The Next Financial Crisis Is Right on Schedule (2019)

By Charles Hugh Smith


This post The Next Financial Crisis Is Right on Schedule (2019) appeared first on Daily Reckoning.

After 10 years of unprecedented goosing, some of the real economy is finally overheating: costs are heating up, unemployment is at historic lows, small business optimism is high, and so on — all classic indicators that the top of this cycle is in.

Financial assets have been goosed to record highs in the everything bubble.Buy the dip has worked in stocks, bonds and real estate — what’s not to like?

Beneath the surface, the frantic goosing has planted seeds of financial crisis which have sprouted and are about to blossom with devastating effect. There are two related systems-level concepts which illuminate the coming crisis: the S-Curve and non-linear effects.

The S-Curve (illustrated below) is visible in both natural and human systems.The boost phase of rapid growth/adoption is followed by a linear phase of maturity in which growth/adoption slows as the dynamic has reached into the far corners of the audience/market: everybody already caught the cold, bought Apple stock, etc.

The linear stage of maturity is followed by a decline phase that’s non-linear.Linear means one unit of input yields one unit of output. Non-linear means one unit of input yields 100 unit of output.

In the first case, moving one unit of snow clears a modest path. In the second case, moving one unit of snow unleashes an avalanche.

The system isn’t stable. It’s brittle and fragile. Eventually some non-linear dynamic manifests: a blight that’s resistant to the herbicide destroys the crop, an insect that’s resistant explodes out of nowhere and eats the crop, etc.

Pushing the system to an extreme only made it more vulnerable to an increasingly broad range of disruptors.

Systems made to appear stable by brute-force application of extremes will never be stable. Stability arises from all the features erased by brute-force application of extremes.

The previous two bubbles that topped/popped in 2000-01 and 2008-09 both exhibited non-linear dynamics that scared the bejabbers out of the central bank/state authorities accustomed to linear systems.

In a panic, former Fed chair Alan Greenspan pushed interest rates to historic lows to inflate another bubble, thus insuring the next bubble would manifest even greater non-linear devastation.

Ten years after the 2008-09 Global Financial Meltdown, analysts are still trying to understand what happened.

For example, the new book Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze is an attempt to autopsy the meltdown and investigate the mindset and assumptions that led to the panicky bailouts and frantic goosing of a third credit/asset bubble — the bubble which is about to pop with even greater non-linear effects.

This is the nature of non-linear dynamics: everything is tightly tied to everything else. Tightly bound/connected systems are hyper-coherent, i.e. every component is tightly bound/correlated to other components.

This is how the relatively modest-sized subprime mortgage market ($500 billion) almost toppled the entire $200 trillion global financial market.

The vast imbalances created by 10 years of unceasing goosing will unleash a non-linear avalanche of reversions to the mean and rapid unwinding of extremes.

Consider the impact on hedges, a necessary function of the financial system. With yields so low, the cost of hedging negatively impacts returns, so hedging has been abandoned, trimmed or distilled down to magical-thinking (shorting volatility as the “can’t lose” hedge for all circumstances).

With shorting volatility being the one-size-fits-all hedge, the signaling value of volatility has been distorted. The same can be said of other measures: the information value of traditional financial signals have been lost due to manipulation and/or goosing.

The interconnectedness of global markets means a small blaze in a distant market can quickly become a conflagration. Put these two together and you get a perfect setup for crisis and crash:

Nobody really knows anything because the signals have been distorted, but everyone thinks they know everything — sell volatility and buy the dip. It works great until it doesn’t.

Meanwhile, beneath the “best economy ever” the rot is accelerating. For example, empty storefronts are proliferating throughout New York City’s neighborhoods, This is an example of the distortions that will be unwound in the next financial crisis.

Desperate for yield in the near-zero yield world engineered by central banks, investors have piled into commercial real estate and overpaid for buildings as the bubbles in rents and valuations expanded in tandem.

These owners are now trapped: their lenders demand long-term leases that lock in nosebleed rents, but back in the real world, no business can survive paying nosebleed rents, and agreeing to long-term leases in this environment is akin to committing financial suicide.

If you actually want to make a profit, it’s impossible to do so paying current commercial rent rates. And if you want to retain the absolutely critical flexibility you’ll need to adjust as conditions change, you can’t sign a long-term lease.

Everyone signing a long-term lease today will be declaring bankruptcy in 2019 when the recession trims sales but leaves expenses unchanged.

In other words, neither small business nor the bottom 90% of households can afford this “best economy ever.”

The financial markets have completely disconnected from reality, and the process of reconnection will unravel all the imbalances and extremes and deflate every interconnected bubble.

The current fantasy is that bubbles will never pop and recessions are a thing of the past; financial engineering can maintain bubbles and “growth” forever.

Everything is distorted to the point that those wandering the hall of mirrors believe they know everything they need to know to continue reaping fat returns on capital.

Conventional thinking that performs well in linear eras is disastrously ill-prepared to navigate non-linear eras like the one we’ll be entering in 2019 — right on schedule.


Charles Hugh Smith
for The Daily Reckoning

The post The Next Financial Crisis Is Right on Schedule (2019) appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

The Biggest Casualty of the Financial Crisis

By Brian Maher


This post The Biggest Casualty of the Financial Crisis appeared first on Daily Reckoning.

Today we acknowledge a grim anniversary…

Lehman Bros. shuttered its doors 10 years ago this very day… and the Great Financial Crisis was underway.

A decade on, America is still shoveling its way out.

The stock market has gone on a run for all time, it is true.

But the Main Street economy appears to have acquired a permanent limp.

Not one year has GDP grown at 3%… while recoveries from previous recessions routinely exceeded 3%.

Meantime, the national debt pre-crisis was roughly $9.5 trillion.

The government of the United States borrowed $11.6 trillion since 2008.

Today the national debt rises above $21 trillion.

But the American economy expanded only $5.1 trillion these past 10 years.

That is, while GDP has increased 35% since 2008… the national debt has increased 122%.

The Keynesian “multiplier” has taken up division.

As “Sovereign Man” Simon Black notes… every borrowed dollar since 2008 has generated only 44 cents of economic output.

We await the breathless explanation of Paul Krugman, arch-salesman of the Keynesian business model.

We recently revealed the specific economic impact of post-2008 “unconventional monetary policy.”

This includes QEs 1 through 3, NIRP, ZIRP and three-quarters of the English alphabet.

The combined results, as summarized by analyst Daniel Lacalle:

  1. In eight of the 12 cases analyzed, the impact on the economy was negative.

  2. In three cases, it was completely neutral.

  3. It only worked in the case of the so-called QE1 in the U.S. and fundamentally because the starting base was very low and the U.S. became a major oil and gas producer.

For emphasis:

In 11 of 12 instances… “unconventional monetary policy” proved either negative or insignificant.

Again we turn to Torsten Slok, chief international economist at Deutsche Bank:

The conclusion is that U.S. QE1 had an impact but in all other cases the impact of QE and negative interest rates has been insignificant. And in eight out of 12 cases, the economic impact has been negative.

We re-submit the following graphic in indictment of central banks the world over:

Radical changes as those above get no hearing in normal times.

But come the crisis, we are forced to guzzle whatever medicine is on tap — however bitter — side effects be damned.

Was there a man outside the economics departments of ivied institutions who would mount a soapbox and yell for negative interest rates?

Imagine… being charged to house your money in a bank.

A fellow proposing it would have been packed off to a farm not nearly as funny as the word suggests.

But Lehman fell.

A few short years later whole swathes of the civilized world were toiling under negative interest rates.

Many still are.

Absent the great crisis, it would not have been.

Nor would the rest of the financial witchcraft conjured into being these past 10 years.

Come the next crisis…

Negative interest rates, the banning of cash, “helicopter money,” etc., we will likely be treated to the entire menu — and probably more.

“The modern world is insane,” said G.K. Chesterton once upon a time, “not so much because it admits the abnormal, as because it cannot recover the normal.”

We have lost the normal.

Only one question remains:

Will we ever recover it?


Brian Maher
Managing editor, The Daily Reckoning

The post The Biggest Casualty of the Financial Crisis appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

Is Trump’s Tax Cut “Paying for Itself”?

By Brian Maher


This post Is Trump’s Tax Cut “Paying for Itself”? appeared first on Daily Reckoning.

There is absolutely nothing wrong with America’s finances that a miracle couldn’t fix… as the great man said.

We learn this week that 2018’s budget deficit currently rises Himalayan-high to $895 billion — a 39% increase over last year.

The Congressional Budget Office (CBO) announced in April that the budget deficit would exceed $1 trillion in 2020.

But CBO now estimates the deficit will top $1 trillion in 2019… one year ahead of schedule.

The reason, simple as snow and as obvious as the nose on a man’s face:

The United States government lays out far more money than it hauls aboard.

The Republic demands its bread… circuses… its gladiator combats.

But it prefers to buy on credit.

“Defense” spending — up 10% on the year…

Social Security outlays — up 5%…

Medicare — up 7%.

Overall federal spending has increased 7% this fiscal year… while tax revenues have increased only 1%.

To the business we must add a 25% increase in net interest on the public debt.

The economic men in practice at Washington assured us the Trump tax cuts would “pay for themselves” through higher growth.

Treasury Secretary Steve Mnuchin — for example — assured us, “The plan will pay for itself with growth.”

Then we come to President Trump’s senior economic adviser…

Larry Kudlow is a swell enough fellow who is nonetheless trapped in 1981… like a fly trapped in amber.

He argues that “Even the CBO numbers show now that the entire $1.5 trillion tax cut is virtually paid for by higher revenues and better nominal GDP.”

But if outlays are up 7% while revenues are up 1%… how is the entire $1.5 trillion tax cut being paid for by higher revenues and better nominal GDP?

We will gladly take correction if mistaken.

But in our court stands economist Greg Mankiw.

Mankiw was George W. Bush’s chairman of the president’s Council of Economic Advisers.

From whom:

I do not know what numbers Larry is referring to… A reasonable rule of thumb, in my judgment, is that about one-third of the cost of tax cuts is recouped via faster economic growth.

We’re heart and soul for tax cuts — provided they are twinned with spending cuts to match.

There is something within the liver and lights that demands a square accounting.

Spend less, it whispers — or more if you must.

But pay your way as you go.

Borrowing from tomorrow to pay for today is the way of the scoundrel… the profligate… the serial bankrupt.

“The wicked borrows, and cannot pay back”… as Psalm 37:21 reads.

But worry not, soothes the official voice — deficits don’t matter.

And for years they haven’t… or not overmuch.

But the laws of economics will not be forever conned, the old-timers insist.

Actions demand reactions… scales must ultimately balance… the free lunch has no existence this side of paradise.

We suspect a great reckoning will prove once and for all that deficits do matter.

At writing the national debt rings in at $21,479,156,738,092… and rising… rapidly.

For your viewing pleasure, CBO’s projected trajectory of the national debt as a percentage of GDP:

The greatest burglars of America’s fiscal future?

Social Security, Medicare and Medicaid… with interest on the debt into the bargain.

If you accept the CBO at its word, mandatory spending — including these budget-busters and a few others — will constitute 78% of federal spending by 2026.

That leaves only 22 cents per dollar for education, science, transportation and a hundred other priorities… including defense.

Former Treasury official Peter Fisher’s waggish observation gains currency with each passing year:

The federal government, says he, is a “gigantic insurance company (with a sideline business in national defense and homeland security).”

Much truth is spoken in jest.

With a spirit of doom upon us today, let us sink further into the mire…

According to no less an authority than the United States Treasury, projected tax revenues to fund Social Security and Medicare over the next 75 years fall $46.7 trillion short.

“Unfunded liabilities,” these are called.

But even these $46.7 trillion of unfunded liabilities may tell a mere fraction of America’s true indebtedness…

Economist and Boston University professor Larry Kotlikoff says Social Security, Medicare and Medicaid are not fully accounted for in official number crunching.

These accounting shell games mask the actual debt, says Kotlikoff.

What is America’s actual debt?

Over the next 75 years, this Cassandra projects America’s true debt at an intergalactic $210 trillion.

Kotlikoff, shaking his head in despair:

We have all these unofficial debts that are massive compared to the official debt. We’re focused just on the official debt, so we’re trying to balance the wrong books…

If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $210 trillion. That’s the fiscal gap. That’s our true indebtedness.

Kind heaven, no — could our fair land be $210 trillion in debt?

On days such as this, when our hopes for America crash upon the shoals of actuarial mathematics and we wonder why we even bother… our thoughts turn to author Robert Benchley.

We have told the tale before, but today we tell it again…

Benchley sat at his typewriter one day to tackle a vexing subject.

He got one word into it — “The” — when he came upon a brick wall. The words would not come.

He soon threw up the sponge… and abandoned his typewriter in frustration.

After soaking his head in the hotel bar he returned to visit the task anew, freshly inspired.

With only one word to work with — “The” — Benchley rapidly hammered out his article, presented here in its entirety:

“The hell with it.”


Brian Maher
Managing editor, The Daily Reckoning

The post Is Trump’s Tax Cut “Paying for Itself”? appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

Every Parent’s Worst Nightmare… And How It Relates To Your Bank Account

By Zach Scheidt

Zach Scheidt

This post Every Parent’s Worst Nightmare… And How It Relates To Your Bank Account appeared first on Daily Reckoning.

My teenage daughter had a minor collision on her way to work yesterday.

She’s totally fine. Everything is alright.

She was in a rush because her little sister took too much time getting ready and made her late. So as she was backing out of the driveway, she bumped into my wife’s car. Ooops!

As the father of teenage drivers, one of my worst fears is getting a call that my kid has been in an accident. The stakes are just so high as these young ones get their experience behind the wheel and learn how to handle different situations.

Thankfully, this collision was very minor. And it was all because her speed was so slow. In other words, her risk was very low because she wasn’t moving quickly.

I think there are some similarities between drivers and investors when it comes to crashes…

This week marks the 10th anniversary of the financial crisis and the news media has been making a big deal of covering the events that led up to the Lehman Brothers bankruptcy in 2008.

I remember the year very well. In fact, I was actually in New York City the week that Lehman Brothers went under. A few days before the actual bankruptcy, I had lunch with my contact at Lehman and the two of us walked through the company’s main trading floor.

Normally, this would be a loud bustling place with papers flying and brokers yelling orders into their headsets. But on this day, the floor was eerily quiet. None of the banks’ trading partners wanted to do business with them. And the brokers sat watching the price of LEH drop steadily, their own personal net worth (and their livelihood) literally withering in front of their eyes.

I’ll never forget that somber tension.

A day later, I was sitting at a Starbucks across the street, watching people walk out of the bank with their desks packed into cardboard boxes. It was so sad to see the despair in their faces.

As part of the financial crisis anniversary, a lot of people are asking the question, “When is the next crisis going to happen?”

And that takes me back to the teenage driving example.

Markets ebb and flow, and it’s natural for the economy to go through periods of expansion and contraction. That’s all well and good.

But the crisis ten years ago was much different than the natural ebb and flow of the market. It was brought on because investors and institutions were moving at a reckless pace, taking on too much risk, and putting our economy at risk.

Just like a teenager driving 20 or 30 miles over the speed limit, banks were lending huge sums to people who had no income. Individuals were buying and flipping houses for prices that were absurdly higher than normal values. The amount of debt in the economy was so high. These factors were BOUND to cause a problem at some point.

People say they were surprised and caught off guard by the financial crisis. But the truth is, you could have read the writing on the wall. People were quitting jobs to flip houses (even though there were far too many homes built than people available to fill them). Debt levels were astronomically high. And smart investors were warning that this type of activity simply wasn’t sustainable.

That’s why the crash was so bad. Because the speed of the economy, and the risk that individuals and businesses were taking was so high.

So that’s a lesson in history. But how does that help us today?

Well, today’s market is completely different from the environment that led to the financial crisis.

We’re not anywhere close to the breakneck speed that risked so much 10 years ago. So if we have a “collision” or a pullback in the market, it’s very unlikely to cause the same sort of panic and fallout that the financial crisis ten years ago did.

In fact, we’re in a very different situation with an open road in front of us and a chance for our economy to actually accelerate as tax cuts stimulate the economy, corporate earnings grow, and investors get more confident in putting their money back into the stock market.

That’s why I expect the overall market to push higher for the rest of this year and into next. Because there are so many strong catalysts, and we’re nowhere near the risky environment that led to the financial crash.

So today, you can invest with confidence despite all of the skeptics who are still fixated on the risks that hurt our economy so badly ten years ago.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge

The post Every Parent’s Worst Nightmare… And How It Relates To Your Bank Account appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

Don’t Miss the Signs of Another Slow-Motion Meltdown

By James Rickards

This post Don’t Miss the Signs of Another Slow-Motion Meltdown appeared first on Daily Reckoning.

If you’ve ever lived through a life-threatening emergency — whether a car crash, train wreck or a steep fall (hopefully not) — you have noticed that time seems to slow down.

You witness your personal jeopardy in slow motion. A memorable example of this is the film The Matrix, in which the hero, Neo, could dodge bullets since time moved in slow motion for him.

According to the best science, time does not actually slow down for those in jeopardy, nor do their perceptions slow down. What happens is that the stress and novelty of the experience causes the brain to create extra layers of memory, a saturation effect, compared with everyday experiences.

According to researcher David Eagleman, “The more memory you have of an event, the longer you believe it took.” So yes, time does seem to slow down in a crisis, but it’s a cognitive illusion.

That slowing down effect is important to bear in mind as we encounter the 20th anniversary of the Russia-LTCM financial crisis of September 1998 and the 10th anniversary of the Lehman-AIG financial crisis of September 2008.

For investors, those events were the financial equivalent of falling off a tall building or being strapped in during a plane crash. If you lived through them, you’ll recall some hours that seemed like days and days that seemed like weeks.

Of course, investors recall where they were and what they did during the absolute height of the panics — Sept. 28, 1998 and Sept. 15, 2008.

Most investors may not be aware that these peak panic moments had actually been playing out for over 15 months in both cases. Investors who closely observed the early signs of trouble had ample time to get out of the way of the panic itself.

In fact, most investors were oblivious to the early warnings. That 15-month build-up was a real slow-motion event, not an illusion.

The September 1998 Russia-LTCM crisis began in June 1997, 15 months earlier, when Thailand devalued its currency and closed its capital account.

For several years, Thailand had maintained a fixed exchange rate to the U.S. dollar. Money poured into Thai real estate and resorts to earn high yields with an exchange rate guarantee. When some investors started to pull their money out, a run on the bank emerged.

Thailand could not make good on its dollar guarantee and devalued, causing massive losses for U.S. investors. From there the panic spread to Indonesia, Malaysia, South Korea and other nations. There was literally blood in the streets as some were killed in money riots.

Markets calmed down that winter, but the contagion returned in the summer of 1998.

In August, Russia defaulted on its bonds, devalued its currency and closed its capital account. That led to a global liquidity crisis, which caused massive losses at hedge fund Long-Term Capital Management. The Fed and Wall Street banded together to bail out LTCM, but really to save themselves. Global markets were just hours away from complete collapse when the deal was finally done.

The September 2008 Lehman-AIG crisis began in June 2007, 15 months earlier.

HSBC had just reported weaker-than-expected earnings due to higher mortgage defaults in the subprime sector. In July 2007, two Bear Stearns hedge funds collapsed due to an inability to roll over their short-term financing of long-term mortgage securities. In August, the panic intensified and the Fed cut the discount rate, the first in a long series of rate cuts to zero.

Three major money market funds sponsored by BNP Paribas closed their doors and suspended redemptions. Bank-sponsored off-balance-sheet special-purpose vehicles could not obtain short-term funding.

Again, markets calmed down in the winter as sovereign wealth funds pledged billions of dollars of new money to prop up U.S. banks.

But the panic returned in the spring with the failure of Bear Stearns in March 2008, followed by the collapse of Fannie Mae and Freddie Mac in June. The panic turned into a global liquidity crisis and reached an apex with the bankruptcy of Lehman Bros. on Sept. 15, 2008, and the subsequent insolvency of insurance giant AIG.

Wall Street was facing a sequential collapse of other banks, beginning with Morgan Stanley when the Fed and Congress stepped in with trillions of dollars of guarantees, swaps and bailout money.

Both of these panics — 1998 and 2008 — began over a year before they reached the level of an acute global liquidity crisis.

Investors has ample time to reduce risky positions, increase cash and gold allocations and move to the sidelines until the crisis abated. At that point there were bargains galore for those with cash. An investor with cash in 2008 could have preserved wealth during the crisis and quadrupled his money since then by buying the Dow Jones index at 6,550 (today it’s around 26,000).

Relatively few investors did this. Instead they suffered from “fear of missing out” as markets rose until the panic began. They persisted in the mistaken belief that they could “get out in time” if markets reversed, not realizing that reversals happen much faster than rallies. They held onto losing positions hoping they would “come back” (they did after 10 years) and so on.

Simple behavioral biases stand in the way of doing the right thing almost every time.

Are we in another slow-motion meltdown? Are markets telling us that another global liquidity crisis is on the way in 2019?

It’s impossible to know, yet the signs are not encouraging.

Venezuela is an economic and human rights tragedy. Turkey, Argentina and Indonesia, all major emerging-market economies, are in complete meltdown. India, Malaysia, Brazil and Mexico are in the midst of currency collapses. South Africa is in recession. China’s growth is slowing and its debt is unsustainable. The trade war between the U.S. and China is starting to take its toll and will get worse.

Then there are geopolitical hotspots like the South China Sea, North Korea, Syria, Iran, Ukraine, Taiwan and others that could turn into shooting wars in little or no time.

Investors do not have to …read more

From:: Daily Reckoning

The Rate Hike That Will Trigger a Bear Market

By Brian Maher


This post The Rate Hike That Will Trigger a Bear Market appeared first on Daily Reckoning.

The Federal Reserve will almost certainly raise its benchmark rate in under two weeks — for the eighth occasion since December 2015.

For a market dizzied by the helium of low interest rates, rising rates are a sobering dose.

The stock market has withstood the business to date.

But how many additional rate hikes can it endure before collapsing under the strain?

Two… three… four… maybe more?

Today we reveal the precise rate hike that will trigger the next bear market — and when you can expect it.

But first, what was Monsieur Market up to?

The Dow Jones was up 147 happy points today.

The S&P closed the day 15 points higher, the Nasdaq a jaunty 59.

Relaxed trade war jitters was the explanation on offer in the financial press.

But to the question on our mind today…

How many rate hikes can the stock market endure?

That is… which rate hike will prove the straw that fractures the camel’s spine?

Mr. Barry Bannister directs investment firm Stifel’s institutional equity strategy division.

He was one of few who accurately foretold February’s correction — while the stock market was slipping the bonds of gravity — and reality was slipping its leash.

Mr. Bannister has done some additional investigating…

It concerns what the economics profession calls the “neutral rate” of interest.

The neutral rate is the interest rate that neither stimulates the economy… nor restrains the economy.

Anything below the neutral rate pushes. Anything above it pulls.

Hence, “neutral.”

Many consider the neutral rate impenetrable, unknowable… “as elusive as sheet lightning playing among June clouds,” in the words of writer James Huneker.

But Bannister believes the stock market has it by the collar:

“Although some say the neutral rate is difficult to observe, stocks see the barrier quite clearly.”

When the Federal Reserve’s target rate rises above the neutral rate, trouble is on tap, says Bannister — at least since the 1990s:

A “maximum tolerable peak” for the fed funds above the neutral rate has been associated with bear markets since the late ’90s global-debt boom.

Observe the results once the fed funds rate (blue) crosses the neutral rate (red):

The fed funds rate has been below the neutral rate for a decade running.

But the Federal Reserve has been hard at hiking rates since December 2015.

And the fed funds rate now eyes the neutral rate, as the chart reveals.

Meantime, official statistics suggest the labor market is drum-tight.

And inflationary rumblings, long dormant, have been heard and felt.

August’s consumer price index increased 2.7% over last year, for example.

Hourly earnings also increased 2.9% year over year.

Jerome Powell is therefore hung on the hooks of a thumping dilemma…

The official unemployment and inflation data — accurate or not — compel him to continue hiking rates.

But additional rate hikes will lift the fed funds rate above the neutral rate… and invite a bear market in stocks.

Bannister nonetheless believes the Fed has one choice only — to cool things down with additional rate hikes:

Weighing stability versus mandate, we believe the Fed has no realistic option other than [raising rates], eventually revealing the speculative excesses created in the past decade.

Fine and well, you say — but enough is enough.

Just tell me how many more rate hikes will trigger the bear market.

The definitive answer, says Bannister… is two.

Two additional rate hikes take the fed funds rate above the neutral rate.

The first of these will almost certainly arrive in 13 days, at the conclusion of the Fed’s “Open Market” Committee meeting.

The market currently places the odds at 97.4%.

We will likely be treated to the second rate hike in December — 80.1% are the odds given today.

Thus the Fed will likely cross the neutral rate by year’s end.

The bear market follows if the foregoing holds.

But when exactly?

“Timing the next 20% bear market is difficult due to policy distortion,” Bannister concedes…

“But ‘within six–12 months’ seems assured,” he concludes.

The arithmetic therefore puts June 2019 on watch.

The window remains open through next December.

But perhaps the Fed will be on alert, you say, and spring to action when circumstances demand.

You may wish to reconsider your position, according to Bannister:

History indicates that the next bear market may be quite rapid, probably exceeding the reaction time of the Fed.

A dozing tree sloth on a full belly exceeds the reaction time of the Fed, we might add… but will not.

Regardless, you are free to salt the preceding to your own individual taste.

How many false alarms have gone out over the years?

A tricky catch, it is, to time any market event.

We have suggested previously that the bull market could parade on another year or two.

Bannister’s schedule fits neatly inside our own.

But of course the gods, the inscrutable gods, keep a schedule all their own…


Brian Maher
Managing editor, The Daily Reckoning

The post The Rate Hike That Will Trigger a Bear Market appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

SHOCKER: Buffett Bets On Asia… Confirms Our Trend

By Jody Chudley

Fairfax india

This post SHOCKER: Buffett Bets On Asia… Confirms Our Trend appeared first on Daily Reckoning.

In early August, I wrote about how one of the best hedge fund managers of the past twenty years has put a staggering 40 percent of his fund into stocks in India.

That isn’t just a bold bet. That’s a “putting your career on the line bet,” which suggests an incredibly high level of conviction.

The hedge fund manager I’m talking about is Monish Pabrai. Since founding his fund in 2000, he has generated a cumulative return of 967 percent for his investors. That performance smashes the 168 percent that the S&P 500 has produced over the same time period.

After doing some sleuthing, I discovered that Pabrai is especially bullish the Indian finance sector, which is essentially still in its infancy and growing incredibly fast.

Pabrai’s huge conviction bet put the Indian finance sector on my radar.

Now, something else has happened that has even further increased my interest…

Warren Buffett Jumps On This Indian Opportunity

Just a few days ago, news broke that Warren Buffett’s Berkshire Hathaway had purchased a stake in Paytm, India’s largest digital payments company.

Like Pabrai, Buffett’s investment shows that he sees value in the Indian finance sector. The investment in Paytm is the first ever direct investment in India for Buffett’s Berkshire Hathaway.

As part of the deal, Berkshire’s investing lieutenant Todd Combs has joined the Paytm Board of Directors. That tells us that not only is this is going to be a long-term holding for Berkshire, but that we can expect Berkshire to increase the size of its investment over time.

Even more intriguing, Buffett’s Berkshire wasn’t the only mega-cap corporation investing in Indian e-commerce/finance in August. Walmart (WMT) closed a deal to acquire a 77 percent stake in Flipkart, India’s largest e-commerce platform, for a smooth $16 billion. That is a big commitment, even for Walmart.

The reason for all this interest is the growth that India has in front of it. Fuelled by the combination of rising incomes and a surge in the number of people using the internet, Indian e-commerce specifically is about to blast off like a rocket ship.

A study by PWC India estimates that the Indian e-commerce market is going to increase fourfold in just five years, from $36 billion in 2017 to $150 billion by 2022.1 Keep in mind, we get pretty excited here in North America with 3 percent GDP growth, but the Indian e-commerce industry is growing at an annualized clip of almost 35 percent!

No wonder Pabrai, Buffett and Walmart have all jumped on board.

Success in business is much easier when you are operating in an industry that has the wind at its back. Indian e-commerce and the Indian finance sector in general don’t just have a tailwind behind it, this is more like a category five hurricane!

This Is Your Passport To Invest In This Indian Opportunity

Fairfax India (FFXDF) is a publicly traded company that was formed specifically to take advantage of the opportunity that a rapidly growing India presents. The company was founded by Prem Watsa, who is often referred to as the “Canadian Warren Buffett.”

Watsa has led the Canadian reinsurance company, Fairfax Financial (FRFHF), to an incredible 33-year track record.

Today, Fairfax India has made investments in India that are approaching $2 billion. Those investments are focused on giving Fairfax controlling interests in the companies that it has taken a position in.

Click to enlarge

Thirty percent of those investments have direct exposure to the Indian finance sector that Pabrai and Buffett are so bullish about. The other investments include the third largest airport in India, a soda producer and an agriculture finance business.

What I love about this is that Watsa is a world class investor who is applying his skills to a much less efficient market. That is a recipe for success, and I believe it’s just the start of more good things to come.

Here’s to looking through the windshield,

Jody Chudley
Financial Analyst, The Daily Edge

1India’s e-commerce market to grow fourfold to $150 billion by 2022 , LiveMint

The post SHOCKER: Buffett Bets On Asia… Confirms Our Trend appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

Wake Up A Millionaire… Over And Over Again…

By Zach Scheidt

Zach Scheidt

This post Wake Up A Millionaire… Over And Over Again… appeared first on Daily Reckoning.

“Get in the car kids, we’re celebrating!”

I had to laugh at the different responses from my kids. The little ones jumped out of bed and flew down the stairs. They didn’t know what was up, but they were pretty sure it was going to include sugar.

The teens’ response was a bit more subdued.

“What the heck are we celebrating?” mumbled my 17-year-old, wiping sleep out of her eyes.

“Can I at least get a flat white mocha extra hot with two additional shots?” asked my 14-year-old. (How does she rattle that off half asleep?)

“Whatever you want!” I smiled. “This one’s on me… or rather on the takeover deal that just happened!”

She just looked at me like I had two heads.

“Hop in the car; I’ll explain on the way,” I said. And we rolled out for a special breakfast to celebrate the latest win in the market.

Waking Up to a Celebration

Every so often, I wake up to some great news in the market. News that means my brokerage account just jumped to a new level, adding overnight profits that leave most traditional investors in the dust.

What causes these overnight gains?

They’re a direct result of a new takeover deal that has been announced, driving the stock price of one specific stock sharply higher.

If you’re lucky enough to own that stock, you’ll walk away with a huge profit.

That’s why I’ve spent years developing a system to track exactly which stocks will be selected to jump sharply higher as a takeover deal gets inked.

Here’s how it works.

Large companies are always looking for ways to grow their profits, beat their competition, acquire new technology and dominate in their respective industries. And often the best way to accomplish these goals is to buy out another company!

The other company may be a competitor. Or it might supply a specific technology or component needed in the manufacturing process. Sometimes it’s a leader in an up-and-coming market.

Whatever the reason, a takeover deal is often the best way for a company to remain relevant, competitive, and profitable in this ever changing market.

When a large company decides to buy out a smaller firm, they have to convince the existing owners to sell. And what better way to convince someone than with a much higher price?

That’s exactly what led to our celebration earlier this year. One of the stocks that I owned was bought out through a takeover deal. And when I woke up, the stock was sharply higher.

This wasn’t just some one-off event, either. Takeover announcements likes these happen regularly — generating large profits in a short period of time (typically overnight). And I think we’re heading into a period when we’ll see much bigger deals happening much more frequently!

Let me explain…

2018 Is the Year of the Takeover — And We’re Running Out of Time!

Remember the tax bill that passed late last year?

It not only lowered the tax rate for corporations… but it also created bigger cash balances for the biggest companies on Wall Street. That’s because there was a special provision that allowed for roughly $2 trillion in cash stored in overseas bank accounts to come back to the U.S.

Much of that cash is now sitting in companies’ bank accounts, waiting to be spent. And management teams have decided the best way to use that money is to buy out competitors!

Think about AT&T’s $85 billion dollar deal to take over Time Warner, or Cigna’s $67 billion deal to acquire Express Scripts. Those are just two of the hundreds of takeover deals to be announced this year.

Looking ahead to the last three and a half months of the year, you’re going to see a lot more of these deals making waves. Because with so much opportunity right now, and with the uncertain political landscape following the November elections, companies have every incentive to lock in takeover deals NOW!

So I’ve been working hard to pinpoint which companies are perfect candidates to be taken over at a much higher price. And I’m sharing my research in my Takeover Alert service. It focuses exclusively on stocks that are ready to post big overnight gains as new deals are announced.

If you want to make sure you’re capturing those profits and celebrating each morning that these deals are announced, you should check out the Takeover Alert right away!

But make sure you get started right away. Because the clock is ticking and the next deal could be announced as soon as tomorrow morning!

You can see all of the details on my M.A.R.K.E.D. system for identifying these takeover deals right here.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge

The post Wake Up A Millionaire… Over And Over Again… appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

WARNING: 75% Chance of Bear Market

By Brian Maher


This post WARNING: 75% Chance of Bear Market appeared first on Daily Reckoning.

A raging hurricane — Florence — menaces the East Coast.

Landfall is expected Thursday… by which time it may attain the fury of a Category 4 tempest.

Meantime, a different type of menace drifts into view…

One prominent market indicator is presently blaring its loudest warning in 50 years.

What does it forecast?

Answer anon. First we take a reading of markets today… while the weather holds.

Stocks were up and away today.

The Dow Jones ended the day 114 points in green territory.

The S&P closed 11 points higher… the Nasdaq, a hearty 48.

But to the topic under discussion…

The Goldman Sachs Bull/Bear Market Risk Indicator is a market barometer tracking the following metrics:

Stock valuations, growth momentum, unemployment, inflation and the yield curve (the spread between short-term and long-term interest rates).

No single metric throws off sufficient light to read by.

But string them all together, says Goldman’s Peter Oppenheimer… and you’re on to something:

All of these variables are related. Tight labor markets are typically associated with higher inflation expectations. These, in turn, tend to tighten policy and weaken expectations of future growth. High valuations, at the same time, leave equities vulnerable to de-rating if growth expectations deteriorate or the discount rate rises, or, worse still, both of these occur together.

This indicator has mirrored closely the S&P’s forward performance since 1955.

The higher the reading, the greater the risk.

And now… Goldman’s number crunchers claim their indicator is “flashing red.”

It gives 75% odds of an impending bear market.

Not since 1969 has it recorded such heightened levels — and such heightened risk.

In fact, lower readings preceded the 2000 and 2008 bear markets:

But returning to the all-important question:

What next?

Goldman concedes two possibilities…

Possibility one: A “cathartic” bear market (English translation: a devastating collapse that cleans everyone out)…

Possibility two: A “long period of relatively low returns across financial assets.”

That is, not a crash, but a dismal slump — not a squalling rain, but an endless drizzle.

Which is more likely?

We anticipate a “melt-up”… followed by a meltdown perhaps next year or the year following.

A crash, that is.

But the Goldman men incline toward the drizzly forecast.

Stock market valuations hover at or near record highs, they grant.

But inflation is just now finding its legs.

And they believe “structural factors” such as globalization’s disinflationary bias may keep it caged.

A lower inflation means the Federal Reserve will not be forced to raise interest rates nearly so hastily.

That, in turn, means the market is less vulnerable to a rate shock.

Hence, Goldman’s gradualistic outlook.

You may prefer a slow motion bear market to the “cathartic” sort that comes by way of a single knockout blow.

But catharsis has its points…

Once done, the business of recovery can proceed immediately — as a village can build anew after the hurricane knocks it flat.

The “long period of relatively low returns” is rather a long gray twilight, a death by inches, an extended and demoralizing siege.

Goldman projects this protracted bear market could last five years… until 2023.

Why so long?

Two reasons:

  1. The U.S. has already expanded fiscal policy and its debt levels and budget deficit are rising, which could make it difficult to find room for significant easing.
  1. There may be room for U.S. interest rates to be cut in the next downturn but less so than in other downturns.

Thus Goldman concludes:

“Even if the next economic downturn turns out to be mild, it may prove difficult to reverse.”

These Goldman fellows sound lots like Jim Rickards.

Jim’s been high on his rooftop for years, hollering the same warnings to anyone with ears to listen.

Debt at all levels has swollen to dimensions truly obscene, Jim insists.

Meantime, he says the Federal Reserve should have begun to tighten in 2009, 2010 and 2011:

If they had raised rates, many would have grumbled, the stock market would have hit a speed bump, but it wouldn’t have been the end of the world.

We’d just had a crash. But by the end of 2009, the panic was basically over. There was no liquidity crisis. There was plenty of money in the system. There was no shortage of money and interest rates were zero. They could have tried an initial 25-point rise but didn’t.

Instead, “Helicopter” Ben Bernanke found the courage to act… by opening the monetary floodgates.

That is, he found the courage to cave before the entire financial and political establishment.

That is, he found the courage to boot the soda can down the road… and inflate a gargantuan bubble so doing.

Perhaps if our courageous banker had instead found true courage — the courage to raise.


Brian Maher
Managing editor, The Daily Reckoning

The post WARNING: 75% Chance of Bear Market appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

The Fed’s Lost Opportunity to Return to Normal

By James Rickards

This post The Fed’s Lost Opportunity to Return to Normal appeared first on Daily Reckoning.

Current Fed policy will push the U.S. economy to the brink of recession, possibly by later this year. When that happens, the Fed will have to reverse course and ease monetary policy.

Meanwhile, the economic cheerleaders recite recent GDP figures and the stimulative effects of the Trump tax cuts.

There’s one problem with the happy talk about 3–4% growth. We’ve seen this movie before.

In 2009, almost every economic forecaster and commentator was talking about “green shoots.” In 2010, then-Secretary of the Treasury Tim Geithner forecast the “recovery summer.” In 2017, the global monetary elites were praising the arrival (at last) of “synchronized global growth.”

None of this wishful thinking panned out. The green shoots turned brown, the recovery summer never came and the synchronized global growth was over almost as soon as it began.

Strong quarters have been followed by much weaker quarters within six months on six separate occasions in the past nine years. There’s no reason to believe this time will be any different.

This expansion has been extraordinarily long — over 30% longer than average — indicating that a recession should be expected sooner rather than later.

Into this mix of weak growth comes the Federal Reserve, which is tightening monetary policy, reducing the base money supply and supporting a strong dollar. All of these policies are associated with slower growth ahead and a high probability of recession.

In a typical business cycle, the economy starts from a low base, then gradually business starts expanding, hiring picks up, more people spend money, and businesses expand.

Eventually, industrial capacity is used up, labor markets tighten, resources are stretched. Prices rise, inflation picks up and the Fed comes along and says “Aha! There’s some inflation. We’d better snuff it.”

So it raises rates, usually for a full cycle.

Eventually it has to lower rates when the process goes into reverse. That’s the normal business cycle. It’s what everyone on Wall Street looks at. And historically, they’re right. That process has happened dozens of times since the end of World War II.

The problem is, that’s not what’s happening now. We’re in a new reality.

This is a result of nine years of unconventional monetary policy — QE1, QE2, QE3, Operation Twist and ZIRP. This has never happened before. It was a giant science experiment by Ben Bernanke.

And that’s the key. You have to have models that accord to the new reality, not the old. Wall Street is still going by the old model.

The new reality is that the Fed basically missed a whole cycle.

They should have raised rates in 2009, 2010 and 2011. Economic growth was not powerful. In fact it was fairly weak. But it was still the early stage of a growth cycle. If they had raised rates, many would have grumbled, the stock market would have hit a speed bump, but it wouldn’t have been the end of the world.

We’d just had a crash. But by the end of 2009, the panic was basically over. There was no liquidity crisis. There was plenty of money in the system. There was no shortage of money and interest rates were zero. They could have tried an initial 25-point rise but didn’t.

This isn’t Monday morning quarterbacking, either. I was on CNBC’s “Squawk Box” in August ’09. The host turned to me and asked, “Jim, what do you think the Fed should do?”

My response was, “They should raise rates a little bit, just to say they were going to get back to normal.” Of course, that never happened.

Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates all those years ago. They’re trying to play catch-up, and its June rate hike was the seventh rate hike since December 2015.

Economic research shows that in a recession, they have to cut interest rates 300 basis points or more, or 3%, to lift the economy out of recession. I’m not saying we are in a recession now, although we could be close, much closer than many think.

But if a recession arrives in a few months, how is the Fed going to cut rates 3% if they’re only around 2%?

The answer is, they can’t.

So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3%, before the next recession, so they have room to start cutting again. In other words, they are raising rates so they can cut them.

And that’s what Wall Street doesn’t understand. It’s still operating from its old assumptions about the business cycle.

Wall Street thinks the Fed’s raising rates because official unemployment is low and the economy’s strengthening. But as I just explained, that’s not the reason at all. The reality’s quite different.

The Fed is hiking rates because it’s desperate to catch up with the fact that Bernanke skipped a whole cycle in 2009, 2010 and 2011. So as usual, Wall Street is reading the signals exactly backwards. The Fed’s actually tightening into weakness.

So now what?

After June’s hike, the Fed still has four rate hikes to reach 3%. It will likely raise rates at this month’s meeting as well, which kicks off in two weeks. But at this rate, the mission won’t likely be accomplished until June 2019.

What would cause the Fed to back off? Any of three conditions…

Number one is a market meltdown. If the stock market sells off 5%, which would be over 1,000 points on the Dow, that would not be enough to throw them off. But if it goes down 15%, that’s a different story. Ben Bernanke actually told me that not long ago.

Now, if the stock market falls 10% again like it did in February, the Fed will pause. It won’t raise. But it won’t cut either at that point.

Markets are getting complacent again and are not expecting any sudden moves to the downside. But it’s when markets are most complacent that sudden drops are most likely. August 2015 and January 2016 are good examples. Another drop could be right …read more

From:: Daily Reckoning