Where will gold end 2015?
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October 8, 2015 PDF Print E-mail
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Thursday, 08 October 2015 18:19
  • Presidential hopeful Hillary Clinton unveiled a plan that aims to tackle excessive risk-taking in the financial sector, calling for the break-up of so-called "too big to fail" banks. Where have we heard this before? Methinks maybe Hillary got a briefing about the imminent demise of Deutsche Bank. "To prevent irresponsible behavior on Wall Street from ever again devastating Main Street, we need more accountability, tougher rules and stronger enforcement," Clinton said, as if that was remotely the solution to the problems mostly created by fiscal and monetary policy and the revolving door between DC and Wall Street.
  • Alcoa reported a smaller-than-expected quarterly profit, hurt by a slide in aluminum prices that has prompted the company to separate the smelting operations from the faster-growing plane and car parts business. Benchmark London Metal Exchange prices fell to six-year lows towards the end of September, a nearly 20% drop from a year earlier. Alcoa sales fell 10.7% to $5.57 billion, providing 7 cents per share earnings, down from 12 cents a year earlier. Analysts on average were expecting Alcoa to earn 13 cents per share on sales of $5.65 billion. Alcoa's shares fell 4.3% in extended trading.
  • Fed Funds RateA decidedly dovish FOMC Minutes released today, warning that the economy is not ready for rate-hikes, has driven rate-hike odds to their lows once again. December and January odds are now below 50% and markets are reacting with bond, crude, and bullion buying, Dollar selling and stocks uncertainty.
  • HSBC's Steven Major is out with a bold new forecast in a client note on Thursday, saying that bond yields would be much lower than the markets expected because central banks including the Federal Reserve were reluctant to raise interest rates. Major sees the benchmark U.S. 10-year yield, now at 2.05%, tumbling to 1.5% by the third quarter of 2016. He also lowered projections for European bond yields. According to Bloomberg, the median strategist's forecast is for the 10-year yield to rally to 2.9% by Q3 2016 and 3.0% by Q4 2016. Of 65 published forecasts, Major's 1.5% call is the only one below 1.65%. He wrote, "Much of the shift lower in our yield forecasts derives from the view that the ECB [European Central Bank] will continue to buy bonds in its QE [Quantitative Easing] program. The forecast for a 'bowing-in' of curves reflects our opinion that a long period of unconventional policy will create an unconventional outcome. Central banks did not forecast the persistently weak growth or recent decline in inflation. So data dependency does not easily justify lifting rates from the zero-bound -- it might suggest the opposite." Major was one of the few forecasters to correctly predict that in 2014 bond yields would fall and end the year lower. Others had predicted that yields would rise as the Fed wound down its massive bond-buying program known as Quantitative Easing (QE). "The conventional view has been that a normalization of monetary policy would be led by the Federal Reserve, involve a rise in short rates and a flatter curve," Major wrote. "This has already been proven completely wrong." Major is in the small minority, with others including Komal Sri-Kumar, president of Sri-Kumar Global Strategies, and DoubleLine Capital's Jeff Gundlach.
  • Minneapolis Fed chief Narayana Kocherlakota gave a speech Thursday extolling the benefits of an even more accommodative policy than ZIRP... yes, NIRP, or negative interest rate policy. This is definitely on the table now. "I believe the FOMC should take actions to facilitate a resumption of the 2014 improvement in the labor market by adopting a more accommodative policy stance," he said. "I don’t see raising the target range for the fed funds rate above its current low level in 2015 or 2016 as being consistent with the pursuit of the kind of labor market outcomes that we are charged with delivering. Indeed, I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes... to best fulfill its congressional mandates, the Committee should be considering reducing the target range for the fed funds rate, not increasing it."
  • With the U.S. House Republican leadership now in total chaos and no real idea of who will succeed John Boehner as Speaker, Congress and the Obama administration are facing a whole new layer of uncertainty over whether they can meet looming deadlines to keep the government afloat and avert a first-ever default by the U.S. Treasury. The original game plan called for the retiring Boehner to work closely with Senate Majority Leader Mitch McConnell and the White House to negotiate compromises on the most critical budget and fiscal issues while House Majority Leader Kevin McCarthy -- Boehner’s heir apparent -- assumes the reins of the Speakership by the end of the month. Now, with McCarthy’s shocking announcement on Thursday that he was pulling out of the race in the face of strong opposition from the most conservative members of the GOP conference, there is now considerable confusion over who really speaks with authority for the party. Technically, Congress has until Dec. 11 to approve a final budget or extend existing spending authority, but GOP leaders and the president appeared determined to work out a comprehensive budget agreement before then to resolve major differences over spending policy. Obama has threatened to veto any budget plan that doesn’t include a substantial increase in domestic spending. But the immediate challenge is striking an agreement on raising the debt ceiling to enable the Treasury to cover federal government obligations. The Treasury Department has put Congress on notice that the government will run out of money to meet all its obligations on November 5 –- triggering the first default in U.S. history. Treasury Secretary Jack Lew repeated that warning on Thursday during an interview with National Public Radio and insisted that the administration refuses to negotiate side deals as part of an agreement to raise the debt ceiling. Then, later in December, the government has to come together again to address massive shortfalls in Social Security funding.

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October 7, 2015 -- Global Financial System Precipice PDF Print E-mail
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Wednesday, 07 October 2015 17:39
  • Deutsche Bank expects to report, according to their press release, a third quarter income before taxes loss of approximately €6.0 billion and a net loss of €6.2 billion. Moreover, management is recommending a reduction or elimination of the common share dividend. S&P cut DB's credit rating to BBB+ in June, a lower rating than Lehman Brothers had when it declared bankruptcy. DB has been ensared in the fallout from the Greek troubles, its role in the LIBOR manipulation, its Hua Xia Bank stake, the Volkswagen scandal, among other issues. Deutsche Bank has a total derivatives exposure of over €54.7 TRILLION ($62 TRILLION), which is more than 5 times the entire Eurozone GDP and more than 20 times the German GDP. Even very small moves in underlying assets can precipitate catastrophic derivatives losses. Recall that Warren Buffet called derivatives "financial weapons of mass destruction". Well, since the time he said that and now, those weapons have been refined from kiloton weapons into 100 megaton weapons. Deutsche Bank could be the first domino to fall in another massive global financial collapse. As reported Monday, bank revenues are likely to collapse on the back of Fixed Income, Currency and Commodity (FICC) losses in the range of 10-25%. That kind of shock could be what generates bankruptcy-level derivatives losses and the cross-contamination of those losses with any counterparties, causing a chain reaction global catastrophe not unlike -- but BIGGER than -- 2008 since the banking system has been significantly consolidated since then.
  • Evolution of Credit Default SwapsAnother potential domino which may start that cascade is commodities trading giant, Glencore, with a debt and derivatives position of around $100 billion. While this may seem like small fries compared to Deutsche Bank, the fall of Glencore could nonetheless send big ripples through its counterparties. Bank of America noted, "We estimate the financial system's exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group's strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus... For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)." In other words, this sounds a whole lot like the subprime mortgage market in 2008. AIG's notional credit default swap (CDS) exposure was about $440 billion, and when AIG couldn't produce the $100 billion to collateralize those CDS contracts when its credit rating was downgraded, the financial stalwart went bankrupt and was taken over by the government. That could be in the cards now for Glencore and other institutions with a large commodities exposure.
  • The Fed, in my mind, has a bit of a credibility issue,” said Brian Rehling, co-head of Global Fixed-Income Strategy at Wells Fargo Investment Institute. “They've kind of communicated to the market that it's likely they're going to raise so I do think we'll get a raise in December. Even if the data doesn't necessarily warrant it,” he said. Meanwhile, stocks have been climbing steeply in the last few sessions on anticipation that a Fed rate hike isn’t likely, so this sets up the market for volatility no matter what happens.
  • “The root of all of our problems is that we cannot generate enough growth in the industrial world, and over time that has now contaminated the emerging world and that is feeding back onto the west,” says Mohamed El-Erian of Allianz. “So we are in this low growth malaise with the balance of risk now having shifted to the downside. The biggest risk to the Fed is not on the inflation side, it's not on the employment side, it is in terms of financial stability -- to what extent has the Fed bought time at the risk of financial instability down the road. That's the thing I worry most about.” With lower rates a given and growth stalled somewhat, El-Erian believes we are transitioning to a high-volatility regime. “First, prices start to move a lot more; secondly you start getting contagion -- you have one asset class contaminated by the other and thirdly you get unpredictable correlations between asset classes,” he says.
  • Societe Generale suggested, as Citi did last month, a potential policy of: "The helicopter. Rather than buying assets, central banks drop money on the street. Or even better, in a more modern and civilised fashion, credit our bank accounts! That, after all, may be more effective than buying assets, and would not imply the same transfer of wealth as previous or current forms of QE. Indeed, ‘helicopter money’ can be seen as permanent QE, where the central bank commits to making the increase in the monetary base permanent." That this is now being seriously suggested by serious people is rather scary.
  • Nationally, home prices were nearly 7% higher in August compared to a year ago, according to a new report from CoreLogic. That is a bigger annual gain than we saw during the spring market in May and June. Other monthly reports have shown the same phenomenon. "It is clear that house price growth has picked up recently," noted analysts at Capital Economics, comparing August's annual gain to a 4.8% rise in February. "Indeed, with the months' supply of homes close to a 10-year low, if anything, both CoreLogic and Case-Shiller are reporting slower growth than might be expected." While home prices nationally have not yet returned to their peak of the last housing boom, some local markets have surpassed it. Now, some claim the housing market is in a bubble far worse than the devastating one in 2006. The argument: Housing is far less affordable today than it was back then, and the home price gains are driven not by healthy, end-user demand but by a lack of construction, artificially low interest rates, and institutional and foreign all-cash buyers. In the days of 'anything goes,' ninja financing caused housing prices to lurch higher, which forced people to rush in and buy, which in turn pushed prices higher, thus increasing volume more, and so on. But when it comes to the new-era, end-user buyer, that can't happen any longer, as buyers actually have to fundamentally 'qualify' for the mortgage for which they apply," wrote housing analyst Mark Hanson in a note to clients. Hanson points to the institutional and foreign buyers who have flooded the market since 2012, buying up distressed and lower-priced homes, as well as some new construction, all with cash. He calls it an exact replay of the last housing boom, "when unorthodox demand with unorthodox capital would pay any price it took to hit the bid." Even with interest rates today considerably lower than they were during the housing boom, housing today is far more expensive. Hanson says, "In short, end-users today are being handed a red-hot potato market already in a bubble larger than 2006."
  • Some 88% of property managers raised their rent in the last 12 months and 68% predict that rental rates will continue to rise in the next year by an average of 8%, according to a survey of more than 500 of Rent.com’s property management customers, which the site says represents thousands of rental properties and hundreds of thousands of rental units. That’s nearly three times the wage increase that most employees can expect this year. 55% of property managers said that they are less likely to offer concessions or lower rents in order to fill vacancies. One reason why they’re getting even tougher: They are in a stronger position than they were this time last year. More than 46% of property managers surveyed reported a decrease in rental vacancies in Rent.com’s survey and, in the second quarter of 2015, vacancy rates in the U.S. for rental housing was 6.8%, the lowest it has been in almost 20 years, according to data from the U.S. Census Bureau.
  • In what seems like a nervous populist move amid Bernie Sanders' gains, Hillary Clinton has flip-flopped rather stunningly to oppose President Obama's Trans-Pacific Partnership. Despite supporting the bill at least 45 times, as CNN's Jake Tapper points out, Clinton told PBS' Judy Woodruff Wednesday in Iowa that, "As of today, I am not in favor of what I have learned about it." It's also a departure from the Clinton legacy, as CNN notes, it was President Bill Clinton who, two decades ago, signed the first mega-regional pact: the North American Free Trade Agreement.

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October 5, 2015 -- Rate Increase Window Closed PDF Print E-mail
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Monday, 05 October 2015 23:39
  • Did the recession ever end?Stocks rallied in the U.S. and overseas Monday after last week's gloomy jobs report led investors to expect that the Federal Reserve will wait even longer before making its first interest rate increase since the financial crisis. In other words, bad news is good news again, as the Fed is seen as the most important determinant of market direction. Fed fund futures -- securities which bet on which way the Fed will move interest rates -- now indicate that investors expect the most likely timing for the next rate increase is March 2016. Whether the Fed agrees with investors remains to be seen. Fed officials, including Janet Yellen, have said the central bank is looking to start raising rates this year. But if the Fed doesn't want to generate a panicked crash, they cannot oppose a market now pricing in no hikes until at least March. And with recession now bearing down, it would seem that the window for Yellen's Fed to raise interest rates -- if it was ever open -- has closed for good. Was there ever really a window?
  • After looking at the latest terrible U.S. economic data, Goldman Sachs had this to say: "It is interesting that the reduced market-implied probability of liftoff in 2015 after Friday’s weak employment report mostly translated into a higher probability of liftoff not in 2016 but in 2017!
  • Q3 2015 EPS estimates disappointing...As the Q3 earnings season get's underway, the Estimize community is expecting S&P 500 earnings per share (EPS) to decrease 2.2% for the quarter and revenues to decline 1.7%. Factset further notes that "if the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009."
  • Markit's U.S. Services PMI (Purchasing Manager Index) printed 55.1 (missing exectations of 55.6) and dropping to its lowest since June. With new orders crashing to multi-year lows, Markit says, "the degree of positive sentiment [among service providers] dipped to its second-lowest since June 2012." Low oil prices were cited as a helpful development... but I thought deflation was bad?
  • Morgan Stanley's Huw van Steenis is seeing nothing short of a bloodbath in banking revenues, with the traditionally strongest performer, Fixed Income, Currency and Commodity (FICC) set for a tumble as much as 25%, to wit: "We are forecasting a challenging Q3: with FICC down 10-25%; IBD down 10-25%." If true, this will severely surprise investors expecting a 5.4% increase in bank earnings (see chart above).
  • Former Fed Chairman Ben Bernanke told CNBC on Monday he sees no reason why central bank policymakers should rush to increase interest rates. "[The Fed] has a 2% inflation target. It needs to get inflation up to that target," said Bernanke. "Easy money is justified by the need to get inflation up to the target." In a wide-ranging interview on "Squawk Box," he also addressed criticism that the Fed keeps moving the goal posts for raising rates. "As a form of forward guidance [in 2012], we promised we would not tighten until at least, at least until we got to 6.5% [unemployment rate]. We didn't say we would tighten when we got to 6.5%," he said. Reiterating the importance of the inflation target, he stressed: "The goal post was 2% inflation. We're not there yet." Of course, that depends on how you measure inflation. The Fed's favorite consumer price index (CPI) measurement does not count things like stock prices, college education, health care, food, and energy, and also employs various adjustments to the raw numbers which tends to drive them lower -- according to shadowstats.com, which uses the Bureau of Labor Statistics' (BLS) 1980-based calculation method, this CPI inflation rate is around 7% currently, but still doesn't include the many sectors engorged with easy money from the Fed, particularly equities. Bernanke also lamented that the economy is too dependent on the Fed, saying, "A better policy would be a better mix of monetary, fiscal, and other policies." By this, he perhaps means his famous "helicopter money" fiscal stimulus, which involves getting freshly created currency directly into consumers' pockets. Some ways to do that include government jobs programs, infrastructure spending, tax incentives, bailouts, and tax cuts.
  • “My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States,” William C. Dudley, president of the Federal Reserve Bank of New York, told a conference in Boston. Donald Kohn, a former Fed vice chairman and senior fellow in economic studies at the Brookings Institution, said he was troubled by the gap between perception and reality. “If you ask people who is responsible for financial stability they would say, ‘The Fed.' But the Fed doesn’t really have the instruments. It doesn’t really have the tools. And I think this is a dangerous situation if people perceive that it has the responsibility and it doesn’t have the tools.” Financial writer Jim Grant observed, “The mispricing of biotech stocks or corn and soybeans is of no great consequence to financial markets at large. Interest rates are another matter. They are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.” So is it really any wonder that the Fed doesn't have the tools to control financial traffic when they've broken the implicit market signals? They've ramped up risk and then lament the inability to force stability!
  • Investors paid $100 for a 3-month Treasury-bill at today's auction. That is a 0% yield -- for the first time ever -- lower even than the auction right after Lehman's bankruptcy in Nov 2008. That reflects the fact that global risk appetite dropped to "panic" levels for the first time since January 2012, according to Credit Suisse’s Global Risk Appetite Index.
  • Economist Gary Shilling told Bloomberg this weekend that he expects the 30-year Treasury bond to fall from 3% to 2%, a 33% collapse in yield.
  • Homes as ATMs is coming back into vogue as cash-out refinances jumped 68% in the second quarter from a year ago, according to Black Knight Financial Services. This is the highest volume of this type of refinance in five years. "People realize that refinancing these funds is extremely inexpensive and that rates will eventually rise, so they're capitalizing on the strength of home price appreciation," said Ben Graboske, senior vice president at Black Knight Data & Analytics.
  • Meanwhile, actual ATMs are getting much more expensive, the Wall Street Journal reports. The latest tactic in the war on cash has fees to remove paper notes out of the electronic banking system soaring to an average of $4.52 per transaction, and up to $8 for some "out-of-network" ATMs. This reflects an increase of 21% over the past 5 years. This "tax" on accessing your own money as cash helps to discourage cash transactions. As the Fed pivots into NIRP (negative interest rate policy), it will be important to keep people from stuffing their mattresses with cash to avoid or counteract the negative rate. I.e. they need it to cost people money to hold cash.
  • American Apparel filed for Chapter 11 bankruptcy protection Monday. If approved in court, creditors led by Monarch Alternative Capital, Coliseum Capital, and Goldman Sachs Asset Management will exchange their bonds for equity and seize ownership of the reorganized company.
  • The U.S., Japan, and 10 other countries around the Pacific reached a historic accord Monday to set commercial rules of the road for two-fifths of the global economy, including tariff rates, intellectual property rules, etc. The Trans-Pacific Partnership (TPP) deal, if approved by Congress early next year, will mark an effective expansion of the North American Free Trade Agreement (NAFTA) launched two decades ago to include Japan, Australia, Chile, Peru, and several southeast Asian nations. The trade block does NOT include China or Russia. Critics globally have lambasted the deal for being negotiated in secret and being biased towards big corporations. TPP also troublingly includes the Investor-State Dispute Settlement (ISDS) provision, which gives foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever the government passes a law that negatively impacts corporate profits -- such things as discouraging smoking, protecting the environment, or preventing nuclear catastrophe. This means that signatory nations voluntarily surrender national sovereignty to the authority of corporate tribunals, without appeal, and apparently without exit provisions.
  • Despite Draghi's promises and EU leaders' exuberance, European Investor Confidence tumbled to its lowest since January as the QE bounce has now well and truly died. While reassuring tones have been uttered by every central banker in the world, it is the real economy that appears to be weighing on confidence as Eurozone Composite PMI prints at 53.6 - its lowest since February.
  • Diminishing expectations that the U.S. Federal Reserve will raise interest rates this year could allow the yen to strengthen, precipitating another round of monetary easing by the Bank of Japan, BOJ watchers say. Should the Federal Open Market Committee hold off on a rate increase at its Oct. 27-28 meeting and seek to tamp down expectations of such a move, upward pressure on the Yen would only rise. This could squeeze earnings and undermine confidence in Japan's corporate sector, mostly among export-driven companies. "If the Yen continues to strengthen, the BOJ will have no choice but ease again," said Izuru Kato, chief economist at Tokyo-based Totan Research.
  • Chinese President Xi Jinping confirmed the practice of moving the People’s Bank of China’s reserve assets to other entities in China: “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals.” This might explain where some of China’s gold hoard, that many suspect they posses but have not reported as reserves, may be located.
  • Once again the reactions of desperate government policies looks like creating an even worse situation thanks to unintended (though entirely foreseeable) consequences. Amid the prospect of sharply higher shipping taxes in Greece - designed to increase revenues and 'fix' the debt-ridden nation, WSJ reports many of Greece’s world-leading shipowners are actively exploring options to leave their home country. With Greece controlling 20% of the world's shipping fleet, the 'quadriga' of Greek creditors' demands to raise taxes (because debt restructuring is out of the question) on such an 'easy target' as the world's largest shipping industry appears likely to backfire as an entire industry's revenues move out of reach of government taxers.
  • Pierre Moscovici, the European Commission's top economy official, said Monday that Spain's draft budget plans miss fiscal targets by 0.3% in 2015 and 0.7% in 2016. As such, he said the Commission will on Tuesday invite Spain's center-right government to make sure the budget plans comply with Euro rules. The Eurozone's top official, Jeroen Dijsselbloem, said it was up to the Spanish government to act on the opinion. In joining the Euro currency, countries signed up to a set of rules to keep their budgets within certain parameters. In theory, countries could face sanctions.

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October 2, 2015 PDF Print E-mail
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Friday, 02 October 2015 20:34
  • The Bureau of Labor Statistics announced yet another disappointing jobs report. The labor force participation rate fell to the lowest level since 1977 (62.4%), with another half a million people exiting and joining the 94.61 million Americans neither working nor considered by the government to be unemployed. The biggest participation declines are in the 25-54 year old "prime" cohort, not retiring Baby Boomers as you might expect. The economy would have to add 184,000 jobs just to absorb those entering the workforce for the first time (i.e. coming of working age); but in September, only 142,000 were added to the employment ranks, missing economist predictions by over 60,000. Moreover, BLS revised down the previously reported August number from 173,000 to just 136,000. But those numbers are dwarfed by the 579,000 knocked out of the "labor force" category. So the headline unemployment rate of 5.1% remains laughable when you add the 7.9 million officially unemployed to the 94.61 million not in the labor force and realize that over 100 million Americans (40% of working-age civilian adults) and their dependents are living off of some kind of government assistance. All told, only about 46.5% of Americans are supporting the other 53.5% (including children, disabled, and elderly). BLS reported that average hourly earnings also declined by one cent to $25.09 and the average workweek declined by 0.1 hour to 34.5 hours.
  • The US Census Bureau report on Manufacturers' Shipments, Inventories, and Orders released Friday showed additional weakness:
    • New orders for manufactured goods in August decreased $8.2 billion (1.7%) to $473.0 billion.
    • Shipments, down four of the last five months, decreased $3.2 billion (0.7%) to $480.1 billion. This followed a 0.2% July decrease.
    • Unfilled orders decreased $2.4 billion (0.2%) to $1,195.0 billion.
    • Inventories, down two consecutive months, decreased $1.6 billion (0.3%) to $648.4 billion. This followed a 0.3% July decrease.

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Smoke & Mirrors PDF Print E-mail
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Friday, 02 October 2015 15:26
S&P 500 Buybacks Drive Stocks Investors care about earnings per share (EPS). If you bought a share of a company, you want to see your share of earnings increase. So when companies' overall earnings go down and they don't want to spook away investors, what do they do? They borrow money at cheap interest rates and buy back shares! So even though their business is in decline, the number of public shares is decreasing faster, so their EPS is going up! Therefore their stock price goes up! Therefore they seem like they're doing well! In the chart at the right, you can see that S&P 500 companies which have engaged in buybacks have not only beat the index as a whole, but they actually drove the overall positive growth of the index on a share-price basis. The whole index goes up or down on the basis of buybacks and little more.

It's a giant con game that the Federal Reserve is fueling with zero-percent interest rate policy (ZIRP). Since 2009, public corporations have bought back at least $2.4 trillion worth of shares, and this is the main source of liquidity in the stock market and essentially a manipulation to make private investors confident enough to keep their money invested. They could not have done this with a free market in interest rates, but only with suppressed interest rates thanks to the central bank. Meanwhile, company balance sheets are deteriorating as their cash reserves decline and their debt load skyrockets. Moreover, they're not investing anything into capital assets. So factories, vehicles, offices, etc., are going into disrepair. Workers are being laid off.

S&P 500 Buybacks Drive Stocks Our entire economy is rotting from the inside even as the shiny veneer of a stock bubble makes it look resilient. It's more profitable for businesses to borrow money cheaply in order to coerce equity investors to pony up even more rather than running a profitable enterprise. These are the unintended consequences of central planning and monetization. We're now irrevocably addicted to cheap credit. If rates go up, almost every major corporation in America, every state and municipality, and the federal government itself will go bankrupt. And so ZIRP and stock buybacks will continue to go on. Until they can't. And then the man behind the curtain is revealed and we cease believing in Wall Street and Federal Reserve wizardry. And we cease our irrational confidence in paper notes and stocks behind which all real value has been diluted, stolen, and rotted away.

S&P 500 Reversion How long can this go on? When will the general public catch on? Those are the $100 trillion questions! That's what we continue to follow daily. Check back at PassantGardant.com regularly to get a run-down of every new development without having to personally suffer the mainstream media lies and distractions and scour the international and alternative news sources to ferret out every nugget of relevant truth.

Look beyond the smoke & mirrors to prepare for the coming stampede out of the phony economy. Few people realize it yet, but this is the most important issue of our times! Little else will matter once the global economic system crashes and sends the vast majority of the world into poverty. While nobody will be immune from the utter destruction this will cause, we can take steps to prepare so as not to suffer the brunt of it. For instance, saving gold and silver in non-bank vaults and at home via services like Bullion Vault and Silver Saver is a good step. Set up an automatic withdrawal from your checking account starting today to dollar-cost-average into them and build up a nest egg. Get your money out of stocks and bonds. If you have a 401K or IRA, transfer your holdings into precious metals, rental-based REITs, inflation-adjusted bonds, international non-financial equities, and other diversified instruments that can withstand financial and monetary collapse better, or simply withdraw those accounts, even with the penalty. Invest in capital assets like a garden, solar panels, an efficient wood stove, and other tools to help make you more self-sufficient. When the collapse comes, it won't be all at once, but it will be jarring nonetheless, and nobody can predict exactly how things will play out. So you have to be prepared for almost anything -- transportation interruptions, food shortages, utility outages, riots, etc. Take a look at Venezuela as an example. There's still a little time to prepare, but not much.

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October 1, 2015 PDF Print E-mail
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Thursday, 01 October 2015 16:06
  • The government will reach its borrowing limit around Nov. 5, the Treasury Department said Thursday, setting up what promises be a tense round of negotiations over raising the debt ceiling just as House Republicans transition to a new leadership team with Speaker John Boehner set to step down at the end of the month. Treasury Secretary Jack Lew wrote Boehner (R-Ohio) on Thursday to inform Congress that the debt limit would need to be increased earlier than under previous estimates. He said the tax payments received in September were lower than expected and that the government expects to have less than $30 billion in cash available by early November. “Based on this new information, we now estimate that Treasury is likely to exhaust its extraordinary measures on or about Thursday, November 5,” Lew wrote. “Without sufficient cash, it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”
  • The Atlanta Fed slashed its third quarter view on U.S. economic growth from a prior estimate of 1.8% to just 0.9%. This was driven largely by a revised August trade gap of $67.187 billion.
  • U.S. stocks headed lower Thursday, a day after the market wrapped up its worst quarter in four years.
  • Non-voting Fed governor Eric Rosengren will present a research report tomorrow he co-authored entitled “Should U.S. Monetary Policy Have a Ternary Mandate?” As if the Fed can just unilaterally decided to centrally plan another major aspect of the economy! It discusses whether the Fed should place financial stability on par with employment and inflation in its deliberations. The bottom line of the analysis is that, dual mandate aside, the FOMC is very much aware of, and respondent to market conditions. The danger though is that adjusting monetary policy to stock market gyrations turns central bankers into traders and market timers, for which they are even more ill-equipped than they are at deciding interest rates, managing the yield curve, quantitative easing, and other regular disasterous policies.
  • Deutsche Bank's chief credit strateigst, Jim Reid, said, "The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy... We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised. Perhaps the G20 will get together and decide to try a different approach. In our 2013 long-term study we speculated how we thought the end game was 'helicopter money' -- ie money printing to finance economic objectives (tax cuts, infrastructure etc). While it has obvious flaws and huge risks (eg political manipulation and inflation), one can argue it will always have more economic impact than QE in its current form.
  • JPMorgan's global PMI reading of 50.6 in August is the weakest "expansion" since June 2013. 14 of 29 regions showed a contracting manufacturing sector.
  • The University of Michigan’s Consumer Sentiment Index dropped from 91.9 to 85.7 – the lowest level in a year -- as 401Ks collapsed 10% over the summer, giving people a sense of economic loss. Holiday spending and travel are now at risk.
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    September 30, 2015 PDF Print E-mail
    Written by Administrator   
    Thursday, 01 October 2015 01:48
    • Congress sent "continuing resolution" legislation to President Obama this evening to prevent a government shutdown and to keep federal agencies funded through December 11th. Congress will still be faced with the same unresolved budget issues in December. But in the meantime, they're going to have to do something about the debt ceiling. Treasury will have both exhausted its measures that allow it to issue debt and run out of cash by the third week of November -- or sooner if tax collections come in weaker than expected due to the crashing economy.
    • According to ADP, for the first time this decade, the US hasn't created a single manufacturing job for the entire year. In fact, it has lost some 6,600 jobs.
    • For the first time since 2009, all six major Fed regional activity surveys are in contraction territory. Chicago PMI, the most important regional survey, puts ISM at 46.9%. Chicago confirms Richmond, New York, Philly, Chicago, and even Kansas City regional surveys all flashing recessionary warnings with sub-50 prints.
    • Bob 'The Bear' Janjuah warns, "Significant damage has yet again been done to the credibility of policymakers, and to the belief in normalisation, in inflation, and in the ability of risk markets to continue ignoring the harsh realities of weak growth, weak pricing power and weakening earnings... the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit. However, considering the failure of global QE to generate sustainable global growth and inflation, and considering the Fed’s starting point, 2016 could be the year when we see negative Fed Funds as a way of getting money velocity moving up rather than down. Such a move may work, in that risk assets could react very positively for a period of time, but in the longer run any such moves would only serve to highlight the extraordinary ongoing failure by global central banks to manage economies (both into and) since the 2008-09 crash."
    • Dennis Gartman's letter today declared, "We are of the opinion that the worst is not yet behind us; that a mere less-than-handful of months from the highs is insufficient as far as 'time' is concerned for a bear market to have run its course and that new lows still lie ahead. We shall consider each and every rally then to be interim and corrective in nature, as we consider today’s rally." The S&P 500 will decline to at least the 1420-1550 range, the letter predicted.
    • China’s foreign-exchange regulator put a new annual cap on overseas cash withdrawals using China UnionPay Co. bank cards, a UnionPay official said on Tuesday. Under the new rules, UnionPay cardholders can withdraw up to 50,000 yuan ($7,854) overseas during the last three months of this year, and the amount will be capped at 100,000 yuan for all of next year, the official said. State-run UnionPay has a virtual monopoly on processing card transactions in China, meaning the limits extend to nearly all Chinese bank- and credit-card holders. It wasn’t clear when the new cap was issued. The new cap is in addition to an existing 10,000 yuan daily withdrawal limit, part of China’s curbs on how much money can flow across its borders. The move by China’s State Administration of Foreign Exchange is the latest by Beijing to scrutinize capital outflows. The People’s Bank of China, the country’s central bank, said earlier this month that its foreign-exchange reserves fell by $93.9 billion, the biggest monthly drop ever. The pressure will continue as it is expected that the PBoC will devalue the Yuan by perhaps double-digits, so people will try to get their money out any way possible before that happens.
    • Japan’s $1.2 trillion Government Pension Investment Fund faces mounting pressure to boost returns and diversify assets as pension payouts for the world’s oldest population swell. With that in mind, GPIF unveiled sweeping changes to its foreign bond investments on Wednesday, hiring more than a dozen new asset managers and creating mandates for junk and emerging-market securities... the same investments yesterday called a "trainwreck" and compared to a panicking crowed squeezing out of a burning theater. “I’m worried," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “The timing isn’t good. We’re talking about the Fed raising rates, and the assets that are likely to be affected the most by this are junk bonds. Investing in emerging-market currencies is worrying, too." Investors pulled $40 billion out of emerging markets in the third quarter, fleeing at the fastest pace since the height of the global financial crisis. GPIF expects yields of 5% or more from bonds rated BB or lower, the Nikkei newspaper reported. Japan’s 10-year sovereign bonds yield 0.345%. Merrill Lynch data show that investors in global junk debt lost 4.5% last quarter, the most since the three months ended September 2011. “It seems like GPIF has become more short-sighted," said Fujiwara. “Instead of chasing higher returns, it should be reviewing pension payouts.”
    • The PBOC announced that China's official gold holdings had risen again in August, increasing by 520,000 troy ounces, or 16.2 tons (which is more than 3 times the entire registered gold inventory in the Comex vault system), and bringing the new total to 54.5 million ounces, or 1,694 tons of gold. In dollar terms, Chinese gold holdings rose from $59.2 billion at the end of July to $61.8 billion. This follows the July increase of 19.3 tons. Meanwhile, Russia added 31 tons in August, bringing its total to about 1,320 tons.
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    September 29, 2015 -- Late Stage Antics PDF Print E-mail
    Written by Administrator   
    Wednesday, 30 September 2015 03:44
    • Billionaire investor activist Carl Icahn ramped up criticism of the U.S. Federal Reserve, warning about the unintended consequences of ultra low interest rates on the economy and financial markets. "They don't understand the treacherous path they are going down," Icahn said in an interview with Reuters. "God knows where this is going. It's very dangerous and could be disastrous," said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008. Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year. In a video entitled "Danger Ahead" and released on Tuesday, Icahn said the Fed's rate policy had enabled U.S. chief executives -- many of whom he describes as "nice but mediocre guys" -– to pursue "financial engineering" that he said has exacerbated an already wide gap between rich and poor in America. Icahn slammed money managers who benefit from the so-called "carried interest" loophole under which their earnings are taxed as capital gains rather than ordinary wage income. "Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things... They are going in and they are buying back stock or even worse, making stupid takeovers," said Icahn, adding some recent acquisitions have been done at a too high a price. Much of this debt is bought via exchange-traded funds, a popular vehicle for trading baskets of bonds and stocks. Icahn said retail investors had a false sense of security about how easy it would be to sell their holdings of such debt if the market turns. "It's like a movie theater and somebody yells fire. There is only one little exit door," he said. "The exit door is fine when things are OK but when they yell fire, they can't get through the exit door... and there's nobody to buy those junk bonds."
    • Bank of America/Merrill Lynch is out with a new note describing high yield bonds as a “slow moving trainwreck that seems to be accelerating... For five months in a row now more than 50% of the sectors in our high yield index have had negative price returns. That’s the longest such streak since late 2008. This isn’t to whip up predictions of utter doom and gloom as in that fateful year. But it’s a stark statistic, highlighting our principal refrain for the last several months -- this isn’t just about one bad apple anymore. The weakness in high yield credit is to us not just a commodity story; it is about highly indebted borrowers struggling to grow, an investor base that cannot digest more risk, a market that has usually struggled with liquidity and an economy that refuses to rise above mediocrity. The problems in the coal sector that began to surface two years ago were perhaps the canary in the coal mine in hindsight. It was easy to dismiss a tiny sector with badly managed companies in a product that was facing secular headwinds as a one-off. But then we had the collapse in oil prices, much more difficult to ignore given the sheer size of the Energy sector in high yield. Barely had the market got its head around the scale of the issue when metals and miners started showing tremors. Now it’s the entire commodity complex... Over a third of the bonds that have experienced more than a 10% price loss this month belong neither to Energy nor Basic Industries." They went on to make some dire predictions. "We suspect that this is the start of a long, slow and painful unwind of the excesses of the last five years. Along with decompression comes a tick up in defaults, and we expect those to increase in 2016 and 2017. Although a company with a poor balance sheet doesn’t necessarily default, all defaulted issuers have poor fundamentals -- and we see a lot of companies with lackluster balance sheets and earnings. The difference why in one environment an issuer survives while in another it doesn’t has as much or more to do with risk aversion and the subsequent conscious decision to no longer fund the company than any change in leverage or earnings. And risk aversion, as noted above, is increasing amongst our clientele. As more investors continue to see the forest for the trees, we believe they will see what we have seen: a series of indicators that are consistent with late cycle behavior that we think clearly demonstrates a turn of the credit cycle. Finally, there is other typical late-stage behavior that is observable but difficult to quantify. We often see that a cycle is approaching its end when the bad apples start visibly separating out from the pack as idiosyncratic risk surfaces. We saw this first with Energy and Retail, then Telcos and Semis, and now creeping into some of the perceived ‘safe havens’ such as Healthcare and Autos. This is also when company balance sheets that have amassed debt during the cycle start to show visible cracks and investors question whether companies have enough earnings capacity to grow into their balance sheet. Terms of issuance become more issuer-unfriendly and non-opportunistic deals go through pushing new issue yields up. This is also a time when problems surface (Volkswagen), and negative surprises have the capability to cause precipitous declines in stocks and bonds (Valeant, Glencore). Though we don’t and won’t pretend to predict the next corporate scandal or regulatory hurdle, what we do know is that as cycles become long in the tooth, companies could act desperately. In addition to a world of lackluster earnings, bloated balance sheets, and worrying global economic conditions, we’re hard-pressed to come up with any client conversation we’ve had on HY over the last 12 months that hasn’t included a tirade on appalling bond market liquidity... the inability to enter and exit trades easily leads to more volatility and contagion into seemingly unaffected sectors (sell not what you want to, but what you can)."
    • UBS had similar warnings... "US high grade and high yield markets have suffered under the weight of weak commodity prices, heightened issuance (and the forward calendar), the rally in the long bond, rising idiosyncratic risks and illiquidity limiting the recycling of risk. Lower commodity prices are increasingly pressuring metals/mining and energy firms because prices are so low that many business models are essentially broken. Heavy supply, specifically in the high grade market, is a result of releveraging announcements to satiate equity investors and there have been few signs that management teams are retrenching -– effectively setting up a standoff between equity and bond investors where ultimately the path to slower issuance is a broader re-pricing in spreads. Falling Treasury yields have chilled the demand from yield bogey buyers as rates have fallen faster than spreads have widened. Rising idiosyncratic risk, although it arguably is thematically symptomatic of late stage antics where firms are under massive pressure to boost profits (e.g., VW, Valeant), has added accelerant to the fire. And lack of liquidity has made the recycling of risk increasingly difficult. The prognosis is challenging. Why? Certain aspects are structural in nature; in the later stages of the credit and asset price cycle one should expect greater net issuance from releveraging actions and rising idiosyncratic risk. Further, illiquidity is in effect part of the unintended consequences of post-crisis regulation. However, the outlook for commodity prices and, in turn, Treasury yields is arguably more balanced, but uncertainty around demand, supply and speculative conditions is elevated. But, alas, the primary driver of credit markets remains the same: commodity prices. We believe the market is now reflecting the thesis we have outlined in recent months: lower commodity prices will trigger rising contagion, and weakness will spread to the broader credit markets (in particular lower-quality high yield). Put differently, if commodity prices go lower, index spreads will go wider. This, in our view, is a virtual certainty."
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    September 25, 2015 PDF Print E-mail
    Written by Administrator   
    Friday, 25 September 2015 16:08
    • Former Bank of England central banker, Charles Goodhart, told a London audience that bills such as the Swiss National Bank’s 1,000-franc note and the European Central Bank’s €500 note should be abolished. After first saying how this idea was meant to hamper drug dealers, he moved on to the real motivation for this suggestion: “If we were limited to low-denomination notes, at any rate because of the costs of stockpiling and all the rest we can drive interest rates a little bit further down.” So, you see, the real idea here is to support the implementation of negative interest rate policy (NIRP), because if banks charge interest to hold savings, people will stash cash under their mattresses. But if they have to use low-denomination notes, that's a lot harder to do. Central banks don't want people saving at all -- they have to spend every cent they get their hands on to keep currency velocity elevated. The banks will find ways to circumvent people's natural inclination to have a rainy day fund any way possible. NIRP means charging interest on savings accounts and paying interest to borrowers. In addition to reducing the usage of cash by restricting the notes available, they'll probably find ways to tax its usage, forcing people to use electronic credit, debit, or bank transfers. And rather than keep savings accounts or hoard cash, people will be prodded to speculate on stocks and bonds.
    • House Speaker John Boehner announced he would be stepping down at the end of October. The news came as a surprise -- a happy surprise for many, such as the crowd that erupted in cheers when Marco Rubio announced it to the Value Voter's Summit. It's being widely predicted that Boehner will use his last month in office to cut a deal with Democrats, undercutting the Republicans' wishes, to side-step debate and keep the government from shutting down. The move would be so unpopular with his party that he knows he wouldn't survive it, and so has preemptively offered his resignation. If Congress doesn’t pass a funding bill, much of the federal government could shut down starting on Oct. 1. However, after Boehner is gone and the continuing resolution expires in December, the risk of a shutdown could be even worse.
    • Long-term economic growth remains slow, despite a rebound in both equities and housing. This is a clear sign that the market is overheated, warns Robert Shiller, Nobel Prize-winning economist and co-author of the book Phishing for Phools. "The correction in August brought the market down ten percent," Shiller says. "But it's halfway back up. It's still looking pretty frothy.” Shiller adds that his valuation confidence index, known as the CAPE ratio, is far above the historical norm of 17. The ratio, which compares current stock prices to earnings over a ten-year period, currently measures 24.5, near the peak it reached before the financial crisis in 2007.
    • Employer-based health insurance premiums climbed 4.2% this year for family plans, according to an annual Kaiser Family Foundation report. That’s up from 3% the year before. Since 2008, average family premiums have climbed a total of $4,865. Obama promised back in 2008 to reduce premiums by $2,500 per family! Just another example of government interference in the market causing problems.
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    September 24, 2015 -- Here Comes NIRP PDF Print E-mail
    Written by Administrator   
    Thursday, 24 September 2015 20:59
    • Societe Generale's Albert Edwards believes that the Federal Reserve will lower its benchmark rate below zero during the next economic downturn. In a note to clients on Thursday, Edwards wrote: "The next US recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed. Bob [Janjuah of Nomura] and I thought that this time we would see deeply negative interest rates in the US (and Europe). Sweden has led the way, dipping their toe below the water line with their current -0.35% policy rates but there will be more, much more along these lines. For if -0.35% is possible, why not - 3.5% or less? It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the US. The last seven years of exploding central bank balance sheets will seem like Bundesbank monetary austerity compared to what is to come." As you can see in the graph below, each cut in the interest rates causes a spike in monetary creation. Just maintaining ZIRP creates over $800 billion per year. NIRP will necessitate a monetary explosion in the trillions.
      Fed Funds Rate vs MZM Monetary Creation

    • Fed Chairwoman Janet Yellen explored the idea of negative interest rate policy (NIRP) in her speech today, saying, "the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities... This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace."
    • Janet Yellen got physically ill delivering her speech. MarketWatch's Greg Robb noted, "Yellen faltered at end of her speech. Last page was agonizing. I don't think she felt well." Fed spokeswoman Michelle Smith said in an e-mailed statement, "[Yellen] was seen by EMT staff on-site at U-Mass Amherst." But the queaziness passed and she resumed her schedule.
    • Former Treasury economist Bryan Carter described to Bloomberg the circular problem of Fed policy: "short-end rates move higher as the Fed gets closer to hiking, and that causes the Dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created." In other words, according to Fed principles, it is impossible for them to tighten monetary policy. The global economy is addicted to easy money, and even the prospect of tapering that drug would send the economy into a tailspin, requiring ever higher doses. Hence, with rates currently at zero, the talk of negative rates. But of course eventually the patient overdoses. Without being able to purge the speculative excesses and misallocations, the global economy will become completely unhinged from the reality of true supply and demand, and all accumulated wealth will be consumed.
    • Time reports, "With the effects of the financial crisis still lingering, 30 million Americans in the last 12 months tapped retirement savings to pay for an unexpected expense, new research shows. This undercuts financial security and underscores the need for every household to maintain an emergency fund. Boomers were most likely to take a premature withdrawal as well as incur a tax penalty, according to a survey from Bankrate.com. Some 26% of those ages 50-64 say their financial situation has deteriorated, and 17% used their 401(k) plan and other retirement savings to pay for an emergency expense. Two-thirds of Americans agree that the effects of the financial crisis are still being felt in the way they live, work, save and spend, according to a report from Allianz Life Insurance Co. One in five can be called a post-crash skeptic -- a person that experienced at least six different kinds of financial setback during the recession, like a job loss or loss of home value, and feel their financial future is in peril." But what they don't tell you is that this was by design. Zero interest rates and quantitative easing are meant to prevent saving, promote consumption, and reduce wages. It's the entire point of Fed policy, so why do people complain... remember Ben Bernanke "saved the global economy"!
    • Industrial Bellweather Caterpillar Inc. (CAT) cut its revenue outlook by 5% with the admission that "2016 would mark the first time in Caterpillar's 90-year history that sales and revenues have decreased four years in a row." Note that that history includes the Great Depression. For 2015, the company's sales and revenues outlook has weakened, now expected to be $1 billion lower than the previous outlook. For 2016, sales and revenues are expected to be about 5% below 2015. They announced significant restructuring and cost reduction actions that are expected to lower operating costs by about $1.5 billion annually once fully implemented. These actions include firing as many as 10,000 employees, voluntary retirement incentives, and the closure of up to 20 facilities. This is on top of 31,000 employees laid off and 20 facilities closed already since 2012.
    • The Kansas Federal Reserve reported the 6th disappointing Regional Fed Survey in a row (following Dallas, Richmond, New York, Philly, and Chicago), with a -8 (versus expectations of -6), and has now been negative for 7 months in a row. With all regions showing contraction, it's a fair bet that we're in a recession.
    • Durable Goods New Orders dropped 2.0% in August, the biggest drop since March, extending the ex-transports year-over-year losing streak to 7 months.
    • The S&P 500 is now lower than at the end of QE3, showing no overall gain since May 2014.
    • Charles Hugh Smith from the OfTwoMinds.com financial blog predicts "Days of Rage" are coming, as the masses who have been losing ground financially rebel at outward signs of wealth, creating an environment of pervasive unrest and burned-out luxury cars.
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