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Sunday, March 24, 2024

2024-03-24

***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:

Right from the get-go, the report authors warn that whatever Canada’s current situation, it 'will probably deteriorate further in the next five years'

A secret RCMP report is warning the federal government that Canada may descend into civil unrest once citizens realize the hopelessness of their economic situation.

“The coming period of recession will … accelerate the decline in living standards that the younger generations have already witnessed compared to earlier generations,” reads the report, entitled Whole-of-Government Five-Year Trends for Canada. ...



This week marks a new phase in the battle between markets and central banks about the timing of rate cuts. We are not at the end—no one is expecting the assorted central bank meetings to produce rate cuts this week. We are not at the beginning of the end—explicit forward guidance of rate cuts also seems unlikely. But we are at the end of the beginning. Ongoing disinflation forces continue to make a forceful case for rate cuts in the second quarter.

Rate cuts this year should not be considered to be policy stimulus. As inflation continues to slow, rate cuts are needed to prevent rising real rates, which would choke growth more aggressively. This year’s policies are anti-depressants, not stimulants....



... As regular readers are aware, an inverted yield curve has been the best predictor of a US downturn of any variable through history: the yield curve has always inverted before all of the last 10 US recessions, with a lag that is usually 12-18 months, but some cycles - certainly this one - take longer.... much longer.




The Fed simply cannot even

.... Central bankers have long argued that changes in interest rates affect global economies with “long and variable lags”.

So the continued strength in markets (including labour markets) doesn’t necessarily conflict with orthodox views of monetary policy. Nor does it mean that the Fed’s current monetary policy won’t ever affect the broader US economy. It might just be taking a while, for whatever reason. .......

..... All of this means that the US economy (and global economy) could still be due for a recession driven by lay-offs and falling incomes at current interest rates.

If the explanation is really that Fed policy is working but with a long lag, Perkins lists some “monetary canaries” that could show US policy is actually hurting growth. He’ll be watching residential property markets in Australia, Canada, the UK and Sweden; commercial real estate in the US and Germany; US corporate debt; and default rates from US consumers on credit cards and auto loans.

...... Although this scenario does not seem very likely and the hurdle for rate hikes remains high, the lesson of the past few years is not to take anything for granted. This is no ordinary business cycle.


The ‘pretend and extend’ tactics playing out in the sector need to end

That doughty — somewhat dull — Canadian insurance company known as Manulife does not often attract attention. This week, however, it caused a frisson in the real estate world.

Shortly before Jay Powell, Federal Reserve chair, announced that the central bank was keeping benchmark rates at 5.25 per cent to 5.5 per cent, Colin Simpson, Manulife’s chief financial officer, revealed that the group had written down the value of its US office investments by 40 per cent from a pre-Covid peak. 

“I like to think our property portfolio is of reasonably high quality and quite resilient,” Simpson told Bloomberg. “But the structural forces of higher interest rates and trends around return-to-office make it a difficult market.” In plain English: working from home has hurt.

At first glance, that looks scary; 40 per cent is a big number. But in reality investors should celebrate. One bit of good(ish) news is that Manulife has relatively deep pockets, and thus can absorb this blow. The second, more important, point is that Manulife’s move shows that some players are finally getting more honest about America’s commercial real estate pain. ....


.....


The evidence is overwhelming that the post-COVID inflationary spiral enabled many companies to hike the prices of their products considerably so that profit margins rose sharply because wage rises did not match price increases.  Inflation bit into the living standards of most American households, but not into the profit margins of the US multi-nationals and mega firms. ......

...... Profit-driven inflation seems to have been highly concentrated in a small number of firms and a small number of ‘systemic’ sectors, including extractive industries, manufacturing, IT & finance.

....... And most important, there is an issue of definition here.  Profit margins are not the same as profits.  Profit margins are the difference per unit of output between the price per unit sold and the cost per unit.  But the profitability of capital should be measured by total profits against the total costs of fixed assets invested (plant, machinery, technology), raw materials and the wage bill.  On that measure, outside of the ‘magnificent seven’ of US mega tech and social media corporations and energy companies, the rest of the US corporations are experiencing low profitability on their capital.  Indeed, it has been estimated that 50% of quoted US firms are unprofitable. ....

And remember, it is now well established that profits lead investment and then employment in a capitalist economy.  Where profits lead, investment and employment follow with a lag.



This strategy appears to be the path of least resistance for governments to reduce debt and keep bond vigilantes at bay

Financial markets and fiscal rules are pressuring governments to lower historically high public-debt-to-GDP ratios. Fiscal restraint and inflation are politically unpopular ways of doing that. And growing out of debt is less likely today, given low expected real GDP growth rates. What is known as financial repression appears to be the path of least resistance to reduce debt and keep bond vigilantes at bay.

This is defined as any policy with the explicit purpose of reducing the cost of government debt — such as forcing down real interest rates or steering central and commercial banks to buy up government bonds. There is historical precedence for financial repression as an effective solution to reducing the public debt burden. Following the debt accumulation of the second world wear, the US Federal Reserve pegged interest rates on government debt at a low level until 1951. Thereafter, the Fed kept interest rates below the level of inflation for many years. As US president, Richard Nixon put pressure on Fed chair Arthur Burns to ease monetary policy in 1971 ahead of the 1972 election. A recent IMF working paper estimates that financial repression during this time led to a reduction of over 50 percentage points in the debt-to-GDP ratio. .....


........

....... He said this high amount of debt that has been extended and modified rather than refinanced "helped mitigate a default wave and a sharp pick-up in losses on CRE loan portfolios." He noted the main driver of this has been the "willingness of lenders and borrowers to modify and extend maturing loans rather than refinancing or forcing a foreclosure." In other words, the can was simply kicked down the road ....



Abstract
The free market works because no one person or company is making the decisions. In a competitive market, businesspeople make the wrong decisions all the time, just as central planners do. But the consequences of those decisions don’t infect the market as a whole. Businesses that guess wrong lose money or go out of business. But as long as there is a competitor out there who guesses right, the market provides people what they want.

But it turns out that the very last thing capitalists want is a free market. Capitalism may thrive under
conditions of robust market competition, but most capitalists don’t. They would much rather operate in an environment free from government restraint but also free from the discipline of a truly competitive market.

Unfortunately, we have obliged them. At every turn, we have allowed the dominant forces in a market to erect barriers to protect themselves from being dislodged and to maximize their own profits at the expense of everyone around them. The result has been that while we have a capitalist economy, we no longer have a free market. Nearly every market sector is less competitive today than it was fifty years ago. We have centralized control over important sectors of the economy in a handful of companies. And we have given them the tools to use that control to prevent new competition, to make it hard for consumers to take advantage of what competition there is, to drive down wages, and to extract as much short-term profit as possible rather than invest in long-term productivity. Late-stage capitalism isn’t the free market run amok. It is the capture of markets by actors who have a vested interest in making sure there is no free market. And the consequences have been dire, not only for consumers, but for inequality and political stability in the U.S. and throughout the world ......



Bubble Fare:

********* Hussman: Universal Capitulation and No Margin of Safety

Based on the valuation measures we find best-correlated with actual subsequent S&P 500 total returns across a century of market cycles, the stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021 (the 2022 peak occurred the next trading day) and the bubble peak in the week ended August 26, 1929. While our investment discipline is to align our outlook with prevailing, observable market conditions, my impression is that investors are presently enjoying the double-top of the most extreme speculative bubble in U.S. financial history.

Present valuation extremes might only be a long-term concern if our measures of market internals were not also divergent and unfavorable here. It seems popular to imagine that “this time is different” – that the economy has entered a new era of permanently high profit margins and credit expansion; that a narrow, selective, two-tier frenzy among large capitalization glamour stocks is enough to carry the market ever higher. History is not friendly to these ideas, but no forecasts are required. Our outlook will change as observable conditions change.

This month’s comment offers an expansive and data-rich dive into profit margins and market composition. The objective is not to argue, or convince, or urge investors to do anything. We share our research, and we ask nothing in return. Still, if there is one suggestion that might be useful to investors here, it is simply to allow the possibility that market conditions will change. Whether your outlook is bullish or bearish, the notion that the current situation is permanent is exactly what will make you suffer. 

Current market conditions
I think we can all agree on two propositions.

First, if enough speculators believe that stock market gains are driven by a tap-dancing squirrel monkey named Bobo, and Bobo starts tap-dancing, well, the stock market is going up, at least in the short run. Neither truth nor logic have anything to do with it.

Second, because stocks are ultimately a claim on future cash flows that must be delivered over time, higher starting valuations still mean lower long-term returns, which is why no speculative episode in history has ever ended well.

Both of these propositions can be true at the same time. .......

The chart below shows our most reliable valuation measure, the ratio of nonfinancial market capitalization to gross value-added, including estimated foreign revenues (see the chart text for calculation details). We’ve observed greater extremes only twice in U.S. financial history: the week ended December 31, 2021, and the week ended August 26, 1929.

... The market can certainly advance during periods of unfavorable internals, particularly over the short run. Still, these periodic advances tend to lag T-bills on average, and the gains are often abruptly surrendered. Accepting market risk during periods of unfavorable market internals always comes with elevated risk, and that risk becomes steeper when extreme valuations and overextended market action are present, as they are today. Put simply, I trust the guidance we have from valuations and internals, and our defensiveness here is both uncomfortable and intentional.

If you can’t stand “missing out” on any market advance, and speculative exuberance tempts you to abandon your discipline, you might benefit from some passive investment exposure – not because we think it will do well, but to relieve your psychological discomfort. That’s a personal decision, and we need not be involved. For our part, our outlook will change as observable conditions change.

The scatter plot below shows the relationship between starting valuations and subsequent 12-year S&P 500 average annual total returns. I’ve broken the chart into two subsets, not because I actually believe the long-term relationship has changed, but to isolate the effect of repeated speculative episodes since 1998. As I detailed more fully in The Structural Drivers of Investment Returns (see the section titled “You may not like this part”), the apparent “shift” in the relationship between valuations and returns is a reflection of speculative bubbles that front-load returns, and then resolve with negative returns, as usual.

...

That said, we do find P/E ratios to be fraught with risky and unobserved assumptions. As Jeremy Grantham reminded investors last week, “if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins.”

.......... While we’ve increasingly prioritized the condition of market internals in our discipline, valuations still matter. It’s just that they matter for long-term returns and have less reliable effects on short-term outcomes. ..............

Meanwhile, as Graham and Dodd observed about the advance leading to the 1929 market peak, investors seem to have abandoned an analytical approach, except to the extent that it reinforces the idea that “good” stocks are sound investments regardless of how high their prices may be .........


Quotes of the Week:




Charts:
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(not just) for the ESG crowd:









Due to a flurry of western support for Ukraine, now escalating to ground troop insertions, Russia had to move its special military operation in Ukraine into the bigger scope of a full fledged war. .....



This should be seen as the Kremlin’s clearest signal yet that it’ll respond to the scenario of a conventional Western intervention by striking those opposing forces in line with the international laws governing this form of conflict... Kremlin spokesman Dmitry Peskov told the Argumenti I Fakty newspaper that “We are at war. Yes, it began as a special military operation, but as soon as this group was formed there, when the collective West became a participant in this on the side of Ukraine, for us it already became a war.” This is unprecedented since national security legislation prohibits the use of the word “war”, which is regarded as a mischaracterization of the way in which Russia is conducting what it refers to as a special operation.

The distinction is important regardless of whatever Western commentators claim since a special operation is a voluntarily limited military action whereas a war is only restricted by the international laws governing it (and only then if they’re abided by or externally enforced). Additionally, fighting what’s legally designated by the state as a war instead of a special operation pressures the authorities to respond accordingly to the West’s participation in this conflict, thus heightening the risk of escalation. ........


***** Lawrence: Authorized Atrocities
Israel’s lawlessness has a history that those in the West share with the apartheid state.


Our culture of ennui

............ As a former correspondent abroad, I have taken up the peculiar habit of collecting headlines that reflect on the commonly shared preoccupations of Americans, their thoughts and feelings—the American zeitgeist, this is to say. These are drawn from a large inventory stored in my computer. What do they tell us?

With Russia’s intervention in Ukraine—a military operation I consider regrettable but inevitable given the Western alliance’s incessant efforts to subvert the Russian Federation—the U.S. brought us as close to “nuclear Armageddon,” Biden’s phrase, as we have been at least since the Cuban missile crisis 62 years ago. In the case of Gaza, the U.S. fully supports Israel as it bombs, shoots, and now starves Palestinians in the cause of an ethnic-cleansing genocide that begs comparisons with the diabolic viciousness of the Reich in the 1930s and 1940s.

There is something quite “off,” even indecent about Americans’ fascination with Taylor Swift and garden hoses in these circumstances. ........





At some point, an America President will shut down the southern border, ban social media, and openly wage genocide and/or start World War III. And it won't be Trump that starts it. Biden has already done Trump's homework.

Biden has already laid the legislative groundwork for a President shutting down the border and banning media he doesn't like. He has already done the wetwork of starving millions of civilians to death in Palestine and starting a land war in Eurasia. Trump doesn't have to start anything. He can just finish it.

In the same way, Biden just picked up Trump's homework and cribbed from it. Biden has continued Trump's 'cold' wars with China and Iran, and added Russia to the mix. Biden has continued caging people at America's illegitimate southern border and continued deporting them from stolen land. Whereas Trump merely yelled media and social media, Biden has pushed legislation to ban entire platforms. And whereas Trump merely looked like he'd start World War III, Biden has effectively done it in Ukraine.

American Presidents historically just hand-off homework to each other, and the big assignment is fucking up the world as much as possible. Americans like to act like Trump is some unique evil and he's not. He's just an honest American, like Hitler was the last honest European. Trump is honestly evil, whereas Biden is just a sanctimonious sack of shit, doing the same things except more organized. He's laying the groundwork for a fascist Trump Presidency quite capably and in 2025 you'll see them shake hands.

Blockquotes
As the (racist) Hannah Arendt said about pre-Nazi Germany, Trump's positions are “actually the attitudes and convictions of the bourgeoisie cleansed of hypocrisy.” ............

............... What are the actual choices here? It's like a choosing between kicked in the left nut or the right nut. Who gives a fuck? The fact is that Biden and Trump are just two wrinkly old nuts in the same sack. ..........

As I've said, Biden deserves to lose (to be hung, actually) and Trump doesn't deserve to win. You could say America doesn't deserve this, but oh yes, it does. Americans are just Nazis that won. ..........



The New York Times reports that the Biden administration is dispatching a whole "army of lawyers"  on a special mission to aggressively seek and destroy any and all challengers to the unpopular incumbent's continued reign in the White House.

What - you still thought that democracy included giving voters an actual choice on Election Day? To the contrary. Anybody still operating under the delusion that our form of government is anything but a fascist oligarchy should be getting a cruel wake-up call with this latest news. Not only are they acting like the dictators that they accuse Donald Trump of wanting to be, they are flaunting their own authoritarianism right out  in the open. No matter to them that they are also flaunting their abject fear of the voting public  right out there in the open.

Not for nothing does the Times headline characterize such anti-genocide candidates as Cornel West and Jill Stein as "threats" - literal enemy combatants of the World Order.

These and other upstarts are, according to the article, "peeling away" votes that Joe Biden presumes that he, and he alone, rightfully owns. If this tired old flaying-alive nonsense doesn't plant an image in your head of a puckered rind being pulled off an old lemon whose pulp is revealed to be covered with toxic mold, then I guess you're not as much into horror as I .....





... I’m always talking here about the need to fight empire propaganda to help the public awaken to the fact that everything we’ve been trained to believe about the world is a lie, because that insight taking root in sufficient numbers would be the first step toward the revolutionary changes our world so desperately needs.

But large numbers of people opening their eyes to the reality of mass-scale psychological manipulation by the powerful would by itself be insufficient, because people need not only to see the truth — they also need to care. ..........



Sci Fare:




Other Fare:

You don't need to know that.

.......................... What we may call the “signal to noise” ratio of data available today has probably never been lower, even while the quantity continues to grow. .................

The sheer quantity of data —again, let’s not confuse data and information, let alone knowledge—is burying us .............

What this does is to clear an enormous amount of space in your brain, and to avoid stressing yourself with unnecessary emotions about things you can’t influence. So once you have decided that what’s going on in Gaza is terrible, which it is, how many more videos and stories do you need to subject yourself to in order to confirm that view? ............


The infantilizing social control of the university.


Perception-altering drugs are going mainstream. Could a new movement driven by profit bring more harm than healing?


Trillions of black soldier flies slowly starve to death

1 Beneath the giants’ heels
The giants ruled the world and

They reshaped it a lot

Nature warped beneath their hands

Vast palaces were built, but not

Much heed was paid to those below

Those trampled by their feet

They didn’t really care to know

What those tiny beings could be

One day some giant scientists performed some basic tests

On those tiny little creatures, who got crushed and squashed and bled

It turned out those little guys, by the word human, that were addressed

Could feel, and laugh, and love, and yet their blood was flowing red

A few especially caring giants wondered what to do

For these beings that they killed and maimed

Were, as they said, “just like me and you.”

And were screaming out in pain

They hoped and prayed that this would change

The way that things were done

That they could mitigate the insane

Destruction wrought upon the tiny screaming ones

They asked those advocating change for giants ill-treated

If they’d support reshaping

The practices done to these creatures

That they were mercilessly razing

But those progressive giants shook their head

And in their heels dug

For though these creatures became dead

Nothing should be done

And though the science did suggest

That they could feel all

Could morality need one acquiesce

To the demands of one so small

Meanwhile, many miles below, the little humans screamed

They wished that they’d have respite from

The giant torturous fiends

2 Reasons to care
Soon, trillions of insects will starve.

This article is about the mistreatment of insects. I write this knowing that virtually no one cares about insects being mistreated, however badly. I am going to try very hard to get you to care about these creatures that matter, that cry out in agony by the trillions. Yet I recognize most of you will continue to be indifferent.

Caring about insects is treated as so manifestly absurd that people reject any view implying we should do it, however otherwise plausible. Bryan Caplan thinks we shouldn’t care about animals because if we do, we’d have to care about insects, and that’s clearly crazy (his argument is wrong).

And yet the evidence is mounting that insects can feel pain, just as non-insects can. ........



Pic of the Week






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