Please Read: I’ve highlighted the significant bits.
kong and rickards
Jim Rickards – Markets Are Experiencing Cognitive Dissonance
Cognitive dissonance is a psychological term to describe a situation where perception and reality are out of sync.
It’s similar to what most people refer to as “denial.” The patient sees things one way, but the reality is different. Of course, it’s just a matter of time before reality prevails and the patient is jolted back to reality. This process can be fast or slow, easy or painful, but the important thing to bear in mind is reality always wins.
Something like cognitive dissonance is going on in markets right now. Markets have been temporarily euphoric over Trump’s tax, regulatory and spending policies. Those policies are important to business and credit cycles and economic growth.
The perception is that happy days are here again. The new Trump administration is expected to pour trillions of dollars of stimulus spending and tax cuts into the economy. Immediately after the Nov. 8 election, investors took a quick look at Trump’s policies and decided they liked what they saw.
Trump wants lower taxes, less regulation and higher infrastructure spending. Corporate profits and consumer spending benefit from lower taxes. Banks and pharmaceutical companies benefit from less regulation. Construction firms and defense contractors benefit from infrastructure spending. There seemed to be something for everyone, and the stock market took off like a Roman candle.
And indeed, the major stock indexes hit one record closing after another. The Dow topped 20,000 this week before pulling back. The dollar has been trading near a 14-year high, although it’s slipped in recent days. Gold was moving mostly sideways until it broke out again over the past few days.
Bank stocks went vertical in expectations of wider net interest margins (from Fed rate hikes) and less regulation (from Dodd-Frank reform). Happy days, indeed.
Reality is another matter. I’ve been warning my readers lately that the Trump trade is levitating in thin air and is ready for a fall. Now that reality could be beginning to sink in.
It’s far from clear how much of the Trump economic agenda will see the light of day. Congress wants to offset tax cuts in one area with tax increases in another so they are “revenue neutral.” That takes away the stimulus. Less regulation for banks won’t help the economy if bankers lead us into another financial meltdown like 2008.
Infrastructure spending will increase the debt-to-GDP ratio past the already high level of 105%, putting the U.S. closer to a sovereign debt crisis like Greece. As I wrote Tuesday, many believe a 60% debt-to-GDP ratio retards growth. That’s the standard the ECB uses for members of the Eurozone. Scholars Ken Rogoff and Carmen Reinhart put the figure at 90%.
Again, the U.S. debt-to-GDP ratio is currently at 105%, as stated, and heading higher. Under any standard, the U.S. is at the point where more debt produces less growth rather than more. This is one more reason why the Trump infrastructure spending plan will not produce the hoped for growth. And if infrastructure is funded privately, you’ll need tools and user fees to pay the bondholders, which is just another form of tax increase.
There’s almost no way Trump’s policies can supply the stimulus the market is pricing in. The Dow Jones index peaked on Jan. 26, 2017, one day after cracking the mythical 20,000 mark. It’s now trading around 19,900. The downhill trend may continue and get steeper soon.
Productivity has stalled out in recent months. Economists are not sure why. It could be due to lack of investment by business, or that workers are not being trained in useful skills, or that everyone is spending too much time on social media. Whatever the cause, productivity is flat.
Fourth-quarter GDP came in at 1.9%, below expectations — the final chapter on the worst year of U.S. growth since 2011 when the economy was still healing from the global financial crisis. The strong dollar is a major headwind to growth, along with flat labor force participation and weak productivity growth.
Growth in a major economy is simply the sum of increases in the labor force plus increases in productivity. Think about it. How many people are working and what is the output per worker? That’s it; that’s all there is. The reality is that the workforce is not growing.
Labor force participation is near 40-year lows and is expected to decline further for demographic reasons. Birthrates have never been this low since the Great Depression. The U.S. used to get a labor force lift from immigration, but that might dry up because of Trump’s policies. We’ll have to wait and see.
A flat labor force plus flat productivity equals a flat economy, or almost zero nominal growth. That’s reality.
kong and rickards
How will this situation be resolved?
Either growth will rebound based on “animal spirits” and the Trump stimulus working better than expected or markets will collapse once they realize the growth is not coming. By “collapse,” I mean a violent stock market correction, a falling dollar and major rallies in bonds and gold. We expect the latter.
Financial crises are not mainly about the business cycle. They’re about investor psychology, sudden shocks and the instability of the financial system. Right now investors are skittish, numerous shocks are waiting to happen and the system is highly unstable due to overleverage and nontransparency.
Despite Trump’s best efforts and positive policies, a collapse could happen any day unless radical steps are taken to prevent it — such as breaking up big banks and banning derivatives. I’ve been warning about this for a while, but now mainstream economists see the danger too. Nobel Prize winner Robert Shiller, for example, sees a stock market crash coming that could be worse than 1929 or 2000. I hope he’s wrong.
The problem with a financial panic is that panicked investors don’t care if the president is a Democrat or a Republican; they just want their money back. The same dynamic applies to natural disasters like tsunamis and earthquakes.
Once the disaster starts, the dynamics have a life of their own and don’t care if the victims are liberals or conservatives. Everyone gets hurt just the same. I’m not hoping for it, but this is a lesson Trump may learn the hard way.
Above I said collapse means a violent stock market correction, a falling dollar and major rallies in bonds and gold. I expect the latter. The long-term trends favor gold if U.S. growth continues disappoint.
The strong dollar story can’t last, so it won’t. The Trump administration has clearly signaled that the day of the strong dollar is over. When you see a coordinated attack on the dollar from the White House, the Treasury and the Fed, you can bet the dollar will weaken. That means a higher dollar price for gold.
The dollar may get one last boost from a Fed rate hike in March, but after that, even the Fed will acknowledge that they got it wrong again and start another easing cycle with happy talk and forward guidance.
For now, investors should not stand in front of a moving train. Keep cash ready and be prepared to move into gold, bonds and the euro. In fact, it’s not too soon to leg into those positions now.
Instead of watching the tape or short-term trends, my advice is to stay focused on the long-term trends. That’s how you’ll make the most money and preserve wealth in adversity.
I laugh out loud this morning….as Im sure you´ve seen my last two posts – encouraging you to get short USD.
Talk about timed to perfection. USD is getting hammered on ¨no real news¨ and look at that…..U.S Equities falling pretty hard too. Again I wonder about all those blow hard ¨dollar longs¨struggling to understand how I keep making this look easy.
The trade is ¨short USD¨…….the reasons are many.
Timing has been key here these past months as you´ve recently seen me come out of hiding to bang down the first trade in weeks – if not months.
As I am always a touch early……..short USD trades are looking very good here.
One can see that The Buck has had it´s day, and has now been soundly rejected at the 200 SMA.
You guys can look back and recall short trades in Apple – with the exact same set up. Very straight forward…when an asset hits the 200SMA from below, then gets smoked. A very large level of resistance, and generally a pretty clear indication that things will be headed lower.
USD Rejected at the 200 Simple Moving Average
You can look for a million different reasons, but fact remains that a rise in interest rates will blow this market up, and that if anything….further easing will likely make more sense, and that´s bad for USD.
You have to keep in mind that the big boys are ¨spinning the story¨ not sheepishly following along! Long positions by the big boys have already been sold to you, as the common man ¨reactes¨ to the trickle of silly news stories aimed at keeping you on the wrong side of the trade.
You falling for this shit? Grab a backbone. Get informed. Remember the days when The U.S Federal Reserve was printing like mad, and crushing the currency with hopes to boost exports and the economy?
So…..if you’ve only got a view of oh…let’s say just a small portion of the market ( maybe a couple of blue chips, gold) and perhaps the U.S Dollar “against” your own local currency well…..one might suggest adding a couple more “market indicators” to the pile.
I know you may find this incredibly hard to believe, maybe even IMPOSSIBLE to believe but….The U.S Dollar “spike” here in the wake of Brexit market madness will soon provide one of the greatest “short opportunities” of our time ( slight exaggeration perhaps ).
While you’re all drooling over the massive moves “upward” against both the EUR and GBP ( no kidding right? As the vast majority of traders got “wacked” by Brexit ) The U.S Dollar “continues to sink” against its arch rival ( or at times good buddy ) the Japanese Yen (JPY).
The two are now almost at par.
Now….for those with near term memory loss – do you remember the continued explanation here at Kong with respect to money flows on this planet? The safe havens / funding currencies such as JPY going absolutely “parabolic” during times of “risk aversion”? The money that comes “flooding back” to these this currency as large-scale “carry trades” are wound down? Well……if you think the U.S Dollar is strong right now……why is it getting its ass kicked by the Yen? Why is USD losing all support / falling like a rock against JPY?
That’s what I call JPY stength. That’s what I call “risk off”.
The U.S Dollar will soon follow….providing for large scale gains SHORT USD against any number of currencies.
I will again be waiting for a daily “swing high” in USD ( likely within the next 3-4 days tops ) for another joyous ride “back on the big short” – USD.
I took this graphic from “somewhere” as it’s a great visual representation of what is “really going on” with the U.S Dollar and international trade.
Don’t be a dope. If the arrows and numbers where pointed in the “other direction” then perhaps you could build a case. The numbers speak for themselves. The U.S “strangle hold” on the world’s reserve, and in turn “slice of the pie” generated via currency exchange ( in order to buy commodities ) is over.
With readership here at Kong now doubling “again” over the past few months – I struggle to understand what “new information” people are looking for.
You do understand that the recent fall in oil prices ( well …actually not so recent considering it’s been falling like a rock since June – down from 110 to now 58 bucks a barrel ) is a blatant and obvious indication that “global growth” and “global demand for oil” is falling off a cliff right?
Seriously…….if you don’t see the connection between “supply and demand” in something this blatant and simple well…….one has to wonder “what you do see” – if anything relevant at all.
Finally something “other than The Fed / mainstream media bullshit” to get you off the couch and start asking yourself?
Could it actually be? You mean all this Kong talk of “global slowdown” over the past months ( despite the ridiculous rise in equity pricing ) is actually for real?
Give your head a shake. The world outside your tiny bubble of plastic wrap and pizza boxes is selling off like hotcakes and you still think Apple looks like a buy here at 110.
Oil related currencies such as The Canadian Dollar as well The Mexican Peso are getting creamed even as The U.S Dollar is falling hard, and The Japanese Yen enters “lift off stage”.
Debate over the next couple weeks and “what ever miniscule points are left” in the general propping up of both Japanese and American markets is a dead mule.
Step back and imagine oil at 30 bucks…perhaps that will get your attention.