1. The Coup d’État Against President Trump Has a New Twist

    The attempt by the U.S. intelligence community to depose Trump led by James Comey (FBI), John Brennan (CIA) and James Clapper (director of national intelligence) is well-known by now. These officials used a flawed and unverified “dossier” paid for by Hillary Clinton to get a warrant to spy on a low-level official in the Trump campaign.

    Of course, this surveillance included senior officials who spoke to the junior official, thereby granting access to the entire Trump campaign. The effort was aimed at preventing Trump’s election. After that failed, the effort was directed at preventing Trump from taking the oath of office by forcing him to step down in favor of Mike Pence with selective leaks of the dossier material and unsupported accusations about Trump’s ties to Russia.

    When that failed also, the intelligence community did not give up. As this article reports, after Trump fired Comey, a new investigation was launched based on a theory that Trump was operating under Russian influence.

    There’s no proof that Trump was influenced by Russia and there’s a strong case that the U.S. should improve relations with Russia in order to counter even greater threats from China. The story is almost two years old and there’s nothing to support it. It seems the media are just recirculating old “news” with no basis to keep up the drumbeat of anti-Trump coverage.

    The message for investors is that the war on Trump will not end soon. More uncertainty and volatility are to be expected.

    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. Never Heard of Julian Castro? Don’t Worry, You Will

     

    The 2020 presidential election race is now in full swing, even though it’s still early in 2019. Presidential races seem to get longer every four years. Now we’re at the point where the next race begins when the votes in the midterm election are barely counted.

    If you’re a political junkie (I’m not), this is like heaven on Earth because the politics never end. Trump is a shoo-in for the Republican nomination, so not much will happen on the Republican side until the summer of 2020. John Kasich and Jeff Flake may challenge Trump in the Republican primaries. This will provide some hope to “Never Trump” Republicans, but these are not serious challenges and they’ll be lucky to get out of the single digits in primary returns.

    Things are different on the Democratic side. There may be as many as 20 Dems running for president, a thundering herd. So far, Elizabeth Warren (D-MA), Tulsi Gabbard (D-HI) and Julian Castro (former HUD secretary and subject of this article) have all declared they are running. But you can expect to hear announcements by Joe Biden, Beto O’Rourke, Bernie Sanders and many more in the next few months.

    This creates an interesting dynamic. Most primaries are “winner take all,” meaning the candidate who gets the most votes takes all of the delegates from that state. With 20 candidates, the average vote will be 5% each. In fact, most candidates will get 1–3% and only a handful will break into double digits.

    This means that a 20% share of the vote could win 100% of the delegates from each state. To do that you need money, name recognition and voter loyalty.

    Incredibly, the candidate who would be the strongest in all three categories is Hillary Clinton. Don’t count Hillary out; she may be running again and would start in a strong position. A crowded field gives her a chance to pick up delegates even with minority support. Stranger things have happened.

    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. One More Reason the U.S. Economy Is Slowing Down

    The U.S. economy is facing head winds from many sources. These head winds include currency wars, trade wars, higher interest rates, tighter money supply and excessive debt. The results are appearing in a declining rate of GDP growth.

    U.S. annual GDP growth was 4.2% in the second quarter of 2018, 3.4% in the third quarter and is currently estimated at 2.8% for the fourth quarter, according to the Atlanta Fed. On the whole, this looks like a reversion to the slow 2.3% growth we’ve had since the recovery began in 2009.

    Increasingly, it appears the 2017 Trump tax cuts produced a temporary bump in GDP growth, but not the lasting return to trend growth (3.2%) expected by the Trump inner circle of Larry Kudlow, Art Laffer and other advisers. But, now the head winds have helped in the form of a self-imposed drag from the government shutdown.

    As described in this article, there are currently 800,000 government workers who are not getting paid due to the failure of Congress to pass the needed appropriations. These workers will receive back pay when the government reopens, but that may take weeks to accomplish. In the meantime, these workers will spend less, skip restaurants and other discretionary spending and draw down savings to cover mortgage payments and other necessities.

    By itself, this kind of reduced spending could cut 0.2% off GDP. Reduced government spending by the affected departments will reduce GDP even further. This is not a permanent or extreme condition, but it doesn’t help at a time when growth is already weaker.

    Get ready for higher unemployment, more disinflation and lower interest rates in the months ahead.

    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. Paying off Debt Is a Good Idea but It Does Not Help U.S. GDP

    This article reports that Americans in their 40s and 50s are devoting more of their discretionary income to paying off debt rather than savings or investments for retirement.

    Economically, this makes good sense. Paying down debt is the same as investing; you’re giving up one asset (cash) in exchange for eliminating one liability (the debt) with no change in your net worth. The interest expense you save is, in effect, your return on an “investment” in debt reduction.

    Most safe investments today pay about 2–4% in returns. Risky investments in assets like stocks have been producing losses lately. Stocks had high returns from 2009–2018, but the average return since 2000 is only 4.5%. Much of the “rally” since 2009 was simply a recoupment of huge losses from the dot-com crash and the 2008 financial panic.

    Interest rates on debt are often 12–30%, depending on the type of debt. In effect, paying off debt is the same as investing at 12–30%. Your interest savings are your return on investment; there’s that much more in your pocket. While this may be a wise strategy for individuals, it’s a cause for concern in the broader economy.

    Paying off debt does nothing to increase GDP, while spending and investing can have positive effects on GDP. Individuals who pay off debt are improving their personal finances, but they’re contributing to a “liquidity trap” that slows growth. Keynes recognized that when individuals don’t spend, the government may have to spend more to keep up “aggregate demand” and prop up GDP.

    Washington is running $1 trillion deficits, but we may be in the “red zone” where more government debt does not produce more GDP. These individual debt reductions are a straw in the wind that we’re headed for a long period of slower growth, more deflation and ultimately a loss of confidence in central banks.

    The last time this happened was the 1930s, and before that the 1870s. Get ready for another round of serious slowdowns in growth 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.

  5. Rumors of a War — Iran Is Back in the Cross Hairs

     

    The U.S. was in a serious financial and cyberwar with Iran in 2012 and 2013. The U.S. and Israel were giving consideration to military attacks on Iran in order to disable Iran’s uranium enrichment program. At the end of 2013, President Obama reached a truce in exchange for Iran entering into negotiations on their efforts to develop nuclear weapons.

    Eighteen months of negotiations led to the 2015 Joint Comprehensive Plan of Action, JCPOA, among Iran, the U.S., the U.K., Germany, France, Russia and China (the “P5 +1”) and the EU. Under this agreement, Iran agreed to stop its nuclear enrichment activities in exchange for sanctions relief and funds estimated at over $50 billion, mostly in the form of frozen bank accounts that were unfrozen.

    In addition, the U.S. delivered about $1.5 billion in physical cash and physical gold to Iran on pallets flown to Tehran. Most of that money was used to finance warfare and terrorism in Yemen, Gaza, Lebanon, Syria and Sinai.

    This resolution seemed to reduce the risk of war in the short run. However, Iran’s compliance was difficult to monitor and in some activities such as missile testing, Iran was violating the spirit of the agreement. When Trump became president, he terminated the JCPOA and led an effort to reimpose financial sanctions on Iran.

    This also marked the start of a new financial war. According to this article, the shooting war option may also be back on the table. Although there has been some good news coming from the North Korean negotiations lately, the news seems to be getting worse in Iran, Ukraine, Syria, Venezuela and the South China Sea.

    While it may be impossible to forecast exactly where war will break out, it’s easy to forecast it will break out somewhere soon, simply because of the large number of danger zones. Investors should prepare accordingly with increased allocations to cash, gold and Treasury notes.

    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. Here’s Where the Next Crisis Starts

    The case for a pending financial collapse is well grounded. Financial crises occur on a regular basis including 1987, 1994, 1998, 2000, 2007-08. That averages out to about once every five years for the past thirty years. There has not been a financial crisis for ten years so the world is overdue. It’s also the case that each crisis is bigger than the one before and requires more intervention by the central banks.

    The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

    This means a market panic far larger than the Panic of 2008.

    To read the rest of this article, click here.

  7. The Annual Return on the S&P 500 With Dividends Since 1999 Is 4.8%

     

    On any given day, it’s easy to find a stock bull and a stock bear ready to fight it out with conflicting advice and opinions. The bull points to stronger growth in the U.S. in 2018, stimulus from tax cuts, tight labor markets, low interest rates and high consumer confidence as evidence that all is well and stocks should continue to soar. The bear points to a fourth-quarter U.S. slowdown (with growth dropping to 2.6% from the second quarter’s 4.2%), a slowdown in China, head winds from the trade war and the deflationary effects of a strong dollar.

    Both sides have a lot more ammunition. The bear says that consumer confidence is correlated to the stock market and when stocks drop, confidence is not far behind. The bull says that the Fed just signaled a “pause” in rate hikes, which will give the market a boost. And so it goes.

    One way to cut through the noise is to take a few steps back and look at a longer perspective. That’s exactly what this article does.

    The author points out that in the past 20 years, the annual return on the S&P500 (including dividends) is only 4.8%, well below the annual returns on bonds and gold. Investors will point to the fact that stocks have risen 300% since the post-recession low in March 2009. That’s true, but it ignores the 50% crash in 2008 and the near 50% crash in 2001–02.

    Most of the reputed “big gains” in the S&P are really just a matter of making up big losses. The long-term returns are not horrible; they’re just ordinary. The article makes the point that passive “buy-and-hold” investing is a Wall Street smokescreen, and superior returns require active investing.

    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. U.S.-China Trade Talks Take Center Stage This Week

     

    The U.S.-China trade war has been out of the headlines lately as the two sides pursue private negotiations against a March 1 deadline for new higher U.S. tariffs on Chinese goods. That’s about to change, according to this article.

    The stock market rally last Friday was widely attributed to dovish talk from Fed Chair Jay Powell and the strong December jobs report. But a third catalyst for the rally was some favorable movement in the U.S.-China trade impasse.

    The trade war began in January 2018 when Trump announced tariffs on solar panels and appliances mainly aimed at the Chinese. Events escalated rapidly from there to the point that reciprocal Chinese and U.S. tariffs now apply to over $300 billion of traded goods. A new round of tariffs was scheduled for Jan. 1, 2019, but in early December the two sides declared a 90-day truce until March 1, 2019, to allow for negotiations.

    Not much happened in December, but the trade talks are set to get serious this week. Wall Street rallies on each positive leak and then pulls back when the talks appear stalemated. We’ll probably see a lot of both between now and March.

    The likely outcome is some modest concessions on tariffs and an extension of the truce to allow more time to work on the tough issues, like theft of intellectual property by China. That result is a mild positive for markets, but the difficult talks and a potential breakdown are yet to come.

    One thing investors can count on is continued volatility as the trade talks ebb and flow.

    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. Fed Goes for “Verbal Ease” as Powell Reintroduces the Word “Patient”

     

    Fed Chair Jay Powell just sent the most powerful signal from the Fed since March 2015. The Fed has taken a March 2019 rate hike off the table until further notice. At a forum in Atlanta last Friday, reported in this article, Powell used the word “patient” to describe the Fed’s approach to the next interest rate hike.

    When Powell did this, he was reading from a script of prepared remarks in what was otherwise billed as a “roundtable discussion.” This is a sign that Powell was being extremely careful to get his words exactly right. When Powell said the Fed would be “patient” in reference to the next rate hike, this was not just happy talk. The word “patient” is Fed code for “no rate hikes until we give you a clear signal.”

    This interpretation is backed up by the Fed’s past use of verbal cues to signal ease or tightening in lieu of actual rate hikes or cuts. Prior to March 2015, the Fed consistently used the word “patient” in their FOMC statements. This was a signal that there would not be a rate hike at the next FOMC meeting. Investors could do carry trades safely.

    Only when the word “patient” was removed was the Fed signaling that rate hikes were back on the table. In that event, investors were being given fair warning to unwind carry trades and move to risk-off positions.

    In March 2015, Yellen removed the word “patient” from the statement. In fact, the first rate hike (the “liftoff”) did not happen until December 2015, but the market was on notice through the June and September 2015 FOMC meetings that it could happen. Now, for the first time since 2015, the word “patient” is back in the Fed’s statements, which means no future Fed rate hikes without fair warning.

    For now, the Fed is rescuing markets with a risk-on signal. That’s why the market rallied last Friday. But we’re not out of the woods.

    The U.S. stock market had already anticipated the Fed would not raise rates in March. Friday’s statement by Powell confirms that, but this verbal ease is already priced in. As usual the markets will want some ice cream to go with the big piece of cake they just got from Powell. So we’re in wait-and-see mode.

    The next FOMC meeting is Jan. 30. If the Fed does not repeat the word “patient,” markets could be in for an extremely negative reaction.

    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. Why the Next Financial Crisis Will Catch Many by Surprise

     

    When financial panics begin, they play out in similar ways. First, one asset class has a surprise drop. The leveraged investors sell the sinking asset, but soon the asset is unwanted by anyone. Margin calls roll in. Investors then sell good assets to raise cash to meet the margin calls. This spreads the panic to banks and dealers who were not originally involved with the weak asset.

    Soon the contagion spreads to all banks and assets, as everyone wants her money back all at once. Banks begin to fail, panic spreads and finally central banks step in to separate winners and losers and re-liquefy the system for the benefit of the winners. Typically, small investors (and some bankrupt banks) get hurt the worst while the big banks get bailed out and live to fight another day.

    What varies in financial panics is not how they end but how they begin. The 1987 crash started with computerized trading. The 1994 panic began in Mexico. The 1997–98 panic started in Asian emerging markets but soon spread to Russia and the big banks. The 2000 crash began with dot-coms. The 2008 panic was triggered by defaults in subprime mortgages. What will trigger the next panic?

    This article by prominent economist Carmen Reinhart says the place to watch is U.S. high-yield debt, aka “junk bonds.” Right now, spreads between yields on emerging-market debt and U.S. high-yield debt are diverging. This suggests that either emerging markets are underpriced or U.S. junk bonds are overpriced. Reinhart suggests the latter.

    Watch these spreads. If they start to converge with U.S. junk bonds falling in price, that may be a signal that a new financial panic is not far behind.

    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.