Friday, January 29, 2016

Nobody Really Knows Anything Right Now........THE SCHULTZ ECONOMY!

Nobody Really Knows Anything Right Now

We learned one thing yesterday: the U.S. Federal Reserve is in the same position as the rest of us when it comes to forecasting the future path of economic growth.  Nobody really "Knows" anything right now.  From that touchstone observation, we add two additional points.  

First, if you think the Fed is going to reverse course any time soon, be aware that neither Fed Funds Futures nor the 2 Year Treasury agree with you. Both discount a slow but perceptible increase in rates this year.  

Second, it pays to think a little more long term than just 2016. For example, consider that Chair Yellen has exactly 2 years left in that role before the next U.S. President can opt for someone else. What does she want her legacy to be?  Not, I think, the Chair that failed to get (and keep) Fed Funds off the zero lower bound.

There is an old adage in economic circles that "Stock market indexes have predicted nine of the last five recessions". The author of that statement is none other than Nobel Prize winner Paul Samuelson, who concluded the observation with "And its mistakes were beauties".  Fair enough – equity markets are notoriously fickle.  But market watchers would be fair in asking, "Fine…  But how many recessions have "Blue chip" economists called correctly?"

It is in that philosophical cage match that investors and the Federal Reserve find themselves just now. Global equity market volatility combined with ever-lower crude oil prices are like a traffic signal turning from yellow to red. And red is also pretty much all you see on the screen. The economics-minded stewards at the Fed see an entirely different picture: low notional unemployment, the dry powder for consumer spending in the form of lower oil prices, and easy monetary policy around the world. For these idiots 
the light is turning green, talk about being color blind!

But one side will be right, and one side will be wrong. The dichotomy is too stark for any other conclusion.

The bigger question here is what happens when investors realize that central planners cannot arrest economic gravity? The answer: People start to sell because profits are slowing. That's the most obvious call. 

Looking through the Fed's recent statement, I had three observations about how the central bank is weighing these facts versus how capital markets perceive them.

Point #1: The Federal Reserve's cautious stance shows they don't know any more than capital markets do about the current trajectory of global economic growth.  They see the volatility in equity markets and oil's slippery slope but are keenly aware that markets are fickle.  Just think back to the August 2015 bout of volatility and how the Fed seemed to put off a September rate increase because of it. Whether that was optics or reality, it set a precedent that global equity market volatility could alter Fed policy.  Look for the Fed to wait on the real economic data that surrounds its dual employment and inflation mandate before it fundamentally changes course.

There's one exception to that observation, at least by historical Fed policy standards: a market crash caused by external events.  A 1987-style meltdown isn't enough since the central bank playbook there is to simply ensure the system has the liquidity it needs.  If there were a geopolitical shock, however, that's a different page in the playbook.  Barring such an event, however, the Fed is going to take its time in 2016.  An S&P 500 that grinds lower by another 5-10% isn't likely going to change that.

Point #2: While plenty of market watchers are calling for a return to zero interest rates and maybe more quantitative easing, some tell-tale capital markets disagree those events are in the cards.  Fed Funds Futures peg the chance of a July rate increase at 50% and put the chance of higher rates by year-end at 68%.  Two year Treasuries – the hair trigger of the yield curve for changes in Fed policy – yield 83 basis points.  That's down from over 100 basis points late last year but still higher than September 2015 when the market was sure the Fed was going to increase rates.  The point here is that these markets are not forecasting a return to zero interest rates.  Not even close.

For the sake of completeness, there are two markets that have their doubts.  Gold prices are up from their 2015 lows of $1,050/troy ounce to $1,125 currently.  Given that the yellow metal has been in a vicious bear market since 2011, that is a notable reversal of fortune and could be the canary in the coalmine chirping a warning about further fiat currency debasement.  The other market worth a mention is the 10-year U.S. Treasury note.  At a 2.0% yield, it signals a vote of no confidence in the Fed's hope that inflation will return to desired levels any time soon.

Point #3: Fed Chair Janet Yellen has exactly 2 years left in that position before the next President has a chance to consider reappointing her or choosing a new person to fill the slot. Think of the Federal Reserve as either a blue chip public company or major branch of the U.S. government.  In both cases, the people that run them give serious thought to their legacy – what they did to shape the organization's goals and what specific accomplishment they achieved.

Through that lens, the conversation about Fed policy in 2016 takes on a different hue.  In retrospect, every Fed Chair has their emblematic "Achievement": Paul Volcker (tamed inflation), Alan Greenspan (the 90s expansion), Ben Bernanke (saved the financial system).  For Janet Yellen, her prospective accomplishment must be "Got things back to normal".  That means getting interest rates far away from the zero lower bound if at all possible.  If for this reason, and no other, the Fed is going to raise rates in 2016 barring a shock to the system.

The conclusion here: you dance with who you brung, and this Fed is our date to the prom. They don't have any greater level of clarity about how this year is going to shape up than the marginal investor setting equity prices or an oil trader looking for direction in that market. This is patently different from the period from 2008 – 2015, when the Fed was clear about its perspective and knew exactly which policy levers to pull. Perhaps they were wrong, but they were never in doubt.

Now, there's enough doubt for everyone: markets, central banks, consumers, governments. Everyone. 



The S&P 500 is on track for its fourth straight season of negative sales:

Per-share earnings are looking at a deep decline:

The Empire Has No Clothes..........DO NOT MISS THIS!

The Empire Has No Clothes

Hans Christian Andersen told the story of "The Emperor's New Clothes" as part of his  Fairy Tales Told for Children collection. The tale is almost two hundred years old. Most know how a little boy was the first to announce that the emperor had no clothes. Andersen's tale is being re-written today and should be entitled "The Empire Has No Clothes." This story is one occurring around the world.

Governments are in disrepair and disrepute everywhere....

They are increasingly viewed as exploitive, ineffective and catering to privilege. Public interest, the idealistic goal of government, never was real in the sense that it overrode the private needs and wants of officeholders. "Public servants" were never better stewards of public interest than private citizens pursuing their own self-interest. Indeed, once the returns to power increased, self-selection made most politicians inferior in morality and public interest than the typical citizen.

The discomfort and turn against government occurs not because any of its behavior is new. Government has always been dishonest and a scam. What changed over time is the magnitude of government and its burden on citizens. The pain of tolerating it has apparently reached that threshold where people are no longer willing to ignore it.

Governments around the world have become leviathans, meddling in the most minute and personal decisions of its citizens. Supporting government in its infancy required no taxation. Today the average citizen pays more than 40% of his production as tribute and support to the empire. Few believe they get much of value in return.

Even with such confiscatory theft, governments are spending themselves and their citizens into bankruptcy. Capital that entrepreneurs need to start and grow businesses is now consumed by government vote-buying schemes and stupidity. As a result, economic growth cannot occur, jobs are lost and the standard of living declines.

The current political contest in the United States reflects the attitude of citizens against government. Outsiders are either winning or gaining popularity in the primaries. The public is fed up with government as shown by almost every poll taken. The political establishment still has not grasped the real reasons for their unpopularity.

The phrase "limited government" is used to differentiate a so-called government "of, by and for the people" from government that is not limited or "of, by and for the people." Arguably Abraham Lincoln's description was the best piece of Statist propaganda ever delivered to the public. It was not true when he said it and it is implausible to even utter such a sentiment today without being ridiculed.

"Limited government" is a clever phrase that is both untrue and impossible. It is akin to describing cancer as "limited cancer." Left alone, cancer grows and kills. So too does government. 

A more accurate but less flattering description of government is "limited tyranny." Limited government is merely a euphemism for limited tyranny. Unfortunately neither government nor tyranny can be limited.

Power is like cancer. It grows and eventually destroys whatever it preys upon. The only way to constrain power is with greater power. But therein lays the insoluble problem. Government was an attempt to provide order to society. It was granted power over others to keep order. But granting such power and controlling it was not possible. Who was to constrain the power? No entity with power willingly limits its power. Setting up another layer of government or power to do so only worsens the situation. 

Ultimately all power succumbs to Lord Acton's undeniable truth: Power corrupts and absolute power corrupts absolutely.

Power granted is always limited yet it always grows and is abused. Power, even in small doses, qualifies as tyranny. Idealists may not recognize it as such until it becomes so great that the tyranny can no longer be denied or ignored. The notion of limited government is fantastical. It is the belief in unicorns, tooth fairies and Santa Claus! Only the young or naive believe in such things.

History provides no examples of government staying within the bounds granted. All governments grow and become increasingly oppressive. The passage of time and human nature ensure such outcomes.

Civilization Is At An Important Inflection Point.

The current disgust with government is palpable. It is the reason why a braggart like Donald Trump can challenge for and likely win the Republican nomination for president. It is also the reason why a septuagenarian Socialist can challenge an anointed Democrat candidate. Both political contests reflect  hatred toward the political class. The voters are saying STOP! They turn to outsiders out of desperation.  NO DOUBT ABOUT THIS, NONE!

Is this merely a political phase that can be remedied? Is it merely a normal ebb and flow of the political process? It is easy to answer in the affirmative to both of these questions. History shows few exceptions and the few are usually bloody and violent. It is easy to be influenced by a form of confirmation bias when assessing such conditions. However, this current dissatisfaction is not something temporary that will self-repair.

This country and likely other so-called advanced democracies seem to be at an inflection or turning point. History is typically not useful in identifying such times.

Donald Trump is not a politician although he is likely to be elected. Voting for Donald Trump (or Bernie Sanders) is a protest vote against government. 

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth, banks are going bust, shopkeepers keep a gun under the counter.

There's nobody anywhere who seems to know what to do, and there's no end to it. 

We sit watching our TV's while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be. We know things are bad – worse than bad. They're crazy. It's like everything everywhere is going crazy.

Donald Trump (or Bernie) is a sign of how frustrated the electorate has become. Voters don't know how to stop what is happening to them and their country but they are mad as hell and are not going to take this anymore. The upcoming election will change nothing. The best that the public can hope for is to elect a wrecking ball that will dent or damage some of the government apparatus.

The ballot box will be ineffective in satisfying the public. Other means will be tried. The Empire will not stand idly by while its power is threatened. It will strike back at any attempt to slow its growth or rate of plunder. It will become truly vicious, not unlike a wounded and cornered animal. Power is never relinquished willingly.

Government, more properly called The State, has always been dependent on a myth. That myth is that society cannot be orderly without government and that all perceived ills can be solved by it. The reality is that society preceded government and that the State is little more than an official mafia with better PR.

Our founders did their best with The Constitution. Few believed it could be preserved easily. Thomas Jefferson knew as much when he stated:

Every generation needs a new revolution.

The next revolution is upon us, like it or not!

Will Our Nation And Freedoms Survive Politics?........DO NOT MISS THIS!

Will Our Nation And Freedoms Survive Politics?

Never has our future been more unpredictable, never have we depended so much on political forces that cannot be trusted to follow the rules of common sense and self-interest—forces that look like sheer insanity, if judged by the standards of other centuries. 

Adding yet another layer of farce to an already comical spectacle, the 2016 presidential election has been given its own reality show. Presented by Showtime, The Circus: Inside the Greatest Political Show on Earth will follow the various presidential candidates from now until Election Day.

As if we need any more proof that politics in America has been reduced to a three-ring circus complete with carnival barkers, acrobats, contortionists, jugglers, lion tamers, animal trainers, tight rope walkers, freaks, strong men, magicians, snake charmers, fire eaters, sword swallowers, knife throwers, ringmasters and clowns. Lots and lots of clowns!

Truly, who needs bread and circuses when you have the assortment of clowns and contortionists that are running for the White House?

No matter who wins the presidential election come November, it's a sure bet that the losers will be the American people.

Despite what is taught in school and the propaganda that is peddled by the media, the 2016 presidential election is not a populist election for a representative. Rather, it's a gathering of shareholders to select the next CEO, a fact reinforced by the nation's archaic electoral college system.

Anyone who believes that this election will bring about any real change in how the American government does business is either incredibly naïve, woefully out-of-touch, or oblivious to the fact that as an in-depth Princeton University study shows, we now live in an oligarchy that is "of the rich, by the rich and for the rich."

When a country spends close to $5 billion to select what is, for all intents and purposes, a glorified homecoming king or queen to occupy the White House, while 46 million of its people live in poverty, millions of Americans are out of work, and millions more are homeless or nearly so, that's a country whose priorities are out of step with the needs of its people.

It is important to bear in mind that political campaigns are designed by the same people who sell toothpaste and cars.

In other words, we're being sold a carefully crafted product by a monied elite who are masters in the art of making the public believe that they need exactly what is being sold to them, whether it's the latest high-tech gadget, the hottest toy, or the most charismatic politician.

Dictators are not in the business of allowing elections that could remove them from their thrones.

To put it another way, the Establishment—the shadow government and its corporate partners that really run the show, pull the strings and dictate the policies, no matter who occupies the Oval Office—are not going to allow anyone to take office who will unravel their power structures. Those who have attempted to do so in the past have been effectively put out of commission.

So what is the solution to this blatant display of imperial elitism disguising itself as a populist exercise in representative government?

Stop playing the game. Stop supporting the system. Stop defending the insanity. Just stop.

Washington thrives on money, so stop giving them your money. Stop throwing your hard-earned dollars away on politicians and Super PACs who view you as nothing more than a means to an end. There are countless worthy grassroots organizations and nonprofits working in your community to address real needs like injustice, poverty, homelessness, etc. Support them and you'll see change you really can believe in in your own backyard.

Politicians depend on votes, so stop giving them your vote unless they have a proven track record of listening to their constituents, abiding by their wishes and working hard to earn and keep their trust.

Stop buying into the lie that your vote matters. Your vote doesn't elect a president. Despite the fact that there are 218 million eligible voters in this country (only half of whom actually vote), it is the electoral college, made up of 538 individuals handpicked by the candidates' respective parties, that actually selects the next president.

The only thing you're accomplishing by taking part in the "reassurance ritual" of voting is sustaining the illusion that we have a democratic republic. What we have is a dictatorship, or as political scientists Martin Gilens and Benjamin Page more accurately term it, we are suffering from an "economic élite domination."

Of course, we've done it to ourselves.

The American people have a history of choosing bread-and-circus distractions over the tedious work involved in self-government.

As a result, we have created an environment in which the economic elite (lobbyists, corporations, monied special interest groups) could dominate, rather than insisting that the views and opinions of the masses—"we the people"—dictate national policy. As the Princeton University oligarchy study indicates, our elected officials, especially those in the nation's capital, represent the interests of the rich and powerful rather than the average citizen. As such, the citizenry has little if any impact on the policies of government.

We allowed our so-called representatives to distance themselves from us, so much so that we are prohibited from approaching them in public, all the while they enjoy intimate relationships with those who can pay for access—primarily the Wall Street financiers. There are 131 lobbyists to every Senator, reinforcing concerns that the government represents the corporate elite rather than the citizenry.

We said nothing while our elections were turned into popularity contests populated by individuals better suited to be talk-show hosts rather than intelligent, reasoned debates on issues of domestic and foreign policy by individuals with solid experience, proven track records and tested integrity.

We turned our backs on things like wisdom, sound judgment, morality and truth, shrugging them off as old-fashioned, only to find ourselves saddled with lying politicians incapable of making fair and impartial decisions.

We let ourselves be persuaded that those yokels in Washington could do a better job of running this country than we could. It's not a new problem.  As former Senator Joseph S. Clark Jr. acknowledged in a 1955 article titled, "Wanted: Better Politicians": "We have too much mediocrity in the business of running the government of the country, and it troubles me that this should be so at a time of such complexity and crisis… Government by amateurs, semi-pros, and minor-leaguers will not meet the challenge of our times. We must realize that it takes great competence to run a country which, in spite of itself, has succeeded to world leadership in a time of deadly peril."

We indulged our craving for entertainment news at the expense of our need for balanced reporting by a news media committed to asking the hard questions of government officials. The result, as former congressman Jim Leach points out, leaves us at a grave disadvantage: "At a time when in-depth analysis of the issues of the day has never been more important, quality journalism has been jeopardized by financial considerations and undercut by purveyors of ideology who facilely design news, like clothes, to appeal to a market segment."

We bought into the fairytale that politicians are saviors, capable of fixing what's wrong with our communities and our lives, when in fact, most politicians lead such sheltered lives that they have no clue about what their constituents must do to make ends meet. As political scientists Morris Fiorina and Samuel Abrams conclude, "In America today, there is a disconnect between an unrepresentative political class and the citizenry it purports to represent. The political process today not only is less representative than it was a generation ago and less supported by the citizenry, but the outcomes of that process are at a minimum no better."

We let ourselves be saddled with a two-party system and fooled into believing that there's a difference between the Republicans and Democrats, when in fact, the two parties are exactly the same. 

As one commentator noted, both parties support endless war, engage in out-of-control spending, ignore the citizenry's basic rights, have no respect for the rule of law, are bought and paid for by Big Business, care most about their own power, and have a long record of expanding government and shrinking liberty.

Then, when faced with the prospect of voting for the lesser of two evils, many simply compromise their principles and overlook the fact that the lesser of two evils is still evil.

Perhaps worst of all, we allowed the cynicism of our age and the cronyism and corruption of Beltway politics to discourage us from believing that there was any hope for the American experiment in liberty.

Granted, it's easy to become discouraged about the state of our nation. We're drowning under the weight of too much debt, too many wars, too much power in the hands of a centralized government, too many militarized police, too many laws, too many lobbyists, and generally too much bad news.

It's harder to believe that change is possible, that the system can be reformed, that politicians can be principled, that courts can be just, that good can overcome evil, and that freedom will prevail.

So where does that leave us?

Benjamin Franklin provided the answer. As the delegates to the Constitutional Convention trudged out of Independence Hall on September 17, 1787, an anxious woman in the crowd waiting at the entrance inquired of Franklin, "Well, Doctor, what have we got, a republic or a monarchy?" "A republic," Franklin replied, "if you can keep it."

What Franklin meant, of course, is that when all is said and done, we get the government we deserve.

A healthy, representative government is hard work. It takes a citizenry that is informed about the issues, educated about how the government operates, and willing to make the sacrifices necessary to stay involved, whether that means forgoing Monday night football in order to attend a city council meeting or risking arrest by picketing in front of a politician's office.  

Most of all, it takes a citizenry willing to do more than grouse and complain.

We must act—and act responsibly—keeping in mind that the duties of citizenship extend beyond the act of voting.

The powers-that-be want us to believe that our job as citizens begins and ends on Election Day. They want us to believe that we have no right to complain about the state of the nation unless we've cast our vote one way or the other. They want us to remain divided over politics, hostile to those with whom we disagree politically, and intolerant of anyone or anything whose solutions to what ails this country differ from our own.

What they don't want us talking about is the fact that the government is corrupt, the system is rigged, the politicians don't represent us, the electoral college is a joke, most of the candidates are frauds, and that we as a nation are repeating the mistakes of history—namely, allowing a totalitarian state to reign over us.

Former concentration camp inmate Hannah Arendt warned against this when she wrote, "No matter what the specifically national tradition or the particular spiritual source of its ideology, totalitarian government always transformed classes into masses, supplanted the party system, not by one-party dictatorships, but by mass movement, shifted the center of power from the army to the police, and established a foreign policy openly directed toward world domination."

Clearly, "we the people" have a decision to make.

Do we simply participate in the collapse of the American republic as it degenerates toward a totalitarian regime, or do we take a stand at this moment in history and reject the pathetic excuse for government that is being fobbed off on us?

One Chart To Rule Them All......THIS TELLS YOU ALL YOU NEED TO KNOW!

One Chart To Rule Them All

What the quarterly S&P 500 chart below says is that the risk of a major decline in stock prices from current levels is as great as it has been since 2000, and perhaps greater than in 2008.

Thursday, January 28, 2016

Market Erases Tuesday's Gains, Adds To Mondays Losses...........GREAT STUFF!

If you think the recent bounce in the Dow and other world markets means an end to this year's opening curtain of turbulence, think again and instead, fasten your seatbelts. The fact is you haven't seen anything, yet.

This will be the year that will make even the most experienced traders' and hedge fund managers' heads spin. Huge losses will be taken by the biggest and brightest of them.

Why? Because the second act of the financial crisis of 2008/2009 is now coming home to roost, smacking the governments of the world as a result of all their policy mistakes of the last several decades. Turning markets inside out and upside down, for all of us, in a way that has not been seen since the Great Depression.

Market Erases Tuesday's Gains, Adds To Mondays Losses

  • Dow: 15,940.01, -227.22, (-1.41%)

  • S&P 500: 1,881.44, -22.19, (-1.17%)

  • Nasdaq: 4,470.54, -97.14, (-2.13%)
Down on Monday, up on Tuesday, Down on Wednesday, a very dangerous, very volatile, very sick market.

The Fed's Bridge to Nowhere

Yellen Abandons Markets; Stocks Plunge

Wednesday the Federal Reserve signaled renewed worry about financial market turbulence and slow overseas economic growth. Recent market action offers the first evidence that central banks may be near the limit of their ability, or their willingness, to keep pumping up asset prices.

U.S. stocks moved back into the red Wednesday after the Federal Reserve left interest rates unchanged and said "economic growth slowed" since its last meeting in December. Inflation is expected to remain low in the near term," the Fed said in new, more cautious language, that suggests the central bank won't be quick to raise interest rates again.

Treading a fine line between losing all credibility and exposing their total devotion to the stock market, it appears the Fed is maintaining its delusion that everything will be fine as they unwind the largest and most experimental monetary policy of all time.

There is simply not a lot of optimism among big institutional investors this year. Every rally so far has been an opportunity to sell and overall sentiment is bad.

If QE worked for the real economy, we wouldn't need fresh doses of it every few months. The economy would surge, eliminating the need for more and more treatments.

If ultra-low or even negative interest rates worked for the real economy, we wouldn't need cut after cut from the world's central bankers. 

And let's be honest: They aren't even working in the financial markets anymore. New cuts generate a couple of hours or days of "risk on" gains … then we roll right back over.

Stay focused on underlying corporate fundamentals, credit market trends, and global economic data, NOT central bank talk. They're all signaling tough times ahead, and that's why selling into rallies is the best course of action.

Central banks and the government have trained people to confuse credit with money. When people get a new credit line, they feel good. They spend it like money, same as our government does. 

The difference is, Washington prints it. People have to pay it back. The real mess is just in the beginning stages.

Debt is the problem, which no one has been willing to face since 2000, period. The world is mired in debt so deep every central banker has tried to figure out how to avoid facing the problem. Too much debt, and now society has to begin paying the bill.......

Dip Buyers Will Get Clobbered: The US Economy Isn't Doing "Just Fine"

As of June 2008 no Wall Street banking house was predicting a recession, yet by then the Great Recession - the worst economic downturn since the 1930s - was already six months old, as per the NBER's subsequent official reckoning. Wall Street never predicts a recession. And that's basically why the stock market goes up for 5-7 years on a slow escalator, and then plunges down an elevator shaft during several quarters of violent after-the-fact retraction when an economic and profits downturn has already arrived.

Actually, it was already several years old if you concede that the phony housing boom of 2005-2007 was generating merely transient "statistical" GDP, not permanent gains in main street wealth. Even the movie houses now showing "The Big Short" have some pretty palpable reminders on that point——not the least being the strip club dancer who owned 5 residential properties, with two adjustable rate mortgages on each.

Martin Feldstein, a prominent Harvard economist once on many people's short-list to lead the Federal Reserve, has a simple message for the U.S. central bank: ignore the stock market.

In an interview, Feldstein said stocks are overvalued. Any signal from the U.S. central bank that it may pause from its plans to continue raising interest rates would only create the impression that there is a "Fed put" on the market. It is time to escape the unprecedented monetary policy that for a while stimulated demand – but then distorted prices and brought about the current corrections.

Low interest rates have led to a variety of risk-taking that could cause significant problems going forward. So the stock market got pushed up to a point where the price-to-earnings ratio is about 30% higher than it's been historically and we're seeing what that's doing in terms of falling equity prices and similar things are happening on high-risk debt. The stock market is very overvalued and  we shouldn't be surprised that, at some point, it has to revert to a more normal level. Valuations are high, and that means future returns likely will be low. Valuations this high mean there's a higher probability of a large stock market downturn at some point. It's prudent to be mentally prepared for a meaningful decline. There's plenty to worry about.

Earnings Take A Dark Turn As Profit Warnings, Sales Misses Mount

S&P 500 on track for fourth straight season of negative sales, as earnings decline. The S&P 500 is on track for its fourth straight season of negative sales, the longest such negative streak since the four-quarter stretch from the fourth quarter of 2008 to the third quarter of 2009.

Earnings season took a dark turn on Wednesday, when the majority of companies reporting numbers for the December quarter missed on sales and lowered their outlook for the rest of the year.

This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity. Earnings discount all the noise,It's the best unbiased view of what's going on in the global economy.

U.S. Steel Corp. sales fell 37%, Tupperware Brands Corp. sales fell 13%, State Street Corp. revenue fell about 5% and Cliffs Natural Resources Inc. revenue fell 54%. Fiat Chrysler profit fell 40%, Ferrari N.V.  profit slid 34%, Novartis A.G. profit fell 57%, Hess Corp. said its loss deepened to $1.82 billion from $8 million a year ago and Norfolk Southern Corp. said it would cut 2,000 jobs and downsize its rail lines after profit tumbled a worse-than-expected 29%. Boeing Inc offered guidance for 2016 that fell way below current expectations, forecasting a slowdown in commercial airplane deliveries for the year. United Technologies Inc. missed revenue by a staggering $1 billion as all units suffered declines. Apple Inc.'s revenue miss from late Tuesday, the news was a grim reminder that corporate America is struggling to generate growth after years in which massive sums were spent on share buybacks instead of investing for growth.

The decline in earnings could hurt share prices more than it did last year. Why would you pay more for the same exact thing you got last year?

J.P. Morgan cuts S&P target to 2,000, from 2,200

The bank's problematic factors are: 

1) a rising risk of a U.S. earnings recession; 

2) diverging central bank policies, including a Federal Reserve that is trying to tighten, causing the dollar to strengthen; 

3) a U.S. manufacturing sector already in recession territory and a non-manufacturing sector continuing to decelerate. 

4) a deteriorating macroeconomic backdrop, with China posing a significant risk to global markets; 

5) credit spreads widening and high yield nearing recession levels; 

6) late cycle dynamics; 

7) continued elevated volatility that's likely to hurt investor sentiment.

Their bear-case scenario for the S&P 500 is a drop to 1,700 by year's end, and their recession case sees the benchmark diving to 1,400. The medium-term risk-reward for equities has worsened significantly, in our view, and the risk of a downside economic scenario is far from adequately priced in. J.P. Morgan, also noted that during previous downturns, the S&P 500 normally fell an average of 29% versus the 11% decline the market has witnessed so far. These suggest the market has yet to hit bottom and that the risks associated with a potential economic slowdown aren't fully reflected in share prices.

In another note, J.P. Morgan  warned about "overstaying one's welcome" in the recent stock-market bounce. J.P. Morgan warned that the market's tumult is far from over, and reiterated its call from earlier this month to sell into any gains. There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology and spills over, negatively impacting investor, consumer and business sentiment, resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy.

This all makes for a very u
nattractive equity backdrop.....

Manufacturing Depression Enters Uncharted Territory: Caterpillar Retail Sales Have Never Been Worse

Caterpillar reported its latest monthly retail sales statistics and the numbers have never been worse.

Not only is the fourth, feeble and final dead CAT bounce in US sales officially over, with December US retail sales tumbling -10% Y/Y, after "only" a -5% decline in November and hugging the flatline for the past few months, but sales elsewhere around the globe were a complete debacle: Asia/Pacific (mostly China) was down -21%, EAME dropping -12%, and Latin America (i.e. Brazil) continuing its free fall dropping by -36%, but global retail sales just posted a massive -16% drop in the past month, tied for the worst annual decline since the financial crisis. Putting the annual drop in context, CAT sales dropped 12% a year ago, another 9% in 2013, and -1% in 2012, or four consecutive years of declines!

CAT has now suffered a record 37 months, or over 3 years, of consecutive declining annual retail sales - something unprecedented in company history, and set to surpass the "only" 19 months of decling during the great financial crisis by a factor of two in January!

While debating whether the US is or is not in a recession, one should also ask how much worse the global industrial depression will get?

Deutsche Bank Declares War On Mario Draghi, Warns Him Any Further QE Will Push Stocks Lower

In what is the first official warning to a central bank to no longer do what has been done so far for seven years, earlier this week 
Deutsche Bank came out with a startling presentation addressed to Mario Draghi, warning him explicitly that any more QE will not only not help stocks, but will actually push equities lower.

At Times Like These Always Remember

The financial service industry's Prime Directive is to exploit humanity's core drives of Greed and Fear. Financial service companies promise high returns (fulfilling our greed) that are low-risk, i.e. "safe" (placating our fear of losing our nest-egg). But the safety of many supposedly low-risk investments is illusory.

The risk is not actually near-zero; rather, the risk has been buried, masked or obscured, for the obvious purpose of persuading the marks (i.e. the investing public, non-financial institutions, etc.) that the promised gains are essentially risk-free.

Central banks have generated risk-on euphoria after every crash since 2000, but there is no guarantee the bloated balance sheets of central banks and plummeting profits of corporations can support a fourth expansion of manic risk-on to buy stocks.

How Do You Know When Your Society Is In The Midst Of Collapse?.........A MUST READ!

How Do You Know When Your Society Is In The Midst Of Collapse?

Economic turmoil worldwide is becoming increasingly apparent. 

What is collapse? How do we define it? And, are some of the notions of collapse in the public consciousness completely wrong?

It's funny, because skeptics opposed to the idea of a U.S. collapse will most often retort with one question; "So, when  is this supposed collapse going to take place? What day and time?"

My response has always been – "We're in the middle of a collapse right now."

The reason most people are incapable of grasping this kind of answer is in large part due to the popular mainstream conceptions of systemic collapse. These are conceptions that are for the most part delusional and not in line with the facts. The public idea of collapse comes predominantly from Hollywood. For the masses (and some preppers, unfortunately), a collapse is an "event" that happens visibly and usually swiftly. You wake up one morning and behold; the television and phones don't work anymore and zombies are at your doorstep! Yes, it's childish and cartoonish, but anything less than a Walking Dead/Mad Max scenario and many people act as if all other threats are benign.

This is the driving reason why many Americans are absolutely oblivious to the economic instability that is rampant within our system. They might see the same signals that analysts see, but these signals do not register in their brains as dangers, even worse they believe the government and the mainstream media.

Look at it this way; say you told a person their whole life that a tiger is a 10-foot tall behemoth with four heads that breathed fire. Say you make movies and TV shows about it and they never have any experience to the contrary. When they finally come across a real tiger, they might try to pet the damn thing instead of running in terror or searching for a means of defense.

To use another analogy, when I encounter skeptics with false assumptions of what a collapse actually is, I am often reminded of that woman in Anchorage, Alaska who jumped into an enclosure at the local zoo to get a closer picture of Binky the polar bear. These people have been made so inept when it comes to identifying threats that they will continue arguing with you as the animal takes a football-sized bite out of their anatomy.

So what is the root of the problem beyond Hollywood fantasies? Well, the problem is that social and economic collapse is not a singular event, it is a PROCESS. Collapse is a series of events that sometimes span years. Each event increases in volatility and intensity over the last event, but as time goes on these events tend to condition the masses. The public develops a normalcy bias towards crisis (like the old "frog in a boiling pot" analogy). They lose all sense of what a healthy system looks like.

It is not uncommon for a society to wade through almost a decade or more of violent decline before finally acknowledging the system is imploding on a fundamental level. It is also not uncommon for societies to endure years of abuse by corrupt governments before either organizing effectively to rebel, or caving in and submitting to totalitarianism.

But how does one recognize a failing system? How does a person know if they are in the middle of a collapse rather than on the "verge" of collapse? 

Here are some signals I have derived from research of various breakdowns in modern nations and why they indicate we are experiencing collapse in the U.S. right now…

The Criminals / Fraudsters Openly Acknowledge Reality

The surest way to know if your society is in the midst of disintegration is to see if the criminals who created the instability in the first place are openly discussing a collapse scenario or warning that one is imminent.

A year ago, central bankers presented little more than a chorus of recovery propaganda. Today, not so much. The Royal Bank of Scotland is now warning investors to "sell everything" ahead of a "cataclysmic" year in markets.

The Federal Reserve's Richard Fisher has admitted that the Fed "frontloaded" (manipulated) stock markets into a bubble and that payment is about to come due in the form of severe economic volatility (up to 20% crash in equities).

The Bank for International Settlements, the central bank of central banks, has a track record of warning the public about collapse conditions – right before they happen, leaving little or no time for people to prepare. They have followed their habit by warning in September and December that a Fed rate hike would "shatter" the uneasy calm in markets.

The former Chief Economist of the BIS now says the economy is in worse shape than it was in 2008 and is headed for a larger fall.

What happened between last year and this year and why are these internationalists suddenly so forthcoming about our economic reality? The fact that central bankers are the cause of our current collapse leads one to believe that such admissions are designed to deflect guilt. If they put out a few warnings now, they can then later claim they are prognosticators rather than culprits, and that they were trying to "help us." Beyond that, the reality is that our situation was just as dire in 2014/2015 as it is today; the difference is that now we are about to enter a new phase in the ongoing collapse, a much more detrimental phase, but still a phase of a breakdown that has been progressing since at least 2008.

The Fundamentals Break Through The Manipulation Barrier

Governments and central banks do not have the capacity to artificially create demand for goods or a supply of well-paying jobs in a crashing economy. What they can do, though, is hide the visible problems in supply and demand with false numbers.

I examined such false economic statistics in great detail last year in a six-part series titled "One Last Look At The Real Economy Before It Implodes." I will not cover them all again here. I would only point out that recently the fundamentals of supply and demand have begun to break through the deceit of manipulated numbers, and this is a sign that the collapse is about to move from one stage to the next.

With global shipping and trucking freight in steep decline, with retail inventories in stasis and current oil consumption falling to levels not seen since 1997 despite a larger population, the mainstream can no longer deny that consumer demand is crumbling. If demand is falling dramatically, then the financial system is in the middle of falling dramatically; there is simply no way around this truth.

Stocks And Commodities Become Violently Erratic

Let's be clear, if stock markets represent anything at all, they are merely lagging indicators of economic instability.  Stock markets are NOT predictive indicators of anything useful.  Therefore, any person who does nothing but track equities each day is going to be completely oblivious to the bigger picture behind the economy until it is too late.  They will be so mesmerized by the green numbers and red numbers and lines on minute-to-minute graphs that they will lose all sense of reality.

Violent swings in stocks are a sign of a financial system that is at the middle or end of the collapse process, not the beginning.

It is also important to note that extreme shifts in stocks and commodity values to the upside are just as much a signal of instability as shifts to the downside.  For instance, if you witnessed the recent 9% explosion in oil markets and thought to yourself "Ah, the markets are being stabilized again and nothing is different this time...", then you are an idiot.

Of course, the next day oil markets lost almost all of the gains they made the day before.  And this is how markets behave when they are about to die; they expand and implode chaotically each day on nothing more that meaningless news headlines rather than hard data.  This heart attack in equities inevitably trends downwards as the weeks and months pass.  Keep in mind, equities are down nearly 10% from their recent highs, and oil is down approximately 50% in the past six months.  Every time there is a dead cat bounce in stocks skeptics come out of the woodwork to call alternative analysts "doomers", yet they are nowhere to be found when markets come crashing back down.  They are not looking at the overall trend because their short attention spans hinder them.  Again, extreme swings in markets, whether up or down, are a sign of progressing collapse.

Deterioration Of Cultural Values, Heritage And Identity

I have written extensively over the years about the Cloward-Piven strategy; a strategy used by collectivists to destabilize social systems by dumping overt numbers of foreign immigrants into the population without demand for integration. This process has been obvious in the U.S. and Europe for quite some time, but only now is it peaking to the point that collapse is seen as an inevitable result by the public. Europe is worse off than the U.S. in this regard as millions upon millions of Muslim immigrants are injected into the EU's already dying body; immigrants that intend to transplant their culture from their own failed societies rather than adopting the values and principles of the societies that have invited them in.

Natural-born Americans and legal immigrants with aspiration of integration appear to be fighting back against the Cloward-Piven strategy with some success by holding onto traditional American values despite being labeled "barbarians" and "racists." Illegal immigration, though, is still completely unchecked.

In the EU, the long campaign of cultural Marxism has made natural-born Europeans perhaps the most self-hating people on the planet as well as the most passive and weak. Organized opposition to massive immigration programs in the EU should have taken place years ago. Now it is far too late, and the European system is finishing a social implosion which should have already been obvious to average citizens.

Open Discussion Of Totalitarian Measures

When corrupt leadership moves from quiet totalitarianism to more open totalitarianism, your society is in the FINAL stages of collapse, not the beginning of a collapse. The U.S. in particular has been slowly strangled with subversive legal directives and political policies ever since the so called "War on Terror" began. However, there are now multiple signals of a much deeper and open tyranny in the works.

A few recent examples stand out, including Barack Obama's insistence that the office of the president has the legal authority to issues executive orders that affect constitutional protections such as the 2ndAmendment. As many liberty movement activists are aware, there is absolutely no constitutional precedent for the use of executive orders and such powers are not mentioned anywhere in the document. They were simply created out of thin air to be used by the federal government and sometimes state governments to supersede normal checks and balances.

While numerous presidents have issued executive orders, including some that were outright tyrannical, like Franklin Delano Roosevelt's unconstitutional internment of Japanese Americans into concentration camps, George W. Bush and Barack Obama have been the most subversive in their bypassing of the Constitution. Obama, in particular, has tried to hide the number of executive actions he has taken by issuing hundreds of "presidential memorandums," which are basically the same dirty play by another name.

These actions have been progressively setting the stage for the removal of checks and balances entirely in the name of crisis management. They are so broad in their nature and vague in their definitions and applications that they could be interpreted by federal authorities to mean just about anything in any given situation.

If executive actions are not scary enough, corrupt politicians are now becoming blunt in their demands for dominance. Two Republican Senators, Mitch McConnel and Lindsay Graham, are calling for unlimited AUMF-style (authorization of use of military force) war powers to be given to the president. Such powers would allow the president to project U.S. military forces anywhere in the world for any reason without review or time limits. This includes the use of military forces on U.S. soil.

The rationale for this is, of course, the threat of ISIS. The same group of terrorists the U.S. government helped to create.

And finally, if you want perhaps the most nonchalant admission of future tyranny in recent days, check out former General Wesley Clark's call for "disloyal" Americans to be placed in internment camps through the duration of the war on terror, a war that could ostensibly go on forever.


One could argue that all of these measures are meant only to deter "Islamic extremism." I would point out that government officials could have stemmed that tide at any time by enforcing existing immigration laws, or, by stopping all immigration for a period of years until the problem is handled. Instead, they have allowed open borders to remain, and have even imported potential terrorists while focusing Department of Homeland Security efforts more on evil white guys with guns.

If we accept the violation of the constitutional rights of any group of citizens, if we allow the concept of "thought crime" to become commonplace, then we leave the door open to the violation of our own rights someday. And that is how tyrants trick populations through incremental collapse; by applying despotism to a claimed dangerous minority, then expanding it to everyone else.

America is sitting near the end of the spectrum in terms of economic collapse and in the middle of the spectrum in terms of social collapse.  While more violent events are certainly gestating and are likely to be triggered in the near term, we should not overlook the reality that collapse is happening in stages all around us.  This process gives us at least some time.  All is not lost yet, and the steps we take to organize and prepare today will affect how the collapse process unfolds tomorrow. People who continue to ignore the outright evidence of collapse based on false assumptions of what collapse should look like are only preventing themselves from taking proper action until it is too late. Make no mistake, our system is dying. We cannot allow our false perceptions of this death to cloud the reality of it, or our response to it.

The End Of The Illusion Of Recovery....

The End Of The Illusion Of Recovery

Making their annual pilgrimage to the exclusive Swiss ski sanctuary of Davos last week, the world's political and financial elite once again gathered without having had the slightest idea of what was going on in the outside world. It  appears that few of the attendees, if any, had any advance warning that 2016 would dawn with a global financial meltdown. 

The Dow Jones Industrials posted the worst 10 day start to a calendar year ever, and as of the market close of January 25, the Index is down almost 9% year-to-date, putting it squarely on track for the worst January ever. But now that the trouble that few of the international power posse had foreseen has descended, the ideas on how to deal with the crisis are few and far between.
The dominant theme at last year's Davos conference, in fact the widely held belief up to just a few weeks ago, was that thanks to the strength of the American economy the world would finally shed the lingering effects of the 2008 financial crisis. Instead, it looks like we are heading straight back into a recession. 

While most economists have been fixated on the supposed strength of the U.S. labor market (evidenced by the low headline unemployment rate), the real symptoms of gathering recession are easy to see: plunging stock prices and decreased corporate revenues, bond defaults in the energy sector and widening spreads across the credit spectrum, rising business inventories, steep falls in industrial production, tepid consumer spending, a deep freeze of business investments and, of course, panic in China. The bigger question is why this is all happening now and what should be done to stop it.
As for the cause of the turmoil, fingers are solidly pointing at China and its slowing economy (with very little explanation as to why the world's second largest economy has just now come off the rails). And since everyone knows that Beijing's policymakers do not take advice from the Western financial establishment, the only solutions that the Davos elite can suggest is more stimulus from those central banks that do listen.
Interviewed on an investment panel in Davos, American multi-billionaire and hedge fund manager, Ray Dalio, perhaps spoke for the elite masses when he said, "...every country in the world needs an easier monetary policy." In other words, despite years (decades in Japan) of monetary stimulus, in the form of low, zero, and, in some cases, negative interest rates, and trillions of dollars in purchases of assets through Quantitative Easing (QE) programs, what the world really needs is more of the same. Lots more.

Despite the fact that no country that has pursued these policies has yet achieved a successful outcome (in the form of sustainable growth and a subsequent return to "normal" monetary policy), it is taken as gospel truth that these remedies must be administered, in ever-greater dosages, until the patient improves. No one of any importance in Davos, or elsewhere for that matter, seems willing to question the efficacy of the policies themselves. And since the U.S. Federal Reserve is the only central bank officially considering policy tightening at present, Dalio's comments should be seen as squarely addressing the Fed. But apparently they were not.
While economists are calling for central banks in Brussels, Beijing, and Tokyo to pull out more of the monetary stops, few have called for the Federal Reserve in Washington to do the same. Most on Wall Street are, publicly at least, supporting rate increases from the Fed, albeit at a slower pace than what was envisioned just a few months, or even weeks, ago. As many economists were very public in excoriating the Fed for moving too slowly in 2015, perhaps they are unwilling to admit that their confidence was misplaced. Many also may realize the colossal embarrassment that would await Fed policymakers if they were to reverse policy so quickly. To have waited nearly 10 years to raise interest rates in the U.S., only to cut rates less than three months later would be to admit that the Fed was both clueless AND ineffective. This could cause an even greater panic as investors became aware that there is no one flying the plane.
But perhaps the main reason other central bankers are reluctant to urge the Fed to ease is that the United States is supposedly the poster boy that proves quantitative easing actually works. 
After all, the rest of the world is being told to emulate the successes that were achieved in the U.S. Ben Bernanke had the courage to act while European central bankers were too timid, and the result was not only full employment and a recovery strong enough to withstand higher rates in the U.S., but a best-selling book and magazine covers for Bernanke. The world's central bankers are not quite ready to consign Bernanke's book to the fiction section where it rightfully belongs, as it would call into question their own commitment to following a failed policy.
But some doubt is starting to creep in publicly. An underlying headline in a January 25 story in the Wall Street Journal finally said what most mainstream pundits have refused to say: "Fed is a key reason markets have plunged and risk of recession is rising." But even in that article, which analyzes why six years of zero percent interest rates created bubble-like conditions that were vulnerable to even the small pin that a 25-basis point increase would provide, the Journal was reluctant to say that the Fed should begin to ease policy. At most, they seemed to urge the Fed to call off any future increases until the market could adjust and digest what has already happened.
However, George Soros, another legendary hedge fund billionaire (with a well-known political agenda), is dipping his toes in that controversial pool, by telling the Fed that the time had come to face the music and eat some humble pie. In an interview with Bloomberg Television's Francine Lacqua on January 17, Soros claimed that the Fed's decision to raise rates in December was "a mistake" and that he "would be surprised" if the Fed were to compound the mistake by raising rates again. (Officially the Fed has forecast that it is likely to boost rates four times in 2016). When pressed on whether the Fed would actually do an about-face and cut rates, Soros would simply say that "mistakes need to be corrected and it [a Fed reversal] could happen." Look for many more investors to join the crowd and call for a reversal, regardless of the loss of credibility it would cause Janet Yellen and her crew.
Stimulus in the form of zero percent interest rates and quantitative easing is not a means to jump start an economy and restore health, but a one-way cul-de-sac of addiction and dependency that pushes up asset prices and creates a zombie economy that can't survive without a continued stimulus. In the end, stimulus does not create actual growth, but merely the illusion of it.
This is consistent with what is happening in the global economy. China is in crisis because commodities and oil, which are priced in dollars, have sold off in anticipation of a surging dollar that would result from higher rates. The financial engineering that has been made possible by zero percent interest rates is no longer available to paper over weak corporate results in the U.S. Our economy is addicted to QE and zero rates, and without those supports, we will spiral back into recession. This is the reality that the mainstream tried mightily to ignore the past several years. But the chickens are coming home to roost, and they have a great many eggs to lay.
Investors should take heed. The bust in commodities should only last as long as the Fed pretends that it is on course to continue raising rates. When it finally admits the truth, after its hand is forced by continued market and economic turmoil, look for the dollar to sell off steeply and commodities and foreign currencies to finally move back up after years of declines. The reality is easy to see, and you don't need an invitation to Davos to figure it out.

Former Fed Official Fears A Global Meltdown.....

Former Fed Official Fears A Global Meltdown

by Gerald O'Driscoll, former vice president at The Dallas Fed

Are we headed for another global financial crisis? 

The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified, yet.

This year is likely to be one of financial crises in industries and countries around the world. 

Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will.

Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead "extend and pretend"—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process? They have in the past, and rumor is that they are already doing so today.

The problem with extend and pretend is that it allows losses to accumulate. When they finally must be realized, they are larger than they would have been, and some financial firms will collapse. This happened in the Texas banking crisis of the 1980s and the nationwide savings-and-loan crisis of the 1980s and '90s. 

Regulators need to apply prompt corrective action to overextended lenders. New capital must be injected by investors into solvent banks, but those that are insolvent or too weak to survive must be closed.  Another banking crisis is likely.

In addition to the world-wide oil glut, which will continue in 2016, another important factor in the story is the strong U.S. dollar. The dollar is at a near-term high against an index of other currencies. This reflects, at least in part, trends in monetary policy. The U.S. Federal Reserve implemented a long-expected, modest increase in short-term interest rates in December, while other major central banks, like the European Central Bank and the Bank of Japan, are easing their monetary policies. The Fed's action is seen as a prelude to a series of interest-rate increases. That would further strengthen the dollar.

However, oil is priced globally in dollars. When the dollar is getting stronger, oil becomes more expensive for other countries, who have to sell more of their own currencies to afford it—and this dampens their demand, putting further downward pressure on oil and other commodity prices. In addition, a stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, lowering U.S. exports.

A strong dollar also means that those who borrowed in U.S. dollars but earn income in other currencies are stressed to pay back their dollar-denominated debts. Emerging-market countries (governments and private borrowers) were heavy borrowers in dollars and are at risk of default on these debts.

In their 2009 book on financial crises, "This Time Is Different," Carmen Reinhart and Kenneth Rogoff observed that countries are more prone to default on foreign-held debt than debt held by their own citizens. Especially at risk are energy-producing, emerging-market countries as they have been hit by a double whammy: steep drops in the price of their leading export and rising debt-servicing costs in dollars.

I am not going to predict which specific countries are likely to default because there are many variables, including the varying political situations. Default is as much a political decision as an economic necessity. 
But one country illustrates the ramifications for the U.S. of a default. Brazil is a large, emerging-market debtor. U.S. banks had $89 billion worth of loan exposure to Brazil as of the middle of last year. That debt was likely concentrated in a few large institutions.

The Fed's monetary policy of extraordinarily low interest rates helped create the asset bubbles in stock and commodity prices that are now bursting. Low rates also distorted investment decisions. I have argued for the Fed's increasing interest rates much sooner. Now the Fed has made a tentative step forward on rates. It has done so, however, with incredibly bad timing—with the dollar already getting stronger and the global economy weakening. The Fed is worried about energy-industry loans. But how can oil prices recover with a rising U.S. dollar?

In retrospect, the Fed's rate hike last month will likely be viewed as monetary malpractice. The next hike is on hold, and there is already talk of another round of quantitative easing. None of this is likely to forestall turmoil in credit markets. Investors are wise to be worried, but it's likely that 2016 won't be a replay of 2008, it will be worse.

The 75-Year Debt Supercycle Is Coming To An End...........

The 75-Year Debt Supercycle Is Coming To An End

The ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.

We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about 5 to 7 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.

There are limits to spending growth financed by a combination of debt and easy 
money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed "pushing on a string."

Risk premia — the return of risky assets such as bonds compared with cash — are currently at historically low levels. This makes it harder for central banks to keep pushing up the prices of these assets with loose monetary policy, such as low interest rates and quantitative easing, because there is less incentive, or yield, to compensate investors for taking the risk on debt.

As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth. When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

This debt fatigue explains why central banks are still locked into near-zero interest rates, seven years after the financial crisis that prompted their fall. In this scenario too, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics.

Wednesday, January 27, 2016

A Manufacturing Recession.......What's The Big Deal?

A Manufacturing Recession.......What's The Big Deal?

Despite the services economy starting to turn down towards manufacturing's inevitable recessionary prints, there remains a hope-strewn crowd of status-quo face-savers desperately clinging to the linear-thinking"but manufacturing is only 12% of economic output and thus is no longer a good bellwether for the overall economy" narrative. 


On the left below, we see the mainstream media's perspective on why a collapse in manufacturing"doesn't matter" and you should buy stocks.

On the right below, we see why it does... especially since the "doesn't matter" narrative is used only to justify buying stocks...



Last week the market plunged to arrive at the last ditch support level in the 1800 – 1850 zone on the S&P500 index that we had defined as marking the lower boundary of the giant Head-and-Shoulders top. Once this level is breached, the full-on crash starts. Because it arrived at this support level in an even more oversold state than it was at the depths of the plunge last August, and because Smart Money has become bullish, it made it unlikely that it would break down and crash just yet, and sure enough the market bounced the last two days of last week. 

The stabilization of the market here is expected to generate a short covering bounce, regardless of the rotten fundamentals, and as it unfolds the "reasons" for it will be presented in the mainstream financial media as "Market responds to stimulus talk" etc. The big question now is how far this bounce is likely to get.

Whilst no-one can be sure how far this bounce will get, possibilities vary from it being over already to it making it all the way back up to the Dome boundary shown on our charts, as it did after the August plunge, it will likely be sufficient to substantially alleviate the current extremely oversold condition and so create the conditions for the full-on crash phase. This means that it is likely to rally, and it could even make it all the way back up to the Dome boundary again, although this is considered highly unlikely, the reason being that we are not looking for symmetry on the way down - since markets drop on average twice as fast in bear markets as they rise in bull markets. 

So, the relief rally should take the S&P500 index somewhere into the red box shown on our chart, probably to the resistance level, but perhaps a little higher or lower. 

The longer-term 5-year chart provides more perspective and enables us to see the origin point of the Dome top and better appreciate the downside risk should the support at the lower boundary of the Head-and-Shoulders fail in due course as expected. Actually, you need to go back a lot further than this to understand just how far this market can drop, which is better understood on the long-term chart for the Dow Jones Industrials shown below which goes back to 1980. This chart gives a downside target in the 5,500 area (it's now at almost 17,000), achievable within a year or so, which might seem incredible to many, but is certainly well within the bounds of possibility, as this chart makes plain, and if ever the conditions existed for such a devastating decline, it's now. This means that the market should lose two-thirds of its value.

We are at the end of an era, with the entire debt-wracked Ponzi scheme that the world economy has now become set to go down in a ball of flames like the Hindenburg, a reset that will involve unprecedented devastation including wars. Fiscal restraint and discipline, having been abandoned for decades now, will be imposed by force, the force of the markets, and discredited Keynesian economics will be consigned to the garbage can of history where it belongs.