Toynbee’s Europe

John Mauldin

In today’s Outside the Box, Charles Gave offers an incisive and absolutely scathing indictment of the latter-day European project. Harking back to the historian Arnold Toynbee, Charles reminds us that “the role of ‘elites’ in any society is to handle challenges that allow the group to survive and move on to the next phase of their shared journey. If bad solutions are offered up then problems will intensify and pressure will arise for a change in the elite.”

In the postwar era, Charles asserts, European leaders have time and again responded to new challenges with old solutions, chief among them being the forced integration of Europe into a single political and economic construct.

And the interesting thing, Charles notes, is that members of the elite are starting to openly admit that they have been making Europe’s problems worse. He gives the example of Mervyn King, the former governor of the Bank of England, who recently wrote that European leaders pushed for the adoption of the euro as a single currency knowing that it would result in economic disaster in Southern Europe.

And then just last week we saw the IMF unleash a torrent of self-criticism about its handling of the eurozone crisis.

“So where does this leave us?” Charles asks. There are two options available when an “unelected mafia” has seized control, he says: elections and revolution. The Brits opted for an election, but what if Italy, Portugal, and/or the Netherlands do the same, with the same outcome?

At this point Charles’ indictment morphs into a warning; but rather than spilling the beans, I’ll let you dig into this brief but important piece.

I am in the air on the way to NYC, and then to catch a flight to Bangor tomorrow.

Trey and I are both pretty excited to get back to Leen’s Lodge for what will be our 10th year at Camp Kotok. There will be no end of topics to chew on, some of them economic and some just catching up with old friends. Looking forward to learning from the debates, which given the composition of the group are a nearly continuous feature of the gathering. If there’s not a debate in progress, you can always just start one up. It’s a good place to toss out new ideas and see who squawks.

Now let me hit the send button and send you on your way to Charles.

Your ready to relax a little analyst,

John Mauldin, Editor
Outside the Box

Toynbee’s Europe

By Charles Gave, Chairman, Gavekal

In A Study of History the great Arnold Toynbee explained that the role of “elites” in any society is to handle challenges that allow the group to survive and move on to the next phase of their shared journey. If bad solutions are offered up then problems will intensify and pressure will arise for a change in the elite. This can happen in various ways: through elections in a best case scenario, a change of regime as with France’s forth Republic which failed to properly handle decolonization, a collapse in the political structure such as befell the Austrian empire at the end of WWI, or, most dramatically, the overthrow of a civilization as in South America with the arrival of the Spaniards or in Egypt when the Muslims took over.

In Europe, the main problem for a century or more was the internecine rivalry between Germany and France which led to three wars that became progressively more destructive. By the time Europe’s exhausted elites reached 1945, it was obvious that war was not going to solve anything and hence a new solution was tried in the shape of “political” Europe. The plan worked to such an extent that new challenges were spawned such as the handling of Germany's reunification, managing the effects of an aging population and integrating lots of immigrants from a genuinely different civilization.
New problems, old solutions

These new challenges required new solutions, and yet the elites responded with solutions used to handle the previous challenge, with the forced integration of Europe into a single political and economic construct. Unsurprisingly, the old solutions have not worked and indeed their application is making Europe’s various problems worse. The interesting thing is that members of the elite are starting to openly admit this:

  • Mervyn King, the former governor of the Bank of England, wrote in his recent book The End of Alchemy that European leaders pushed for the adoption of the euro as a single currency knowing that it would cause an economic disaster in Southern Europe. The idea was that the impact of weakened economies would force national politicians to accept “reforms” imposed by Brussels. Put simply, Lord King argues that these elites consciously organized a huge decline in living standards in the expectation that it would undermine the legitimacy of local politicians. The problem is that most regular people (rightly) believe that their state is the best guarantor of their society being able to “live together”, which is the basic contract binding a nation.
  • Last week the International Monetary Fund’s independent watchdog offered a scathing assessment of the agency’s handling of the eurozone crisis with the allegation that staffers willfully ignored fatal flaws in the euro project due to an emotional attachment. It became a totem of IMF thinking that in a common payment area, there could not be a solvency crisis. Moreover, the “solutions” imposed on Greece hurt the most vulnerable part of society, causing a collapse in living standards. In an indictment of the IMF’s competence, its assessments (forecasts) about the impact its policies would have on the Greek economy were shown to border on the ridiculous. To boot, the processes followed by IMF staff were shown to be unprofessional with decisions being taken without proper discussion and documentation.

Our “experts” (the brilliant men of Davos) have thus been shown to protect their own particular tribal interests, rather than the common good. These testimonies are part of an revelatory exercise in Europe which must accelerate a collapse in the legitimacy of both know-better technocrats and the trans-national institutions, which have been all over the European project since 2011 with such deleterious effects. As such, not only the IMF but the European Commission and the European Central Bank have all seen their credibility decimated. 

The really worrying thing with these demonstrably incompetent institutions is their continued power grab without any proper authority. Such hubris has seen them break pretty much every agreed rule of national economic management that existed prior to the crisis (it seems a quaint detail now that the ECB was not supposed to buy government bonds) in a bid to sustain a project which is manifestly pushing European economies toward a disaster. So where does this leave us?

Historically, when an unelected “mafia” has seized control of the political domain, the two remedial options available to the citizenry have been elections, and failing that a revolution. As usual, the British moved first— through an election (England’s last revolution was in 1688). The Brits’ decision to break free should not have been that surprising, given that in the normal course of events the EU system had been rigged to stop the genius “elites” from being fired democratically.

Yet for all the significance of the Brexit vote, the UK is not part of the eurozone and so could leave without dooming the system. Italy, Greece, the Netherlands, Portugal and Finland, by contrast, are subjected to that straitjacket. And getting out of the euro implies exiting the EU. For this reason, the next exit (Italy looks like a prime candidate) is going to be far more momentous, with very clear investment implications.

The savings of the problematic countries will likely move to Frankfurt (in expectation of the deutschemark coming back), London or New York on the basis of a slightly revised Gresham’s law that bad currency will chase out the good ones. The result will be a big rise in German M1 and a banking crisis in the weak countries, with banks being bled dry of their deposits. The value of the pound and the US dollar can be expected to appreciate. Since it appears that Europe’s banking crisis is already under way, my advice would be to watch these variables very closely. If the pound and the dollar start to rise against the euro, it will probably mean that German M1 is rocketing upwards. And at that point the advice would be to adopt the brace position.

The Strong Jobs Report Drops Gold - Is This A Buying Or Selling Opportunity?

by: Hebba Investments

- For the week, we saw speculative gold longs increase their positions - right into Friday's gold price drop.

- While we expect next week's report to show a smaller net long position in both precious metals, they are still near historic highs.

- We expect a further drop in the gold and silver price as these drops tend to snowball with so many bullish traders already in the market.
In the latest COT report, we saw a rise in the gold long speculative positions, which occurred right before Friday's jobs report related drop in the gold price. Based on the position data from Tuesday, we believe a large chunk of gold traders were probably on the wrong side of Friday's trade. Silver traders were a little less bullish into the COT report close (Tuesday), and we would imagine the next report would continue to show that the bearish side of silver does have a pulse. We have been expecting a bit of a pullback in precious metals based on the historically high bullish positioning - is it time to get back in?
We will give our view and will get a little more into some of these details, but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report
The COT report is issued by the CFTC every Friday to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued, it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it.
What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
This week's report showed speculative gold longs significantly increase their positions for the first time in a month, while shorts slightly increased their own positions.
After a month of decreasing positions, speculative gold longs increased their positions in the latest COT report week, but unfortunately it was directly before Friday's big drop in the gold price. Shorts slightly increased their own positions during the week but they haven't had much courage in a few months now and this week wasn't much different as their positions only grew by a little over 1,800 contracts. It will be really interesting to see how net Tuesday's report shows traders reacting to Friday - will it be primarily longs selling or shorts shorting?
Moving on, the net position of all gold traders can be seen below:
The red line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, speculative traders have raised their net long positions to 267,000 contracts. Of course, this data doesn't incorporate Friday's drop in the gold price and thus we expect the speculative net long level to be a bit lower; however, we don't expect it to be too much lower since it was only a one-day drop and we'd have to see some more sustained declines in the gold price to expect the net long speculative levels to approach more reasonable historic numbers.
As for silver, the week's action looked like the following:
The red line which represents the net speculative positions of money managers, finally saw a slight pullback as shorts increased their positions by a little more than 3,500 contracts while longs decreased their own positions by 450 contracts. Having said that, we're still at extremely high net long levels in silver and we would need to see a much larger change to make us more comfortable here.
Our Take and What This Means for Investors
So what should precious metals investors do here?
We have seen a little bit of the pullback that we were expecting based on the extreme net long levels in both gold and silver, but one day will not eliminate some of the froth we believe has been building in the precious metals markets over the past few months. There's still simply too much confidence on the long end of the trade for us to get back into some of our gold trading positions just yet.
Having said that this doesn't affect our view on gold in the intermediate and long term as we are big bulls on gold over those time frames as there are too many significant financial questions without answers and policy makers that have no plans to solve moving forward. In fact, recent talk by both US presidential candidates (which we highlighted earlier this week) about large increase in deficit infrastructure spending are certainly making the future bright for inflation-proof assets like gold. That is why we still hold a significant amount of paper and physical precious metals as our core position and have no desire to sell any of those assets.

But for now, in the short term, we are not convinced this pullback is big enough for us to start re-initiating some of our previously sold trading positions in the precious metals. Investors should remember that this drop was initiated by a big jobs report beat, and though we think the report itself (or far more accurately: "the survey") is not a great indicator for the economy, we know other traders do follow it and trade accordingly. With such historically large net long positions in both precious metals, they remain vulnerable to pullbacks that snowball into much larger drops than warranted.
Investors have to be careful here as there is plenty of room to drop further and we are really looking for a pullback below $1,300 to shake some momentum players out of the market. Thus, we think investors should hold off or lighten up on gold positions in the ETFs and miners such as the SPDR Gold Trust ETF (NYSEARCA:GLD), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and miners such as Randgold (GOLD) and Barrick Gold (NYSE:ABX).

Technology in China

China’s tech trailblazers

The Western caricature of Chinese internet firms needs a reboot

GOOGLE left. Facebook is blocked. Amazon is struggling to make headway. And if further proof were needed that China’s tech market is a world apart, this week seemed to provide conclusive evidence. Uber, a ride-hailing service that is the world’s most valuable startup, decided to sell its local unit to Didi Chuxing, a Chinese rival. Its China dream, like those of so many before, is dead.

For many, the lessons of this latest capitulation are clear. China is a sort of technological Galapagos island, a distinct and isolated environment in which local firms flourish. Chinese firms are protected from external competition by government regulation and the Great Firewall. And that protection means that they need not innovate but can thrive by copying business models developed in the West. In short, China is closed, its firms are cosseted and their talent is for mimicry.

At first sight, Uber’s retreat appears to fit this damning profile. The startup has ceded China to Didi: it will concentrate on its home market and elsewhere. Uber’s surrender was caused partly by regulations, issued at the end of July by the Chinese authorities, that in effect outlawed subsidies—Uber spent $1 billion a year in incentives to Chinese drivers and riders. Now Didi, whose forerunner firms were founded in 2012, three years after Uber introduced ride-hailing, can make hay. But look more closely and a more positive picture emerges—not just of Didi, but of China’s technology firms as a whole. 

Getting the message
The usual story about the isolated nature of the Chinese market is that foreign firms are either blocked altogether or hobbled by regulators. The government has indeed restricted competition in some areas—which is why China has subpar clones of Western firms, such as Baidu in search or Renren, an ailing knock-off of Facebook. But China is not as impenetrable as its critics suggest.

WhatsApp, the world’s most popular messaging app, which is owned by Facebook, is freely available in China; yet it is dwarfed by WeChat, China’s leading app (which has also fought off Alibaba, a formidable local internet giant). China is the largest market for Apple’s iPhone. And Uber made a valiant effort to establish itself in China, the world’s largest ride-hailing market: a 17.7% stake in Didi is not a bad consolation prize. Nor are Chinese tech giants walling themselves off from the rest of the world. They have invested in American startups, including Snapchat and Lyft, and bought mobile-gaming firms like Supercell of Finland and Playtika of Israel.

Being present in the Chinese market is all very well, comes the retort, but not if you are stopped from winning. That gives too little credit to China’s tech leaders. Ride-hailing, like many online businesses, is a cut-throat, winner-takes-all market: Didi itself is the product of a 2015 merger of two local firms. Uber was outcompeted. Globally, Uber arranged its billionth ride at the end of 2015, after five years in business; Didi arranged 1.4 billion rides in 2015 alone, just in China.

Uber struggled to raise its market share in China above 10%. Didi understood the local culture, integrated better with social-media platforms and got taxi drivers onside by incorporating them into its app from the beginning. In outlawing subsidies, the regulators called time on a fight the American firm had already lost.

Similarly, whatever the settings of the Great Firewall, there is nothing outside China that offers WeChat’s combination of features. It has over 700m monthly users, and combines messaging, voice calls, browsing, gaming and payments. It can be used for everything from paying parking tickets to booking a hospital appointment, ordering food or paying for a cup of coffee. WeChat is not so much an app as an entire mobile operating system, and accounts for more than one-third of all time spent online by Chinese mobile users; HSBC, a bank, values the app at over $80 billion. To Chinese users, Western apps look hopelessly backward.

WeChat is the best riposte to the condescending, widely held belief that Chinese internet firms are merely imitators of Western ones, and cannot innovate themselves. But it is not the only example. Alibaba kick-started Chinese e-commerce with the clever trick of holding payments in escrow, helping buyers and sellers establish trust. It now offers services that exploit its vast customer database, including credit-scoring, digital marketing, and vetting visa applicants and users of dating sites. Didi’s ride-hailing app includes novel features such as on-demand bus services and the option to request a test-drive of a new car. Sina Weibo, the Chinese equivalent of Twitter, has a built-in payments system and supports premium content, both features that Twitter lacks. With revenue from payments, virtual goods and gaming, Chinese internet firms are also much less dependent on online ads than Western rivals.

As a result, the flow of ideas between China and the West is now two-way. Facebook’s efforts to incorporate payments and commerce into its Messenger app are inspired by WeChat, as is Snapchat’s expansion from a messaging app into a media portal, and the sudden enthusiasm of Google, Facebook and Microsoft for bots (smart software that chats with customers). Western consumers are having their experience of the mobile internet shaped by a Chinese success story.

Companies that want a glimpse of the future of mobile commerce should look not just to Silicon Valley but also to the other side of the Pacific.

Digital dragons
Policymakers should study China, too. No other place will reveal more about the advantages and drawbacks of winner-takes-all digital markets. As WeChat shows, a single dominant app, particularly with a payments system included, is amazingly convenient for users. But monopolies can also spell danger. Now that Didi has a 90% market share and no serious rivals to speak of, riders can expect to pay more and drivers to be paid less. How to strike the balance between convenience and dominance is the great question for regulators in the digital age. One lesson is already clear: compared with Renren and Baidu, Didi and WeChat were strengthened by fierce rivalries. If China’s tech trailblazers aim to become truly global champions, then competition is their friend. Watch closely, world.

Globalisation and politics

The new political divide

Farewell, left versus right. The contest that matters now is open against closed

AS POLITICAL theatre, America’s party conventions have no parallel. Activists from right and left converge to choose their nominees and celebrate conservatism (Republicans) and progressivism (Democrats). But this year was different, and not just because Hillary Clinton became the first woman to be nominated for president by a major party. The conventions highlighted a new political faultline: not between left and right, but between open and closed.

Donald Trump, the Republican nominee, summed up one side of this divide with his usual pithiness. “Americanism, not globalism, will be our credo,” he declared. His anti-trade tirades were echoed by the Bernie Sanders wing of the Democratic Party.

America is not alone. Across Europe, the politicians with momentum are those who argue that the world is a nasty, threatening place, and that wise nations should build walls to keep it out.

Such arguments have helped elect an ultranationalist government in Hungary and a Polish one that offers a Trumpian mix of xenophobia and disregard for constitutional norms. Populist, authoritarian European parties of the right or left now enjoy nearly twice as much support as they did in 2000, and are in government or in a ruling coalition in nine countries. So far, Britain’s decision to leave the European Union has been the anti-globalists’ biggest prize: the vote in June to abandon the world’s most successful free-trade club was won by cynically pandering to voters’ insular instincts, splitting mainstream parties down the middle.

News that strengthens the anti-globalisers’ appeal comes almost daily. On July 26th two men claiming allegiance to Islamic State slit the throat of an 85-year-old Catholic priest in a church near Rouen. It was the latest in a string of terrorist atrocities in France and Germany. The danger is that a rising sense of insecurity will lead to more electoral victories for closed-world types. This is the gravest risk to the free world since communism. Nothing matters more than countering it.

Higher walls, lower living standards
Start by remembering what is at stake. The multilateral system of institutions, rules and alliances, led by America, has underpinned global prosperity for seven decades. It enabled the rebuilding of post-war Europe, saw off the closed world of Soviet communism and, by connecting China to the global economy, brought about the greatest poverty reduction in history.

A world of wall-builders would be poorer and more dangerous. If Europe splits into squabbling pieces and America retreats into an isolationist crouch, less benign powers will fill the vacuum.

Mr Trump’s revelation that he might not defend America’s Baltic allies if they are menaced by Russia was unfathomably irresponsible. America has sworn to treat an attack on any member of the NATO alliance as an attack on all. If Mr Trump can blithely dishonour a treaty, why would any ally trust America again? Without even being elected, he has emboldened the world’s troublemakers. Small wonder Vladimir Putin backs him. Even so, for Mr Trump to urge Russia to keep hacking Democrats’ e-mails is outrageous.

The wall-builders have already done great damage. Britain seems to be heading for a recession, thanks to the prospect of Brexit. The European Union is tottering: if France were to elect the nationalist Marine Le Pen as president next year and then follow Britain out of the door, the EU could collapse. Mr Trump has sucked confidence out of global institutions as his casinos suck cash out of punters’ pockets. With a prospective president of the world’s largest economy threatening to block new trade deals, scrap existing ones and stomp out of the World Trade Organisation if he doesn’t get his way, no firm that trades abroad can approach 2017 with equanimity.

In defence of openness
Countering the wall-builders will require stronger rhetoric, bolder policies and smarter tactics.

First, the rhetoric. Defenders of the open world order need to make their case more forthrightly. They must remind voters why NATO matters for America, why the EU matters for Europe, how free trade and openness to foreigners enrich societies, and why fighting terrorism effectively demands co-operation. Too many friends of globalisation are retreating, mumbling about “responsible nationalism”. Only a handful of politicians—Justin Trudeau in Canada, Emmanuel Macron in France—are brave enough to stand up for openness. Those who believe in it must fight for it.

They must also acknowledge, however, where globalisation needs work. Trade creates many losers, and rapid immigration can disrupt communities. But the best way to address these problems is not to throw up barriers. It is to devise bold policies that preserve the benefits of openness while alleviating its side-effects. Let goods and investment flow freely, but strengthen the social safety-net to offer support and new opportunities for those whose jobs are destroyed.

To manage immigration flows better, invest in public infrastructure, ensure that immigrants work and allow for rules that limit surges of people (just as global trade rules allow countries to limit surges in imports). But don’t equate managing globalisation with abandoning it.

As for tactics, the question for pro-open types, who are found on both sides of the traditional left-right party divide, is how to win. The best approach will differ by country. In the Netherlands and Sweden, centrist parties have banded together to keep out nationalists. A similar alliance defeated the National Front’s Jean-Marie Le Pen in the run-off for France’s presidency in 2002, and may be needed again to beat his daughter in 2017. Britain may yet need a new party of the centre.

In America, where most is at stake, the answer must come from within the existing party structure.

Republicans who are serious about resisting the anti-globalists should hold their noses and support Mrs Clinton. And Mrs Clinton herself, now that she has won the nomination, must champion openness clearly, rather than equivocating. Her choice of Tim Kaine, a Spanish-speaking globalist, as her running-mate is a good sign. But the polls are worryingly close. The future of the liberal world order depends on whether she succeeds.

Make America Grow Again

The economy is stuck on 1% growth as business investment stalls.

Republicans in Cleveland were accused of being overly “dark,” and Democrats in Philadelphia (or at least some of them) tried to convince voters that the economy is better than they think it is. But the diminished opportunities that most Americans experience in their own lives is also reflected in the official statistics, which on Friday showed that the economy grew in the second quarter at an annual rate of only 1.2%.

The meager growth took most economists and Wall Street analysts by surprise, coming in at less than half the consensus forecast of 2.6%. The Commerce Department also revised growth down for the first quarter to 0.8% from the prior 1.1% estimate and the fourth quarter of 2015 to 0.9% from 1.4%.

This means that since last September the economy has pumped the brakes from the 2.2% average from 2012-2015 into a near-stall speed of about 1%. Seven years after the recession ended, President Obama on Wednesday took credit for an economy that he called “stronger and more prosperous than it was when we started.”

Talk about a low bar. When he started, the economy was in recession. The President didn’t mention that the current recovery, the one on his watch that began in June 2009, is easily the weakest since World War II.
The second quarter suffered in particular from the same malaise that has marked nearly the entire Obama era—poor business investment. Consumer spending rose smartly at 4.2% in the second quarter, but business investment fell at a 2.2% pace, and companies ran down inventories for the fifth consecutive quarter.

The nearby chart shows the quarterly contribution to GDP from private “nonresidential fixed investment” since 2013. Business spending on the likes of new factories, equipment and software has subtracted from growth for three straight quarters. Apart from a stretch in 2014, the last three years have been historically weak.

This matters because business investment spurs the growth and productivity gains that produce more jobs and higher wages. As resilient as consumers have been, they can’t drive growth by themselves.
The investment plunge is a signal that business is on strike, or at least depressed by uncertainty.

Most CEOs will be risk-averse and conservative with their balance sheets until they see signs of a growth rebound, even though they’re sitting atop piles of cash and the cost of capital is at all-time lows. They will also hold off investing until they have a better sense of the future tax and regulatory burdens they are likely to face next year.

They can’t be re-assured by what they heard in Philadelphia, where the Obama-Clinton Democrats promised more of the policies that have stifled growth the last eight years. “Wall Street, corporations and the super-rich are going to start paying their fair share of taxes,” Hillary Clinton declared.

Start? The richest 1% already pay about 38% of federal income tax revenue. And perhaps Mrs. Clinton will disclose which sage economic advisers have told her that raising taxes on business will yield more business investment. We were taught that if you tax something you get less of it. Mr. Obama’s unprecedented wave of regulatory costs is another main reason business isn’t investing. Yet Mrs. Clinton promised more costly rules on finance, health care, drug prices, mandated wages and benefits, and more.

Normally all of this would help the party that doesn’t hold the White House, but Donald Trump is talking more about law and order and terrorism than the economy. His two main economic themes are restricting the labor force with immigration controls and raising the prices of imports with new tariffs. Both would harm the economy. As it happens, an upturn in net U.S. exports added 0.23 percentage points to GDP in the second quarter.

Mr. Trump does say he’ll reduce regulation and cut taxes, but he offers few details and these are hardly his main talking points. In his Cleveland acceptance speech, he mentioned them almost as an afterthought.

About the only serious pro-growth agenda on offer is the House GOP’s “Better Way” that would reform the business tax code, ease rule-making and otherwise remove barriers to investment and job creation. The Tax Foundation estimates the package would make the economy about 9% larger and lift wages by 8%. Maybe Mr. Trump should read it.

The alternative is another lost decade of slow growth, which will lead to more economic anxiety and thus more political unrest.

Doug Casey on “Brexit”

by Doug Casey

On June 23, the UK had a referendum in which 52% of voters opted to leave the European Union. I applaud Britain for leaving the corrupt, costly, and dysfunctional EU. It may be the best thing that’s happened to Europe since the end of World War 2. And, I think, it signals the start of some major new trends.

In principle, the idea of the European Union sounded good. All the signatory countries joined a customs union so goods and people could flow freely.

The idea was to both increase general prosperity and decrease the chances of another war. It sounds very libertarian—in principle. But in practice it turned out very differently. And may wind up doing the opposite of its intended purpose.

Europeans could have had all the benefits of free trade simply by eliminating all import duties and quotas—a very simple and costless solution. Having duties and quotas amount to putting your own country under embargo. They increase the costs and decrease the availability of foreign goods and services; that lowers a country’s competitiveness while decreasing its standard of living. It sounds insane.

Why would any country want to do that? Because some industries and unions in the country want to keep out competition. Duties and quotas can help them, even though hurting the country at large.

Politicians also like duties and quotas because they give them additional power, tax revenue, and opportunities for bribery.

If a country really wants to prosper to the greatest degree, it will unilaterally drop all duties and quotas. No trade agreements are necessary.

But that would have been too easy for the Eurocrats. Instead, they set up a gigantic bureaucracy in Brussels. They did eliminate internal duties between EU members, but at the cost of regulating everything within the EU while retaining duties and quotas against non-EU members. The EU employs 50,000 functionaries, imbued with dirigiste attitudes. Pound for pound they’re much more obstructive than those working within the Washington Beltway.

Europe is, after all, the ancestral home of cultural Marxism, and the people who take it most seriously all want to work in Brussels.

The EU has reduced the standard of living of the average European. But perhaps its creation was inevitable since the average European is overwhelmingly socialist or fascist in philosophy.

They seem to love the idea of government, as big, and strong, and with as many layers as possible. But the bigger and more complex any organization gets, the more likely it is to fail.

My prediction that the Continent will one day just be a giant petting zoo for the Chinese is intact—assuming the current wave of migrants approve.

400 million Europeans now have to deal with regulation coming from Brussels as well as from their town councils, provinces, and national governments. On a local level there was at least some semblance of control since those laws were passed by people with the same language, ethnicity, and culture. The laws were destructive, but at least they were imposed from within.

But the EU adds thousands of new laws and regulations, created by a class of people who are responsible mainly to other members of their own class in Brussels. They’re united by the ridiculous ideas they picked up in university from their Marxist professors.

EU regulations dictate the shapes of bananas and cucumbers. Manufacturers of bottled water aren’t allowed to say it fights dehydration. There are laws against unsupervised children blowing up balloons. Laws against unlabeled olive oil in restaurants, the amount of cinnamon in certain pastries, the maximum size of vacuum cleaner motors, the disposal of tea bags, and the “correct” methods of producing hundreds of varieties of French cheeses.

You’ve likely heard of these regs simply because they’re so outrageous and nonsensical. They’re annoying, but actually quite trivial. What you don’t hear about is a vast body of agricultural, industrial, and labor regulations because they are technical and affect businesses more than consumers. Meanwhile, 10,000 registered lobbyists circulate around Brussels inducing Eurocrats to pass laws favoring this or outlawing that and distribute an annual budget of about 150 billion euros among the politically favored. That is where the real damage is done.

The EU also aggravates the current problem with migrants from the Middle East and Africa. All Western European governments are massive welfare states with free food, housing, medical care, schooling, and living expenses for citizens. And even for residents who aren’t citizens.

Benefits like these will naturally draw in poor people from poor countries. That’s why France, Belgium, Holland, and the UK already have substantial and rapidly growing minorities of Muslims. The governments of Sweden and Norway are actually importing these people, at great expense. The EU not only promotes bad policies, but makes the whole continent bear the burden of mistakes made by its most misguided members.

The free-market solution to the migrant situation is quite simple. If all the property of a country is privately owned, anyone can come and stay as long as he can pay for his accommodations. When even the streets and parks are privately owned, trespassers and squatters have a problem. A country with 100% private property, and zero welfare, would attract people who like those conditions. And they’d undoubtedly be welcome as individuals.

But “migration” would be impossible.

Some have said that Britain shouldn’t Brexit because it will cause chaos. There’s some truth to that—but not because what Britain did was in any way destructive. Their action is best compared to that of passengers on a sinking ship who are the first ones to board a lifeboat.

Nietzsche had it right when he said “that which is about to fall deserves to be pushed.” Any chaos that occurs is the result of the EU’s flaws, not Britain’s exit. It’s as if you have a 100-story building which is about to collapse. It’s better to arrange a controlled demolition than wait for it to fall at a random time.

So, where will this all end? Let’s look at a few trends that Brexit will initiate, or accelerate. And also how you can insulate yourself from the fallout, or perhaps even profit from it. This has the makings of a classic speculative opportunity—one where politically caused distortions are liquidated and prices readjust. But a word of caution. It’s going to take place within the context of the Greater Depression. And, as Richard Russell, who lived through the last depression, observed: In a depression, nobody wins. The winner is just the person who loses the least.

The EU will disintegrate. It never made sense from the beginning to try to get Swedes to live by the same rules as Sicilians or Germans by the same rules as Portuguese. Not to mention that the rules are entirely arbitrary. Worse, almost all the rules are economic in nature, with legislated winners and losers. Deals like that always lead to resentment, among both the winners and the losers.

In addition to this, the EU is very problematical when it comes to immigrants. There will be more migrants trying to settle in Europe. Why? Because the Muslim world, the swath of countries extending all across northern Africa, through the Middle East, Central Asia, and the Far East, is likely to become increasingly unstable. The EU, as a very politically correct organization is loathe to turn them away. However, once they’re within Schengen, the migrants can travel anywhere. Perhaps where welfare benefits are best and where other migrants are gathering. Remember, when times get tough, both politicians and the capite censi look for someone to blame.

How to profit from this? Most people don’t think the EU will collapse just because Britain (which has always been closer to the U.S. than the Continent anyway) has left. They’re wrong.

For one thing, although Brussels won’t become a ghost town, it’s going to lose scores of thousands of highly paid Eurocrats and their minions. I recall that property there was some of the cheapest in Europe in the early ’80s; it’s going to return to that status. We’ll look for a REIT to sell short, specializing in the Brussels market.

It will accelerate the disintegration of nation-states everywhere. There are about 200 nation-states in the world. The international “elite,” the “intelligentsia,” the members of the Deep State everywhere, and organizations like the EU in Brussels, would like to see a much smaller number of more powerful states. Orwell anticipated just three mega-states in his dystopia. But the actual trend is in the opposite direction.

It’s not just the UK seceding from the EU, but Scotland from the UK. The Basques and Catalans may eventually secede from Spain. Belgium, a totally artificial country, may eventually break up into Flemish-speaking Flanders and French-speaking Wallonia. France has half a dozen secession movements. Italy was only unified into its present form from scores of principalities, duchies, and baronies in 1871 by Garibaldi. It was the same with Germany until Bismarck in 1871. The break-up of the USSR in 1990 into 13 smaller states was a good start, but Russia itself is a small empire with dozens of distinct ethnic and linguistic groups.

You will rarely hear about this in the mass media, but there are dozens of secession movements throughout Europe.

That’s one more reason why (in addition to the interest rate risk and the inflation risk, which are both substantial) you should stay away from long-term government bonds.

The euro will cease to exist. The Esperanto currency was doomed from the beginning. It was not just an “IOU nothing,” like the U.S. dollar, but a “Who owes you nothing” since it’s not even backed by a specific government’s taxing power. How to profit? I’ve put on long-term futures contracts, long the British pound vs. short the euro. My rationale is simple. Britain will benefit from exiting the EU, attracting capital and strengthening the pound—which is down 11% against the euro since Brexit.

The euro, meanwhile, will approach its intrinsic value at an accelerating rate.

A truly major banking crisis. Much worse than that of 2007-2009. Governments, who are all bankrupt, borrow money from commercial banks. Commercial banks have lent it to them because they believe it’s a risk-free loan. Governments encourage them to lend recklessly, hoping that will jump-start sluggish economies. Central banks, which are the arms of their governments, have taken interest rates to zero and below for that reason and to make it easier for governments to service their debt. This policy has encouraged businesses to take on debt.

It’s an idiotic and reckless experiment that will end—likely in this cycle—with bankrupt central banks and governments bailing out bankrupt commercial banks and businesses. Just the way they did in 2007-2009. Except this time, the situation is much more serious.

How to profit? Don’t own European companies, stocks or bonds, and banks in particular. In fact, even though they’re already down considerably, they’re going lower and are excellent candidates for short sales, or the sale of naked calls.

A panic into gold. You’ve heard this story many times before here. But it’s truer than ever as we approach a genuine crisis. There are no stable paper currencies anywhere in the world. The dollar has been strong only because it’s liquid. Liquidity is good, but here, we’re talking about liquid like nitroglycerin. Hedge funds will start buying gold in size. As will central banks, who don’t want to hold each other’s paper. As will individual investors. Right now, few people even think about gold, much less understand it. How to profit? Buy gold. I expect we’ll see it well over $5,000 this cycle.

Silver should do even better in relative terms. And gold stocks have explosive upside.

An exodus of capital and people from Europe to parts of Latin America, plus to the U.S., Canada, Australia, and New Zealand. This is, obviously, bad for Europe and good for the recipient countries.

In recent years, I might not have included Latin America, but things have changed. Argentina and Colombia are liberalizing economically.

The continent isn’t involved in any entangling alliances, isn’t on the migration highway, and has low costs. Why a wealthy European would stay in that stagnant and unstable continent when he could live better, and mostly tax-free, at a fraction of the cost in Argentina is a mystery to me.

Chaos in Africa. Almost every country in Africa is an ex-European colony. Over the last 50 years, Europe, with the U.S. and now China, have shipped over a trillion dollars to the continent. Most of it has been recycled back to Europe by the African elites that stole it, and the rest has mostly been wasted. That flow is going to stop for a number of reasons, but among them is that it makes no sense in an “every-man-for-himself” world. At the same time, essentially all of the world’s population growth over the next couple of decades is going to come from sub-Saharan Africa. It’s a nasty economic environment that’s a formula for conflict.

Millions of Africans will want to emigrate, especially to the homelands of their ex-colonial masters in Europe. They won’t, however, be welcome. How might one take advantage of this?

The higher population is going to put upward pressure on commodities, and the chaos is going to make their production much riskier in Africa.

In conclusion, Brexit itself is likely to be good for Britain. And it augurs some big changes in the world at large. Don’t forget that it will all be in the context of the Greater Depression. Our objective here remains to not only keep you advised of what’s happening, but help you profit from opportunities while avoiding major dangers.

NGOs and the Fallacy of Civil Society

Though called "non-governmental," NGOs often receive significant government funding and may pursue political agendas.


Non-governmental organization (NGO) is often a misleading label. Over the past several decades, a new phenomenon – government-backed NGOs – has emerged. These groups are formally independent from governments, but in reality rely on government support and funding, domestic or foreign.

• In Central and Eastern Europe and the Balkan states, foreign governments – both from the West and Russia – have used NGOs to further geopolitical aims.

• The involvement of organizations like USAID and NED in funding pro-Western NGOs has created both fear and suspicion that Western governments are attempting to instigate color revolutions – popular protest movements aimed at regime change.

• NGOs across the former communist bloc are largely not financially viable without domestic government or outside support.

• While both Russia and the West use NGOs, funding these groups is not a very effective method of influencing decision-making and public opinion.


Civil society is a sphere that, by definition, is outside the scope of government. Following a trip to America in the early 1830s, Alexis de Tocqueville – much impressed with American civil society – wrote in his work “Democracy in America” that “wherever at the head of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.” Thinkers like Tocqueville valued and advocated for the separation of private life from the public and the ability to organize outside the framework of the state. Civil society includes everything from business associations to Girl Scouts, charities and bowling leagues. These are forms of organizing, both political and non-political, where the government plays no role.

Within civil society, there is a subgroup generally referred to as non-governmental organizations (NGOs). These groups are non-profit entities that provide services, conduct research or perform advocacy work. As their name suggests, in theory these groups are firmly grounded in civil society, have no relationship to government and are often regarded as a check on government.

Nevertheless, many NGOs are not truly non-governmental entities. Over the past decades, a new phenomenon – government-backed NGOs – has emerged. These are groups that formally are independent from governments but in reality rely on government support and funding, domestic or foreign. Governments use these groups as tools for building influence and achieving goals that they cannot undertake directly. Nowhere is this phenomenon more prominent than in Central and Eastern Europe and the Balkan states, where foreign governments – both from the West and Russia – have used NGOs to further geopolitical aims.

In this region, financial and sometimes legal limitations have prevented the rise of indigenous groups truly independent from government influence.

NGO, therefore, is often a misleading label that can belie a political purpose. Government funding of NGOs creates a new class of political organizations. These groups are at the very least in an ambiguous position. At most, they have become government organizations and thus no longer part of civil society.

The West and Russia: Government-Backed NGOs

NGOs are sometimes used by governments and intelligence agencies to boost influence and further strategic goals. During the Cold War, Western and Soviet intelligence agencies actively sought to influence local groups in countries of interest. The Central Intelligence Agency covertly funded private organizations – in addition to newspapers and political parties – to help shape public opinion in Europe.

When the National Endowment for Democracy (NED), one of America’s main vehicles for supporting NGOs abroad, was created in the 1980s, it was set up as a private-public partnership largely to shield the organization from meddling or accusations of intelligence agencies’ involvement. Nevertheless, NED still relies on U.S. government funding for many of the 1,200 grants it issues to NGOs abroad each year.

This financial dependency on the U.S. government, as well as awarding grants to NGOs involved in promoting social causes and political agendas that align with U.S. interests (and at times anti-government activities in their home countries), has opened up NED and other major government-funded institutions – like the U.S. Agency for International Development (USAID), the National Democratic Institute (NDI) and the International Republican Institute (IRI) – to suspicions of continued CIA involvement.

Over the past 25 years, NED, USAID, NDI, IRI, their German counterparts Friedrich-Ebert-Stiftung and Konrad-Adenauer-Stiftung, and a host of other government and private foundations have supported NGOs in Central and Eastern Europe that promote democratic governance, fair elections, training for youths and activists and anti-corruption and transparency efforts. These projects are funded partly to further the goals of strengthening pro-Western movements in the region and promoting European integration in countries like Moldova and Ukraine.

NGOs in Ukraine, which Russia considers a key strategic buffer and where Washington and the Kremlin are competing for influence, have received significant funding, directly and indirectly, from Western governments. According to USAID, the top foreign institutions funding groups in Ukraine are USAID, the Swedish International Development Cooperation Agency (a government entity), the Mott Foundation (a private U.S.-based institution), the International Renaissance Foundation (a branch of the U.S.-based private Open Society Foundation) and the U.K.’s Department for International Development (a government entity). It is estimated that between 1992 and 2014, the U.S. spent between $3 billion and $5 billion in assistance to Ukraine. Over the past decade, a significant portion of this aid went to NGOs, especially groups that work on governance, anti-corruption and democracy issues, and groups that had been involved in the 2004 pro-Western Orange Revolution.

For example, New Citizen is a coalition of NGOs that was involved in setting up the first round of protests against the government of Ukrainian President Viktor Yanukovych in 2013 and later expanded into the Maidan movement, ultimately leading to the fall of the government. New Citizen had earlier received funding from U.S. government-funded organizations. American grants to Ukrainian NGOs were often allocated for training activists or election monitors, and in some cases totaled hundreds of thousands of dollars.

U.S. efforts have continued, however, even after the fall of the Yanukovych government. One recent example of U.S. efforts in Ukraine is NDI’s use of its Civi online contact management system. This helps Ukrainian NGOs and members of parliament with outreach to voters, allowing them to send texts and mass emails to thousands of supporters. At the same time, some NGO projects funded by the U.S. government have overtly strategic undertones. IRI, with funding from NED, is currently running a project to “develop political coalitions and produce materials that debunk Russian deception campaigns.”

The involvement of organizations like USAID and NED in funding pro-Western NGOs and democracy projects has created both fear and suspicion among some governments in the region that Western governments are attempting to instigate color revolutions – popular protest movements aimed at regime change. In countries like Belarus, Azerbaijan and Russia, strong efforts have been made to limit NGOs’ ability to operate and access foreign funding. Notably, in July 2015, NED became the first foreign organization banned in Russia under the Kremlin’s law against “undesirable” international NGOs.

Like the U.S. and some Western governments, Russia also funds NGOs and uses these groups to further its geopolitical aims. There is evidence of strong connections between Russian intelligence agencies, in particular the FSB, and Russian-backed NGOs. In fact, some of the money and goods used by Russian-backed rebels in Donbass were moved through what on paper are Orthodox charities.

Russian funding for groups in Central and Eastern Europe revolves primarily around financing for groups and projects related to Russian-speaking communities, as well as Slavic and Orthodox communities. The Russian state’s formal vehicle for extending its influence in the NGO realm abroad is Rossotrudnichestvo (the Federal Agency for the Commonwealth of Independent States, Compatriots Living Abroad and International Humanitarian Cooperation), which maintains offices abroad and acts as a grant-awarding institution.

At the same time, the Russian Ministry of Foreign Affairs and the president’s office also issue a large number of grants to Russian-friendly and Russian-backed groups. Russia also uses the Orthodox church to build its influence. Moreover, state-owned companies and oligarchs close to the Kremlin have provided funding for Kremlin-backed NGOs in the region. These groups include cultural institutions, youth organizations and human rights NGOs. Their activities range from Russian language promotion to history projects, conferences, information campaigns, youth camps and trainings designed to shape public opinion and promote pro-Russian views, as well as build ties between Russia and communities across the region.

Ukraine, Moldova and Georgia have been the focus of many of these projects, while Russia also supports NGOs in the Balkans and Baltic states. A 2016 study by Chatham House found that the Russian World Foundation, funded directly by the Russian state, has made Ukraine its focus – spending about a million dollars a year primarily on projects connected to pro-Russian groups and initiatives to emphasize linguistic divisions between Ukrainian and Russian speakers within the country.

Lack of Independent Funding

While there are variations across Central and Eastern Europe, in much of the region NGOs are directly or indirectly dependent on governments. This is the case because NGOs across the former communist bloc are in large part not financially viable without domestic government or outside support. The graphic below shows the results of a 2015 study by USAID on the sustainability of “civil society organizations” in Central and Eastern Europe.

A score of 1 to 3 indicates that most groups have sound financial management systems in place, raise a significant percentage of their funding from local sources and have multiple sources of funding. A score of 3.1 to 5 indicates that while still largely dependent on foreign donors, individual groups experiment with raising revenues in other ways. However, a depressed local economy may hamper efforts to raise funds from local sources. This middle category includes a wide range of countries, from the Baltic states to the Balkans. Finally, a score of 5.1 to 7 indicates that most groups are largely inactive after failing to win foreign donor funding. In this category, governments restrict access to resources – foreign or domestic – through legislative and other means. This category includes countries like Belarus and Azerbaijan.

This data reveals two key realities about non-governmental organizations, even in parts of the region where there are relatively few legal restrictions on the activities of NGOs. First, groups in countries with weaker economies struggle to find domestic sources of funding and are thus more likely to depend on foreign governments or international donors for funding and support. Only two countries – Poland and Estonia – fall in the top category where groups are considered financially viable. The vast majority of countries fall in the second category, where poor economic conditions undermine local fundraising efforts.

This discrepancy is due to the fact that most Central and Eastern European countries still lag behind their Western counterparts economically. At the same time, European Union integration has intensified the economic disparities. According to World Bank data, Poland’s GDP per capita is over seven times that of Moldova’s. While most funding for groups in Poland comes from domestic sources, an estimated 83 percent of funding for groups in Moldova comes from foreign donors. There is a strong relationship, therefore, between a country’s wealth and the level of organizations’ reliance on foreign funding.

The second important reality behind the USAID data is that even in wealthier countries where groups enjoy high levels of financial sustainability and do not need to rely heavily on foreign funding sources, groups are often still dependent on domestic government funding. For example, in Poland, USAID found that despite the fact that 29 percent of Poles are estimated to have donated to charities in 2014, local governments are still the main source of funding. This dependency highlights that although there is more funding available overall in more developed countries in the region, private domestic funding is limited even in wealthier Central and Eastern European countries. For the most part, groups throughout the area must rely on funds either from domestic state sources or foreign entities.

Limitations of NGOs

While Russia and the West fund NGOs, there are two factors that undermine the effectiveness of NGOs as a tool of influence. First, there is a general lack of public trust in these groups. In Georgia, merely 22 percent of respondents trust “civil society organizations,” according to a 2015 Transparency International poll. In Moldova, a 2015 poll by the Institute for Public Policy found that only 24.2 percent of the public trusts these groups. In Ukraine, 45.7 percent of the population trusts civil society organizations, according to a Razumkov Center poll. This lack of trust likely emanates from the communist era, as well as from a perception that NGOs often depend financially on governments – foreign or domestic – or certain private interests.

Another factor is that the focus of NGO work often translates into these groups holding workshops or organizing projects with partners that are already likely to agree with them. For example, Western-funded democracy or capacity building projects often involve partners and participants who are already pro-Western. Similarly, the focus of Kremlin-funded NGOs on Russian speaking and Orthodox communities means that their work often involves individuals who already have exposure to pro-Russian views.

Funding NGOs, therefore, is not a highly effective method of influencing decision-making and public opinion. Nevertheless, both sides see the financing of NGOs as one tool in a diverse set of activities that together boost their position in the region. These tools include financing media outlets, like U.S. government-funded Radio Free Europe and Russian state-funded Russia Today. In the case of Russia, these tools also include building relationships and sometimes even financially supporting already existing anti-establishment, Euroskeptic or pro-Russian political parties. For the West, integration through the EU’s association agreements and policy options like visa-free travel and loans to governments are important ways to influence decision-making and public opinion in the region.


NGOs are generally presented as independent entities forming one of the pillars of civil society, but in some cases these groups are not part of the private sphere that Tocqueville and others supported. The U.S. and other Western governments openly fund NGOs in Central and Eastern Europe and the Balkans, as well as other regions. At the same time, Russia also supports its own network of NGOs as the two sides compete for influence. Once a group relies on government funding – from its own country or from outside powers – it is no longer truly a part of civil society, but rather a government-sponsored entity that could be used as a vehicle for achieving political goals.

2nd Quarter Real GDP 1.2%, 1st Quarter Revised Lower to +0.8%; Bloomberg Spins This Mess Positive

By: Mike Shedlock

Not only did real GDP come in on the low side, below nearly all consensus estimates, but first quarter GDP was revised lower to 0.8% from 1.1%.

Factoring in the downward revision, my second quarter guess of 0.8% was extremely close. For details please see GDP Forecast Roundup: GDPNow, Nowcast, Econoday, Goldman, Markit, ZeroHedge, Mish.

Bloomberg Spins This Mess Positive

The Bloomberg Econoday consensus estimate was 2.6% in a range of 2.2% to 3.4%.

Despite the huge miss compared to expectations, Bloomberg Econoday managed to put a positive spin on this mess.
Second-quarter GDP looks very weak at only a plus 1.2 percent annualized rate, but the details are positive. The biggest positive is consumer spending where growth, showing strength across readings, came in at a stellar 4.2 percent rate, more than double the first-quarter's 1.6 percent rate. 
A plus for the economy but a big negative in this report is slowing inventory accumulation which pulled down GDP by 1.2 percentage points in the quarter. But lean inventories point ahead to new accumulation which is a plus for future production and employment. 
Another negative in the report is a reversal in residential investment, which had been running in the double-digit zone but which fell at an annualized 6.1 percent to pull down GDP in the second quarter by 2 tenths. A central concern remains nonresidential fixed investment, falling at a 2.2 percent rate and pulling down GDP by 3 tenths in the quarter.  
Weakness here points to weakness in business confidence and trouble ahead for productivity growth. 
Recent History 
The first estimate for second-quarter GDP is expected to come in at plus 2.6 percent for a sizable gain from first quarter growth of 1.1 percent which was held down by severe weakness in nonresidential fixed investment. Retail sales rose sharply in the second quarter and are expected to feed strong gains for the consumer spending component, offsetting what is expected to be continued weakness in business investment, slowing in residential investment, and slowing in inventory accumulation. The GDP price index, reflecting energy prices, is expected to accelerate sharply, to plus 1.8 percent from 0.4 percent in the first quarter.
Inventory Madness

The inventory-to-sales numbers remain in the stratosphere so it is beyond absurd to spin inventories as a huge positive.

On July 12, Bloomberg noted the "success" in inventory reduction. Here is a chart of that "success".

Overall Inventory-to-Sales Ratio
Overall Inventory-to-Sales Ratio

For more details and three more inventory-to-sales charts, please see Wholesale Trade: Inventory-to-Sales Ratios Extremely Elevated.

This Econoday writer is a real "gem".

Three Consecutive Quarters of Weak GDP

The last three quarters are 0.9%, 0.8%, 1.2%.

Mish Tweet

Real GDP Historic Trend

Real GDP Historic Trend

Real GDP Compounded Rate of Change

Real GDP Compounded Rate of Change

The preceding two charts courtesy of Doug Short Q2 GDP Advance Estimate: A Major Downside Surprise.

Surprises Galore

As posted yesterday ...
  • GDPNow 1.8%: July 28 GDPNow Forecast Sinks to 1.8% Following Advance Economic Indicators Reports
  • FRBNY Nowcast 2.2%: July 15 GDPNow and Nowcast Forecasts Tick Up 0.1 Percent; Diving Into Interesting Details. The NY Fed had a blackout due to the FOMC meeting. It normally reports on Friday so its report is stale. I am confident its report would have been lower today had it made an update.
  • Goldman Sachs 2.4%: Zerohedge tweeted earlier to day that Goldman lowered its forecast today from 2.6% to 2.4%.
  • Bloomberg Econoday Survey 2.6%: The Bloomberg Econoday consensus estimate is 2.6% in a range of 2.2% to 3.4%.
  • Wall Street Journal Survey 2.6%: July 28 - Gross domestic product, a broad measure of economic output, is projected to have advanced at a 2.6% annualized pace this spring, according to economists surveyed by The Wall Street Journal. The economy grew at 1.1% in the first three months of the year.
  • Markit Chief Economist 1.0%: July 6 is the latest I could find from Markit chief economist Chris Williamson as noted in PMI Services Essentially Flat, Non-Manufacturing ISM Jumps Huge
  • ZeroHedge 2%: I emailed ZeroHedge this morning to see if he had a guess. He does. It's 2%.
  • Steen Jakobsen, chief economist and CIO Saxo Bank 1.6%
  • Mish: 0.8%
Straight up, Chris Williamson comes closest. Factoring in the downward revision, it's closer to a tie between Williamson and I.

Looking Ahead

Should consumer spending falter for any reason, we will be looking at zero or negative GDP numbers.