A Day Of Reckoning

By: Captain Hook


A day of reckoning approaches - even the oligarchs know this - and it's coming closer faster every day. No, I'm not playing with words here, or your sensibilities. However, because our situation has been in hyper-bloat for so long now, essentially measured by stock market lows in 2009, this statement is simple fact. A day of reckoning approaches - and it's coming closer faster every day. It's that simple, whether you want to face up to this inevitability or not. And it will arrive for all the reasons we discuss on these pages every week, some of which, the important ones, we will discuss here again today.

As regular readers would know, long ago we sounded in on the inevitability of a profound decentralization process, countering still omnipresent 'Globalization' plans on the part of the world's elites, now accelerating in sympathy with increasingly destabilizing economies as central planning continues to destroy the global economy, impoverish increasing numbers, and exacerbate wealth / income inequalities. So make no mistake - process continues to accelerate in this regard - where the economy / markets are disintegrating even though a thin veneer of normalcy is still being maintained in 'price stability', a situation that should look quite different next year.

Next year is another year ending in '7' that should go down in history as a pivot point back towards the volatility that more accurately reflects the vulgarities associated with the human experience - and our flagrant disregard for the 'seven deadly sins'. The markets / economy are being supported by the status quo's desire to maintain stability prior to the US Presidential election this fall, because they are especially worried about being displaced by a popular vote that brings in radical change, if that is truly what Donald Trump represents. Because globalists will put the heat on Trump if he wins - and embedded bureaucrats will back them up logistically.

Thing is, it won't matter who wins in the end, as suggested last week. Competition for scarce resources on a global basis will trump all such concerns in the end. And as process unfolds, which will accelerate de-globalization and the further loss of living standards in America (and world), while central planners and elitists will attempt to counter loss of power by rallying the masses in war, again, this will not matter in the end as localization trends overtake the macro.

Schumaker was of course way ahead of his time in envisioning this, a more natural order for the human condition, a genius, as we began documenting some eight years ago now, along with here and here.

The question then arises, 'if the system and markets crash again, won't they just reinflate them like all the other times?' Indeed. Why would this time be any different - postponing a 'true reckoning' once again, and pivot towards decentralization? That's a very good question. The answer of course is answered in the cost of money - which is now essentially worthless and devoid of any value - and is why central authorities must now give it away. (i.e. ZIRP, NIRP, etc.) Unfortunately, this condition will not prevent central bankers from melting down the system in a painful quasi-hyperinflationary event (some degree of hyperinflation), coming to your town soon, evidenced in the now inverted yield curve - concrete evidence the US economy is a painted-over recession.

Power always corrupts, which is why you can't have somebody in Washington or Brussels making it appear they are taking care of your interests. They are taking care of themselves, and are more than willing to throw everybody else under the bus in order to maintain their utopian dystopia. Human beings in positions of power must be managed, as represented by the Constitution, which has been thrown out the window now along with the baby, bathwater, and anything else 'America' once represented that was 'good'. And unfortunately this continues until it's too late, as is the case right now, no matter who wins the election. Because even if Trump is elected, and he is allowed to take office and begin implementing policy, it won't matter because America is broke and will have to print the money to keep all those promises.

So make sure you understand this - it won't matter who is elected in November - the US is broke and will need to implement money printing acceleration or face economic implosion, again, evidenced in the now crashing inverted yield curve, which will play havoc on the dollar($). Add in the growing trend toward decentralization, which is another way of saying 'de-dollarization', and 2017 should see an unstoppable torrent of $ selling that sends commodity and input prices in America through the roof, further enflaming an already enraged mob that will be on the war path for blood.

Once people stop eating, which is what will happen as commodity prices explode higher, will turn America into Venezuela so fast is will make your head spin, so I hope Trump enjoys his honeymoon quickly, because it won't last long. As you can see below in the Dow / CRB Ratio, the turn into an accelerating inflationary environment is close now. (See Figure 1)

Figure 1
INDU:CRB Monthly Chart

Here's a chart nobody else is looking at, which is always good for those who are, the NASDSAQ / NASDAQ Volatility Index (VXN) Ratio (monthly). What is the chart pattern in this ratio telling you at present? Answer: That inflation is on the way, and as a result, tech stocks are going higher. It's that simple unless the triangle test currently underway fails. So again, as per our comments above, it doesn't matter who wins the election - the feds will have to print ever-increasing money or face economic implosion - right here - right now -  election or no election. So to answer the bigger question - will we ever see a 'day of reckoning' with all the money printing bureaucrats of the world, the answer is still yes, but not in the traditional form. It will come not in a deflation scare - but (some degree of) hyperinflation reality. (See Figure 2)

Figure 2
NASDAQ:VXN Monthly Chart


Funny thing is though, in looking at the plot below, we have a profound negative divergence in tech stock out-performance in this last surge that began at the turn of the year, suggestive any further gains should be fleeting. What does this mean? It means once the NASDAQ tops out, whenever that is (next year ends in '7'), the losses should be spectacular assuming the NASDAQ / Dow Ratio doesn't miraculously explode higher in coming days. So you see, we have a 'Tale of Two Cities' here. Or is it we have a 'tale of sequencing'? Explosion higher in tech stocks another 10% -- then collapse. Who really knows - right? One thing is for sure though; you don't want to be shorting stocks with the message in Figure 1, or that in the Figure below either. We are of course referring to the Dow / XAU (Philadelphia Gold & Silver Index) Ratio, which has turned higher now, as forecast. (See Figure 3)

Figure 3
NASDAQ:DOW Monthly Chart

Because again, although it appears authorities will need to institute something different soon (because conventional games / policy no longer work) no matter who is elected, with America in recession (something you won't hear in mainstream media (MSM)), something different needs to be done, whether that's QE for the people, helicopter money, etc. - something that will get money multipliers turned higher. Because while giving bankers more money to park on deposit at the Fed is working out great for them, just about everybody else is getting killed unless they belong to the (successful) speculator community, rentier class, or higher end of the bureaucrat classes. That's what the above charts are telling you. They are telling you big inflation is coming soon, and that this inflation will eventually have a very negative effect on the economy, corporate profitability, and broad stock prices at some point. (See Figure 4)

Figure 4
Silver:SPX Monthly Chart


That's the big question for so many now, with the stock market so important to the economy at this juncture. So don't be fooled about this hesitation in the inflation trade - the best is yet to come. The Dow / XAU Ratio still needs to correct higher quite a bit more in order to trace out a 38.2% retracement (to 250) in coming weeks (until an equity crash in October?), however don't let this volatility fool you, once this is over the inflation trade will be back on in spades next year as the world accelerates the dishoarding of $'s. (i.e. once they see the money multipliers in the States turn higher.) Again, if inflation (freshly printed currency) is finally disseminated to the public directly through QE for the people or helicopter money (this one would have the biggest kick), the velocity of money will accelerate, general price levels will rise, interest rates will rise, true inflation hedges will rise (commodities, precious metals, tangibles), and paper will lose its appeal.

That's when precious metals will make some serious gains against the stock market, with silver in the lead, as seen in Figure 4. In looking at Figure 4, we see a very 'un-natural' chart pattern that has gone on for far longer than would have occurred if silver were not the West's 'whipping boy' (and stocks the darling), where because of its relationship to gold and the perception of a controlled monetary order by the Fed (and their buddies), silver prices would be far higher today. That being said, in looking at the monthly plot from the Chart Room above, we can see that fresh buy signals are now appearing, with silver coming back in spite of the status quo's price managers - the suppression that has gone on aggressively since the Greenspan Era. So after some further consolidation that could take the correction in silver into October, or perhaps next year at the outside (Commercial sellers will show up again the next time silver attempts to clear $21), it should start a serious 'catch up' move at some point.

So how deep will this correction in precious metals go? While nobody knows for sure obviously, I am sticking with my thoughts from last week on this subject matter in spite of the fact it would be more encouraging to see Comex speculators abandoning their bullish positions faster.

The COTS for gold and silver are still on the high side, however they are coming down without damaging the price structures much, so this is encouraging. With respect to the shares, obviously the 250 mark on the Gold Bugs Index (HUI) is now history support wise, where we now have lower trajectories in sight.

Therein, if the Dow / XAU Ratio still has another 50-plus points to the upside in order to trace out a 38.2% retracement, then obviously at least a 38.2% retrace should be considered likely here as well, bringing the large round number at 225 into view (slightly below). That said however, we know that in terms of these larger corrections that based on my harmonics study from 2003, the tendency is for a 50% retracement, suggestive a move to the large round number at 200 is definitely not out of the question, especially if general liquidity conditions become an issue in October.

Impossible? If you think that, just go to this link, click the weekly tab at the top of the chart, and notice the MACD just crossed lower last week. Therefore, if history is a good guide in this respect, it should take at least 6 to 8 weeks for a bottom to be put in place - an intermediate degree correction.

That puts us into the stock market crash window in the second half of October - for a seasonal inversion. So thinking it's possible (likely?) the HUI vexes 200 is definitely not a stretch by any means - you can take that to the bank. What's more, it should be noted that open interest put / call ratios are falling with prices, meaning we have the proper sentiment background to sponsor further losses as well. Most notably, Friday saw a big decline in the GDX ratio (see here) with falling prices, where it should be noted the GDX ETF and contract generator (speculating & hedging instrument) is the largest in the sector - by far.

So let's hope for this corrective process to get on with it, allowing us to redeploy trading positions at attractive prices. Because after that, with status quo price managers now realizing how bad the economy is, and the need for both accelerating and new forms of money printing, money printing that actually reaches the economy (people on the ground), you are going to need all the inflation hedges you can get. And it just so happens precious metal shares should be at the top of the list in years to come.

Here's hoping for a mania in precious metal shares in 2020 - no?

See you next time.


Building the case for greater infrastructure investment

Lawrence Summers

The issue now is not whether the US should invest more but what the policy framework should be



There is a consensus that the US should substantially raise its level of infrastructure investment. Economists and politicians of all persuasions recognise that this can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run. They also see that such investment can expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation.

The case for infrastructure investment has been strong for a long time, but it gets stronger with each passing year, as government borrowing costs decline and ongoing neglect raises the return on incremental spending increases. As it becomes clearer that growth will not return to pre-financial-crisis levels on its own, the urgency of policy action rises. Just as the infrastructure failure at Chernobyl was a sign of malaise in the Soviet Union’s last years, profound questions about America’s future are raised by collapsing bridges, children losing IQ points because of lead in water and an air traffic control system that does not use GPS technology.
 
The issue now is not whether the US should invest more in infrastructure but what the policy framework should be. There are five key questions.
 
How much more do we need to invest? For the foreseeable future, there is no danger that the US will overinvest in infrastructure. An increase in investment of 1 per cent of gross domestic product over a decade would total $2.2tn and permit substantial steps both to catch up on deferred maintenance and embark on new projects.
 
What is the highest priority? The fastest, highest and safest returns are likely to be found where maintenance has been deferred. Maintenance outlays do not require extensive planning or regulatory approvals, so they can take place quickly. And they tend naturally to take place in areas where infrastructure is most heavily used.

How should investment be financed? There is a compelling case that infrastructure investments pay for themselves by expanding the economy and increasing the tax base. The McKinsey Global Institute has estimated a 20 per cent rate of return on such investments. If the return is only 6 per cent and the government collects about 25 cents on every dollar of GDP, it will earn 1.5 per cent on investments. This far exceeds the real cost of borrowing even over a horizon of 30 years. Debt financing of new infrastructure investment would be entirely reasonable. And if there is a desire to generate revenue to finance infrastructure investments, the best approaches would involve user fees.
 
Thus, increased landing fees could help finance airports; tolls or taxes on miles driven could fund road improvements.
 
What about the private sector? Some infrastructure priorities, such as replacing coal-fired power plants with renewables, expanding broadband networks or building pipelines, are clearly the responsibility of the private sector. Policy frameworks that streamline regulatory decision-making and reduce uncertainty could spur investment in these sectors. There is a case for experimenting with mobilising private capital for use on infrastructure that has been a public-sector preserve, such as airports and roads. But, the reality that government borrowing costs are much lower than the returns demanded by private-sector infrastructure investors should lead to caution. It would be unfortunate if, in an effort to avoid deficits, large subsidies were given to private financial operators. Only when private-sector performance in building and operating infrastructure is likely to be better than what the public sector can do is there a compelling argument for privatisation.

How can we be sure investment is carried out efficiently? There is legitimate scepticism about this, and there is no silver bullet for this problem. Transparency of the type adopted for the Obama administration’s fiscal stimulus should become the norm. Additionally, progressive advocates of more investment should compromise with conservative sceptics and, in the context of increased spending, accept regulatory streamlining, as well as requirements that projects undergo cost-benefit analysis. Minimising cost should be the objective of infrastructure procurement.
 
Every year that we allow our infrastructure to decay raises the burden that our generation places on the next. We will not always be able to borrow for the long term at a near zero interest rate. However the election turns out, a major infrastructure investment programme should be adopted by the president and Congress in the spring of 2017.


The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary


Why the Greater Recession will be Dollar Bearish

By: Michael Pento  


The Great Recession of 2008 provided markets with an interesting irony: As the US economy was collapsing under the weight of crumbling home prices, investors curiously flocked to the US dollar under the guise of "The Safety Trade."

But the truth is that investors weren't running into the dollar for safety, what they were actually doing was unwinding a carry trade. In a carry trade an investor borrows a depreciating currency that offers a relatively low interest rate and uses those funds to purchase an appreciating currency that offers the potential for higher returns on its sovereign debt and stock market. The trade's objective is to capture the difference between rates, while also benefitting from the currency that is rising in value against the borrowed (shorted) funds.

In the years leading up to the 2008 crisis, a popular trade was to short the US dollar and invest in higher yielding emerging markets (EM's) such as Brazil, Russia, India, and China referred to as the "BRIC'S". The Federal Reserve's manipulation of interest rates following the attacks of September 11, 2001, sent the market on a desperate search for yield. Investors found the return they were seeking in the EM's and remained there for years as the Fed was merely playing catch-up with rates.

The Fed Funds rate went from 1 percent in 2004, to 5.25 percent in 2006, while the value of the dollar reduced during that timeframe.


Rise in Emerging Markets since 2002
US Dollar Index Weekly Chart

As you can see from 2002 to 2008, EM stocks rose and the dollar fell as investors took advantage of the relative yield differential between the US and EM's.

But by the second half of 2008 the market's focus shifted away from yield differentials and FX advantages to a massive concern over tumbling US growth spilling over to the EM's due to collapsing real estate prices and insolvent banks. The short dollar/long EM carry trade reversed as investors panicked to cash out of booming BRIC markets and bought back dollar loans to close out the trade.

This sent the dollar soaring and EM stocks crashing, which provided the peculiar narrative that investors were moving into the dollar for safety even as the US economy and financial system was in freefall.

What's happening now?

Today we actually have the reverse scenario: the dollar index is rising as the yen and euro currencies are falling. The carry trade is to borrow (short) the yen and euro and buy higher-yielding dollar-denominated assets. Therefore, the next economic collapse will reverse this carry trade.

Dollar Index:
Dollar Index since 2012
Yen:
Japanese Yen since 2012
Euro:
Euro since 2012


This explains the real reason why the Japanese yen spikes at the slightest whiff of market turmoil.

Market analysts again like to describe this phenomenon as a flight to safety. But why would any investor seek protection in Japan when its enormous debt to GDP ratio proves the nation is insolvent and its central bank is hell-bent on creating inflation by all means necessary?

Investors need to prepare their portfolios for the next recession, which will be worse than 2008 due to the massive increase in global debt and central banks that have no room left to reduce borrowing costs. Therefore, expect the yen and euro will be the beneficiaries of the next carry trade reversal and a much weaker response on the part of the greenback during the next crisis.

But as mentioned, perhaps the biggest worry for investors is what happens to the global economy when there is no room for central banks to save us?  After all, they are already pushing the limits of their money printing and Zero Interest Rate Policies schemes. And the 90+ months of unprecedented and unorthodox monetary expansion has made asset bubbles and debt levels much greater than at any other time in history. The dollar will also come under pressure as the Fed's current divergent monetary policy joins the ECB and BOJ in a commitment to perpetual QE and ZIRP.

The next recession will be much different than the crisis of 2008 in its intensity, duration and effect on the US dollar. Of course, the only caveat would be a crisis that is precipitate by an aggressive Fed rate hike cycle. Otherwise, wise investors will anticipate this differential and have a plan to increase their allocation to precious metals at the onset of the next crisis.


Why Swiss Private Banks Still Face Taxing Times

European outflows from ‘regularization’ have peaked, but outflows from emerging markets have picked up

By Paul J. Davies

A branch of Credit Suisse in Zurich, Switzerland. Credit Suisse has forecast another 5 billion Swiss francs in outflows this year, mostly from emerging market clients, as a result of regularization across the sector. Photo: Reuters


In polite circles they call it “regularization.” More bluntly it is coming clean.

Wealthy people in Europe have been admitting for years to having money they should have declared to tax authorities. For Swiss banks, that has been money out the door as clients moved it home or withdrew funds to pay taxes.

But the trend is spreading to emerging markets. And starting next year, a global automatic exchange of information program will be adopted by about 50 countries. Under the program, countries will share with each other details of financial assets owned by nonresidents, lifting the lid on more hidden funds.

For the Swiss private banks, this will dampen growth, but is also likely to depress profitability because these cross-border assets have historically produced a higher gross margin.

Customers in Latin America have already begun sucking back funds from the industry due to tax amnesty programs in Argentina, Brazil, Chile and Mexico. Russia and South Africa too are causing outflows.

Credit Suisse, CS 0.51 % UBS and Julius Baer JBAXY -0.97 % all noted some effects of this in recent results.

Within Europe, the total amounts “regularized” between 2011 and the end of last year were huge, more than 40 billion Swiss francs ($41 billion) for Credit Suisse and another 30 billion francs for UBS.

A study by Deutsche Bank DB 3.18 % and Oliver Wyman estimated that these outflows cut pretax earnings by between 400 million and 500 million Swiss francs over the period for each of bank. Across Swiss banking, the study estimates that regularization and more focus on the superwealthy, who get lower fees on their big accounts, have cut margins by about 30% since 2010.

The peak of European outflows was in 2012 and they have declined steadily since, but outflows from emerging markets have picked up.

Credit Suisse has forecast another 5 billion Swiss francs will go this year, mostly from emerging markets clients.

This rate is less than half what it was in the heaviest years, but will still be a drag on growth for the whole industry. Swiss banks as a group expect tax-related outflows in 2016 and 2017 to continue at a similar rate as they did in 2015, according to Citigroup. C -1.30 % Julius Baer said it expects emerging market regularization outflows to drag on growth for two to three more years.

The big question is whether the trend will spread to Asia, where the best current and future growth lies. India and Indonesia have declared tax amnesties, but the effects aren’t yet noticeable.

The types of clients Swiss banks attract in Asia—the ultrarich—may present less of a tax risk because they haven’t avoided taxes in the same small, systematic way over decades that European clients did.

For the superrich of a country like China, the cash they have salted away across Asia may be more at risk if they fallout of favor politically, or if other policies change.

By the end of 2018, when information exchange has been in place for a while, the impact on Asia will be clearer.

For those banks with slowing or struggling investment banking businesses, the last thing they need is more difficulty making money in their most promising wealth markets.


How the Sugar Industry Shifted Blame to Fat

By ANAHAD O’CONNOR
.

Credit iStock                    

 
The sugar industry paid scientists in the 1960s to play down the link between sugar and heart disease and promote saturated fat as the culprit instead, newly released historical documents show.
 
The internal sugar industry documents, recently discovered by a researcher at the University of California, San Francisco, and published Monday in JAMA Internal Medicine, suggest that five decades of research into the role of nutrition and heart disease, including many of today’s dietary recommendations, may have been largely shaped by the sugar industry.
 
“They were able to derail the discussion about sugar for decades,” said Stanton Glantz, a professor of medicine at U.C.S.F. and an author of the JAMA paper.
 
The documents show that a trade group called the Sugar Research Foundation, known today as the Sugar Association, paid three Harvard scientists the equivalent of about $50,000 in today’s dollars to publish a 1967 review of research on sugar, fat and heart disease. The studies used in the review were handpicked by the sugar group, and the article, which was published in the prestigious New England Journal of Medicine, minimized the link between sugar and heart health and cast aspersions on the role of saturated fat.
 
Even though the influence-peddling revealed in the documents dates back nearly 50 years, more recent reports show that the food industry has continued to influence nutrition science.
 
The Harvard scientists and the sugar executives with whom they collaborated are no longer alive.
 
One of the scientists who was paid by the sugar industry was D. Mark Hegsted, who went on to become the head of nutrition at the United States Department of Agriculture, where in 1977 he helped draft the forerunner to the federal government’s dietary guidelines. Another was Dr. Fredrick J. Stare, the chairman of Harvard’s nutrition department.
In a statement responding to the JAMA report, the Sugar Association said that the 1967 review was published at a time when medical journals did not typically require researchers to disclose funding sources. The New England Journal of Medicine did not begin to require financial disclosures until 1984.
 
The industry “should have exercised greater transparency in all of its research activities,” the Sugar Association statement said. Even so, it defended industry-funded research as playing an important and informative role in scientific debate. It said that several decades of research had concluded that sugar “does not have a unique role in heart disease.”
 
The revelations are important because the debate about the relative harms of sugar and saturated fat continues today, Dr. Glantz said. For many decades, health officials encouraged Americans to reduce their fat intake, which led many people to consume low-fat, high-sugar foods that some experts now blame for fueling the obesity crisis.
 
“It was a very smart thing the sugar industry did, because review papers, especially if you get them published in a very prominent journal, tend to shape the overall scientific discussion,” he said.
 
Dr. Hegsted used his research to influence the government’s dietary recommendations, which emphasized saturated fat as a driver of heart disease while largely characterizing sugar as empty calories linked to tooth decay. Today, the saturated fat warnings remain a cornerstone of the government’s dietary guidelines, though in recent years the American Heart Association, the World Health Organization and other health authorities have also begun to warn that too much added sugar may increase cardiovascular disease risk.
 
Marion Nestle, a professor of nutrition, food studies and public health at New York University, wrote an editorial accompanying the new paper in which she said the documents provided “compelling evidence” that the sugar industry had initiated research “expressly to exonerate sugar as a major risk factor for coronary heart disease.”
“I think it’s appalling,” she said. “You just never see examples that are this blatant.”
 
Dr. Walter Willett, chairman of the nutrition department at the Harvard T. H. Chan School of Public Health, said that academic conflict-of-interest rules had changed significantly since the 1960s, but that the industry papers were a reminder of “why research should be supported by public funding rather than depending on industry funding.”
 
The JAMA paper relied on thousands of pages of correspondence and other documents that Cristin E. Kearns, a postdoctoral fellow at U.C.S.F., discovered in archives at Harvard, the University of Illinois and other libraries.
 
The documents show that in 1964, John Hickson, a top sugar industry executive, discussed a plan with others in the industry to shift public opinion “through our research and information and legislative programs.”
 
At the time, studies had begun pointing to a relationship between high-sugar diets and the country’s high rates of heart disease. At the same time, other scientists, including the prominent Minnesota physiologist Ancel Keys, were investigating a competing theory that it was saturated fat and dietary cholesterol that posed the biggest risk for heart disease.
 
Mr. Hickson proposed countering the alarming findings on sugar with industry-funded research.
 
“Then we can publish the data and refute our detractors,” he wrote.
 
In 1965, Mr. Hickson enlisted the Harvard researchers to write a review that would debunk the anti-sugar studies. He paid them a total of $6,500, the equivalent of $49,000 today. Mr. Hickson selected the papers for them to review and made it clear he wanted the result to favor sugar.
 
Harvard’s Dr. Hegsted reassured the sugar executives. “We are well aware of your particular interest,” he wrote, “and will cover this as well as we can.”
 
As they worked on their review, the Harvard researchers shared and discussed early drafts with Mr. Hickson, who responded that he was pleased with what they were writing. The Harvard scientists had dismissed the data on sugar as weak and given far more credence to the data implicating saturated fat.

After the review was published, the debate about sugar and heart disease died down, while low-fat diets gained the endorsement of many health authorities, Dr. Glantz said.
 
“By today’s standards, they behaved very badly,” he said.