Tag Archives: gold

Shedlock: Recession Will Be Deeper Than The Great Financial Crisis

Economists at IHS Markit downgraded their economic forecast to a deep recession.

Please consider COVID-19 Recession to be Deeper Than That of 2008-2009

Our interim global forecast is the second prepared in March and is much more pessimistic than our 17 March regularly scheduled outlook. It is based on major downgrades to forecasts of the US economy and oil prices. The risks remain overwhelmingly on the downside and further downgrades are almost assured.

IHS Markit now believes the COVID-19 recession will be deeper than the one following the global financial crisis in 2008-09. Real world GDP should plunge 2.8% in 2020 compared with a drop of 1.7% in 2009. Many key economies will see double-digit declines (at annualized rates) in the second quarter, with the contraction continuing into the third quarter.

It will likely take two to three years for most economies to return to their pre-pandemic levels of output. More troubling is the likelihood that, because of the negative effects of the uncertainty associated with the virus on capital spending, the path of potential GDP will be lower than before. This happened in the wake of the global financial crisis.

Six Key Points

  1. Based on recent data and developments, IHS Markit has slashed the US 2020 forecast to a contraction of 5.4%.
  2. Because of the deep US recession and collapsing oil prices, IHS Markit expects Canada’s economy to contract 3.3% this year, before seeing a modest recovery in 2021.
  3. Europe, where the number of cases continues to grow rapidly and lockdowns are pervasive, will see some of the worst recessions in the developed world, with 2020 real GDP drops of approximately 4.5% in the eurozone and UK economies. Italy faces a decline of 6% or more. The peak GDP contractions expected in the second quarter of 2020 will far exceed those at the height of the global financial crisis.
  4. Japan was already in recession, before the pandemic. The postponement of the summer Tokyo Olympics will make the downturn even deeper. IHS Markit expects a real GDP contraction of 2.5% this year and a very weak recovery next year.
  5. China’s economic activity is expected to have plummeted at a near-double-digit rate in the first quarter. It will then recover sooner than other countries, where the spread of the virus has occurred later. IHS Markit predicts growth of just 2.0% in 2020, followed by a stronger-than-average rebound in 2021, because of its earlier recovery from the pandemic.
  6. Emerging markets growth will also be hammered. Not only are infection rates rising rapidly in key economies, such as India, but the combination of the deepest global recession since the 1930s, plunging commodity prices, and depreciating currencies (compounding already dangerous debt burdens) will push many of these economies to the breaking point.

No V-Shaped Recovery

With that, Markit came around to my point of view all along. Those expecting a V-shaped recovery are sadly mistaken.

I have been amused by Goldman Sachs and Morgan Stanley predictions of a strong rebound in the third quarter.

For example Goldman Projects a Catastrophic GDP Decline Worse than Great Depression followed by a fantasyland recovery.

  • Other GDP Estimates
  • Delusional Forecast
  • Advice Ignored by Trump
  • Fast Rebound Fantasies

I do not get these fast rebound fantasies, and neither does Jim Bianco. He retweeted a Goldman Sachs estimate which is not the same as endorsing it.

I do not know how deep this gets, but the rebound will not be quick, no matter what.

Fictional Reserve Lending

Please note that Fictional Reserve Lending Is the New Official Policy

The Fed officially cut reserve requirements of banks to zero in a desperate attempt to spur lending.

It won’t help. As I explain, bank reserves were effectively zero long ago.

US Output Drops at Fastest Rate in a Decade

Meanwhile US Output Drops at Fastest Rate in a Decade

In Europe, we see Largest Collapse in Eurozone Business Activity Ever.

Lies From China

If you believe the lies (I don’t), China is allegedly recovered.

OK, precisely who will China be delivering the goods to? Demand in the US, Eurozone, and rest of the world has collapse.

We have gone from praying China will soon start delivering goods to not wanting them even if China can produce them.

Nothing is Working Now: What’s Next for America?

On March 23, I wrote Nothing is Working Now: What’s Next for America?

I noted 20 “What’s Next?” things.

It’s a list of projections from an excellent must see video presentation by Jim Bianco. I added my own thoughts on the key points.

The bottom line is don’t expect a v-shaped recovery. We will not return to the old way of doing business.

Globalization is not over, but the rush to globalize everything is. This will impact earnings for years to come.

Finally, stimulus checks are on the way, but there will be no quick return to buying cars, eating out, or traveling as much.

Boomers who felt they finally had enough retirement money just had a quarter of it or more wiped out.

It will take a long time, if ever, for the same sentiment to return. Spending will not recover. Boomers will die first, and they are the ones with the most money.

Cartography Corner – April 2020

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


March 2020 Review

E-Mini S&P 500 Futures

We begin with a review of E-Mini S&P 500 Futures (ESM(H)0) during March 2020. In our March 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for March are:

  • M4                 3614.00
  • M1                 3457.50
  • PMH              3397.50
  • MTrend         3166.53
  • Close             2951.00     
  • PML               2853.25
  • M3                 2678.00    
  • M2                 2525.50     
  • M5                2369.00

Active traders can use 3166.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for March 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of March saw the market price rise, reflecting market participants’ “buy-the-dip” mentality towards February’s weakness and anticipation of the Federal Reserve responding with further monetary stimulus.  The high trade for March was realized during the second trading session at 3137.00, just under our isolated pivot at March Monthly Trend, MTrend: 3166.53.  The following two trading sessions saw lower highs, yet they also afforded market participants reasonable opportunities to sell against March Monthly Trend.  On March 6th, 2020, the market price began to break lower, with clustered support at QTrend: 2974 and Q2: 2934.25 being surpassed intra-session and the market price settling the session below QTrend.

During the following session, March 9th, the market price gapped lower on the open, breaking and settling below another clustered support zone at PQL: 2855.00 and PML:2853.25.  The following two trading sessions were spent with the market price oscillating between PQL / PML now acting as resistance and isolated support at M3: 2678.00.  On March 12th, the market price descended below isolated support at M3: 2678 and M2: 2525.50, stopping short of achieving the Monthly Downside Exhaustion level for March at M5: 2369.00.  The following three trading sessions were spent with the market oscillating between M3: 2678.00 now acting as resistance and support at M5: 2369.00.  The Monthly Downside Exhaustion level was first achieved on March 16th, 2020.

With the market price having achieved our isolated Monthly Downside Exhaustion level, our focus turned immediately to our weekly support levels.  The following four trading sessions, March 18th through March 23rd, saw the market price continue to descend below M5: 2369.00.  The low price for March was achieved on March 23rd at the price of 2174.00.

On March 23rd, the Federal Reserve committed to unlimited quantitative easing (QE).  That action stopped the market price descent and a rally ensued.  The final six trading sessions of March saw the market price rise sharply from the low, with monthly (and weekly) support levels acting as resistance.

Active traders following our monthly analysis had the opportunity to capture a 24% profit.

 

Figure 1:

Gold Futures

We continue with a review of Gold Futures (GCM(J)0) during March 2020.  In our March 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for March are:

  • M4         1863.70
  • M1         1770.10
  • PMH       1691.70
  • M2         1582.50
  • Close        1566.70
  • MTrend   1560.26
  • PML        1551.10           
  • M3         1545.50                       
  • M5           1488.90

Active traders can use 1545.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for March 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first six trading sessions of March, aided by the Federal Reserve’s actions on March 3rd, saw the market price ascend to and surpass intra-session February’s high price at PMH: 1691.70.  However, the market price did not settle above February’s high.

Over the following four trading sessions, the market price descended through multiple isolated support levels, including our isolated pivot at M3: 1545.50.  On March 16th, our Monthly Downside Exhaustion level for March at M5: 1488.90 was achieved and exceeded intra-session.  The low price for the month at 1451.74 was realized during that session.  The following four sessions were spent with the market price oscillating between clustered support levels at MTrend: 1560.26 / PML: 1551.10 / M3: 1545.50, now acting as resistance, and Monthly Downside Exhaustion level acting as support.

The Federal Reserve announcement of unlimited quantitative easing on March 23rd re-ignited market participant’s enthusiasm for Gold.  The market price cleared the clustered support levels at MTrend: 1560.26 / PML: 1551.10 / M3: 1545.50, now acting as resistance.  On March 24th and March 25th, the market price ascended to and surpassed intra-session February’s high price at PMH: 1691.70.  The final four trading sessions of March were spent with the market price essentially drifting sideways, with a final push lower towards isolated support at M2: 1582.50.

Our analysis essentially bound the realized range for March.

Figure 2:

April 2020 Analysis

E-Mini S&P 500 Futures

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESM0).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Monthly Trend        2980.56       
  • Quarterly Trend      2918.33
  • Current Settle         2569.75       
  • Daily Trend             2567.31       
  • Weekly Trend          2501.47

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”, after having been “Trend Up” for four quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”, settling below Monthly Trend for two months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Down” for five weeks.  The relative positioning of the Trend Levels has lost its bullish posture.

We wrote in March, “The final piece of the sustained Trend Reversal puzzle is a quarterly settlement under Quarterly Trend at QTrend: 2974.00.”  March’s settlement completed the puzzle.

One rule we have is to anticipate a two-period high (low), within the following four to six periods, after a Downside (Upside) Exhaustion level has been reached.  We now anticipate a 2-period high in the quarterly time- period over the next four to six quarters, in the monthly time-period over the next four to six months, and in the weekly time-period within two weeks.  This does not mean the market price will immediately reverse higher, as those two-period highs can occur at lower absolute levels.  In our judgment, in bear markets, two-period highs are the safest place to sell. Illustrations of this concept, in the monthly time-period, can be found in our April 2018 commentary.

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4                 3420.75
  • PMH              3137.00
  • MTrend         2980.56
  • M1                 2876.50
  • Close             2569.75     
  • M3                 2188.50
  • PML               2174.00     
  • M2                 1494.75     
  • M5                950.50

Given that the first monthly resistance and support levels are roughly 300 and 400 points away from the current market price, we suggest active traders rely upon our weekly analysis to guide them directionally.

For less-active market participants with an intermediate or long time-period focus, we suggest using MTrend: 2980.56 and QTrend: 2918.33 as the pivot, respectively.  Maintain a flat or short position below the pivot and a long position above the pivot.

WTI Crude Oil Futures

For April, we focus on WTI Crude Oil Futures (“Crude”).  We provide a monthly time-period analysis of CLK0.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend    49.79             
  • Monthly Trend      44.43
  • Weekly Trend       26.73             
  • Daily Trend           20.94             
  • Current Settle       20.48

As can be seen in the quarterly chart below, Crude is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that Crude has been “Trend Down” for three months.  Stepping down to the weekly time-period, the chart shows that Crude has been “Trend Down” for five weeks.

Our model got short Crude in January with the break of Monthly Trend.  We had no insight into the actions of Saudi Arabia concerning oil output and pricing.  As we have, please consider the following words of wisdom from Ed Seykota:

“A surprise is an event that catches someone unaware.  If you are already on the trend, the surprises seem to happen to the other guys.”

To our knowledge, no one predicted that Saudi Arabia would boost production and cut its selling price for oil.      

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4         53.47
  • PMH       48.66
  • MTrend  44.43
  • M1         42.66
  • Close        20.48
  • PML         19.27
  • M3         0.00     
  • M2         0.00                 
  • M5           0.00

Active traders can use 19.27 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Shedlock: Fed Trying To Save The Bond Market As Unemployment Explodes

Bond market volatility remains a sight to behold, even at the low end of the curve.

Bond Market Dislocations Remain

The yield on a 3-month T-Bill fell to 1.3 basis points then surged to 16.8 basis points in a matter of hours. The yield then quickly crashed to 3 basis points and now sits at 5.1 basis points.

The Fed is struggling even with the low end of the Treasury curve.

$IRX 3-Month Yield

Stockcharts shows the 3-month yield ($IRX) dipping below zero but Investing.Com does not show the yield went below zero.

Regardless, these swings are not normal.

Cash Crunch

Bloomberg reports All the Signs a Cash Crunch Is Gripping Markets and the Economy

In a crisis, it is said, all correlations go to one. Threats get so overwhelming that everything reacts in unison. And the common thread running through all facets of financial markets and the real economy right now is simple: a global cash crunch of epic proportions.

Investors piled $137 billion into cash-like assets in the five days ending March 11, according to a Bank of America report citing EPFR Global data. Its monthly fund manager survey showed the fourth-largest monthly jump in allocations to cash ever, from 4% to 5.1%.

“Cash has become the king as the short-term government funds have had massive deposits, with ~$13 billion inflows last week (a 10-standard deviation move),” adds Maneesh Dehspande, head of equity derivatives strategy at Barclays.

4th Largest Jump in History

It’s quite telling that a jump of a mere 1.1 percentage point to 5.1% cash is the 4th largest cash jump in history.

Margin and Short Covering

“In aggregate, the market saw a large outflow, with $9 billion of long liquidation and $6 billion of short covering,” said Michael Haigh, global head of commodity research at Societe Generale. “This general and non-directional closure of money manager positions could be explained by a need for cash to pay margin calls on other derivatives contracts.

The comment is somewhat inaccurate. Sideline cash did not change “in aggregate” although cash balances t various fund managers did.

This is what happens when leveraged longs get a trillion dollar derivatives margin call or whatever the heck it was.

Need a Better Hedge

With the S&P 500 down more than 12% in the five sessions ending March 17, the Japanese yen is weaker against the greenback, the 10-year Treasury future is down, and gold is too.

That’s another sign dollars are top of mind, and investors are selling not only what they want to, but also what they have to.

Dash to Cash

It’s one thing to see exchange-traded products stuffed full of relatively illiquid corporate bonds trade below the purported sum of the value of their holdings. It’s quite another to see such a massive discount develop in a more plain-vanilla product like the Vanguard Total Bond Market ETF (BND) as investors ditched the product to raise cash despite not quite getting their money’s worth.

The fund closed Tuesday at a discount of nearly 2% to its net asset value, which blew out to above 6% last week amid accelerating, record outflows. That exceeded its prior record discount from 2008.

It is impossible for everyone to go to cash at the same time.

Someone must hold every stock, every bond and every dollar.

Fed Opens More Dollar Swap Lines

Moments ago Reuters reported Fed Opens Dollar Swap Lines for Nine Additional Foreign Central Banks.

The Fed said the swaps, in which the Fed accepts other currencies in exchange for dollars, will for at least the next six months allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap up to a combined total of $450 billion, money to ensure the world’s dollar-dependent financial system continues to function.

The new swap lines “like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad,” the Fed said in a statement.

The central banks of South Korea, Singapore, Mexico and Sweden all said in separate statements they intended to use them.

Fed Does Another Emergency Repo and Relaunches Commercial Paper Facility

Yesterday I commented Fed Does Another Emergency Repo and Relaunches Commercial Paper Facility

Very Deflationary Outcome Has Begun: Blame the Fed

The Fed is struggling mightily to alleviate the mess it is largely responsible for.

I previously commented a Very Deflationary Outcome Has Begun: Blame the Fed

The Fed blew three economic bubbles in succession. A deflationary bust has started. They blew bubbles trying to prevent “deflation” defined as falling consumer prices.


BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

Blowing bubbles in absurd attempts to arrest “price deflation” is crazy. The bigger the bubbles the bigger the resultant “asset bubble deflation”. Falling consumer prices do not have severe negative repercussions. Asset bubble deflations are another matter.

Assessing the Blame

Central banks are not responsible for the coronavirus. But they are responsible for blowing economic bubbles prone to crash.

The equities bubbles before the coronavirus hit were the largest on record.

Dollar Irony

The irony in this madness is the US will be printing the most currency and have the biggest budget deficits as a result. Yet central banks can’t seem to get enough dollars. In that aspect, the dollar ought to be sinking.

But given the US 10-year Treasury yield at 1.126% is among the highest in the world, why not exchange everything one can for dollars earning positive yield.

This is all such circular madness, it’s hard to say when or how it ends.

Unemployment Set To Explode

A SurveyUSA poll reveals 9% of the US is out of a job due to the coronavirus.

Please consider the Results of SurveyUSA Coronavirus News Poll.

Key Findings

  1. 9% of Working Americans (14 Million) So Far Have Been Laid Off As Result of Coronavirus; 1 in 4 Workers Have Had Their Hours Reduced;
  2. 2% Have Been Fired; 20% Have Postponed a Business Trip; Shock Waves Just Now Beginning to Ripple Through Once-Roaring US Economy:
  3. Early markers on the road from recession to depression as the Coronavirus threatens to stop the world from spinning on its axis show that 1 in 4 working Americans have had their hours reduced as a result of COVID-19, according to SurveyUSA’s latest time-series tracking poll conducted 03/18/20 and 03/19/20.
  4. Approximately 160 million Americans were employed in the robust Trump economy 2 months ago. If 26% have had their hours reduced, that translates to 41 million Americans who this week will take home less money than last, twice as many as SurveyUSA found in an identical poll 1 week ago. Time-series tracking graphs available here.
  5. 9% of working Americans, or 14 million of your friends and neighbors, will take home no paycheck this week, because they were laid off, up from 1% in an identical SurveyUSA poll 1 week ago. Time-series tracking graphs available here.
  6. Unlike those laid-off workers who have some hope of being recalled once the worst of the virus has past, 2% of Americans say they have lost their jobs altogether as a result of the virus, up from 1% last week.
  7. Of working Americans, 26% are working from home either some days or every day, up from 17% last week. A majority, 56%, no longer go to their place of employment, which means they are not spending money on gasoline or transit tokens.

About: SurveyUSA interviewed 1,000 USA adults nationwide 03/18/20 through 03/19/20. Of the adults, approximately 60% were, before the virus, employed full-time or part-time outside of the home and were asked the layoff and reduced-hours questions. Approximately half of the interviews for this survey were completed before the Big 3 Detroit automakers announced they were shutting down their Michigan assembly lines. For most Americans, events continue to unfold faster than a human mind is able to process the consequences.

Grim Survey of Reduced Hours

Current Unemployment Stats

Data from latest BLS Jobs Report.

If we assume the SurveyUSA numbers are accurate and will not get worse, we can arrive at some U3 and U6 unemployment estimates.

Baseline Unemployment Estimate (U3)

  • Unemployed: 5.787 million + 14 million = 19.787 million unemployed
  • Civilian Labor Force: 164.546 million (unchanged)
  • Unemployment Rate: 19.787 / 164.546 = 12.0%

That puts my off the top of the head 15.0% estimate a few days in the ballpark.

Underemployment Estimate (U6)

  • Employed: 158.759 million.
  • 26% have hours reduced = 41.277 million
  • Part Time for Economic Reasons: 4.318 million + 41.277 million = 45.595 million underemployed
  • 45.595 million underemployed + 19.787 million unemployed = 65.382 million
  • Civilian Labor Force: 164.546 million (unchanged)
  • U6 Unemployment Rate: 65.382 / 164.546 = 39.7%

Whoa Nellie

Wow, that’s not a recession. A depression is the only word.

Note that economists coined a new word “recession” after the 1929 crash and stopped using the word depression assuming it would never happen again.

Prior to 1929 every economic slowdown was called a depression. So if you give credit to the Fed for halting depressions, they haven’t. Ity’s just a matter of semantics.

Depression is a very fitting word if those numbers are even close to what’s going to happen.

Meanwhile, It’s no wonder the Fed Still Struggles to Get a Grip on the Bond Market and there is a struggled “Dash to Cash”.

Very Deflationary Outcome Has Begun: Blame the Fed

The Fed is struggling mightily to alleviate the mess it is largely responsible for.

I previously commented a Very Deflationary Outcome Has Begun: Blame the Fed

The Fed blew three economic bubbles in succession. A deflationary bust has started. They blew bubbles trying to prevent “deflation” defined as falling consumer prices.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

Blowing bubbles in absurd attempts to arrest “price deflation” is crazy. The bigger the bubbles the bigger the resultant “asset bubble deflation”. Falling consumer prices do not have severe negative repercussions. Asset bubble deflations are another matter.

Assessing the Blame

Central banks are not responsible for the coronavirus. But they are responsible for blowing economic bubbles prone to crash.

The equities bubbles before the coronavirus hit were the largest on record.

Dollar Irony

The irony in this madness is the US will be printing the most currency and have the biggest budget deficits as a result. Yet central banks can’t seem to get enough dollars. In that aspect, the dollar ought to be sinking.

But given the US 10-year Treasury yield at 1.126% is among the highest in the world, why not exchange everything one can for dollars earning positive yield.

This is all such circular madness, it’s hard to say when or how it ends.

Shedlock: Supply And Demand Shocks Coming Up

Dual economic shocks are underway simultaneously. There are shortages of some things and lack of demand for others.

Rare Supply-Demand Shocks

Bloomberg has an excellent article on how the Global Economy Is Gripped by Rare Twin Supply-Demand Shock.

The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings.

From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses.

With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing — worsening the hit to spending.

How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending.

Some economists argue that what’s happened is mostly a supply side shock, others have highlighted the wallop to demand as well, to the degree that the distinction matters.

Slowest Since the Financial Crisis


Inflationary or Deflationary?

In terms of prices, it’s a bit of both, but mostly the latter.

There’s a run on sanitizers, face masks, toilet paper ect. Prices on face masks, if you can find them, have gone up.

But that is dwarfed by the demand shock coming from lack of wages for not working, not traveling, not eating out etc.

The lost wages for 60 million people in China locked in will be a staggering hit alone.

That has also hit Italy. It will soon hit the US.

Next add in the fear from falling markets. People, especially boomers proud of their accounts (and buying cars like mad) will stop doing so.

It will be sudden.

Bad Timing

Stockpiling

Deflation Risk Rising

Another Reason to Avoid Stores – Deflationary

Hugely Deflationary – Weak Demand

This was the subject of a Twitter thread last week. I agreed with Robin Brooks’ take and did so in advance but I cannot find the thread.

I did find this.

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

These are the important point all the inflationistas miss.

Cartography Corner – March 2020

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


February 2020 Review

E-Mini S&P 500 Futures

We begin with a review of E-Mini S&P 500 Futures (ESH0) during February 2020. In our February 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for February are:

  • M4                 3605.50
  • M1                 3421.00
  • PMH              3337.50
  • M2                 3292.50
  • Close             3224.00     
  • M3                 3217.00
  • PML               3181.00     
  • MTrend         3180.97     
  • M5                3108.00

Active traders can use 3217.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for February 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first four trading sessions of February saw the market price rise, reflecting market participants’ bullishness toward the recent directional bias.  On February 6th, the market price exceeded, and settled above, January’s high price at PMH: 3337.50.  The market oscillated around that level for the following two trading sessions, building energy for the next directional move.  Over the following six trading sessions, the market price continued to drift higher, reaching its high settlement price for the month on February 19th at 3387.25.

During the following session, February 20th, the market achieved its high price for February at 3397.50 yet settled down for the trading session.  This small reversal was a precursor to the carnage that ensued.

Over the final six trading sessions of February, risk-management and speculative actions related to fear of the economic impact(s) of the CoronaVirus gripped market participants.  The market price declined (16.02%) peak-to-trough and (12.88%) on a settlement basis.  To the uninformed and unprepared, the rapid decline may have appeared to be unorderly.  However, we know that is not the case…

 

I would like readers to focus on the “anatomy” of the decline:

  • February 20th: The small reversal referred to earlier stopped right in front of PMH: 3337.50, then acting as support.
  • February 21st: PMH: 3337.50 again offered support, with the market price settling at 3339.25.
  • February 24th: The market had an opening gap lower, with the early price action occurring in front of M2: 3292.50, then acting as support.  Once that level gave way, the market price declined to and settled just above our isolated pivot for February at M3: 3217.00.
  • February 25th: Clustered support levels at M3: 3217.00 / PML: 3181.00 / MTrend: 3180.97 gave way, suggesting the market price was going to test the Monthly Downside Exhaustion at M5: 3108.00.  The low for the session was 3117.25.
  • February 26th: The trading range for the session was essentially bound by MTrend: 3180.97 and PML: 3181.00, then acting as resistance, and M5: 3108.00, acting as support.  The market price settled the session at 3110.25, with an intra-session low of 3091.00.

Our clients know that the emphasis we place on our levels increases with the length of the time period.  Quarterly levels, with Quarterly Trend specifically, being the most important.  Coming into the trading session of the 27th, the market had already achieved our isolated Monthly Downside Exhaustion, so what were we to do?  Our focus turned immediately to the quarterly support levels.

  • February 27th: Support at M5: 3108.00 gave way and the market price achieved, and exceeded, Quarterly Trend at QTrend: 2974.00.  The market price settled at 2957.00, in between QTrend: 2974.00 and our next support level at Q2: 2934.25.
  • February 28th: The purpose of every trading session is to surpass the high or low of the previous trading session…  The trading range was essentially bound by QTrend: 2974.00, then acting as resistance, and the previous quarter low at PQL: 2855.00, acting as support.  The low trade for February occurred at the price of 2853.25; purpose fulfilled in both the monthly and quarterly time periods.

Our analysis, yet again, proved its worth to the discerning market participant.  For both long-term investors managing risk and traders actively speculating, our analysis provided a map to profitability.  Subscriptions and referrals are appreciated.

Bitcoin Futures

We continue with a review of Bitcoin Futures (BTH0) during February 2020.  In our February 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for February are:

  • M4         13,070
  • M3         11,670
  • M1         11,520
  • PMH       9,745
  • Close        9,440
  • MTrend   7,982
  • M2         7,300  
  • PML        6,860              
  • M5           5,750

Active traders can use 9,745 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for February 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  On the third trading session of February, bitcoin settled above our isolated pivot level at PMH: 9,745.  The following six trading sessions saw the market price rise to a high price of 10,670 on February 13th, with the high settlement price for the month being achieved at 10,525 the session before.

Over the following four trading sessions, the market price descended to and settled back below our isolated pivot level at PMH: 9,475, then acting as support.  The final six trading sessions of the month saw the market price declining towards Monthly Trend at MTrend: 7,982.

Conservatively, active traders following our analysis had the opportunity to monetize a 10.7% profit.

 

March 2020 Analysis

E-Mini S&P 500 Futures

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESH0).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Weekly Trend         3250.44       
  • Monthly Trend        3166.53
  • Daily Trend             3022.42       
  • Quarterly Trend      2974.00       
  • Current Settle          2951.00

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”, after having been “Trend Up” for eight months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  The relative positioning of the Trend Levels is beginning to lose its bullish posture.

We wrote in February, “The next event that needs to occur to strengthen the case of a possible Trend Reversal is a monthly settlement under Monthly Trend.”  February’s settlement achieved that.  The final piece of the sustained Trend Reversal puzzle is a quarterly settlement under Quarterly Trend at QTrend: 2974.00.  We eagerly anticipate the settlement price on March 31st.

Support/Resistance:

In isolation, monthly support and resistance levels for March are:

  • M4                 3614.00
  • M1                 3457.50
  • PMH              3397.50
  • MTrend         3166.53
  • Close             2951.00     
  • PML               2853.25
  • M3                 2678.00    
  • M2                 2525.50     
  • M5                2369.00

Active traders can use 3166.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

 

Gold Futures

For the month of March, we focus on Gold Futures (“Gold”).  We provide a monthly time-period analysis of GCJ0.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend           1627.51         
  • Weekly Trend       1604.79
  • Current Settle       1566.70         
  • Monthly Trend       1560.26        
  • Quarterly Trend     1449.56

As can be seen in the quarterly chart below, Gold has been “Trend Up” for five quarters.  Stepping down one time-period, the monthly chart shows that Gold has been “Trend Up” for three months.  Stepping down to the weekly time-period, the chart shows that Gold is in “Consolidation”, after having been “Trend Up” for eleven weeks.

If not for the agenda of a motivated seller on Friday, February 28th, Gold would have settled above Weekly Trend again.  However, as a technician, my primary job is to recognize the beginning of a new trend, the reversal of an existing trend, or a consolidation area, regardless of qualitative factors.  Adhering to that job, Gold has begun to consolidate in the weekly time-period and is only 6.43 points away from consolidating in monthly time-period.  This deserves attention, as Gold has had quite a rally over the past five quarters.

Support/Resistance:

In isolation, monthly support and resistance levels for March are:

  • M4         1863.70
  • M1         1770.10
  • PMH       1691.70
  • M2         1582.50
  • Close        1566.70
  • MTrend   1560.26
  • PML        1551.10           
  • M3         1545.50                       
  • M5           1488.90

Active traders can use 1545.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

It’s Not 2000, But The Market Is Mighty Narrow Again

For those of us who were around in 1999-2000 looking at charts and perhaps writing about them, there is an eerie familiarity with the market of today. Back then, when indices and the Nasdaq in particular, were rallying harder each day than the last, market breadth was looking fairly weak. In other words, the big the names were soaring, forcing indexers and ETFs to buy them just to keep their weightings, and the positive feedback cycle roiled on.

I remember, looking at this stuff for BridgeNews and having to forecast where resistance levels might be based on Fibo projections or the top of some trading band. Walking by my desk, it was not unusual for me to exclaim, “This is nuts!” By that way, a much funnier TV show than “This is us”.

Now, I am in no way comparing 2000 and 2020 in any way but they did have one thing in common. Big cap, and mostly big cap tech, was powering ahead while mid-cap and especially small-cap lagged far behind.

No, that does not show up in the advance-decline line, which just managed to set a new high after its late January swoon. A colleague had a good explanation for this, saying that plenty of stocks can be rising but by smaller amounts and far below previous highs. That would certainly explain why the a/d line is rising and up/down volume is mediocre, at best.

Have you looked at a small-cap advance-decline? Not pretty.

Check out these charts:

(Click on image to enlarge)

This is the regular, cap-weighted S&P 500 vs. the equal-weighted version. The trend has been accelerating higher for months. While it is not anything near what it looked like in 1999-2000, it is still quite significant.

(Click on image to enlarge)

Here is the Nasdaq-100 ETF vs. the equal-weighted Nasdaq-100 ETF. To the moon, Alice.

(Click on image to enlarge)

And then let’s look at a mega-cap stock. This is Microsoft MSFT and it looks just as nuts. Don’t forget this is a $1.4 TRILLION stock so every gain packs on huge amounts of market cap.

What happens when this stock finally decides to pull back? It scored an as yet unconfirmed bearish reversal this week on huge volume. And look how far above it is now from its 200-day averages. Nuts!

Considering that it is a member of the Dow, the Nasdaq-100, the S&P 500 and XLK tech ETF, what do you think will happen when this huge member (keep it clean, pervs) corrects? And there is a lot of correcting room before even thinking about a change in a major trend.

There you have it. A narrow market at all-time highs, ignoring news and having utilities among the leading groups.

But don’t worry, the Fed has already committed to more quantitative easing. Whoopee! Kick that can, Jerry.

Dallas Fed President Sees “No Move” In Fed Funds Rate

Dallas Fed President Robert Kaplan made some interesting comments today on interest rates, repos, and the coronavirus.


Dallas Fed President Robert Kaplan was on panel discussion today at the University of Texas McCombs School of Business on the “2020 Business Outlook: Real Estate and the Texas Economy” in Austin, Texas.

Bloomberg Econoday Synopsis

  1. Dallas Fed President Robert Kaplan is neutral right now on monetary policy, saying neither a rate cut nor a rate hike are necessary in the medium term. “My base case is no movement up or down in the Fed funds rate [in 2020], but I’ll be monitoring [things] carefully … this year,” Kaplan said in a panel discussion.
  2. Kaplan believes the outlook for the economy has stabilized and if anything has “firmed”, and though he now has “a more confident outlook” he isn’t ready to commit to a rate hike saying it’s “too soon to judge if a hike is coming, and you’ve got a number of [risky] factors going on.”
  3. Regarding a so-called “coronavirus cut” to reassure markets, Kaplan doesn’t see justification yet adding, however, that he is carefully watching how the virus unfolds and that he will have a better sense of its effects over the next few months. Kaplan also noted that he will be watching the first-half impact of the Boeing 737 production shutdown.
  4. On repo operations, Kaplan described the rise in the Fed’s balance sheet through year-end as “substantial” but he sees slowing growth through June. “I’d be hopeful and expect that as we continue bill purchases during the second quarter, the repo usage will begin to decline and the headline net balance-sheet growth for the Fed will moderate – certainly far more moderate than what’s we’ve seen to this period.”
  5. On inflation, Kaplan’s base case is an upward trend toward 2 percent in the medium term. Kaplan said the Fed is debating whether to lengthen out its look at inflation from a one-year average to perhaps a two-year average. “We look at a variety of factors to make our judgment.”

Regarding no interest rate movement, the market disagrees, and so do I.

On inflation, the entire fed is clueless about what it is.

In regards to a firming economic outlook, Kaplan may wish to ponder Coronavirus Deaths Surge, No Containment In Sight.

The supply chains disruptions will be massive. A “Made in China” Economic Hit is coming right up.

On repo operations, yep, it’s entirely believable the Fed will keep ballooning its balance sheet risking even bigger bubbles.

The yield curve is inverted once again. And that’s flashing another recession signal. On Average, How Long From Inversion to Recession?

Recession Arithmetic: What Would It Take?

David Rosenberg explores Recession Arithmetic in today’s Breakfast With Dave. I add a few charts of my own to discuss.

Rosenberg notes “Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened twice outside of a recession.”

Here is the chart he presented.

Fixed Investment, Imports, Government Share of GDP


Since 1980 there have been five recessions in the U.S.and only once, after the dotcom bust in 2001, was there a recession that didn’t feature an outright decline in consumption expenditures in at least one quarter. Importantly, even historical comparisons are complicated. The economy has changed over the last 40 years. As an example, in Q4 of 1979, fixed investment was 20% of GDP, while in 2019 it makes up 17%. Meanwhile, imports have expanded from 10% of GDP to 15% and the consumer’s role has risen from 61% to 68% of the economy. All that to say, as the structure of the economy has evolved so too has its susceptibility to risks. The implication is that historical shocks would have different effects today than they did 40 years ago.

So, what similarities exist across time? Well, every recession features a decline in fixed investment (on average -9.8% from the pre-recession period), and an accompanying decline in imports (coincidentally also about -9.5% from the pre-recession period). Given the persistent trade deficit, it’s not surprising that declines in domestic activity would result in a drawdown in imports (i.e. a boost to GDP).

So, what does all of this mean for where we are in the cycle? Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened two other times outside of a recession. The first was in the year following the burst of the dotcom bubble, as systemic overinvestment unwound itself over the course of eight quarters. The second was in 2006, as the housing market imploded… and we all know how that story ended.Small sample bias notwithstanding, we can comfortably say that this is not something that should be dismissed offhand.

For now, the consumer has stood tall. Real consumption expenditures contributed 3.0% to GDP in Q2, and 2.1% in Q3. Whether the consumer can keep the economy from tipping into recession remains to be seen.

Dave’s comments got me thinking about the makeup of fixed investment. It does not take much of a slowdown to cause a recession. But there are two components and they do not always move together.

Fixed Investment Year-Over-Year

One thing easily stands out. Housing marked the bottom in 12 of 13 recessions. 2001 was the exception.

Fixed Investment Year-Over-Year Detail

Fixed Investment Tipping Point

We are very close to a tipping point in which residential and nonresidential fixed investment are near the zero line. The above chart shows recessions can happen with fixed investment still positive year-over-year.

Manufacturing Has Peaked This Economic Cycle

The above charts are ominous given the view Manufacturing Has Peaked This Economic Cycle

Key Manufacturing Details

  • For the first time in history, manufacturing production is unlikely to take out the previous pre-recession peak.
  • Unlike the the 2015-2016 energy-based decline, the current manufacturing decline is broad-based and real.
  • Manufacturing production is 2.25% below the peak set in december 2007 with the latest Manufacturing ISM Down 5th Month to Lowest Since June 2009.

Other than the 2015-2016 energy-based decline, every decline in industrial production has led or accompanied a recession.

Manufacturing Jobs

After a manufacturing surge in November due to the end of the GM strike, Manufacturing Sector Jobs Shrank by 12,000 in December.

PPI Confirmation

Despite surging crude prices, the December Producer Price Inflation was Weak and Below Expectations

Shipping Confirmation

Finally, please note that the Cass Year-Over-Year Freight Index Sinks to a 12-Year Low

Manufacturing employment, shipping, industrial production, and the PPI are all screaming the same word.

In case you missed the word, here it is: Recession.

Gold: How High Will It Go In 2020?


Gold broke out of a six year consolidation. Things look up in 2020.

Gold Monthly Chart 2004-Present

Gold Monthly Chart 2010-Present


Smart Money Shorts

I ignore short-term COT “smart money” warnings although I would prefer there to be fewer bulls.

For discussion of “smart money“, please see Investigating Alleged Smart Money Positions in Gold.

Pater Tenebrarum at the Acting Man blog pinged me with this idea: The only caveat remains the large net speculative long position, but at the moment this strikes me almost as a “bear hook” that is keeping people on the sidelines waiting for the “inevitable” pullback while the train is leaving the station.

With the 6-year consolidation over, there is every reason fundamentally and technically for gold to continue up.

So, be my guest if you want to time gold to COT positions.

Technically Speaking

Technically, there is short-term monthly resistance between here and $1566. Perhaps there’s a pullback now, but with technical and fundamentals otherwise aligned why bet on it?

The next technical resistance area is the $1700 to $1800 area so any move above $1566 is likely to be a fast, strong one, perhaps with a retest of the $1566 area from above that.

Gold Fundamentals

Gold fundamentals are in excellent shape as I noted in How Does Gold React to Interest Rate Policy?

Much of the alleged “fundamentals” are noise, not fundamental price factors.

Not Fundamentally Important

  • Mine supply
  • Central Bank Buying
  • ETF analysis
  • The ever popular jewelry buying in India discussion

Aso, gold does not follow the dollar except superficially and in short-term time frames.

Gold vs the Dollar

Many people believe gold reacts primarily to changes in the US dollar.

Last week, I rebutted than notion in Gold’s vs the US Dollar: Correlation Is Not What Most Think.

True Supply of Gold and Reservation Demand

It is important to note that nearly every ounce of gold ever mined is still in existence. A small fraction of that mined gold has been lost, and other small fractions sit in priceless statues in museums etc., and is thus not available for sale.

Otherwise, someone has to hold every ounce of gold ever mined, 100% of the time. That is the true supply. Jewelry buying and mine output are insignificant in comparison. We are not about to run out of gold as some gold shills suggest.

Mises refers to the desire to hold gold as “Reservation Demand“, that is the desire of people to hold their gold coins, bullion, bars, and jewelry rather than trading it for something else.

If we strike out jewelry buying, central bank buying, the dollar, and mine supply, what then determines “Reservation Demand” to own gold vs some other asset?

Faith in Central Banks

Talk of normalization was nonsense, as were various “Dot Plots” that suggested the Fed was on a major hiking cycle.

For an amusing chart of where the Fed projected interest rates would be in 2020, please see Dot Plot Fantasyland Projections.

The market did not believe the Fed, neither did I, and neither did gold.

Once again we are back to my central gold theme question.

Is everything under control or not?

Hussman Agrees With Powell: It’s Not QE4

A debate over a sudden dramatic surge in Repos is raging. Is it or isn’t it QE4?


Organic Growth

On October 9, Powell discussed “Organic Growth” of its balance sheet.

“Going forward, we’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves,” Powell said at a news conference. “And we’re going to be assessing the question of when it will appropriate to resume the organic growth of our balance sheet.”

Not QE

On October 10, Powell commented on Not QE.

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” said Powell.

In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

Quacks Like QE

Peter Schiff chimed in what what I believe to be the consensus view: Powell Can Call It What He Wants, But It Quacks Like QE

As the reliable American folk wisdom states: if something “looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” In this case, Powell can call the new Fed program anything he wants, but it certainly quacks like QE.

Hussman Sides With Powell

In One Tier and Rubble Down Below John Hussman made the case that Powell is correct.

There’s a broad misunderstanding that the Fed’s recent repo operations somehow represent “quantitative easing in disguise.”

Not quite.

The essential feature of QE was that the Fed purchased interest-bearing Treasury bonds, replaced them with zero-interest base money, and created such a massive pile of zero-interest hot potatoes that investors went absolutely out of their minds to seek alternatives, resulting in a multi-year bender of yield-seeking speculation.

With that understanding, it should be clear why the Federal Reserve’s recent repo facilities do not, in fact, represent a fresh round of QE. The difference is that the repo facilities replace interest-bearing Treasury bills with bank reserves that are eligible for the same rate of interest. This swap does nothing to promote yield-seeking speculation. Now, the psychology around these repos has certainly been good for a burst of investor enthusiasm and a nice little can-kick. But that enthusiasm isn’t driven by actual yield differentials – as QE was – it rests wholly on the misconception that these repos themselves represent fresh QE.

Balance Sheet, Monetary Base, Excess Reserves vs QE

To better understand and explain what Hussman is saying, I created the above chart.

I based my QE boxes on Yadeni Chronology of Fed’s QE and Tightening.

Hussman mentioned “Treasury Bonds” but the Fed bought various durations. I used the 10-year Treasury Rate as a proxy in my chart.

If one wants to nitpick, zero-interest base money is not perfectly accurate as interest on excess reserves was slightly above 0% as shown by the green line.

That tiny correction aside, the Fed did suck up bonds yielding over 3% at time and replaced then with reserves yielding just over 0%.

As Hussman points out, someone has to hold those cash reserves at all times resulting in the “hot potato” environment in which those earning 0% desperately tried to get rid of the cash.

This only “worked”, using the term loosely, because asset prices were rising. If at any time, asset prices fell for a prolonged period, cash at near-0% would not have looked so bad.

Effectively, with its policy, the Fed blew another massive bubble.

Just Don’t Call it QE

Subadra Rajappa, head of US rates strategy at Société Générale, also sides with Hussman.

That’s the distinction between QE and just increasing cash reserves in the system. It’s a communication challenge. It’s a very nuanced difference which could easily get lost,” said Rajappa as quoted by the Financial Times.

Organic Growth

Let’s return to the top.

If you accept what Hussman is saying, this isn’t QE, but is sure the heck cannot be called “organic” growth either.

Organic growth looks like slow upward movement in monetary base, not the explosions in monetary base and asset growth

Can The Fed Fight Wealth Inequality

Minneapolis Fed President Neel Kashkari says the Fed Can Fight Inequality. Then in a move guaranteed to fail, Kashkari Hires an Obama Economic Advisior as His Guide.

Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials.

When Kashkari, a year into his job, launched an in-house effort in 2017 to examine widening disparities in the economy, he was expecting to generate research that might inform lawmakers’ decisions, rather than the Fed’s.

“We had historically said: distributional outcomes, monetary policy has no role to play,” he said in an October interview. “That was kind of the standard view at the Fed, and I came in assuming that. I now think that’s wrong.”

Kashkari’s project has taken an unexpected turn over the last two years, morphing into something more ambitious. It has the potential to transform an intensely political debate about inequality into a scientific endeavor that the Fed’s 21st-century technocrats could take up.

This year, he finally found someone to lead it: Abigail Wozniak, a Notre Dame economics professor, became the first head of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute. Wozniak was a member of President Barack Obama’s Council of Economic Advisers.

One of its priorities has been to build a network of experts on income and wealth distribution, the same way the Fed brings in specialists in financial markets or growth.


Fed a Key Driver of Income Inequality

Kashkari is correct in a perverse sort of way given that Fed is a key driver of income inequality:

  1. By bailing out banks and financial institutions when they get in trouble
  2. By keeping interest rates too low too long
  3. By promoting economic bubbles
  4. By promoting inflation

So yes, the Fed could help if it simply stopped doing those things. It would be better still if there was no Fed at all, so the main thing the Fed could do would be to promote a sound currency then disband itself.

There is No Economic Benefit to Inflation

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study*.*

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Challenge to Keynesians

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

Irony Abounds

Kashkari came to the right conclusion but instead of disbanding the Fed or changing any of the above four points, he hires and Obama economic clown as his guide.

Note that Kashkari is the biggest dove on the Fed. He would vote for 2, 3, and 4 at every chance.

Yet, inflation benefits those with first access to money (banks, wealthy, asset holders, and corrupt politicians). The poor only participate in bubbles after there is nothing left to gain.

Curiously, my answer is the same as Kashkari’s. Yes, the Fed can help. And the first thing Kashkari could do to help is simple enough, resign.

Addendum

A reader criticized the title “income inequality”. He thought distorted the picture.

He is correct but in the opposite sense as he intended. Wealth inequality (via asset bubbles) is imore of the issue.

I change the title to “wealth inequality”. The title of the linked-to article simply says “inequality”. It’s both income and wealth actually.

Income inequality is via stock options and pay bonuses for blowing bubbles. Wealth comes from cashing out stock options and holding assets accumulated during bubble phases.

$250 Trillion In Global Debt: How Can That Be Paid Back

Global debt just topped $250 trillion. Please ponder paying the interest on that, let alone the principal.

Global Debt $250 Trillion and Rising

Please note that Global debt surged to a record $250 trillion in the first half of 2019, led by the US and China.

What about Global GDP?


Global GDP

Global GDP Numbers from the World Bank.

To get a $1 rise in GDP it takes about a $3 rise in debt.

Things keep pointing back to 1971.

I have written about the importance of 1971 many times, most recently in Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis

Dollar Crisis

A reader asked the other day what I meant by “dollar crisis“.

What I meant to say was “currency crisis” and the above title is now changed.

Since the dollar is still rising (thanks to European, Japanese, and Chinese tactics), It may take even bigger US deficits before something major breaks.

On that score, both political parties in the US are poised to deliver increasing deficits as far as the eye can see.

Meanwhile, negative interest rates are destroying the European banks. For discussion of this important issue, please see In Search of the Effective Lower Bound.

US Picture

Currency Crisis Awaits

$250 Trillion in debt. How will that be paid back?

I expect an uncontrolled collapse of a major currency, debt market, or bank system that cannot be funded. It is hard to say where it starts but I doubt it starts in the US.

Chinese and European banks are in far worse shape than US banks. European banks are getting hammered by negative rates.

Japan still struggles with decades of Abenomics.

The Fed and Central Banks brought this on by refusing to let zombie banks and corporations go under and insisting on cramming more debt into a global financial system choking on debt.

But this all has its roots in 1971. Central banks are the enablers, but Nixon Shock set things off.

A currency crisis awaits but the timing and conditions of the crisis are not knowable. It can start anywhere but I suspect the EU, Japan, or China as opposed to the US.

Ponder even paying the interest on $250 trillion, let alone the principal. What interest rate will it take?

Meanwhile, please reflect on gold.

Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge

In the link below I post charts that make a mockery of the claim gold is some sort of inflation hedge or tied to movements in the US dollar.

But if Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge, what is it?

Here’s the answer.

If you think central banks have everything under control, gold is not where you want to be.

If you think otherwise, gold is where you want to be.

Do central banks have everything under control?

Addendum

My friend Pater Tenebrarum at the Acting Man Blog just pinged me with this pertinent thought:

“The answer is of course: It won’t be paid back. And since every debt is someone else’s asset, you can imagine what that ultimately means. A great many people are a lot less wealthy than they think. It is all phantom wealth that can disappear in an eyeblink.”

10-Reasons Why Productivity Is Declining

Economists debate whether the decline in productivity is real. It is real. let’s investigate 10 reasons why.

Productivity Measurement

Brookings questions the Productivity Slump. It cites measurement issues.

Much of the recent debate, and related research, on productivity measurement issues has focused on this decline in productivity in the U.S. Predating the financial crisis and the ensuing Great Recession, and now continuing for more than a decade, the productivity slowdown in the U.S. does not appear to be just cyclical in nature, but rather seems to reflect also deeper, structural phenomena. There are different views on what factors explain the slowdown. But one view challenges the very reality of the slowdown, arguing that the slowdown wholly or largely reflects the failure of the productivity statistics to capture recent productivity gains, particularly those from new and higher-quality ICT goods and services

There are two potentially important sources of underestimation of productivity related to ICT goods and services. First, if prices do not fully capture quality improvements in the new ICT products, price deflators are overestimated and real output (adjusted for improvements in quality, including product variety) is underestimated. Second, many ICT services, in particular internet-based services such as Google searches and Facebook, are largely not reflected in GDP measurement even though they generate substantial utility for consumers, the reason being that their use does not involve monetary cost as they are available free of charge to the users.


Facebook a Productivity Killer

Google searches are indeed a time-saver. But what the hell is “produced” by them. And where do the searches and Facebook playing take place?

At work perhaps. After discussing the above Brookings did come to this conclusion: “In large part, the productivity slowdown—and the associated productivity paradox—are real.”

It never explained why. Rather Brookings remains puzzled: “While recent research suggests that mismeasurement, although sizable, does not explain most of the observed decline in productivity, it must be noted that there remain unknowns and gaps in data.”

Real or Imagined

The National Bureau of Economic Research (NBER) asks Is the U.S. Productivity Slowdown a Mirage?

Labor productivity in the United States—defined as total output divided by total hours of labor—has been increasing for over a century and continues to increase today. However, its growth rate has fallen. One explanation for this phenomenon focuses on measurement difficulties, in particular the possibility that current tools for measuring economic growth do not fully capture recent advances in the goods and services associated with digital communications technology.

One reason some analysts believe that labor productivity is understated is that price inflation may be overstated for digital goods and services.

As with Brookings, the NBER concludes there is some mismeasurement but fails to figure out why.

As an aside, the NBER group is the official arbiter of recession dates in the US.

Federal Reserve Bank of San Francisco Study

The FRBSF asked the same question: Does Growing Mismeasurement Explain Disappointing Growth?

The FRBSF came to the same conclusion that mismeasurement is a problem but like the others fails to offer credible rationale.

No Hidden Productivity

The problem with the above analysis is the Fed, Brookings, and the NBER all focused on the measurement issue in apparent belief there is some sort of hidden productivity waiting to be discovered.

Mismeasurement Irony

I propose productivity is likely to be overstated, not understated because of mismeasurement.

How so?

  • How many overtime hours do supervisory workers at Walmart, Target, etc., actually work while getting paid for 40?
  • How many hours do employees work at home and on vacation while not getting paid for them?

Before diving into a 6-point practical explanation as to why productivity losses are real, please ponder a few charts that I put together.

Nonfarm Productivity 1990-Present

In the above and all the following charts, I let Excel plot the trendline. The chart shows declining productivity, but it’s horribly misleading. Let’s investigate other timeframes to understand why.

Nonfarm Productivity 1990-2000

Those are the heydays of the internet revolution. Computers replaced people. Spreadsheets replaced accountants. Robots replaced manufacturing workers at an increased pace.

Nonfarm Productivity 2001-2007

Productivity soared coming out of the dotcom and 911-related recession.

By 2004, economic activity was all about housing and finance.

Nonfarm Productivity 2009-2019

Productivity soared coming out the the Great Recession as is the case coming out of any recession. Since then corporate productivity has been anemic.

Manufacturing Real Output vs Employees

From 1990 until 2008 manufacturing output per employee skyrocketed. Both plunged in the Great Recession and the trends are now positive but output per employee has slowed to a crawl as the number of manufacturing employees has been on the rise.

This indicates decreasing marginal utility of robots, lower worker skill sets, or both.

Chart from the National Institute of Health.

Obese workers have more health-related issues and thus need more time off. They also move slower and do not function as well as healthy workers.

Rise of the Zombies

Zombie firms are companies that are unable to cover debt servicing costs from current profits over an extended period. Cheap financing is the primary cause. The result is low productivity.

Please review Rise of the Zombie Corporations: Percentage Keeps Increasing

Collective Bargaining with Militant Unions

On October 31, I asked Chicago ISM Crashes: How Much is GM to Blame?

I do not pretend to have the answer, but GM agreed to a lot of worker protections, guaranteed hours, plant improvements, etc, that will not make any sense if there is an economic slowdown.

Chicago also just settled its teacher strike to which I commented Chicago Headed for Insolvency, Get the Hell Out Now

Chicago Teacher Contract Details

  1. 16% raise over five years (not including raises based on longevity)
  2. Three-year freeze on health insurance premiums
  3. Lower insurance copays
  4. Caps on class sizes
  5. More than 450 new social workers and nurses.
  6. New job protections for substitute teachers who going forward may only be removed after conferring with the union about “performance deficiencies.”
  7. Chicago Public Schools will become a “sanctuary district,” meaning school officials won’t be allowed to cooperate with the Immigration and Customs Enforcement without a court order.
  8. Employees will be allowed 10 unpaid days for personal immigration matters.
  9. Under the new contract, a joint union-school board committee will be convened to “mitigate or eliminate any disproportionate impacts of observations or student growth measures” on teacher evaluations.
  10. Instead of student performance, teachers will probably be rated on more subjective measures, perhaps congeniality in the lunchroom.
  11. The new union contract caps the number of charter-school seats, so no new schools will be able to open without others closing.

Points four through 11 are all productivity killers.

Soaring Fiscal Deficits

Government does not spend money wisely to say the least. It collects money via taxes then wastes in on counterproductive military operations and other nonsense.

When it spends on infrastructure, it overpays because of prevailing wage laws and collective bargaining.

For further discussion of the debt vs deficits, please see Budget Deficit Lies: What’s the Real Deficit?

It’s the Debt Stupid

It takes $103 in public debt for a $100 increase in GDP.

Build up public debt, expect lower productivity.

Interest on the National Debt

According to Treasury Direct, Interest on the National Debt is $574 billion.

There is nothing remotely productive about paying interest to banks.

Corporate Buybacks

Trump’s tax cuts did not spur investment as claimed. Corporations took the cuts and another repatriation holiday for dividend and buybacks.

In addition to using profits to buy back shares, some companies went further into debt to buy back shares.

If you skimp on investment, don’t expect productivity miracles.

Real Productivity Decline, 10 Simple Explanations

  1. The internet boom and the rising productivity associated with it were very real. The rate of change in internet-related improvements has fallen since 2000.
  2. Decreasing marginal utility of robots.
  3. The Fed’s easy money policies sponsored numerous corporate zombies. Those zombies survive only because of ultra-easy financing. Zombie companies are unproductive, by definition. Things are even worse in the EU because of negative rates.
  4. The Fed’s easy money policies also sponsored a “store on every corner”. There are far more retail stores, restaurants, fast food establishments, and outlet malls than needed.
  5. Marginal stores have to be manned by somebody and they are, by increasingly marginal employees as the unemployment rate declines.
  6. Demographics. As skilled workers retire, those workers are replaced by workers with lower skills.
  7. Health issues in general. Obesity and drug-related issues are on the rise as are time off for those reasons.
  8. Militant unions demand and receiving unwarranted pay, time off, and control over workplace conditions.
  9. Corporate buybacks mainly benefit CEOs and executives who cash out their shares and options. It takes careful investment, not reckless expansion, not buybacks to have productivity gains.
  10. It’s the debt, stupid. Fiscal deficits are totally out of control. Interest on the national debt by itself is $574 billion. What are we getting for it?

Looking in the Wrong Place

The San Francisco Fed, Brookings, and the National Bureau of Economic Research all struggle to explain falling productivity.

They can’t come up with the answer because they all have a spotlight on mismeasurement (and in the wrong direction at that, failing to count supervisory overtime and hours worked at home).

But there’s the answer, in ten easy to understand points, supported by data, logical analysis, and graphs.

By the way, this enormous buildup of debt at every level is hugely deflationary. Bubbles do burst eventually.

Offense/Defense Index Looking Better

But technical analysts like ratios, too, and one of them is telling us that this bull market is not over yet.

Many years ago, a technical analyst named Boris Simonder, with whom I’ve lost touch, showed me his offense/defense index, which he created from a proprietary classification of stocks deemed part of the “offense,” such as technology, and stocks deemed part of the “defense,” such as consumer staples. I adapted it to use standard SPDR ETFs and have been following it ever since.

Here’s the formula:

( XLK * XLY ) / (XLP * XLV)

or, if you prefer:

XLK * XLY / XLP / XLV

That’s tech and consumer discretionary in the numerator and consumer staples and health care in the denominator.  And you may have noticed that it is an expansion on simpler XLY / XLP ratio many analysts now use.

We can argue on the specifics and you may think you want to substitute utilities for health care or some other tweak. Go ahead and float that boat but for this missive, I’ll stick with what’s been doing OK for me.

Anyway, take a look at this chart:

That’s a nice coiling pattern for my version of the offense/defense index. And you might think that we’re in a small decline within that pattern right now. I agree. But stochastics applied to the ratio shows a higher low on the last price swing lower. For regular stocks and indices, that suggests a bit of internal strength and there is no reason why it should not apply here.

Of course, we have to wait for the actual breakout to declare the bulls to be in charge but this is certainly a better picture than that of the traditional discretionary / staples ratio:

This also looks like resistance is at hand and it shows no encouragement in stochastics. Perhaps the lack of lower low in Sep/Oct is bullish but I’d like to see the index hold near the trendline and then make the breakout attempt.

Consider this one more, albeit small, bit of evidence that this bull market is not over yet.

China’s Growth Much Worse Than Reported, What About The U.S.?

China doubles value of infrastructure project approvals to stave off economic slowdown amid trade war.

The South China Morning Post reports China Doubles Value of Infrastructure Project Approvals to Stave Off Slowdown.

The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to South China Morning Post calculations based on the state planner’s approval statements released between January and October this year.

The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads and airports.

Local governments have been under increasing pressure from Beijing to support the economy, but they have less budget room due to lower tax revenues after the central government over the past year ordered individual and business tax cuts.

To fill the gap, Beijing has allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects. At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year. And when local governments came close to exhausting their annual quota set this autumn, the central government brought forward a portion of their 2020 quota so they could continue to raise funding for new projects.

Infrastructure Urgency

Michael Pettis, Finance Professor, Peking University, and author of the China Financial Markets website has an interesting take infrastructure projects.

Allocation of Money

To fund the projects China Cuts Banks’ Reserve Ratios, Frees up $126 Billion for Loans.

Analysts had expected China to announce more policy easing measures soon as the world’s second-largest economy comes under growing pressure from escalating U.S. tariffs and sluggish domestic demand.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 50 basis points (bps) for all banks, with an additional 100 bps cut for qualified city commercial banks. The RRR for large banks will be lowered to 13.0%. The PBOC has now slashed the ratio seven times since early 2018. The size of the latest move was at the upper end of market expectations, and the amount of funds released will be the largest so far in the current easing cycle.

The broad-based cut, which will release 800 billion yuan in liquidity, is effective Sept. 16. The additional targeted cut will release 100 billion yuan, in two phases effective Oct. 15 and Nov. 15.

Real Growth

Trade Agreement

Chinese Local Government Funds Run Out of Projects to Back

On October 16, the Fiancial Times reported Chinese Local Government Funds Run Out of Projects to Back.

There are not many economically viable projects for us to take on,” an official at Sichuan Development told the FT. “We have plenty of bridges and roads already.

GDP Formula

GDP = C + I + G + (X – M)

GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

Whether or not the projects are viable, government spending adds to nominal GDP.

If the government paid people to spit at the moon it would add to GDP.

Arguably, that’s a far better use than dropping bombs and making enemies in the process.

Not Writing Down Losses

​China isn’t writing down losses, but neither is the US, EU, or any other country.

With that in mind How Badly Overstated is Chinese and US GDP?

Concern over GDP with no concern over losses and malinvestment is concern over nonsense.

In The Fed We TRUST – Part 2: What is Money?

Part one of this article can be found HERE.

President Trump recently nominated Judy Shelton to fill an open seat on the Federal Reserve Board. She was recently quoted by the Washington Post as follows: “(I) would lower rates as fast, as efficiently, and as expeditiously as possible.” From a political perspective there is no doubting that Shelton is conservative.

Janet Yellen, a Ph.D. economist from Brooklyn, New York, appointed by President Barack Obama, was the most liberal Fed Chairman in the last thirty years.

Despite what appears to be polar opposite political views, Mrs. Shelton and Mrs. Yellen have nearly identical approaches regarding their philosophy in prescribing monetary policy. Simply put, they are uber-liberal when it comes to monetary policy, making them consistent with past chairmen such as Ben Bernanke and Alan Greenspan and current chairman Jay Powell.

In fact, it was Fed Chairman Paul Volcker (1979 to 1987), a Democrat appointed by President Jimmy Carter, who last demonstrated a conservative approach towards monetary policy. During his term, Volcker defied presidential “advice” on multiple occasions and raised interest rates aggressively to choke off inflation. In the short-term, he harmed the markets and cooled economic activity. In the long run, his actions arrested double-digit inflation that was crippling the nation and laid the foundation for a 20-year economic expansion.

Today, there are no conservative monetary policy makers at the Fed. Since Volcker, the Fed has been run by self-described liberals and conservatives preaching easy money from the same pulpit. Their extraordinary policies of the last 20 years are based almost entirely on creating more debt to support the debt of yesteryear as well as economic and market activity today. These economic leaders show little to no regard for tomorrow and the consequences that arise from their policies. They are clearly focused on political expediency.

Different Roads but the Same Path –Government

Bernie Sanders, Alexandria Ocasio-Cortez, Elizabeth Warren, and a host of others from the left-wing of the Democrat party are pushing for more social spending. To support their platform they promote an economic policy called Modern Monetary Theory (MMT). Read HERE and HERE for our thoughts on MMT. 

In general, MMT would authorize the Fed to print money to support government spending with the intention of boosting economic activity. The idealized outcome of this scheme is greater prosperity for all U.S. citizens. The critical part of MMT is that it would enable the government to spend well beyond tax revenue yet not owe a dime.   

President Trump blamed the Fed for employing conservative monetary policy and limiting economic growth when he opined, “Frankly, if we didn’t have somebody that would raise interest rates and do quantitative tightening (Powell), we would have been at over 4 instead of a 3.1.” 

Since President Trump took office, U.S government debt has risen by approximately $1 trillion per year. The remainder of the post-financial crisis period saw increases in U.S. government debt outstanding of less than half that amount. Despite what appears to be polar opposite views on just about everything, under both Republican and Democratic leadership, Congress has not done anything to slow spending or even consider the unsustainable fiscal path we are on. The last time the government ran such exorbitant deficits while the economy was at full employment and growing was during the Lyndon B. Johnson administration. The inflationary mess it created were those that Fed Chairman Volcker was charged with cleaning up.

From the top down, the U.S. government is and has been stacked with fiscal policymakers who, despite their political leanings, are far too undisciplined on the fiscal front.

We frequently assume that a candidate of a certain political party has views corresponding with those traditionally associated with their party. However, in the realm of fiscal and monetary policy, any such distinctions have long since been abandoned.

TRUST

Now consider the current stance of Democratic and Republican fiscal and monetary policy within the TRUST framework. Government leaders are pushing for unprecedented doses of economic stimulus. Their secondary goal is to maximize growth via debt-driven spending. Such policies are fully supported by the Fed who keeps interest rates well below what would be considered normal. The primary goal of these policies is to retain power.

To keep interest rates lower than a healthy market would prescribe, the Fed prints money. When policy consistently leans toward lower than normal rates, as has been the case, the money supply rises. In the wake of the described Fed-Government partnership lies a currency declining in value. As discussed in prior articles, inflation, which damages the value of a currency, is always the result of monetary policy decisions.

If the value of a currency rests on its limited supply, are we now entering a phase where the value of the dollar will begin to get questioned? We don’t have a definitive answer but we know with 100% certainty that the damage is already done and the damage proposed by both political parties increases the odds that the almighty dollar will lose value, and with that, TRUST will erode. Recall the graph of the dollar’s declining purchasing power that we showed in Part 1.

Data Courtesy St. Louis Federal Reserve

Got Money? 

If the value of the dollar and other fiat currencies are under liberal monetary and fiscal policy assault and at risk of losing the valued TRUST on which they are 100% dependent, we must consider protective measures for our hard-earned wealth.

With an underlying appreciation of the TRUST supporting our dollars, the definition of terms becomes critically important. What, precisely, is the difference between currency and money? 

Gold is defined as natural element number 79 on the periodic table, but what interests us is not its definition but its use. Although gold is and has been used for many things, its chief purpose throughout the 5,000-year history of civilization has been as money.

In testimony to Congress on December 18, 1912, J.P. Morgan stated: “Money is gold, and nothing else.” Notably, what he intentionally did not say was money is the dollar or the pound sterling. What his statement reveals, which has long since been forgotten, is that people are paid for their labor through a process that is the backbone of our capitalist society. “Money,” properly defined, is a store of labor and only gold is money.

In the same way that cut glass or cubic zirconium may be made to look like diamonds and offer the appearance of wealth, they are not diamonds and are not valued as such. What we commonly confuse for money today – dollars, yen, euro, pounds – are money-substitutes. Under an evolution of legal tender laws since 1933, global fiat currencies have displaced the use of gold as currency. Banker-generated currencies like the dollar and euro are not based on expended labor; they are based on credit. In other words, they do not rely on labor and time to produce anything. Unlike the efforts required to mine gold from the ground, currencies are nearly costless to produce and are purely backed by a promise to deliver value in exchange for labor.

Merchants and workers are willing to accept paper currency in exchange for their goods and services in part because they are required by law to do so. We must TRUST that we are being compensated in a paper currency that will be equally TRUSTed by others, domestically, and internationally. But, unlike money, credit includes the uncertainty of “value” and repayment.

Currency is a bank liability which explains why failing banks with large loan losses are not able to fully redeem the savings of those who have their currency deposited there. Gold does not have that risk as there is no intermediary between it and value (i.e., the U.S. government or the Japanese government). Gold is money and harbors none of these risks, while currency is credit. Said again for emphasis, only gold is money, currency is credit.

There is a reason gold has been the money of choice for the entirety of civilization. The last 90 years is the exception and not the rule.

Despite their actions and words, the value of gold, and disTRUST of the dollar is not lost on Central Bankers. Since 2013, global central banks have bought $140 billion of gold and sold $130 billion of U.S. Treasury bonds. Might we say they are trading TRUST for surety?

Summary

To repeat, currency, whether dollars, pounds, or wampum, are based on nothing more than TRUST. Gold and its 5000 year history as money represents a dependable store of labor and real value; TRUST is not required to hold gold. No currency in the history of humankind, the almighty U.S. dollar included, can boast of the same track record.

TRUST hinges on decision makers who are people of character and integrity and willingness to do what is best for the nation, not the few. Currently, both political parties are taking actions that destroy TRUST to gain votes. While political party narratives are worlds apart, their actions are similar. Deficits do matter because as they accumulate, TRUST withers.

This article is not a call to action to trade all of your currency for gold, but we TRUST this article provokes you to think more about what money is.

GDP Estimates Collapse After Dismal ISM Report

GDPNow and other GDP estimates took a dive today on weaker than expected manufacturing reports.

The GDPNow forecast for third-quarter GDP fell to 1.8% today on weak economic reports.

Gold and Treasuries Rally

GDP Estimates

Oxford Estimate

Real Final Sales

The important number is “Real Final Sales“.

That’s the bottom line estimate for the economy. The rest is inventory adjustment which nets to zero over time.

The GDPNow estimate of Real Final Sales fell to 1.6% today, a new low for the series. It’s near, and possibly below the economic stall point.

Also, please see my report today: Manufacturing ISM Worst Since 2009 on Severe Contraction of Export Orders.

A Somewhat Bullish Market Commentary

Let’s just put the lead where it should be. Stocks are resilient and short-term dip notwithstanding; they are likely to be higher before the end of the year.

Here’s the evidence in bullet form.

  • The NYSE advance/decline is hovering at all-time highs.
  • Three-month bill yields are dropping hard. The Fed will cut rates one more time this year.
  • Financials are holding tight near resistance thanks to the “uninverting” of the yield curve. You can argue with me on that point later.
  • Trade deals are getting done (Japan) so China will feel the heat. I do not buy the argument that the Chinese are waiting out the current administration (i.e. impeachment or failed reelection). They know better than that.
  • Sector rotation is a healthy sign. Chart below of value and growth.
  • Retail is not dead. Chart below.

Of course, it’s not all great. I’d like to see more stocks hitting new highs and small caps, which started to perk up nicely, have eased back.

Now let’s talk about those headlines.

  • Impeachment inquiry. This may or may not hurt the orange fella but it is likely to seal the deal for Elizabeth Warren on the blue side. Wall Street has already vocalized that it will crumble for President Warren.
  • Softening economic numbers. Nothing stays that good forever. The U.S. is still the best game in town. Why else is the U.S. dollar at a 2 ½ -year high? Yeah, we’ve got positive bond yields but we’ve also got a growing economy. By the way, the UUP bullish dollar ETF is at an 11-year high.
  • What the heck happened to gold? After a major, long-term upside breakout in June and a nice rally to resistance in August, it is now overstaying its welcome as a correcting market. That pesky dollar, right? Well, gold priced in euros has been flat for more than a month, too.
  • And while I’m using such foul language, what the heck happened to bitcoin? It was supposed to get a boost from all this economic turmoil. And when I say foul language, I mean bitcoin.

So, unless something big and bad happens, I’m still a stock market fan.

In the spirit of Warner Wolf, CMT, let’s go to the charts.

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Important support for big cap indices.

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