Markets, Mania, and Meltdown – a Brief Synopsis of the Past Month

Consumer Finance, Economics, Geoeconomics, Manufacturing, Monetary Policy, My Two Cents, National Debt, RIsk Management, , , ,

Andrew W. Sutton, MBA and Graham Mehl, MBA

“The past month has been one of nearly continuous turmoil in the financial markets”. That might well be the understatement of this still fairly new century. Keep in mind that during the past 20 years, we’ve had 2 significant recessions (according to the Bureau of Economic Analysis), a complete meltdown of the .com mania, the inflation of a real-estate bubble and its subsequent bursting, the halving of US financial indexes, and the bankruptcy of names like Lehman Brothers, and AIG to name a few. Throw in a massive bailout, a fusillade of rescue programs like TARP, TSLF and the resulting blowout of the federal reserve’s balance sheet. This is within the first 10 years. Keep that in mind.

The second ten years have featured D-E-B-T – on all levels. Governments of the world, states and provinces, local municipalities and parishes, students, consumers, homeowners. In short? Pretty much everyone. That debt has driven the economy for the past decade. Globally. Many will think this is just an American problem. It’s not. Misery loves company, right? Not so fast. In this brave new world of interlocking economies and financial systems, a failure on the other side of the world can cause problems in our own back yards.

Entire countries have gone bust and have had to go hat in hand to their representative central bank. Remember Portugal, Ireland, Italy, Greece, and Spain? Don’t forget the tiny island of Cyprus and its king-sized banking crisis, which led to a bank holiday and eventually a bail-in. Wait, we just talked about a bailout. What’s a bail-in? We penned a serious of articles on this topic back in 2013. Read them here. Keep in mind that this is very non-exhaustive and brief summation of some of the more important events.

Which brings us to the present. Yesterday, 3/11/2020, the ENTIRE yield curve for USGovt bills, notes, and bonds was under 1%.  That’s not a typo. There is rampant talk of negative interest rates here in the US. This phenomenon is already happening in Germany – the powerhouse of the European Union and several other easily recognizable nations. Moves in the bond market that generally take many months are now taking days. If you’re planning on retiring and living on the interest of your bonds, you might want to rethink that strategy. Many of the people we communicate with regularly have themselves or know quite a few people who have gotten a 20% haircut or more on their equity investments since the beginning of the year.

Much of the more recent activity has been blamed on the emergence of a new Coronavirus. The fear alone that has been imparted by the mainstream – and even alternative media is bound to have some kind of impact on the global economy. Economists are already clamoring for cash payments to citizens as a means of ‘stimulating’ the economy. In the US we’ve done this twice previously in the past two decades. Both were credited with averting nasty recessions. Both went directly on the federal budget deficit here in the US. Debt has indeed become the answer to all that ails most economies the world over.

The gyrations and volatility in financial markets have been enough to give even seasoned investors a serious case of whiplash. In the past 10 trading days the Dow Jones Industrials Average here in the US has had its two biggest down days – EVER – in terms of the number of points lost. Sandwiched in there are some of the biggest up days – EVER – again, in terms of index points. Oil crashed over 20% in a single day. Gold has broken out and is once again around/over the very important $1650 level. Silver is probably the bargain of the century to this point. Throw into all this a major year in terms of the political arena. And no, we are not breaking our tradition of focusing on policy. The policy provides the answers. The names only serve to muddle the issues.

As we write this evening of the 10th of March in the year 2020, it is quite possible and likely that the economic and financial foundation that we all rest on has begun yet another metamorphosis into something completely different than we’re all used to. Contemplate the concept of negative interest rates alone. Such a ridiculous move would take several hundred years of investing philosophy and modeling and flush them directly down the toilet. Again, this is likely an understatement. The US went from a national debt around $14T during the 2012 campaign season to a level of $23.5 trillion in the early part of 2020. In 1986, America reached the $1 trillion mark. Any stimulus will go right on the tab.

Many people are electing to stay home for fear of contracting COVID-19 and with all the uncertainty that exists regarding this virus, we refuse to pass judgement. Since consumers are responsible for nearly 70% of US Gross Domestic Product, even a month’s cessation of vacations, cruises, flying, going shopping and all the other activities that fall under consumption, we could easily see a sizable dent popped into Q1 GDP. Or the money might be spent online, and it might not affect GDP that much at all. The situation in China can only be guessed. Sadly, national governments have a growing aversion to the truth even when lives are at stake.

In summation, we cannot and will not make any ‘predictions’ regarding Q1 GDP, consumer spending and the balance of trade. Given that oil has dropped precipitously, that drop will translate into lower gas prices at some point and that will lower that portion of consumer spending, which will negatively affect GDP. This reality makes a strong case that we should be measure growth in units rather than dollars wherever and whenever it is practical to do so. The best advice we can give is gather as much information as possible and try to avoid making decisions based on emotion. Seeing the Dow Jones Industrials Average lose over 2,000 points in a single trading will unnerve even the savviest of investors.

Living off the interest from investments, for all purposes, is not going to be feasible for the foreseeable future. Our economies are hooked on low interest rates. That is helpful for the borrower, but lethal for the investor. It forces investors with shorter time horizons into the riskier equity markets. This situation represents a clear and present danger to the standard of living for millions of people in America alone.

This is not all gloom and doom, however. Again, like 2008, we have a chance to endure the economic pain necessary to down regulate our debt-laden, consumption-oriented economy into something that doesn’t need trillions of borrowed dollars each year just to keep plodding along at a snail’s pace. We have an opportunity. Will we avail ourselves of it? If the talking points coming out of the television and Internet media outlets is any indicator, we will most likely not take this opportunity, opting instead to kick the proverbial can down the road ensuring that the pain will only be worse for the next generation when they are forced to deal with it. We challenge not only America, but the rest of the world to put down the credit cards and take a step back. We did it here in the US during 2010. We can do it again. But will we?

Stay tuned and stay well.

Sutton/Mehl

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Andy Sutton Appears on Liberty Talk Radio

Consumer Finance, Economics, Geoeconomics, Liberty Talk Radio, Modern Monetary Theory, Monetary Policy, , , , ,

Andy’s Notes: A big “thank you” to Joe Cristiano and Liberty Talk Radio for having me on to discuss negative interest rates and the implications. We also had a chance to talk about other aspects of monetary policy and things you must know in an inverted yield curve / ZIRP environment. It will be 35 minutes well-spent if you listen.

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A Picture Worth a Trillion (and then some) Words?

Consumer Finance, Debt Ceiling, Economics, Government Statistics, Monetary Policy, National Debt, , , , , ,

Andy’s Notes: Inflation, the Debt Ceiling, and the Dow Jones mentioned in the same sentence. They all have one thing in common – they’re going up. Asset bubbles are much more palatable by the average person than cost of living bubbles. In other words, when inflation blows up stock indices, the world cheers. When it blows up the cost of things like food, gas, and other necessities, that is not acceptable. (Click the thumbnail below to see the whole image).

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Addendum for ‘Modern Monetary Theory – Applications in the 21st Century’ Forthcoming

Economics, Geoeconomics, Modern Monetary Theory, Monetary Policy, My Two Cents, Pensions, , , , , , ,

We appreciate the large number of inquiries, questions, and comments regarding our recent paper on ‘MMT’. We’d also like to thank www.marketoracle.co.uk for giving it such a favorable position on their website, we truly appreciate it. We do this not for accolades, however, but to raise awareness.

Along that thread, we’ve decided the best way to handle the communications we’ve received is with a brief audio transmission, which we will post on this site – within the next week – to give us more time to read additional emails and reflect on the material in general.

Once again we are blessed to have such great readers. The questions asked originated from points we’d made during our research and actually caused us to ask even MORE questions regarding this material. This is critical thinking at its absolute finest and we are again reminded that this is far more than just two guys – this is truly a TEAM. You are doing far more for the advancement of the science of Economics than you can ever imagine.

Andy & Graham

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Modern Monetary Theory – 21st Century Applications : A Sutton / G. Mehl

Consumer Finance, Economics, Geoeconomics, Monetary Policy, My Two Cents, , , , , , , , , ,

To the people who have been waiting patiently for this paper, we apologize. Our own ‘deadline’ for this was a month or so ago, but life generally conspires to get in the way of even the best laid plans. While there is little in the way of good news contained in the work itself, there is an upside in that the world has still yet just barely dipped its toes into the dubious world of ‘Modern Monetary Theory’. Knapp should not be blamed for what modern policymakers do in his name – Knapp had a healthy suspicion regarding governments and their use of money and wrote as such.

Over 100 years later and having that same strong sense of skepticism and the benefit of history to go along with it, we present to you this paper. Some of these concepts are already in use today. With regards to those, hopefully the paper helps you understand they ‘why’ of the situation. However, MMT has not yet been fully rolled out in all of its statist grandeur and for that we must rejoice. MMT is the Capstone of the monetary enslavement process going on worldwide at the present time – our opinion. We hope to have some opportunities to discuss this paper publicly. If that doesn’t transpire, then we’ll come up with something because we know there are a lot of you out there who still care what happens – even if the masses do not.

Please click the link below to access the paper. It is in PDF format. You may also right-click the link and save the PDF to your computer.

Our Best – Andy Sutton and Graham Mehl

https://www.andysutton.com/blog/wp-content/uploads/2023/08/MMT.pdf

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Republished 2011 Report – “If You Have Paper Assets, there are 3 Things You MUST Consider”

Consumer Finance, Geoeconomics, Geopolitics, Portfolio Analysis, RIsk Management, , , , ,

The attached report was published by my firm in 2011. I was the sole author of the report. Why publish it again now? Because all of the main points covered in the report are still very relevant. In fact, they never ceased to be relevant in the first place. Just because the world hasn’t witnessed another Lehman style event doesn’t mean we’re in the clear.

If anything, we’re at least as close to another Lehman event – or similar trigger which causes major upheaval in the markets – as we were back in the summer of 2008. All the same ingredients are present – just in different proportions back then.

Therefore, I give you this report. I ask nothing for it – not even an email address. There are some ground rules, however. The information included is for educational purposes only and may NOT be taken in any way as investment advice. The report doesn’t contain specific securities anyway – it’s more about strategy. You should, however, consult with a licensed investment professional before embarking on ANY strategy. Secondly, if you are a writer and choose to use any part of this report or its contents in your own work, you must cite your source as “Andrew W. Sutton, MBA, former Chief Market Strategist for Sutton & Associates, LLC”. Thirdly, I believe this information to be very relevant – so please DO share it with everyone you know if you agree with me after reading it.

2011 Market Conditions ReportDownload

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US vs. China – A New Kind of Cold War – The Economist

Economics, Geoeconomics, Geopolitics, Trade War, , , ,

Andy’s Notes: Granted, The Economist is a very biased publication although to give credit where it’s due they don’t do much to hide their positions. Why post this article? Because, like it or not, we are at war on multiple fronts, many of which have nothing to do with bombs or bullets. Economic warfare, trade warfare, and even information warfare are what dot the landscape today – along with war of the variety Eisenhower warned us about all those years ago. This is not going away and that’s the point of making the post. Those who are treating this state of permanent warfare as a fad have been wrong for nearly two decades and will continue to be wrong. This is the new ‘normal’.

FIGHTING OVER trade is not the half of it. The United States and China are contesting every domain, from semiconductors to submarines and from blockbuster films to lunar exploration. The two superpowers used to seek a win-win world. Today winning seems to involve the other lot’s defeat—a collapse that permanently subordinates China to the American order; or a humbled America that retreats from the western Pacific. It is a new kind of cold war that could leave no winners at all.

As our special report in this week’s issue explains, superpower relations have soured. America complains that China is cheating its way to the top by stealing technology, and that by muscling into the South China Sea and bullying democracies like Canada and Sweden it is becoming a threat to global peace. China is caught between the dream of regaining its rightful place in Asia and the fear that tired, jealous America will block its rise because it cannot accept its own decline.Get our daily newsletter

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The potential for catastrophe looms. Under the Kaiser, Germany dragged the world into war; America and the Soviet Union flirted with nuclear Armageddon. Even if China and America stop short of conflict, the world will bear the cost as growth slows and problems are left to fester for lack of co-operation.

Both sides need to feel more secure, but also to learn to live together in a low-trust world. Nobody should think that achieving this will be easy or quick.

The temptation is to shut China out, as America successfully shut out the Soviet Union—not just Huawei, which supplies 5G telecoms kit and was this week blocked by a pair of orders, but almost all Chinese technology. Yet, with China, that risks bringing about the very ruin policymakers are seeking to avoid. Global supply chains can be made to bypass China, but only at huge cost. In nominal terms Soviet-American trade in the late 1980s was $2bn a year; trade between America and China is now $2bn a day. In crucial technologies such as chipmaking and 5G, it is hard to say where commerce ends and national security begins. The economies of America’s allies in Asia and Europe depend on trade with China. Only an unambiguous threat could persuade them to cut their links with it.

It would be just as unwise for America to sit back. No law of physics says that quantum computing, artificial intelligence and other technologies must be cracked by scientists who are free to vote. Even if dictatorships tend to be more brittle than democracies, President Xi Jinping has reasserted party control and begun to project Chinese power around the world. Partly because of this, one of the very few beliefs which unite Republicans and Democrats is that America must act against China. But how?

For a start America needs to stop undermining its own strengths and build on them instead. Given that migrants are vital to innovation, the Trump administration’s hurdles to legal immigration are self-defeating. So are its frequent denigration of any science that does not suit its agenda and its attempts to cut science funding (reversed by Congress, fortunately).

Another of those strengths lies in America’s alliances and the institutions and norms it set up after the second world war. Team Trump has rubbished norms instead of buttressing institutions and attacked the European Union and Japan over trade rather than working with them to press China to change. American hard power in Asia reassures its allies, but President Donald Trump tends to ignore how soft power cements alliances, too. Rather than cast doubt on the rule of law at home and bargain over the extradition of a Huawei executive from Canada, he should be pointing to the surveillance state China has erected against the Uighur minority in the western province of Xinjiang.

As well as focusing on its strengths, America needs to shore up its defences. This involves hard power as China arms itself, including in novel domains such as space and cyberspace. But it also means striking a balance between protecting intellectual property and sustaining the flow of ideas, people, capital and goods. When universities and Silicon Valley geeks scoff at national-security restrictions they are being naive or disingenuous. But when defence hawks over-zealously call for shutting out Chinese nationals and investment they forget that American innovation depends on a global network.

America and its allies have broad powers to assess who is buying what. However, the West knows too little about Chinese investors and joint-venture partners and their links to the state. Deeper thought about what industries count as sensitive should suppress the impulse to ban everything.

Dealing with China also means finding ways to create trust. Actions that America intends as defensive may appear to Chinese eyes as aggression that is designed to contain it. If China feels that it must fight back, a naval collision in the South China Sea could escalate. Or war might follow an invasion of Taiwan by an angry, hypernationalist China.

A stronger defence thus needs an agenda that fosters the habit of working together, as America and the USSR talked about arms-reduction while threatening mutually assured destruction. China and America do not have to agree for them to conclude it is in their interest to live within norms. There is no shortage of projects to work on together, including North Korea, rules for space and cyberwar and, if Mr Trump faced up to it, climate change.

Such an agenda demands statesmanship and vision. Just now these are in short supply. Mr Trump sneers at the global good, and his base is tired of America acting as the world’s policeman. China, meanwhile, has a president who wants to harness the dream of national greatness as a way to justify the Communist Party’s total control. He sits at the apex of a system that saw engagement by America’s former president, Barack Obama, as something to exploit. Future leaders may be more open to enlightened collaboration, but there is no guarantee.

Three decades after the fall of the Soviet Union, the unipolar moment is over. In China, America faces a vast rival that confidently aspires to be number one. Business ties and profits, which used to cement the relationship, have become one more matter to fight over. China and America desperately need to create rules to help manage the rapidly evolving era of superpower competition. Just now, both see rules as things to break.

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John Rubino on Chicago’s Fiscal Disaster

Consumer Finance, Economics, Municipal Debt, Pensions, , , , , ,

This is the second post in a week on Chicago’s epic financial train wreck. That’s a lot of attention and it probably won’t happen again, given the target-rich world we live in.

But jeeze, talk about not learning from past mistakes.

This latest chapter begins with the Chicago mayoral race and the two candidates’ stances on the Jussie Smollett controversy – one is on his side, the other on that of the Chicago PD.

That’s interesting but otherwise irrelevant.

The race is between two African American women, one gay and the other presumably not, one from deep in the local political machine, the other from outside it. So far so good. The tent is getting bigger, more categories of people can aspire to high office, go Chicago.

But this is also apparently irrelevant, because when it comes to saving the city from pension-driven financial collapse, well, here’s a snippet from today’s Wall Street Journal:

There’s little daylight between the two Democrats on policy. Both support higher taxes to pay for pensions, though they differ on which levies to increase. Ms. Lightfoot this week endorsed a value-added tax on legal and accounting services. She’s also proposed an increase in the city hotel tax—already among the highest in the nation—and a real-estate transfer tax. Ms. Preckwinkle is supporting Democratic Gov. J.B. Pritzker’s proposal for a graduated state income tax. Both oppose modifying worker pensions and want to impose a moratorium on charter schools.

Trailing in the polls, Ms. Preckwinkle and her supporters have resorted to weaponizing identity politics. Last weekend U.S. Rep. Bobby Rush smeared Ms. Lightfoot at a Preckwinkle rally as a killer of black people and champion of police because she has served on the Chicago Police Board and Police Accountability Task Force. “Everyone who votes for Lori, the blood of the next young black man or black woman who is killed by the police is on your hands,” Mr. Rush declared.

Ms. Preckwinkle declined to denounce the comment. She may believe fomenting racial discord will help her turn out the vote in the city’s heavily black South and West sides, where she performed well during the primary. Thus, Ms. Preckwinkle may not want to be seen supporting the police investigation of Mr. Smollett, who claims to be innocent and a victim of racial discrimination.

The Journal reporter concludes:

“Neither candidate appears likely to arrest the city’s spiral into insolvency. But stopping its descent into cynicism and racial grievance may be an equal imperative.”

Wrong, WSJ. The financial spiral is everything. Chicago is experiencing an already catastrophic rate of out-migration, as people who can afford to (a.k.a. the tax base) move to less rapacious places. And the two mayoral candidates both oppose scaling back union benefits while proposing much higher taxes and more stringent regulations, which will turbo-charge the descent into financial chaos.

And this, recall from the post that appeared here a few days ago, comes as both Chicago and its host state Illinois begin massive and sustained borrowing campaigns to cover existing shortfalls.

The conclusion? They can only behave this way in a financial market that assumes no matter how badly they mess up, national taxpayers will be coerced into saving them and their investors. Look up “moral hazard” in the dictionary and you might find a picture of the Illinois state seal.

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