Instability

Doug Nolan


With the Turkish lira down another 6.6% in Monday trading, global "Risk Off" market instability was turning acute. The U.S. dollar index jumped to an almost 14-month high Monday, as the Turkish lira, Argentine peso, Indian rupee and others traded to record lows versus the greenback. The South African rand "flash crashed" 10%, before recovering to a 2.3% decline. Brazil's sovereign CDS jumped 14 bps Monday to a six-week high 252. Italian 10-year yields jumped 11 bps in Monday trading to 3.10%, near the high going back to June 2014, as the euro declined to one-year lows.

The Turkish lira surged 8.4% Tuesday, jumped another 6.8% Wednesday and then gained an additional 1.9% Thursday. Wild instability then saw the Turkish lira drop 3.1% during Friday's session, ending the week up 6.9%. Qatar's $15 billion pledge, along with central bank measures, supported the tenuous lira recovery.

August 17 - Wall Street Journal (Lingling Wei and Bob Davis): "Chinese and U.S. negotiators are mapping out talks to try to end their trade impasse ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November, said officials in both nations. The planning represents an effort on both sides to keep a spiraling trade dispute-which already has involved billions of dollars in tariffs and comes with the threat of hundreds of billions more-from torpedoing the U.S.-China relationship and shaking global markets. Scheduled midlevel talks in Washington next week, which both sides announced on Thursday, will pave the way for November. A nine-member delegation from Beijing, led by Vice Commerce Minister Wang Shouwen, will meet with U.S. officials led by the Treasury undersecretary, David Malpass, on Aug. 22-23. The negotiations are aimed at finding a way for both sides to address the trade disputes, the officials said, and could lead to more rounds of talks."

Apparently, global "Risk Off" attained a level of momentum that compelled Chinese and Trump administration officials to jointly calm the markets. After trading as low as 24,966 in Wednesday trading, the Dow rallied more than 700 points to end the (option expiration!) week at 25,669. For yet another week, U.S. markets were rewarded for disregarding mounting risk. Extraordinary market complacency is at this point No Conundrum. A Trump and Xi trade-focused meeting in late-November is conveniently timed soon after the midterms.

And while U.S. stocks rallied on happy prospects, the same cannot be said for global markets. The South African rand sank 3.8% this week to the low versus the dollar since June 2016. Brazil's real declined another 1.2% this week, trading the weakest against the dollar going back to early-2016. The Colombian peso, Chilean peso and Argentine peso all fell at least 2.0% this week. European equities were under pressure. Italian banks fell 3.2%, with European banks down 3.0%. Hong Kong's Hang Seng Financial index lost 4.1%.

The Shanghai Composite sank 4.5% this week, trading Friday at the lowest closing level since December 2014. China's renminbi traded to 6.93 (vs. $) in Wednesday trading, rapidly approaching the 2016 low of 6.96 to the dollar. The renminbi has now declined 8.7% from May 30th trading highs and 6.9% since June 14th. Increasingly fearful of a disorderly devaluation, Chinese officials implemented measures this week to support their sickly currency.

August 13 - Bloomberg: "China's broadest measure of new credit slowed, underlining concerns about the economy that have prompted authorities to start doing more to support growth. Aggregate financing stood at 1.04 trillion yuan ($151bn) in July… That was slower than the 1.39 trillion yuan in June, using the central bank's new calculation method for this data. The new index includes more types of credit and so isn't comparable to Bloomberg's survey or the data reported in previous months. New yuan loans stood at 1.45 trillion yuan, versus a projected 1.275 trillion yuan and 1.84 trillion yuan the previous month. Broad M2 money supply rose 8.5%, rebounding from record low expansion in June."

The PBOC has somewhat tweaked China's aggregate Credit data. Total Aggregate Financing for July ($151bn) was down 13% from July 2017. After 2018's first seven months, y-t-d Total Aggregate Financing of 10.137 TN yuan ($1.475 TN at current exchange rates) is running 18% below last year's comparable period. Beijing's crackdown has stopped shadow banking in its tracks, with July seeing another contraction in key shadow lending components.

And while bank lending moderated somewhat from a huge June, New (bank) Loans continue to expand rapidly. At 1.450 TN yuan ($210bn), New Loans for the month were up 76% compared to July 2017's 826 billion yuan. New Loans have expanded 10.479 TN ($1.52 TN) y-t-d, up 19% from comparable 2017. To be sure, the household borrowing binge runs unabated. At 44.756 TN yuan, China's Household Debt was up 19% over the past year and 47% in two years.

August 14 - Bloomberg: "There's no stopping China's property market. New-home prices rose at the fastest pace in 22 months in July, climbing 1.2% from the previous month… The jump in values in third-tier cities was the biggest in data going back to 2009, signaling the potential for the government to roll out more housing curbs in a cooling campaign that began more than two years ago. The dilemma for officials is how to restrain prices without tanking the property sector during a broader economic slowdown. 'A persistently high home price is going to lead to a very strong response from the government,' Phillip Zhong, a Hong Kong-based equity analyst at Morningstar… Asia, said… 'We are going to expect to see more tightening measures being put in place.'"

"China's state planning authorities pledged on Wednesday to keep debt levels under control as it expressed confidence that the year's growth target will be achieved in spite of the trade war with the US."

Accepting that growth has slowed and recognizing trade risks, the bullish consensus view holds that China retains the tools to ensure uninterrupted steady growth. Most believe China is adeptly managing Credit growth. I believe their policy dilemma is in the process of turning much more challenging.

Seemingly lost in the discussion is the reality that China's historic economic boom is turning dangerously unbalanced. While Beijing has moved aggressively to contain high-risk "shadow" lending, it has remained too timid in restraining household borrowing. Indeed, China is now facing full-fledged mortgage finance and apartment Bubbles - in the face of rapidly waning prospects elsewhere. Beijing seeks to continue cracking down on risky Credit, while pursuing measures to stimulate a slowing economy. Chinese officials would hope to spur ample productive Credit and sound economic investment to sustain the boom. The harsh reality is there are limited opportunities for both. They're stuck, for the duration, with risky non-productive Credit and additional malinvestment and overcapacity.

August 13 - Reuters (Yawen Chen and Kevin Yao): "China's property investment growth accelerated to its quickest pace in nearly two years in July, driven by faster transactions and stronger developer appetite for land as funding conditions improved. Real estate investment rose 13.2% in July from the same period a year earlier, the fastest pace since October 2016 and higher than June's 8.4% rise… It grew 10.2% in the first seven months of the year."

Runaway mortgage finance Bubbles turn increasingly precarious. Late in the cycle, systemic risk grows exponentially. As we saw unfold during the U.S. mortgage finance Bubble, there is a ("Terminal Phase") rapid acceleration of loan growth of rapidly deteriorating Credit quality. The unparalleled Chinese real estate Bubble is backed by, too commonly, poorly constructed residential complexes. If the P2P lending Bubble collapse is causing public angst, just wait until apartment prices start sinking.

While Beijing has over the years made numerous attempts to tighten real estate lending, mortgage rates have remained significantly below the rate of apartment price inflation. I would argue that China's real estate Bubble is today acutely vulnerable to an unexpected jump in rates and/or tightening of lending conditions.

August 13 - Bloomberg (Yalman Onaran): "In 1988, 9 of the 10 largest banks in the world were Japanese. Three years later the country's financial system, along with its lenders, collapsed, sending Japan into its infamous lost decade (or three, considering the country is still struggling to escape deflation and low growth). The nine Japanese companies in the top ranks by assets 30 years ago have since consolidated into four successors. Only one turns up in this year's ranking. By 2007 all of the top 10 slots were filled by U.S. and European lenders. A year later the subprime mortgage meltdown hit the U.S. The sovereign debt crisis followed in Europe. Four of the 10 had to be bailed out by their respective governments… U.S. and European economies, like Japan's, have contended for most of the past decade with low growth. It's 2018, and the rankings teem with Asian banks again. This time the top four by assets are Chinese."

There was further confirmation this week of the faltering global Bubble thesis. Monday saw acute instability in EM currencies, in particular. With the Argentine peso down as much as 4.4%, the Argentine central bank raised interest rates 500 bps (to 45%) to support the peso. Indonesia Wednesday unexpectedly raised rates another 25 bps (to 5.5%) after the rupiah sank to almost three-year lows. And with "hot money" fleeing EM, worries for the sustainability of the Hong Kong dollar peg returned.

August 13 - Bloomberg (Emma Dai): "Hong Kong's interbank borrowing costs climbed across the curve, as the city's currency interventions continued overnight, taking this week's total to HK$16.8 billion ($2.1bn). The three-month Hong Kong dollar interbank offered rate, known as Hibor, jumped by the most in more than two months… The Hong Kong Monetary Authority bought HK$14.6 billion of local dollars Wednesday…, after the currency declined to the weak end of its trading band."

At $432 billion, the Hong Kong Monetary Authority is viewed by the markets as having sufficient resources to indefinitely maintain the peg to the U.S. dollar. But with faltering global markets and increasingly nervous officials in Beijing, analysis has turned more complex. With a massive and vulnerable financial sector, along with its own formidable real estate Bubble, Hong Kong could find itself in the crosshairs of faltering global, EM and Chinese Bubbles.

August 13 - UK Telegraph (Ambrose Evans-Pritchard): "Hong Kong's housing boom is starting to fray as monetary tightening by the US Federal Reserve forces the enclave's authorities to tighten credit. A rash of home buyers has pulled out of purchases at the last moment despite losing large deposits, a sign that financial stress is biting harder or that fear is creeping into the market… This is happening as regulators in mainland China clamp down on capital outflows through interbank accounts using the Hong Kong-Shanghai Connect, aiming to stem any further fall in the yuan. The People's Bank (PBOC) is squeezing liquidity in the offshore Hong Kong market and has lifted the risk requirement ratio for forward yuan contracts to 20pc. This makes it harder to short the Chinese currency." 
The late-week rally in U.S. equities did not pull the metals out their deep funk. Copper sank 4.2% this week, pushing 2018 losses to almost 20%. "Zinc heads for Worst Week Since 2011," closing Friday down 6.2%. Lead dropped 5.2%, and Tin fell 4.1%. Aluminum declined 3.6%. Precious metals were only somewhat firmer. Platinum fell 4.7%, Silver 3.3% and Gold 2.2%.

The metals are surely not responding to currency issues in Turkey. Turkey is, after all, only symptomatic of the faltering global Bubble. This week provided important evidence of "Risk Off" dynamics turning more systemic for the emerging markets. With China's stocks and currency under heavy pressure again this week, the negative feedback loop between EM and China has turned quite threatening.


August 17 - Bloomberg: "China's government bonds declined as funding costs rebounded amid expectations of rising supply, giving the 10-year yield its biggest two-week advance since December 2016. The yield on notes due in a decade rose four bps to 3.65% Friday, taking its two-week increase to 19 bps… Bond futures also declined… The Ministry of Finance on Tuesday urged local governments to accelerate bond issuance to support economic expansion, spurring speculation that supply will jump in the coming weeks. The overnight repurchase rate surged 76 bps this week, after the People's Bank of China suspended reverse-repurchase operations for 18 days in a row… 'The previous market-supportive factors such as ample liquidity and gloomy economic outlook seem to have waned this week,' said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co."

Beijing faces a huge dilemma. The faltering EM Bubble poses significant risk to the unbalanced Chinese economy. Moreover, global de-risking/deleveraging dynamics exacerbate risk to Chinese finance and the renminbi. The policymaker impulse is to orchestrate another round of fiscal and monetary stimulus. Meanwhile, China's historic mortgage finance and apartment Bubbles maintain powerful momentum. Stimulus measures at this stage of the cycle pose extreme risk. For one, it would surely push non-productive Credit growth to perilous extremes. Second, the combination of additional system liquidity and escalating systemic instability would exacerbate already significant risk of a disorderly Chinese currency devaluation.

That things look "terrible" in China, in contrast to obvious greatness in the U.S., is to provide the Trump administration a decisive trade negotiation advantage. And I can see the perceived benefit of scheduling low-level trade discussions ahead of a big trade meeting with the Chinese after the midterms. A temporary "truce" would be viewed as bolstering U.S. equities and supporting "great again" campaigning into November. I'm not, however, convinced this gambit will reverse the bursting of the EM Bubble. And I don't believe pushing serious negotiations out to November will in anyway resolve China's deteriorating financial and economic positions.

All in all, it was another ominous week for highly unstable global financial markets. Bubbles bursting, Bubbles faltering and Bubbles inflating. Global financial and economic prospects are dimming rapidly. I would be less apprehensive if U.S. equities (and Chinese apartment prices!) were adjusting to new realities. But it's not as if Bubble resilience is without precedent.

The S&P500 peaked on July 20, 1998, just weeks prior to near global financial meltdown. Back on August 25, 1987, the S&P hit a record high about six weeks before the "Black Monday" market crash. And looking back to fateful 1929, the DJIA traded to a record high on September 1st, with the Great Crash erupting the following month. Those that have studied the late-twenties should recognize ominous parallels. How on earth were they so completely blindsided?

Gold Is Melting: Why This Is No Time To Panic

by: Victor Dergunov

- Gold has been dented in recent months, crashing by nearly 15% from peak to trough in just 4 months.

- Several key elements are supporting and driving the dollar higher. However, this is very likely just a short-term phenomenon.

- Longer term, the dollar essentially has nowhere to go but lower relative to gold.

- The COT report is illustrating extraordinary bearishness in gold, showing net positions at their second-lowest level in 10 years, behind only the 2015 bottom.

- There's no need to panic, gold has declined by 15%. This is likely a healthy correction, not the start of a bear market, and certainly not the end of the world.

      

Source: MoneyControl.com

 

 

Gold Is Melting: Why This Is No Time To Panic

 

Gold/SPDR Gold Shares (GLD) is going thorough one of its most vicious selloffs in years. The yellow metal is essentially melting, down the last 9 out of 10 weeks, and from peak to trough has cratered from almost $1,370 in April to just around $1,165 in recent days. This represents a 15% retracement in just 4 months - rather extraordinary for an asset traditionally considered to be a stable safe haven and store of value by many investors.

 

 

Gold 1-Year Chart

Source: StockCharts.com

 

 

But it’s not just gold, silver/iShares Silver Trust (SLV) has cratered by about 17% in the last two months alone, with silver prices trading around the “silver flash crash” lows of last year ($14.40). In addition, silver prices are approaching the multi-year lows from the late 2015 commodities bottom ($13.50-14.00). Naturally, the gold miners/VanEck Vectors Gold Miners ETF (GDX) is also getting slammed, with the price down by nearly 20% in fewer than just 6 weeks.

Silver 3-Year Chart

GDX 5-Year Chart

 

So, what is it with gold and the precious metals complex in general? Why are prices essentially melting through the floor? Is this a lasting trend, the start of a new bear market perhaps? Or is this a transient phenomenon, and likely a buying opportunity instead?

 

About GLD

 

GLD is the largest, reportedly physically backed gold exchange-traded fund in the world, with roughly $31.5 billion worth of net assets. It offers market participants an efficient way to access the gold market. The ETF is an attractive alternative to trading gold futures, as it can be traded much like a stock on the NYSE Arca exchange instead of dealing with alternative exchanges and trading requirements pertaining to futures contracts.

 

Furthermore, it is an appealing alternative to trading physical gold, as investors get exposure to the same price action as the physical metal but can buy and sell gold with great fluidity using GLD. This way, investors bypass the inconvenience of having to take physical delivery of the asset.

 

Since the ETF mimics the price of gold almost identically, I will refer to GLD and gold interchangeably throughout this article.

 

What’s Behind the Meltdown?

 

Several key short-term factors have aligned together and are pushing gold prices lower. These include the Fed’s tightening policy, trade war tensions, instability in China and other emerging markets, and of course, the rising USD. The rising dollar is perhaps the main culprit in causing gold’s decline, but its strength is ultimately being supported by the factors just mentioned. Additionally, momentum and sentiment have turned extremely bearish for gold in recent weeks.

Gold is not a stock that trades on fundamentals, it has no earnings, no P/E ratio, no cash flow, etc. It is strongly influenced by shifts in investor appetite and sentiment. Furthermore, momentum begins to feed on itself, and wild swings to the upside or downside can be expected. Right now, we are clearly going through a period of overly negative sentiment and downward momentum in the gold markets.

 

Investors are Really Bearish on Gold

 

Things have gotten so bad in the gold market that investors are about as bearish on gold as they have been since the yellow metal bottomed in late 2015. This is precisely what the COT report is telling us. Gold’s speculative net positions were at just 12.7K at last count, the second-lowest level registered over the past 10 years. The only lower reading on record came in at 9.8K at the height of the gold selloff in late 2015, right as gold was bottoming at around $1,050.

 

 

Gold Net Speculative Positions

Source: Investing.com

 

 

So, could the bearish situation surrounding gold exacerbate further? It’s possible, but if history is any indicator, the extreme bearishness present in the gold markets is a great counter indicator that suggests prices are likely to stabilize and begin to recover in the near future.

 

Silver speculative net positions are also at an extreme level, with just 4.3K contracts at last count. Moreover, silver’s net speculative positions recently turned negative for the first time in at least 10 years. Net positions went negative, peaking at -17K contracts, indicating extreme pessimism and negative sentiment in the silver market. This essentially means that out of all the silver futures contracts, there were 17K more short contracts open than long contracts recently - a somewhat unprecedented statistic.

 

Silver Net Speculative Positions

 

 

Gold-to-Silver Ratio

 

Another sentiment and counter indicator gauge, the gold-to-silver ratio, went above 80 recently and is currently trading around this historically high level. Generally, extremely elevated gold-to-silver ratios coincide with substantial bottoms in the gold and silver market. In fact, the last 3 times this ratio went above 80 in the last 20 years, it preceded remarkably strong gold and silver rallies in 2003, 2008 and 2016. With the gold-to-silver ratio currently above 80, we could be on the cusp of another historic gold and silver bull run.

 

Source: GoldPrice.com

 

USD: Gold’s Greatest Challenge Short-Term

 

Remarkably, the dollar has surged by 10% since the lows earlier this year. In this time frame, gold has declined by about 15%, so we can see the clear inverse relationship at work here. However, even by just looking at gold’s disproportionate decline relative to the USD, it appears that the gold selloff is likely overdone now. Nevertheless, oversold conditions, Fed tightening, trade tensions, instability in EMs and other factors have come together to create a powerful storm favorable for the dollar in the short term.

 

 

USD 1-Year

 

USD 5-Year

Longer Term the Dollar Will Likely Only Go Lower

Conversely, longer-term the positive thesis for the dollar begins to breakdown substantially, which is very bullish for gold. First and foremost, the Fed’s tightening path is likely to slow significantly going forward. In fact, there is about a 75% chance that the Fed funds rate will be just 0.75% higher after the 2019 September meeting than it is now. This implies that factoring in the likelihood of Fed rate hikes in September and December, there is only likely to be just one hike through the first 9 months of 2019.

 

 

Source: CME Group

 

 

We know that markets are anticipatory mechanisms, and the PMs and currency markets are likely reflecting the steepened rate hike path with their recent price action. However, a sharp reversal could occur when the markets begin to price in a much slower rate hike trajectory in 2019 and beyond.

 

Also, there is only so much the Fed can do in the form of tightening before higher interest rates begin to substantially weigh on the U.S. economy. As soon as the U.S. economy begins to show signs of slower growth, the Fed is likely to discontinue tightening, and as the inevitable contraction begins, the Fed will very likely reverse policy, cutting rates and introducing additional rounds of QE to prop up asset prices. This will be extremely bullish for gold prices and the entire PM complex.

 

In addition, there are long-term structural issues confronting the dollar, such as rising inflation that could persist much longer than anticipated, record levels of debt and continuous dollar expansion.

Current CPI is at 2.9%, the highest levels of consumer inflation seen in the last 6 years. In addition, the PPI’s latest reading came in at 3.3%, also showing some of its highest levels since 2012. Final demand goods PPI came in at about 4.5% in the last reading, which is exceptionally high and implies producers are paying 4.5% more in raw material costs than they were just 1 year ago. Ultimately, inflation signals the devaluation of the dollar and is a very bullish long-term element for gold.

 

Source: TradingEconomics.com

 

Source: BLS.com

 

 

Debt is also sky-high in all aspects of the U.S. economy. Government debt is at about 105% of GDP, approaching $21.4 trillion. Moreover, all levels of consumer debt are at all-time highs. To sustain high levels of debt, continuous monetary expansion is required. If we look at monetary statistics just since 2000, the numbers are truly staggering. The monetary base has been increased by over 500% to over $3.6 trillion, treasury securities have surged by 561% to $1.44 trillion, and currency and credit derivatives have shot up by 513% and are approaching a mind-numbing $563 trillion. This trend of perpetual dollar creation will almost inevitably continue, and should intensify once the Fed reverses policy to prop up asset markets in the next down cycle.

 

 

It is not a coincidence that gold has increased in price by about 370% since its lows in the early 2000s. This long-term trend of higher gold prices is also extremely likely to continue as the dollar continues to be perpetually inflated and debased over time.

 

Gold: Trading vs. Investing

 

Some market participants trade gold and gold-related trading vehicles, and some invest in gold and other PM-related assets. There are certain positives and negatives pertaining to each strategy. In the short term, gold reacts very strongly to sentiment and momentum, and this exposes traders and investors to violent downdrafts, much like we are seeing occur now. However, in the long term gold follows an inverse relationship to the number of dollars circulating throughout the world’s monetary system.

 

Gold’s price was flat relative to the dollar for about 150 years, as the currency was originally pegged to gold. However, since the early 1970s, when the Nixon administration officially ended the gold standard, gold has appreciated by nearly 3,300%. This is actually better than both the S&P 500’s roughly 2,700% and the DJIA’s approximate 3,100% returns in the same time frame. The U.S.’s money creation trajectory is likely to follow only one direction and that’s up, thus gold prices should continue to go higher long term as well.

 

Bottom Line

 

Gold has been dented in recent months, but it’s no time to panic, especially if you are a long-term investor. The overall long-term trend has been higher over the past 50 years, and it’s not likely to change despite the short-term gyrations. In addition, gold is only down about 15% from the highs this year, which constitutes a healthy correction, not a new bear market, and is certainly not the end of the world.

Several factors have recently united to propel the U.S. dollar substantially higher, and this has produced an overly negative effect on gold, silver, gold miners and other PM-related prices. However, pessimistic sentiment and overly negative momentum have caused gold to become massively oversold, and there is almost a panic-like atmosphere surrounding PMs. This is evidenced by the record, or near-record bearish positions in the futures markets, the extreme gold-to-silver ratio, incredibly oversold technical conditions and other elements.

 

Additionally, the long-term trend for the dollar is lower relative to gold, as the perpetual inflation of the monetary supply is needed to sustain the current debt-based economy. Moreover, the inflation picture is far from tame, and the Fed can only raise rates so much before a reversal in its current policy is needed.

 

Therefore, gold, silver, gold miners and other gold-related assets will very likely perform extraordinarily well in the intermediate and longer term. I am interpreting the recent selloff in gold as a temporary, negative sentiment and momentum-induced phenomenon, and I am treating it as a substantial buying opportunity by adding to my gold-related asset positions at current levels.

Fear of the lira

Turkey’s crisis is not fundamentally contagious

Spillovers through trade and banking links should be limited

America’s Neville Chamberlain

Harold James





PRINCETON – When countries get nervous about their security, they often insist that they need to reduce their dependence on foreign products, shorten supply chains, and produce more goods domestically. But does protectionism really improve security? Now that the world is hovering on the brink of a full-scale trade war, we should examine some of the arguments made in favor of protectionism, and then revisit the largest trade war of the twentieth century.

There tends to be a great deal of duplicity in debates about trade. Import tariffs and other similar measures are often presented as convenient foreign-policy tools for serving the general good. But if one looks past the rhetoric, it is obvious that such measures really just reward particular constituents, and amount to an unfair form of taxation.

US President Donald Trump would argue that a trade war is a means to an end. To his mind, tariffs are a reasonable response to unfair currency practices and national-security threats. But, of course, there is also a domestic political calculus: namely, tariffs will help specific producers and constituents by making their competitors’ goods more expensive. The problem is that tariffs inevitably force domestic consumers to foot the bill for that subsidy, by paying higher prices.

There is nothing new in Trump’s assertion that, “Trade wars are good, and easy to win.” And that means we can test his claim against the historical record. When Neville Chamberlain was serving as Britain’s Chancellor of the Exchequer in 1932, he reversed his country’s century-old position as a champion of free trade. Worried about Britain’s longstanding trade deficit, he announced a new “system of Protection,” which he hoped to use “for negotiations with foreign countries which have not hitherto paid very much attention to our suggestions.”

Chamberlain concluded that it was only “prudent to arm ourselves with an instrument which shall at least be as effective as those which may be used to discriminate against us in foreign markets.” In the event, he was paving the road to World War II. His trade policy weakened Britain and strengthened Germany. And in a mere six years, his appeasement policy toward the Nazi Germany regime would reach its pinnacle with the 1938 Munich Agreement, which Hitler discarded six months later by destroying the rump Czechoslovakia and bringing it under the control of the Third Reich.

The interwar years were dominated by the fear of a German nationalist resurgence. For Western powers, containing Germany would require either an alliance system or a more ambitious collective-security pact. France preferred the former option, and advocated an arrangement in which its alliance with Poland, plus the “Little Entente” of Czechoslovakia, Romania, and Yugoslavia, would contain both Hungarian and German expansionism. Great Britain favored the second option, and saw the League of Nations as the most effective instrument for defending territorial integrity.

Both approaches crashed in the Great Depression, owing primarily to France and Britain’s own protectionist policies. Both countries shifted abruptly to a policy of high tariffs and import quotas that gave preference to products from their overseas empires. The result was that Czechoslovakia’s industrial producers and Romanian and Yugoslav agricultural exporters could no longer sell to Western Europe. Instead, they became increasingly dependent – economically as well as politically – on Nazi Germany. Likewise, Poland, after fighting a customs war with Germany in the 1920s and early 1930s, entered into a non-aggression pact with the Nazi regime in 1934.

Through all of this, the League of Nations and other multilateral bodies tried to organize conferences and summits to halt the slide toward protectionism. But those talking shops all failed.

During the Great Depression, accusations of currency manipulation formed the primary impetus for protectionist measures. One hears the same sort of rhetoric today from Trump, both when he criticizes the US Federal Reserve for tightening monetary policy and when he claims – falsely – that China is artificially depreciating the renminbi.

The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained.

Precisely this scenario is playing out today. Trump’s protectionist rhetoric is a response to the dramatic rise of China. But by launching a tariff war that also affects the European Union and Canada, Trump is making China look like a more attractive partner than the US. To be sure, Trump and European Commission President Jean-Clade Juncker have now reached a preliminary agreement to de-escalate the US-EU tariff fight. But Trump has already roiled the transatlantic alliance. Like Germany’s neighbors in the 1930s, Europe and Canada may feel as though they have no other choice than to seek out a more open – or at least more stable – partner.

Trump’s trip to Europe last month went a long way toward destroying the alliances that have maintained global stability since the end of WWII. And his self-abasing press conference with Russian President Vladimir Putin had more than a whiff of Chamberlain-style appeasement. If Trump actually wanted to make China more attractive to the world, then he could do no worse than to continue his war on free trade and the multilateral institutions that arose from the ruins of 1945.


Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

The Longest Bull Market In History And What Happens Next

by: Lance Roberts 

"Barring a breathtaking plunge, the bull market in U.S. stocks on Aug. 22 will become the longest in history, and optimistic investors argue it has miles to go before it rests."  

- Sue Chang, MarketWatch

Depending on how you measure beginnings and endings, or what constitutes a bear market or the beginning of a bull market, makes the statement a bit subjective. However, there is little argument the current bull market has had an exceptionally long life-span.

 

But rather than a "siren's song" luring investors into the market, maybe it should serve as a warning.

"Record levels" of anything are "records for a reason."

It should be remembered that when records are broken that was the point where previous limits were reached. Also, just as in horse racing, sprinting or car races, the difference between an old record and a new one are often measured in fractions of a second.

 

Therefore, when a "record level" is reached, it is NOT THE BEGINNING, but rather an indication of the PEAK of a cycle. Records, while they are often broken, are often only breached by a small amount, rather than a great stretch. While the media has focused on record low unemployment, record stock market levels, and record confidence as signs of an ongoing economic recovery, history suggests caution. For investors, everything is always at its best at the end of a cycle rather than the beginning.

 

The chart below has been floating around the "web" in several forms as "evidence" that investors should just stay invested at all times and not worry about the downturns. When taken at "face value," it certainly appears to be the case. (The chart is based up Shiller's monthly data and is inflation-adjusted total returns.)

 

 

The problem is the entire chart is incredibly deceptive.

More importantly, for those saving and investing for their retirement, it's dangerous.

 

Here is why.

 

The first problem is the most obvious, and a topic I have addressed many times in past missives, you must worry about corrections.

"Most investors don't start seriously saving for retirement until they are in their mid-40s. This is because by the time they graduate college, land a job, get married, have kids and send them off to college, a real push toward saving for retirement is tough to do as incomes, while growing, haven't reached their peak. This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals. 

This is where the problem is. There are periods in history, where returns over a 20-year period have been close to zero or even negative."

Currently, we are in one of those periods.

 

 

Lies, Damned Lies, And Statistics

Secondly, percentages are deceptive.

 

Back to the first chart above, while the mainstream media and bloggers love to talk about gains and losses in terms of percentages, it is not an apples to apples comparison.

 

Let's look at the math.

 

Assume that an index goes from 1,000 to 8,000.

• 1,000 to 2,000 = 100% return
• 1,000 to 3,000 = 200% return
• 1,000 to 4,000 = 300% return
• …
• 1,000 to 8,000 = 700% return

A 700% return is outstanding, so why worry about a 50% correction in the market when you just gained 700%?

 

Here is the problem with percentages.

 

A 50% correction does NOT leave you with a 650% gain.

 

A 50% correction is a subtraction of 4,000 points which reduces your 700% gain to just 300%.

 

Then the problem now becomes the issue of having to regain those 4,000 lost points just to break even.

 

Let's look at the S&P 500 inflation-adjusted total return index in a different manner.

The first chart shows all of the measurement lines for all the previous bull and bear markets with the number of years required to get back to even.

 

 

 

What you should notice is that while the original chart above certainly makes it appear as if "bear markets" are no "big deal," the reality is that in many cases, bear markets wiped out essentially a substantial portion, if not all, of the the previous bull market advance. This is shown more clearly when we convert the percentage chart above into a point chart as shown below.

 

 

 

Here is another way to view the same data. The table and chart below overlays the point AND percentage of gain and loss for each bull and bear market period going back to 1900 (inflation-adjusted).

 

 

 

Again, the important thing to note is that while record "bull markets" are a great thing in the short term, they are just one half of the full-market cycle. With regularity, the following decline has mostly erased the previous gain.

 

Broken Records

 

While the financial media is anticipating a new "record" being set for this "bull market," here is something to think about.

• Bull markets END when everything is as "good as it can get."
• Bear markets END when things simply can't "get any worse."

While everything is certainly firing on all cylinders in the market and economy currently, for investors this should be taken as a warning sign rather than an invitation to pile on additional risk.

 

In the near term, over the next several months, or even a year, markets could very likely continue their bullish trend as long as nothing upsets the balance of investor confidence and market liquidity.

This bull market will easily set a "new bull market record."

But, as I said, "records are records" for a reason. As Ben Graham stated back in 1959:

"'The more it changes, the more it's the same thing.' I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, 'the more it changes.' 

The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound, then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market. 

In other words, a place where today's free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one."

He is right, of course, things are little different now than they were then.

For every "bull market" there MUST be a "bear market."

While "passive indexing" sounds like a winning approach to "pace" the markets during the late stages of an advance, it is worth remembering "passive" approaches will also "pace" the decline.

 

Understanding that your investment returns are driven by actual dollar losses, and not percentages, is important in the comprehension of what a devastating effect corrections have on your financial outcome. So, before sticking your head in the sand and ignoring market risk based on an article touting "long-term investing always wins," ask yourself who really benefits?

This time will not be "different."

 

If the last two bear markets haven't taught you this by now, I am not sure what will.

 

Maybe the third time will be the "charm."

Mexico Can’t Handle Your Tired, Poor, and Huddled Masses

Ever since Donald Trump's election, America's southern neighbor has become a growing destination for migrants—and the country is already buckling under the strain.

By Maya Averbuch


A Honduran immigrant inspects map of Mexico showing train routes leading north at a shelter for undocumented immigrants on September 14, 2014, in Tenosique, Mexico. (John Moore/Getty Images)


TAPACHULA, Mexico—At midnight, the immigrants outside the gate of the local office of the Mexican Commission for Refugee Assistance know that only the first arrivals will get past the security guard in the morning. They prepare to buy gum, cigarettes, or breakfast pupusas—a traditional Salvadoran stuffed dough—from those who have made a business out of serving those waiting. Once they register, they will have weeks before the first interview. In the interim, some bring their children to sleep in the central park, while others make their way to local shelters.

The experience of these migrants is now at the center of a debate in Washington. In recent months, the U.S. administration led by President Donald Trump has spoken of officially designating Mexico a “safe third country” for asylum-seekers, giving it a role akin to that of Canada. The terminology surfaced in Secretary of Homeland Security Kirstjen Nielsen’s statements on the refugee caravan in April, in Mexico-U.S. negotiations in May, and in the Securing America’s Future Act voted down in the House in June.

The debate isn’t merely semantic. A change in Mexico’s status would, for instance, permit the United States to turn away many of the hundreds of thousands of people who submitted asylum applications in the United States last year, requiring those who arrived at the southern border to first submit applications in Mexico instead. It’s a proposal that some U.S. policymakers say makes sense because, over the past five years, a growing number of migrants have started to apply for refugee status in Mexico. 

Claims that Mexico is a safe country by any conventional measure are dubious: Crime statistics show that 2017 was Mexico’s deadliest year on record, and Mexicans themselves still rank among the most common asylum applicants in the United States. (President-elect Andrés Manuel López Obrador was voted in, in part, on the promise of reducing migration to the United States by improving conditions for Mexicans at home.)

What has received less attention, however, is whether Mexico, despite its emerging status as a destination for other migrants, is truly capable of receiving them. Once a country of transit, Mexico is already buckling under the demands of its new reality. Although its government had once styled itself as a progressive defender of refugees, some immigrants are discovering that the country isn’t nearly as welcoming to its neighbors in need as its rhetoric suggests.


“It’s not that Mexico has decided to take more people,” said Irazú Gomez, a coordinator with the migrant defense organization Sin Fronteras. “People are arriving regardless, even if there is no political will.” The problem, she said, is that last year, “the system collapsed.” 
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Guatemalan mothers feed their children in a southern Mexico refugee camp on Jan. 4, 1993. Several dozen camps, housing about 45,000 refugees, were scattered along the border with Guatemala. (Omar Torres/AFP/Getty Images)


If Mexico has a reputation for taking in exiles, that’s because in the 20th century the country famously accepted everyone from Lebanese traders, such as the family of billionaire Carlos Slim, to Cuban revolutionaries, such as the young militants who joined Fidel Castro after his release from prison. Specific presidents also sought to portray their country as magnanimous—though in practice, generosity was reserved for those who were deemed politically convenient, according to Javier Urbano Reyes, a professor of international studies at the Universidad Iberoamericana in Mexico City.

Lázaro Cárdenas, who served as president from 1934 to 1940, was known for bringing in Spanish exiles who fled from Francisco Franco’s dictatorship in Spain. His ambassador in France granted visas to people escaping from Nazi Germany. Luis Echeverría, who was president from 1970 to 1976, was in power when the widow of Chilean President Salvador Allende came to Mexico; he saw the early wave of migrants after the fall of the socialist governments in Chile and Argentina.

These historical cases, however, were exceptions to the rule. “Mexican migration policy has traditionally focused on containment along the border,” Urbano Reyes said. The country did not develop a consistent protocol for refugees, and for all its self-described grandeurs, the number of people it received remained modest; the Spaniards who sailed in on ships with names like Ipanema and Orinoco were received graciously in hotels on the coast but are estimated to have numbered only 25,000.

It was not until mass migration during the Guatemalan Civil War that the uglier side of Mexican immigration policy began to publicly emerge. During the 1980s, an estimated 50,000 migrants settled in camps in the state of Chiapas. At first, they returned to Guatemala in daylight and then retreated to Mexico at night, at times having to fend off invasions from the Guatemalan military. But Mexico was at times two-faced, known to have handed over alleged guerillas to the Guatemalan authorities.

It was in the face of this wave that Mexico created the Mexican Commission for Refugee Assistance, abbreviated in Spanish as COMAR, which eventually helped the government send many of the Guatemalans to live in isolated border territories in the states of Campeche and Quintana Roo. But according to María Cristina García, the author of Seeking Refuge, the office was soon hindered. It was placed under the Interior Department “theoretically to better coordinate assistance to the refugees, but also to control any dissident voices that challenged official government policy.”

Mexico thus failed to establish a refugee system that could respond to future crises, such as the civil war that displaced Salvadorans in the 1980s or the natural disaster that pushed out Hondurans in the 1990s. Its response to these problems was ultimately ad hoc: It harbored more than half a million Salvadorans but forced the majority to remain undocumented. For years, COMAR denied the Guatemalans visas that would allow them to establish themselves beyond the encampments and then encouraged their return to their original homes after the war.

When it came to migration policy, Mexico was instead focused on the rate at which its own people were bleeding out of the country. In the 1990s, the population of Mexican immigrants living in the United States grew by 5 million. “Mexico’s concern was how to attend to the Mexican immigrant population in the United States,” said Axel García Carballar, a former COMAR official. Aiding refugees, on the other hand, “has never been a national priority.”

In the early part of this century, after Mexico belatedly signed the 1951 Refugee Convention, which is the basis for international refugee protections, the United Nations turned over official responsibility for adjudicating refugee cases to the country. García Carballar said that the office came into its new role in the uproar immediately after Sept. 11, 2001, and it would struggle to fulfill its responsibilities in the years that followed. 
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Honduran immigrant Rosel, 3, plays in front of a mural at a shelter for undocumented immigrants on Sept. 14, 2014, in Tenosique, Mexico. (John Moore/Getty Images)


Last year, more than 14,000 people applied for asylum in Mexico. That represents a drop in the broader ocean of migrants in Mexico, many of whom are looking to head farther north. But it’s a major increase from only five years ago, when just over a thousand people applied—the result, perhaps in part, of Mexican officials’ increased security measures and the Trump administration’s fiery rhetoric. Both have made some migrants living in Mexico illegally reconsider continuing north.

The people who end up staying are often those with fewer established family ties in the United States or those who have a network of earlier immigrants in Mexico to support them, according to Carlos Cotera, the coordinator in Tapachula for the Jesuit Refugee Service. Those from nearby countries stand in immigration lines next to Venezuelans running from economic collapse, Cubans who faced the end of the United States’ “wet foot, dry foot” policy, Haitians who had previously settled in Brazil, and Cameroonians fleeing conflict between their country’s army and rebel groups.

They are all obliged to have patience with a bureaucratic system that has developed at a snail’s pace. García Carballar remembered being one of only three interviewers in the office when the COMAR started processing applications. For years afterward, refugee applications were “treated like an administrative proceeding, the same as for tourists,” he said. It took another 10 years, until 2011, to develop a national law that granted immigrant rights such as medical care and education, though the Mexican government never fully followed through on all its promises.

Today, limited staff still sometimes leaves applicants in limbo. COMAR’s delegations exist only in the capital, Mexico City, and in two southern cities: Acayucan, one of the more violent cities in the cartel-controlled state of Veracruz, and Tapachula, in the lush border state of Chiapas. Officials also conduct interviews in the city of Tenosique, a more frequent crossing point for Hondurans. After immigrants have a preliminary interview, they are still obliged to wait in line once a week at the same office to sign in, attesting that they have remained in the city and wish to continue proceedings, the resolution of which will determine whether they will be granted the equivalent of a U.S. green card. (In the interim, those who voluntarily applied before being detained by Mexican authorities are supposed to eventually be given a temporary humanitarian permit that allows them to legally work.)

According to Mexican law, proceedings are supposed to take three months, an exemplary speed that would be unthinkable in the United States, where cases go unresolved for years. Unfortunately, it turns out to be equally unthinkable in Mexico. COMAR’s staff has struggled with its growing stack of applications. Five years ago, its budget hovered at $1.2 million dollars; last year, it inched up to $1.3 million. When an earthquake impacted their offices last September, COMAR’s staff continued to take new cases, but they indefinitely suspended the timeline for all open proceedings, leaving half of the year’s cases unresolved.

“We had cases that had not been resolved in five months, so the earthquake was just a pretext,” said Alejandra Macías Delgadillo, the director-general of Asylum Access Mexico. “If we suppose that the COMAR has 30 people, and you divide 7,000 cases between those 30 people, do you really think you can do an in-depth study of each case?”

The buckling of Mexico’s immigration system has directly affected migrants, including a 31-year old Venezuelan graphic designer who preferred to remain anonymous because his asylum application is still pending. After leaving his native country in December 2015 because his pay fell to less than 50 cents a day and he was unable to afford basic medicines, he chose to file for asylum from Monterrey, a city on Mexico’s northern border, where a friend of his already lived. But because the entirety of northern Mexico lacks a refugee office, his interview with COMAR was perpetually delayed.

As a result, he was never granted an interview and never received the identification number that would authorize him to become formally employed, obliging him to work for lower wages on the black market. When he traveled to Mexico City in March 2018 to see whether he could schedule an interview in person, he was detained on the bus back for not having documents.

“It’s a test to try to make you not stay in Mexico,” he said, explaining how his passport had been confiscated and he was held until it was established he had an open case. “For 18 days, I was in the migration station, and it was a deplorable situation. It was literally a jail.”

The legal aid organizations that work with Mexico’s asylum-seekers have often found themselves baffled by the disarray that COMAR is in. Cotera, of the Jesuit Refugee Service, had a case of a 32-year-old Somali man who, when he was denied asylum, was told by Mexican authorities he should have resettled in another part of El Salvador; it was a case of erroneously copying and pasting the answer that had been given to another person.

Immigrants to Mexico sometimes give up on staying in dusty towns upon the border, where there is almost no decent work. Those with temporary humanitarian permits can get on a series of buses without being detained by immigration agents, though they will still have to hope to avoid criminal groups or corrupt police who could kidnap them, assault them, or rob them blind. If they succeed, they can try their luck in the United States. 
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Migrants sleep on mats at the Hermanos en el Camino (Brothers in the Road) shelter on Aug. 4, 2013, in Ixtepec, Mexico. The shelter, founded by Catholic Father Alejandro Solalinde Guerra, houses and feeds immigants, most from Central America, during a stop on their train route toward the U.S. border. (John Moore/Getty Images)


Like many Mexican policymakers, Ardelio Vargas Fosado, who served as the director of Mexico’s National Institute of Migration from 2013 to early 2018, assumes that migrants simply don’t want to stay in Mexico. That is why Mexico sends back the vast majority of the foreigners it detains—in 2016, officials stopped nearly 190,000 people, often by monitoring the highways and train routes north.

“Why don’t people resort to refuge in Mexico? Because they did not come to stay in Mexico,” Vargas Fosado said. “They ask me, ‘Is this going to help me get to the United States?’ I say, ‘Of course not. Refugee status is so that you stay here under the protection of the Mexican government and start a new life in Mexico.’”

Among would-be refugees in Mexico, the denial rate last year was 37 percent, by far better than the 62 percent in the United States. But those who leave the country before receiving a decision may nevertheless be making a strategic decision, according to Leonila Romero González, a coordinator for the Scalabrinian Mission for Migrants and Refugees shelter in Mexico City. “It’s expensive for them to stay here, so they think about crossing and then sending money back [to family members],” she said.

Others find themselves driven away by suspicions among Mexicans about immigrants. Central Americans are sometimes assumed to be criminals, which forces them into lower-rent and often more dangerous neighborhoods on the periphery of cities, thus reinforcing the stereotypes. In 2017, the local newspaper Diario Del Sur published a photograph of tattooed men with the headline “COMAR: Refuge of Gang Members in Chiapas.”

López Obrador has indicated that, after he takes office in December, he would like to close the gap between Mexico’s generous legal provisions for migrants and the strained reality. He has already proposed Alejandro Solalinde, a celebrated priest who created one of the most prominent migrant shelters in Oaxaca, as the head of the National Human Rights Commission. In a letter he sent to Trump on July 12, he also suggested that the United States, Mexico, and Central America all invest in a regional plan to reduce migration: 75 percent of the money would be to increase employment and diminish poverty, and the remainder would be for border security.

“Every government, from Panama to the Rio Grande, will work to make the migration of its citizens economically unnecessary and will care for its borders to avoid the illegal transit of goods, arms, and drugs, which we see as the most humane and effective way to guarantee peace, tranquility, and security for our people and nations,” he wrote.

López Obrador has also endorsed the Mexican government’s announced commitment, prior to the election earlier this month, that it planned to increase COMAR’s staff by 84 percent and to start granting all asylum-seekers an identification number so they are not obliged to work on the black market while their applications are being processed. But the president’s ambitious plans have not spared him controversy. His pick for chief of public security, Alfonso Durazo, said in an interview with Bloomberg that the new administration planned to create its own border police force. He later clarified, in response to swift backlash, that it would be exclusively for tourist regions—nothing to do with immigration enforcement.

Ultimately, the president-elect’s priority will be to improve conditions for his own citizens so that they are not forced to migrate and instead remain at home. That has limited relevance for immigrants who are caught in Mexico’s bureaucratic dysfunction as they consider where to start their lives anew.

“When I started the process, they told me it would only be three months,” said Anderson Hernández Miranda, 18, a migrant from Honduras who dealt with COMAR’s stalled bureaucracy over the course of his first year in the country, while sleeping in a church-run shelter. “I almost left, but the priest stopped me and told me I should think about whether my life is important to me.” It was an acknowledgment that the Mexican government’s provisions for migrants aren’t good enough—but they are often still, sadly, better than any alternative.


Maya Averbuch is a freelance journalist based in Mexico.