Friday, February 28, 2020

Dollar Pushed Higher Then Backed Off - Why?

The dollar's weakness in the last few days can be explained from the yen being used as a conduit for wealth fleeing China and the euro enjoying a "dead cat" bounce. The dollar still sits at the higher part of its range. Currencies seem to be locked in a narrow trading range which could be another indication that Central Bank manipulation has gone nuclear. Near the end of 2015, a great deal of wealth began flowing into America seeking protection from the ravages fostered upon it. Much has happened since then. Between Trump and many others talking down the dollar, trade wars, and the introduction of several cryptocurrencies the dollar has backed off a bit. Still, the dollar remains relatively strong with any big increase in strength seen as a ticking time bomb for the global financial system. 
Is The Dollar Has Been Held In Its Trading Range

The dollar's strength has been largely a result of  many countries adopting even worse policies than those America's leaders have chosen to pursue. Investors across the globe are engaged in a massive game of speculation that contains a lot of risks. This is driven by the need to get reasonable yields in a challenging environment. Still, all this tends to reinforce the fact the dollar is the linchpin of global finance and has guaranteed itself a place at the head of the table until dethroned.

A strengthening dollar sends a signal that the global economy is unstable which is something central banks want to avoid at all costs. This may account for why central banks all seem to be marching in lockstep as they take turns injecting more liquidity into the system. To be perfectly blunt, none of the rapid expansion of debt and credit during the last decade could have occurred without the Fed being complicit and in agreement. It has been the Fed that decided to allow the dollar to be used as a global prop. This exploded following the 2008 financial crisis when then-Fed Chairman Ben Bernanke adopted policies of massive quantitative easing (QE) to stimulate the economy when normal monetary policy became ineffective.

Today QE has become the lifeblood of a sick financial system rather than the jolt needed to restore its health. This circles back to the little held idea the policy adjustments Fed chairman Powell has made are driven more out of fear a strengthening dollar would crash the system than the monkey hammering he received from President Trump. It also could tie into the recent "repo-liquidity" problems and questions as to where all the money has gone.
The Fed Has Allowed This To Happen

A stable dominate currency forces other currencies to toe the line or pay a stiff price. Ignoring this economic reality translates into pain for those holding the currency of any country that abuses this economic law. This plays out in the account balances of any country that watches its currency fall as it imports far more than it brings in. As a rule, wealth tends to flow towards where it will be safe and protected. This is especially true today when wealth is able to rapidly move across borders. The inflow or outflow of capital is a big deal.

Throughout history, strong currencies have attracted wealth and this means money and wealth from all over the world could be headed towards America's shores. The money coming into America flows into both bonds and stocks supporting lower interest rates and the stock market. Those of you who have read other articles I have written know I think the market is overvalued and the bond market is a "bubble ready to pop", but as long as we remain the best and safest place to hide money do not discount the dollar. If this turns into a self-feeding loop the dollar may soon get much stronger especially if I'm correct in my suspicion that its recent narrow trading range is indeed artificial.

The important part of this theory the central banks have rigged the currency markets is based on the idea several currencies have become rather fragile. With this in mind, the central banks appear to be making every effort to reinforce feelings of economic stability by keeping currencies trading in a "quiet" range. It is in their advantage that people think the global economy is on sound footing as central banks across the world continued to print and pump out money in search of the "ever-elusive growth" that never quite arrives.

Do not underestimate the power of cross-border money moving into a country as a powerful economic force. While the dollar has been described as the cleanest dirty shirt in the closet, or the best house in a bad neighborhood, both place it as the least worse option. The reality is other options fail to pass the smell test. This is partly because the dollar sports a huge advantage over other currencies because of its role as the world's reserve currency. This makes it the "default currency" and by the size of its market, float, and liquidity the currency by which all others are weighed, measured, and often pegged.

Very Important Chart In Understanding The Dollar
The chart to the left shows four major currencies dominating the world stage. They are the pound, the euro, the yen, and of course the dollar. All remaining currencies are small players in the overall scheme of things. John Maynard Keynes said, By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there is a slew of  Currency Vigilantes always ready to make their presence known.

Low-interest rates coupled with easy money pouring into the economy through the expansion of credit tend to create an illusion of prosperity. A "Trojan horse method" by which countries steal wealth is by the monetization of debt. This is done by printing massive amounts of new currency or new taxes. If you look close you will see the currency markets are beginning to reflect diminished confidence in the system central banks have created. This can be seen by the renewed interest in Gold and a slew of new cryptocurrencies.

The false economy we have created can rapidly vanish. Proof of just how much this economy relies on the continued flow of cheap money was highlighted when the stock market started to wobble and President Trump to ratcheted up his attacks on Fed Chairman Jerome Powell for "ruining the party".  Trump has become the market's head cheerleader and constantly points to the soaring stock market as confirmation of his skill in growing the economy. In truth, his flawed tax reform package has mainly benefited the rich by fostering massive stock buybacks, it is only this coupled with massive deficit spending has allowed the false illusion of prosperity to continue.

The central banks' experiment in money creation has painted them in a corner. Their current policies should make us question the use of currencies as an economic tool going forward. It has also increased the risk that more currencies will fail as their capability to safely store wealth comes under scrutiny. Currencies are morphing into a tool of governments and have become weaponized which takes them further away from their original role as a medium of exchange in commerce. Again it must be stated, the dollar's role as a reserve currency gives it oversized importance in world markets. It is without a question the benchmark by which other currencies and commodities are valued.

When all things are considered, fiat currencies are in general a rather weak lot. This means it is best not to look too closely or the system glued together by faith and a prayer could come crashing down. Overall the dollar remains a far better currency to hold than its weak sisters, the euro and the yen. If indeed the central banks are behind currencies trading in their rather narrow range it must be noted such currency manipulation is a very dangerous path to start down. It is a slippery slope bringing into question the real value of a currency and further distorts true price discovery. 

As the currency games continue to ratchet ever higher it is becoming apparent that much of our financial structure is built on shifting sand. This means the schemes bankers have used for years to hide and transfer debt are coming under attack. If the current system crumbles it will climax in a reset of the economic system across the globe. If people all over the world try to get out of their home currencies a surge in the value of the dollar is logical. In the end, this would not be the salvation of America or its economy but it sure would create a lift that we would be wise to use to our advantage.

Sunday, February 23, 2020

Syria Stands As A Mega-Embarrassment For America

For a long time, America has tried to ignore and distance itself from its role in making Syria the disaster it is today. Syria stands as a mega-embarrassment that shines a spotlight on America's failed foreign policy. To say President Obama blew it is an understatement. His inexperience took us down a rabbit hole with each turn revealing more ugliness than the one before. Both Obama and Trump pledged to reduce America's role in Afghanistan and Iraq but it has proven easier said than done, it has also had massive far-reaching ramifications.

Aleppo Is Just One Of The Many Cities Destroyed
By reassuring and almost encouraging the people of Syria to rise up and overthrow their brutal leader Obama started a series of events that has taken countless lives and destroyed millions of others. Three of the most damaging developments flowing from this are the development of ISIS, the flow of millions of refugees into Europe, and the bombing and destruction of cities and innocent civilians. Continued violence in the region over the last decade has spurred the destabilizing mass migration of millions of people from the area.

Many people do not realize the formation of ISIS is rooted in this mess and flowed out of America's meddling. A failed attempt to build an army to fight Syrian President Bashar al-Assad backfired.  A report published by Reuters claimed that 200 men were trained and that over 1200 were to be added in a plan to prepare to free Syria from the rule of President Bashar but General Ibrahim al-Douri. who had been on the US most-wanted list since the second Gulf War took over control. This left the group with a problematic leader and a huge war chest at his disposal. Most of the money had come from US allies, including Kuwait, Qatar, and Saudi Arabia, all are Sunni-based countries that originally supported ISIS.

The Middle East Is Ready To Kill (click to expand)
For years, day after day, week after week, month after month, the American people have busied themselves with ignoring the Pandora's box of misery Obama opened and unleashed is his arrogance. Please don't take this as an Obama bashing, he didn't do it alone. The same old group of clowns that have infected American foreign policy for years weighed in and helped bring us to where we are today. America simply can't mind its own business.

While it could be argued a great deal of this is a continuation of President Bush's folly, anyone making such a case should concede that Obama widened the conflict destabilizing the situation even more. In 2011, he and then-Secretary of State Hillary Clinton decided to undertake a "military intervention " in Libya. Years later in a 2016 Fox interview, Obama said the handling of the military intervention in Libya was his “worst mistake” Today, oil-rich Libya is a violent mess split between rival governments, each backed by an array of foreign countries jockeying for influence and control of Libya’s resources. According to a statement from the UN, the failed country is continuing its long efforts to reach a lasting cease-fire.  

Looking back at President Obama’s legacy in early 2017 The Guardian reported that in 2016 alone, the Obama administration dropped at least 26,171 bombs. Most of these air attacks were in Syria and Iraq but US bombs were also dropped in Afghanistan, Libya, Yemen, Somalia, and Pakistan. All seven of these countries have populations where a majority of the people are Muslim. as for the numbers of civilians killed by these bombs it could be in the thousands. We will never know because both the administration and mainstream media remained nearly silent about the civilian toll of the administration’s failed interventions.

Returning to the issue of Syria, currently, around a million Syrians have their backs against the wall in the northern Syrian province of Idlib. The UN Office for the Coordination of Humanitarian Affairs reports the number of civilians displaced since December 1 at 700,000. These civilians are trapped, the population is caught under the bombs of a three-way war which now involves the Syrian-Russian alliance fighting Turkey, as well as Turkish proxy jihadists as well as terror group Hayat Tahrir al-Sham.

The Syrian and Russian armies are bombing these people while Turkey refuses to let them cross the border partly because once there they become Turkey's problem. Adding to the problem is that the European Union has signaled they don't want them either. The situation has degraded into an almost bizarre state where America and the Trump administration are backing Turkey and its President Tayyip Erdo─čan. This is definitely not a marriage made in heaven. Over the last few years, Turkey has bashed the Kurds and played Russia against America while constantly leaning on Greece and the Euro-zone.

People Have Fled To Horrible Camps (click here)
Those that have fled the fighting are suffering horrible conditions. A YouTube video is linked to the picture to the right. Clicking on the picture brings up drone footage showing the horrible conditions in a refugee camp covered in snow. Snow blankets the countryside while mothers and their children live in flimsy tents without heat or enough to eat.

Living in the mud, cold and hungry without proper sanitation is far from ideal. The children have no real schools and people have little to do except to suffer. To make matters worse the men have little or no work or any way to make money. Life in the refugee camps is a case of just trying to survive until things get better. It is important to remember most of these were happy middle-class people simply wanting to go about their lives before we stirred the pot.

I started writing about Syria back in 2012. At the time I predicted the country had passed the tipping point and was facing a civil war. That was at a time forces were lining up to supply weapons to both sides of the Syrian conflict. This fueled the fire and turned the Syrian people into pawns in a very dangerous and deadly game. As in Libya, a parade of foreign countries jockeying for influence and control have poured weapons and fighters into the area and it is the people of the region that are paying the price.

Was their government perfect? No, but they were not living under the conditions under which they are currently forced to exist. To make matters worse the vice is expected to tighten. Syria is only one example of how meddling in the affairs of other countries has consequences. Unfortunately, America's history of intruding in the affairs of others has been widespread. To say these people face a bleak future is most likely an understatement because the world is doing little to help them. It could be said that with friends like us these counties don't need more enemies.

Saturday, February 22, 2020

Warren's Attack On Bloomberg Was Unfair And Malicious

Elizabeth Warren seems to be making an all-out effort to make herself the most annoying person in the Democratic Presidential race. She created the negative image of a desperate attack dog during the Wednesday night debate in Las Vegas. Before that, I held a rather neutral view of her. This may be a case of the more you know about someone the less you like them. Warren may have forgotten that these debates are as much about demeanor, temperament, self-control, and disciple than about what a candidate believes or policies they might want to pursue.

Warren Is Pushing Hard With A Lot to Prove
Apparently, Warren felt the need to be aggressive to show voters she’s primed to take on the man in the White House. Following the debate former Nevada Sen. Harry Reid, who is remaining neutral in the primary, told The Daily Beast, “I thought Elizabeth Warren was on fire last night,” Reid went on to say,“ I guess somebody finally told her she had to do something rather than try to get along.” Warren took this tact after she had a huge slip in the polls leaving Klobuchar to ascend in her place. The problem is how she grabbed such attention, coming across as nasty is not a great quality and either is being unfair.

A big part of Warren's debate performance centered on what some people see as her evisceration of her rival former mayor of New York, Mike Bloomberg. Warren plummeted the New York billionaire several times and while she may have exited her followers she did little to give viewers an inkling that she is the person that can bring America together and heal our political divide. This was a theme she had been test-running in recent weeks as she promised she is the best suited to unite the fractured Democratic Party. Her attacks during the debate make it appear she has abandoned this approach. 

Several times during the evening I felt a desperate Warren was trying to hang her hat on the idea we need a woman in the White House, to be more specific, in charge of it. If I was convinced women politicians had a record superior to the miserable males they have replaced I would have been swayed, however, I see them as equally flawed. This means her gambit came across as playing the "sex card."  As a voter, I find this as pathetic as flaunting the race card or dealing from the bottom of the deck.

Bloomberg Has Money And Is Competent 
Mike Bloomberg has been under the spotlight of public scrutiny far longer than Warren and is still standing. He has made efforts to address stop and frisk, not paying more in taxes, and even being too rich. Bloomberg also reflects current concerns over growing inequality and climate change. While pointing her finger at him and demanding more transparency on things like sexual harassment complaints at his many companies, his taxes, and more Warren seems to have forgotten her own transgressions. It seems a bit self-righteous and  hypocritical of her to simply brush aside her past overzealous claims of an Indian heritage and being a minority to advance her career.

Some questions exist when it comes to Warren's judgment and just how wed she is to her principles. One example is after she publicly denounced the decision of “any Democratic candidate” to “reverse course and endorse the use of unlimited contributions from the wealthy” she has done just that. While in Las Vegas on Thursday. Warren did a 180 on the super PAC issue when she said; “It can’t be the case that a bunch of people keep them and only one or two don’t.” This was all part of her saying I will now take the money.

Politics is a strange and bizarre game. If someone apologizes for a past error in judgment it is often not good enough, declared to be pandering, or seen as a show of weakness. On the other hand, the refusal to do a mea culpa can give the impression the person is a pompous ass. In truth, the flaws in policies such as stop and frisk often become apparent only after the program is implemented. Warren may not know it but her idea to make a boatload of money available for people to start new businesses while sounding good will result in massive defaults. One of the things Warren may soon learn is that by winning a debate with venomous and unfair attacks you can deeply wound your image.

I'm not a fan of Bloomberg and this should not be considered an endorsement but at least he has proven himself competent. He has run both a massive company as well as one of America's largest cities for over a decade, few politicians come to the table with such a resume of experience. It should also be pointed out, whether we agree with him or not, he does put his money where his mouth is and has given away a great deal of money to promote what he believes in. Warren, on the other hand, has proven flawed to where the saying, "don't throw stones if you live in a glass house" may apply. Most Americans have little desire to replace Trump with a hypocritical nasty woman that has a loose relationship with the truth and flip-flops on key issues.

Thursday, February 20, 2020

Coronavirus To Hammer Japan And The Yen

The coronavirus spreading across Asia and the world is very likely to hammer Japan and the yen. Some people consider the Japanese yen a "safe-haven" currency where they can safely store their wealth in times of financial turmoil. This flies in the face of reason because Japan is destined to eventually face an economic crisis brought on by the growing debt of its government. Central banks have promoted the myth that a major currency cannot fail, however, the rapid demise of either the yen or the euro is all that will be needed to reveal the truth and remind people our system of fiat money is held together only by faith in the system and a prayer. An accurate timetable for the collapse of the yen is nearly impossible to predict. Several factors play into such a scenario and how fast it might unfold. In recent years as Japan has undertaken a policy to weaken its currency and to strengthen its exports America has remained mute in sympathy for the problems Japan is facing. The reality is that much like the situation that developed in Greece, Japan is facing a wall of debt that it will never be able to repay. The difference is that Japan controls the press that prints its money.

BOJ Leads In This Experiment click to enlarge
Near the end of last year, Daniel Lacalle wrote the failure of Abenomics has been phenomenal. Lacalle points to the balance sheet of Japan's central bank which has ballooned to more than 100% of the country’s GDP. The central bank now owns almost 70% of the country’s ETFs and is one of the top 10 shareholders in the majority of the largest companies of the Nikkei index. Despite the record-low cost of debt, Japan's government spends almost 22% of its budget on interest expenses. This has occurred while none of the results that were expected from the massive monetary experiment, inventively called QQE (quantitative and qualitative easing) have materialized.

Abenomics has consistently missed both its inflation and economic growth targets. Japan has been unable to offset the problem of demographics and productivity with higher debt and money printing. Japan has incentivized malinvestment and government spending has resulted in transferring wealth to unproductive sectors which has zombified the economy. The QQE program was based on three “arrows”; monetary policy, government spending, and structural reforms which never happened because protecting the bureaucratic machine of government always takes priority over what is best for the people.
Shifts From Bigger Players Move Yen - Click To Enlarge
In the future, Japan's debt can only be addressed by printing more money and debasing the yen. This means Japan would be paying off its debt with worthless yen when possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 250% of its GDP is the highest in the industrialized world (click here to view debt clock). Because of its size, people tend to forget that the island nation of Japan is an economic powerhouse with a GDP that ranks third behind only the United States and China. Japan is an export-driven economy meaning it sucks in raw materials from all over the world, adds value to them, and then spews out finished goods. This leaves the country and its economy dependent on and vulnerable to the countries buying its products. A weak yen makes these goods more competitive on the world market and propels the economy forward.

The yen is part of a somewhat self-defending system of reserve currencies which are considered the most liquid and sound in the global economy. The value between them constantly fluctuates and as one currency falls out of favor investors shift into the other three seeking the least bad choice. As long as savers, investors, and institutions keep their wealth stored within these four currencies and continue the delicate balancing act of avoiding the worse and exiting the most overvalued the system remains relatively stable and will continually readjust partly because it is so self-contained. Each of these currencies has its particular strengths and weaknesses, however, the most vulnerable of the two are probably the Japanese yen and the Euro which is the official currency of the Eurozone, which consists of 19 of the 28 member states of the European Union. A key weakness of the euro is the questionable accountability of its controlling institution.  

Weak Growth And Huge Debt click to enlarge
Over recent decades because of its size in the global economy the current Bank of Japan policy has quietly and systematically distorted financial markets across the planet. With super-low interest rates, it has become a key player in the carry trade. In recent years investors and the mega-banks across the world have drastically reduced their Japan Government Bond (JGB) holdings. This has quietly transferred the risk of who gets hurt in the case of a falling yen or a default directly to the Japanese public. As Japan continues down this path it is only a matter of time before the credibility of the BOJ is lost and the yen plunges in value. Many economists have taken a dim view as to the yen's future, however, when it will succumb to economic reality has been delayed because it is so well insulated and intertwined in world markets.

Demographics paint a bleak picture for Japan which is stuck with an aging and shrinking population that is increasingly expensive for the government to provide for. Adding to its woes the Fukushima nuclear disaster shuttered its nuclear power plants and forced the country to import more expensive energy alternatives. All in all neither monetary nor fiscal policy will adequately solve Japan's problems. Continuing to run fiscal deficits only means that government debt is pushed onward and upward. Simply put, the fundamentals of Japan are lousy. It should be noted that Japan would be sitting in far worse shape if it were not for the wealth currently shifted from America to the small island nation each year. America spends billions each year defending Japan and puts much of this money directly into the economy. Another way America supports Japan is by purchasing many of the goods the country produces. The massive trade deficit America has with Japan feeds large amounts of money into Japan, without this money the massively indebted nation would be in even more trouble.

For years it has been noted that a key strength that Japan holds is its ability to control its own economic fate and that it cannot be held hostage to foreigners because the people and institutions of Japan hold its debt. In the past, we have seen that outside creditors can wield a great deal of sway over a nation that is deeply in debt. It is not uncommon for creditors to squeeze, threaten, and even blackmail a country that owes them a great deal of money. A country can always drive its currency downward, however, supporting it is much more difficult. To drive a currency lower a country only needs to print and sell their currency using it to buy one or more of the other three reserve currencies. It should be noted that in recent years a great deal of the yen's resilience may be contributed to the fact Japan has strong economic ties to China. This bolstered the yen during China's boom years and as growth in China slowed the yen became a conduit to move wealth out of China.

Unlike many other leading economies, Japan has been battling deflation or falling prices for the best part of the past two decades. At some point expect this to change and a new reality to take hold. To support their stock market the BOJ has even gone to buying stock. When investors in Japan's government bonds begin to believe that Abenomics will be successful in bringing back inflation it would be logical for owners of  JGB's to move out of low yielding securities and buy foreign bonds or equities. The moment the Japanese stock market fails to rise enough to offset a falling yen and inflation we may see a tsunami of money fleeing Japan. This would constitute the end of the line for those left holding both JGB's and the yen. This has been a long time coming and when this finally occurs and Japan crumbles it will be felt across the world.

Saturday, February 15, 2020

Cambodian Prime Minister Shook Hands With Infected

An 83-year-old American passenger of the luxury cruise ship Westerdam has been diagnosed with the coronavirus just a day after more than 2,200 passengers and crew disembarked in Cambodia. Previously the ship had been turned away by five other ports. The Westerdam was welcomed to Cambodia after spending two weeks looking for a port as Taiwan, Japan, the Philippines, and Guam rejected the ship on concerns over the virus. 

Not Only Welcome But Glad To Meet You!
While medical workers wear masks and special garb when approaching a person that might be carrying the coronavirus, not all individuals are so careful. It is difficult to believe but Bloomberg reports the Cambodian Prime Minister Hun Sen, who has been skeptical of the severity of the virus, personally distributed roses and shook hands with the Westerdam’s passengers as they disembarked. This may soon prove to be a boneheaded move that he comes to regret. The coronavirus has killed more than 1,500 people since the outbreak started in central China late last year.

The woman and her husband left Cambodia and flew to Malaysia on Feb. 14, with 143 other passengers. Her symptoms were discovered upon landing in Kuala Lumpur and she was sent to a hospital designated for the virus. Her husband tested negative but has been placed under observation. They were two of more than 600 Americans on board the ship. Since the outbreak became a concern cruise ships have become a high-profile symbol of governments around the world struggling to contain the outbreak.

It would be silly to describe the coronavirus story as anything but fluid. It appears the Prime Minister falls into the group of people that think this virus story is overblown and it is less dangerous than many people claim. Many things are unknown at this time but we do know it is easily spread. It is also rapid and aggressively attacks those contracting it after what can be a long incubation period that may last up to 14 days. It also appears to be able to hit from 60 to 80 percent of a population. Raising the level of concern is that those hit the hardest with this virus may face death even if given proper medical treatment which is not always available but will prove very expensive.

Can Sanders Beat Trump In Capitalist America? Possibly!

Socialist Sanders Versus The Don
The Democrats are searching for the candidate best able to defeat Trump in the forthcoming Presidential race. The question on the mind of many democrats is whether Bernie Sanders can beat Trump in a capitalist America? Considering the surge in inequality the answer is, yes. It is difficult to underestimate the anger building under the surface as Trump makes his rounds declaring this the "best economy ever." The reason for the discontent is many Americans are not feeling all that blessed. Wealth inequality has soared in recent years and now stands at the worst it has been during the entire U.S. post-war period. Simply put, statistics show many Americans lack the money to pay for a $500 repair. Driving a decent car doesn't make a person middle-class or economically equal, especially if they are up to their eyeballs in debt to do so.

Like Always The Swing States Decide  (click to enlarge)
As for whether Sanders could beat Trump, a couple of issues rapidly come to mind. First, Trump is not as loved as he indicates, matter of fact  the President has a way of ruffling the feathers of both friends and foes. 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. This has caused many of his supporters to indicate they would like him to stop tweeting and shut-up. The second fact is that by flipping a couple of swing states to blue it would be all over for the republicans.   

Much of Sander's appeal comes from his promises he can deliver a more just society by transferring wealth to those embracing his long-held socialistic values. This highlights a glaring weakness in the democratic system, and that is, a highly motivated minority can overwhelm an unmotivated majority. History shows the promises of generous programs have proven to be a great motivator. It does not hurt that Sanders comes across as sincere and passionate. Those wielding the power to bring about change are often sheltered from the pain inequality and a broken justice system cause. This means they are out of touch with what many people are forced to go through every day. Because of this, the thorny problems of the day become a low priority. Sanders on the other hands seems to relish the challenge of attacking these issues. 

The reality that a vast majority of people face diminishing prospects is a concerning trend. This was highlighted by the IMF in a report focused on data showing how middle-income households have continued to move downward. The U.S. middle class has never recovered after being “hollowed out” when manufacturing jobs fled America and incomes fell. Current trends indicate the "equality gap" is not expected to narrow in the future. This comes at a time when the American worker is being told robots are here and more are being deployed each day. this means millions of jobs will soon vanish due to automation, This is a huge threat and could prove to be a big deal. Growing income inequality is not just an American problem but it is an issue across the globe and no magic or silver bullet exists to address the conundrum brought about by this concentration of power and wealth.

A More Recent Chart Hard To Find! click to enlarge
In a piece titled; "The Morass That Swallowed the Middle Class" Matthew Shaw delves into how much of the inequality debate focuses on the gains of “the 1%,” and less attention has been paid to the economic well-being of what is broadly termed the middle class. These people are all too often just lumped into a diverse group labeled the 99%. Some of these people do very well for themselves but many are dirt poor. Much of this centers around just how out of touch our "professional elite" are with the general population and the economy. By our professional elite, I refer to those who make the rules and their minions, their aids, the academics, the financial institutions, economists and the media, all of which have tied their wagon to the status quo. Conflict and corruption also enter into this because we often find those setting the rules also tend to want a bigger piece of the pie.

Trump's trickle-down economics and tax cuts may sound good but they have not worked for all of America. Trump is very comfortable with economic manipulation and has displayed a surprisingly short-term view in his economic policies. This means he often appears more worried about today than the future. His "damn tomorrow" attitude is reflected in deficit spending, his calls for lower interest rates, and by embracing MMT. The Trump economy which is based on huge deficit spending can only take the economy so far and carries with it a fair amount of negatives. Trump's delusion that his stock market can go straight up forever is not based on years of stock trading but rather his years in real estate where inflation treated him well as prices rose ever higher.

The structural issues that haunt America's competitiveness and far outweigh the benefits of lower taxes. If you are one of the many Americans that pay no taxes this subject only means the government will have less to transfer your way. Healthcare remains a huge issue for most voters and Trump's failure to move healthcare reform forward coupled with Republicans' pathetic excuse for an answer to improve healthcare was short of inspiring. 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.

Trump's narrative that tomorrow will be brighter is not being heard everywhere, in fact, some people are downright fearful of where he is taking the country. Many Americans balk at the idea their children will enjoy a better life partly because the system has become so unfair. Moreover, a slew of important emotionally charged issues such as immigration and climate change are still being ignored. In fact, Trump often shows a lack of respect and mocks those concerned about these matters  In addition to exorbitant healthcare America has a broken justice system that it is both expensive and often unjust.  As more Americans retire and become dependent on government anxiety will continue to grow. Also, there is the issue of continuing expensive wars, something Trump pledged to end, not only has he failed to do so but he seems to agitate and inflame discontent where ever he goes.

Just like in the previous elections voters should be prepared to be given a less than inspiring choice for a President to lead us forward. Even though he has been acquitted on impeachment charges Trump still has a reputation of being a schmuck which is something he most likely not be able to shake. Expect both these men to be supported by motivated bases with demographics favoring the Democrats but it is the disaffected independents that will decide this election. Do not be surprised if the decision comes down to who these independents dislike the least, at this point, it is a toss-up. The argument that socialism doesn't work and that all countries that have attempted to institute it have miserably failed may not be enough to turn voters away from seeking new answers.

While I have strong reservations as to the argument Sanders can trump the Don I must say Sanders is clearly shining a spotlight on growing inequality and the unrest bubbling beneath the surface. If Sanders can tap into this feeling it may become more about a kinder more compassionate America than socialism or Trump. This means watching how women and the elderly weigh in. Whether Sanders could win the election without increasing polarization and hatred is questionable but it would be wise for those in power not to get overly comfortable or to underestimate the resentment brewing under the surface.

Footnote; This is an exercise based on Sanders becoming the Democratic party nominee. It should be noted this has not yet occurred. A big wildcard in the 2020 election would be a third party candidate drawing off just enough votes to spoil everyone's plans. Remember 1992 and Ross Perot!.

Wednesday, February 12, 2020

CDC Rather Powerless In Halting Spread Of Coronavirus

It may come as a shock to many Americans but the Centers for Disease Control and Prevention (CDC) will most likely prove rather powerless in halting the spread of the coronavirus. High profile incidents covered by the media often reassures the public that the government stands ready to rush to our aid in case of a national disaster. Following a tornado or hurricane, we often see news coverage of FEMA workers spreading out and moving from door to door offering help to Americans in need. This reassuring media coverage is misleading. Be prepared that in the case of a major crisis, such as the coronavirus pandemic or disaster the government will not be much help. If and when a large "Armageddon" event covering a large area does occur we will quickly become acutely aware that God helps those who help themselves.

On route to a meeting at the World Health Organization (WHO) in Geneva on Tuesday, Prof Gabriel Leung, the chair of public health medicine at Hong Kong University, told the Guardian an “attack rate” of 60-80% may occur. Currently, the CDC, even with its 11.1 billion dollar budget, is showing that it is powerless to even rapidly conduct a large number of tests on those likely to be carrying the coronavirus. The epicenter of this rapidly spreading killer bug is Wuhan, China and it is far from contained. Much is still unknown about this virus but accompanying its spread has been a great deal of economic damage as businesses are forced to temporarily close. Claims by President Trump the health and economic toll will soon pass and be very limited may be overly optimistic.

The trend of the government pandering to victims that we have seen develop over the years may be a result of the battering former President Bush took in opinion polls following Hurricane Katrina. The pictures that the media posted following a slow response in handling Katrina victims haunted the Bush administration and painted Bush as being insensitive and out of touch with the plight of poor Americans. At what point did government become responsible for dispensing sorrow and grief?  The bar to show concern for every shooting or incident is currently set so low it impairs what gets done in Washington.
During A Real Disaster, Help Will Be Hard To Find

It appears in our media-driven world, the President has been given the role of consoler in chief and is expected to pour forth sympathy and cast out concern for every American following an incident of destruction or violence. It does not matter if it is an accident, shooting, or some natural disaster. In recent years all this has reached new heights where even in the case of a few deaths it is not uncommon to see the President leaping upon Air Force One and rushing to the scene to sympathize with families and friends. In this politically correct world, it has even gone so far as to the President being expected to weigh in as to minor tragedies that occur throughout the world.

A great deal of time is wasted performing these acts that could be better used and focused on solving many of the real and pressing problems that face America. I contend this pandering is a major disservice to Americans in that it fosters the impression that government will be there for you if you ever get into a pickle or jam. While reassuring to many the false illusion of a competent and effective government ready to come to your aid comes at the cost of raising unrealistic expectations. I suspect that with the formation of the massive Homeland Security Agency this may be a case of reassuring the masses that their tax money has not been wasted.

A perfect example of just how impotent our government has become was demonstrated following the Boston Marathon bombing. The government threw a huge amount of manpower into searching for the perpetrator but in the end, it was a homeowner checking the tarp on his boat noticing a spot of blood and not the thousands of law enforcement officers that brought the manhunt to an end. No matter how much planning is spent it is silly to think someone can quickly rush to an area they are unfamiliar with and institute actions to efficiently solve massive problems. Do not be fooled, in the case of a real disaster the government is generally not very effective. The real help will come from your neighbors, this has been the case throughout history.

All disasters are not created equal. In all reality, the Federal government would be relatively ineffective and not much help in a major crisis that covered a large area and affecting tens of millions of Americans. Anyone who has ever experienced the frustrations caused by a bad storm with power outages and such will tell you most help comes from nearby and government is not the answer. People who adopt the attitude that they are a victim following a real disaster and then simply wait for the government to arrive to set things straight are making a huge mistake and are risking the kiss of death.

Footnote; This link to the SOUTH CHINA MORNING POST is in places slightly out of date! note the dates! Still it will give you a great deal of insight to what is happening.

Saturday, February 8, 2020

Coronavirus Ignored To Protect Stock Market Rally

It appears an effort to mask the danger of the coronavirus from the American people may be in play. This could be an attempt to protect Trump's all-important stock market rally. It has become very apparent that the President values the stock markets' constant move to newer highs as a reflection that he has done an outstanding job promoting economic growth. This shortsightedness coupled with Trump's massive ego may have placed his need for self-gratification in front of the welfare of the American people.

Wuhan Under Quarantine (click to enlarge)
Thus far many people in my part of the country are unaware of or under the impression, we have little to fear from this virus. Sadly, most Americans pay little attention to breaking news. How many Americans know of the events unfolding in Wuhan, China? The city of over 12 million people has been on lock-down since January 23rd. This coupled with what appears an attempt to deny or cover up the threat of how easily and rapidly the often deadly coronavirus can spread puts all Americans at future risk.

The President has even gone so far as to praise China's leader Friday morning in a tweet. This seems to conflict with reports that Washington is especially frustrated with Beijing over the crisis. For the last month, the CDC has been offering to send a team of experts to help China combat the outbreak but the Chinese have refused to accept the help. The President's tweet can be seen below;

Donald J. Trump
Just had a long and very good conversation by phone with President Xi of China. He is strong, sharp and powerfully focused on leading the counterattack on the Coronavirus. He feels they are doing very well, even building hospitals in a matter of only days. Nothing is easy, but.he will be successful, especially as the weather starts to warm & the virus hopefully becomes weaker, and then gone. Great discipline is taking place in China, as President Xi strongly leads what will be a very successful operation. We are working closely with China to help!...
5:31 AM · Feb 7, 2020Twitter for iPhone

The timing of much of the news being tossed out is becoming very suspicious. This came as many people familiar with what is happening in Asia continue to question whether China is being transparent in telling the world what is happening. Cruise ships across the world are being turned away from ports because they may be carrying infected passengers or crews. The Diamond Princess cruise ship which is anchored in Yokohama, Japan and is under quarantine has now discovered 42 additional cases of coronavirus adding to the 20 confirmed earlier. Airlines have canceled all flights to and from many areas.

(Click Above To Enlarge)
This brings into question the decision of the CDC to allow thousands of passengers to disembark from a cruise ship returning to New Jersey on Friday morning. This was after more than two dozen Chinese nationals were screened for signs of the virus and four of the passengers were taken to a hospital. Royal Caribbean's Anthem of the Seas was scheduled to depart again Friday, but the company announced shortly before noon the trip would be delayed. Many people think a quick test can be run but officials say it typically takes up to 48 hours for results because samples have to be taken to the CDC in Atlanta, Georgia. Currently, the CDC is giving localities the tools to test for the illness and pushing to speed up this process.

The number of confirmed deaths in China from the coronavirus has surpassed 724 and it is reported the doctor who was punished by the police for first reporting the dangerous virus back in December has died from it. In China, the quarantine has expanded to Guangzhou. This means 400 million now under lock-down. This is something the world has never seen, also it means that thousands of factories in China will be shuttered until at least mid-February. On Thursday, Treasury Secretary Steven Mnuchin tried to reassure investors that the outbreak wouldn't seriously disrupt the supply chains of western companies. The lack of parts flowing out of China is starting to cause serious supply-chain disruptions halting production at plants here in America and across the world.

In a full-court-press, even National Economic Council Director Larry Kudlow, has been out spouting off about how well the economy is doing and promoting a new tax cut for the middle class. This brings front and center the issue that Trump is not an economist and his economy is being propelled forward from a policy of deficit spending. We must not confuse economic growth with economic strength but that is a subject for another time.

Circling back to the crux of this article, why are we not hearing a great deal more about the coronavirus on the mainstream media? Part of the problem is that governments may be covering up how bad the coronavirus outbreak is and the strong possibility it may have been manufactured in a lab as a weapon. Is it a mere coincidence it was first discovered in the same city where China has its only BSL-4 laboratory?

Sunday, February 2, 2020

Coronavirus Makes The Market - Impossible To Predict!

Foreboding At Best - Disaster At Worst

It is impossible to predict what lies ahead! The coronavirus outbreak could be a nothing burger or become a watershed event. A mountain of debt has formed over the years and whether countries and central banks can hurl enough resources at this crisis to calm a growing fear remains to be seen. It is fear versus more promises of stimulus and at some point, all bets are off. To highlight the vulnerability of the financial markets we can always turn the spotlight back upon derivatives. Hundreds of billions of dollars do not matter when we are talking about death or something like the derivative markets.

Currently, China is looking to dump a wagon full of stimulus into an already highly leveraged market to offset the toll taken from virus fear. China said that billions of dollars will start flowing into markets at the opening and the Chinese government has ordered that short-selling of shares be halted. This instability makes it important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important. Everyone paying attention knows that the size of the derivatives market dwarfs the global economy. Several books on derivatives have been written and the size of the derivatives market could be larger than $1.2 quadrillion. To put this in perspective it is about 20 times the size of the world economy.

Attempting to regulate and control our complex global markets is easier said than done. This can be seen in derivatives which are usually lengthy complex legally binding agreements that are very difficult to dissect and often reek with potential contagion. Derivatives fall into many categories from futures, options, credit default swaps, and any complex combinations of these. They can also be used to wager, bet, and spectate on a market move or direction. Regulation is difficult and spotty at best in that a derivative transaction in one country might be considered a simple spot trade in another. I have become convinced after studying derivatives that QE following the 2008 financial crisis may have been geared to hold up the underlying value of assets that feed into and support the massive derivative market rather than help the economy.

Derivatives Could Explode Like A Bomb!
Way back in the middle of 2014, the Bank for International Settlements revealed that the amount of over-the-counter (OTC) derivatives outstanding was around 710 trillion dollars at the end of 2013. Most of that exposure is held by banks. The US Office of the Comptroller of the Currency at the time reported the exposure of US banks to derivatives totaling 237 trillion dollars. Of that, four big banks, JP Morgan Chase, Citibank, Goldman Sachs and Bank of America accounted for over 219 trillion dollars. The staggering size of this market is beyond anything that can be comprehended.

When I tried to get more recent numbers I ran into fairly stiff resistance which I contribute to the fact nobody knows the true exposure that is difficult to assess. Hopefully, much of the derivative exposure somehow nets out so that real exposure is far less than the hundreds of trillions of dollars on the books. This is only part of a much larger market that includes hundreds of trillions of dollars in non-reported agreements and private contracts. The efforts to achieve more reporting, more platform trading and central clearing of derivatives have fallen behind because of the complexity of crafting mutually consistent regulations at the jurisdiction level, for a highly globalized market.
While This Is Not A Current Chart Note The Trend Line!

Many derivative writers should be called "too clever by half" if they think they have successfully controlled the risk or removed the implications and problems massive defaults would cause. They pump these out because they make money in the process of structuring and selling these agreements. A derivative is in many cases an insurance policy covered by collateral. Sadly, those who buy and write derivatives often play fast and loose with the value of the collateral or flat out lie about it. This moves them from an insurance policy and into the area of high risk.

Those of us skeptical of the market wonder whether the coronavirus will be dismissed as another over-hyped hysteria or devastate economies. The potential that things could get ugly does exist. If at some point, a "mob mentality" takes over logic could get tossed out the window. This is when claims their actions are for the "greater good" becomes irrelevant. Temporarily, we are on hold while events unfold around us. The window has gone dark and our vision is limited. Just remember those in government generally take care of themselves first, in their minds they are the priority. 

Saturday, February 1, 2020

The Economic Path Forward May Lead Over A Cliff

It is important to acknowledge the path forward does not always take us where we would like to go. We as a country and society do not always have as much control over our fate as we tend to believe. Starting life as an idealist that had high hopes for mankind and society, I have become jaded over the years by man's shortcomings. The combination of laziness, shortsightedness and several other negative traits have weakened my belief our government and society will do the right thing when push comes to shove. The less you leave in the hands of those who couldn't care less about your fate the better off you will be.

Hunting By Stampeding Your Prey Over A Cliff
Unfortunately, our economy and financial system have been crafted in a way that places our fate in the hands of those who often don't care about us as individuals. Those in control often do not have "skin in the game" and are not positioned to be held accountable if the system fails. An image of an effective hunting technique can be seen in the picture of Buffalo Jump Wyoming on the right. In the past hunters were known to stampede their prey over the edge of a steep cliff. 

This image is in some ways an analogy to the fate I envision awaiting those who have willingly placed their wealth in the hands of others. Far too much faith has been placed in governments doing the right thing. The term "public servant" stands as a monument to our gullibility as a society. In reality few of those employed by the government carry out their duties because of dedication and devotion. Generally, power and compensation coupled with security and little downside or risk are why people choose to take a job in government.

In our modern culture, we as individuals are often far removed from the wealth we have accumulated. At one-time people were surrounded by tangible items representing where their wealth was stored but today that is less common. Now, much of our savings flow into paper or digital promises such as stocks or pensions plans. The further away from us our wealth is removed and stored the less control we have over it. Some people have almost 25% of their pay withheld and placed in a retirement vehicle with only a pledge it will be returned with interest several decades from now. These people are very vulnerable to the possibility their money will vanish into the dark. 

Liquidity floats all boats until it doesn't but that is the part of this economic farce we have yet to see play out. When this happens the inflow of liquidity from policies that have concentrated far too much wealth into equity markets will reverse. This will trigger a negative ripple effect that strikes all segments of the economy and financial sectors. The natural laws of economics dictate that at some point going through the pain of an economic crisis becomes preferable to expanding a bubble that carries with it devastating side-effects. This doesn't mean we will be given a choice, most likely the general direction we take will be dictated by events outside our control. The possibilities of nuclear war or the current global pandemic are just two examples. 

Inequality Is A Growing Problem (click to enlarge)
We are moving down the current path at a time when inequality has exploded Still, many people are buying into the line that things have never been better. The question is, better for who? After adjusting for real-world inflation many households have seen their net income and wealth decline over the last decade. Despite the endless media propaganda about growth and recovery, it is self-evident to anyone who bothers to look closely that the rich and powerful are increasingly grabbing a larger slice of the economic pie. This is an issue society must address in one form or another.

A recent post questioned the sanity of a market that values Tesla as the second most valuable carmaker on the planet. Tesla's recent rally has pushed its market value to over $85 billion making it the most valuable US automaker in history with its market cap more than Ford and GM combined. It should be noted that Tesla has never even produced 400 thousand cars in one year and less than a million during its history. Still, within days Tesla's valuation again jumped, this time to over $100 billion taking it above the world’s second most valuable carmaker, VW, which sold over 10 million vehicles last year.” Now it trails only behind Toyota.

All the money and credit being unleashed by central banks is the equivalent of printing tokens and placing them in digital accounts that can vanish in the blink of an eye. It does not necessarily create real wealth. Oddly enough, this is something the world has come to accept overtime. Belief in a broken or poorly designed system does not mean it will fulfill its desired task. How long we can ignore these flaws before they come back to haunt us is questionable but the seed of financial destruction has begun to grow. This can be seen in our growing debt both public and private as well as in pension plans which are massively underfunded.

This article is not intended to provide glorious answers but to remind and warn you that articles on many media outlets such as the ones titled; A quarter of millennials say they’ve saved $100,000 — here’s how they did it! or This Earnings Season Is Better Than You Think are misleading at best. Like many of you, I'm troubled by a future that is hurling at us with ever greater speed and for which, in reality, all of us have very limited control. Years ago I started this blog as a way to express my views and exchange ideas on a variety of subjects.  With that in mind, it is a good time to point out that nobody can time or predict when the economy will fall out of bed but we are in uncharted waters and caution is warranted.