The new censors

The global gag on free speech is tightening

In both democracies and dictatorships, it is getting harder to speak up

ON JUNE 22ND there was an alleged coup attempt in Ethiopia. The army chief of staff was murdered, as was the president of Amhara, one of the country’s nine regions. Ordinary Ethiopians were desperate to find out what was going on. And then the government shut down the internet. By midnight some 98% of Ethiopia was offline.

“People were getting distorted news and were getting very confused about what was that very moment there was no information at all,” recalls Gashaw Fentahun, a journalist at the Amhara Mass Media Agency, a state-owned outlet. He and his colleagues were trying to file a report. Rather than uploading audio and video files digitally, they had to send them to head office by plane, causing a huge delay.

Last year 25 governments imposed internet blackouts. Choking off connectivity infuriates people and kneecaps economies. Yet autocrats think it worthwhile, usually to stop information from circulating during a crisis.

This month the Indian government shut down the internet in disputed Kashmir—for the 51st time this year. “There is no news, nothing,” says Aadil Ganie, a Kashmiri stuck in Delhi, adding that he does not even know where his family is because phones are blocked, too. In recent months Sudan shut down social media to prevent protesters from organising; Congo’s regime switched off mobile networks so it could rig an election in the dark; and Chad nobbled social media to silence protests against the president’s plan to stay in power until 2033.

Tongues, tied

Free speech is hard won and easily lost. Only a year ago it flowered in Ethiopia, under a supposedly liberal new prime minister, Abiy Ahmed. All the journalists in jail were released, and hundreds of websites, blogs and satellite TV channels were unblocked. But now the regime is having second thoughts. Without a dictatorship to suppress it, ethnic violence has flared. Bigots have incited ethnic cleansing on newly free social media. Nearly 3m Ethiopians have been driven from their homes.

Ethiopia faces a genuine emergency, and many Ethiopians think it reasonable for the government to silence those who advocate violence. But during the alleged coup it did far more than that—in effect it silenced everyone. As Befekadu Haile, a journalist and activist, put it: “In the darkness, the government told all the stories.”

Some now fear a return to the dark days of Abiy’s predecessors, when dissident bloggers were tortured. The regime still has truckloads of electronic kit for snooping and censoring, much of it bought from China. It is also planning to criminalise “hate speech”, under a law that may require mass surveillance and close monitoring of social media by police. Many fret that the law will be used to lock up peaceful dissidents.

According to Freedom House, a watchdog, free speech has declined globally over the past decade. The most repressive regimes have become more so: among those classed as “not free” by Freedom House, 28% have tightened the muzzle in the past five years; only 14% have loosened it. “Partly free” countries were as likely to improve as to get worse, but “free” countries regressed. Some 19% of them (16 countries) have grown less hospitable to free speech in the past five years, while only 14% have improved (see map).

There are two main reasons for this. First, ruling parties in many countries have found new tools for suppressing awkward facts and ideas. Second, they feel emboldened to use such tools, partly because global support for free speech has faltered. Neither of the world’s superpowers is likely to stand up for it. China ruthlessly censors dissent at home and exports the technology to censor it abroad. The United States, once a champion of free expression, is now led by a man who says things like this:

“We certainly don’t want to stifle free speech, but ... I don’t think that the mainstream media is free speech ... because it’s so crooked. So, to me, free speech is not when you see something good and then you purposely write bad. To me, that’s very dangerous speech and you become angry at it.”

Really? Seeing something that the government claims is good and pointing out why it is bad is an essential function of journalism. Indeed, it is one of democracy’s most crucial safeguards. President Donald Trump cannot censor the media in America, but his words contribute to a global climate of contempt for independent journalism. Censorious authoritarians elsewhere often cite Mr Trump’s catchphrases, calling critical reporting “fake news” and critical journalists “enemies of the people”.

The notion that certain views should be silenced is popular on the left, too. In Britain and America students shout down speakers they deem racist or transphobic, and Twitter mobs demand the sacking of anyone who violates an expanding list of taboos. Many western radicals contend that if they think something is offensive, no one should be allowed to say it.

Authoritarians elsewhere agree. What counts as offensive is subjective, so “hate speech” laws can be elastic tools for criminalising dissent. In March Kazakhstan arrested Serikzhan Bilash for “inciting ethnic hatred”. (He had complained about the mass incarceration of Uighurs in China, a big trading partner of Kazakhstan.) Rwanda’s government interprets almost any criticism of itself as support for another genocide. In India proposed new rules would require digital platforms to block all unlawful content—a tough task given that it is illegal in India to promote disharmony “on grounds of religion, race, place of birth, residence, language, caste or community or any other ground whatsoever”.

One way to silence speech is to murder the speaker. At least 53 journalists were killed on the job in 2018, slightly more than in the previous two years, according to the Committee to Protect Journalists (CPJ), a watchdog. Few of the killers were caught. The deadliest country for journalists was Afghanistan, where 13 were killed. In one case, a jihadist disguised himself as a journalist so as to mingle with, and slaughter, the first reporters and medics to arrive at the scene of an earlier suicide bombing.

Perhaps the most brazen murder in 2018 was of Jamal Khashoggi, a critic of the Saudi regime. A team of assassins landed in Turkey on easily identifiable private jets, drove in luxury cars to the Saudi consulate in Istanbul and cut Khashoggi to pieces on consular property. Whoever ordered this presumably thought there would be no serious consequences for dismembering a Washington Post contributor. He was right. Although Germany, Denmark and Norway stopped arms sales to Saudi Arabia, Mr Trump stressed America would remain the kingdom’s “steadfast partner”.

On December 1st 2018 the CPJ counted more than 250 journalists in jail for their work: at least 68 in Turkey, 47 in China, 25 in Egypt and 16 in Eritrea. The true number is surely higher, since many journalists are held without charge or publicity. However, the number in Eritrea may be lower, since nearly all have been held in awful conditions since President Issaias Afwerki shut down the independent media in 2001, and some are probably dead.

Rather than risking the bother and bad publicity of putting journalists on trial, some regimes try to intimidate them into docility. In Pakistan, when military officers ring up editors to complain about coverage, the editors typically buckle. Ahmad Noorani, a reporter who dared to write about the army’s role in politics, was ambushed by unknown assailants on a busy street in the capital, Islamabad, and beaten almost to death with a crowbar.

In India journalists who criticise the ruling Bharatiya Janata Party receive torrents of threats on social media from Hindu nationalists. If female, those threats may include rape. Reporters are often “doxxed”—pictures of their families are circulated, inviting others to harm them. Barkha Dutt, a television pundit, filed a complaint against trolls who had sent her a death threat and published her personal telephone number as that of an escort service. Four suspects were arrested in March.

Occasionally, the worst threats against Indian journalists are carried out, lending chilling credibility to the rest. Gauri Lankesh, an editor who often lambasted Hindu nationalism, was gunned down outside her home in 2017. Pro-BJP commenters celebrated. The man arrested for pulling the trigger told police that his handlers told him he had to do it to “save” his religion.

Intimidation does not always work. Ivan Golunov, a Russian reporter, investigated Moscow city officials buying mansions with undeclared millions and security officers going into business with the mafia. His stories were little known, published on a small website called Meduza. On June 6th police grabbed Mr Golunov, bundled him into a car, took him to a government building, beat him up and claimed to have found drugs in his backpack. The ministry of interior posted nine photos of drugs allegedly found in his flat, but then removed eight of them, admitting that they were taken elsewhere and saying they had been published by mistake.

Mr Golunov’s supporters think the drugs were planted. To the authorities’ surprise, the story spread rapidly on Facebook and Twitter—Russia does not have anything like China’s capacity for suppressing unwelcome posts on social media. Street protesters demanded Mr Golunov’s release. Foreign media picked up the story, which overshadowed Mr Putin’s summit with Xi Jinping, China’s president, that week. An embarrassed Kremlin ordered Mr Golunov’s release. When his new investigation was published by Meduza a few weeks later, it was read by 1.5m people—several times its usual audience.

Breaking the news

As the advertising revenues that used to support independent journalism dwindle, many governments have found it easier to distort the news with taxpayers’ hard-earned cash. The simplest method is to pump it into state media that unctuously support the ruling party. Most authoritarian regimes do this. China and Russia go further, sponsoring global media outlets that seek to undermine democracy everywhere. However, the problem with state media, from an autocrat’s point of view, is that they tend to be boring.

So another method is to use government advertising to reward subservience and punish uppityness. In many countries the government is now by far the biggest advertiser, so newspapers and television stations are terrified of annoying it.

A subtler method is to cultivate tycoons who depend on the state for permits or contracts, and urge them to buy up media outlets. Unlike normal moguls, they don’t need their media firms to make profits. The favours their construction firms receive far outweigh any losses they incur running obsequious television stations. Indeed, they can often undercut their independent media rivals, exacerbating the financial distress caused by the decline of advertising, aggressive tax audits, unreasonable fines and so forth. Cash-strapped independent media are of course cheaper for the president’s cronies to buy and de-fang.

Several ruling parties use these techniques. India’s uses most of them, as do Russia’s and Turkey’s. Israel’s prime minister, Binyamin Netanyahu, is accused of promising favourable regulation to a telecoms firm in exchange for positive coverage on a news website it owns. In January, Nicaragua’s most popular newspaper ran a blank front page to complain that its imported supplies of ink, paper and other materials had been mysteriously impounded at customs after it published critical reports about the ruling Sandinista party.

Such skulduggery has even crept into supposedly democratic parts of Europe. Hungary’s ruling party, Fidesz, has used public money to dominate the national conversation. The state news agency has been stuffed with toadies and offers its bulletins free to cash-strapped outlets. “When you get a news flash on [an independent] rock radio station, [it’s] totally government propaganda...because it’s free,” complains a local journalist.

The Hungarian government’s advertising budget has swollen enormously since 2010, when Prime Minister Viktor Orban took power. His cronies have bought up previously feisty broadcasters and websites. “It’s an unstoppable process,” says an independent editor. “Hungarians are used to the idea that online news is free.

So [media firms] become reliant on the money of their owners. And many of the businessmen in public life are linked to the government.” Last year the proprietors of 476 media firms, including practically all the local newspapers in Hungary, gave them without charge to a new mega-foundation run by a pal of Mr Orban. Starved of cash, serious journalists find it hard to do their jobs. “It’s practically impossible to investigate even the major corruption stories, because there are so many,” says Agnes Urban of Mertek, a media watchdog.

Meanwhile, in mature democracies, support for free speech is ebbing, especially among the young, and outright hostility to it is growing. Nowhere is this more striking than in universities in the United States. In a Gallup poll published last year, 61% of American students said that their campus climate prevented people from saying what they believe, up from 54% the previous year. Other data from the same poll may explain why. Fully 37% said it was “acceptable” to shout down speakers they disapproved of to prevent them from being heard, and an incredible 10% approved of using violence to silence them.

Many students justify this by arguing that some speakers are racist, homophobic or hostile to other disadvantaged groups. This is sometimes true. But the targets of campus outrage have often been reputable, serious thinkers. Heather Mac Donald, for example, who argues that “Black Lives Matter” protests prompted police to pull back from high-crime neighbourhoods, and that this allowed the murder rate to spike, had to be evacuated from Claremont McKenna College in California in a police car. Furious protesters argued that letting her speak was an act of “violence” that denied “the right of black people to exist”.

Such verbal contortions have become common on the left. Many radicals argue that words are “violence” if they denigrate disadvantaged groups. Some add that anyone who allows offensive speakers a platform is condoning their wicked ideas. Furthermore, as America has polarised politically, many people have started to divide the world simplistically into “good” people (who agree with them) and “evil” people (who don’t). This has led to bizarre altercations.

At Reed College in Portland, Oregon, Lucia Martinez Valdivia, a gay, mixed-race lecturer with post-traumatic stress disorder, was accused of being “anti-black” because she complained about the aggressive students who stood next to her shouting down her lectures on ancient Greek lesbian poetry (to which the hecklers objected because the poet Sappho would today be considered white). As Greg Lukianoff and Jonathan Haidt argue in “The coddling of the American mind”:

“If some students now think it’s OK to punch a fascist or white supremacist, and if anyone who disagrees with them can be labelled a fascist or a white supremacist, well, you can see how this rhetorical move might make people hesitant to voice dissenting views on campus.”

The habit of trying to silence opposing views, instead of rebutting them, has spread off campus. In Portland, Oregon, this weekend, far-right extremists are planning to rally, their “antifa” (anti-fascist) opponents are expected to try to stop them, and both sides are spoiling for a fight. When the same groups clashed in June, a conservative journalist, Andy Ngo, was so badly beaten that he was hospitalised with a brain haemorrhage.

Similar intolerance has spread to Europe, too. French “yellow jacket” protesters have repeatedly beaten up television crews. In Britain any discussion of transgender issues is explosive. In September, for example, Leeds City Council barred Woman’s Place UK, a feminist group, from holding a meeting because activists had accused them of “transphobia”. (The feminists do not think that simply saying “I am a woman” should confer on biological males the right to enter women’s spaces, such as changing rooms and rape shelters.)

“It’s nearly impossible to have a free debate [on this topic]. I’ve never seen anything like it,” says Ruth Serwotka, a co-founder of Woman’s Place UK. Today, the group only tells members where meetings will take place a couple of hours in advance, to avoid disruption. Feminists who question “gender self-identification” (the notion that if you say you are a woman, you should automatically be legally treated as one) are routinely threatened with rape or death. Some have faced organised campaigns to get them sacked from their jobs, barred from Twitter or arrested.

In March, for instance, Caroline Farrow, a Catholic journalist, was interviewed by British police after someone complained that she had used the wrong pronoun to describe a transgender girl. Another feminist, 60-year-old Maria MacLachlan, was beaten up by a transgender activist at Speakers’ Corner in London, where free speech is supposed to be sacrosanct.


Doug Nolan

The Chinese Credit machine sputtered in July. Growth in Total Aggregate Financing dropped to $144 billion, almost 40% below consensus estimates. This was less than half of June’s $320 billion increase and the slowest expansion since February. The sharp slowdown was beyond typical seasonality, with the month’s growth in Aggregate Financing 18% below July 2018. Despite July’s weak growth, Total Aggregate Financing was still up 10.7% over the past year.

New Bank Loans fell to $150 billion from June’s $235 billion, with growth 28% below that from July 2018. At $2.331 TN, New Loans were still up 12.6% over the past year. Consumer Loans dropped to $74 billion, the weakest showing since February. Consumer Loans were nonetheless up 16.5% over the past year, 38% in two, 71% in three and 138% over five years.

Loans to the non-financial corporate sector collapsed in July to $42 billion, about a third June’s level. Somewhat offsetting this decline, Corporate bond issuance almost doubled in July to $32 billion.

The ongoing contraction in “shadow” finance accelerated in July, with declines in outstanding Trust Loans, Entrusted Loans, and Banker Acceptances. On a year-over-year basis, Trust Loans were down 4.3%, Entrusted Loans 10.0% and Bankers Acceptances 15.0%.

China’s July Credit data were alarming on multiple levels. For starters, the sharp Credit slowdown supports the view that financial conditions tightened meaningfully after the government takeover of Baoshang Bank (and attendant money market instability). It also raises the increasingly pressing question as to the willingness of the banking system to continue to take up the slack in the face of a broadly deteriorating backdrop. And in a new development, analysts have begun contemplating the possibility of waning Credit demand.

The sharp pullback in Consumer Loans raises the specter of an inflection point in household mortgage borrowings. Bubbling apartment markets have supported a resilient consumer sector along with an unrelenting housing construction boom. Government tightening measures may be having some impact. It is possible as well that market sentiment has begun to shift.

August 14 – Reuters (Huizhong Wu, Yawen Chen and Stella Qiu): “China’s economy stumbled more sharply than expected in July, with industrial output growth cooling to a more than 17-year low, as the intensifying U.S. trade war took a heavier toll on businesses and consumers. Activity in China has continued to cool despite a flurry of growth steps over the past year, raising questions over whether more rapid and forceful stimulus may be needed, even if it risks racking up more debt. After a flicker of improvement in June, analysts said the latest data was evidence that demand faltered across the board last month, from industrial output and investment to retail sales… Industrial output growth slowed markedly to 4.8% in July from a year earlier…, lower than the most bearish forecast in a Reuters poll and the weakest pace since February 2002.”

August 14 – Reuters (Roxanne Liu): “China’s property investment slowed to its weakest pace this year in a sign the housing market’s resilience may be waning as Beijing toughens its crackdown on speculative investments and holds back on new stimulus… Property investment in July rose 8.5% year-on-year, easing from June’s 10.1% gain and was the slowest since December’s 8.2%...”

China is now only a faltering apartment Bubble away from a period of major economic upheaval and acute financial instability.

Global bond markets were this week nothing short of incredible. Ten-year German bund yields dropped 11 bps to a record low negative 0.69%, and French yields fell 15 bps to negative 0.41%. Swiss 10-year yields sank 19 bps to negative 1.14%. Spanish and Portuguese yields fell 18 bps to 0.08% and 0.11%. Italian yields sank 41 bps to 1.40%. Sovereign yields ended the week at negative 0.69% in Denmark, negative 0.57% in Netherlands, negative 0.49% in Slovakia, negative 0.44% in Austria, negative 0.43% in Sweden, negative 0.42% in Finland, negative 37 bps in Belgium, negative 0.26% in Slovenia, negative 0.18% in Latvia, and negative 0.14% in Ireland. Japanese 10-year yields ended the week down a basis point to negative 0.23%.

Extraordinary in its own right, the Treasury market garnered intense media focus: CNBC: “Bond Market Close to Sending Biggest Recession Signal Yet.” Fox Business: “Recession Indicator with Perfect Track Record Flashing Red.” Business Insider: “The Market's Favorite Recession Indicator Just Flashed its Starkest Warning Since 2007.” NBC: “Wall Street Slides as Inverted Yield Curve Rings Recession Alarm Bells.” Money and Markets: “Yield Curve Blares Loudest Recession Warning Since 2007.”

Ten-year Treasury yields collapsed 19 bps this week to 1.56%, the low going back to August 2016. Thirty-year bond yields traded as low at 1.91% in Thursday’s session, dipping below 2.00% for the first time (ending the week down 22 bps to 2.04%). Two-year yields fell 17 bps to 1.47%, with December Fed funds futures implying a 1.49% funds rate. Wednesday’s inverted Treasury curve was widely cited as the key factor behind the equities' selloff.

August 14 – Reuters (Gertrude Chavez-Dreyfuss and Dhara Ranasinghe): “The U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, in a sign of investor concern that the world's biggest economy could be heading for recession. The inversion - where shorter-dated borrowing costs are higher than longer ones - saw U.S. 2-year note yields rise above the 10-year yield.”

At this point, Treasury yields have little association with the U.S. economy. The structure of the Treasury curve (along with Federal Reserve monetary policy) has detached from U.S. economic performance. Treasuries are instead caught up in an unprecedented global market phenomenon. Sovereign debt, after all, has traded for hundreds of years. Yet bonds have never traded with negative yields. Never have global bond prices spiked in unison, with yields collapsing to unprecedented lows across the globe.

I understand why market professionals, pundits and journalists focus on the conventional “recession risk” explanation for sinking Treasury yields and the inverted curve. For one, there is insufficient awareness as to the deep structural impairments that today permeate global finance. Besides, no one wants to contemplate that global bond yields might portend serious problems ahead – that global yields are signaling the reemergence of Crisis Dynamics.

Throughout this decade’s long Bubble period, I’ve often written and stated, “I hope things are not as dire as I believe they are.” Along the way, Bubble Analysis has appeared flawed and hopelessly detached from reality. And that’s exactly how these things work.

But I’ve never wavered from the view that this would end badly. Never have I believed that manipulating and distorting markets would achieve anything but epic Bubbles and inevitable terrible hardship. I’ve not seen evidence to counter the view that the longer the global Bubble inflates the greater the downside risk (moreover, such risk grows exponentially over time). And not for one minute did I believe zero rates and QE would resolve deep financial and economic structural issues. Indeed, I have fully expected reckless monetary mismanagement to ensure a global crisis much beyond 2008. From my analytical perspective, the global Bubble has followed the worst-case scenario.

It sounds archaic, but sound money and Credit are fundamental to sound financial systems, sound economic structure, cohesive societies and a stable geopolitical backdrop. The most unsound “money” in human history comes with dire consequences. Global finance now suffers from irreparable structural impairment. Economies across the globe are deeply maladjusted. Global imbalances are unprecedented. The trajectory of geopolitical strife is frightening.

Meanwhile, central banks are locked in flawed inflationist doctrine. Their experiment is failing, yet in failure they will resort to only more reckless market manipulation and monetary inflation. This analysis is corroborated both by collapsing sovereign yields and a surging gold price. The clear and present risk is of an abrupt globalized market dislocation, financial crisis and resulting economic and geopolitical instability. It may sound like crazy talk, except for the fact that such a scenario is alarmingly consistent with signals now blaring from global bond markets.

August 16 – Bloomberg (John Authers): “There has been a tendency since the financial crisis to label any market that is rallying or deemed overvalued to be in a ‘bubble.’ The word has become overused and debased. But if we treat it rigorously, the bubble concept is still vital in navigating financial markets. And the rigorous treatment reveals that bonds really are in a bubble. Longview Economics Chief Market Strategist Chris Watling published a fascinating research note applying the framework introduced by Charles Kindleberger in his book ‘Manias, Panics, and Crashes.’ …Watling reminds us that Kindleberger needed to satisfy four conditions before he diagnosed a bubble: i) cheap money underpins and creates the bubble; ii) debt is taken on during the bubble build-up, which helps fuel much of the speculative price increases (e.g. buying on margin); iii) once a bubble is formed, the asset price has a notably expensive valuation; & iv) there’s always a convincing narrative to ‘explain away’ the high price. Reflecting that, there’s a wide acceptance in certain quarters that the price is rational (and ‘this time it’s different’).”

I’m biased, but what could be more fascinating than Bubble Analysis? My analytical framework owes a debt of gratitude to Charles Kindleberger’s work. I’ll interject my definition: “A Bubble is a self-reinforcing but inevitably unsustainable inflation.” This “unsustainable” facet has become critical in this bizarro world of central bank finance and accompanying runaway Bubbles. At a decade and counting, it is reasonable to assume that the realm of central bank supported bull markets is everlasting. Such optimism is today dangerously misplaced.

I’ll take somewhat exception to John Authers’, “[Bubble] has become overused and debased.”

The key issue is that Bubble Dynamics took root across asset classes and across the world.

Never has “Bubble” applied to so many markets in so many places – never has finance created Bubble Dynamics on an almost systemic basis.

I have argued post-crisis monetary stimulus unleashed a historic global Bubble in “financial assets” more generally, a “global government finance Bubble” that fueled hyperinflation in prices for stocks, bonds, structured finance, real estate, private businesses, collectibles, and so on around the world. The word “Bubble” has not been overused and debased, as much as the overuse of central bank and government Credit has worked to debase “money” more generally.

Authers also states: “But if we treat it rigorously, the bubble concept is still vital in navigating financial markets.” The problem is markets love Bubbles – jump aboard and make easy “money.” And for the past decade central banks have incentivized speculation and speculative leverage across assets classes and around the world.

Bubble Analysis is vital for both navigating markets and for policymaking. For a decade now, speculators have been playing Bubbles, while central bankers have been denying their existence. Global bond markets have become convinced the Bubble is faltering, with the expectation that central banks have no alternative than to drive rates even lower while monetizing further Trillions of government bonds (throwing in some corporate debt and even equities for good measure). This expectation of additional aggressive monetary stimulus has bolstered the view within the risk markets that the bottomless central bank punchbowl will keep the party rocking.

At this point, the overarching issue is not the U.S. vs. China trade war, and it’s not specifically the vulnerable Chinese economic boom. The U.S. economy is certainly not the focal point of global market dynamics. Importantly, the trade war is a catalyst for pushing China’s vulnerable economy to the downside. After a historic Bubble inflation, a faltering Chinese economy is a catalyst for pushing China’s fragile Credit and financial systems beyond the precipice. And as the marginal source of global finance and economic growth, faltering Chinese Credit and economic systems will be a catalyst for bursting Bubbles around the globe.

August 10 – Reuters (Cassandra Garrison and Nicolás Misculin): “Argentine voters soundly rejected President Mauricio Macri’s austere economic policies in primary elections on Sunday, raising serious questions about his chances of re-election in October… A coalition backing opposition candidate Alberto Fernandez - whose running mate is former president Cristina Fernandez - led by a wider-than-expected 14 percentage points with 47.1% of votes, with fourth-fifths of ballots counted.”

Granted, opposition candidate Fernandez’s margin of victory was larger than expected. But what a market reaction. The Argentine peso sank 14.5% in Monday trading. Argentina’s Merval Equities Index collapsed 38% (48% in U.S. dollars) Monday and ended the week down 31.5%. The price of Argentina’s dollar-denominated 30-year bonds sank 25%, as yields surged 300 bps in Monday trading to 12.51%. Yields jumped above 15% during Wednesday’s trading before ending the week at 13.5%.

August 13 – Reuters (Tom Arnold): “The cost of insuring against an Argentine sovereign default jumped again on Tuesday as investors continued to react to the heavy defeat of President Mauricio Macri in the country’s primary elections at the weekend. Argentine 5-year credit default swaps (CDS) were marked at 2,116 basis points, up from what was already a five-year high of 1,994 bps the previous day, according to… IHS Markit. Markit calculations estimate that level prices the probability of a sovereign default within the next five years at more than 72%.”

After ending convertibility to the U.S. dollar at a one-to-one rate with the onset of Argentina’s 2001 financial crisis, it now requires 55 pesos to exchange for one dollar. Oversubscribed when issued in the summer of 2017, Argentina’s 100-year bond lost 30% of its value this week and now trades at 52 cents on the dollar.

Market reaction to Argentina’s primary election is further evidence the global market environment has changed. “Risk off” is gaining momentum. De-risking/deleveraging dynamics have altered the liquidity backdrop, leading to more chaotic market reactions along with heightened contagion risk. This week’s EM currency declines included the Russia’s ruble 1.9%, Brazil’s real 1.6%, Turkey’s lira 1.5%, Poland’s zloty 1.4% and Mexico’s peso 1.3%. Major equities indices were down 4.0% in Brazil, 3.9% in Turkey, 3.3% in Russia and 2.7% in Mexico.

It was not as if there weren’t constructive developments. At least for the week, the People’s Bank of China could stabilize the renminbi (up 0.27% vs. the dollar). Monday’s ugly market performance apparently spurred President Trump to delay imposing additional Chinese tariffs on many goods until December 15th. China announced plans to boost household disposable income. And, from an ECB official, the clearest signal yet that “whatever it takes” is about to shift into overdrive.

August 15 – Wall Street Journal (Tom Fairless): “The European Central Bank will announce a package of stimulus measures at its next policy meeting in September that should exceed investors’ expectations, a top official at the central bank said. …Olli Rehn said the slowing global economy would see the ECB rolling out fresh stimulus measures that should include ‘substantial and sufficient’ bond purchases as well as cuts to the bank’s key interest rate. ‘It’s important that we come up with a significant and impactful policy package in September,’ said Mr. Rehn, who sits on the ECB’s rate-setting committee as governor of Finland’s central bank. ‘When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker,’ Mr. Rehn said.”

The President’s trade war retreat tweet had a notably short market half-life. It appears markets these days are less invigorated by talk of additional Chinese stimulus. And Olli Rehn’s “significant and impactful policy package” essentially bypassed equities markets while throwing gas on the raging bond fire.

It’s been a full decade of government and central bank backstops, with the “Trump put” a relatively late addition. It sure appears the Trump, central bank and Beijing “puts” have lost some potency. And in about a month we’ll have a better read on the “Fed put.” It’s a reasonable bet the stock market will go into the September 18th FOMC meeting with a gun to its head: “50 bps or we’ll shoot!”

Much can happen in a month – especially at the current mercurial clip of developments. But the Fed will be in a really tough spot. Don’t give the market 50 bps and ultra-dovish commentary and risk getting hit with a heated market tantrum. Give markets what they demand and risk a “sell the news” response and a critical change in market sentiment. It has the feel that a decade of egregious monetary inflation and speculative Bubbles is about to get Some Comeuppance.

Russia and China

Partnership is much better for China than it is for Russia

Just how much better might not become clear for a few years yet

IT IS THE love triangle of global politics. Since the second world war, China, Russia and the United States have repeatedly swapped partners. The collapse of the Sino-Soviet pact after the death of Josef Stalin was followed by Richard Nixon’s visit to China in 1972 and Mikhail Gorbachev’s detente with China 30 years ago. Today’s pairing, between Vladimir Putin and Xi Jinping, was cemented in 2014 after Russia annexed Crimea. In each case the country that was left on its own has always seemed to pay a price, by being stretched militarily and diplomatically.

This time is different. Though America is out in the cold, the price is falling chiefly on Russia. China dominates every aspect of the two countries’ partnership. Its economy is six times larger (at purchasing-power parity) and its power is growing, even as Russia’s fades. What seemed a brilliant way for Mr Putin to turn his back on the West and magnify Russia’s influence is looking like a trap that his country will find hard to escape. Far from being an equal partner, Russia is evolving into a Chinese tributary.

That may seem a harsh judgment. Russia is still a nuclear-weapons state with a permanent seat on the UN Security Council. It has modernised its armed forces and, as in Syria, is not afraid to use them. This week Russian and Chinese warplanes conducted what appeared to be a joint air patrol for the first time, causing alarm when South Korea said a Russian plane had intruded into its airspace.

But the real news is how rapidly Russia is becoming dependent on its giant neighbour (see article). China is a vital market for Russian raw materials: Rosneft, Russia’s national oil company, depends on Chinese financing and is increasingly diverting its oil to China. As Russia seeks to evade the hegemony of the dollar, the yuan is becoming a bigger part of its foreign-currency reserves (the share of dollars fell by half to 23% during 2018, while the yuan’s share grew from 3% to 14%).

China supplies vital components for Russia’s advanced weapons systems. And China is the source of the networking and security gear that Mr Putin needs to control his people. Last month Russia struck a deal with Huawei, a Chinese telecoms firm distrusted by America, to develop 5G equipment—thus rooting Russia firmly in China’s half of the splinternet.

This suits China just fine. It wants a lasting friendship with Russia, if only to secure its northern border, the scene of clashes in 1969, and a source of worry in the 1990s when Russia looked as if it might drift into the West’s orbit. Russia also serves as an enthusiastic vanguard in China’s campaign to puncture Western ideas of universal human rights and democracy, which both countries see as an incitement to “colour revolutions”.

Mr Putin can point to several arguments for his partnership with China, in addition to their joint hostility to the liberal project. One is expediency. Western sanctions, imposed after his annexation of Crimea, the meddling in American elections in 2016 and the lethal use of a nerve agent in Britain two years later, have left Russia without many alternatives.

Mr Xi has also given Russia cover for its military action in Syria and, to some extent, Crimea. And, in contrast to the end of the 17th century, when Peter the Great looked to Europe as the wellspring of progress, Mr Putin can plausibly argue that the future now belongs to China and its system of state capitalism.

However, Mr Putin is mistaken. For a start, the Russian version of state capitalism is a rent-seeking, productivity-sapping licence for the clique that surrounds him to steal freely from the national coffers—which is one reason why Chinese investment in Russia is rather limited.

There is also a contradiction between Mr Putin’s claim to be restoring Russian greatness and the increasingly obvious reality of its subordinate role to China. This creates tension in Central Asia. Because stability in the region is important for China’s domestic security—it wants Central Asia to keep Islamic extremism at bay—the People’s Liberation Army is stationing troops in Tajikistan and staging exercises there, without consulting Russia.

And, at some level, the aims of Russia and China diverge. There is a limit to how much ordinary Russians will forgo Western freedoms. If the regime holds on to power by means of Chinese technology, it will feed popular anger towards China and its Russian clients.

Who can say when the strains will show? Imagine that Mr Putin chooses to step down in 2024, when the constitution says he must, and that his successor tries to mark the change by distancing Russia from China and turning towards Europe. Only then will it become clear how deep China’s influence runs and how much pressure it is prepared to exert to retain its sway. Russia’s next president may find that the country has lost its room for manoeuvre.

Does this mean that the rest of the world—especially the West—should seek to prise Russia from China’s embrace, before it is too late? That idea will tempt those diplomats and analysts who think Russia is too important to alienate. But it seems unlikely. America does not suffer from the Xi-Putin alignment today as it would have done in the cold war. Although Russia and China do indeed undermine the West’s notion of universal values, with President Donald Trump in the White House that doctrine is, alas, hardly being applied universally in any case.

What is more, China’s influence over Russia has compensations. An angry declining power like Russia is dangerous; it may feel tempted to lash out to show it is still a force to be reckoned with, by bullying Belarus, say, or by stoking the old fears of Chinese expansion into Siberia.

But China has no appetite for international crises, unless they are of its own devising. As Russia’s partner, China can serve as a source of reassurance along their joint border, and temper Russia’s excesses around the world.

Sweet patience

Rather than railing against Russia or trying to woo it back, the West should point out its subordination and wait. Sooner or later, a President Alexei Navalny or someone like him will look westwards once again. That is when Russia will most need Western help. And that is when the man or woman in the Oval Office should emulate Nixon—and go to Moscow. ■

Precious Metals Reaching Initial Targets Prior to Aug 19 – Now What’s Next?

October 5 ADL predictive modeling forecast chart

Our incredible October 5 ADL predictive modeling chart, below, highlights just how powerful some of our proprietary price modeling tools really are.  Imagine having the ability to look 10+ months into the future to be able to attempt to understand exactly what price may attempt to do and to be able to plan and prepare for these moves well ahead of the “setup”. 

So far, our analysis of the precious metals has been spot on and we’ll continue to try to update our members and followers as this movement continues.



The ADL system hs played a large roll in our short term trading result for August already having closed 24.16% profit this month – See Here

This original prediction based on our advanced Adaptive Dynamic Learning (ADL) predictive price modeling system suggests price should be near or above $1600 by August/September 2019 (the higher yellow dash lines within the blue rectangle).  If these predictions continue to hold up as valid and true, then we would expect the price of Gold to target these levels as a “leg 1 move” then consolidate a bit before attempting to move higher.

Weekly Gold chart highlights our expectations

This Weekly Gold chart highlights our expectations for the current and future price rotations in Gold. 

As you can see, we are still expecting a $1600 initial upside price target (shown as $1595) and a brief price rotation after that level is reached.  The reality of this move is that Gold could rally well above $1600 before stalling, but we believe the $1595 level is a safe call for this move and we believe the rotation will be fairly short-lived before the price continues to rally further.

One interesting point to make is that the $1595 level is well above the highest (RED) Fibonacci projected price target.  These types of moves by price can happen in extended trending.  It happens that the Fibonacci price modeling system predicted these ranges based on historical price rotations and recent trends. 

Yet when something happens in the markets that result in trends extending beyond the predicted levels, it suggests that a larger, more volatile, the price trend has established which could push price levels to 1.6x or 2x the precious target level ranges.  This would suggest $1700 to $1850 as a new upside target level (eventually).

As Silver starts to move higher, finally breaking above historical resistance and really starting to rally as Gold has taken off, one very interesting price setup happened this week – a VERY LARGE RANGE BAR.  Silver has historically shown a bar range volatility of near or below $0.40.  On August 13, Silver set up a total high-to-low bar range of just over $1.00.  This massive increase in volatility suggests that Silver could be setting up for a very explosive price move in the near future. 

If volatility continues to stay near 1.5x to 2.5x historical levels, Silver could rally $6 to $10 in a very short 14 to 30 days.

What does this mean for our precious metals trade and for our members and followers?  It means that the metals are “loading up on fuel” at the moment and preparing for something BIG.



How is this aligning with our August 19 breakdown prediction and how should traders plan for these moves and protect their assets?  Right now, if you have not already set up and entered your precious metals trades, you should consider scaling into trades soon and/or waiting for this rotation that we are suggesting is only about 5+ days away.  Silver is still an incredible opportunity for traders and Gold should stall near $1595, then likely rotate a bit lower towards $1525 before bottoming.  Therefore, any entry below $1540 in Gold or below $17 in Silver is still a solid entry-level.

Now, before we carry on with our research, we want to highlight the fact that many things are aligning with our August 19 global market breakdown prediction.  We’ll go into more detail about this in Part II of this research article and attempt to detail our expectations, but we want to warn you that we believe extended risks will start to become more evident on or after August 19, 2019.  This is not a warning that should prompt you to immediately start selling off everything you own and setting up for a massive short trade in the markets.  What it means is that August 19 will likely be the start of an extended “rounded top” or other types of extended top formation that will provide a more clear projection of targets and opportunities as it plays out.

You’ll see more in Part II of this research post (delivered to you just in time before the weekend)


I warned that the next financial crisis (bear market) was scary close, possibly just a couple weeks away. The charts I posted will make you really start to worry. See Scary Bear Market Setup Charts.

In early June I posted a detailed video explaining in showing the bottoming formation and gold and where to spot the breakout level, I also talked about crude oil reaching it upside target after a double bottom, and I called short term top in the SP 500 index. This was one of my premarket videos for members it gives you a good taste of what you can expect each and every morning before the Opening Bell. Watch Video Here.

Detailed report talking about where the next bull and bear markets are and how to identify them. This report focused on gold miners and the SP 500 index. My charts compared the 2008 market top and bear market along with the 2019 market prices today. See Comparison Charts Here.

Dispatches From Bond-Land

Jared Dillian

First, please do me a favor—I would love it if you would follow me on Twitter.

By this point, you have probably heard that $15 trillion of bonds are trading with negative yields, which represents 25% of all sovereign bonds outstanding. Lots of people are indignant about this—but it’s no use getting mad at the market.

Lots of people say it doesn’t make sense. It makes sense to me, and to a few other people. If you see something in the market that doesn’t make sense, it’s usually best to stay away, rather than picking a fight with it.

We’re not in uncharted territory here. Let’s do a market psychology exercise.

Back in 2012, ten-year yields were actually lower:

And again in 2016:

Both of those times (and I remember this quite clearly), people were bullish on bonds and said that yields were going lower. Instead, they rocketed higher. They said that the deflation/disinflation that we were experiencing was unstoppable, and a whole bunch of other stuff, that turned out not to happen.

In 2016 I presented a short bond thesis at a conference and I practically got hounded off the stage. Nobody remembers this, but everyone was really bullish on bonds back then. It was actually kind of a weird situation. The organizers of the conference avoided me after that, like I was radioactive.

Now practically nobody is bullish! Why is that? I suppose the inflation picture is markedly different—we have tariffs and there are wage pressures and such—but I don’t think that’s what this is about.

My thesis, which I have carried around for 20 years: when everyone believes something, it is usually wrong.

What does everyone believe right now? That negative yields are unsustainable.

Maybe that is true. Maybe not.

Bubbles in Everything

You can have a bubble in any asset class, from little stuffed animals to lines of computer code. Why not bonds?

The bitcoin bubble burst when there were more Coinbase accounts than Schwab accounts, and there was a bitcoin rapper in the New York Times. We don’t have any bond rappers yet, so I’d say the bull market has a ways to go.

George Soros always said that if he saw a bubble forming he would get in there and try to make it bigger—which is pretty much the opposite of what everyone does.

What everyone does, is goes on Twitter to complain about it. It’s not just Twitter—negative yields was probably the biggest concern you guys listed in the bond survey.

Right now, people don’t believe in the trade, or understand it. This is going to continue until they do understand it.

There are also fundamental reasons which are plainly obvious—bad demographics and a savings glut, which creates huge demand for safer assets like bonds, pushing down yields. Both of those things were cited the last two times around (2012 and 2016), but not this time.

My opinion: smart people (including the owner of this website) predicted debt and deflation years ago. You know how it happens. Gradually, then suddenly.

Anyway, I can’t do one scroll through Twitter without someone freaking out about negative interest rates. Turn on the internet and see. But what if negative interest rates… are normal? What if they make sense?

Ask this question around certain people and they completely lose their minds. The last time I saw people get this indignant about a trade, it was… Beyond Meat. See how that turned out. I have experience with this sentiment thing. When something makes people angry, I have confidence that the trend in question will continue for a very long time. I think negative rates are not an aberration and could become a semi-permanent feature of finance.

When people start to believe in negative rates, they will probably come to an end.

Bond House

Lehman Brothers was a “bond house.” They were really good at fixed income—not so good at equities. Though equities did pretty well towards the end.

It was kind of hard not to be exposed to bonds at Lehman, even if you did work in equities. If you recall, the Barclays bond indices that we have today used to be Lehman bond indices. I got a lot of customer flow in the 20+ Year Treasury Bond ETF, TLT, and it was because Lehman had the index.

I also took six weeks of bond math when I joined the firm in the summer of 2001, and most of it stuck with me.

A lot has changed since then. Most of the trading activity in US Treasurys is electronic.
Back then, it was all high-touch—carried out by actual humans.

A lot has remained the same. It’s still fundamentally the same market that it was 20 years ago. There’s a lot more debt, but one thing that has remained constant is how difficult it is to trade off of supply—the idea that more bonds makes rates go higher. And, people believe strange things about the bond market these days—they think more supply makes interest rates go down.

If you think things are stupid, they will probably get more stupid. You can put that on my tombstone.

PART 4 – Global Central Banks Move To Keep The Party Rolling

Chris Vermeullen

In this last segment of our multi-part research post regarding the US Fed and the global central banks, it is becoming evident that the fear of a further market contraction is resulting in the decrease in rates and the push for additional QE functions.  Our research has shown that the global economy has partially recovered from the 2008-09 credit market collapse, but the process of the recovery has resulted in a “blowout” type of event where shifting capital intents and the transition from the 19th century economic model towards a new 21st century economic model is setting up the global markets for a massive rotation event over the next 12 to 24 months – possibly longer.




It is our belief that capital is still doing what capital always does, seeking out the best opportunities for safety and returns.  Right now, that location is easily found in only certain segments of the markets; volatility, precious metals, certain energy sectors, US Treasuries and CASH.  The future events, including the massive rotational event that we believe is about to unfold in the global markets, will change the way capital is deployed for many years to come. 

It is very likely that this rotation event will create incredible opportunities for skilled technical traders or subscribers to our trade signal newsletter over the next 12 to 36 months and will likely prompt a further shift towards the new 21st-century economic model that we believe will be the ultimate outcome.

Taking a brief look at our recent history highlights the fact that capital becomes fearful about 12 to 16 months before a major US election event.  Additionally, certain other factors related to the global economy heighten this fear as US/China trade issues, global debt issues and economic output issues continue to plague the markets.  The combination of these types of events set up a “perfect storm” type of economic cycle where skilled technical traders are just waiting for the impact event to hit before the markets begin a bigger rotational event.

These types of events, similar to the 2000 and 2008-09 market crash event, are a process where price rotates out of a normal range and attempts to explore lower price levels that act as price support.  It is not uncommon for these types of events to happen, although the severity of these events is difficult to determine prior to their execution. 

The US Fed and global central Banks set up an easy money process over the past 9+ years that allowed for capital to be deployed as a process that has setup this current massive rotational event. 

At first, the intent was to support collapsing markets and institutions – we understand that. 

But the nature of capital is to always seek out suitable safety and returns, so capital did what is always does hunt out the best opportunities for profits.  First, it rallied into the crashing real estate market and emerging markets – which had been crushed by the 2008-09 credit crisis event. 

Next, it piled into the Asian markets and healthcare/technology markets.  At this time, it also started piling into the startup/VC markets throughout the world as well as certain commodities.  The recovery seemed to have created a booming and cash-flush market for anyone with two dollars to rub together.

Then came the 2015-16 market contraction and the end of the US Fed QE processes.  At this time, China realized the need to control capital outflows and the US/Global markets slowed to a crawl as the US Presidential election cycle ramped-up.  It was just 12 months prior to this 2015-16 event that oil crashed from $114 to $46.  Within 2015-16, Oil continued to crash to levels below $30.  This was the equivalent of the blowout cycle for the global economy.  Headed into the 2016 US elections, the global economy was running on only 5 of 8 cylinders and was limping along hoping to find some way out of this mess.

The November 2016 US elections were just what the global economy needed and everyone’s perceptions about the future changed almost overnight.  I remember watching the price of Gold on election night; +$75 early in the evening as Clinton was expected to win, then it continued to fall back to +$0 fairly late in the evening, then it fell to -$75 as the news of a Trump win was solidified.  This rotation equated to a nearly 10% rotation in less than 24 hours based on FEAR.  Once fear was abated, global investors and capital went to work seeking out the safest environments and best returns – like normal.

This resurgence of capital into the markets set up of a new SOP (standard operating procedure) where capital began to be deployed in more risky environments and into broader and bigger investment structures.  This is the SETUP I’m trying to highlight that was created by the US Fed and central banks.  I don’t believe anyone thought, at that time in early 2017, that the current set of events would have transpired and I believe global governments, central banks, and global financial institutions thought, “Party on, dude!  We’re back to 2010 all over again”.  Boy, were they wrong.

This time, the global central banks, governments and state-run enterprises engaged in bigger and more complex credit/debt structures while attempting to run the same game they were running back in 2010 and 2011.  The difference this time is that the US Fed started raising Fed Fund Rates and destroyed the US Dollar carry trade while putting increasing pressure on the global market, global debt and global trade.  The continued rally of the US Dollar after the 2018 lows helped to solidify the advantages and risks in the markets.  This upside rally in the US Dollar, after the 2014 to 2016 rally, really upset the balance of the global markets and setup an increasing pressure point for foreign markets.

It soon became very evident that risks in the foreign markets could be partially mitigated by investing in the US stock market and by moving capital away from risky currencies and into US Dollar based assets.  Capital is always doing what it always does – seeking out the best environment for returns and protection from risk.  Thus, we have the setup right now – only 15 months before the 2020 US Presidential elections.  What happens now?

This setup is likely to prompt a rotation in the global markets as well as within the US stock market. 

It is very likely that a continued contraction in consumer and banking activity (think business, real estate, trade, commodities, and others) will prompt a contraction in global economics very similar to what happened in 2014~2016.  This process will likely put extreme risk factors at play in some of the most fragile economies and state-run enterprises on the planet.  Once the flooring begins to crack in some of these markets, we’ll see how this event will play out.  Right now, our eye is watching Europe and Asia for early warning signs.

The US Fed will continue to manipulate the FFR levels in an attempt to help mitigate the risks associated with this contraction event.  It is likely that the US Fed already sees what we see and it attempting to position themselves into a more responsive stance given the potential outcomes. 

Inadvertently, the US Fed and global central banks presented an offer that was too good for anyone to ignore – easy cash.  What they didn’t expect is that the 2014 to 2019 rally in the US Dollar and US stock market would transition capital deployment within the global market in such a way that it has – setting up the current event cycle.

We believe a downside pricing event is very likely over the next 10 to 25+ days where the US stock market may fall 12 to 25%, targeting levels shown on this chart (or slightly lower) as this rotational event takes place.  Ultimately, the US markets will recover much quicker than many foreign/global markets.  Our estimates are that the recovery in the US markets will likely begin to take place near March or April 2020 and continue higher beyond this date.

This Custom Smart Cash Index chart highlights the type of capital shift activity we’ve been describing to our readers and followers.  It is easy to see that capital moved out of risky investments within the downturns on this chart and into the most opportunistic equity markets within the uptrends on this chart.  Remember, most opportunistic markets are sometimes outside of the scope of this Smart Cash index.  For example, this chart does not relate strength in the Precious Metals markets or other commodities/currencies.  All this chart is trying to highlight for followers is how capital is being deployed in viable global equity markets and when capital is exiting or entering these markets.

Given the current setup, we would expect a breakdown in this Smart Cash Index over the next 4+ months to set up a new lower price level establishing a base/bottom before attempting to move higher.  We believe the 100 level, shown as historical support, is a proper target price level for this move initially.

Lastly, we believe capital is moving aggressively into the precious metals markets and we urge all skilled technical traders to pay attention to this chart of the Gold/Silver ratio.  If our analysis is correct and a larger rotation price cycle is about to unfold in the global markets, which may last well into 2020 (or beyond) for certain global markets, then you really need to pay attention to the upside potential for this Gold/Silver ratio.

As we’ve drawn on this chart, if this ratio recovers to 50% of the 2011 peak levels as this rotation unloads on the global market, this would push Gold and Silver prices to levels potentially 60% to 140%+ higher than current levels.  I understand how hard it is to understand these types of incredible price increases and how they could possibly be relative to current prices, but trust us in our research. 

Gold and Silver prices have been measurably depressed over the past 3 to 4 years.  Unleashing the real valuation levels of these precious metals at a time when risk factors are excessive suggests that Gold could easily be trading above $3200 and Silver above $60 to $65 within 6 to 12 months.


In closing, we want to urge all skilled technical traders to keep a very open perspective to the “Party on, Dude” mode of the global central banks and be aware that a very fragile floor is the only thing holding up the markets in another massive US presidential election cycle event.  In our opinion, the writing is already on the wall and we are preparing for this rotational event and alerting our members on what to do to profit from these moves.

The Federal Reserve and global central banks will attempt to keep the party rolling for as long as possible because they know the downside event could be something they don’t want to have to deal with.  So watch how these global central banks attempt to nudge public perception away from risks and towards the “party on” mode.  Stay alert.  Stay aware.  When this breaks, it will break quickly and aggressively.

Using technical analysis and proven strategies we can follow the market trends and profit from them no matter which the market moves. We bet with the market (the house) and provide entry, target, and stops for all trades we initiate.

Google parent Alphabet overtakes Apple to become new king of cash

Leadership switch follows concerted effort by iPhone maker to reduce its liquid reserves

Richard Waters in San Francisco

The financial reserves of Google’s parent company Alphabet have risen to $117bn while Apple’s cash pile has fallen to $102bn © Bloomberg

The corporate world has a new king of cash. The title for the company with the biggest financial reserves, held by Apple for a decade, has passed to Google’s parent, Alphabet, according to figures released in recent days.

The switch in leadership follows a concerted effort by the iPhone maker to reduce its liquid reserves, six years after it first came under pressure from activist investor Carl Icahn to pay out more of its cash hoard. Apple’s holdings of cash and marketable securities, net of debt, has fallen to $102bn, down from a peak of $163bn at the end of 2017.

Alphabet’s financial reserves have been moving in the opposite direction. At $117bn, its cash pile has risen by almost $20bn over the same period.

The rise of Google’s parent to the top of the corporate liquidity rankings puts its corporate wealth and power on conspicuous display at a politically sensitive moment. After being hit with €8.2bn in antitrust fines to the EU in the past two years, it now faces intense scrutiny in Washington.

The company’s preference for hoarding its money and spending it on trying to break into new markets, rather than using it to reward shareholders with buybacks or dividends, as Apple has done, also antagonises some investors.

“In general, their attempts to reinvent themselves with their new initiatives aren’t working out,” said Walter Price, a portfolio manager at Allianz Global Investors. “I wish they’d return more cash to shareholders and waste less.”

Too much liquidity?

The cash build-up has come despite a surge in capital spending. At $25bn last year — up 50 per cent from 2017 — much of the money has been pouring into real estate, as Google has added to its office holdings in cities such as New York and built data centres to support its growing cloud computing business.

Ruth Porat, chief financial officer, has been at pains to downplay the real estate investments, stressing that they are a one-off and that, in a normal quarter, 70 per cent of capital spending goes into servers and other new equipment.

The infrastructure to support artificial intelligence that Google had been building “requires a tonne of compute power”, said Youssef Squali, an analyst at SunTrust Robinson Humphrey. But he added that, like some other big tech companies, it had seen higher spending on machine learning feed through directly into higher revenue. That had left Wall Street generally comfortable with the spending surge.

It is in areas beyond Google’s core business that the complaints persist. Alphabet’s cash is produced almost entirely by its search advertising business, which has been supplemented by strong growth from online video service YouTube.

By contrast, Google’s other businesses — such as cloud computing, smartphones and home automation — are believed to have been consuming cash. Alphabet has also lost $15bn in the six years since disclosures began in businesses beside Google — something it describes as its “Other Bets”, ranging from the Waymo driverless car unit to the Verily healthcare division.

Google had done enough to “make the cut” in cloud computing, where it is chasing market leaders Amazon Web Services and Microsoft, said Mr Price. But he added that it had had little impact in breaking into other markets.

Heightened buybacks

Until last week, Alphabet has also stood out among big tech companies for not taking a more aggressive stance on returning cash to shareholders following the passage of US tax reform at the end of 2017. The new law applied an immediate — though reduced — tax rate to US companies’ overseas cash reserves, in the process removing the incentive to sit on the money rather than start paying it out.

Apple has responded to the change by spending $122bn on buying back stock and paying dividends in the past 18 months. Other companies to dig deep include Cisco Systems, which has cut its cash holdings from $35bn at the time of the new tax law to only $11bn.

Alphabet’s stock buybacks, by contrast, have been paltry. In the nearly four years since it began repurchasing its own stock, it has spent an average of only $1.7bn a quarter.

In that time, it has handed out more new shares in the form of employee stock benefits than it has bought back through its repurchase programme. As a result, the payments have done nothing to lift its earnings per share — the reason investors generally welcome buybacks.

Things could be about to change. Last week, Alphabet said its board had added $25bn to its stock buyback programme, taking total new repurchase authorisations to $37.5bn since the start of this year.

Ms Porat said the increase did not reflect any change in Alphabet’s financial priorities, and that its two top goals were unchanged: to invest in the long-term growth of its existing businesses, and to support acquisitions. However, the move contributed to a strong stock price rebound on the same day that the company also reported a rebound in revenue growth, dispelling worries about a sharp secular slowdown in its advertising business.

The cash mountain

Even the heightened rate of buybacks may not cap the growth in Alphabet’s cash mountain. Its free cash flow this year was forecast to top $30bn, rising to almost $40bn next year, said George Salmon, an analyst at Hargreaves Lansdown. The new buyback intentions “don’t represent a step change” big enough to actually reduce the company’s total reserves, he said.

Many investors are now counting on a steady increase in Alphabet’s stock repurchases as its search advertising business continues to mature — much as Apple responded to an end of growth in iPhone volumes with a more concerted effort to distribute its cash.

One potential avenue for using the money — making acquisitions — looks less likely given the regulatory backdrop, according to some investors. “The US government is going to take care of the M&A question by making it more difficult to do deals,” said Jim Tierney, a chief investment officer at AllianceBernstein. Along with growing maturing in the core business, that was likely to make the $25bn repurchase authorisation announced last week “the tip of the iceberg”, he said.

Facebook, with less than half the cash reserves, has also turned its thoughts to distributing more of its excess cash, heavily outspending Google last year on stock repurchases.

“These are going to become free cash flow machines with nowhere to spend their money except on buybacks,” said Mr Tierney.