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#MacroView: The Threats To The Bullish Thesis Have Grown

#MacroView: The Threats To The Bullish Thesis Have Grown

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Since the March lows, the markets have rallied on optimism of a “V-shaped” economic recovery and constant stimulus from the Fed. So far, that has been the right call. However, in recent weeks, the threats to the bullish thesis have grown.

We recently discussed the Fed’s inflation of an asset bubble. The crux of the analysis was the unprecedented amount of monetary stimulus to counter the “pandemic.”

The Fed was able to inflate another asset bubble to restore consumer confidence and stabilize the credit markets. The problem is that since the Fed never unwound their previous policies, current policies will have a more muted long-term effect.

However, this time there are 50+ million unemployed, wage growth is declining, and bankruptcies are on the rise. The Fed’s attempt to inflate another bubble to offset the damage from the deflation of the last bubble, will likely not work.”

In the short-term, the Fed’s actions had the intended outcome by providing “stability” to the financial markets.

The Paradox

What is most imperative for the Fed is those market participants, and consumers “believe” in their actions. With the financial ecosystem more heavily levered than ever, the “instability of stability” remains the most significant risk.

“The ‘stability/instability paradox’ assumes that all players are rational. That assumption implies participants will avoid complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”

The problem the Fed, and Global Central banks, currently face is an inability to extract themselves from ongoing monetary policy measures. After the “Financial Crisis,” the Fed had hoped they would be able to reduce their accommodation as economic growth and inflation returned.

Neither ever happened.

A Diminishing Rate Of Return

Instead, as each year passed, more monetary policy was required just to sustain economic growth. Whenever the Fed tightened policy, economic growth weakened, and financial markets declined. The table shows it takes increasingly larger amounts of QE to create an equivalent increase in asset prices.

As with everything, there is a “diminishing rate of return” on QE over time. Since QE requires more debt to be issued, the consequence is slower economic growth over time.

“The relevance of debt growth versus economic growth is all too evident. Debt issuance initially exploded during the Obama administration. It further accelerated under President Trump, and has taken ever-increasing amounts of debt to generate $1 of economic growth.”

In other words, without debt, there has been no organic economic growth.

Importantly, after a decade of unprecedented monetary policy programs in U.S., the risks in the system have been expanded. It is now imperative that everyone continues to “act rationally.”

By not letting the system correct, letting weak companies fail, and allowing valuations to mean revert, the Fed has trapped itself. Such was a point we discussed previously:

“One way to view this problem is by looking at the Nasdaq 100 versus the S&P 500 index. That ratio is now at the highest level ever.”

These levels of extremes rarely exist for extended periods. It currently seems as if “nothing can stop the bullish market.” However, it is always an unexpected, exogenous event, which pops the bubble. 

The Bear Case

My colleague Doug Kass recently penned an interesting post on this issue:

“In aggregate terms, COVID -19 will likely have a sustained impact on the domestic economy. Such will be seen in reduced production and profitability for several years and forever in some industries.

At the core of my concerns:

  • Important Industries Gutted: Several key labor-intensive industries, such as education, lodging, entertainment, restaurant, travel, retail, and non-residential real estate, all face an existential threat. For these industries, they simply cannot survive the conditions they face. For these gutted industries, we face, at best, an 80% to 85% recovery in the years to come. In the case of some of these sectors like retail, Covid-19 only sped up what was already a secular decline. 
  • A Negative Knock-On Effect: Tangential industries, like food and other services surrounding less utilized offices, malls, and other spaces, will also get hit. They, too, face at best, an 80% recovery.
  • Widening Income and Wealth Inequality: The combined unemployment impact will run deep and cause adverse economic ramifications and intensified social imbalances.
  • A Battered Public Sector: With a lower revenue base, the Federal government and municipalities will cut services (and employment).
  • Rising Tax Rates and Redistribution: To fund the revenue shortfall tax rates will steadily increase. Such will exacerbate the disruption described above, and create a less than virtuous cycle.

Negative Impact To Stocks

As Doug also notes, there are substantial impacts to companies individually, which will eventually manifest in lower asset prices.

  • Weak Capital Spending: With a large output gap and higher debt loads ($2.5 trillion of Federal Debt and $16 trillion of non-financial debt), the outlook for capital spending is weak over the next several years.
  • Higher Costs And Lower Profit Margins: The surviving companies in a post-virus world will face higher costs of doing business. 
  • The Competitive Influence of Zombie Companies Exacerbate Lower Profitability: Corporations will face further pressure on profit margins from “zombie companies.” These companies compete aggressively on cost, and take longer to die due to low interest rates and weak loan covenants. 
  • Small Businesses Gutted: The greatest brunt from the pandemic is faced by small businesses that historically account for the largest job creators.
  • The Specter of a Secular Erosion in Unemployment: Permanent job losses will be surprisingly large, ultimately killing consumption. 
  • More Cautious Business Confidence and Spending: The surviving companies were ill-prepared operationally and financially, in early 2020 for the disruptive impact of COVID- 19. Such will force companies to maintain a “buffer” of additional capital (and cash) in the event of another unforeseen event or tragedy. In all likelihood, this will make for less ambitious capital spending and expansion plans relative to the past. 
  • Financial Repression Holds Multiple Risks: A sustained period of low-interest rates, necessary (by some) to offset reduced economic growth, could backfire. Repressing interest rates runs the risk of a pension fund crisis, and intransigence on the part of businesses to expand and may impair the U.S. banking system.
  • A Political Stasis: Political divisiveness and partisanship could intensify – dimming the probability of effective, pro-growth fiscal policy necessary in a low growth economy.

Overly Bullish

When reading through Doug’s list, the immediate response from readers who have a “bullish bias,” is “yeah…but what about the Fed?”

In the short-term, the Fed’s monetary interventions can certainly lift asset prices. As noted in the table above, the biggest “bang for the buck” is when asset markets are profoundly depressed, and negative sentiment is exceptionally high.

Such is not the case currently with retail investors chasing momentum in the markets with reckless disregard of the underlying investment risk. The sharp rise in the Russell 2000 index, as noted by Sentiment Trader, supports this view:

“Below is the percentage of Russell 2000 firms that have negative operating earnings over the trailing-12 months. It just moved above 30%, the most in over a decade. Only twice before in 20 years have such a high proportion of these small companies lost money. Those two periods were in April 2002 and December 2009 through February 2010.”

Furthermore, you have a near-record number of small traders speculating on asset prices through the use of options.

As noted previously, investors are also using 24-month forward estimates to justify overpaying for assets.

But, by nearly any metric, stocks are extremely expensive. There is only so much “future growth” that can be pulled forward. Eventually, “the piper must be paid.” 

The Risks Of Being Bullish

At the moment, none of these risks seem to matter.

What is vital to understand none of these issues will “cause” the “bear market.”

They are just the “fuel” that will exacerbate an eventual decline when the right catalyst is applied. Much like a can of gasoline stored in your garage, gas is inert until introducing the proper catalyst (a match.)

Concerning the financial markets, it will most likely not be a resurgence of the virus, weak economic data, or even a dismal earnings season. Such has already been “priced in” by the market. However, as stated, it will require an unexpected, exogenous event to ignite the fuel. At the point, it will become hard to contain the flames.

From an investment standpoint, it is critical to understand the “risk” under which you deploy capital into overvalued and extended assets.

While it may seem like a “no-lose” scenario due to the Fed’s liquidity programs, mean reversions can, and have previously, occurred.

As Doug concluded:

“While the Federal Reserve can provide the necessary ammunition (and liquidity) to stabilize activity briefly – it is unlikely a longer-term solution.

As we pass another Independence Day, the downcast prospects will impact the markets in the coming weeks and months

These are not an ingredient for a “Bull Market” or rising valuations. Instead, the above factors may be an ingredient to:

  1. Increased market volatility.
  2. Increasing economic uncertainty and cautiousness in the C-suite.
  3. An irregular period of growth.
  4. Lower price-earnings ratios.
  5. More social unrest.

The U.S. economy and our financial markets now face a crossroad – they are once again decoupling. The test of economic aspiration and market optimism will come in the years ahead.”

Navigating The Risk

Whenever I write an article that discusses a “bearish view” on the financial markets, readers construe it to mean I am sitting in cash, or short the “bull market.”

Nothing could be further from the truth. As stated over the last few weeks, we are currently “uncomfortably long” the market on our portfolios’ equity side. While we continue to hedge our risks to some degree through our bond, gold, and cash holdings, we are still well exposed to potential downside risks.

Having a thorough understanding of the “risk” is to have better control over long-term outcomes. While it is essential to make money while markets are rising, it is even more critical to control the losses. Spending a bulk of your time getting “back to even” is not a long-term investment strategy.

In January and February of this year, we discussed taking profits in stocks like AAPL, MSFT, AMZN, and others. The reason was not some prediction about the impact of the virus, but rather the gross deviation and extension of these positions from long-term means.

That risk reduction benefited us much when the crash came in March.

On Wednesday, we took profits in AAPL, MSFT, NFLX, and AMZN. (Taking profits does not mean we sold the entire position.)

I don’t know what might cause the next correction, or if there will even be one. But what I do know is that when stocks are this extended, overbought, and deviated above long-term means, bad things tend to happen.

The post #MacroView: The Threats To The Bullish Thesis Have Grown appeared first on RIA.

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Delivering aid during war is tricky − here’s what to know about what Gaza relief operations may face

The politics of delivering aid in war zones are messy, the ethics fraught and the logistics daunting. But getting everything right is essential − and…

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Palestinians on the outskirts of Gaza City walk by buildings destroyed by Israeli bombardment on Oct. 20, 2023. AP Photo/Ali Mahmoud

The 2.2 million people who live in Gaza are facing economic isolation and experiencing incessant bombardment. Their supplies of essential resources, including food and water, are quickly dwindling.

In response, U.S. President Joe Biden has pledged US$100 million in humanitarian assistance for the citizens of Gaza.

As a scholar of peace and conflict economics who served as a World Bank consultant during the 2014 war between Hamas and Israel, I believe that Biden’s promise raises fundamental questions regarding the delivery of humanitarian aid in a war zone. Political constraints, ethical quandaries and the need to protect the security of aid workers and local communities always make it a logistical nightmare.

In this specific predicament, U.S. officials have to choose a strategy to deliver the aid without the perception of benefiting Hamas, a group the U.S. and Israel both classify as a terrorist organization.

Logistics

When aiding people in war zones, you can’t just send money, a development strategy called “cash transfers” that has become increasingly popular due to its efficiency. Sending money can boost the supply of locally produced goods and services and help people on the ground pay for what they need most. But injecting cash into an economy so completely cut off from the world would only stoke inflation.

So the aid must consist of goods that have to be brought into Gaza, and services provided by people working as part of an aid mission. Humanitarian aid can include food and water; health, sanitation and hygiene supplies and services; and tents and other materials for shelter and settlement.

Due to the closure of the border with Israel, aid can arrive in Gaza only via the Rafah crossing on the Egyptian border.

The U.S. Agency for International Development, or USAID, will likely turn to its longtime partner on the ground, the United Nations Relief and Works Agency, or UNRWA, to serve as supply depots and distribute goods. That agency, originally founded in 1949 as a temporary measure until a two-state solution could be found, serves in effect as a parallel yet unelected government for Palestinian refugees.

USAID will likely want to tap into UNRWA’s network of 284 schools – many of which are now transformed into humanitarian shelters housing two-thirds of the estimated 1 million people displaced by Israeli airstrikes – and 22 hospitals to expedite distribution.

Map of Gaza and its neighbors
Gaza is a self-governing Palestinian territory. The narrow piece of land is located on the coast of the Mediterranean Sea, bordered by Israel and Egypt. PeterHermesFurian/iStock via Getty Images Plus

Politics

Prior to the Trump administration, the U.S. was typically the largest single provider of aid to the West Bank and Gaza. USAID administers the lion’s share of it.

Since Biden took office, total yearly U.S. assistance for the Palestinian territories has totaled around $150 million, restored from just $8 million in 2020 under the Trump administration. During the Obama administration, however, the U.S. was providing more aid to the territories than it is now, with $1 billion disbursed in the 2013 fiscal year.

But the White House needs Congress to approve this assistance – a process that requires the House of Representatives to elect a new speaker and then for lawmakers to approve aid to Gaza once that happens.

Ethics

The United Nations Relief and Works Agency is a U.N. organization. It’s not run by Hamas, unlike, for instance, the Gaza Ministry of Health. However, Hamas has frequently undermined UNRWA’s efforts and diverted international aid for military purposes.

Hamas has repeatedly used UNRWA schools as rocket depots. They have repeatedly tunneled beneath UNRWA schools. They have dismantled European Union-funded water pipes to use as rocket fuselages. And even since the most recent violence broke out, the UNRWA has accused Hamas of stealing fuel and food from its Gaza premises.

Humanitarian aid professionals regularly have to contend with these trade-offs when deciding to what extent they can work with governments and local authorities that commit violent acts. They need to do so in exchange for the access required to help civilians under their control.

Similarly, Biden has had to make concessions to Israel while brokering for the freedom to send humanitarian aid to Gaza. For example, he has assured Israel that if any of the aid is diverted by Hamas, the operation will cease.

This promise may have been politically necessary. But if Biden already believes Hamas to be uncaring about civilian welfare, he may not expect the group to refrain from taking what they can.

Security best practices

What can be done to protect the security of humanitarian aid operations that take place in the midst of dangerous conflicts?

Under International Humanitarian Law, local authorities have the primary responsibility for ensuring the delivery of aid – even when they aren’t carrying out that task. To increase the chances that the local authorities will not attack them, aid groups can give “humanitarian notification” and voluntarily alert the local government as to where they will be operating.

Hamas has repeatedly flouted international norms and laws. So the question of if and how the aid convoy will be protected looms large.

Under the current agreement between the U.S., Israel and Egypt, the convoy will raise the U.N. flag. International inspectors will make sure no weapons are on board the vehicles before crossing over from Arish, Egypt, to Rafah, a city located on the Gaza Strip’s border with Egypt.

The aid convoy will likely cross without militarized security. This puts it at some danger of diversion once inside Gaza. But whether the aid convoy is attacked, seized or left alone, the Biden administration will have demonstrated its willingness to attempt a humanitarian relief operation. In this sense, a relatively small first convoy bearing water, medical supplies and food, among other items, serves as a test balloon for a sustained operation to follow soon after.

If the U.S. were to provide the humanitarian convoy a military escort, by contrast, Hamas could see its presence as a provocation. Washington’s support for Israel is so strong that the U.S. could potentially be judged as a party in the conflict between Israel and Hamas.

In that case, the presence of U.S. armed forces might provoke attacks on Gaza-bound aid convoys by Hamas and Islamic jihad fighters that otherwise would not have occurred. Combined with the mobilization of two U.S. Navy carrier groups in the eastern Mediterranean Sea, I’d be concerned that such a move might also stoke regional anger. It would undermine the Biden administration’s attempts to cool the situation.

On U.N.-approved missions, aid delivery may be secured by third-party peacekeepers – meaning, in this case, personnel who are neither Israeli nor Palestinian – with the U.N. Security Council’s blessing. In this case, tragically, it’s unlikely that such a resolution could conceivably pass such a vote, much less quickly enough to make a difference.

Topher L. McDougal does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Diagnosis and management of postoperative wound infections in the head and neck region

“The majority of wound infections often manifest themselves immediately postoperatively, so close followup should take place […]” Credit: 2023 Barbarewicz…

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“The majority of wound infections often manifest themselves immediately postoperatively, so close followup should take place […]”

Credit: 2023 Barbarewicz et al.

“The majority of wound infections often manifest themselves immediately postoperatively, so close followup should take place […]”

BUFFALO, NY- October 20, 2023 – A new research perspective was published in Oncoscience (Volume 10) on October 4, 2023, entitled, “Diagnosis and management of postoperative wound infections in the head and neck region.”

In everyday clinical practice at a department for oral and maxillofacial surgery, a large number of surgical procedures in the head and neck region take place under both outpatient and inpatient conditions. The basis of every surgical intervention is the patient’s consent to the respective procedure. Particular attention is drawn to the general and operation-specific risks. 

Particularly in the case of soft tissue procedures in the facial region, bleeding, secondary bleeding, scarring and infection of the surgical area are among the most common complications/risks, depending on the respective procedure. In their new perspective, researchers Filip Barbarewicz, Kai-Olaf Henkel and Florian Dudde from Army Hospital Hamburg in Germany discuss the diagnosis and management of postoperative infections in the head and neck region.

“In order to minimize the wound infections/surgical site infections, aseptic operating conditions with maximum sterility are required.”

Furthermore, depending on the extent of the surgical procedure and the patient‘s previous illnesses, peri- and/or postoperative antibiotics should be considered in order to avoid postoperative surgical site infection. Abscesses, cellulitis, phlegmone and (depending on the location of the procedure) empyema are among the most common postoperative infections in the respective surgical area. The main pathogens of these infections are staphylococci, although mixed (germ) patterns are also possible. 

“Risk factors for the development of a postoperative surgical site infection include, in particular, increased age, smoking, multiple comorbidities and/or systemic diseases (e.g., diabetes mellitus type II) as well as congenital and/ or acquired immune deficiency [10, 11].”

 

Continue reading the paper: DOI: https://doi.org/10.18632/oncoscience.589 

Correspondence to: Florian Dudde

Email: floriandudde@gmx.de 

Keywords: surgical site infection, head and neck surgery

 

About Oncoscience

Oncoscience is a peer-reviewed, open-access, traditional journal covering the rapidly growing field of cancer research, especially emergent topics not currently covered by other journals. This journal has a special mission: Freeing oncology from publication cost. It is free for the readers and the authors.

To learn more about Oncoscience, visit Oncoscience.us and connect with us on social media:

For media inquiries, please contact media@impactjournals.com.

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Biden’s Student Loan Forgiveness Plan Makes the Poor Pay for the Rich

A year after the Supreme Court struck down President Biden’s student loan forgiveness plan, he presented a new scheme to the Department of Education…

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A year after the Supreme Court struck down President Biden’s student loan forgiveness plan, he presented a new scheme to the Department of Education on Tuesday. While it is less aggressive than the prior plan, this proposal would cost hundreds of billions of taxpayer dollars, doing more harm than good. 

As the legendary economist Milton Friedman noted, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” 

Higher education in America is costly, and this “forgiveness” would make it worse. 

Signing up for potentially life-long student loans at a young age is too normalized. At the same time, not enough borrowers can secure jobs that offer adequate financial support to pay off these massive loans upon graduation or leaving college. These issues demand serious attention. But “erasing” student loans, as well-intentioned as it may be, is not the panacea Americans have been led to believe.

Upon closer examination, the President’s forgiveness plan creates winners and losers, ultimately benefiting higher-income earners the most. In reality, this plan amounts to wealth redistribution. To quote another top economist, Thomas Sowell described this clearly: “There are no solutions, only trade-offs.” 

Forgiving student loans is not the end of the road but the beginning of a trade-off for a rising federal fiscal crisis and soaring college tuition. 

When the federal government uses taxpayer funds to give student loans, it charges an interest rate to account for the cost of the loan. To say that all borrowers no longer have to pay would mean taxpayers lose along with those who pay for it and those who have been paying or have paid off their student loans.

According to the Committee for a Responsible Federal Budget, student debt forgiveness could cost at least $360 billion. 

Let’s consider that there will be 168 million tax returns filed this year. A simple calculation suggests that student loan forgiveness could add around $2,000 yearly in taxes per taxpayer, based on the CRFB’s central estimate. 

Clearly, nothing is free, and the burden of student loan forgiveness will be shifted to taxpayers.

One notable feature of this plan is that forgiveness is unavailable to individuals earning over $125,000 annually. In practice, this means that six-figure earners could have their debts partially paid off by lower-income tax filers who might not have even pursued higher education. This skewed allocation of resources is a sharp departure from progressive policy.

Data show that half of Americans are already frustrated with “Bidenomics.” 

Inflation remains high, affordable housing is a distant dream, and wages fail to keep up with soaring inflation. Introducing the potential of an additional $2,000 annual tax burden at least for those already struggling, mainly to subsidize high-income earners, adds insult to injury.

Furthermore, it’s vital to recognize that the burden of unpaid student loans should not fall on low-income earners or Americans who did not attend college. Incentives play a crucial role in influencing markets. 

By removing the incentive for student loan borrowers to repay their debts, we may encourage more individuals to pursue higher education and accumulate debt without the intention of paying it back. After all, why would they when it can be written off through higher taxes for everyone?

The ripple effect of this plan could be far-reaching. 

It may make college more accessible for some, opening the floodgates for students and the need for universities to expand and hire more staff, leading to even higher college tuition. This perverse incentive will set a precedent that will create a cycle of soaring tuition, which would counteract the original goal of making higher education more affordable.

While the intention behind President Biden’s student loan forgiveness may appear noble (in likelihood, it is a rent-seeking move), the results may prove detrimental to our nation’s economic stability and fairness. And if the debt is monetized, more inflation will result.

Forgiving student loans will exacerbate existing problems, with the brunt of the burden falling on lower-income Americans. Instead of improving the situation, it will likely create an intricate web of financial consequences, indirectly affecting the very people it aims to help. But that is the result of most government programs with good intentions.

 


 

Vance Ginn, Ph.D., is president of Ginn Economic Consulting, chief economist or senior fellow at multiple state thinks across the country, host of the Let People Prosper Show, and previously the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on X.com @VanceGinn.

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