Earlier I posted some questions for next year: Ten Economic Questions for 2018. I'm adding some thoughts, and maybe some predictions for each question.5) Monetary Policy: The Fed raised rates three times in 2017 and started to reduce their balance sheet. The Fed is forecasting three more rate hikes in 2018. Some analysts think there will be more, from Goldman Sachs: "We expect the next rate hike to come in March with subjective odds of 75%, and we continue to expect a total of four hikes in 2018."Will the Fed raise rates in 2018, and if so, by how much?For years, following the great recession, I made fun of those predicting an imminent Fed Funds rate increase. Based on high unemployment and low inflation, I argued it would be a "long time" before the first rate hike. A long time passed ... and in 2015 I finally argued a rate hike was likely. The Fed raised rates once in 2015, and then once again in December 2016, and then three times in 2017. Currently the target range for the federal funds rate is 1-1/4 to 1‑1/2 percent.There is a wide range of views on the FOMC. As of December, the FOMC members see the following number of rate hikes in 2018:25bp Rate Hikesin 2018FOMCMembersOne Rate Cut1No Hikes1One1Two3Three6Four3More than Four1The main view of the FOMC is three rate hikes in 2018.As the economy approaches full employment, and with the new tax law adding a little stimulus, it is possible that inflation will pick up a little in 2018 - and, if so, the Fed could hike more than expected.Tim Duy wrote Thursday: 5 Questions for the Fed in 2018Is this the year inflation begins to pick up?...Will job growth slow as expected?...Are policy makers underestimating the impact of the tax cuts?...Should the Fed care about inverting the yield curve?...Will financial stability concerns affect rate policy?...... as we think about these issues, note that the Fed will be navigating these waters with a new captain as Chair Janet Yellen is succeeded by Governor Jerome Powell. Plus, there will be a new crew in the form of Randy Quarles and, if confirmed, Marvin Goodfriend. Moreover, the more dovish voting members of the Federal Open Market Committee such as December dissenters Kashkari and Charles Evans rotate off in favor of the more hawkish voices such as John Williams and Loretta Mester. On net, the Fed will find more reasons to hike rates than hold steady in 2018, leaving the current three hike projection as the best bet.My current guess is the Fed will hike three times in 2018.As an aside, many new Fed Chairs have faced a crisis early in their term. A few examples, Paul Volcker took office in August 1979, and inflation hit almost 12% (up from 7.9% the year before), and the economy went into recession as Volcker raised rates. Alan Greenspan took office in August 1987, and the stock market crashed almost 34% within a couple months of Greenspan taking office (including over 20% in one day!). And Ben Bernanke took office in February 2006, just as house prices peaked - and he was challenged by the housing bust, great recession and financial crisis.Hopefully Jerome Powell will see smoother sailing.Here are the Ten Economic Questions for 2018 and a few predictions:• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?• Question #6 for 2018: How much will wages increase in 2018?• Question #7 for 2018: How much will Residential Investment increase?• Question #8 for 2018: What will happen with house prices in 2018?• Question #9 for 2018: Will housing inventory increase or decrease in 2018?• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?
Authored by Robert Bruner, op-ed via TheHill.com, Ten years ago this month, a recession began in the U.S. that would metastasize into a full-fledged financial crisis. A decade is plenty of time to reflect on what we have learned, what we have fixed, and what remains to be done. High on the agenda should be the utter unpreparedness for what came along. The memoirs of key decision-makers convey sincere intentions and in some cases, very adroit maneuvering. But common to them all are apologies that today strike one as rather lame. “I was surprised by the sudden crisis,” wrote George W. Bush, “My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. … We were blindsided by a financial crisis that had been more than a decade in the making.” Ben Bernanke, chairman of the Fed wrote, “Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.” He cited psychological factors rather than low interest rates, a “tidal wave of foreign money,” and complacency among decision-makers. Timothy Geithner said that, “failures of foresight were primarily failures of imagination … our visions of darkness still weren’t dark enough.” And Henry Paulson explained that “we believed the problem was largely confined to subprime loans. … (Then) the problems were coming far more quickly.” Surprise, underestimation, poor imagination, and disbelief in an adverse outcome are hallmarks of the onset of a financial crisis. My studies of the 17 major financial crises since the founding of the Republic reveal that over-optimism is an important driver of the bubbles that eventually become busts. As the legendary investor, Sir John Templeton, once said, “The four most dangerous words in investing are ‘This time is different.’” Such was the mindset that real estate prices could only rise (2008), dot-com companies would forever grow and be profitable (2001), or that the Russian government would never default (1998). These days, the blogosphere chatters about a coming crash and financial crisis, for the obvious reason that conditions feel bubble-ish. We are in the late stage of the third longest economic expansion and second-longest bull market in U.S. history. Stock prices are high: The cyclically-adjusted price-earnings ratio is at the third-highest since 1880. Consumer confidence is buoyant. The personal saving rate, 3.1 percent, is near the all-time low. According to the Fed, financial conditions are looser than average. House prices have broken above their peak at the last housing bubble. A Saudi prince paid $450 million for a painting. And nearly every day, Bitcoin sets record prices. To be sure, regulatory reforms since 2008 have produced more strongly capitalized banks, tests of resilience to shocks, more inter-agency coordination, and some consumer protections. But like the generals who are prepared to fight the last war, these reforms don’t persuade me that we’ll be ready for the next crisis. History shows that crises arise unexpectedly from corners of the economy that fell beyond the conventional radar screen — in such corners, regulations are light or nonexistent, information is scanty, players are relatively unknown, and flows of capital in and out are particularly hot. Human ingenuity will always create such corners of the economy, either to serve new needs or to arbitrage around regulations. To eliminate every scintilla of systemic risk in the financial sector would be extraordinarily costly and would breed an intolerable regime of surveillance. Yet I believe that there is one thing that the president and other leaders could do that would help to mitigate the risk of a financial crisis: reinforce a national culture of prudence — this includes the virtues of earning your money before you spend it; saving for a rainy day; investing wisely; honoring your debts; using resources carefully; respecting the property rights of others; and providing for the welfare of family and community. For the president and leaders of Congress to say all of this would evoke gales of laughter in the wake of recent action. Yet the bully pulpit of leadership can set a powerful tone. At the outset of this tenth anniversary of the Global Financial Crisis, it is well worth remembering that we require not only vigilance from our leaders, but also the ability to articulate enduring values that will assure the sustainability of our society. We have had a culture of prudence in America before: “Use it up, wear it out, make it do, or do without” was the simple rhyme of the 1930s upon which America built an episode of extraordinary growth to the 1970s. A culture of prudence is a culture of resilience. Prudence and resilience can trump surprise. Would that the president set this tone.
The Fed raised rates another 0.25% the week before last. This marks the 5th rate hike since the Fed embarked on its policy tightening in December 2015 and the fourth rate hike in the last 12 months. The Fed’s latest statement also indicates it plans on raising rates three more times in 2018. It is easy to gloss over the significance of this, but the Fed’s actions are indeed unusual; other major Central Banks (the Swiss National Bank, Bank of Japan, European Central Bank and Bank of England) are all currently running QE programs (the BoJ, ECB and BoE) or openly printing new money to buy stocks outright (the SNB). What precisely is the Fed doing? Why the urge to tighten when other banks are all printing new money by the billions? The following quotes from Fed offer us clues. Fed Monetary Policy Report, June 2017: “Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades, Fed minutes, July 2017: "Since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets." Janet Yellen response to question from IMF Panel, October 2017: Market valuations “are at high level in historical terms” when assessed on metrics akin to price-earnings ratios, Fed Minutes, October 2017: "In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances," Janet Yellen during Fed presser December 13th, 2017: Stock valuations are at high end of historical levels. I want to be clear on the significance of these statements. The Fed’s primary role is to maintain financial stability. This means that the Fed will always downplay risks in its public statements. Indeed, former Fed Chair Ben Bernanke once stated that Fed policy is “98% talk, 2% action.” With that in mind, the above quotes are astonishing in their clarity: the Fed is explicitly stating (in Fed terms) that the markets are in a bubble. And the Fed didn’t just do this once, the Fed has been warning about asset valuations/froth in the system for six months straight. So just how “frothy” are things that the Fed is being so explicit? Try “1999-levels” frothy. Perhaps the best means of measuring frothiness in stocks is the Price to Sales (P/S) multiple. Most investors prefer to use Price to Earnings (P/E), but I am wary of that method because earnings can easily be fudged via gimmicks (different methods of depreciation, write-offs, reducing loan loss reserves, tax loopholes, etc.). Sales, on the other hand, are very hard to fudge. Either money came in the door, or it didn’t. And if a company gets caught fudging its revenues, someone goes to jail. With that in mind, consider that the S&P 500’s current P/S multiple has surpassed its former all time peak from 1999: a period that is now widely considered to be the single largest stock bubble in history. Put simply, stocks are extraordinarily overvalued by a reliable measure. H/T Bill King However, there is one main difference between 1999 and today... Namely, that the Fed has been INTENTIONALLY creating bubbles for nearly 20 years today... and it's out of more senior asset classes to use! Let me explain... The late ‘90s was the Tech Bubble. When that burst in the mid-‘00s, the Fed created a bubble in housing. When that burst in ’08 the Fed created a bubble in US sovereign bonds or Treasuries. And because these bonds are the bedrock of the US financial system, the “risk-free rate” of return against which ALL risk assets are valued, when the Fed did this it created a bubble in EVERYTHING (hence our coining of the term “The Everything Bubble” and our bestselling book by the same name). On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts. It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here: https://phoenixcapitalmarketing.com/TEB.html Best Regards Graham Summers Chief Market Strategist Phoenix Capital Research
Authored by Dave Collum via PeakProsperity.com, A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. Introduction “He is funnier than you are.” ~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition - the likes of Dave Barry on one extreme and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime. (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup). I rely on quotes to let others do the intellectual heavy lifting. “Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.” ~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review “Just the facts, ma’am.” ~Joe Friday By October, I have usually accrued 500 single-spaced pages of notes, quotes, and anecdotes. Fresh ideas occasionally emerge, but most of my distillation is an intellectual recycling program relying heavily on fair use laws.4 I often suffer from pareidolia—random images or sounds perceived as significant. Regarding the extent that self-serving men and women of wealth do sneaky crap, I am an out-of-the-closet conspiracy theorist. If you think conspiracies do not exist, then you are a card-carrying idiot. Currently, locating the increasingly fuzzy fact–fiction interfaces is nearly impossible thanks to the post-election bewitching of 50 percent of the populace. “The best ideas come as jokes. Make your thinking as funny as possible.” ~David Ogilvy, marketing expert You might be asking, “What’s with the title, Dave? My 401K is doing great, and I own a few Bitcoin!” Yes, indeed: your 401K fiddled its way to new highs day after day, but this too shall pass—it always does—and not without some turbulence. This year was indeed a tough one to survey. As many peer through beer goggles at intoxicatingly rising markets, I kept seeing dead people (Figure 1). “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping: I admit to not understanding it.” ~Richard Thaler, winner of the 2017 Nobel Prize in Economics Figure 1. An original by CNBC's Jeff Macke, chartist and artist extraordinaire. A poem for Dave's Year In Review The bubble in everything grew This nut from Cornell Say's we're heading for hell As I look at the data…#MeToo [email protected] Some will notice that in decidedly political sections, the term “progressives” is used pejoratively. Their behavior has become nearly incomprehensible to me. My almost complete neglect of the right wing loonies may reflect some bias, but politically, they have taken a knee. They have become irrelevant. Free speech is a recurring theme, introducing interesting paradoxes for employee–employer relationships. Some say I have no filter. They obviously have no clue what I want to say. In case my hints are too subtle, I offer the following: Sources I sit in front of a computer 16 hours a day, at least three of which are dedicated to non-chemistry pursuits. I’m a huge fan of Adam Taggart and Chris Martenson (Peak Prosperity), Tony Greer (TG Macro), Doug Noland (Credit Bubble Bulletin), Grant Williams (Real Vision and TTMYGH), Raoul Pal (Real Vision), Bill Fleckenstein (Fleckenstein Capital), James Grant (Grant’s Interest Rate Observer), and Campus Reform—but there are so many more. ZeroHedge is by far my preferred consolidator of news. Twitter is a window to the world if managed correctly. Good luck with that. And don’t forget it’s public! Everything needs an open mind, discerning eye, and a coarse-frit filter. “You are given a ticket to the freak show. When you’re born in America, you are given a front row seat, and some of us get to sit there with notebooks.” ~George Carlin, comedian Contents Footnotes appear as superscripts with hyperlinks in the “Links” section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts—the sections are reasonably self-contained—via the linked contents as follows: Part 1 Introduction Sources Contents My Personal Year in Review Investing Economy Broken Markets Market Valuations Market Sentiment Volatility Stock Buybacks Indexing and Exchange-Traded Funds Miscellaneous Market Absurdities Long-Term Real Returns and Risk Premia Gold Bitcoin Housing and Real Estate Pensions Inflation versus Deflation Bonds Banks Corporate Scandals The Fed Europe Venezuela North Korea China Middle East Links in Part 1 Part 2 Natural Disasters Price Gouging The Biosphere and Price Gouging Sports Civil Liberties Antifa Harvey Weinstein and Hollywood Political Correctness–Adult Division Political Correctness–Youth Division Campus Politics Unionization: Collum versus the American Federation of Teachers Political Scandals Clintons Russiagate Media Trump Las Vegas Conclusion Books Acknowledgements Links in Part 2 My Personal Year in Review Who cares what an academic organic chemist thinks? I’m still groping for that narrative. In the meantime, let me offer a few personal milestones that serve as a résumé while feeding my inner narcissist. I remain linked into the podcast circuit, having had chats with Max Keiser and Stacy Herbert (Russia Today aka RT),5 Chris Martenson,6 Jim Kunstler (The KunstlerCast),7 Lior Gantz (Wealth Research Group),8 Anthony Crudele (Futures Radio Show),9 Susan Lustick (News-Talk 870 WHCU),10 Jason Burack (Wall St. for Main St.),11 Dale Pinkert (FXStreet),12 Lance Roberts (Lance Roberts Show),13 and Jason Hartman (Hartman Media Company).14 I also spoke at Lance Roberts’s Economic and Investment Summit discussing campus politics15 and the Stansberry Conference (Figure 2) arguing the merits of price gouging.16 I got into a big spat with the American Federation of Teachers and some local social justice warriors that made it to the national press (see “Unions”) and dropped 30 pounds unaided by disease. “And, before anyone should doubt what a chemistry professor would know about unions and what effect they would have, it should be noted that Collum has amassed a following for his annual 100-page papers on the state of business and politics. Turns out, he knows a thing or two about economics and politics as well.” ~Joe Cunningham, RedState Figure 2. The lovely Grant Williams, brainy Danielle DiMartino Booth, and one of the Paddock brothers in Las Vegas. On the professional side, I had a great year: I finished my stint as department chair; started a sabbatical leave; broke my single-year total publication record; and broke my single-year record for papers in the elite Journal of the American Chemical Society. I attempted to extend a contiguous string of 20 federal grants without a rejection by submitting two NIH grants and subsequently got totally blown out of the water. (OK. I’m still walking that one off. I think the panel finally noticed that I am deranged.) I was accepted into an organization called the Heterodoxy Academy, whose membership includes hundreds of tenured professors standing up for free speech on college campuses.17 “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” ~Jason Zweig, Wall Street Journal columnist Investing “I dig your indefatigable bearishness, my friend.” ~Paul Kedrosky, one of the earliest bloggers I’m sensing a tinge of Paul's sarcasm. My net worth from January 1, 2000, has compounded at a ballpark annualized rate of 7 percent. That’s not so bad, but the path has been rather screwy. From mid ’99 through early ’03, I carried cash, gold, silver, and a small short position. I kept buying gold through about 2005 (up to $700 an ounce), resumed in 2015, and bought several multiples of my annual salary’s worth in 2016. I’m done now. Gold is up 8 percent, and silver is down –2 percent in 2017 thanks to a minor end-of-year sell off. The spanking from ’11 to ’15 seems to have subsided. Precious metals, etc.: 29% Energy: 0% Cash equivalent (short term): 62% Standard equities: 9% “Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest.” ~Richard Rainwater I was totally blindsided by the downturn in gold starting in ’11 and energy in ’13. (Energy peaked in ’08 but was on the mend until ’13.) I bought energy steadily starting in ’01 with broadly based energy funds and a special emphasis on natural gas. The timing of entry was impeccable and all was going swimmingly—I was a genius!—until the Saudi oil minister attempted to talk oil down from $110 to $80 per barrel18 in '13. He thought he could blow the frackers out of the game fast, but it was a hold-my-beer moment for our credit system. The frackers kept fracking, the oil price overshot the Sheik's target by $50 per barrel, and I got whacked for 30–45% losses over four years starting in '14.19 It is impossible to know when you’re being a highly disciplined buy-and-hold investor—a Microsoft and Apple gazillionaire refusing to sell—or just an idiot. I sensed that the rotten debt had been purged and we were through the worst of the energy downturn. I worried that a recession could do a number on me, but it took years to get to my position through incremental buying. I’m holding on, goddammit! We seem to be running out of downside. Unbeknownst to me until October, however, my employer had liquidated my energy funds—every last one of them—and put me in a life-cycle fund in April. Sell ’em after they plummet? Thanks guys. A rational investor, if committed to hold them, would undo the general equity fund restrictions—I did—and buy the energy funds right back—I didn’t. Friends in high places all said to wait. About a week later, the Middle East erupted in what looked like a sand-to-glass phase transition (see “Middle East”), and energy started to move in sympathy. Peachy. Fidelity actually saved me a little money, but I am still white-knuckling the cash, growing a long wishlist, waiting for a generalized sell-off/recession to offer some serious sub-historical-mean bargains (see “Broken Markets”). The correction in ’09 at the very bottom brought us to the historical mean, but not through it. For this reason, I have largely skipped this equity cycle. The current expansion is long in the tooth and founded on poor fundamentals. I hope that the wait won’t be too long. Until then . . . “Remember, when Mr. Market shows up at your door, you don’t have to answer.” ~Meb Faber, co-founder and CIO of Cambria Investment Management Economy “A decade after the biggest crisis since the Depression, a broad synchronized recovery is under way.” ~The Economist, March 2016 Whoa! Fantastic! Goldilocks survived another bear. There is just one hitch: that was a total load of crap in 2016, and it’s a colossal load now. Let’s take a peek at a few gray rhinos—“large and visible problems in the economy that are ignored until they start moving fast.” GDP growth rates from 1930–39 and 2007–16 were as follows:20 GDP growth in the 1930’s 1930: –8.5% 1935: 8.9%1931: –6.4% 1936: 12.9%1932: –12.9% 1937: 5.1%1933: –1.3% 1938: –3.3%1934: 10.8% 1939: 8.0% GDP growth in the new millennium 2007: 1.8% 2012: 2.2%2008: –0.3% 2013: 1.7%2009: –2.8% 2014: 2.4%2010: 2.5% 2015: 2.6%2011: 1.6% 2016: 1.6% Whether you use the arithmetic or geometric mean, both gave us 1.3 percent annualized growth. Let’s spell this out: during the recent era in which markets soared, the economy tracked the Great Depression. It is instructive to look at the economy with a little more granularity than the writers at The Economist-Lite. According to John Mauldin, total domestic corporate profits have grown at an annualized rate of just 0.1 percent over the last five years.21,22 Goldman’s Abby Joseph Cohen says R&D spending is down to 2.5 percent of GDP from 4.5 percent and is a drag on the economy.23 Economic bellwether General Electric saw revenue drop 12 percent and earnings fall 50 percent year-over-year,24 and these numbers are aided by the company’s legendary creative accounting schemes.25 Meanwhile, corporate America witnessed a 71 percent rise in business debt since 2008. According to economist Lacy Hunt, “It’s the investment, the real investment, which grows the economy,” prompting the legendary market maven @RudyHavenstein to state dryly, “I like Hunt.” Where are they spending all that borrowed money? Hold that thought. Long-term demographic problems—“quantitative aging” (Figure 3)—exacerbated by dropping sperm counts26 suggests the economy will continue to shoot blanks. Figure 3. Demographics looking sketchy. Putative job gains affiliated with this low growth are fragile if not dubious as hell and are being boosted by the “Dusenberry effect”—consumers’ reluctance to stop spending even after their income drops—which will cause the next recession to be a real Dusey. (Sorry.) Eventually, common sense prevails as companies run out of credit and savings-deficient consumers reassume the fetal position. According to extensive work by Ned Davis Research, cash levels among households are near their lowest levels of all time; consumer resiliency is always temporary. “When it is all said and done, there are approximately 94 million full-time workers in private industry paying taxes to support 102 million non-workers and 21 million government workers. In what world does this represent a strong job market?” ~Jim Quinn, The Burning Platform blog The Bureau of Labor Statistics has turned to Common Core math. How can we have 100 million working-age adults—40 percent of the working-age population—not working, 4 percent unemployment, and employers claiming the labor market is tight? Are 90 percent of those without jobs professional couch potatoes? Let’s first look at employment in some detail and then address that whole “tight” part. Googles of pixels have been dedicated to the obligatory labor force participation rate (Figure 4), a critical component of any economic debunking. Of those employed, 26 million people are in low-wage, part-time jobs (Figure 5), 8 million hold multiple jobs, and 10 million are “self-employed.”27 Another 21 million work for the government, which means they are a tax on the free market. In 2016, 40 percent of new jobs were fabricated through the specious “birth and death model.”28 2017 will presumably post similar numbers. Occasional reports of large job growth are deceptive. July, for example, witnessed 393,000 benefit-free, part-time, low-skill jobs offset by a drop of 54,000 full-time workers. Payroll numbers keep coming in lower than expected, which economists invariably blame on some big, yet unseen effect they are paid to notice. Nine out of 10 millennials living on their parents’ couches a year ago are still clutching TV remotes.29 There are now 45–50 million Americans on food stamps, up from 14 million in December 2007,30 when the last recession was already underway. Figure 4. Labor force participation. I am going to let Jeff Snyder take a crack at explaining the tight labor market:31 “The economy is tight, not favourably tight as in no slack in the labour market, but more so tight in that there is little margin for addition. . . . The reality in the markets is this: executives are reluctant to pay wages at a market-clearing rate.” ~Jeff Snyder, Alhambra Investments Figure 5. Low-paying service jobs versus manufacturing jobs. Poor economic numbers are pervasive. Auto sales are canaries in the coal mine and getting crushed despite aggressive incentives.32 Ford is already suffering and predicting a multi-year slowdown.33 A car industry crunch analogous to that in ’09 may appear in ’18 as expiring leases leave consumers underwater owing to dropping used car prices, and decreasing profits in the auto industry may “then turn from secular to structural problems.”34 Morgan Stanley predicts a 50 percent drop in used car prices over the next 4–5 years,35 which will gut the new car business. The auto downturn has already begun. Wells Fargo is reporting large drops in auto loans after a long stretch during which subprime car loans flourished yet again.36 That should put a fork in the new car market. Yield-starved investors are chasing cash- and income-starved car buyers. Subprime auto-asset-backed securities will take yet another beating. Chrysler is teaming up with Santander Consumer USA to push out “unverified income” subprime auto loans using “automated decision making.” Santander seems to have nine lives, and they’ll need all of them. The hyperdeveloped loan market for used cars, however, is already faltering (Figure 6); delinquency rates are rising. Goldman expects “challenging consumer affordability” and has downgraded General Motors to “sell.”37 Those cars y’all bought on cheap credit yesterday will not be bought tomorrow. Claims that the hurricanes cleared out auto inventory38 are grotesquely underestimating the magnitude of the overhang and will be paid for by reduced consumption in other sectors. Any consumption pulled forward with debt has a deferred cost. Figure 6. Some key auto industry stats (a) loans and leases, (b) loan delinquencies. We’ll take a crack at the housing market in its own section and simply note here that the cost of renting or buying normalized to income has never been higher. Approximately half of tenants spend more than 30 percent of their income on rent, doubling from a decade ago.39 A survey of 20 cities showed that housing costs are growing at a 6 percent annualized pace. Our paychecks are not. Housing is a bubblette and likely to offer fire-sale bargains again. What many fail to grasp is that the reduced cost of borrowing owing to low rates is offset by higher prices. When interest rates were 15 percent, houses were cheap. Austrian business cycle theory says easy money policies generate overdevelopment and other malinvestment. The day of reckoning appears to be here. (I say that every year…channeling Gail Dudek.) Familiar brands like Toys “R” Us (my keyboard has no backwards R), JCPenny, Abercrombie & Fitch, Sears, Bon-Ton, and Nordstrom are gasping their last gasps before drowning in debt with no customers to save them. Total retail revenues and sales (including online) are up only 28 percent from the 2007 high.40 The management of Ascena Retail referred to an “unprecedented secular change.”41 More than 100,000 retail jobs have vaporized since October 2016.42 Credit Suisse estimates that more than 8,000 retail outlets closed this year.43 Consumer goods companies have held up better because consumers generally put off starving or freezing to death until all options are exhausted. Restaurants are extending the longest stretch of year-over-year declines for 16 consecutive months (last I looked).44 Business Insider blames millennials because they are “more attracted than their elders to cooking at home” (particularly when it’s their parents’ home.) Manhattan retail bankruptcies are called “horrifying.”45 Chapter 11s and company reorganizations in foreign courts increased sevenfold.46 Mall owners are using jingle mail—a term from the ’08–’09 crisis referring to leaving keys to creditors. Commercial retail will be coming into its own refinancing wave in 2018. Bears are sniffing around commercial-mortgage-backed securities as malls around the country begin to die.47 The next downturn will finish many of them off. Exchange-traded funds (ETFs) are positioning to short the brick-and-mortar retail. (Quick: somebody grab the ticker symbol “MAUL.”) Some suggest the Rout in Retail is merely a secular shift to online. Sounds logical except online sales represent only 8.5 percent of total retail sales.48 This argument might be masking a huge downturn in retail corresponding to the bursting of yet another Fed-sponsored bubble. As Amazon encroaches on every nook and cranny of retail sales, what began as a murmur has turned into a chorus: “This isn’t fair; somebody must do something!” Walmart knows this plotline. Market dominance does not connote “monopoly,” but Amazon has an image problem. Amazon gets a $1.46 subsidy (discount) per box from the USPS, well below its cost.49 Seems cheesy. Congress is showing concern out of self-interest. A monopoly is when a company uses its power to blow its competitors out of the water garishly. Who decides what is garish and when enough is enough? A judge under political pressure. A detailed summary of the breadth of Amazon’s market share and its anti-competitive pricing suggests that we are getting close.50 There’s nothing like a protracted anti-trust suit to mute the growth of a large conglomerate. Just ask the Microsoft high command. If our problems are not Amazon, what are they? Austrian business cycle theory says that our debt-driven, consumer-based economy endorsed by sell-side economists and analysts worldwide is unsustainable. Wealth is made, mined, grown, or coded, only then do you get to consume it. Wealth is extinguished by consumption, depreciation, and destruction. Central bankers seem to believe you can will wealth into existence by generating animal spirits. The next recession will start unnoticeably. Economists seem to miss every single one, often declaring telltale indicators irrelevant. Then you will hear phrases like “technical recession,” “growth recession,” or “earnings recession,” all eventually giving way to somebody opening the Lost Arc. If the next recession flushes the waste products (malinvestment) left behind by the central-bank-truncated ’08-’09 recession, it will reveal the central bankers to be charlatans. Even a typical recession witnesses near 40 percent losses in equity portfolios, which will leave already immunocompromised consumers vegetative. Banks will constrict lending to preserve capital, further slowing the economy. Weak businesses living off easy credit will become pink mist. An accelerating vicious cycle downward will take with it formerly viable businesses that could have survived a less arrogant monetary policy. This collateral damage was avoidable at least in its magnitude, but it can’t be avoided now. Are we on the cusp of the next recession? Citigroup “clients” say not even close (Figure 7). I think we are staring into the abyss. Figure 7. June 2017 Citigroup client survey of recession odds. Will this expansion continue because it has been pathetic or die because it is old? I cast my vote for the latter. The Fed and its central bank brethren, whether to retrieve residual credibility—they have precious little—or out of the deep-seated, albeit misguided belief that they are in charge of the economy, have decided it is time to “normalize rates” and undo quantitative easing. (We are now forced to accept the equally silly term “quantitative tightening.”) You can blame the ensuing problems on the tightening if you wish, but the huge mistakes were made long before this tightening cycle commenced. Every postwar recession until now was been preceded by a tightening cycle (although not all tightening cycles lead to recessions). Why not simply refuse to tighten? It won’t work, but the Fed governors are probably entertaining this possibility. “The central banks did their job. Unfortunately, almost nobody else has done theirs.” ~Martin Wolf, Financial Times “As has come to be commonplace, almost everything Mr. Wolf suggests is incorrect.” ~Tim F. Price, Cerberus Capital and author of Investing Through the Looking Glass (see “Books”) I’ll close this discussion with a brief mention of “creative destruction,” the process by which the new (and improved) ushers out the decrepit and out-of-date. It is a central tenet of capitalism—survival of the fittest—but has a disruptive dark side. McDonald’s (and every other service industry) is turning to kiosks to replace more costly human labor. Driverless cars will be awesome but also force car-based workers—potentially millions of them—to find new work. The financialization of the economy by central bankers has tipped the capital–labor balance profoundly toward capital. We will produce goods better and more efficiently, but the Darwinian adjustments will rock the system. Accelerated product cycles facilitated by excess capital can also be highly inefficient. The Erie Canal was completed in 1825 and faced its own black swan—railroads—that same year. Blockbuster was offed by Netflix as fast as it appeared. Can creative destruction happen too fast? Have product cycles become too short? Bulldoze your house every five years to build a better one and tell me how that works. Loose credit accelerates creative destruction, but not without a price. “A high initial saving rate has been associated with subsequently stronger economic growth, while a low saving rate produces a lower growth pattern.” ~Lacy Hunt, economist, noting soaring consumer debt Broken Markets “I think we have fake markets. . . . Everything is so tight, it is hard to pick a winner from a group that is fake.” ~Bill Gross, Janus "One word characterizes why the bull market can go on for years…'Goldilocks'" ~Sam Ro, Yahoo Finance “I’m not worried about the economy so much; what I’m concerned about is valuation.” ~David Swensen, Yale University’s longtime CIO "I think the bull market could continue forever." ~Jim Paulsen, Wells Fargo Regression to the mean is a force of nature. It is also a mathematical truism that markets reside below the mean for half of their price-weighted existence. The failure to go through the mean in ’09 is an anomaly caused by global central bankers that remains as an IOU on investors’ balance sheets and foreshadows trouble to come. Our system is constantly being overtly displaced from equilibrium by central bankers who view displacement as their mandate. Physical scientists know that any system displaced from equilibrium tends to return to equilibrium. The French physicist Carnot, often called the father of modern thermodynamics, showed that the round trip necessarily comes at a cost no matter how efficient the process: it’s a law of physics. Any chemist will tell you that a system massively displaced often returns with a considerable cost: you blow up your laboratory. Geologists? Volcanoes and earthquakes. Ski bums? Avalanches. How far are asset markets from equilibrium? The pros have some opinions: “Asset valuations historically aren’t way out of line, but elevated I would say, relative to historical averages.” ~Lael Brainard, Federal Reserve governor “Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.” ~Warren Buffett, Berkshire Hathaway, channeling the Fed model “Compared to the Dutch Tulip Mania of 1637, stocks still look undervalued.” ~Rudy Havenstein (@RudyHavenstein), Funniest Tweeter of the Millennium Case closed. Let’s get a six-pack and watch football. The problem is that Brainard is a Fed governor, Havenstein is nuts, and Buffett is known for spewing some serious bullshit. Buffett’s favorite indicator—market cap to GDP—is double the historical mean (vide infra)—what market analyst John Hussman calls “historically offensive valuations.” Buffett also wrote an article in 1999 stating without qualification that returns are not about the economy at all.51 Secular bull markets are powered by falling interest rates and secular bear markets by rising rates. With interest rates at multi-century lows, it seems likely the old codger knows that his implicit reliance on the Fed’s valuation model is lunacy. As an aside, Berkshire has the largest cash hoard in its history—$100 billion—and it’s not being used to buy stocks that are “on the cheap side.” Others, only partially impeded by cognitive dissonance and the task of selling assets at any cost, seem to have neurons firing spasmotically (sense something): “We think the market still has the potential to move higher as investors capitulate into equities.” ~Merrill Lynch “Folks, I have been in this business for over 46 years, and observing markets with my father for 54 years, and I have never experienced anything like what is currently happening. . . . There are years left to run in this one.” ~Jeff Saut, Raymond James “It seems like uncertainty is the new norm, so you just learn to live with it.” ~Ethan Harris, global economist at Bank of America Merrill Lynch The fear of missing out (FOMO) is driving the markets way out over their skis. Markets could get much crazier, of course, but as any serious blackjack card counter will tell you, when the deck is stacked against you, size your bets accordingly. "If you pay well above the historical mean for assets, you will get returns well below the historical mean." ~Paraphrased John Hussman This Hussman quote is a recycle from last year but well worth repeating to make sure you understand it. He goes on to channel Ben Graham by noting that the devastating losses come from purchasing low-quality securities when times are good. The Hussman quote also pairs well with ideas about valuation I cobbled together from a well-known maxim about savings: “Overvaluation is appreciation pulled forward.” “Undervaluation is deferred appreciation.” ~David Collum This one passed the Google test for originality. I don’t know about you, but I want my appreciation in the future, or as James Grant (channeling Joe Robillard) likes to say, “I want everybody to agree with me . . . only later.” Valuations are meaningless as long as market participants are determined to buy stocks, but that mood will change at some point. Once markets are overvalued, however, you will give back those and any further gains during the next irrepressible regression to the mean, more so as you linger below the mean. I hasten to add that slight overvaluation is not a problem: the regression will be embedded within the noise. If, however, markets are way overvalued, an unknowable but inevitable combination of price drop and time—a retrenchment that could last decades—will usher invested boomers to the Gates of Hell. What do current valuations tell us about future returns assuming the laws of thermodynamics have not been repealed? Market Valuations “The median stock in the S&P has never been valued higher than it is today.” ~Jesse Felder, The Felder Report “There’s just no other way to say it: the market is insanely overvalued right now. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market.” ~ David Stockman, former Reagan economic advisor and former Blackstone group partner “We are observing an episode that will make future investors wince. Just like the two closest analogs, the 1929 high and the tech bubble, I expect that future investors will shake their heads in wonder at the stark raving madness of it all, and ask what Wall Street could possibly have been thinking.” ~John Hussman, Hussman Funds “The gap between the S&P 500 and economic fundamentals can now be measured in light years.” ~Eric Pomboy, president of Meridian Macro Research "I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere… The scope of today’s global Bubble goes so far beyond 2007." ~Doug Noland, McAlvaney Wealth Management It took a few years to blow up yet another equity bubble—referred to fondly by Jesse Felder and others as the “everything bubble”—but determined central bankers are not in short supply. A host of metrics point to a very mean regression cited below. As I rattle off a few stats, bear in mind the serious yet unknowable losses possible if regression rips through the mean. “Russell 2000 with a 75 p/e is just astronomical.” ~Jesse Felder Starting simple: McDonald’s saw zero revenue growth between 2008 and 2016 but had a 154 percent growth in debt. Its share price is up more than 200 percent. This is not an outlier. Additional examples assembled by Mike Lebowitz of 720Global are shown in Figure 8. I know it’s a table, but look at the contrasting revenue growth versus share price gains! Figure 8. Revenue growth versus price change. “And please don’t claim corporate profits are soaring, so the valuations are justified. . . . Corporate profits are unchanged since 2014—no growth at all.” ~Charles Hugh Smith, Of Two Minds blog The S&P 500 resides 70 percent above its ’07 high even though nominal GDP and total sales rose 10 percent during the same period. Price-to-revenue ratios are sharing the nosebleed seats with 1929 and 2000 (Figure 9).52 Buffett’s market cap–to-GDP indicator is no better, prompting Felder to guesstimate prospective 10-year returns—returns going to somebody else, apparently—at -2.6% annualized.53 In case you suck at math, you will be 10 years older, 33 percent poorer, and in need of a 50 percent gain to stumble your way back to even. Ever the optimist, John Hussman and his relatively complex valuation model, which shows high correlations when back-tested, predicts 60–70 percent losses over the next 10 years.54 To help the value-driven bottom-feeders, Hussman broke down the markets by valuation “deciles” and found that even the deep-value guys are looking at a >50 percent haircut—“haircut” sounds better than “castration” or “blood eagle”—at the end of the current market cycle.55 “Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. . . . What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? . . . After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’ . . . Just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.” ~David Einhorn with tongue in cheek The legendary Howard Marks, using non-GAAP earnings (with a 25 percent fictional fudge factor)56 to calculate trailing P/E ratios, sees a 40 percent regression to the mean. The Case-Shiller weighted P/E ratio—far superior to the non-GAAP alternatives—is in the top 3 percent of historical readings,57 prompting Bob Shiller to dryly note that the markets are “at unusual highs.” (By the way, it was Shiller who slipped Greenspan the phrase “irrational exuberance.”) Dividend yields have flopped around over the centuries. A 56 percent equity decline is required to attain the 150-year historical average of 4.4 percent—assuming reduced cash flows owing to the price collapse don’t lead to dividend cuts.58 Tobin’s Q—essentially price-to-book value ratio and the favorite of Mark Spitznagle—is at all-time highs. The Economist sounds dismissive by suggesting that “a high Tobin’s Q signals that an industry is earning a lot from its assets,"59 which suggests that The Economist is underutilizing its intellectual assets. Figure 9. Valuation metrics from Grant Williams’s World of Pure Imagination.60 Consistency aside, how can these predictions possibly be correct? The reported P/Es are not that bad. The high-growth QQQ index, for instance, is sporting a P/E of only 22, and the Russell 2000—the small-cap engine of economic growth—is in the same neighborhood. Alas, Steve Bregman of Horizon Kinetics notes that the P/E of the QQQ is calculated by rounding all P/Es above 40 down to 40 and assigning a P/E of 40 to all negative P/Es—companies losing money, aka Money Pits.61 For some of the largest companies in the QQQ—think Amazon—with almost no GAAP earnings, these little fudge factors are not just rounding errors. In the scientific community, we call such adjustments “fraud.” Bregman pools the market caps and earnings to give a more honest analysis, which gently nudges the QQQ P/E to 87. In short, Wall Street is “making shit up.” Mark Hulbert, noting that more than 30 percent of the Russell 2000 companies are losing money, concurs with Bregman and suggests that the rascals at the parent company would get a P/E of 80 if they weren’t fibbing like teenagers.62 Market Sentiment Which FANG Stock Will Be The First To Break Out? ~Headline, Investor’s Business Daily (September) I couldn’t care less about market sentiment except to understand how we got to such lofty valuations and how investors have become drooling idiots babbling incoherently about their riches. Nothing scares these markets. Previous bubbles always had a great story, something that investors could legitimately hang their enthusiasm on. The 1929 and 2000 bubbles were floated by dreams of truly fabulous technological revolutions. The current bubble is based on a combination of religious faith in central bankers and, as always, investors’ deluded confidence in their own omnipotence as market timers. Oh gag me with a spoon, really? Unfortunately, some group of prospective toe-tagged investors with silver dollars on their eyes are going to own these investments to the bottom. For now, though, we have nothing to fear but fear itself. Veni vidi vici. “This is not an earnings-driven market; it is a momentum, liquidity, and multiple-driven market, pure and simple.” ~David “Rosie” Rosenberg, economist at Gluskin Sheff The FOMO model is not restricted to Joe and Jane Six-pack. Norway’s parliament ordered the $970 billion sovereign wealth fund to crank up its stock holdings from 60 percent to 70 percent.63 Queuing off an analysis I did last year, a collective (market-wide) allocation shift of such magnitude would cause a 55 percent gain in equities.64 The percentage of U.S. household wealth in equities is in its 94th percentile and above the 2007 numbers.65 A survey of wealthy folks shows they expect an annualized 8.5 percent return after inflation.66 Good luck with that if you wish to stay wealthy. At current bond yields, a 60:40 portfolio would need more than 12 percent each year on the equities. Venture capitalists think they can get 20 percent returns (despite data showing this to be nuts.)67 Maybe they can set up an ETF to track the 29-year-old high school dropout and avid video gamer who professed to love volatility and got himself a 295 percent gain in one year trading some crazy asset (probably Tesla or “vol”).68 He actually ordered a Tesla and proclaimed, “I will soon get my license!” Better get that Tesla ordered soon, young Jedi Knight, given the company’s annualized $2+ billion burn rate and stumbling production numbers. Meanwhile, the legendary Paul Tudor Jones' fund saw 50 percent redemptions.69 (Boomers: Insert Tudor Turtle joke here.) Prudence disappoints investors in the final stages of a market cycle. Unsurprisingly, the complacency index is at an all-time high.70 The oft-cited Fear and Greed Index (explained here71) is pegging the needle on extreme greed (Figure 10). A survey by the National Association of Active Investment Managers found investment managers to be more than 90 percent long the market.72 An American Association of Individual Investors survey showed that retail portfolios were at their lowest cash levels in almost two decades.71 High “delta,” which supposedly reflects investors’ willingness to use levered calls to catch this rally,72 suggests that investors perceive that risk has been eradicated in these central-bank-supervised markets. The few investors retaining a modicum of circumspection are “suffering extreme mental exhaustion” (PTSD) watching the consequences of the “deadweight of [the] US$400 trillion ‘cloud’ of financial instruments . . . supported by ongoing financialization” levitate anything with a price tag on it.73 Booyah Skidaddy. Let’s not forget, however, that traders make tops and investors make bottoms. In the next bloodletting, we may see bonds and stocks compete in synchronized diving. While traders run with the Pamplona bulls, investors sit in the shadows waiting for their day in the sun. Figure 10. Fear and Greed Index. Volatility Market pundits hurl around several definitions of volatility, and both have gotten huge press this year. A narrow dispersion of prices has arisen from the collusion of sentiment, $3 trillion of quantitative easing this year alone,74 trading algos, and programmed contributions to index investments that have created markets that seem very tame (not volatile). Headlines reported all sorts of records such as days without a 1 percent drop,75 consecutive S&P 500 closes within 0.5 percent of previous closing price,76 longest streak of green closes on the S&P, consecutive months without a loss,77 index advances accompanied by new 52-week lows,78 and days without a 3 percent draw down.79 Often the records were kept intact thanks to late-day panic-buying by the FOMO crowd. For the short sellers, it has been the Bataan Death March, particularly in February, when a leveraged fund was forced to liquidate billions of dollars of short positions.80 Even the treasury market shows an “implied volatility” at its lowest level in more than 30 years,81 which highlights historic investor complacency. Some say it is a new era; others see a calm before the storm. A second definition of volatility is explained in Investopedia:82 Volatility: A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used. Glad to have cleared that up. It’s no surprise the market players found a way to turn an arcane market indicator into a trading device: you can buy and sell vol through various indices such as the “VIX,” XIV, and “SVXY.” What’s more, the buying and selling of vol influences the markets (10× leveraged according to Peter Tchir). As the vol indices go down, the markets go up, and if I have this right, there is causality in both directions. Vol has been plumbing record lows. Indeed, those shorting vol (driving it down) are making fortunes—a one-decision trade—at least until buying vol becomes the new-and-improved one-decision trade. Billions have flooded into vol short funds each week.83 It is estimated to be a $2 trillion market. Barron’s called shorting the VIX “the nearest thing to free money.”84 References to exceptionally high “risk-adjusted returns” leave me wondering: How do you adjust for risk on the vol trade? Maybe we should consult the logistics manager at a Target store who made a cool $12 million in five years by shorting the VIX.85 He reminds me of those Icelandic fishermen-turned-bankers. They did quite well for a while, but they returned to fishing the hard way. In an incisive analysis of the risks of the vol trade,86 Eric Peters notes that “to sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today.” Seems like a reach given that such an assumption has no precedent in the recorded history of anything. The fact that 97 percent of VIX shares are sold short also seems a wee bit lopsided (Figure 11).87 The VIX even had a flash crash88: how ironic is that? JPM’s Marko Kolanovic—reputed to be one of the best technical traders in the known universe—says that a regression of the VIX to the historical norm could cause “catastrophic losses” because of all the shorts.89 Given that volatility begets volatility, forcing an epic short squeeze on $2 trillion of vol shorts at some point, one wonders what comes after “catastrophic”? Figure 11. Volatility (VIX) short positions. Stock Buybacks “Companies might have to start rotating out of the debt that they incurred to buy back their stock and start issuing stock.” ~Chris Whalen, The Institutional Risk Analyst In 2016, I referred to Whalen’s vision of stock buybacks as “buying high–selling low.”90 Peter Lynch’s original enthusiasm for buybacks was that clever management sneakily buys back undervalued shares, not overvalued shares. This buyback ploy began to turn into a scam in 1982, when buybacks were excluded from rules prohibiting price manipulation.91 Buybacks are so large now that they correlate with and quite likely cause large market moves (Figure 12). Since 2009, U.S. companies have bought back 18 percent of the market cap, often using debt—lots of debt.92 The 30 Dow companies have 12.7 billion fewer shares today than in ’08: “the biggest debt-funded buyback spree in history.” An estimated 70 percent of the per-share earnings—24 percent versus only a 7 percent earnings gain since 2012—is traced to a share count reduction from buybacks.93 Pumping the share prices at the cost of rotting the balance sheet (which gullible investors ignore) achieves two imperatives: it prolongs executive employment and optimizes executive compensation. Contrast this with paying dividends to enrich shareholders to the detriment of option holders. The rank-and-file employees might be comforted if companies plugged the yawning pension gaps instead (vide infra), but such contributions would have to be expensed, lowering earnings and, stay with me here, reducing executive compensation. Figure 12. (a) S&P real returns versus margin debt. (b) S&P nominal returns versus share buybacks, and (c) buybacks versus corporate debt. In one hilarious case, Restoration Hardware, a loser by any standard except maybe Wall Street’s, used all available cash and even accumulated debt to buy back 50 percent of its outstanding shares to trigger a greater than 40 percent squeezing of the short sellers who, mysteriously, think the company is poorly run.94 In the “eating the seed corn” meme, the 18 biggest pharmaceutical companies’ buybacks and dividends exceed their R&D budgets.95 Market narrowing—the scenario in which a decreasing number of stocks are lifting the indices—is acute and ominous to those paying attention.96 The so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) have witnessed a 50 percent spike in their P/E ratios in less than 3 years.97 The FAANGs compose 42 percent of the Nasdaq and 13 percent of the S&P. An astonishing 0.2 percent of the companies in the Nasdaq have accounted for 45 percent of the gains.98 This is a wilding. The average stock, by contrast, is still more than 20 percent off its all-time high. What is going on? Indexing and Exchange-Traded Funds “When a measure becomes an outcome, it ceases to be a good measure.” ~Goodhart’s Law Charles Goodhart focused on measuring money supply,99 but his law loosely applies to any cute idea that becomes widely adopted (such as share buybacks). This is total blasphemy, but market indexing may be a colossal illustration of Goodhart’s Law. John Bogle was the first to articulate the merits of indexing in his undergraduate thesis at Princeton.100 Columbia University professor Burt Malkiel provided a theoretical framework for the notion that you cannot beat the market, which was translated into the best-selling book A Random Walk Down Wall Street. Even Warren Buffett endorses the merits of indexing, although once again, his words belie his actions. Bogle’s seminal S&P tracking fund now contains 10% of the market cap of the S&P 500 after quadrupling its share since ’08. (Behaviorist Peter Atwater attributes the recent enthusiasm to investors who are PO’d at active managers.)101 “When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now.” ~FPA Capital Then there are the massively popular ETFs that allow you to index while picking your favorite basket of stocks (have your cake and eat it too). Is there anybody who disagrees with the merits of indexing? Didn’t think so. Do ya see the problem here? Goodhart might. Maybe I was oblivious, but acute concerns about indexing seem to have emerged only in the last year or so. Let’s ponder some of them, but only after a brief digression. “There is no such thing as price discovery in index investing.” ~Eric Peters, CIO of One River Asset Management In his must-read book The Wisdom of Crowds, James Surowiecki posits that a large sample size of non-experts, when asked to wager a guess about something—the number of jelly beans in a jar, for example—will generate a distribution centered on the correct answer. Compared with experts, a crowd of clueless people offers more wisdom. I submit that this collective wisdom extends to democracies and markets alike. A critical requirement, however, is that the voting must be uncorrelated. Each player must vote or guess independently. As correlation appears, the wisdom is lost, and the outcome is ruled by a single-minded mob. Thus, when everybody is buying baskets of stocks using the same, wholly thoughtless protocol (indexing), the correlation is quite high. Investors are no longer even taking their own best guesses. The influence of correlation is amplified by a flow of money (votes) putting natural bids under any stock in an index, even such treasures as Restoration Hardware. What percentage of your life’s savings should you invest without a clue? Cluelessness has been paying handsome rewards. A big problem is that index funds and ETFs allocate resources weighted according to market cap and are float-adjusted, reflecting the market cap only of available shares not held by insiders. You certainly want more money in Intel and Apple than in Blue Apron, but indexing imposes a non-linearity that drives the most overpriced stocks to become even more overpriced. That is precisely why the lofty valuations on the FAANGs just keep getting loftier. The virtuous cycle is the antithesis of value investing. The float adjustment drives money away from shares with high insider ownership. Curiously, an emerging strategy that is not yet broadly based (recall Goodhart’s Law) is to find investments that are not represented in popular indices or ETFs on the notion that they have not been bid up by indexers. “With $160-odd trillion global equity market capitalization, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning.” ~Larry Fink, CEO of Blackrock, the largest provider of ETFs The indexed subset of the investing world could be at the heart of the next liquidity crisis. In managed accounts, redemptions can be met with a stash of cash at least for the first portion of a sell-off. This is why air pockets (big drops) often don’t appear early in the downdraft. By contrast, ETFs trade shares robotically—quite literally by formulas and algos (the robots)—with zero cash buffer. The first hint of trouble causes cash inflows to dry up and buying to stop. Redemptions by nervous investors cause instantaneous selling. Passive buying will give way to active selling. The unwind should also be the mirror image of the ramp: FAANGs will lead the way down owing to their high market caps. Once again, selling begets selling, and the virtuous cycle quickly turns vicious. Investors will get ETF’d right up the...well, you get the idea. “You’re better off knowing which ETFs hold this stock than what this company even does. . . . That’s scary to me. . . . The market needs to have a major crash.” ~Danny Moses, co-worker of Steve Eisman “Throw them out the window.” ~Jeff Gundlach, CIO of DoubleLine Capital, on index funds I would be remiss if I failed to note that there are also some really wretched ETFs. What are the odds, eh? I’m not sure I even believe this, but it has been claimed that a 3×-levered long gold mining ETF lost –86 percent while a 3×-levered short gold mining ETF lost –98 percent, both over the same time frame that the GDX returned zero percent. You wouldn’t want to pair-trade those bad boys. It is also rumored that the SEC has approved 4×-levered equity ETFs. Investors are going to be seeing the inside of a wood chipper at some point. A 3×-levered Brazilian ETF (BRZU) lost 50 percent in a single day. Apparently none of these investors ever saw The Deer Hunter. We might as well set up ETFs in which investors choose the leverage multiple. One quick click, and it's gone. “ETFs are the new Investment Trusts (similar vehicles in 1920’s) that led to the Great Crash and will lead to the next crash.” ~Mark Yusko, CEO and CIO of Morgan Creek Capital Management “Passive investing is in danger of devouring capitalism. . . . What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.” ~Paul Singer, founder and president of Elliott Management Corporation Miscellaneous Market Absurdities “Last time this mood took over, it ended very badly. Look at your investments with 2009 eyes. Did you tail hedge then? Should you risk up now?” ~Jeff Gundlach Recent initial public offerings (IPOs) get routinely flogged. SNAP’s 33 percent drop has become onomatopoetic. What would you expect for a company whose customer demographic is 12- to 18-year-olds with no income? GoPro (GPRO) has lost 95 percent in two years. A few more show precipitous drops from post-IPO highs: FIT, TWLO, FUEL, TWTR, ZNGA, and LC. Blue Apron (APRN) dropped 45 percent from its highs in the 36 days after its IPO. The company also cut 1,200 of a total of 5,000 jobs, prompting one veteran to ponder: “Seriously, how is that not illegal?” This is a new era, dude. The froth creeps into the screwiest places. The hard asset purchase of the year was the da Vinci painting of Salvatore Mundi that sold for $450 million. It was the only known da Vinci in private hands. A Modigliani nude sold for $170 million. A Basquiat painting purchased in 1984 for $19,000 moved across the auction block at a snot-bubble-blowing $111 million (23% compounded annualized return). The fabulously creative modern artwork, The Unmade Bed (Figure 13), sold for a cool $4 million.102 (I have one of those in my bedroom that I got for a lot less.) According to CBS News, a Harambe-shaped Cheeto sold for almost $100K on eBay.103 An obscure Danish penny stock company (Victoria Properties) surged nearly 1,000 percent in a few days, prompting management to remind investors that “there has been no change in Victoria Properties’ economic conditions. . . . The company’s equity is therefore still equal to about zero kroner.”104 Ford is valued at around $7,000 per car produced. Tesla is valued at $800,000 per car produced—they are literally making one model by hand on a Potemkin assembly line.105 A company called Switch has a “chief awesomeness officer.106 Ding! Ding! Ding! Figure 13. A $4 million masterpiece of modern art. Long-Term Real Returns and Risk Premia “Maybe it’s time to quietly exit. Take the cash, hide it in the mattress, and wait for the next/coming storm to pass.” ~Bill Blain, Mint Partners “People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.” ~Marilyn Cohen, Envision Capital Management If the next correction is only 20–30 percent, I was simply wrong. Mete out a 50 percent or larger thwacking, and I am declaring victory (in a twisted sort of way). When the pain finally arrives, the precious few positioned to take advantage of the closeout sales will include idiots sitting in cash through the current equity binge buying (me). In theory, the short sellers would be in great shape too, but they all reside in shallow graves behind the Eccles Building. Some wise folks, like Paul Singer, have had the capacity and foresight to be raising billions of dollars for the day when monkey-chucking darts can find a target.107 "We think that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.” ~Paul Singer after raising $5 billion to buy distressed assets in the future There will be few victory laps, however, because boomers will be living on Kibbles ’n Bits. How painful will it be? Figure 14 from James Stack shows the fractions of the last 100 years’ bull markets that were given back.108 On only one occasion were investors lucky enough to hang onto three-fourths of their bull market gains. One-third of the bulls were given back entirely. Two-thirds of the bulls gave half back. The results are oddly quantized. How much will the next bear take back? It depends on how much the reasoning above is out of whack. Do ya feel lucky? Figure 14. Fraction of the bull taken by the bear.108 “The vanquished cry, but the victor doesn’t laugh.” ~Roman proverb Ethereal gains bring up an interesting point, more so than I first thought. In a brief exchange with Barry Ritholtz, I asserted that the “risk premia” on equities—the higher returns because of underlying risk—will be arbitraged away in the long run because occasionally risk turns into reality, and you get your ass kicked. I’m not talking inefficient high-frequency noise but rather the long term—call it a century if you will. With his characteristically delicate touch, Barry noted that I was full of hooey. Refusing to take any of his guff, I dug in. Certainly a free market would price equities much the way junk bonds are priced relative to treasuries to account for mishaps. Look back at Figure 14 in case it didn’t sink in. There is also the problem with interpreting index gains owing to survivor bias. Economist David Rosenberg claims that if the eight companies who left the Dow in April 2004 had remained, the Dow would still be below 13,000.109 Of course, presumably investors swapped them out as well if they were indexing (although somebody ate those losses). “I will get back to you next week with the answer to your singular investment question. Should you have further easy questions such as: is there a God and what gender he/she may be, that will necessarily be part of a separate email chain.” ~Brian Murdoch, former CEO of TD Asset Management on bonds versus stocks Start with the inflation-adjusted principle gains on the Dow (Figure 15), which returns less than 2 percent annualized. Think that’s too low? Take a look at my all-time favorite chart—the Dow in the first half of the 20th century, when inflation corrections weren’t needed (Figure 16). Now throw in some dividends (4 percent on average) and some wild-ass guesses on fees and taxes (including those on the inflated part of the gains). I get a real return on the Dow in the 20th century—a pretty credible century to boot—of only 4–5 percent annualized. Let’s adjust recent returns using the Big Mac inflation metric.110 Big Macs have appreciated sixfold since 1972 (4–5 percent compounded) with little change in quality. Over the same period, the capital gains on the Dow rose twentyfold. Adjusted for Big Mac–measured inflation, the Dow averaged less than 3 percent compounded (ex-dividends). An eightfold rise in the price of extra-large pizzas since 1970 (cited in my now-extinct blog for Elizabeth Warren) paints an even bleaker picture of inflation-adjusted S&P returns. Figure 15. Inflation-adjusted DOW. Figure 16. Non-inflation-adjusted Dow: 1900–1940. Those 4–5 percent inflation-adjusted equity gains do not account for the fourfold increase in the U.S. population, which should be included because the wealth of the nation was shared by four times as many carbon-based life-forms. The returns are also not in the same zip code as the 7–8 percent assumed by many pensioners. Back to the debate, the 4–5 percent inflation-adjusted equity gains contrast with 30-year treasuries returning about 4–5 percent nominally. Hmm...Seems like equities still won, and that Ritholtz appears to have been right. I consulted both digital and human sources (Brian Murdoch, Benn Steil, and Mark Gilbert), and everybody agreed: that punk Ritholtz was right. Even more disturbing, is it possible that Jeremy Siegel is not being a total meathead by asserting that you should buy equities at all times (BTFD)? The explanations for why markets fail to arbitrage the risk premia are said to be rather “mysterious.” According to Brian Murdoch, “academics have been remarkably unsuccessful in modeling it. . . . Despite three decades of attempts, the puzzle remains essentially intact.” Benn Steil concurred. Academic studies (warning!) claim that bonds do not keep up with stocks even over profoundly long periods, and no amount of fudging (fees, taxes, disasters, or survivor bias) accounts for the failure to arbitrage the marginal advantage of stocks to zero. Schlomo Benartzi and Richard Thaler suggest that short-term losses obscuring long-term gains—“myopic loss aversion”—is the culprit.111 (Ironically, I read this paper a week before the Nobel committee told me to read this paper.) Elroy Dimson et al. dismiss all the possible errors that could be root causes and put the sustainable risk premium on stocks at 3–5 percent.112 Let’s flip the argument: Why would you ever own a bond? There are rational answers. To the extent that you do not buy and hold equities for 100 years (unless you are Jack Bogle), you also pay a premium for the liquidity—the ability to liquidate without a huge loss because you were forced to sell into a swoon. You also forfeit the ability to sell into a rally, however, and certainly wouldn't want to sell into a bond bear market either. Of course, the role of financial repression—sovereign states’ ability to force bond yields well below prices set by free markets—could explain it all. Governments like cheap money and have the wherewithal to demand it. Maybe the message is to never lend to governments. I remain in an enlightened state of confusion. Gold “Gold is no more of an investment than Beanie Babies.” ~Gary Smith, economist “If you don’t have 5–10% of your assets in gold as a hedge, we’d suggest you relook at this. . . . [I]f you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you [sic] sharing it with us. ~Ray Dalio, Bridgewater Associates Ray is rumored to have ramped Bridgewater’s gold position fivefold this fall. He cites geopolitical risk as a reason to own the barbecued relic. “If we actually see missiles in the air, gold could go higher.” ~CNBC trader on thermonuclear war Since the early 1970s, gold has had an annual return of 8 percent (nominal). Gold bears are quick to point out it doesn’t pay interest. Nor does my bank, and by the way, what part of 8 percent don’t they understand? By that standard, the 8 percent gain in 2017 was good but not statistically unusual. Coin sales are down,113 which suggests that either retail buyers are not in the game or the bug-out plans of hedge fund managers—I’m told they all have them—are complete. Sprott Asset Management made a hostile move on the Central Fund of Canada, a gold–silver holding company, in a move that might portend promising future returns.114 “Significant increases in inflation will ultimately increase the price of gold. . . . [I]nvestment in gold now is insurance. It’s not for short-term gain, but for long-term protection. . . . We would never have reached this position of extreme indebtedness were we on the gold standard. . . . It wasn’t the gold standard that failed; it was politics. . . . Today, going back on to the gold standard would be perceived as an act of desperation.” ~Alan Greenspan, 2017, still babbling On the global geopolitical front, Deutsche Bundesbank completed repatriation of 700 tons of gold earlier than originally planned.115 The urgency may be bullish, but a possible source of demand is now gone. Chinese gold companies have been actively searching for domestic deposits and international acquisitions as they push to quadruple their reserves to 14,000 tons by 2020.116 (The U.S. sovereign stash is less than 9,000 tons.) The gold acquisitions of China (Figure 17) show a curious abrupt and sustained increase in activity in 2011. When did gold begin its major correction? Right: 2011. Makes you wonder if geopolitics somehow preempted the supply–demand curve. Because gold can leave Shanghai but not China, it’s a one-way trip. The Shanghai Gold Exchange must get its bullion from other sources. Russia continues to push its reserves up too. Rumors swirl that China and Russia are colluding for something grand, possibly a new global reserve currency based on the petro-yuan and gold. This would change the global landscape way beyond generic goldbuggery. Figure 17. Abrupt changes in Chinese gold acquisitions through Hong Kong in 2011. “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” ~Donald Trump, 2016 The gold market continues to be dominated by gold futures rather than physical gold. The bugs think this will end. I can only hope. In this paper market, gaming is the norm. On a seemingly monthly basis, gold takes swan dives as somebody decides to sell several billion-dollar equivalents (20,000–30,000 futures contracts) when the market is least liquid (thinly traded). Stories of fat-fingered trades abound, but I suspect these are just traders molesting the market for fun and profit, unconcerned that a regulator would ever call them on it. The silver market looked even creepier for 17 days in a row (Figure 18). I never trust that kind of linearity. Figure 18. Silver acting odd over 5 minutes and 17 days. Price changes often appear proximate to geopolitical events, but everything is proximate to a geopolitical event somewhere. India’s success at destroying its cash economy—the only economy it had—via the fiat removal of high-denomination bills117 was akin to announcing that only electric cars are legal starting next week. Some suggested that the move was also an attempt to flush gold out of households and into the banking system.118 Gold inched toward currency status at a more local level as Idaho, Arizona, and Louisiana voted to remove state capital gains taxes on gold—baby steps toward an emergent gold standard.119 The Brits are going the other way by banning salary payments in gold.120 Finishing with some fun anecdotes, a massive gold coin worth millions was stolen from a German museum.121 Some guy restoring a World War II tank found $2.5 million in gold bullion tucked in a fake fuel tank.122 A piano repairman discovered 13 pounds of gold in an old piano.123 According to British law, the repairman gets half, and the folks who donated the piano get squat. Beyond that, the gold market has been quiet for almost five years (Figure 19). Some wonder whether Bitcoin is sucking oxygen away from gold. Which way is gold gonna break if Bitcoin or the dollar tanks? Inquiring minds want to know. Figure 19. Five years of gold price discovery. Bitcoin “Worse than tulip bulbs. It won't end. Someone is going to get killed. . . . [A]ny [JPM] trader trading Bitcoin will be fired for being stupid. . . . [T]he currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs." ~Jamie Dimon, CEO of JPM Unbeknownst to Dimon, his daughter was trading Bitcoin: “It went up and she thinks she is a genius.” More to the point, traders at JPM were already firing up crypto exchanges (while Goldman and the CFTC seemed to be positioning to enter the game). Dimon decided it was a prudent time to STFU (shut up) by declaring, “I'm not going to talk about Bitcoin anymore.” The joke was on us, however; nobody seemed to notice that Dimon slipped in an earnings warning the same day his Bitcoin quotes hit the media.124 Well played, Jamie. “Bitcoin owners should appeal to the IRS for tax-exempt status as a faith-based organization.” ~Andy Kessler, former hedge fund manager I wish I had a Bitcoin for every time somebody asked me about it. Cryptos and goldbugs share a common interest in escaping the gaze of the authorities. My ignorance of blockchain technology is profound, but I suspect that is true for many who talk the talk. I wonder if somehow blockchain might play a role in bypassing the SWIFT check-clearing system used by Western powers to shake down opposition (Russia).125 I also wonder, however, if the miracles of blockchain should not be confused with those of Bitcoin. Any mention of price or gains below should be followed with an implicit "last time I checked" or even “as of two minutes ago.” My failure to jump on Bitcoin leaves no remorse: (a) I never take a position that risks a you-knew-better moment, and (b) I would have been flushed out, and then I really would have kicked myself. Recall the legendary founding shares in Apple that were sold for $800 and are now estimated to be worth maybe $100 billion?126 There’s rumor of a guy who lost his Bitcoin “codes” that are now estimated at more than $100 million. That’s real pain. I offer my current view of cryptos from a position of total technical ignorance guided by an only slightly more refined understanding of history and markets. Please forgive me, crypto friends. I know you are tired of hearing the counter arguments and the cat calling. I am restrained by the words of a famous philosopher: “Only God is an expert. We’re just guys paid to give our opinion.” ~Charles Barkley, former NBA star What would have flushed me out of a Bitcoin long position? Let’s take it to the hoop: The price action. Exponential gains, even wildly bent on a semi-log plot, have few analogs in history, all of which led to legendary busts (Figure 20). The South Sea bubble, Tulipmania, Beanie Baby, and Mentos-in-a-Coke analogies are legion. They all had a story that convinced many. Figure 20. One-year price chart of Bitcoin (as of 2 minutes ago). The participants. I have a friend—a very smart former Wall Street guy—who swears by it and is up 100,000 percent. You do not need to size your position correctly with that kind of gain. But then there is the clutch of camp followers emblematic of all manias. We have grad students speculating in Bitcoin. A 12-year-old bought his first Bitcoin in May 2011 with a gift from his grandmother.126a At more than $17,000 per coin, his stash is more than $5 million. On MarketWatch, he declared he had a price target of $1 million. “I’m obviously very bullish, but I expect to make a couple million dollars off very little money. This is the opportunity of a lifetime. Finance is getting its Internet.” ~Bitcoin investor Competitors. A Bitcoin competitor issued by Stratis soared to more than 100,000 percent since its initial coin offering (ICO) this past summer. As of December 1, there were 1,326 cryptocurrencies with a total market cap of >$400 billion.127 Paris Hilton has a cryptocurrency.128 The market is saturated more than the dot-com market ever was. It is a certainty that more than 99 percent will die much like most of the 270 auto companies in the ’20s and dot-coms in the ’90s. A site called Deadcoins shows that some already have.129 The debate is whether 100 percent is the final number. Volatility. Massive corrections followed by ferocious rallies akin to a teenager on driving on black ice would have convinced me it was too crazy for my style. Corrections last seconds to hours, with wildly enthusiastic buyers poised to BTFD. Isaac Newton got into the South Sea bubble, was smart enough to get out, and then reentered in time to go bankrupt. I am decidedly dumber than Isaac. Figure 21. Bitcoin photo bomber (acquiring $15K of Bitcoin via crowdsourcing). For Bitcoin to become a currency in its current form, out of reach of sovereigns, seems to require a society-upheaving revolution, which is a rare event that usually gives way to new, equally ham-fisted regimes. The chances seem slim to none for several reasons. “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.” ~Jamie Dimon (again) The competition. I am doubtless that central banks and sovereign states will never endorse Bitcoin in its current form. They have their own digital currencies and a monopoly on the power to create more, and they commandeer our assets through taxation. Existential risk will bring on the power of the State. When sovereigns decide to do battle, the cryptos will be brought to heel or forced underground. Instabilities. Digital currencies are showing digital instabilities that could just be growing pains or evidence of more systemic problems. How software buffs who know that software is duct tape and bailing wire could think that a software-dependent currency is invincible is beyond me. Ethereum dropped 20 percent in a heartbeat when a hacker theft was reported.130 It dropped 96 percent after the Status ICO clogged the network.131 One user put a stop-loss on Ethereum at $316 on GDAX, which executed at $0.10 during a flash crash.132 So-called “wallets” have been freezing up, although there is some debate as to whether the owners lost the Bitcoins.133 This stuff happens with all risk assets now but not with usable currencies. Volatility. Nobody will use a currency to pay for groceries if prices move 10 percent a day or even 5 percent as you move from the frozen food to the vegetable aisle. This, by the way, is the same explanation for why I don’t consider gold “money” or a “currency.” As long as there exists a Bitcoin–dollar conversion, a sovereign wishing to keep Bitcoin in the realm of a speculative plaything could use its unlimited liquidity to trigger price swings with a little day trading. Legality. If up against the wall, sovereigns will use arguments about fighting crime, stemming ransomware, or controlling monetary policy and declare a War on Cryptos akin to the potential War on Cash. China has already blown shots across the Bitcoin bow by shutting down exchanges as well as ICOs as they struggle with excessive sovereign debt and capital outflows.134 Britain has also done some sabre rattling.135 The IRS has declared gains taxable (akin to gold) and is paying companies to locate digital wallets.136 The fans of BTC declare invincibility—freedom! The average blokes may smoke pot and drive too fast, but they seem less likely to risk a spat with the State on this stuff. “Right now the trust is good—with Bitcoin people are buying and selling it, they think it’s a reasonable market—but there will come a day when government crackdowns come in and you begin to see the currency come down.” ~Mark Mobius, executive director at Franklin Templeton Investments Others have unshakeable faith even in the more obscure cryptocurrencies. I’m unsure what I’m hoping for on this bet (Figure 22): Figure 22. John McAfee, technology pioneer, chief of cybersecurity, visionary of MGT Capital Investments, going all in on cryptocurrencies. Housing and Real Estate “We bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.” ~Mike Krieger, Liberty Blitzkrieg blog Greenspan claimed those who predicted the housing bubble were “statistical illusions” (as were those who saw Greenspan as a charlatan). There are, once again, housing bubbles littered across the globe at various stages of expansion and contraction owing to central banks providing in excess of $3 trillion dollars of QE this year. Credit is fungible, so the flood of capital can come from anywhere and migrate to anywhere it finds an inflating asset. Hong Kong’s spiking prices are rising by dozens of basis points per day. Attempts by authorities to cool the market only fanned the flames, resulting in “a sea of madness.”137 Australian authorities tried to cap the dreaded interest-only loans at 30% of the total pool, prompting one hedge fund to return money to investors and declare that “Mortgage fraud is endemic; it’s systemic; it’s just terrible what’s going on. When you’ve got 30-year-olds, who have never seen a property downturn before, borrowing up to 80% to buy three and four apartments, it’s a bubble.”138 Prices in London are now collapsing.139 Why would anything collapse with so much global credit? Simple: top-heavy structures tend to collapse from even small shocks. I will focus, however, on only two countries—the U.S. because it is my home turf and Canada because it is the most interesting of the markets. The U.S. appears to be in a bubblette, an overvalued market that does not approach the insanity of 2007 (detected by statistical illusions as early as 2002).140 Twenty percent down payments have become passé again. A survey of 20 cities reveals 5.9 percent annualized price rises.141 The median sale price of an existing home has set an all-time high and is up 40 percent since the start of 2014141 despite what seems to be muted demand (Figure 23). Thus, home ownership has dropped by 8 percent since ’09 because soaring prices have rendered them unaffordable. More than 40 percent of 25-34 year olds, a group historically en route to home ownership, have nothing set aside for a down payment.141 Those who scream about the need for affordable housing don’t notice that we have plenty of low-quality houses. We lack low-cost houses. And the Fed says inflation is good. Figure 23. Median new home sales price in the U.S. versus number sold and versus home ownership rate. In 1960, California had a median home price of $15,000—three times the salary of an elementary school teacher.142 The median home price in San Francisco is now $1.5 million,143 which is unlikely to be three times a teacher’s salary. A couple earning $138,000 will soon qualify for subsidized housing in San Francisco. California housing seems to be interminably overvalued, possibly owing to the draw of droughts, mudslides, crowds, and, fires. Despite modest 6 percent population growth since 2010, housing units have shown an only 2.9 percent increase. There could be a supply–demand problem, especially when the fires subside. Florida is rumored to have eager post-hurricane sellers—those with something left to sell, that is.144 Condo flippers drove prices skyward in Miami, but they are heading earthward with a glut of units scheduled to come online in 2018. It’s not just the sand states starting to see softness. In New York City, rising rates seem to be nudging commercial and residential real estate down and foreclosures up to levels not seen since the 2009 crisis (79 percent year-over-year in Q3).145 Sam Zell is, once again, a seller and claims "it is getting hard."146 Recall that Zell nailed the real estate top by selling $38 billion in real estate in ’07.147 “The condo market at the high-end [in Manhattan] . . . is a catastrophe and will get worse.” ~Barry Sternlicht, Starwood Property Trust Those who already own houses can once again “extract equity” from their homes using home equity lines of credit (HELOCs).148 They then wake up with more debt on the same house. Pundits claim consumers’ willingness to mortgage their future is “a healthy confidence in the economy.” Fannie Mae and Freddie Mac have also entered phase II of the catch-and-release program. Their regulators have authorized them to once again engage in unchecked, reckless lending, prompting some to begin estimating the cost of the next bailout.149 What happened to all that inventory from the colossal boom leading to the Great Recession? Some fell into the foundations, but a lot found its way into private equity firms. Mind you, single-family rentals are a low- or no-profit-margin business under normal circumstances. As long as rates stay low—Where have I heard that one before?—inherently thin profits can be amplified to a significant transitory revenue stream through leverage. A proposed merger of Invitation Homes (owned by Blackstone Group) and Starwood Waypoint Homes (owned by Starwood Capital) would spawn the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.150 Of course, rates will rise again, and these sliced-and-diced tranches of mortgage-backed securities must be offloaded to greater fools. Private equity guys are already frantically boxing and shipping.151 To avoid costly and time-consuming appraisals, market players are using “broker price opinions,” which can be had by simply driving by the house and taking a guess (or just taking a guess). In ’09, the legendary “Linda Green” signed off on thousands using dozens of different signatures.152 U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.153 Let me help you guys out: yes. “The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy, and increases contingent claims on the government.” ~IMF, on the Canadian housing market Heading north, we find that Canada’s real estate market never collapsed in ’09 (Figure 24), an outcome often ascribed to the virtues of the country’s banking system. An estimated 7 percent of Canadians work in housing construction,154 and Canadians are using HELOCs like crazy.155 After Vancouver tried to burst a huge bubble in 2016 with a 15 percent buyers’ tax,156 Chinese buyers chased Toronto houses instead. Annualized gains of 33 percent with average prices of $1.5 million are pushing even the one-percentile crowd to remote ’burbs.157 Toronto authorities have now imposed the Vancouver-like 15 percent foreign buyers tax,158 causing a single-month 26 percent drop in sales and ultimately chasing the hot money to Montreal,159 Guelph, and even Barrie.160 “Make no mistake, the Toronto real estate market is in a bubble of historic proportions.” ~David Rosenberg Figure 24. Canadian versus U.S. median home prices and what they buy ($700,000 for that little gem). The most interesting plotline and a smoking gun in Canada’s bursting bubble was failing subprime lender Home Capital Group (HCG). Marc Cahodes, referred to as a “free-range short seller” and “the scourge of Wall Street,” spotted criminality and shorted HCG for a handsome profit.161 HCG was so bad it was vilified by its auditor, KPMG.162 Imagine that. HCG dropped 60 percent in one day when news hit of an emergency $2 billion credit line at 22.5 percent interest by the Healthcare of Ontario Pension Plan.163 (The CEO of the pension plan sits on Home Capital’s board and is also a shareholder.) Cahodes was printing money and ranting about jail sentences when, without warning, the legendary stockjobber Warren Buffett took a highly visible 20 percent stake in HCG at “mob rates” (38 percent discount).164 The short squeeze was vicious, and Cahodes was PO’d. As Paul Harvey would say, “now for the rest of the story.” HCG is, by all reckoning, the piece of crap Cahodes claims it is. Buffett couldn’t care less about HCG’s assets—Berkshire can swallow the losses for eternity. Warren may have bought this loser as a legal entry to the Canadian banking system, which is loaded with hundreds of billions of “self-securitized” mortgages. The plot thickened as a story leaked that Buffett met with Justin Trudeau (on a tarmac).165 When the Canadian real estate bust begins in earnest, Buffett will have the machinery of HCG and the political capital to feed on the carcasses of the big-five Canadian banks. Pensions “This massive financial bubble is a ticking time bomb, and when it finally goes off, it is going to wipe out virtually every pension fund in the United States.” ~Michael Snyder, DollarCollapse.com blog The impending pension crisis is global and monumental with no obvious way out. The World Economic Forum estimates the pension gap—unfunded pension liabilities—at $70 trillion and headed for $250 trillion by 2050.166 Conservative but still conventional assumptions about prospective investment returns and spending patterns in old age suggest that retiring into the American dream in your mid 60s requires you bank 20–25 multiples of your annual salary (or a defined benefit plan that is the functional equivalent) to avoid the risk of running out of money. A friend—a corporate executive no less—retired with 10 multiples; he could be broke within a decade (much sooner if markets regress to historical means). Of course, you can defiantly declare you will work ’till you drop, but then there are those unexpected aneurysms, bypass surgeries, layoffs, and ailing spouses needing care. I’ve seen claims that more than 50 percent of retirees do not fully control their retirement age. “Companies are doing everything they can to get rid of pension plans, and they will succeed.” ~Ben Stein, political commentator The problem began as worker compensation became reliant on future promises—IOUs planted in pension plans—often assuming the future was far, far away. However, a small cadre of demographers in the ’70s smelled the risk of the boomer retirements and began swapping defined-benefit plans for defined-contribution plans.167 (A hybrid of the two traces back to 18th century Scottish clergy.168) The process was enabled by the corporate-friendly Tax Reform Act of ’86.169 Employees were unknowingly handed all the risk and became their own human resource specialists. Retirement risk depends on the source of your retirement funds. Federal employees are backstopped by the printing press, although defaults cannot be ruled out if you read the fine print.170 States and municipalities could get bailed out, but there are no guarantees. Defined-benefit corporate plans can be topped off by digging into cash flows provided that the cash flows and even the corporation exist. The depletion of corporate earnings to top off the deficits, however, will erode equity performance, which will wash back on all pension funds. The multitude of defined-contribution plans such as 401(k)s and IRAs managed by individuals are totally on their own and suffer from a profound lack of savings. Corporate and municipal defined-benefit plans assumed added risks by falling behind in pension contributions motivated by efforts to balance the books and, in the corporate world, create the illusion of profits. The moment organizations began reducing the requisite payments by applying flawed assumptions about prospective returns, pensions shifted to Ponzi finance. My uncanny ability to oversimplify anything is illustrated by the imitation semi-log plot in Figure 25. The red line reflects the assumed average compounded balance sheet from both contributions and market gains. The blue squiggle reflects the vicissitudes of the market wobbling above and below the projection. If the projections are too optimistic—the commonly reported 7–8 percent market returns certainly are—the slope is too high, and the plan will fall short. If the projected returns are reasonable but management stops contributing during good times—embezzling the returns above the norm to boost profits—the plan will fall below projection again. Of course, once the plan falls behind, nobody wants to dump precious capital into making up the difference when you can simply goose projected returns with new and improved assumptions. In a rational world, pensions would be overfunded during booms and underfunded during busts. Assuming we can agree that we are deep into both equity and bond bull markets and possibly near their ends, pensions should be bloated with excess reserves (near a maximum on the blue curve), and bean counters should keep their dirty little paws off those assets and keep contributing because we won’t stay there. Figure 25. Childish construct of pension assets. That’s a good segue to drill down into the contemporaneous details. Public pensions are more than 30 percent underfunded ($2 trillion).171 A buzzkiller at the Hoover Institution says that the government disclosures are wrong and puts the deficit at $3.8 trillion.172 Bloomberg says that “if honest math was being used . . . the real number would actually be closer to 6 trillion dollars.”173 What is honest math? Using prevailing treasury yields for starters. Bill Gross—the former Bond King—says that if we get only 4.0 percent total nominal return rather than the presumed 7.5 percent, pensions are $5 trillion underfunded.174 Assuming 100 million taxpayers, that’s $50,000 we all have to pony up. California’s CalPERS fund dropped its assumption to a 6.2 percent return—still seriously optimistic in my opinion—leaving a $170 billion shortfall.175 The Illinois retirement system is towing a liability of $208 billion with $78 billion in assets ($130 billion unfunded).176 Connecticut is heading for a “Greece-style debt crisis” with $6,500 in debt per capita (every man, woman, and child?).177 The capital, Hartford, is heading for bankruptcy.178 South Carolina’s government pension plan is $24 billion in the hole. Kentucky’s attempt to fill a gigantic hole in its pension fund (31 percent funded) was felled by politics.179 A detailed survey of municipal pension obligations shows funding ranging from 23 percent (Chicago) to 98 percent (Suffolk).180 My eyeball average says about 70 percent overall. Notice that despite being at the peak of an investment cycle, none are overfunded (Figure 26.) Large and quite unpopular 30 percent hikes in employee contributions are suggested. The alternative of taking on more municipal debt to top off pension funds is a common stop-gap measure of little merit long term; somebody still has to pay. Figure 26. State pension deficits. The 100 largest U.S. corporate defined-benefit plans have dropped to 85 percent funded from almost 110 percent in 2007. During the recent market cycle that burned bright on just fumes, the companies gained only 6 percent above the 80 percent funding at the end of 2008. Of the top 200 corporate pensions in the S&P, 186 are underfunded to the tune of $382 billion (Figure 27). General Electric, for example, is $31 billion in the hole while using $45 billion for share buybacks. Figure 27. Underfunding of 20 S&P pension funds. When are serious problems supposed to start, and what will they look like? Jim Bianco says “slowly and then suddenly.” Some would argue “now.” The Dallas Police and Firemen Pension Fund is experiencing a run on the bank.181 They are suing a real estate fund who slimed them out of more than $300 million182 and are said to be looking at $1 billion in “clawbacks” from those who got out early trying to avoid the pain.183 The Teamsters Central States and the United Mineworkers of America plans are failing.184 The New York Teamsters have spent their last penny of pension reserves.185 The Pension Benefit Guaranty Corporation has paid out nearly $6 billion in benefits to participants of failed pension plans (albeit at less than 50 cents on the dollar), increasing its deficit to $76 billion. CalPERS intends to cut payouts owing to low returns and inadequate contributions (during a boom, I remind you). “The middle 40% [of 50- to 64-year olds] earn $97,000 and have saved $121,000, while the top 10% make $251,000 and have $450,000 socked away.” ~Wall Street Journal Looks like those self-directed IRAs aren’t working out so well either. Two-thirds of Americans don’t contribute anything to retirement. Only 4 percent of those earning below $50,000 a year maxes out their 401(k)s at the current limits.186 They are so screwed, but I get it: they are struggling to pay their bills. However, only 32 percent of the $100,000+ crowd maxes out the contribution. When the top 10 percent of the younger boomers have two multiples of their annual salary stashed away, you’ve got a problem.186 If they retired today, how long would their money last? That’s not a trick question: two years according to my math. Half the boomers have no money set aside for retirement. A survey shows that a significant majority of boomers are finding their adult children to be a financial hardship.187 Indeed, the young punks aren’t doing well in all financial categories; retirement planning is no exception. Almost half of Gen Xers agreed with this statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.” Moody’s actuarial math concluded that a modest draw down would cause pension fund liabilities to soar owing to a depletion of reserves.188 There is a bill going through Congress to allow public pensions to borrow from the treasury; they are bracing for something.189 This is a tacit bailout being structured. The Fed cowers at the thought of a recession with good reason: Can the system endure 50% equity and bond corrections—regressions to the historical mean valuation? What happens when monumental claims to wealth—$200 trillion in unfunded liabilities—far exceed our wealth? Laurence Kotlikoff warned us; we are about to find out.190 Beware of any thinly veiled claim that the redivision of an existing pie will create more pie. My sense is that we are on the cusp of a phase change. Stresses are too large to ignore and are beginning to cause failures and welched promises. Runs on pension funds akin to runs on banks would be deadly: people would quit working to get their pensions. At this late stage in the cycle, you simply cannot make it up with higher returns. Enormous appreciation has been pulled forward; somebody is going to get hosed. It’s only fourth grade math. Bankruptcy laws exist to bring order to the division of limited assets. We got into this mess one flawed assumption at a time. On a final note, there is a move afoot to massively reduce contributions to sheltered retirement accounts. This seems precisely wrong. (I have routinely sheltered 25–30 percent of my gross income as a point of reference.) Congress is also pondering new contributions be forced into Roth-like accounts rather than regular IRAs. I have put a bat to the Roth IRA both in print191 and in a half-hour talk.192 Here is the bumper sticker version: Roth IRAs pull revenue forward, leaving future generations to fend for themselves; Fourth grade math shows that Roth and regular IRAs, if compounded at the same rate and taxed at the same rate, provide the same cash for retirement. Roth IRAs are taxed at the highest tax bracket—the marginal rate—whereas regular IRAs are taxed integrated over all brackets—the effective tax rate. If you read a comparison of Roth versus regular IRAs without reference to the “effective” versus “marginal” rate, the author is either ignorant or trying to scam you. Phrases like “it depends on your personal circumstances” are double-talk. This synopsis of a Harvard study has two fundamental errors: Can you find them? “If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.” ~John Beshears, lead author of a Harvard study Inflation versus Deflation “Deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus, deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.” ~Guido Hülsmann. Mises Institute “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” ~Lael Brainard “Inflation is a tax and those least able to afford it generally suffer the most.” ~Esther George, president and CEO of the Federal Reserve Bank of Kansas City “Barring major swings in value of the dollar, inflation is likely to move up to 2 percent over the next couple of years.” ~Janet Yellen, Federal Open Market Committee chair Barring major swings in the value of the dollar? What kind of circular reasoning is that? The Fed tells us inflation is too low relative to their arbitrary 2 percent target. I say they are lying—through their teeth—and I have company. John Williams of ShadowStats has been ringing the alarm for decades, currently putting inflation at 6 percent compared with official numbers of less than 2 percent (Figure 28).193 A study by the Devonshire Group concurs with Williams.194 The most notable support for the official consumer price index (CPI) inflation numbers comes from MIT’s Billion Prices Project (BPP).
Authored by Gail Tverberg via Our Finite World blog, Economists, including Ben Bernanke, give all kinds of reasons for the Great Depression of the 1930s. But what if the real reason for the Great Depression was an energy crisis? When I put together a chart of per capita energy consumption since 1820 for a post back in 2012, there was a strange “flat spot” in the period between 1920 and 1940. When we look at the underlying data, we see that coal production was starting to decline in some of the major coal producing parts of the world at that time. From the point of view of people living at the time, the situation might have looked very much like peak energy consumption, at least on a per capita basis. Figure 1. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent, divided by population estimates by Angus Maddison. Even back in the 1820 to 1900 period, world per capita energy had gradually risen as an increasing amount of coal was used. We know that going back a very long time, the use of water and wind had never amounted to very much (Figure 2) compared to burned biomass and coal, in terms of energy produced. Humans and draft animals were also relatively low in energy production. Because of its great heat-producing ability, coal quickly became the dominant fuel. Figure 2. Annual energy consumption per head (megajoules) in England and Wales during the period 1561-70 to 1850-9 and in Italy from 1861-70. Figure by Wrigley In general, we know that energy products, including coal, are necessary to enable processes that contribute to economic growth. Heat is needed for almost all industrial processes. Transportation needs energy products of one kind or another. Building roads and homes requires energy products. It is not surprising that the Industrial Revolution began in Britain, with its use of coal. We also know that there is a long-term correlation between world GDP growth and energy consumption. Figure 3. X-Y graph of world energy consumption (from BP Statistical Review of World Energy, 2017) versus world GDP in 2010 US$, from World Bank. The “flat period” in 1920-1940 in Figure 1 was likely problematic. The economy is a self-organized networked system; what was wrong could be expected to appear in many parts of the economy. Economic growth was likely far too low. The chance for conflict among nations was much higher because of stresses in the system–there was not really enough coal to go around. These stresses could extend to the period immediately before 1920 and after 1940, as well. A Peak in Coal Production Hit UK, United States, and Germany at Close to the Same Time This is a coal supply chart for UK. Its peak coal production (which was an all time peak) was in 1913. The UK was the largest coal producer in Europe at the time. Figure 3. United Kingdom coal production since 1855, in figure by David Strahan. First published in New Scientist, 17 January 2008. The United States hit a peak in its production only five years later, in 1918. This peak was only a “local” peak. There were also later peaks, in 1947 and 2008, after coal production was developed in new areas of the country. Figure 4. US coal production, in Wikipedia exhibit by contributor Plazak. By type, US coal production is as shown on Figure 5. Figure 5. US coal production by type, in Wikipedia exhibit by contributor Plazak. Evidently, the highest quality coal, Anthracite, reached a peak and began to decline about 1918. Bituminous coal hit a peak about the same time, and dropped way back in production during the 1930s. The poorer quality coals were added later, as the better-quality coals became less abundant. The pattern for Germany’s hard coal shows a pattern somewhat in between the UK and the US pattern. Figure 6. Source GBR. Germany too had a peak during World War I, then dropped back for several years. It then had three later peaks, the highest one during World War II. What Affects Coal Production? If there is a shortage of coal, fixing it is not as simple as “inadequate coal supply leads to higher price,” quickly followed by “higher price leads to more production.” Clearly the amount of coal resource in the ground affects the amount of coal extraction, but other things do as well.  The amount of built infrastructure for taking the coal out and delivering the coal. Usually, a country only adds a little coal extraction capacity at a time and leaves the rest in the ground. (This is how the US and Germany could have temporary coal peaks, which were later surpassed by higher peaks.) To add more extraction capacity, it is necessary to add (a) investment needed for getting the coal out of the ground as well as (b) infrastructure for delivering coal to potential users. This includes things like trains and tracks, and export terminals for coal transported by boats.  Prices available in the marketplace for coal. These fluctuate widely. We will discuss this more in a later section. Clearly, the higher the price, the greater the quantity of coal that can be extracted and delivered to users.  The cost of extraction, both in existing locations and in new locations. These costs can perhaps be reduced if it is possible to add new technology. At the same time, there is a tendency for costs within a given mine to increase over time, as it becomes necessary to access deeper, thinner seams. Also, mines tend to be built in the most convenient locations first, with best access to transportation. New mines very often will be higher cost, when these factors are considered.  The cost and availability of capital (shares of stock and sale of debt) needed for building new infrastructure, and for building new devices made possible by new technology. These are affected by interest rates and tax levels.  Time lags needed to implement changes. New infrastructure and new technology are likely to take several years to implement.  The extent to which wages can be recycled into demand for energy products. An economy needs to have buyers for the products it makes. If a large share of the workers in an economy is very low-paid, this creates a problem. If there is an energy shortage, many people think of the shortage as causing high prices. In fact, the shortage is at least equally likely to cause greater wage disparity. This might also be considered a shortage of jobs that pay well. Without jobs that pay well, would-be workers find it hard to purchase the many goods and services created by the economy (such as homes, cars, food, clothing, and advanced education). For example, young adults may live with their parents longer, and elderly people may move in with their children. The lack of jobs that pay well tends to hold down “demand” for goods made with commodities, and thus tends to bring down commodity prices. This problem happened in the 1930s and is happening again today. The problem is an affordability problem, but it is sometimes referred to as “low demand.” Workers with inadequate wages cannot afford to buy the goods made by the economy. There may be a glut of a commodity (food, or oil, or coal), and commodity prices that fall far below what producers need to make a profit. Figure 7. U. S. Income Shares of Top 10% and Top 1%, Wikipedia exhibit by Piketty and Saez. The Fluctuating Nature of Commodity Prices I have noted in the past that fossil fuel prices tend to move together. This is what we would expect, if affordability is a major issue, and affordability changes over time. Figure 8. Price per ton of oil equivalent, based on comparative prices for oil, natural gas, and coal given in BP Statistical Review of World Energy. Not inflation adjusted. We would expect metal prices to follow fossil fuel prices, because fossil fuels are used in the extraction of ores of all kinds. Investment strategist Jeremy Grantham (and his company GMO) noted this correlation among commodity prices, and put together an index of commodity prices back to 1900. Figure 9. GMO Commodity Index 1900 to 2011, from GMO April 2011 Quarterly Letter. “The Great Paradigm Shift,” shown at the end is not really the correct explanation, something now admitted by Grantham. If the graph were extended beyond 2010, it would show high prices in 2010 to 2013. Prices would fall to a much lower level in 2014 to 2017. Reason for the Spikes in Prices. As we will see in the next few paragraphs, the spikes in prices generally arise in situations in which everyday goods (food, homes, clothing, transportation) suddenly became more affordable to “non-elite” workers. These are workers who are not highly educated, and are not in supervisory positions. These spikes in prices don’t generally “come about” by themselves; instead, they are engineered by governments, trying to stimulate the economy. In both the World War I and World War II price spikes, governments greatly raised their debt levels to fund the war efforts. Some of this debt likely went directly into demand for commodities, such as to make more bombs, and to operate tanks, and thus tended to raise commodity prices. In addition, quite a bit of the debt indirectly led to more employment during the period of the war. For example, women who were not in the workforce were hired to take jobs that had been previously handled by men who were now part of the war effort. (These women were new non-elite workers.) Their earnings helped raise demand for goods and services of all kinds, and thus commodity prices. The 2008 price spike was caused (at least in part) by a US housing-related debt bubble. Interest rates were lowered in the early 2000s to stimulate the economy. Also, banks were encouraged to lend to people who did not seem to meet usual underwriting standards. The additional demand for houses raised prices. Homeowners, wishing to cash in on the new higher prices for their homes, could refinance their loans and withdraw the cash related to the new higher prices. They could use the funds withdrawn to buy goods such as a new car or a remodeled basement. These withdrawn funds indirectly supplemented the earnings of non-elite workers (as did the lower interest rate on new borrowing). The 2011-2014 spike was caused by the extremely low interest rates made possible by Quantitative Easing. These low interest rates made the buying of homes and cars more affordable to all buyers, including non-elite workers. When the US discontinued its QE program in 2014, the US dollar rose relative to many other currencies, making oil and other fuels relatively more expensive to workers outside the US. These higher costs reduced the demand for fuels, and dropped fuel prices back down again. Figure 10. Monthly Brent oil prices with dates of US beginning and ending QE. The run-up in oil prices (and other commodity prices) in the 1970s is widely attributed to US oil production peaking, but I think that the rapid run-up in prices was enabled by the rapid wage run-up of the period (Figure 11 below). Figure 11. Growth in US wages versus increase in CPI Urban. Wages are total “Wages and Salaries” from US Bureau of Economic Analysis. CPI-Urban is from US Bureau of Labor Statistics. The Opposing Force: Energy prices need to fall, if the economy is to grow. All of these upward swings in prices can be at most temporary changes to the long-term downward trend in prices. Let’s think about why. An economy needs to grow. To do so, it needs an increasing supply of commodities, particularly energy commodities. This can only happen if energy prices are trending lower. These lower prices enable the purchase of greater supply. We can see this in the results of some academic papers. For example, Roger Fouquet shows that it is not the cost of energy, per se, that drops over time. Rather, it is the cost of energy services that declines. Figure 12. Total Cost of Energy and Energy Services, by Roger Fouquet, from Divergences in Long Run Trends in the Prices of Energy and Energy Services. Energy services include changes in efficiency, besides energy costs themselves. Thus, Fouquet is looking at the cost of heating a home, or the cost of electrical services, or the cost of transportation services, in inflation-adjusted units. Robert Ayres and Benjamin Warr show a similar result, related to electricity. They also show that usage tends to rise, as prices fall. Figure 13. Ayres and Warr Electricity Prices and Electricity Demand, from “Accounting for growth: the role of physical work.” Ultimately, we know that the growth in energy consumption tends to rise at close to the same rate as the growth in GDP. To keep energy consumption rising, it is helpful if the cost of energy services is falling. Figure 14. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent. How the Economic Growth Pump Works There seems to be a widespread belief, “We pay each other’s wages.” If this is all that there is to economic growth, all that is needed to make the economy grow faster is for each of us to sell more services to each other (cut each other’s hair more often, or give each other back rubs, and charge for them ). I think this story is very incomplete. The real story is that energy products can be used to leverage human labor. For example, it is inefficient for a human to walk to deliver goods to customers. If a human can drive a truck instead, it leverages his ability to deliver goods. The more leveraging that is available for human labor, the more goods and services that can be produced in total, and the higher inflation-adjusted wages can be. This increased leveraging of human labor allows inflation-adjusted wages to rise. Some might call this result, “a higher return on human labor.” These higher wages need to go back to the non-elite workers, in order to keep the growth-pump operating. With higher-wages, these workers can afford to buy goods and services made with commodities, such as homes, cars, and food. They can also heat their homes and operate their vehicles. These wages help maintain the demand needed to keep commodity prices high enough to encourage more commodity production. Raising wages for elite workers (such as managers and those with advanced education), or paying more in dividends to shareholders, doesn’t have the same effect. These individuals likely already have enough money to buy the necessities of life. They may use the extra income to buy shares of stock or bonds to save for retirement, or they may buy services (such as investment advice) that require little use of energy. The belief, “We pay each other’s wages,” becomes increasingly false, if wages and wealth are concentrated in the hands of relatively few. For example, poor people become unable to afford doctors’ visits, even with insurance, if wage disparity becomes too great. It is only when wages are fairly equal that all can afford a wide range of services provided by others in the economy. What Went Wrong in 1920 to 1940? Very clearly, the first thing that went wrong was the peaking of UK coal production in 1913. Even before 1913, there were pressures coming from the higher cost of coal production, as mines became more depleted. In 1912, there was a 37-day national coal strike protesting the low wages of workers. Evidently, as extraction was becoming more difficult, coal prices were not able to rise sufficiently to cover all costs, and miners’ wages were suffering. The debt for World War I seems to have helped raise commodity prices to allow wages to be somewhat higher, even if coal production did not return to its previous level. Suicide rates seem to behave inversely compared to earning power of non-elite workers. A study of suicide rates in England and Wales shows that these were increasing prior to World War I. This is what we would expect, if coal was becoming increasingly difficult to extract, and because of this, the returns for everyone, from owners to workers, was low. Figure 15. Suicide rates in England and Wales 1861-2007 by Kyla Thomas and David Gunnell from International Journal of Epidemiology, 2010. World War I, with its increased debt (which was in part used for more wages), helped the situation temporarily. But after World War I, the Great Depression set in, and with it, much higher suicide rates. The Great Depression is the kind of result we would expect if UK no longer had enough coal to make the goods and services it had made previously. The lower production of goods and services would likely be paired with fewer jobs that paid well. In such a situation, it is not surprising that suicide rates rose. Suicide rates decreased greatly with World War II, and with all of the associated borrowing. Looking more at what happened in the 1920 to 1940 period, Ugo Bardi tells us that prior to World War I, UK exported coal to Italy. With falling coal production, UK could no longer maintain those exports after World War I. This worsened relations with Italy, because Italy needed coal imported from UK to rebuild after the war. Ultimately, Italy aligned with Germany because Germany still had coal available to export. This set up the alliance for World War II. Looking at the US, we see that World War I caused favorable conditions for exports, because with all of the fighting, Europe needed to import more goods (including food) from the United States. After the war ended in 1918, European demand was suddenly lower, and US commodity prices fell. American farmers found their incomes squeezed. As a result, they cut back on buying goods of many kinds, hurting the US economy. One analysis of the economy of the 1920s tells us that from 1920 to 1921, farm prices fell at a catastrophic rate. “The price of wheat, the staple crop of the Great Plains, fell by almost half. The price of cotton, still the lifeblood of the South, fell by three-quarters. Farmers, many of whom had taken out loans to increase acreage and buy efficient new agricultural machines like tractors, suddenly couldn’t make their payments.” In 1943, M. King Hubbert offered the view that all-time employment had peaked in 1920, except to the extent that it was jacked up by unusual means, such as war. In fact, some historical data shows that for four major industries combined (foundries, meat packing, paper, and printing), the employment index rose from 100 in 1914, to 157 in 1920. By September 1921, the employment index had fallen back to 89. The peak coal problem of UK had been exported to the US as low commodity prices and low employment. It was not until the huge amount of debt related to World War II that the world economy could be stimulated enough so that total energy production per capita could continue to rise. The use of oil especially became much greater starting after World War II. It was the availability of cheap oil that allowed the world economy to grow again. Figure 16. Per capita energy consumption by fuel, separately for several energy sources, using the same data as in Figure 1. The stimulus of all the debt-enabled spending for World War II seems to have been what finally encouraged the production of the oil needed to pull the world economy out of the problems it was having. GDP and Disposable Personal Income could again rise (Figure 17.) Figure 17. Comparison of 3-year average change in disposable personal income with 3-year change average in GDP, based on US BEA Tables 1.1.5 and 2.1. Furthermore, total per capita energy consumption began to rise, with growing oil consumption (Figure 1). This growth in energy consumption per capita seems to be what allows the world economy to grow. I might note that there is one other exceptional period: 1980 to 2000. Space does not allow for an explanation of the situation here, but falling per capita energy consumption seems to have led to the collapse of the former Soviet Union in 1991. This was a different situation, caused by lower oil consumption related to efficiency gains. This was a situation of an oil producer being “squeezed out” because additional oil was not needed at that time. This is an example of a different type of economic disruption caused by flat per capita energy consumption. Figure 18. World per Capita Energy Consumption with two circles relating to flat consumption. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent, divided by population estimates by Angus Maddison. Conclusion There have been many views put forth about what caused the Depression of the 1930s. To my knowledge, no one has put forth the explanation that the Depression was caused by Peak Coal in 1913 in UK, and a lack of other energy supplies that were growing rapidly enough to make up for this loss. As UK “exported” this problem around the world, it led to greater wage disparity. US farmers were especially affected; their incomes often dropped below the level needed for families to buy the necessities of life. The issue, as I have discussed in previous posts, is a physics issue. Creating GDP requires energy; when not enough energy (often fossil fuels) is available, the economy tends to “freeze out” the most vulnerable. Often, it does this by increased wage disparity. The people at the top of the hierarchy still have plenty. It is the people at the bottom who find themselves purchasing less and less. Because there are so many people at the bottom of the hierarchy, their lower purchasing power tends to pull the system down. In the past, the way to get around inadequate wages for those at the bottom of the hierarchy has been to issue more debt. Some of this debt helps add more wages for non-elite workers, so helps fix the affordability problem. Figure 19. Three-year average percent increase in debt compared to three year average percent increase in non-government wages, including proprietors’ income, which I call my wage base. At this time, we seem to be reaching the point where, even with more debt, we are running out of cheap energy to add to the system. When this happens, the economic system seems more prone to fracture. Ugo Bardi calls the situation “reaching the inflection point in a Seneca Cliff.” Figure 20. Seneca Cliff by Ugo Bardi We were very close to the inflection point in the 1930s. We were very close to that point in 2008. We seem to be getting close to that point again now. The model of the 1930s gives us an indication regarding what to expect: apparent surpluses of commodities of all types; commodity prices that are too low; a lack of jobs, especially ones that pay an adequate wage; collapsing financial institutions. This is close to the opposite of what many people assume that peak oil will look like. But it may be a better representation of what we really should expect.
One of the traditional push backs against attempts to predict "black swan" events is that they are by default unpredictable, rendering the entire exercise moot. However, for the second year in a row, Nomura's Bilal Hafeez has found a loophole, or rather loop-animal: the grey swan. As Hafeez writes, while he would like to be able to predict black swans, by definition that is impossible. "However, its close cousin the grey swan can be foreseen. These are the unlikely but impactful events that, in our opinion, lie outside the usual base case and risk scenarios of the analyst community. So as we did last year we have put on our creative hats and have come up with 10 potential grey swan events for 2018." For the purpose of this exercise, Nomura avoided the more widely discussed - and more probable scenarios such as the Italian elections, US Impeachment risk, North Korea conflict, which it covered in its event risk radar series, and has instead selected topics that have not been as widely discussed. "Needless to say, none of them are our base case, but we think it is better to be prepared than not." So without further adoNomura's potential grey swan events for 2018 include: Shock 1: What the movies tell us about 2018 Shock 2: The “Amazonification” of inflation Shock 3: 2% inflation targeting goes out of style Shock 4: A United States of Europe Shock 5: Another UK political turnaround Shock 6: Bitcoin starts moving other markets Shock 7: Housing market decline = rate cuts? Shock 8: A bigger proxy war in the Middle East Shock 9: “Get to the chopper!” Shock 10: Credit: stealth leverage pops? Here are the details for each of the swans: 1. What the movies tell us about 2018 Films may end up being better predictors of grey swans than research analysts. Remember it was a film that first predicted a black president of the US (The Man, 1972), the rise of China as an economic powerhouse (Americathon, 1979) and the rise of tabloid TV (Network, 1976). As it happens, we’ve found three notable movies that are based in 2018, and here’s what they foretell. The 2009 film, Terminator Salvation, is set specifically in 2018. The backdrop is a conflict between Skynet and the human resistance. For the uninitiated Skynet is a computer system developed for the US military by Cyberdyne Systems. The system was intended to safeguard the world by pre-empting attacks. However, it soon developed artificial general intelligence and decided that humans were the biggest threat to the planet. Skynet among other things could control mobile phones, drones and cyborgs/ Terminators (or as Arnie says in Terminator 2: “I'm a cybernetic organism. Living tissue over a metal endoskeleton”). It would be easy to dismiss this 2018 scenario, but let’s run through the necessary ingredients for it to emerge. We would need the existence of drones, computer-controlled power grids and networked transportation and food systems. Layered on top of this, we would need AI/machine learning capabilities. What would make the system much more fragile would be the replacement of all physical forms of mediums of exchange such as gold by say a cryptocurrency …hmmm, is Skynet reading this? If this isn’t scary enough then 2018 could prove to be like it was depicted in the 1975 film Rollerball. This is when the world is run by a global energy monopoly, Energy Corporation. Energy Corp wishes to replace warfare with a violent sport called Rollerball, which consists of two teams racing around a circular track on roller skates attacking each other. The plot of the movie hinges around the star player of Rollerball becoming too popular for Energy Corp and they try to get him killed in a match. He, of course, survives and reveals the nature of Energy Corp to the world. The essence of the movie is that behind any veneer of democracy and competition, there lays a corporate imperative to distract the masses with mindless and often violent entertainment. To be honest, many would subscribe to this view already! But to reach the scales of Rollerball control, we would need one or two global companies emerging to dominate the world – ideally in sectors that can distract us with fake news, fun games and constant distractions. Surely we’re not close to that are we? Finally, I can’t ignore the 2012 film Iron Sky. Don’t laugh, but the plot revolves around a manned mission to the dark side of moon in 2018, where the descendants of Nazis are discovered. These Moon Nazis take some technology from the astronauts and invade Earth. Film connoisseurs will know that this is an unlikely scenario as the 2011 film Transformers Dark Side of the Movie already told us that the Decepticon transformers are on the dark side of the moon. They would have easily wiped out the Moon Nazis. But hang on, it would also mean that there would now be a fleet of Decepticons ready to invade the Earth in 2018… * * * 2. The “Amazonification” of inflation 2018 is expected to be the year when inflation kicks back. But the recent drag on US inflation has been caused by the sharp decline in goods price inflation and perhaps the “Amazon effect” won’t stop there. If you look at the amount of column inches dedicated to the disruption Amazon has brought upon industry you’d be surprised to learn that it still only operates in 14 countries. For two of them the focus until recently has been on just selling books. But to focus on this one company would do disservice to how far the deflationary force of technological disruption can go on a global basis. Alibaba’s sales on “singles day” is four times bigger than Amazon’s Cyber Monday or Black Friday. Latin America’s Mercado Libre operates in far more countries and Silicon Valley is yet to replicate the take-up rate of Kenya’s M-pesa or scope of services offered by China’s Wechat. Innovation and disruption take place in many forms and under many different banners, so to quantify their impact we need to think bigger. There are now more mobile phone subscriptions in the world than people, rising to a level where the world’s poorest households are more likely to have access to a mobile phone than to clean water. But the internet is still in its early growth phase. The number of active mobile broadband subscriptions in the world has only just breached the 50% mark. We are still far away from the world being truly “connected.” The first wave of global internet connectivity coincided with the rise of globalisation when China joined the WTO. This saw a marked moderation in goods price inflation in the developed economies. Right now there has been an impressive rise in smartphone ownership in the developing world; there is clearly a second wave of internet connectivity taking place. The argument for lower goods price inflation is clear; with smart phones, not only is online shopping more convenient, but while trying out goods in typical bricks and mortar stores you can decide to buy online for less (“Showrooming”). It’s no wonder the rate of online retail sales in the developed world is picking up at a pace (Figure 2). But there is an argument to say that the technological dampening of inflation may be more persistent than before. The outsourcing of services abroad is easier, the gig economy seems here to stay, AI is on the rise and the disruption from the widespread adoption of 3D printers or indeed cryptocurrencies is yet to be witnessed. Policymakers are split on the matter though, the ECB’s Mario Draghi said there was little evidence that e-commerce was depressing inflation, while the Kansas City Fed’s work (from 2004) on the matter points to clear higher productivity gains and therefore lower inflation. But FOMC members are still using a shotgun-like approach to explaining why inflation has been persistently low with long lists of possible but unquantifiable reasons. Further disruption and disinflationary pressures remain a clear risk into 2018. Our focus would be in Australia, where mobile broadband speeds are the second highest among the G10, inflation remains historically low and … Amazon has just opened its doors for one-day delivery services. * * * 3. 2% inflation targeting goes out of style “We may need to adjust monetary policy frameworks accordingly” (BIS, 2017). While inflation targets of around 2% are often viewed by markets to be an immutable force of nature, the truth is they are a relatively new phenomenon. First adopted by the Reserve Bank of New Zealand (RBNZ) in 1989, as recently as 1997 there were only five recognised inflation targeters – New Zealand, Canada, the UK, Sweden and Australia. According to the Bank of England, there are currently 29 countries that are fully-fledged inflation targeters (not including the ECB, which avoids describing itself as such). So while we may take it as a given that inflation targeting is here to stay, a longer view could reveal it to be nothing more than an economic fad. In time, inflation targeting may either be jettisoned or modified. Since the GFC, price-level targeting or nominal GDP targeting have been popular subjects of debate since the GFC hit. In the US in particular, an active discussion has been taking place on these fronts. One reason for the discussions are that given the low natural rate of interest, and hence a low terminal rate, the Fed would have limited ability to use short rates to battle the next downturn. Former Fed Chair Ben Bernanke has advocated a hybrid inflation-target/price level target approach, especially for times when short rates are near the zero bound. Elsewhere, consideration has been given to lowering the inflation target. There are two key reasons for doing this. The first is the lack of success in hitting an inflation target over recent years. If we look at key inflation targets for the G4, US core PCE inflation has averaged 1.7% since 2000 (and 1.5% since 2010). In the euro area CPI inflation has managed 1.75% (1.3%) and Japanese core CPI -0.1% (1.1%). Only the UK seems to be hitting its target with 2% since 2000 (2.2% since 2010). The whole point of an inflation target is that it builds confidence in where inflation will be in the future. Constant misses, consistent in direction will erode that trust and at some point it become better to admit defeat and shift lower. The other reason for considering a lower inflation target is demographics. According to the Oxford Institute of Population Ageing, within 20 years many countries in Asia and Europe will see a situation where the largest population cohort is 65+ and the average age approaches 50. For those in their sunset years, is inflation a pure cost eroding the purchasing power of their savings with little benefit for the economically inactive? So while central banks will (for now) likely retain their independence on the means to hit inflation targets, the executive / legislative powers in some countries could see political benefits in lowering this to 1%. * * * 4: A United States of Europe 2018 presents a unique political opportunity for the European Union and in particular those countries within the euro area to forge closer ties and perhaps embark upon a political journey that will end with the creation of a ‘United States of Europe’ – the longstanding dream of many federalists within the continent. The reasons for the propitious backdrop are threefold. Less focus on domestic politics: There are still some near-term hurdles to be overcome (Germany actually getting a government, an Italian election in H1 2018 and Catalonian elections next week). If these are resolved, we have a decent gap with no major elections in major countries for some time (Germany 2021, France 2022, the Netherlands 2021, Spain 2020 and Italy…?). Not only does this free up bandwidth for key European political actors to think about European matters, but may also end the de facto ban on any European treaty change that has been in place in recent years. Against the backdrop of waning support for populist parties, an axis of Merkel / Macron, supported by pro-European leaders in other countries could look to define their legacies by driving forwards with an agenda of European federalism (it probably will not be called that though). Brexit in the background: With one of the European Union’s largest countries deciding to go its own way (kind of) it naturally raises the question of what relationship other European countries want to have. If the answer is to have more integration and provide a positive case for a United States of Europe this would be the perfect riposte to Brexit and some of the nationalist, populist politics that have afflicted parts of the continent in recent years as well. Fixing the roof while the sun is shining: One of the lessons learnt from the global financial crisis and the euro crisis that followed is to fix the roof while the sun is shining and don’t wait for when it rains. European growth is at its strongest in years. The EU unemployment rate has fallen from 11% in 2013 to 7.4% currently and shows no signs of stopping. The low in the previous boom period was 6.8% and at the current run rate that could be achieved in under 12 months. Increasing the pace of integration will bring with it some risks and possibly even some J-curve impacts. This suggests there is no better time to undertake this project than now. Something like a United States of Europe cannot be built in a year. But steps on a path that the market understands to be leading there can be taken. A grey swan event for 2018 is that European politicians understand the temporal opportunity they have been given, and undertaking such a path starting with a treaty change that leads to increased mutualisation of debts and sharing of risks. It is important to note that comments from key European leaders are heading in this direction. You can see it in the rhetoric of Jean-Claude Juncker’s State of the Union address, Macron’s united defence speech and in Martin Schulz’s latest, looking for a United States of Europe by 2025. * * * 5: Another UK political turnaround In a speech earlier this year at a regular spring conference, we boldly stated that having spent the 2014 edition of the conference discussing the Scottish referendum, the 2015 edition discussing the general election and the 2016 edition discussing the Brexit referendum, at least in 2017 there were no UK political events to discuss. Just over two weeks after this statement was made, Theresa May announced the 2017 general election. Once bitten and twice shy and all that. So even if the REAL grey swan for UK politics in 2018 would be if nothing interesting happened, that would not give us much to write about. The tail risk we consider, therefore, is if political instability gets so bad that either / or another general election or a second Brexit referendum occurs in 2018. While it is ex-post easy to see why Theresa May called the 2017 general election (a 20 point opinion poll lead is catnip to any politician), there is no such case now. Under the Fixed Term Parliament Act there are two ways to call an early election. The first, à la 2017, where the government chooses to dissolve parliament with a two-thirds majority in the Commons can be ruled out, we think. So if it did happen it would be because the government has lost a vote of no confidence (and not being able to win another one within two weeks). Ordinarily, this would be unlikely, but the government’s wafer-thin effective majority makes it a possibility and public attempts have been made before. In particular, we would highlight that all it needs is some Conservative (or DUP) lawmakers to get annoyed with the way Brexit is going that they are prepared to bring down the government and risk (from their perspective) a Jeremy Corbyn-led government. Because of how polarising Brexit has become in the UK, this is a risk that cannot be ruled out. The other potential political event is a second Brexit referendum. Again parliamentary mathematics is the key here. Around 75% of MPs (including a slim majority of Conservative ones) are pro Remain. So why are they pushing through Brexit legislation? They are enacting the will of the people as set out in the 2016 referendum. Of course, the will of the people can change. Over recent months we have seen a slim majority in the polls saying in hindsight it was wrong for Britain to vote to leave the EU. If this trend continues and that slim majority becomes a commanding one this may embolden Remain MPs on all sides of the house to push for a second referendum, perhaps on the outline of the actual deal the UK agrees with the EU. There is an issue of timing here – as things stand there is not a huge amount of time to fit in a referendum. This is why it would be a tail risk. The really interesting question is what sort of tail risk because there are two different options here. The question could ask whether to accept any deal or instead remain in the EU. Or it could ask whether to accept any deal or crash out of the EU altogether. The market implications of these two different questions would be very different! * * * 6: Bitcoin starts moving other markets Are you a coiner? It’s hard not to be at least interested with the sharp rise in cryptocurrencies. The level of speculative mania has reached a point where stock prices have been boosted by companies simply inserting “Blockchain” onto the end of their names (yes that happened). This phenomenon echoes the dot-com era, but that's all we will say about bubbles today. The arrival of Bitcoin futures will likely see Bitcoin exchange traded funds expand in 2018. Now that cryptocurrencies are entering the “mainstream” could Bitcoin’s high volatility start to move other markets? As it stands the market cap of Bitcoin is $280bn and that number rises to $523bn when all other 1358 cryptocurrencies are included (a number that seems to be ever rising too). Half a trillion dollars is no mean feat, but it is far away from the $79trn total world market cap or indeed the peak $2.9trn dot-com valuation in 2000. It may be too early for Bitcoin to have a global impact on other asset markets at this stage. Instead, we need to look where investors are most exposed on a regional basis for where this cross-market correlation could bite. With Japan accounting for nearly half of global trade in Bitcoin compared with just 25% in the US, it could be in Asia where Mrs. Watanabe pulls back. Beyond the price action there is the issue of longevity of cryptocurrencies to consider. We admit we didn’t ‘coin’ the phrase but “before you climb the ladder make sure it’s leaning against the right building” applies here. In the crypto world or “crypto valley” as it’s coined in Switzerland its well understood that Bitcoin is unlikely to be the future of coins. Proof-of-work (POW) cryptocurrencies such as Bitcoin are energy intensive and time consuming, while proof-of-stake (POS) coins such as the coming Ethereum-Casper are much less so. There are a host of reasons why we have not yet moved on from Bitcoin, POS is in its early stages with security still a concern and people, in general, are not that good with change. When they get used to something, it is very difficult for them to get out of that comfort zone and for most they have only just got their heads around Bitcoin. But for as long as POW is the most common form of cryptocurrency, this could start to have an economic and environmental cost. Bitcoin’s current estimated annual electricity consumption is 33.2TWh at an estimated cost of $1.6bn, while only 0.15% of the world’s current electricity consumption the rise in Bitcoin has been nothing but underestimated and is somewhat exponential in an age of exponential technologies. Estimates were made in March 2016 expecting Bitcoin’s energy consumption to match that of Denmark by 2020. Today Bitcoin already has matched that, three years ahead of schedule. So if it’s not risk-off inspired price action from Bitcoin that moves other markets how about higher energy costs? 71% of Bitcoin mining takes place in China powered by cheap coal electricity. So perhaps the grey swan of next year is not Bitcoin’s bubble bursting, as so many commentators tend to suggest, but instead it’s continued rise and a surging demand for coal. * * * 7: Housing market decline = rate cuts? Solid growth, low interest rates and hot money inflows from overseas have fuelled rapid house price gains in Australia, Canada, New Zealand, Norway and Sweden (Figure 8). As discussed in Residential speed limits, these growing imbalances cannot be ignored by policymakers. Investors have been calling for a downturn for some time in these markets. 2018 could be the year – indeed we are already seeing declines in Norway and Sweden. Residential investment has soared, driving increased supply which could outstrip housing demand and see prices move lower. Furthermore, to offset growing housing imbalances, regulators have tightened macroprudential policy through stricter lending standards and measures to deter foreign inflows. With limited historical precedent, there is a risk that policymakers have over-tightened and driven a slowdown. The consumption share of GDP in these economies is large. Falling house prices (and negative wealth effects) could see the consumer hold back on discretionary spending, particularly with real wage growth still low/subdued. Moreover, debt-to-income levels are at historical highs, meaning households are more sensitive to adverse changes in income, asset prices and interest rates than usual. A recent BIS study argued that in a high debt economy, “interest hikes could be more contractionary than cuts are expansionary”, making it difficult for policy makers to use monetary policy to curb these imbalances from building. A house price collapse would have significant market implications. Rates markets currently price these economies’ central banks normalising policy significantly over the next two years, with the Fed being the only central bank to outpace them (see Figure 9). If this grey swan materialises, expectations for normalisation would be significantly reduced. In fact, central banks may cut under this scenario. The RBNZ has already flagged weaker domestic demand as a downward scenario that could lead to rate cuts. The RBA, BoC, Norges Bank and Riksbank have all noted that the housing market is a key risk to their outlook. A significant house price decline could push them towards much more dovish monetary policy stances with further rate cuts still on the table. If this negative scenario unfolds, a substantial market repricing is likely. The timing for the first interest rate hikes in the Antipodeans and Scandies would be shifted back and even removed. Further hikes from the BoC would be priced out. Under extreme scenarios, rates markets may move to pricing cuts rather than hikes. Respective bond yields would move lower and currencies will depreciate versus the majors. * * * 8: A bigger proxy war in the Middle East In recent years the conflicts in the Middle East have tended to start with a bang, but then assumed a “low intensity” character. The underlying problem that gave way to the conflict in the first place is not resolved, but the conflict remains relatively contained without degenerating into a flare up of tensions that engulf the whole region. This is what happened in Yemen, Qatar and more recently in Lebanon. Our baseline is that this pattern will hold in 2018 too and these conflicts will remain “frozen”. However, 2018 may be different and the tensions may intensify in a manner to threaten regional stability. We see two theatres where the risks of imminent escalation are most significant (even though not part of the baseline): Yemen: Houthi rebels have already shown that they can fire missiles targeting Riyadh, although they failed to inflict significant damage. If such attacks continue and prove more costly for Saudi Arabia, the Kingdom may decide to increase its military involvement in Yemen, increasing the risk of a direct clash with Iran. Lebanon/Palestine: The immediate risk of a proxy war in Lebanon that emerged after the unexpected resignation of PM Hariri seems to have been defused. However, President Trump’s recognition of Jerusalem as capital of Israel may increase this risk again as Lebanon’s Hezbollah and Palestine’s Hamas have called for a renewed “intifada” in response to Trump’s decision. Against Hezbollah involvement in a possible intifada, Israel might decide to take the battle to the Lebanese territory, directly clashing with Iranian proxies/forces, with tacit support for Israel from some of the Sunni countries. If these risks materialise, CDS spreads and the currencies of the countries involved may come under pressure. However, one other point to consider will be the impact on oil prices and global inflation. If tensions reach the point where markets become concerned about oil supplies, then there might have a notable increase in global energy prices. It is difficult to forecast where oil prices will settle in such a scenario, but we stress-tested our baseline forecasts with the Brent oil price at $80, an increase of around 30% from its current price level. With all the usual caveats that apply to such simulations, we find that an oil price shock of this magnitude would add 0.4 and 0.9 percentage points to 2018 headline inflation in the US and eurozone, respectively. Our colleagues in Japan see core inflation breaching 1.5% if the Brent oil price stays above $80/bbl, although they think it would be premature for the BOJ to modify its 10yr JGB yield target in response to such a shock. In EM, we recently looked at the winners and losers of an oil price shock. Outside the countries that are directly affected by regional tensions, Russia, Colombia, Malaysia and Brazil would be among the winners, while China, India, Indonesia, Thailand, South Africa and Turkey would be among the losers of a high oil price. The bottomline is with output gaps in major economies dwindling, an energy price shock may more easily lead to second-round effects on inflation, which may require a monetary policy response with knock-on effects on risk assets. * * * 9: “Get to the chopper!” Helicopter money is now disappearing from investors’ minds (Figure 11). However, we may finally observe helicopters dropping money in 2018. 2018 is expected to be a year of further monetary policy normalisation globally. Inflation has been disappointing globally, but markets now expect central banks to stress the economic recovery and financial stability (higher equity prices), not inflation. However, investors may be surprised by how strongly a few central banks can adhere to their inflation mandate. The BOJ is one of the most likely candidates. In the Abe cabinet, conditions for the BOJ have completely changed, and a further dovish shift cannot be ruled out in 2018, as Prime Minister Abe is now deciding on the next BOJ governor and two deputy governors. Although our central case is that Governor Kuroda will be re-appointed, an appointment of Mr. Honda, ex-economics advisor to PM Abe and currently ambassador to Switzerland, will be a significant shock to the market. The latest survey among FX investors shows that only 5% of them expect Mr. Honda to be the next governor, but the risk is higher to us (10-15%). Mr. Honda may be also appointed as one of the deputy governors to support Governor Kuroda, shifting the direction of monetary and fiscal policies to the more accommodative side. What can the BOJ do? We think clearer cooperation with government deficit financing is likely. The government and BOJ released a Joint Statement in January 2013, which can be re-written to loosen fiscal discipline further. In his interview with Reuters on 8 November, Mr. Honda said that the joint statement must be rewritten to have a joint goal of JPY600trn of nominal GDP. The BOJ’s policy target will thus be revised to make the policy mix more accommodative. Mr. Honda also said current fiscal policy management is tight, while he also said the BOJ may accelerate its JGB purchases to JPY100trn per year if an economic shock occurs. The government has already given up its target of achieving a primary balance surplus by FY2020, loosening its fiscal discipline. Further loosening of fiscal discipline is possible, and the appointment of Mr. Honda will be viewed as a clearer sign of further delays of the sales tax hike. If Mr. Honda is appointed, expectations for a much looser fiscal and monetary policy, i.e. helicopter money, may be ignited. This is not just a story of Japanese politics. A step towards helicopter money is actually recommended by ex-Fed Chair Bernanke. At the conference held by the BOJ in May 2017, he stated that “if more stimulus is needed, the most promising direction would be through fiscal and monetary cooperation, in which the BOJ agrees to temporarily raise its inflation target as needed to offset the effects of new fiscal spending or tax cuts on the debt-to-GDP ratio.” For central banks facing policy limitations, helicopter money can be a natural step towards further easing. We should remember another major central bank, the ECB, also faces limited policy options for resolving negative shocks * * * 10: Credit: stealth leverage pops? After years of accommodative policy, we think the risk is that leverage has built up in the system and as the Fed drains liquidity via the B/S and higher rates, the potential imbalance that may have been up could be exposed. So does US credit pop in 2018? Policymakers are always fighting the last war and in many ways, that has been a good thing because from a variety metrics, the US banking system is now more sound. Years of re-stocking the capital base, lower overall leverage (versus other periods) and less reliance on short-term funding no longer put banks in the cross-hairs. Granted if there was a severe enough recession or sharp repricing in financial assets, US banks would be affected. However, the stress tests suggest the majority would come out ok. Where is the leverage? It lurks in various forms; let’s call it stealth leverage Commercial Real Estate: During 2008-12, banks with high concentrations of CRE loans were about three times more likely to fail than all banks nationwide, according to Richmond Fed research. As specialized knowledge on local real estate markets is often key to CRE loan markets, community and regional banks are major credit providers. Risks associated with construction and land development loans (CLD), the riskiest component of CRE loans (Figure 12), appear concentrated in small banks, which may not have the stuffiest buffers to absorb potential losses associated with CRE loans. In addition, CRE valuation remains at the highs when compared with residential real estate. Subprime Auto Loans: One area of consumer credit that has resurfaced on the radar is subprime, but this time in the auto loan sector. The recent peak in 2015 saw nearly 40% of all US auto loans go to subprime borrowers. There has been a slowdown since and new origination versus total auto loans has decelerated (thus a lower flag). However, the total existing debt load of the past few years is about $0.4trn. During the oil fallout, defaults picked up quickly in shale-producing states. If the economy slows, the risk is that auto sector would get hit, but overall a pop here is not likely to be systemic. Student Loans: Another concern among those worried about the consumer is the high levels of student debt. Instead, it has led to more of a behavioural shift of less home buying. But as wages rise, these debts will not all pop at once. This too is less systemic. Financial Leverage: This is where the embedded leverage is in the system. Over the past 10 years, the fastest-growing debt was in capital markets, as seen in corporate debt up roughly $3trn, as highlighted in our Fed QT Supply/Demand study (see link). Some of this was smart usage of debt, terming out to lock-in low costs of funding, but much of this went into stock buybacks and/or to highly leveraged corporates. In fact, the credit quality of the universe has moved towards BBB and higher duration (see link). A reprice of corporate credit when balance sheets are still thin could indicate that meaningful risk lies ahead. Deeper under the surface margin debt for stock purchases are also at all-time highs. Finally, some vol selling strategies in ETF form could be the pin prick to passive investing.
“I don't know that many people ever believed that someone other than a white male should be a Fed chair.”
Authored by Clive Hale via The View From The Bridge blog, As long time readers will know we do not put much credence in end of year forecasts; nor in fact forecasts in general; the Fed and the Met Office being stand out examples. As an alternative to what is going to happen in 2018 ("Markets will fluctuate"...attrubuted to J.P. Morgan) we have put together some memorable quotes we have picked up dutring the course of 2017. Firstly the reality about forecasting - "Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing." Thomac Vician Jnr student of Ed Seykota. And equally damning is this - The Illusion of Certainty "Many of us smile at old fashioned fortune tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them." - Gerd Gigerenzer "Our industry is full of people who got famous for being right once in a row." Howard Marks And then we have forecasts with added hubris for good measure... "Inflation is not where we want it to be or where it should be" Mario Draghi At least one person gets it! "I never think of the future - it comes soon enough" - Albert Einstein As does the Sage of Omaha "Forecasts usually tell us more of the forecaster than the future" - Warren Buffett And the late, great Peter Bernstein "Forecasts create the mirage that the future is knowable" Or put another way "After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting." Jesse Livermore - Reminiscences of a Stock Operator Another quote from Livermore reminds us that it wont be different this time... "There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure." There are quite a few "idiots" around right now...allegedly "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak or an idiot after the peak" - John Hussman Advice on the pricking of bubbles "The specific manner by which prices collapsed is not the most important problem. A crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger. This very unstable condition will lead eventually to its collapse, as a result of a small or the absence of adequate motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position, the instantaneous cause of the collapse is secondary." Didier Sornette French geophysicist Statistics - sadly an under rated business "Lottery: A tax on people who don’t understand statistics." "All models are wrong, but some are useful." George Box statistician We are promised higher inflation in some quarters but... "Despite the cost of living, have you noticed how it remains so popular?" Most puzzling development in politics is the determination of European leaders to recreate the Soviet Union in Europe - Mikhail Gorbachev Here is some intelligent advice from a surprising source "Sometimes your best investments are the ones you don't make." - Donald Trump. And from another head of state turned technical analyst "Follow the trend lines not the headlines." Bill Clinton “Government is instituted for the common good; for the protection, prosperity and happiness of the people; and not for the profit, honour, or private interest of any one man, family, or class of men” – John Adams, 2nd President of the United States. Something the 45th should bear in mind...if only "The main difference between government bailouts and smoking is that in some rare cases the statement "this is my last cigarette" holds true." Nicholas Taleb Economists are getting a bad press so we wont buck the trend "Economics is like a dead star that still seems to emit light, but you know that it's dead." - Nicholas Taleb "Anyone who believes in indefinite growth of anything physical on a physically finite planet is either a madman or an economist" – Kenneth Boulding “I imagine that Ben Bernanke, Mario Draghi and Haruhiko Kuroda all stay awake at night imagining ways to force negative rates on savers. But the larger question, beyond a sociopathic desire to control others in service of one’s own intellectual dogma, is why anyone would advocate such policies. I can’t emphasize strongly enough that there is no economic evidence that activist monetary intervention has materially improved economic performance in recent years.” John Hussman "Reliance on monetary policy as an effective stabilising device would involve a high degree of instability in the capital market. The capital market would become far more speculative and longer run considerations of profitability would play a subordinate role. As Keynes said, "when the capital investment of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.” — Kaldor, 1958 And finally in a lighter vein... "Grow your own dope. Plant an economist." Graffiti seen at the LSE Lastly some classics that you may have seen before but are worthy of repetition mainly because they will make you smile. "The fact that there is a highway to hell but only a stairway to heaven tells you something about the anticipated traffic..." "There are three excellent theories for arguing with women...none of them work" "Some people see the glass half full. Others see it half empty. I see a glass that’s twice as big as it needs to be."– George Carlin For those of us with teenage children "Why can't life's problems hit us when we're 17 and know everything?" Nothing like a good game of cards - "I stayed up all night playing poker with Tarot cards. I got a full house and four people died." "I don’t exercise because it makes the ice jump right out of my glass." “The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine” Abraham Lincoln And as Christmas is coming we will all need to do follow this guide How to reduce your stress: 1 don't respond to negativity2 go for a walk, be active3 be honest4 read, write more5 give without expecting a get6 breathe deeply7 forgive first8 write thank you notes9 be a better friend10 you are not your job11 complain less12 laugh more Especially 12! Have a very Merry Christmas and all that you wish for in the New Year.
The Great Depression from the Perspective of Today, and Today from the Perspective of the Great Depression: Hoisted from 2013
**Hoisted from 2013**: The Great Depression from the Perspective of Today, and Today from the Perspective of the Great Depression: J. Bradford DeLong U.C. Berkeley and NBER September 2013 :: University of Missouri—Columbia ---- ####1. Introduction#### The past six years have seen an interesting dual shift in economics and economic history. Six years ago economists were a highly confident, aggressive, and arrogant bunch. We believed that we understood how modern market economies worked. We believed that we knew how to keep them running with both low and stable inflation and at fairly high levels of prosperity, relative to their technological productive potential. It happened—as it had always happened whenever economics had thought that they had it figured out—we were wrong. We were wrong, as we have discovered over the past six years as people attempted to do economic policy, that we had misjudged how to reliably keep economies running at a high level of prosperity. And we had misjudged how to reliably keep economies running at a high level of prosperity because we had misjudged what the Great Depression was. The fact that we had a faulty vision of the Great Depression was a caused of the policy errors and...
What Is Bitcoin Really Worth? Don’t Even Ask. - Robert Shiller What Can Central Banks Do To Manage the Next Financial Crisis? - Ben Bernanke How the MillerCoors joint venture changed competition - Microeconomic Insights What Happens if the Tax...
Authored by Brandon Smith via Alt-Market.com, There is one simple rule to follow when understanding the tragic history of economies: Never put blind faith in a system built on an establishment-created foundation. You would think this would not be a difficult concept to grasp being that we have so many examples of controlled economies and collapse to reference over the centuries, but in our era more than ever the allure of a virtual world with promises of endless wealth and ease is overwhelming. Yes, I am referring primarily to cyptocurrency "tulip-mania" (sorry bitcoiners, the description is too fitting, it isn't going away), but not this issue alone. I am also referring to a far-reaching problem of which cryptocurrencies are a mere reflection. Namely, the fact that humanity is swiftly losing sight of what a true economy is and what it is supposed to accomplish. It is because of this reality that crypto is thriving. First, let's be clear, fiat currencies are one of the first machinations of the virtual economy. Once paper currencies printed from thin air by central bankers were separated from tangible backing and accepted by the masses as "valuable" and worth trading labor for, the seed of financial cancer was planted. Today, there is one final step needed for the establishment to accomplish complete tyranny in global trade and that is to disconnect the masses fully from private transactions. In other words, we must be tricked into going digital, where privacy is an absurd memory. Virtual economics is appealing for several reasons, most of them bad. Americans and much of the west in particular are increasingly uncomfortable with the idea of real production. The latest generation coming into political and social influence, the millenials, is a perfect example. Surveys show American millenials more than any other generation lack basic workplace competency skills, including scoring low on arithmetic and reading comprehension. Often portrayed as "tech savvy" in popular culture and the media, millenials are quite inept when it comes to core skills that fuel strong business and trade, which is part of the reason why the U.S. is falling into the shadow of foreign workforces. Millenials in the West also exhibit abysmal technical skills in international testing and lag far behind foreign peers. This has come as a surprise to many mainstream economists and social analysts, primarily because millenials are also considered the "most educated" generation ever. But, of course, we have not only been given a virtual economy in recent decades, but also a virtual educational system. A majority of millenials are lacking when it comes to key production skills and entrepreneurship methods because they have been trained to dismiss such skills as negligible. In other words, millenials have been conditioned to be academic idiots. Why go through the struggle and hardship required to become an effective producer of tangible necessities when it is far easier to join a collectivist drive for socialism and a structure in which little to no work is required to obtain such necessities? Why not steal from a productive minority and spread it thinly enough to keep the unskilled majority fed? It is only within this kind of culture that virtual production, a virtual society and virtual "money" is seen as an ideal solution. The notion is becoming more and more prevalent in our popular media, and I believe this is rather symbolic (or ironic) of our conundrum. For example, consider the book Ready Player One, a pop-culture craze and archetypal zeitgeist for millenials soon to be released as an intended Hollywood blockbuster directed by Steven Spielberg. The novel depicts the world of 2045, a world in which fossil fuel depletion and "global warming" have triggered economic and social decline (Remember in the 1980s when they used to tell us that global warming was going to melt the polar icecaps and we would be under water by the year 2000?). A totalitarian governing body controlled by corporate behemoths rules over the dystopian sprawl. In response to an ever painful existence in the real world, the masses have sought to escape to a virtual world called "the Oasis," created by a programming genius. The Oasis becomes a nexus for the global economy and a virtual society. This sounds like a rousing background for a story of rebellion, and it is about that... sort of. Unfortunately, here is where the disturbing ties between our world and the fictional world of Ready Player One meet. The "rebellion" is for all intents and purposes also virtual, and for millenial audiences in particular, this is supposed to be inspiring. Perhaps this is why cryptocurrencies are so appealing to the millenial crowd in particular. Think about it — the dismal economic doldrums of Ready Player One exist NOW; we don't have to wait until 2045. Millenials are already feeling disaffected, indebted and disenfranchised, and most of them are also skill-less. Self reliance to them is an idea so alien it rarely if ever crosses their minds. So, how do they fight back? Or, how are they tricked into thinking they can fight back against a virtual system that has left them in the gutter? Why, with a virtual community and a virtual currency, of course. Millenials and others think that they are going to rebel and "take down the banking oligarchs" with nothing more than digital markers representing "coins" tracked on a digital ledger created by an anonymous genius programmer/programmers. Delusional? Yes. But like I said earlier, it is an appealing notion. Here is the issue, though; true money requires intrinsic value. Cryptocurrencies have no intrinsic value. They are conjured from nothing by programmers, they are "mined" in a virtual mine created from nothing, and they have no unique aspects that make them rare or tangibly useful. They are an easily replicated digital product. Anyone can create a cryptocurrency. And for those that argue that "math gives crypto intrinsic value," I'm sorry to break it to them, but the math is free. In fact, for those that are not already aware, Bitcoin uses the SHA-256 hash function, created by none other than the National Security Agency (NSA) and published by the National Institute for Standards and Technology (NIST). Yes, that's right, Bitcoin would not exist without the foundation built by the NSA. Not only this, but the entire concept for a system remarkably similar to bitcoin was published by the NSA way back in 1996 in a paper called "How To Make A Mint: The Cryptography Of Anonymous Electronic Cash." The origins of bitcoin and thus the origins of crytpocurrencies and the blockchain ledger suggest anything other than a legitimate rebellion against the establishment framework and international financiers. I often cite this same problem when people come to me with arguments that the internet has set the stage for the collapse of the globalist information filter and the mainstream media. The truth is, the internet is also an establishment creation developed by DARPA, and as Edward Snowden exposed in his data dumps, the NSA has total information awareness and backdoor control over every aspect of web data. Many people believe the free flow of information on the internet is a weapon in favor of the liberty movement, but it is also a weapon in favor of the establishment. With a macro overview of data flows, entities like Google can even predict future social trends and instabilities, not to mention peek into every personal detail of an individual's life and past. To summarize, cryptocurrencies are built upon an establishment designed framework, and they are entirely dependent on an establishment created and controlled vehicle (the internet) in order to function and perpetuate trade. How exactly is this "decentralization", again? TOTAL information awareness is the goal here; and blockchain technology helps the powers-that-be remove one of the last obstacles: private personal trade transactions. Years ago, a common argument presented in favor of bitcoin was that it was "completely anonymous." Today, this is being proven more and more a lie. Even now, in the wake of open admissions by major bitcoin proponents that the system is NOT anonymous, people still claim anonymity is possible through various measures, but this has not proven to sway the FBI or IRS which have for years now been using resources such as Chainanalysis to track bitcoin users when they feel like doing so, including those users that have taken stringent measures to hide themselves. Bitcoin proponents will argue that "new developments" and even new cryptocurrencies are solving this problem. Yet, this was the mantra back when bitcoin was first hitting the alternative media. It wasn't a trustworthy assumption back then, so why would it be a trustworthy assumption now? The only proper assumption to make is that nothing digital is anonymous. Period. With the ludicrous spike in bitcoin prices, champions of the virtual economy are unlikely to listen to any questions or criticisms. I have never argued one way or the other in terms of bitcoin's potential "market value," because it does not really matter. I have only ever argued that cryptocurrencies like bitcoin are in no way a solution to combating the international and central banks. In fact, cyrptocurrencies only seem to be expediting their plan for full spectrum digitization and the issuance of a global currency system. Bitcoin could easily hit $100,000, but its "value" is truly irrelevant and consistently hyped as if it makes bitcoin self evident as a solution to globalism. The higher the bitcoin price goes, the more the bitcoin cult claims victory, yet the lack of intrinsic value never seems to cross their minds. They have Scrooge McDuck-like visions of swimming in a vault of virtual millions. They'll only accuse you of being an "old fogey" that "does not understanding what the blockchain is." The fact is, they are the one's that do not really understand what the blockchain is — a framework for a completely cashless society in which trade anonymity is dead and economic freedom is destroyed. Ask yourself this: Why is it that central banks around the world (including the BIS and IMF) are investing in Bitcoin and other crytpocurrencies while developing their own crypto systems based on a similar framework? Could it be that THIS infusion of capital and infrastructure from major banks is the most likely explanation for the incredible spike in the bitcoin market? Why is it that globalist banking conglomerates like Goldman Sachs lavish blockchain technology with praise in their white papers? And, why are central bankers like Ben Bernanke speaking in favor of crypto at major cryptocurrency conferences if crypto is such a threat to central bank control? Answer — because it is not a threat. They benefit from a cashless system, and liberty champions are helping to give it to them. Above all else, the virtual economy breeds weakness in society. It encourages a lack of tangible production. Instead of true producers, entrepreneurs and inventors, we have people scrambling to sell real world property in order to buy computing rigs capable of "mining" coins that do not really exist. That is to say, we may one day soon be faced with millions of citizens expending their labor and energy in order to obtain digital nothings programmed into existence and given artificial scarcity (for now). It also encourages false rebellion. Real change requires actions in the real world. Removing banking elitists and their structures by force if necessary (and this will probably be necessary). Instead, freedom activists are being convinced that they will never have to lift a finger to beat the bankers. All they have to do is buy and mine crypto. The day will come in the near future when the folks that embrace this nonsense will wake up and realize they have wasted their energies chasing a unicorn and are ill prepared to weather the economic reset that continues to evolve. To maintain a real economy in which people are self reliant and safe from fiscal shock, you need three things: tangible localized and decentralized production, independent and decentralized trade networks that are not structured around an establishment controlled system (like the internet is controlled), and the will to apply force to protect and preserve that production and those networks. If you cannot manufacture a useful thing, repair a useful thing or teach a useful skill, then you are essentially useless in a real economy. If you do not have localized trade, you have nothing. If you do not have the mindset and the community of independent people required to protect your local production, then you will not be able to keep the economy you have built. This is the cold hard truth that crypto proponents do not want to discuss, and will dismiss outright as "archaic" or "not obtainable." The virtual economy is so much easier, so much more enticing, so much more comfortable. Why risk anything or everything in a real world effort to build a concrete trade network in your own neighborhood or town? Why risk everything by promoting true decentralization through localized commodity-backed money and barter systems? Why risk everything by defending those systems when the establishment seeks to crush them? Why do this, when you can pretend you are a virtual hero wielding virtual weapons in a no risk rebellion in a world of electronic ones and zeros? In truth, the virtual economy is not legitimate decentralization, it is a weapon of mass distraction engineered to kill legitimate decentralization.
Authored by 720Global's Michael Lebowitz via RealInvestmentAdvice.com, Recently we received the following question from a subscriber: “If a correction in the stock or bond markets comes, the Central Banks will buy stocks with printed money, like the Japanese Central Bank, etc. Will there ever be a shakeout of the garbage and junk in the system? I am losing all confidence.” –Ron H. Questions like Ron’s that suggest the decay of capitalism and free markets should raise concerns for anyone’s market thesis, bullish, bearish or agnostic. What stops a central bank from manipulating asset prices? When do they cross a line from marginal manipulation to absolute price control? Unfortunately, there are no concrete answers to these questions, but there are clues. Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC). The central banks’ goals, in general, are threefold: Expand the money supply allowing for the further proliferation of debt, which has sadly become the lifeline of most developed economies. Drive financial asset prices higher to create a wealth effect. This myth is premised on the belief that higher financial asset prices result in greater economic growth as wealth is spread to the masses. “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”– Ben Bernanke Editorial Washington Post 11/4/2010. Lastly, generate inflation, to help lessen the burden of debt. QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome. The wealth effect is putting riches in the hands of a small minority of the population, with negligible benefits, if any, flowing to the majority of the population. Bernanke’s version of the virtuous circle, as highlighted above, is far from virtuous unless you are in the upper five to ten percent of households by wealth. To understand how a real economic virtuous circle works, we recommend you read our article The Death of the Virtuous Cycle and watch The Animated Virtuous Cycle. Inflation has been low since 2008 and deflation continues to be a chief concern of most central bankers. Because QE, in all cases, was focused on financial asset prices and not the prices of everyday goods and services, the inflation they aimlessly seek has not occurred. To summarize our views, largely ineffective monetary policies are providing few economic benefits. They are increasing the debt burden and furthering socially destabilizing trends. Worse, these policies are packed with consequences that lie dormant and have yet to emerge. One of our concerns, which is being heralded as a positive, is the massive distortions in financial asset prices worldwide. Consider a few of these facts below and whether they are sustainable: U.S. yields have been among the lowest ever on record dating back to 1776 U.S. equity valuations have risen to levels rarely observed and from this perch have always been followed by massive losses Over $9 trillion in sovereign bonds yields in many European countries and Japan have negative current yields European junk-grade debt now trades at yields lower than U.S. Treasuries Veolia, a French BBB rated company, recently issued a 3-year bond at a yield of -.026%. Italian 3-year government bonds yield -0.337%, despite the 3rd highest debt to GDP ratio of all developed nations (132%) Argentina, which has defaulted 6 times in the past 100 years, issued a $2.75 billion 100-year bond paying a paltry 8% interest The BOJ owns over 75% of all Japanese ETFs The Swiss National Bank owns 19.2 million shares of Apple, or 3% of total shares outstanding, and $84 billion in aggregate of U.S. stocks Yes, Ron, the central bankers have clearly crossed the line between free markets and government controlled markets. To answer your question about the “shakeout,” we must wait until the inevitable day comes and asset prices are in free-fall. When this occurs, we will learn the full extent of their support and how far they have crossed the line. We like to think the central bankers are willing to endure the short-term pain of such a situation and allow the natural cycle of economies and asset prices to run their course. The reality, however, is that the pattern of their actions in the post-financial crisis era argue that they are unlikely to relinquish their grip. To the extent that authority and power is extended to the Fed through the U.S. Congress, it does not seem likely for career politicians to urge action that may be painful in the short-term but highly beneficial in the long-term. This premonition was supported by recent statements from the October 2017 Federal Reserve minutes and appointed Fed Chairman Jerome Powell respectively. Fed Minutes: “In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” further “They worried that a sharp reversal in asset prices could have damaging effects on the economy.” Jerome Powell, in prepared remarks to Congress stated: “(the Fed) will respond with force to threats to the nation’s stability.” Putting two and two together, one can quickly figure out that falling asset prices and the “damaging effects” they will inflict on the economy will not be tolerated by the Fed. Ron, while we cannot answer your question with certainty, we are relatively confident the Fed and other central banks’ influence on markets will only increase in time as they continue to perpetuate the debt and economic problems they helped create. Naturally, the next question for consideration is to what extent markets may be bigger than the Fed? That is an article for another day.
Authored by Kevin Muir via The Macro Tourist blog, The past three Fed Chairs before Yellen all had their own crisis to deal with. Volcker had the disaster of the early 1980’s as he struggled to tame inflation with double digit interest rates. That helped contribute to the Latin American debt crisis, and the subsequent global bear markets in stocks. He handed over the reins to Greenspan in the summer of ‘87 and within months, the new Fed Chairman faced the largest stock market crash since the 1920’s. That trial by fire was invaluable for Greenspan, as he faced a second crisis when the DotCom bubble burst at the turn of the century. His successor, Ben Bernanke also did not escape without a record breaking financial panic when the real estate collapse hit the global economy especially hard in 2007. But Yellen? Nothing. Nada. She has presided over the least volatile, most steady, market rally of the past century. Was she lucky? Or was this the result of smart policy decisions? I tend to attribute it more to luck, but it’s tough to argue that she made any large mistakes. Sure you might quibble about the rate of interest rate increases. And her critics will argue that economic growth, and more importantly, wage increases have been especially anemic under her watch, but to a large degree, those variables are out of her hands. I don’t want to argue about Yellen’s legacy. Chances are your view is heavily influenced by your opinion about proper monetary policy. I doubt I could change your mind, but more importantly, it won’t help us decide where the markets are headed even one little bit. Yellen’s last meeting Yet the lack of a market crisis under her watch might play an important influence on the last meeting she chairs. Think about what she is leaving for Jerome Powell. It is quite clear that the ‘animal spirits’ have been ignited. All you need to do is look at the price of Bitcoin, or the last eleven months of gains in global stocks. Look closely at that chart. Try to find another year without a red month. Or take a gander at the market capitalization of the various crypto currencies. Say what you want about the investing merits surrounding Bitcoin and all the other crypto currencies, but it’s safe to say that without the massive Central Bank science experiment of massive balance sheet expansion and negative rates, it would have been considerably more difficult for crypto currencies to reach this sort of popularity. Try blowing a crypto currency bubble with positive real rates. Tough. Try again with negative real rates throughout the world. Much easier. Look at the Developed Market countries. They all have a negative real Central Bank rate. Wonder why the public is clamouring for an alternative store of value? It’s because Central Bankers are engaging in offensive amounts of financial repression. I have this buddy who used to be a big time credit trader, but is now a semi-retired student of the markets. He is a massive crypto bull. Since way back when. And the reasons for his bullishness center around the absurdity of the amount of Central Bank printing. He has seen first hand the fragility of the financial system and is convinced we will be debased to oblivion. Ok, I might be paraphrasing a little. But here are a couple of blog posts he wrote on LinkedIn (yeah, I know, LinkedIn?) that go into his reasoning for owning cryptos - The Last Ten Years of Fiat Money Math and I am a Bitcoin Fan. Now I can’t bring myself to buy bits-in-the-sky because the Central Bankers are all insane, but I am sympathetic to his arguments that the end game is for all this to be debased. The reason I bring this up? This is Janet Yellen’s last press conference. Yeah, it appears as though she has made it through her term without causing an equity crash. But could it be that her legacy will be tarnished by presiding over the end of the public’s faith in Central Banks’ ability to preserve the value of money? Rightly or wrongly, we might be on the verge of a dramatic change in the global financial system. It’s the right thing to do Given the environment, the most logical tack for Yellen is to err on hawkishness. She has a chance to give a final warning about the current exuberant attitude sweeping across the nation. Let’s face it, the Federal Reserve was practically begging the Federal Government to loosen the fiscal purse strings in the years following the Great Financial Crisis, yet the Tea Party made sequestration and other cuts a priority. Now, some eight years into a recovery, the Federal Government is aggressively cutting taxes and planning on making a big infrastructure spending push. The timing is terrible. The animal spirits have been roused, and it’s clear it’s the Federal Reserve’s job to tame them. Trouble is, the market does not believe the Fed has the guts to follow through with their projections. Have a look at the difference between market expectations of future Fed Funds policy versus the FOMC’s “infamous” dot plot. The purple line is the market’s expectation of Fed funds, while the green line is the FOMC’s median projection. The other day on Bloomberg TV, I heard a great explanation of the difference between these two series. A former Fed staffer argued that the FOMC projection represents the modal path, while the market is pricing a probability weighted mean. The market is worried about an accident causing the Fed to slash rates aggressively, and even if it is not probable, they still need to reflect this possibility in their pricing. By that argument, it would seem that the Fed’s Dot Plot will always be higher than the market. But what about the alternative scenario? What if the Fed has to jack up rates because of inflation? Well, the market obviously doesn’t view that outcome as realistic. Yellen is going to surprise on the hawkish side Back to Yellen. She is leaving, the markets are going bezerk. Put yourself in her shoes. You haven’t had even the slightest hint of a crisis under your watch. You are about to hand over the keys of the Federal Reserve. What would be the honourable thing to do? Delivering the most hawkish press conference one could reasonably deliver under the circumstances would be the correct course of action. Maybe the market will ignore you. But at least you tried. I know the markets are not at all concerned about tomorrow’s FOMC meeting, but I think there is a decent chance that Yellen & Co. end up erring with a significantly more hawkish statement than expected. My suspicion is that Central Banks throughout the globe have not only passed their period of peak easiness, but are going to surprise in the coming quarters by aggressively reducing monetary stimulus. Nothing would help this campaign more than a Federal Reserve leading the way. This will be Yellen’s parting gift to Powell and the world. Let’s just hope that doesn’t cause a repeat of Greenspan’s first few months on the job…
Optimal quantitative easing Richard Harrison Bank Underground, DECEMBER 2017 Ben Bernanke famously remarked that “the trouble with QE is that it works in practice but not in theory”. And ahead of its adoption, many academics were sceptical that QE would have any effects at all. Yet despite QE being a part of the… Read More The post Optimal Quantitative Easing appeared first on The Big Picture.
Authored by Jeffrey Snider via Alhambra Investment Partners, The timing just never seems to fall in our favor. If we had had this conversation ten years ago as would have been appropriate, then this evolution might have fell perfectly in our collective laps. Just as the global financial system, really the international, interbank monetary system of the eurodollar, was crashing all around us, the genesis block of the Bitcoin blockchain was hard coded. Within it contained very insightful if superfluous (from a technical standpoint) text, a truly elegant starting point for a competing monetary idea: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks Officials, particularly Western central bankers, were at that time in no mood for thinking about alternative global arrangements. Even those other monetary officials (Zhou Xiaochua) who happened to know what was really wrong were still willing to give the Ben Bernanke’s a second chance to fix it. It was our lost opportunity because central bankers didn’t then, and still don’t now, know what’s actually broken. The world is far too focused today on Bitcoin, not without legitimate reasons. It has in 2017 taken it by storm, rising parabolically for quite a remarkably sustained period. People who have no idea what it really is are rushing toward it, some buying it without first appreciating the whole complexity and texture of the technology behind it. As such, it forces unwanted political attention that might have been better served understanding the motivations behind the message contained within the genesis block. Now, they can simply claim it’s in a destructive bubble and lump every form of crypto, both what’s already in existence and what is yet to come (the really exciting part), into the same negative category. Economists, even those who still bother trying to resemble free market thinkers, rush to ban it. As I wrote last week on the topic of what’s really, in my view, motivating Bitcoin mania: Statists don’t share power. Economists in the realm of money are thorough statists, however they might describe themselves as some range of capitalist. Bitcoin is not, to me, the part to focus on. It is in many important ways, as President Obama was often fond of saying, a distraction. The potential lies not in it being a competing currency but upgrading as to what the eurodollar has been for half a century already. If you understand that the eurodollar system isn’t really a currency system but a set of network standards and protocols, then blockchain seems like it was made to be if not the perfect solution than still perhaps the right one given where we are (to really make sense of this, you really should read the whole thing). That’s what the acceptance market essentially became – a way for banks to conduct their thousands of individual transactions across time and geography with only having to ship, or wait to receive, money once the net sum of all those trades would come due. It was a ledger system (poker chips) that was backed by deposits of gold and cash (with the dealer), as well as central banks (the house). The eurodollar which supplanted the acceptance market even while the Bretton Woods gold exchange system remained nominally the official reserve standard was merely the next step for international monetary evolution along these lines. How much more elegant might the whole operation become if we just eliminate the need for cash deposits altogether? To a true money adherent, such an idea was and is today abhorrent. To a bank merely trying to operate as efficiently as possible, this was a dream scenario. The primary problem with the eurodollar system is that it is a decentralized ledger, where much of what goes on with them doesn’t ever see the light of day (the shadows). It was an attempt at a pure medium of exchange, and for a very long time it seemed to work that way as if nobody really needed to know what was on all those darkly hidden registers. From August 9, 2007, forward, it was proven that even a decentralized ledger system really needs full private scrutiny. This is where blockchain may hold an answer. The technology behind Bitcoin (don’t get hung up on specifically Bitcoin) is nothing more than a network ledger. It is instead centralized, but it could in theory (with a bit more work, pun intended) take the place of the decentralized eurodollar ledger. In the latter, the credit-based money system, the banks are what matter for creation of money supply (the dealers create all the chips, and even control what kind of chips may be played). In the former, that weakness is removed as is the foolish dependency on incompetent, ideologically stunted central bank statisticians. In other words, it’s not so much ridding ourselves of dollars or even “dollars”, but changing the way they are accounted for while still allowing for some positive attributes (there are some) of the eurodollar system to be maintained. A pure medium of exchange is a truly tantalizing idea, a dedicated payment system alone, but it needs to be far more robust in a way the dispersed and spread out eurodollar format just never could be. More than that, I think it offers the shortest distance between A and B; A being where we are now stuck in chronic monetary instability and thus the worst economic case; B being the very happy day when that problem is solved and the great global recovery, real not imagined, takes off. We are going to get to B at some point in the future, and the journey we take to that point will determine what that means. If we arrive at B in the same way as the Great Depression era (Bretton Woods taking place toward the end of another world war), meaning doing nothing but the same thing that Economists tell us to do over and over, it will have been the worst of the worst cases. The idea is to get started as soon as possible so that we can work out the solution and the way to implement it as painlessly and with as little disruption as possible so as to arrive at B long before the political and social sh#& hits the fan. That’s where the timing may have us unlucky. Maybe our fate was sealed the minute Ben Bernanke started acting courageously and we let him off the hook for why he felt that way in the first place (he’s never answered for “subprime is contained”, and nobody has ever made him). It’s too late now, and with Bitcoin off like a rocket there is a very real, dispiriting chance blockchain may never get enough work and then its real trial run. Nobel Prize-winning economist Joseph Stiglitz said “bitcoin is successful only because of its potential for circumvention, lack of oversight.” “So it seems to me it ought to be outlawed,” Stiglitz said Wednesday in a Bloomberg Television interview with Francine Lacqua and Tom Keene. “It doesn’t serve any socially useful function.” Stiglitz is a buffoon and a thorough statist, but he is influential because Economics still dominates the political end of things. From China to Europe there are official and unofficial voices expressing grave doubts and discomfort over Bitcoin without really considering blockchain. It may end up where Bitcoin sinks the blockchain given that its greatest risks are all political (an outright ban). The only way to thwart those intentions is for enough people to take a determined interest in cryptos as a class rather that solely as speculation in the one; to see the great potential in the real stuff of its evolution, and not get hung up on something like price. We have to step ourselves outside of currency and appreciate the currency system, and do it with enough of a broad basis of appreciation that it overcomes and survives what will surely be an effort to kill it. It may be that our future depends upon how successful we can become in this way, accepting blockchain no matter what ancient Economist decries it, or whichever political figure who clearly doesn’t get it or our real monetary problem seeks its official exile. As if we needed any more of them, it’s another race or countdown. The primary issue after losing one decade is always really going to be time. We are going to go from A to B one way or another; willingly by design, in a messy, uncontrolled reset, or some ways in between . There are today even after ten years still some positive outcomes possible. I worry that timing (Bernanke’s real legacy) may be conspiring to take one of those few away before it ever really gets started.
Authored by John Mauldin via MauldinEconomics.com, Like millions of other people, I am a fan and a user of Amazon. They do make buying things convenient, especially little things that you might have to go to art specialty stores to find. I’m a huge user of the Kindle app, too. I will admit that I don’t quite understand the Amazon business model of growth over profits. But I have noticed that most of the profits Amazon actually makes are coming from their non-commercial side—stuff like cloud services. Be that as it may, there is a semi-dark side to Amazon. They are slowly but surely eating retail jobs. Amazon Is Not the Only One to Be Blamed Now, to be fair, Amazon represents only a small portion of US retail sales, but it accounts for an outsized portion of the growth in retail sales. And, again to be fair, Amazon does not do even a majority of online sales, since other online retailers are just as aggressively pushing their own products. To be even more fair, a great deal of the problem in American retail jobs and businesses is that we simply have too many retail stores. Reasonable analysis that I’ve read suggests that we have anywhere from 10 to 15% more retail stores than we actually need. Now, that’s good for competition and choice, but it is just one more reason why there is going to be a consolidation in retail companies and further losses of retail jobs. What’s That Going to Do for the Wage-Inflation Issue? As we head into 2018, there are a few dark clouds here and there, but I am mostly optimistic. I do think the primary risk in 2018 will be major central bank policy errors. I will probably repeat these figures again this weekend, but between the $450 billion that the Fed intends to pull out of its balance sheet and the $500 billion by which the ECB is going to reduce its QE, there will be almost $1 trillion going into the market. Since the Fed, and especially Ben Bernanke, took credit for the rise in asset prices induced by its QE, why this Fed thinks that quantitative tightening (QT) will have no effect at all on the market is quite beyond me. It’s one thing to raise rates, which they should have done years ago, and it’s another thing altogether to raise rates and fire up a QT program at the same time. I think they will be doing this at precisely the wrong time and for the wrong reasons. In the meantime, let’s look at one of the technological forces, Amazon, and the tidal wave of online sales that is putting pressure on the retail sales market. You wonder why there has been no wage inflation when, theoretically, unemployment is so low? Here’s one of a number of answers: Amazon has hired approximately 75,000 robots just this year. * * * Get Varying Expert Opinions in One Publication with John Mauldin’s Outside the Box Every week, celebrated economic commentator John Mauldin highlights a well-researched, controversial essay from a fellow economic expert. Whether you find them inspiring, upsetting, or outrageous… they’ll all make you think Outside the Box. Get the newsletter free in your inbox every Wednesday.
4 декабря в рамках выставки "ФармМедПром-2017" состоялась церемония подписания меморандума о сотрудничестве междуTriton Electronic Systems, Ltd. и Shenzhen Mindray Bio-Medical Electronics Co., Ltd. Стороны договорились о начале локализованного производства оборудования для анестезиологии и реанимации на базе "Тритон-ЭлектроникС" (Екатеринбург).Подписание настоящего меморандума является официальным началом сотрудничества между компаниями - лидерами российского рынка. Оборудование будет выпускаться под маркой Triton/Mindray.Новое оборудование - это синергия передовых разработок китайской и российской стороны. В российскую модификацию наркозно-дыхательных аппаратов WATO RUS и мониторов пациента Beneview RUS будут включены измерительные функциональные модули, разработанные компанией "Тритон-ЭлектроникС". Например, серия модулей: капнография в прямом потоке, мониторинг уровня седации и глубины анестезии, мониторинг концентрации газовых анестетиков и пр. Дополнительные возможности для разработки и запуска производства этих измерительных модулей российская компания получила при софинансировании Министерством промышленности и торговли Российской Федерации в рамках программы "Развитие фармацевтической и медицинской промышленности Российской Федерации на период до 2020 года и дальнейшую перспективу".Новая модификация оборудования под маркой Triton/Mindray существенно снизит стоимость владения медицинской техникой для конечного потребителя. Теперь лечебные учреждения могут сформировать любую необходимую комплектацию за меньшую цену. Также компания "Тритон-ЭлектроникС" возьмет на себя обязательства по гарантийному и постгарантийному обслуживанию, инсталляции оборудования и обучению персонала.Расходные материалы для измерительных каналов в новой линейке медицинской техники будут также производиться компанией "Тритон-ЭлектроникС". Низкая стоимость расходных материалов позволит лечебным учреждениям любого уровня использовать самые современные медицинские технологии."Мы уверены в жизнестойкости совместного проекта с нашими китайскими партнёрами. Компания Mindray давно известна на российском рынке и имеет хорошую деловую репутацию. Продукты партнёров уже заслужили доверие покупателей. Поэтому я считаю, что наш совместный проект по локализации оборудования имеет хорошее будущее и будет выгоден для обеих сторон. Мы планируем и дальше углублять сотрудничество в области трансфера технологий, в том числе экспорт наших разработок за рубеж", - прокомментировал Генеральный директор "Тритон-ЭлектроникС" Игорь Лившиц.Запуск нового оборудования для анестезиологии и реанимации под двойным брендом запланирован на второй квартал 2018 года. В настоящий момент оборудование передано в учреждения Росздравнадзора для проведения государственной регистрации медицинских изделий. Потенциальный объем продаж оборудования в 2018-2020 годах составит не менее 10 млн. долларов."Сегодня мы начинаем сотрудничество с компанией "Тритон-ЭлектроникС". Мы считаем, что в настоящее время эта компания является наиболее компетентным российским производителем медицинского оборудования. У партнёра есть интересные инновационные разработки, которые можно интегрировать в наши аппараты. К тому же у нас одинаковая точка зрения на стратегию развития рынка медицинского оборудования в России и СНГ. Я думаю, в тесном сотрудничестве с "Тритон-ЭлектроникС" мы сможем создать оптимальные продукты для российских больниц", - сказал Генеральный директорМиндрей Медикал Рус и директора Миндрей Медикал в странах СНГ Xing Chen.Совместный проект Triton/ Mindray направлен на создание оборудования, которое сможет максимально отвечать клиническим потребностям врачей. И в то же время является наиболее экономически эффективным. образование и здравоохранение Fri, 08 Dec 2017 22:31:35 +0700 Наталия Кулагина 535783 Американские "сланцевые бароны" переходят на сторону России http://news2.ru/story/535782/ В сентябре этого года в Нью-Йорке состоялась секретная встреча 12 наиболее влиятельных игроков сланцевой индустрии США. Об этом стало известно только сейчас, да и то исключительно по причине невозможности скрыть результаты переговоров. The Wall Street Journal сообщает, что американские "сланцевые бароны" фактически подняли белый флаг в глобальной ценовой войне, а Bloomberg с грустью констатирует: "Большой сланец перешел на сторону ОПЕК". После нескольких лет упорной борьбы за долю нефтяного рынка и обрушение российской и саудовской экономики американские сланцевые компании коллективно отказываются от дальнейших попыток "задушить" своих российских и ближневосточных конкурентов. Если называть вещи своими именами, можно сказать, что американские "сланцевые бароны" объявили всеобщую политическую забастовку и теперь будут заниматься зарабатыванием денег, а не геополитикой.Встреча крупнейших инвесторов в сланцевые компании Штатов оказалась необходимой главным образом по причине того, что весь пиар американских сланцевиков, которые заявляли о прибыльности своей добычи даже при ценах в 20 доллар за баррель, оказался ложью. Несмотря на многочисленные меры по "повышению эффективности добычи" и резкое снижение цен на нефтесервисные услуги (что довело до банкротства многие нефтесервисные компании), американская сланцевая добыча приводила к убыткам в 2012 году и генерирует убытки сейчас.Несколько лет инвесторы жили с надеждой на то, что дешевая американская нефть, буквально затопив мировой рынок, приведет к коллапсу конкурентов - прежде всего России и стран ОПЕК, - после чего американские компании смогут заработать просто баснословную прибыль. Ставка вполне могла сыграть: опыт Ливии показывал, что в случае дезинтеграции государства нефтяная добыча пострадавшей страны будет восстанавливаться очень долго или не восстановится полностью вообще никогда.Если вспомнить прогнозы американских экспертов образца 2014 года, то в них не только фигурировали, но и смаковались сценарии, в которых резкое падение цен на нефть, совмещенное с жесткими антироссийскими санкциями, приводило к коллапсу российской государственности. Аналогичные варианты развития событий обсуждались в контексте кризиса в Саудовской Аравии. Несколько лет американские сланцевики работали (и теряли деньги) под лозунгом "все умрут, а я останусь", но Россия в очередной раз отказалась соответствовать западным ожиданиям. Вышеизложенная версия может кому-то показаться конспирологичной, но единственным альтернативным объяснением поведения сланцевых инвесторов США является версия о том, что они все - коллективно - страдают финансовой безграмотностью и были готовы годами терять серьезные суммы просто так. Что же, у игроков финансового рынка иногда случаются приступы массового безумия. Но они всегда происходят в условиях взрывного роста цен, а акции сланцевых компаний Америки за последние годы потеряли около трети своей стоимости, если судить по данным FactSet, на которые ссылаются журналисты The Wall Street Journal. В этом контексте версия о том, что американские сланцевики занимались сознательным демпингом с геополитическим подтекстом и прицелом на ликвидацию иностранных конкурентов, выглядит гораздо убедительнее.В преддверии осенних переговоров по продлению сделки "ОПЕК+Россия" американские "сланцевые бароны" собрались для того, чтобы подсчитать убытки и придумать новую стратегию. По подсчетам консалтинговой компании Evercore ISI, нефтяные компании потратили на 280 миллиардов долларов больше, чем они получили от своих сланцевых операций. Сумма, в которую американской нефтяной отрасли обошлась ценовая война с Россией, не может не поражать воображение. Для сравнения: 280 миллиардов долларов - это ценовой эквивалент 21(!) современного американского авианосца, таких как "Джеральд Р. Форд", которые стоят по 13 миллиардов долларов за штуку. Можно провести и другую параллель: 280 миллиардов долларов - это примерно три долларовых номинальных ВВП Украины за 2016 год. Определенная часть российского экспертного сообщества испытывает иллюзии по поводу способности и желания монетарных властей США бесконечно финансировать "сланцевую революцию". Практика показывает, что никакого подключения американского "печатного станка" к бюджетам сланцевых компаний не произошло, причем по вполне очевидной причине. Федеральная резервная система готова надувать пузыри на финансовых рынках и спасать американские банки, в чьих резервах мертвым грузом лежит значительная часть долларов, "напечатанных" в рамках программы по борьбе с кризисом, но при этом Федрезерв как огня боится "перелива" этих денег в реальную экономику - с непредсказуемыми инфляционными последствиями. Если бы этого страха не было, то правительство США уже давно бы раздавало купюры избирателям или "разбрасывало деньги с вертолетов", как предлагал в свое время глава Федрезерва Бен Бернанке. "Американский сланец" по большей части финансировался очень патриотичными и надеющимися на большой куш после российско-арабского коллапса частными инвесторами. Сейчас эти инвесторы подсчитали потери и поняли, что ценовые войны - хорошо, но деньги зарабатывать надо, и, как точно отметили журналисты Bloomberg, "сланцевая индустрия стала союзником ОПЕК". Такое изменение настроений "сланцевых баронов" является хорошей новостью для нефтяного рынка. Если американские сланцевые компании начнут работать ради прибыли, а не неограниченного увеличения добычи, один из главных факторов, сдерживающих рост цен на нефть, в обозримой перспективе просто исчезнет. Как отмечают журналисты США, это может привести к тому, что участники сделки "ОПЕК+Россия" добьются решительной победы в борьбе за сокращение американской сланцевой добычи. Отсрочить поражение сланцевой индустрии Америки могут несколько факторов. Возможно, среди "сланцевых баронов" найдутся штрейкбрехеры, которые попытаются вести ценовую войну до конца. Может, часть сланцевых компаний окажутся "нереформируемыми", и инвесторам придется их для начала обанкротить, что потребует дополнительного времени. Но самый серьезный риск для сговора "сланцевых баронов" заключается в том, что их позиция может сильно не понравиться вашингтонским политикам. По формальным признакам сентябрьская конференция в Нью-Йорке вполне подходит под определение картельного сговора, а в условиях царящей в Штатах антироссийской истерии есть вероятность, что, помимо обвинений в создании нефтяного картеля, "сланцевым баронам" предъявят еще и обвинение в работе на Кремль. Американской прессе очень понравится сюжет о том, как "двенадцать друзей Путина создали нефтяной картель против интересов США". Остается выяснить, сможет ли богатство американских нефтяников защитить их от гнева политического истеблишмента Соединенных Штатов Америки. (https://ria.ru/analytics/...)
Несмотря на длительное ралли фондового рынка США и рост показателей по ВВП, в американском обществе за последние годы заметно усилились негативные настроения, во многом благодаря которым к власти пришел президент, разделяющий антиутопические взгляды.