Everybody’s (Not) Talkin’

By Tim Knight

Once again, after a tiny, tiny dip in the market, everybody’s talking about a push higher. S&P 3000 is offered as a foregone conclusion. Indeed, even to this poor old bear, I can see an argument to be made for a bounce at current levels:

Yet something has been developing recently which I’ve been watching all year long. Indeed, my Gold and Diamond members know that I’ve been sort of obsessed with what I’ve been calling the Most Important Chart Ever, which has been slowly but surely forming precisely as I hoped.

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Prefiguring The Expected Expectations Fail

By Jeffrey Snider

The Boston Fed held its 62nd Annual Economic Conference over the weekend. Not quite as well-known as the KC Fed’s Jackson Hole symposium, this Eastern branch’s meeting still attracts many big-name speakers. The “right” speakers, that is, meaning academic and mainstream bank Economists, supranational think tank thinkers, as well as current and former central bankers. The echo chamber is just as thick and impenetrable as it is in Wyoming.

Appearing in Boston alongside former Treasury Secretary Larry Summers, Goldman Sachs chief Economist Jan Hatzius, and Cleveland Fed President Lorretta Mester was Olivier Blanchard. Dr. Blanchard has every bit of pedigree covered: former director of research at the IMF, M. Solow Professor of Economics emeritus at the Massachusetts Institute of Technology, and now a Senior Fellow at the prestigious Peterson Institute for International Economics.

The purpose of this year’s gathering was to decipher if there might be any lingering effects from “long spells” of low interest rates. From what I can tell, nobody addressed the biggest one – why there were long spells of low interest rates. They’ve moved on from all that to fretting over what that might say about the ability of Economists to decipher the major economic problems confronting the global economy.

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Inflation-Related Impressions From Recent Events

By Michael Ashton

It has been a long time since I’ve posted, and in the meantime the topics to cover have been stacking up. My lack of writing has certainly not been for lack of topics but rather for a lack of time. So: heartfelt apologies that this article will feel a lot like a brain dump.

A lot of what I want to write about today was provoked/involves last week. But one item I wanted to quickly point out is more stale than that and yet worth pointing out. It seems astounding, but in early August Japan’s Ministry of Health, Labour, and Welfare reported the largest nominal wage increase in 1997. (See chart, source Bloomberg). This month there was a correction, but the trend does appear firmly upward. This is a good point for me to add the reminder that wages tend to follow inflation rather than lead it. But I believe Japanese JGBis are a tremendous long-tail opportunity, priced with almost no inflation implied in the price…but if there is any developed country with a potential long-tail inflation outcome that’s possible, it is Japan. I think, in fact, that if you asked me to pick one developed country that would be the first to have “uncomfortable” levels of inflation, it would be Japan. So dramatically out-of-consensus numbers like these wage figures ought to be filed away mentally.

Continue reading Inflation-Related Impressions From Recent Events

The “Big Bond Short” Illusion

By Kevin Muir

Before we even start, I want to point out I deserve zero credit for this next idea. All of the following insightful observations are brought to you by Adam Collins of Movement Capital. Adam’s work on COT data is second-to-none and he is a must-follow.

Over the past few months I have struggled with a glaring inconsistency.

The CFTC’s Committment of Trader’s (COT) data for the 10-year US treasury note has displayed a large increase in the size of the net speculative short position, yet this is at odds with what I observed in terms of market sentiment amongst traders and portfolio managers.

This increase in speculative net shorts has pushed it to a record position.

Continue reading The “Big Bond Short” Illusion

The Myth of Gold Stock Leverage

By Steve Saville

A few years ago I wrote a couple of pieces explaining why gold mining is a crappy business. The main reason is the malinvestment that periodically afflicts the industry due to the boom-bust cycle caused by monetary inflation.

To recap, when the financial/banking system appears to be in trouble and/or economic confidence is on the decline, the perceived value of equities and corporate bonds decreases and the perceived value of gold-related investments increases. However, gold to the stock and bond markets is like an ant to an elephant, so the aforementioned shift in investment demand results in far more money making its way towards the gold-mining industry than can be used efficiently. Geology exacerbates the difficulty of putting the money to work efficiently, in that gold mines typically aren’t as scalable as, for example, base-metal mines or oil-sands operations.

In the same way that the malinvestment fostered by the creation of money out of nothing causes entire economies to progress more slowly than they should or go backwards if the inflation is rapid enough, the bad investment decisions fostered by the periodic floods of money towards gold mining have made the industry inefficient. That is, just as the busts that follow the central-bank-sponsored economic booms tend to wipe out all or most of the gains made during the booms, the gold-mining industry experiences a boom-bust cycle of its own with even worse results. The difference is that the booms in gold mining roughly coincide with the busts in the broad economy.

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Why the Fed Denied the Narrow Bank

By Keith Weiner

It’s not every day that a clear example showing the horrors of central planning comes along—the doublethink, the distortions, and the perverse incentives. It’s not every year that such an example occurs for monetary central planning. One came to the national attention this week.

A company called TNB applied for a Master Account with the Federal Reserve Bank of New York. Their application was denied. They have sued.

First, let’s consider TNB. It’s an acronym for The Narrow Bank. A so called narrow bank is a bank that does not engage in most of the activities of a regular bank. It simply takes in deposits and puts them in an account at the Fed. The Fed pays 1.95%, and a narrow bank would have low costs, so it could pass most of this to its depositors. This is pretty attractive, and without the real estate and commercial lending risks—not to mention derivatives exposure—it’s less risky than a regular bank. According to Bloomberg’s Matt Levine, saving accounts for large depositors average only 0.08% interest.
Continue reading Why the Fed Denied the Narrow Bank

Three-Bagger

By James Howard Kunstler

And so the Golden Golem of Greatness re-enters the hall of mirrors that Syria has become. The US intelligence “community” has informed the US Media that Syrian President Assad is planning a new gas attack on Idlib Province, where a ragtag army of US-backed “rebels” (ISIS, etc) remain holed up against Assad’s forces backed by Russian air support. Have we seen this movie before?

Is Mr. Assad truly that dumb? — since the last time a gas attack was alleged (and actually never proven), Mr. Trump averred that he would attack Syria. And what did he even mean by that? Send a barrel bomb down the Assad family chimney, or just blow up more stuff on the ground? And for what? To birth another failed state in the Middle East (just what the world needs), or perhaps start World War Three with Russia? (Ditto, with a cherry on top.)

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Fed Shed: Balance Sheet Down $245 Billion Since September ’17

By Anthony B. Sanders

10-Year T-Note Yield UP From 2.06% To 2.90%

The Fed’s Quantitative Tightening (aka, Fed Shed) has resulted in a decline of their balance sheet of $245 BILLION since September 2017, about one ago.

fedshed

And the 10-year Treasury Note yield has climbed from 2.06% in September 2017 to 2.90% today.

Shedding Dog

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LatAm GDP in 2018: Forecasts Versus Reality (from IKN484)

By Otto Rock

This piece was part of IKN484, out last weekend. 

How LatAm and Carib economies are doing compared to expectations
Generally recognized as the best regional macro-economic study group, CEPAL held its mid-year update in Mexico last weekend and during the week I had chance to catch up on its mid-term report on Latin America and the Caribbean. As usual there’s a lot of information, both on the overview and granular ends, as you’d expect from a 242 page document (get yours on this link here (4) if economics in Spanish language is your thing too…yummy), but after perusing through I think this chart (with personal notes added) is a useful guide to the region and its economies, worth a segment on the Weekly.

What we see is the GDP performance in 2018 of the regional countries, done in order of GDP growth (e.g. Dominican Republic is doing best at +5.4% growth this year, Venezuela worst at -12%). Expectations for growth weren’t on the spectacular end of the spectrum at this point in the cycle, so numbers like +4% or +5% may be good and solid but they’re not going to make world headlines against the +7% of China or +8% of India. Which brings me to the reason I chose this particular graphic, as it charts the current estimates for 2018 compared to CEPAL’s own forecast made for 2018 at the end of last year.

Continue reading LatAm GDP in 2018: Forecasts Versus Reality (from IKN484)

Simple And Powerful Stock Market Charts

By Chris Ciovacco

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Tesla Conference Call Preview

By Tim Knight

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Global Equities Breadth Check – As Bad as 2015

By Callum Thomas

As I was going through and updating some client chart packs, I noticed an interesting development in the global equities country breadth charts.  The proportion of countries (we track 70 for this analysis) trading above their respective 200-day moving average (a good rough proxy for whether a market is an up vs down trend) reached the lowest point since the twin corrections and near-miss global recession of 2015/16.

I think this is a key chart to be across because it feels like we are in a similar potential kind of “near-miss” scenario where the pressure is really starting to mount on emerging markets.  The way a lot of key markets, e.g. global cyclicals vs defensives, are trading right now it’s not going to take much at all to trigger off a broader and deeper correction.  So the improvement that we’ve already seen in valuations might look better before long…

Continue reading Global Equities Breadth Check – As Bad as 2015