2019-11-25 Charts and Links

Global Debt To Hit All Time High $255 Trillion, 330% Of World GDP.
Bank of America's Michael Hartnett on Friday calculated that since the collapse of Lehman, government debt has increased by $30tn, corporates debt by $25tn, household by $9tn, and financial debt by $2tn; And with central banks expected to support government debt, BofA warns that "the biggest recession risk is disorderly rise in credit spreads & corporate deleveraging."

Is There a Threat of a New Global Economic Crisis?
The unprecedented debt load of major economies, like the United States, China and the EU is fraught with a disastrous threat for the entire world. This could lead to a disaster that will by far exceed the Great Depression if deleverage starts, Valdai Club expert Alexander Losev warns. … despite the unprecedented growth of world debt in the past ten years after the 2008 crisis, investment activity in the real economy is declining, growth in the world economy and international trade is slowing and the risk of a global recession is on the rise. The accumulated aggregate debt is becoming a real threat to the stability of the global financial system.

Here's The Simple Reason Why A Global Economic Recovery Is Not Coming.
But has the global economy indeed troughed, and is a period of smooth sailing ahead? The answer will depend, as it traditionally has in the past decade, on whether China will stimulate both its own, and the global economy to the point where it successfully triggers a global inflationary shockwave around the globe. Unfortunately, the answer for now appears to be a resounding no, and not just as a result of the latest leading economic indicators out of China which missed across the board, confirming that Beijing is bracing for the first ever sub-6% GDP print. As Saxo Bank's Christopher Dembik writes, there is another reason why China will not open massively the credit tap anytime soon. But before we get into his argument, as a reminder, the latest Chinese credit data was a disaster, with the revised Aggregate Financing data series printing at its lowest level on record as we discussed in "China's Credit Creation Unexpectedly Collapses At The Worst Possible Time."


Why China's Growth Rate Is Much, Much Lower Than You Think. 

Fathom's China Momentum Indicator Signals More Downside Ahead



Michael Pettis, via Mish: China, like Japan in the 1990s, Will Be Dominated by Huge Zombie Banks.

China needs to prepare for zero interest rates.

Visualizing The Simple Reason Why America Will Drown In Deflation.



World Trade Barometer Suggests Global Economy Continues To Plunge As Trade War Takes Toll.




Rail Recession: U.S. Carloads Continue Collapse As Manufacturing Slows.

Couple charts from GS from: 

Here Are Goldman's Top Trades And Themes For 2020.
Wage growth is picking up… from repressed levels back to normal

Seeing as I brought up the topic of the (misleading) savings rate recently:
Why The Measure Of “Savings” Is Entirely Wrong. The reality is the measure of “personal savings,” as calculated by the Bureau of Economic Analysis, is grossly inaccurate. However, to know why such is the case, we need to understand how the savings rate is calculated….
The differential between incomes and the actual “cost of living” is quite substantial. As Researchers at Purdue University found, in the U.S., $132,000 was found to be the optimal income for “feeling” happy for raising a family of four. A Gallup survey found it required $58,000 to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”)

The “gap” between the “standard of living” and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2654 annual deficit that cannot be filled.


That gap explains why consumer debt is at historic highs and growing each year. If individuals were saving 8% of their money every year (as per the phony US personal savings rate), debt balances would at least be flat, if not declining, as they are paid off.


Consumers Are Keeping The US Out Of Recession? Don’t Count On It.

Fed's "National Activity Index" Plunges To 2-Year Low.

DB charts, Global light vehicle sales, etc.:

(Not just) for the ESG crowd:

Brookfield markets new green bond in Canada, sets sights on Brazil and India.

Climate-proofing Canada’s economy.

There is no denying that climate change is now a mainstream issue, as evidenced by vigorous debates in the recent federal election. While governments are struggling to come up with public-policy responses, global investors and financial institutions are not standing around. The investment world is already shaping markets in response to the effects of climate change.

Lewis Lapham in Lapham’s Quarterly: Paying the Piper.

The warming of the planet currently spread across seven continents, four oceans, and twenty-four time zones is the product of a fossil-fueled capitalist economy that over the past two hundred years has stuffed the world with riches beyond the wit of man to marvel at or measure. The wealth of nations comes at a steep price—typhoons in the Philippine Sea, Category 5 hurricanes in the Caribbean, massive flooding in Kansas and Uttar Pradesh, forests disappearing in Sumatra and Brazil, unbearable heat in Paris, uncontrollable wildfires in California, unbreathable air in Mexico City and Beijing.

The capitalist dynamic is both cause of our prosperous good fortune and means of our probable destruction, the damage in large part the work of Adam Smith’s invisible hand, guided by the belief that money buys the future. Nature doesn’t take checks. Who then pays the piper—does capitalism survive climate change, or does a changed climate put an end to capitalism? The question informs this issue of Lapham’s Quarterly…

Steve Keen: ‘4°C of global warming is optimal’ – even Nobel Prize winners are getting things catastrophically wrong.

William Nordhaus was awarded the 2018 Nobel Prize in Economics for “integrating climate change into long-run macroeconomic analysis”. This implies that he worked out what global heating means for our economy, given what climate scientists say will happen to our planet. But Nordhaus’s predictions of what global heating will cost the earth are dangerously at odds with the science. In his Nobel Prize lecture, Nordhaus described a 4°C increase in global average temperature as “optimal” — that is, the point at which the costs and benefits of mitigating climate change are balanced. In a subsequent academic paper based on this lecture, he stated that “damages are estimated to be 2 percent of output at a 3°C global warming and 8 percent of output with 6°C warming”. This is a trivial level of damage, equivalent for the 6°C warming case to a fall in the rate of economic growth over the next century of less than 0.1% per year. …. The average global temperature during the last Ice Age was 4°C cooler than today. There’s no way we can accurately predict what GDP would be in such a cool world today, but we know that most of Europe north of Berlin, and of America north of New York, would be under a kilometre of ice. To argue that this would cut GDP by just 3.6% is simply absurd.

Climate Change Is Coming for Global Trade. As sea levels rise and storms become fiercer, container shipping could be in for major disruptions

Ford’s Mustang Mach-E is an electric SUV with up to 300 miles of range. (Starting at US$43,895 and coming in late 2020)



Geopolitics

Ian Bremmer: The End of the American International Order: What Comes Next?

This is the text of a speech delivered by Bremmer on November 18 at the 2019 GZERO Summit in Tokyo.

Bound to Fail: The Rise and Fall of the Liberal International Order. Journal of International Security.

The liberal international order, erected after the Cold War, was crumbling by 2019. It was flawed from the start and thus destined to fail. The spread of liberal democracy around the globe—essential for building that order—faced strong resistance because of nationalism, which emphasizes self-determination. Some targeted states also resisted U.S. efforts to promote liberal democracy for security-related reasons. Additionally, problems arose because a liberal order calls for states to delegate substantial decision-making authority to international institutions and to allow refugees and immigrants to move easily across borders. Modern nation-states privilege sovereignty and national identity, however, which guarantees trouble when institutions become powerful and borders porous. Furthermore, the hyperglobalization that is integral to the liberal order creates economic problems among the lower and middle classes within the liberal democracies, fueling a backlash against that order. Finally, the liberal order accelerated China’s rise, which helped transform the system from unipolar to multipolar. A liberal international order is possible only in unipolarity. The new multipolar world will feature three realist orders: a thin international order that facilitates cooperation, and two bounded orders—one dominated by China, the other by the United States—poised for waging security competition between them.

Other Fare:

Blockbuster WSJ Investigation: How Google Interferes With Its Search Algorithms and Changes Your Results.



Book Review:

David Graeber: Against Economics – reviews Robert Skidelsky’s Money and Government: The Past and Future of Economics.

There is a growing feeling, among those who have the responsibility of managing large economies, that the discipline of economics is no longer fit for purpose. It is beginning to look like a science designed to solve problems that no longer exist. A good example is the obsession with inflation. Economists still teach their students that the primary economic role of government—many would insist, its only really proper economic role—is to guarantee price stability. We must be constantly vigilant over the dangers of inflation. For governments to simply print money is therefore inherently sinful. If, however, inflation is kept at bay through the coordinated action of government and central bankers, the market should find its “natural rate of unemployment,” and investors, taking advantage of clear price signals, should be able to ensure healthy growth. These assumptions came with the monetarism of the 1980s, the idea that government should restrict itself to managing the money supply, and by the 1990s had come to be accepted as such elementary common sense that pretty much all political debate had to set out from a ritual acknowledgment of the perils of government spending. This continues to be the case, despite the fact that, since the 2008 recession, central banks have been printing money frantically in an attempt to create inflation and compel the rich to do something useful with their money, and have been largely unsuccessful in both endeavors. 

We now live in a different economic universe than we did before the crash. Falling unemployment no longer drives up wages. Printing money does not cause inflation. Yet the language of public debate, and the wisdom conveyed in economic textbooks, remain almost entirely unchanged.

One expects a certain institutional lag. Mainstream economists nowadays might not be particularly good at predicting financial crashes, facilitating general prosperity, or coming up with models for preventing climate change, but when it comes to establishing themselves in positions of intellectual authority, unaffected by such failings, their success is unparalleled. One would have to look at the history of religions to find anything like it. To this day, economics continues to be taught not as a story of arguments—not, like any other social science, as a welter of often warring theoretical perspectives—but rather as something more like physics, the gradual realization of universal, unimpeachable mathematical truths. “Heterodox” theories of economics do, of course, exist, but their exponents have been almost completely locked out of what are considered “serious” departments, and even outright rebellions by economics students (from the post-autistic economics movement in France to post-crash economics in Britain) have largely failed to force them into the core curriculum.

As a result, heterodox economists continue to be treated as just a step or two away from crackpots, despite the fact that they often have a much better record of predicting real-world economic events. What’s more, the basic psychological assumptions on which mainstream (neoclassical) economics is based—though they have long since been disproved by actual psychologists—have colonized the academy, and have had a profound impact on popular understandings of the world.

Nowhere is this divide between public debate and economic reality more dramatic than in Britain, which is perhaps why it appears to be the first country where something is beginning to crack. It was center-left New Labour that presided over the pre-crash bubble, and voters’ throw-the-bastards-out reaction brought a series of Conservative governments that soon discovered that a rhetoric of austerity—the Churchillian evocation of common sacrifice for the public good—played well with the British public, allowing them to win broad popular acceptance for policies designed to pare down what little remained of the British welfare state and redistribute resources upward, toward the rich. “There is no magic money tree,” as Theresa May put it during the snap election of 2017—virtually the only memorable line from one of the most lackluster campaigns in British history. The phrase has been repeated endlessly in the media, whenever someone asks why the UK is the only country in Western Europe that charges university tuition, or whether it is really necessary to have quite so many people sleeping on the streets.

The truly extraordinary thing about May’s phrase is that it isn’t true. There are plenty of magic money trees in Britain, as there are in any developed economy. They are called “banks.” Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way. Not only is the public largely unaware of this, but a recent survey by the British research group Positive Money discovered that an astounding 85 percent of members of Parliament had no idea where money really came from (most appeared to be under the impression that it was produced by the Royal Mint).

Quotes of the Week:

Rubino: “Every sector of the U.S. economy is so over indebted I don’t see how we go on much longer. The Fed is desperately trying to prolong this thing. We’re running trillion dollar deficits now, and what that is for is to keep the system from falling apart. We are 11 years into an expansion, a record. This is the longest bull market in history, and this is the longest economic expansion in history… These guys don’t know exactly what’s going to happen in the next recession, but they are afraid that the system is so highly leveraged that even a garden-variety three quarters of a percent of negative growth and a garden variety of 20 % drop in stock prices might be fatal. The system might not be able to handle that because it would cause so much damage and there are so many different places that can blow up that the system would spin out of control. We would get 2008-09 again but on steroids because the numbers are so much bigger this time around. So, they want to avoid that at all costs.”


US AG William Barr: “in waging a scorched earth, no-holds-barred war of ‘Resistance’ against this Administration, it is the Left that is engaged in the systematic shredding of norms and the undermining of the rule of law.”

… much more on Adam Schiff’s and the Democrats’ Orwellian “campaign to blow smoke up America’s ass for three years running” by JHK here, and more on our Pravda-like B.S. media’s inane coverage or our insane world by Johnstone here, in which politicians and the media “use a light sprinkling of fact to weave a narrative that has very little to do with reality”


Photo of the Week:
Hope we don’t have any “Black Swans” coming, because they are fierce-looking!

Totally Unrelated – Catchy Headlines; just checking if you’re reading these:

Pointless work meetings 'really a form of therapy'.

Cops put GPS tracker on man’s car, charge him with theft for removing it.

They Can't Stop Us:' People Are Having Sex With 3D Avatars of Their Exes and Celebrities.

2019-11-18 Charts and Links

Here's What To Expect From Fed Chair Powell Today. zerohedge. Nov. 13, 2019.

Key Takeaways from Powell's Prepared Remarks (via Bloomberg)

1. The Fed chairman says the current stance of monetary policy is “likely to remain appropriate” as long as the economy remains on track for moderate growth
2. In a dovish note he adds: “Sluggish growth abroad and trade developments have weighed on the economy and pose ongoing risks,” and inflation pressures “remain muted”
3. Powell’s outlook remains positive; “My colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely”

Bank Of America: Stocks Are The Most Expensive Since The Jan 2018 Meltup "But There Is No Alternative"

Must Read: 
A Striking Collection of Duck-Like Features. …as usual with Hussman, I recommend reading the whole thing; lotsa gems; this is just an appetizer:

“Are stocks in a bull market? Are stocks in a bear market? The answer isn’t actually observable in real-time. As I’ve noted for decades, bull markets and bear markets exist only in hindsight. When will the bull market end? It might have ended Friday. I kind of think it did. But that question is irrelevant to our investment outlook, because our outlook is a reflection of current, observable evidence. We choose our actions based on the conditions we observe, and the range of outcomes that have historically followed. No future-looking labels are necessary. We also pay special attention to features that tend to emerge – usually as a collection – at the most extreme points of opportunity or risk. The goal isn’t so much to forecast future conditions but instead to identify present ones: to gather observable evidence, to insist on knowing how that evidence has been associated with actual subsequent outcomes, and to align our investment stance with the “distribution” of likely opportunities or risks, understanding that the outcome in this particular instance is unknowable ….

Below is a version of a chart I shared last year. In hindsight, the large collection of duck-like features we observed the week of September 21, 2018 was immediately followed by a -19.8% swoon into year-end. As I observed at the time: “The only time we’ve ever seen a confluence of risk factors anywhere close to those of today was the week of March 24, 2000, which marked the peak of the technology bubble. In my view, this sort of analysis is useful because it doesn’t rely on any single risk factor, and emphasizes that while these risk factors can emerge individually without consequence, a large and critical mass of them probably shouldn’t be dismissed. My impression is that this is as close as one gets to ringing a bell at the top.” We observed an equivalent extreme last week (ended Friday, November 8, 2019). While this is again as close as one gets to a duck, we can’t know until later whether it’s actually a duck. All we can say with confidence is that current, observable market conditions present us with a striking collection of duck-like features.”

Technically Speaking: A Correction Is Coming, Just Don’t Tell The Bulls…Yet.

Q4 GDP Crashes: US Economy Growing At Slowest Pace In 4 Years.

(MW: Okay, its kinda early to be saying this, but:)

Following a burst of poor US economic data, including today's disappointing retail sales and dismal industrial production, the US economic surprise index has slipped back into the negative after peaking in late September.

                                                                        

Household debt climbs to record high, delinquencies rise. (lotsa charts at link) 

The "Oh, $hit!" Moment For Subprime Auto Loans Arrives; Serious Delinquencies Blow Out.

 

Bank lending, UK, China, India. (charts at the link)

India's Factory Output And Electricity Demand Plunge To Decade Lows Amid Economic Downturn.

CLO Slump Sparks Warning: "There's More Volatility Coming". (see the chart at link of monthly returns of BB CLO bonds… October, ouch)


The Long Read:
History as a giant data set: how analysing the past could help save the future. The Guardian.

Calculating the patterns and cycles of the past could lead us to a better understanding of history. Could it also help us prevent a looming crisis? 

(not just) for the ESG crowd: 

Ben Hunt: The Rake

1) Require by law that the board Chair of publicly traded companies may not also be the CEO. [and if you really want to get serious about this, require that the board Chair be an independent director]

2) Require by law that board directors may only receive cash compensation for their services and are not eligible for any form of stock-based compensation.

3) Require by law that board directors may not exercise any form of previously granted stock-based compensation while they serve on the board.

Do these proposals go far enough? I don’t think so. But they’re a start.

Morgan Stanley: Decarbonization: The Race to Net Zero.

Morgan Stanley produced a Sustainability report in October called Decarbonization: The Race to Net Zero -- it has sections on Renewables; EVs; CCS; Hydrogen; and Biofuels; followed by economics consequences of climate change (low-balled / understated ... if a report doesn't acknowledge the potential economic loss by 2100 is infinite, then it doesn't understand the science ... yes, I'm serious, and so are the scientists -- even if the IPCC, a political body, doesn’t say so); implications for coal/oil/gas (also under-stated, b/c (a) what big US bank is going to piss off its big-time energy clients, and b/c of (b) my last point, i.e. that if we don't keep most of the oil in the soil, we're toast -- if you don't want to believe me, and who does, feel free to check out all the research I've collected on my other blog re: positive feedback effects, tipping points, irreversibilities and abrupt climate change --- particularly re the release of undersea and permafrost methane); green financing; and a just transition(?)

‘Profound shifts’ underway in energy system, says IEA World Energy Outlook. Carbon Brief.

The world’s CO2 emissions are set to continue rising for decades unless there is greater ambition on climate change, despite the “profound shifts” already underway in the global energy system.

It’s too late for a carbon tax—it’s time for a world war against climate change. Adele Peters, Fast Company. Nov. 4, 2019.

“The reality is that we have zero years and we have to change all of our infrastructure.”

Aronoff: We Need a Green Bailout for the People.

Book review:

Yanis Varoufakis: Good Economics for Hard Times by Abhijit V Banerjee and Esther Duflo review – methodical deconstruction of fake facts

Good Economics for Hard Times is the latest attempt by economists to defend their profession. It is, happily, an excellent antidote to the most dangerous forms of economics bashing: the efforts of opportunistic politicians to weaponise discontent with mainstream politics and to press it into the service of a xenophobic ideology that denies facts and serves the interests of a nativist, global oligarchy.

The book’s authors, MIT economists Abhijit Banerjee and Esther Duflo, write beautifully and are in full command of their subject. They examine the most crucial issues humanity faces (migration, trade wars, the scourge of inequality, climate catastrophe) with a combination of humility over what economics cannot tell us and pride over its contributions to our limited understanding. On every page, they seek to shed much-needed light upon the distortions that bad economics bring to public debates while methodically deconstructing their false assumptions. In their words, the book’s noble, urgent task is “to emphasise that there are no iron laws of economics keeping us from building a more humane world”.

Serendipity would have it that even as Good Economics… was still in the pipeline Banerjee and Duflo, who are also partners in life, were awarded (with Michael Kremer) this year’s Nobel prize in economics. It was an inspired choice. Unlike previous winners, mostly older white males whose grand theories are built upon mathematics of dizzying complexity, they have made a name for themselves by studying the circumstances of the world’s poorest people.

….

in Good Economics…, the plentiful facts do not go far enough in exposing the deeper causes of our current predicament. …. Every book as important as this one must include a theory of change: how shall we use its insights to bring about a more humane world? Banerjee and Duflo’s offering is enlightened selfishness by the rich, and razor-sharp analysis that is disseminated to the public. This is unconvincing, but it could not be otherwise. To provide a persuasive progressive policy agenda at a time when the usual fixes (quantitative easing, taxation) no longer work, the roots of capitalism’s stagnation and flirtation with climate catastrophe must come to the surface. It is a remarkable sign of the times that, as my friend the philosopher Slavoj Žižek once said, even the brightest minds would rather fathom the end of the world than plan for the demise of capitalism. Perhaps the greatest contribution of Good Economics… is precisely this: it demonstrates both the brilliant insights that mainstream economics can make available to us and its limits, which a progressive internationalism has a duty to transcend.

Quote(s) of the Week:

“Tyler Durden”:

"The fact that Dennis Gartman - the most successfully contrarian indicator in the history of capital markets - on Tuesday repeated the now traditional Treasury bear gibberish, that "the case can be made that the three decade long bull run in 30 Year Treasuries has run its course to the end", only gave us certainty that the Treasury selloff is now over."

Bill Mitchell:

“One of the stark facts about the academic economics discipline is its insularity and capacity to deliver influential prognoses on issues that affect the well-being of millions with scant regard to the actual consequences of their opinions and with little attention to what other social scientists have to say. The mainstream economists continually get things wrong but take no responsibility for the damage they cause to the well-being of the people”

JFK (to James Tobin):

“Is there any economic limit to the deficit? I know of course about the political limits. People say you can’t increase the national debt too fast or too much. We’re always answering that the debt isn’t growing relative to national income. But is there any economic limit to size of the debt in relation to national income? There isn’t is there? Well, what is the limit?” – Tobin said the only limit is really inflation – JFK: “That’s right, isn’t it? The deficit can be any size, the debt can be any size, provided they don’t cause inflation. Everything else is just talk.”

Lars Syll: 

There are “difficulties encountered by heterodox thinkers. Orthodox thinkers share a dogma, or at least a set of a priori assumptions, and usually a methodology. In essence, this makes orthodox thinking an echo chamber where basic ontology is never questioned. When the heterodox argue, as in the economically heterodox here, the argument eventually descends (or ascends?) into metaphysics; into ontology and epistemology. This is both the benefit and drawback of thinking and arguing from any kind of heterodox position. While we are all drawn here by our rejection of orthodox economics, each of us has a particular perspective. That perspective is drawn from our enculteration and areas of study. That perspective is a kind of filter through which we see and interpret the world. Our only commonality appears to be a rejection of orthodox economics…. After rejecting orthodox economics, which unavoidably involves critiquing and rejecting its patently fallacious ontology, we are faced with the task of constructing a new ontology suitable for modern political economy. It’s not an easy task and there will be many disagreements on perspective. There are two keys in my view. Empiricism is one. “It is a fundamental part of the scientific method that all hypotheses and theories must be tested against observations of the natural world rather than resting solely on a priori reasoning, intuition, or revelation.” ”

Lisa Duggan:

“We are in the midst of a major global, political, economic, social and cultural transition—but we don’t know which way we’re headed”

As quoted by Chris Hedges, who also said:

“The corporate coup orchestrated by the ruling oligarchs over the past few decades gave us Donald Trump. If this coup is not reversed, far worse will follow. The oligarchs are the last to understand the consequences of their moral depravity.”

Followed by:

“Oligarchs, freed from outside oversight and regulation, wantonly pillage the political and economic institutions that sustain them. They run up huge government deficits by slashing taxes on the rich. This forces an underfunded government to borrow from the banks, further enriching the oligarchs, and impose punishing austerity programs on the public. They privatize traditional government services, including utilities, intelligence gathering, large parts of the military, the police, the prison system and schools to make billions in profits. They create complex financial mechanisms that ensure usurious interest rates on mortgages, personal and student loans. They legalize accounting fraud and suppress wages to keep the public trapped in a crippling debt peonage. They loot trillions in taxpayer money when their speculative bubbles burst. They are no longer capitalists, if we define capitalists as those who make money from the means of production. They are a criminal class of financial speculators that rewrite the laws to steal from everyone, including their own shareholders. They are parasites that feed off the carcass of industrial capitalism. They produce nothing. They make nothing. They manipulate money. And this gaming of the system and seizure of political power by finance capital is why the wealthiest 1% of America’s families control 40% of the nation’s wealth.”

Which reminded me of Robert A. Heinlein, in Stranger in a Strange Land.

“Government! Three-fourths parasitic and the rest stupid fumbling.”

Photo of the Week:

“A cheetah has given birth to a giant litter of seven adorable cubs… In the wild cheetahs usually give birth to three to five young, and they are vulnerable to predators from birth, so to see seven siblings together is very unusual.”

2019-11-11 Charts and Links

Global debt surges to record high $188 tn: IMF chief.

Ray Dalio: The World Has Gone Mad, and the System is Broken.

I say these things because:
Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes). As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish. Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations. Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power.

How Much Higher Can Yields Rise Before Stocks Get Slammed? Marko Kolanovic Answers. 

"Not QE", Monetization, & "Definitely Asset Inflation"

The chart below shows the Federal Reserve holdings of Treasuries, a weekly change (black columns) and total holdings (red line) during QE1, QE2, Operation Twist, QE3, QT, and "Not QE". Got it?!? This current "Not QE" explosion in QE is like some kind of old time vaudeville act (like the old Abbott and Costello bit, "who's on first, what's on second, I don't know's on third"). … As the Fed restarted "not QE" but did not go through the façade of attempting to stock the new money away as "excess reserves", this new money is flowing straight into assets, like monetary heroine.

Who Needs Graham & Dodd When We Have 'Quantitative' & 'Easing'?



The Recession In The Auto Industry Is Tanking The Global Economy.

The global economy continues to grind to a halt and the culprit has never been clearer: the auto industry. For the better part of almost 2 years now, we have been reporting monthly on marked slowdowns in key auto markets like China, North America and Europe. Now, the slowdown in this massive industry is what’s helping spur an overall global economic slowdown, according to FT. The reaches of the auto market go deep, with long supply chains and large consumption of raw materials, textiles, chemicals and electronics. The industry is home to millions of jobs and last year, the sector shrank for the first time since the global financial crisis. The IMF is estimating that this fall in output accounted for more than 25% of the slowdown in the global economy between 2017 and 2018.

Decline in Profit Margins and Investment Suggests Recession Due Now. 

Charts from Albert Edwards via Mike Shedlock 

Nevins: Where Is That Confounded Recession?

“All Big-3 precursors considered, the near-term outlook is weaker than normal but not yet recessionary—the expansion appears to have enough policy support, spending capacity growth and overall momentum to continue through at least the first quarter or two of 2020.

Deeper into the year, the outlook could darken as many forecasters predict, especially if corporate earnings continue to slide. But we could just as easily see more of the same—an economy that grinds slowly higher as real incomes grow, asset prices trend upwards and bank balance sheets expand. To gauge which of the scenarios is becoming more likely, I suggest watching the Big-3 and tuning out most everything else.”

China's Credit Creation Unexpectedly Collapses At The Worst Possible Time. 

Roiled Repo Markets: Looking for Answers in All the Wrong Places

“Even though this is a finance and economics blog, I haven’t written about the disruption in the repo markets. That is in part because the upset is not in any way, shape, or form like the 2008 period when banks were unwilling to repo even Treasuries to each other overnight because they were fearful another major dealer (say Morgan Stanley, which was on the verge of going tits up) would go the way of Lehman. I thought posting on it would feed the false narrative (which sadly is still kicking around) that the repo crunch is a sign of systemic stress, which it isn’t. The second reason is that pretty much no one seems to have a clue as to why this is happening including most troublingly, the Fed. Perversely, the fact that the Fed is so clearly behind the curve is almost certain to make whatever the underlying problems are worse. Flatfooted central banks waking up to a problem and randomly hitting switches to try to make it go away is not only not a good look, but it makes the Confidence Fairy have a sad, which makes market upsets worse.

We’ll give a high level review of some of the major theories and why they don’t add up (and worse, look like special pleading by banks for regulatory breaks they don’t need) and will turn to an idea from John Dizard of the Financial. Dizard argues that the big banks even with the apparent repo crisis make more money lending to the FX swaps market. This is consistent with big fish like JP Morgan’s Jamie Dimon whining about regulation rather than sounding at all worried.

Mind you, we are not saying there are not problems here. What we are questioning is whether they are being characterized properly and whether they could become systemic. If Dizard is right, and Dizard is reviving and amplifying concerns raised by the Bank of International Settlements two years ago, the problem is in FX swaps and forwards, which amount to dollar lending but unlike repos, aren’t booked on balance sheet. That means that this area is a big blind spot for central banks; ….

Long-term trends in employment by age group. 

Global income growth and inequality, 1980-2016. 

Organic Collapse In Money Supply Supplanted By Synthetic Growth = Centrally Directed Melt-Up. 

Simply put, in our fractional reserve banking system, the bulk of "money" in the economy is lent into existence by a rising quantity of loans. But the data is clear that those who undertake new loans (create new money) will be in indefinite decline, while roughly equally and oppositely, those that pay down or pay off existing loans (destroy existing money) will take their place. …

Thus, there are two options to continue growing debt (aka, "money"). Either encourage the continually fewer working age persons among consumer nations to take out ever more debt (via perversely paying borrowers with NIRP or similar to undertake new loans) and/or central banks conjure it from nowhere. ZIRP, NIRP, QE, LTRO, and acronyms yet to be invented will all have the express purpose to destroy assets (purchasing bonds, stocks, etc. that are never to return to the market) and replace them with newly printed "money" which will chase the remaining assets higher. This monetization is to avoid a free-market from pricing assets based upon a declining quantity of buyers and fast increasing quantity of sellers.

It is the progressive and degenerative fundamental weakness (slowing population growth and outright population declines among consumers) that is the premise for ever greater market interference that drives the observed economic and financial market "strength". Of course, the policy of centrally directing asset appreciation has clear winners (a declining quantity of institutions, asset holders, federal governments) and losers (a fast growing quantity of young, poor, working class, and those with few or no assets).

Number of Job Openings Falling Dramatically. 

(read, especially, the “What Does This Mean?” section) 

Trending Down. Tim Morgan, Surplus Energy Economics. 

Ultimately, the economy isn’t, as the established interpretation would have us believe, a financial system at all. Rather, it’s an energy system, driven by the relationship between (a) the amount of energy to which we have access, and (b) the proportion of that energy, known here as ECoE (the Energy Cost of Energy), that is consumed in the access process.

Properly understood, money acts simply as a ‘claim’ on the output of the energy economy, and driving up the aggregate of monetary claims only increases the scope for their elimination in a process of value destruction.

…

My energy-based economic model, the Surplus Energy Economics Data System (SEEDS), is showing a worsening deterioration, and now points to a huge and widening gap between where the economy really is and the narrative being told about it from the increasingly unreal perspective of conventional measurement.

…

we should anticipate a major financial shock, far exceeding anything experienced in 2008 (or at any other time), as a direct result of the widening divergence between soaring financial ‘claims’ and the reality of an energy-driven economy tipping into decline.”

(not just) for the ESG crowd : 

World Scientists’ Warning of a Climate Emergency. 

Exactly 40 years ago, scientists from 50 nations met at the First World Climate Conference and agreed that alarming trends for climate change made it urgently necessary to act. Since then, similar alarms have been made through the 1992 Rio Summit, the 1997 Kyoto Protocol, and the 2015 Paris Agreement, as well as scores of other global assemblies and scientists’ explicit warnings of insufficient progress. Yet greenhouse gas emissions are still rapidly rising, with increasingly damaging effects on the Earth's climate. An immense increase of scale in endeavors to conserve our biosphere is needed to avoid untold suffering due to the climate crisis.

Morgan Stanley: "Climate Will Be A Key Driver Of Asset Prices In The Months And Years Ahead". 

In three weeks, the world's leaders will begin to gather in Madrid for the 25th United Nations Climate Change Conference. The intensity of the global climate strikes this year suggests that the proceedings will be scrutinized as never before. But the decisions made, or not made, will also have repercussions for global markets.

We’re transitioning towards a lower carbon economy, albeit at a slower pace than needed to stay within a two degrees Celsius climate scenario (2DS).

…

If governments are serious about halting climate change, some form of stimulus will be needed.

…

One alternative is to make high-carbon incumbents prohibitively expensive.

…

Until now, the willingness of governments to take steps to halt climate change has been open to question, given the potential implications for inflation, government debt and employment. But we see several reasons why change may come over the next 12 months. Significantly, awareness and concern about climate change among the general population are growing, driven by more frequent extreme weather, media coverage and actions by protest groups.

(Pictured) Quote of the Week 

California Brewery is Printing “Epstein Didn’t Kill Himself” on the Bottom of its Cans. 

2019-11-04 Charts and Links

NBF: Does investment dive point to imminent recession?

“Despite all the recession talk, the U.S. economy continues to expand at a healthy pace. … the U.S. managed to stay out of recession in 2015-2016 despite declines in non-residential investment. And that’s in large part due to resilience of consumption. Considering the persistence of low interest rates, rising disposable incomes (courtesy of a hot labour market), positive housing wealth effects and a healthy household balance sheet, the U.S. consumer is again in a good position to provide a similar offset.”

The Market Soars As Corporate Profits Slump.

Wells Fargo: How Bull Markets End: Investment Strategies to Prepare for the Next Downturn



Pending home sales surprise, biggest annual gain since 2015. 

But, on the other hand, Chicago PMI



Fiscal Policy "Flop": The US Gov't Spent Hundreds Of Billions, And GDP Slowed




A Decade Of Record Deficits Has Led To A Mutant Business Cycle.

Federal budget deficits need to be analyzed nowadays in the context of how much it is propping up the economic growth cycle because after a decade of record federal deficits the current business cycle would ran out of gas without ongoing federal borrowing to support public and private sector spending and activities. The current decade-long business cycle has received unprecedented support from the federal government. For example, in the last 10 years the federal budget deficit averaged $830 billion per year, and the cumulative deficits of the past decade have exceeded the budget deficits in the previous 50 years combined by nearly $2 trillion.

Measured in relation to the Gross Domestic Product (GDP), the annual budget deficit in the past decade averaged 4.8%. That’s the first time in the post war period that during an economic growth cycle the scale of the budget deficit exceeded the annual growth (4%) of nominal GDP.

… It is always difficult to predict what “shock” could trigger the next recession, but the reliance on federal deficits to support public and private spending should draw attention to the structural weakness of the current cycle.

The Economic Crisis of 2008 Did Not End, It Has Been in Remission.

It is the Federal Reserve’s job to keep the economy from contracting too hard. Does that mean keeping stock prices from crashing? I get the sense that there are times when Federal Reserve members take this factor into consideration. But keeping irrational exuberance going at some point becomes a futile endeavor. We can’t just create money out of thin air by pushing stock prices upward. At some point the market insists that prices reflect real value (this is Shiller’s core finding). Pushing prices up is a holding action. Sooner or later we have to accept that fair-value prices will prevail again and that the economic pain that follows from a return to fair-value prices must be endured.

High stock prices are a lie. That’s what I am saying. They are not just a lie that affects stock investors. They are a lie that affects everyone who is living in our economic system. The Pretend Money that is created when stock prices rise above fair-value levels always disappears down the road a bit.

Geopolitics:

Krieger: U.S.-China Relations in the Years Ahead: The Trade War Is a Sideshow

I don’t take the U.S.-China trade war seriously, because I don’t expect a transformative deal to come of it. Specifically, I see the current trade charade as little more than a warmup to a far more serious, unpredictable and dangerous conflict between the U.S. and China in the years ahead.

(MW: I considered including a bunch of excerpts here, b/c I find myself agreeing with all of it; although I admit it is mostly just educated guesswork, it seems not just plausible but very likely to me… worth reading in full)


Kill me now:
With Biden floundering, Democratic establishment considers Clinton and Kerry.


For the ESG crowd:
The explosion in green bonds comes without a premium.

Most fashion brands don’t know enough about their carbon footprints to actually shrink them.


Other fare:
What are the best first lines in fiction?

Quotes of the week
The phenomenon works – until it doesn’t.

What’s astonishing is how long it works.

People do it because it works.

Trading algos are written to replicate it, because it works.

It works on the simple principle: If everyone believes stocks will go up, no matter what the current price or the current situation, or current fundamental data, then stocks will go up. They will go up because there is a lot of buying pressure because everyone believes that everyone believes that prices will go up, and so they bid up prices and chase stocks higher.

“When it comes to Trump you may ask me a question and I’ll give you an answer which might seem strange. 

I tell you he’s the best American president,” Assad said, according to a translation provided by NBC. “Why? Not because his policies are good, but because he is the most transparent president,” Assad continued. “All American presidents commit crimes and end up taking the Nobel Prize and appear as a defender of human rights and the ‘unique’ and ‘brilliant’ American or Western principles. But all they are is a group of criminals who only represent the interests of the American lobbies of large corporations in weapons, oil and others,” he added.

Photo of the week
Kincade Fire