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Make no mistake, the coming recession is going to be brutal...
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Markets in the throes of the biggest flight to safety in decades...Treasuries, gold and the Japanese yen are clocking 'the largest number of outsized rallies' combined since at least 1990
https://www.bloomberg.com/news/artic...dash-to-safetyComment
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Authored by David Rosenberg, chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave. First published in the Globe and Mail.
We are living in dangerous times.
Mostly, everyone I speak to lives in the here and now. They seem more interested in telling people how crazy cheap the stock market is and how crazy expensive the Treasury market is, rather than trying to look at the current environment in a historical perspective. We are living through a period of history that will be written about in textbooks in years and decades to come, and the undertones are none too good.
Instead of telling people there is no recession, these bulls should be discussing why the markets are busy pricing one in. What do these pundits know that the markets don’t know? We have a bond market in which a quarter of the universe trades at a negative yield. The long bond yield has gone negative in Germany. More than half of the world’s bond market is trading below the Fed funds rate. Investment grade yields, on average, are below zero in the euro area.
This is completely abnormal because it reflects an abnormal economic, financial and political backdrop. Those who point to the stock market’s performance with glee, because of its V-shaped recovery, don’t bother telling you that in the past 12 months the total return is marginal in real terms and the best performing sectors are the ones you can only typically rely on in a deflationary recession – real estate, utilities and consumer staples.
One of the problems coming out of the most recent recession is that the global debt load is infinitely larger now than it was at the peak of that prior credit-bubble cycle. The world is awash in debt. Years of monetary intervention among the world’s central banks created artificial asset-price inflation and exacerbated wealth inequalities at the same time. Fiscal policy failed to arrest the increasingly wide income disparity, a global dilemma that has become acute in the United States.
https://twitter.com/i/status/1150801618964746243
At the same time, the accelerated pace of technological change has led to even greater obsolescence in the labour force. There is so much uncertainty that even at a five-decade-low, sub-4-per-cent headline unemployment, the U.S. working class is too nervous to ask for a pay hike. All the while, the immigrant and the foreign competitor is blamed for the woes, so it has been an easy time for brash populists to emerge as national leaders and tap into this anxiety.
This is a global phenomenon. The first sign that the centrists were heading into obscurity, along with that middle part of the political spectrum, was when Jeb Bush was forced to pull out of the 2016 GOP presidential primaries in the very early stages. The hate that filled that campaign has only managed to deepen – on both sides. The shootings this past weekend are a signpost of a society starting to come apart at the seams.
Meanwhile, the world is splintering. We have Brexit to contend with. There are deep divisions within the European Union; Italy may be next to depart. We have unstable situations in North Korea, a trade war between Japan and South Korea, and of course there is Iran. Out of nowhere, we also have these renewed tensions between India and Pakistan, as Indian Prime Minister Narendra Modi has chosen a very nationalistic route since his election victory. And the situation in Hong Kong bears watching – especially if the peg with the U.S. dollar ever comes into question. Then we have this trade, currency and economic war between the United States and China – with no side willing, or perhaps able, to back down at this point.
All the while, central banks are being pushed into easing action. For the first time since the 1930s, a Federal Reserve tightening cycle got stopped out at 2.5 per cent on the federal-funds rate.
We have long duration yields going negative, as discussed above. Debt dynamics are very unstable and likely why interest rates have to go down – but if they are negative, how do assets with cash-flow streams get valued? The distortions are wild. All the while, gold prices have broken out in recent months in all currency terms and central banks are adding bullion to their reserves.
And we have a Fed that’s doing little more than sow confusion. Fed chair Jerome Powell did a “pivot” with his messaging as long ago as January, but didn’t start to act until July. After sounding very dovish at his semi-annual congressional testimony, he walked that sentiment back at the following meeting, saying this wasn’t going to be an easing cycle. Why on Earth would he say that? Meanwhile, we have had at least one dissent at each of the past two Federal Open Market Committee meetings, and half of the central bank is dovish and half is hawkish. We have a Fed chair who seems to change his mind constantly and who also is being badgered by U.S. President Donald Trump relentlessly.
This is also a President who has attempted to exert pressure on the Fed right out in the open, and who has blatantly attempted to verbally weaken the U.S. dollar, which makes no sense considering he simultaneously jeopardizes its status as the world’s reserve currency. Beyond the deep social and political divisions in the U.S., we have the rising tide of nationalism and protectionism.
What we took for granted in the post-Marshall Plan/Bretton Woods experience was the unusually high degree of world co-ordination and integration. It wasn’t perfect, but it engineered an unprecedented period of global stability. And unless somehow the political leadership vacuum is filled, and filled fast, we are on a slippery slope. The gains of the past 70 years, in which the world became smaller and worked together to make it a better place, are at risk. It was an era of relative stability that we all know, having lived it. But keep in mind it was also a grand experiment – and now the ugliness of hate, blame, mistruths, nationalism and populism have staged a revival. Mr. Trump, Mr. Modi and Britain’s Boris Johnson are symbols of this, not the cause.
To cap off, look at all the information at our disposal. Gold prices surging. Bond yields plunging. Central banks in a confused state. The breakdown of the world order. Here we have a trade and currency war going on between the world’s two dominant powers – with no end-game in sight.
Think about what I am describing – gold soaring, bonds rallying sharply, an equity market rolling off the highs, deepening racism, and a tariff and currency war.
This sounds a lot like the 1930s to me. Back then it became a real war that cost millions of lives. This war won’t cost lives, but it will cost livelihoods.
Investment recommendation: cash, gold, silver, long Treasuries – and limit your equity exposure to noncyclical sectors with strong balance sheets and reliable dividend/cash flow streams (even in the Great Recession, Walmart still made you money).
Most important – be as liquid as possible for the next several months.
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It's been like a slow moving train heading toward you when your leg is caught in the track, you can see it slowly coming from a mile away but you can't get away.Originally posted by Bouncer View Post
Sent from my SM-G930R4 using Tapatalk
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It was always only a matter of time, especially with this stupid trade war. Lets all just pray it doesn't end with a real war.Comment
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U.S. created 500,000 fewer jobs since 2018 than previously reported, new figures show
Turns out hiring wasn’t nearly as strong in 2018 and early 2019 as the government initially reported — by about a half-million jobs.
The economy had about 501,000 fewer jobs as of March 2019 than the Bureau of Labor Statistics initially calculated in its survey of business establishments. That’s the largest revision since the waning stages of the Great Recession in 2009.
The newly revised figures indicate the economy didn’t get a huge boost last year from President Trump’s tax cuts and higher federal spending. They also signal the economy is a bit weaker than previously believed and could give the Federal Reserve even greater reason to cut interest rates in September.
“This makes some sense, as the 223,000 average monthly increase in 2018 seemed too good to be true in light of how tight the labor market has become and how much trouble firms are said to be having finding qualified workers,” said chief economist Stephen Stanley of Amherst Pierpont Securities.
The average 223,000 monthly increase in employment in 2018 — the strongest in three years — could be trimmed to 180,000 to 185,000, economists estimate.
Fewer jobs were created in restaurants, hotels, retailers and professional business services. Leisure and hospitality employment was reduced by 175,000, business services by 163,000 and retail by 146,400.
This annual “benchmark” revision is much larger than is typically the case. The preliminary revision in 2018, for example, showed the economy produced 43,000 additional jobs than initially reported.
The government’s employment report each month is compiled from a survey of almost 700,000 work sites, but the BLS updates its numbers every year after rechecking its results against company tax records. These record are not immediately available.
In most years the revisions are quite small, reflecting about one-tenth of 1% of total nonfarm employment and attesting to the accuracy of the BLS survey.
Yet the current revision reflects an adjustment of 0.3%, although the number is not final. The 2018 revision was eventually changed again to -1,000 from 43,000. The final results will be released in February 2020.
What remains to be seen is whether the lower employment figures end up showing that wage growth was a lot stronger in the past year than government figures now tell us.
Hourly wage growth has topped out at just slightly higher than 3% a year, a surprisingly modest increase given that the unemployment rate stands near a 50-year low of 3.7%. Tight labor markets usually lead to annual wage increases of up to 4%.
https://www.marketwatch.com/story/us..._theo_homepage
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LOL Blond Saddam tweeting his own ass out of a second term
Stocks Sink, Bonds Gain as U.S.-China Feud Deepens
https://www.bloomberg.com/news/artic...p?srnd=premium
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Trump is consistently ramping his attacks up, took it to a whole new level today by comparing the Fed's Chairman to China's Chairman, labeling them as "our enemies".
Shaming the Chinese into a corner is a lose-lose proposition. Even if Trump had the ability to extract the best possible deal out of China, best to let China save face. His anti-Fed antics starting to feel deranged. Markets operate on perceptions.Comment
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He is either a severe drug addict or suffering from dementia. Dude is completely fucked up. My dog can out together more coherent sentences.Originally posted by Bouncer View PostComment
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World needs to end risky reliance on U.S. dollar - Bank Of England
JACKSON HOLE, Wyo. (Reuters) - Bank of England Governor Mark Carney took aim at the U.S. dollar’s “destabilising” role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.
The dollar’s dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole in the United States.
“While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed,” Carney said, referring to the end of the dollar’s peg to gold in the early 1970s.
Emerging economies had increased their share of global activity to 60% from around 45% before the financial crisis a decade ago, Carney said.
But the dollar was still used for at least half of international trade invoices - five times more than the United States’ share of world goods imports - exposing many countries to damaging spillovers from swings in the U.S. economy.
Carney - who was considered a candidate to be the next head of the International Monetary Fund but failed to secure backing from Europe’s governments - said the problems in financial system were encouraging protectionist and populist policies.
Earlier on Friday, U.S. President Donald Trump said he was ordering U.S. companies to look at ways to close their operations in China, the latest twist in mounting trade tensions between Washington and Beijing.
Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.
China’s yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready, Carney said.
The best solution to dislodge U.S. currency would be a diversified multi-polar financial system, something that could be provided by technology, Carney said.
Facebook’s (FB.O) Libra was the most high-profile proposed digital currency to date but it faced a host of fundamental issues that it had yet to address.
“As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.
Such a system could dampen the “domineering influence” of the U.S. dollar on global trade.
“Even a passing acquaintance with monetary history suggests that this centre won’t hold,” Carney said. “We need to recognise the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”Comment
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In 1962 in a picturesque setting in Santa Barbara, California, two local entrepreneurs opened a low-cost, roadside inn where the nightly room rate was just $6.
They called it Motel 6.
And today the chain has grown to over 1,400 locations. If you want the most straightforward explanation for why you should invest in gold, consider your local Motel 6.
It’s noteworthy that, today, the very same Santa Barbara location now rents its rooms for nearly $90 per night.
That’s a 15x increase in 57 years, an average increase of roughly 5% per year.
The reason the price has increased so much is because of inflation– the gradual erosion of the US dollar’s purchasing power over the past several decades.
Unlike paper currencies, gold has a 5,000 year track record of keeping up with inflation.
In fact, when priced in gold, a room at the Motel 6 has actually gotten cheaper.
Back in 1962, an ounce of gold would buy you about 6 nights at the motel. Now, despite the 12-fold increase in the price of a room, one ounce of gold will buy you 21 nights there.
That’s because the price of gold has largely outpaced the rate of inflation and the decline in the purchasing power of the US dollar.
Gold is a fantastic long-term store of value. It’s also an insurance policy– a hedge against paper currency, systemic risk, and uncertainty.
And there’s plenty of those in the world.
But there’s also a number of catalysts emerging right now that could send gold prices substantially higher in the near future, so it may be worth considering gold right now as a speculation.
There have been several times in history where gold has experienced wild swings in value against paper currency. That time is now. Invest accordingly...
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In Ominous Warning, Ray Dalio Says The Current Period Is Just Like 1935-1945
Something has dramatically changed in the establishment's view of central banking... and of the future.
As we reported earlier this week, recently we have observed a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend "to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime" when he also urged an end to the dollar's status as world reserve currency. This continued when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the "Japanese experience", where negative rates dragged down inflation expectations even more, is ground for NIRP caution.
Meanwhile, as the FT concluded in its summary of last week's Wyoming outing, "there was a sense that things will never be the same again" and quoted St Louis Fed President James Bullard, who wrote that "the developed world had experienced a “regime shift” in economic conditions: "Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing," Bullard admitted. "We just have to stop thinking that next year things are going to be normal."
Tying it all together was Bank of America, which in anreport meant to recommend buying gold, lashed out at the Fed, warning that "ultra-easy monetary policies have led to distortions across various asset classes"; worse - and these are not our words, but of Bank of America - "it also stopped normal economic adjustment/renewal mechanisms by for instance sustaining economic participants that would normally have gone out of business", i.e. a record number of zombie corporations. In addition, as everyone knows, debt levels have continued to increase, making it more difficult for central banks to normalize monetary policy as 2018 showed so vividly (and for Powell, painfully). Which brought us to BofA's conclusion:
"We fear that this dynamic could ultimately lead to "quantitative failure", under which markets refocus on those elevated liabilities and the lack of global growth, which would in all likelihood lead to a material increase in volatility."
BofA wasn't finished, however, and one day later, Bank of America doubled down when the bank's FX strategist Athanasios Vamvakidis unleashing even more unexpected truth, and in a note justifying why further monetary easing is not the proper response to what ails the world now, writes that "the risks that monetary policy is trying to address are primarily the result of policy failures in other areas, which more central bank easing is unlikely to offset" and concludes that "we see increasing evidence that monetary policy easing in this environment supports asset prices more than the real economy. This increases risks for asset prices bubbles, with the eventual adjustment leading to a worse economy-the Greenspan mistake."
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All of which brings us to Wednesday's highlight which was the latest scathing essay published by Bridgewater's billionaire Chairman, Ray Dalio, titled "The Three Big Issues and the 1930s Analogue" in which he joins the pile up of Fed criticism, and echoes what BofA said, warning that central banks' ability to reverse an economic downturn is coming to an end as the global economy enters what he says are the late stages of the long-term debt cycle.
The outcome could be nothing short of a global conflict (just as Carney hinted last Friday)
Specifically, the formerly optimistic Dalio (who can forget his lovely if fatally flawed "beautiful deleveraging" thesis) has turned downright Zerohedgish, and writes that the most important forces that exist now are:
The End of the Long-Term Debt Cycle (When Central Banks Are No Longer Effective)
The Large Wealth Gap and Political Polarity
A Rising Work Power Challenging an Existing World Power
All of these combined to explain "The Bond Blow-Off, Rising Gold Prices, and the Late 1930s Analogue."
In other words now 1) central banks have limited ability to stimulate, 2) there is large wealth and political polarity and 3) there is a conflict between China as a rising power and the U.S. as an existing world power.
While Dalio does not explicitly repeat Carney's warning that extended periods of low rates lead to financial crisis and war, he does get to the same place in a circular fashion, saying that "if/when there is an economic downturn, that will produce serious problems in ways that are analogous to the ways that the confluence of those three influences produced serious problems in the late 1930s."
We hope that everyone is familiar with what those "serious problems" were.
And actually, it is not true that Dalio does not reference the pernicious effects of low interest rates. After going through a brief recap of his economic outlook on the world, which he has summarized best in his video "How the Economic Machine works", Dalio writes that "the most important things that are happening (which last happened in the late 1930s) are
a) we are approaching the ends of both the short-term and long-term debt cycles in the world’s three major reserve currencies, while
b) the debt and non-debt obligations (e.g., healthcare and pensions) that are coming at us are larger than the incomes that are required to fund them,
c) large wealth and political gaps are producing political conflicts within countries that are characterized by larger and more extreme levels of internal conflicts between the rich and the poor and between capitalists and socialists,
d) external politics is driven by the rising of an emerging power (China) to challenge the existing world power (the U.S.), which is leading to a more extreme external conflict and will eventually lead to a change in the world order, and
e) the excess expected returns of bonds is compressing relative to the returns on the cash rates central banks are providing.
Is monetary policy able to counteract any of the above considerations? According to Dalio, the answer is no, as "we are classically in the late stages of the long term debt cycle when central banks’ power to ease in order to reverse an economic downturn is coming to an end because":
Monetary Policy 1 (i.e., the ability to lower interest rates) doesn’t work effectively because interest rates get so low that lowering them enough to stimulate growth doesn’t work well,
Monetary Policy 2 (i.e., printing money and buying financial assets) doesn’t work well because that doesn’t produce adequate credit in the real economy (as distinct from credit growth to leverage up investment assets), so there is “pushing on a string.” That creates the need for…
Monetary Policy 3 (large budget deficits and monetizing of them) which is problematic especially in this highly politicized and undisciplined environment.
This is also analogous to Carney's warning that extended periods of low rates effectively become self-reinforcing and lead to catastrophic results.
And yet, central banks can't just throw in the towel, so what are they to do? According to the Bridgewater billionaire, "central bank policies will push short-term and long-term real and nominal interest rates very low and print money to buy financial assets because they will need to set short-term interest rates as low as possible due to the large debt and other obligations (e.g. pensions and healthcare obligation) that are coming due and because of weakness in the economy and low inflation. Their hope will be that doing so will drive the expected returns of cash below the expected returns of bonds, but that won’t work well because..."
a) these rates are too close to their floors,
b) there is a weakening in growth and inflation expectations which is also lowering the expected returns of equities,
c) real rates need to go very low because of the large debt and other obligations coming due, and
d) the purchases of financial assets by central banks stays in the hands of investors rather than trickles down to most of the economy (which worsens the wealth gap and the populist political responses).
Compounding the complexity, this is happening at a time when investors "have become increasingly leveraged long due to the low interest rates and their increased liquidity. As a result we see the market driving down short term rates while central banks are also turning more toward long-term interest rate and yield curve controls, just as they did from the late 1930s through most of the 1940s."
Then just as importantly Dalio says that the current period is a mirror image "symmetrical reversal" of the inflationary explosion of the late 1970s/early 1980s, a period he calls a "dis/deflationary blow-off", and urges readers to "look at the current inflation rates at the current cyclical peaks (i.e. not much inflation despite the world economy and financial markets being near a peak and despite all the central banks’ money printing) and imagine what they will be at the next cyclical lows. That is because there are strong deflationary forces at work as productive capacity has increased greatly."
It is these deflationary forces - including debt, demographics and technology - that are creating "the need for extremely loose monetary policies that are forcing central banks to drive interest rates to such low levels and will lead to enormous deficits that are monetized, which is creating the blow-off in bonds that is the reciprocal of the 1980-82 blow-off in gold." The charts below show the 30-year T-bond returns from that 1980-82 period until now, which highlight the blow-off in bonds.
Which brings us to Dalio's conclusion, which finds that the epic build up of imbalances in the economy can be traces to one specific period in history: that of World War II:
To understand the current period, I recommend that you understand the workings of the 1935-45 period closely, which is the last time similar forces were at work to produce a similar dynamic.
If that sounds surprisingly familiar to what Mark Carney said last Friday, when he warned that low rates lead to "crisis and war", it is probably not a coincidence. Of course, not looking to be blamed for catalyzing the next world war, Dalio caveats that he is "not saying that the past is prologue in an identical way. What I am saying that the basic cause/effect relationships are analogous:
a) approaching the ends of the short-term and long-term debt cycles, while
b) the internal politics is driven by large wealth and political gaps, which are producing large internal conflicts between the rich and the poor and between capitalists and socialists, and
c) the external political conflict that is driven by the rising of an emerging power to challenge the existing world power, leading to significant external conflict that eventually leads to a change in the world order.
As a result, Dalio concludes, "there is a lot to be learned by understanding the mechanics of what happened then (and in other analogous times before then) in order to understand the mechanics of what is happening now. It is also worth understanding how paradigm shifts work and how to diversify well to protect oneself against them."
Considering that the period Dalio says is most comparable to the current "paradigm shift" culminated with world war that resulted in the deaths of tens of millions, we are very curious what Dalio would recommended to "protect oneself" from what is coming. Or is a "beautiful world war" just the inevitable next step when "beautiful deleveraging" fails?Comment
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New orders for heavy trucks have dropped 80% from a year ago
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The Coming Retirement Crisis Explained and Explored
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