Why You Should Brace Yourself for Big Financial Changes

By Elliott Wave International

Extrapolating current trends into the future leave many people unprepared for major societal shifts

The one thing you can count on in financial markets, and society at large, is change.

I was reminded of this when I read this May 18 New York Times’ headline and subheadline:

The Last Days of Time Inc.

… how the pre-eminent media organization of the 20th century ended up on the scrap heap.

Time Inc. has been purchased by the Meredith Corporation, which plans to spin off Time magazine, Sports Illustrated, Fortune and Money. All four magazines have suffered from declining ad revenue and declining circulation. There are other details, but the bottom line is that an established media empire, which had a long history of reporting on change, has now been swept up by change.

A generation ago, many observers would not have imagined that a company as iconic as Time Inc. would find itself “on the scrap heap.”

But linear trend extrapolation has always had its pitfalls, and on changes that have been on a much bigger scale than one media company, which brings to mind what the 2017 book, The Socionomic Theory of Finance, said:

(1) It is 1975. Project the future of China.

(2) It is 1963. Project the cost of medical care in the U.S.

(3) It is 100 A.D. Project the future of Roman civilization.

In 1975, the Communist party was entrenched in China. … Would anyone have imagined that China’s economic production, in just over a single generation, would rival that of the United States?

In 1963, medical care was cheap and accessible. … Would anyone have guessed that [today] pills would sell for $2, $20, $200 and even $1,000 apiece?

Continue reading Why You Should Brace Yourself for Big Financial Changes

What Wall Street Expects From the Fed

By Heisenberg

Well, it’s Fed day and obviously everyone will be kind of frozen in time in the lead up to the decision and the post-meeting presser where Jerome Powell will probably prove (again) that he prefers to answer questions in a more direct, less academic fashion than Janet Yellen.

I continue to maintain that’s not a positive development, because it leaves less room for obfuscation and paradoxically, academic obfuscation (i.e., model-based bullshitting) is a highly effective way of letting markets know that the committee is willing and able to conjure up excuses to remain dovish even when the data suggests a different path in the event risk assets are showing signs of cracking. And I know what you’re thinking: “The Fed shouldn’t be concerned about propping up risk assets at every press conference meeting!” Yeah, ok man. Just remember you said that when, sometime down the road, Powell accidentally triggers an afternoon rout by eschewing long-winded rambling for a straightforward answer.

Powell of course hasn’t adopted anything that approximates the approach Kevin Warsh might have preferred, but obviously there’s a perception that he (Powell) is more data-dependent than Yellen and that it will take more in the way of turmoil in emerging markets and much more in the way of exogenous shocks and event risk from things that aren’t directly related to Fed policy (e.g., Italy) to deter him.

On Tuesday, WSJ moved markets with a report that once again suggested Jerome Powell may be moving towards holding a press conference after every meeting, which would effectively mean that every meeting is live. That got a reaction across fed funds futures and pushed the dollar higher. A move to take questions after each meeting could potentially set the stage for more volatility – or at least that’s the way I would see that panning out, even though I’m sure that wouldn’t be the intent and I’m sure a lot of folks wouldn’t agree with me.

Continue reading What Wall Street Expects From the Fed

China Credit Flows

By Callum Thomas

The May data for China showed a further slowing in the growth of credit.  To be clear, total credit is still increasing, but the issue is that it is increasing at a slower pace.  Now there are basically 2 reasons people worry about China: 1. because debt levels are “too high”, and 2. because debt growth becomes too slow and therefore activity levels slow down.  Today’s chart will give both of those groups something to worry about!  It shows the monthly growth in “total social finance” (a broad measure of credit growth), standardized against GDP, and the key point is that the pace of TSF growth is slowing down.  I’ve also noticed a broader tightening of financial conditions e.g. slower money supply growth, changes in the currency, real interest rates, property prices, etc.  My base case is that the Chinese economy sees slower growth this year, but aside from the negative impact this will have on commodities/EM at the margin, I’m not particularly concerned about major downside risk in China at this time.

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What A Difference A Few Months Make, Highest Inflation in Six Years And Market Shrugs

By Jeffrey Snider

What a difference a few months make. Perhaps given all that has happened since January people have regained some badly needed perspective. The core of inflation hysteria was the belief the economy was about to take off which would exacerbate underlying price pressures. That would necessitate more aggressive Federal Reserve reaction, corroborated by an epic bond market selloff.

Had last month’s CPI number been released, say, last November, it would have been hugely entertaining. According to the Bureau of Labor Statistics, the consumer price index for the month of May 2018 was 2.80% more than May 2017. This inflation rate bests the 2.74% posted in February 2017 as the highest since the 2.87% recorded for February 2012.

The predictable headlines about the “highest inflation in six years” would have at the end of last year set off a disturbed frenzy. Instead, this update with all the same comparisons is being met with a collective shrug; at most a reasonably toned-down if disappointing murmur.

The difference is economy and risk, often one and the same. Unlike in 2017, in 2018 the global economy has encountered numerous issues and even more “transitory” difficulties that are getting harder to overcome. Right at the front is the “dollar.” Again.

With economic reality setting back in, what’s really going on with US (and European) consumer prices is a bit clearer, though in truth it was always perfectly obvious. Oil and little else is behind these index spikes. It’s the rationalizations about them in the narrative form that no longer weigh so heavily.

Continue reading What A Difference A Few Months Make, Highest Inflation in Six Years And Market Shrugs

Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • 27 minutes to CPI! Here are my pre-figure thoughts:
  • Last month (April CPI) was a big surprise. The 0.098% rise in core was the lowest in almost a year, rewarding those economists who see this recent rise as transitory. (I don’t.)
  • But underneath the headlines, April CPI was nowhere near as weak as it seemed. The sticky prices like housing were stronger and much of the weakness came from a huge drop in Used Cars and Trucks, which defied the surveys.
  • Medical Care and Apparel were also both strong last month.
  • Now, BECAUSE the weakness was concentrated in a small number of categories that had large moves, median inflation was still +0.24% last month, which drives home the fact that the underlying trend is much stronger than 0.10% per month.
  • The question this month is: do we go back to what we were printing, 0.18%-0.21% per month (that’s the 2 month and 6 month avg prior to last month, respectively), or do we have a payback for the weak figure last month?
  • To reiterate – there were not really any HIGH SIDE upliers to potentially reverse. Maybe housing a touch, but not much. To me, this suggests upside risk to the consensus [which is around 0.17% or so and a bump up (due to base effects) to 2.2% y/y].
  • I don’t make monthly point forecasts, but I would say there’s a decent chance of an 0.21% or better…which number matters only since it would accelerate the y/y from 2.1% to 2.3% after rounding. So I agree with @petermcteague here, which is a good place to be.
  • Note there’s also the ongoing risk each month of seeing tariffs trickle through or trucking pressures start to diffuse through to other goods prices. Watch core goods.
  • So those are my thoughts. Put it this way though – I don’t see much that would cause the Fed to SLOW the rate hike plans, at least on the inflation side. Maybe EM or something not US economy-related, but we’d have to have a shockingly broadly weak number to give the FOMC pause.
  • Starting to wonder why we even both with an actual release. Economists nailed it, 0.17% m/m on core, 2.21% y/y.
  • That’s a 2.05% annualized increase. Which would be amazing if the Fed could nail that every month.

Continue reading Post-CPI Summary

Emerging Markets Sovereign CDS

By Callum Thomas

Another update to a really important chart for emerging markets, this one shows the median 5-year sovereign CDS premium across 14 emerging market countries.  Basically it is a market-based measure of sovereign credit risk for emerging markets.  As noted previously, the fact that the indicator has crossed up through its 200-day moving average is key, particularly against the backdrop of softer macro data for EM and ongoing rate hikes and quantitative tightening from the Fed (and thus, a stronger US dollar).  As I showed in yesterdays chart on EMFX, the path of the US dollar is going to be key for EM risk assets, and that path points to caution at this point.

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‘Main Street Optimism Is On A Stratospheric Trajectory’…

By Heisenberg

…Small Businesses Go All-In On Trump’s Pedal To The Metal Populism

Listen, if you’re a small business, you’re feeling pretty goddamn “tremendous” about Trump’s economy, which is running on a sugar high from late-cycle fiscal stimulus and deficit-funded tax cuts.

Specifically, the NFIB Small Business Optimism Index rose last month to the second highest level in the survey’s 45-year history.

NFIB

“Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes,” NFIB President and CEO Juanita Duggan said Tuesday, adding that “for years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase.”

And look at this:

Continue reading ‘Main Street Optimism Is On A Stratospheric Trajectory’…

Common Sense Monics

By Keith Weiner

[biiwii comment: gold and silver supply/demand funda follow opening segment]

Suppose you’re driving a car, and you turn the steering wheel left. You will feel the door and pillar of the car push your left shoulder (in a left-drive car). This is an observed fact.

Common Sense Physics

One idea—let’s call it common sense physics—is that a force is pushing you outward into the door. If you picture the center of the circle that the car is making in its turn, there is an apparent radial force on you. The direction of this force is outward. It is called centrifugal force.

Or suppose you fill a jar with water and mixed soil sediments. You put it into a machine that spins it rapidly, with the lid facing inwards toward the center. After the machine spins for a while, you stop it and remove the jar. The heavier particles are at the bottom of the jar. Above them are the slightly less heavy, and so on, to the lightest. The water is at the top. This experiment confirms the idea. Something apparently pushes the heaviest particles farthest out from the center. Centrifugal force.

In any group of people who have not studied physics, this view is entirely uncontroversial. Indeed nearly everyone who hasn’t studied physics would agree with what we wrote above.

However, if you go to a group of people who have taken a college-level physics class, you would get the opposite reaction. The above view is wrong. And not a single one (who received a passing grade) would defend it.

Any first-year university student in physics would draw the circle and the radius. But he would add an additional concept—velocity. The velocity of the object is tangential to the circle. There is a force pulling the object. That is, there is a radial force, but its direction is inward—centripetal force. The object does not fall into the center, because its velocity is tangential. The net result is that the path is a circle.

Continue reading Common Sense Monics

Eurozone Credit Risk Pricing

By Callum Thomas

This chart of Eurozone credit risk pricing attracted a lot of interest when I originally posted it, and it remains extremely topical, so I thought I would do a quick update.  The chart shows the z-score (standardized values) of high yield corporate credit spreads and the spread between the average 10-year government bond yield for the Eurozone vs Germany.  Again, what stands out to me on this chart is how relaxed credit risk pricing has become, certainly relative to what we’re seeing in sovereign risk pricing.  As I mentioned previously, risk flareups in Europe often take at least a couple of months to run their course, so I am taking a cautious stance on Eurozone risk assets for the time being (particularly when you add the softer earnings/macro pulse to the picture).

 

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Novo Resources (NVO.V): A Conversation (from IKN 472)

By Otto Rock

A minor part of the Weekly IKN473, out last night.

We join this conversation half way through:

A: So do you agree that it’s going to be very difficult to reach a 43-101 or JORC compliant resource number for NVO?
B: Yes, we agree on that. But that doesn’t make the company worthless! They clearly have a lot of gold!
A: And I agree with you on that. But what I’m interested in is monetizing it, making the company profitable.
B: Me too.
A: Good! We’re on the same page. But what really matters is being able to justify the current market cap, because if you include those very-in-the-money warrants (and you have to, really) NVO is now revolving around a $1Bn market cap. That’s expensive.
B: Okaaaay…if you say so. I think NVO is cheap!
A: Fine. So in that case, I’m not even going to ask you to justify a future where NVO is double or triple today, all we are going for is to justify $1Bn.
B: They have a lot of gold!
A: And a lot of market cap valuation, too. Let’s justify its market price with that gold, yes?
B: Well, you do what Bob Moriarty says! You mine it!
A: I agree 100%. Now, how do you mine it?

Continue reading Novo Resources (NVO.V): A Conversation (from IKN 472)

World Wrassling Diplomacy

By James Howard Kunstler

Why not war with Canada? That pissant “nation” is cluttering up the northern half of OUR Continent, which we struggled mightily to free from wicked Old Europe. What doesn’t Justin Trudeau get about that? And when we’re done with him, how about a few rounds with Frau Merkel and the wee frog, Monsieur Macron? I’d like to see the Golden Golem of Greatness in a leotard and one of those Mexican wrestling masks, tossing these peevish international dwarves out of the ring like so many sacks of potting soil.

And now it’s off to Singapore for a championship bout with the opponent known as “Little Rocket Man.” There’s an odd expectation that these two avatars of unreality will settle the hash that has been simmering for sixty years between the divided Korea and the USA. Mr. Trump will make a deal to turn North Korea into a golfer’s paradise and Mr. Kim will promise to beat his nuclear arsenal into nine irons and putters. And then they’ll celebrate on Air Force One with bags of Big Macs and Buckets o’Chicken. (Let the aides and advisors fight over the Singapore Noodles and squid beaks in garlic sauce.)

Continue reading World Wrassling Diplomacy