Sunday, April 14, 2019

WikiLeaks Founder Assange Arrested And In Custody!

Assange, A Hero To Many, A Criminal To Others!
The news that Wikileaks founder Julian Assange has been arrested and is now in the custody of British police after a nearly seven-year stay in the Ecuadorian embassy does not bode well for freedom lovers. Wikileaks warned last week that Ecuador was preparing in revoke Assange's asylum and Assange was ousted on Thursday morning. In recent weeks there have been reports the relationship between Assange and Ecuador had become more strained. Ecuadorian President Lenin Moreno stated that Assange's "discourteous and aggressive" behavior, as well as "hostile" acts committed by Wikileaks have resulted in Ecuador revoking his asylum.

While Moreno has said Wikileaks' publication of sensitive Vatican documents earlier this year is the straw that finally broke the camel's back, we should wonder if this is indeed the motivation behind this action. This comes just after a March 30th article states that Ecuadorean President Lenin Moreno’s poll numbers keep on a downward spiral. New results published Saturday from local pollster Perfiles de Opinion show, only 26.82 percent consider that Moreno is performing well and only 17% of those polled endorse him. This comes as Lawmaker Ronny Aleaga told reporters that he received a dossier anonymously filled with documents that will implicate Moreno and his family in alleged crimes of corruption, perjury, and money laundering. This may be why Moreno has started to scramble for better relations with America, it could be he wants a powerful friend to help keep him in power.

Former Trump campaign chairman Paul Manafort's spokesman told CBS News, that during a trip to Ecuador in an effort to broker an investment deal between that country and China, Ecuador's president raised the possibility of a deal that would remove Assange from the country's embassy in London. This is something many American hardliners and the security apparatus dearly wanted. Another sign that better relations are desired flow from a trip to Ecuador during the middle of 2018, where, in a speech Vice President Mike Pence thanked President Moreno.  Pence said, "Prior to your election, our nations had experienced 10 difficult years where our people always felt close but our governments drifted apart.  But over the past year, Mr. President, thanks to your leadership and the actions that you’ve taken have brought us closer together once again."

Many Americans have paid little attention to the huge brouhaha over Assange and why the G-men want him thrown into a deep dark hole.  This all circles back around to the fact Assange and Wikileaks are guilty of warning us of what our government is doing and revealing a few of its dirty little secrets which embarrassed those in positions of power. Today we live in a world where evil companies such as Amazon spy on its customers and are working with this monster we have allowed to grow within our midst. The problem is this sector of the government and economy has grown bigger and stronger and by its very nature, it wants to take more control. We have every reason to be concerned and worried considering revelations of just how big the government intelligence agencies have grown since 9-11 and how unlimited their spying and surveillance operations have become.  

New NGA Facility Under Construction In St. Louis
For example look at the part of this apparatus known as the NGA, also known as the National Geospatial-Intelligence Agency. It has plans for a new $1.75 billion facility to be located in St. Louis. It should be pointed out most Americans have never heard of this agency and would not be able to explain what it does or the name of the person at its helm. The NGA is the agency that acts as our "eyes in the sky" and is in control of both the pictures taken and the data generated from them, and it is big, which this PDF link delving into its mission and St. Louis expansion confirms.

Throughout history, spies have always drawn suspicion. Conspiracy theories and "false flags" are everywhere and we have good reason to be suspicious because governments across the world often aided by an easily manipulated bias mainstream media are full in when it comes to generating propaganda. They often do this by spreading what has become known as "fake-news" as well as promoting vague unproven speculation and quoting unnamed sources. The contemporary term false flag describes covert operations that are designed to deceive in such a way that activities appear as though they are being carried out by entities, groups, or nations other than those who actually planned and executed them. All this makes arriving at the truth rather difficult and empowers governments to bend our opinions to fit their agenda.

The man responsible for bringing much of what we know about the size of what is sometimes referred to the "deep state" and for giving us an indication of what it does is Edward Snowden a former National Security Agency contractor. Snowden has become a polarizing figure, some Americans consider him a whistle-blower who sacrificed his career and freedom to inform the American people of government intrusion into their private lives, and others view Snowden’s motives as less than noble. Those in the latter camp believe that, intentionally or not, his actions benefited the intelligence apparatus of adversary nations and that he should be tried as a traitor and suffer harsh consequences for his actions.

It is not unexpected that those running different divisions of this colossal spy network would be a little miffed at Snowden and want his head on a stick because articles then reported how the surge in CIA resources funded secret prisons, a controversial interrogation program, the deployment of lethal drones and a huge expansion of its counter-terrorism center. One of the better places to get an idea of what is being spent, and where, is to explore the top-secret funding of the Black Budget operations in a site put out by the Washington Post. This is where you will find details of the $52.6 bn request for 2013 by America's 16 spy agencies. http://www.washingtonpost.com/wp-srv/special/national/black-budget/  Sadly, most of the information we have only looked at expenditures through 2013 when Snowden gave us a look into the size of this hidden empire.

Much of the case against Assange focuses not on the truth of what Wikileaks revealed but his role in obtaining the information. This brings us back to the issue of whether this has all gone too far and how to halt the growing power of this dark side of government. While we are constantly reassured the main goal of these clowns is our protection it is difficult to forget the words of Lord Acton who back in 1887 wrote, Power tends to corrupt and absolute power tend to corrupt absolutely. This tends to make it difficult for those of us who have grown distrustful of those in power to think they always do the right thing or that false flags have not become a common weapon in trying to embarrass your enemies. With this in mind and the warnings of writer George Orwell lingering in our minds about the ability of governments to morph into police states, we should be aware of the potential of abuse and that we may all be well on our way to becoming no more than slaves to those we have empowered to serve us.

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Footnote; We all know in life on occasion a need for secrecy exist. In an attempt to be humorous I find I want to add one final thought, a little more accountability would be nice, however, if they told us more they might have to kill us! The article below is the first of a series of how governments across the world are taking huge steps to control us and meeting little resistance in their efforts. https://Liberals And Conservatives Both Buy Into Orwellian Trend.html

Saturday, April 13, 2019

The Signs Of Economic Stagnation Are On The Rise

The main drivers of the economy remain as they have for several years, massive government spending and the expansion of credit to marginal consumers and big business. While small business loans are often hard to get, even small businesses have been able to partake in the flow of easy money by simply leasing equipment rather than taking a loan for a direct purchase. At the end of last year an article titled; "A False Economy Of Fraud Will Usher In A Hard Landing" explored how such actions always lead to problems. A false economy of fraud is created by seizing on a few positive numbers that can be spun and hyped to convince people all is well. In such a situation perception trumps substance.

A New Hospital On Every Corner A Sign Of Fraud
This can be seen in healthcare where we have seen the construction of huge facilities across the country. We may be wowed by these huge expensive new building but on the flip side, it has resulted in the shuttering of many smaller local and rural hospitals and clinic that were adequate to care for patients at a much lower cost. These massive new hospitals that stand as monuments to Obamacare often run far below capacity. Another example is in the oil industry where fracking and drilling for oil reserves with a very short life has created jobs and temporarily lowered energy prices. Both these industries have massively added to America's GDP quarter after quarter.  

On a daily bases, a series of what would have at one time been considered outlandish ideas, such as a war on cash, forgiving debt through a debt jubilee, giving everyone a guaranteed income, and even injecting money into the economic system by dropping it from a helicopter have all found their way into conversations. Such talk generally reserved for times of economic woe and considered as ways to jump-start an economy would not be so up front and center if real concern that at any time a rapid decline in the economy might take place.

Closings Are Having A Huge Economic Impact
 Across America retail stores closings have become so common they often go unnoticed. This has been described as "America's retail apocalypse" or the collapse of brick and mortar. It extends past what many people see as retail but has begun to take a toll on small business in general. Today small business is having its clock cleaned as they are forced to pay higher wages, comply with new government regulations and forced to compete with big businesses backed by Wall Street money. A sea of empty and under-leased buildings that once housed thriving businesses that provided Americans with good paying jobs stand as a monument to how we are hollowing out the economy. 

All this confirms that planners, with little skin in the game, love to overspend the money of others. The truth is, this extends well past healthcare and into housing, the auto sector, Wall Street, and most sectors of our economy. Over the years we have witnessed those in control of the purse strings rotating through the various sectors of our economy. Generally, their dabbling results in doing far more harm than good. for instance, in higher education, we have seen costs soar resulting in a student debt crisis that is crushing the ability of many young people to move forward with their lives. The poison leaking through our economy can also be seen in auto sales where roughly a third of those buying cars are taking out sub-prime loans stretched out far longer than ever before.

While government spending has proven able to stimulate the economy and supplement growth, history shows that over the long run government spending is a poor substitute for the free market in allocating capital to where it is most effective. A large part our perception of a booming economy flows from the low unemployment rate issued by the Bureau of Labor statistics which is based on employees "who did any work for pay or profit" during the week being surveyed, this includes part-time workers who are employed for just one hour a week and those working for low wages. It is important to remember these statistics do not include the large number of Americans who have given up looking or simply chosen not to work in recent years.

Stock Buybacks Drive Markets Higher (click to enlarge)
Low interest rates coupled with easy money pouring into the economy through the expansion of credit tend to create a false economy and the illusion of prosperity that can rapidly vanish. While conservatives and his supporters may try to deny it, much of the Trump economy is an extension of the policies ushered in during the Obama - Bernanke era. Trumponomics may include selective tax-cuts, that go largely unpaid for which add to the deficit, and some deregulation but overall is based on the same easy money policies exercised since 2008.

Proof of just how much this economy relies on the continued flow of cheap money was highlighted when the stock market started to wobble two months ago and President Trump ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party. Trump constantly points to the soaring stock market and its oversized influence as a confidence builder as confirmation of his skill in growing the economy and leading us forward. In truth, a flawed tax reform package that benefited the rich by fostering massive stock buybacks coupled with massive deficit spending has allowed the false illusion of prosperity to continue far longer than usual. 

This does not mean the bull market which is long in the truth will not die a sudden death. The speed at which companies such as GM and GE have suddenly pulled back should act as a warning and a reminder of how rapidly "Now Hiring" signs can be pulled from a window. Recent economic numbers show signs that economic stagnation is on the rise and we may be hitting a wall. At some point, the lift from credit expansion based on low-interest rates that has brought future consumption forward and increased speculation will have run its course. When that happens even massive government spending will become ineffective at creating economic momentum.

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Friday, April 12, 2019

Waking Up To A World Done Saved!

Rejoice, Everything Is Coming Up Roses!
This morning I woke up to a "World Done Saved!" This translates into smooth sailing ahead. Markets were up, deals had been made, and problems solved! In such a situation only the most cynical among us would have reason to doubt all is well. I just read it, so it must be true! Matter of fact, I would not be surprised April 12th becomes a day that will be herald as a turning point for all of eternity. Here are just a few of the stories adding substance to my claim. Jumping off the page were the following reasons to rejoice and no reason for concern.

The terrible, possibly one of the worse people to ever have lived, according to America's security apparatus, Julian Assange has been taken into custody. Assange the head and founder of Wikileaks is responsible for leaking government secrets. He is guilty of informing the world that America's government has purposely been lying to its citizens. Halting such leaks is key to the government being able to continue acting for "the greater good."

A company just announced it has successfully tested an integral component of its Synergetic Air-Breathing Rocket Engine (SABRE). This could clear the path for commercial hypersonic flight in the next decade, read the press release. Slap this baby on the wings of an airliner and we could travel at Mach 5 or even faster. This would allow us to travel from New York to London in just one hour. Adding to this good news, Reaction Engines responsible for this breakthrough is located in the Denver area. Being centrally located everyone can get to it, whereas, if it was located on one of the coasts it would be more difficult for buyers of their product to reach them.

Also, overnight, a sharp rebound in Chinese trade data coupled with a surge in Chinese credit bolstered risk assets across the board. This underpinned "signs of resilience" in the global economy. and acted as a catalyst that caused the S&P futures to rally back above 2,900, their highest level since September 2018. This rebound in March exports is considered proof of its economic recovery. The PBOC also reported new yuan loans of 1.69 trillion, far above 1.25 trillion estimate, while total aggregate financing in March soared higher 2.86t yuan. This smashed the 1.85t yuan estimate, and was more than four times the February 703BN yuan increase. This translates into proof that China once again is doing everything in its power to flood the economy with new credit reversing concerns from the sharp February TSF drop. 

Saving the best for last, the Asian Times reports the European Union and China managed to come up with an important joint statement. It outlined agreement on three quite sensitive fronts and paves the way, in theory, that a complex, wide-ranging EU-China investment deal may be signed “by the end of next year. The statement was signed by Chinese Premier Li Keqiang, European Commission President Jean-Claude Juncker and head of the European Council, Donald Tusk. It is already being described as "the real deal" and a departure from antics such as the endless Brexit soap opera.

In the article the writer notes, the joint statement reads in fact like a rose garden: “The high level of ambition will be reflected in substantially improved market access [and] the elimination of discriminatory requirements and practices affecting foreign investors.” Better yet, there were no accusations of “unfair” trade hurled at Beijing. It appears that Brussels and Beijing seem to be finally engaging in building some sort of synergy between the One Belt One Road Initiative and something only Eurocrats know actually exists but is outlined in the EU Connecting Europe and Asia project report.

The only real negative to all this great news is that the devil is in the details. This is where you find nothing is really different and in many cases, close inspection reveals that the motivation behind the headlines indicates trouble ahead. As for the examples above, should we celebrate the deep state's victory over Wikileaks an international non-profit organization that publishes secret information, news leaks, and classified media provided by anonymous sources? Do we really think the world will change overnight because jets travel faster? Is this unfinished deal with a deteriorating Europe and a desperate China really going to benefit anyone but the Chinese? It may be best not to ask too many questions or your enthusiasm may rapidly wane. 

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Thursday, April 11, 2019

The "Trump Economy" Is A Mirage Based On Spending

The Trump Economy May Be Flawed
Questioning the whole "Trump Economy" may seem in poor taste to those who have benefited so much but it is something we should do. The fact is Trump is not a rocket scientist something he most readily would deny, matter of fact he may not fully understand the economy. I base this on my observations of his reaction to many events that have occurred over the years. My conclusion is that Trump is not an economist but simply a businessman who loves the economy when it is in sync with his investments.

Trump engages the world on several levels, as both a communicator and as a politician he has displayed a style uniquely his own. With this in mind, it is important to remember Trump is a creature of the late 1900s and much of his success is rooted in inflation driving up real estate values and retaining that wealth by playing tax games. Throw in a few well-positioned bankruptcies that left his unfortunate investors and vendors under the bus and we are left with the real Donald. He could be described as a self-promoting charlatan that has in his own words "negotiated deals" that have allowed him to move forward.

The unexpected occurred when Trump was elected, the stock market soared and he quickly stepped up and declared the credit for the move was because of his vision. Oddly, Trump never was a stock guy but he now points to the market as proof of his success. Wall Street may have been on a roll since he took office but the economy on Main Street remains troubled. To those looking a little deeper into the American economy, it is clear many problems still exist such as growing inequality and more dependence on government spending. This spending and artificially low-interest rates, however, do not always lead to nirvana. This can be seen in the government bond sector where investors seeking safety have driven yields into the basement.

It does appear, however, that Trump does understand that bloated government spending drives the GDP ever higher. Whether it be military or infrastructure spending. This should give America great concern for today way too much of our focus is about Trump "in the moment" rather than "America going forward." It is difficult to ignore that immediately after taking office Trump loaded his cabinet with  Goldman Sachs executives, the same loathsome creatures that have created so many problems across the world. It seems Trump is more interested in the perception all is well than substance or the long-term health of the economy. This means we should not be surprised to find the economy is left flapping in the wind when all is said and done.

Trump Has Pushed The Fed Towards Easing
Of course, the media always comes up with an explanation for market moves and many times they seem a bit far fetched. In the end, anything can be explained away, bad news is good news and such. Still, the current conventional wisdom remains that any weakness in the economy ensures another wave of stimulus will flow from the Fed.  Without question, and as demonstrated by the Fed’s recent decision to hold rates steady nothing has changed and the will to really stress the system is again on hold.

Without a doubt, because of Trump's braggadocios nature he now owns not just the stock market but the overall economy as well and when both turn south the blame will fall directly upon his shoulders. In all truth it should, as an economic doctor Trump is a "quack" that has prescribed a treatment full of inconsistencies. His goal has become to produce numbers with little regard as to what lies behind them. This is evidenced by Trump's recent actions which include monkey hammering the Fed and called for QE4. He has also called for and badgered oil producers to produce more in an effort to lower prices. Trump even has Larry Kudlow, Director of the United States National Economic Council, running around calling for a 50bp rate cut.

What is being ignored is the structural issues that haunt America's competitiveness and far outweigh the benefits of lower taxes. The ugly truth is American companies have little reason to bring jobs home. The logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. The tax bill Trump served up did little to level the playing field between low wage countries and predators such as China. It merely encouraged companies to spend money doing stock buybacks driving their share value ever higher. Issues such as healthcare cost and over-regulation continue to act as barriers to doing business in America.

Trump's Ugly Legacy - Debt!
 Sadly, it is only massive and unsustainable deficit spending that continues driving our economy forward. This over the top spending coupled with a series of one-offs is why investors would be wise not to accept America's recent GDP as verification that the economy is hitting on all cylinders. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.

Government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future. After criticizing Obama and the Democrats for taking us down this road we find Trumponomics is little different. With the government driving demand we continue to see the economic imbalance grow and should prepare for inequality to worsen. This will become obvious over time as sharp-elbowed preferences feed money into larger and sanctioned businesses and away from small local business.

Any notion that as a no-nonsense businessman Trump would halt wasteful government spending and go about setting our house in order is gone. The problem disenchanted Trump supporters have with the current state of the union is that they have no real alternative to him. We live in a political world devoid of a "one size fits all" hero of the people. This means, no real choice or options exist.  Whether it was Trump's promise to "Make America Great Again" or simply that he was not Obama, Hilary Clinton, or one of the other miserable choices we were given it seems it was just enough to get him the big prize.

Unfortunately, Trump's history of flip-flopping on issues and constantly capitulating or redefining his stand has left many of his supporters appalled and questioning whether he really has a spine. Still more important to investors contemplating the direction of the Trump economy is the "hope" that central banks will extend and expand the pretend state of QE and once the US and China sign a trade deal global growth will re-accelerate in 2020. This is what has ushered in a stock market that soars higher even as cracks continue to appear in the false economy. Trumponomics is built on perception rather than substance which like a mirage can vanish before your eyes.

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Saturday, April 6, 2019

Japan's Stock Market Held Up By BOJ Buying Stocks!

The BOJ Has Masked Reality By Buying ETFs
For years Japan has been the poster child and living proof that low-interest rates do not guarantee economic growth and prosperity. Oddly with so much economic dislocation over the last decade, people seem to have forgotten the lessons we thought we had learned as Japan struggled. Now it seems the whole world is on a path that mirrors the same unsuccessful path taken by Japan since its bubble economy popped decades ago. It is a path that avoids real reform and bails out the very people that caused many of our problems.

The BOJ  has been pumping up Japan's stock market by buying into the ETF market. All this has morphed into a program that seems akin to fraud based on doing "whatever it takes" to give the appearance their economy is moving forward. Following along the line of thought that while there is no way of avoiding the final collapse of a boom brought about by credit expansion years ago, Ludwig von Mises wrote; "The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." In short, the BOJ now has little choice but to go all in which strips away any illusion all is well.

Japan Leads The Way In This Experiment
Before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. At the time the idea was that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. For decades Japan languished and avoided disaster only by the fact that it enjoyed a large trade surplus year after year. Today much of that trade surplus has vanished but Japan's massive debt remains.

Recent data shows overseas investors dumped the most Japanese stocks in 31 years in the fiscal year ended Sunday. Official market data shows these market participants unloaded about $50 billion worth of shares on a net basis. this was the second straight year of net selling and the highest sell-off since 1987. The reason this selling caused barely a ripple in Japanese stock prices is because the Bank of Japan's asset purchases absorbed all the bleeding. The near-record liquidation was matched nearly yen for yen as the BOJ bought 5.65 trillion yen worth of equity exposing its oversized role in the market.

Central Banks have long pointed to stock markets as the leading indicators for regional and global economies. The fact that in 2016, the BOJ raised its annual ETF purchasing goal to 6 trillion yen and since then Kuroda unleashed an unprecedented stock buying rampage is a reason to doubt the validity of Japan's market. Currently, the BOJ's estimated aggregate ETF balance totals around 250 billion dollars. In some ways, the actions of Japan's central bank could be considered nothing more than a new model of "stealth nationalization." This is a course filled with moral hazard.

Recently articles have surfaced exploring how the central banks and governments have distorted true price discovery in stock markets across the world. By buying stocks they are taking or transferring branch of industry or commerce from the private-sector to state ownership or control. The key word here is "ownership." This is because the state may choose to abdicate control over decisions leaving them in the hands of management. That being said, it is hard to deny that the person or entity that owns the stocks still controls its valuation as the "market maker" setting its price. Since true price discovery is the bedrock of free markets we cannot underestimate the importance feedback loops between assets prices and input signals play. These are critical in determining value, especially when it comes to assets such as stocks, bonds, currencies, or paper promises which carry no utility value and can perform no useful task.

When true price discovery is lost or impaired management teams no longer get market feedback as to whether an executive decision is good or bad, this dilutes the market's ability to reward and punish companies no matter how disastrous their decisions. Instead, it masks signs and warnings of a company's demise. The fall of great empires throughout history shows states of unsustainable equilibrium cannot continue forever. This means that first and last price backstops become invalid and creates a situation where shareholders may rush to liquidate in panic. When this occurs authorities tend to halt capital markets indefinitely in a last-ditch attempt to make selling impossible, this creates a false floor under markets creating the illusion of value where it no longer exists.

After 2008 Japan made the decision to put itself on the leading edge of an experiment to propel its economy forward. This includes the BOJ not only expanding its balance sheet but pumping up the market by jumping into the ETF market, what the country is not doing is taking big steps toward economic reform. All this has morphed into a program that seems to share a key focus on doing "whatever it takes" to keep the economy moving forward. The problem in pursuing the flawed policy of never allowing the market to slip but putting it on a path ever upward until everyone doubting the strength of the market finally capitulates is that it thwarts true price discovery.

The BOJ's Soaring Share Of Market Akin To Fraud 
To keep the illusion alive central banks must continue expanding credit and debt so the wheels do not come off the economy. It would be rather hard to sell the illusion all is well if unemployment soars and defaults skyrocket. This means the central banks remain trapped in a box Ben Bernanke built and that Janet Yellen reinforced.

A while back I outlined in an article how central banks through a stealth move were slowly buying equities and corrupting true price discovery. An interesting twist is that because money can easily flow across borders not all this is taking place in only the country where the credit originates. While a person can interpret all this as proof the markets are indeed rigged it also signals that any fall in prices is merely a signal for central banks to double down and rush in to buy more. It is easy to see how this feeds into a self-fulfilling loop of speculation. This falsely accomplishes two things, it bolsters and supports current holdings while reinforcing the image markets are climbing higher because our economic future is getting brighter which is a narrative mainstream media is glad to provide.

The Case Can Be Made For A Weaker Yen
This all started as a "short-term solution" but Ben Bernanke upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. When other central bankers embraced this solution the world embarked on a grand experiment that never really gained traction. The key problem is momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed.  

Current policies are not creating true growth in productivity or real wealth but simply driving up the value of certain markets and assets. This benefits those who own or have assets but does little or even hurts the poor or those who have nothing. It also increases economic inequality and social unrest. You could say this lessens or reduces the impact of existing debt but this is generally true if we see massive inflation which causes wages and income to soar. It is important to remember this is a "high stakes" game and a strong incentive for central banks to continue on this course is that pension funds around the world are in serious trouble and any fall in their assets would be a disaster.

As we continue down the path to nationalizing debt two enormous problems exist, the first is the economic growth lacks any real quality and the second even bigger issue is that under this policy eventually central banks will control or pretty much own everything at a distorted value they determine best suits their narrative or purpose. The good or bad news depending on how you look at it is that the plan may not work and it may come crashing down around those in charge of this great manipulation. All this is akin to a doctor telling a patient to double or triple his dosage when the medicine does not work. Policymakers across the world have entered uncharted waters that are full of peril. While global capital markets are now delighted by the recent U-turn in monetary tightening, it just makes the eventual moment of reckoning that much more painful.

                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
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Footnote; Many economists fail to consider the strong the role China now plays in the Japanese economy. More on that subject in the article below.
 http://brucewilds.blogspot.com/2017/10/china-china-china-it-is-all-about-china.html
 

Thursday, April 4, 2019

China Remains Steadfast In Trade Talks Yielding Nothing

China's C919 Airplane Will Compete With Boeing
The fact is, China has little intention of altering its course and continues to concede little as trade talks drag on. Their goal is to wear-down the impatient Americans. China is a state-run economy based on a business model that is geared to expand by crushing the competition by using trade as a weapon. The simple truth is China has no intention of being locked into producing low-end manufacturing of basic goods but is determined to move into high-tech products.

Beijing has tried hard to convince Washington to lift all of the trade war-inspired tariffs on Chinese goods as part of a sweeping trade accord. Bloomberg reports China is again offering up pathetic tokens in an effort to take American eyes off important issues. Up until now, this strategy has worked with the White House delaying their planned tariff increase from 10% to 25% on $200 billion of Chinese goods. These "shiny baubles" include extending the suspension of retaliatory auto tariffs imposed last year during the trade debacle and re-promising to tighten controls of the deadly synthetic opioid fentanyl. Neither of these are new concessions but Beijing is hoping they will help foster a "positive atmosphere" for talks by "baffling us with bullshit."

Sadly, President Trump has tied so much of his success to climbing stock market valuations that he appears to be ready to capitulate and fold like a cheap umbrella on his demands China levels the field when it comes to trade. This translates into Trump taking any deal so he can claim victory. Many critics and even Trump's supporters see this is becoming a pattern and are beginning to discount many of his claims. Bloomberg reported Wednesday the goal over the next several days "is to strike an agreement on the core issues so President Donald Trump and Chinese leader Xi Jinping can hold a ceremony to sign a deal." To achieve that, it is said, Lighthizer, Mnuchin, and Liu held a working dinner Tuesday night. Knowing how eager the President has become to reach an agreement has removed much of China's need to compromise.

There is even talk of a 2025 deal implementation target, this is totally insane and shows America has no stomach for playing hardball. Such a time frame would fall into Trump's second term if he can win re-election This is the same as America admitting the for all practical purposes the talks and the deal have been a sham. This could give markets a brief push higher by allowing the US-China trade war to vanish in the rearview mirror. Still, it solves none of the problems that made the talks necessary in the first place. Overall, while the general view is that some progress has been made, not enough has been done to adequately address difficult issues such as intellectual-property protection. If Trump signs the current deal, it virtually assures that there would be no IP protection and China will revert to its old ways such as reverse engineering American products and stealing technology. 

China Excels In "No Nonsense" Manufacturing
A great deal of China's economic plan centers around both state-owned and private firms investing in and acquiring foreign companies for the purpose of stealing their technological innovations. Global investment numbers show that in 2016, the top two industries in which Chinese firms engaged in foreign acquisition deals were manufacturing (at about $30 billion) and information technology/software (about $26.4 billion). It is also important to note that in order to receive permission for foreign companies to do business in China it is common for the Chinese to insist the company shares and transfers their tech knowledge to their Chinese joint-venture counterparts which excel in "no-nonsense" manufacturing.
 
Circling back to the issue of China and its strategy going forward, people are naive if they do not recognize China will do everything possible to exploit the distinct advantage a state-driven economy has over free enterprise, With an expanding military armed with a slew of modern cutting-edge weapons produced at home China intends to be ready to flex its muscle if necessary. Predatory in nature, such systems have the ability to quickly exploit the weaknesses of its competitors. It is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition. Subsidizing those companies working within its system in a multitude of ways helps China achieve this goal. 

China's history of exporting goods at cost or slightly below cost in exchange for manufacturing jobs is predatory and we in America are their prey. This happens because countries are willing to allow China to move ahead unrestricted. Subsidizing those companies working within its system in a multitude of ways helps China achieve this goal. Over time the trade imbalance being created will eventually lead to conflict far greater than what we face today. Unfortunately, it is very likely even a good trade deal with China will by itself do very little to reinvigorate the American economy, however, a real deal could alleviate some of the damage China is inflicting upon us every day.


Footnote 1; The link below is to an article about China's new C919 airplane that will soon compete directly against Boeing.
 https://brucewilds.blogspot.com/2019/03/chinas-c919-poses-major-threat-to.html

Footnote 2; This is all very reminiscent of Trumps move to force funding to build a wall. The link to an article about the failure of an expensive government shutdown to produce anything of substance can be found below.
https://The Partial Government Shutdown - An Expensive Farce.html

Wednesday, April 3, 2019

Bonds As An Investment Have A Very Ugly Side

                                                        
Interest Rates Too Low for Too long Spells Trouble
Bonds as an investment have been deemed safe by many investors and financial advisors. This has caused many people to forget after their nearly four-decade run that bonds have a very ugly side that can yield great pain. The yield curve inverted last week moving many investors to start the countdown to the next recession and causing bond yields to fall as more money shifted in their direction seeking shelter from what investors feel may be a coming storm. With CPI inflation falling here and in Europe we are seeing central bank liquidity continue to rotate out of risk assets into what many people see as the last game in town which is government bonds.

Today's lower yields may be part of a greater conundrum created by the reality of too much freshly printed money floating around and people needing someplace to stash it. An influx of foreign capital and a strong dollar are also contributing to these lower yields. Investors look for large markets to park their money because they imply a degree of liquidity that insures a quick exit if necessary. The sharp move lower in yields has resulted in the first inversion in the recession signaling 3M-10Y curve since 2007. Normally this would be an indication many investor's expected inflation to remain below 2% for decades. Whether this is a true reflection of what investors truly believe this is up for debate because this could also be driven by the search for a safe place to store wealth before a crash.

Is The Bond Market A Bubble?
It has been several years since we have seen so many predictions of interest rates remaining low forever and a day. Currently, it appears the whole world is again trapped in an easy money low-interest rate environment with no way out. This is a sign that in the future a massive problem is developing which holds huge economic ramifications and a great deal of risk. Many of us think the bond market remains a bubble and when it pops it will leave a massive path of destruction in its wake, yet it is clear the general public is totally unaware of the ramifications it will have, these even extend down to reduced payouts on pensions. 

Many of us have a problem lending hard earned money out for a long period of time and with good reason. Rates are based on predictions of future government deficits and events around the world that may or may not unfold as expected. It is not reassuring to know these forecasts are often formed and made on assumptions based on rosy scenarios or politically skewed to benefit those in power. Knowing of the effect that interest rates have on the value of bonds in the secondary markets, one might deduce that the nearly 40-year bull run on bonds will end the moment rates clearly signal they are about to rise. To give you a sense of what this may mean to U.S. Treasury Bond investors a 10-year treasury bond issued at a 2.82% interest rate could see a 42% loss in value from a mere 3% rise in interest rates. This means if you’d held $100,000 in these bonds prior to the rise in rates, you would only be able to sell those bonds for $58,000 in the secondary market after the 3% rise. Please note the $58,000 you get back would be before factoring in the loss of purchasing value lost from inflation.

Much of the massive debt hanging above our heads in 2008 has not receded or gone away. In fact, global debt has surged since 2008, to levels that should frighten any sane investor because debt has always had consequences. Because central banks across the world have acted in unison each stepping up time and time again to carry things to the next level does not change the economic reality that this situation is unsustainable. They have merely transferred this debt to the public sector where they feel it is more benign. With a series of off-book and backdoor transactions, those in charge have transferred the burden of loss from the banks onto the shoulders of the people. This should give us little comfort, shifting the liability from one sector to another does not alleviate the problem. In this case, bonds are generally the place where the risk has been transferred and history has shown the promise of payment in the future is often broken.

In light of rapidly growing global debt, it might soon become apparent that storing your wealth in any kind of  "paper promise" is a bad idea. This means, far more concern should be focused on what happens if this is indeed a bubble market and it pops. The idea of money quickly leaving the bond market should worry to all governments. Bonds are not just issued by America but by countries all around the world. While some forecasters predict America is now set to grow at the fastest pace in a decade debt investors are signaling their skepticism as slowdowns in Europe and Asia threaten the U.S. economy.

The term "liquidity trap" often used by Allen Greenspan and others can be difficult to understand. It can occur when all the additional money poured into the system, even when coupled with lower rates, can no longer drive the economy forward. This could happen if people realize the return on loaning money is simply not worth the risk!  Why do you want to loan money if may never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth is in "tangible assets" and lenders will start loaning money only for short periods at super high rates. This will signal that we are at the end game, the collapse of the economic efficiency of credit has powerful implications because credit is the lubricant that greases the wheels of commerce.

Consider the possibility that inflation has been kept in check primarily because we as a society have invested a large percentage of our wealth into intangible products such as stocks, bonds, and even currencies. If faith drops in intangible "promises" and wealth suddenly flows into tangible goods seeking a safe haven inflation would soar and this would drive interest rates upward. Like many of those who study the economy I worry about the massive number of promised being made and the debt being accumulated by governments, this all ties into the pace at which central banks have expanded the money supply. The current subsidizing of the auto, housing, and financial industry with an ad hoc disregard for basic economics produces a very flawed kind of growth. For years the ECB has manipulated bond rates lower for countries undeserving of such, as a result, Italy, and others have kept their debt service cost in check, but the fact is artificial rates from central banks mask and perpetuate a debt problem that will come back to haunt them.

The idea that markets are always efficient is a myth manufactured by so-called experts residing in the ivory towers of academia. Disconnected from the real world those responsible for guiding our banking institutions often fail to see potential second and third order effects of debt monetization. This poses a great threat to the stability of our economic system. A policy of blindly trusting anyone who claims to be an expert has disaster written all over it. If the bond market is indeed a bubble the implications of its collapse will be massive and such an event will not only affect bondholders but will test the economic foundations of both the country and the world. Not only will bondholders be stripped of wealth but soaring interest rates will magnify the nations debt service and rapidly impact our deficit in a negative way.

Ironically, the Wall Street Journal reports that nearly bankrupt  Illinois and its biggest city Chicago just kicked off a move to borrow hundreds of millions of dollars. This will test investors’ willingness to lend to stressed governments prone to spending more money than they bring in. The fact is when governments default the pain goes everywhere and a dagger slips into the hearts of bondholders who receive nothing or little of their investment back. Whenever I start to think this long credit cycle and massive expansion of debt will never end I slap myself and force myself to remember that periods of rapid credit expansion always end the same way and that is in default. It should never be forgotten that debts can go unpaid and promises broken, the impression that many people hold, "things are different this time" will surely be tested. As the next chapter unfolds in America's financial future those rushing to buy bonds may someday rue the day they made this decision.

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Footnote; Below are two prior posts. One concerning how in 1980 the Fed turned bonds on their ear by raising rates to 20% if you have the time it takes you down an interesting path explaining how we got to where we are today. The other argues much of this debt will end in default as history shows it always does. As usual please feel free to explore the blog archives and as always your comments are encouraged.
http://brucewilds.blogspot.com/2015/04/interest-rates-inflation-and-debt-matter.html
http://This Time Is Different-But Is It Really? html