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Monday, May 13, 2024

2024-05-13

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


Economic and Market Fare:


.................... Stocks are expecting a soft or no landing. They are currently behaving in a way consistent with the Fed’s first rate cut — the most likely move if it changes rates this year — occurring in the absence of a recession. However, rate cuts that happen when there is a slump have historically led to a much worse outcome for equities — both before and after the recession — than currently priced ..............





The Fed started publishing the dot plot in 2012, and comparing the Fed’s forecasts with the forecasts from Fed funds futures yields three important conclusions, see charts below:
  1. The Fed’s and the market’s forecasts about the future path of the Fed funds rate are almost always wrong.
  2. The forecasts are very similar, and the Fed has managed to anchor market expectations about where it thinks the Fed funds rate is going.
  3. The direction of the forecasting mistake is always identical, suggesting that the market is taking its cue about the future path of interest rates from the Fed’s dot plot.
The good news is that the Fed is able to anchor market expectations, and thereby reduce volatility in financial markets. 

The bad news is that when the Fed’s forecast is wrong and the FOMC has to move from three cuts in 2024 to say, one cut, it will hurt Fed credibility.

The US economy’s lower interest-rate sensitivity, combined with strong structural and cyclical tailwinds to growth, brings us to the conclusion that the Fed will not cut interest rates in 2024.

Wafer-thin spreads on corporate debt don’t matter — until they do. There are several potential triggers for risk premia to flare, denting credit portfolios.

Spreads have collapsed across the board, from investment-grade and junk bonds to collateralized loan obligations. The extra yield investors get for owning US high-grade corporate debt instead of government bonds is the lowest in two-and-a-half years.

At less than 90 bps, that’s far below the five-year average of about 120 bps. As a percentage of all-in yield, it’s the least since 2007.





................................. The right way to think about debt may be best captured by one of the oldest maxims: “There are old investors, and there are bold investors, but there aren’t many old bold investors.” 


"There's A Lag In The Real Economy... And It's Hitting Now" - Ed Dowd Warns Of "Huge Credit Crisis Coming"


There will be blood: Lenders warn of bank failures at TRD forum
“I don’t think most of the banks understand what is on their balance sheets”


You can’t fight a war without understanding your enemy.  That’s an adage as old as war itself.  Which means it’s very old.

Joe Stiglitz doesn’t understand his enemy.

Now, that’s an odd thing to say bout someone who’s worldview is hardly a secret.  Stiglitz has given it his best shot for decades.  He’s one of the few big name economists worth reading on a regular basis.  But that doesn’t mean he always says things that add up.

He’s a roll lately and his latest book is attracting a lot of attention. So it should because it is an attempt to undo some of the immense damage economists have done to society over the past few decades.  In particular it is an attempt to reframe the notion of “freedom”.  ...........

For those of you now coughing angrily into your coffee, let me repeat — inevitably create.

Power matters.  Economies are expressions of underlying social power structures.  They are not perfectly smoothly operating systems suspended in midair.  They sit firmly on the ground.  Social ground.  And all social ground is littered with the hills and valleys of power relationships.

Economists, in their quest for scientific purity, have sought to minimize the impact power has.  They go to great lengths to sanitize their models of the muddling effect power implies.  Which is why their models most often fail to track reality very well.

So.  No.  Neoliberalism was never, ever, about strengthening democracy.  It was about something else.  It was about the capture, or more correctly, the recapture of power, by an elite that resented the social consequences of the policies put in place to rebuild society after the collapse of older versions of capitalism in the Great Depression.  Those policies had both corroded the power and diluted the wealth of the old elite.  So a counter attack was conceived. .........


Canada’s Secret Is Out: Growth Is Dead



MMT Fare:

Recently, the neglected question of why the US government borrows, given that it can print money, has arisen in the context of discussions surrounding a new documentary, Finding the Money. As L. Randall Wray observes in this one-pager, Modern Money Theory has been providing answers to this question for some time; and, he argues, it is a topic that mainstream economists are ill-equipped to address, since very few concern themselves with the monetary operations that underlie the question of why a currency-issuing government issues debt.



The first and most obvious is to control inflation. As I've explained before on this channel, every time the government spends, it creates new money to do so. It borrows it from the Bank of England, it spends it into the economy to deliver on its policies, and then it has to tax to bring that money back out of the economy under its control, when it cancels it. Literally. It puts it out of use.

That's the biggest reason why we tax, but there are five other reasons as well.

The second one, many people think is a little obscure, but let me make it clear. Unless we did have tax, and unless we had to pay it using the currency that the government creates - the pound in the case of the UK -  then that pound would not have value. ..........



China Fare:


........... But there’s a limit to how far such a strategy can go. Some industries are now plagued by overcapacity concerns, while there’s a rising threat of protectionism from foreign countries that have seen a flood of Chinese imports. And in recent months, industrial loan growth has slowed after the epic surge.

As a result, strategists at Clocktower note that China may be in the potentially treacherous position where credit demand from both households and corporations is falling at the same time.


Why that is important? The strategists explained:

A credit collapse will be a death knell for a highly leveraged economy like China. If the public sector does not come to support credit growth in a timely manner, a sharp growth deceleration is likely to occur going forward as economic agents will be forced to cut consumption and investment to meet their debt obligations.



........................... The decrease of real estate prices is also contributing to the weakness of consumption. Housing assets account for about 70% of the assets held by households. The falling value of housing assets is deterring consumption expenditures. According to Harvard University Professor Kenneth Rogoff and others, China’s real estate sector directly and indirectly accounted for 25% of its GDP in 2021. The contraction of this sector is having a substantial impact.

Moreover, in view of China’s demographic structure, it is highly likely that the demand for residential housing will gradually diminish going forward.  .............



It has long been understood that most financial data provided by the Chinese government is propaganda designed to misrepresent the country's true economic circumstances. At best, their statistics provide half the truth and the rest has to be discerned through deeper investigation. When systemic crisis events take place in China it usually comes as a shock to much of the world exactly because they expend considerable resources in order to hide instability behind a thin veneer of fabricated progress.

The biggest story in China in the new millennia has been nation's debt explosion. China's debt-to-GDP ratio is currently estimated at nearly 300% (official numbers), with most of the liabilities accrued in the past 15 years. ......


Abstract
...... Both parties [the US and China] thus worry about the possibility that financial interdependence can be weaponized yet find it hard to extricate themselves from the inevitability of financial interdependence absent a clean break from an entrenched pattern of trade imbalances. 


Professor Jing Men delves into the perspectives of Chinese scholars, experts, and policy advisors concerning China’s interactions with the Western world.



Bubble Fare:

***** Hussman: This Is Where You Start Bear Markets From

As of last week, the total return of the S&P 500 was even with 3-month Treasury bill returns since the valuation peak of January 2022, more than two years ago. In our view, investors continue to “grasp at the suds of yesterday’s bubble,” ignoring extreme valuations, lopsided bullish sentiment, emerging pressure on profit margins, economic conditions at the border of recession (though the evidence is not yet decisive) and most important for near-term outcomes, unfavorable market internals.

An improvement in the uniformity of market internals would not improve our expectations for long-term returns, nor would it reduce the risk of severe market losses over the completion of this cycle. Still, improved internals would encourage a more neutral or even constructive near-term outlook (albeit with position limits and safety nets). For now, rich valuations, unfavorable market internals, and other elements of our discipline hold us to a defensive outlook.

Regardless of how much we might comment on underlying market conditions, particularly valuations, remember the condition of market internals drives much of our investment outlook at each point in time – particularly with the adaptations we adopted in 2021. Valuations are like potential energy, and it’s important to know when you’re sitting on a powder keg. But investor psychology, which we infer from market internals, is the main catalyst that suppresses or releases that potential energy.

The chart below shows our most reliable valuation measure, based on its correlation with actual subsequent S&P 500 total returns across a century of market cycles: the ratio of nonfinancial market capitalization to corporate gross value-added, including estimated foreign revenues.

Notice that the current extreme is just shy of those observed in August 1929 and January 2022. The current level is about three times the historical norm. We’ve seen this sort of valuation extreme before, but as Jeremy Grantham observed, “you’ve only seen it once or twice.” .................


The arithmetic is straightforward. Over the past 10, 20, and 30 years, both nonfinancial corporate revenues and nominal GDP have grown at an average annual rate of about 4.5%, which includes the impact of the recent bout of inflation. Meanwhile, the dividend yield of the S&P 500 currently stands at 1.4%. Assuming that valuations remain at a “permanently high plateau,” prices would grow at the same annual pace as fundamentals. Add the dividend yield, and estimated long-term S&P 500 total returns – assuming permanently elevated valuations – come to about 5.9% annually.

Now allow MarketCap/GVA to retreat from its current extreme of 3.2 over the coming decade, but no lower than the level of 1.7 we observed in early 2020. In that case, the estimated total return includes not only growth in fundamentals and dividend income, but also the annualized impact of the change in valuations:

Estimated 10-year S&P 500 total return: 1.045*(1.7/3.2)^(1/10) – 1 + 0.014 = -0.5% annually

Now assume that MarketCap/GVA instead retreats to its historical norm of 0.98. Historically, that level has been consistent with run-of-the-mill subsequent S&P 500 total returns averaging 10% annually. Valuations regularly fell below that historical norm (followed by high subsequent market returns) in much of U.S. market history before 1995. As I noted at the time, the S&P 500 also dropped to undervalued levels in October 2008. In contrast, recent market returns have relied on valuations pushing to record highs. Suppose that valuations a decade from today instead reach that norm of 0.98:

Estimated 10-year S&P 500 total return: 1.045*(0.98/3.2)^(1/10) – 1 + 0.014 = -5.8% annually

Such seemingly preposterous long-term return estimates, like those I proposed in 2000 and 2007, are largely a reflection of basic arithmetic. In the short run, stock prices will go wherever investor psychology will take them. Yet, be it a speculative bubble or a risk-averse panic, stocks continue to be claims on a stream of future cash flows, and long-term returns are still determined by the prices investors pay.

Given that 10-year Treasury bonds currently yield about 4.5% annually, it should not be surprising that our estimate of the likely 10-year “equity risk premium” (S&P 500 total returns in excess of Treasury returns) stands at the lowest level in history. The chart below shows this projection in data since 1928. Notably, there’s no complex data mining here. The projected S&P 500 total return is just linear in (log) valuations.

We presently estimate that the S&P 500 is likely to lag Treasury bond returns by a record -9.3% annually over the coming 12-year period. That’s worse than the August 1929 low of -6.4%. Worse than the 2000 low of -7.9%, a point when I was also projecting negative 10-year S&P 500 total returns and an -83% loss in technology stocks (the tech-heavy Nasdaq 100 went on to lose an improbably precise -83%).

Show us a financially reasonable and more reliable estimate of the likely equity risk-premium, and we would happily use it. Why wouldn’t we? The problem is that we haven’t found any alternative estimation approach, not the Fed Model, not Shiller-Black-Jirav, not Damodaran, nothing, better correlated with actual, subsequent S&P 500 total returns than the methods we use. ...........

Still, if you’re looking for the “optimistic case” for market valuations, the chart below is it. It shows the ratio of the S&P 500 to analyst estimates of year-ahead “forward” operating earnings, strictly in data since 1990. This is as bullish a view as I can offer. Unfortunately, with the S&P 500 price/forward earnings currently above 20, it still implies estimated 10-year S&P 500 total returns in the low single digits, implying a slightly negative 10-year risk premium relative to Treasury bonds. ...........

For decades, I’ve noted that extreme valuations do not necessarily imply near-term market losses. The only way valuations can ever reach levels as extreme as 1929, 2000, 2021 and today is by blowing through lesser valuation extremes for years. This leads to the dangerous tendency to abandon valuations as uninformative and useless. That’s a mistake.

Valuations matter profoundly when estimating long-term market returns and likely full-cycle market losses. Yet market returns over shorter segments of the cycle are mainly driven by investor psychology – specifically, whether investors are inclined toward speculation versus risk-aversion. ........................................

On the economic front, forward-looking measures remain at levels that have historically defined the border between expansion and new recession, but we have no particularly strong views here. We would need to see greater deterioration across a broad range of leading measures to expect a recession with confidence, and we don’t see that yet. .................


......... To be intentionally defensive means that whatever we might miss here is an intentional miss. Even during the recent bubble, the preponderance of market gains occurred in periods of favorable valuations, favorable internals, or both. We’ve made our adaptations in this bubble, and we’re comfortable maintaining our discipline, in the knowledge that even the most extreme market conditions are impermanent. As Jeremy Grantham recently observed, “This is where you start bear markets from.”



Vids of the Week:

Bad data & bad policy will force the Fed to scramble to cut rates


Exhausted consumers are "Spent Up & Lent Up", so economy will slow




Quotes of the Week:

Knausgard: Good decisions are based on experience and experience is based on past bad decisions. This is the basic algorithm of learning. Our mistakes have a didactic value and the bigger they are, the more learning power they contain (the more severe the consequences, the more likely we will internalize their message)


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(not just) for the ESG crowd:

"I'd make this the lead story in every paper and newscast on the planet," said Bill McKibben. "If we don't understand the depth of the climate crisis, we will not act in time."

The average monthly concentration of carbon dioxide in the atmosphere jumped by a record 4.7 parts per million between March 2023 and March 2024, according to new data from NOAA's Mauna Loa Observatory in Hawaii. ..........




Turning nature into currency is a plan to resurrect the imperial heyday


A trip to the Beijing Auto Show reveals just how advanced China's EVs are. So what are the so-called "foreign" automakers doing about it?



Geopolitical Fare:

Life sentences for speech? Pre-crime detention? Ex post facto law? Anonymous accusers? It's all in Justin Trudeau's "Online Harms Bill," a true "threat to democracy"

......... There was little initial uproar. What could be wrong with increasing child safety, or “protecting the vulnerable”?

Then people read the bill.

“If you look at the purpose of this law, it’s actually quite noble and most lawyers would agree with it,” says Canadian attorney Dan Freiheit. “Online safety, protecting children’s physical and mental health.” But the actual text?

“It’s wild,” Freheit says.

Trudeau was lying when he said C-63 was “very, very specifically focused on correcting kids.” The purview of the Online Harms Act extends far beyond speech, reimagining society as a mandated social engineering project, creating transformational new procedures that would: ...................

Things you’re saying, things you’ve already said, things an administrative judge thinks you might say, all barred, with neighbors deputized as enforcers? Good times. Leave it to Trudeau, a frequent trailblazer in new forms of illiberalism in the digital age, to come up with this quantum leap downward on the rights front. C-63 is a Frankenstein’s Monster combining the worst censorship ideas already deployed by supposed ally government-in-laws like Europe’s Digital Services Act, Australia’s updated Australian Communications and Media Authority Act (ACMA), and Scotland’s Hate Crime and Public Order Act, which saw 7,152 complaints in its first week when the law took effect last month. ..............


An Opportune Time For System Change?


Fascism is a monster born of capitalist parents. It came as the end-product of centuries of capitalist bestiality, exploitation, domination, and racism. (Walter Rodney)

......... WWII is a perfect example. It left us with long-lasting collective memory and powerful images which have been both didactic and traumatic. Mankind has discovered deep and disturbing secrets about itself which took years to digest and internalize leading to distorted lessons and incomplete conclusions.

Eighty years have elapsed. We have enjoyed an unprecedented period of peace and prosperity, but, despite substantial temporal distance, powerful collective memory of the trauma remains. Fascism has become a metaphor that condenses all aspects of that experience. However, by giving way to that metaphor, its essence has been lost leaving us without power to recognize its core. In the meantime, neoliberalism has created a fertile ground for fascism to flourish and has delivered people into its hands. Populist leaders have harvested the growing libidinal surplus of the forgotten white worker, the unintended victim of neoliberalism, as the newcomer to the ranks of excess population. Now, more than ever before, confronted with new political realities, we are talking again about WWII and its origins, in an attempt to grasp what happened and how and extract new lessons and guidance. Despite the privilege of hindsight, today we seem to be in no better position than a 100 years ago, blind to the warning signs of fascism. Due to decades of its pathologizing we have lost sight of its true nature and have been late to recognize the reality of its present tide. .................

Fascist ideology is not simply an instrument of deception, but a fragment of an old and romantic antagonism to capitalism derived from deprivations in contemporary life with a longing for a vague “other”.  ..........

Fascism is an elite solution to the organic crisis of a profit regime confronted by the threat of organized class struggle amid the vacillations of an imperialist order ...................................

People fall for fascism for the same reason they fall for other fraudulent financial schemes. When free money is offered or quick fixes promised, we don’t ask for a rationale, we take it. Fascism’s appeal is fueled by people’s inability to understand the laws of probability and likelihood of realization of false promises. Capitalism creates desperation and victims who are ready to embrace fraudulent promises in the absence of real solutions, and as long as there is capitalism, there will be fascist movements and uprisings. We will never be able to eradicate it. If properly diagnosed on time, we will only be able to downgrade it to temporary and manageable outbursts. This is the best outcome we can achieve. .......



......................... The war regime is also evident in the militarization of the social field. Sometimes this takes the explicit form of suppressing dissent and rallying around the flag. But it also manifests in a more general attempt to reinforce obedience to authority at multiple social levels. ...................

The emergent war regime is also visible in the seeming paradox regarding the continual failures of recent hegemonic war campaigns. For at least a half century now, the US military, despite being the most lavishly funded and technologically advanced fighting force on the planet, has done nothing but lose wars, from Vietnam to Afghanistan and Iraq. The symbol of such failure is the military helicopter carrying off the last remaining American personnel, leaving a devastated landscape in its wake. Why does such a powerful war machine keep failing? One obvious answer is that the United States is no longer the imperialist hegemon that some still believe it to be. Yet this dynamic of failure also discloses the overarching global power structure that such conflicts help to sustain. Here it is worth recalling Foucault’s work on the perpetual failures of the prison to accomplish its stated goals. Since its inception, he remarks, the penitentiary system, ostensibly dedicated to correcting and transforming criminal behaviours, has repeatedly done the opposite: increasing recidivism, turning offenders into delinquents and so on. ‘Perhaps’, he suggests, ‘one should reverse the problem and ask oneself what is served by the failure of the prison . . . Perhaps one should look for what is hidden beneath the apparent cynicism of the penal institution.’ In this case, too, we should reverse the problem and ask what is served by the failures of the war machine – what is hidden beneath its apparent aims. What we discover when we do so is not a cabal of military and political leaders plotting behind closed doors. It is rather what Foucault would call a governance project. The incessant parade of armed confrontations, large and small, serve to prop up a militarized governance structure that takes different forms in different places, and is guided by a multi-level structure of forces, including the dominant nation-states, the supranational institutions and competing sectors of capital, which sometimes align and sometimes conflict.

The intimate relation between war and circuits of capital is nothing new. .........



"And they’ll say that we are disturbing the peace. There is no peace. What bothers them is that we are disturbing the war."
Howard Zinn, Boston Common, 1971.



How could they do this to us? Why does Kiev want to destroy us?

These are the questions that the people of Donbas have been asking themselves for the past 10 years. Considered from Switzerland or France, they may seem incongruous, as we are so used to believing that only Ukrainians are suffering from the war with Russia. We don't want to know that the battle has been going on for a decade and has primarily affected the civilian population of Donbas. .........


Read an Open Letter From Scholars and Professors Across the Country


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Sci Fare:




Other Fare:

In a world without seams, things falls apart


Inmates do billions of dollars of work for companies and governments each year. A landmark lawsuit alleges many are being kept in prison because the business is just too good.


Part one, "Truest Crime." From a series by E.R. doctor Matt Bivens

............................. Things got so bad that when heroin (diacetylmorphine) arrived, it was welcomed as an improvement. Chemists had discovered it decades earlier, but in 1898 the pharmaceutical company Bayer started selling it as Heroisch, German for “heroic.” 

Heroin was a trade name. It was Heroin™ — brought to you by Bayer! 

Doctors desperate for something safer than morphine often convinced themselves this new drug wasn’t addictive. ..............

Ordinary Americans weren’t buying it, and by 1906 we had established the federal Food & Drug Administration, because moms want to know if it’s got heroin. Cure-alls like the morphine-and-alcohol-based Mrs. Winslow’s Soothing Syrup definitely did quiet fussy babies, but it’s believed thousands never woke up again. .........

That should have been peak “Opioid Crisis.” But it was only 2007. Heck, George W. Bush was still president. The Sacklers were never contrite. They’d been raking in about $1 billion a year for more than a decade. The $600 million fine sounded impressive — but the Sacklers shrugged, cut the government in to the tune of less than 5% of the cash rolling in, and got right back to slinging opioids. And in the 17 years since, everything has gotten terribly worse. ........

Pondering these massive new settlements, I remember thinking, “Walmart? Johnson & Johnson? Surely some innocents have been caught up in an indiscriminate dragnet?”

Wrong. Don’t look into this if you don’t want to know. Like competitive bicyclists, many had lined up to slipstream behind Purdue Pharma and its deranged, anti-social marketing of OxyContin®. Perhaps none of those other corporations would have dared try to convince physicians and nurse practitioners to hand out opioids like candy. But the Sacklers dared and met with success — instant success, shocking success, in perhaps the most shameful episode in the history of medicine. 

The other companies might have been surprised, but they all fell eagerly in line behind. ............

But wait long enough, and Big Pharma always wins. Amoral, soulless corporations — often the same ones paying out massive settlements — have maneuvered skillfully to reassert control over the addiction market they’ve created. ........




Paul Cooper's hit podcast is now a book. He talks to Middle East Eye about the decline and fall of empires both ancient and modern



Satirical Fare:


An extreme geomagnetic storm hit Earth for the first time in over 20 years, causing stunning aurora displays across northern Europe and very low latitudes in the U.S.

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