Можно воспользоваться спокойными торгами и поговорить о составе Комитета по открытым рынкам Федерального резервного банка США в 2018 году. Помимо ухода Джанет Йеллен, будет внесен ряд дополнительных изменений, которые могут оказать значительное влияние на желание ужесточения политики в следующем году. Традиционно FOMC состоит из 12 членов - 7 членов Совета управляющих, главы центробанка и 4-х президентов Резервного банка, которые работают на 1-летней основе. Когда нынешний глава ФРС Джанет Йеллен уйдет в отставку в феврале, FOMC будет состоять из следующих членов: Председатель ФРС - Джером Пауэлл Совет управляющих - Лайел Брейнар, Рэндал Куорлз ФРС Нью-Йорк - Уильям Дадли ФРС Кливленд - Лоретта Местер ФРС Сан-Франциско Джон Уильямс ФРС Атланта - Рафаэль Бостич ФРС Ричмонд ФРС - ??? Из него выходят Чарльз Эванс и Нил Кашкари, единственные 2 члена, которые проголосовали против повышения ставок в декабре, и в нем появляется Местер, который является ястребом и Уильямс и Бостик, которые являются центристами. Уильямс ранее предположил, что в следующем году ставки могут возрасти в 3 раза, тогда как Бостик менее привержен конкретному масштабу, заявив, что может быть 2,3 или 4 похода. На пост главы ФРС Ричмонда по-прежнему необходимо назначить замену Джеффри Лэкеру, который ушел в отставку в апреле, и на пост ФРС Нью-Йорка нужно будет найти замену Уильяму Дадли, который планирует выйти на пенсию в середине 2018 года. Помимо этих открытых мест в Совете осталось еще 4 вакансии губернаторов. В этом месяце Трамп назначил экономиста Марвина на одну из вакансий. Он широко уважаемый экономист и бывший политик в ФРС Ричмонда, который выступает за более строгий таргетинг на инфляцию и отрицательные процентные ставки по сравнению с количественным ослаблением. Несколько вице-директоров были приглашены на должность вице-председателя - ни один из которых не имеет прямого опыта в области денежно-кредитной политики. Говорят, что Белый дом рассматривает Ричарда Клариду (управляющего директора PIMCO NY), Лоуренса Линдсей (советника по экономическим вопросам у Буша) и Джона Тейлора (отмеченного экономиста) за эту должность. Это оставляет одно дополнительное место в Совете управляющих и заменяет президентов ФРС Нью-Йорка и Ричмонда. Лоуренс Линдсей и Джон Тейлор вероятные претенденты на эту должность. Из подтвержденных членов мы знаем, что взгляды Пауэлла и Дадли совпадают с взглядами Йеллен. Блейнард - голубь, Куарлз проголосовал с большинством на последней встрече, Местер, Уильямс и Бостик, которые немного более ястребины. Таким образом, если голубки не будут назначены на оставшиеся должности, в 2018 году у центрального банка будет более яростный наклон. Информационно-аналитический отдел TeleTrade Источник: FxTeam
Не перегреется ли американская экономика в 2018 году? Рынок труда сегодня - самый здоровый, по крайней мере, за последние десять лет. Однако инфляция остается низкой
Обычно политики делают вид, что появляющиеся во время их нахождения у власти хорошие экономические новости не являются для них сюрпризом. Однако недавно опубликованные показатели роста экономики оказались настолько позитивными, что даже администрация Дональда Трампа позволила себе восторги по этому поводу. "На самом деле все происходит быстрее, чем мы ожидали", - сказал в сентябре Мик Малвейни (Mick Mulvaney), глава бюджетного управления Белого дома, после того как во втором квартале рост составил 3,1% (Г-н Трамп, в действительности, победил на выборах, пообещав рост в 4%, однако теперь кажется, что целью является показатель в 3%).Г-н Малвейни предупреждал о том, что ураганы скоро понизят данные о росте экономики. Однако вместо этого в третьем квартале экономика выросла на 3,3%, и этот показатель был встречен с восторгом и с еще большей уверенностью. Первоначальная осторожная позиция администрации оказалась мудрой - квартальные показатели роста являются волатильными, и мало кто из экономистов ожидают того, что показатели роста свыше 3% смогут продержаться долго. Тем не менее нельзя отрицать, что экономика может похвастаться своим крепким здоровьем. Частично в этом отражается и сила глобальной экономики. Но одновременно нынешнее состояние экономики является кульминацией многолетней тенденции. Поскольку политика поглотила внимание людей в Америке в течение последних двух лет, то одна за другой обычные жалобы из прежнего десятилетия начинают выглядеть устаревшими. Средний доход домохозяйств больше не стагнирует - он вырос на 5,2% в 2015 году и на 3,2% в 2016 году (данные с учетом инфляции).В течение этих двух лет более бедные домохозяйства, в среднем, получили больше, чем богатые. Инвестиции бизнеса больше не являются умеренно теплыми - они обеспечили рост экономики в третьем квартале нынешнего года. Рабочих мест предостаточно - безработица составляет всего 4,1%. От Уолл-Стрит до мелких инвесторов бизнес излучает уверенность. Кроме того, готовится сокращения налогов для стимулирования экономики. Аналитики больше не задают вопросов о том, когда же начнется рост. Вместо этого их беспокоит возможность перегрева экономики.Федрезерв учитывает возможные риски. 13 декабря он объявил о третьем в этом году повышении процентной ставки, а также о пятом повышении в ходе экономической экспансии, и теперь она будет составлять от 1,25% до 1,5%. Средний прогноз Комитета Федрезерва по определению ставки звучит так - еще три раза произойдет ее увеличение в 2018 году. Никто из тех людей, занимающихся установлением ставки, не считает, что нынешний низкий уровень безработицы является устойчивым. Однако все они предсказывают дальнейшее сокращение уровня безработицы в 2018 году. Озабоченность Федрезерва имеет под собой определенное основание. Внушающие доверие прогнозисты едины в своем мнении - устойчивые темпы поста (по мере старения населения Америки) ближе к 2%, чем к 3%, что бы ни говорил г-н Трамп. За последние три месяца экономика создавала в среднем по 170 тысяч рабочих мест в месяц. Однако через десять лет, в 2026-ом году, доля населения в диапазоне от 20 до 60 лет, согласно официальным прогнозам, будет увеличиваться менее чем на 50 тысяч человек в месяц. Показатели безработицы не будут постоянно падать, и поэтому, если не будут увеличена производительность, рост должен сократиться. А если Федрезерв будет слишком активно предоставлять деньги, то инфляция, в конечном счете, повысится, поскольку нагрев экономики будет слишком большим. Домохозяйства, похоже, выглядят прекрасно. В октябре индекс настроения потребителей Мичиганского университет оказался на самом высоком уровне с 2004 года. Недавний рост потребления был стимулирован резким падениям уровня сбережений у домохозяйств - этот показатель сократился с 6% ВВП, отмеченного два года назад, до всего лишь 3,2%. В начале 2016 года некоторые аналитики опасались того, что потребители откладывают деньги, которые появились у них в результате низких цен на бензин, лишая тем самым экономику дополнительных стимулов. Сегодня, похоже, экспертов беспокоит нечто совершенно противоположное - цены на нефть несколько восстановились, однако норма сбережения покатилась вниз. Падение нормы сбережения вызывает тревогу, однако активный настрой потребителей сильно зависит от состояния рынка труда, а также от показателей балансовых отчетов домохозяйств. При низких процентных ставках расходы на обслуживание долгов, если представить их в виде доли после уплаты налогов, приближаются к рекордно низким показателям. У большинства ипотечных кредитов в Соединенных Штатах фиксированная процентная ставка, поэтому владельцы домов защищены от высоких ставок. А цены на недвижимость тоже растут. В третьем квартале 2016 года они прошли пиковые значения 2007 года. После этого они выросли еще на 6,3%. Высокие доходы Более высокие цены на недвижимость и активный рост фондового рынка обеспечили неожиданное увеличение благосостояния. Домохозяйства и некоммерческие организации сегодня обладают активами, которые почти в семь раз превышают размеры их доходов после уплаты налогов. Люди со средними доходами, по данным проведенного Федрезермом исследования, получили самую большую прибавку. Средняя чистая стоимость одного домохозяйства в середине квинтили распределения доходов (то есть, от 40-ой до 60-ой процентили), выросла на 34% в период с 2013 по 2016 год. Цены на недвижимость восстановились, несмотря на жесткие правила по выдаче кредитов, введенные после финансового кризиса. Ипотечный кредит сложно получить людям с плохой кредитной историей. Политика помогает бизнесу чувствовать себя более уверенно. Оптимизма прибавилось у владельцев небольших фирм после победы Дональда Трампа на выборах. 5 декабря, спустя несколько дней после того как законопроект республиканцев о налогах был одобрен Сенатом, уверенность среди исполнительных директоров достигла самого высокого уровня почти за шесть предыдущих лет, подчеркивают представители лоббистской организации Business Roundtable. Перспектива значительного сокращения корпоративных налогов (и, возможно, дерегуляция) уже дали возможность фондовым биржам совершить длинный победный подъем вверх. Если взять средние величины на рынке в марте 2009 года и сравнить с показателями после избрания г-на Трампа, то ежегодный рост составил 22%. Бурно растущий фондовый рынок нравится инвесторам, однако он создает еще одну головоломку для Федрезерва. Некоторые нормировщики показателей обеспокоены тем, что нежесткая монетарная политика может раздуть пузырь в области активов. А бурно растущие фондовые биржи способствовали общему ослаблению финансовых условий. Доллар сейчас на 7% слабее с учетом объемов внешней торговли, чем он был в начале нынешнего года. Долгосрочные облигации тоже слегка падают, хотя после выборов они заметно подросли. Уильям Дадли (William Dudley), председатель нью-йоркского Федререзва, считает, что менее жесткие финансовые условия увеличивают вероятность повышения процентной ставки, потому что именно за счет воздействия на финансовые рынки монетарная политика, по идее, и должна работать. По данным проведенного компанией Goldman Sachs исследования, финансовые условия ослаблялись при каждом ужесточении Федрезервом своей политики после того, как в декабре 2015 году он начал поднимать процентные ставки. Однако в анализе "перегрева" экономики отсутствует один крайне важный элемент - инфляция. Начиная с весны, ее показатели оказывались ниже ожиданий. Если не считать продуктов питания и энергоносителей, то цены в октябре были всего на 1,4% выше, чем годом ранее, и это те показатели, которые вполне устраивают Федрезерв. Заработная плата тоже не отражает явную силу рынка труда. Хотя уровень заработной платы голубых воротничков и работников сферы услуг в третьем квартале в годовом исчислении вырос на 3,8%, рост их заработной платы замедлился. В целом, заработная плата увеличивается примерно на 2,5%, то есть, не быстрее, чем два года назад.Одна из причин состоит в том времени, которое необходимо для того, чтобы низкая безработица отразилась на инфляции. В настоящий момент одноразовые факторы способны исказить полученные данные. Г-жа Йеллен (Yellen) указывает на сокращение в начале года цен на контракты в области мобильной связи. Это скоро отразится на показателях. Другие приводят в качестве причины "эффект компании Amazon" - речь идет о жестокой ценовой войне среди ритейлеров. Возможно также, что произошло искажение кривой Филлипса (Phillips curve), соотношения между показателями инфляции и безработицы, и поэтому инфляция может неожиданно взлететь вверх, если уровень безработицы окажется слишком низким. Не исключено также, что рынок труда не так перегрет, как считает Федрезерв. Оценки в отношении так называемого "естественного" уровня безработицы - показатель, не зависящий от понижающего или повышающего давления инфляции - известны своей ненадежностью. Нормировщики постепенно изменили нижние значения - с 5% в конце 2013 года до сегодняшних 4,6%. Продолжительная низкая инфляция может заставить их повторить подобный трюк. В любом случае, как считает Майкл Пирс (Michael Pearce) из консалтинговой компании Capital Economics, исследование Федрезерва свидетельствует о том, что рынок труда не такой жесткий, как это было, скажем, в середине 2000-х годов, когда уровень безработицы опустился до 3,8%. Но даже при таких условиях базисные показатели инфляции не достигли 2%. Бурный рост прекратился не из-за резкого роста инфляции, а из-за того, что лопнул пузырь доткомов (dot.com). Кроме того, безработица не является единственной переменной величиной, за которой нужно наблюдать. В ее показателях не учитываются данные о тех, кто не ищет работу. Во время и после кризиса американцы толпами покидали рабочие места. Однако с конца 2015 года занятость среди людей трудоспособного возраста, особенно среди женщин, увеличивается. В течение большей части 2016 года эта тенденция помогала удерживать показатели безработицы плоскими, хотя в экономике в изобилии создавались рабочие места. Показатели безработицы снизились в 2017 году, однако доля работающих среди людей трудоспособного возраста продолжает расти.Скептики сомневаются в том, что занятость прочно связана с экономическими циклами. Они указывают на то, что некоторые тенденции, в том числе сокращение доли занятости, являются, по крайней мере, весьма сложными для предсказания. Недавний рост этой величины опровергает официальные прогнозы Бюро трудовой статистики (Bureau of Labour Statistics).Продолжение этой тенденции зависит от темпов роста экономики. Экономисты пришли к такому выводу: если уровень занятости во всех возрастных и демографических группах будут соответствовать тенденции прошлого года, то численность рабочих и служащих будет увеличиваться примерно на 135 тысяч человек в месяц. При нынешних темпах роста количества рабочих мест безработица к концу 2018 году опустится до 3,6%. Но если уровни занятости вернутся к предсказанным Бюро трудовой статистики показателям, то каждый месяц будет появляться только 86 тысяч рабочих мест. Показатели безработицы будут сокращаться значительно быстрее в следующем году - до 3,4%.Повышение Федрезервом процентной ставки, вероятно, замедлит процесс создание рабочих мест, и произойдет это до того, как указанные гипотезы можно будет проверить. Разочарованные "голуби" полагают, что Центральный банк должен испытать пределы рынка труда, а не утверждать, что эти данные ему заранее известны. В данном случае существует риск того, что рабочие могут быть лишены возможности появления настоящего рынка полной занятости (tight labour market) через десять лет. Более того, только в том случае, если будет разрешен рост заработной планы, фирмы будут вынуждены инвестировать больше средств в трудосберегающие технологии (Растущие инвестиции и намек на отскок производительности в этом году свидетельствуют о том, что подобный процесс может начаться в ближайшее время). А если Федрезерв будет слишком быстро ужесточать свою политику, то изменение курса может оказаться сложным, поскольку процентная ставка не может быстро падать перед достижением нулевого уровня.В качестве свидетельства того, что нормировщики безосновательно беспокоятся по поводу инфляции, "голуби" указывают на рынок облигаций. Доходы от долгосрочных бондов упали, несмотря на то, что повышением Федрезервом процентных ставок может восприниматься инвесторами как снижение вероятности инфляции. Г-жа Йеллен с этим не согласна, и она считает, что инфляционные ожидания, как показывают проводимые опросы, в этом году оставались стабильными. Это говорит о том, что какие-то другие факторы обеспечивают рост доходов от облигаций.Вскоре новый глава Федрезерва столкнется с всеми этими загадками. Джером Пауэлл (Jerome Powell) сменит г-жу Йеллен уже в феврале. Г-н Пауэлл, который является управляющим Федрезерва с 2012 года, в целом, поддерживает стратегию г-жи Йеллен, направленную на постепенный рост процентных ставок. Во время слушаний по утверждению в Сенате, проходивших 28 ноября, он, пожалуй, казался настроенным несколько больше как "голубь" - он признал, что доля занятости среди мужчин трудового возраста может свидетельствовать о провисании рынка труда.Однако Федеральный комитет по операциям на открытом рынке быстро меняет свою позицию, и г-н Пауэлл, вероятно, обнаружит, что он находится в окружении "ястребов". В качестве примера можно назвать Марвина Гудфренда (Marvin Goodfriend), которого г-н Трамп назначил членом этого комитета, заполнив тем самым вакантную позицию. Г-н Гудфренд в течение многих лет призывает к увеличению процентной ставки, а после 2010 года он все время заранее говорит об опасности инфляции. В 2012 году он назвал "сомнительным" мнение о том, что Федрезерв может уменьшить безработицу и сделать ее показатель ниже 7%. После ухода г-жи Йеллен, г-н Трамп должен будет заполнить еще три вакантных места. Кроме того, существует система ротации права голоса среди председателей региональных Федрезервов. Три "голубя" - Чарльз Эванс (Charles Evans) из Чикаго, Нил Кашкари (Neel Kashkari) из Миннеаполиса и Роберт Каплан (Robert Kaplan) из Далласа - потеряют свое право голоса в январе и будут заменены более "ястребиными" голосами. Четвертый "голубь", г-н Дадли, планирует покинуть свой пост в 2018 году. Его новые коллеги могут протестировать приверженность г-на Пауэлла относительно сохранения подходов г-жи Йеллен.Федрезерв также должен решить, каким образом ответить на предпринятое г-ном Трампом сокращение налогов. Даже в том случае, если экономика не находится на пределе и не перегрета, выбор времени для этого следует назвать неудачным. Если стимулы гарантированы, то Федрезерв имеет возможность в любое время сократить процентные ставки, избегая при этом риска увеличения государственного долга, возникающего в результате фискальных импульсов. Сокращение налогов может вызвать некоторое увеличение инвестиций и привести к росту экономики, хотя речь идет о нескольких десятых процентного пункта в краткосрочной перспективе. Тем не менее это может также подтолкнуть Федрезерв к более быстрому увеличению процентных ставок. Экономическая модель Центрального банка предполагает, что процентные ставки, в конечном итоге, будут увеличиваться на 0,4 процентных пункта. Законопроект, одобренный Сенатом 2 декабря, увеличит дефицит на 0,2% ВВП в 2018 году и на 1,1% в 2019 году, если не учитывать воздействие инвестиционных стимулов и стимулов по созданию рабочих мест. В последние годы высокопоставленные политики склоняются к тому, чтобы быть слишком, а не менее осторожными. Более вероятным представляется такой вариант, при котором они будут действовать предельно осмотрительно и не позволят экономике слишком перегреться. Однако дебаты в Америке по поводу политики пришли, наконец, в равновесное состояние. По мере приближения экономики к своим пределам поле для ошибочных решений сокращается.Оригинал публикации: Will America's economy overheat in 2018? (http://inosmi.ru/politic/...)
Федрезерв также должен решить, каким образом ответить на предпринятое г-ном Трампом сокращение налогов. Даже в том случае, если экономика не находится на пределе и не перегрета, выбор времени для этого следует назвать неудачным. Если стимулы гарантированы, то Федрезерв имеет возможность в любое время сократить процентные ставки, избегая при этом риска увеличения государственного долга, возникающего в результате фискальных импульсов. Сокращение налогов может вызвать некоторое увеличение инвестиций и привести к росту экономики, хотя речь идет о нескольких десятых процентного пункта в краткосрочной перспективе.
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).
Федеральная резервная система (ФРС) США подняла базовую процентную ставку на 25 базисных пунктов. Окончательное значение ставки составляет 1,25% 1,5%.
The first full week of December is shaping up as rather busy, with such Tier 1 data in the US as the payrolls report, durable goods orders and trade balance. We also get UK PMI data and GDP, retail sales across the Euro Area, as well as central bank meetings including Australia RBA and BoC monetary policy meeting. Key events per RanSquawk Monday: UK PM May To Meet EU’s Juncker & Barnier Tuesday: UK Services PMI (Nov), RBA MonPol Decision Wednesday: BoC MonPol Decision, Australian GDP (Q3) Friday: US Payrolls Report (Nov), Japan GDP (Q3, 2nd) The week's main event takes place on Friday with the release of November’s US labour market report. Consensus looks for the headline nonfarm payrolls to show an addition of 188K jobs, slowing from October’s 261K. Average hourly earnings growth is expected to slow to 0.3% M/M from 0.5%, while the unemployment rate and average hours worked are expected to hold steady at 4.1% and 34.4 respectively. Hurricane induced volatility should be absent from the November release, and consensus points to a headline print much more in-keeping with trend rate. Other key data releases next week include the remaining October services and composite PMIs on Tuesday in Asia, Europe and the US, ISM non-manufacturing in the US on Tuesday, ADP employment report on Wednesday and China trade data on Friday. Focus will also fall on Wednesday’s Bank of Canada (BoC) interest rate decision, with the majority looking for the Bank to leave its key interest rate unchanged at 1.00%, although 3 of the 31 surveyed by Reuters are looking for a 25bps hike. Following the BoC’s back-to-back rate hikes in Q3, interest rate markets were pricing in a 40-50% chance of a hike at the upcoming decision, that has now pared back to 25% as the BoC has sounded more cautious in recent addresses, highlighting that it expected the economy to slow (GDP growth moderated to 1.7% in Q3 on a Q/Q annualised basis, from 4.3% in Q2) while stressing that it remains data dependant. RBC highlights that “the BoC has been focused on the consumer’s reaction to the earlier hikes and is content to wait-and-see for the moment. Wage growth – another key metric for the central bank – has improved in recent employment reports (reaching the highest level of growth since April 2016 in November’s report). Despite its softer tone, the BoC continues to stress that “less monetary stimulus will likely be required over time” and as a result the statement will be scoured for any changes in tone. At the time of writing, markets are pricing a 57.2% chance of a 25bps hike in January, with such a move 91.0% priced by the end of March. November’s Chinese Caixin Services PMI survey will hit on Tuesday. October’s survey came in at 51.2, with the new business sub-index declining for a second consecutive month, while the price-based sub-indices continued to expand. Survey compilers Caixin noted that “the PMIs for October showed that the economy had a relatively weak start to the fourth quarter. However, monetary policy is unlikely to be loosened unless major downside risks emerge.” Friday will bring the release of November’s trade balance, with analysts looking for a surplus of USD 39.50bln, slightly wider than the USD 38.19bln seen in October. In Japan, the secondary estimate of Q3 GDP will be released on Friday. The preliminary estimate came in at 0.3% Q/Q, and 1.4% Q/Q annualised. Daiwa highlights that “the ministry of finance’s corporate survey for Q3 reported that nominal capex (excluding software) rose 1.0% Q/Q in Q3, with spending up 0.5% Q/Q in the manufacturing sector and 1.3% Q/Q for the non-manufacturing sector. That left overall capex up 4.3% Y/Y, a touch above market expectations. This suggests that a read-across to the national accounts implies an upwards revision to the estimate of real private non-residential investment in Q3 from the advance estimate of 0.2% Q/Q to about 0.6% Q/Q. The decline in public investment, however, might have been somewhat larger than initially thought.” Overall, Daiwa looks for modest upward revisions. The Reserve Bank of Australia (RBA) meets on Tuesday with little prospect of any meaningful change in communication or guidance for the foreseeable future. 3Q GDP released the day after could impact sentiment. Strong investment, public demand, net exports, alongside a positive base effect, could see GDP spike to 3.2% YoY. Other releases of note during the week: Monday US Factory Orders (Oct) Tuesday Canadian Trade Balance (Oct) US Markit Services & Composite PMI (Nov) US ISM Non-Manufacturing (PMI) Wednesday US ADP Nonfarm Employment Change (Nov) US Unit Labor Costs (Q3) Canadian Labour Productivity Thursday Canadian Ivey PMI Friday Canadian Housing Starts (Nov) Canadian Capacity Utilisation (Q3) US Wholesale Inventories (Oct) The Fed is now in its blackout period so there’s no Fedspeak due. The ECB’s Mersch speaks on Wednesday and BoJ’s Kuroda and Masai on Monday and Wednesday, respectively. Euro area finance ministers are also due to meet in Brussels on Monday In other data In the US, busy week with final print of durable & capital goods orders, trade balance, ISM Non-Mfg., non-farm payrolls, labor market report & U. of Michigan sentiment. In the Eurozone, we have final print of PMIs and GDP, PPI and retail sales. In the UK, we have PMIs, reserve changes, trade balance and mfr & industrial production. In Japan, we get monetary base, PMIs, final 3Q GDP print and official reserve assets. In China, we receive foreign reserves and trade balance. In Canada, beyond BoC rates meeting, we also have building permits and housing starts. In Australia, we have RBA rates meeting, PMIs, current account balance, GDP, foreign reserves, home loans and investment lending. DB's Jim Reid breaks down key global events day by day : Monday: Brexit will likely be the key focus for markets today with UK PM Theresa May due to travel to Brussels to meet with European Commission President Jean-Claude Juncker and EU Chief Brexit negotiator Michel Barnier. It’s expected that May will present the UK’s offer on the divorce bill and proposals around the Irish border. Away from this, finance ministers in the Euro area are due to meet in Brussels to discuss the future of the Euro area, vote for a new President, and debate Greece’s bailout review. Finally, notable data releases on Monday include the December Sentix investor confidence reading and November PPI data for the Euro area, and October (final) revisions to durable and capital goods orders and factory orders in the US. The BoJ’s Kuroda is also due to speak in the morning in Tokyo. Tuesday: A fairly packed day for data including the final November services and composite PMIs in Europe and the US. The Caixin PMIs will also be released in China. In the US, the October trade balance and November ISM nonmanufacturing will be out. Wednesday: Another key date for Brexit talks with the EC College of Commissioners likely to make a recommendation on whether or not sufficient progress has been made, and UK Brexit Secretary David Davis due to address a Brexit Parliamentary Committee. Away from that the most significant data release will be the November ADP employment change report in the US, while final revisions to Q3 nonfarm productivity and unit labour costs will also be released. German factory orders for October will be out in the morning. Away from that the BoJ’s Masai speaks early in the morning, while the ECB’s Mersch speaks later on. In the afternoon UK Chancellor of the Exchequer Philip Hammond is due to speak at the Treasury Select committee. Thursday: Politics might well be the main focus for markets again with Germany’s Social Democratic Party due to hold a convention in Berlin. A vote on endorsing coalition talks is expected. Datawise on Thursday we’ll get October industrial production in Germany, the October trade balance in France and weekly initial jobless claims and October consumer credit in the US. Q3 GDP for the Euro area will also be released. November foreign reserves in China is also due, along with the final Q3 GDP revisions for Japan (in the late evening). Friday: Front and centre on Friday will be the November employment report in the US with payrolls and average hourly earnings likely to be the biggest focus. Also due out in the US are October wholesale inventories and the preliminary December University of Michigan consumer sentiment reading. Away from the US, November trade data in China, October trade data in Germany and the UK and October industrial production in France and the UK are due. Friday also marks the deadline for US Congress to pass a spending measure and avoid a partial government shutdown. Finally, here is Goldman's preview of key US events with consensus estimates: The key economic releases this week are the ISM non-manufacturing index on Wednesday and the employment report on Friday. New York Fed President Dudley has a speaking engagement on Thursday. Monday, December 4 10:00 AM Factory orders, October (GS -0.3%, consensus -0.4%, last +1.4%); Durable goods orders, October final (last -1.2%); Durable goods orders ex-transportation, October final (last +0.4%); Core capital goods orders, October final (last -0.5%); Core capital goods shipments, October final (last +0.4%): We expect factory orders edged down in October following a 1.4% increase in September. Core measures for durable goods were mixed in October, with a decline in core capital goods orders and an increase in core capital goods shipments. Tuesday, December 5 08:30 AM Trade balance, October (GS -$47.8bn, consensus -$47.4bn, last -$43.5bn): We estimate the trade deficit widened by $4.3bn in October. The Advance Economic Indicators report last week showed a much wider goods trade deficit, and we also note scope for retrenchment in service exports, following above-trend growth in recent months. 09:45 AM Markit US Services PMI, November (consensus 55.3, last 54.7): Markit US Composite PMI, November (last 54.6) 10:00 AM ISM non-manufacturing index, November (GS 59.1, consensus 59.0, last 60.1): We expect the ISM non-manufacturing index to move down 1.0pt to 59.1 in the November report, after rising 4.8pt over the previous two months. We expect a pullback in the supplier deliveries component, which has been elevated recently due to hurricane-related supply chain disruptions. Overall, our non-manufacturing survey tracker rose 0.4pt to 57.8 in November, and we believe underlying growth in the service sector remains at a solid pace. Wednesday, December 6 08:15 AM ADP employment report, November (GS +195k, consensus +190k, last +235k): We expect a 195k increase in ADP payroll employment in November, reflecting a net boost from the financial and economic indicators used in the ADP model. We note uncertainty may be higher than normal, as it is unclear how ADP's methodology addresses hurricane effects in the nonfarm payrolls data that it also uses as an input. The report is likely to be difficult to interpret as a result. 08:30 AM Nonfarm productivity (qoq saar), Q2 final (GS +3.3%, consensus +3.3%, last +3.0%); Unit labor costs, Q2 final (GS +0.2%, consensus +0.3%, last +0.5%): We estimate Q2 non-farm productivity will be revised up in the second vintage by 0.3pp to +3.3%, well above the +0.75% trend achieved on average during this expansion. Similarly, we expect Q2 unit labor costs – compensation per hour divided by output per hour – to be revised down by 0.3pp to 0.2% (qoq saar). Thursday, December 7 8:30 AM Initial jobless claims, week ended December 2 (GS 245k, consensus 240k, last 238k); Continuing jobless claims, week ended November 25 (consensus 1,900k, last 1,957k): We estimate initial jobless claims rebounded 7k to 245k in the week ended December 2 after declining in the previous week. The timing of the Thanksgiving holiday may introduce seasonal adjustment difficulties. Continuing claims – the number of persons receiving benefits through standard programs – rose more than expected in the previous week, perhaps related to seasonal adjustment difficulties as well. A sharp pullback in that measure would be encouraging, as it would confirm that the pace of layoffs has indeed remained low. 8:30 AM New York Fed President Dudley speaks: New York Fed President William Dudley will give remarks at an event on "Higher Education Financing and Costs and Returns of Higher Education” at the Federal Reserve Bank of New York. Friday, December 8 08:30 AM Nonfarm payroll employment, November (GS +225k, consensus +200k, last +261k); Private payroll employment, November (GS +220k, consensus +200k, last +252k); Average hourly earnings (mom), November (GS +0.3%, consensus +0.3%, last flat); Average hourly earnings (yoy), November (GS +2.7%, consensus +2.7%, last +2.4%); Unemployment rate, November (GS 4.1%, consensus 4.1%, last 4.1%): We estimate nonfarm payrolls rose 225k in November, compared to a consensus of +200k. November job growth likely benefited from additional normalization in hurricane-affected regions. Additionally, the early Thanksgiving this year is likely to boost retail job growth, as relatively more of the holiday hiring will occur before the survey week. The arrival of over 200k Puerto Ricans in Florida (following Hurricane Maria) could also increase payrolls this month. We estimate a stable unemployment rate (4.1%), as the downward trend (-0.3pp over the last three months) seems due for a pause. For average hourly earnings, we estimate +0.3% with upside risk, reflecting somewhat favorable calendar effects and a boost from the unwind of hurricane-related distortions. 10:00 AM University of Michigan consumer sentiment, December preliminary (GS 99.5, consensus 99.0, last 98.5): We estimate the University of Michigan consumer sentiment index increased 1.0pt to 99.5 in the preliminary estimate for December. Our forecast reflects the cycle-high reading in the Conference Board measure in November. The report’s measure of 5- to 10-year ahead inflation expectations declined one tenth to 2.4% in November, towards the low end of its 12-month range. Source: DB, BofA, Goldman
Глава Федерального резервного банка Нью-Йорка Уильям Дадли сообщил в пятницу, 1 декабря, о том, что видит разумные аргументы в пользу повышения ключевой процентной ставки в декабре. Дадли при этом подчеркнул, что любое увеличение налогово-бюджетного стимулирования, которое могут одобрить американские законодатели, изменит ожидания ФРС в отношении дополнительных повышений ставки в следующем году. Между тем, Дадли также отметил, что попытки упростить налоговое законодательство являются уместными, однако, с учетом устойчивого экономического роста в США и снижения безработицы до отметки в 4,1%, руководителям ФРС придется внимательно следить, не способствуют ли изменения в налоговом законодательстве перегреву экономики страны. По словам Дадли, ситуация в американской экономике является благоприятной и поэтому существуют перспективы дальнейшего подъема ставки.
Despite a Wednesday dive in high-flying U.S. tech stocks on worries their boom may have peaked following a MS downgrade, which presured Asian stocks leading to a slide in Hong Kong and South Korean share, on Thursday morning the dip buyers have emerged and both European stocks and US equity futures are once again solidly in the green as yesterday's tech selloff is quickly forgotten. Confirming that algos have moved on, US stock-index futures climbed briskly (ES +0.3%), and Dow futures were above 24,000 with Europe green across the board as signs of progress on the tax reform plan led some investors to shift to positions that are seen benefiting from lower corporate tax. Following a lackluster Wednesday session, and some mixed results in Asia, Europe's Stoxx 600 has advancds to session’s high, up 0.6%, as defensive sectors including telecommunications, utilities and real estate outperform more cyclical sectors like construction, financial services and technology, with the FTSE 100 once again lagging (-0.3%) as the firmer GBP continues to hamper the index. Despite opening relatively flat, European bourses have drifted higher amid the declines seen in EUR with little else in the way of fresh fundamental catalysts to guide price action. All sectors trade in positive territory with the exception of energy names in the wake of yesterday’s sell-off in oil prices. Germany's Dax and France's CAC 40 both inched up for a third day, though London's FTSE was back in the red as hopes of a breakthrough in Brexit negotiations pushed the pound higher again. Earlier, Hong Kong and South Korean-listed shares tumbled, while Japanese stocks gained. Asia stock markets were mostly negative as the tech-sell off on Wall St. dampened sentiment in the region and overshadowed better than expected Chinese PMI data. ASX 200 (-0.7%) was pressured by its largest weighted Financial sector after the announcement of a royal commission inquiry into the industry, while Nikkei 225 (+0.6%) recovered from opening losses as JPY weakness provided support. Elsewhere, KOSPI (-1.5%) weakened as the BoK delivered a widely anticipated 25bps rate hike and Chinese markets were also subdued with the Hang Seng (-1.5%) reeling on tech weakness, although losses in the Shanghai Comp. (-0.6%) were somewhat stemmed by encouraging Chinese Official PMI data. In global FX and macro, the Bloomberg Dollar Spot Index was higher a fourth day, its longest winning run since August, before key U.S. data releases including personal income, spending, deflator, initial claims, and Chicago PMI; the pound held on to Asia session gains as Brexit talks seemed on track to soon enter phase 2, the hardest part of the negotiations. As noted earlier, the euro reversed gains after inflation in the currency bloc missed estimates, while the 10-year bund yield fell from a two-week high; equities were mixed amid profit taking in EMFX and month-end flows in G-10 currencies. Some other key FX observations, from Bloomberg: The pound was the only G-10 currency to strengthen against the dollar on Thursday after news that Ireland and the U.K. were close to a border deal EUR/USD set a fresh session low after annual euro-zone flash CPI rose 1.5% in November versus an estimated 1.6% rise Kiwi dropped after business confidence fell to the lowest level since 2009 The yen fell to a one-week low on the back of a rally in Japanese stocks and as better-than- expected U.S. economic data sapped haven demand Norway’s krone slid to a nine-year low against the euro, with low liquidity exaggerating the move, after retail sales unexpectedly contracted 0.2% m/m in October versus an estimated 0.7% rise Weighing on tech were concerns, sparked by a Morgan Stanley report earlier this week, that the “super-cycle” in memory chip demand looks likely to peak soon. Yesterday, shares of Amazon.com, Apple, Alphabet and Facebook fell between 2 percent and 4 percent. Among the year’s other high fliers, Netflix slid 5.5 percent while Asia’s bellwether Samsung slumped 4.3 percent to two-month lows, also on some Morgan Stanley skepticism. “I‘m not sure one would say it’s a bubble (in tech stocks),” said Andrew Milligan, head of investment strategy at Standard Life. “By and large the companies are generating either good profits or the potential for good profit growth”. But “Tech is a sector unto itself... it’s utterly a view about barriers to entry.” Still, the Nasdaq index remains up 26.8% so far this year, roughly 7% points above gains in the MSCI world index. “It is true that if you look at the world’s semiconductor sales on chart, their year-on-year growth appears to be peaking out,” said Hiroshi Watanabe, an economist at Sony Financial Holdings. “But if you look at what’s driving demand, it’s not just smart phones and actually a lot of things.” In the US, Senate Republicans voted 52-48 to begin debate on their sweeping tax-overhaul bill, touching off a process that could produce an up-or-down vote before the end of this week. Outgoing Federal Reserve Chair Janet Yellen said Wednesday the central bank would welcome and support a faster expansion of the economy stemming from changes in the tax code, provided it was the right kind of growth. Other notable US events overnight: White House adviser Kushner said to have met with Special Counsel Mueller's team for discussions regarding former National Security Adviser Flynn. Marvin Goodfriend was nominated for the Fed Board of Governors position. Other changes are afoot: JPM Asset Management global head of rates David Tan predicted on Thursday that there will be some 1,000 rate hikes globally over the next decade. “The current period of economic expansion has therefore been extraordinarily long, almost 10 years and counting, but we know that the days of super low global central bank rates are in the process of coming to an end,” he said. Meanwhile, interest rates in Germany rose to their highest in just over two weeks, while 10-year U.S. Treasuries yield climbed too, reaching 2.389% to near this month’s high of 2.414%. There was no immediate market response after U.S. President Donald Trump nominated Carnegie Mellon University professor Marvin Goodfriend, viewed as a policy hawk, to be a member of the Federal Reserve Board of Governors. Oil meanwhile moved cautiously ahead of an OPEC meeting in Vienna later in the day, with members set to debate an extension of the group’s supply-cut agreement. While the Organization of the Petroleum Exporting Countries and key non-member Russia look set to prolong oil supply cuts until the end of 2018, they have signaled that they may review the deal when they meet again in June if the market overheats. Market Snapshot S&P 500 futures up 0.3% to 2,633 STOXX Europe 600 up 0.3% to 389.17 MSCI Asia Pac down 1.1% to 170.05 MSCI Asia Pac ex Japan down 1.6% to 553.31 Nikkei up 0.6% to 22,724.96 Topix up 0.3% to 1,792.08 Hang Seng Index down 1.5% to 29,177.35 Shanghai Composite down 0.6% to 3,317.19 Sensex down 1.1% to 33,245.95 Australia S&P/ASX 200 down 0.7% to 5,969.89 Kospi down 1.5% to 2,476.37 German 10Y yield rose 1.1 bps to 0.396% Euro down 0.1% to $1.1835 Brent Futures up 1.5% to $64.08/bbl Italian 10Y yield rose 1.3 bps to 1.527% Spanish 10Y yield fell 0.5 bps to 1.48% Brent Futures up 1.5% to $64.08/bbl Gold spot down 0.2% to $1,281.27 U.S. Dollar Index up 0.2% to 93.36 Top Overnight News U.S. Senate begins a marathon debate on the Republican tax bill after an intensive bargaining phase. Lawmakers reached a deal on pass-through business and were still discussing adding a trigger to include up to $350b in automatic hikes if revenues were not met. The pound advanced after news the U.K. and the EU are working against the clock to reach a compromise on the Irish border that will allow a breakthrough in Brexit talks at a key meeting next week German unemployment declined for a fifth month as Europe’s largest economy continues to boom. Business confidence is at the highest level since the country’s reunification with the hiring spree driven by companies seeking to expand their ranks to keep up with a growing backlog of work Marvin Goodfriend, a widely respected monetary economist and sometime critic of the Federal Reserve under Chair Yellen, was nominated by President Trump to be a governor at the U.S. central bank, the White House announced on Wednesday The International Monetary Fund is projecting the volume of trade in goods and services will have climbed 4.2 percent over the year, up from 2.4 percent in 2016. That would be the first time trade has outpaced output growth since 2014 and goes against the view earlier this year that 2017 would be the year of trade wars The U.S. is rejecting China’s claim of market-economy status, saying the country doesn’t deserve to be treated as such in anti-dumping investigations because the state continues to play a pervasive role in the economy. The stance will be made clear in a document that will be published Thursday. The U.K. and the European Union are moving to a compromise on the Irish border which will allow Brexit talks to move on to trade next week. All parties want to avoid a hard border, U.K. Prime Minister Theresa May told reporters. Asia stock markets were mixed as the tech-sell off on Wall St. dampened sentiment in the region and overshadowed better than expected Chinese PMI data. ASX 200 (-0.7%) was pressured by its largest weighted Financial sector after the announcement of a royal commission inquiry into the industry, while Nikkei 225 (+0.6%) recovered from opening losses as JPY weakness provided support. Elsewhere, KOSPI (-1.5%) weakened as the BoK delivered a widely anticipated 25bps rate hike and Chinese markets were also subdued with the Hang Seng (-1.5%) reeling on tech weakness, although losses in the Shanghai Comp. (-0.6%) were somewhat stemmed by encouraging Chinese Official PMI data. Finally, 10yr JGBs were lower amid spill-over selling from their US counterparts and as a mixed 2yr auction failed to inspire demand. Chinese Official Manufacturing PMI (Nov) 51.8 vs. Exp. 51.4 (Prev. 51.6). Chinese Non-Manufacturing PMI (Nov) 54.8 (Prev. 54.3) PBoC injected CNY 150bln via 7-day reverse repos, CNY 120bln via 14-day reverse repos and CNY 10bln via 63-day reverse repos to total a net neutral operation for a 4th consecutive day once maturing repos are accounted for. PBoC set CNY mid-point at 6.6034 (Prev. 6.6011) BoK 7-Day Repo Rate (Nov) 1.50% vs. Exp. 1.50% (Prev. 1.25%). BoK Governor Lee said the rate decision was not unanimous as board member Cho dissented, while he added that uncertainties for the economy are higher than ever and that additional adjustment depends on growth and inflation. Top Asian News BOJ Cuts Buying Range for Debt Due Up to 1 Year in December Plan BOJ Reflationist Harada Sees No Problem in Continuing Stimulus China Bond Selloff Abates as 10-Year Yield Falls Most Since June China Factory Gauge Unexpectedly Rises as Global Demand Firms Up Hong Kong Regulator Says Agreement Reached on Investor ID Plan BOJ Cuts Buying Range for Debt Due in Up to One Year in December European equities trade higher across the board (Eurostoxx 50 +0.6%) with the FTSE 100 once again lagging (-0.3%) as the firmer GBP continues to hamper the index. Despite opening relatively flat, European bourses have drifted higher amid the declines seen in EUR with little else in the way of fresh fundamental catalysts to guide price action. All sectors trade in positive territory with the exception of energy names in the wake of yesterday’s sell-off in oil prices. A rather timely rebound in the 10 year German benchmark just ahead of the Eurozone inflation data, as the slightly softer than forecast headline measure inspired more upside to a fresh 162.75 high for the Eurex session (+27 ticks vs -24 ticks at the other extreme). Relatively dovish, albeit typical comments from ECB’s Praet may also have impacted and countering speculation about a leak or pre-release whisper, USTs squeezed higher around the same time. Whatever the catalyst or inspiration, the price recovery to intraday peak represents a 50% retrace of Wednesday’s move, to the precise tick. Short term longs will now be eyeing 162.96 ahead of 163.10. Top European News Hong Kong Stocks Pare Monthly Gain as Technology Selloff Spreads BOE’s Carney Hints at Scrapping Banker Bonus Cap After Brexit Turkey Cenbank May Raise LLW Rate Without MPC Meeting: Ertem IPT: Bunzl Finance Expected GBP300m 7.5Y UKT +135 Area IPT: TSB Bank GBP Bmark 5Y Covered 3mL +30 Area In FX markets, GBP is still riding high on expectations that the UK and EU are getting closer to striking an agreement on the key issues that need to be settled before a Brexit transition and trade talks can begin. JPY softer again on broadly upbeat risk sentiment (amidst above forecast Chinese PMIs, healthy Fed Beige Book and commentary), with USD/JPY up near 112.50 and the next chart resistance level at 112.70. EUR is holding above key tech support vs the USD at 1.1813 again, but struggling to maintain bullish momentum given the ongoing Greenback recovery. Expiry interest close by at 1.1840-45 (2.8 bln). In terms of Eurozone inflation, headline Y/Y printed at 1.5% for Nov vs. Exp. 1.6% with ex-food and energy firmer at 1.1% vs. Exp. 1.0%. Eurozone Inflation, Flash YY (Nov) 1.5% vs. Exp. 1.6% (Prev. 1.4%); Eurozone Inflation ex-food, energy, tobacco (Nov P) Y/Y 0.9% vs. Exp. 1.0% (Prev. 0.9%); Eurozone Inflation Ex Food & Enr Flash (Nov) 1.1% vs. Exp. 1.0% (Prev. 1.1%). In commodities, WTI and Brent crude futures initially traded with little in the way of the firm direction after yesterday’s modest recovery from the initial sell-off, however, heading into US trade have been met with a bid. In terms of the latest OPEC rhetoric, energy ministers all appear to be on the same page with their desire for a 9-month extension to the existing deal (subject to a review in June). The Kuwaiti oil minister also added that production caps have been confirmed for Libya and Nigeria at around 1mln bpd and 1.8mln bpd respectively. In metals markets, spot gold has drifted lower throughout the session, briefly breaking below USD 1280/oz to the downside where some contacts had reported stops. Elsewhere, Copper was subdued overnight alongside the broad risk averse tone triggered by the US tech sell-off. Looking at the day ahead, in the US the big focus will be on October personal income, spending and PCE data all due out at 8.30am ET. Also due is the November Chicago PMI and the latest weekly initial jobless claims data. The big focus away from the data will be a possible Senate vote on tax reform while central bank speakers today include the ECB’s Mersch and Praet, Fed’s Kaplan and BoE’s Sharp. The OPEC meeting in Vienna is also worth keeping a close eye on given that the meeting should include a discussion around extending production cuts. US Event Calendar 8:30am: Initial Jobless Claims, est. 240,000, prior 239,000; Continuing Claims, est. 1.89m, prior 1.9m 8:30am: Personal Income, est. 0.3%, prior 0.4%; Personal Spending, est. 0.3%, prior 1.0% PCE Deflator MoM, est. 0.1%, prior 0.4%; PCE Deflator YoY, est. 1.5%, prior 1.6% PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.3% 9:45am: Chicago Purchasing Manager, est. 63, prior 66.2 9:45am: Bloomberg Consumer Comfort, prior 51.7 12:30pm: Fed’s Quarles Speaks on Payments Systems in Cleveland 1pm: Fed’s Kaplan Speaks in Dallas DB's Jim Reid concludes the overnight wrap It might be the last day of November but it still feels like we have some way to go before markets finally ease their feet off the pedals for the holiday season. We’re at the business end of the week now and one event which is waiting in the wings is the Senate vote on tax reform. It’s unclear if we’ll get a vote today or even this week with the latest update being that the Senate approved a motion to proceed on party lines yesterday, clearing a path for a vote on the bill. The vote to approve followed more debate yesterday with GOP senators negotiating compromises with their leaders. One of those was a more generous tax break for pass-through business. Politico reported that there are still a number of issues to resolve so keep an eye on how things progress today. Away from politics it’s also worth watching some of the data due out today and especially the various inflation readings. This morning we’ll receive the November CPI report for the Euro area where the consensus expect a small pickup in the core to +1.0% yoy from +0.9%. Across the pond this afternoon we’ll then get the October personal income and spending data in the US which will also provide the latest reading for the Fed’s preferred inflation metric – the core PCE deflator. Our US economists and the market expect a +0.2% mom reading which if it holds would push the annual figure up one-tenth to +1.4% yoy. We talked extensively about inflation in our outlook and how the risks are to upside in the second half of next year especially, so this data is becoming more and more significant in our view as we look ahead to 2018. Back to the present now where the biggest action in markets over the last 24 hours has been that in the tech sector. The Nasdaq closed -1.27% last night, although did pare heavier losses intraday, for its biggest one day decline since August. An index tracking FANG stocks fell -3.72% with an impressive $62bn wiped from the four stocks’ combined market value. That’s pretty much the equivalent of the GDP of Uzbekistan. In contrast, the S&P 500 (-0.04%) finished pretty much flat while the Dow closed +0.44%. In Europe the Stoxx 600 also closed +0.24%. So it was very much a tech only story with much of the commentary pointing towards sector rotation as the reason for the selloff ahead of US tax reform which is seen as doing little to benefit the sector given the already low effective tax rates. In fairness, the Nasdaq move looks like an afterthought compared to the 21.21% high-to-low range for Bitcoin yesterday. After nearly touching $11,500 intraday, in the space of five and a half hours the cryptocurrency tumbled all the way to $9,000, before then rallying back above $10,000 by the close to end the day more or less unchanged. For some context, while the intraday range in percentage terms was ‘only’ the fifth biggest this year, the range in US $ terms ($2,424) is actually the same as where the cryptocurrency traded back in July. Mind boggling. Elsewhere, bond markets didn’t offer much in the way of protection yesterday with yields sharply higher across the globe. 10y Treasuries finished +6.1bps higher last night with a combination of a Gilt led selloff following the Brexit developments late on Tuesday (more on that below), tax reform talk and Yellen’s testimony all seemingly playing a part. This morning in Asia it’s more of the same with weakness across tech names generally weighing on sentiment. The Hang Seng (-1.28%) has been the biggest mover with tech names down -2.47%, while the Kospi (-0.70%), ASX (-0.57%) and Shanghai Comp (-0.25%) are also in the red. The Nikkei is back to flat following a similarly weak start while US equity index futures are mixed. It’s worth noting that there doesn’t appear to be any follow on to President Trump’s tweet yesterday when he warned of “additional major sanctions” for North Korea following a phone call with President Xi Jingping of China. Speaking of China, this morning China’s manufacturing PMI for November was reported as rising slightly to 51.8 from 51.6 the month prior. Expectations had been for a modest decline. The non-manufacturing PMI was also reported as rising, to 54.8 from 54.3. The other significant overnight news is that at the Fed, with Bloomberg reporting that monetary economist Marvin Goodfriend has been nominated by President Trump to be a governor at the Fed following an announcement by the White House. Goodfriend has previously questioned the use of QE post 2008 and was instead said to favour negative interest rates, despite acknowledging that it could require abolishing paper currency. Back to Yellen, as was pretty much expected the Fed Chair played a relatively straight bat in what was likely her last testimony to Congress in her current role. As a broad conclusion, her tone seemed to somewhat reiterate a willingness at the Fed to continue with tightening but clearly dependent and limited on the data. A “gradual” need for rate increases was noted as being appropriate to sustain a healthy labour market and stabilize inflation. Recent inflation readings were highlighted as transitory which was also no change although she did note that the Fed has seen modest upward pressure on wages. She also made mention that the lesson from modest wages is that the labour market and economy are not overheated which was a similar comment to one made by the incoming Chair Jerome Powell the day before. On growth Yellen also said that “economic growth appears to have stepped up from its subdued pace early in the year” and is now “increasingly broad-based across sectors as well as much of the global economy”. One topic which Yellen chose to refrain from addressing however was tax reform. The Fed Chair’s comments around growth also came as the second reading for Q3 GDP was revised up a tenth more than expected to +3.3% qoq annualized, compared to the initial +3.0% estimate in the flash reading. Meanwhile the details showed that while headline PCE prices were revised down a tenth (+2.1% vs. +2.2%) the core PCE was however revised up a tenth to +1.4% qoq (compared to expectations for no change). It’s worth noting that corporate profits also rose +4.3% qoq and in year over year terms have now risen for four consecutive quarters following five quarters of consecutive declines ending in Q3 2016. Yellen’s colleague at the Fed, the NY Fed President William Dudley, was also busy speaking yesterday. In comments at a moderated forum in New Jersey, Dudley played down any concern about the relative strength in markets currently although did make a special mention of being sceptical about Bitcoin. On the economy Dudley said that he thinks that the expansion has “got lots of room to go”. Meanwhile later on in the evening San Francisco Fed President John Williams said that four rate hikes in 2018 is his base case, roughly two more than that currently implied by market pricing. Closer to home, as noted earlier UK assets spent much of yesterday absorbing the latest Brexit developments. Tuesday’s headlines regarding the agreement between the UK and EU on the divorce bill was confirmed by most major UK press outlets yesterday. It remains to be seen how PM May will deal with some likely fallout from her cabinet and a resolution on citizens’ rights and Northern Ireland also remains outstanding, but it is still being taken as a key breakthrough of sorts. Sterling rallied +0.52% and +0.47% respectively versus the Greenback and Euro yesterday, weighing on the FTSE 100 (-0.90%), while 2y, 10y and 30y Gilt yields rose +3.5bps, +8.4bps and +6.5bps. In contrast 10y Bunds were +4.5bps higher. Quickly wrapping up the remaining data yesterday, pending home sales in the US came in a much stronger than expected +3.5% mom (vs. +1.0% expected). In Europe there was a modest upward surprise in the November flash CPI report in Germany where headline CPI came in at +0.3% mom (vs. +0.2% expected), helping to lift the YoY rate to +1.8% from +1.5% and the highest since February. In France Q3 GDP was left unrevised at +0.5% qoq while in the UK there wasn’t a huge amount interesting in the October money and credit aggregates data. Lending growth in consumer credit continued to flat line slightly but not to levels which would likely concern the BoE. Looking at the day ahead, this morning in Europe we’ll kick off with German retail sales data for October alongside the latest November house price data in the UK. Following that we’ll get the flash November CPI report for France where market expectations are for a modest +0.1% mom headline increase. That data comes before the wider Euro area report where the consensus is for a two-tenths increase in the headline to +1.6% yoy and one-tenth increase in the core to +1.0% yoy. In the US the big focus will be on the aforementioned inflation data too with the October personal income, spending and PCE data all due out at 1.30pm GMT. Also due is the November Chicago PMI and the latest weekly initial jobless claims data. The big focus away from the data will be a possible Senate vote on tax reform while central bank speakers today include the ECB’s Mersch (at 8am GMT) and Praet (10am GMT), Fed’s Kaplan (6pm GMT) and BoE’s Sharp (6.10pm GMT). The OPEC meeting in Vienna is also worth keeping a close eye on given that the meeting should include a discussion around extending production cuts.
В ходе своего вчерашнего выступления глава ФРБ Нью-Йорка Уильям Дадли заявил о том, что Федеральная резервная система изучает возможность создания собственной цифровой валюты, учитывая резкий рост курсов криптовалют и совокупной капитализации данного рынка. В то же время, Дадли подчеркнул, что биткоин пока нельзя назвать надежным средством накопления или же считать данную криптовалюту конкурентом американскому доллару. Кроме того, Дадли также отметил, что видит хорошие перспективы дальнейшего роста американской экономики и фондового рынка США, при этом финансовая стабильность не вызывает у него особого беспокойства.
В ходе своего вчерашнего выступления глава ФРБ Нью-Йорка Уильям Дадли заявил о том, что Федеральная резервная система изучает возможность создания собственной цифровой валюты, учитывая резкий рост курсов криптовалют и совокупной капитализации данного рынка. В то же время, Дадли подчеркнул, что биткоин пока нельзя назвать надежным средством накопления или же считать данную криптовалюту конкурентом американскому доллару. Кроме того, Дадли также отметил, что видит хорошие перспективы дальнейшего роста американской экономики и фондового рынка США, при этом финансовая стабильность не вызывает у него особого беспокойства.
В руководстве Федеральной резервной системы США "начали думать" над созданием официальной цифровой валюты. Об этом, выступая в Ратгерском университете (Rutgers University) штата Нью-Джерси, в среду 29 ноября заявил президент Федерального резервного банка Нью-Йорка Уильям Дадли. Дадли отметил, что ФРС пока не ведет работу над созданием цифровой валюты, но при этом "активно размышляет на эту тему". Комментарии со стороны одного из главных чиновников ФРС (после председателя ФРС Джанет ......
Кажется, таки дождусь я официальную криптовалюту от ФРС! Писал про это ранее https://www.facebook.com/permalink.php?story_fbid=181619369051669&id=100016108202630, что скорее всего ФРС рано ли поздно объявит о создании собственной криптовалюты. Тогда мои предположения выглядели, как некая теория заговора или просто как «желтая пресса». Но сегодня на эту тему высказался один из самых влиятельных членов ФРС, глава ФРБ Нью-Йорка William Dudley. https://www.cnbc.com/2017/11/29/federal-reserve-starting-to-think-about-its-own-digital-currency-dudley-says.html Он сказал буквально следующее, что ФРС начинает задумываться о запуске своей собственной цифровой валюты! Отличное заявление! Всё к этому и шло. Все мои подозрения оправдываются, кто и зачем раскручивает проект под названием «БИТКОИН». https://smart-lab.ru/blog/412119.php Долговая проблема США и других развитых стран будет решена за счет обесценения нынешнего долга, номинированного в «бумажных» деньгах, по отношению к новой официальной криптовалюте от ФРС.P.S. Ждём UScoin! (криптодоллар)
В мире . Доллар США умеренно укреплялся к ключевым валютам после публикации речи выступления будущего главы ФРС США Джерома Пауэлла, который пообещал сделать все возможное для достижения максимального уровня занятости, а также целевого уровня по инфляции (2%). Пауэлл подчеркнул, что он нацелен на преемственность и стабильность, не преследует радикальных изменений и намерен постепенно повышать ставки. При этом Пауэлл считает необходимым гибко и быстро реагировать на возможные события, угрожающие финансовой стабильности страны. В целом, член Феда назвал текущую финансовую систему более устойчивой, чем десять лет назад. Сегодня состоятся слушанья Пауэлла в Конгрессе в рамках утверждения его на пост будущего главы ФРС – рынок будет внимательно следить за комментариями. Глава ФРБ Нью-Йорка Уильям Дадли (голосующий член Комитета по операциям на
Глава Федеральной резервной системы (ФРБ) Нью-Йорка Уильям Дадли заявил, что он все еще ожидает, что очень сильный рынок труда в США поможет подтолкнуть инфляцию с течением времени.
В руководстве Федеральной резервной системы рассматривают возможность использования отрицательных процентных ставок, в случае если американская экономика вновь столкнется с серьезным кризисом.