| | | Just in in-tray
On 23 Mar 2018, at 4:40 PM, H wrote:
I don't write as many blog entries anymore these days (due to health problems mostly), but my recent ones were often focused on interest rates, credit markets, etc. There is a feedback loop between Fed policy and market interest rates (particularly short term ones), but in the transition from falling to rising ST rates, the Fed is more of a follower than a leader. The economy's production structure has become severely distorted due to the money printing orgy from 2008-2014 (and the associated suppression of market rates). The ratio between spending on capital goods production vs. consumer goods production has never been more out of whack, and never for a comparably long time period. It is a good bet that we are simply seeing the beginning of the inevitable reversal of these processes, which is triggered by this imbalance becoming unsustainable. That is when market rates begin to turn around and move back toward the (unknowable) natural rate dictated by society-wide time preferences. In a wealthy economy this moment can be delayed for quite a long time with ever greater gobs of money printing, but obviously that won't work forever.
However - take a look at the attached charts. Guess where the RSI of the daily LIBOR chart is at the moment. It stands at 99.59 (not a typo). I don't expect a whole lot of near term upside actually, especially as these moves are reportedly not driven by an outright funding crisis (not yet, anyway).
Now consider the chart comparing the spread of the 3m t-bill discount rate over the FF rate - something is going to have to give there soon - either the Fed will hike much more and much faster than hitherto, or t-bill rates will come down again. In case of the latter, the yield curve will flip from rapid flattening to rapid steepening, which is traditionally a signal of a beginning economic bust and an imminent central bank policy flip-flop.
And now consider the net speculative short position in euro-dollar futures - it has reached a notional value of $4.7 trillion, which is a record as far as I know. It seems to me this is a very vulnerable position - in other words, we should actually expect that short term rates will soon decline sharply. LIBOR should go down as well, unless funding problems do in fact emerge (I imagine liquidity in eurodollars is poor ever since US MM funds have become subject to new regulations - but if push comes to shove, European banks can always make use of the Fed-ECB swap window - this has been made a permanent facility back in 2011 as I recall).
On 23 Mar 2018, at 4:21 PM, M wrote:
Fred Hickey - The High-Tech Strategist:
"I'm a veteran of six US bear markets as I've been an active investor for nearly forty years. On the other hand, a recent survey of fund managers in New York, Paris, and London found that more than half of current fund mangers hadn't experienced a single stock bear market. The last one began in late 2007. Jese Felder, publisher of the Felder Report observed: ""Most (investors) have only the experience of the greatest bull market of all time to fall back on. They have not experienced even a normal market that corrects regularly let alone a real bear market." In that survey more than 75% of fund managers hadn't experienced the dot-com crash in 2000-2002 - the only other bear market in the past twenty-seven years."
On 23 Mar 2018, at 4:01 PM, H wrote:
I concede he may have a point that Trump is simply using this as a negotiating tactic - he has done similar things many times, and it often works. Example, North Korea; he loudly threatened Kim with his "bigger button" (that was hilarious, it triggered vast waves of righteous indignation among the chattering classes everywhere), but as soon as North and South Korea started talking to each other, he immediately gave his placet (also via Twitter!). One must not forget, he's the biggest troll in the world. Still, what he has publicly said about trade over the past few years sounds to me as though he doesn't really understand the basic economic principles involved. Exchanging electronic chits called "dollars" for lots of real goods doesn't exactly strike me as a bad deal by the way and I'm surprised so many people think it is.
I by and large agree with Feldsteins view on the tax reforms. In addition to what I said earlier, one must also keep in mind that estimates regarding the effects of the tax cuts on future deficits are generally based on simplistic linear extrapolations. If the people producing these estimates were honest, they would have to say "we actually have no idea what is going to happen". It is e.g. possible that economic activity will be boosted to such an extent that government revenues eventually become larger than they would have been otherwise - but it will be impossible to prove or disprove this based on empirical data, because too many different factors affect this equation. This is an issue that can only be resolved by sound economic reasoning, not by statistics.
One of Trump's biggest political mistakes may well turn out to be his urge to take ownership of the stock market bubble. Pointing to rising asset prices as proof for the success of his economic policies makes him vulnerable to a backlash once the stock market falls - and it is imo certain that the bubble won't survive tighter monetary conditions unscathed, regardless of the policies he pursues.
On Fri, Mar 23, 2018 at 8:22 AM, M wrote:
I met with Marty this week. He is currently the [...]. (Wikipedia).
Marty described the US economy as, “in great shape, but fragile.” For the argument for “great shape,” Marty noted that unemployment is now at 4.1% and for College graduates the unemployment rate is currently 2.3%. In conversations with businessmen, they complain that it is “hard to hire new, qualified employees.” If that is the case, then why are wages not rising substantively? Marty suspects that companies, rather than raising salaries, have been paying bonuses, retention bonuses, and the like that tie compensation to how well the company is doing, which will give them more flexibility if/when a downturn begins.
He noted that household income is up, and that unlike Europe, the US is “a shareholding economy.” By that, he means that most Americans have IRA’s, 401K’s, etc. rather than defined benefit retirement programs. In addition, he noted that housing prices are up 6.1% over the past year.
He is noting strength coming out of the tax bill with employees experiencing tax savings at every tax bracket. More importantly, the reduction of the Corporate Tax Rate is extremely important. The tax system will no longer tax income earned abroad, which encourages companies to bring that money back home. He is hearing that other countries are now complaining as they are now at a disadvantage rather than an advantage in regards to comparative tax rates / regimes. In addition, the new tax code allows for capital expenditures to be expensed rather than depreciated in many cases, which incentivizes new expansion. All of this will result in higher growth, higher productivity and higher wages.
But it is not all good news, as he considers the expansion “fragile.”
He noted that asset prices are way out of line with historical averages. He noted that cap rates for real estate are also at historically low levels. But interest rates are beginning to rise, and that will continue as he sees inflation rising, which will put even more pressure on rates to move higher.
He is uncomfortable with the fiscal deficit, yet he expects even more spending in both defense and non-defense areas. However, he did admit that the big elephant in the room was entitlements. He noted that when he was in the Reagan White House, they worked to raise the age of full eligibility from 65 years old to 67 years old. That was in 1984, and the final effects of that change won’t come into effect for another couple of years! But since that time, life expectancy has increased, which has once again put pressure on entitlement programs.
As for the stock market, he thinks that it is currently trading at about 170% of historical averages. If the stock market returns to the average (100%), that would equate to a loss of $10 Trillion in household wealth!
He was asked about Trump and the tariffs Trump is seeking to enact. Marty thinks that it pretty much a negotiating tactic to put pressure on China. The goal for Trump is to get China to rescind the decree that companies cannot sell into China without opening a factory in China and enacting technology transfer. In his conversations with US corporate leaders, this is by far the biggest issue that concerns them. Every time they open in China and use their technology, it is almost always immediately stolen, taking away their competitive advantage. So many companies today, when they can, simply use their third generation technology in China and do everything they can to not put in their latest technology. He noted that the US had objected to China’s interference and stealing via the internet into US companies. China vehemently denied it. But Trump’s team (with the help of the NSA), showed Xi and his team exactly who had been stealing, where it originated from and named names. China then stopped its actions (at least in the short run). Intellectual property transfer is not within the confines of the WTO, so that nothing can be done to China in terms of the WTO. So Trump is using a very blunt instrument to try and force / convince China to change their ways. So Trump is less of a protectionist and more of a negotiator using whatever advantage he can in order to get the results he wants / needs.
And Bloomberg seems to confirm this assertion:
President Donald Trump is set to announce about $50 billion of tariffs against China over intellectual-property violations on Thursday, according a person familiar with the matter. The president is considering targeting more than 100 different types of Chinese goods, according to the person, who spoke on the condition of anonymity. The value of the tariffs was based on U.S. estimates of economic damage caused by intellectual-property theft by China, the person said.
“Tomorrow the president will announce the actions he has decided to take based on USTR’s 301 investigation into China’s state-led, market-distorting efforts to force, pressure, and steal U.S. technologies and intellectual property,” White House official Raj Shah said in an emailed statement on Wednesday.
It will be Trump’s first trade action directly aimed at China, which he has blamed for the hollowing out of the American manufacturing sector and the loss of U.S. jobs. The decision comes as policy makers including IMF Managing Director Christine Lagarde warn of a global trade conflict that could undermine the broadest world recovery in years.
Trump instructed Trade Representative Robert Lighthizer last year to probe allegations that China violates U.S. intellectual property. After seven months of investigation, U.S. officials found strong evidence that China uses foreign-ownership restrictions to compel U.S. companies to transfer technology to Chinese firms, said an official with the U.S. Trade Representative’s office who spoke to reporters Wednesday on condition of anonymity.
The U.S. also suspects Beijing directs firms to invest in the U.S. with the purpose of engineering large-scale transfers of technologies that the Chinese government views as strategic, said the USTR official. The investigation also found strong evidence China supports and conducts cyberattacks on U.S. companies to access trade secrets, according to the official.
American officials have been raising their concerns about China’s IP practices since Bill Clinton was president, and Beijing has repeatedly failed to deliver on promises to reform, said the official, adding the administration is still open to discussing the issue with the government of President Xi Jinping. The official declined to comment on the remedies planned, emphasizing it’s Trump’s decision.
Lighthizer confirmed Wednesday the administration is considering both tariffs and curbs on Chinese investment, among other options. U.S. companies from Walmart Inc. to Amazon.com Inc. have warned that sweeping sanctions against China could raise consumer prices and hit the stock market.
China is preparing to hit back at Trump’s planned sweeping tariffs with levies aimed at industries and states which tend to employ his supporters, the Wall Street Journal reported on Wednesday, citing unidentified people familiar with the matter.
“Our view is that we have a very serious problem of losing our intellectual property, which is really the biggest single advantage of the American economy,” Lighthizer told lawmakers. "We are losing that to China” in a way that doesn’t reflect economic fundamentals, he said.
The Chinese exports most at risk of protectionist measures by the U.S. are ones that compete with U.S.-based production and are produced via Chinese or Asian supply chains with little involvement of U.S. firms and products. Items that fit these criteria include portions of China-made furniture, textiles, shoes, toys, as well as China-branded information technology, electronics and telecom products, said Kuijs
Lighthizer has been probing China’s IP practices under section 301 of the Trade Act of 1974. The law allows Lighthizer, at the president’s discretion, to take broad steps, including tariffs, to correct against any harm against U.S. businesses. The USTR has argued that China uses a range of practices to force companies to transfer IP, and Chinese entities engage in widespread theft of U.S. trade secrets, as it seeks to become a leader in advanced manufacturing and artificial intelligence. U.S. businesses in China have long complained about being forced to hand over technology as the price of gaining access to the market.
Republican House Ways and Means Committee Chairman Kevin Brady on Wednesday cautioned against the U.S. imposing “indiscriminate” tariffs against China and he encouraged a wider public discussion before the U.S. takes new trade measures. It’s “not about backing down, it’s about hitting the target,” said Brady.
On 23 Mar 2018, at 3:36 PM, M wrote:
If Martin Armstrong is right, then the stock market is really going to tank....
It is not the end of the month, but 3-Month LIBOR is currently trading at 227.....
LIBOR at 5%? Oh my.....
M
armstrongeconomics.com
The Libor (London Interbank Offered Rate), the most important reference rate for the global interbank market, is currently at its highest level since 2008. We elected a Yearly Bullish Reversal on the close of 2016. Once we see the rate close above 213 on a monthly basis, LIBOR rates will be poised to jump to 510. When the Libor price rises, the short-term borrowing for banks becomes more expensive, and for borrowers in the financial market, such as sellers of bonds or buyers of mortgages, debt service becomes more difficult. The demand for debt is exceptionally high. We are looking at LIBOR rates rising sharply. The dollar-lending rate for dollar loans has been rising steadily in all maturities since about the end of 2014. The dollar-Libor for three-month loans in March 2017 were trading at around 1.1%. Currently, this dollar-Libor rate stands at around 2%.
On 23 Mar 2018, at 3:28 PM, H wrote:
I agree with this idea - this is what e.g. happened in 1929 - gold miners went down during the crash, but then started a scorching rally while all other sectors went into a severe bear market. Something very similar happened when the tech mania peaked in 2000 as well (but there were more sectors that showed some strength in the bear market, at least on a relative basis, because many value stocks became cheap well before the bear market started). In 2008 gold stocks at first crashed, but thereafter were the first sector to rally again (their rally started 6 months before the S&P bottomed out). I think they crashed in 08 because they were at an ATH and fairly overbought. This is not the case now, because the HUI has already gone through a bear market decline of more than 80% from Sept 2011-Jan 2016 (in fact, the most severe bear market in the sector ever). So I would expect them to weaken with the stock market initially, but not as dramatically as in 2008 - and they should decouple fairly quickly.
On Fri, Mar 23, 2018 at 8:02 AM, M wrote:
So do the miners go higher if the broader market collapses?
Or do they all go down together, allowing for even cheaper prices for gold stocks to load up on?
My guess is that they'd initially go down with the broader market, but when things start to stabilize, it is gold stocks that becomes almost the only sector that rallies.
M
On 23 Mar 2018, at 3:15 PM, H wrote:
I think a much higher allocation than is considered normal is appropriate - held far from entities that have credit risk and preferably well out of the sight of grasping governments.
Some people have argued that one can circumvent the risk posed by fractionally reserved banks by holding paper money - to some extent this is true, since paper money is the "standard money" of the fiat system. Luckily the government of India has fairly recently demonstrated that paper money is definitely not "safe" (irrespective of one's inflation expectations), as governments can simply declare it worthless overnight. We should be grateful to Mr. Modi for bringing this little factoid to everyone's attention.
Meanwhile, anyone still holding deposits with banks in the euro area periphery or Italy should get out yesterday. US banks are safer, not least because around 20% of their deposit liabilities still consist of covered money substitutes. This particular proportion is currently fairly high in the euro area as well (a result of QE), but NPLs still amount to nearly €800 billion across the region and I have grave doubts about the improvement in capital ratios. After all, what does it really mean in the case of banks that are e.g. stuffed to the gills with Italian government bonds that enjoy a "risk weighting" of zero.
The global environment is growing more dangerous in every respect by the day - see e.g. my earlier comments about US money supply growth (other CBs are taking the foot off the pedal as well), which is certain to end up unmasking the malinvestments of the recent boom. I have no problem with that per se, but I fear the political repercussions of the next crisis - they are highly unlikely to be conducive to individual liberty. Contrary to what seems to be general opinion, I actually thought Trump's tax cuts were a good idea. Yes, cutting taxes and accelerating spending seems to make no sense, but these concerns remind me of calling someone a little bit pregnant - in this case the bone of contention seems to be whether the government is becoming a little bit more insolvent on a GAAP basis. If the choice is between the citizenry keeping as much of its own money as possible or fine-tuning the degree of government insolvency, I go with the citizens. But his recent trade-related shenanigans and the nomination of Yosemite Sam of all people as his "security advisor" are genuinely dangerous missteps.
Anyway, no matter where one looks, there are plenty of reasons to hold gold.
On Fri, Mar 23, 2018 at 3:44 AM, W wrote:
10% adequate in normal times
These times are not normal
Sent from my Huawei Mobile
-------- Original Message --------
Subject: Re: why is this forum so quiet?
From: C
Yes J,
You are right. The old private bankers' advice used to be;
"Put 10% of your assets in gold and pray that it goes down"
Clive
On 23/3/2018 10:15, J wrote:
gold shall simply be a consolation prize
but we best obtain at least that prize on the otherwise very ugly bad day
On 23 Mar 2018, at 10:07 AM, C wrote:
Thanks for your contributions to the unhappiness index
Other additions that come to mind;
Obesity and the Processed Food Industry's Tobacco like reactions to deny their causality
The erosion of Civil Liberties worldwide
Refugee flows
Rampant widespread Financial/Political corruption
On 23/3/2018 9:59, J wrote:
civil wars
On 23 Mar 2018, at 9:57 AM, W wrote:
Plague
Climate change
Environmental destruction
GMOs
NWO tyranny
Etc
Sent from my Huawei Mobile
-------- Original Message --------
Subject: Re: why is this forum so quiet?
From: C
Gold is, from time to time, a good speculation
Most of the time it is insurance. The need for insurance seems particularly obvious right now as we look at all the following risks coming together;
War Risks
Trade War
Facebook scandal
Expensive and volatile stock markets
Rising interest rates
Political movements moving towards despotism round the world. A despot can have an ego tantrum more easily than a real cabinet of effective ministers
Populations distrustul and/or contemptuous of their governments
Plague
What have I left out???
C
On 23 Mar 2018, at 2:34 PM, H wrote:
The probability that the 1980 high will be tested one more time has by now become exceedingly small. Gold is trading 27% above the low it made more than two years ago. Cyclical bear markets do not make pauses lasting more than two years. Secular bear markets occasionally do (it's rare, but not unprecedented), but I cannot believe that gold is in a secular bear market. From a long term technical perspective we also have a major Coppock curve buy signal in place, mirroring the signal that was given at the 1999-2000 low (incidentally the opposite of the "killer wave" signal besetting the stock market - nomen est omen).
You have to ask yourself this: why is gold so strong? Apart from "unexpected" (by mainstream observers) dollar weakness, practically every macroeconomic driver of the gold market was bearishly aligned since the new bullish phase in the gold market started. Real interest rates increased, credit spreads were stuck near record lows, confidence in central banks was extremely high, stock markets were strong, economic indicators signaled growing strength in economic activity, etc. - gold had every reason to go down, and yet it showed persistent strength. Keith Weiner's analysis of the relationship between gold spot and futures prices shows that strong physical demand emerges on every price dip - and recently it has even been strong in the absence of price dips. Generally we can state that reservation demand for gold must have hardened considerably. This is to say, existing gold holders simply refused to sell at the prices extant over the past 2+ years - despite the lure of rising stock and bond markets and a cryptocurrency craze.
There is a reason for this of course - we have seen similar behavior in the gold market from 2004-2006, when gold also rallied in the face of a gold-negative (except for dollar weakness) macro-backdrop. The gold market is subject to variable leads and lags, and since the beginning of the secular bull market it has become increasingly sensitive, with its lead time on future developments growing substantially. In short, the gold market is ignoring all these ostensibly bearish macro conditions because it "knows" they will all turn on a dime when the GBEG implodes - and this coming implosion is an apodictic certainty (GBEG = "Great Bernanke Echo Bubble"). In fact, we may well be witnessing the implosion at this very moment. Broad true US money supply growth has collapsed to the lowest level since 2007, and it has done so at a rapid clip - we are down from 12% y/y growth in November 2016 to 2.67% y/y as of February. At this rather inopportune juncture the Fed has begun to tighten policy in earnest (which it always does, because it is driving forward with its eyes firmly fixed on the rear-view mirror).
Looking at the chart of the SPX, it seems possible that we are at the beginning of wave 3 of a devastating crash wave (that is what the chart pattern looks like, anyway). Normally stock market crashes are preceded by a number of warning signals that are not in evidence this time, above all rising credit spreads. There are very good reasons though as to why this signal may be "lagging" instead of "leading" this time around. 1. the ECB's corporate bond buying spree, which has become an ever larger proportion of its QE operations, has artificially suppressed credit spreads which were transmitted around the world via arbitrage. 2. banks are no longer market makers in corporate bonds, as they had to abandon their proprietary trading activities. Usually banks have fairly good insight into the true state of corporate finances and tend to be a bit more suspicious than other market participants. But now the biggest corporate bond holders (bag holders may be more appropriate) are all a bunch of "weak hands", and many of them have literally no idea what they are buying (ETFs cannot think). Much of the risk in corporate bonds has moved from banks to investors, many of whom have foolishly accepted not only the lowest yields, but also the weakest credit covenants in history in recent years. A giant equal opportunity massacre is going to unfold in this market sector.
What central banks have done over the past decade is unprecedented - one should therefore expect that the denouement will also unfold in an unusual manner, at least in some respects. I have suspected for a while now that credit spreads will not rise sufficiently in good time to warn stock market participants that something is amiss. It could well be that the coming "adjustment" in spreads will look like the seismographic image of an earthquake when it happens - going from "everything is fine" to "red alert" practically overnight. One must seriously consider the possibility of a stock market crash here, even though this is normally a low probability event. Keep a close eye on the previous low in the SPX at 2530, which is now almost certain to be retested. If it breaks on a closing level, then it's adios GBEG!
Attached charts: Gold Coppock curve buy signals
NEM - strength in premier senior gold producer a sign the lows are in
TMS-2 y/y growth with 12m moving average
Major holders of corporate bonds (the convocation of the mindless)
SPX, NDX and NYA - patterns eerily similar to 1929, 1987 and Japan 1990
SPX vs. Eurostoxx - major bearish divergences
On Fri, Mar 23, 2018 at 12:53 AM, J wrote:
am aware that the marty armstrong US$ 900 gold is still on the table
900 may hold for a few seconds, by would still be stressful if caught wrong-footed
of course, should gold zoom up 100 all of a second, the fretting would be as bad
tough gaming
On 23 Mar 2018, at 7:47 AM, R wrote:
any thoughts on petro yuan starting next week?
Seems to me that it is time to visit the gold shops.
On Thu, Mar 22, 2018 at 4:33 PM, J wrote:
A lot of evil people are taking the positions of authority.
Sent from my iPhone
On 23 Mar 2018, at 7:27 AM, W wrote:
John Bolton moves us ever closer to the nuclear button.Lunatic and terrible choice for NSA.
From: R
cnbc.com
It appears we are about to declare war on the world. The administration is now staffed with one unified voice.
Would it be Ukraine, or Syria, or North Korea or all of the above at the same time? My bet is on a Syria false flag chemical weapon attack so we can have an excuse to bomb the Russians and the Iranians.
Trade war with China is a lose lose proposition. If our costs go up, is J Powell going to call it inflation and raise rates faster, especially since all these jobs are now returning to the US?
I think I am going to dump my small long positions and go all short. Any thoughts?
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