The Case Against Economists

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Dear Reader,

Whenever despair slumps our shoulders and the sorrows of the world gnaw our liver… we can rely on CNBC to bring us up:

“Latest Data Show the Economy Ended 2019 on a Strong Note, Putting Recession Fears to Bed.”

Thus we are caressed, soothed, cheered, lifted.

And mortified.

When fear goes to bed… we vault instantly up from our own, hemorrhaging icy sweat.

That is because danger is highest when the guard is lowest — when fear dozes and snoozes.

A Jinx?

CNBC continues in the same lovely, terrifying vein:

The fourth-quarter growth scare is a thing of the past, as the U.S. economy looks set to close the books on 2019 with a solid rise.

Manufacturing and trade reports Tuesday confirmed that GDP is on pace to rise more than 2% for the period.  An Atlanta Fed gauge estimates the gain at 2.3%, better than the 2.1% in the third quarter and enough to close out the year with [an] average quarterly gain of about 2.4%.

While that would mark a slowdown from the 2.9% increase in 2018, it would still be indicative that the decade-old expansion is alive and well and prepped to continue into 2020.

Just so. But we might remind the joymongers that recession is nearly always an invisible menace.

It often comes in on tiptoe… like a noiseless thief in the night.

The Shockingly Short Route From Expansion to Recession

As we have written before:

Periods of jogging, even galloping, growth may immediately precede recession.

We invite you again to consult the following dates. Each reveals the real economic expansion rate — the economic growth rate adjusted for inflation — immediately before recession’s onset:

  • September 1957:     3.07%
  • May 1960:                2.06%
  • January 1970:          0.32%
  • December 1973:      4.02%
  • January 1980:          1.42%
  • July 1981:                4.33%
  • July 1990:                1.73%
  • March 2001:             2.31%
  • December 2007:      1.97%.

(Again we acknowledge Lance Roberts of Real Invest‍ment Advice for the data).

No Indication of Recession “Anywhere in Sight”

Review the figures. You are immediately seized by this strange and remarkable fact:

Recession has followed hard upon jumping growth of 3.07%, 4.02%… and 4.33%.

“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”

Let the record further reflect:

Growth ran 2% or higher immediately prior to five of nine recessions listed.

Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects Q4 2019 will turn in 2.3% growth when the tally comes in Jan. 30.

What was GDP before the last recession — the Great Recession?

It was 1.97% — a workable approximation of the rate presently obtaining.

“Very, very few recessions have been predicted nine months or a year in advance,” affirms economist Prakash Loungani.

Adds George Washington University economist Tara Sinclair:

“There’s no economic data or research or analysis that suggests we can look 12 months into the future and predict recessions with any confidence.”

The facts are with them…

A Failure Rate Second to Few

The world has endured 469 downturns since 1988. How many did the IMF see coming?

Four.

This we have on authority of one Andrew Brigden, chief economist at Fathom Consulting.

But perhaps IMF economists are uniquely blinded and botched. Their private-sector brethren may enjoy superior vision. Private-sector economists are, after all, closer to the field of action.

But the record indicates private-sector economists are equally sightless, equally unable to penetrate the fog of data that surrounds them.

Between 1992 and 2014… 153 combined recessions came to 63 countries the world over.

How many recessions did private-sector economists spot coming — as a whole?

Five.

What is more, these bunglers generally undershoot recession’s severity.

Do we condemn the erring and wayward vision of professional economists, their phantom vision?

No. We question their value, certainly. But we do not condemn them.

“A Bedlam of Unpredictability”

The economy is a bedlam of unpredictability, an infinitely complex Rube Goldberg contraption — a chaos of billiard balls in endless and delirious collision.

Try to keep track of it…

A cue ball goes careening into a rack. A six ball lights out in one direction. A nine ball strikes out in a second, a four ball in a third…

A three ball goes knocking into an 11 ball, a two ball into a seven ball, a one ball into a 14 ball, a five ball into a 12 ball, a 13 ball into an eight ball, a 10 ball into a 15 ball…

Each in turn shoots in a random direction. Each then runs into another previously sent on its own indeterminate course.

Another dizzying chain reaction begins… with its own set of imponderables.

Into which pocket will each ball drop ultimately?

The answer is not only difficult to determine at the outset. It is impossible to determine at the outset.

The number of variables is endlessly boggling.

And so the economic outcome is impossible to determine too far out. And for the same exact reason.

As well hazard the winner of the 2096 presidential election… the number of angels that can fit on a pinhead… or the precise number of rocks in a senator’s skull.

Besides, we are in no position to mock the faulty psychic eyesight of economists…

A Prediction, Horribly Failed

That is because our own crystal gazing gives a consistently false image. For instance:

Roll back the calendar — to last Jan. 3.

The stock market had just come within one whisker of correction, defined as a 20% stagger.

We believed the curtain was coming down at last. We divined the Dow Jones would close 2019 at roughly 18,000… and the S&P near 2,000.

But we underestimated the Federal Reserve’s ferocious response and the vast pull of its magnetism.

Jerome Powell went into his trick bag. And our apocalypse went into oblivion…

The Dow Jones concluded the year above 28,500; the S&P above 3,200.

This year we tempted fate further yet. That is, we came out flat-footed with a prediction of the future, 10 years out.

We claimed the S&P will end this newly hatched decade between 1,500 and 2,300.

Today it floats at 3,265.

We claimed additionally the Dow Jones will be similarly trounced percentage wise.

Bulls, take heart! You need only glance at our record if concerned.

But come back home…

Few respectable economists forecast recession this year — or a stock market calamity.

And look at their record…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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A New Gold Standard: Orderly or Chaotic?

This post A New Gold Standard: Orderly or Chaotic? appeared first on Daily Reckoning.

Over the past century, monetary systems change about every 30 to 40 years on average. Before 1914, the global monetary system was based on the classical gold standard.

Then in 1945, a new monetary system emerged at Bretton Woods. I was at Bretton Woods this past summer to commemorate its 75th anniversary.

Under that system, the dollar became the global reserve currency, linked to gold at $35 per ounce. In 1971 Nixon ended the direct convertibility of the dollar to gold. For the first time, the monetary system had no gold backing.

Today, the existing monetary system is nearly 50 years old, so the world is long overdue for a change. Gold should once again play a leading role.

I’ve written and spoken publicly for years about the prospects for a new gold standard. My analysis is straightforward.

International monetary figures have a choice. They can reintroduce gold into the monetary system either on a strict or loose basis (such as a “reference price” in monetary policy decision making).

This can be done as the result of a new monetary conference, a la Bretton Woods. It could be organized by some convening power, probably the U.S. working with China.

Or they can ignore the problem, let a debt crisis materialize (that will play out in interest rates and foreign-exchange markets) and watch gold soar to $14,000 per ounce or higher, not because they wanted it to but because the system is out of control.

I’ve also said that the former course (a conference) is more desirable, but the latter course (chaos) is more likely. A monetary conference would be far preferable. Why not avoid the train wreck rather than clear up the wreckage? But will probably be ignored until it’s too late. Either way, the price of gold soars.

The same force that made the dollar the world’s reserve currency is working to dethrone it. It was at Bretton Woods that the dollar was officially designated the world’s leading reserve currency — a position that it still holds today.

Under the Bretton Woods system, all major currencies were pegged to the dollar at a fixed exchange rate. The dollar itself was pegged to gold at the rate of $35 per ounce. Indirectly, the other currencies had a fixed gold value because of their peg to the dollar.

Other currencies could devalue against the dollar, and therefore against gold, if they received permission from the International Monetary Fund (IMF). However, the dollar could not devalue, at least in theory. It was the keystone of the entire system — intended to be permanently anchored to gold.

From 1950–1970 the Bretton Woods system worked fairly well. Trading partners of the U.S. who earned dollars could cash those dollars into the U.S. Treasury and be paid in gold at the fixed rate.

Trading partners of the U.S. who earned dollars could cash those dollars into the U.S. Treasury and be paid in gold at the fixed rate.

In 1950, the U.S. had about 20,000 tons of gold. By 1970, that amount had been reduced to about 9,000 tons. The 11,000-ton decline went to U.S. trading partners, primarily Germany, France and Italy, who earned dollars and cashed them in for gold.

The U.K. pound sterling had previously held the dominant reserve currency role starting in 1816, following the end of the Napoleonic Wars and the official adoption of the gold standard by the U.K. Many observers assume the 1944 Bretton Woods conference was the moment the U.S. dollar replaced sterling as the world’s leading reserve currency.

In fact, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944.

In fact, the period from 1919–1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side.

Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914.

The significance of the process by which the dollar replaced sterling over a 30-year period has huge implications for you today. Slippage in the dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process.

Signs of this are already visible. In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

It is equally obvious that a major creditor nation is emerging to challenge the U.S. today just as the U.S. emerged to challenge the U.K. in 1914. That power is China. The U.S. had massive gold inflows from 1914-1944. China has been experiencing massive gold inflows in recent years.

Gold reserves at the People’s Bank of China (PBOC) increased to 1948.31 tonnes in the fourth quarter of 2019. For comparison, it held 1,658 tonnes in June, 2015.

But China has acquired thousands of metric tonnes since without reporting these acquisitions to the IMF or World Gold Council.

Based on available data on imports and the output of Chinese mines, actual Chinese government and private gold holdings are likely much higher. It’s hard to pinpoint because China operates through secret channels and does not officially report its gold holdings except at rare intervals.

China’s gold acquisition is not the result of a formal gold standard, but is happening by stealth acquisitions on the market. They’re using intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold’s been flowing to China in recent years, just as gold flowed to the U.S. before Bretton Woods.

China is not alone in its efforts to achieve creditor status and to acquire gold. Russia has greatly increased its gold reserves over the past several years and has little external debt. The move to accumulate gold in Russia is no secret, and as Putin advisor, Sergey Glazyev told Russian Insider has said, “The ruble is the most gold-backed currency in the world.”

Iran has also imported massive amounts of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian gold imports are a state secret.

Other countries, including BRICS members Brazil, India and South Africa, have joined Russia and China in their desire to break free of U.S. dollar dominance.

Sterling faced a single rival in 1914, the U.S. dollar. Today, the dollar faces a host of rivals. The decline of the dollar as a reserve currency started in 2000 with the advent of the euro and accelerated in 2010 with the beginning of a new currency war.

The dollar collapse has already begun and the need for a new monetary order will need to emerge. The question is whether it will be an orderly process resulting from a new monetary conference, or a chaotic one.

Unfortunately, it’ll probably be chaotic. Don’t count on the elites to act in time.

Regards,

Jim Rickards
for The Daily Reckoning

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Rickards: Here’s Where Gold Will Be in 2026

This post Rickards: Here’s Where Gold Will Be in 2026 appeared first on Daily Reckoning.

Dear Reader,

Gold spiked after last Friday’s drone strike that took out a top Iranian military official and is trading at seven-year highs.

Yes, the news was dramatic and made a major impact. But geopolitics is just one factor driving gold. Even without the latest geopolitical tensions, gold is poised for a historic run.

The first two major gold bull markets were 1971–80 and 1999–2011. Today, gold is in the early stages of its third bull market in 50 years.

If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026.

What’s driving the new gold bull market?

From both long-term and short-term perspectives, there are three principal drivers: geopolitics, supply and demand and Fed interest rate policy (the dollar price of gold is just the inverse of dollar strength. A strong dollar = a lower dollar price of gold, and a weak dollar = a higher dollar price of gold. Fed rate policy determines if the dollar is strong or weak).

The first two factors have been driving the price of gold higher since 2015 and will continue to do so. Geopolitical hot spots like Iran, Korea, Crimea, Venezuela, China and Syria remain unresolved. Some are getting worse.

Each flare-up drives a flight to safety that boosts gold along with Treasury notes, as the latest incident shows.

The supply/demand situation remains favorable with Russia and China buying over 50 tons per month to build up their reserves while global mining output has been flat for at least five years.

The third factor, Fed policy, is the hardest to forecast and the most powerful on a day-to-day basis.

But there’s little chance that the Fed will be raising rates anytime soon. It’s much more likely to cut rates as the U.S. economy faces strong headwinds, especially from rising debt levels. Debt is growing faster than the economy.

Debt is now at the highest levels since World War II. We’re nearly in the same position on a relative basis as we were in 1945.

Because of the natural deflationary state of the world and the high debt-to-GDP ratio, growth has been snuffed out.

And based on Congressional Budget Office (CBO) projections — which I think are conservative — the debt-to-GDP ratio is going to keep going up.

There is no way out except inflation.

Add it all up and the environment is highly favorable for gold. But if you want evidence that owning gold is probably the best way to guard your wealth, just look at the “smart money.”

I’m sure you’ve seen plenty of billionaire hedge fund managers on business TV or streaming live from Davos. They like to discuss their investments in Apple, Amazon, Treasury notes and other stocks and bonds.

They love to “talk their book” in the hope that other investors will piggyback on their trades, run up the price and produce more profits for them.

What they almost never discuss in public is gold. After all, why have gold when stocks and bonds are so wonderful?

Well, I worked on Wall Street and in the hedge fund industry for decades. I also lived among the players in New York and Greenwich, Connecticut, at the same time. I’ve met the top hedge fund gurus in private settings. And here’s the thing:

I’ve never met one of them who does not have a large hoard of physical gold stored safely in a nonbank vault. Not one.

Of course, they won’t say so on TV because they don’t want to spook retail investors into dumping stocks and bonds. But watch what they do, not what they say.

If gold bullion is the go-to asset for billionaires, why don’t small investors have at least a 10% allocation to gold and silver bullion just in case?

Some do, but most don’t. They’ll find out the hard way what individuals have learned over centuries and millennia. Gold preserves wealth; paper assets do not.

Below, I show you why a global monetary reset is coming, with gold at its center. It can either be an orderly process — or a chaotic one.

Which will it likely be? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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Is War Next?

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Dear Reader,

Stocks ran red this morning… stained crimson by the blood of Iranian Gen. Qassim Soleimani.

A Reaper drone of the United States Air Force sent this hellcat over the rainbow early Friday.

The late departed was no second-rater, no minion. Explains Matthew Hoh of the Center for International Policy:

The equivalent of the killing of Gen. Soleimani would be as if the Iranians assassinated Gen. Richard Clarke, the U.S. four-star general in charge of all U.S. special operations, but only if Gen. Clarke had the name recognition of Colin Powell and the competency of Dwight Eisenhower.

And so fresh geopolitical anxieties have riled the markets.

The First Shot of World War III?

Iran’s No. 1 man Ayatollah Khamenei insists the “criminals” responsible will face “severe revenge.”

And a red flag ominously rises above the Jamkaran Mosque in Iran’s holiest city, Qom:

Building Iran 540px

Our agents, far more familiar with such matters, tell us this flag nearly always flies blue.

But in ancient Iranian tradition — we are told — blue switches red when an enemy perpetrates a murder.

It stays red until the murder is repaid in identical coin, avenged.

Iranian state television has demanded the head of President Donald Trump. Whoever presents it is to collect an $80 million jackpot.

Meantime, Soleimani’s replacement — a certain Esmail Qaani — pledges to push America out of the Middle East.

And so the warhawks circle overhead… and blood drips from the moon.

“The first shot of World War III has been fired,” shrieks forecaster Gerald Celente.

“The region (and possibly the world) will be the battlefield,” intones Council on Foreign Relations President Richard Haass, his face taut with urgency.

Is it true? Is war next?

Answer shortly. But our beat is money. Let us first take the historical view of Friday’s murder… and the monetary view.

British and American Imperial Weapons

As we have written before:

“The guinea and the gallows” were the true instruments of British imperial power.

The guinea represented the coined wealth of Great Britain.

The gallows represented its… constabulary zeal to put down and scotch irksome natives.

This is the 21st century of course — a time of enlightenment.

The British Empire is a distant and cobwebbed memory. As is the guinea. As are the gallows.

But their example lives on in the American Empire…

America’s imperial weapons are not the guinea and the gallows.

They are rather “the dollar and the drone.” They serve precisely identical functions.

Yes… the dollar and the drone are America’s nonhuman janissaries, its imperial enforcers.

Different, Yet Identical

Like the 19th-century pound (which replaced the guinea), today’s dollar is the world’s reserve currency.

Like the 19th-century pound, the dollar finances some two-thirds of global trade.

And the gallows?

Britain hanged its overseas nuisances. America disintegrates its own:

Baghdad Airport Attack

Here is civilization. Here is progress.

The sun eventually sank on the British Empire… the gallows came down… and the pound fell off its global perch.

The United States has its drones, as Mr. Soleimani’s ethereal form can presently attest.

But is America’s other weapon — the dollar — near to losing global reserve status?

The Global Counterattack Against the Dollar

The United States has employed its dollar to bludgeon its enemies. It is a weapon the president holds close.

As our colleague Dave Gonigam of The 5 Min. Forecast half-jestingly wonders:

“Is the Trump administration trying to kill off the U.S. dollar’s status as the globe’s reserve currency?”

And “for every action, there is an equal and opposite reaction,” says Jim Rickards:

The U.S. has been highly successful at pursuing financial warfare, including sanctions. But for every action, there is an equal and opposite reaction.

As the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.

I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.

The “Axis of Gold”

Jim reminds us that Russia and China — among others — are hoarding gold to break their dollar shackles.

Thus they are forming an “axis of gold”:

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

This is the axis of gold.

This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.

Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.

Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and untraceable (it is an element, atomic number 79), so its origin cannot be ascertained.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a network that facilitates trillions of dollars in international money transfers each year.

It is the oil that lubricates the machinery of the international financial system — or as Jim styles it, “the oxygen supply that keeps the global financial system alive.”

Can we be surprised the Russias and Chinas and Turkeys and Irans of this world seek alternate sources?

The message, clear as a rifle shot on a still morning: The dollar’s days of “exorbitant privilege” are ending.

Slowly at First…

Of course… the dollar will not lose its throne tomorrow, next week, next year. But beware the trend, warns Jim:

In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

How does one go bankrupt?

Slowly at first, said Hemingway — then all at once.

That is how the dollar will likely lose its reserve status. Slowly at first… then all at once.

But to return to our central question:

Will the Soleimani murdering plunge the United States into war with Iran?

Will There Be War?

The war hawks circle menacingly, as noted.

But they will scatter. The doves of peace will chase them off…

The dueling parties will break a lance or two upon each other’s shields. But the swords stay in the sheaths.

Argues Jim:

The media are buzzing with stories about how Soleimani’s death will lead to a major war with Iran. The killing of Soleimani was a big deal and a clear win for the U.S. It’s true that Iran may well retaliate in some way, at least for the sake of its honor. But it’s unlikely to do anything that will invite a major U.S. response.

It will not turn into a full-scale war. Iran would lose and they know it. It will ratchet up the anti-American rhetoric for sure, but Iran does not have a lot of options.

They’ll fire a few missiles (we’ll fire back), shout threats and then that will be that. The real action will be in Iraq (will U.S. troops leave or not; I say no) and Israel (a target of opportunity and Iran’s real goal in the Middle East).

And so we conclude the hounds of war will stay on their leashes.

Do not forget: It is an election year…

Why Trump Doesn’t Want War

War with Iran — and its skyshooting oil prices — would send these fiendish canines tearing into the economy. And onto Wall Street.

Who requires an intact economy… and an intact stock market… for reelection?

That is correct.

The president will therefore keep the war dogs tethered tight — at least until the election passes.

But we depart with caution…

Nations can stumble into war… as easily as men can stumble into love.

The June 1914 assassination of Austrian Archduke Franz Ferdinand did not automatically fire off the guns of August. War was far from inevitable.

But blunders were made… and miscalculations. That is, human beings were at their normal follies.

And the guns roared for the next four years.

The dogs of war are willful creatures, ever hot to break free.

And this president is easily distracted.

If he isn’t watchful, they could just slip their leashes…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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U.S. Risks Becoming a Technological Runner-up

This post U.S. Risks Becoming a Technological Runner-up appeared first on Daily Reckoning.

Editor’s note: America’s no.1 futurist George Gilder, fears the U.S. has lost its technological and entrepreneurial edge. China has instead emerged as the next global technological leader. Today Mr. Gilder defends a controversial Chinese company against accusations by The Wall Street Journal, and shows you why the U.S. is in no position to complain.

Dear Reader,

On Christmas day, overflowing with holiday cheer and bursting with goodwill for all men, I decided I could let pass the latest Wall Street Journal resentful essay against China’s emergence as a global leader in technology.

There it sat on the front page, one more egregious slander, this time in the form of a “special report” portraying the telecommunications giant Huawei as a dependency of the Chinese government.

Ah, but it was Christmas and to the intrepid — and far as I knew, merry — gentlemen of the Journal I was content to wish God’s rest and the good tidings of the day.

Now, after winging my way back to China, I am feeling a tad less noble about letting the Journal get away with one more entry in a propaganda campaign as absurd as it is dangerous for the U.S.

The basis of the latest charge is a bold venture in investigative journalism — the reporters read Huawei’s annual reports and a few other public documents.

Much Ado About Nothing

They came away with the breathtaking conclusion that Huawei received some $1.8 billion in Chinese government grants since 2008 or about $180 million a year on average

For 2019, Huawei’s revenues look to come in at around $122 billion. I wonder what they would have done without that $180 million per year.

China, like the U.S., does make grants to firms making progress in key technologies. I would be unsurprised to discover Chinese bureaucrats — who tend to be actual scientists and engineers — do a better job at rewarding actual merit than we do.

Also gravely suspicious to the Journal’s merry men were substantial local subsidies in the form of discounted real estate, tax breaks, and even government-built housing for Huawei employees, offered by municipal governments desperate to get one of the world’s great companies to locate in their region.

This would never happen in the U.S. where state and local governments exhibit a pristine indifference to where, oh, say, Amazon decides to put down new roots.

But consider the facts. Part of the private sector, Huawei rose to the top by outperforming all the state-owned enterprises, such as ZTE, that previously dominated China’s telecom sector.

Its accountants at Price Waterhouse show no exceptional debt or government subsidies. Under staunch entrepreneurial leadership from Ren Zhengfei, son of a “capitalist roader,” Huawei is probably more independent than most. It is a multinational with operations in 170 countries and about a third of its executives are non-Chinese.

The U.S. Does the Same Thing

It’s a different world. Twenty years ago, I spent most of my time celebrating the entrepreneurial break-throughs of American technology leaders.

I was regularly beset by advocates of central planning buzzing in my ear about how the real credit belonged to DARPA (Defense Advanced Research Projects Agency) which “really” created the technology.

Meanwhile, carped the critics Texas Instruments, which manufactured the first reliable silicon transistors or, Fairchild Semiconductor.

Which in turn invented the integrated circuit and would have gone broke without massive military “subsidies.”

That’s exactly how they portrayed the military’s purchase of never-before-possible electronics that could sustain the stress of flying in jets or rumbling around in tanks.

Certainly, the U.S. military’s desperate need for a solid-state helped power the fledgling U.S. semiconductor industry. Entrepreneurs need customers, and well-funded customers demanding levels of previously unavailable levels of performance can be a great spur to creativity.

Nevertheless — in terms of actual products that made it to market or manufacturing processes as fantastic as the devices themselves — the contribution of the U.S. government to the semi-conductor industry was trivial at best and possibly negative.

The Anti-capitalist Chorale

The anti-capitalist chorale is always with us. In those same old days, the American press and politicians convinced themselves that Japanese government planners were the reason that nation had joined the first rank of industrial powers.

Their solution: we needed more politicians of our own, were we ever to regain our competitive edge. And yet in those years one barely heard a peep from the politicians about China, then still a dreadful tyranny holding the world’s record for murders of its people.

Only as China has become capitalist have U.S. politicos and media concluded it is it not a partner in wealth creation but an implacable enemy.

Even my conservative friends — lifelong defenders of capitalism and deriders of central planning — seem to suddenly have decided that in China, central planning and government subsidies work, and brilliant firms like Hua Wei owe all their success to government-controlled banks and bureaucracies.

Critics say the current Chinese model is self-defeating. Less-deserving companies receive most of the financing and opportunities. The staggering misallocation of capital is only worsening, they say.

But the misallocation of capital in the U.S. is far greater. We are subsidizing useless wind mills across the country in a demented campaign against delusions of climate change. We have devastated and paralyzed our companies with lawsuits. We suppress manufacturing with lawyers and luddites. We are now moving on to tie down our social networks and high-tech goliaths with regulatory chains.

By contrast, the Chinese built 106 new cities, most of them viable. They continue to open new “free zones,” such as the 13,000-square mile island of Hainan in the South. They are favoring an efflorescence of high-tech ventures and promoting new industries such as AI and blockchain.

Unlike in China, where IPOs and high technology startups have boomed, the government sector in the U.S. has been growing far faster than has the private sector. U.S. politicians and journalists should halt their increasingly outlandish efforts to blame China for the effects of our own mistaken socialism, mercantilist trade war, educational and monetary manipulations.

The U.S. Risks Becoming a Technology Runner-up

Meanwhile, I’ve been focusing on the titanic and widely underestimated technical challenge of 5G networks. High-frequency transmissions at high power across a range of competing channels are the nightmare of telecom engineers — and the absolute requirement of 5G.

Neither this challenge, nor that of realizing artificial intelligence’s full potential, or creating the inherently secure internet, can be fully met by the U.S. alone. We need all the brains and all the entrepreneurial energy in the world.

U.S. politicians without the slightest grasp of this challenge are trying to isolate China from the rest of the world. As the world realizes that it needs China more than it needs us, it is the U.S. that may be cut off.

And it’s the U.S. that risks being reduced to a technology runner-up.

Regards,

George Gilder
for The Daily Reckoning

Does any of this matter? Unfortunately, yes.

The post U.S. Risks Becoming a Technological Runner-up appeared first on Daily Reckoning.

REVEALED: The Trade of the Decade

This post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

Dear Reader,

Yesterday we snuck into the future… and smuggled out a worrisome vision:

The S&P will end the decade 50–60% lower than where it began the decade.

Our snooping revealed that “mean reversion” will run down the elusive stock market at last.

That is, the long arm of statistical law will finally collar its man.

Yet as we wondered yesterday: Can a “trade of the decade” lock in your wealth?

Can it be your Rock, your anchor against stock market catastrophe?

If so… what can it be?

Today we rip the wrapping paper off the trade of the decade.

But first, what other visions did our adventure into the future reveal?

Here is a brief sketch of the 2020s as we saw them, a tour of the horizon…

The Next Two Presidential Elections

President Trump will retain his throne this November.

The economy will gutter along before sinking into woeful recession in 2022 or early 2023.

The Federal Reserve will leap to action. Interest rates will go to zero — and yes, below zero.

Quantitative easing on the scale of the Marshall Plan you will see.

But all attempts will be vain.

The Federal Reserve will stand discredited, embarrassed, helpless.

In the 2024 presidential election, the American people will invite in a “progressive.”

He/she/hir, we could not identify the winner — the haze was thick, the picture grainy — will sign into law some version of Modern Monetary Theory (MMT).

It will differ vastly from the Federal Reserve’s quantitative easing. Quantitative easing was contained within the banking system. It largely prospered Wall Street… and largely bypassed Main Street.

The American people were left to scratch by on the leavings.

But MMT promises to pour money directly onto Main Street — and Maple Street and Oak Street and Pine Street and Birch Street.

Everything for Everyone

The print press will go into fantastic and ceaseless operation. It will promise to fan a roaring whirlwind of prosperity.

Off the presses will fly the wherewithal for Medicare for All, universal college education, guaranteed employment at $15/hour, a Green New Deal, etc.

It will give a good original impression. The economy will jump, thrill and excite… after dozing lo so many years.

And the authorities will finally have their 2% inflation, sustained.

MMT will receive a highly favorable press. What ogre, what misanthrope, what dastard could be against it?

But a paper prosperity is a false prosperity. It is the eternal quest to lunch for free… and the immemorial dream of cranks.

That world has no existence… at least not upon this Earth.

MMT will give an overall increase of the price level — but without a corresponding increase in goods, products and services.

The Stirrings of Inflation

After decades of muted (official) inflation, inflation’s initial gurglings and bubblings will catch the American people off their guard.

But after some hard experience, they will recalibrate their expectations. They will begin to hunker in against the expectation of rising prices.

A chance spark will light an inflationary brush fire. It will soon jump the perimeter. Before long it will spread like prairie fire… carried along by the gusting winds of sentiment.

And so MMT will ultimately kindle a fine inflationary blaze.

The authorities will be eager to get water on it. But they will discover it rages beyond all control.

Can it happen so fast? Yes, it can happen so fast.

Explains Jim Rickards:

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a nonlinear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little, you can melt the reactor down and kill a million people…

Inflation is not a linear phenomenon but a nonlinear phenomenon that can spiral out of control before you can do anything about it.

The fiscal authorities will truly have a tiger by the tail. But what can they do?

No Good Options

They can kink off the oxygen feeding the fire. That is, they can turn off the print press.

But a paper prosperity requires ever-increasing amounts of paper. Shutting down the press would murder it.

The late-lamented Paul Volcker put down inflation in 1981 by lifting interest rates to 20%. But the debt level then prevailing was a trifle — a pimple against today’s Matterhorn.

Today’s creaking, debt-addled economy may not withstand 5% rates… much less 20%.

But if authorities let the fire run, it may burn until nothing remains to burn.

What will they decide?

It is at this point — 2027 or 2028 — that our vision of the future turned to static.

And perhaps it is just as well, given the hell-mouth scene we report.

‘It Can’t Happen’

You may laugh the preceding out of court. The “experts” certainly will.

But did the experts foresee the 2001–02 dot-com smash-up? Did those same experts holler about a subprime mortgage crisis beforehand?

And how many would have told you this in 2007?

That negative interest rates would soon become reality… or that “quantitative easing” would soon become a household term?

Indeed… how many would have told you Mr. Donald J. Trump would one day be president?

Yet they came to be, all of them.

Do you wish to peer around the next bend? Do you wish to steal an unauthorized glimpse of the future?

Then you must range out ahead of the herd. You must venture out upon the thin, spindly branches, risking a fall. You must shoo away consensus.

And you may need to fall in with disreputable company. As our co-founder Bill Bonner recently reminded us:

To find the new truth, we have to go far out on the knowledge spectrum to the edgy part… the shady and speculative part… where the kooks, geniuses and gurus are.

Come we now to the “trade of the decade”…

The Candidates

Is the trade of the decade some promising, youthful technology company?

Is it a manufacturer of driverless autos, or artificial intelligence?

Is it a wager on China — or a wager against China?

Is bitcoin the trade of the decade — or a rival cryptocurrency?

None of these is the answer. Then what is the answer?

Colleague Byron King recently sat at a business meeting where Mr. Bonner was likewise sitting.

During the proceedings Byron cleared his throat, faced Mr. Bonner… and requested his trade of the decade:

“Well,” he said…

“When I look at what’s going on with the world, with the U.S. dollar, politics, everything…”

The room was silent. You could hear a pin drop. You could detect the vibe of grinding vertebrae as people strained their necks to pick up on Bill Bonner’s latest Trade of the Decade…

Mind you — gold was Mr. Bonner’s trade of the previous decade. It was also his trade of the decade prior.

Did gold satisfy its advertising?

“If you followed Bill Bonner’s Trade of the Decade for 2000–09,” Byron reminds us, “you more than tripled your money, in terms of dollars.”

Plenty handsome. But what about the decade just vacated?

“If you bought into Bill’s Trade of the Decade for 2010–19, you went from $1,100 to just over $1,500, or a 36% gain… admittedly with a ride.”

The Trade of the Decade

So what is Mr. Bonner’s trade of this freshly hatched decade? Has he found an alternative to gold?

In Mr. Bonner’s own words:

I’d have to say stick with gold. I can’t think of anything else that’s as well set up to hold value and deliver gains.

Thus you have your trade of the decade — gold — ancient, fusty, unresponsive, unglamorous gold.

Gold will provide you a potent antidote to the monetary toxins above described. And if the stock market is knocked flat this decade?

Gold should help keep you upright.

Thus we speak our piece for gold.

Might we report a faulty vision of the future?

It is entirely possible. Our eyes have failed us before.

If erring, we find solace in this one supreme fact:

We face no consequences for our botchwork.

On Jan. 3, 2030 — 10 years from today — no living soul will recall a single word we wrote this day.

But if proven correct, we will be certain to remind you…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

REVEALED: The Trade of the Decade

This post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

Dear Reader,

Yesterday we snuck into the future… and smuggled out a worrisome vision:

The S&P will end the decade 50–60% lower than where it began the decade.

Our snooping revealed that “mean reversion” will run down the elusive stock market at last.

That is, the long arm of statistical law will finally collar its man.

Yet as we wondered yesterday: Can a “trade of the decade” lock in your wealth?

Can it be your Rock, your anchor against stock market catastrophe?

If so… what can it be?

Today we rip the wrapping paper off the trade of the decade.

But first, what other visions did our adventure into the future reveal?

Here is a brief sketch of the 2020s as we saw them, a tour of the horizon…

The Next Two Presidential Elections

President Trump will retain his throne this November.

The economy will gutter along before sinking into woeful recession in 2022 or early 2023.

The Federal Reserve will leap to action. Interest rates will go to zero — and yes, below zero.

Quantitative easing on the scale of the Marshall Plan you will see.

But all attempts will be vain.

The Federal Reserve will stand discredited, embarrassed, helpless.

In the 2024 presidential election, the American people will invite in a “progressive.”

He/she/hir, we could not identify the winner — the haze was thick, the picture grainy — will sign into law some version of Modern Monetary Theory (MMT).

It will differ vastly from the Federal Reserve’s quantitative easing. Quantitative easing was contained within the banking system. It largely prospered Wall Street… and largely bypassed Main Street.

The American people were left to scratch by on the leavings.

But MMT promises to pour money directly onto Main Street — and Maple Street and Oak Street and Pine Street and Birch Street.

Everything for Everyone

The print press will go into fantastic and ceaseless operation. It will promise to fan a roaring whirlwind of prosperity.

Off the presses will fly the wherewithal for Medicare for All, universal college education, guaranteed employment at $15/hour, a Green New Deal, etc.

It will give a good original impression. The economy will jump, thrill and excite… after dozing lo so many years.

And the authorities will finally have their 2% inflation, sustained.

MMT will receive a highly favorable press. What ogre, what misanthrope, what dastard could be against it?

But a paper prosperity is a false prosperity. It is the eternal quest to lunch for free… and the immemorial dream of cranks.

That world has no existence… at least not upon this Earth.

MMT will give an overall increase of the price level — but without a corresponding increase in goods, products and services.

The Stirrings of Inflation

After decades of muted (official) inflation, inflation’s initial gurglings and bubblings will catch the American people off their guard.

But after some hard experience, they will recalibrate their expectations. They will begin to hunker in against the expectation of rising prices.

A chance spark will light an inflationary brush fire. It will soon jump the perimeter. Before long it will spread like prairie fire… carried along by the gusting winds of sentiment.

And so MMT will ultimately kindle a fine inflationary blaze.

The authorities will be eager to get water on it. But they will discover it rages beyond all control.

Can it happen so fast? Yes, it can happen so fast.

Explains Jim Rickards:

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a nonlinear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little, you can melt the reactor down and kill a million people…

Inflation is not a linear phenomenon but a nonlinear phenomenon that can spiral out of control before you can do anything about it.

The fiscal authorities will truly have a tiger by the tail. But what can they do?

No Good Options

They can kink off the oxygen feeding the fire. That is, they can turn off the print press.

But a paper prosperity requires ever-increasing amounts of paper. Shutting down the press would murder it.

The late-lamented Paul Volcker put down inflation in 1981 by lifting interest rates to 20%. But the debt level then prevailing was a trifle — a pimple against today’s Matterhorn.

Today’s creaking, debt-addled economy may not withstand 5% rates… much less 20%.

But if authorities let the fire run, it may burn until nothing remains to burn.

What will they decide?

It is at this point — 2027 or 2028 — that our vision of the future turned to static.

And perhaps it is just as well, given the hell-mouth scene we report.

‘It Can’t Happen’

You may laugh the preceding out of court. The “experts” certainly will.

But did the experts foresee the 2001–02 dot-com smash-up? Did those same experts holler about a subprime mortgage crisis beforehand?

And how many would have told you this in 2007?

That negative interest rates would soon become reality… or that “quantitative easing” would soon become a household term?

Indeed… how many would have told you Mr. Donald J. Trump would one day be president?

Yet they came to be, all of them.

Do you wish to peer around the next bend? Do you wish to steal an unauthorized glimpse of the future?

Then you must range out ahead of the herd. You must venture out upon the thin, spindly branches, risking a fall. You must shoo away consensus.

And you may need to fall in with disreputable company. As our co-founder Bill Bonner recently reminded us:

To find the new truth, we have to go far out on the knowledge spectrum to the edgy part… the shady and speculative part… where the kooks, geniuses and gurus are.

Come we now to the “trade of the decade”…

The Candidates

Is the trade of the decade some promising, youthful technology company?

Is it a manufacturer of driverless autos, or artificial intelligence?

Is it a wager on China — or a wager against China?

Is bitcoin the trade of the decade — or a rival cryptocurrency?

None of these is the answer. Then what is the answer?

Colleague Byron King recently sat at a business meeting where Mr. Bonner was likewise sitting.

During the proceedings Byron cleared his throat, faced Mr. Bonner… and requested his trade of the decade:

“Well,” he said…

“When I look at what’s going on with the world, with the U.S. dollar, politics, everything…”

The room was silent. You could hear a pin drop. You could detect the vibe of grinding vertebrae as people strained their necks to pick up on Bill Bonner’s latest Trade of the Decade…

Mind you — gold was Mr. Bonner’s trade of the previous decade. It was also his trade of the decade prior.

Did gold satisfy its advertising?

“If you followed Bill Bonner’s Trade of the Decade for 2000–09,” Byron reminds us, “you more than tripled your money, in terms of dollars.”

Plenty handsome. But what about the decade just vacated?

“If you bought into Bill’s Trade of the Decade for 2010–19, you went from $1,100 to just over $1,500, or a 36% gain… admittedly with a ride.”

The Trade of the Decade

So what is Mr. Bonner’s trade of this freshly hatched decade? Has he found an alternative to gold?

In Mr. Bonner’s own words:

I’d have to say stick with gold. I can’t think of anything else that’s as well set up to hold value and deliver gains.

Thus you have your trade of the decade — gold — ancient, fusty, unresponsive, unglamorous gold.

Gold will provide you a potent antidote to the monetary toxins above described. And if the stock market is knocked flat this decade?

Gold should help keep you upright.

Thus we speak our piece for gold.

Might we report a faulty vision of the future?

It is entirely possible. Our eyes have failed us before.

If erring, we find solace in this one supreme fact:

We face no consequences for our botchwork.

On Jan. 3, 2030 — 10 years from today — no living soul will recall a single word we wrote this day.

But if proven correct, we will be certain to remind you…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The Trade of the Decade appeared first on Daily Reckoning.

The Daily Reckoning Turns 20

This post The Daily Reckoning Turns 20 appeared first on Daily Reckoning.

Twenty years…

Twenty years have lapsed since The Daily Reckoning first jumped from the presses.

Thursday night we attended a black tie affair in honor of this, its china anniversary.

Our hosts were Daily Reckoning co-founders Messieurs Bill Bonner and Addison Wiggin (here pictured, both bespectacled):

IMG 1

Your humble editor even consented to the dress code — under violent protest:

IMG 2

The publication you presently hold in your hands is the oldest daily newsletter of its kind.

For 20 years The Daily Reckoning has stood athwart, watching the scenery roll by.

From Y2K to bitcoin…

From the 2000–2001 dot-com derangement to the 2008 near-nightmare to the ongoing lunacies that have followed…

From United States presidents 42–45 — and two impeachments…

From Federal Reserve chairmen 13–16…

The Daily Reckoning has suffered through them all.

But it has endured them with a wry, smirking detachment — even a tinge of sympathy for the offenders.

This world may be hopelessly and incurably botched. It may be sinful that it is that way. It may be against God that it is that way.

But it is that way.

There is no changing it. And this publication holds out no solution to the sorrows of this world.

We simply attempt to make sense of it all… and largely fail.

We harbor no illusion that what we do here makes the least difference. And what we write one day is dead the next.

As H.L. Mencken styled it, we are entirely devoid of messianic passion. We hear no voice from the burning bush.

But what spectacle it all provides, what theater, what circus — what comedy.

And we have the best kind of time looking on from the front row.

Well and truly… a man in our seat is a man enthroned. We would not climb out of it for all the perfumes of Arabia.

As Mr. Bonner has asked:

Was ever there a fairer métier than ours?

The poor carpenter risks cutting his fingers or banging his knee.

The used car salesman’s hearing goes bad as soon as he takes up his job: “No, I don’t hear any rattle,” says he.

The foot soldier gets sent to a godforsaken hole like Afghanistan, where the women are covered up and the liquor stashed away.

But in our trade as newsletter publishers, hardly a day passes without a good laugh. Our only occupational hazard is a rupture of the midriff.

We took command of The Daily Reckoning fully aware of the bodily risk.

Each day rolls out a fresh parade of fools, scoundrels, frauds, knaves, rogues, ne’er-do-wells, world improvers, lunatics and pitchmen.

Sometimes — though rarely — they combine in the form of a single person.

The trouble with them all is that they are vastly amusing. Hence the constant threat of an abdominal tear.

Sadly, most people take it all far too seriously… as Bill reminds us:

Most people, after all, read the news pages for information. They lack the proper training and perspective to fully enjoy them. The consequence is that they are always in danger of taking the humbug seriously, or, worse, finding the people who populate the headlines important.

If you really want to appreciate the media, you have to get close enough to see how they work — like a prairie dog peering into a hay baler — but not so close that you get caught up in it yourself. The inves‌tment newsletter business is perfect; it is part of the media, but it wouldn’t be mistaken for a reputable part.

Not in one million years would it be mistaken for reputable. And we would choose it no other way.

Thursday night Bill furled back the calendar and reflected on our origins. Here is the CliffsNotes version:

At the time — 1999 — there were two schools of thought. The main one was that our little inves‌tment research business was soon going to be put out of business by the internet.

People came up to me and said so. “You can get all the inves‌tment advice you want on the internet for free… Nobody is going to pay us for it.”

The other school of thought was equally gloomy, from our point of view. It told us that we would be put out of business by the big firms — the Goldman Sachses and Dow Joneses — who could spend millions of dollars putting up fancy, professional websites so that readers would find them and become customers. These big firms would dominate the space, like fast-growing poplars, shading out the more noble oaks.

I knew that readers don’t go looking for our kind of ideas. They don’t even know they exist. And nobody wakes up and says, “Honey, we need a financial newsletter with a contrarian point of view.”

Besides that, we had a chain saw! I knew, too, that that if we could just put good ideas, solid thinking and real research in front of people, we might persuade them that we were worth doing business with…

The trouble with The Truth is that it won’t stand still. What’s true today is often a lie tomorrow. And that’s why we try to anchor our opinions and ideas in these Old Truths. Like nature, you can’t get away from them.

But it’s the new truth people want. Nobody wants to be reminded that things go down as well as up… that life can be tough… and that you can’t spend more than you earn.

They want to know what stock will go up tomorrow. They want to know who will win the next election. They want to know which ideas will flourish… and which will wither and die.

Where do you find this truth? Tomorrow’s truth? Not in The Washington Post or The New York Times… or on TV. That’s where you find what people think today.

Instead, to find the new truth, we have to go far out on the knowledge spectrum to the edgy part… the shady and speculative part… where the kooks, geniuses and gurus are.

At any given time, most of the ideas that pass for truth are just fads and fashions. Our job is to cut down these false truths in order to allow a little daylight onto better ones. Let me give you some examples…

There was the truth in 1999, for example, that the dot-com stocks had ushered in a new era of permanent prosperity for all.

And that truth morphed into the truth of 2005/2006, that you can’t go wrong buying a house… because house prices never go down.

And there’s a similar truth today… that you can’t go wrong buying stocks because the Fed has your back.

We rev up our chain saw. We cut a little deeper every day. And we know we’re right when even our Dear Readers don’t want to hear it.

People don’t like to see their fashionable truths attacked. And attacking them puts us at odds with the mainstream press, the government, Wall Street, the academics and all the people whose reputations and wealth depend on them.

And… we’re often wrong… which leaves us exposed to ridicule as well as regulatory threats.

“You said that stock would go up…” say the critics.

“You said Congress would never go along…”

“You said the economy would be in recession by now…”

When you’re looking into the future, there are an infinite number of things you can be wrong about. Since we’ve been writing for so long, we’ve probably already been wrong about most of them.

And we’ll get the rest of them wrong in due course.

But it is not given to man to know his fate; that’s an “old truth.”

And our Dear Readers know we are mortal, just like they are. They don’t expect us to be right all the time. They only expect us to be honest… about what we see and hear and think and know… and to work hard to try to discover tomorrow’s truth before it is mainstream news.

That’s been our mission since we began writing 20 years ago. We are out to connect the dots so we can see…

… when to buy stocks… what the Fed will do… what will happen to our economy… or where the country is going…

We mock the conceits of the great and the good. We laugh at absurd trends and foolish fads… and at ourselves…

… and we squint so hard our eyes hurt, desperately trying to catch a tiny glimpse of real truth.

And we never forget our humble motto: Sometimes right, sometimes wrong… and always in doubt.

If we ever come out of doubt, it will be a sign to pack our belongings — and walk out.

Twenty years down. We have designs on another 20… if the gods are kind.

And we are pleased beyond description to claim you as a reader.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The Daily Reckoning Turns 20 appeared first on Daily Reckoning.

Bigger Isn’t Better

This post Bigger Isn’t Better appeared first on Daily Reckoning.

What caused the overnight lending market to unexpectedly seize up in September? There’s a good reason to believe JPMorgan Chase (JPMC) may have been at the heart of it.

JPMorgan Chase is the largest bank in the U. S., and has about $1.49 trillion in deposits. It’s one of the big banks that provide much of the loans in the overnight money markets.

But it seems the mega-bank had gone on a stock buyback spree from January through September of this year.

Buybacks, which are designed to boost stock prices, have been enabled for years by the Fed’s artificially low-interest rates. Corporations, in fact, have been the largest purchasers of stocks, which is heavily responsible for the bull market that’s now over a decade old.

According to the SEC, JPMC has spent about $77 billion on buybacks since 2013. But the money JPMorgan Chase used for buybacks on its most recent buyback binge was, therefore, unavailable to be loaned out in the repo market.

This information is from the bank’s annual SEC filing (hat tip to the Wall Street on Parade blog):

In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing… cash was used for repurchases of common stock and cash dividends on common and preferred stock.

That diversion of money likely contributed to the liquidity crunch, which forced the Fed had to intervene in order to make up the difference.

Here’s how Wall Street on Parade sums it up:

Had JPMorgan Chase not spent $77 billion propping up its share price with stock buybacks, it would have $77 billion more in cash to loan to businesses and consumers — the actual job of its commercial bank. Add in the tens of billions of dollars that other mega banks on Wall Street have used to buy back their own stock and it’s clear why there is a liquidity crisis on Wall Street that is forcing the Federal Reserve to hurl hundreds of billions of dollars a week at the problem.

But altogether, JPMorgan has actually withdrawn $158 billion of its liquid reserves from the Fed in the first half of this year. That’s an extraordinarily large amount of money to withdraw in such a short amount of time, as my friends at Wall Street on Parade point out. That’s bound to have an effect on the market.

And that’s what we’ve seen.

Of course, JPM is one of those Wall Street banks that are “too big to fail.” It’s the largest commercial bank in the nation, with $1.6 trillion in deposits.

But it’s not just JPM.

It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest. Here’s an example…

82% of bank analysts on Wall Street recently gave Citigroup stock a “buy” rating. What you didn’t hear reported on CNBC or Fox Business News is that the major banks they work for — like JPM, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS and Bank of America — have strong incentive to recommend Citigroup.

That’s because all the major banks are interconnected through derivatives. And weakness in one bank could spill over into the others. So it’s not a level playing field at all. It’s tilted in favor of the big banks.

But as one observer asks, “Why should any Wall Street bank be allowed to make research recommendations on stocks and then trade in those very same stocks?”

It’s a corrupt system designed by insiders for insiders. I should know because I used to be one of them.

I worked at four of the world’s major banks for a decade and a half until I finally had enough and walked away. Two of the four banks I worked for, Bear Stearns and Lehman Bros., were destined to implode.

That’s because they overleveraged themselves, taking on too much debt to bet on risky credit instruments. These credit instruments included subprime loans, credit derivatives and Wall Street’s version of a debt buffet called CDOs, or collateralized debt obligations.

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing.

Today the big banks are bigger than ever and the amount of debt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.

My research for my book Collusion: How Central Bankers Rigged the World revealed how central bankers and massive financial institutions have worked together to manipulate global markets for the past decade.

Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage and corporate bonds; and in some cases — as in Japan and Switzerland — buy stocks, too.

They have not had to explain to the public where those funds are going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

The zero-interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks.

It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.

The world’s debt pile sits near a record $246.5 trillion. That’s three times the size of global GDP. It means that for every dollar of growth, the world is borrowing three dollars.

Of course, this huge debt pile has done very little to support the real economy. Even the IMF now admits that global central bank policies to lower interest rates in order to stave off immediate economic risks have made the situation worse.

Their actions have led to “worrisome” levels of poor credit-quality debt as well as increased financial instability.

The IMF noted that 40% of all corporate debt in major economies could be “at risk” in the event of another global economic downturn, with debt levels greater than those of the 2008–09 financial crisis.

That huge pile of debt is basically the kindling for the next financial fire. We’re just waiting for the match to light it.

So today we stand near — how near we don’t yet know — the edge of a dangerous financial conflagration. The risks posed by the largest institutions still exist, only now they’re even bigger than they were in 2007–08 because of the extra debt.

It’s not sustainable. But that doesn’t mean the central banks won’t try to keep it going with monetary easing policies in place.

It could work for a while, until it doesn’t.

The post Bigger Isn’t Better appeared first on Daily Reckoning.

The Fed Gets Blindsided… Again

This post The Fed Gets Blindsided… Again appeared first on Daily Reckoning.

The big news this week was that the House of Representatives impeached President Trump for abuse of power and obstruction of Congress.

Trump now joins Andrew Johnson and Bill Clinton as the only U.S. presidents to be impeached (Nixon resigned before he could be impeached).

Now it goes to the Senate for trial. But there’s virtually no chance the Senate will convict Trump on the charges, given the Republican majority.

The market has completely shrugged off the news. The stock market is up today, which tells you it doesn’t fear political instability or expect anything to come of the impeachment process.

But the real market story right now on Wall Street has to do with the Fed, and it’s not getting anywhere near the attention it deserves.

Since September, the Fed’s been pumping in massive amounts of liquidity into the “repo” markets to keep the machinery of the financial system lubricated.

So far, the figure stands at about $400 billion. But it’s showing no signs of slowing down.

The Fed has now announced it will provide an additional $425 billion of cash injections into the repo market as the year draws to a close on concerns that funding could fall short into year’s end.

And Jerome Powell has admitted these injections will continue “at least into the second quarter” of 2020.

What does all this bailout money say about the health of the money markets?

And that’s really what it is — a bailout. Without Fed intervention, liquidity in these markets would have dried up.

But the Fed’s massive liquidity injections are basically a Band-Aid on the real problem.

There’s plenty of liquidity in the market right now. The real problem is that the big banks, the 24 “primary dealers” who have direct access to the Fed’s liquidity, aren’t lending the money out like they’re supposed to.

They’re sitting on it, which is depriving other banks and financial institutions of the short-term funding they need.

Part of it has to do with regulations that require these banks to hold a certain amount of reserves, so they’re reluctant to lend them.

But it’s also because these banks can earn more on their money by parking their reserves at the Fed than they can lending it out, which pays very little interest.

Here’s what one portfolio manager, Bryce Doty, says about it:

The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.

So, until that situation changes, there’s no reason to expect that the Fed’s support will go away anytime soon.

But if you ask New York Fed head John Williams, everything’s just hunky-dory.

He says it’s all “working really well.” But the Fed is having to expand its balance sheet at the fastest pace since the first round of QE began in December 2008.

It’s gone from $3.8 trillion in September to over $4.07 trillion today. And it’s going higher.

Would all this be necessary if the system were working well?

The Federal Reserve’s Board of Governors recently published its annual Supervision and Regulation Report, which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.

How did the banks grade?

Overall, the board concluded that 45% of U.S. banks with more than $100 billion in assets merited a rating of “less than satisfactory.”

Tellingly, the report did not say which banks have these less-than-satisfactory ratings. It doesn’t want to make any real waves, after all. The entire system depends on confidence.

Of course, the Fed didn’t see problems in the repo market coming at all. They never do. All they ever do is react and pretend that they have everything under control.

Basically, the Fed was blindsided… Again.

But they don’t have everything under control or they would have seen the problems coming and maybe done something about it.

Continued problems in the repo market may mean the Fed could launch another round of official quantitative easing in the very near future, possibly as soon as early January.

The good news for the markets is that the Fed’s liquidity injections have helped boost stocks to record levels again.

The Fed is basically handing investors a Christmas present. Unfortunately, most people on Main Street don’t realize it. The present’s being put under the tree this year (and maybe next) won’t last. They can’t.

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