Monday, January 27, 2020

Don’t Fight the Fed! Or the Rest of the World’s Central Banks

by Michael Pento, Market Oracle:

On March 9, 2009, The Wall Street Journal’s Money and Investing section posed this ominous question: “How low can stocks go?” The stench of economic malaise was suffocating as the Dow Jones Industrial Average (DJIA) rounded off its fourth straight week of losses, and the S&P 500 touched below 700 for the first time in 13 years. Goldman Sachs cautioned the S&P could fall to 400, while CNBC’s Jim Cramer was busily calculating the stock valuations of the DJIA components based on balance sheet cash levels. 

Yet miraculously, as the market pundits stood despondently believing there was nothing positive on the economic horizon and that no stock was worth buying at any price, investors stared into the abyss and took a leap of faith. And just like that, the market had bottomed. Dow 6,440.08 was a buying opportunity, and with the Fed’s QE spigot operating on full throttle, the Dow was poised for a historic take-off.

Oh, what a difference nine years make! Today, the Dow has now crossed the then unimaginable level of 26,000. The rationalizations abound; lower corporate taxes, less regulation and sizzling business and consumer confidence all scream “happy days are here again!” With nothing but blue skies ahead, the only question left for Wall Street to ponder is the uncertainty of how many days it will take before the Dow crosses another 1,000-point milestone.

But not so fast…Remember, the stock market climbs a wall of worry, and in 2009 that wall was seemingly insurmountable. Back then the sentiment was that nothing could go right–yet the market endured as economic and financial Armageddon loomed around every corner. Today, the exact opposite scenario is evident. The belief prevails that nothing can go wrong. However, hiding in plain sight there is one gigantic cliff the market has already started to head down. But the real reason behind the next violent crash in the equity market is the current bursting of the worldwide bond bubble.

The stock market now resembles an unstable uranium 235 isotope. The splitting catalyst will be the result of slamming $10 trillion worth of negative-yielding sovereign debt and $230 trillion worth of total global debt into the reversal of central bank money printing and unprecedented interest rate suppression.

Remember this truth: If the market can rise on sluggish growth, it can also fall when growth seems fine. 

Investors must determine what has already been priced into shares and what lies ahead for growth. It is essential to keep in mind that the market is over-priced according to almost every metric. For instance, even if all the rosy economic projections pan out for the tax cuts, the market is still trading at 18.6 times forward 2018 earnings, according to FACT SET–the market trades typically closer to 15 times earnings. The trailing PE ratio is now at its highest going back to 2009.

In addition to this, we have cash levels at all-time lows and margin debt at all-time highs. Mutual funds and ETFs that focus on stocks just recently raked in $58 billion in new money, according to Bank of America Merrill Lynch. And at 150%, the total market capitalization of equities has never been higher in relation to the underlying economy.

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Message from Planet Japan: The good times never last forever

by Simon Black, Sovereign Man:

After having traveled to more than 120 countries in my life, the only person I know who’s been to more places than I have is Jim Rogers.

Jim is a legend– a phenomenal investor, author, and all-around great guy.

(His book Adventure Capitalist is a must-read, chronicling his multi-year driving voyage across the world.)

Some time ago while we were having drinks, Jim remarked that he occasionally tells people, “If you can only travel to one foreign country in your life, go to India.”

In Jim’s view, India presents the greatest diversity of experiences– mega-cities, Himalayan villages, coastal paradises, and a deeply rich culture.

My answer is different: Japan.

To me, Japan isn’t even a country. Japan is its own planet… completely different than anywhere else in ways that are incomprehensible to most westerners.

(Watch my friend Derek Sivers explain it to a TED audience here.)

On one hand, this is a culture that strives to attain beauty and mastery in even mundane tasks like raking the yard or pouring tea.

Everything they do is expected to be conducted to the highest possible standard and precision.

They start the indoctrination from birth; Japanese schools typically do not employ janitors and instead train children to clean up after themselves.

Later in life, the Japanese salaryman is expected to practically work himself to death (or suicide) for his company.

Obedience and collectivism are core cultural values, and the tenets of Bushido are still prevalent to this day.

One of the most remarkable examples of Japanese culture was the aftermath of the devastating 2011 earthquake (and subsequent tsunami) in the Fukushima prefecture.

It was the worst natural disaster in Japanese history, causing nearly as much damage as the atomic bombs over Hiroshima and Nagasaki in 1945.

Yet rather than panic and pillage, the Japanese sat patiently outside of their ravaged homes waiting for direction from the local authorities.

Then again, this is also the place that brought us ‘Hello Kitty,’ and where men have to be admonished to not grope young girls on the subway.

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Debate Over Food Inflation: What’s the Real Story?


by Mish Shedlock, Mish Talk:

Is food a bargain or are prices rising far faster than the BLS says they are?

The above image is from the Visual Capitalist via ZeroHedge a Decade of Grocery Prices for 30 Common Items.

Is the chart accurate? I have no reason to believe otherwise.

In fact, it supports my contention that food is a bargain.

Annualized Rate of Inflation

16 of 30 Items Annualized Inflation Under 2%

16 of the 30 items listed by the Visual Capitalist have prices rising less than 2% per year.

Foods that Store Easily

Next consider flour, rice, sugar, pasta, and dried beans.

All of those items store very well for long periods of time in a pantry. No refrigeration is necessary.

Moreover, all of those items go on sale periodically. There is no reason to buy any of those items when not on sale.

And how much flour and sugar does one use anyway? Few bake bread any more, and those who do can always buy on sale.

Pasta is frequently 2 for 1.

There are 5 items in this category.


I have discussed this before and it’s worth repeating. Get a freezer!

I was at Sam’s Club a week ago. Whole pork tenderloin was on sale at $1.98 a pound. It is still on sale today at that price.

Compare that price to the Visual Capitalist listed price of $3.82.

All of the prices listed by the Visual Capitalist are likely accurate, but as of a moment in time.

Anyone paying those prices has no idea how to shop.

Paying $4.12 per pound for ground beef or $3.21 for boneless chicken is absurd.

Frozen turkeys go on sale every Thanksgiving for $0.69 or so. That’s the same freaking price nearly every year for 10 years. Buy 2 or 3. Have one for thanksgiving and another for Christmas and Easter.

Bacon, on sale, is often 2 for 1.

There are 7 items in the meat basket. One of them, pork, also falls in the under 2% inflation category.

Peanut Butter

Peanut butter does not store forever, but it does store well, especially unopened, and is frequently on sale.

Food Inflation Complaints

  • Grapes at 2.48% inflation.
  • Potatoes at 3.31% inflation.
  • Cookies at 2.54% inflation.

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Bond Market’s “Inflation Expectations” Highest since 2014


by Wolf Richter, Wolf Street:

What’s going on is a sell-off in the Treasury market.

On Friday, the government bond market’s “inflation expectations” rose to the highest level since September 2014. Quite a feat, considering that six months ago, economists were clamoring for the Fed to slow down its already glacial pace of rate hikes – or abandon them altogether – because of “low inflation.”

The Treasury market’s “inflation expectations” show up in the premium that investors demand for buying regular 10-year Treasury Securities over 10-year Treasury Inflation Protected Securities (TIPS). TIPS compensate investors for the loss of purchasing power due to inflation. The principal of TIPS increases at the rate of the annual Consumer Price Index, which effectively protects the principal from inflation to the extent measured by CPI.

TIPS holders also receive a small yield, if any. The spread between the 10-year TIPS yield and the 10-year Treasury yield reflects the bond market’s expectation of where inflation is headed over the next ten years.

The 10-year Treasury yield ended Friday at 2.66%. It has been in this neighborhood all week, the highest yield since April 2014 when the bond market was coming out of its “Taper Tantrum” that it had entered into when Chairman Bernanke suggested the unthinkable, that the Fed might someday start tapering “QE Infinity.”

Bond prices fall when yields rise. So what has been going on is a sell-off in the Treasury market. This chart shows the 10-year yield. Note the closing low of 1.37% on July 5, 2016. On an intraday basis, the yield had dropped to 1.32%, an all-time low. Since then, the 10-year yield has about doubled. July 5, 2016, very likely marked the end of the 35-year bond bull market that had kicked off in October 1981.:

The spread between the 10-year Treasury yield (2.66%) and the 10-year TIPS yield (0.57%) widened on Friday to 2.09%, the highest since September 2014. This is what the Treasury market is now pricing in as its expectations for inflation over the next 10 years:

In the chart, note the inflation dynamics. The oil bust started in mid-2014, and the broader commodities bust was going on at the same time. This filtered into all kinds of prices – not just fuel. At the same time, transportation costs collapsed during the “transportation recession” of 2015 and 2016 not only for freight within the US but also for containerized freight across the oceans.  And there were other elements that pressured inflation lower.

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Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences


by David Stockman, David Stockman’s Contra Corner:

In Part 1 we noted that the real evil of Bubble Finance is not merely that it leads to bubble crashes, of which there is surely a doozy just around the bend; or that speculators get the painful deserts they fully deserve, which is coming big time, too; or even that the retail homegamers are always drawn into the slaughter at the very end, as is playing out in spades once again. Daily.

Given enough time, in fact, markets do bounce back because capitalism has a inherent urge to grow, thereby generating higher output, incomes, profits, wealth and stock indices. That means, in turn, investors eventually do recover from bubble crashes—notwithstanding the tendency of homegamers and professional speculators alike to sell at panic lows and jump back in after most of the profits have been made—or even at panic highs like the present.

Instead, the real economic iniquity of central bank driven Bubble Finance is that it destroys all the pricing signals that are essential to financial discipline on both ends of the Acela Corridor. And as quaint at it may sound, discipline is the sine qua non of long-term stability and sustainable gains in productivity, living standards and real wealth.

The pols of the Imperial City should be petrified, therefore, by the prospect of borrowing $1.2 trillion during the upcoming fiscal year (FY 2019) at a rate of 6.o% of GDP during month #111 through month #123 of the business expansion; and doing so at the very time the central bank is pivoting to an unprecedented spell of QT (quantitative tightening), involving the disgorgement of up to $2 trillion of its elephantine balance sheet back into the bond market.

Even as a matter of economics 101, the forthcoming $1.8 trillion of combined bond supply from the sales of the US Treasury ($1.2 trillion) and the QT-disgorgement of the Fed ($600 billion) is self-evidently enough to monkey-hammer the existing supply/demand balances, and thereby send yields soaring.

But that’s barely the half of it. All the laws of economics, which are now being insouciantly ignored by the stock market revilers, are also time and place bound. That is to say, deficit finance in a muscle-bound Welfare State/Warfare State democracy like the US is always a questionable idea.

After all, it is virtually guaranteed based on the budgetary doomsday forces now at work that by 2030 the public debt will approach $40 trillion compared to the $930 billion level where it stood when the Gipper took office in January 1981. In a half century, therefore, the GDP—swollen by inflation notwithstanding—will have grown by 8.5X versus a 43X eruption of the debt.

Even then, that’s the long-trend of the thing: The cyclical context is the far more preposterous part. The very idea of running a 6.0% of GDP deficit at the tail end of what would be the longest business expansion in recorded history is just plain insane. Yet as the Donald and his feuding band of Capitol Hill Republicans stumble from one bi-weekly CR (continuing resolution) fix to the next, they exude complete obliviousness to the fiscal time-bomb strapped to their chests.

Admittedly, the Dems are far worse. Even as they appropriately champion the cause of the Dreamers for the wrong reason (i.e. in pursuit of Democrat voters rather than the real economic need for additional workers and Tax Mules), their true agenda at the moment is stasis and parity. That is, no change (stasis) whatsoever in the $2.5 trillion entitlement monster, but a dollar for dollar increase (parity) in domestic appropriations to match the $80 billion per year defense increase demanded by the GOP hawks (which is most of the GOP).

Our point is that prior to the final betrayal of sound money incepting with Greenspan’s arrival at the Fed in 1987, politicians of both parties had a healthy fear of deficits because in the absence of massive monetization by the central banks, rising deficits tended to cause “crowding out” and soaring interest rates.

In effect, even the quasi-honest monetary policies of the 1953-1987 period generated counter-vailing constituencies for fiscal rectitude. Thus, when interest rates rose, the lobbies for small business, homebuilders, Savings and Loans, farmers and capital goods suppliers predictability brought their political heft to bear in behalf of fiscal restraint.

No more. The Fed’s massive and relentless suppression of yields has eliminated the counter-vailing constituencies for fiscal rectitude and, at length, vaporized the politicians’ fear of deficits.

And understandably so. The public debt is up by 220% from the pre-crisis peak (Q4 2007), while interest expense has risen by only 20%.  With the debt rising 10X faster than its service cost, why would anyone expect the politicians to do anything but kick-the-can?

And worst still, why would they not loose all historical memory that might otherwise warn of the extreme dangers posed by radically expanding the deficit at the tail end of the weakest business cycle in modern history?

Indeed, the Fed’s culpability for the nation’s imminent fiscal catastrophe is doubly evident when the full extent of the above chart’s false price signals is dissected.

To wit, not only has the Fed driven the weighted average cost of the Federal debt to under 1.7% and therefore into negative yield territory when inflation is factored in; it is also the case that its massive debt monetization has further minimized the true cost of the public debt owing to the so-called “profit remittance” to the Treasury.

That is, the Fed collects upwards of $125 billion from the yield on its $4.4 trillion of Treasury and GSE notes, but pays essentially nothing for its liabilities, which are printed from thin air. The Fed’s gross interest income less several billion of operating costs and $25 billion of IOER payments to the banks (an inducement to the banks to keep their excess reserves idle and not lend them out at lower than the Fed’s target funds rate) is therefore returned to the Treasury in a round robin of monetary hocus pocus.

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by Egon von Greyerz, Gold Switzerland:

2018 is starting right on cue. Inflationary pressures have been latent for quite some time but have recently shown the world what is to come in the next few years.

How could anyone believe the propaganda that there is no inflation. It has of course suited the market manipulators. But the fake wizardry of the central bankers is now about to be revealed. Since the early 1980s the interest rate cycle were in a strong down trend. When the financial crisis started in 2007, central banks panicked and rates were rapidly lowered around the globe.

US short term rates went from 5% in 2007 to zero in 2008 and stayed at that level until late 2015. In many countries rates were lowered to negative like in Japan, the Euro area, Switzerland, Sweden etc. Low or negative interest rates defy all economic principles and distort the equilibrium of a normal market economy. They discourage savings and without savings there can be no sound investments. Instead, investments have been made with printed or borrowed money. Due to the low cost of money many high risk projects have been undertaken.

Low or negative interest rates also lead to irresponsible deficit spending by governments. This is why global debt has gone from $120 trillion in 2006 to $240 trillion today.

Explosion in money supply will lead to inflation explosion

Normally this explosion of money would have created very high inflation or hyperinflation. But since virtually none of the fabricated money went to the normal economy, published inflation has been non-existent. Anyone buying food, or paying bills of course knows that official inflation is a fiction of governments’ imagination. And although the official figures show no inflation, there has been an explosion in asset prices. Stocks, bonds and property have all soared. US stock markets for example are up 4 times since 2009.

These assets bubbles do not benefit normal people. They take away valuable investment into the real economy to the benefit of the top 1-5%. This is a very dangerous trend that eventually will lead to social unrest or revolution.

But we have now reached a stage when the explosion in money supply will have a major influence on the real economy. The inevitable consequences of the totally irresponsible mismanagement of the economy that I have been forecasting for quite some time are now starting to take effect.


The most critical areas to watch are commodity inflation, interest rates and the dollar. These three markets are now giving clear signs of the coming inflation and subsequent hyperinflation.

If we start with inflation, official statistics are useless as I mentioned above since these figures are totally manipulated. A very good indicator of inflation are commodities. Below is a chart of the GS commodity index versus the S&P since 1971. That ratio is at an all time low and below the 1971 and 1999 lows. This cycle is now turning and the ratio is likely to go well above the 1974, 1990 and 2008 highs. Thus the minimum target is 10 which is a 10-fold increase from here. This means that stocks will fall at least 90% against commodities. Since the precious metals will be the main beneficiaries of the commodity boom, stocks are likely to fall at least 95% agains gold and silver.


Looking at a short term chart of commodities, the CRB index bottomed in Feb 2016 and is up 30% since then. Since June 2017 the CRB is up 20% and since mid Dec 2017 it is up 8%. This is a clear indication that inflation is now going up fast.

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Jim Rickards: You Must Own a Monster Box; N. Korea Close to Being Able to Destroy U.S.

by Mike Gleason, Money Metals:

Coming up we’ll hear the explosive conclusion of my two part interview with Jim Rickards. Find out what Jim has to say about not just gold but also silver, and where he thinks things are headed between the U.S. and North Korea. Don’t miss this fascinating conversation with Jim Rickards, coming up after this week’s market update.

Gold prices advanced this week to an 18-month high, entering a zone of critically important levels on the charts. As gold bulls sought to push prices up to a 4-year high mark of $1,375 on Thursday afternoon, bears clawed back and regained some lost ground. In volatile trading late Thursday, the gold market swung from $1,365 to roughly $1,340 an ounce.

As of this Friday recording, gold trades at $1,352, good for a 1.4% gain on the week. The silver market checks in at $17.39 per ounce after rising 2.0% since last Friday’s close. The white metal still needs to get above the $18.50 level in order to take out its highs from last year.

Click HERE to listen

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An “Extreme Warning” From Our Doom Index


by Bill Bonner, Casey Research:

When we left you last, we were describing why the situation is getting dangerous for investors, and how the lessons learned over the last 30 years may backfire in the next crisis.

“Dow over 26,000… bitcoin under $10,000,” reports the news… “but could crypto panic spill over into stocks?”

Investors are accustomed to depending on the Greenspan-Bernanke-Yellen Put… which is to say, they are pretty sure that the feds will come in with more booze when the party starts to flag.

“Buy the dip,” they tell each other, confident that the feds can be counted on in a pinch.

Many think the recently passed tax bill is 80-proof, too—sure to rev things up by putting more money in the hands of shareholders and consumers.

Maybe it will raise stock prices. Or maybe it won’t. What it won’t do is make the next crisis disappear.

Bad Tidings

We hate to be the bearer of bad tidings, but bad tidings are all we have to bear.

Corporate America is already pretty flush. The price-to-earnings (P/E) ratio for the S&P 500 is now 70% above its long-term average.

In fact, the price of stocks relative to earnings has only been near this high three times in the last 118 years… each time caused by the aforementioned Fed party favors.

And if stocks go higher, it merely gives them further to fall.

In order to get back to more traditional levels, notes Martin Feldstein in a recent Wall Street Journalarticle, the next bear market would have to wipe out some $10 trillion of stock market wealth.

This, he says, would take 2% off annual GDP… tipping the country into recession.

Extreme Warning

How close is this crisis?

We turn to our Doom Index, put together by our ace researcher, Joe Withrow:

The Doom Index spiked back up to “7” this month – our extreme warning level.

After a surprisingly expansive third quarter in 2017, credit growth fell back to 1.6% in the fourth quarter. Paraphrasing your friend and economist Richard Duncan, bad things happen when credit growth falls below 2%.

Looking at the credit markets, corporate bond downgrades continued to come in at an elevated level last quarter. And junk bonds are starting to show some cracks, falling more than 1% on the quarter. That said, junk bonds still closed out 2017 in positive territory.

Stock valuations are still high relative to their historical averages. But we still haven’t really seen the spike in “animal spirits” that we usually see at the end of each bull market.

But that is starting to change. Investor bullishness spiked by more than 20 percentage points last quarter, as measured by the American Association of Individual Investors survey that we follow.

Our financial metrics were the first to scream warnings at us back in 2000 and 2007… but the markets did not crash until we started to get warnings from our productivity metrics also. I suspect that will be the case this time around as well… But you can never know for sure.

What you can know, however, is that we are much closer to doom today than we were last quarter. Might be a good idea to dust the old Crash Alert Flag off… Make sure it looks presentable.

Inevitable Bear

We’ve hung out the old black-and-blue Crash Alert flag so often—and without effect—that both it and our reputation for market timing are in tatters.

We’re reluctant to expose either to further ridicule now.

But a bear market is inevitable. We recall the 1970s…

It was in 1973 that the Dow first crested above 1,000. Then, it went down… and didn’t get back to 1,000 for another decade.

During that time, the ’70s, “nominal” stock prices—without accounting for inflation, that is—went down, but never by more than about 25%.

The damage didn’t seem so bad. But consumer price inflation was also steadily eating away at “real” (inflation-adjusted) values. You can see what really happened by looking at the Dow in gold terms.

The peak occurred in 1965, when it took about 25 ounces of gold to buy the Dow stocks.

Then, stock prices fell… down… down… down – to the point where you could buy the entire Dow with a single ounce of gold.

In real terms, stocks had lost 96% of their value.

Ready… Aim… Fire!

We see a similar debacle coming. The Dow sells for 20 times the price of an ounce of gold—below the level of ’65, but higher than the level of ’29.

Central banks are raising rates. Inflation seems to be picking up. And the feds have huge deficits to finance.

The bond market is going to be squeezed between more supply and less demand. Bond prices will fall as yields rise. Recently, the yields on the 10-year Treasury rose to 2.58%, up from a low of 1.40% set in July 2016.

Stock prices will fall, either because of rising interest rates… or in spite of them. Expect initial losses of about 50%.

Then, once again, investors will turn their lonely eyes to the Fed.

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