Monday, September 30, 2019

Do Average American's Care If Trump "Dunn It?"

Trump Was A Womanizer But does America Care
In mid-December of 2018, there was a huge dust-up when misdoings of a more personal nature took front and center. These concerned what were called, new statements and "allegations" having to do with Trump's sexual adventures. At the time those attempting to ouster the Donald latched on to these as the final nail in his coffin. For politicians unable to meteorically pin the tail on the donkey or in this case, pin guilt on Trump, a man which ironically they also consider an ass, the game quickly shifted back to crimes of lust and payoffs.

Back then the story surrounded Trump's attorney Michael Cohen now facing three years in prison and the parent company of the National Enquirer, American Media Inc. (AMI), admitting responsibility for its role in a $150,000 "catch-and-kill" hush money payment to a former Playboy Playmate, Karen McDougal; She alleged that she had an affair with Donald Trump in 2006. Under a non-prosecution agreement, AMI admitted that it refused to publish Karen McDougal's claim to prevent it from influencing the election by damaging Trump.

This episode of the "dump Trump" lasted a short time with the never-ending Washington sideshow ramping up as the mainstream media kept us a "breast" of every salacious detail. They even provided us with eye-candy suggestive photos of all lewd, crude, and improper conduct our current Pervert and Chief may have touched on. With everyone all a tither with speculation, this gave lobbyist even more time to go about their task of writing legislation giving those they represent an edge. As for us taxpayers who sent our representatives to Washington at great expense were forced to view this as another excuse to add to America's dysfunctional political culture.

Is This About Trump's Policies Or The Man?
This game of, "if his enemies can't get Trump on this, they will go after him on that" seems without end. After month after month of back and forth, the question remains in the minds of many Americans as to whether President Trump had a closer relationship with Russia at any point before his election than he leads on. This runs directly up against the question of how much it really matters, does it impact national security, as the deep state claims, and does the average American really cares? With respect for the media, politicians, institutions like the FBI and CIA in the cellar, we are left wondering who to trust.

All this is getting long in the tooth and fatigue is setting in. The current impeachment move is centered around a whistle-blower complaint claiming President Donald Trump broke the law during a phone call with the Ukrainian president where he threatened to withhold military in exchange for a political favor. The complaint is riddled with repeated references to what anonymous officials allegedly told the complainant. These include things such as: “I have received information from multiple U.S. Government officials,” “officials have informed me,” “officials with direct knowledge of the call informed me,” “I was told by White House officials,” “the officials I spoke with,” “I was told that a State Department official,” and more.

This has driven the President's enemies into a feeding frenzy. Some are even seeking to expand this investigation to include the private talks between Trump and leaders of other nations. These may or may not be crimes significant enough to merit Trump's ouster unless expanded into the world of technicalities and lies. This is a place where speculation, who knew what, when, or who said what often rule the day. Again, this brings us back to the question of whether Trump is guilty and does America really care? Politics seems to be the driver as to whether this is "impeachable behavior" and if those in Washington should begin to move in that direction. The standard for removal from office on impeachment is seen as the conviction of, treason, bribery, or other high crimes and misdemeanors.

The truth is even if Trump is cast out of Washington little will change and our problems will remain. Ironically, the latest impeachment talk centering around new territory and a bit of skulduggery. Sean Davis of The Federalist reports that between May 2018 and August 2019, the intelligence community secretly eliminated a requirement that whistle-blowers provide direct, first-hand knowledge of alleged wrongdoings. Without this major change in the law the current complaint would never have seen the light of day and been dismissed as sour grapes or unsubstantiated speculation. This raises substantial questions about the intelligence community’s behavior and its role in this.

Circling back around as to how we got here, A big part of the problem is that Hilary Clinton the Democratic presidential candidate that ran against Trump was such a tarnished figure many Americans were left feeling they were forced to chose between the least of two evils. Since these allegations have damaged Joe Biden by shedding a bit of light upon his past this has opened up the Democratic Presidential race. Even more mind-blowing is this has created talk about Hilary Clinton again running for President.

When it comes to lies, and lying to the people, both political parties should hang their heads in shame. America is not alone when it comes to the rich history of politicians bending the truth, breaking pledges or committing outright deceit. It is almost as if honesty is in the eye of the beholder and this is where terms like alternative facts come to mind. Currently, a full-scale propaganda war rages with many Americans hellbent on convincing the rest of us what is really going on. Two things remain clear, they are that this contentious debate continues to stir the waters and polarize the nation while creating some rather strange alliances.

As in the case of Russia's meddling in the election or whether Trump colluded with the Russians, by now most people seem to have made up their mind. People are either outraged, simply concerned or take the attitude this is all a big nothing burger or much ado about nothing. Still, for the lovers of gridlock, all this will go a long way towards allowing Washington not to concentrate on important legislation and reforms or trimming our soaring national deficit. It is a bit reminiscent of the saying, "A bad day fishing is better than a good day working" and guarantees we will see more of the same political grandstanding rather than politicians focusing on crucial issues of the day.

Tuesday, September 24, 2019

It Is Dangerous To Build Your Retirement Around Equities

Most Americans Have Saved Little (click to enlarge)
The myth that the stock market is a vehicle which can protect your wealth and buying power is accepted by many people. Those that have invested in these markets including pension funds have a vested interest in seeing stock prices move higher. Even President Trump has tied his wagon to higher market evaluations by touting higher equity prices as a proxy report-card of his success. The fact is equity prices are not guaranteed to always rise and if they fall substantially the pain will be widespread. In some ways simply getting stock prices to rise can conflict with strengthening the economy over the long-term. Sustainability of the system is far more important.

The title of this piece referring to the retirement savings resting in US equities is an effort to highlight the danger older investors face. Lower interest rates and a rising market have shifted wealth into stocks and out of savings and other productive investments. This has long-term consequences  At one time an American that worked hard and saved a million dollars over their working life could expect to earn enough in interest to live on but not anymore. This has caused far too much wealth and savings to be shifted into equities. In a recent article, the case was made that true price discovery in equities is totally gone. Honest price discovery has fallen victim to the combination of stock-buybacks, and what has become known as the "Plunge Protection Team" appearing to jump in at any sign of any pullback. This leaves the market vulnerable to a huge downward move.

This Is A Worldwide Problem (click to enlarge)
Older Americans and pension funds can ill afford the risk a huge sell-off would bring because time is not on their side. They need access to money now and in the near future. Circling back to the crux of this article which is how savings, equity prices, and retirement intersect it is easy to see a big cloud sits over our heads. This is not just an American problem, the World Economic Forum warns in a recent report that from the US to Europe, Australia and Japan, retirement account balances aren't increasing fast enough to cover rising life expectancy and workers could outliving their savings by as much as a decade or more.

Keeping our focus on America, if each new retiree were a raindrop we would be experiencing a downpour. Part of this is because many people are retiring early. For older individuals not earning a high income and not up to their eyeballs in debt much of the incentive to work has vanished. Those not making a great deal in our current low-interest economy often find they do just as well retiring early sometimes even before social security kicks in. As a bonus low-income earners often find Obamacare allows them to replace their expensive healthcare with a far less costly government program. In addition, this means they are often able to qualify for other government programs. Unfortunately, this is putting more pressure on entitlements which increase our huge national deficit.

Simply put, in our current economic environment, it no longer pays to save when inflation is outpacing what you earn on savings. This reality is one of the reasons causing people to retire early and say to hell with work even if it means retirees must cut spending or find new ways to cope. One way they are doing this is reflected in a CBS News report citing Social Security Administration data. It shows the number of retirees who draw Social Security currently living outside the US increased by 40% during the ten years between 2007 and 2017.  This translates into more than 413,000 American retirees who collect social security moving out of the country.

The question is how much of this is driven by the financial reality that many baby boomers reaching retirement have not set enough aside for their golden years and this is one way to make ends meet. Just as troubling is that much of their wealth has been placed in paper promises and not tangible assets. These "paper promises" can be unfulfilled and this wealth could vanish if a major economic disruption occurs. While the median retirement savings for people in their mid-60s is around $152,000, the highest of any working generation. It should be noted these savings are not equally shared and many people have saved nothing. Still, most people agree even $152,000 is not enough, especially when factoring in inflation expectations.

The size of the "retirement savings" problem is staggering and getting worse. Figures indicate the size of the world's collective savings gap could be larger than $400 trillion by 2050. That's up from $70 trillion in 2015. The US is forecast to have the biggest retirement savings gap at $137 trillion, followed by China ($119 trillion) and India ($85 trillion). This is difficult to sugarcoat and means a great many older people are about to find themselves in a horrible financial predicament, broke, and too old to do anything about it. This has been cited as a contributor to suicide in older adults. Overall, to say the situation is distressing is an understatement.

Footnote; How much wealth will escape the next large economic crisis is very important because it will set the bar that determines the rate of inflation or deflation in coming years. The article below delves into this issue.

Sunday, September 22, 2019

House Arrest An Odd Twist Of Orwellian Oversight

Over the years technology has greatly expanded the ability of government to watch the movements and control individuals. During this time I have encountered several people that have run afoul of the law in some way or other the way the legal system deals with people is also changing. While many of us see house arrest as a great option to throwing minor offenders into a prison system filled with hardcore criminals it does have shades of totalitarianism. A recent article on this site explored the difficulty society is having in getting people to obey its rules and laws. Without a doubt, the failure to enforce laws to deter minor acts of stealing and such impacts our culture over time. Sadly, this is not a problem just in America but across the world. as the cost of enforcement has soared and the system struggles to dole out justice.

House Arrest Turns Your Home Into A Jail
The focus of this article is to explore how sophisticated the state has become and its ability to turn your home into an Orwellian prison. Crumbling justice systems have forced courts to prioritize crimes by seriousness and explore new ways of getting people to behave. This translates into petty criminals being allowed to walk free for crimes such as shoplifting, minor assault, vandalism, fraud, and DUIs. A rapidly growing alternative to throwing a person convicted of a crime in jail is some form of house arrest. This is a term most of us heard but do not understand the full scope of what it may encompass.

House arrest typically isn’t a judge’s first choice for punishment but it is becoming more common as the cost of incarceration rises. This is considered a privilege normally requested by the defendant’s attorney, who would then have to establish to the court’s satisfaction that it’s a good idea and why. Sometimes, house arrest is issued as a condition of bail. Bernie Madoff, charged with defrauding investors of billions of dollars, was released on $10 million bail and house arrest pending his trial. House arrest rules and regulations tend to vary widely from state to state and county to county but one common factor is the Orwellian nature of near-total control.

Make no mistake, the abilities and options available to the government to enforce turning your home into a jail can boggle the mind. House arrest is only one of the alternatives to jail including a suspended sentence, probation, fines, and community service. Most offenders eligible for house arrest are confined to their home instead of spending time  in jail. Depending on their situation and the ruling of the court a person on house arrest is usually electronically monitored through an ankle monitor with a GPS tracking system. It can't be removed and is electronically connected to local police headquarters giving off signals when it goes out of its allowed area. The word arrest is somewhat misleading in that it is really house sentencing and many variations of it exist.

One thing is clear when looking into this issue and that is Orwellian control is almost complete. The extent of control depends on the sophistication of the technology employed. Some electronic transmission systems worn in addition to the ankle monitor are equipped with breathalyzers which the prisoners are required to breathe into.periodically. The data is transmitted back to the agency. Some monitors measure alcohol concentration in the blood 24/7. Also, court representatives can do surprise visits for random testing. Drug and alcohol use is not permitted during house arrest, even if the underlying crime did not involve substance abuse. The frequency of such testing is generally increased when issues of abuse do exist.

Ankle Monitor With A GPS Required
Not only can the electronic monitoring prove a person's location within his residence but it can tell the agency exactly where the convict is and whether he’s done anything to the ankle monitor. Some of these systems are even equipped with photographic capabilities so if the agency calls the convict, the system will snap a picture of him answering the telephone.GPS can also be included which allows the agency to track the convict and locate him on a map if the person is granted permission to leave their residence. People under house arrest are sometimes permitted to leave home to take care of certain family responsibilities or to attend religious services.

One disadvantage to house arrest for the offender is the person won't be able to take advantage of good time credits. This is the incentive system that allows them to serve less of a jail sentence as a reward for good behavior. Below are a few of the options or things people on house arrest face. Many people think that house arrest is like being in jail and they will have to be there all day, every day. This is not always the case. Depending on your circumstances, the severity of the crime, and a person's criminal record, the judge may allow "breaks" from house arrest. This means a person may be able to go to work, school, doctors appointments, counseling sessions, community service, and other court-approved activities. The court may also order a curfew requiring you return directly from the allowed activity.

Another twist is a person under house arrest should expect to pay some of the costs. House arrest is cheaper for the court system than putting you in jail. Incarcerating a person in prison can cost over $20,000 a year. Confining a person at home can be as cheap as $6,000 a year. Most of the time, you will be required to pay a weekly or monthly amount towards the cost of an ankle monitor, or electronic monitoring transmitter 24/7. Other costs are also involved. The price of house arrest varies from probation department to probation department. Some have a set price for everybody. Some determine the price on a sliding scale based on an offenders ability to pay.

Just like parole, if an offender violates any condition of house arrest they can be immediately arrested and sent to jail to serve out their sentence in captivity. Leaving the house, if allowed, is restricted for a person on house arrest. Some offenders are allowed to be employed, this can go either way with some states and courts allowing it while others do not. Some allow regular visits such as the doctor's office but these must be scheduled and approved in advance. Other times they may be permitted to attend counseling in cases where drug or alcohol abuse are involved or to perform community service as part of their sentences. Exceptions are also made in order to attend court-mandated appearances or activities such as meeting with a probation or parole officer.

Programs might also allow for some offenders to do laundry, attend religious services and go food shopping. Offenders generally have a curfew and whenever they are allowed to leave their home the person is required to report in upon return. People under house arrest also have access to television and the Internet but in many cases, they do not have access to a telephone and if they do the conversations are monitored. Visits from close family members or friends may be permitted, but this depends on the convicted individual's specific situation and factors like his state's laws.

The court has the discretion to set restrictions on visitors, meaning a friend or loved might need to get permission from the convicted individual's assigned officer. Minors on house arrest are more or less subject to the same rules as adults but generally allowed to go to school and sometimes allowed to leave home when they’re in the company of a parent or legal guardian. Some states require that the parent check with the probation officer first, and if the child breaks the rules they must report it to the authorities. Typically minors can’t have friends stop by to visit but are sometimes allowed to engage in phone communications with an approved list of people.

This is a glimpse of government's ability to totally control our lives. This picture of your home as a prison may eventually be extended to include your city or country if the government continues to expand its reach. Signs of this happening can now be seen in China where a surge in facial recognition and social point system has begun to reshape society. It is interesting how few people have commented on the way passport requirements and higher cost have reduced the ability of many people to travel. If this continues there may come the day when only the elite and wealthy are allowed to cross borders.

Tuesday, September 17, 2019

EU Trade Deficit With China Destined To Grow

Europe Runs A Solid Trade Deficit With China
While we read a great deal about the huge trade deficit America runs with China it is important to understand we are not the only one. Other countries also have this problem. Europe as a whole runs a solid trade deficit with China. In some ways, this is balanced by the EU having a surplus with America. Still, in many ways, a growing trade deficit with China bodes poorly for the EU as they look down the road.

Reuters reports the European Union’s trade surplus in goods with the United States and its deficit with China both increased in the first seven months of 2019. Eurostat, the EU statistics office, reported the European Union’s surplus with the United States grew to 100.8 billion dollars in Jan-July 2019 from 88.6 billion in the same period of 2018. During that time the EU’s trade deficit with China expanded to 120.9 billion dollars from 109.2. This comes at a time that trade figures are adding extra strain to global tensions.

The Items These Countries Trade (click to enlarge)
This brings up the importance of what countries buy and sell to each other. If a county's exports are not centered around products where they have a core advantage over time they can see them erode. I contend part of the problem the EU has going forward is that much of the EU is simply uncompetitive. This means unless it takes strong action to halt the importation of cheap Chinese consumer goods it will be flooded with them in coming years. Since Europe does not sell China much in the way of "raw goods" it has little to balance this trade.

Simply put, the EU and the companies that call it home lag in both innovation and technology. The most innovative companies based on the number of patents they received in 2017 were IBM, Samsung Electronics, Canon, Intel, LG, Qualcomm, Google, and Microsoft, in that order. Note how European companies are absent from this list. Adding to their lack of industrial leadership is the matter of over-regulation that stifles EU companies from moving forward. When it comes to low-cost production they are also beaten by China and other Asian countries. This has caused Brussels to join Washington in complaining that China wants free trade but does not play fair.

The auto industry is just one example of the EU losing its ability to compete. A recent article titled, "European Carmakers Face Perfect Storm" delves into how European carmakers are facing what could turn out to be a major crisis. It is being created by EU regulators which are driving automakers to cut emissions at great cost. The EU has been enforcing emission caps on cars but beginning next year they will be reduced further to 95 grams of CO per km. This means a slew of electric vehicles will be rolled out but there are no guarantees that people will want to buy those cars. These cars will be much more expensive to build, estimates are each one will cost over $10,000 more to produce, so just because many people claim they are a greener alternative does not guarantee a market for them.

Click Here To View C919 Article
In future years the EU is expected to continue slipping further behind in many areas. Politico reports that Washington is preparing to announce tariffs on billions of goods from the European Union.  This follows a decision by the WTO which has just ruled in favor of the US in a case against Airbus. This ends a multi-year transatlantic dispute between the world's two largest aircraft manufacturers over whether Airbus had benefited from illegal state subsidies. Unfortunately, for both America and the EU the Chinese state-owned aviation manufacturer Commercial Aircraft Corp of China (COMAC), has been busy developing the C919, which is seen as China's answer to the Boeing 737 and Airbus 320.

The C-919 hits right at the core market of both companies. COMAC is yet to release the price tag of the jet, but a report by China National Radio predicted that it would likely to be sold for around $43 million. This is much cheaper than a Boeing 737 or an Airbus 320 which each cost around $80 million $100 million respectively. It does not take a rocket scientist to calculate how rapidly China can ramp up production. This is just the sort of thing that dooms the EU into an unwinnable position. The EU will be hard hit if America is successful in trimming its existing deficit with the region while its deficit with China widens.

Footnote; This article is in some ways a follow up to a previous post titled; "China Is cutting A Path through The Turbulence." The article delves into how China's One Belt One Road agenda includes developing much stronger trade ties with Europe. The link to that article is below.

Thursday, September 12, 2019

Central Banks Low Rate Solution Remains Problematic

This Simplistic View Of Economy Is Problematic
One of the most remarkable features of our current economy is that interest rates are flat or negative in real terms and many people are advocating they need or should go lower. This is not completely unprecedented. Real rates were negative after the second World War and again in the 1970s. Across the world, the central banks have raced to the bottom lowering interest rates only to find little relief from the slow economic growth that has haunted their economies for years. What former Fed Chairman Ben Bernanke, started as a program to support and prop up the economy has over time morphed into the main driver of economic data.

It is becoming clear the actions Ben Bernanke took that enabled and even encouraged the central banks to go down this rabbit hole have had more than a few negative consequences. An argument could be made that the power of lowering interest rates is a one-off that has largely run its course and is largely behind us. The truth is a policy of creating debt and stacking layer after layer of it behind the curtain has dampened the ability of consumers to move forward. Even at super low-interest rates, a great share of income must now be used to service past obligations. This leaves less money available for new purchases which has a major dampening effect going forward.  

Between the low-interest rates that have propelled investors into high-risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. Frequently overlooked is that low-interest rates do not extend down to low-income individuals with poor credit and many people fall into this category. This tends to fuel inequality and punish the poor. Policymakers aided by the media thrive at presenting simplistic but flawed answers to solve both economic and society’s problems which will require little or no effort from the masses. Unfortunately, the concept that a rising tide floats all boats or trickle-down economics tends to heavily favor the rich.

We also face the "inflation factor" which nibbles away at our standard of living. Even as many economist claim inflation is not an issue for the many Americans forced to pay higher food, rent, and health insurance premiums little comfort is forthcoming. Currently, much of the recent economic data indicates lower-interest rates have been a "one-time" economic tailwind that is rapidly weakening and lost its kick. This puts both the central banks and the economy between a rock and a hard place. The big issue is where we go from here, regardless of what you name it, this is the box Ben Bernanke created when he painted both himself and the Federal Reserve in a corner. Adding to our woes is the Federal Reserve's failure to make any serious efforts in pushing the government to address structural problems thus delaying necessary adjustments to make America more competitive.

Debt Has Grown Faster Than GDP (Click to enlarge)
The level of interest rates is normally viewed as an effort to balances several forces at work within an economy such as the desire for saving with the demand for investment or consumption. Negative real rates reduce the incentive to save and indicate that businesses are reluctant to invest in new projects. Central banks attempt to offset this during a very weak economy by lowering rates. These policies aim to discourage saving thus boosting consumer demand.  

Sadly, the low rates geared to encourage business borrowing and boost employment also tend to encourage savers to take on more risk than they should as they search for higher yields. This can create a full "risk-on" mentality that can wash away common sense. It can also fuel what is known as "the fear of missing out." As stated earlier, the policy of rapid credit expansion while an interesting concept frequently is accompanied by negative consequences. Reports from the Bank for International Settlements point to a number of other problems that negative real rates can cause such as tempting borrowers into ignoring their balance-sheet problems. This tends to allow problems to fester making it more difficult for central banks to raise interest rates in the future.

This is being put to the test in China where we see the amount of GDP growth generated by each infusion of new stimulus decrease year after year. At the end of 2015, the Chinese debt to GDP ratio stood at 258%. This can be viewed as an indication of economic exhaustion and overcapacity results from continually priming the pump. Way back in 2014 Wei Yao Of Societe Generale warned the debt ratio of Chinese companies had reached 30% of GDP which is seen as a sign of financial crisis because it means companies are on the verge of no longer being able to pay the interest on their debt. This creates a situation known as a "Minsky Moment " where the debt pyramid can collapse under its own weight as the debt "snowball" keeps getting bigger without contributing to the real economy. At the time she pointed out the total credit in China's financial system was estimated to be as high as 221% of GDP and had surged almost eight-fold in just 10 years.

When an economy is growing rapidly, there is generally an abundance of profitable investment opportunities and businesses are happy to borrow at high real rates. Real interest rates set a hurdle by which profitable projects should be judged. If the rate is held at an artificially low level for too long, a big danger is that capital will be misallocated and flow into speculative investments. Banks may also become too optimistic about the ability of borrowers to repay, and fail to make adequate provisions for bad debts. It also encourages banks to borrow short-term from the central bank and lend long-term to the government. This is a public subsidy that should cause more taxpayers to scream foul!

Another problem is that pensions also invest in bonds using the income to fund future payouts. As yields fall it creates a situation that makes it harder for pensions to remain solvent while honoring future obligations. Low-interest rates in the developed world also spill over into emerging markets, pushing up exchange rates, increasing speculation, inflating commodity prices and causing asset bubbles. We must keep in mind that when rates do eventually rise we will most likely see a painful unwinding of these investments.

Savers also suffer from these low-interest rates because it means that every dollar of savings spent becomes more difficult to re-earn or replenish. Lower rates in effect cause many older people to hoard their wealth. This translates into baby boomers keeping that older car for an extra 50,000 miles, to cancel remodeling projects, and make the grand-kids fund their own education in an effort to extend the life of their savings. This often means that with less interest income they are purchasing a lot fewer electronic gadgets and spending vacations in the backyard. Tens of millions of Americans are either in this position now or about to become so.

On the flip-side, many people with little savings have rushed out to buy cars and expensive items they really can't afford and pulled consumption forward. Ironically, as the country's most responsible citizens hunker down we see lenders leaning into the wind and playing Russian roulette with high-risk loans to those with poor credit records that may never be repaid or have to be written down. The premise being that when you charge interest in the high teens even after the write-downs you come out ahead. The bottom-line is that all the above trends and reactions to lower interest rates feed into a situation that is not particularly healthy, fair, or logical. As a result of these low-interest rates this "recovery" has been built on a false base and been far less robust than originally hoped. The legacy of Central Banks pursuing the "low rate" solution may turn out rather ugly when all is said and done.

Thursday, September 5, 2019

Farmageddon Is Real And Farmers Are Suffering

Farmageddon is real and very painful for a small segment of America. According to the Book of Revelation in the New Testament of the Bible, Armageddon is the prophesied location of a gathering of armies for a battle during the end times. Today many farmers living in America's farm belt are facing tough times with no end in sight. The trade war with China has taken a toll by bringing grain exports to a near halt.  This has caused grain prices to tumble adding to the list of blows hitting farmers. While the number of people employed on farms has declined over the decades farming remains a big business and has a huge impact on many communities. In these areas, the money flowing into local businesses as farmers sell their crops is evident in everything from truck sales to the little things common in everyday life such as dining out or getting a haircut.

Net Farm Income (click to enlarge)
The USDA's farm income forecasts are released three times a year. While little noticed by the average person living on the coast or in one of our many large cities this is a big deal. As mentioned earlier in this article farm income is not contained in a closed-loop but spills into other parts of the economy. Many areas in the heartland of America have not experienced the benefits showered upon Wall Street, because of this we should not be surprised if the gloom covering many areas of the country does not lift anytime soon. The chart to the right shows a "forecast of income" but fails to take the impact of the trade war into full consideration.

Sadly, getting support to the average working farmer is more difficult than it might seem. A recent article in AgMag claims About 9,000 "city slickers," that means, people living in luxurious neighborhoods in large cities received a farm bailout from the Trump administration's recent effort to minimize the impact of the trade war on farmers. An updated Environmental Working Group (EWG) analysis of Department of Agriculture data revealed that many recipients of the relief money live not in farm country but in large cities or other decidedly non-rural locations. These urban recipients of the bailout include members of farm families, landowners, and investors that provide land, capital, equipment for farms or make operational decisions for how a farm is run.

Modern Farming Is Capital Intense
Farm real estate debt is expected to reach $263.7 billion in 2019, a 5.1 percent annual increase. Of this real estate debt accounts for 61.8 percent of total farm debt. Due to the weakness in the prices of crops and livestock, many farmers today suffer cash flow issues and struggle to get financing to plant crops. Farmer access to capital continues to be primarily in the form of debt. Commercial banks and the FCS have become more cautious as bankruptcy filings in the Seventh Circuit (Illinois, Indiana, Wisconsin) and Eight Circuit (N Dakota to Arkansas) have hit a10-year high. Most operators try to hang on when grain prices are low, hoping to still be in business when prices increase. Efficient farmers with manageable debt levels have the flexibility to stay profitable throughout the cycle but the smaller often less efficient farmers generally feel a huge impact from a drop in income and tighter lending criteria.

Adding to the already bad situation down on the farm is the negative feedback flowing from the recent decision by the EPA to ramp up the number of waivers that it grants to the refining industry, absolving some smaller refiners of the requirement to buy ethanol. The Trump administration's shocking decision to approve 31 and deny only six 2018 waiver requests has left the bio-fuels industry reeling was incensed. The Renewable Fuels Association (IRFA) Executive Director Monte Shaw stated in a press release. “With this action, President Trump has destroyed over a billion gallons of bio-fuel demand and broken his promise to Iowa voters to protect the [Renewable Fuels Standard].”  This caused futures prices for corn-based ethanol to plunge to a five-year low for this time of year and down roughly 25 percent since June. “The Trump administration has totally annihilated the margins for ethanol producers,” Charlie Sernatinger, head of global grains futures with ED&F Man Capital Markets, told the Wall Street Journal.

The EPA’s decision is merely the latest in a series of blows from Washington and the hits keep on coming. The U.S.-China trade war has battered the U.S. Midwest, as farmers have all but lost access to the Chinese market. China has turned to Brazil for ethanol and soybeans. Prices for U.S. soybeans, corn, and other agricultural commodities have plunged. Corn prices had rebounded after the Midwest was soaked in record-breaking floods that threatened corn plantings, however, the latest data from the U.S. Department of Agriculture shows that yields are not expected to be as hard hit as previously expected. Normally this would be good news for farmers but higher-than-expected supply has sent corn prices tumbling.

Several months ago JPMorgan told clients the American agriculture complex is on the verge of disaster, with farmers caught in the crossfire of an escalating trade war. Modern farming is a capital intense business and over the years many farmers have taken on debt. They have come to count on income from grain exports to service their obligations. JPMorgan analyst Ann Duignan alerted investors that, Overall, this is a perfect storm for US farmers," Because of this, in May, Duignan downgraded John Deere's stock to underweight, pointing to the fundamentals in the farm-belt as "rapidly deteriorating."

Farm Implement Sales Have Tanked
The pain felt in the farm-belt is very evident at dozens of John Deere dealerships where the agriculture bust that has triggered massive tractor sales declines and left stores reeling. Reuters contacted dozens of John Deere Stores across the Central and Midwest U.S. in an effort to access what the trade war and adverse weather conditions have had on tractor sales this year. It reports that about a half dozen stores across the Midwest said sales in the first half of 2019 collapsed. One store, in Geneseo, Illinois, saw sales fall 50% from the previous year. Sales orders for tractors next season are down, this is an indication that farmers expect the bust will continue through 2020.

The USDA forecasts the farm sector’s risk of insolvency to be at its highest level since 2002. The value of land, the most stable asset on the farmer’s balance sheet is impacted by commodity prices, interest rates and the cyclical nature of farm income. From the farmer's point of view, Trump may have made a big mistake when he recently decided to hold off on additional tariffs on Chinese goods because it will drag out negotiations. The President's motivation seems to be keeping consumer prices in stores low over the holidays. Christmas sales make up a good share of retailers overall annual revenue. Unfortunately, his move also delayed a resolution to the trade talks by removing pressure on China to come to the table. The bottom-line is farmers can expect export sales of grain pushed back again because China views that punishing the American farmer is a chief weapon in the negotiations.

Tuesday, September 3, 2019

Euro-zone Woes Continue With No End In Sight

German Business Confidence (click to enlarge)
Recently we saw the euro's slump deepen after German business confidence extended its decline. The euro fell to its weakest level in almost seven years as weakening manufacturing put Europe’s largest economy on the brink of recession. The German GDP contracted in the second quarter and it could shrink again in the third, sending the economy into its first technical recession in years. It does not help that as Germany’s export-centered economy is struggling global trade tensions are worsening. With talk of the trade war back with a vengeance following Jackson Hole the German government has signaled it’s open to fiscal stimulus if the current downturn turns into a more severe crisis.

On top of this bad news, it appears the European Union is finally moving towards crunch time with the UK. Boris Johnson, the new Prime Minister of the United Kingdom, has taken the stand the UK will exit the union, deal or no deal, on October 31. The failure of the EU to negotiate in a fair way has led to this scenario and the negative implications of such a split may reverberate throughout the economy for years. This all leaves those of us watching Europe's combined economies wondering where they might get a spark that will ignite growth. Sadly, the answer has not revealed itself and it appears it could be all downhill from here.

This leaves much of the EU fate resting on the new incoming head of the ECB, former IMF chief Christine Lagarde and the hope she can pull a rabbit out of her hat and find a way to set things right. Lagarde's announced appointment is reviving praise as an experienced financial firefighter with a steady hand. Her greatest challenge is that she is replacing a man credited with saving the Euro-zone by means that will no longer work. If she departs from Draghi’s script, she will face fierce criticism but if she does not, the Euro-zone’s never-ending crisis is expected to spin out of the ECB’s control. Draghi attempted to save the Euro-zone by printing trillions of euros which funded bankrupt banks and allowed Italy, Spain and other stressed states to roll over their debts but has failed.

Low-interest rates and easy money have not cured Europe's problems and the area continues to face growing anti-EU sentiment. Looming before the region is the problem of envisioning exactly from where its next economic renaissance might flow. The source certainly won't be from a well-tuned and responsive political system or because of its growing ability to produce goods for a fraction of the cost of competing nations. Unfortunately for the Euro-zone, much of its problem can be viewed as one of "stagnation." Figures show that as of 2017 not a single European company ranked among the top fifteen technology companies in the world. It was mainly North American and Chinese companies that are driving the world forward. Still, more troubling is that of the top 50 global technology companies, only four are European and even those are slowing losing their edge.

Italy A European Debt Bomb Waiting To Explode
The truth is that in all reality Italy went bankrupt in summer 2011. Back then we saw interest rates on the national debt spike going out of control and Italy lost access to the financial markets. At that time the ECB and political authorities in Europe agreed to create around the country’s finances an artificial market to give the impression of stability and the appearance that Italy could work its way through its problems.

Italy is now forced to stay on this artificial support until the economic conditions improve and confidence is restored to where the country will have again access to real and normal credit markets. This most likely will never happen because not only is Italy mired in debt but it is also a mess politically. Not only the size of debt but the quality of the debt meaning the ability to repay it is an important issue. Because of the sheer dimensions of Italy as an economy and as a debtor, it dwarfs the problems posed by other countries that make up what has been referred to as the Euro-zone PIGS. All countries are not equal in size and the reason for their woes vary, however, propping up an economy is not a long term fix. The ECB loaning money to banks to have them purchase government-issued bonds is a scheme and instrument that allowed international investors to exit Italy in an orderly fashion but resolves little.

Not attempting to load onto the list of problems it still must be pointed out that on May 16th of this year when Bloomberg declared the EU migrant crisis over they may have been premature. This has proven to be a case of hope being placed in front of reality. The good news is the 150,000 migrants seeking to enter Europe illegally last year represents a 92% drop since 2015. Also, the article stated the number of people seeking asylum in 2018 was 646,000, less than half of what it was three years ago. Still, the issue remains politically divisive as ever. It is clear the EU’s member states do not share a common long-term perspective on migration from the Middle East and Northern Africa to Europe.

Who Should We Blame? (click to enlarge)
In the later part of July, French president, Emmanuel Macron, said European countries have made progress on plans to redistribute refugees rescued in the Mediterranean. Still, Italy's Salvini, who closed ports to NGO rescue boats, said the agreement underscored a demand that Italy continues to be the refugee camp of Europe. Salvini said Italy “does not take orders and is not a partner. If Macron wants to discuss migrants, come to Rome.” The fact is things are still up in the air as to what to do with the thousands of refugees still attempting to reach Europe.

Each day more attempt to cross the Mediterranean with Italy and a few other countries forced to bear the brunt of the problem. Salvini has accused the NGOs of running a “taxi service” for migrants and has demanded other European countries open their ports to the boats. This has resulted in NGO boats being forced into time-consuming negotiations between EU member states as they try to find a country willing to admit them each time they rescue migrants and refugees. Charities have criticized what they describe as Europe’s “campaign of criminalization” towards their rescue boats. This has led to a joint statement from the heads of the UN refugee agency UNHCR and the International Organization for Migration, it said: “The crucial role played by NGOs must be acknowledged. They should not be criminalized nor stigmatized for saving lives at sea.”

When all is said and done we in America have been shielded from a great deal of the bad news and migrant problem flowing out of Europe. In general, we hear little of the continuing yellow vest protest in France or no-go zones where police and delivery divers fear to tread. Instead, our media is focused on Trump's latest tweets. It seems we have enough of our own problems both economically and politically to keep us busy. Like many of the issues confronting America, the woes facing the Euro-zone economies are deep-seated and structural. Trying to avoid confronting them will not make them disappear but will simply result in more pain down the road. In time, much of this pain may come to the people of Europe in the way of a falling euro that strips them of their wealth.

Sunday, September 1, 2019

China's Currency Problem Is Worse Than It Appears

China's currency woes are worse than many people think and this is putting the yuan under pressure. When people point to China's large holdings of U.S. Treasuries as proof of China's solvency they frequently discount the amount of debt that has grown in the Chinese system. It is true the Chinese own a lot of U.S. debt, $1.123 trillion as of December 2018. Together Japan and China own about ten percent of  the U.S. debt, 5.1%, and 4.7% respectively. Japanese-owned debt doesn't receive nearly as much negative attention because Japan is seen as a friendlier nation and the Japanese economy appears more stable. While many Americans tout that China has us by the throat it is not true. Considering how rapidly debt and credit have increased over the years, it could be argued that a trillion dollars of debt is not nearly as relevant as it was a decade ago.
China Only Holds A Small Percentage Of US Debt

The main reason China bought up so many U.S. Treasuries over the years is that it wanted its currency pegged to the dollar. Dollar-pegging adds stability to the yuan since the dollar is viewed as one of the safest currencies in the world. This has been a common practice for many countries since the 1944 Bretton Woods Conference. Still, even though China owns these U.S. Treasuries, China is running a massive U.S. dollar shortage both on a corporate and a national level. Much of the problem stems from Chinese companies having roughly $2 trillion U.S. dollar-denominated debt owed to international investors.

Loans of this type are not uncommon, especially in developing nations. Much of global debt is denominated in U.S. dollars. This means the companies owing it need to pay both the principal and the interest payments to their lenders in U.S. dollars. This results in a demand for dollars and usually a constant flow of dollars out of the country. This is a totally separate issue from individuals or companies shifting wealth out of China to avoid the pain of currency devaluation or to escape its repressive regime. An article titled; China Continues To Prop Up Its "Unpropable" Economy, delves into how China continues to prop up a financial collapse and how China suffers under crushing debt. It contends due to the huge amount of debt China's demise can only be postponed but not stopped.

China's Debt Soared After 2008 (click to enlarge)
It expands on the proposition that since the 2008 financial crisis Chinese bank assets, and by implication liabilities, have exploded by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined. This means that China's debt is now creating instability and has become the biggest wildcard in the global financial system. Continuing along this "one-way path," in January of 2019, Beijing injected a staggering $685 billion in new credit into its financial system. This injection was greater than the GDP of Taiwan the world's 21st largest country. 

Many of us are drawn to a good illusion and in some ways, it could be said that our culture has become obsessed with avoiding what is real. With this in mind, we must remember that politicians and those in power tend to go to extreme efforts to avoid taking responsibility for the problems they create and this has been done in China. History shows that one way a country can kick their gross domestic product higher is to build a false economy based on infrastructure or war. China's version of this is apparent in its "ghost cities." Unfortunately, when a country gorges at the trough of deficit spending that generates a big temporary boost in its GDP it also creates a wall of debt. One of the best examples of building an economy on such a foundation was demonstrated by Germany when it turned its economy into a war machine during the 1930s.

To understand the ramifications of the situation China now finds itself in we need only look at the finding of the 2009 bestselling book titled, "This Time Is Different." The book written in 2009 by Carmen Reinhart and Kenneth Rogoff. It chronicles eight centuries of financial follies in which financial meltdowns have typically followed real-estate bubbles, rising indebtedness, and gaping deficits. Their work adds credence to the belief that debt has consequences. The authors highlight a clear pattern of similarity between many of the defaults that have occurred throughout history and the situation developing today. Debt has been growing at an incredible rate across the globe but even more in China.

For years as they debate the true strength and sustainability of China's economy and its role as a global player has been debated by China watchers, economists, and investors. Those of us that paint a picture of future collapse and a day of reckoning are often accused of spreading "doom-porn" when we claim that the Chinese have masked over their dire situation by continually expanding credit. It is important to note that over the years each new wave of money has begun to lose its impact as the efficiency of stimulus waned and more and more of the credit was absorbed in supporting existing debt. The fact is few good investment opportunities currently exist in China and this causes much of the newly printed money to leak across the border inflating asset bubbles in other countries.

 China's Yuan Is A Small Player (click to enlarge)
Much of what is occurring in global currency markets has been "scrubbed away" by our complex financial system that tends to soften the edges of harsh moves obscuring their importance. Many people think things move and unfold in a logical way but  we should also consider the possibility the currency market is a manipulated scheme by central banks to create the illusion of stability. For a long time, I have maintained the view that currencies are trading in a false paradigm created by the coordinated collusion of the major central banks to limit currency volatility. The central banks know the collapse of any one of the world's four major reserve currencies would shatter the myth that the major currencies of today are immune to the fate that has haunted currencies throughout history.

In our modern global economy, a huge percentage of our wealth is contained within the rather closed system of fiat money. The laws and rules governing this system by their nature discourage freedom of movement into tangible assets. History shows that when the nations granting a currency have proven unable to control their budgets and are crushed under the weight of debt bad things happen. This situation frequently results in inflation. A key reason inflation has remained so low since 2008 is because people have been willing to store their wealth in paper instruments. The good people of countries like Argentina, Venezuela, Iran. and Turkey that held on to their country's currency have been financially raped as the currencies have fallen in value. Today they are far less wealthy compared to people in countries that have seen their currencies remain stable.

The rubber will meet the road as more countries that export to China question the value of the Chinese currency and demand payment in dollars and refuse the yuan. While China enjoys a trade surplus with America this is used to support trade deficits with many other nations. If at some point China decides to or is forced to sell its FX reserves to get access to U.S. dollars to help prop up systemically important firms it becomes a bit of a self-defeating exercise. When a currency implodes or fails, wealth is transferred from those improperly invested to survive such an event to those positioned to benefit. The canary in the coal mine portending of such an event may be the stories we hear of central banks and countries buying gold. In the future investors would be wise to prepare for a rude awakening due to a huge shift in the values of currencies.

Footnote; A recent article by on The Sounding Line delves into the idea the Chinese stimulus is not working anymore. The link to that article can be found below.