Central Banks Don’t Matter

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“There is no money in monetary policy.”

Could it be true? Is there no money in monetary policy?

Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.

Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.

No money stands beneath it, behind it, beside it.

The emperor is well and truly nude.

Who then actually controls monetary policy today?

The answer may very well lie hidden in the “shadows.”

The details — the shocking details — to follow.

Monetary Policy Is Actually About Credit and Debt

First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying… 

Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is debt-based money in today’s lunatic and preposterous world.

The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

None of the foregoing will stagger or flabbergast Daily Reckoning readers.

Money is debt in today’s world. Debt represents a claim upon the future. The Federal Reserve is a vast engine of debt, a menace.

But this Snider fellow strays far beyond the normal run of grievances…

He commits perhaps the grandest heresy in the universes of economics and finance:

That the Federal Reserve and all central banks are largely powerless…

The Central Bank Is Not Central

They are merely men behind curtains… irrelevancies… and the emperor in fact wears no clothing.

Here Snider strips the emperor bare:

The Fed is, largely outside of temporary sentiment, irrelevant. The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central. It flies in the face of everything you have been taught and told your whole life. The media still give these guys every benefit of every doubt, and central bankers (ab)use that privileged platform to perpetuate their myth. 

Central banks are not central? The Federal Reserve is irrelevant?

As well argue that gravity is a vicious fiction, that 2 and 2 is 9, that Washington never axed the cherry tree.

Snider further argues that the interest rate the Federal Reserve monkeys — the fed funds rate — is likewise an irrelevancy:

There is absolutely no legitimate reason why anyone should [notice federal funds.] The federal funds market is a nonentity… pocket change… It is the sparest of spare liquidity… Today, federal funds is nothing, an extraneous anachronism.

The Fed’s Target Audience: You 

Why then does the Federal Reserve target the fed funds rates?

Because it wants you to believe that it bosses the markets, that its false fireworks are real:

What was decided, essentially, was to keep federal funds as the primary monetary policy focus. The reason? You.

Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…

So the FOMC decided that for the public they would still use federal funds to signal to you their intentions… There is no money in monetary policy; it is entirely psychology.

What about quantitative easing? Was it not about “printing money”

QE accomplished next to nothing….QE’s real purpose was …in trying to manage expectations which central bankers were more than happy to let you believe this was all money printing… 

Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.

Blasphemy mounts upon blasphemy!

But if not the central banks… who or what is central?

Who, then, is running monetary policy?

The Shadow Banking System

You will find the answer in the shadows, says Snider — the shadow banking system.

The shadow banking system?

That is the deeply interconnected network of banking institutions that operate outside direct control of central banks.

They include the large banks and their offshore units.

This shadow banking system extends through Europe, the Caribbean and Asia, the world over.

In 2017, the Bank for International Settlements — the central bank of central banks —  estimated $13 trillion to $14 trillion dwell within the shadow system.

But this shadow banking system is invisible.

It hides in shadow, leaving only traces of its activity… as a thief leaves traces of his crime.

Only a properly trained sleuth can sniff them out:

No one can directly observe this global [shadow banking] system, what is actually the world’s reserve currency. First of all, it is primarily based offshore from everywhere, therefore outside of official recognition. There are no direct statistics. The term “shadow” is, in this case, perfectly appropriate.

The United States dollar is the coin of this realm.

The shadow system first took shape in the 1950s and ’60s after Bretton Woods placed the dollar at the center of the international monetary system.

It expanded through the 1980s, ’90s… into the early aughts.

And beneath notice, the shadow banking system shouldered the central banks out of the international monetary system. Snider:

“The global money system moved on without central banks bothering to notice.”

Did the Shadow Banking System Cause the Great Financial Crisis?

These shadow banks traded heavily in derivatives and other risky instruments. All without oversight.

Where do asset bubbles come from, asks Snider? “They came from the shadows” is his answer — including the U.S. housing bubble:

Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade. What actually happened was it became a parallel banking system unto itself… not so much that a company in Japan could import goods from Sweden. But so that the banks in Japan or Sweden or Switzerland or anywhere around the world could participate in this [shadow banking] system that at the time was stoking a U.S. housing bubble, while at the same time creating vast bubbles in emerging market[s]… 

So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.

To repeat:

Snider argues that the 2008 crisis was not merely a housing crisis. It was rather a crisis of the shadow banking system:

The Great Financial Crisis has been laid at the doorstep of subprime, a bunch of greedy Wall Street bankers insufficiently regulated to have not known any better.

That was just a symptom of the first. The housing bubble itself was more than housing. What was going on in the shadows wasn’t bounded by national borders or geography… The Great Financial Crisis was a [shadow banking] event, nothing less. 

Why hasn’t the global economy recovered from the Great Financial Crisis? Might the answer involve the shadow banking system?

More tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

The post Central Banks Don’t Matter appeared first on Daily Reckoning.

EXPOSED: The Fed’s Deepest Secret

This post EXPOSED: The Fed’s Deepest Secret appeared first on Daily Reckoning.

The announcement came issuing at 2 p.m. EST.

As roundly expected… Jerome Powell and his fellows sat idly upon their hands.

The fed funds rate remains chained in place, at 2.50%.

Mr. Powell, by way of explanation:

We think our policy stance is appropriate at the moment and we don’t see a strong case for moving in either direction. We say in our statement of longer-run goals and monetary policy strategy that the Committee would be concerned if inflation were running persistently above or below 2%.

The good chairman went on to dismiss last month’s weak inflation numbers as “transient.”

But is this the picture of “transience”?


Observe the trendline.

Where’s the (Official) Inflation?

Nearly 10 years on, the Federal Reserve pursues a grail agonizingly beyond its grasp — 2% inflation, sustained.

The latest data reveal March inflation increased only 1.6% year over year. January gave a reading of 1.8%.

Thus the Fed’s 2% target slips further beyond its outstretched fingers.

What — if any — credibility remains?

We can only cough sadly behind our hands, sink into our chair and look away in pity… as from a stage magician whose abracadabra has failed to conjure the rabbit.

So the time has come to expose the fraud sweating and writhing upon the stage… and reveal its deepest secret.

What is it?

To the answer we turn shortly. But first to the magic show on a parallel stage…

The Market Wanted a Rate Cut

The Dow Jones scraped along in positive numbers until word came down shortly after 2.

Upon which point it sank deeper and deeper into red, closing the day down 163 points.

Both S&P and Nasdaq followed nearly identical tracks.

The S&P ended the day 22 points lower; the Nasdaq 46.

Why the long faces on Wall Street?

The audience demanded a trick — a rate cut. And Mr. Powell failed to deliver.

Peter Boockvar, CIO of Bleakley Advisory Group:

“The market was pricing in this rate cut. They want a rate cut and this was basically Powell saying, ‘Sorry, but we’re not.’”

Not this time at least.

But to resume our exposé of the Federal Reserve… and its deepest secret…

The Federal Reserve Cannot Even Define Money

We begin with a premise:

The Federal Reserve can no longer define money. That is correct. It cannot even define money.

Imagine a butcher who cannot cut you a pound. Imagine a map maker who cannot measure a mile.

Now you have the flavor of it.

Under the Coinage Act of 1792, a dollar equaled one Spanish milled dollar — containing “371 grains and 4/16th parts of a grain of pure, or 416 grains of standard silver.”

Under the classic gold standard a dollar was defined as 1/20th of one ounce of gold. It was later defined as 1/35th of one ounce of gold.

But once old Nixon scissored the dollar’s final golden tether… the dollar defied all measurement.

It was as if 2.54 centimeters no longer defined an inch but a mile. Twelve inches no longer defined a foot but an inch. Three feet no longer defined a yard but a mile.

Perhaps you define a dollar as 100 cents. Well then, what is a cent? 1/100th of a dollar. But what again is a dollar?

And so you embark upon an infinite chasing of your tail.

We must conclude that today’s money is largely abstraction — wispy as gossamer, slippery as eels, elusive as quicksilver.

It is measured by a warring arrangement of alternate “money supplies” — none of which meet full requirements:

Unit of account, medium of exchange… store of value.

Alan Greenspan Comes Clean

Thus the Federal Reserve steers by the swaying and erratic lights of M0, M1, M2, MZM, etc.

Here we have money, near money, money at second and third remove, money somewhere in the ghostly ether.

And so the monetary authority cannot heave forth a working definition of money… or its true supply.

But do not rely upon our slanted word.

This we have on the authority of the maestro himself — Alan Greenspan — who confessed nearly 20 years previous that:

The problem is that we cannot extract from our statistical database what is true money conceptually…

One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing… 

While of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition. 

Two decades, a great financial crisis and multiple rounds of QE later, the proposition has grown more dubious yet.

What and where is money? Where is inflation?

As notes Jeff Snider of Alhambra Investments, wryly:

“If you can’t ‘locate’ money, you can’t locate inflation.”

A Basic Definition of Money

We would argue that it is located in the asset classes — equities, real estate, etc.

But let us cleave to the simplest definition of money as defined by the late “Austrian” school economist Murray Rothbard:

The thing that all other goods and services are traded for, the final payment for such goods and services on the market.

True money is the “final” payment, that is. Only this money satisfies all obligations, retires all debts.

Economists of the Austrian School crafted a metric they labeled the “true money supply” (TMS) in the 1970s and ’80s.

Existing measures of money supply gave distorted readings, they claimed.

The true money supply consists of cash, demand deposits (i.e., checking accounts) at banks, savings… and government deposits at the Federal Reserve.

That is, it consists of money immediately available for transaction.

The TMS broad money supply is therefore more restrictive than the Federal Reserve’s broadly defined M2, for example.

March 2018 to March 2019, the official M2 money supply expanded 3.8%.

But TMS-2 year-over-year growth speaks a different tale…

Year-over-year TMS-2 money supply expanded a mere 2.2% in March, says analyst Michael Pollaro — its slowest pace in 12 years.

And preliminary data indicate year-over-year TMS-2 expansion has slipped to 1.7% in April.

That is, by the narrow TMS-2 reading, money supply is expanding at a far lesser clip than official M2.

Might this vast discrepancy explain the soft inflation data as officially presented?

An Arresting Conclusion

We cannot say for certain — we are not a credentialed member of the professional economics guild.

Thus we lack all official standing.

Might the theory wobble, might it stagger before an onslaught of evidence?

It may very well.

Then you can add it to the existing list of quack theories.

But the fact remains:

Nearly 10 years on, the Federal Reserve cannot work a sustained 2% inflation.

After long, hard pummeling of our cerebral centers, thus do we arrive at this arresting conclusion, the Federal Reserve’s deepest secret:

The Federal Reserve exerts little actual control upon the monetary system.

More tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

The post EXPOSED: The Fed’s Deepest Secret appeared first on Daily Reckoning.

The Fed’s Dangerous Inflation Game

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By now you’ve heard that the U.S. economy expanded at an annualized rate of 3.2% in the first quarter of 2019. That was reported by the Commerce Department last Friday morning.

That strong growth coming on top of 4.2% in Q2 2018 and 3.4% in Q3 2018 means that in the past twelve months, the U.S. economy has expanded at about a 3.25% annualized rate. That’s a full point higher than the average growth rate since June 2009 when the expansion began and it’s in line with the 3.22% growth rate of the average expansion since 1980.

It looks as if the “new normal” is back to the old normal of 3% or higher trend growth. Or is it?

The headline growth rate of 3.2% was certainly good news. But, the underlying data was much less encouraging. Most of the growth came from inventory accumulation and government spending (mostly on highway projects). But, business won’t keep building inventories if final demand isn’t there. That’s where the 0.8% growth in personal consumption is troubling.

The consumer didn’t show up for the party in the first quarter.

If they don’t show up soon, that inventory number will fall off a cliff. Likewise, the government spending number looks like a one-time boost; you can’t build the same highway twice. Early signs are that the second quarter is off to a weak start.

Dig deeper and you can see that core PCE (the Fed’s preferred inflation metric) cratered from 1.8% to 1.3%. That’s strong disinflation and dangerously close to outright deflation, which is the Fed’s worst nightmare.

The data just show that the Fed is as far away as ever from its 2% target. But why should it even have 2% as its target?

Common sense says price stability should be zero inflation and zero deflation. A dollar five years from now should have the same purchasing power as a dollar today. Of course, this purchasing power would be “on average,” since some items are always going up or down in price for reasons that have nothing to do with the Fed.

And how you construct the price index matters also. It’s an inexact science, but zero inflation seems like the right target. But the Fed target is 2%, not zero. If that sounds low, it’s not.

Inflation of 2% cuts the purchasing power of a dollar in half in 35 years and in half again in another 35 years. That means in an average lifetime of 70 years, 2% will cause the dollar to 75% of its purchasing power! Just 3% inflation will cut the purchasing power of a dollar by almost 90% in the same average lifetime.

So again, why does the Fed target 2% inflation instead of zero?

The reason is that if a recession hits, the Fed needs to cut interest rates to get the economy out of the recession. If rates and inflation are already zero, there’s nothing to cut and we could be stuck in recession indefinitely.

That was the situation from 2008–2015. The Fed has gradually been raising rates since then so they can cut them in the next recession.

But there’s a problem. The Fed can raise rates all they want, but they can’t produce inflation. Inflation depends on consumer psychology. We have not had much consumer price inflation, but we have had huge asset price inflation. The “inflation” is not in consumer prices; it’s in asset prices. The printed money has to go somewhere. Instead of chasing goods, investors have been chasing yield.

Yale scholar Stephen Roach has pointed out that between 2008 and 2017 the combined balance sheets of the central banks of the U.S., Japan and the eurozone expanded by over $8 trillion, while nominal GDP in those same economies expanded just over $2 trillion.

What happens when you print over $8 trillion in money and only get $2 trillion of growth? What happened to the extra $6 trillion of printed money?

The answer is that it went into assets. Stocks, bonds and real estate have all been pumped up by central bank money printing. The Fed, first under Ben Bernanke and later under Janet Yellen — repeated Alan Greenspan’s blunder from 2005–06.

Greenspan left rates too low for too long and got a monstrous bubble in residential real estate that led the financial world to the brink of total collapse in 2008.

Bernanke and Yellen also left rates too low for too long. They should have started rate and balance sheet normalization in 2010 at the early stages of the current expansion when the economy could have borne it. They didn’t.

Bernanke and Yellen did not get a residential real estate bubble. Instead, they got an “everything bubble.” In the fullness of time, this will be viewed as the greatest blunder in the history of central banking.

The problem with asset prices is that they do not move in a smooth, linear way. Asset prices are prone to bubbles on the upside and panics on the downside. Small moves can cascade out of control (the technical name for this is “hypersynchronous”) and lead to a global liquidity crisis worse than 2008.

If the Fed raises rates without inflation, higher real rates can actually cause the recession and/or market crash the Fed has been preparing to cure. The systemic dangers are clear. The world is moving toward a sovereign debt crisis because of too much debt and not enough growth.

Inflation would help diminish the real value of the debt, but central banks have obviously proved impotent at generating inflation. Now central banks face the prospect of recession and more deflation with few policy options to fight it.

So the Fed has been considering some radical ideas to get the inflation they desperately need.

One idea is to abandon the 2% inflation target and just let inflation go as high as necessary to change expectations and give the Fed some dry powder for the next recession. There are other, more drastic solutions as well.

I’ve discussed how Modern Monetary Theory (MMT) is becoming increasingly popular in Democratic circles, even though the Fed has disavowed it. But it can’t be ruled out if Democrats win the 2020 election.

That means 3% or even 4% inflation could be coming sooner than the markets expect if they’re pursued.

But those who want higher inflation should be careful what they ask for. Once inflation expectations develop, they can take on lives of their own. Once they take root, inflation will likely strike with a vengeance. Double-digit inflation could quickly follow.

Double-digit inflation is a non-linear development. What I mean by that is, inflation doesn’t go simply from two percent, three percent, four, five, six. What happens is it’s really hard to get it from two to three, which is ultimately what the Fed wants. But it can jump rapidly from there.

We could see a struggle to get from two to three percent, but then a quick bounce to six, and then a jump to nine or ten percent. The bottom line is, inflation can spin out of control very quickly.

If people believe inflation is coming, they will act accordingly en masse, the velocity of money will increase and soon enough the inflation will arrive unless money supply has been severely constricted. That’s how you get the rapid inflation increases I described above.

So is double-digit inflation rate within the next five years in the future? It’s possible. Just to be clear, I am not making a specific forecast here. But if it happens, it could happen very quickly. So the Fed is playing with fire if it thinks it can overshoot its inflation targets without consequences.

It doesn’t seem like a problem now. But one day it might.


Jim Rickards
for The Daily Reckoning

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The Latest Government Myth

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“Deep down, he’s shallow,” said critic Peter DeVries of one author, famously revered.

Today we submit the case that Friday’s GDP report — grand, gaudy and garish — is deeply shallow beneath the scintillated surface.

That is, the deeper numbers tell a tale 180 degrees out of joint with appearance.

And private-sector growth may actually peg along at the crawlingest rate in six years.

Let us now peek within and beneath official data…

Friday’s official 3.2% trounced all reasonable estimate, all respected opinion.

Even the Federal Reserve’s chronically cheerful Atlanta squad pegged Q1 GDP at 2.8%.

But scratch the surface and what do we find? What accounts for the screaming headline number?


Companies will often amass inventories to jump out ahead of expected tariffs.

Inventories have been mounting for the past year and then some… rising some 8%.

And data reveal American business piled up $32 billion of inventoried goods the first quarter — a $46.3 billion swelling over the previous quarter.

Government bean counters heap inventories into the column of business investment. Thus in the official telling, they add to the gross domestic product.

Says the Bureau of Economic Analysis, Q1 rising inventory contributed 0.65 percentage points to real GDP.

Rinse them out and we have Q1 growth of 2.55%… not 3.2%.

2.55% is still handsome. Most original Q1 estimates came in under 2%.

But Daily Reckoning affiliate Wolf Richter takes the longer view:

Rising inventories, which are considered an investment and add to GDP, are eventually followed by a decline in inventories when companies whittle them down again, and there is a price to pay for it…

Companies that sit on that inventory and have trouble selling it will at some point cut their orders to reduce their inventories. When this happens, sales drop all the way up the supply chain… when businesses whittle down their inventories by ordering less, it ripples through the economy, lowers GDP growth…

Affirms a swarm of Morgan Stanley economists:

“The buildup in inventories over the past several quarters points to a large reversal in the second quarter.”

How about the third… and the fourth?

Meantime, we are informed the false fireworks of government spending account for another portion of the final 3.2%.

But according to the ladies and gentlemen of Oxford Economics, one metric tells tell a far truer tale of GDP:

Final sales to domestic purchasers.

What if we run the blue pencil through Q1 inventory and government GDP contributions… and cleave to final sales alone?

Q1 GDP increased not 3.2% or even 2.6% after subtracting government’s “addition” — but a wilting 1.3%.

1.3% is miles and miles and miles behind the official 3.2%.

Let us peek even deeper beneath the shimmering surface…

Q1 consumer durable goods spending sank 5.3%… the steepest plunge in 10 years.

Private-sector consumption and investment — the pounding pulse of a healthful economy — trickled to a semi-comatose 1.3%.

That is the faintest increase in nearly six years.

Consumer spending overall increased a mere 1.2%… off from 2.5% the quarter previous.

And from last quarter’s 5.4%, business investment halved — to 2.7%.

MarketWatch informs us that investments in factories, offices, stores and oil wells sank for the third-straight quarter.

It further informs us that investments in equipment such as computers, aircraft and machinery overall scratched out a piddling 0.2% increase.

Is this the eight-cylinder roar of a throbbing economic engine?

“On the outside, it looks like a shiny muscle car,” writes Bernard Baumohl of the Economic Outlook Group…

“Lift the hood, however, and you see a fragile one-cylinder engine.”

Former Obama economic adviser and present Harvard grandee Jason Furman takes his own disappointing glance under the hood:

“First-quarter GDP is 3.2%, but the underlying data is much weaker and is consistent with a slowing economy.”

The aforesaid Oxford Economics affirms the economy is “undeniably cooling.”

Meantime, the Federal Reserve huddles at Washington this week.

What does Friday’s GDP report implicate for interest rates?

Despite the dazzling headline number, the Federal Reserve’s “Open Market” Committee will hold rates steady. They will certainly not raise rates.

Why are we so certain?

Official inflation data.

The Federal Reserve’s preferred inflation gauge — which excludes more fluid food and energy prices — increased not a jot last month.

And it has increased only 1.6% year over year.

So the Federal Reserve remains hopelessly asea, as far as ever from its infinitely elusive 2% target.

And it will cut rates before raising rates — depend on it.

But last week we explained why we expect inflation to menace within the foreseeable future.


Brian Maher
Managing editor, The Daily Reckoning

The post The Latest Government Myth appeared first on Daily Reckoning.

The Bull Will Keep Running

This post The Bull Will Keep Running appeared first on Daily Reckoning.

Many market bears are coming out of the woodwork. They’re talking up recession and talking down stocks all over town.

But Friday’s GDP report should stop some of that talk. At 3.2%, first-quarter GDP easily topped estimates.

Meanwhile, many Americans are gainfully employed and they’re seeing their wages rise now more than any other time since the Financial Crisis. Interest rates and inflation are still low, and the Fed has stopped cutting rates, at least for now.

After December’s pullback, the stock market bounced back in the first quarter. The S&P 500 saw its biggest first quarter gain since 1998. And both the S&P and Nasdaq are back to record highs! The Dow is close to its own record highs.

The truth is, it didn’t pay to sell your stocks and dig your head into the sand last quarter. And it certainly won’t pay to be a bear this quarter either.

Corporate profits are also still on the rise, despite a slowdown from last year. Now we’re into earnings season again, with companies reporting results for the first quarter.

So far, many of those reports have been excellent.

That’s because many companies have reported profits that are well above investor expectations. Part of this outperformance is due to companies continuing to cash in on the growing economy.
But there’s also the fact that investors anticipated weak profits from the start.

Remember, the last earnings season happened when the market was just starting to recover from the December sell-off. And investors were worried about higher interest rates, the government shutdown and tense trade negotiations with China.

Today, many of those fears have proven to be false or overblown. The Federal Reserve didn’t raise interest rates at all — and signaled it’s not planning to raise them for the rest of the year.

And trade negotiations with China are reportedly going well. I anticipate we’ll receive some more definitive news about the final agreement soon. The final announcement should help drive stocks higher.

In short, this earnings season is helping investors become more confident and sending stocks higher.

But let’s take a look at the bigger picture.

The great value investor, Ben Graham, once said, “In the short term, the stock market is a voting machine. But in the long run, the market is a weighing machine.”

If you’re a longtime investor like me, I bet you’ve heard this quote countless times. But few people really grasp what this saying actually means. Allow me to offer an explanation…

Day to day, or even week to week, stocks get knocked around by headlines — because investors are emotional.

But month to month, or even year to year, the daily noise fades away and the true value of stocks become a lot clearer. For the bulls, that picture has looked pretty good!

Over the last ten years, all three major U.S. stock indices have more than tripled in value.
That’s in spite of all the bad, worrisome news thrown at investors every single day. And for the first time in history, we’ve seen two American companies reach $1 trillion in market value during this incredible stock run.

Better still, the economic outlook for America remains strong. So stocks should have plenty of fuel to keep charging higher as far as the eye can see.

Some would say the current expansion is long in the tooth. But I think we’ve still got plenty of room to run!

Yes, at some point, we’ll see a recession. But for now, the smart money, like me, is still bullish. And you should be, tooo.

Here’s to growing and protecting your wealth!

Zach Scheidt
for The Daily Reckoning

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Investors Are Falling Into a False Sense of Security Again

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In January 2018, two significant market events occurred nearly simultaneously. Major U.S. stock market indexes peaked and volatility indexes extended one of their longest streaks of low volatility in history. Investors were happy, complacency ruled the day and all was right with the world.

Then markets were turned upside down in a matter of days. Major stock market indexes fell over 11%, a technical correction, from Feb. 2–8, 2018, just five trading days. The CBOE Volatility Index, commonly known as the “VIX,” surged from 14.51 to 49.21 in an even shorter period from Feb. 2–6.

The last time the VIX has been at those levels was late August 2015 in the aftermath of the Chinese shock devaluation of the yuan when U.S. stocks also fell 11% in two weeks.

Investors were suddenly frightened and there was nowhere to hide from the storm.

Analysts blamed a monthly employment report released by the Labor Department on Feb. 2 for the debacle. The report showed that wage gains were accelerating. This led investors to increase the odds that the Federal Reserve would raise rates in March, June and September (they did) to fend off inflation that might arise from the wage gains.

The rising interest rates were said to be bad for stocks because of rising corporate interest expense and because fixed-income instruments compete with stocks for investor dollars.

Wall Street loves a good story, and the “rising wages” story seemed to fit the facts and explain that downturn. Yet the story was mostly nonsense.

The fact is that stocks and volatility had both reached extreme levels and were already primed for sudden reversals. The specific catalyst almost doesn’t matter. What matters is the array of traders, all leaning over one side of the boat, suddenly running to the other side of the boat before the vessel capsizes.

The technical name for this kind of spontaneous crowd behavior is hypersynchronicity, but it’s just as helpful to think of it as a herd of wildebeest that suddenly stampede as one at the first scent of an approaching lion. The last one to run is mostly likely to be eaten alive.

Markets are once again primed for this kind of spontaneous crowd reaction. After coming to within a fraction of an official bear market in December, the Fed capitulated to markets by pausing on rate hikes and ending QT far ahead of schedule.

Financial conditions eased dramatically. The markets rallied hard, and the stock market turned in its best first quarter in 20 years. The S&P and Nasdaq stormed back to record highs this week, while the Dow is only about 1% away from its own previous record.

Meanwhile, CNNMoney’s Fear and Greed Index has gone from “greed” to “extreme greed” within the span of a week. Good times are here again and investors are getting complacent again, just like last year.

But there are just as many if not more catalysts for a sharp market selloff.

Despite today’s surprising GDP report, which is likely an outlier that doesn’t mean much, there are signs the economy is slowing down.

In March, for example, the yield curve inverted. The yield on the 10-year Treasury note fell below the rate on the three-month note. Thats happened prior to each of the past seven recessions.

That doesn’t mean a recession is imminent; it could still be another year or more away. But it is an ominous sign.

Meanwhile, a recent report revealed a record seven million Americans are now at least 90 days behind in their car loan payments. There is also a student loan crisis unfolding.

Total student loans today at $1.6 trillion are larger than the amount of junk mortgages in late 2007 of about $1.0 trillion. Default rates on student loans are already higher than mortgage default rates in 2007. This time the loan losses are falling not on the banks and hedge funds but on the Treasury itself because of government guarantees.

Not only are student loan defaults soaring, but household debt has hit another all-time high. Student loans and household debt are just the tip of the debt iceberg that also includes junk bonds corporate debt and even sovereign debt, all at or near record highs around the world.

But it’s not just the U.S.

Other signs are appearing on the horizon also as the global economy is slowing down. Europe and Asia are showing marked declines.

China’s problems are well-known. And while the causes may vary, growth in all of the major economies in the EU and the U.K. is either slowing or has already turned negative. The world is discovering the limits of debt-fueled growth.

According to the Institute of International Finance (IIF), it required a record $8 trillion of freshly created debt to create just $1.3 trillion of global GDP. The trend is clear. The massive debts intended to achieve growth are piling on every day. Meanwhile, many of the debts taken on since 2009 are still on the books.

The U.S. debt-to-GDP ratio is now 106%, the highest since the end of the Second World War. The Chinese debt-to-GDP ratio is a more reasonable 48%, but that figure is misleading because it does not include the debts and guarantees of provinces, state-owned enterprises, banks, wealth management products and numerous other entities that the government in Beijing is directly or indirectly obligated to support.

When that additional debt is taken into account, the real debt-to-GDP ratio is over 250%, about the same as Japan’s.

Debt-to-GDP ratios below 60% are considered sustainable; ratios between 60% and 90% are considered unsustainable and need to be reversed; and ratios in excess of 90% are in the red zone and will produce negative growth along with default through nonpayment, inflation or other forms of debt repudiation.

The fact is, the world’s three largest economies — the U.S., China and Japan — are all now deep in the red zone.

What is striking is the speed with which synchronized global growth has turned to synchronized slowing. Indications are that this slowing is far from over. While growth can create a positive feedback loop, slowing can do the same.

Warnings of economic collapse are no longer confined to the fringes of economic analysis but are now coming from major financial institutions and prominent economists, academics and wealth managers. Leading financial elites have been warning of coming collapses and dangers.

These warnings range from the IMF’s Christine Lagarde, Bridgewater’s Ray Dalio, the Bank for International Settlements (known as the “central banker’s central bank”), Paul Tudor Jones and many other highly regarded sources.

We have had major stock market crashes or global liquidity crises in 1987, 1994, 1998, 2000 and 2008.

That’s five major drawdowns in 31 years, or an average of about once every six years. The last such event was 10 years ago. So the world is overdue for another crisis based on market history.

The trouble is, most investors will never see it coming.

Smart investors can profit from this with a combination of long-volatility strategies, safe-haven assets, gold and cash.


Jim Rickards
for The Daily Reckoning

The post Investors Are Falling Into a False Sense of Security Again appeared first on Daily Reckoning.

GDP: Fake News

This post GDP: Fake News appeared first on Daily Reckoning.

The first-quarter GDP number was released this morning. And at 3.2%, it came in far above estimates. Consensus was about 2.3%. It was also the highest Q1 GDP print since 2015.

But there’s probably less here than meets the eye.

About half the GDP gain came from a surge in inventories and a sharp reduction in the trade deficit, neither of which is sustainable. They are likely one-time boosts.

The economy has been growing since June 2009, making this the second-longest economic expansion on record. However, it has also been the weakest economic expansion on record. That has not changed under President Trump.

Even during Obama’s weak expansion we saw strong quarters including the first quarter of 2015, which was 3.2%, and the second quarter of 2015, which was almost 3%. The problem is that these strong quarters soon faded; growth in the fourth quarter of 2015 was only 0.5%, almost recession level.

Under Trump, second-quarter 2018 growth was a very impressive 4.2% annualized. Third-quarter 2018 growth was 3.4%. Trump’s tax cuts seemed to be producing exactly the kind of 3–4% sustained trend growth Trump had promised.

But then the economy put on the brakes and growth slowed to only 2.2% in the fourth quarter. It looked like the 2018 “Trump bump” in growth was over and growth was returning to the 2.2% trend that had prevailed during the Obama administration.

And despite the first quarter’s 3.2% outlier, I expect lower GDP in the quarters ahead, returning to the same punk levels we’ve seen for nine years.

For the year, economists believe GDP will expand 2.4%, down from last year’s 2.9% gain, as the boost from the 2017 tax cuts and increased government spending over the past two years start to fade.

What about the possibility of recession?

Most investors are familiar with the conventional definition of an economic recession. It’s defined as two consecutive quarters of declining GDP combined with rising unemployment and a few other technical factors.

But investors may not be as familiar with two other aspects of recession timing. The first is the exact body that makes the determination, and the second has to do with the timing of that body’s announcements.

The group that “officially” decides when the U.S. economy is in a recession is called the National Bureau of Economic Research (NBER) based in Cambridge, Massachusetts, although there’s nothing official about what they do.

NBER is a private nonprofit think tank that receives substantial input from scholars at Harvard and MIT, but it is not a government agency. Their decisions on the start and finish of recessions are not technically “official,” but they are widely accepted by Washington, the Fed and Wall Street.

Less well known is the fact that recessions are not called by NBER until well after they have begun. In this respect, NBER looks backward at the data rather than forward like a forecasting firm.

On occasion, the NBER might not identify the start date of a recession until nine months or a year after the recession began. By that method, the U.S. could be in a recession next month and we would not know about it until a year from now when the data were all in.

The Fed may be on pause, but previous Fed action has been catching up with the economy. Monetary policy operates with a lag of six–18 months, so the slowing of the economy we saw in the fourth quarter of 2018 was the result of Fed tightening in late 2017 and early 2018.

Don’t be surprised if we wake up a year from now only to find the NBER says the recession began in April or May of 2019.

The Fed move to a rate pause in January 2019 and the end of QT in September 2019 will not be felt in the real economy until late 2019 and early 2020.

The timing has serious implications for next November’s presidential election. If the economy improves ahead of the election, Trump has an excellent chance. If it falls into recession, the Democratic candidate will probably win, whoever it is.

In that case, get ready for class warfare, much higher taxes and even more government spending than today.

Got gold?


Jim Rickards
for The Daily Reckoning

The post GDP: Fake News appeared first on Daily Reckoning.

“Is Inflation Dead?”

This post “Is Inflation Dead?” appeared first on Daily Reckoning.

Today we don the prophet’s motley, climb atop our soapbox… and holler a thumping prediction.

For we have indication — reliable indication — that an established trend will soon end. And that another will begin.

But what established trend? How will it end? And why so all-fired important?

Answers anon. But first an after-action report on today’s combats…

The bears won — if barely.

The Dow Jones lost 135 points today. The S&P was essentially even on the day. The Nasdaq, meantime, turned in a 16-point gain.

Mixed earnings reports — some swell, some not — largely cancelled each other.

We now turn and face the future, by first turning and facing the past — Aug. 13, 1979, to be precise.

“The Death of Equities,” 2019 Version

On that date BusinessWeek announced before the world “The Death of Equities.”

For nearly 15 years the stock market had been sunk in the crushing deeps of a bear market. Why should it end?

Dazzled and blinkered by the present’s brilliant focus, the wise men of BusinessWeek had forgotten about the past.

This time is different, they believed.

They forgot that markets move in clockwork cycles, that the wheel swings around eventually, that the full circle runs to 360 degrees.

The gods pointed, laughed… and plotted.

By 1982 the loveliest bull market in all of history was underweigh. It roared and raged for nearly 20 years following.

Come we now to this headline in another BusinessWeekBloomberg Businessweek — dated April 17, 2019:

“Is Inflation Dead?”

Is Infaltion Dead?

“It Is Always Different — Until It Is Once Again the Same”

As the case for stocks was laughed out of court in 1979, so the case for inflation is laughed out of court today.

As in 1979, today’s professional men believe this time is different.

They tell us globalization, a “savings glut” or productivity increases through technology have licked inflation for good.

Despite the heroic sweating of the printing press and all the angels and saints, they remind us, the Federal Reserve cannot work a sustained 2% inflation rate.

Why should it change now?

But it is always different — until it is once again the same.

Here at The Daily Reckoning we take the overall view, the long view — the view sub specie aeternitatis.

And in the grand sweep, the cycle completes.

Now that the Bloomberg men have tugged on Fate’s cape good and hard… now that they have suggested inflation’s permanent demise…

We have our perfect contrarian indicator.

We must conclude that inflation lurks in the offstage wings, awaiting word from the gods.

But if the Federal Reserve has proven unable to whip disinflation with its deep bag of tricks, how will inflation make its entrance?

How Might Inflation Return?

We have suggested it previously, if only from a glancing angle:

Modern Monetary Theory — MMT.

Come the next downturn, the Federal Reserve will blast us with the same quantitative easing and zero interest rates it inflicted upon us last time.

It may also have a go at negative interest rates.

But much of its “dry powder” the Federal Reserve used against the last crisis. Its stocks remain heavily depleted, despite efforts to reload.

Like last time, its false fireworks may scintillate the stock market — in the near run at least.

Also like last time, they will work limited effect upon the economy of people, places and things.

That is, upon the real economy.

And negative interest rates have failed to meet their advertising where tried, Japan and Europe being cases brilliantly in point.

There is little reason to expect they will succeed in these United States.

No, the central banks are tied hand and foot.

Now enter MMT…

The “Perfect Theory for Our Times”

MMT will parade as quantitative easing for Main Street.

Through the miracle of the printing press a healthy inflation will finally emerge from its cage.

If it strays too far or begins to snarl, the tax man will go chasing after it.

Higher taxes will simply vacuum surplus money from the economy and jam inflation back in its cell.

MMT further promises universal health care, full employment, college free of charge, a throbbing economic engine, a thermostatic correction of the planetary temperature… and more.

Thus MMT is the “perfect theory for our times” explains former Morgan Stanley global strategist Gerard Minack:

One reason this may be attractive is that it is increasingly clear that monetary policy is exhausted, at least in the developed economies…

It seems to me that MMT is the perfect theory for the times. It appears to justify a switch from monetary to fiscal policy as the key tool of macro management… it can also be used to fund popular policies… Put simply, this would see fiscal policy play the role that monetary policy has played for decades… The key point now is that MMT is being used as an argument to justify important policy changes…

An End to “Secular Stagnation” and the “Savings Glut”

And through public spending MMT promises to murder the “secular stagnation” and “savings glut” that presently ride and torture the economic establishment.

Lower interest rates and further monetary gimcrack cannot.


If this policy approach were implemented it would be fatal to secular stagnation… For 30 years the main policy response to this [problem] has been to reduce interest rates… The point is that it has required lower and lower rates to achieve any given growth rate. Increased public dis-saving is the direct antidote to the private sector’s rising saving… if there is a broad-based adoption of MMT in the next downturn, it will end the secular stagnation era. 

We are skeptical — deeply — that a “savings glut” has any existence whatsoever.

As well argue that a “wealth glut” exists. Moreover, that it takes the form of a public menace.

But our larger point, sharp as pins, is that MMT is beginning to get a hearing.

To date a mere handful of Democratic officials and presidential aspirants have bellowed for MMT.

But come the next downturn and the Federal Reserve’s botched rescue, the chorus will swell — depend on it.

Just so, you say.

But the Republicans will never let it through. They may be a gang of scoundrels in their own right. But even they will go only so far.

“Modern Monetary Theory for Conservatives”

But Republicans too sense changes in the wind. They too can jab a moist index finger in the air to determine which way it blows.

Might they hatch a “conservative” MMT to position themselves upwind of public opinion?

But does a conservative MMT even exist?

Yes, says a certain Steve Englander, who directs global research at Standard Chartered Bank.

He is also the author of “Modern Monetary Theory for Conservatives.”

From which:

A conservative version of Modern Monetary Theory (MMT) could arguably work just as well as the standard progressive version…

But instead of funding lavish and exotic government spending, a conservative MMT would finance tax cuts.

But have they not tried tax cuts already to little general effect?

Yes, but an MMT-backed tax cut would hacksaw taxes to the extent a progressive MMT would heave forth money.

Two Approaches, Same Result

The gargantuan tax savings would then go flooding onto Main Street.

Mr. Englander:

The economic outcomes from the lower-tax version of MMT would likely be indistinguishable from the higher spending version…

In the first case, the private sector is expected to do the spending, in the second, the government…

The same principles could be used to justify a very different agenda than is commonly associated with MMT. The core idea that central bank-financed deficits drive activity and inflation remains the same. 

This Englander says he does not advocate any such plan — merely that it is possible.

But might some enterprising politicos haul it out as a more “sensible” alternative to a lunatic progressive MMT?

Why not?

Might it blast identical holes in the deficit?

Well, maybe it would. But recall, deficits do not matter.

This we have on authority of a former Republican vice president.

Besides, you cannot beat something with nothing, he might say.

We must do something. This is something. We must therefore do it.

Progressive MMT, conservative MMT, the end is the same.

And either could be one good crisis away…


Brian Maher
Managing editor, The Daily Reckoning

The post “Is Inflation Dead?” appeared first on Daily Reckoning.

The Fight For 2020 Has Begun

This post The Fight For 2020 Has Begun appeared first on Daily Reckoning.

The focus of the anti-Trump forces has shifted. Trump was not removed from office as his opponents had hoped. And the long-awaited Mueller report on “collusion” by Trump with Russia has turned out to be an anticlimax showing no collusion. In fact, Trump is on track to complete a mainly successful first term.

Instead, the “resistance,” aided by the deep state and the media, have turned their attention to the 2020 election. Efforts to harass and distract Trump are now mainly for the purpose of weakening Trump’s reelection prospects and promoting the election of an opponent from among a field of Democratic candidates.

The greatest question facing President Trump over the next 18 months is whether or not he can avoid a recession. If he can, he stands an excellent chance of reelection. If he doesn’t, then a Democrat will likely win.

Trump supporters will be the first to tell you that the stock market has rallied from 18,529 on the Dow Jones industrial average index the day before Trump was elected to about 26,680 as of today. That’s nearly a 45% gain in 29 months.

Unemployment is near 50-year lows. African-American and Hispanic unemployment is at an all-time low. Labor force participation is steady after falling during the Obama years. Food stamp usage is down. Housing prices are up. Inflation is under control.

Growth in 2018 was above the 10-year trend since the end of the last recession and 2018 was the best full-year growth of that entire period. Real wages have shown their best gains in over 10 years.

While the economy is not booming by historical standards, it is producing its best performance since the global financial crisis. The U.S. economy looks particularly strong when compared with major trading partners such as the U.K., France, Italy, Japan and Germany. Even China is slowing dramatically as the U.S. continues to perform as a reliable engine of world growth.

The foregoing economic track record is repeated by Trump supporters and their (few) media allies on a daily basis. Most of the media simply ignore these data and continue the Trump bashing about the Mueller report and Trump’s business practices. These dueling narratives are by now business as usual when it comes to Trump.

But behind the media spin curtain, there is some reason to be concerned about the economy.

Manufacturing output is declining, both on a month-over-month and year-over-year basis. U.S. capacity utilization is showing a recent slight decline. Certain indexes of new orders and shipments are also showing declines. Imports and trade deficits have both increased sharply. The yield curve is slightly inverted in the 2–5-year sector.

None of these indicators is declining to extreme levels and there are other indicators showing positive results. None is pointing to a recession in the short run, but all should be worrisome to Trump.

His supporters continually recite the claim that this is “the best economy ever.” It’s not.

The Fed continues to tighten (through balance sheet normalization if not rate hikes) despite signs of a slowing economy. The problem is that monetary policy acts with a lag of 12–18 months. The economy is slowing now, not because of the December 2018 rate hike, but because of rate hikes in December 2017 and March 2018. The Fed’s later rate hikes in 2018 have yet to take hold.

They will soon and the economy will slow further. This dynamic can be seen clearly in Chart 1 below:

Chart 1

When the trend is not your friend. While GDP got a bump in the second quarter of 2018 as a result of the Trump tax cuts (4.2% annual growth), it appears that growth is declining rapidly toward the 2.24% average annual growth since the end of the last recession in June 2009. Obama also achieved several quarters of over 4% growth, but those strong quarters quickly reverted to the 2% level or lower. 

Trump boosters pointed to the 4.2% annual growth in the second quarter of 2018 as “proof” that the president’s economic policies were returning the U.S. to sustainable above-trend growth. My view at the time was that Q2 growth was a temporary pop from the late–2017 tax cuts (effective Jan. 1, 2018), but we needed more data before drawing conclusions.

Now the data are in. Growth dropped from 4.2% to 3.4% in the third quarter and dropped again to 2.6% in the fourth quarter. Estimates for the first quarter of 2019 by the Atlanta Fed call for annual growth of only 2.8%. In short, the “Trump bump” is over and U.S. growth is trending towards the post-2009 trend of 2.24% (well below the post-1980 long-term trend of 3.23%).

None of these trends (tight money, inverted yield curve, slower growth, etc.) is a sure predictor of recession, but all give some cause for concern. The current expansion (118 months long) is just a few months short of being the longest expansion in U.S. history. However, it is also the weakest expansion in U.S. history. The current expansion shows none of the inflation, labor shortages or capacity shortages that historically cause the Fed to raise rates and trigger a recession.

The Fed is conducting a balancing act between higher rates (to get ready for the next recession) and rate hike “pauses” (to avoid causing a recession now). So far, this finesse has worked, but it’s a delicate balance that could easily tip into recession. In addition, there are other factors (trade wars, global slowdown, financial panic) that are beyond the Fed’s control and could also lead to a recession.

Essentially, the difference between no recession and a recession over the next 18 months is also the difference between Trump’s re-election and the election of a Democrat in 2020.

But recession is the hardest to forecast with great accuracy and is therefore the biggest wild card. Trump was elected in large part, despite his off-putting demeanor, because he promised a better economy. He has delivered in part, but has to keep delivering.

In effect, Trump’s probability of victory is simply the inverse of the probability of a recession in the next 18 months. If recession odds are 40%, then Trump’s chance of losing is also 40%. The inverse is a 60% chance of winning. As goes the economy, so goes Trump.

If the economy goes into a recession, that could translate into a voter search for a new economic solution and that could lead straight to the Democratic promise of “free everything.”

Will the present odds change? You bet. As investors, the key is to stay nimble and stay alert to updates. As a Daily Reckoning  reader, you’ll be the first to know.

The impact of this election cycle on markets will be profound and the stakes for investors have never been higher. The time for investors to prepare is today.

That means you’ll want to be ready with a portfolio of gold, silver, fine art, land, cash, intermediate-term Treasury notes, and private equity.

And buckle in. It could be a very bumpy ride ahead.


Jim Rickards
for The Daily Reckoning

The post The Fight For 2020 Has Begun appeared first on Daily Reckoning.

Will Trump Nominate Gold Standard Advocate to Fed?

This post Will Trump Nominate Gold Standard Advocate to Fed? appeared first on Daily Reckoning.

Trump has already exerted more influence over one institution than any other president in over 100 years — the Federal Reserve.

That’s because Trump has had more control over Fed personnel than any president since the Fed was founded in 1913. As I’ve written before, Trump now “owns” the Fed.

When Trump was sworn in, he inherited two vacant seats on the seven-person board of governors of the Federal Reserve System. Holders of those two seats are also members of the Federal Open Market Committee (FOMC), the group that sets U.S. interest rates and monetary policies.

President Obama also had the same vacancies, but he did not nominate anyone to fill the seats because he doubted his chances of getting the nominees past the Republican-controlled Senate and he was sure “President Hillary” would do the right thing and appoint pro-Democratic nominees.

In the end, Trump beat Clinton and the vacancies fell to Trump. Then Trump got another windfall. Within 14 months of becoming president, three additional Fed governors resigned (Dan Tarullo, Stan Fischer and Janet Yellen), and Trump suddenly had five vacancies to fill, or 70% of the entire Fed board.

Trump promoted Jay Powell to chair and appointed Richard Clarida as vice chair, Randy Quarles as vice chair for regulation and Michelle Bowman to fill a seat reserved for community bankers.

All of those appointments were well regarded by Wall Street and the media. But that still left Trump with the two original vacancies.

Trump indicated he wanted to appoint Herman Cain and Steve Moore to fill those seats. Cain is a former presidential candidate, chair of the board of the Federal Reserve Bank of Kansas City and CEO of the Godfather’s Pizza chain. Moore is a think tank analyst, founder of the Club for Growth and a former member of the editorial board of The Wall Street Journal.

Cain has now withdrawn his nomination after running into opposition from Senate Republicans based in part on old allegations of sexual misconduct. Moore is also being opposed by those who fault him for not having a Ph.D. in economics.

Whatever the merits, the real reason they have been opposed by monetary elites is that they are “friends of Trump” and will hold Jay Powell’s feet to the fire to cut interest rates and keep the economic expansion going ahead of the 2020 election.

But if Moore withdraws next or if his nomination is defeated, no worries. There’s some indication that Trump’s next nominee will be Judy Shelton.

She does have a Ph.D. and is a well-known advocate of a new gold standard. Just this Sunday she wrote an article in The Wall Street Journal, “The Case for Monetary Regime Change,” that challenged the current system and defended the classical gold standard.

She has also defended Trump’s trade policies, arguing that those who embrace unfettered free trade dogma “disregard the fact that the ‘rules’ are not working for many American workers and companies.”

For those who want Moore to step aside next, the best advice may be “Be careful what you wish for.”

Regardless, the 2020 presidential election is already beginning to take shape.

A few weeks ago, I unveiled my first forecast on the outcome of the 2020 presidential race. My estimate was that Trump had a 60% chance of winning.

I was also careful to explain that my forecasting model includes constant updating and would no doubt change between now and Election Day on Nov. 3, 2020.

That’s normal. Politics is a highly volatile process and it’s foolish to put a stake in the ground this early. My model has quite a few factors, but the leading factor right now is that Trump’s chances are the inverse of the probability of a recession before the third quarter of 2020.

If recession odds by 2020 are 40%, then Trump’s chances are the inverse of that, or 60%. With the passage of time, Trump’s odds go up because the odds of a recession go down.

If a recession does hit, then Trump’s odds go way down. This dynamic can be used to explain and forecast Trump’s economic policies, including calls for interest rate cuts and efforts to place close friends on the Fed Board of Governors.

It’s all connected.

As usual, I found myself out on a limb with my forecast; the mainstream media are sure Trump will lose in 2020, if he’s not impeached sooner. So it was nice to get some company who sees things my way…

A new Goldman Sachs research report also projects that Trump will win in 2020. Goldman shows a narrower margin of victory than my model, but a win is a win.

Of course, their forecast will be updated (like mine) but we’re starting to see more signs from other professional analysts that Trump is a likely winner after all.


Jim Rickards
for The Daily Reckoning

The post Will Trump Nominate Gold Standard Advocate to Fed? appeared first on Daily Reckoning.