Market Talk- August 21, 2018

Middle of summer and if you ever needed an excuse not to trade, today was probably it! Volumes were so poor they hardly registered a change in markets. Although the Nikkei started lower, it spent the rest of the day making its way back to positive. That is probably the good news as the close was only +0.10%. The Yen did trade to high to mid 109’s but has subsequently drifted back into the US afternoon session. The Shanghai has been the key driver today, helping sentiment for the Hang Seng (+0.6%) and pushed confidence into the European opening. SENSEX spent all day trading neutral, but probably not a surprise as Wednesday is a public holidays. The index continues to play around all time highs and so month end numbers will probably be quite supportive, lets see! ASX lost 1% as Malcolm Turnbull narrowly escapes a leadership challenge. Despite the largest stock BHP announcing a 33% improvement of increased profits – but, expectations were higher and consequently their shares lost almost 2%.

The US strength came a little too late to have a significant effort on Europe, but they caught the bullish trend none the less. The core CAC and DAX both finished around +0.5% and even saw a mild recovery in the Euro, which was expected for this week. Energy, commodities and base materials have all helped this week as they are all priced in USD and that is what is driving them this week. Europe is still fragmenting after today we see Italy plans to move ahead with an internal infrastructure spend, which helped FTSE MIB accelerate +1.53%. UK’s FTSE traded heavy, but more due to the +0.7% rally in currency than anything else. BREXIT is being talked of a likely ‘No Deal’ but still the market is refusing to believe that outcome. This way the shock will be even more inflated, as no one seems to wish to hedge – even just in-case! Interesting why so many live in denial until its too late.

The biggest headline and market talk this afternoon has been the fact that the S+P index hit fresh record highs whilst setting a record for the longest bull run ever. It will be interesting to see the close on Friday, after we hear from Powell. Also, we have month end next week, which will be equally closely watched. The US Dollar has obviously helped this week, but the flow of cash continues to be towards the US. The NASDAQ still lags much of the core whilst the S+P Mid & Small Caps and DOW Transports all hit records.

Japan 0.08%, US 2’s closed 2.60% (+1bp), US 10’s closed 2.85% (+3bp), US 30’s 3.01% (+3bp), Bunds 0.33% (+3bp), France 0.67% (+2bp), Italy 2.98% (-3bp), Greece 4.16% (-9bp), Turkey 20.90% (u/c), Portugal 1.76% (-2bp), Spain 1.36% (-2bp), and Gilts 1.27% (+5bp).

WEC Orlando November 16-17, 2018

This year’s World Economic Conference in Orlando will be the launchpad for what is to unfold as we move into 2020. We are holding it after the elections November 16-17 but as we move into the Pi Target on November 21st, which is typically most important politically. This has been the turning point marked 911 attack to the day and also on the next cycle the very day that Greece asked for help from the IMF. July 12th turned out to be the Direction Chance which started the breakout to the upside in the Dow.

The world economy is twitching and has been extremely confusing to many. The Turkish currency has lost up to 50% of its value against the dollar this year fluctuating back and forth. This is really not confined to the worsening diplomatic rift between Turkey and the USA. There are ripple effects raising concerns about this new economic risk which is appearing out of Turkey. Germany is the second biggest foreign investor in Turkey, whose biggest trading partner is the European Union – not the USA. The risks surfacing from the Turkey affair has been the exposure of the contagion in Emerging Markets. Then we still have the concerns raising fears about the possibility of a no-deal Brexit. Add to this the trade frictions with the US under Donald Trump. Then we have the Federal Reserve determined to get the interest-rates back to normal to ward off the building crisis in Pension. The Fed plans to continue to gradually raise interest rates into 2020 where they hope to have reach normalization.

All of these trends are conspiring against Europe. Merkel is under pressure to leave government. She held less than 35% in the last election and it looks more and more like she would be unable to gain even 25% in a new election. We will be looking at the world economy and how things are shifting. When the dollar declined at the beginning of the year, we saw how the Dow crashed. Then the NASDAQ took the lead as the domestic economy took charge.

We will be resolving the trends globally and focus on the equities, gold, bonds, commodities, and real estate. We will also include a brief training session on Socrates. This year we are preparing for the next leg in the ECM from November into January 2020. Welcome to the ride.

Italy’s Conflict with Brussels & EU


 

The collapse of the Morandi Bridge in Italy has prompted a serious dispute between Brussels and Italy. Italy is taking the position that the demand of Brussels to comply with austerity denies Italy the ability to even repair its infrastructure for its own people. When it asked previously for relief to deduct the cost of all the refugees, Brussels denied that exception. My sources in Italy are hardening on their view that Italy is now an occupied country.

The Eurozone austerity policy has destroyed the European economy because they have utterly FAILED to understand what was the real cause of the German Hyperinflation. This view that any increase in the money supply is evil has subjected Europe to DEFLATION that has devasted its economy, infrastructure, and resulted in massive unemployment among the youth. The Great Depression was not reversed until they stopped Austerity which only benefits the bondholders – not the people. To sell their debt, they presume they need austerity so bondholders get back the fair value of what they lent. That has never happened anyway.

 

Modern Love – Internet – Changing Patterns in Marriage/Divorce

COMMENT: I enjoyed your article on gold and how trends change with the generations. I find it very true that my children looked at me with my silver bars and just asked so what can you really do with it? I have watched the youtube video when people choose the chocolate bar over a bar of silver. Things do change and we should ask if we are judging the world only by own own beliefs rather than trying to see what others think.

Thank you for the food for thought. The world is not always black and white.

BDV

REPLY: The Economist just published a piece on how the internet has changed the dating scene among the youth.  How people now meet is almost 70% online. A church is the lowest, primary schools are #2, college #3, bars #4, and introductions among friends #1. How people are meeting has changed and even how marriage has evolved over the centuries is even more interesting from a cyclical perspective.

The Economist stated that the first personal advertisement for marriage took place back in 1695. Traditionally, the man was twice the age going into the 19th century because he first had to establish himself and then prove he could support a wife and family. If he went to a girl’s father to ask for her hand, the first question was: What do you have? The dowry is one of the biggest misconception ever. Many assume the dowry was given to the husband to marry the daughter. It was the opposite. The dowry was given to contribute to her support and that of her children. It was not money for the husband to party.

As the industrial revolution began to mature, the age difference declined by the end of the 19th century as men were able to support a family at an earlier age. It was common up until the Great Depression for the man to be 15 to 20 years older before he could afford a wife. There was none of this stuff about looking and falling in love at first sight. That was really lust turned into love by Holywood to sell movies. Most studies have found love at first sight to be just an illusion. Interestingly, Holywood has really changed society hand-in-hand with socialism. Today, 61% of women believe in love at first sight while a whopping 72% of men actually think it is a real concept. This probably has a lot to do with the divorce rate.

It was the birth of Socialism where society was drastically changed. The age difference collapsed to nearly the same age as socialism expanded but the divorce rate soared. No longer did the boy have to prove he could afford a wife, government social programs filled the gap. As women entered the workforce after World War II, no longer was the burden on the man to support the family. Suddenly, the burden was shared and the two could start with no assets and build a life. Yet the number one reason for divorce was not infidelity, but money is in the top 10 while most say they got married for the wrong reason.

However, not only did Socialism change marriage, it also changed the family structure. No longer did you have several children because that was your retirement. The average family size declined and children no longer saved to take care of their parents. Now we have the internet changing dating but what is really interesting is that the cycle has changed and the age difference is back on the rise. It seems that boys do not become men until at least 10 years after a girl becomes a woman. This difference in maturity is making itself known once again. Younger women are now seeking older men especially in Europe where unemployment among the youth is at 60% in the southern regions.

Women are upset because studies show that men live longer with younger wives who probably keep them more active. Yet, when a woman marries a younger man, the opposite takes place and her life-span declines. Perhaps because she had to take care of a grown child. These studies in themselves have caused a lot of controversies. Perhaps everything is just returning to what it was before socialism. Young women expect boys to be men and thus that has been the challenge post-1930. I can say from my personal experience, my father was 15 years older than my mother. It was nice that after he died in 1983, she was still with us until 2018 with her mind intact.

Things are starting to reverse. The age gap is returning to the historical norm and people are starting to get upset politically with socialism. Once upon a time BEFORE income tax, the woman stayed at home and raised the kids. Today, it takes two incomes to live even at a lower standard with each passing decades. Socialism has led to governments consuming up to 33%-40% of GDP and the tax burden rising to provide government employees with pensions. Something has to give.

TRUTH is so precious that she should Always be attended by a Bodyguard of Lies

QUESTION: Do you support the unilateral withdrawal of the US from the Iran deal?

ANSWER: Iran has no intention of actually conforming with that agreement. But that is really a side issue. There is a significant displeasure with the religious government in Iran among its own people. No nation is ever 100% left or right. There will always be dissent against whatever government is in power. This rising discontent has appeared since the Arab Spring. The Iranian Revolution of 1979 will be followed by another counter-revolution probably in 2022. Iran has suppressed its people for far too long and it will rise up in yet another revolution. The government is at war in the Middle East against Saudi Arabia because of a political-religious philosophy. They seek to export their beliefs to others and that is the problem. If they would just adopt live-and-let-live policy things would be much calmer.

I do not support the USA sticking its nose into everything. This is the inherent problem when you have military establishments. As I have said before, the days of Empire Building are gone. China, Russia, and the USA have no desire to occupy each other. Both Erdogan and Iran are still clinging to this idea of reestablishing Empires. The major powers are engaged in proxy wars. It really makes no sense to intervene for it only inspires hatred.

Franklin Roosevelt lied to the people to get into World War II because the American people were isolationists. You have to understand that you MUST always separate the PEOPLE from the Government and its POLITICIANS. The European Americans fled Europe and wanted no part of the political nonsense there. FDR appeared in Boston and said he wanted to send arms to Britain but not troops. Boston was predominantly Irish. They did not want to go to war to defend Britain when they viewed Britain as the oppressor of the Irish. FDR lied to the people and claimed ending the embargo and shipping arms to Britain would KEEP America at peace. He said:

Let no group assume the exclusive label of the “peace bloc.” We all belong to it … I give you my deep and unalterable conviction, based on years of experience as a worker in the field of international peace, that by the repeal of the embargo the United States will more probably remain at peace than if the law remains as it stands today … Our acts must be guided by one single, hardheaded thought — keeping America out of the war.

Governments have ALWAYS lied about every war to justify it. Watch the movies Fair Game and Shock & Awe. It is the people who pay the price of war while the politicians reap only the glory and not the hardship. Even if we look at ancient times the civil war between Octavian and Marc Antony, he always distanced himself from making it outright appear as a civil war against Antony. His victory coin simply stated Egypt was Captured – not Antony. In this manner, he always managed to keep it as a war between himself and Cleopatra.

If Marc Antony did not commit suicide as the story is told, Octavian surely would have killed him anyway and possibly did. There was just no circumstance where Octavian could proclaim a victory over a Roman who had at least been a friend of Julis Caesar and a Roman of distinction. There were people who supported Antony against Octavian. The image of the war had to be against Cleopatra politically. Antony was simply portrayed as being delusional and under her spell. Hence, he was not really culpable for his actions and Antony and Cleopatra are portrayed as great lovers. Cleopatra was very ambitious and she bore the son of Caesar for she sought to have Egypt conquer Rome by using her body and brains. Women have been doing that for centuries and intelligence agencies still routinely use women to infiltrate as spies and perhaps the 007 is really more for the assassination types.

So how we portray war and an enemy has always been subject to manipulation. I would NEVER accept what is said by any side as being the truth. Winston Churchill said: “In wartime, truth is so precious that she should always be attended by a bodyguard of lies.”

Market Talk- August 20, 2018

 

Japan was the outlier today after the majority produced a positive return. After an initial surge the Nikkei fell back into negative territory where it spent the rest of the day. Exporters, energy, base metals and banks fell victim to todays weakness and probably not helped by the Yen’s strength. In late US trading it currently plays with a 109 handle having been edging its way for much of the day. Core Shanghai and Hang Seng both performed as much is being built into the resumption of US/China trade talks. A much welcomed 1%+ rally for both has helped bring a little relief, but both remain at the bottom of their 52wk range. The headlines will be very closely watched, especially later in the week when Powell speaks at Jackson Hole on Friday and Wednesdays FED Minutes release. In India today the SENSEX (+0.87%) rallied to another fresh high and probably helped by the fresh capital being repatriated. This cash flow does appear to be slowing, but it has helped bring the Rupee back to a 69 handle. ASX closed a touch firmer helped by a strong performances in base resources and the mining sector, this also massaged the A$ a touch pushing that back to a 0.7325 (+0.25%) quote.

We are quite light on economic data this week and so people will naturally focus on the US/China trade talk even though they are a precursor to the November conference. The positive talk and a reasonably healthy Asian session helped European indices also. The DAX returned 1%, and the CAC gaining +0.65%. Peripherals also managed to tag alone with FTSE MIB and IBEX both closing around +04% higher. The UK’s FTSE added +0.45% in light summer volume as many await the next headline on BREXIT. Domestic headlines are quiet currently as the government is on summer recess, but we do see the odd scare comment from bank chiefs. A lot is being made of Greece finally exiting its EU bailout after eight years. A rough amount of $330bn will still take decades to repay. The debt stands at around 180% of GDP and is around 25% smaller than it was pre-crisis. Even though it now has the ability to raise cash, the yield will be in excess of current rates (10yrs at 4.25%) and that’s hoping the ECB would be there to help.

Headlines are all about being within a whisker of fresh all time highs again. Today the S+P closed within 1% of record close after we closed up 7 points (+0.24%) today. The treasury market is helping this rally still, as yields decline in what many believe is gentle persuasion between the President and the Chair. Next, all eyes will be on headlines surrounding these trade talks, but it is probably doubtful we will hear much until the end of the week. Tech is back helping push the core to new heights and again this does not look as though it has run its course anytime soon. The trend remains buy the dips even with the light volume.

Japan 0.09%, US 2’s closed 2.59% (-3bp), 10’s 2.82% (-5bp), 30’s 2.98% (-5bp), Bunds 0.30% (u/c), France 0.65% (-1bp), Italy 3.01% (-10bp), Greece 4.25% (-3bp), Turkey 20.90% (-7bp), Portugal 1.78% (-5bp), Spain 1.38% (-6bp) and Gilts 1.22% (-1bp). Treasury market is running ahead of the Trump comments and assuming they are having a knock-on effect on the Federal Reserve.

Who is the Fool? The Borrower or the Lender?

Many people worry about over-indebtedness and point to a default of borrowers. It is interesting how the view of debt is always the low-life borrower. In reality, the real stupidity rests with the lender. Many are pointing to US corporate debt and stating that it has grown to an estimated US $ 7 trillion and they paint this as high-risk bonds and corporate loans which have been issued over the past decade. Of course, there were some who were foolish to issue variable interest rate bonds. Those companies are likely to find themselves in trouble. But there are others who issued long-term fixed bonds at low rates. Our advise to corporate clients was to borrow as much as possible at fixed rates for 50 to 100 years while the fools were willing to buy. Other major corps issued 100-year bonds including Walt Disney Company (DIS) and Coca-Cola (KO). The loser will be the BUYER, not the ISSUER.  It was a fool’s market to buy such fixed rate bonds for 100 years.

When Greece got in trouble, what is the first solution economists ALWAYS recommend? A debt haircut!. , which in most cases is based on the Libor benchmark interest rate, which has increased significantly in recent months. The first thing they did was extend the Greek debt by 10 years to avoid a default and the ECB agreed that any profits made by central banks in the Eurozone on Greek bonds would be returned to Athens in two equal tranches every year, between 2018 and 2022. You always extend maturity to avoid a default and you take a haircut in the value of the bonds you bought.

We are also witnessing this at the municipal level in Germany where about 50% of municipal governments are effectively bankrupt. The President of the German Institute for Economic Research (DIW), Marcel Fratzscher, came out and called for fundamental reforms where the holders of their debt would take a haircut. He has made it clear that a reduction in more than half of the state investments was made by the municipalities. The German grand coalition was supposed to organize a haircut to reduce the value of outstanding debt from the federal states on down to the municipalities. In reality, they are hopelessly over-indebted not unlike Illinois and California in the USA.

Even when we look at the war loans from the USA to Europe, it was not until 2015 that Britain finally repaid it war loans. There were still 38,000 holders of UK war bonds with amounts less than £100 as well. They actually cut the 5% coupon in 1932 reducing it by agreement to 3.5%. So you see, taking 100 years to repay a debt meant that the value of the pound when the money was lent was $4.86 and when it was paid off less than $2. Actually, the French never even paid interest on the $4 billion they owed the USA after World War I and the only country to pay the United States back during the 1930s was Finland.

So when we look at the indebtedness of even Emerging Markets, keep in mind that the loser will be the lender – not the borrower. It seems that no matter how many times a government defaults like Spain, seven times, the fools rush right back in and buy again. The famous bank of the Medici had a rule “to deal as little as possible with the court of the Duke of Burgundy and of other princes and lords, especially in granting credit and accommodating them with money, because it involves more risk than profit” (Raymond de Roover Professor of History at Brooklyn College: The Rise and Decline of the Medici Bank was first published in 1966. id/ p 343). The Medici failed because later generations did not follow that rule.

Brunson – the Alleged Pastor

 

 

The Turkish court has rejected the appeal to release Andrew Brunson, who is the alleged US pastor at the center of a dispute between Ankara and Washington. While he has been there for 23 years, his new Church of the Resurrection has existed for less than a year and it had only 25 members. From the photo, it appears that the prayer room consists of about 40 seats. There is no professional pulpit, but drums and a lectern with speakers. Nobody even knows about the financing of the church.

Following the Turkey coup of July 15th, 2016, Brunson was arrested by the Turkish security authorities in October 2016. He was charged with espionage and the attempt to overthrow the Turkish government. According to the newspaper Sözcü , Brunson wrote in an e-mail to a friend five days after the coup: “The Turkish people have not taken sides as usual for the Turkish military. Everything is going badly, but in the end, we will be the winners. “ This one of the statements of Brunson that forms the charges in his indictment.

According to the indictment, Brunson also met with the head of the Gülen movement for the Aegean, Bekir Baz, on several occasions before the coup. Brunson apparently told the prosecutor that he did not know a person named Bekir Baz and had never met a member of the Gülen movement knowingly. He has also been charged with being involved with members of the PKK. Brunson also denies trying to help Syrian refugees.

The indictment against Brunson also alleged that Brunson was kicked out of the Church of the New Birth between 2008 and 2009 because it did not support terror. He then went abroad for about one and a half months. Brunson then returned to Turkey, and he opened a new church in Alsancak in Bornova Street. 

Trump demands Brunson back and Erdogan refuses. The question remains if Trump even does know the real story of Brunson and in fact does anyone? It some seem obsessive that Erdogan just does not deport him, send him back to the states, and deny him any right to return. That would end the upfront issue and then the real build-up of tension might pass and relieve Turkey as a nation.

Merkel Objects to France’s Vision of a EU Finance Minister

Chancellor Angela Merkel has rejected France’s Macron’s proposal for the establishment of a euro finance minister. Merkel has also stated that she wants a planned EU budget for the Eurozone area as part of the EU budget. She does not want an independent budget for the 19 countries of the monetary union. Merkel is still adhering to her view that the quantity of money causes inflation and it has been that policy which has suppressed the European economy for the last decade. A Euro finance minister she argues would lack both a budget as well as there would be no parliamentary control.

 

The Eurozone economy certain cannot be rectified by the appointment of a Finance Minister who indeed has no real power. On that score, Merkel is correct. However, her idea that the German Hyperinflation was caused by the increase in the supply of money is just wrong. That policy has been forced upon the rest of Europe and it is the very issue that is tearing the union apart. This is part of the reason behind the growing lack of confidence in the euro. It is also why there are those in Southern Europe who are beginning to resent Germany and view their own countries as being occupied with their domestic policies dictated by Germany. This is not a healthy situation for the EU longer term.