Category Archives: International

Loose Cannons

In the days of fighting sail, the ship’s main armament typically consisted of rows of cannons lined up on each side of the ship. These cannons fired through ports in the side of the hull and were mounted on wheels so that they could be pointed and able to recoil when fired. Normally, they were constrained by heavy ropes. But from time to time one or more would get loose. Each cannon could weigh as much as three tons and would then roll around the gun deck as the ship pitched and rolled, crushing anything or anybody in its way. The gundeck would be crowded most of the time – each gun on a large ship had a crew of 14 men who not only worked but ate and slept near their gun. Needless to say, a loose cannon could do much more damage than any broadside from an enemy ship.

In the market, the black boxes or “algos” are the equivalent of the loose cannons of yore. They are out of control and roll around in herds, as many of them share similarly programmed rules. You can watch the “herding” in the stock market by watching the “Tick” as it moves to extremes in both directions – that’s the herd. You hear about “flash crashes” – that’s a herd of algos running over some security or asset class. They pose a huge danger to the financial system, and need to be reined in. The mistake that the regulators make is to only consider them as single entities, without comprehending the emergent phenomena arising from unintentional herding behavior.

Crispin’s Day (Not Henry V)

Crispin Odey, who runs the most bearish hedge fund and needless to say has done rather well this year, writes in his recent manager’s letter:

I have a lot of sympathy for your position, sitting on the other side of the desk.

This is late cycle economics. Consumers are sated and over-borrowed. Companies have extracted all the margin they can and have leveraged themselves as well. Cheap money has spawned competition. Populism risks playing about with prices and property ownership. Recessions will not be altogether unwelcome given that they deal with the problem of rich and poor and young and old. The rich lose money which pleases the poor. The old lose their jobs and the young are the first to be reemployed. Without recessions this redistribution has to be done through taxation and legal theft.

Deflation Watch

ECRI chimes in – I told you so.

The plunge in oil prices, which dropped below $50 this week, blindsided many businesses and investors. But the inevitable decline was foreshadowed months ago by a downturn in commodity prices, as measured by ECRI’s Industrial Price Index (IPI) which was previously known as the JoC-ECRI IPI*…….

…..Oil price inflation has now plummeted to a 32-month low – its worst reading since early 2016 (bottom line). But industrial commodity price inflation, as measured by the IPI, has already dropped to a 33-month low, and is still falling (top line), signaling continued downside risk for oil price inflation.

Jawboning

Well Trump saw the market was down 300, more or less, so… he got on the wires and said that “China talks are going well” and he thinks “US will reach a trade deal with China.”

That’s a blatant attempt at jawboning the market higher. Of course the algos went berserk. What BS. But it shows how important he thinks the stock market is to electoral success, and that he will do “whatever it takes” to keep it up. Well until Tuesday’s close, anyway. After that he will likely be able to blame the Dems.

Meanwhile the ten-year is solidly above 3% and rising. Dems will need a miracle. Expect a panic soon.

Close To The Event Horizon?

From ECRI’s Lakshman Achuthan:

Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year.

Remarkably, then, the global economy—slowing in sync despite soaring debt—finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll’s Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

The R Word

From highly respected Ned Davis Research via Zero Hedge:

Expect a global recession. It either has begun or will begin shortly. Though no guarantee, as 7.89% of the time since 1970 when the global economic indicators that make up this model were above 70, a recession did not occur.

Let’er Rip, Potato Chip

Larry Kudlow, newly minted economic advisor, was on CNBC last night, advising that the Fed should “Let the economy rip.”

Larry, if you want to see what happens when a country monetizes its deficits, look south.

A Little Late

Maybe a few folks at the BIS now realize that the light at the end of the tunnel is, in fact, a train.

The previous analysis suggests that there is a prima facie case for monetary policy to pay closer attention to the financial cycle than in the past. We may have been underestimating the influence of benign disinflationary forces and overestimating the ability of monetary policy to fine-tune inflation, especially to push it up towards targets in the face of powerful headwinds. If so, we may also have been underestimating the collateral damage that such strategies may generate in terms of financial and macroeconomic stability over longer horizons, especially by amplifying the financial cycle.

Inflation Is About To Disappear

The main factor is U.S. oil production,” the IEA said. “In just three months to November, crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader.

DACA

The Trump administration announced the end of the DACA program, that allows undocumented immigrants who arrived as children to obtain work permits.

The administration’s point is that the program, established by the Obama administration, was a direct violation of black-letter law and exceeded the President’s authority. Like many other immigrant-friendly policies, of course. True enough, but one can reasonably hope that Congress will act to change the law and the administration has provided time to allow that to happen, if it will.

The good reason for acting is that these people are the innocent victims of their parents’ bad acts and should not be penalized for them. Many have little or no connection with their country of birth and may not even speak the language. The bad reason for acting that is being bandied about is the resultant shortage of workers for low-wage jobs. The shortage has nothing to do with immigration and everything to do with the “welfare trap,” which makes it foolish for many Americans to seek employment because the withdrawal of benefits will more than offset any wage income they might receive.

To fix the shortage, the government needs to remove the trap.