Sunday, August 25, 2019

Trump Continues His Effort To Be Too Clever By Half

Anyone with a lick of commonsense knew Trump's detractors would be gunning for him during his trip to Europe. Trump has not disappointed these people by continuing his effort to come across as too clever for his own good. This has gone so far that during the “Overtime” segment of HBO’s Real Time, former North Dakota Senator Heidi Heitkamp (D) made fun of Donald Trump even before he arrived at the G7 summit in France. She did this by doing an impression of Trump "pouting." Heitkamp said Trump will pout his way through the weekend because the other world leaders loathe him. While nobody cares about the opinion of this woman, sadly, many people tend to agree that Trump is held in low esteem.

To make matters worse Trump gave these people more ammunition when he said he has doubts about his actions. During breakfast with the UK's Boris Johnson at the G-7 meeting in Biarritz, France Trump acknowledged having second thoughts about the escalating the trade war with China. A top spokeswoman later tried to clarify his statement to mean he regretted not raising tariffs even more. Adding to the confusion was Trump's response to questions from reporters on whether he had any second thoughts about his escalation in the "tariff war" by saying, “Yeah, sure. Why not?”  When the question was repeated Trump replied: “Might as well. Might as well.” Another reporter then followed up seeking clarification, Trump responded, “I have second thoughts about everything.”

Trump Often Comes Across As Too Clever By Half
These are not the kind of words most voters want to hear flowing from the Presidents mouth on such important issues tied directly to the global economy. Remember this is a guy that fits the mold of a person that is, "too clever by half." This is an old British saying, it refers to someone who is too confident of their intelligence in a way that annoys other people.

Often the reason a person gets labeled this way is because they come across as arrogant. The word braggadocios has been used to describe Donald Trump, synonyms for this word according to are blowhard, boaster, bragger, show-off, and windbag. None of these are very flattering and over time such behavior has a way of wearing on people which often results in a backlash accommodated with negative consequences. This may be why the polls continue to show Trump lacks broad support and his favorability ratings can't seem to get out of the cellar. 

Ironically, in the past when he took strong military action such as in bombing a Syrian airbase in reaction to a chemical attack that killed children, he did receive kudos, however, it was from "never Trump" people. The pop in his polls came from neocons and liberals who believe in intervention. In fact, many of the supporters that constitute his base were a bit down in the mouth. Another way to gauge how President Trump's base is reacting to his moods is how they react to the tweets he sends out at any time of the day or night. When he twitters the President is able to bypass the mainstream media but it often gets their attention and a fair amount of negative coverage. Still more important is the reactions to the messages he twitters can vary greatly among those who voted him into office.  

One thing many people find troubling is that during his time in office Trump has on more than one occasion brought America to the brink of war, and I don't mean with just one country or foe. You can flip a coin as to whether it is the Korean peninsula that will light up with a nuclear glow, Europe erupting into conflict with Russia, or we will awaken to find thousands of American troops being dispatched to the Middle East. Years ago an attorney cautioned me that when negotiating a deal I sometimes came across as a little coy, I have always questioned his terminology, however, admit that when young and leaning far into the wind I might have gone a little too far. My point is when you play fast and loose the potential that you may lose control of events increases dramatically.

A Growing Concern For Trump Supporters
Over time a number of articles have surfaced on the subject of Trumps "flip flops." Needless to say, this does not bode well for those seeking stability. Let me be clear, we are not talking about minor issues but some of the key issues of the day such as whether China is and should be pursued as a currency manipulator or whether he will try to get rid of Powell as head of the Federal Reserve. Even his stand on NATO which has a direct bearing on national security. He even threw his support behind the Export-Import Bank  after opposing it during the campaign. This leaves many of us a bit puzzled.

The mainstream media is quick to point out Trump's shortcomings and make a big deal over every falling out he has with his staff. Still, he remains brash and bold and supremely confident. While he claims he's running a well-oiled machine others give the impression that a revolving door needs to be installed to accommodate those rapidly becoming disenchanted with the way things are being run. Inside the White House, a bubbling cauldron of different ideas are competing for power and the President's ear. With this in mind, everyone should remember it was a populist message of "draining the swamp" that resulted in his election and while often discounted as "common folk" these voters are not necessarily as simple-minded as the pundits might lead you to believe. 

For many Americans supporting Trump was not easy or did not come naturally, however, they saw Hillary Clinton as even less acceptable. A series of recent flip-flops on positions are beginning to irritate and concern his base. If this continues they will begin to doubt what he is really about. If voters who supported Trump become convinced he is playing them for fools it is likely they will loudly voice their discontent. One argument to explain Trumps is that we are looking at a choice of style. Trump has repeatedly said he likes to play cards that are unexpected to keep the opposition off balance, however, when you unsettle those who support you it has a way of coming back to haunt you.

This article has been brewing for a while, like many voters, I viewed Trumps failure to move healthcare reform forward coupled with Republicans pathetic excuse for an answer to improve healthcare as far short of inspiring. This has raised a great deal of doubt about his ability to deliver on other issues and while Trump predicted that Democrats will own ObamaCare if it falls apart reality may not support his view. A recent poll from the Kaiser Family Foundation shows a majority of voters, 61 percent said they now blame Trump and Republicans for “future problems” with the healthcare law. It seems the GOP had their chance to fix it and are now responsible for any problems with it moving forward.”

While some of this can be explained away as a strategy change or that he is evolving it has and should raise concern. Part of the problem is we were promised better than this, and not only better but quickly, we were promised we would win so much we would get tired of winning. To hear Trump talk at times you get the idea he thinks it is all about him. For example, Trump has both praised and blamed himself for the strong dollar. “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,” said Trump. This means whether he realizes it or not, by taking credit for things not directly flowing from his position he also opens and creates the situation where he may also be blamed and have criticism heaped upon him for things out of his control.

We must not underestimate just how polarized America is and because of that any event playing out poorly or a few bad news cycles can put Trump in a precarious position. A little humility on the part of Trump would go a long way towards defusing the anger that is beginning to smolder as his supporters witness a flip flop here and a flip there. With Trump detractors eagerly awaiting the day when he fails and receives his comeuppance Trump best remember who his friends are and that in Washington he has very few of them. There will be bad days, there always are, and before they erupt Trump would be wise to remember the message he put before the people that put him in office, if not the populist most likely unleash their wrath upon him.

Saturday, August 24, 2019

Liquidity Is Often The First Casualty In A Financial Crisis

During Market Carnage Liquidity Takes Flight!
For years investors have been rather complacent to the risk they faced and because of this, leverage has slowly built up within the system. It is important to internalize in your mind that buying the dip is not a trading strategy carved in stone. There is a reason we have been warned; "do not to try to catch a falling knife."

Sadly, banks have a way of failing us when we need them most and that is a big part of why liquidity is generally the first casualty in a financial crisis. A huge part of the problem is rooted in the economic tool known as leverage. The same massive gains leverage brings, also showers us with huge losses that rapidly paralyze both individuals and financial institutions. When volatility hits the markets any person or group with less than stellar credit are likely to find they are unable to borrow new money.

Often even those with good credit are forced to watch as even existing credit-lines are cut. The bottom-line is banks do not like to loan money to those that need it but prefer to line the pockets of those who dwell in their inner circle. Many of the credit-lines that existed prior to 2008 have gone the way of the dinosaurs with banks claiming new government regulations are to blame for the way they do business today. Much of this is hidden away in that pesky small print that exists is all the paperwork we sign when dealing with these institutions. This is especially clear in the commercial real estate market. CEO Chris Maher of New Jersey’s Ocean First Bank has already pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans. He told Reuters.

“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”

It is the slow movers and common folks that will suffer the brunt of a falling market. Phone lines get jammed and computer access backs up or becomes unavailable as "at market orders" flood the system. With this in mind, we should not rule out the possibility that much of the "smart money" has already exited the stock market in recent months or hedged in a way to minimize potential losses. Another problem for the bulls is that many shorts got out of the market long ago and today many traders are playing on borrowed money. This means the margin calls will be fierce. Market uncertainty combined with the desire to protect capital tends to create a "circle the wagons" mentality. The lack of liquidity it fosters will be particularly hard on high yielding and smaller markets with narrow appeal.
Liquidity Falls Off The Chart In A Financial Crisis
Uncertainty rules during a financial crisis and when liquidity drys up cash rapidly becomes king. Anyone doing a great deal of negotiating knows the one-word people wanting to reach an agreement don't want to hear is "IF"! This is why I will never call the holder of cash stupid unless it is during a long period of massive inflation.

We should remember how well banks fare if assets retrench will depend a great deal on the collateral they have glommed onto prior to the onset of the difficulties. Falling oil prices are already putting pressure on a slew of oil patch loans and bonds. It is also important to remember historically banks have been poor managers of any tangible assets that require day to day care. One thing banks do not need is a slew of properties defaulting on loans and coming under their control.

In a recent article, I questioned whether we have entered the period that may someday be referred to as "The Great Reset" where values might be shaken to their core. If so, the ramifications are that assets such as stocks could take it hard on the chin. When adjusted for inflation, the case could be made that stocks may not recover for decades. The market surge since 2008 has reinforced the myth that stocks move upward and always recover if you ride out market tantrums, however, this is not true. All those owning shares of GE, GM, and a slew of other companies caught up in the last crisis will confirm that holding on to an investment does not always make you whole. When markets cross into bear-market territory and retreat from their peak market psychology begins to change and "worry" becomes the word of the day.

During the December 2018 market pullback, the five FAANG stocks. Facebook, Amazon, Apple, Netflix, and Google/Alphabet together accounting for more than two-thirds of the Nasdaq-100's loss. When such high-flyers that are always being hyped in the news get whacked traders take notice. With liquidity on the wane and traders rather nervous this might be a bad time to buy the latest dip. Remember the market has climbed a long way in the last ten years without a major correction. While the idea of buying stocks when the market is out of favor sounds great pulling the trigger is difficult in an unstable market which causes many investors to alter their plans. Be careful out there, and remember capital preservation is job one!
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Saturday, August 17, 2019

The CPI Understates Inflation Skewing Our Expectations

The purpose of the consumer price index (CPI) is to reflect just how much inflation is eating into both our incomes and our savings. Consumer inflation has been estimated since the 1700s, by measuring price changes in a fixed-weight basket of goods. This method was seen as a way of measuring the cost of maintaining a constant standard of living. In the last 30 years, a growing gap has become obvious between government reporting of inflation, as measured by the CPI, and the perception of actual inflation held by the general public.

Currently, the government understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. This extended into the BLS re-weightings sales outlets such as discount or mass merchandisers with Main Street shops. Those promoting this change claim it is simply another way to measure inflation and it still reflects the true cost of living. Politicians touting the benefits of this system created it as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc. By moving to a substitution-based index and weakening other constant-standard-of-living ties those reporting inflation have muddied the water as to just how much we are being impacted by inflation.

The general argument was that changing relative costs of goods results in consumers substituting less-expensive goods for more expensive goods.  Allowing for a substitution of goods within the formerly "fixed-basket" would allow the consumer flexibility in obtaining a “constant level of satisfaction." This adjustment to the inflation measure was touted as more appropriate for the GDP concept in measuring shifting demand and weighting actual consumption. Other tricks were also used to give the illusion of less inflation. In cases where the quality of the product are deemed by the government to be "improved" prices in the CPI, calculations are now adjusted lower to offset the higher quality. Extending this idea the Baskin Commission Report, December 4, 1996, actually used steak and chicken for its substitution example.

Bloomberg recently reported that a shopping trip to Walmart cost an astounding 5.2% more in June than it did just a year ago. Sadly, this is the type of inflation directly impacts many of the consumers that can least afford it. Recently product manufacturers like Coca-Cola, Pepsi, and Procter & Gamble all started raising prices across the board, which means that "something has to give." Retailers can only absorb so much of these increases before being forced to pass them on to consumers. Walmart values low prices and it is a key part of their marketing strategy but higher wages, transportation costs, and e-commerce investments have all pressured Walmart to bump some prices higher.

Click On Image To Enlarge
Many smaller specialty retailers like O’Reilly Automotive and Tractor Supply Company have also been hiking prices. Many of these hikes have been blamed on the trade war and tariffs but the economic reality for what is occurring goes much deeper. For years consumer prices have been held down by America importing goods from countries with cheap labor but that has a hidden cost which is the loss of manufacturing jobs. Another huge issue is that inflation varies drastically from one sector of the economy to another. When it comes to assessing real-world inflation that is having a direct impact on consumers, the Fed is conspicuously absent from this important conversation. The day to day increases in prices we see add credence to the informal evidence and occasional surveys that indicate the general public believes inflation is running well above official reporting. The numbers government pumps out today are politically motivated and the result of changes made in the 1990s when Washington moved to change the nature of the CPI.

These changes were promoted under the cover of academic theories and the sinister move was masked by the contention was that the CPI overstated inflation. Katharine G. Abraham, then commissioner of the Bureau of Labor Statistics, laid out her recollections in an August 1996 paper: “Back in the early winter of 1995, Federal Reserve Board Chairman Alan Greenspan testified before the Congress that he thought the CPI substantially overstated the rate of growth in the cost of living.  Greenspan's testimony generated a considerable amount of discussion but the general public paid little if any attention. In truth, the cuts in reported inflation were part of an effort to reduce the federal deficit without anyone in Congress having to do the politically impossible which was to register a vote that would harm the image of Social Security.

The Importance Of  The CPI (click to enlarge)
While the substitution-related alterations to inflation methodologies were made beginning in the mid-1990s the introduction of major changes to concepts geared towards making us feel better about things began in the 1980s. The aggregate impact of the reporting changes since 1980 has been to reduce the reported level of annual CPI inflation by roughly seven percentage points meaning there is no question as to the understatement of inflation. If the methodological changes did not reduce CPI inflation reporting significantly, the politicians would not have pushed the changes through. The important issue is that without these changes, Social Security checks would be more than double what they are today.

A big factor in a false cost of living is that the purchasing consumer is not given a choice when paying out-of-pocket the full price for a product declared to have quality improvements they do not want or need. An example of this is the government-mandated the use of a gasoline formulation that was to improve auto emissions. It added ten cents per gallon to gasoline costs, but that cost was excluded from CPI calculations even though the person filling his or her gas tank suffered the actual out-of-pocket expense. This is also clearly seen in new computer and televisions. New features are deemed quality improvements resulting in downside price adjustments to the CPI even when the consumer may not use or want them. Also absent from this formula is recognition of how housing prices vary so greatly across the nation. 

To understand how just how large the impact has been on the CPI it is important to note that 24.0% of the total current CPI-U (the CPI for all urban consumers) is rooted in the category of “homeowners’ equivalent rent of residences.” This means that instead of reflecting some measure of home prices, as was the case before 1983, the BLS estimates the cost of housing based on what homeowners theoretically would pay to rent their own homes from themselves. The BLS then estimates how much homeowners raise the rent on themselves each month. Starting in 1989, the BLS skewed these estimates further by beginning to adjust that imaginary series for quality adjustments that would make the consumer feel good or better enjoy their residence.

Years ago when America was experiencing what the late Allen Meltzer described as "The Great Inflation" his take was that inflation generally was not considered a major problem until it rose into the double-digit area. I maintain the manipulation of data to artificially lower the official rate of inflation feeds into the illusion of economic stability. This helps both politicians and central banks sell the idea that inflation is not and will not become a problem. This false information is then used by individuals to plan and make decisions concerning their investments and retirement needs. I further contend that inflation would be much greater if more money was flowing into tangible goods rather than paper investments and promises. For proof as to the real cost of inflation just look at the surging replacement cost resulting from recent storms and natural disasters. Beware, if you are taking the CPI numbers being reported to heart you will pay dearly in coming years.

Footnote; The following articles are related to this topic.

Sunday, August 11, 2019

Trade Is Not A Big Driver Of The American Economy

Expect the controversy over just how much trade contributes to America's economic growth to be ramped up as growth slows. Trade between countries is given far to much credit for being a big driver of our economy. It pales next to factors such as government spending and credit expansion. The fact is if John needs to buy a wheelbarrow for work it does not matter where it is built. John needs and will buy a wheelbarrow. Where trade does fit into this has to do with what country employes workers to make that wheelbarrow and how much it will cost. While John may save money if the wheelbarrow was produced in a low wage country trade has more to do with who benefits from commerce and should not be seen as a force driving us forward.

Trade Is Not A Big Driver (click to enlarge)
In many ways, trade should be seen as a way to increase access to a greater variety of goods at a better price but this only works over a long period of time if it is balanced. A county that constantly enjoys a trade surplus at the expense of their trade partners often reaches a position to exploit the weaker countries and generally does so. Throughout history, trade policies have had massive long-term ramifications on the strength of a nation's economy. The promise that increased trade will create new jobs has turned out to be largely a myth. Still, we hear the narrative spun by politicians playing the "fear card" with statements such as "We can’t let countries like China write the rules of the global economy.” This implies we will lose the power to control our own fate if we stand firm and protect what is ours.

While the President and the markets want the Fed to do more we should understand simply printing more money and lowering rates has lost its ability to create growth. In many ways, the Federal Reserve has become the great enabler responsible for allowing the world to embark on a huge and rapid expansion of debt and credit during the last decade. This global credit binge could not and would not have occurred without the Fed being totally complicit and agreeing to allow it to take place. As the world's most powerful reserve currency a strong dollar could have contained the economic overindulgence we have witnessed.

By their actions, the Fed has failed to force other currencies to toe the line or pay a stiff price. It has been the Fed that decided to allow the dollar to be used as a global prop. A major problem stemming from low interest easy money policies is that the quality of the growth it generates is often very poor and creates problems in the future. An example of this is the rise in sub-prime loans that fuel auto sales. Just how bad the situation has become tend to be papered over until the point where it can no longer be ignored and things collapse.

The demand that trade partners be fair has become the scapegoat for a sagging global economy at the end of a growth cycle. The real reasons for slowing growth flow from poor government policies and the recognition that quality growth trumps quantity. Trade is overrated as an economic driver which means when imports are reduced internal production simply takes up the slack. For a country like America which has a huge trade deficit, this is a good thing. Long-term planning and sustainable growth is key to a healthy economy. Instead of getting to the business of setting things to right, corrupt and lazy politicians and bankers across the globe play the blame game.

An article recently by Mohamed Aly El-Erian published on Project Syndicate states; "Trade tensions are a symptom rather than a cause of the world’s underlying economic and financial malaise. Moreover, an excessive focus on trade could deflect policymakers’ attention from other measures needed to ensure faster and more inclusive growth in a genuinely stable financial environment." He then goes on to write, "Monetary policy has not been very effective in boosting sustainable growth, but it has lifted asset prices significantly. This has further fueled complaints that the system favors the already-rich and privileged rather than serving the broader population"

History has shown that trade agreements with low wage nations are not the great job creators we have been told. Much of the "free trade" movement is driven by mega-companies desire for larger markets and greed. It is difficult to deny that in our modern world many large companies already have more power than most nations and their power continues to grow at an alarming rate. The desire of companies to both develop and control future rules has caused them to lobby individual governments into giving up control and becoming subservient to corporate “efficiency.”

It is these mega-companies and the money they wield that has hijacked the conversation about how much benefit creates. I contend that trade shifts growth and jobs from one country to another rather than simply adding to the equation in a substantial way. This translates into the companies and their owners or shareholders benefiting far more than the economy in general. In many ways, the global economy has become an ill-regulated business model tilted to favor big business and giant conglomerates. It is not difficult to make the argument this has been harmful to the smaller domestic companies that generate many jobs here in America, Apple is a prime example of this.

Circling back to the example of John and his wheelbarrow used at the beginning of this article, it is wise to remember that the economic cycle is rooted in reality. The Johns and Freds of the world only need so many wheelbarrows, when they have enough, they stop buying them until they are worn out and they need more. Low interest rates, super sales, and easy credit can only stimulate growth in these sales so much and often it is at the cost of future sales. As the economy slows and trade tensions rise expect more fingers to point at sagging trade as the culprit. The fact is, no matter what we have been told by those with an agenda, trade between countries is only a small factor in what produces quality and sustainable economic growth.

Sunday, August 4, 2019

The Yen Is A Major Conduit For Wealth Leaving China

The link between China and Japan recently raised its head in the currency markets when President Trump upped the ante over trade-talks. Following a session in Shanghai that yielded only anger, the American trade-talk delegation quickly left for home. It appears that China has little intention of altering its course and will concede little or nothing in future talks. This highlights that China is a state-run economy based on a business model geared to expand by crushing its competition. Within hours, President Trump threatened to increase tariffs on Chinese goods flowing to America. This signals a growing impatience on the part of the White House to move trade-talks forward and finalize a deal.  

China Faces Growing Trade Problems
Immediately currency markets witnessed the yen surge in response. This makes it difficult to argue that a correlation does not exist between the value of the yen and problems in China. The yen has become a major conduit by which wealth is transferred out of China. This tight relationship can be seen each time trouble surfaces in China's economy. When this happens the yen rises in value as wealth exits China through business back-channels. It is also important to remember that economic weakness in China carries over and has a negative impact on Japan's overall GDP. Feeding into this relationship is the fact Japan does not desire a stronger yen which hurts exports. Since the yen constitutes just about 4 percent of the global world currency reserve the boost in its value is generally short-lived as the wealth flowing out of China moves on to other countries across the globe.

Last year, the U.S. combined goods and services deficit with China was a hefty $309.8 billion US dollars. Presidents Trump and Xi Jinping at their April 2019 meeting at Mar-a-Lago mapped out a strategy to remove trade irritants from the overall relationship and established a 100-day plan to reach an agreement. So far this map has led nowhere. The opinion that China may be stalling in hopes that Trump is not reelected is gaining traction. This has generated a tougher attitude in the White House that could have decades-long consequences. Trump claims he is hellbent on ending China's system of subsidizing Chinese companies in a multitude of ways that allows them to export goods at slightly below cost in exchange for manufacturing jobs. This is not stupid it is predatory
Trade Deficit Continues Running Ahead Of  2018
As you may recall, in May with great fanfare the “initial results” of the plan were revealed in the form of a ten-point program.  Sadly, many of the Chinese concessions listed were pre-existing obligations that China had already agreed to. In truth, after stripping out the pre-existing Chinese obligations and including new American concessions the May 11th deal does little to decrease the U.S. trade deficit with China. We have seen this play out in recent months as the trade deficit continues running slightly ahead of last year’s near-record pace despite efforts by the Trump White House to reduce them

There is even talk of not implementing the new deal until 2025. Many Americans see this as totally insane and take it as a sign that America has no stomach for playing hardball. Other issues also play into this discussion, as we focus on China taking advantage of America we tend to give a pass to Japan. America's "far too generous" relationship with Japan is rooted in a longtime post-war relationship. I contend it is time to question whether Japan deserves such treatment considering the strong economic ties Japan has formed with China. Up until now, Trump has left Japan relatively unscathed when it comes to demanding trade concessions, however, just like Mexico, Japan has the potential to become a prime target because of the strong economic links it has developed with China. Trade flows are far more complicated than many people realize. Most Americans remain oblivious to the fact that because of the huge trade deficit Mexico has with China the money Mexico receives from trading with America quickly passes through its lands and flows to Asia.

Over the years Japanese direct investments and technology have played a critical role in the development and competitiveness of China’s global supply chains. A strong link exists between China and Japan because of these major investments in China. It is clear China has exploited this relationship to learn the advanced industrial skills and production techniques of its neighbor. An example of how strong those links are can be seen at call centers in China where young workers speaking flawless Japanese answer customer service calls for a Japanese company. In western Japan, a new commercial Chinatown is rising in Kobe City's rebuilt port area. Instead of the gaudy restaurants in old Chinatown, the new area contains nondescript office buildings that are leased to Chinese companies focusing on everything including biotechnology.

This increased trade with China while bolstering the Japanese economy has also driven costs down significantly for Japan's long-suffering consumers which also played into the deflation factor. As for the yen, with a government gross debt to GDP ratio of 253 percent, Japan has the unwanted title of ranking highest in the developed world. The recent budget requests by Japan's central government ministries and agencies for fiscal 2019 total a record-high 102.77 trillion yen. Recently Japan's trade balance has again swung into deficit territory and a matter that has not garnered enough attention is how the economic problems that continue to develop in China will most likely spill over and affect Japan.

Between slowing economic growth and rising protest in Hong Kong, it seems China's problems may be about to get worse. China's economy is hooked on new credit and government stimulus. China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. As the China story unfolds it is clear the scope for a debt meltdown in China remains immense. China watchers, economists, and investors have been forming battle-lines for years as they debate the true strength and sustainability of China's economy and its role as a global player. Those of us that paint a picture of future collapse and a day of reckoning are often accused of spreading "doom-porn" for claiming the Chinese have masked over their dire situation by continually expanding credit.

In January alone, Beijing injected a staggering $685 billion in new credit into its financial system and the money continues to leak out causing assets to rise across the globe. Today China continues to prop up the "unpropable," and yes, while no such word exists, when it comes to China's economy it should. A matter that has not garnered enough attention is how the economic problems that continue to develop in China will spill over and affect Japan. The Japanese economy is very vulnerable to a negative economic feedback loop flowing from China. Recent market action should not be misinterpreted as the yen strengthening, but as simply a temporary bump before the wealth moves on to a safer place. This wealth shift will have a major impact on currency markets going forward. expect the yen to be a popular vehicle by which wealth flees China and enters the global economy.

Saturday, August 3, 2019

Somethings Got To Give! - The Ugly Economic End Game

Edvard Munch, The Scream
It is very possible we are moving towards an economic Armageddon that will shake the world to its core. The numbers simply don't work. When the markets succumb to the fact that current economic policies have failed all will collapse. Following the onset of such a collapse central banks will be forced to unleash huge massive amounts of new currency into the system to combat the scourge of deflation. This mind staggering shift will in effect clear the deck of deadwood through hyperinflation. It will also, most likely, pave the way forward to introduce a new or a "batch of new" currencies.

Call it a multi-generational "re-alignment" if you wish, but in reality, it is the recognition that our path was an unsustainable illusion. By declaring "that a new start" has been deemed the best path out of the legal morass that contagion and collapse has rendered those in charge of such things can throw the common man under the bus. In such a situation, the debts that are not written off will become a moot point in that most will be devalued and paid off in worthless paper. The important issue will not be fairness but how to get from here to there with the least damage to the institutions and wealth those in power seek to protect. Sooner or later all great Ponzi schemes must come to an end.

We are but pawns in the giant game known as the global economy. Please excuse the tone of this article, it is rooted in the idea that on occasion it is good to vent or say what is on our mind. Sometimes we have to simply concede things are what they are and find solace in the thought that things could be far worse. You can expect promises to be rewritten and broken. Rules will change as we go through the wash. Most people will see their assets rinsed away as society is put through the wringer. For example, expect the cost of living adjustment on social security to be modified reducing payments to the elderly. Adding to the woes of retirees is that many pensions will be forced to reduce payouts and break promises as the returns on their investment fail to meet expectations. Many of the guarantees and paper promises granted over the past decades will prove to be less valuable than the paper they are printed on.

Global Debt Has Surged Since 2008
Blame the Fed if you like but it does little to alter the reality or ugly road ahead. The Fed's past collusion with Goldman Sachs and the fact it has been complicit in allowing other central banks to massively expand credit has garnered far too little attention. The scheme to transfer wealth to the large banks is intact and most Americans know something is wrong but are too busy with their day to day existence to react. There is a huge revolving door between large financial institutions and government that allows former employees with connections and strong ties to policies to flow freely back and forth between the two and the conflict it raises. We need only look at the soaring national debt to see this wave of crony capitalism will soon sweep us off our feet. This is a form of government corruption that has inflicted pain upon people throughout history.

With big business increasingly exerting its power over small enterprises. We the people are trapped in a world where our options are rapidly vanishing. In many ways, those in control have paved over economic reality masking and covering a multitude of sins against the laws of supply and demand. It is impossible to deny this has also taken its toll on "true price discovery" that allows our economic system to adjust and properly function. As pawns in this game, we can either choose to sacrifice ourselves or fight. In this case, fighting means to undertake a strategy that protects what we can of the life we have created within the power we have been granted. The fact you are reading and thinking about this subject puts you in a far better position than the masses who see before them blue skies and unicorns grazing upon a hill.

As the global economy moves forward it is difficult to ignore that it is constructed on a weak foundation of imbalances, lies, and excesses. We only need to look towards China with its ghost cities and the fact its massive factories continue to crank out far more steel than is needed. Across the world, debt has exploded as wages stagnate. Countries have borrowed against the future by running up huge deficits. Good jobs based on creating and doing a real task that can be economically justified are in short supply. The situation has become dire and the numbers do not work, borrowing money to merely pay the interest on past debt and NIRP is not a prescription that leads to economic nirvana and bliss.

Make no mistake, we cannot and should not look for a white knight to come riding in to save the day, no such leader exists to lead us out of the economy hell we have created. Predictions of  "lost decades" are not uncommon as we recover and struggle to find a path forward. Here in America, we see a field of over twenty presidential hopefuls that will soon be weened down but do not expect a hero to emerge. In the end, the system we have created will ask a majority of voters to cast their ballot for the candidate they "hate the least" or in more politically correct terms the "least of two evils".  Adding to our woes is the constant reminder that even if we garner up the enthusiasm to go to the polls rather than disengaging from the process the poorly crafted electoral college will soon strip us of any illusion that all votes are created equal. In the end, a few voters in some "battleground" state will make the final decision as to our fate.

Returning to the subject of the economic end game, make no mistake, periods of rapid credit expansion always end the same way and that is in default. This translates into a major shift in wealth. Global debt has surged since 2008, to levels that should frighten any sane investor because debt has always had consequences. Much of the massive debt load hanging above our heads in 2008 has not receded or gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. By a series of off-book and backdoor transactions, those in charge have transferred the banks loses onto the shoulders of the people, however, shifting the liability from one sector to another does not alleviate the problem. As noted earlier, the fact you are reading and thinking about this subject puts you in a far better position than the masses to weather the coming storm.