Why Monetary Policy Will Cancel Out Fiscal Policy

Authored by MN Gordon via EconomicPrism.com,

Good cheer has arrived at precisely the perfect moment.  You can really see it.  Record stock prices, stout economic growth, and a GOP tax reform bill to boot.  Has there ever been a more flawless week leading up to Christmas?

We can’t think of one off hand.  And if we could, we wouldn’t let it detract from the present merriment.  Like bellowing out the verses of Joy to the World at a Christmas Eve candlelight service, it sure feels magnificent – don’t it?

The cocktail of record stock prices, robust GDP growth, and reforms to the tax code has the sweet warmth of a glass of spiked eggnog.  Not long ago, if you recall, a Dow Jones Industrial Average above 25,000 was impossible.  Yet somehow, in the blink of an eye, it has moved to just a peppermint stick shy of this momentous milestone – and we’re all rich because of it.

So, too, the United States economy is now growing with the spry energy of Santa’s elves.  According to Commerce Department, U.S. GDP increased in the third quarter at a rate of 3.2 percent.  What’s more, according to the New York Fed’s Nowcast report, and their Data Flow through December 15, U.S. GDP is expanding in the fourth quarter at an annualized rate of 3.98 percent.

Indeed, annualized GDP growth above 3 percent is both remarkable and extraordinary.  Remember, the last time U.S. GDP grew by 3 percent or more for an entire calendar year was 2005.  Several years before the iPhone was invented.

A Cornerstone Promise of the GOP Tax Reform Bill

But despite closing out the year strong, 2017 won’t be the year when annual U.S. GDP growth finally eclipses 3 percent.  By our rough calculations, annual GDP growth for 2017, using the Q4 estimate, comes out to 2.92 percent.  What to make of it…

Certainly, strong GDP growth is a cornerstone promise of the GOP tax reform bill.  Specifically, the promise is that resultant economic growth will pay for the tax cuts.  Yet based on the work of one group of number crunchers, the expectation that the U.S. economy will produce 3 percent economic growth in 2018 is wishful thinking.  The Tax Foundation, an outfit out of Washington, offered the following assessment:

“According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.  In 2018, our model predicts that GDP would be 2.45 percent, compared to baseline growth of 2.01 percent.”

To be clear, we don’t know what assumptions went into the Tax Foundation’s Taxes and Growth Model.  Does it factor in the latent effects of quantitative tightening?  Does it assume a total of 3 Fed rate hikes in 2018?  What about the flattening yield curve?

In short, will tightening credit markets offset any boost that tax cuts are expected to deliver to the economy?  In other words, will monetary policy cancel out fiscal policy?

Most likely it will.  Here’s why…

Why Monetary Policy Will Cancel Out Fiscal Policy

Plain and simple, the entire financial system and economy has become fully dependent on cheap and ever expanding credit.  Consumers, the federal government, and corporations have gone hog wild gorging on a decade of artificially suppressed, cheap credit.

Presently, American’s owe $3.8 trillion in outstanding consumer credit – some of which, no doubt, was used to purchase light up reindeer antlers.  Of this, more than $1.2 trillion of consumer spending has been borrowed into the economy over the last decade.  This is consumer spending that has been borrowed from the future into the present.

Similarly, over the last decade the federal government has borrowed and spent over $11 trillion, bringing the federal debt from $9 trillion to over $20 trillion.  That’s more than a doubling of the debt in just 10 years.

But that’s not all.  Corporations have been on a massive borrowing and spending binge too.  Total outstanding nonfinancial corporate debt has jumped from about $3.2 trillion in 2007 to over $6 trillion today.  Again, that’s a doubling of debt over the last decade.

What makes the growth of consumer, government, and corporate borrowing over this period so dangerous – in addition to its pure enormity – is that it was encouraged by the Fed’s artificially low interest rates.  The scale and magnitude of this cheap credit expansion is nothing short of a manic credit bubble.

The point is, as mentioned last week, we appear to be entering a period where the price of credit – specifically, interest rates – rise and, thus, credit contracts.  Naturally, this is occurring at the worst possible time; after everything and everyone has become wholly dependent on cheap, expanding credit.

As the Fed raises interest rates, borrowing costs become more expensive.  With respect to government debt, it will take a larger and larger share of the government’s budget to finance the debt.  This will reduce the funds that the government can spend elsewhere.  Similarly, with respect to consumers and corporations, increasing borrowing costs will subtract from spending and investment.

And this is precisely why monetary policy will cancel out fiscal policy.  And this is precisely why the cornerstone promise of the GOP tax reform bill will come up empty.  And this is precisely why we are all doomed.

And on that cheery note, we’ll conclude our ruminations.

Blow.Off.Top.

Authored by Sven Henrich via NorthmanTrader.com,

No period is worse for bears than when it’s the best time to sell stocks. It’s the polar opposite of when conditions are worst for bulls, right when it’s the best time to buy as it was in January-March 2009. The exhaustion factor is enormous. It’s called capitulation as moves get stretched to the extreme even though the set-up is valid.

November’s close marked the 13th consecutive month straight up for global markets. Nothing but up with fewer and ever smaller dips in between. Deutsche Bank’s Reid illustrated the point: “We’ve never had such a run with data going back over 90yrs”. I’d say that qualifies as the worst of time for bears.

Yet we could be sitting on a generational opportunity to sell equities as it could be argued that conditions will never be better for bulls as the game of offering carrots of free money is coming to an end. Indeed it could be argued that the prospect of tax cuts is the final carrot the free money scheme has to offer. The carrot top. No more carrots.

Consider the central banking liquidity game has peaked and is dropping off:

The 2016/2017 period saw the largest amount of central bank intervention ever. Ever. Over 8 years after the financial crisis.

The slow reduction in central bank liquidity has been supplemented by record ETF inflows this year. Retail went long and continues to buy the most expensive market since 1900 according to Goldman:

Even now via @jennablan: “U.S.-based money market funds attract inflows of $33 bln in week ended nov 29, largest inflows for the year”.

And leverage has never been higher either. Via @Schuldensuehner: 

“Dow Jones Industrial closed >24k for the first time ever. Wall St record has occurred in tandem w/record margin debt. Margin debt now at $561bn, double amount of tech bubble of 2000, 47% > than in 2007”:

Retail is in and we see it in various data charts:

Via @BN:

The Rydex bull/bear allocation data shows the most bullish allocation into equities ever:

Don’t tell me it’s the most hated bull market ever. The data says otherwise.

Markets are in big time pig time mode. The prospect of imminent tax cuts keeps investor salivating and allocating cash into all time highs as markets drenched in 8 years of artificial liquidity find tax cuts to be the next carrot to push markets caps into the stratosphere:

A blow-off top perhaps setting us up us for something more sinister than a correction. What’s the biblical phrase? Forgive them for they do not know what they are doing?

Look, the tax narrative is that tax cuts will pay for themselves, that companies will hire more people as a result, and that middle class will benefit greatly from it, that GDP will swell to 4% and Trump claimed that these tax cuts will actually personally hurt himself financially. None of these things are true. Not a one. In fact everything is precisely the opposite. The math says so.

While extreme political tribalism encourages ideology over facts math is true whether you believe in it or not. And these tax cuts will add greatly to the deficits. I won’t belabor the point here as I’ve outlined my thoughts on the subject in detail in Tax Cut Scam.

An Opinion Piece From The Edge: Tax Cut Scam.
This tax cut proposal is a scam. Don"t fall for it.https://t.co/rkDg5UnIZ3 pic.twitter.com/L9lhIqd9sn

— Sven Henrich (@NorthmanTrader) November 9, 2017

The deficit will increase, many will see actual tax increases over time and/or lose benefits and the big tax cut benefits go precisely to people such as Trump and corporations already sitting on record cash positions. As far as GDP growth the FOMC doesn’t believe it either as incoming Fed Chair Powell affirmed a 2.5% GDP outlook for 2018 and many companies are on the record that they will use the extra cash for dividends and buybacks not hiring. This tax bill will exacerbate wealth inequality.

And hiring? Forget it. Structurally we’re looking at the great firing to come: 800 million people might be out of a job by 2030 because of automation

Precise numbers are to be taken with a grain of salt but it’s coming, whether you want to believe it or not.

And this perhaps is the biggest lie of the entire construct: That it’s done for the benefit of the middle class. It’s not. It’s done for wealthy donors who have threatened to cut off donations if they don’t see results. It’s big time pig time. Greed at its finest consequences be damned.

So the odds are the tax cut bill will end up passing in one form or another unless someone stands up and says they’re not voting for something that’s based on a lie.

Deficits will keep expanding before even a new recession hits. I’ve said for a long time that market levels and economic growth have been bought with debt and stimulus producing multiple expansion. See below multiple expansion in context of price and aggregate GAAP earnings:

We do not know what organic growth is without permanent intervention. That was true with the past administration and it is true with this one.

Except now we see increased in defense spending and a cutting of the revenue structure. This year’s deficit was already $666B and that’s without tax cuts. The deficit will be expanding to $900B by 2019 according to JPMorgan.

Even Janet Yellen felt compelled to comment on the debt:

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said.

 

“It’s the type of thing that should keep people awake at night,” she added.”

Cute, especially coming from her who was a key contributor to the easy money train. The context is glaringly obvious:

Janet Yellen:
“It’s the type of thing that should keep people awake at night” pic.twitter.com/PsRUHVpbH5

— Sven Henrich (@NorthmanTrader) November 30, 2017

But Janet Yellen is not alone in suddenly getting concerned about the sustainability of debt expansion.

Dallas Fed president Kaplan came out this week and basically highlighted many of the concerns I’ve been talking about for a long time. A shockingly rare admission of the truth. Quite a statement:

“As a central banker, I want to be vigilant to imbalances and distortions that can build as a result of accommodative monetary policy. I have argued that monetary policy accommodation is not “free” —there are costs to accommodation in the form of distortions and imbalances in consumer decisions as well as in investing, hiring and other business decisions. More specifically, experience suggests that the greater the overshoot of full employment, the more difficult it is to unwind imbalances when growth ultimately slows—as it certainly must.

When excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods. There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level.

It is of course possible that “this time will be different,” but as I assess the condition of the U.S. economy, I am carefully monitoring evidence that might suggest growing risks of real imbalances, which could threaten the sustainability of the current economic expansion. For example, the headline unemployment rate has fallen by 70 basis points over the past year, nearly matching the average rate of decline over the prior seven years of the expansion. If this rate of decline continues, this will further tighten labor market conditions and would likely add to excesses and imbalances accumulating in the economy.

Excesses can also manifest themselves in financial imbalances. While I would prefer to rely primarily on macroprudential policy tools to manage financial imbalances, I am nevertheless monitoring various measures of potential financial excess. I monitor these and other market measures because I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity. Examples of potential excesses might include:

• The U.S. stock market capitalization now stands at approximately 135 percent of GDP, the highest since 1999/2000.[3]Correspondingly, commercial real estate cap rates and valuation measures of debt and other markets appear notably extended.


• Measures of stock market volatility are historically low.[4] We have now gone 12 months without a 3 percent correction in the U.S. market.[5] This is extraordinarily unusual.


• While household debt to GDP has improved over the past eight years, corporate debt is now at record highs.[6] I am not overly concerned about current levels of corporate debt because, importantly, financial sector leverage has declined substantially since the Great Recession. However, U.S. government debt now stands at approximately 75 percent of GDP,[7] and the present value of unfunded entitlements now stands at approximately $49 trillion.[8] In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable—and has been made to appear more manageable due to today’s historically low interest rates.


• Debt and equity securities trading volumes have markedly declined over the past several years. For example, NYSE equity trading volume on average for 2017 is down 51 percent from 2007 levels, while the NYSE market cap has increased 28 percent over the same time period.[9] I would also note that margin debt is now at record-high levels.[10] In the event of a sell-off, high levels of margin debt can encourage additional selling, which could, in turn, lead to a more rapid tightening of financial conditions. Sufficient market trading liquidity is key to managing the resulting increased volume. I am cognizant that lower trading volumes may be due, in part, to low levels of market volatility and may also be due to regulations such as the Volcker rule.”

So he’s watching markets closely and looking at some of the very same trends and factors we are.

In essence he is affirming one of the key cornerstones of the bear case: We are late in the cycle and low unemployment is not sustainable:

Again:  “There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level”.

And neither is the debt build up and he knows it just like Yellen: “In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable —and has been made to appear more manageable due to today’s historically low interest rates”.

The chart above outlines the argument I’ve been making for a long time. This hyper bull market has not only been enabled by low rates but is the end product. Low rates enabled unprecedented debt expansion. And without low rates it can’t be sustained.

In this context then the concern is what happens if the 10 year were to rise above its 30 year trend line. Note the 2 most recent market tops came at a time when the 10 year was approaching its upper trend line. It is doing so again now.

And it’s doing it in context of a flattening yield curve:

The Fed is paying attention and it’s very concerned:

“Federal Reserve Bank of St. Louis President James Bullard on Friday warned that more rate increases by the central bank would raise the risk the U.S. economy could fall into recession.”

The key question: How sensitive is the entire construct to rising rates in context of record debt. The macro charts I keep tracking suggest stress building underneath.

And so the question then becomes not if it unwinds, but when and from where.

Morgan Stanley came out this week and raised its own concerns:

“An unprecedented central bank unwind… We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Remember, monetary policy has been massive in this cycle, and extremely supportive for credit markets. The Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.

…with markets late cycle, and very dependent on ultra-easy liquidity… It is not a coincidence that fundamental problems are becoming more apparent in one sector after the next, as the Fed withdraws liquidity. In fact, we see late-cycle risks popping up all over the place, and as is often the case near a top, these risks are mistakenly (we think) being rationalized as purely ‘idiosyncratic’ problems. Defaults should remain low in 2018, but that is expected. Credit markets anticipate defaults one year ahead of time, and we think a cycle turn is closer than many believe.

…and valuations very rich: Spreads are near all-time tights, adjusting for the quality deterioration in the indices over time. Yes, the technicals have been strong, but that may change as the Fed’s balance sheet shrinks faster. We note, a recession is not necessary to see negative excess returns, especially in the second half of a cycle, and particularly late in a Fed tightening cycle. Credit markets have not experienced three straight years of positive excess returns in over 20 years.

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while “Goldilocks” is firmly in the price across most risk assets.

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on “auto-pilot,” reversing course, in our view, is a last resort.”

You may note how these comments compliment the concerns Kaplan is raising himself. All of this fits with the larger macro analysis I’ve been outlining all year.

There is a reason the Fed has been oh so careful in tinkering and hand wringing. There’s a reason the ECB and the BOJ keep printing. They all know the construct is fragile and they are all worried. They actually say so:

From the recent FOMC minutes: “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”

That’s it. Asset prices are now so elevated that a correction is viewed as a clear and present danger to the global economy. It’s actually all quite simple and obvious. They’ve created a monster and are worried about pissing it off. So the entire construct is held up by low rates and there is a moment where the balance breaks. But we don’t know the when and the where although as my previous chart showed $SPX just hit its 1987 trend line this week which could make any further advances rather challenging or perhaps mark a key pivot.

Here’s the closer view:

Note this tag is coming in context of a $VIX that keeps pinging its upper trend line as it did again this week:

The monthly view via Mella:

These charts continue to signal that volatility will eventually break higher and perhaps violently so.

Now in context of $TNX and the $SPX I’ve created a ratio chart looking at the interplay between $SPX and $TNX:

Note that since the 2009 lows a trend line established itself and it was broken in 2016. Indeed in 2017 it rejected trying to recapture the trend line. Furthermore we can observe a potential right shoulder building. With a significant lower high. Why is that? Well because despite $SPX printing new highs $TNX is not printing new lows. So if $TNX breaks higher it will take massive higher market gains to avoid a break lower in the ratio. This pattern is massive and it would accelerate to the downside if markets broke lower with yields rising. In essence the scenario that Kaplan and Morgan Stanley expressed concerns about.

Bottomline: The macro analysis of the entire construct remains spot on. Central banks have created the TINA effect (there is no alternative) asset prices have become amplified via multiple expansion in lieu of any other investment alternatives and now with the prospect of tax cuts all sellers have disappeared. For now.

Markets have proven they can rally with the loosest financial conditions in this cycle along with continued M1 money supply expansion:

They have yet to prove they can do without.

But after tax cuts there are no more carrots to dangle in front of markets hence we’re finding ourselves in an environment of an imminent carrot top.

The watershed moment will come when people want to sell. How will markets handle a situation with sellers suddenly appearing? Nobody knows. But clearly the Fed is worried about it.

*  *  *

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Flatliners - Dead Market Walking

Authored by Sven Henrich via NorthmanTrader.com,

In the movie Flatliners aspiring medical doctors tried to unlock the mysteries of death by, well, killing themselves. It was meant to be a controlled death of course, to flat line on the heart rate monitor for a few minutes to find out what wonders where to be found “on the other side” only to then return safe & sound thanks to medical intervention. Well, they soon found out the other side wasn’t everything it was cracked up to be and the main character soon got regular beatings as the sins of his past came back to haunt him.

In my view markets find themselves in a very similar script. The promise of investor nirvana where the pains of real life no longer matter. If you only pay attention to the record highs headlines it all looks rather fantastical these days.

Prices only go up no matter what time frame you look at.

Annually:

Quarterly:

Monthly:

And still central bankers can’t find any evidence of inflation. Funny.

Indeed all risk has been flat-lined in this grand central bank experiment as the following chart of the $VIX shows:

Oh I’m kidding of course, but any trader staring at the tape knows that we find ourselves in the most compressed price environment in history.

This is not normal, there’s no heartbeat:

As I’m writing this I’m fully aware I may be viewed as the bear who cried wolf. After all I’ve been outlining structural risk factors for a while and markets have moved past my technical risk zones of 2450-2500 and most recently 2530. That’s what bubbles do. They blow past anyone’s expectations, they make believers of the unbelievers, make bears look like idiots and the most reckless look like geniuses.

But an extreme market that only becomes more extreme is not any less extreme, it is just more extreme. As no risk is apparent these extremes are then dismissed as the new normal.

Yet momentum driven price appreciation has absolutely zero predictive value of future price appreciation, it only appears as such at the time.

Here’s the $NDX leading up to the 2000 top:

It looked fantastic.

It meant absolutely nothing:

For traders of course the key is how to trade set-ups (I’ll post more on this in the near future, but I’ve talked a bit about it in The Relevance of Technical Charts) and for investors it is a matter of how to take advantage while at the same time know when things change.

At this time I want to document a bit of what I see here in markets and the structural world as I don’t want anyone to be surprised when the flat risk line we currently see brings about those nasty consequences.

Let’s be clear.

We find ourselves in a very unique point in history and in a world dominated by false narratives. It is a challenge to keep an analytical grip on reality, but I’ll try to tie a few threads together here to put everything in a macro context.

Firstly the underlying base reality: Free money, easy money, whatever you want to call it, permeates everything we see in financial markets. Indeed I would argue price appreciation has been paid for with unprecedented and, in my view, unsustainable volatility compression.

A couple of charts really highlight this.

Most clearly perhaps is the precise trend line tagging we can observe in the correlated picture of price appreciation and volatility compression since the February 2016 lows:

The $VIX’s corollary, the inverse $XIV, embarked on an explosive near one way journey since the US election coinciding with over $2 trillion central bank intervention in just the first 9 months of 2017:

And it has continued to this day and just made another all time high this past week on a massive negative divergence. It is the magnitude of this volatility compression that explains the current trading environment we find ourselves in.

Aside from the obvious artificial liquidity avalanche we’ve had speculated about the driver of all this and the answer may simply be the promise of even more free money, specifically tax cuts.

As some of you may recall from my analysis over the past year  I’ve been very clear that math ultimately will bring out truth in any narrative. In this case that notion that tax cuts pay for themselves is a fantasy. It always has been. Can it result in a short term bump in spending or even growth? Yes it is possible, especially if structured right. But any historical analysis will show you that tax cuts, especially already coming from a relatively low base, will just add to debt via larger deficits.

Recently the White House budget director finally acknowledged this very reality:

“a tax plan that doesn’t add to the deficit won’t spur growth”

My criticism has been that all this marketing talk is simply a lie and will structurally put the country further at risk of trillion dollar deficits and a massive debt explosion that is already baked in even without tax cuts.

Indeed the further one digs through the details the bigger the expense of these tax cuts become:

“We have a lot of businesses… I don’t think any of them are non-competitive in the world because of the corporate tax rate,” Buffett, the chairman and CEO of Berkshire Hathaway Inc told CNBC.

Fink said a corporate rate as high as 27 percent could satisfy U.S. businesses’ need for tax relief, while avoiding an increase in the federal deficit.

“What is being proposed is a pretty large expansion of our deficits,” Fink told Bloomberg TV. The plan contains up to $6 trillion in tax cuts, according to independent analysts.”

I bet you if you ran these tax cuts through a budget that accounts for a recession case somewhere in the future this entire budget would be an utter disaster and they could never sell it. And this is why you won’t see a stress tested scenario, all you will see is happy steady 2.9% growth projections in perpetuity. Nonsensical. Unrealistic. And frankly intellectually insulting to anyone that insists on any base line of intellectual veracity to any budget process.

Running the numbers it’s clear who actually benefits:

So I ask, how will any of this change this trend?

The answer is it won’t despite public narratives to the contrary. People will choose to believe what they want, but math is independent of beliefs and the math is very clear on this.

Put this proposal in context of standing trends:

Real disposable personable income growth remains meager at best:

Debt expansion at low rates continues to sustain the illusion of real prosperity for the 90%:

A meager set of rate hikes is already putting pressure on revolving credit obligations and personal interest payments:

Why does all this matter for us here?

Look no further than to the earlier quoted Warren Buffett who may have explained much of the reason we see no sellers in these markets currently:

“Buffett also said he would wait to see how the tax push played out before doing any significant selling of Berkshire Hathaway stock to avoid paying unnecessary taxes on his gains.

“I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” Buffett said.”

I get it, why sell anything if you can save on taxes and while central banks keep pushing markets higher with record liquidity? Steady as she goes after all.

And we have to acknowledge that the combined effect may be here to stay until clarity has emerged. If current legislative efficiency is any indicator then this may drag on for months with perhaps nothing accomplished.

Health care? Still nothing has happened. And let’s be clear: Not a single health care proposal (and there have been multiple efforts) have had anything to do with health care. They have been proposals that would have knocked millions off health care coverage and financially benefitted the 1% in form of tax reversions. That’s the analytical reality.

I don’t know why anyone still believes this administration will implement anything substantive to help the middle class. Previous administrations (both Democrat & Republican) have failed miserably on the wealth inequality front. And this administration looks no different and perhaps only worse. Every proposal looks to disproportionally benefit the top 1% and this latest tax cut proposal is no exception. Every analysis I have seen shows disproportionate benefit going to the wealthy. And how will that stimulate growth for the middle class? Or the bottom 50%?

And don’t think I’m alone bemoaning wealth inequality & associated inbred dynastic economic structure as an increasing drag on society and its future prospects.

Here’s Buffett himself again:

Ironically it is those 400 that would benefit the most by getting rid of the estate tax that is currently proposed as part of the tax cut package.

Bottom-line, it’s all tied together in a package that promises more and more debt.

Central banks do whatever it takes to keep reality at bay:

And hence I’ve called this entire central bank talk of “normalization” a fantasy. They can’t do it, they’re trapped and even the quants at JPM are out in force warning of it:

As central banks begin shrinking their balance sheets, they risk triggering another financial crisis, something that may be sharpened by the shift away from active investing, JPMorgan’s top quant strategist has warned.

“Such outflows (or lack of new inflows) could lead to asset declines and liquidity disruptions, and potentially cause a financial crisis,” said Mr Kolanovic (who, it is worth noting, has issued such warnings before). “The timing will largely be determined by the pace of central bank normalisation, business cycle dynamics and various idiosyncratic events, and hence cannot be known accurately.” Mr Kolanovic pointed out that “this is similar to the 2008 [Great Financial Crisis], when those that accurately predicted the nature of the GFC started doing so around 2006.”

“The shift from active to passive assets, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” Mr Kolanovic said. He added that the move towards passive and momentum strategies, where traders chase market cues as opposed to company fundamentals, has “eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.”

And this is precisely why we won’t see any real normalization ever again. Or perhaps only after a massive reset in the financial system.

This new administration wants massive tax cuts. This year the military budget was already increased by $80B to $700B. The costs of the recent hurricanes are providing the perfect excuse for running larger deficits and you can already see the narrative creeping in:

“I hate to tell you Puerto Rico, but you’ve thrown our budget a little out of whack,” said Trump as he introduced his budget director Mick Mulvaney.

Not the $80B increase in military spending of course.

Look, I can read between lines with the best of them and the message is clear.

Low rates are here to stay and the administration needs low rates to keep it all going and justify tax cuts.

The writing is on the wall, no, actually it is coming to you courtesy Jeffrey Gundlach:

“Bond King” Jeffrey Gundlach has an unusual pick for who President Donald Trump will choose to be the next Federal Reserve chief.

“I actually have a very non-consensus point of view. I think it’s going to be Neel Kashkari,” the the CEO of DoubleLine Capital told the Vanity Fair New Establishment Summit on Tuesday in Los Angeles. “He happens to be the most easy money guy that’s in the Federal Reserve system today and that’s why he may win.”

Kashkari is the president of the Minneapolis Fed and happened to say Monday that the central bank is making a mistake by continuing to raise rates, comments Gundlach referenced as helping him possibly get the job.

“I think there is no chance that she wants to be chairwoman, nor do I think the president wants her to be,” said the manager of $109 billion.

Gundlach said that Trump needs someone who will keep rates low in order to keep his populist reputation and help his base voters and that’s why he’ll pick Kashkari.

“A stronger dollar is not good for achieving that agenda,” he said.

And there you have it. We need an easy money guy. Now I don’t know if Kashkari will be it, but it’s pretty clear Yellen is toast and some version of an easy money guy is coming and the Fed’s balance sheet reduction plan may be out the window shortly after February.

But that’s the combined message, massively more debt is coming, normalization is at best a marketing ploy, and easy money will continue to be part of the equation with perhaps more coming in form of tax cuts.

So yes, I get and receive comments about how it’s different this time, how price discovery as we know it may be a thing of the past.

An asset price inflation world, without core inflation, where valuations don’t matter and debt flows continue unabated and consequence free…

…and market caps rise in asymptotic fashion every quarter, month and week:

The end result: The $SPX is now 18.8% above its annual 5 EMA:

As far as I can tell this is the largest, or one of the largest disconnects ever.

And I’ve shown the chart of $MSFT as an individual stock example of how historically extreme the current disconnect is:

$MSFT is now 35% above its annual 5 EMA. There’s been only 1 year prior to 2017 when it did not touch its 5 EMA: 1999. Did it have any predictive value of future price appreciation? Nope.

Speaking of 1999: Greed is back with a vengeance.

It is all around us:

Central bankers have flat lined risk and investors have crossed to the other side expecting nirvana & free money forever.

So far so good it seems. Just remember in Flatliners the allure of nirvana turned into a running nightmare:

What would be signs of nirvana turning into a nightmare?

Keep an eye on this thin red line:

It will get tested again. Currently the trend line is barely 2% below current prices and it is rising steeply.

When price breaks below this line it’s time to return to real life.

After all you do want a heart beat:

Don’t you? I know I do.

The Globalists Are Systematically Destroying America's Middle Class

Authored by Michael Snyder via The Economic Collapse blog,

When people are dependent on the government they are much easier to control.

We are often told that we are not “compassionate” when we object to the endless expansion of government social programs, but that is not how the debate should be framed.

In America today, well over 100 million people receive money from the federal government each month, and the number of Americans that are truly financially independent is continually shrinking.  In fact, only 25 percent of all Americans have more than $10,000 in savings right now according to one survey.  If we eventually get to the point where virtually all of us are dependent on the government for our continued existence, that would give the globalists a very powerful tool of control.  In the end, they want as many of us dependent on the government as possible, because those that are dependent on the government are a lot less likely to fight against their agenda.

Back in 1992, the bottom 90 percent of American income earners brought in more than 60 percent of the country’s income.  But last year that figure slipped to just 49.7 percent.  The wealth of our society is increasingly being concentrated at the very top, and the middle class is steadily being eroded. 

Surveys have found that somewhere around two-thirds of the country is living paycheck to paycheck at least part of the time, and so living on the edge has become a way of life for most Americans.

Earlier today, I came across another article that was bemoaning the fact that the U.S. economy seems to be rather directionless at this point…

• We do not have a real plan for health care, and costs continue to gobble up American wages.


• We do not have a plan for dealing with globalization and economic change, but that change continues to shape our economy.


• We don’t have a plan to update our decrepit infrastructure.


• The one plan we did have — the Federal Reserve’s post-financial crisis program — is about to be unwound, marking the end of the last clear, executable plan to bolster America’s economy.

Ultimately, the truth is that we don’t actually need some sort of “central plan” for our economy.  We are supposed to be a free market system that is not guided and directed by central planners, but many Americans don’t even understand the benefits of free market capitalism anymore.

However, that article did make a great point about globalization:

Most people don’t realize that our economy is slowly but surely being integrated into a global economic system.   This is really bad for American workers, because now they are being merged into a global labor pool in which they must compete directly for jobs with workers in other countries where it is legal to pay slave labor wages.

Even down in Mexico, many autoworkers are only making $2.25 an hour…

Most of the workers at the new Audi factory in the state of Puebla, inaugurated in 2016 and assembling the Audi Q4 SUV, which carries a sticker price in the US of over $40,000 for base versions, make $2.25 an hour, according to the Union.

Volkswagen, which owns Audi, started building Beetles in Puebla in 1967 and has since created a vast manufacturing empire in Mexico, with vehicles built for consumers in Mexico, the US, Canada, and Latin American markets.

Volkswagen, Ford, GM, or any of the global automakers, which can manufacture just about anywhere in the world, always search for cheap labor to maximize the bottom line.

Would you want to work for $2.25 an hour?

Over time, millions of good paying jobs have been leaving high wage countries and have been going to low wage countries.  The United States has lost more than 70,000 manufacturing facilities since China joined the WTO, and this is one of the biggest factors that has eroded the middle class.

In a desperate attempt to maintain our standard of living, we have gone into increasing amounts of debt.  Of course our federal government is now 20 trillion dollars in debt, but on an individual level we are doing the same thing.  Today, American consumers are over 12 trillion dollars in debt, and it gets worse with each passing day.

The borrower is the servant of the lender, and most Americans have become debt slaves at this point.  This is something that Paul Craig Roberts commented on recently…

Americans carry on by accumulating debt and becoming debt slaves. Many can only make the minimum payment on their credit card and thus accumulate debt. The Federal Reserve’s policy has exploded the prices of financial assets. The result is that the bulk of the population lacks discretionary income, and those with financial assets are wealthy until values adjust to reality.

As an economist I cannot identify in history any economy whose affairs have been so badly managed and prospects so severely damaged as the economy of the United States of America. In the short/intermediate run policies that damage the prospects for the American work force benefit what is called the One Percent as jobs offshoring reduces corporate costs and financialization transfers remaining discretionary income in interest and fees to the financial sector. But as consumer discretionary incomes disappear and debt burdens rise, aggregate demand falters, and there is nothing left to drive the economy.

This debt-based system continuously funnels wealth toward the very top of the pyramid, because it is the people at the very top that hold all of the debts.

Each year it gets worse, and most Americans would be absolutely stunned to hear that the top one percent now control 38.6 percent of all wealth in the United States…

The richest 1% of families controlled a record-high 38.6% of the country’s wealth in 2016, according to a Federal Reserve report published on Wednesday.

That’s nearly twice as much as the bottom 90%, which has seen its slice of the pie continue to shrink.

The bottom 90% of families now hold just 22.8% of the wealth, down from about one-third in 1989 when the Fed started tracking this measure.

So how do we fix this?

Well, the truth is that we need to go back to a non-debt based system that does not funnel all of the wealth to the very top of the pyramid.

Unfortunately, most Americans don’t even realize that our current debt-based system is fundamentally flawed, and it will probably take an unprecedented crisis in order to wake people up enough to take action.

*  *  *

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

Fed Chair Janet Yellen Warns Congress: US Debt Trajectory Is Unsustainable

During her tesimony this morning, Fed Chair Janet Yellen urged Congress to take into account the growth trajectory of the federal debt when making decisions about spending and taxation.

She said lawmakers need to work toward achieving "sustainability of this debt path over time," ...

"Let me state in the strongest possible terms that I agree" the U.S. federal debt trend is unsustainable, may hurt productivity, and living standards of Americans.

Of course she is correct, but we do not remember her being so forthright during the last few years of President Obama"s reign as he doubled the national debt?

As a reminder, the Congressional Budget Office estimated last month the national debt could reach 91% of gross domestic product by 2027. Lawmakers are weighing major fiscal policy changes, including tax cuts, changes to health care and infrastructure spending, that could drive deficits higher in the coming years. Furthermore, at the cuirrent spending/taxation rates, debt/GDP expected to hit 150% by 2047 if the current government spending picture remains unchanged.

The CBO"s revision from the last, 2016 projection, shows a marked deterioration in both total debt and budget deficits, with the former increasing by 5% to 146%, while the latter rising by almost 1% from 8.8% of GDP to 9.6% by 2017.

According to the CBO, "at 77 percent of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II. If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would reach 150 percent of GDP in 2047."

In addition to the booming debts, the office expects the deficit to more than triple from the projected 2.9% of GDP in 2017 to 9.8% in 2047. The deficit at the end of fiscal year 2016 stood at $587 billion.

A comaprison of government spending and revenues in 2017 vs 2047 shows the following picture:

The CBO also mentions rising rates as another key reason for the increasing debt burden. The Federal Reserve has kept rates low since the financial crisis but is on track to gradually hike rates in the coming year.

On the growth side, the CBO expects 2% or less GDP growth over the next three decades, far below the number proposed by the Trump administration.

The budget office breaks down the primary causes of projected growth in US spending as follows: not surprisingly, it is all about unsustainable social security and health care program outlays.

The CBO"s troubling conclusion:

Greater Chance of a Fiscal Crisis. A large and continuously growing federal debt would increase the chance of a fiscal crisis in the United States. Specifically, investors might become less willing to finance federal borrowing unless they were compensated with high returns. If so, interest rates on federal debt would rise abruptly, dramatically increasing the cost of government borrowing. That increase would reduce the market value of outstanding government securities, and investors could lose money. The resulting losses for mutual funds, pension funds, insurance companies, banks, and other holders of government debt might be large enough to cause some financial institutions to fail, creating a fiscal crisis. An additional result would be a higher cost for private-sector borrowing because uncertainty about the government’s responses could reduce confidence in the viability of private-sector enterprises.

It is impossible for anyone to accurately predict whether or when such a fiscal crisis might occur in the United States. In particular, the debt-to-GDP ratio has no identifiable tipping point to indicate that a crisis is likely or imminent. All else being equal, however, the larger a government’s debt, the greater the risk of a fiscal crisis.

The likelihood of such a crisis also depends on conditions in the economy. If investors expect continued growth, they are generally less concerned about the government’s debt burden. Conversely, substantial debt can reinforce more generalized concern about an economy. Thus, fiscal crises around the world often have begun during recessions and, in turn, have exacerbated them.

If a fiscal crisis occurred in the United States, policymakers would have only limited—and unattractive—options for responding. The government would need to undertake some combination of three approaches: restructure the debt (that is, seek to modify the contractual terms of existing obligations), use monetary policy to raise inflation above expectations, or adopt large and abrupt spending cuts or tax increases.

Then again, as the past 8 years have shown, only debt cures more debt, so expect nothing to change.

Also, we find it just a little confusing why the CBO never warned of an imminent "fiscal crisis" over the past 8 years when total US debt doubled, increasing by $10 trillion under the previous administration.