All is Not Well

Doug Nolan

The 1987 stock market crash raised concerns for the dangers associated with mounting U.S. “twin deficits.” Fiscal and trade deficits were reflective of poor economic management. Credit excesses – certainly including excessive government borrowings – were stimulating demand that was reflected in expanding U.S. trade and Current Account Deficits. Concerns dissipated with the revival of the bull market. These days we’re confronting the consequences of 30-plus years of mismanagement.

Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.

Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.

The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.

Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.

With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims.
After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?

As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.

Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.

Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.

Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.

Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.

Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.

Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.

My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.

Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.

I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.

Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention.
This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).

While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).

March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”
I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.

Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:

March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream.
From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”
All is not well in leveraged speculation…


Overcoming their fears

Investors may expect slower growth, but not a recession

INVESTORS have recovered some of their confidence. In the first six weeks of the year stockmarkets plummeted, but in mid-February the S&P 500 index began a rally which has regained most of the lost ground (see chart). Emerging markets are back where they were at the start of the year. Another sign that markets are less fearful is the declining yield on speculative, or junk, bonds, which dropped from 10.2% on average on February 11th to 8.5% a month later.

The two big worries in January and February were that the Chinese economy was slowing fast and that the Federal Reserve might therefore have miscalculated when it pushed up interest rates in December. Perhaps the global economy might be heading back into recession.

Those worries have not completely disappeared: forecasts for economic growth are still being revised down. The OECD, a think-tank, predicts that global growth will be 3% this year, below its previous estimate of 3.3%. But slower growth is not the same as a recession.

In China the official figures continue to show a slowdown but not a catastrophic one: industrial output in January and February (the months were combined because of the impact of China’s new-year holiday) was up 5.4% on the previous year while retail sales were up 10.2%. Both figures were lower than those recorded in December. But both fixed investment and property sales were higher than expected. A rebound in commodity prices, seen as a proxy for Chinese demand, may also be a sign that the economy is not collapsing. And the Chinese authorities have eased monetary policy (via a cut in the reserve ratio for banks) to boost growth.

In America employment numbers have shown no sign of a deteriorating economy, although February’s retail sales were disappointing. The latest estimate of first-quarter growth from the Atlanta Fed’s GDP Now model is for an annualised rise of 1.9% (around 0.4-0.5% for the quarter).

The European Central Bank (ECB) did its bit to boost growth on March 10th by cutting rates further into negative territory, expanding its bond-buying programme and offering banks an incentive to increase their lending. The package had a mixed initial reaction from the markets, after Mario Draghi, the ECB’s president, hinted that rates could not be cut any further. But most economists seemed to think that the ECB had done more than expected.

The problem, according to Stephen King, an economist at HSBC, is that “the combination of weak nominal GDP growth and low interest rates suggests that central bankers’ monetary powers are beginning to wane.” Normally, monetary easing would weaken a currency, but the euro rose after the ECB’s move. The yen has also jumped since the Bank of Japan eased policy in January. It may take more to impress the markets these days than it did in 2012, when Mario Draghi turned the tide of the euro crisis: we have moved from “whatever it takes” to “whatever”.

Another issue for markets is that growth in corporate profits has stalled. The first-quarter profits of S&P 500 companies are expected to be 6.2% lower than a year ago. Even if energy companies are excluded, they will be 0.7% lower. Global corporate profits fell by 2% last year, according to Société Générale, a French bank; in emerging markets they were down by 12%. In response, firms have been cutting investment spending: Standard & Poor’s, a rating agency, estimates that global capital expenditure fell by 10% in 2015 and will drop further this year and next. In real terms global capex may be no higher in 2017 than it was in 2006.

Then there is political risk. The setbacks for Angela Merkel’s Christian Democratic party in German regional elections and the likelihood that Donald Trump will be the Republican nominee for president indicate that voters are in an ornery mood. Politicians may well respond to their anger by taking a more populist tack, increasing taxes on business and raising trade barriers.

All this means there is a limit to how exuberant any equity rally can be. This year may end up resembling 2015, when, after many twists and turns, most markets finished flat or down. Yet it is hard to imagine investors turning their backs on shares altogether. The latest poll by Bank of America Merrill Lynch shows that fund managers retain a higher-than-normal weighting in equities. With cash yielding virtually nothing and many government bonds offering negative returns, investors do not have much choice. It will take signs that the global economy (or at least America’s) is actually in recession for investors to succumb to outright panic.

Terrorism and Being Terrified

George Friedman
Editor, This Week in Geopolitics

In 2013, President Barack Obama pointed out that more people are killed in the United States in car crashes than in terrorist attacks. More recently, he said that more people are killed by handguns in the United States than by terrorist attacks. Both statements are true. His intention in making these statements was to put terrorism into perspective, in order to calm the public and keep terrorism from defining our national policy. Obviously, his argument did not achieve its rational goals. Terrorism clearly frightens people more than other threats do. Some argue that people are overreacting to terrorism. However, comparisons with automobile accidents fail to capture the profound difference between the two, a difference that isn’t reflected in the simple probabilities of dying by various means. And this difference is the reason that fear of terrorism is an appropriate response.

Americans and Europeans know intuitively that we are, as individuals, highly unlikely to be killed in a terrorist attack, but we also know such attacks are almost inevitable and that some of us will be the victims. It is terrifying to think that there are people who at this very moment are planning attacks with the goal of causing as many deaths and injuries as possible.

To understand how people respond to different threats, we need to look at the psychology of risk. Automobile deaths are generally not intended, and people who are about to have a car accident do not wake in the morning expecting or planning to die.

Gun deaths may be accidental or planned, but even the ones that are planned are generally not part of a major, well-integrated plot. Some shootings have involved relatively large numbers of casualties; they have been the work of individuals or small groups. Though such shootings may be intended, they remain unrelated to one another rather than centrally organized by a malevolent network bent on destruction. Therefore, what differentiates gun and automobile deaths from terrorism is organized intentionality.

Terrorism draws its motivation from a clear and organized intention. Terrorists believe they are acting out a moral imperative on behalf of a well-established organization.

Terrorists are not maniacs, and terrorism is not an accident. Terrorism is carefully planned yet invisible until it strikes. This is one of terrorism’s most powerful aspects.

Neither the time nor place is predictable. And the moment public fear subsides, terror may erupt again.

Lone wolves are alone to the extent that no one directly helps them plan or execute an attack. But even as they act alone, they may draw their inspiration from a supposed moral principle. European left-wing terrorists in the 1970s and 1980s relied on transitory moral principles. They were easily defeated because they self-destructed as a result of internal squabbles and defections that reflected a lack of clarity in their beliefs and the weakness of their bonds.

Islamist terrorism is different. It draws its strength from a cohesive doctrine with a deep history. As with all religions built on revelation, there is deep disagreement within Islam between the demands imposed by revelation and the interpretations conceived by later religious authorities. But a powerful case can be made that Islamic terrorists cannot be separated from the Islamic religion. They are Muslims, and their violent interpretation of their religious doctrines is a powerfully destructive trend, even if it is not dominant within contemporary Islam. In addition, the concept of jihad, defined in the military sense, has played a critical role in shaping the evolution of Islam. Armed Islamist non-state actors have built their ideology on historical precedent. The fact that most Muslims today do not believe in jihad as the terrorists have interpreted it is not as important as is the fact that some do believe in it and are willing to act on t hat belief and kill for their cause.

There is an inhumanity, not in the Islamist terrorists’ cruelty—cruelty is common—but in their sense of what life and death mean. Islamist terrorists welcome death. Many groups—not just IS and al-Qaida but also Hamas, Hezbollah, and others—have promoted the saying “We love death more than you love life.” This idea has its origins in the statement of a prominent 7th-century Muslim general who was engaged in jihad against the Persian Empire. Terrorists who have no fear of dying rob us of a key weapon we wield in conducting warfare: the threat of death. The purpose of killing in war is not to simply eliminate enemy soldiers; it is to demoralize them by convincing them that death awaits. But this threat no longer has power when the enemy doesn’t fear death. What makes terrorism more frightening is that we do not know how many jihadists there are, how many need to be killed, or even how we can recognize them a mong the innocent.

When we see pictures of terrorists calmly pushing luggage carts in an airport, it is not their courage that stands out, nor their willingness to die, but the sense that death does not mean to them what it means to us. We speak of dehumanizing people by regarding them as “other” or alien. These terrorists are “other.” They are not like us in the fundamental sense that they say they prefer death over life—and by every indication, they do. We are, of course, terrified by the randomness and the violence of the terrorists, but what is more frightening is the terrorist himself.

This point brings us back to the question of what the appropriate response to terrorism should be. Obama wants to put our fear of terrorism into context—but we have seen that terrorism is not like other threats we face. It is invisible, pitiless, and very real. Terrorism is designed to transform the souls of potential victims. As Lenin is said to have remarked, “The purpose of terror is to terrify.” Those who claim not to be afraid may characterize our fear of terrorism as excessive, but perhaps those who think they have rationalized away their fear of terrorism simply don’t understand it or may feel personally immune to the danger it presents.

In war, the goal is to keep the enemy off balance. One way to accomplish that is to do something that paralyzes him. Another way is to force him to lash out irrationally, so that he squanders his strength in pointless enterprises. Islamist terrorists are adept at both strategies. By making their attacks intermittent, they create a temporary sense that they have disappeared, so that readiness is reduced and there are squabbles about overreaction—a familiar cycle that has been playing out in Europe and the US for decades now. At the same time, the terrorists have caused the United States in particular to take substantial military action that has not succeeded in reducing terrorism. The cyclical nature of Islamist terrorism, coupled with large military deployments by the US, have created a cycle that oscillates between demands for extreme countermeasures and demands that we m ust not change our lives because terrorism is a marginal force. This cycle reflects the paralysis of the hyperactive—always doing, never getting anywhere.

People express a variety of beliefs about Islamist terrorism. One is that it is invisible but potent and ready to strike, and this assumption creates fear that the threat is imminent.

The other stance dismisses this fear, arguing that terrorism isn’t war and so isn’t all that important. The latter attitude is essentially the one that Obama has espoused. His argument is that, since other things cause death more frequently than terrorism does, terrorism ought not to be granted unique importance. It should not be responded to disproportionately, but rather in the broader context of all potential threats.

The president’s argument is a powerful one in light of the terrorist’s mission, which is to terrify us into unwise actions. According to this argument, terrorism is one of the things we must live with. It has a definable size and shape—even if some of the perpetrators act irrationally or alone. We will do what we can to fight terrorism, but we will not let it fundamentally change the way we live. Otherwise, the terrorists have won.

We should not dismiss this stance. I do, however, disagree with it. First, I suspect that there is bit of denial involved in it. It’s true that terrorist attacks are rare and that few of us will die from them, but it is still possible that we, or our loved ones, will become the victim of an attack. If we’re playing terrorist roulette—and we are—we shouldn’t get too comfortable about our house odds. The probability of you or me dying in a terrorist attack is vanishingly small. But we are human beings, and if 100 people die in an attack and the president reacts by saying, “Only 100 people died. Don’t panic,” I suspect there will be public turmoil. Game theory might minimize the significance of such an event, but we can all imagine that the people lost in that attack were our own family members. Imagination is not comforted by statistical improbability, and our political leaders cannot get away with offering only a fal tering response to terrorism—even if we turn around and criticize them for intruding on our privacy. I don’t think Obama would be comforting us with comparisons to car accidents had the attacks in Paris or Brussels occurred in the United States.

The second argument against Obama’s view is that, in prior conflicts, the United States has always limited liberties in the course of formulating a robust response to our enemies. During World War II there was severe censorship. In the Civil War habeas corpus was suspended. These limitations were lifted after the wars. The United States has a superb history of managing national emergencies and then moving beyond them.

But of course, this is the problem. The present emergency may not end, because we will never know—and have no way of knowing—whether people who love death more than life have moved into the house next door. We can ban anyone and everyone from the country, as we ban drugs or once banned alcohol. But banning people won’t work. And even if it did, we would never be sure that the threat was really gone.

And that is why terrorism is effective. A terrorist need not be present among us in order to cause terror. Our imaginations are already infested with him. He wins if we can’t live with the terrors our imaginations conjure, inspired by acts already committed here and there around the world. But imagination is neither trivial nor a mere illusion. It is where we define our relations with the world. We win if we can control our collective imagination. But in naively purging our imaginations of a known threat just because there are more car accident deaths than terrorism deaths, we fail to understand the power of the jihadist army and the nature of the terrain of the imagination. In the end, we are only human, and we, for our part, love life.

The new class warfare in America

The data express a feeling of being shut out from the benefits of growth
Matt Kenyon illustration, class war©Matt Kenyon
Say what you like about Donald Trump, he knows his market. “I love the poorly educated,” he said recently to cheers from those he loves. The rest of America inhaled sharply. Welcome to a very un-American debate. Once redundant, the term “working class” is now part of everyday conversation. In an age of stifling political correctness, the only people who are fair game in polite society are blue-collar whites. How absurd these people are, we tell each other, and how ignorant. Don’t they know Mr Trump was born rich? Can they really be so stupid as to fall for his con trick?
The derision is not limited to liberal elites. Educated conservatives are just as scathing. Take the National Review, a flagship of thinking conservatives, that described Mr Trump as a “ridiculous buffoon with the worst taste since Caligula”. In January it pulled together 22 intellectuals to condemn Mr Trump’s candidacy as an existential threat to conservatism. Their efforts had no impact on Mr Trump’s fan base. Now the magazine has switched to damning his supporters. By declaring open season on blue-collar whites, Kevin Williamson’s widely read essay on “white working class dysfunction” marks a turning point. Yet he is only putting into writing what many conservatives say.

“The truth about these dysfunctional, downscale communities is that they deserve to die,” Mr Williamson writes. “Economically, they are negative assets. Morally, they are indefensible . . . the white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles. Donald Trump’s speeches make them feel good. So does OxyContin.”

Margaret Thatcher’s henchman, Norman Tebbit, once sparked fury by implying the jobless should get on their bikes to find work. Mr Williamson says America’s benighted working classes should hire a U-Haul and move on.

As an exercise in condescension, Mr Williamson’s words rival the most inbred hereditary peer.
As an economic prescription, it is wide of the mark. Millions of Americans are anchored to blighted neighbourhoods by negative equity, or other ties that bind. Their life expectancy is falling. Their participation in the labour market is dropping. The numbers signing up to disability benefits is rising.
Opioid prescription drugs are rife. Those that are white tend to vote for Mr Trump. On Super Tuesday this month, the counties with the highest rates of white mortality — whether to overdoses, suicide or other symptoms of community breakdown — came out heavily for Mr Trump. The correlation was almost exact, according to a Wonkblog study.
None of these trends are new. It should be no surprise that many Americans are desperate for a different kind of politics. As Mr Williamson notes, what is happening to much of the country’s white working class is eerily redolent of what befell its Russian counterpart after the collapse of the Soviet Union. There too, people yearned for a strongman — or a “father-führer”— to reclaim past certainties. There too, the gulf between the urban elites and the rest was an open cultural sore. It is no accident Mr Trump admires President Vladimir Putin so much, and vice versa. Their electoral bases share distinct traits, such as a taste for authoritarian flag wavers.
In a recent poll of people serving in the US military, Mr Trump received the largest support at 27 per cent. It was followed by Bernie Sanders at 22 per cent. Hillary Clinton received 11 per cent.
The class divisions within the Democratic Party are just as stark. Mrs Clinton scoops up wealthier liberals and minorities. Mr Sanders takes the northern white working classes. It is a mirror image of the Republican field. Both Mrs Clinton and Mr Trump have won their biggest majorities in the southern states, where non-white Democrats and poor white Republicans are most populous. Most educated progressives believe Mrs Clinton’s brand of liberalism has history on its side. The share of non-whites in the US electorate edges a little higher with each general election. By 2042, whites will be a minority. According to the Democratic strategists, the white working class is a dinosaur that is going slowly extinct. Besides, most of them suffer from a false consciousness about their true interests. Why else would they vote Republican? Barely a third of the white working class vote went to Mr Obama in 2008.

Yet demography is not destiny. Here is a better explanation for what is happening. In 2000, 33 per cent of Americans described themselves as “working class”, according to Gallup. By 2015 that number had risen to 48 per cent. Far from dying out, the working class now accounts for almost half of America by people’s self-perception. In some respects these measures are more revealing than statistics on median income, or income inequality. They express a feeling about being shut out from the benefits of growth. It is a very un-American state of mind. Which party represents them best? Is it the Republicans who keep cutting taxes on thresholds way above their paygrade? Or the Democrats whose organising principle is diversity? Until recently, blue-collar whites were like turkeys voting for Thanksgiving. We have only ourselves to blame for missing the fact that one day these turkeys might switch to Halloween.

Central Banks Are Attempting To Ward Off The Stock Market Crashes

Chris Vermeulen

The European Central Bank and the Bank of Japan have run out of “bullets” in their arsenal!

They will continue to cut interest rates further ‘below zero’, but that is not taming the ‘Beast of ‘Deflation’.  To the global community, it is evident that this is not continuing to prop up the stock markets any longer.  How can they be expected to be trusted, anymore?

Take a look at the Bank of Japan which started QE in 2001.  It’s still in deflation!

World Leaders Struggle For Control of the Financial Markets

As of today, I have no doubt that the ECB President Mario Draghi is back peddling on his statement regarding no further easing which will be contemplated. He is now stating “whatever it takes”.

The ‘monetary easing’ in Europe, Japan and China are placing us even further into a ‘black hole’.

There are no more tools left in the tool box that may somehow magically appear.  I am confident that the FED will not ‘materially’ raise their short term interest rates over the next two or more years. 

Alan Greenspan recently stated that the Fed cannot exit its era of ‘Quantitative Easing’ without any serious repercussions. Greenspan warns that there will be a “significant market event.” 

The last crisis struck investors without any warning. So consider yourself fore warned by one who has over 35 years of experience in the financial market arena. 

Wake up America!  Warning signs are abundant, however, there is one sign that even the most complacent of all investors cannot ignore. 

The banks of the world are now preparing for the biggest crisis in history.  They call it the ‘BAIL-IN’.  There was a paper prepared by the Federal Reserve Bank of New York in December of 2014.  It was written by Joseph H. Sommer, a member of the Federal Reserve’s legal team. It specifically indicates that bank deposits are bank liabilities which are clearly affected by a bankruptcy.  Your deposits are loans to the bank of which they can default on repayment, in the event of bankruptcy.

In July 2014, Germany gave its’ blessing to a ‘Bail-In Deposit Confiscation Plan’ and additionally, reports surfaced on Canada’s ‘Bail-In’ move.  In December 2014, it was reported that the entire ‘G20’ were preparing for ‘Bail-Ins’ along with Australia, China, Italy, Japan and the United Kingdom, to name just a few countries.  The plan has gone global and whether or not you believe it can happen, the banks of the world do believe it will happen.  Why would the ‘G20’ make a plan to deal with a crisis that will never materialize?

In this ‘currency war’ that is still occurring, all over the world, the FED cannot allow for a stronger U.S. Dollar.  China is further devaluating the Yuan, while Japan continues to devalue their Yen.  The European Central Bank is now implementing more QE, as well as other measures. 

It is very clear that the NIRP has turned into a ‘disaster’ and as each of these monetary decisions in policy are announced, they are being ridiculed.  The Bank of Japan is continuing to purchase shares in Exchanged Traded Funds and Real Estate Investors Trusts, (REIT).   Each new round of these policies has a diminishing marginal rate of return. They are perpetrating a ‘global fraud’ on the global markets.

Deflation is rapidly spreading throughout Europe, China and Japan.  The FED cannot stop it here, as there is nothing they can further implement other than to bail-in and use the hard working Americans bank savings to save the butts.

March 16th, 2016, the FED revamped their view of the economy and stated that they most likely not raise short term interest rates as swiftly as they had previously anticipated. There are still lingering risks which are posed by both soft global growth and financial-market volatility.

The FED has removed the ‘rocket fuel’ that had propelled the markets to all new ‘artificial’ highs.  Investors will continue to deal with even more volatility and then a stock market crash which will occur. The FED is behind 93% of the entire markets movement since 2008. (Source: “The Fed caused 93% of the entire stock market’s move since 2008: Analysis,”) (Yahoo Finance, March 11th, 2016).  We have just experienced the third longest bull market, in history.

Good News! Opportunities Await Those Who Understand

In fact, I have several tremendous opportunities that I will reveal shortly.

While the Risk On Assets Like Stocks Are Hot the music is about to stop for them. You do not have to remain helpless against these unstoppable forces. 

You do not have to suffer the ravages of too much debt that will destroy your wealth.  Additionally, you can and will prosper in the process and rise above the masses who have fallen victim to complacency and have turned a blind eye to the facts if you know what to do and how to do it which I will share in the coming days.

Making the Case for Trade

Reagan’s ‘protectionism is destructionism’ message was true—and it would be derided in the 2016 race.

By Morton Kondracke and Matthew J. Slaughter           

Divided though the four leading presidential candidates are on so many topics, united they stand on one: the assertion that trade hurts America.

All four oppose the U.S. ratifying the Trans-Pacific Partnership. All four demonize trade the same way. Donald Trump blasts that “foreigners are killing us on trade,” while Bernie Sanders inveighs against “disastrous trade agreements written by corporate America.” Ted Cruz laments that “we’re getting killed in international trade right now,” and after flipping her position on the TPP and other trade agreements, Hillary Clinton now promises that America will never again “be at the mercy of what any country is going to do to take advantage of our markets.”

Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” To explain how trade translates into prosperity and new jobs, and how the disruptions inevitable in a trading economy can be managed for the benefit of those who need help.

All we are hearing now are antitrade anecdotes and outright misinformation. Someone needs to reclaim the story line and spell out the facts.
A container ship off the California coast near the Port of Los Angeles. Photo: Bloomberg
First, trade has generated substantial gains—not losses—for America overall. Companies and their workers benefit when the company sells more exports and can pay higher wages.

Individual consumers and families benefit when they enjoy a wider variety of products at lower prices. America’s exporters and importers are among the country’s most dynamic companies, paying their workers about 15%-20% more than workers earn elsewhere in the economy.

The overall gains are large. Trade and related activities—spurred by accords such as the North American Free Trade Agreement, or Nafta, have boosted annual U.S. income today by about 10 percentage points of GDP relative to what it would have been otherwise. This translates into an aggregate gain of about $1.8 trillion in 2015—thousands of dollars per U.S. household every year.

Future trade agreements will bring more gains. A 2016 analysis by Peter A. Petri and Michael G. Plummer estimates that the TPP—which will eliminate more than 18,000 tariffs that other countries today impose on U.S. exports—will boost U.S. national income by about $130 billion annually. Part of this gain will be due to the higher average wages Americans earn as a result of more trade.

The second important pro-trade narrative is that creative destruction—the movement of people and capital from weaker businesses to stronger ones and new opportunities—is how many of the gains from trade arise. And because trade is only one of the forces driving this continual churn, the scale of creative destruction is vast. In December, for example, America’s creation of almost 300,000 payroll jobs was the net outcome of 5.4 million new jobs created and 5.1 million old jobs destroyed.

Technology innovation and other drivers of long-run economic prosperity also entail more gains to “winners” than costs to “losers.”

This points to the third key theme: The way to support those affected by trade is not with tariffs that will destroy the jobs of other Americans that depend on trade. The solution is to drop trade barriers to maximize trade’s gains—and then design well-targeted supports for workers and communities that need help.

Whatever field they work in, many American voters feel anxious about their jobs and their paychecks. Policies designed in a bygone age—when there was less economic volatility—aren’t enough to help them cope with ever-shifting labor-market pressures. We need to build a broader, more-responsive safety net to assist workers in transition regardless of the reason. For instance, unemployment insurance and trade-adjustment assistance should become part of an integrated program that offers a menu of options to all displaced workers.

To help offset trade’s pretax pressures on the wages of certain workers, the earned-income tax credit could be expanded—or the Federal Insurance Contributions Act (“payroll”) tax could raise its cap to allow lower rates on lower earners while remaining revenue-neutral. In the longer term, education of all kinds—vocational and technical, apprenticeships, and ongoing retraining—is critical to prepare more workers to gain from trade.

For generations, American presidents of both parties have spoken about the benefits of trade. “Economic isolation and political leadership are wholly incompatible,” warned John Kennedy. “A creative, competitive America is the answer to a changing world,” said Ronald Reagan. “We should always remember: protectionism is destructionism.”

Today, when the volume of U.S. exports has contracted amid a slowing and more-uncertain world economy, such voices have fallen silent. A global trade war come January 2017—which is what the leading candidates mentioned above are either inviting or bound to create—could throw more people out of work in America than most can imagine. Who will step up to tell the compelling trade story that America needs to hear?

Mr. Kondracke is the retired executive editor of Roll Call and co-author of “ Jack Kemp: The Bleeding Heart Conservative Who Changed America” (Sentinel, 2015). Mr. Slaughter is dean of the Tuck School of Business at Dartmouth.

Brazil’s political crisis

Time to go

The tarnished president should now resign

DILMA ROUSSEFF’S difficulties have been deepening for months. The massive scandal surrounding Petrobras, the state-controlled oil giant of which she was once chairman, has implicated some of the people closest to her. She presides over an economy suffering its worst recession since the 1930s, largely because of mistakes she made during her first term. Her political weakness has rendered her government almost powerless in the face of rising unemployment and falling living standards. Her approval ratings are barely in double digits and millions of Brazilians have taken to the streets to chant “Fora Dilma!”, or “Dilma out!”

And yet, until now, Brazil’s president could fairly claim that the legitimacy conferred by her re-election in 2014 was intact, and that none of the allegations made against her justified her impeachment. Like the judges and police who are pursuing some of the most senior figures in her Workers’ Party (PT), she could declare with a straight face her desire to see justice done.

Now she has cast away that raiment of credibility. On March 16th Ms Rousseff made the extraordinary decision to appoint her predecessor, Luiz Inácio Lula da Silva, to be her chief of staff. She portrayed this as a shrewd hire. Lula, as he is known to all, is a canny political operator: he could help the president survive Congress’s attempt to impeach her and perhaps even stabilise the economy.

But just days before, Lula had been briefly detained for questioning at the order of Sérgio Moro, the federal judge in charge of the Petrobras investigation (dubbed lava jato, or “car wash”), who suspects that the former president profited from the bribery scheme. Prosecutors in the state of São Paulo have accused Lula of hiding his ownership of a beach-front condominium. He denies these charges. By acquiring the rank of a government minister, Lula would have partial immunity: only the country’s supreme court could try him. In the event, a judge on the court has suspended his appointment.

This newspaper has long argued that either the judicial system or voters—not self-serving politicians trying to impeach her—should decide the president’s fate. But Ms Rousseff’s hiring of Lula looks like a crass attempt to thwart the course of justice. Even if that was not her intention, it would be its effect. This was the moment when the president chose the narrow interests of her political tribe over the rule of law. She has thus rendered herself unfit to remain president.

Three ways to leave the Planalto
How she exits the Planalto, the presidential palace, matters greatly. We continue to believe that, in the absence of proof of criminality, Ms Rousseff’s impeachment is unwarranted. The proceeding against her in Congress is based on unproven allegations that she used accounting trickery to hide the true size of the budget deficit in 2015. This looks like a pretext for ousting an unpopular president. The idea, put forward by the head of the impeachment committee, that congressmen deliberating Ms Rousseff’s fate will listen to “the street”, would set a worrying precedent. Representative democracies should not be governed by protests and opinion polls.

There are three ways of removing Ms Rousseff that rest on more legitimate foundations. The first would be to show that she obstructed the Petrobras investigation. Allegations by a PT senator that she did so may now form the basis of a second impeachment motion, but they are so far unproven and she denies them; Ms Rousseff’s attempt to shield Lula from prosecution may provide further grounds. A second option would be a decision by Brazil’s electoral court to call a new presidential election. It may do that, if it finds that her re-election campaign in 2014 was financed with bribes channelled through Petrobras executives. But this investigation will be drawn out. The quickest and best way for Ms Rousseff to leave the Planalto would be for her to resign before being pushed out.

Her departure would offer Brazil the chance of a fresh start. But the president’s resignation would not, of itself, solve Brazil’s many underlying problems. Her place would initially be taken by the vice-president, Michel Temer, leader of the Party of the Brazilian Democratic Movement. Mr Temer could head a national-unity government, including opposition parties, which, in theory, might be able to embark on the fiscal reforms needed to stabilise the economy and close a budget deficit that is close to 11% of GDP.

Sadly, Mr Temer’s party is as deeply enmeshed in the Petrobras scandal as the PT. Many politicians who would join a unity government, including some from the opposition, are popularly seen as representatives of a discredited ruling class. Of Congress’s 594 members, 352 face accusations of criminal wrongdoing. A new presidential election would give voters an opportunity to entrust reforms to a new leader. But even this would leave the rotten legislature in place until 2019.

The judiciary, too, has questions to answer. Judges deserve great credit for holding Brazil’s mightiest businessmen and politicians to account, but they have undermined their cause by flouting legal norms. The latest example is Mr Moro’s decision to release recorded telephone conversations between Lula and his associates, including Ms Rousseff. Most jurists believe that only the supreme court may divulge conversations in which one of the parties has legal immunity, as the president does. This does not justify the claim from government supporters that the judges are staging a “coup”. But it makes it easy for lava jato suspects to divert attention from their own misdeeds to the blunders of their pursuers.

Brazil’s war of parties and personalities obscures some of the most important lessons of the crisis.

Both the Petrobras scandal and the economic crash have their origins in misconceived laws and practices that are decades old. Getting Brazil out of its mess requires wholesale change: controlling public spending, including on pensions; overhauling growth-crushing tax and labour laws; and reforming a political system that encourages corruption and weakens political parties.

These can no longer be put off. Those chanting “Fora Dilma!” on the streets would claim victory if she was ousted. But for Brazil itself to win it would be just the first step.

Liquidity crunch elevates bond traders

FT_Traders_FinalV2.jpg©Joe Waldron

Falling liquidity in fixed income markets has created a new sphere of influence at some of the world’s largest investment houses: the trading desk.

Over the past 18 months, large fund houses have hired more bond traders, overhauled the technology their traders use and encouraged those responsible for executing deals to work more closely with portfolio managers.

In some cases, traders have even begun to influence investment decisions, according to several asset management executives.

These changes are a big departure from the days when traders simply executed the buy and sell orders placed by fund managers, with little interaction between the two teams.

But highly skilled traders are now seen as a vital source of information for portfolio managers, in an environment where it has become increasingly difficult to find suitable buyers or sellers at the opposite end of complex fixed income trades.
The liquidity crunch has come about because banks and other counterparties, the traditional middlemen in fixed income trading, have significantly reduced their bond inventories because of stricter regulations. Asset managers say this has made it harder for them to offload bonds quickly and made the trading environment more difficult.

Deutsche Asset Management, Nordea Asset Management, Amundi, Pioneer and Jupiter, which collectively oversee more than $2.3tn of assets, have increased the size of their bond trading desks over the past 18 months as a result.

Deutsche Asset Management opened a trading desk in London last November, and plans to open another one in Hong Kong in the coming months, in addition to existing teams in Frankfurt and New York.

Nordea AM has increased the size of its trading desk by a fifth, to 24, since 2014 and hired a new head of trading last year. Amundi, which oversees €600bn of fixed income assets, has increased the size of its Paris-based dealing desk from seven traders to 10 over the same period.

Both Jupiter and Pioneer have added one trader to existing teams over the past 12 months.

The consensus among these groups is that having more traders who specialise in a wider range of fixed income asset classes will help them to combat the growing difficulty of identifying suitable trades.

The head of trading at a large European asset manager, who requested anonymity, says:
Traders work more closely with portfolio managers now than ever before. Specialised traders come to portfolio manager meetings, analyst meetings and portfolio construction team meetings.

“We give [fund managers] a reality check quite often, and they come to us for a reality check.

We look for the most liquid opportunities ahead of any order coming to us. This absolutely influences asset managers’ decisions.

“Not all portfolio managers are willing to take our advice as not all traders have the same reputation with the portfolio managers. But there is more awareness of the importance of the [trading] role and the liquidity challenge. Bond markets are not a supermarket any more.”

Christian Hyldahl, chief executive of Nordea Asset Management, the Swedish investment group, agrees the trend of traders suggesting trades to fund managers has become “increasingly common” in his group’s fixed income team.

Alastair Sewell, senior director at Fitch, the rating agency, adds: “We have seen fund managers restructure their trading desks so that traders propose trades to portfolio managers. There are specific examples we are explicitly aware of.”

Asset managers are keen to avoid swamping the market with one large trade that could alarm potential buyers or sellers in the market. They are instead bringing a series of smaller trades to the market, which is a more labour-intensive process.

Eric Brard, head of fixed income at Amundi, says: “It is now easier to trade 10 small [tranches of a bond], rather than one big order of €10m. This puts more pressure on the dealing desk because this is more work. We also have a more complex universe of securities in fixed income portfolios, with more high yield and convertible debt, which puts pressure on the dealing desk.

“In the old days when a portfolio manager wanted to buy or sell something, he asked his dealer to trade in the market and speak to the counterparties. This sequence has changed over the past two years, with much more integration between the portfolio manager and the dealing desk.”

A spokesperson for Jupiter adds: “Liquidity in fixed income has become more difficult to source now the major brokers are not allowed to hold inventory on their balance sheets. As a result we have to work harder to find the other side of the trade we are trying to execute. All this takes time, with increased phone calls [and] checking bid and offer lists.”

There is a big divergence in the tools asset managers want their traders to use in order to overcome liquidity problems. Some are choosing cutting-edge technology, while others are returning to more traditional techniques.

Deutsche AM adopted technology 18 months ago that enables the company to bypass human traders altogether when carrying out simple trades in liquid areas, such as certain European government bonds.

Juan Landazabal, head of fixed income trading at Deutsche AM, says: “It is not just about throwing more resources at the trading desk — we are cost constrained. There is an important element of technology and how we organise ourselves.”

Mr Hyldahl agrees: “There is no silver bullet to solve the liquidity challenge. What makes it difficult is that, under normal circumstances, fixed income markets work pretty well, but in times of stress [they don’t].

“We have hired 20 per cent more [traders] over the past three years, [but] at the same time we seek to automate. You want as much [trading] as possible to be fully automated.”

By contrast, Axa Investment Managers, which oversees €432bn of fixed income assets, is in some cases turning away from automated technology in favour of human interaction.

Paul Squires, head of trading at the French asset manager, says: “We generally execute 93 per cent of our fixed income orders in a day, and we have not seen that figure drop in quite testing markets. But we have become more discriminate in how we execute our orders.

“Where it is difficult to execute, the expertise of the traders and the sensitivity around giving information to the market is more important. That is why more orders are being given by voice rather than electronically.”

The number of traders at Axa IM has fallen by one in the past year, to 24, as a result of a reorganisation of the dealing desk, but Mr Squires says the company “may need to reverse that decision” and add to its headcount, given the challenging market environment.

Many other asset management companies are also likely to boost trader headcount in the coming months, according to Huw van Steenis, an analyst at Morgan Stanley, the bank.

The analyst, who has met several heads of trading and investment bosses at fund companies representing $10tn of assets since December, says: “Every asset manager we met was concerned about accessing bond market liquidity. They are learning to live with less liquidity, and this requires some material operational changes. Trading desks are typically the starting point.

“Many asset managers ran their portfolios assuming vast and deep liquidity is a given. They are now having to optimise portfolios for a much more stressed liquidity environment and need market intelligence on what is readily available to sell.

“It is not necessarily that the power is shifting [towards traders], but [investment companies] need to have a clear fire-drill plan that is done collaboratively between fund managers, the trading desk and the risk management team.”

This Is the Reason Stocks Haven’t Fallen Yet

Justin Spittler

The bull market is on its last leg…

As Dispatch readers know, U.S. stocks began a historic rally seven years ago. From March 2009 through December 2014, the S&P 500 soared 204%.

This bull market is still “technically” alive. The popular definition says a bull market ends when an index falls 20%. Since peaking in May, the S&P 500 has dropped a maximum of 15%.

Still, the rally appears to be running on fumes…

• The bull market is now 84 months old…

The average bull market since World War II has lasted just 52 months. Historically speaking, U.S. stocks are long overdue for a bear market.

That’s just one reason to be concerned.

According to the popular CAPE valuation ratio, stocks in the S&P 500 are 53% more expensive than their historic average.

The S&P 500 is also coming off its third consecutive quarter of declining earnings. That hasn’t happened since 2009. According to research firm FactSet, Wall Street expects the S&P 500 to report an 8.3% decline in first-quarter earnings. The first quarter ends on March 31.

• With all these warning signs, you may be wondering why U.S. stocks haven’t tanked yet...

The answer is simple. Although “mom and pop” investors have been dumping stocks, U.S. corporations have been buying their own shares at a near-record pace.

Bloomberg Business reported yesterday:

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever...

Should the current pace of withdrawals from mutual funds and ETFs last through the rest of March, outflows would hit $60 billion. That implies a gap with corporate buybacks of $225 billion, the widest in data going back to 1998.

Since 2009, S&P 500 companies have shelled out more than $2 trillion on share buybacks. A share buyback is when a company buys its own stock from shareholders.

Buybacks reduce the number of shares that trade on the market. This can boost a company’s earnings per share, which can lead to a higher stock price. But buybacks do not actually improve the business. They just make it look better “on paper.”

Buybacks are about the only thing keeping the stock market afloat. As you can see in the chart below, the S&P 500 has gone nowhere since September 2014.

• Borrowed money has fueled the buyback craze...

Dispatch readers know the Fed has held its key interest rate near zero since 2008. It’s made it comically cheap for U.S. companies to borrow money.

In 2008, a corporation with good credit (an “A” credit rating) could borrow money in the bond market at around 6.0%. Today, these companies can borrow at 3.1%.

As a result, U.S. corporations have loaded up on cheap debt.

The Securities Industry and Financial Markets Association reports that U.S. corporations have issued $9.7 trillion in new debt since 2008. Last year, U.S. companies issued more than $1.5 trillion in new debt, which set a new all-time high.

Many companies have used this borrowed money to fund share buybacks. Reuters reported in September:

Interest rates at near zero have increasingly prompted companies flush with cash to issue debt to fund share buybacks. Apple Inc., for instance, has issued $23.6 billion in debt this year despite having more than $200 billion in cash, part of its plan to buy-back up to $140 billion in shares by the end of March 2017. MetLife Inc., meanwhile, sold $1.5 billion in bonds in June to fund share buybacks, while having more than $10 billion in cash on its balance sheet.

• The buyback mania helped push stock prices to record highs...

But remember, individual investors are no longer buying stocks. Corporate America is the only buyer still standing.

Buybacks can only prop up the market for so long…

As we said earlier, corporate earnings are drying up. The last two major earnings droughts sparked huge declines in share buybacks. Bloomberg Business reports:

During the last two decades, there have been two times when earnings contractions lasted longer than now. Both led companies to slash buybacks, with the peak-to-trough drop reaching an average 62 percent.

• E.B. Tucker, editor of The Casey Report, thinks stocks are on the verge of a major decline...

In short, E.B. thinks U.S. stocks will enter a bear market before summer. One of his favorite “big picture” tools is flashing a warning sign we haven’t seen since the financial crisis. Investors who sold their stocks when this warning appeared in 2008 avoided a 43% loss.

Dispatch readers know E.B. is worth listening to. In September, he called the end of the bull market.

It was a bold call. The S&P 500 had more than tripled in value over the past six years. The Dow Jones Industrial Average and NASDAQ both hit record highs only two months earlier.

E.B.’s call has been spot-on so far. None of the three major U.S. indices have set new highs since July.

• The U.S. stock market is incredibly fragile…

We recommend setting aside cash. This will help you avoid major losses if stocks plunge. A cash reserve will also put you in position to buy stocks when they get cheaper.

E.B. is waiting for that day… He plans to buy “empire assets” in The Casey Report for cheap.

Empire assets is our nickname for world-class businesses that we buy and hope to own for a long time. They include companies that own valuable real estate and natural resource deposits, and companies that control things people need, like water.

E.B. is watching one industry in particular…

I'm waiting for once-in-a-decade prices on food stocks.

You see, selling inexpensive food is a great business. Even when the economy is bad, people need to eat. Businesses that mass-produce inexpensive food are nearly recession-proof. E.B. says:

When people can't afford to eat out, they go to the grocery store more. I want to own the companies that stock the shelves…companies like cereal maker Post Holdings (POST) and B&G Foods (BGS), which sells the iconic Green Giant frozen vegetables.

• Owning physical gold could also save you from big losses...

Gold is money. Unlike paper currencies, governments cannot destroy its value. It has held its value through every financial crisis in history. And it also tends to perform well when stocks and bonds do poorly.

The price of gold is already up 17% this year. It’s off to its best start in more than 25 years, according to Financial Times.

• Louis James, editor of International Speculator, has never been more bullish on gold...

Louis is our resource guru. He’s been studying the gold market for more than a decade. His specialty is finding small gold miners with massive upside.

As his readers know, Louis travels the world visiting mines. He studies rock samples, questions management, and looks at projects firsthand to find gold stocks with the most upside.

Last week, Louis explained why this is one of the best opportunities to buy gold he’s ever seen.

Today, we’re coming off the longest and most devastating gold bear market in the past 40 years. With valuations near extreme lows, small gold stocks are like coiled springs, ready to leap higher. Now is the best time I’ve seen since I started this business to position yourself for potential 10-baggers (1,000% gains).

Gold stocks offer leverage to the price of gold. A 100% surge in the gold price can cause gold stocks to surge 200%...300%...400%...or more.

• The last time Louis saw an opportunity like this in 2001, a key gold stock index surged 602%...

The best gold stocks jumped more than 1,000%.

Louis thinks we’ll see even bigger gains during this gold bull market.

To help you profit off this rare opportunity, we’re offering a special deal on International Speculator. If you sign up today, we’ll knock $500 off the normal price.

You’ll also receive Louis’ latest report, 9 Essential Gold Stocks to Buy Right Now. This report includes Louis’ top picks for the current gold bull market. These stocks could return 10x, 20x, or even 30x. Those gains might sound unbelievable...but they’ve happened before.

Click here to learn about this incredible opportunity.

Chart of the Day

Corporate earnings are worse than they appear.

U.S. corporations are required to report GAAP earnings per share. GAAP stands for “Generally Accepted Accounting Principles.” It’s the standard way to report earnings.

A growing number of companies are also reporting “adjusted” earnings. These alternative earnings measures don’t conform to GAAP.

Many companies use adjusted earnings to remove the impact of factors they consider “temporary,” like the strong dollar or a warm winter. A company’s management team decides what to include or ignore when measuring adjusted earnings. As you might guess, adjusted earnings typically look better than GAAP earnings.

Last year, 20 of the 30 companies in the Dow Jones Industrial Average reported adjusted earnings.

Today’s chart shows the difference in GAAP and adjusted earnings for companies in the Dow Jones Industrial Average over the past two years. In 2014, adjusted earnings were 12% better than GAAP earnings. Last year, they were 31% better.

Companies claim that adjusted earnings give a more accurate picture of their business. We’re skeptical. Be cautious when investing in companies that cite strong adjusted earnings. Some companies use “adjustments” to hide weakness in their business.

China’s High-Income Future

Erik Berglöf

 banks in China 
LONDON – “What if this is ‘as good as it gets’?” Jack Nicholson asks, as he walks through his psychiatrist’s waiting room in the eponymous film. At the recent meeting of G-20 finance ministers in Shanghai, participants were asking much the same question – and not just with regard to medium-term expectations of weak global growth. Many are now wondering whether China’s current growth rate will be as good as it gets for a long time to come.
Determining the validity of such fears requires understanding what is driving China’s economic slowdown. Some offer a straightforward explanation: China, along with other major emerging economies, has become ensnared in the dreaded “middle-income trap,” unable to break through to advanced-economy status. But this assumes that some exogenous force or tendency causes countries to become “stuck” at a particular income level – a view that one academic study after another has debunked.
To be sure, countries do often struggle to achieve high-income status. According to the World Bank, only 13 of 101 countries classified as middle income in 1960 had reached high-income status in 2008.
Moreover, some middle-income countries, after promising growth, spent decades “trapped” at a certain per capita income level. Argentina, for example, kept pace with the United States in per capita income growth from 1870 to 1940; since then, the gap has been widening steadily. In this manner, even countries that make it to high-income status sometimes regress to middle-income levels.
But there is no historical necessity that dictates that countries get stuck at particular levels of income. On the contrary, studies suggest that fast-growing low-income economies are also likely to become fast-growing middle-income economies, and ultimately to graduate to high-income status. If an economy gets stuck, it is because it has failed to adjust, as the basis for growth changes. And, in fact, the lack of capacity for self-transformation normally would have been visible at low-income levels, too.
What, exactly, does the needed adjustment entail? While the specifics vary across countries, the innovation-focused Neo-Schumpeterian growth theory, proposed by the economists Philippe Aghion and Peter Howitt, offers some important insights.
Aghion and Howitt view innovation as any change that leads to the introduction of new products or processes in the market where a firm operates. Countries far from the world technology frontier are better off imitating existing technologies and adapting them to local conditions, but over time such countries must improve their capacity for innovation. Studies have also shown a positive link between innovation and social mobility, and even between innovation and income inequality.
Central to the innovation-focused perspective is the notion that economic growth requires technology transfers and an environment in which new firms can form, grow, and exit (thereby reallocating factors of production to more successful firms). Quality of management obviously plays a key role, but institutions and human capital also matter; corruption, credit constraints, and lack of access to high-quality education all make economic transformation more difficult.
But fostering innovation is not a silver bullet. While providing returns to innovators can help to spur more innovation, it can also allow businesspeople to capture too large a share of the transformation process. For example, whereas Bill Gates has probably been good for economic transformation, the Mexican telecoms billionaire Carlos Slim has not. Encouraging one kind of innovator could easily give rise to the other.
What does all this mean for China? As the country attempts to create the conditions for greater genuine innovation, it must also address myriad short-term challenges. It is caught in a deflationary spiral, with falling prices and increased anxiety over the economy’s prospects reinforcing each other.
And excessive lending to the corporate sector, particularly in manufacturing, has led to massive excess capacity and a growing mountain of bad debt, suppressing growth.
Compounding the challenge, China’s economy is more globally relevant and interconnected than ever before, which means that any action it takes can have far-reaching effects. With tried and tested policies unlikely to work in this new context, the government is having to improvise. And, as anxious markets clearly recognize, that approach carries the potential for policy mistakes.
Nonetheless, there is good reason to believe that China can succeed, given that the country’s economic history indicates an impressive capacity for transformation. Of course, China’s economy has come a long way since Deng Xiaoping initiated the policy of reform and opening up in 1978. But even in more recent years, the skill content in China’s output has improved radically, and resources have been successfully transferred from agriculture to the services sector, rather than to the manufacturing sector, where large state-owned firms still dominate many industries.
If the recent research debunking the middle-income trap is correct, China – one of history’s most miraculous growth stories – has a very good chance of succeeding in the transition to high-income status with similar vigor. The underlying structural changes that have occurred in China in recent years reinforce this optimism. China will need to continue reforms and overcome vested interests, particularly in the state-owned sector, but its chances of success remain high.