1. Have Democrats Learned From 2016 Defeat? Don’t Bet on It

    I maintain a proprietary model that I use to forecast major market and political events. Three days before the U.K.’s Brexit referendum when markets gave a 70% chance to a “remain” vote, I forecast the U.K. would vote to “leave” and recommended a long gold, short sterling position. The U.K. voted “leave” and subscribers made massive profits on that trade.

    In the weeks and days before the November 2016 presidential election when polls and pundits were giving Hillary Clinton a 90% chance of winning, I was traveling around the world doing TV appearances forecasting that Trump would win in a close race.

    Neither of these forecasts (and many others) was a lucky guess. My models give clear guidance as to what the outcome should be and why.

    What are these models saying about the 2020 presidential race? Right now, the model gives Trump a 67% chance of winning reelection. That forecast is based on the likelihood of a recession before the election.

    Since recession odds are 33%, Trump’s chances are the reciprocal, or 67%. Those odds should go up monthly from now on as the chances of a recession diminish as the time to the election declines.

    There are other factors in the model. One of the most important is to ask whether Democrats have learned anything from their defeat in 2016. If the answer is yes, then the odds of Democrats winning go up. If the answer is no, then the odds of Democrats winning go down.

    Unfortunately for Democrats, the answer appears to be no. As this article describes, Democrats are offering voters little more than continued Trump bashing. More to the point, despite his many mistakes and offensive comments, Trump comes off as genuine. He actually means what he says.

    Democrats come off as scripted, calculating and tailoring their message for the progressive wing of the party rather than the broader party and the more broad electorate. There’s still time to change things up, but for now the Democrats appear to have learned nothing and therefore appear headed for a second straight defeat.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  2. Trump Delays Some Tariffs for Two Weeks. It’s All for Show

    Recent news on the trade wars has been uniformly good. As reported in this article, Trump has agreed to postpone tariff increases on certain Chinese exports to the U.S. until mid-October. That’s an important date because it comes after the Oct. 1, 2019, celebration of the 70th anniversary of the Communist takeover of China in 1949.

    The Chinese would like their celebration to go off without acrimony or discord (including demonstrations in Hong Kong), so they are grateful for Trump’s delay. China reciprocated by excluding pork and soybeans from their own list of increased tariffs on U.S. exports to China. At the same time, both sides are preparing for a new round of trade talks tentatively scheduled for mid-October when these tariff and other nontariff barrier-related issues will be addressed.

    The stock market has rallied on this run of good news. Does this mean the trade wars are coming in for a soft landing, as the market seems to expect? Not at all.

    Both sides have selfish reasons for these concessions. As noted, China has its hands full with Hong Kong and would like to avoid further confrontation with the U.S. before the Oct. 1 celebrations.

    Trump is running for reelection in 2020 and relies on a strong U.S. stock market to help his chances. The delayed tariffs should be understood as temporary and cosmetic moves designed to achieve domestic political goals.

    None of the hard trade issues (intellectual property theft, verification processes, direct foreign investment, etc.) has been dealt with at all. Even if these matters are discussed at the mid-October meetings, they are months and possibly years away from resolution, if ever. None of the wider geopolitical issues (South China Sea, Taiwan, Korea) is being addressed in this forum.

    The stock market has a reprieve, but don’t expect it to last. Stock markets have been up and down and back again for almost two years based on the latest good (or bad) news on the trade wars. Expect that pattern to continue. This means getting ready for the next downswing by late October.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  3. Trump Calls for Negative Interest Rates

    As described in this article, Trump recently tweeted that the Fed should lower interest rates immediately and should consider going to “negative” interest rates. We’re a long way from negative rates, but Trump has shown an uncanny ability to read the economy better than the Fed.

    Trump’s call for negative rates may be a much better indicator of where markets are heading than anything from the Fed’s research department. This won’t happen all at once. The Fed moves cautiously and slowly.

    Assuming the Fed keeps up its tempo of 0.25% rate cuts, it would take eight cuts (and therefore eight FOMC meetings) to reach 0% from the current 2% target rate. The Fed meets eight times per year. So assuming one cut at every meeting, it would take at least a year to hit zero.

    The central bank may pause in rate cuts at one or more meetings based on economic data, so the entire process could take more than a year. Still, rates could hit zero before the presidential election in 2020, which is just over a year away.

    Negative rates before the presidential election are unlikely unless the economy tumbles into a recession (also unlikely based on the best available data). But if Trump wins a second term (a 67% probability, according to my models), his pressure on the Fed will continue.

    I recently attended a closed-door, off-the-record session with two senior Fed officials who indicated that negative rates are being seriously considered, even though no final decisions have been made. Rates may seem low today, about 1.85% on the 10-year Treasury note and 2% on the fed funds target rate, but they could go much lower as they already have in Germany, Japan and elsewhere. That means huge capital gains for investors who buy the notes today.

    Trump’s economic forecasts have been highly accurate (better than the Fed’s). This may be yet another example with upside for investors who take heed.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  4. Bonds Are in a Brave New World

    This article is about Mohamed El-Erian, one of the most powerful and best-connected members of the global monetary elite. El-Erian was a former head of bond giant Pimco and is currently the chief economic adviser for Allianz, one of the largest insurance companies and wealth managers in the world.

    He is routinely on the stage at the Davos World Economic Forum, Aspen Ideas Festival and other gatherings of the rich and powerful. His words are taken to heart by other elites. El-Erian is now advising that investors have to reconsider a lot of conventional wisdom about bonds.

    We typically hear that U.S. interest rates are “low” but other developed economies such as Germany and Japan have rates that are much lower. When investors declare that U.S. rates are low, they fail to distinguish between nominal rates, which are low by historic standards, and real rates (nominal minus inflation), which are still high for a slowing economy.

    El-Erian also points out that some bond markets have overshot in a certain direction, which creates opportunities for investors willing to take some risk to earn much higher returns. He cites Argentina as a case where financial distress is evident but outright default is unlikely.

    Investors could make huge returns as Argentinian bonds normalize based on economic reform and IMF support. As for U.S. bonds, it’s critical to get the nominal rate below the rate of inflation in order to create negative real rates that actually could stimulate economic growth. We’re starting to see some signs of this in the housing market (with long-term fixed-rate mortgages now at 3.5%), but the process has a long way to go.

    Rates on U.S. Treasury 10-year notes of 0.85% or lower (compared with 1.85% today) are not at all out of the question. Huge capital gains are available to investors who purchase the notes today and ride the yield curve down to projected levels below 1%.

    El-Erian urges investors to look at factors such as global growth, U.S. growth and government intervention before declaring the end of the bull market in bonds. The bull market may have far to run.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  5. It’s Not Too Soon to Get Ready for the Next Recession

    Recession talk has dominated headlines and TV talking head discussions for the past several weeks. The reason is obvious. The U.S. Treasury yield curve inverted in the 3-month-to-10-year segment.

    Inversion is when shorter maturities have higher yields to maturity than longer maturities. This inverted curve has been a reliable indicator of recessions in the past. Parts of the yield curve inverted months ago, but the 3-month-to-10-year segment is considered the strongest indicator of a coming recession. Suddenly, pundits and politicians (especially those challenging Trump) were yelling about “recession” night and day.

    This was true even for politicos who can’t explain what the yield curve is and who wouldn’t recognize an inversion if it bit them on the ankle. It didn’t matter. Just yelling “recession” as a way to bash Trump was good enough for their purposes.

    There are only two problems with this approach. The first is that when yield curve inversion signals recession, it usually does so 18–24 months in advance. This might mean that a recession is coming in early 2021 (after the next presidential election) but it says little or nothing about the odds of a recession in 2019 or 2020.

    The second problem is that there is no other confirmatory evidence. Yes, the yield curve inverted, but other indicators such as housing prices, unemployment, initial claims, service sector output, commodity prices and many more are not signaling recession. It’s good to be attentive and the yield curve does warrant watching, but it’s far too soon to be calling for a recession.

    Still, Trump’s reelection in 2020 may hinge on that. Generally speaking, presidents who seek a second term are always reelected unless they have a recession late in their first term. This happened to Jimmy Carter and George H.W. Bush. Both lost reelection bids because of recessions on their watches.

    Trump knows this, and as this article reveals, he is taking steps to fend off a recession should one appear on the horizon. Trump wants to rely on Fed interest rate cuts to prop up stock markets and postpone any recession. But if the Fed does not cooperate or interest rate cuts don’t work, Trump’s tool kit includes massive infrastructure spending, possible tax cuts and industrial bailouts.

    Trump could also reverse course on the trade wars. Investors who watch for signs of recession (something we do in our publications) can also anticipate Trump’s tool kit and invest in those sectors most likely to benefit from new tax cuts and spending.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.


  6. Musings Report 2019-37 9-14-19 The Black Swan Is a Drone

    Picture courtesy of usatoday.com

    The Black Swan Is a Drone

    The coordinated drone attack on Saudi oil facilities is a Black Swan event that is reverberating around the world like a meteor strike, awakening copycats and exposing the impossibility of defending against cheap drones of the sort anyone can buy.

    The attack’s success should be a wake-up call to everyone tasked with defending highly flammable critical infrastructure: there really isn’t any reliable defense against a coordinated drone attack, nor is there any reliable way to distinguish between an Amazon drone delivering a package and a drone delivering a bomb.

    Whatever identification protocol that could be required of drones in the future–an ID beacon or equivalent–can be spoofed. Bring down a legitimate drone, swap out the guidance and payload, and away it goes.  Or steal legitimate beacons from suppliers–the list of spoofing workaround options is extensive.

    This is asymmetric warfare on a new scale: $100,000 of drones can wreak $100 million in damage.

    If it’s impossible to defend against coordinated drone attacks, and impossible to differentiate “good” drones from “bad” drones, then the only reliable defense is to ban drones entirely from vast swaths of territory.

    So much for the widespread commercialization of drones.

    What sort of light bulbs are going off in the minds of copycats? It doesn’t take much imagination to see the potential for mayhem–and without sacrificing your own life.  Any highly flammable target is at risk of a similar attack: fully fueled aircraft, oil/natural gas tankers, trucks carrying fuels, pipelines, etc.

    The range and payload of commercially available drones is limited. The big drones can fly hundreds of miles and carry hundreds of pounds of weaponry, but these can be targeted by radar and conventional ground-to-air missiles. So-called hobby drones skimming over the rooftops (or deserts or forests) are difficult to shoot down, especially if the attack is coordinated to arrive from multiple directions.

    Small hobby drones may only carry 3 KG (roughly 6 pounds), but how much damage can 3 KG of high explosives cause?  The answer is “considerable” if the target is flammable, or lightly shielded electronics.

    Larger commercially available drones can carry up to 20 KG or 40 pounds–more than enough explosive capacity to take out any number of targets.

    Defense and intelligence agencies have no doubt war-gamed the potential for coordinated drone attacks, and the world’s advanced militaries are already exploring the potential for self-organizing “drone hordes” of hundreds or even thousands of drones overwhelming defenders with sheer numbers. The success of the oil facilities attack proves the effectiveness of much smaller scale drone attacks.

    Put yourself in the shoes of those tasked with securing hundreds of miles of pipelines carrying oil and natural gas around the world. What’s your defense against drone attacks? A.I. or remote-operated gun towers every few hundred yards, along thousands of miles of pipelines?

    It’s obvious there are no low-cost, effective defenses of thousands of miles of pipelines.  (Recall that the Saudis depend on seawater being piped hundreds of kilometers into the desert to inject into oil wells to bring the oil up to the surface. Taking out these water lines and pumps would cripple production, too.)

    The only effective way to limit drone attacks is to ban all drones and institute a shoot-on-sight policy for all drones. But that will not negate the potential for coordinated drone strikes or drone attacks on remote facilities.

    The mainstream media will be under pressure to downplay the consequences of this attack, but the cat is out of the bag: the Black Swan is a drone. What was “possible” yesterday is now a proven capability, and the consequences are not fully predictable.

    By Charles Hugh Smith

  7. Don’t Fall for the Latest Chinese Head Fake. The Trade War Will Roll On

    Last week, China and the U.S. announced they were resuming trade talks in early October. Right on cue, the stock market rallied, bonds and gold fell and the euro came roaring back from interim lows. It was as if they were playing “Happy Days Are Here Again” on CNBC.

    By the way, the early October date was not random. It follows the Oct. 1, 2019, celebration in Beijing of the 70th anniversary of the Communist victory over the Nationalists for control of China and the beginning of the regime of the Communist Party of China that continues until this day. President Xi did not want messy trade talks, let alone failed talks, to muddy the waters on this big celebration.

    That aside, the question is whether the stock market rally was justified and whether anything really changed in the China-U.S. trade wars as a result of these new talks. The short answer is no.

    Talking is certainly better than not talking and much better than fighting. But the issues are still irresolvable.

    China cannot give up its theft of U.S. intellectual property because it depends on that theft to propel growth. China cannot amend its internal laws to provide enforceability of any agreement because that involves a major loss of face and erodes Xi’s power. Trump cannot let the Chinese trade surplus with the U.S. persist because it’s a major drag on U.S. growth and it steals U.S. jobs.

    None of the big issues are any closer to a solution and that state of affairs may last for years. Despite the temporary euphoria, the market will realize sooner than later that the resumption of trade talks is just part of China’s strategy of delay and Trump’s strategy of propping up the stock market. When that realization sinks in, probably in late October, stocks will reverse course and bond and gold prices will resume their long-term climb.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  8. Easy to Find Global Warming if You Put Thermometers Near Heat Ducts

    The so-called “climate crisis” is one of the greatest public policy hoaxes ever perpetrated. That said, the hoax is not ending soon.

    Investors and concerned citizens need to see through the fog of false science and rigged data if they really want to understand what’s going on. First of all, climate change is real, but it’s not the critical crisis the alarmists would have you believe.

    I lived a decade on Long Island Sound. Ten thousand years ago the sound was a glacier. Today, you can sail, fish or paddle board on it and it’s a major water transportation pathway. That’s climate change, but it played out over thousands of years and was caused not by internal combustion engines (there weren’t any) but by solar cycles, volcanos, ocean warming and cooling and other factors that defy easy measurement and modeling.

    The best evidence with regard to carbon dioxide (C02) is that it does not cause warming (in fact, the opposite is true, warming causes C02 release). Of course, C02 is needed for plant growth and survival.

    This article shows that the climate alarmist deception is even deeper than we expected. Many data collection points that were suitably located when they were set up in 1923 have since been invaded by fast-food restaurants, heat exhaust fans and asphalt parking lots that make ambient temperatures higher in ways that have nothing to do with global warming. In fact, newly improved measurement techniques show that there has been no warming for the past 14 years, and a slight cooling trend has been detected.

    It’s also the case that U.S. C02 emissions have declined sharply and are now back to the levels of 1985. Alarm about climate change and the Green New Deal are frauds perpetrated by those who want to seize control of the economy for their own purposes. The data in this article (and many other sources) show this fraud for what it is.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  9. New York Fed Chief Says Low Inflation Is a Problem. He’s 10 Years Too Late

    For over 10 years, beginning with my first book, Currency Wars, I’ve consistently maintained that the Federal Reserve has no idea what they are doing when it comes to monetary policy and economic forecasting. I don’t consider that a controversial position; the evidence is overwhelming in the form of highly erroneous forecasts, policy reversals (from QE to QT and probably back again) and rate reversals (from cuts to increases and back to cuts), all without any significant changes in macroeconomic performance.

    The U.S. economy has been stuck in a persistent rut of annual growth around 2.2% for over 10 years regardless of whether the Fed is printing or burning money, raising or cutting rates. Long-term trend growth has been around 3.2%, so underperformance the past 10 years has cost the economy over $5 trillion in lost output. Thank you, Fed.

    Now comes the latest evidence for my thesis. In this article, New York Fed President John Williams says, “Low inflation is indeed the problem of this era.” He’s right, but he’s about 10 years too late with the observation.

    In Currency Wars(2011) I wrote, “The Fed is attempting to inflate asset prices, commodity prices and consumer prices to offset the natural deflation that follows a crash. It is basically engaged in a game of tug of war against the deflation that normally accompanies a depression… This is the essence of the Fed’s gamble. It must cause inflation before deflation prevails; it must win the tug of war.”

    The Fed spent 10 years (2009–2019) worrying about inflation that never appeared. The Fed consistently failed to achieve even the modest goal of 2% inflation. They should have been targeting 3% inflation (which would provide some debt relief in real terms) by working with fiscal authorities instead of wasting time printing money that banks wouldn’t lend and customers wouldn’t borrow.

    Now the disinflation and deflation may be too deeply ingrained to reverse. The U.S. is like Japan with one “lost decade” under our belts and another one on the way. The Fed has discovered this far too late.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  10. Google and Amazon Are Spying on You

    We’ve just gone through a three-year knock-down, drag-out fight between the Trump administration and the deep state over allegations of collusion by Trump with Russia and counterallegations of spying on Trump by the deep state. There’s no need to recite that history; we’ve all heard enough already. But what if you were being spied on not by the deep state but by the device in your pocket or on the kitchen counter?

    According to this article, that’s happening every day with innocuous and convenient devices like Alexa from Amazon, Assistant from Google and Siri from Apple. Most people who have these devices think of them as a one-way street where they can order pizza, buy products and get information by voice command. That they can do. But these systems are really a two-way street.

    They’re listening to your private conversations, tracking your whereabouts and talking amongst each other (robot to robot) about your behavioral patterns and whether you might be some kind of threat to society. Even that can sound benign if the “threat” is a possible mass shooter. But how good are the algorithms? (Not very good, in my experience.)

    And what if that “threat” comes to be defined as your religious beliefs, political beliefs, family size or thoughts on climate change that happen to be at odds with what’s considered acceptable by the engineers and thought police at Google? I don’t have Alexa (ever since I smashed mine with a sledgehammer) and I don’t use Assistant. I have Siri (can’t seem to get rid of it) but I leave it in the “off” position and disable all other apps from communicating with it.

    I’m not exempt from this kind of Big Brother surveillance (no one is) but I do try to keep it to a minimum. Other techniques (none infallible) are to leave your phone off whenever possible and leave it home if you’re just walking to do routine tasks.

    Good luck with all of the above; it can seem like a losing battle. The only thing worse than deep state surveillance and Silicon Valley surveillance is when the two join forces. I’ve seen that firsthand also. It’s not coming; it’s already here.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.