Today's Chart

Corporate profits in the USA are down 3.6% year-over-year for the second quarter in a row...


The stock market rarely ignores drops in profits. This isn't a catastrophe, but the Talking Heads have their lines ready, "We were primed for a healthy pull-back."

The markets pulled back markedly last August, and again in January/February. I think they are guaranteed to pull back as soon as the US Fed raises rates in June.  They may recover yet again after that, but is this the start of a yo-yo market that eventually ends in a significant, long-term pull-back?

What could possibly go wrong???

Today's Charts

Please look at this...

This chart is from Zero Hedge, which says rightly that many indicators suggest that the world's economy is actually at its worst since the Great Depression, but also that the UK has a worse economy than during the Great Depression.  It relies on charts like this...



And this to apply the same thesis to Europe.



Zero Hedge is bang on in noting that the recovery since 2009 has been slower than after the onset of the Great Recession. But this is actually WORSE anywhere than the Great Depression?

Zero Hedge notes this for the US experience...



Zero Hedge quotes prognosticators who suggest that we are actually in a depression now....the "longest depression".  Note how, in the chart they provided above, they conveniently neglect the period from 1929 to 1933.  The US economy declined by over 25% between 1929 and 1933.  That was a DEPRESSION! Out another way,  if they were to start the chart at the beginning of the Great Depression, there was no recovery to 1929 levels for 6.5 years, as 1933 isn't "100", it is "75.

There has been a slow recovery since 2009. There is a solid argument that, considering all the stimulus still in the system and how it has not worked but has only buttressed a weak world economy, that the Great Recession actually never ended. But a "recession" and a "depression" like the world experienced in 1929 - 1939 are in no way the same; specifically, the 2009 Great Recession was in NO WAY as severe as the Great Depression.  The suggestion that it is even close is nonsense.

Judge for yourself...

http://www.zerohedge.com/news/2016-05-25/worst-economy-great-depression

Note - this sight is still well worth reading.

The Last Time They Did This...

In mid-December, 2015, the US Fed raised interest rates for the first time since 2006.  The day this happened, the S&P was at 2073. Seven weeks later, it was at 1829. That equated to a 12% drop in a month and a half.

There is a debate underway around the possible effects of rising interest rates. Here it is...

One side holds that the markets have nothing to do with the massive economic stimulus that was unleashed by governments and central banks world-wide after 2008. The markets reflect real economic growth, and are a rational reflection of normal economic activity.

The other side believes that the markets are a Ponzi scheme. They are elevated only because of the economic stimulus, especially the era of free money that was ushered in by central banks, especially the US Fed.  Once this era ends, the markets will essentially collapse, as the economic activity that we have witnessed since 2008 is similarly a mirage.

Both sides have compelling arguments to make. Which side is right?  Here is what we know.

The stimulus that has been unleashed since 2008 has been unprecedented in peace-time. It has not had the economic effect it was supposed to have had, and has been a failure in many respects.

Quantitative Easing, for example, was supposed to launch $4.05 Trillion into the US economy in three phases as the US Fed bought US Treasuries and mortgage-backed securities from US banks, that then lend the cash into the economy. Had that actually happened, the US economy would have exploded - and inflation with it. In fact, only about $1.5 Trillion of that money ever made it into the US economy, and almost all during QE1. The effect as the best economic growth since the Great Recession, but that was in 2010. It is now 2016, and the US economy has not seen a significant up-tick in growth since. US banks still have about $2.4 Trillion of QE cash on deposit with the US Fed.

The US government borrowed and spent trillions of dollars in 2008 - 2012. This also made it into the US economy.  In previous recessions, the result of spending like this would have been massive growth - well above 5%. Again, this simply has not happened this time.  

The QE and borrow and spend policies have been mirrored in Europe, Japan and China. Nowhere has there been really significant new growth. Japan is still in recession, Europe is anaemic, and even China is slowing.

And so, for those who argue that the markets reflect real growth since 2008....where is this significant new growth?

The other side of the debate my be too negative - it ignores that there has actually been been some growth since 2008, and we have not actually been in a world-wide technical recession in years. The markets should be higher than they were in 2008 - 2009. The question is...how high?

Well, I don't know; no one does.

What I do know is that the last time the US Fed raised rates, the markets pulled back in double-digit percentages world-wide, and last week the US Fed hinted at another rate hike next month.

Is it hard to figure out what will most likely happen immediately after that?    




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A Warning to Investors

If you have money in the international equity Markets, you need to read this.

http://www.marketviews.com/rmg/patience-needed-as-investors-seek-instant-gratification/

These people are not conspiracy theorists. They keep it simple - many macro-economic trends are actually very negative, and central bank policies are not working. The Market is going to pull back in a very big way.

Colabello

He denies that he did it, and says he has no idea how it got in this system. More than that, he has pointed out that he had 19-20 drug tests in the last 4 years with no problems. He has also noted that he got caught after he made it to the Big Leagues - there was no question that he would be a starter this year, so why cheat? Finally, he has said that he will not rest until he gets to the bottom of this mystery!

Regardless of the denials, the fact is that Chris Colabello was caught with dehydrochlormethyltestosterone (DHCMT) or Oral Turinabol in his system, apparently in the first day of training camp.

What is this stuff?

Turinabol was the steroid of choice for use by the notorious East German doping campaign from the 1960s to the late 1980s. It is no longer legitimately produced, and is only available on the black market (i.e. on the Internet). It has been illegal worldwide for at least a decade.

This stuff doesn't mistakenly make its way into your Cornflakes on occasion. It only exists for purposes of illicit, drug-based cheating. Saying you didn't know how this got into your system is very close to someone saying they didn't know how a blood-covered knife got into their hand as they are caught standing over the corpse of their most hated, sworn enemy. Really?

The Blue Jays claim that Colabello was only supplied with approved stimulants during his time with the team. He also claims that this is true - that he only took what the team gave him, even before he came to training camp. The team was quick to emphasize that he got caught on Day 1 of training camp, subtly suggesting that they could not know what he was doing beforehand.

In short, Colabello is implicitly blaming the team for at least a catastrophic mistake, and the team is blaming him for at least being extremely sloppy with what he was taking beyond what the team gave him.

This should be pretty simple. If the team was supplying others with stimulants before the start of the pre-season, and no one else got a positive test, then Colabello was taking something other than what the team was sending him in the off season. This means he is either a cheater or at least very sloppy.

He is what the world was told was normal in female swimmers coming out of East Germany during their doping campaign in the 1970s....all a product of good living, training, and healthy Socialist eating...



To be fair, these women were not told that they were being given steroids.

Sadly, Colabello's story, at least for now, is just not believable. It would be great if we were to discover that there is some honest explanation out there, but this would be just about the first time that ever happened. The fact is that after the Steroid Era, we are fast approaching a point where anyone caught with PEDs in their system will simply not be given the benefit of the doubt anymore.  You cheat; you get caught; you are gone - simple.

Need 5 million jobs??

"Foreman says these jobs are going boys and they ain’t coming back..."

The USA has lost 5 million good manufacturing jobs since 2000.  Services now account for about 85% of the jobs in the USA.  This includes great jobs that are the essence of America's new economy, like those stemming from Research and Development (academic, engineering, high tech), and management/administration services (lawyers, business and investment professionals). It also includes very low-paying restaurant and retail jobs that are the only ones many people can get absent an advanced education.

There are 14 million people working in restaurants in the USA today. Another 4.5 million work in retail sales. The average minimum wage in the USA is $7.25 an hour. That means there are almost 20 million working poor  in the services industries. In decades past, many of these people would have been working in great jobs such as those in auto plants that closed years ago. Add 45 million people living on food stamps, and this is a n American national tragedy.

Given that the good manufacturing jobs aren't coming back, the challenge is simple - i) recognize that service jobs will be the only jobs that millions of people will ever get in their lives - this is their career; ii) make sure that these people can live off the wages they earn at these jobs; and iii) spread these jobs around to dramatically lower the number of people living on food stamps.

California is going to raise the minimum wage to $15 an hour. This will represent a living wage for a family of 2. This should be a national policy. Unlike manufacturing jobs, service jobs cannot be exported. If the wages of almost 20 million people were to be doubled overnight, the positive effect on the demand side of the economy would dwarf anything the US Government or US Fed have done since 2009, simply because millions of poor people would now have twice as much money to spend.  The effect on businesses???...see below.

Spreading these jobs around would require a delicate policy balance. The policy could aim at limiting the length of the work weeks of those in these positions, thereby making room for more people to enter the workforce. This could be done through a combination of incentives to business to hire people in these industries, disincentives to staying on food stamps, and taxing people who work above a certain number of hours a week in these industries. The goal should be to open up 5 million new positions as soon as possible, which could reduce the number of people living on food stamps by perhaps 15 million, given that many people living on food stamps are dependents of people who are out of work.

But wouldn't the economy collapse as a result of doubling the minimum wage for the service industry? Wouldn't unemployment increase?  Wouldn't all service industry companies disappear?

The service industry will raise prices. This will cause the very inflation the US Fed has been praying for in order to have a relevant policy suite again. And the service industries will have millions more customers who can actually afford to buy - money will start moving again.

But isn't this socialism!!??

This is really about a managed economy. Every single banker in America has been managed for generations now. Every business benefits from some form of government largess, whether in the form of subsidies tax credits. Every single person has their hand in the public cookie jar, whether in the form of tax deductions for mortgage interest payments or Social Security or Medicaide, you name it...everyone in America is benefiting from an economy that is managed in almost every respect.

So why not manage the economy for the benefit of poor people? The state saved the banks and bankers took millions in bonuses during and after 2009. Mortgage interest deductions means the state is helping people to buy their homes! Why not structure a system that already exists - minimum wages and taxes - to maximize employment in an economy, and to make a massive dent in the number of people living on food stamps?

The alternative is what, exactly? More tax breaks for billionaires? 5 million new good paying jobs are just a few realizations away.

Panama II

The truth is starting to bubble...

http://www.zerohedge.com/news/2016-04-07/yes-panama-papers-could-really-end-hillary-clintons-campaign

The only place I could find a possible connection to the Clintons was on Zero Hedge, and Observer.  Stay tuned!