The Coin-Toss Election

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The political climate is fragile and feverish, with the nation amid a crisis that is both fast-changing and unparalleled in living memory.

The biggest change in my election forecast is that Trump’s chances of reelection in November have plunged from 74% (the pre-COVID forecast) to 50% as of today.

This does not mean Trump will lose; he could very well win. But it will be a very close election. Deciding the outcome between Trump and Biden as of now is basically a coin toss. Many factors, some foreseeable and some unforeseen, could tip the balance.

Trump’s strengths are that he is an excellent campaigner, has enormous amounts of mo‌ney for the campaign and seems to have unlimited stores of energy. He also has the power of incumbency, which usually propels a sitting president to a second term.

Trump’s weaknesses are the depth of the New Depression and his handling of the COVID-19 pandemic. Amost no one blames Trump for the outbreak, but many found his response belated and overly optimistic in the initial stages. He did some things right (the China travel ban), but many responses were bungled (defective testing kits, shortages of masks and protective clothing, shortages of ventilators).

In stages, these mistakes were overcome. Masks and protective clothing were mass-produced. Ventilators were surged to those locations that most needed them. New hospital beds were made available through Navy hospital ships and temporary hospitals built by the Army Corps of Engineers. Testing kits gradually became available, although there is still a severe shortage.

Instead of taking credit in a measured way for these positive developments, Trump wasted time in petty disputes with corrupt journalists. Those fights might be OK in the normal political arena, but there’s nothing normal about a pandemic. Trump didn’t seem to know the difference and alienated even his supporters in the process with his pontificating and sideshow antics.

These Trump deficiencies (despite many positive accomplishments) began to show up in the polls.

Large employment losses in states that Trump must carry, especially Pennsylvania, will not help Trump’s chances in November. On the other hand, if Trump can reopen the economy and recover some of these losses, he may benefit from a positive trend even if net losses remain.

What about Joe Biden?

Biden may have pulled even with Trump in the election horse race, but he’s not a sure thing by any means. Before Biden can even turn to the campaign against Trump, he must still try to obtain unity in his own party.

Bernie Sanders withdrew from the race, which essentially guaranteed the nomination for Biden. But will the “Bernie Bros” actually turn out on Election Day? Key components of the Democratic base might not be motivated to vote.

The left wants a Biden administration ban on anyone who has worked on or near Wall Street, the fossil fuel industry, the health insurance sector and the lobbying world, to name a few.

In short, the price that Bernie Sanders’ supporters are demanding from Biden may well make Biden unelectable in key swing states like Florida, Pennsylvania, Michigan and Wisconsin.

If Biden does not embrace the socialist agenda, his lost support from the Sanders movement may make him unelectable for other reasons. Biden is between a rock and a hard place, and the Bernie Bros intend to keep him there in order to pursue their goals.

One way for Biden to appease the Bernie Sanders movement without going all-in on the progressive agenda is to choose a progressive running mate. In the eyes of progressives, the right running mate will be able to “keep an eye” on Biden and pursue the Bernie agenda inside the White House even if the specifics are not shouted from the rooftops.

Here’s a summary of the struggle going on inside the Biden camp regarding a VP choice as reported by Tal Axelrod for The Hill on April 19, in an article titled “Progressives Look for Concession From Biden With Running Mate”:

“Joe Biden absolutely has to pick a progressive champion as his VP pick. He has to unify the party, and that’s the key,” Charles Chamberlain, head of Democracy for America, told The Hill. “What we saw during the primary is… that we have two major factions of this party, the corporate wing, more establishment Democrats, and there is [the] progressive, ascendant left. And he absolutely has to choose from that progressive left to unify the party.”

Biden could pick from a number of progressive women to serve as his VP. Among the most prominent contenders who have been floated are [Elizabeth] Warren and Stacey Abrams, the former Georgia gubernatorial candidate and state House minority leader.

Both have openly expressed interest in the role, with Abrams saying she would be an “excellent” running mate for Biden and Warren confirming that she would accept an offer to be his No. 2.

Amy Klobuchar, the Minnesota senator, has also been mentioned as a leading candidate.

There are others, but these three have gotten the most attention.

But there’s no free lunch for Biden. The choice of Stacey Abrams for vice president would undoubtedly rally progressive and minority voters to turn out for Biden. That’s critical. But it helps Biden in places he is highly likely to win anyway such as California and New York.

Abrams’ ultra-leftist views and strident persona would drive away many moderates in critical swing states such as Michigan and Pennsylvania and possibly tip those states to Trump.

What we have today is a too-close-to-call election and six long months to go before Election Day.

Trump is aided by a solid base and a well-organized campaign strategy. Biden is aided by an electoral vote head start in big states like California and New York and a friendly media that will not criticize his many shortcomings.

The Democrats may hold a “digital” convention and keep Biden under wraps as much as possible until the October debates (where his cognitive decline may be difficult to disguise).

Republicans want to get the economy open for business and show some growth in the aftermath of a second-quarter collapse.

But there is one potential development that could move the odds in Trump’s favor…

Remember the “Russia collusion” accusations against Trump? The accusation was that he colluded with Russians to interfere in the 2016 presidential election. Trump campaign aides and early appointees such as Gen. Michael Flynn, Carter Page, George Papadopoulos and others were all said to be in on the conspiracy to “steal the election.”

There was only one problem with these claims. None of them were true. Multiple congressional investigations all reached the conclusion that there was no merit to the claims. The two-year, $30 million Mueller investigation found no evidence of Russian collusion by Trump or his team.

Multiple internal reviews and inspector general reports not only found no collusion, but also revealed extensive wrongdoing by the FBI and the U.S. intelligence community when it came to false representations, doctored reports, illegal surveillance of American citizens and other egregious abuse of constitutional rights.

Well, a day of reckoning may be coming soon. U.S. attorney John Durham has been conducting a multiyear investigation of his own at the request of the U.S. attorney general, William Barr. This investigation targets the wrongdoers in the Obama administration Justice Department, intelligence community and diplomatic corps.

High-profile subjects of inquiry include former FBI head James Comey, former National Security Adviser Susan Rice, former U.N. Ambassador Samantha Power and many other former high-ranking officials.

Guess what? Joe Biden has been listed as someone who requested and was privy to these reports, which raises serious questions.

The Durham investigation is criminal, so a wave of indictments and prosecutions may be coming soon. The exact timing is uncertain, but mid-July seems a likely date for announcement of the results of the investigation and any indictments.

Attorney General William Barr said Monday that he doesn’t expect criminal charges to be filed against Biden (or Obama). But Biden’s involvement in the Russiagate scandal could have implications for the election. We’ll see.

Investors have their hands full today dealing with the Wuhan virus, the new depression and an unsteady stock market. Now you can add legal fireworks to the list of things that may disrupt markets.

Regards,

Jim Rickards
for The Daily Reckoning

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Trump vs. Biden: Who Will Win?

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The novel coronavirus has dominated the headlines for the past two months, as it should. There’s no bigger story in the world. And besides its human toll, I believe we’ll be dealing with its economic fallout for years.

But let’s not forget, this is an election year. Today I want to tie together the pandemic, the economy and the election.

What we are witnessing is a cascade of complex systems.

A pandemic is one complex dynamic system. The economy is another. A political season is still another.

Each complex system is highly unpredictable and capable of throwing out shocks (called “emergent properties” by physicists).

These three dynamic systems could exist on their own without affecting each other. But that’s not the case today.

A contagious virus, an unstable economy and a highly contested election are crashing into each other. Any one of these systems is difficult to model and predict. Collectively, it’s almost impossible.

All three systems go around in a circle affecting each other and being affected by each other. The pandemic has crashed the economy, and the economic collapse will affect the election. They all interact.

There’s no early end to this complex dynamic in sight.

There’s much that we don’t know about the pandemic and the political outcome. We know more about the economy because the specter of mass layoffs and business failure is already plain to see.

Even at that, we don’t know how long the economic distress will last and how long a recovery will take.

At this point, it’s fairly clear that the presidential election will feature Donald Trump versus Joe Biden.

There is some chance that Biden will stumble because of his cognitive disabilities, but it’s more likely the media will cover for him and he’ll be on the ballot on Election Day.

The principal factor in my election model this year was the probability of a recession before Election Day. No president seeking reelection to a second term has lost in the 20th or 21st centuries unless a recession occurred late in his first term.

Jimmy Carter and George H.W. Bush both lost their reelection bids, and both suffered recessions shortly before the election. Absent a recession late in a first term, the incumbent wins.

Until March, the odds of a recession before Election Day were less than 30% (many analysts set those odds even lower). This meant that Trump’s odds of winning were the reciprocal of 30%, which put the odds of winning at 70% (or higher).

And Trump’s odds would have likely improved by 2% per month. This means that if nothing changed, Trump would be an 86% favorite to win on Election Day.

Yet things did change.

Because of coronavirus, the odds of a recession switched to 100%. In theory, that would put the odds of Trump’s reelection at 0%. But Trump certainly has a better chance of reelection than zero. Basically, you have to set aside the rule book in this case.

This isn’t just a garden variety recession. It was deliberately imposed and accepted as a legitimate trade-off to prevent a massive public health crisis that could have overwhelmed the health care system.

I’m not going to get into a debate about whether it was necessary or not, but the point is it was a choice. It wasn’t because the economy suddenly collapsed on its own (although the economy was weaker than most people think it was).

So past comparisons don’t really hold up. This is a completely unprecedented situation.

But if you’re trying to forecast the election, how do you do it?

The best place to start the modeling process is to make the odds 50/50 (which really is just an educated starting place in the absence of better information).

That means Biden’s odds of winning are also 50% (for now).

In other words, the election has gone from being close to a sure thing for Trump to a coin toss.

Stock markets certainly have not had time seriously to contemplate President Biden and his pledges of higher taxes, open borders, the Green New Deal, late-term abortions and gun confiscations.

But that’s coming soon and is another huge headwind for markets.

So you can see how coronavirus, the economy and the election are all densely connected. Few would have imagined seven months ago where we’d be today. But here we are.

We still have nearly six months until the election. The best approach is to reserve judgment on what will happen six months from now.

But I’ll be watching developments closely and giving my readers the best available forecasts using my predictive analytic models and decades of experience.

Regards,

Jim Rickards
for The Daily Reckoning

The post Trump vs. Biden: Who Will Win? appeared first on Daily Reckoning.

Chris Temple from The National Investor – Thu 26 Mar, 2020

US Markets Up For A 3rd Day In A Row. Is it time to fade this rally already?

Chris Temple joins me for comments on the US markets and Trump’s comments on getting everyone back to work in the near term.

With US markets up for the third day in a row on the back of a US government spending deal investors are now wondering if we could see a strong V shaped recovery. Don’t get too confident just yet.

As for Trump’s comment a couple days ago regarding getting people back to work, this might be more optimism than anything. There are a couple things to note about his press conference that are not flattering.

Click here to visit Chris’s site and keep up to date with his market and economic comments.

Weekend Show Politics – Sat 23 Nov, 2019

Hour 2 – Current US Political Issues
Full Second Hour
  • Segment 1 – Dr. John Huber explains the vitriol associated with the impeachment hearings.
  • Segment 2 – David Howowitz discusses the principles behind his best selling book The Plot to Overthrow Christian Americas.
  • Segment 3 – Best selling NT Times author Dr Jerome Corsi discusses urgent political issues.
  • Segment 4 – Dr. James Corsi introduces a revolutionary new affordable way to secure our southern borders.

Dr. John Huber
David Horowitz
Dr. Jerome Corsi
Dr. Jerome Corsi – Part 2

President(?!) O’Rourke Will Take Your Guns

This post President(?!) O’Rourke Will Take Your Guns appeared first on Daily Reckoning.

Dear Rich Lifer

Last week, I explained why Elizabeth Warren’s plan for Social Security – while philosophically flawed – at least made more sense than Andrew Yang’s “freedom dividend” plan.

But let me tell you, Beto O’Rourke’s plan to forcibly buy back all the AR-15 and AK-47 rifles in the United States takes the cake as the most outrageous proposal we’ve heard from a Democratic candidate.

It doesn’t matter whether you’re pro-gun, anti-gun, or somewhere in between.

I’m highlighting this as another example of the way politicians will say anything to win the hearts and minds of various groups of Americans without any regard to facts or laws. (And yes, the same applies to Trump and most other elected officials as well.)

There are several huge problems with O’Rourke’s promise.

Let’s start with this whole idea of defining certain weapons as “assault rifles,” particularly the AR-15 currently sold to civilians in the United States.

What is an Assault Rifle Technically?

An Assault Rifle, like an AR-15 is a semi-automatic rifle, which means it fires one round for every time you pull the trigger.

So contrary to what a lot of people think, you can’t just hold the trigger down and have it keep shooting round after round like the fully automatic version U.S. soldiers use.

Meanwhile, it fires Remington .223 or 5.56 NATO ammunition, which is a far less powerful round than many others in common usage … including most common types used for deer hunting.

Really, the idea of an “assault rifle” is completely made up and mostly relates to appearance – black or olive drab green plastic parts – and relatively superficial features like folding stocks or mounting rails.

Many modern rifles – with plain-looking wooden stocks – fire the exact same types of ammunition, just as quickly, and in the same quantities as AR-15s. Indeed, they are functionally equivalent.

But let’s put that nerdy stuff aside.

There are much bigger legal and logistical hurdles to consider.

District of Columbia v. Heller

The President of the United States simply doesn’t have the authority to perform such an action without Congressional approval.

Getting that is a fairly big task in and of itself.

And even with Congressional approval, it’s very likely that such an action would be found unconstitutional based on past Supreme Court rulings such as District of Columbia v. Heller.

That case, dating back to 2008, determined that the Second Amendment grants individual U.S. citizens the right to keep and bear arms for lawful purposes – including self-defense inside their homes – without having to belong to any official militia.

The specific case was about D.C.’s handgun ban but the Heller ruling affirmed the idea that people have the right to own guns “in common use at the time.” With millions of AR-15s already in use by civilians, it’s hard to see how a wholesale and involuntary buyback of those guns would be deemed constitutional based on the Heller ruling.

Speaking of which, even if all the legal issues were put aside, how exactly would the government make such a thing happen anyway?

The Logistics are a Nightmare

There are somewhere between five and 20 million AR-15s alone in the U.S. though nobody really knows the exact number.

How come we don’t know? Because the Firearm Owners Protection Act of 1986 prohibits any type of federal gun registry linking specific guns with specific owners.

In other words, many AR-15s are not in any centralized computer database, and have changed hands without any official record of those transactions even in any individual state databases.

It doesn’t matter what you think about this personally. It’s a fact.

Neither O’Rourke nor anyone else in the government can ever know how many existing AR-15s need to be confiscated or the names of the people who own them.

By the way, how much would the government pay for each of those weapons as it bought them back? The typical AR-15 is currently worth $1,000 or more.

One also wonders how O’Rourke would handle noncompliance … because I’m pretty sure you would have a lot of AR-15 owners who are unwilling to hand over their guns.

As you can see, the list of potential issues with O’Rourke’s promise are absolutely massive and, in my mind, completely insurmountable.

So whether you support the idea or absolutely abhor it – you might as well forget about it. It’s simply not going to happen.

Indeed, it’s Americans who are somewhere in the middle of the gun debate that should be most concerned …

Because in his attempt to grab headlines, O’Rourke has only polarized people further, making it far more difficult for our country to have any type of reasonable dialog at all.

That’s the real lesson in all of this, and it’s an important one as we keep moving toward 2020 …

Whether they’re from long-shot candidates like O’Rourke or a sitting President, attention-seeking promises should always be countered with on-the-ground facts. Quickly.

And as someone with a soapbox, a level head, and a penchant for research, I’m happy to take on that responsibility whenever I see a good opportunity.

After all… bad information is one of the biggest blockades to living a rich life.

To a richer life,

Nilus Mattive

Nilus Mattive

The post President(?!) O’Rourke Will Take Your Guns appeared first on Daily Reckoning.

Ed Moya – Senior Market Analysts at OANDA – Tue 24 Sep, 2019

It’s all about politics driving money flows to safe assets

Ed Moya, Senior Market Analysts at OANDA joins me to outline the major driver in the markets. These drivers all revolve around politics ranging from Brexit to trade wars, and now US political issues. The markets have been reacting by selling risk on and continuing to shift into risk off.

Click here to visit the OANDA website and follow along with Ed’s daily market calls.

Trump Declares War

This post Trump Declares War appeared first on Daily Reckoning.

Trump has had it!

He is apparently declaring a currency war on the rest of the world. Trump resents China and Europe cheapening the yuan and the euro against the dollar in order to help their exports and hurt ours.

He says it’s time for the U.S. to cheapen the dollar also. Trump has a point. If you put a 25% tariff on many Chinese exports to the U.S. (as Trump has done) or a 25% tariff on German cars exported to the U.S. (as Trump has threatened to do), it can be a powerful way to reduce the U.S. trade deficit and generate revenue for the U.S. Treasury.

But a trading partner can undo the effect of the tariff just by cheapening its currency.

Let’s say a Chinese-made cellphone costs $500 in the U.S. If you slap a 25% tariff on the imported phone, the immediate effect is to raise the price by $125.

A simple solution to tariffs is to devalue your currency by 20% against the dollar. Local currency costs do not change, but the cellphone now costs $400 when the local currency price is converted to U.S. dollars.

A 25% tariff on $400 results in a total cost of $500 — exactly the same as before the tariffs were imposed. Tariff costs have been converted into lower production costs through currency manipulation.

There’s only one problem with Trump’s currency war plan. There’s nothing new about it. The currency wars started in 2010 as described in my 2011 book, Currency Wars. 

As soon as one country devalues, its trading partners devalue in retaliation and nothing is gained. It’s been described as a “race to the bottom.” Currency wars produce no winners, just continual devaluation until they are followed by trade wars.

That’s exactly what has happened in the global economy over the past 10 years. But the final step in the sequence is often shooting wars. That’s what happened leading up to WWII. Let’s hope the currency wars and trade wars don’t turn into shooting wars as they did in the 1930s.

Meanwhile, the Fed is a critical player in the currency war because it has a major influence on the dollar.

The world is waiting to see what it does at its policy meeting on July 31. There is almost no chance the Fed will raise rates. The choices are to cut rates or keep rates unchanged. The market is betting heavily on a rate cut, for what it’s worth.

If the Fed cuts rates, we’ll have to see how other central banks react. But the Fed has many factors to consider when it meets later this month…

For the past 10 years, Fed policy changes have been relatively straightforward to forecast, based on a simple model. The model said the Fed would raise rates consistently in 0.25% increments until rates are normalized around 4% (the amount needed to cut in case of recession).

The exceptions (where the Fed would “pause” on rate hikes) would occur when job creation is low or negative, markets are disorderly or strong disinflation threatens to turn to deflation. Markets certainly became disordered late last year, when the U.S. stock market nearly entered a bear market. And so the Fed paused.

None of those conditions apply today. Job creation is strong, markets are at all-time highs and disinflation is mild. But a new factor has entered the model, which is the fear of causing a recession.

Estimated growth for the second quarter of 2019 is 1.3% annualized, compared with 3.1% in the first quarter. Using the Fed’s own models (which are different from mine), the Fed is concerned that if they don’t cut rates, a market correction and recession may occur.

But if they do cut rates, inflation may result due to tight labor markets and higher costs due to tariffs.

This Fed decision will likely come down to the wire. Second-quarter GDP will be reported on July 26, and personal income and outlays will be reported on July 30. Both data points (and underlying inflation data) will be available right before the July 31 decision date.

Markets will cheer a rate cut and probably sell off if the Fed does not cut rates. But both the markets and the Fed itself will have to wait until the last possible minute before this conundrum is resolved.

And the world will be watching very closely.

Below, I show you how Fed policy is one of three factors driving a new multiyear rally in gold. What are the other two? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

The post Trump Declares War appeared first on Daily Reckoning.

The Cult of the Trump Tax Refund

This post The Cult of the Trump Tax Refund appeared first on Daily Reckoning.

Last week, I told you how I got a surprise correction from the IRS – one relating to Trump’s new tax laws and my Solo 401(k) retirement plan.

What I didn’t mention is the monetary impact of that note – essentially, I ended up owing a couple thousand more in taxes than I had previously figured.

Before you shed a tear, on balance, the new tax laws were a net positive for my specific situation last year.

Even though my Solo 401(k) contributions were slightly less valuable, the qualified business income deduction was a big win …

While the SALT cap is painful for someone like me living in California – with high state income taxes and high property taxes – at least my oversized mortgage is still fully deductible because I purchased my home before the new lower limits kicked in …

And with a young child in the home, the doubling of the child tax credit (plus higher phaseout thresholds), was an additional positive.

I could keep going.

The point is that many things changed and how the sum total affected you depends on the very specific details of your life.

How did Americans Fare Under Trump’s Tax Changes?

The IRS just released its first batch of official numbers, using tax returns filed by May 23rd.

Roughly 10% of filers are still using the benefit of extensions and haven’t turned in their returns yet. Moreover, that group of people tend to be higher-income filers – with more complicated returns – and they represent 20% of all the income reported to the IRS.

Still, we can get a good idea of where things stand.

Here are some general takeaways:

#1. Households making somewhere between $100,000 and $250,000 received fewer refunds and were more likely to owe money.

That comes from a Wall Street Journal analysis of the IRS’ data. But we’ll talk more about this idea in just a second. It isn’t really what it seems.

#2. Average refunds for households making $250,000 to $500,000 rose 11%.

I suspect this has a lot to do with the aforementioned QBI and other benefits for businesses and their owners.

If you’re starting to feel like only the wealthy made out …

#3. From a high-level view, about the same number of Americans got refunds this year (79% vs. 80%) and for roughly the same amount ($2,879 vs $2,908) as the 2017 tax year.

So if you’re now feeling like the ultra-wealthy made out and everyone else got shafted, you’re not alone.

Barron’s recently cited a Gallup poll conducted in April, which found only 14% of Americans thinking their taxes went down.

However, the reality is far different …

#4. The Tax Policy Center says roughly two-thirds of American households paid less in taxes overall year-over-year while 6% paid more.

How is this possible?

How can half of the population not realize their taxes actually went down under the new laws?

Beyond the fact that many people outsource their tax preparation and thus have no real connection to what’s happening in that part of their life, many Americans only look at their refunds.

If they get money back after they file, they’re happy.

If they get more than last year, they’re really happy.

Of course, none of that makes rational sense.

This year, for example, IRS withholding amounts were adjusted earlier in the year.

That means many workers had less money getting taken out of their regular paychecks. So what they ended up owing or getting back is not a good indication of how they fared overall.

So What’s with the Overreaction?

The entire “cult of the tax refund” is completely misguided and always has been.

Getting a large refund from Uncle Sam simply means you loaned him a good chunk of money at zero-percent interest over the course of the year.

That’s hardly something to celebrate!

Instead, your goal should be paying exactly what you owe and not a penny more.

Or, even better, paying less than you owe without incurring underpayment penalties and then writing a check for the difference come filing time.

And bonus points if you have the difference invested and earning some type of return during the interim … which is the polar opposite of what almost everyone else does.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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About Today’s Jobs Report…

This post About Today’s Jobs Report… appeared first on Daily Reckoning.

The May unemployment report came rolling from the United States Department of Labor this morning.

In the highly technical vernacular of the trade… it was a “miss.”

And not by a nose, not by a hair, not by a whisker.

Economists as a group divined 175,000 May jobs.

What was the actual number?

Seventy-five thousand — fully 100,000 beneath consensus — and the lousiest figure since February.

Each one of 77 Wall Street analysts — each one — heaved up a greater estimate.

But unlike February, they cannot foist blame upon winter weather or a government shutdown.

Thus our faith in experts staggers yet again… and fast approaches our faith in weathermen, crystal gazers, salesmen of pre-owned automobiles and congressmen of the United States.

But our faith in the lunacy of the existing financial system is infinitely confirmed…

Wall Street vs. Main Street

In a healthful and functioning order, the stock market is a plausible approximation of prevailing economic conditions.

A poor unemployment report should send panicked shudders through the stock market.

It indicates a wobbled economy. Rough business is likely ahead. And companies can expect a reduced profit.

Stocks should — in consequence — fall tumbling on the news.

But ours is not a healthful and functioning order. It is rather an Alice in Wonderland order.

Up is down. Down is up. Good news is bad news.

And bad news is good news…

Bad news for Main Street is good news for Wall Street, that is.

Wall Street thrives on Main Street’s bad news as doctors thrive on fractured legs… as dentists thrive on toothaches… as embalmers thrive on murders.

And this morning’s jobs report constitutes good news for Wall Street.

It merely forms additional evidence the Federal Reserve will be slashing interest rates soon.

And low interest rates are the helium that lifted stocks to such gaudy and obscene heights lo these many years.

Stocks Soar on Today’s Weak Jobs Report

The Dow Jones was so heavily floored by this morning’s jobs report it went up 300 points by 11 a.m.

The other major indexes were similarly flabbergasted.

The S&P was up 35 points and the Nasdaq up 130 by the same 11 a.m.

All three indexes composed themselves somewhat by day’s end.

The Dow Jones ended the day 263 points in green territory. The S&P gained 30 points, while the Nasdaq added 126.

Yet as we documented Wednesday, the economy is going backward… and recessionary warnings flash in all directions.

Meantime, all reasonable estimates place second-quarter GDP growth under 2%.

But because the Federal Reserve promises yet additional levitating gases, the stock market has record heights once again in view.

“The Disconnect Between the Economy and Stocks is at Record Highs”

Thus the gentlemen of Zero Hedge declare, “The disconnect between the economy and stocks is at record highs.”

JJ Kinahan — chief market strategist at TD Ameritrade — here affirms the “bad news is good news” theory:

The market’s got a conundrum here. That’s a bad report. Just on the report itself, I think people would want to sell the market. However, the fact that it really makes the case for a rate cut, I think is why you’re seeing the market hang in there.

Affirms Mike Loewengart — vice president of investment strategy at E-Trade:

This is the type of [jobs report] the doves will really take to as it supports the argument for cutting rates beyond politics or trade issues…

Luke Tilley, chief economist at Wilmington Trust, adds:

I think that this is a true slowdown in hiring right now… The market signals are obviously screaming for the Fed to reduce rates.

Wall Street has Jerome Powell by the ear.

When Wall Street screams for lower interest rates, lower interest rates it will have.

Odds of Rate Cuts Approach 100%

The market presently gives 84% odds that the Federal Reserve will cut rates at least 25 basis points by July. By September those odds increase to 95%.

By January, they rise to 99%… with the heaviest betting on two rate cuts.

Investors further expect at least three rate cuts by next June.

But as we have detailed at length… you can expect recession within three months of the inevitable rate cut — whenever it may fall.

Yes, the next destination is recession.

The route may twist, the route may meander, the route may even temporarily turn back on itself.

But it terminates in recession nonetheless.

The “New Normal”

The No. 2 man at the Federal Reserve would nonetheless have us put away all talk of recession.

Mr. John Williams insists diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

The United States government borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome. Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

Or to switch the figures some, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We have gotten plenty of buck, that is. But not half so much bang to go with it.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

Trillion-dollar deficits extend to the horizon.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a bleak calculus — growing debt twinned with sagging growth.

The Mills of the Gods 

As we have argued previously, time equalizes as nothing else.

Scales balance, that which goes up comes down, that which goes down comes up…

The mighty fall, mountains crumble, the meek inherit the Earth.

We suspect strongly that stock market and economy will meet again on fair ground.

We further suspect it is stock market that will fall to the level of economy. Not the other way.

The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted.

But as he warned…

They grind exceedingly fine…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Wall Street and the New Cold War

This post Wall Street and the New Cold War appeared first on Daily Reckoning.

The stock market seems to rise or fall almost daily based on the latest news from the front lines of the trade wars.

When Trump threatens new tariffs and China threatens to retaliate in kind, stocks fall. When Trump delays the tariffs and China agrees to resume negotiations, stocks rise. And so it goes. It has been this way since January 2018 when the trade war began.

The latest dust-up came late last week when Trump threatened tariffs against Mexico if it doesn’t do more to curb illegal immigration to the U.S. Markets sold off on Friday as a result, bringing a terrible May to an end. Largely due to the trade war, the stock market had its worst May in seven years.

From the start, Wall Street underestimated the impact of the trade war. First they said Trump was bluffing. Then the analysts said that Trump and Xi would put their differences aside and make an historic deal.

All of these analyses were wrong. The trade war was problematic from the start and is growing worse today.

China will lose the trade war. The reasons are obvious. Foreign trade is a much larger percentage of Chinese GDP than it is for the U.S., so a trade war was always bound to have more impact on China than the U.S.

And if China tries to match the U.S. in tariffs dollar for dollar, they run out of headroom at $150 billion while the U.S. can keep going up to $500 billion and inflict far more pain on China.

Other forms of Chinese retaliation are mostly nonstarters. They cannot dump U.S. Treasuries without hurting their own reserve position and risking an account freeze by the U.S. China cannot turn up the pressure by stealing intellectual property because they’re already doing that to the greatest extent possible.

China’s latest threat is to ban exports of “rare earths” to the U.S. and its allies. Rare earths are essential for the production of plasma screens, fiber optics, lasers and other high-tech applications. Electric vehicles, mobile phones and telecommunications systems would be impossible to build without them. China is responsible for 90% of global production, which makes them a potent weapon in the U.S.-China trade wars.

“Rare” earths aren’t actually that rare. They are plentiful in quantity. The problem is that they are found in extremely low concentrations. This means a huge amount of ore and expensive mining processes are needed to extract even a small amount of these vital substances.

So rare earths are one weapon China possesses.

But over time, Western powers can replace rare earths purchased from China. There could be major manufacturing disruption in the meantime, it’s true. But it would not be the end of the world.

The U.S. will win the trade war and either China will open its markets and buy more U.S. goods or the Chinese economy will slow significantly.

But while the trade war is important, it’s not the main event.

The trade war is part of a much larger struggle between China and the U.S. for hegemony in Asia and the Western Pacific.

They are locked in a new cold war being fought on many fronts. These include trade; technology; rights of passage in the Taiwan Strait and the South China Sea; and alliances in South Asia, where China’s Belt and Road Initiative is promising billions of dollars for infrastructure development.

The U.S. is responding with arms deals and bilateral trade deals to counter Chinese influence. Even if a modest trade deal is worked out with China this summer, it will not put an end to the larger struggle now underway.

What are the implications?

If the Chinese view the trade war as just one step in a protracted cold war, which I believe they do, then we’re in for a long period of contracting growth that will not be confined to China but will affect the entire world.

That seems the most likely outcome for now. Get set for slower growth and perhaps stagflation. It could be like the late 1970s all over again.

Slowly, Wall Street is taking the trade wars seriously. But it is still missing its larger implications of a new cold war.

This new cold war could last for decades and it will affect the entire global economy. Let’s just hope it doesn’t turn into a shooting war.

Below, I show you why it could. Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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