• As Growth Slows Down, The Fed Will Be The Last To Know
    by Tyler Durden on 14/11/2018 at 19:35

    Authored by James Rickards via The Daily Reckoning, You are well aware that the Federal Reserve is raising interest rates. This policy started in December 2015 with Janet Yellen’s “liftoff” from zero and has continued through seven more rate hikes in 2016, 2017 and 2018, with another hike expected this December. The cumulative impact is to put the high end of the range for the fed funds rate at 2.5% by year-end. More of the same is widely anticipated for 2019. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going. The Fed calls this approach “gradual” but it’s not. There’s a huge difference between a 0.25% rate hike (that’s the Fed’s tempo per hike) starting at 2% versus starting at 6%. In both cases, the hike is 0.25%, but the impact on bond prices and economic activity is much greater when you start with the lower base. There are highly technical reasons for this, having to do with concepts called “duration” and “convexity.” We don’t need to dive into those. Suffice it to say that hikes from a lower base are much more impactful. In short, the Fed’s policy today is a body blow to an economy that’s still recovering from the worst recession since the Great Depression. Other major central banks are either following in the Fed’s footsteps (Bank of England) or preparing to do so in the near future (European Central Bank). Even the money-printing and stock-buying Bank of Japan has acknowledged the central bank’s game can’t go on forever. Leaving China to one side (it’s a political shell game leading to a historic credit crisis), the central banks are either raising rates or getting ready. If this rate hiking were the only major monetary development in the world, that would create a challenging environment for investors in stocks, bonds, gold and real estate — all interest-sensitive in different ways. But it’s not the only major development. Behind the curtain, central banks are either slowing down the printing presses or actually burning money. This marks the end of quantitative easing (QE) for the Bank of Japan and the ECB and the start of quantitative tightening (QT) in the case of the Bank of England and the Fed. From 2008–2014, U.S. critics of the Fed complained about rampant money printing under the banner of QE. There was even a popular cartoon that showed Ben Bernanke on the outside of a helicopter with one hand on a strut and the other hand throwing money out of the helicopter with a wild-eyed look on his face. This was a send-up of the infamous “helicopter money” that Bernanke advocated, an idea he nicked from uber-monetarist Milton Friedman. Many U.S. investors assume QE is still going on. It’s not. QE was reduced with the “taper” beginning in December 2013 and was stopped completely by November 2014. The Fed then kept money supply constant until October 2017 when QT began. Instead of Bernanke dangling from a helicopter, picture Jay Powell near a furnace with a shovel and a huge pile of $100 bills. Powell is madly shoveling the money into the furnace, burning it. That’s what reducing the money supply looks like, and that’s what the Fed is doing now. This money burning, or QT, is officially called “balance sheet normalization.” The Fed increased its balance sheet from $800 billion to $4.4 trillion from 2008–2014 under the policy of QE. Now they’re trying to get back to a reasonable number. It won’t be $800 billion, but the target could be around $2.4 trillion. That’s still a $2 trillion money supply reduction from the 2014 high. Analysts estimate every $600 billion of balance sheet reduction is roughly equivalent to a 1.0% hike in the fed funds rate. So in addition to the 3.5% of rate hikes from 2015–2020, you can add on another 3.0% of implied rate hikes from QT. A total of 6.5% of rate hikes (3.5% nominal and 3.0% from QT) in five years from a zero base is one of the most extreme examples of monetary tightening in the history of the Fed. It compares to the Volcker tightening from 1979–1981. Volcker intentionally set out to crush inflation even if it meant a recession (there were two recessions from 1980–1982). In contrast, there is no inflation on the horizon today and the economy is probably heading for a recession without any help from Jay Powell. The global phenomenon is neatly illustrated in the chart below. This chart combines the QE and QT of the BoE, BoJ, Fed and ECB using colors to show the individual contributions of each central bank. The Fed’s QE1 (2008), QE2 (2010) and QE3 (2012) stand out clearly in the three blue spikes. The BoE also had three waves of smaller magnitude shown as green waves from 2010–2016. The BoJ started late (in 2011) but has never stopped since, as shown in the red wave. Finally, the gray wave is the ECB. They were also late to the party but made it up in volume. What’s important about this chart is not where we’ve been but where we’re going. The Fed is already in negative territory (the blue wave below the “0” line starting in 2018). The BoE is neutral but is also ready to go negative. The ECB and BoJ are still positive but trending down sharply; the ECB will go negative in 2019, according to current plans. The black trend line shows the aggregate of all four central banks. It crashed in 2018 (mostly because of the Fed) and will go negative globally in 2019. Before long, our cartoon of Jay Powell shoveling cash into a furnace will have to be updated to include Mark Carney, Mario Draghi and Haruhiko Kuroda. Americans today are celebrating back-to-back quarters of strong growth. That’s fine, but it’s dangerous to ignore the trend. Since April 2018, we’ve seen growth of 4.2% (Q2), 3.5% (Q3) and an estimate of 2.9% (Q4, per the Atlanta Fed). The trend is pointing down. This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated. The trend line points to a return to the 2.2% growth that prevailed from 2009–2017. This is exactly what one would expect from the extreme tightening described above. As usual, the Fed will be the last to know. […]

  • Theresa May Says She Has Secured Cabinet Backing For Brexit Deal
    by Tyler Durden on 14/11/2018 at 19:32

    Update 4: And now time for another twist: in a brief, two-minute address, Theresa May said that she has Cabinet has backed the draft deal was the “best that could be negotiated.” She also said that the “collective decision of Cabinet” is to push ahead with the deal, even though the decision was not taken lightly. The prime minister said that the deal is the result of “thousands of hours of meetings” and that she “firmly believe that the draft withdrawal agreement was the best that could be negotiated.” Despite her apparent optimism, she warned that “there will be difficult days ahead. This is a decision which will come under intense scrutiny.” May effectively is presenting the choice as between her deal, or no deal “or no Brexit at all.” This, as Bloomberg notes, is aimed at Brexiteers in her party who aren’t happy with the deal and the U.K. keeping closer ties to the bloc than they want. She also confirmed she’ll make a statement in Parliament tomorrow. She concluded her brief statement by saying that the decision is “in the best interests of our United Kingdom.” And now, bring on even more flashing red headlines, denials, media clarifications and fake news. As for the pound, it is… unchanged on the day.   * * * Update III: The chaos continues. One source says there aren’t enough letters yet to spark a leadership challenge…but that doesn’t necessarily mean one won’t happen. It doesnt appear there are enough letters to spark a challenge to the PM – yet Not to say more arent on their way — iain watson (@iainjwatson) November 14, 2018 While frustration remains high, there hasn’t been an official ERG decision to submit the letters of no confidence. Understand there has not yet been an official ERG decision to get group to push button on letters going in, but levels of anger so high that some are doing it anyway – this might be the start of crashing into a leadership contest by accident – impossible to tell yet — Laura Kuenssberg (@bbclaurak) November 14, 2018  Meanwhile, after entering its fifth hour, May’s contentious cabinet meeting is reportedly on the verge of wrapping up. According to the Guardian, the fact that it ran three hours over suggests that ministers have “substantial concerns” about the deal. * * * Update II: As frustration with Theresa May’s still-unpublished draft Brexit deal intensified, Brexiteer MPs (most of whom are members of the European Research Group faction led by Jacob Reese-Mogg) are sending in letters calling for a ‘no confidence’ vote, which BBC political editor Laura Kuenssberg said could happen as soon as Thursday morning. Senior tory tells me Brexiteer anger so high that seems likely there will be a call for no confidence vote tomorrow – letters going in – — Laura Kuenssberg (@bbclaurak) November 14, 2018 No way of knowing exactly how and if this will happen – but hearing same as @SamCoatesTimes – seems some Brexiteers are switching position from wait and see to moving now — Laura Kuenssberg (@bbclaurak) November 14, 2018 Meanwhile, the Europeans are turning up the pressure, threatening to cancel the hoped for Nov. 25 summit if May can’t find support for the deal Wednesday night. Unsurprisingly, cable is back at lows. Since the subject of leadership change is back in the headlines, here’s a roundup of the most popular political figures in the UK (courtesy of Statista). Notably, Boris Johnson is the most popular Brexiteer, making him perhaps the most likely candidate to succeed May. * * * Update: 10 Downing Street is now saying there will be a short statement Wednesday night following what has become a marathon meeting with May’s cabinet. Though the full press conference has been canceled. BREXIT: NUMBER 10 NOW SAYING PM MAY WILL MAKE SHORT STATEMENT OUTSIDE DOWNING ST WHEN CABINET IS OVER, NICK HURD “MIS-SPOKE”  – SKY CORRESPONDENT The pound is beginning to erase some of its losses triggered by news of the cancellation. As MPs from the ERG faction (the group of Brexiteers led by Jacob Reese Mogg who have persistently opposed the deal) say May’s deal in its current form doesn’t have the votes to pass, Downing has pushed back May’s planned statement until tomorrow. Meanwhile, here’s a glimpse at chaos as journalists struggle to figure out what the hell is going on. And, as this flow chart of the most likely scenarios shows, things are only going to get more complicated from here. Across the channel, the group of 27 EU ambassadors has ended their discussion of the draft plan – and reportedly they have been given no indication about the prospect for a deal. Since that meeting has been let out, expect any further leaks about the deal to come from the EU side as hope that May might have given Barnier enough hope to call a broader summit begins to fade. * * * Moments after Buzzfeed reported that between eight and ten cabinet ministers stormed into Theresa May’s critical Wednesday afternoon vote-whipping session with senior members of her government… 8-10 ministers went in to cabinet planning to tell May they do not support various aspects of the deal. Some said they would tell her she should go back and try to secure changes — Alex Wickham (@alexwickham) November 14, 2018 …The BBC has confirmed that Theresa May’s Wednesday night press briefing – which was preemptively scheduled so that she could announce that she had secured cabinet support for her latest draft Brexit deal – has been cancelled. News of the cancellation followed reports from earlier in the afternoon that May’s address, which had initially been planned for 5 pm London Time, would be pushed back by at least two hours as more than a dozen cabinet members had yet to speak. “I am authorised to inform the House there will be no press statement this evening. There was considerable concern in the House about that happening before the PM came to parliament.” The pound weakened against the dollar and euro on the news. Perhaps it’s time to put the podium away…   That lonely microphone has a long time to wait – Cabinet running maybe as much as two hours over pic.twitter.com/PSHyRK7QcC — Laura Kuenssberg (@bbclaurak) November 14, 2018 &nbs […]

  • With Brexit In Chaos, Here Is What Goldman Thinks Will Happen Next
    by Tyler Durden on 14/11/2018 at 19:22

    With Theresa May suddenly facing a fresh rebellion from within her cabinet, one which many speculate could result in a vote of no confidence as soon as tomorrow, ending her career and pushing the UK and Brexit in chaos, traders are once again asking what happens next. One answer has just been published by Goldman strategist Adrian Paul who lays out how he sees the next steps in the Brexit withdrawal agreement. As Paul summarizes the current state of events, while there is now a draft Withdrawal Agreement for the UK’s departure from the EU, it has been roundly criticised in Westminster. But although MPs of different stripes have united in their opposition to the Withdrawal Agreement, there is no consensus on what should replace it. Here, the Goldman analyst writes that relative to his base case, the shape of the Brexit deal looks likely to be in line, and its denouement “looks likely to be later.” According to Paul, if at first pass the deal does not garner a majority in the House of Commons – which now looks increasingly likely –  there are three viable destinations: a subsequent, successful attempt to pass an amended Withdrawal Agreement; a second referendum; or a “no deal” cliff-edge departure. Goldman then sketches out the possible paths to each destination, warning that some of those paths raise the prospect of a general election. That said, “we are still some way from the Brexit endgame.” Goldman concludes on an optimistic note: “The UK is scheduled to leave the EU at the end of March 2019. Although the risks have intensified, we retain our base case that the House of Commons will ratify a Withdrawal Agreement by then. It is characteristic of European negotiations to come down to the wire.” * * * Below we lay out the key points from Goldman’s note: 1. What are the most contentious aspects of the draft Withdrawal Agreement? The ‘Irish backstop.’ In some scenarios, this backstop would keep the whole of the UK in a customs union with the EU after Brexit. The draft Withdrawal Agreement struck between the UK and the EU paves the way to a ‘status quo’ post-Brexit transition period, lasting from March 2019 until at least December 2020. The crucial ingredient – and the bone of contention that has delayed agreement thus far – relates to the ‘Irish backstop.’ The Irish backstop comes into effect if the EU and the UK are unable to agree a comprehensive free trade agreement that would obviate the need for a physical border between Northern Ireland (which is part of the UK) and the Irish Republic (which is part of the EU). Neither the EU nor the UK sees the activation of the Irish backstop as the most likely scenario. But a legally binding Irish backstop is required in the UK’s EU Withdrawal Agreement nonetheless. The backstop looks likely to have four key characteristics: (i) a UK-wide customs union with the EU, with no supplementary customs union applying only to Northern Ireland; (ii) rules to ensure that the UK and the EU operate on a ‘level playing field’ in terms of regulatory requirements on goods and services; (iii) no specified expiry date; and (iv) an independent arbitration mechanism to determine when the requisite conditions have been met to allow the UK to exit the mechanism. Even if the contents of the draft Withdrawal Agreement do not constitute a major surprise, the response with which it has been met in Westminster has raised the risk of a disorderly Brexit. 2. What happens after Cabinet approval? The denouement comes later, in our view. Probably in December, MPs in the House of Commons will vote on the Withdrawal Agreement. There, the Prime Minister carries a very slim majority. In concrete terms, there are two domestic hur dles to safe passage of the Withdrawal Agreement. Once the deal is approved by members of the Prime Minister’s Cabinet, it must then be put to the House of Commons for ratification. In our view, neither of  these hurdles is low, but the latter is significantly higher than the former. Yesterday’s vocal opposition to the agreement has, to our mind, significantly raised the hurdle to Commons ratification. This criticism has come from all quarters of Westminster. It began even before the draft agreement was widely disseminated. A prominent Eurosceptic Conservative MP argued that the draft agreement would bind the UK to rules which it had played no part in designing. A prominent Labour MP argued that, even if the draft agreement did not precipitate a general election, “all options” should remain on the table — including a second EU referendum, perhaps with “Remain” on the ballot. A prominent member of the Democratic Unionist Party (the DUP) argued that the draft agreement could “lead to the break-up of the UK…and is not something we can support”. The breadth of this dissent matters. When it comes to ratification in the House of Commons, any one of a handful of factions in Parliament — be it the Eurosceptic Conservative MPs, the pro-EU Conservative MPs, the bulk of Labour MPs, or the DUP’s ten MPs — is influential enough to vote down the Withdrawal Agreement. To the extent that the critics of the Prime Minister’s negotiating stance have adopted a united front in recent days, this has raised the risk of a more protracted endgame. 3. How do the numbers look in the House of Commons? The parliamentary arithmetic has looked tight for some time. It now looks tighter, given signs of greater unity among those who object to the draft Agreement. The parliamentary arithmetic has looked tight for some time. For a working government majority, PM May relies on 10 MPs from the DUP. Assuming the Speaker and two Deputy Speakers do not vote, assuming Sinn Fein MPs do not take their seats at Westminster, and assuming only a few Labour MPs cross party lines, a handful of Conservative MPs is all that is required to vote down the Withdrawal Agreement. Added to this, in recent days, one prominent Conservative MP resigned from his ministerial post. The former Minister for Transport published a critique of the government’s negotiating position, and called for a second referendum. 4. How meaningful is the “meaningful vote”? This remains unclear. The government has sought to discourage counter-proposals. Opposition MPs have sought the legislative power to propose alternative Brexit paths. The leaders of four opposition parties — Labour, Plaid Cymru, the Scottish National Party and the Liberal Democrats (which together occupy around 47% of seats in the House of Commons) — wrote to the Prime Minister yesterday, urging her to offer Parliament a “truly meaningful vote” on any Withdrawal Agreement. The letter comes against the backdrop of written communication between the Brexit Secretary and all sitting MPs back in October. In that letter, the Brexit Secretary asserted that Parliament’s “meaningful vote” on the exit treaty negotiated between the EU and the UK must be “unequivocal”, and thereby “clear to the British public”. By contrast, yesterday’s letter from opposition leaders asserts that, at a minimum, MPs must be allowed to table “multiple amendments” to the main motion by which the Withdrawal Agreement would be passed. In particular, the group of four signatories argued that “it would be reckless to present this vote as a take-it-or-leave-it without Parliament being able to suggest an alternative”. The scope of the “meaningful vote” remains unresolved. But it accentuates the risk of a disorderly Brexit. The amendments tabled by MPs may advocate for a second referendum, or a different version of withdrawal, even if the EU does not signal a willingness to re-open negotiations. The more meaningful the “meaningful vote”, the wider the spectrum of scenarios that could follow once the Withdrawal Agreement is presented to Parliament. 5. What happens if Parliament votes down the deal? We see three viable destinations : (i) a subsequent, successful attempt to pass an amended Withdrawal Agreement; (ii) a second referendum; or (iii) a “no deal” cliff-edge departure. The path to one or more of these destinations could involve a general election. We see three viable destinations. Each destination could be reached via multiple paths. Destination 1: A successful, second attempt in Parliament. Presumably, this would require some amendments to the current Withdrawal Agreement. The response of companies, households and financial markets to a fraught political environment may also affect the stance taken by those MPs who vote down the initial deal. Amendments to the Agreement could arise via three routes: Either: (1a) Theresa May continues as PM. She negotiates a different exit treaty with the EU, which then garners a majority in the House of Commons, under its current composition; Or: (1b) Theresa May is replaced as PM, but there is no general election. A new Conservative PM negotiates a different exit treaty with the EU, which then garners a majority in the House of Commons, under its current composition; Or: (1c) Theresa May either resigns as PM, or is replaced as PM, and there is a general election. A new Prime Minister — from whichever party — negotiates a different exit treaty with the EU, which garners a majority in the House of Commons, under a different composition. The UK leaves the EU on 29 March 2019 with a Withdrawal Agreement. Destination 2: A second referendum. This would require a more fundamental change in policy stance, on the part of both major parties. Senior ministers in the Conservative Party have, thus far, ruled out the possibility of a second referendum, ostensibly as a matter of principle. Senior ministers in the Labour Party have prioritised a general election over a second referendum, arguing that a new government should come to power if PM May cannot deliver a workable deal. A second referendum could arise via three routes: Either: (2a) The current government tables a motion to legislate for a second referendum. This motion garners a majority in the House of Commons, under its current composition; Or: (2b) A coalition of opposition MPs joins with a minority of Conservative MPs. This coalition garners a majority in the House of Commons, under its current composition. The political momentum behind a second referendum intensifies. Theresa May calls a second referendum; Or: (2c) A new general election returns a government that has either campaigned for a second referendum, or decides to call a second referendum after taking office. Assuming the EU grants the UK an extension to the Article 50 deadline, the UK does not leave the EU on 29 March. A second referendum takes place in 2019. Other complications arise. It would not be straigthforward for Parliament to determine how the options in a second referendum shoud be specified, precisely. And there would be disagreement about whether the option to “Remain” could appear on the ballot paper. Destination 3: A “no deal” cliff-edge departure. Suppose that, irrespective of the government of the day, Article 50 is not extended. The UK would move directly to WTO tariffs in its trade with the EU. Non-tariff barriers would come into force. A “no deal” cliff-edge departure could arise via two routes: Either: (3a) No new exit treaty can be reached between the UK and the EU; Or: (3b) An amended exit treaty again fails to garner a majority in the House of Commons, irrespective of its composition. The UK leaves the EU on 29 March 2019 with a “bare bones” agreement. This is a far cry from the ‘status quo’ transition embodied in the current draft Withdrawal Agreement. 6. Where are the risks to our base case? Relative to our base case, the shape of the Withdrawal Agreement looks broadly in line. Its discontents look likely to be more united. And its denouement looks likely to be later.  This raises the risks appreciably. But we are some way from the endgame. All in all, we maintain our base case that the Withdrawal Agreement struck between the EU and the UK will be ratified by the House of Commons by the end of the year, and ratified by the European Parliament before the end of March 2019. The risks to that view have clearly intensified. Within our base case, an ‘Irish backstop’ in which the entire UK remains within a customs union with the EU — even if that backstop were never to be triggered — raises the prospect of a Brexit end-state involving permanent customs union membership. Off our base case, we see a successful, second attempt to pass a Withdrawal Agreement through Parliament as more likely than a second referendum. In turn, we see a second referendum as more likely than a “no deal” cliff-edge departure. To be sure, several of the paths to the destinations we sketch out above raise the prospect of a general election in the next six months. Indeed, it has been precisely that prospect of a general election that PM May’s government has used in crucial votes in the past to assuage potential backbench dissent. * * * Got all that? No? Then here is a “simple” schematic summarizing most of the above in just one chart. And now armed with all the latest hot takes, go out there and try make money trading the pound. Good luck. […]

  • Waves Of Caravan Migrants Arrive In Tijuana, Begin Climbing San Diego Border Fence
    by Tyler Durden on 14/11/2018 at 19:00

    As the first waves of Central American migrants arrive in Tijuana, dozens of people on the Mexican side of the border could be seen scaling the border fence – which oddly has a wide platform at the top, and none of the razor wire recently deployed further inland.  The video shows migrant caravan members climb atop the border fence at Playas de Tijuana as U.S. Border Patrol agents monitor from the U.S. side. https://t.co/OcItRugEhv pic.twitter.com/ZwQfg32DtB — AM 760 KFMB (@760kfmb) November 14, 2018 Hundreds of migrants from the caravan reach the U.S. border and scale the small fence that separates Tijuana, Mexico, and San Diego, California. They’re almost all young men, little to no women and children. pic.twitter.com/igoeuPwBni — Ryan Saavedra (@RealSaavedra) November 14, 2018 Border Patrol released a statement Tuesday that said they believe some of those at the fence are members who were traveling as part of the Central American migrant caravan that originated in Honduras. Migrants who reached the border fence in that area are from Honduras, Guatemala, Nicaragua, and El Salvador. Many are walking and will still need more time to reach the border, and those who have arrived already appeared to do so with the help of buses or other transportation. -Washington Examiner On Monday, the first wave of migrants arrived in Tijuana; approximately 80 gay, lesbian and transgender asylum seekers who were bussed ahead by an anonymous organization after they say intolerant fellow asylum seekers were harassing them.  “We were discriminated against, even in the caravan,” said Erick Dubon, 23, from San Pedro Sula, Honduras, who has been traveling with his boyfriend, Pedro Nehemias, 22. “People wouldn’t let us into trucks, they made us get in the back of the line for showers, they would call us ugly names.” -WaPo Meanwhile, US Customs and Border Protection (CBP) announced that work began on Tuesday to “harden” the border crossing between Tijuana, Mexico and San Diego, using razor wire and other measures. Just not at the beach, apparently.  As we reported on Tuesday, CBP closed four lanes at the heavily trafficked San Ysidro and Otay Mesa ports of entry in San Diego in order “to install and pre-position port hardening infrastructure equipment in preparation for the migrant caravan and the potential safety and security risk that it could cause,” according to CBS News and PBS.  On Thursday, 1,100 Marines from Marine Corps Base Camp Pendleton in California were deployed to support border security, CBS San Diego affiliate KFMB reported. They were primarily tasked with installing concertina wire and pre-positioning jersey barriers, barricades and fencing. … The thousands of Central American migrants left shelters in Guadalajara early Tuesday and were taken by bus to a highway tollbooth to wait for rides to their next destination. Most appeared intent on taking the Pacific coast route northward to the border city of Tijuana, which was still about 1,350 miles away. The migrants have come about 1,500 miles since they started out in Honduras around October 13. While the caravan previously averaged only about 30 miles a day, the migrants are now covering daily distances of 185 miles or more, partly because they are relying on hitchhiking rather than walking.  -CBS News […]

  • Steen Jakobsen: The Four Horsemen Portend A Painful Reckoning
    by Tyler Durden on 14/11/2018 at 18:40

    Authored by Adam Taggart via PeakProsperity.com, Even the US is now “swimming naked”… Steen Jacobsen, Chief Economist and Chief Investment Officer of Saxo Bank sees economic slowdown ahead. Specifically, his “Four Horseman” indicators: the drivers of economic growth, are all flashing red.  Jacobsen believes that the central banks will continue their liquidity tightening efforts for as long as they can get away with (i.e., until the financial markets start toppling over). In his opinion, they eased way too much for way too long; and the malinvestment and zombification that resulted needs to clear the system — and it will likely do so more violently and painful than the central banks will like: I like to make things simple. Right now we have the Four Horsemen: the four drivers of the global economy. They are: the quantity of money, which is falling; the price of money, which is rising; the price of energy,which is a tax on consumers and is rising; and globalization/productivity, which is falling. So, if you look at the economy as a black box, I really don’t know what happens inside of it. But I can observe what goes into the black box: it’s these four things. Globalization / productivity, we know that’s all about Trump, trade war and the likes. It’s not exactly improving; it’s actually worsening. As for the quantity of money, a lot of people argue with me that the Central Banks are still expanding their balance sheets, but the fact of the matter is that the QT in terms of the U.S has been reducing the Federal Reserve balance sheet. And we have a stealth reduction of the balance sheet in terms of the Bank of Japan. The EBC would love to cut and is publicly committed to doing so. The Bank of England is doing its first hike. So the quantity of money is falling. As for the price of money, I think Powell is really in the mold of Volcker. He’s a practical guy, and what he’s decided to do is pretty much just to hike interest rates until the market collapses. That would indicate that pausing from this tightness is probably 5-10% below the recent low that we saw in the stock markets. If we don’t get to that level again, he’s going to continue the hiking. So you almost have a self-feeding process by which, ultimately, the stock market will have to collapse because behind the scene, the pragmatic way that Powell does his policy really means the interest rate is going up and, hence, you haven’t seen your move to safety yet in terms of Treasurys. And then, the final one, which is often ignored, the price of energy. Before the dramatic drop over the past few weeks, the price of energy was up at 15 to 20 percent this year in terms of the oil price input. But, if you add to the fallout from the emerging market selloff and the currency-negative impacts, you will have prices on petrol in energy-intensive countries like India, Indonesia, China where the prices are up somewhere between 50 and 100 percent. Imagine how much of the purse that expensive energy takes away from these developing economies in terms of the purchasing power. So I think the full force of these Four Horsement that drive the world economy is now going to slow economic growth dramatically after this recent boost from the twin tailwinds of the tax cut and repatriation of capital. So even the U.S. now seems to be swimming naked. Click the play button below to listen to Chris’ interview with Steen Jakobsen (48m:35s). […]

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