Chinese rally not providing lift for Europe

Chinese rally provides little boost elsewhere

Surging stocks in China hasn’t provided much of a catalyst for similar moves elsewhere at the start of the week, with local investors seeing recent comments from various officials as evidence that the private sector will be protected, despite heightened risk from a trade war with the US.

President Xi added his name to the list of those vowing to support private firms over the weekend, giving investors reason to pile back in to battered Chinese stocks. The Shanghai Composite had fallen more than 30% from its peak this year prior to Friday’s comments, which has been the clearest sign so far that tariffs are biting.

The tariffs may not yet be taking their toll on the trade data but as long as the stock market continues to take a beating and growth stalls – as the data last week showed – Trump will be confident that the measures are effective and continue to threaten to double down until he wins concessions. There’s still a long way to go in this particular trade spat it would seem.

China equities lead the pack as US indices lag

Italian budget and Brexit enough of a headache for EU

Europe has its own problems, without having to worry about hostile trade policies of the world’s two largest economies, as Italy prepares to defy the EU on its budget and risk sanctions and the UK pushes negotiations to the wire over the backstop for the Northern Irish border.

Reports over the weekend suggest Italy is not willing to budge on its 2.4% deficit target and will instead conduct regular monitoring to ensure it doesn’t exceed it. This is unlikely to satisfy the European Commission but at the same time, it will be extremely reluctant to impose financial sanctions and fuel the already growing populist movement in the country that has already delivered a Eurosceptic coalition government.


We could hear from the EC as early as Tuesday, which will likely come as a request to amend and resubmit the 2019 budget at this stage.

Asia market update: US-China digging in for the long haul?

Falih comments don’t provide much comfort for oil traders

Comments from Saudi Energy Minister Falih this morning don’t appear to have provided much comfort to oil traders, despite his insistence that a repeat of a 1973-style oil embargo is not their intention and that production will likely go up to 11 million barrels per day in the near future.

Source - OPEC Monthly Oil Market Report

This comes as people become increasingly frustrated with the handling of the apparent Khashoggi murder, with Trump appearing very keen to accept any explanation that removes any link whatsoever to the Crown Prince. Trump has been desperate not to threaten the relationship the US has with Saudi Arabia or the arms deal that he signed with the Crown Prince not too long ago.

It would appear the route forward has already been laid and the explanation – no matter how unbelievable many find it – will be accepted by the White House and the whole saga will attempt to be brushed under the rug. This may prevent a series of sanctions and counter measures between the two countries that could disrupt oil supply and drive prices much higher and Trump may even believe he can use the situation to push the Saudi’s to increase output as sanctions against Iran kick in, or is that the cynic in me?

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Jordan Cancels Key Part Of Historic Treaty With Israel, Refusing To Renew Land Annexes

Jordan announced a bombshell on Sunday in relation to its peace treaty with Israel, stating it would not renew a 25-year lease of two tracts of territory along its border which is set for renewal on Thursday. 

Under the 1994 historic treaty brokered under Bill Clinton, Israel retained private land ownership and special travel rights in Baquora called Naharayim by the Israelis  in the northwestern part of the kingdom, and Ghumar or Zofar in Hebrew  in the south. Part of the agreement signed at the White House in which Jordan became only the second Arab country after Egypt to make peace with Israel was that Jordan would lease sovereign Jordanian land to Israel.

But after sizable protests last Friday in Amman involving marchers demanding that Jordan reclaim full sovereignty over the territory, King Abdullah announced the cancellation of this part of the treaty, saying an official message has been relayed to Israel on the matter

“Baqoura and Ghumar were at the top of our priorities,” King Abdullah tweeted via his official account. “Our decision is to terminate the Baquoura and Ghamar annexes from the peace treaty out of our keenness to take all decisions that would serve Jordan and Jordanians.”

Both sites, which Israel had leased and utilized primarily for agriculture and considers key strategic security points, are located on the Jordan-Israel border. Israel is expected to attempt to retain lease rights to the land as strategic locations essential to its border security. 

Israeli Prime Minister Benjamin Netanyahu reacted to the news at a memorial for the late Prime Minister Yitzhak Rabin on Sunday: “There is no doubt the agreement is an important asset,” he said. He called the peace deals with Jordan and Egypt “anchors of regional stability.”

King Abdullah has been under intense domestic pressure not to renew the lease deals — not only the face of the recent Amman protests, but as eighty-seven lawmakers in parliament have signed a petition demanding the restoration of Jordanian sovereignty over the lands. Relations between the two countries have been severely strained over the past years over an array of key issues from the status of Jerusalem and the Temple Mount to lack of progress in Israeli-Palestinian talks to deep uncertainty over Trump administration offers of new peace talks. 

Map via Haaretz

But the more immediate issue which has inflamed tensions on both sides of Israeli-Jordanian relations was the July 2017 shooting by an Israeli Embassy security guard in Amman of two Jordanian citizens. The shooting happened as one allegedly tried to attack the guard with a knife, while the other Jordanian was an innocent bystander who was shot in the ensuing chaos.

The whole event sparked a diplomatic crisis with Israel, which caused Israel to withdraw its embassy staff and ambassador. Israeli embassy operations resumed only after Israel paid a total of $5 million in compensation to the two families of the men killed. 

Currently, there are dozens of Israeli farmers and their families living on the strips of land Jordan has said it will repossess when the treaty fails to be renewed on Thursday. 

According to Haaretz:

“This announcement would mean a catastrophe for agriculture. It’ll affect about 20-30 farmers and about 1,000 dunams that will be transferred to the Jordanians. It’s a disaster for Zofar. As it is, the situation of agriculture is not great,” Eyal Blum, the head of the Central Arava Regional Council, where Zofar is located, said in response.

The Israeli official further called in “inconceivable” that the territories would be given up by Israel: “The agricultural areas in the Zofar enclave are very significant for the security of the region, the state, for livelihoods and agriculture in the central Arava. It is inconceivable that after so many years, the world order will change. I call upon the prime minister of Israel to solve this crisis immediately,” he said. 

Many of the protesters in Amman in recent weeks have actually demanded a complete Jordanian pullout of the historic 1994 treaty signed at the White House. After the recent US recognition of Jerusalem as the official capitol of Israel, it is likely a swell of domestic anger in Jordan will only fuel the worsening of relations. 

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It’s Not The Economy, Stupid; It’s WACC!

Authored by Adam Taggart via,

When it goes up, prices go down. It’s going up…

This is a revisitation of a report I wrote back in late 2016, predicting the imminent end of zero-bound interest rates and warning of the downward pressure that rising rates, mathematically, must place on today’s elevated asset prices.

Since the publication of that report, interest rates have indeed vaulted higher. Look at how the 3-month US Treasury yield has exploded since the start of 2017:

A Little Background

When I was fresh out of college in the mid-90s, I landed a job at Merrill Lynch. I was an “investment banking analyst”, which meant I had no life outside of the office and hardly ever slept. I pretty much spoke, thought, and dreamed in Excel during those years.

Much of my time there was spent building valuation models. These complicated spreadsheets were used to provide an air of quantitative validation to the answers the senior bankers otherwise pulled out of their derrieres to questions like: Is the market under- or over-valuing this company? Can we defend the acquisition price we’re recommending for this M&A deal? What should we price this IPO at?

Back then, Wall Street still (mostly) believed that fundamentals mattered. And one of the most widely-accepted methods for fundamentally valuing a company is the Discounted Cash Flow (or “DCF”) method. I built a *lot* of DCF models back in those days.

I promise not to get too wonky here, but in a nutshell, the DCF approach projects out the future cash flows a company is expected to generate given its growth prospects, profit margins, capital expenditures, etc. And because a dollar today is worth more than a dollar tomorrow, it discounts the further-out projected cash flows more than the nearer-in ones. Add everything up, and the total you get is your answer to what the fair market value of the company is.

The Weighted Average Cost Of Capital

The DCF approach sounds pretty straightforward. And it is. But it’s still much more of an art than a science. Your future cash flow stream is entirely dependent on the assumptions you bake into the model. The difference between a 5% or 15% assumed EBITDA compound annual growth rate becomes huge when projecing over 10+ years.

But one assumption in the model has far more impact on the final valuation number than any other. And it has nothing to do with the company’s projected operations.

Recall that the DCF approach projects out the expected future cash flows, and then discounts them (back to what’s called a “present value”). This raises a critically important question:

At what rate do you discount these future cash flows?

Well, to address this, you need to ask yourself a few questions. How will the company be financing itself? It will need to deliver an acceptable return to both its stockholders and bondholders. What kind of return can investors get out in the market for a similar investment? If they can get a better expected rate of return, or similar return with less risk, they’ll put their money elsewhere. 

Enter a calculation known as the Weighted Average Cost Of Capital (or “WACC”). Again, without getting too technical on you, the WACC looks at how a company is capitalized (what % with debt, what % with equity) and what blended annual rate of return the investors who contributed that capital expect. Once you’ve calculated the WACC, you put that number into your DCF model as the annual discount rate and — Voilà! — your model spits out the present value for the company.

It’s All About The “Risk Free” Rate

So, to recap:

  1. Companies (really, any asset with an income stream) are valued off of the present value of their discounted future cash flows

  2. This present value is highly dependent on the discount rate used

We just talked about how the WACC is commonly used as the discount rate (or, at least, its foundation). So how is the WACC calculated?

Here’s its formula (Don’t let it scare you; I’m not going to get all mathy on you here):

I want to point your attention to two important factors in this equation: the cost of equity (re) and the cost of debt (rd). The size of these variables has a big impact on the final number calculated for the WACC.

Re, the cost of equity, is made up of two components: the market’s current “risk free rate” + the “equity premium” that investors demand on top of that to hold stocks, which have more risk. Most folks use the current yield on the 10-year US Treasury bond as the risk free rate (which is now over 3%).

Similarly, rd, the cost of debt, has two components: the market “risk free rate” + the premium that the company’s bondholders are charging to hold debt riskier than a Treasury bond.

Note that the “risk free rate” is a critical component of both re and rd

So, as interest rates (i.e., 10-year Treasury yields) rise, the cost of equity goes up and the cost of debt goes up, too.

Why is that so important? Glad you asked…

The Future Of Rising Rates (And Falling Asset Prices)

Most reading this are aware that we’ve been living in a falling interest rate environment for most, if not all, of our adult lives. And since the 2008 financial crisis, interest rates were held down at essentially 0% (or even lower) by the world’s central banks:

While not the only reason, this decline in interest rates has been a huge driver behind the tremendous rise in valuations across assets like stocks, bonds and real estate over the past 30-odd years.

Which begs the question: What will happen to asset prices now that interest rates have started rising again?

Well, as I hope the above lesson on the Weighted Average Cost Of Capital hammered home, when the core interest rate rises, both the cost of equity and the cost of debt go up. Mathematically, this increases the WACC used as a discount factor, thereby reducing the present value of future cash flows.

Or in layman’s terms: When interest rates rise so does the WACC, which mathematically makes valuations fall.

In my original report back in December 2016, I penned the following:

Now, we only need to care about this if we’re worried that interest rates will start rising. Maybe the central banks have everything under control. Maybe we’re at a “permanent plateau” of sustainable zero-bound interest rates.

Well, we now know the answer: It’s time to worry.

Remember how the “risk free rate” used in calculating the WACC is often the 10-year Treasury bond yield? Since writing the above, the yield on the 10-year Treasury has nearly tripled, and has recently cracked above the much-feared 3% level, the milestone at which many analysts have predicted it would cause a major correction in the financial markets:

It has taken a while for the higher cost of capital to ripple through the system, but the repercussions are now becoming apparent.

Bonds have been in sell-off mode the longest, pretty much since since l gave warning at the end of 2016:

The housing market, which is sensitive to interest rates given the see-saw mathematical relationship between mortgage rates and real estate prices (i.e., higher rates = lower prices, all else remaining equal), has started cooling off after an eight year bonanza. As we’ve recently detailed in our report Trouble Ahead For The Housing Market, the most popular formerly red-hot markets are all showing signs of stalling/declining prices.

Nationwide, versus last year, mortgage applications have tanked 15% and home refinance loan applications have declined 34%. Mortgage rates are now the highest they’ve been since 2011 — but of course, houses are substantially pricier than they were then, too. Affordability is now a huge issue increasingly restricting the pool of potential buyers, as starkly presented in this CNBC video:

Meanwhile, the stocks of homebuilding companies have been selling off hard since the 10-year Treasury cracked above the psychologically-important 3% threshold:

Speaking of stocks, many pundits have been attributing much of last week’s market plunge to the bite today’s higher interest rates are starting to have across the economy:

The biggest change has been an acknowledgement that rising interest rates could cool a strong U.S. economy and also put a dent in corporate earnings. The combination of the Federal Reserve hiking short-term rates last month and another increase expected in December, coupled with a spike in the 10-year U.S. government bond to a seven-year high has made stocks less attractive compared with lower-risk bonds. 

Low rates and cheap money resulted in a flood of money into stocks in recent years, as people searched for bigger returns.

But now financial conditions are getting tighter.

“The wave of money that was moving into the market is now reversing,” says Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch. “As liquidity is withdrawn from the market, it amplifies market volatility” and price swings.

Higher borrowing costs also make it tougher for Americans to afford houses and buy cars on credit, analysts say.


Rising interest rates are quickly creating a political snafu. President Trump, who has enthusiastically claimed credit for the market rally that ensued after his election, is now lambasting new Federal Reserve Chairman Jerome Powell (whom Trump appointed) for departing from his predecessors’ path of quantitative easing (i.e., bringing interest rates to historic lows). 

Trump is now accusing Powell of having “gone crazy“, going as far to claim that “The Fed is my biggest threat“:

Trump Blames ‘Out of Control’ Fed for Rout But Says He Won’t Fire Powell (Bloomberg)

President Donald Trump said he won’t fire Federal Reserve Chairman Jerome Powell but blamed an “out of control” U.S. central bank for the worst stock market sell-off since February.

Trump also told reporters in the Oval Office Thursday morning that he knows monetary policy better than the Fed’s leaders and continued criticizing them for interest-rate increases.

“The Fed is out of control,” Trump said. “I think what they’re doing is wrong.”

The president added that the Fed’s interest rate increases are “not necessary in my opinion and I think I know about it better than they do.”

Is this a sign Trump will pressure the Fed to reverse path, possibly even replacing Powell? Or is this just deliberate theatre on his part to position Powell as the fall guy should a full-blown market correction be in the cards?

Either way, these higher rates were inevitable and eminently predictable by the administration. Back when I wrote the original version of this report in late 2016, Trump’s newly-selected Treasury Secretary Steve Mnuchin clearly declared the following:

“We’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.”


Indeed, like it or not, we’re now being forced to learn how to deal with higher interest rates.

Prepare Now

The conclusion from all the above? Get ready to live through the new era of rising interest rates. It’s going to be unfamiliar territory for all of us…

What will likely happen? The unrelenting upward march in asset prices we’ve enjoyed over the past several decades is over. People won’t be able to pay as much for stuff because the financing costs will be higher.

Falling asset prices should be in the cards. We’ve already been seeing that with bonds, and housing and stocks look like they are finally following suit. The higher rates go, the farther the fall should be.

The Fed will be in a tough spot as this unfolds. Right now, the Fed is in quite a box after years of habituating the market to ZIRP. Powell seems serious about continuing to raise rates as far as the financial markets will tolerate, provided he can do so without killing the economy — which is a big “if” at this point. There’s a lot of precedent for this; historically, the Fed’s interest rate has usually followed the market vs leading it. The Fed wants to gain some maneuvering room to drop rates at some point in the future if it feels it needs to.

At some point, if we risk entering a full deflationary rout, the world’s central planners may well indeed pull out an arsenal of tricks similar to what we saw following the 2008 crisis. We may eventually see liquidity-injection programs so extreme that hyperinflation becomes a valid concern. But that time is not now.

For now, we recommend the following:

  • Get out of debt. Especially variable rate, non-self-liquidating debt (credit cards being a great example). As we’ve said many times, in periods of deflation, debt can be a stone-cold killer.

  • Read the Financial Capital chapter from our book Prosper! (we’ve made it available to read for free here).

  • Read our primer on hedging.

  • Talk with our endorsed financial adviser (again, free of charge) if you’re having difficulty finding a good one to discuss this topic with. Be sure to have positioned your financial portfolio to take into account the risks to stocks/bonds/etc raised here.

And put today’s rising interest rates to work in your favor. If you have substantial cash savings, consider putting them in short-term T-bills using TreasuryDirect, which now yield between 2.14-2.45%. That’s over 30x what the average bank savings account is currently yielding. To learn more about this program, read our (free) report here.

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Tesla Employees Describe Musk As Polarizing, Wasteful Micromanager In New Expose

A new CNBC expose on Tesla, the product of conversations with 35 current and former employees, has revealed Elon Musk to be a polarizing and wasteful boss who micromanages too much.

The extended report gives yet another look into a personality and work environment that helps explain the exodus of senior executives that the company has suffered over its short lifespan; it also touches on some “creative” accounting allegedly taking place at the company, like defining extra work on production lines as “training” or “research and development”. 

Primarily, the expose notes that Musk often does not take the advice of his team and instead insists on what he envisions, regardless of whether or not it’s practical. An example of Musk’s chaotic method is his promise to crank out 500,000 electric vehicles a year by 2018. He made this promise without having the infrastructure in place. Instead, it was only afterwards that Musk tried to “automate everything”, according to the article. Despite being warned by his team that robots and automation were not practical to install some vehicle parts, like door seals, Musk insisted that it was possible and it was what he wanted.

As a result, the door seals became one of several automation failures that forced Musk to starkly rearrange his production facility this past summer and replace this automation with manual labor. Musk later admitted on camera with CBS that his vision for automation didn’t go off as he planned. Some of the 35 current and former employees interviewed by CNBC claim that this hard headedness, along with “ignoring methods pioneered by other automakers and industry veterans”, is how Musk has been regularly managing Tesla.

Musk’s style of promising first and figuring out a way to deliver later is the same style that has many analysts and investors worried that Tesla may not meet the Q3 profitability goals it set for itself at the beginning of the year. At the same time Tesla’s deliverables are mounting with the company carrying about $3 billion in accounts payable, and has a total of more than $1.5 billion in debt coming due by March of next year.

Other employees echoed stories about Musk’s wasteful style. For example, Tesla had at one point tried to set up a “vision system” which was supposed to help speed up end of the line quality inspections for the Model 3. It was designed to help take high resolution photos and send them to elsewhere in the plant so that humans could do a visual inspection of the vehicles coming off the line. But former employees told CNBC that the cameras didn’t work well: they couldn’t get a clear shot of some parts of the car and that certain key parts of quality inspections were getting overlooked. While these cameras are still used in other parts of the company’s factory now, they have been removed from this part of the line.

Then there’s the alleged $40 million that Tesla spent trying to set up a system of software controlled conveyors and slides to move parts to workers on the Model 3. The company dedicated 20 engineers to set up the system. It took them three months and ultimately never worked. Instead, employees now bring parts to the line using traditional methods, like pallet jacks and tow motors. Tesla disputes the $40 million figure in the CNBC article, despite Musk’s admission in the company’s Q2 earnings call that the original plan didn’t work.

“So we actually didn’t have time to order new equipment because it would have taken too long to arrive. So we took the conveyors that we discarded from the GA 3 line, which didn’t work. Or it was way too complex to actually move our products.” - Elon Musk, Q2

Tesla’s Fremont Factory/CNBC

Employees also noted that Musk rejects approaches taken by carmakers like Toyota, GM and Volkswagen. They even reject the acronyms and terminology used within the industry. Obviously, ignoring best practices in the industry, especially a capital intensive industry like automobile manufacturing, is going to make like life more difficult than it has to be. 

Musk also often addresses individual problems with drastic “solutions”. For instance, the Model X line in 2016 found itself unorganized, with boxes and parts stacking up and clutter on the line. When Musk heard about the drag it was creating on Model X production, he reportedly went down the line and implemented a solution of solving part shortages by moving a warehouse of pallets closer to the line and bringing in more parts than needed. According to CNBC, the solution didn’t work and only created even more clutter.

So instead, Musk’s employees went behind his back and implemented a method called kanban, that was pioneered by Toyota. With this method, workers put up workflow chart schedules and cards around a production line that helps them keep track of the items they need and the items that they have. Because the system had been pioneered by Toyota, Musk’s workers hid it from him. A half dozen current and former employees said that they were warned by supervisors that if Musk discovered they were using this method, they would be in danger of getting fired. Tesla disputes this, claiming that kanban methods are widely used in their factories and that no workers have ever been fired for using them.

Tesla’s Fremont Factory/CNBC

Musk has also encouraged Tesla to build its own software, when possible. The company’s internal WARP software system, used for purchasing orders, work orders and service centers, is “seemingly never complete” and has made it hard for employees to keep track of whether or not their projects are staying within budget. Factory workers told CNBC that they can’t see what’s been invoiced to the projects they’re responsible for and how much their team has left to spend. Instead, they wind up sending a litany of emails to accounts payable. Several employees said that accounts payable is often too busy to send a detailed report back.

Other workers said that the WARP system made it difficult to find detailed invoices. One person said that he discovered $1 million in charges invoiced to his team by unknown colleagues. He never found out why or who was responsible, and it put him over budget.

Buried deep in the CNBC expose, are additional comments from employees that should give cause for concern about Tesla’s accounting. Some employees told CNBC that when they would send mechanics to help out build “bursts” of new vehicles at Fremont, the mechanic’s time was billed to either “training” or “research and development”, instead of service or vehicle assembly.

Tesla’s Fremont Factory/CNBC

Often, the solution that Musk proposes isn’t as loved by his employees as it first seems. For instance, when trying to troubleshoot battery production at the company’s Gigafactory in Nevada, Musk worked to take out a number of “parts, production steps and specs” in assembling batteries. To illustrate that his solution was prudent, he attached a flattering message he got from an employee in an email to the rest of his employees. This email to Musk stated:

“I just wanted to express my gratitude for CEO Elon Musk coming down to the ‘front lines’ at Giga 1 this last week. I can not speak for everyone; but from where I work he came in and eliminated 80% of the problems we were having in about 20 minutes. It was amazing. He re-engineered process and final product on the spot and in ‘real-time.’ In completely cool fashion he actually ‘talked and listened’ to the workers on the line where the work is being done and the ‘tires hit the road’…That same night we blew away the record for the most production by a long shot! My coworkers and I were all giving high fives at the end of shift.”

But not everybody was excited about the changes that Musk made. Employees told CNBC that changes Musk made meant that vehicles and batteries being made were done so omitting parts, including fasteners that connect the battery to the body of a Model 3.

While under pressure from Musk to continue to improve production numbers, a manager at the Gigafactory told engineers to keep using parts that were red-tagged for scrap or further review, according to one current and two former employees. Employees that were responsible for quality control say that they repeatedly saw battery modules come through with cells that were raised too high or slightly out of place. 

When employees raised concerns about this and went to HR, at least one of them was asked to leave after pressing the matter.

These claims seem to corroborate the whistleblower suit currently in the midst of litigation filed by former Tesla employee Martin Tripp. 

Some industry experts give Musk credit for his ability to move on quickly from mistakes. They know the tent used for Model 3 production is a huge step back to the basics of automobile manufacturing and represents what Tesla should have been doing from the get go, had they adopted best practices in the industry instead of trying to chase down the gimmicky but inefficient and useless solutions put forth by Musk.

The only question now is whether or not Musk will continue his newly diverted path towards becoming a traditional auto manufacturer or if his stubborn “vision“ will make things for Tesla and its shareholders even worse. And, if the company winds up becoming a traditional auto manufacturer, will it be valued by the market as such?

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Saudi Crown Prince Spoke To Khashoggi By Phone Moments Before He Was Killed: Report

In the latest bombshell report involving the Khashoggi murder, Saudi Crown Prince Mohammed bin Salman reportedly spoke on the phone with journalist Jamal Khashoggi moments before he was murdered in the Saudi consulate in Istanbul. Turkish pro-government daily Yeni Safak disclosed the new alleged details of the case in a report on Sunday, contradicting claims by Saudi authorities that Prince Mohammed played no part in Khashoggi’s murder.

“Khashoggi was detained by the Saudi team inside the consulate building. Then Prince Mohammed contacted Khashoggi by phone and tried to convince him to return to Riyadh,” the report said.

“Khashoggi refused Prince Mohammed’s offer out of fear he would be arrested and killed if he returned. The assassination team then killed Khashoggi after the conversation ended,” it added.

While the report is so far unconfirmed, the New Arab reports that so far Turkish pro-government media have been receiving a steady stream of leaks many of which turned out to be accurate, including pictures of the hit team as they entered Turkey and reports of audio recordings of the murder said to be in the possession of Turkish authorities.

Meanwhile, the Saudi version of events has been changing significantly over the past two weeks with authorities conceded Saturday that Khashoggi, the Washington Post columnist and a Riyadh critic, was killed inside the kingdom’s Istanbul diplomatic compound following a “brawl”. The admission came after a fortnight of denials with the insistence that the journalist left the consulate alive, starting on October 5, when Crown Prince MBS told Bloomberg that Khashoggi was not inside the consulate and “we are ready to welcome the Turkish government to go and search our premises”.

On Saturday, the kingdom announced it had fired five top officials and arrested 18 others in an investigation into the killing - a move that has widely been viewed as an attempt to cover up the crown prince’s role in the murder.

The shifting Saudi narrative of the killing has been met with scepticism and condemnation from the international community, and has left the U.S. and other allies struggling for a response on Sunday. As Bloomberg reports, France demanded more information, Germany put arms sales to Riyadh on hold and the Trump administration stressed the vital importance of the kingdom and its economy to the U.S.

In Sunday radio and TV interviews, Dominic Raab, the U.K. politician in charge of negotiating Britain’s exit from the European Union, described the latest Saudi account as not credible; French Finance Minister Bruno Le Maire called for “the truth’’; and Germany’s Foreign Minister Heiko Maas said his government would approve no arms sales so long as the investigation was ongoing.

Earlier on Sunday, Saudi Foreign Minister Adel al-Jubeir acknowledged a cover-up attempt. The dramatic reversal, after Saudi officials had previously said the columnist left the building alive, has only complicated the issue for allies.

Saudi Arabia’s al-Jubeir told Fox News on Sunday that the journalist’s death was an “aberration.”

“There obviously was a tremendous mistake made and what compounded the mistake was the attempt to cover up,” he said, promising that “those responsible will be punished for it.” 

More importantly, he said that Prince Mohammed had no knowledge of the events, although if the Turkish report is confirmed, it will be yet another major flaw with the official narrative.

Several senior members of US President Donald Trump’s Republican Party said they believed Prince Mohammed was linked to the killing, and one called for a “collective” Western response if a link is proved. In an interview with The Washington Post, President Trump, too, said the Saudi narrative had been marked by “deception and lies.’’ Yet he also defended Crown Prince Mohammed bin Salman as a “strong person,’’ and said there was no proof of his involvement in Khashoggi’s death. Some members of Congress have questioned his willingness to exonerate the prince.

“Obviously there’s been deception and there’s been lies,” Trump said on the shifting accounts offered by Riyadh.

On Sunday, Turkish President Recep Tayyip Erdogan promised to disclose details about the case at a meeting of his AK Party’s parliamentary faction on Tuesday, Haberturk newspaper reported.

Meanwhile, as Western firms and high-ranked officials scramble to avoid any Saudi involvement, Russia is more than happy to step in and fill the power vacuum void left by the US. As a result, Russian businesses are flocking to attend the investment forum in Saudi Arabia, as Western counterparts pull out.

Russian President Vladimir Putin has had considerable success boosting Moscow’s influence in the Middle East at U.S. expense, by standing by regimes that fall afoul of the West, including in Syria and Iran. Last week Putin signed a strategic and partnership agreement with Egypt’s President Abdel-Fattah El-Sisi, backed by $25 billion in loans to build nuclear reactors. Until El-Sisi came to power, Egypt had been closely allied to the U.S.

Meanwhile, all eyes are fixed squarely on the Crown Prince whose position of power is looking increasingly perilous. Congressional leaders on Sunday dismissed the story proffered earlier by the Saudis, with Republican Senators Lindsey Graham of South Carolina and Bob Corker of Tennessee saying they believed the crown prince was likely involved in Khashoggi’s death.

Lawmakers said they believe the U.S. must impose sanctions on Saudi Arabia or take other action if the crown prince is shown to have been involved. Speaking on NBC’s “Meet the Press,” Senator Dick Durbin of Illinois, the chamber’s No. 2 Democrat, said the Saudi ambassador to the U.S. should be formally expelled until a third-party investigation is done. He said the U.S. should call on its allies to do the same.

“Unless the Saudi kingdom understands that civilized countries around the world are going to reject this conduct and make sure that they pay a price for it, they’ll continue doing it,”’ Durbin said.

The obvious question is what happens and how the Saudi royal family will respond if it is pushed too far, and whether the worst case scenario, a sharp cut in oil exports, could be on the table if MBS feels like he has little to lose from escalating the situation beyond a point of no return.

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Eric Peters: “If US Stocks Finally Crack, Most People Will Conclude We’re Headed Into Another Depression”

Submitted by Eric Peters of One River Asset Management


“I was asked to lay out the case for the US being mid-cycle,” said my favorite strategist. “Residential housing is 4% of GDP now, that’s consistent with past recessionary levels. So perhaps it jumps to 8%,” he continued.

“Equipment and machinery spending is just 6% of GDP.” Pretty consistent with previous recessions. “So maybe both expand, and incomes rise.” Which leads to higher inflation and shrinking profit margins. “Then perhaps the Fed tolerates rising prices which means that nominal growth remains strong even if real growth rates slow,” he postulated.

“So in that case, workers do better, and companies are worse off on a relative basis. But in that 7% nominal GDP world, inflation might mask the pain well enough to allow stocks to sail through,” continued my favorite strategist.

“You think about that hypothetical and it’s possible,” he said. “But then you listen to what the companies are saying, and you walk away with the sense that there’s just no way.” Homebuilding stocks are -30% from the January highs.

“If you just look across the spectrum, interest-sensitive equities are screaming late-cycle.”

“Making the mid-cycle case raised my conviction that we’re late-cycle,” he said. “America’s fiscal boost masked the natural cycle dynamics.” The US is the outlier. In dollar terms, of the major markets, only American stocks are higher on the year.

So if US stocks catch up and crash from here, what happens next?” he asked rhetorically. “I think most people will conclude we’re headed into another depression. But I think there will be great things to buy. Probably in the places that are already crashing and burning.”


“Hidden dollar shorts throughout the global banking system were overwhelming and ill understood in 2008,” said the strategist. “So when the dollar began to appreciate, you hit stop loss after stop loss.” Mexico’s peso plunged from 11 to 14 versus the dollar in no time.

“You thought, could this happen? And it could, anything can.” That’s how markets work. “It was difficult to understand the magnitude of the dollar shorts, but they were interwoven into almost every conceivable product. Everyone had the position. Just like the short-volatility trade today.”


“What song shall I play?” wondered Draghi, heart racing faster than in that moment before his first dose of QE. “Dancing Queen of course!” shrieked Mario, a closet ABBA fan. On went the headphones, out came the bone saw.

There on the table lay Matteo Salvini, European dissident, Italian patriot, strapped tight, bug eyed, gagged. “Let’s start with your fingers,” said Draghi, unable to hear his own voice, “Just scream when I’ve cut enough to bring down your deficit.” Salvini nodded frantically, panting, convulsing. Moody’s downgraded his nation’s debt late Friday to one notch above junk, outlook stable.

“Is That All There Is,” whispered Trump to himself, naming his all-time favorite song, Peggy Lee’s nihilistic 1969 hit, an exploration of life’s disillusionments, meaninglessness. On went the headphones, out came the bone saw. Before him sat Xi Jinping, China’s newly-anointed ruler for life, American rival, adversary, tightly bound, pouting, naturally. “Let’s make this really hurt,” said Trump, Peggy Lee blaring in his Bose. He rolled in a Bloomberg, images of the Shanghai Composite plunging to new 4yr lows, the renminbi teetering near the key 7.00 level, the ticker declaring: America Exits 144yr Old Postal Treaty. “Leave me my middle fingers,” taunted Xi.

Theresa May scrambled for a fitting song, Junker did too, neither yet sure who will wield the bone saw in the gruesome finale.

And of course, Dr. Salah al-Tubaigy, autopsy expert, advised Mohammed bin Salman’s security officers to crank their favorite songs. On went their headphones. They dismembered Jamal Khashoggi, Saudi Arabian dissident, patriot, critic, writer. As the rest of the world listened intently, for even the smallest sound. To understand whether, when forced to choose in broad daylight between money and morality, today’s western leaders turn up the volume and pull out the bone saws.

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Migrant “Attack Caravan” Regroups; 5,000 Push North As Mystery Men Hand Out Cash

A Central American migrant caravan which was temporarily delayed by the Mexican government has regrouped, resuming their advance towards the US border on Sunday, according to AP

The number of migrants swelled overnight to approximately 5,000 as the mile-long caravan set out toward the Mexican town of Tapachula. Several hundred asylum seekers have reportedly applied for refugee status in Mexico, while an estimated 1,500 remain on the Guatemalan side of the Suchiate River in the hopes of entering Mexico legally. 

It was not immediately clear where the additional travelers had materialized from since about 2,000 had been gathered on the Mexican side Saturday night. They seemed likely to be people who had been waiting in the Guatemalan town of Tecun Uman and who decided to cross during the night.

They marched on through Mexico like a ragtag army of the poor, shouting triumphantly slogans like “Si se pudo!” or “Yes, we could!

As they passed through Mexican villages on the outskirts of Ciudad Hidalgo, they drew applause, cheers and donations of food and clothing from Mexicans.

Maria Teresa Orellana, a resident of the neighborhood of Lorenzo handed out free sandals to the migrants as they passed. “It’s solidarity,” she said. “They’re our brothers.” -AP

The group has been referred to as an “attack caravan” by former GOP House Speaker Newt Gingrich, who cited a figure by Fox News host Laura Ingraham that the caravan would cost around $7,000 per person, or $28 million total when the size of the group was estimated at 4,000 people. At 5,000 strong, the caravan would cost $35 million. 

Meanwhile, two men in white t-shirts were seen handing out what appears to be cash to the migrants last week, fueling speculation that the second such group this year has been professionally organized and funded. 

The migrant caravan regrouped after Mexican authorities refused mass entry via a bridge over the Suchiate River - instead allowing small groups of migrants to enter for asylum processing, while giving 45-day visitor permits to others. That said, many of the migrants found ways to circumvent the Mexican government despite the deployment of hundreds of riot police upon President Trump’s request

But many became impatient and circumventing the border gate, crossing the river on rafts, by swimming or by wading in full view of the hundreds of Mexican police manning the blockade on the bridge. Some paid locals the equivalent of $1.25 to ferry them across the muddy waters. They were not detained on reaching the Mexican bank.

Sairy Bueso, a 24-year old Honduran mother of two, was another migrant who abandoned the bridge and crossed into Mexico via the river. She clutched her 2-year-old daughter Dayani, who had recently had a heart operation, as she got off a raft.

“The girl suffered greatly because of all the people crowded” on the bridge, Bueso said. “There are risks that we must take for the good of our children.” -AP

The Mexican Interior Department reported the receipt of 640 refugee requests by Hondurans at the border. 

Federal police monitored the Caravan on Sunday via helicopter, while approximately 500 officers briefly shadowed the group on the highway - however according to AP, officers say taht their instructions were to allow the caravan to continue while maintaining traffic. 

Trump isn’t having it

President Trump reiterated his commitment to deploying the US military if the caravan isn’t stopped. At a Friday rally in Scottsdale, Arizona, he said “But as of this moment, I thank Mexico. If that doesn’t work out, we’re calling up the military — not the Guard.”

Trump reiterated his statements to reporters: 

On Sunday, Trump tweeted: “Full efforts are being made to stop the onslaught of illegal aliens from crossing our Souther Border. People have to apply for asylum in Mexico first, and if they fail to do that, the U.S. will turn them away. The courts are asking the U.S. to do things that are not doable!” 

On Saturday, State Department spokeswoman Heather Hauert said: “The Mexican Government is fully engaged in finding a solution that encourages safe, secure, and orderly migration, adding: “both the United States and Mexico continue to work with Central American governments to address the economic, security, and governance drivers of illegal immigration.”

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Big Tech Snuffing-Out Free Speech & Google’s Poisonous ‘Dragonfly’

Authored by  Judith Bergman via The Gatestone Institute,

The internet, especially social media, has become one of the primary places for people to exchange viewpoints and ideas. Social media is where a considerable part of the current national conversation takes place.

Arguably, big tech companies, such as Google, Twitter, Facebook and YouTube, therefore carry a responsibility to ensure that their platforms are equally accessible to all voices in that national conversation. As private commercial entities, the social media giants are not prima facie legally bound by the First Amendment to the US Constitution, and are free to set their own standards and conditions for the use of their platforms. Ideally, those standards should be applied equally to all users, regardless of political or other persuasion. If, however, these companies choose what to publish and what not to publish, they should be subject to the same licensing and requirements as media organizations.

The current media giants’ favoring one kind of political speech over another — progressive over conservative — and even shutting down political speech that does not conform to the views of the directors, certainly skews the national political conversation in a lopsided way that conflicts with basic principles of democratic freedom of speech and what presumably should be the obligations of virtual monopolies.

The question of whether such discrimination against conservative viewpoints constitutes a breach of law is currently the subject of a number of lawsuits. In October 2017, PragerU, a conservative educational website, filed a lawsuit against YouTube and its parent company, Google, for “intentional” censorship of conservative speakers, saying that they were “engaging in an arbitrary and capricious use of their ‘restricted mode’ and ‘demonetization’ to restrict non-left political thought.”

PragerU claimed that “Google and YouTube’s use of restricted mode filtering to silence PragerU violates its fundamental First Amendment rights under both the California and United States Constitutions,” YouTube, for instance, restricted a video by a pro-Israel Muslim activist, discussing how best to resist hatred and anti-Semitism, as “hate speech”. The US District Court Judge in the case, Lucy Koh, however, dismissed PragerU’s claims because Google, as a private company, is not subject to the First Amendment. “Defendants are private entities who created their own video-sharing social media website and make decisions about whether and how to regulate content that has been uploaded on that website,” Koh wrote. PragerU has appealed the decision.

In August, Freedom Watch filed a $1 billion class-action lawsuit against Apple, Facebook, Google, and Twitter, claiming that they act in concert to suppress conservative speech online. Freedom Watch claims, among other things, that the four media giants have violated the First Amendment to the Constitution and that they have engaged “in a conspiracy to intentionally and willfully suppress politically conservative content.”

PragerU and Freedom Watch are not the only conservatives to have experienced suppression of their voices on social media. In April, the conservative Media Research Center released a report detailing the suppression of conservative opinions on social media platforms.

The 50-page report, “Censored! How Online Media Companies Are Suppressing Conservative Speech,” which looked at how conservative political speech fared on Google, Facebook, Twitter, and YouTube, found that the tech companies stifle conservative speech and that in some instances, staffers have admitted that doing so was intentional. The report found that Google showed a “tendency toward left-wing bias in its search results”, and that Twitter (by admission of its own employees) had “shadow-banned” some conservative users. (“Shadow banning” means that their content did not appear to other users, but the account owners themselves had not been notified of this “banning” of their content).

The apparent leftist bias, however, not only shows itself in the suppression of conservative speech on social media giants’ websites. Censorship and selective presentation of speech has also led to unfortunate policy decisions by some of the big tech companies. Google, for example, has decided it will not renew a contract with the Pentagon for artificial intelligence work when it expires next year, because Google employees were upset that the technology they were working on might be used for lethal military purposes.

Yet, according to leaked documents, Google is planning to launch a censoredversion of its search engine in China, code-named “Dragonfly,” which will aid and abet a totalitarian “Big Brother is watching you” horror state. China, according to the Economist, is planning to become “the world’s first digital totalitarian state.” The Chinese government is in the process of introducing a “social credit” system by which to score its citizens, based on their behavior. Behavior sanctioned by the government increases the score; behavior of which the government disapproves decreases the score. Jaywalking, for example, would decrease the score. China is reportedly installing 626 million surveillance cameras throughout the country for the purpose of feeding the social credit system with information.

According to Gordon G. Chang, Chinese officials are using the social credit system for determining everything from being able to take a plane or a train, to buying property or sending your children to a private school. Officials prevented a journalist, Liu Hu, from taking a flight because he had a low score. According to China’s state-owned Global Times, as of the end of April 2018, authorities had blocked individuals from taking 11.14 million flights and 4.25 million high-speed rail trips. “If we don’t increase the cost of being discredited, we are encouraging discredited people to keep at it,” said the former deputy director of the development research center of the State Council, Hou Yunchun. He added that an improved social credit system was needed so that “discredited people become bankrupt”.

According to a legal expert at the Chinese Academy of Social Sciences in Beijing, Zhi Zhenfeng:

“How the person is restricted in terms of public services or business opportunities should be in accordance with how and to what extent he or she lost his credibility…. Discredited people deserve legal consequences. This is definitely a step in the right direction to building a society with credibility.”

The goal, straightforwardly, is to control citizen behavior by aggregating data from various sources such as cameras, identification checks, and “Wi-Fi sniffers” so that Chinese citizens will end up being controlled completely. As Chinese officials have reportedly put it, the purpose of the score card system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.”

It is, in other words, an excellent deliberate tool to suppress the human rights of the Chinese people.

Although Google has refused to comment on the concerns about Dragonfly, the leaked documents indicate that this censored version of Google’s search engine will help the Chinese government do just that by blacklisting websites and search terms about human rights, democracy, religion, and peaceful protest. It will also, reportedly, link users’ searches to their personal phone numbers, thereby making it possible for the Chinese government to detain or arrest people who search for information that the Chinese government wishes to censor.

“Linking searches to a phone number would make it much harder for people to avoid the kind of overreaching government surveillance that is pervasive in China,” said Cynthia Wong, senior internet researcher with Human Rights Watch. Fourteen organizations, including Amnesty International, Human Rights Watch, Reporters Without Borders, Access Now, the Committee to Protect Journalists, the Electronic Frontier Foundation, the Center for Democracy and Technology, PEN International, and Human Rights in China, have demanded that Google stop its plans for a censored search engine. They say that such cooperation would represent “an alarming capitulation by Google on human rights” and could result in the company “directly contributing to, or [becoming] complicit in, human rights violations.”

In a recent speech, US Vice President Mike Pence also asked Google to end Dragonfly: it “will strengthen Communist Party censorship and compromise the privacy of Chinese customers,” he said.

So, while Google claims it has moral qualms about cooperating with the US government, the company evidently has no moral issues when it comes to cooperating with Communist China in censoring and spying on its billion citizens with a view to rewarding or punishing them via opportunities in real life. Google employees, according to the Intercept, have circulated a letter stating that the censored search engine raises “urgent moral and ethical issues,” and saying that Google executives need to “disclose more about the company’s work in China, which they say is shrouded in too much secrecy, according to three sources with knowledge of the matter”.

Google is apparently all too eager to work with China on micromanaging its citizens, and there is plenty to work on, according to a recent Amnesty International report :

“China has intensified its campaign of mass internment, intrusive surveillance, political indoctrination and forced cultural assimilation against the region’s Uighurs, Kazakhs and other predominantly Muslim ethnic groups.”

Up to 1 million people have been detained in “China’s mass re-education drive,” many of them tortured, according to the report.

Eight years ago, Google co-founder Sergey Brin — who was born in the highly repressive Soviet Union — at least had the decency to hesitate on (if not turn down) doing business in China if it involved censorship. “[W]e have decided we are no longer willing to continue censoring our results,” Google had announced two days before “company spokesman Scott Rubin started singing a different tune.”

Perhaps totalitarian Communist repression is of no consequence to Google, so long as it gets still more market share?

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Gold Shorts Suffer Biggest Squeeze Since 1999 As Specs Abandon VIX-Selling Spree

Until the last couple of weeks, net speculative positioning in financial markets was all on one side of the boat with speculators are woefully unprepared for a major risk-off event, suggesting complacency had reached epidemic levels as equities broke out to new highs.

Then the calendar rolled over to October and everything changed…

In the last two weeks, the aggregate net speculative positioning in futures in what are considered traditional risk-off assets - gold, 10-year Treasuries, and the VIX - surged by the most since Brexit…

As speculative shorts in VIX, Treasuries, and precious metals were pummeled last week.

As VIX spiked from under 12 to almost 29…

VIX speculators net positioning suffered a dramatic short-squeeze as once again picking up pennies in front of that Minsky-steamroller, snapped a few fingers…

This is the second biggest short-squeeze in the vol complex in history (and this time no ETF-driven collapse drove it)…

And as leveraged speculators abandon their ‘no-brainer’ short-vol trades, Treasury speculators continue to slowly but surely abandon their record short bond positions

And given the moves in gold and copper recently, bond yields are set to push notably lower squeezing those record shorts even more…

Finally, as gold surged from under $1190 to over $1230…

Gold’s net speculative positioning flipped from short to long for the first time in two months..

The last time gold speculators went from that short with a huge cover was March 1999…

And all this is happening as Speculators pile long into the USD, but the dollar won’t rally…

Additionally, Russia added the most gold to its reserves in two years in the last month

And as Russia piles into precious metals, it is dumping Treasuries…

Finally, we note that as reality starts to chip away at complacency, China has suddenly lost control of its currency…

As we noted previously, something broke (and we’re just now finding out the consequences)

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The Coming Inflation Threat: The Worst Of Both Worlds

Authored by Charles Hugh Smith via,

Expect falling asset inflation, but rising cost inflation…

Inflation is a funny thing: we feel it virtually every day, but we’re told it doesn’t exist—the official inflation rate is around 2.5% over the past few years, a little higher when energy prices are going up and a little lower when energy prices are going down.

Historically, 2.5% is about as low as inflation gets in a mass-consumption economy like the U.S. that depends on the constant expansion of credit.

But even 2.5% annually can add up if wages are stagnant. According to the Bureau of Labor Statistics (BLS), what cost $1 in January 2009 now costs $1.19.

That 19% decline in the purchasing power of dollars is tolerable as long as wages go up by 20% over the same period, but for many American households, wages haven’t kept pace with official inflation. 

While the nominal hourly wages keep rising, adjusted for inflation, wages have stagnated for decades.  Here’s a chart based on BLS data that shows median weekly earnings adjusted for official inflation rose $6 a week after five years of decline:

But stagnant wages are only part of the inflation picture: official inflation under-represents real-world inflation on several counts.

First, the weightings of the components in the Consumer Price Index (CPI) are suspect.  Many commentators have explored this issue, but the main point is the severe underweighting of expenses such as healthcare, which is only 8.67% of the CPI but over 18% of the U.S. Gross Domestic Product (GDP).

Second, the “big ticket” components—rent/housing, healthcare and higher education—are under-reported for those who have to pay the unsubsidized cost.  The CPI reflects minor cost decreases in tradable commodity goods such as TVs and clothing that are small parts of the family budget, while minimizing enormous expenses such as college tuition and healthcare that can cost $20,000 annually or more.

Third, by lumping the entire nation into one basket, the CPI ignores the reality that the inflation rate experienced by the protected class whose big-ticket expenses are subsidized by the government or employers is far lower than the rate experienced by the unprotected class that pays full freight. While the protected class complains about healthcare visit co-pays rising from $20 to $40, the unprotected class is getting hit with monthly increases of hundreds of dollars or co-pays in the thousands of dollars.

Fourth, there are significant regional differences which the CPI doesn’t reflect: inflation in coastal areas is running white-hot compared to lower-cost regions.

The Chapwood Index attempts to measure apples-to-apples real-world expenses, and as you can see, the Index estimates real inflation is above 10% for many American households.

It’s hard to believe 2.5% inflation includes the soaring costs of goods such as insulin:

Or student loan payments:

Then there’s the mystery of how the Federal Reserve can create trillions of dollars of new currency and governments and banks can issue trillions of dollars in newly borrowed money—private, corporate and sovereign—can flood into the economy without generating higher official inflation.

Here’s a chart of all credit outstanding in the U.S.: $70 trillion, up $40 trillion since 2000 and up $15 trillion since 2009:

The answer of course is most of that new money has flowed into assets, pushing the valuations of assets such as stocks, high-yield (junk) bonds and real estate to the moon.

This vast inflation of asset prices has pushed household net worth to the moon, too, but…

..the problem is, the wealth isn’t distributed very evenly. The gains have flowed mostly to the top .1% and to a lesser degree to the top 5%:

Unsurprisingly, this asset inflation has greatly enriched those who were already rich, i.e. the owners of the assets which have soared in value.

The fly in the ointment is the real economy hasn’t expanded at the same rate as debt; the ratio of debt to GDP now far exceeds the extremes of the Roaring 20s that set up the collapse of both debt and the asset prices that depended on new debt to fuel demand for overpriced assets.

The enormous expansion of debt and the resulting asset inflation are global phenomena:

Three secular trends have driven asset inflation and moderate deflation of commoditized goods and services:

  1. Globalization, a.k.a. global capital moving around the globe, reaping the gains of labor, credit, environmental and tax arbitrage: move from high-cost, high-tax, environmentally regulated locales to low-tax, low-labor costs and environmentally lax locales and skim all the profits.

  2. Declining interest rates.  Increasing production overseas and stock buybacks have been encouraged by central banks’ maintaining super-low interest rates and easy lending liquidity. Both have pushed corporate profits much higher.

  3. Financialization, i.e. low interest rates, ample liquidity, expanding leverage, the commoditization of previously low-risk financial instruments such as home mortgages, expansion of credit-default swaps and other derivatives and the generalized belief that risk can be eliminated by counterparty contracts.

All three of these secular trends are reversing: globalization is under assault on multiple fronts, as people are starting to question globalization’s role in increasing inequality, environment damage and the hollowing out of domestic economies and the middle class.

A decade of financial repression to keep interest rates near zero is slowly being “normalized” by central banks, enabling rates to rise.  As the overhang of bad debt and the rising risk of defaults start being priced into the bond and debt markets, the pressure on rates will only increase as higher risks demand higher compensation via higher yields.

Furthermore, all the trillions in existing debt will be rolled over at much higher rates going forward, squeezing the revenues of all borrowers, governments, corporations and households alike.

Financialization is following an S-Curve of diminishing returns: all the speculative games that have boosted assets to the moon are running out of steam or faltering.

This is visible in the divergence of GDP (the real-world economy) and household net worth (speculative debt-fueled asset bubbles) mentioned above:

So what happens to inflation as the trends that kept real-world inflation officially low and boosted asset inflation to unprecedented heights all reverse?

The obvious conclusion is asset valuations re-correlate to the trend line of the real-world economy, which is another way saying they drop a lot in a global repricing of risk and the impact of secularly rising interest rates.

That will put the kibosh on the much-vaunted wealth effect that supposedly boosted the animal spirits of borrowing and spending (and speculating) that has fueled the “recovery” of the past decade.

As the global economy spirals into recession, central banks will panic (as usual) and attempt to spark flagging consumption by lowering interest rates and governments will increase deficit spending (i.e. government borrowing) to boost household incomes and corporate revenues.

But unlike last time, these policies may not reflate asset bubbles that have popped, or suppress real-world inflation. Rather, they may fail to boost asset inflation and succeed in boosting real-world inflation while wages continue stagnating and household net worth craters.

Simply put, the world has changed, and the unintended consequences of the past decade’s policies cannot be stuffed back in the bottle. The easy years of watching index funds and other assets rise like clockwork because central banks willed it are over.

In Part 2: Get Ready For “QE For The People” we detail the likeliest next steps in this story in which, under the guise of “progressive fairness”, the next phase of money printing will transmit free money directly into the populace’s pockets.

What’s not to like about that? Well, for starters, it won’t create any true prosperity, it will send cost inflation skyrocketing, and it will further subjugate the populace to the cartels running our economy and political system. But the masses will cheer for it anyways. So get ready.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access

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