed “balance sheet reduction” program as the most recent analysis shows a $13.5 billion “reinvestment” into their balance sheet which has helped fuel the recent market advance.

But therein lies the potential “fatal flaw” of the “bullish logic.” 

At the September FOMC meeting, the Federal Reserve announced their latest decision which contained two primary components:

  1. No rate hike currently, although, further rate hikes are likely in the future, and;
  2. The beginning of the process to cease reinvestment of the Fed’s balance sheet. 

That announcement was notable for two reasons:

  1. The Fed did NOT hike rates because the underlying economic data, and, in particular, the inflation data, suggests the economy is too weak to absorb a further increase currently, and;
  2. The unwinding of the balance sheet is generally believed to be bullish for stocks. 

So, despite the clear evidence of the support for the markets provided by near zero-interest rate policy and trillions in monetary injection, it is believed that “unwinding” those supports will have “no effect” on the market. In other words, it doesn’t matter what the Fed does, it’s “bullish.”

The same is also believed to be the case for the European Central Bank and Mario Draghi who just announced yesterday that the ECB’s QE program will begin to be reduced by €30 Billion per month (down from €60 Billion). While this will continue the expansion of their balance sheet currently, the end of “QE,” as the markets have come to know it, is coming to an end.

Don’t misunderstand me, Central Banks are still very actively engaged in the support of the financial markets for the time being which keeps asset prices positively buoyed. However, with Central Banks now “tightening” monetary policy, the risk of a policy error has risen markedly. This is particularly the case when the financial markets insist on ignoring the knock-off effects of less liquidity.

Tax Reform With Complete Disregard

Yesterday, the House of Representatives passed the Senate-approved budget. This budget is an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

 

While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt.

 

Make no mistake – this is a defining moment for the Republican party. After years of passing balanced budgets and calling for fiscal responsibility, the GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform and failing to act on the pressing need to reform our largest entitlement programs.”

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.

As the CFRB concludes:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”

That is absolutely correct.

Here is your weekend reading list.


Trump, Economy & Fed


Markets


Research / Interesting Reads


“There have been three great inventions since the beginning of time: fire, the wheel, and Central Banking.Will Rogers

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Weekend Reading: Dow 24,000 By Christmas

Authored by Lance Roberts via RealInvestmentAdvice.com,

This past week, the Dow crested 23000 sending the networks into a “tizzy.” It took about 5-minutes of crossing that magical “round number,” before questions raised of how long before the markets cross 24,000, and 25,000.

The chart below shows the 1000-point milestones of the Dow going back to 2009. After a long break between 18,000 and 19,000 in 2015 through the election in 2016, the Dow has surged higher ticking off 4-more milestones in less than a year.

As I have shown previously, these late stage “melt-ups” are not uncommon. In fact, as shown below, it is something witnessed prior to every market peak previously. 

As I stated just recently:

“This past weekend, I discussed what appears to be the markets ongoing melt-up toward its inevitable conclusion. Of course, that move is supported by the last of the ‘holdouts’ that finally capitulate and take the plunge back into a market that ‘can seemingly never go down.’ But therein lies the danger.

 

‘However, it should be noted that despite the ‘hope’ of fiscal support for the markets, longer-term conditions are currently present that have led to rather sharp market reversions in the past. Regardless, the market is currently ignoring such realities as the belief ‘this time is different’ has become overwhelming pervasive.’”

With volatility crushed, and record short positions on the VIX, there will likely be an event at some point that leads to a massive reversal in the assessment of “risk” and an unwinding of the market.

However, such is not the case currently as even “small dips” are met with eager buyers which continues to reinforce the very dangerous lack of fear.

With more ETF’s currently available to investors than there are stocks to fill them, it is quite likely the demand ramp for ETF’s will continue to push the Dow higher into the end of the year.

Dow 24,000 by Christmas?

Don’t be surprised if it happens.

Just remember, all market melt-ups end just when things look their brightest.

Here’s your reading list to for the weekend.


Trump, Economy & Fed


Markets


Research / Interesting Reads


“A bear market returns capital to those who it rightly belongs to.Ian McAvity

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Weekend Reading: $7 Trillion To Manipulate Prices

Authoreed by Lance Roberts via RealInvestmentAdvice.com,

As the stock market continues to press new highs, the level of optimism climbs with it. I discussed yesterday Richard Thaler’s, a recent recipient of the Nobel Price in Economics, comments about not understanding the current “irrationality of investors relating to their investing behavior.”

What is interesting is that Thaler’s received his Nobel Prize for his pioneering work in establishing that people are predictably irrational — that they consistently behave in ways that defy economic theory. For example, people will refuse to pay more for an umbrella during a rainstorm; they will use the savings from lower gas prices to buy premium gasoline; they will offer to buy a coffee mug for $3 and refuse to sell it for $6.

The fact that a man who studies the “irrationality of individuals” is stumped by current investor behavior should be alarming at the least.

But as earnings season gets underway we once again return to quarterly Wall Street “beat the estimate game,” in which companies are rewarded by beating continually lowered estimates. Of course, the primary catalyst used to beat those estimates was not a rise in actual revenue, or even reported earnings, but rather ongoing accounting gimmickry and stock buybacks. As shown below, through the second quarter of this year, reported EPS, which includes “all the bad stuff,” actually declined in the latest quarter and has remained virtually unchanged since 2014. (But, even that is an illusion as shares have been aggressively bought back in order to sustain that same level of EPS.)

The difference between reported earnings with and without the benefit of share repurchases is substantial. The chart below shows the net difference between gross reported earnings with and without the buyback impact. Importantly, the net effect of buybacks is having less impact which, as was the case in 2007, was a precursor to the crash. 

Ralph Nader just recently did an in-depth expose on the problems with share repurchases. To wit:

The monster of economic waste—over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations—started with a little-noticed change in 1982 by the Securities and Exchange Commission (SEC) under President Ronald Reagan. That was when SEC Chairman John Shad, a former Wall Street CEO, redefined unlawful ‘stock manipulation’ to exclude stock buybacks.”

Yep, stock buybacks used to be considered stock manipulation, yet today, it is widely accepted by investors as “just the right measure to boost earnings in the ongoing “beat the estimate” game.

As Ralph Nader points out – there is a problem.

“The stock buyback mania was unleashed. Its core was not to benefit shareholders (other than perhaps hedge fund speculators) by improving the earnings per share ratio. Its real motivation was to increase CEO pay no matter how badly such burning out of shareholder dollars hurt the company, its workers and the overall pace of economic growth.

The bottom line is that while companies take trillions of dollars and buyback shares, it only benefits the executives of the company at the expense of both workers and, ultimately, shareholders as companies with excessive stock buybacks experience a declining market value.

The interview is worth watching, and read the article, and think about it.

Here’s your reading list to for the weekend.


Trump, Economy & Fed


Markets


Research / Interesting Reads


“Making it, and keeping it, are two different things.Anonymous

 

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Donald Trump: Warmonger-In-Chief?

Authored by Antonius Aquinas via Acting-Man.com,

Cryptic Pronouncements

If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!

The commander-in-chief – a potential source of radiation?

 

This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In a cryptic exchange with reporters during a dinner with military leaders, he quipped:

You guys know what this represents? Maybe it’s the calm before the storm.  It could be the calm… before… the storm.*

A reporter asked if he meant Iran or Isis which the POTUS responded, “you’ll find out.”  Instead of threatening supposed overseas foes with nuclear annihilation, none of whom have taken any concrete military action against the US, why not go after someone who has actually compromised the country’s security, namely Hillary Rodham Clinton!

While some dismissed the comments as typical Trumpian bluster, White House press secretary Sarah Sanders added further ominous overtones when questioned saying they were “extremely serious.” Later in the week, Trump continued to threaten tiny North Korea, this time in not so veiled terms:

“Presidents and their administrations have been talking to North Korea for 25 years, agreements made and massive amounts of money paid hasn’t worked, agreements violated before the ink was dry, making fools of U.S. negotiators.  Sorry, but only one thing will work”.**

If war erupts either on the Korean Peninsula or in any other part of the globe that the U.S has wantonly poked its nose into, it can be safely assured that neither Trump nor any of the other “military leaders,” with whom he recently had dinner with will be in the midst of hostilities as the bombs and bullets are being cast about.

No, these laptop bombers will be in safe quarters far away from enemy lines, giving orders, making speeches, and praising the troops, while Congress will be hurriedly passing more “defense” funding legislation further lining the pockets of the military industrial complex.

Too far removed from the battlefield…

 

Curtailing the Warmongers

The Warmonger-in-Chief, who has repeatedly bragged about America’s military prowess, had a chance to become a part of the organization he constantly gushes over during his youth at the time of the Vietnam War.  Yet, he escaped military service, due to the machinations of his father, because of a mysterious foot/toe malady.

All those who avoided being conscripted into America’s disastrous imperial exercise in Southeast Asia during those years, whether it was from phony medical conditions, escaping to Canada or beyond, or going to jail, they did so for justifiable reasons.

The war was immoral, since Vietnam had taken no hostile action against the US and what made it worse, the government drafted thousands of America’s youth to fight it.  It is reprehensible that those who got out of military service then are now at the forefront in advocating mass murder (war).

One resolution that would certainly curtail warmongering in the future would be that any legislator, president, cabinet officer, or ambassador who promotes military intervention abroad should be required to directly participate in field operations.  This would quickly put the brakes on threatening talk from the likes of Trump and his crazed UN Ambassador, Nikki Haley.

A country’s leadership personally conducting military operations has a long tradition in Western history.  During the era of the crusades, princes and kings led their retinues and forces into battle risking their own life and limb – such as the great Norman prince, Bohemond, whose courage, tenacity, and military acumen won the day for Christian forces at the battle of Antioch.

From left to right: Bohemond I of Antioch, Bohemond’s troops scaling the ramparts of Antioch in AD 1098, Bohemond’s mausoleum in Canosa di Puglia. Bohemond was the son of Rober Guiscard, the count of Apulia and Calabria. His real name was Mark Guiscard. He was a nicknamed Bohemond after a legendary giant – the name was given to him because he was an unusually tall and strong man, dwarfing those around him. Even for a crusader, Bohemond’s life was unusually colorful. [PT]

 

This venerable ideal can still be seen in Russia when recently one of its generals and two colonels lost their lives in the Syrian quagmire.***   When was the last time a US general has perished in active combat?

It is apparent that the current POTUS does not understand the catastrophic consequences of what his threats, if carried out, would lead to – death to millions, unimaginable destruction, and the end of civilization.

A brief history of US-North Korean relations in the 2000ds

 

Maybe, had he actually suffered through the horrors of combat or had been the victim of US aggression as the peoples of North Korea, Vietnam and Iraq have witnessed, he might refrain from such bellicose language.

Hopefully, cooler heads in the Administration will prevail, however, a more peaceful world is unlikely with the likes of Donald J. Trump at the command of the greatest destructive force in human history.

References:

*Tyler Durden, “President Trump Warns Ominously: ‘It’s the Calm Before the Storm.’”  Zero Hedge.  6 October 2017.

**Tyler Durden, “Trump Hints at War With North Korea: ‘Sorry, But Only One Thing Will Work.’”  Zerohedge, 7 October 2017.

***Alexander, “General Asapov Died Because as a Russian Officer He Led From the Front.”  Russia Feed.  30 September 2017.

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Weekend Reading: Bull Market In Complacency

Authored by Lance Roberts via RealInvestmentAdvice.com,

With the market recently breaking above 2500, there seems to be nothing to dampen the bullish exuberance. The recent run, which has largely been focused on areas in the market with the most sensitivity to tax cuts, has exploded over the last two weeks to record highs.

That explosion has also lead to a surge in the Market Greed/Fear Gauge which comprises different measures of market complacency and bullishness.

But the rush to chase performance can be clearly seen in the chart below of the S&P 600 index (small cap) which is now 4-standard deviations above the 6-month moving average.

Then there is the widely viewed CNN Fear/Greed Index.

Of course, not surprisingly, with investors as optimistic and bullish as they can be equity to money market ratios are at extremes.

And “Dumb Money” is continuing to pile into markets as “Smart Money” is willing to sell positions to them.

After 9-years of a bull market, and pushing a 270% gain from the lows, investors have now decided it is now time to get back into the market. But that is the nature of a bull market, and particularly one that has entered into the final stages of long-term cyclical advance, where the last of the “holdouts” are sucked back into the game.

As we enter into earnings season, we once again enter into the “beat the estimates game,” where analysts act surprised that companies “beat” lowered estimates. In the short-term, these “beat rates” will provide support for the bullish case, but in the long-term, it is valuations and actual revenue growth that matters.

I agree with Doug’s sentiment yesterday:

  •  Massive injections of liquidity from the world’s central bankers
  • Passive investing (quants and ETFs) are now dominating markets (at nearly 40%) at the margin
  • Machines and algorithms, as well as many individual investors, are behaving differently as they are now programmed and conditioned to buy the dips.
  • 17% of the listed shares outstanding have been retired in corporate stock repurchases since the Generational Low in March, 2009.
  • More than half of the listed companies on the exchanges have disappeared over the last eight years

“We have a Bull Market in Complacency.” – Doug Kass

Clearly.

Here’s your reading list to for the weekend.


Trump Tax Cuts…


Markets


Research / Interesting Reads


“In a bear market all stocks go down and in a bull market they go up.Jesse Livermore

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Weekend Reading: Tax Cut Wish List

Authored by Lance Roberts via RealInvestmentAdvice.com,

On Wednesday, the President announced his plan to cut taxes for Americans, return jobs to America and return the country to economic prosperity.

It’s a tall order to fill, and the proposed tax reform is a “Christmas Wish List” that will have to checked twice to determine which parts are “naughty” and “nice.”

As I pointed out yesterday,

“The belief that tax cuts will eventually become revenue neutral due to expanded economic growth is a fallacy. As the CRFB noted:

 

‘Given today’s record-high levels of national debt, the country cannot afford a deficit-financed tax cut. Tax reform that adds to the debt is likely to slow, rather than improve, long-term economic growth.’

 

The problem with the claims that tax cuts reduce the deficit is that there is NO evidence to support the claim. The increases in deficit spending to supplant weaker economic growth has been apparent with larger deficits leading to further weakness in economic growth. In fact, ever since Reagan first lowered taxes in the ’80’s both GDP growth and the deficit have only headed in one direction – lower.’

That little green bump in the deficit was when President Clinton “borrowed” $2 trillion from Social Security to balance the budget, and since there were no cuts to spending, led a surplus that lasted about 20-minutes.

The problem is that the tax plan may not provide the benefits as hoped. While President Trump suggests the plan will return “trillions” of dollars locked up overseas to create jobs, the reality, according to Goldman Sachs, is likely closer to $250 billion that will primarily go to share buybacks, dividends, and executive compensation.  

Of course, such actions do not boost economic growth but are a boon to Wall Street and the 10% of the economy that invest in the market. 

But here is the key point with respect to tax cuts. History is replete with evidence that shows tax cuts DO NOT lead to a rapid growth in the economy. As shown below, the slope of economic growth has been trending lower since the “Reagan tax cuts” were implemented.

Lastly, tax cuts have relatively low economic multipliers particularly when they primarily only benefit those at the top of the income spectrum. With the average household heavily indebted, credit is being used to sustain the standard of living, there is likely to be little transfer of “tax savings” back into the economy.

It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.”

As is always the case…“it’s the debt, stupid.” 

However, here are plenty of discussions both for and against the tax plan so you can decide for yourself.


Trump Tax Cut Plan


Markets


Research / Interesting Reads


A bull market is like sex. It feels best just before it ends.” – Warren Buffett

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Weekend Reading: Yellen Takes Away The Punchbowl

Authored by Lance Roberts via RealInvestmentAdvice.com,

September 20th, 2017 will likely be a day that goes down in market history.

It will either be remembered as one of the greatest achievements in the history of monetary policy experiments, or the beginning of the next bear market or worse.

Given the Fed’s inability to spark either inflation or economic growth, as witnessed by their dismal forecasting record shown below, I would lean towards the latter.

The media is very interesting. Despite the fact there is clear evidence that unbridled Central Bank interventions supported the market on the way up, there is now a consensus that believes the “unwinding” will have “no effect” on the market.

This would seem to be naive given that, as shown below, the biggest injections of liquidity from the Fed have come near market bottoms. Without the proverbial “punch bowl,” where does the “support” come from to stem declines?

I tend to agree with BofA who recently warned” the paint may be drying but the wall is about to crumble.”

This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear.”

“An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs will increase roughly by $1tn over the next five years due to the Fed roll offs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign.

 

Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.”

Of course, as I have discussed previously, a surge in interest rates would lead to a massive recession in the economy. Therefore, while it is possible you could experience a short-term pop in rates, the end result will be a substantial decline in equities as money flees to the safety of bonds driving rates toward zero.

“From many perspectives, the real risk of the heavy equity exposure in portfolios is outweighed by the potential for further reward. The realization of ‘risk,’ when it occurs, will lead to a rapid unwinding of the markets pushing volatility higher and bond yields lower. This is why I continue to acquire bonds on rallies in the markets, which suppresses bond prices, to increase portfolio income and hedge against a future market dislocation.”

My best guess is the Fed has made a critical error. But just as a “turnover” early in the first-quarter of the game may not seem to be an issue, it can very well wind up being the single defining moment when the game was already lost. 

In the meantime, here is what I am reading this weekend.


Politics/Fed/Economy


Markets


Research / Interesting Reads


“If you are playing the rigged game of investing, the house always wins.” ? Robert Rolih

http://WarMachines.com

The Divisive Fallacy Of Bubble Fortunes

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation.

His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..”

Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma?

But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

Presumably, they often also think they have made a fortune, and presumably they also think that means they are smart. But that begs a question: how can it be smart to put one’s money into paper that is ‘worth’ what it is today ONLY because the world’s central banks have been handed the power to save the ailing banks that own them with many trillions of freshly printed QE? And no, there can be no doubt of that.

And there are plenty other data that tell the story. The world’s central banks have blown giant bubbles all over the place. That’s where the bulls’ “fortunes” come from. They are bubble fortunes. It has nothing to do with being smart. And of course, as I’ve said many times before, there are no investors left to begin with, because you can’t be an investor if there are no functioning markets, and for a market to function you need price discovery.

Which is exactly what central banks have killed. No-one has one iota of a clue what anything is really worth, what the difference between ‘price’ and ‘value’ is. Stockman at one point suggests people should hold on to Microsoft, but does he really believe that Bill Gates will remain standing when everyone around him crashes? That tech stocks are immune to the impending crash for some reason? If true, that would seem to indicate that tech stocks represent real value while -virtually- no others do. Hard to believe.

Please allow me to insert a graph. This one is from Tyler Durden the other day, and it paints a clear picture as much as it raises a big question. It suggests that until December 2016 the S&P and the ‘real economy’ were in lockstep. I think not. But one thing’s for sure: ever since January, i.e. the Trump presidency, the gaping gap between the two has grown so fast it’s almost funny.

Not that I would for one moment wish to blame Trump for that; he’s merely caught up in a wave much larger than an election or a White House residency. What is happening to the US -and global- economy goes back decades, not months. Which makes the graph puzzling, too, obviously. Just ask the new-fangled platoons of waiters and greeters with multiple jobs in America. And/or the 50-60-70% who can’t afford a $500 emergency bill, the 97 million who live paycheck to paycheck.. America’s already crashing, it’s just a matter of waiting for the markets to catch up with America’s reality. That’s what price discovery is about. Here’s another, similar, graph. Note: I don’t really want to go and find the best graphs, we’ve posted and re-posted so many of them it would feel like an insult to everyone involved.

But I digress. This was to be about Stuart Varney and the platoons and legions of permabulls out there. As I said, many of them, make that most, will feel they’ve made their fortune because they’re smart. Even if riding a Yellen and Draghi and Abenomics wave has zilch to do with intelligence. But there’s another side to that supposed smartness. And Stockman is on to it.

The large majority of people who think they got rich because they’re smart will also lose their ‘fortunes’ because they think they’re smart. It is inevitable, it’s a mathematical certainty. And not only because the central banks are discussing various forms of tapering. It’s a certainty because those who think they’re smart will hold on to their ‘assets’ too long. Because the markets will become much less liquid. Because the doors through which people will have to pass to escape the fire are too narrow to let them all though at the same time.

Fortunes built on central banks largesses are virtual. You have to sell your assets to make them real. But the same mechanics that blew the bubbles in housing, stocks, bonds et al also keep people from selling them. Until it’s too late. It may seem easier to sell stocks and bonds than homes, and it is, but in a crash it’s harder than one might think. And prices can come down very rapidly in very little time.

So perhaps the right way to look at this is to tell yourself you were not smart at all when you made that fortune, but now you’re going to smarten up. There will be a few people who do that, but only a few. Most will feel confident that they can see the crash coming in time to get out. Because they’re smart enough. After all, they just made a fortune, right?

It’s not just individuals. Pension funds have been accumulating huge portfolios in ever riskier ‘assets’. Which of them will be able to react fast enough if things start unraveling? And for the lucky few that will, what are they going to buy with the money? Bonds, stocks? Gold perhaps? Crypto? Everyone at once?

Don’t let’s forget that one of the main characteristics -and its consequences- of the everything bubble the central banks granted us is far too often overlooked: leverage. Low interest rates have made borrowing stupidly cheap, and so everyone has borrowed. As soon as things start crashing, there will be margin calls, lines of credit will be withdrawn, people and institutions will have to panic sell (everything including crypto) just to try to stay somewhat afloat, it’s all very predictable and we’ve seen it all before.

But yes, you’re right. The rally continues. And we can’t know what will trigger the downfall, nor can we pinpoint the timing. Still, it should be enough to know that it’s coming. Alas, for many it is not. They’re blinded by the light. But even that light is not real. It’s entirely virtual.

http://WarMachines.com

Weekend Reading: They’re Baaaccckkk!

Authored by Lance Roberts via RealInvestmentAdvice.com,

I remember the first time I saw the movie “Poltergeist.” It scared the $*#@ out of me, and I slept with the lights on for a month.

Recently, I got a chance to catch a rerun. It certainly wasn’t the same experience. It was kind of like eating a “twinkie” as an adult, the sponge cake and creamy filling aren’t nearly as delicious as I remembered them. “Poltergeist” is now more of a “campy” flick with bad special effects.

But the run up in the markets over the last few days, on really no news at all, reminded me of the scene where “Carol Anne” is pointing to the static filled television screen proclaiming “they’re back.”

After a brief decline, market sentiment got bearish enough to provide the catalyst for a short-term rally. With Trump now caving in to “Chuck and Nancy,” the North Korean threat deflated, and hopes for tax cuts on the horizon, “the bulls are back.”

Since the election, there has been a concerted effort to push stocks higher on the hopes of tax reform, ACA repeal, and infrastructure building which would lead to strongly improving earnings for U.S. companies. Now, eleven months later, stocks have been breaching the psychologically important levels of 2200 in December, 2300 in February and finally 2400 in May. 2500 is the next target.

The problem is that NONE of the legislative agenda has been passed. Zero, Nada, Zip.

But such small details have not, as noted yesterday, deterred investors who have once again fully abandoned reason and have gone “all in.”

With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it also suggests investors are now functionally ‘all in.'”

“Here is the point, despite ongoing commentary about mountains of “cash on the sidelines,” this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.”

Yes, the bulls are indeed back for now.

The ending of this version of “Poltergeist Market” will surely be just as scary as the last.

In the meantime, here is what I am reading this weekend.


Politics/Fed/Economy


Markets


Research / Interesting Reads


“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” – Alan Greenspan

http://WarMachines.com