Near Term Prospects for World Markets

Investors, please read this....

http://www.marketviews.com/rmg/time-to-be-bearish-again-as-the-reflation-trade-is-topping/

Here is the conclusion.

"So to conclude, we do not think the recent reflation trade is anything more than a very flashy rally that is now pretty much over. We remain of the view that the US and World economies are stuck just above stall speed at best, and are vulnerable to a new recession that would be triggered by falling asset prices. The bear market is likely to happen alongside a decline in corporate buybacks as profits continue to decline and the market pushes back on funding bond issuance purely to buy back shares resulting in higher and higher leverage."

I noted this same source on December 10, 2015, just before markets went into a nose dive, dropping in excess of at least 10% within 6 weeks.

US Economy

The markets have recovered!!  Is this a blip, or are things really going well? As always, the focus is on the USA.

The Good.

Banks:  Only 1 US bank has gone under so far this year. After about 500 bank failures from January, 2008 to the middle of last year, this is excellent news.

Personal Debt: Americans are paying down debt in spite of the lowest interest rates in history.  Personal debt to GDP has gone from about 98% in 2009, to about 79% today, meaning that Americans have far more financial resiliency than they had just seven years ago. Again, this is excellent news.  

Savings: From a low of 1.9% of income in 2005, Americans now save at a rate of about 5.4% of their income. Again, this turn around, in the face of relentless pressure from the US Fed to borrow and spend, is excellent.

Federal Finances: In 2012, the USA Government ran a deficit of in excess of $1.1 Trillion. Today, the projected deficit for the next fiscal year will be well under $500 Billion. This is not excellent, but it is still very significant progress.

Unemployment Rate: This rate is now 5%, but it is up a bit because more people are entering the workforce. There are jobs in the USA, and this number is encouraging some superficial confidence...more on this below.

Housing: The US Housing index is very positive, at 58, where 50 is flat.  Housing prices are also way up. While positive as this implies that Americans are accumulating equity in their homes, this would not be happening absent the most accommodative monetary policy in history. Because this probably represents another housing bubble, it could easily be in the Ugly column.

Federal Reserve Balances: Of the $4.05 Trillion provided to US banks via Quantitative Easing, about $2.33 Trillion never made it into the US economy to stimulate growth - it is still on deposit with the Federal Reserve system on behalf of US banks. While this speaks volumes for how confident US banks actually are about the US economic recovery since 2009. the fact is that they used to have in excess of $2.7 Trillion on reserve. The fact that US banks are now slowly starting to access these funds is excellent news as this money may actually be used for its intended purpose some day, namely, stimulating the US economy.  

The Bad.

Velocity of Money:  Money is moving at its slowest pace in about 30 years. The whole point of QE was to inject cash into the system so it will spark economic growth. This can't happen if the money doesn't move. The fact that it is stagnant strongly suggests very little confidence in the economy.

Food Stamps: The number of food stamp recipients in the USA has fallen over the last two years from about 48 million, to about 45 million. This is still awful compared to the 28 million who were on the program before the Great Recession, but this is getting better.

Student Debt:  While the overall debt load of Americans is dropping relative to GDP, student debt has almost doubled since the Great Recession, from about %600 Billion, to about $1.2 Trillion. This suggests that the next working generation will start out with a significant financial burden that will limit its ability to contribute to economic growth through spending for some time.

Auto Debt: Americans have borrowed $300 Billion more to buy cars over the last four years that then had previously, increasing total auto loan debt from about $700 Billion in mid-2010, to over $1 Trillion now. Americans spend about $500 Billion on new cars and trucks each year. This amount of auto loan debt represents a whopping two full years of normal buying.

Labour Force Participation: This used to be Ugly, but has improved to Bad. The Labour Force Participation Rate in the USA was 63% in March, 2016, seasonally adjusted. This is an increase from 62.8% the year before, and reflects a very slow recovery in the measure in the last year or so. The LFPR was 67% in 2007.  Some of the drop is owing to an aging workforce. Nonetheless, if even half of this drop is as a result of the continuing economic problems in the USA, this represents some 5 million people who do not have work compared to before the Great Recession - these people and their families represent the lion's share of new food stamp recipients. This is improving, but it still has a very long way to go.

Productivity Growth: This is one of the key drivers to long term economic growth. It has been essentially flat in the USA for the last 18 months, and actually fell by 2.2% in Q4 of 2015. While this measure is cyclical, the fact that there is basically no productivity growth while literally trillions of dollars are available for investment in R & D and other productivity improvements suggest that there may be an emerging imbalance in US corporate investment priorities.   

The Ugly.

Corporate Profits: Profits of major US corporations were increasing at a rate of about 5% for the three years between 2012 and 2015, but have recently started to decline significantly - down 3.6% year over year this month. This is the key bell-weather for the stock market. Simply put, declining profits means declining stock prices at some point.

Durable Goods Orders/Industrial Production: Goods orders have not posted a positive quarter in over a year.  In short, production of durable goods in the USA is in a significant recession, down a further 2.8% just last month. Industrial production was down 0.5% in February. Industrial production was only up in three of the last 15 months.

GDP:  The GDP for the last quarter of 2015 has been pegged at 1.4%.  "GDP Now" is saying that the GDP growth in the USA will be about 0.6% for the first quarter of 2016. The 6-month average is about 1% GDP growth. With slowing orders and production, the USA may be on the cusp of another mild recession.

Inflation(?):  The Consumer Price Index in the USA was negative, at minus 0.2% in February.  Import and Export prices were also negative, at minus 0.3% and 0,4% respectively. This is deflation, although no one is saying so. Deflation happens when not enough money is chasing too many goods...it is VERY bad.

Conclusion: There are some positives to the story of the US economy. Having said that, the recent stock market recovery cannot be said to be based on the fundamentals of the US economy, which include virtually no GDP growth; declining corporate profits and industrial production; deflation; flat productivity growth, and an economy where one in eight people still live on food stamps. The dead cats are bouncing...

The Pleasures of Science North!

The New American Prince, and The Necessity of Lying

They all lie!  Well, of course they do! In this post-morality age, lying is not only normal, it is a necessity if an American leader wishes to be venerated and supported by his or her tribe. Without this support, they cannot succeed.

The art of modern leadership in what we would normally recognize as a civilized society was best laid out by Machiavelli in The Prince, written in about 1513. Some key concepts around civilized lying and the need to appear to be good are as follows. 

Here is Machiavelli on the art of lying, “It is necessary to know how to conceal this characteristic well, and to be a great pretender and dissembler. Men are so simple, and so subject to prone to be won over by necessities, that a deceiver will always find someone who is willing to be deceived.”  

And Machiavelli on the dichotomy between being good, and looking good, “It is unnecessary for a prince to have all the good qualities I have mentioned, but it is very necessary to appear to have them.” 

And Machiavelli on the need to always appear to be good, “A prince ought to take care that he never lets anything slip from his lips that is not replete with the… qualities, that he may appear to everyone who sees and hears him as a paragon of mercy, loyalty, humanity, integrity, and scrupulousness.”

Much of this may be obsolete now that the essential fulcrum on which Machiavellian "morality" rested, namely traditional morality, is probably irrelevant. From a moral perspective, American politics appears to have at least partially devolved to a pre-civilization or a pre-morality stage.

Put another way, it is now probably OK for a leader to look "bad" in some eyes, as long as they look "good" to someone else. This most obviously takes flight around the concept of "political correctness", where the spectacle of being "politically incorrect" has take hold to such an extent as to almost be a parody of itself. Is anyone actually politically correct in the Tea Party,? If the answer is "no", why does it matter?

Who are these people to whom the leader must look good?

These are fellow members of the various "tribes" that have essentially replaced "civil society".  That tribe may come in the form of a political party - Democratic or Republican; or a faction within one of those parties - The Tea Party or Establishment; Sanderistas versus the Clinton Democratic Establishment; or in the form of Red State versus Blue State. Whatever the tribe, the key characteristics of all tribes are that of division against others; exclusivity in the sense that tribe members have certain identifiable characteristics; and a perception of exceptionalism, with all usually resting on an edifice of pretended victimization.

The lies that permeate the various tribes have now been hot-wired into American culture.  

News in the USA is now corporately-generated propaganda, on both the Left and the Right, with the Left relying more on professional news organizations and the lies of omission, while the Right relies more on "conservative" talk shows on radio and television and on out and out shameless BS. Neither approach is defensible as compared to the requirements of traditional morality, but as noted, traditional morality may not matter anymore in American political life so both should perhaps be considered as normal.

Some organizations still try point out the lies as if doing so actually matters. PBS in the United States is excellent, and in the face of manipulative, corporate-owned juggernauts like Fox News, CNN and others, it is almost completely irrelevant as it plays to no tribe. Some on-line news and analysis is wonderful at dissecting and illuminating the latest misstatements and lies of candidates and leaders. Almost no one cares.

These clarion calls to a bygone era count for almost nothing compared to guys like Rush Limbaugh, who has an average of 13.25 million listeners a week. These conservative and some liberal commentators get it - it is not about the truth; it is about the tribe. To succeed with the tribe, one must evoke emotion and passion, not higher flights of reason. Limbaugh and others like him make people in their tribe feel enraged and victimized. That is their job, and they are handsomely rewarded for doing it.

Where did this come from?

The tribe is partially a product of reproductive technology, specifically the pill and abortion, the use of which have skewed society into discernible "generations". This development has likely broken an understanding of mutual generational obligations and sense of oneness that had lasted literally for eons. This phenomenon comes to a head every time a national budget discussion breaks out, with each generation professing their never-ending victimization based on a cavalcade of misstatements and manipulations as they strive to get their "fair share". The result is the modern US federal budget cycle, where demographic tribalism has landed on the budget process like buzzards circling an antelope carcass hoping it will somehow replicate itself again and again so that they can prey on it without end.

The tribal instinct is also probably a product of information technology, from the Internet as a source of "evidence", to the ability of any "yahoo" to comment on anything they see fit to discuss, no matter how objectively untruthful, biased, or even hateful their blathering may be. While the Internet is also a source of objective and useful information, for political purposes it is probably the primary platform for the lies and distortions that are now crucial for the success of any American political leader.

Regarding the essence of tribe and the need for lies, we need to mention that other guy if we want to get a deeper understanding of the concept of the tribe and its related worship as a replacement for reason and traditional morality...“If you tell a big enough lie and tell it frequently enough, it will be believed.” - Hitler

The key point that is often missed in Hitler's famous quote - and this is hinted at in Machiavelli - is the willingness of the subservient masses to be misled if the lie is "appropriate" to their needs. In short, if they don't like the lie, they won't believe it. If the lie corresponds to their sense of grievance, exceptionalism, and if it evokes strong emotion, it will be believed, or at least accepted even when it is strongly suspected that it is false.

An example - here is Hitler before WW2 on the fate of the Jews..."Today I will once more be a prophet: if the international Jewish financiers in and outside Europe should succeed in plunging the nations once more into a world war, then the result will not be the Bolshevizing of the earth, and thus the victory of Jewry, but the annihilation of the Jewish race in Europe!"

Well, the Jews did not start WW2. Some Jews were Bolsheviks, but "the Jews" were not the Bolsheviks. Jewish financiers did not start WW2. Regardless of these obvious lies, the fact is that most Germans loved and believed this kind of hyperbole and the man who spewed it, not because it was true, but because they wanted to believe it, and they therefore wanted to believe in him. If these lies didn't speak to their exceptionalism and fake victimization, they would not have worked.

The modern American politician is now in the place of Adolf Hitler, and so many other post-civilization strongmen such as the many odious Communist leaders prior to the fall of the Wall. They must lie in order to drive home the exceptionalism and faux victimization of their tribe, otherwise their tribe will not support them. If they do this, their tribe will be exceptionally forgiving, even loving. Remember, it is probable that at least a large proportion of these people actually want to be lied to, as long as it makes them feel exceptional and as if someone has sympathy for their pretended plight.

How would this type of hyperbole look today?  

Here is Trump on Mexican illegal immigration. “When Mexico sends its people, they're not sending the best,” he said during the announcement. “They're not sending you, they're sending people that have lots of problems and they're bringing those problems. They're bringing drugs, they're bringing crime. They're rapists and some, I assume, are good people, but I speak to border guards and they're telling us what we're getting."

Where to start?  

The Government of Mexico does not send illegal immigrants; they come on their own. They are not all rapists and they do not all bring drugs - likely a very tiny minority do. There is probably no way Trump discussed "who is getting in" with border guards. He probably just made that up on the fly.

Where this travesty of lying and distortion hits the mark is in the emotional response it generates amongst the falsely aggrieved who support Trump. They want to believe these lies and distortions in spite of the fact that they are not, by any objective measure, true. But truth is beside the point. This statement makes them seem like the victims of a Mexican plot to flood the USA with drug-dealing ne'er-do-wells and rapists. They love it, as well as the man who leads them to the promised land of exceptionalism and victimization.

As noted in a previous blog, Trump gets all of this - it may be that no American politician reads the present American political culture and malaise better than he does. He knows that he has to lie to rally his troops and curry favour with his tribe. In fact, it is by shamelessly lying that he is continually building his tribe. If he gets a reputation for lying, all the better. Unlike in Machiavelli's day, getting a reputation for being "bad" is actually "good" as it confirms a politician's ability to "tell it like it is", which is what the tribal members who support them love to see.   

And so, we have The Donald and Hillary "Evita" Clinton. They both get it - likely The Donald more than Clinton. Expect the lies to continue. Sympathize with the fools at PBS and elsewhere who fight a lonely battle against a tribalism that may prove to be way more powerful than anything objective reality has to offer. 

If there is a lesson in this tome, it is that Machiavelli, who rested his political philosophy on traditional morality, may have lost while the Hitlerite abomination, which rested its philosophy on totalitarian tribalism in a complete rejection of the requirements of reason and traditional morality, may have won.  

Is this too strong?

Here is America's first and greatest leader on the need to be truthful..."Father, I cannot tell a lie. I did it with my little hatchet."

America has come a long way since then.

Canada's Economy

Welcome to Canada!

Much recent focus of these blogs has been on the economy of the USA.  In the end, where America goes, Canada will go.  The emphasis on the USA in previous blogs is also a Canadian story. Nonetheless, what can we say about the Great White North in and of itself?  A short economic primer follows.

The Good:

The Loonie.  A Loonie below $0.75 US is great for the export-driven economy in Ontario, Canada's largest province. The short, medium and long term economic prospects for Central Canada are excellent when the Cdn Dollar is at these levels, as Canada's largest export market is in the USA. Ontario added 20,000 new jobs in January, 2016.

Tax Changes.  Moving tax burden from the middle class to the rich makes solid economic sense.  The theory that money given to the rich in the form of tax breaks generates economic growth that benefits the middle class and poor has been implemented since the late 1980's. The result has been a richer group of rich people, and a middle class and the poor who have seen incomes stagnate in real terms.  The "trickle down" didn't.  Time to spread the wealth around to those people who actually spend it, and who stimulate economic growth in so doing.

Legalization of Pot.  The legalization of pot will bring in billions of dollars in hitherto untaxed revenue. This will go some way to addressing an increasingly serious federal government financial situation.

New Markets.  The Trans Pacific Partnership agreement will open new markets to Canadian production. This should increase GDP in the medium to long run.

The Bad:

Investment.  December saw more money leave Canadian markets than in any month in history. This puts pressure on the Loonie, but also pushes up bond yields just as the federal government is looking at running a deficit.

Productivity.  Canadian productivity is at an index level of about 107 on an index that started at 100 in 2007.  It actually declined for most of last year.  The long run determinants of national wealth are population growth and productivity. We need to do better than an average productivity increase of only about 1% a year.

Federal and Provincial Finances.  Canada isn't Greece, but public finances are in serious trouble. The federal government will run a deficit of well in excess of $10 Billion in the next fiscal year, and already has a net public debt of about $610 Billion. Ontario has a debt that will top $300 Billion next year. All told, net public debt in Canada is well over $1.2 Trillion, or over $35,000 for every person in the country. This is manageable, but a new serious economic downturn could push governments right to the wall, as there is little room to expand borrowing to respond to a future crisis with debt levels like this (Note - OEDC just slashed Canadian growth projections from 2% this year to 1.4%.)    

Bank of Canada Policy.  The BoC has been seriously incompetent in the management of monetary policy in this country. It should have raised rates years ago, and has waited so long to raise rates that we are now heading into a new down turn with very low rates, meaning it will have no room to maneuver when problems arise again. The BoC's monetary policy is also the Number 1 reason why personal debt levels are so high, as money has been close to free for seven years (see below). t has also forced retirees in to riskier investments as they cannot make much on their savings with super low interest rates.

Commodity Prices.  Canadian and drawers of water and hewers of wood...still. The recent collapse in world commodity prices will hurt the extraction industry in Canada as China stops building cities with no one living there.

The Ugly:

Personal debt.  Canadians now owe about 165% of their yearly salary in debt. They have never been more personally indebted. Any upturn in interest rates will cause very significant economic pain. Related to this...

The Housing Market.  A massive chunk of this personal debt is in the form of low interest mortgages. There is no doubt that the largest housing markets in Canada - Vancouver and Toronto - are in bubble territory, with prices in Vancouver up 12.5% in the last 12 months, and those in Toronto up 8.5% over the same period. An imploding bubble will throw tens of thousands of construction workers out of work, driving the unemployment rate up markedly. This bubble will pop some day - they all pop eventually.

Oil Prices.  The low price of oil is devastating the economy of Alberta. Until recently, the only real economic driver in the country, the province risks becoming an economic basket case, which would pull the entire country down. As noted in this blog, the price of oil is going to go up again soon as the OPEC nations and other restrict supply to drive up the price to avoid national bankruptcy. Until this happens, Alberta, and to some extent Saskatchewan, will continue to suffer.

Welcome to the Dead Cat Bounce!

The definition of a “Dead Cat Bounce”:

“...a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions.”

Here is what it looks like...

Here is what it looks like if we are talking about a stock market.  The Nikkei - Japan’s stock market.

You’ll notice the drop, then the rise that did not match the previous peak, then the subsequent drop.

Here is the TSX…

You’ll notice the drop, the subsequent recovery that did not match the previous market maximum, then the subsequent fall.

Here is the S&P 500…

You’ll notice, again, the drop, then the subsequent rise that did not go as high as the previous market maximum, then the subsequent fall.

No one knows where this is going.  Some markets are already down 20% from their peak.  The phenomena of the Dead Cat Bounce suggests that this market pull-back still has some way to go.

Updates

Updates on 3 recent posts...

1. Oil...Buy NOW!

Since this post, Russia has indicated that it is not interested in cutting production as part of an OPEC initiative to drive up oil prices. I think this is temporary. They will all agree to cut production to avoid bankruptcy, just as they did 7 years ago. A 10% cut would leave a shortfall of about 1 - 1.5 million barrels a day, which would drive prices up significantly. Since this post on January 20th, the price of oil has moved from $26.55 to $30.89 per barrel, an increase of about 15%.

2. US Employment

The US employment numbers for January, 2016 came out last week.  They show, on a non-seasonally adjusted basis, that about 2.5 million more Americans are employed compared to this time last year (149 million employed in January, 2016, versus 146.5 million in January, 2015).  The seasonally adjusted numbers show the same result, about 2.5 million new jobs (150.5million persons employed in January, 2016, versus 148.1 million employed in January, 2015.)  What is a tad bizarre is the addition of about 1.5 million jobs through the process of seasonal adjustment. How many jobs were actually created?  While there is some job growth, you can't really know this from reading the US Bureau of Labor Statistics reports.  What does stand out is that while both the seasonally adjusted and non-seasonally adjusted reports show 2.5 million new jobs, they both also show that the labour force participation rate has continued to decline.  A declining participation rate is a strong indicator that the much vaunted US job growth is simply not accurate.

3. Why I Will Win Powerball!...

I didn't win.