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Consensus View Of “No Recession.” Could It Be Wrong?

Could the consensus view of a "no recession" scenario be wrong? As portfolio managers, this is the question we ask ourselves daily. Since the lows of last…

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Could the consensus view of a “no recession” scenario be wrong? As portfolio managers, this is the question we ask ourselves daily. Since the lows of last October, the technical backdrop has improved markedly, as discussed last week in “Bear Trap.” To wit:

“Our most critical bullish signals are the short- and intermediate-term Moving Average Convergence Divergence (MACD) indicators. We post this weekly chart in our website’s 401k plan management section. Both sets of weekly MACD indicators have registered buy signals from levels lower than during the financial crisis. The market has also broken above both weekly moving averages and, as noted above, held the long-term bullish trend line.”

While the technical backdrop continues to confirm and reaffirm a bullish trend supporting the “no recession” scenario, there remain substantial risks to that view. Such risks, as was seen with Silicon Valley Financial (SVB) last week, can arise quickly, turning previously bullish sentiment quickly bearish.

What happened with SVB is a result of tighter monetary policy extracting liquidity from the banking system. In an upcoming article, I quoted Thorsten Polleit from The Mises Institute, stating:

What is happening is that the Fed is pulling central bank money out of the system. It does this in two ways. The first is not reinvesting the payments it receives into its bond portfolio. The second is by resorting to reverse repo operations, in which it offers “eligible counterparties” (those few privileged to do business with the Fed) the ability to park their cash with the Fed overnight and pay them an interest rate close to the federal funds rate.”

As shown, contractions in nominal M2 have coincided with financial and market-related events in the past. Such is because the Fed is draining liquidity out of the financial system, which is a problem for overleveraged banks.

However, while SVB might be an isolated event, of which we are not sure, the driver of higher asset prices remains a consensus view that earnings will bottom in the second quarter of this year and begin to improve into year-end. If such is the case, given that markets lead fundamental changes, the market’s rally since last October is logical.

But that is the key to the markets this year. Is the consensus view right or wrong?

Will Earnings Bottom?

The chart below shows the GAAP estimates (red dotted line) by S&P Global through the end of 2023. Amazingly, they expect earnings to recover to where they were at the bull market’s peak in 2022. Such was when interest rates were zero, and the Federal Reserve provided $120 billion monthly in “quantitative easing.”

S&P 500 earnings vs estimates

However, this view from S&P Global is the same as most Wall Street banks who expect the Fed to “pause” its rate hiking campaign and the economy to avoid a recession. That broad consensus view of a “no landing” scenario has fueled the market’s advance since January but remains at odds with much of the macroeconomic data.

As I discussed in “No Landing Scenario At Odds With Fed’s Goals,”

“Given the recent spate of economic data from the strong jobs report in January, a 0.5% increase in inflation and a solid retail sales report continue to give the Fed no reason to pause anytime soon. The current base case is that the Fed moves another 0.75%, with the terminal rate at 5.25%.”

That type of rhetoric doesn’t suggest a “no landing” scenario, nor does it mean the Fed will be cutting rates soon. Notably, the only reason for rate cuts is a recession or financial event that requires monetary policy to offset rising risks. This is shown in the chart below, where rate reductions occur as a recession sets in.

No Landing, “No Landing” Scenario At Odds With Fed’s Goals vs GDP

The problem with that data is that the lag effect of monetary tightening has not been reflected as of yet. Over the next several months, the data will begin to fully reflect the impact of higher interest rates on a debt-laden economy. However, as shown, while the consensus view is that earnings will grow strongly into year-end, higher rates drag on earnings as economic growth slows.

S&P 500 earnings vs estimates vs Fed funds

Of course, such is logical, given that earnings are derived from economic activity. As such, there is a decent correlation between economic growth and GAAP earnings.

GAAP earnings vs GDP growth

With the Fed continuing to hike rates, the ability of the economy to start expanding to support earnings growth seems questionable.

However, two other factors also suggest the consensus view is worth questioning.

To Pivot Or Not To Pivot

The problem with the consensus view is that it requires the Fed to revert to monetary accommodation. However, if the consensus view is correct, why would the Fed change policy? As we noted previously:

  1. If the market advance continues and the economy avoids recession, the Fed does not need to reduce rates.
  2. More importantly, there is also no reason for the Fed to stop reducing liquidity via its balance sheet.
  3. Also, a “no-landing” scenario gives Congress no reason to provide fiscal support providing no boost to the money supply.

See the problem with this idea of a “no landing” scenario?

“No landing does not make any sense because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle, and it’s not an event. It’s just ongoing growth. Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?” – Chief Economist Gregory Daco, EY

As I noted, there are two additional problems with the consensus view of a sharp recovery in earnings.

The first is the reversal of the massive stimulus injections into the economy in 2020-2021, which provided for the surge in economic activity and earnings. As shown, money supply growth is reversing, with earnings also slowing. The consensus view expects earnings to buck that correlation in the future.

S&P 500 earnings vs estimates vs money supply growth

The second problem is inflation. During the pandemic shutdown, the massive supply of monetary stimulus collided with an economic shutdown leading to surging prices. Due to a lack of supply and a massive contraction in employment, surging prices sent corporate profit margins soaring. However, sustaining record margins will be challenging with inflation falling, the economy at full employment, and wages rising.

S&P 500 earnings vs estimates vs inflation.

While the markets are certainly betting on an optimistic scenario, logic suggests many challenges lie ahead.

There is still a lot of money sloshing around the economy from the repeated rounds of stimulus. Also, from the infrastructure spending bill, and increased social security and welfare benefits. The impact of higher rates on economic activity may get delayed but not eliminated.

As Jerome Powell noted in last week’s Senate Finance Committee testimony:

Inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent… That said, there is little sign of disinflation thus far in the category of core services, excluding housing, which accounts for more than half of core consumer expenditures.

If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes… The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.

That certainly doesn’t suggest a pivot is coming any time soon. This brings us to the one question every investor must answer.

How does the consensus view come to fruition with higher interest rates, less monetary liquidity, and slower economic growth?

I don’t know the answer. However, I am not liking the odds that the outcome will be as positive as Wall Street expects.

The post Consensus View Of “No Recession.” Could It Be Wrong? appeared first on RIA.

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Which New World Order Are We Talking About?

Which New World Order Are We Talking About?

Authored by Jeff Thomas via InternationalMan.com,

Those of us who are libertarians have a tendency…

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Which New World Order Are We Talking About?

Authored by Jeff Thomas via InternationalMan.com,

Those of us who are libertarians have a tendency to speak frequently of “the New World Order.”

When doing so, we tend to be a bit unclear as to what the New World Order is.

Is it a cabal of the heads of the world’s governments, or just the heads of Western governments?

Certainly bankers are included somewhere in the mix, but is it just the heads of the Federal Reserve and the IMF, or does it also include the heads of JPMorgan, Goldman Sachs, etc.?

And how about the Rothschilds? And the Bundesbank—surely, they’re in there, too?

And the list goes on, without apparent end.

Certainly, all of the above entities have objectives to increase their own power and profit in the world, but to what degree do they act in concert? Although many prominent individuals, world leaders included, have proclaimed that a New World Order is their ultimate objective, the details of who’s in and who’s out are fuzzy. Just as fuzzy is a list of details as to the collective objectives of these disparate individuals and groups.

So, whilst most libertarians acknowledge “the New World Order,” it’s rare that any two libertarians can agree on exactly what it is or who it’s comprised of. We allow ourselves the luxury of referring to it without being certain of its details, because, “It’s a secret society,” as evidenced by the Bilderberg Group, which meets annually but has no formal agenda and publishes no minutes. We excuse ourselves for having only a vague perception of it, although we readily accept that it’s the most powerful group in the world.

This is particularly true of Americans, as Americans often imagine that the New World Order is an American construct, created by a fascist elite of US bankers and political leaders. The New World Order may be better understood by Europeans, as, actually, it’s very much a European concept—one that’s been around for quite a long time.

It may be said to have had its beginnings in ancient Rome. As Rome became an empire, its various emperors found that conquered lands did not automatically remain conquered. They needed to be managed—a costly and tedious undertaking. Management was far from uniform, as the Gauls could not be managed in the same manner as the Egyptians, who in turn, could not be managed like the Mesopotamians.

After the fall of Rome, Europe was in many ways a shambles for centuries, but the idea of “managing” Europe was revived with the Peace of Westphalia in 1648. The peace brought an end to the Thirty Years’ War (1618-1648) in the Holy Roman Empire and the Eighty Years’ War (1568-1648) between Spain and the Dutch Republic. It brought together the Holy Roman Empire, The House of Habsburg, the Kingdoms of Spain and France, the Dutch Republic, and the Swedish Empire.

Boundaries were set, treaties were signed, and a general set of assumptions as to the autonomy within one’s borders were agreed, to the partial satisfaction of all and to the complete satisfaction of no one… Sound familiar?

Later, Mayer Rothschild made his name (and his fortune) by becoming the financier to the military adventures of the German Government. He then sent his sons out to England, Austria, France, and Italy to do the same—to create a New World Order of sorts, under the control of his family through national debt to his banks. (Deep Throat was right when he said, “Follow the Money.”)

So, the concept of a New World Order has long existed in Europe in various guises, but what does this tell us about the present and, more important, the future?

In our own time, we have seen presidents and prime ministers come and go, whilst their most prominent advisors, such as Henry Kissinger and Zbigniew Brzezinski, continue from one administration to the next, remaining advisors for decades. Such men are often seen as the voices of reason that may be the guiding force that brings about a New World Order once and for all.

Mister Brzezinski has written in his books that order in Europe depends upon a balance with Russia, which must be created through the control of Ukraine by the West. He has stated repeatedly that it’s critical for this to be done through diplomacy, that warfare would be a disaster. Yet, he has also supported the US in creating a coup in Ukraine. When Russia became angered at the takeover, he openly supported American aggression in Ukraine, whilst warning that Russian retaliation must not be tolerated.

Henry Kissinger, who has literally written volumes on his “pursuit of world peace” has, when down in the trenches, also displayed a far more aggressive personality, such as his angry recommendation to US President Gerald Ford to “smash Cuba” when Fidel Castro’s military aid to Angola threatened to ruin Mr. Kissinger’s plans to control Africa.

Whilst the most “enlightened” New World Order advisors may believe that they are working on the “Big Picture,” when it comes down to brass tacks, they clearly demonstrate the same tendency as the more aggressive world leaders, and reveal that, ultimately, they seek to dominate. They may initially recommend diplomacy but resort to force if the other side does not cave to “reason” quickly.

If we stand back and observe this drama from a distance, what we see is a theory of balance between the nations of Europe (and, by extension, the whole world)—a balance based upon intergovernmental agreements, allowing for centralised power and control.

This theory might actually be possible if all the countries of the world were identical in every way, and the goals of all concerned were also identical. But this never has been and can never be the case. Every world leader and every country will differ in its needs and objectives. Therefore, each may tentatively agree to common conditions, as they have going back to the Peace of Westphalia, yet, even before the ink has dried, each state will already be planning to gain an edge on the others.

In 1914, Europe had (once again) become a tangle of aspirations of the various powers—a time bomb, awaiting only a minor incident to set it off. That minor incident occurred when a Serbian national assassinated an Austrian crown prince. Within a month, Europe exploded into World War. As Kissinger himself has observed in his writings, “[T]hey all contributed to it, oblivious to the fact that they were dismantling an international order.”

Since 1648, for every Richelieu that has sought to create a New World Order through diplomacy, there has been a Napoleon who has taken a militaristic approach, assuring that the New World Order applecart will repeatedly be upset by those who are prone to aggression.

Further, even those who seek to operate through diplomacy ultimately will seek aggressive means when diplomatic means are not succeeding.

A true world order is unlikely.

What may occur in its stead would be repeated attempts by sovereign states to form alliances for their mutual benefit, followed by treachery, one- upmanship, and ultimately, aggression. And very possibly a new World War.

But of one thing we can be certain: Tension at present is as great as it was in 1914. We are awaiting only a minor incident to set off dramatically increased international aggression. With all the talk that’s presently about as to a New World Order, what I believe will occur instead will be a repeat of history.

If this belief is correct, much of the world will decline into not only external warfare, but internal control. Those nations that are now ramping up into police states are most at risk, as the intent is already clearly present. All that’s needed is a greater excuse to increase internal controls. Each of us, unless we favour being engulfed by such controls, might be advised to internationalise ourselves—to diversify ourselves so that, if push comes to shove, we’re able to get ourselves and our families out of harm’s way.

*  *  *

Unfortunately, there’s little any individual can practically do to change the course of these trends in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. That’s precisely why bestselling author Doug Casey just released Surviving and Thriving During an Economic Collapse an urgent new PDF report. It explains what could come next and what you can do about it so you don’t become a victim. Click here to download it now.

Tyler Durden Wed, 10/04/2023 - 03:30

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As yen weakens and interest peaks, Bank of Japan balances on a policy precipice

Quick Take The Bank of Japan (BOJ) stands at a critical juncture, striving to maintain a delicate balance amid a changing economic landscape. Recent data…

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Quick Take

The Bank of Japan (BOJ) stands at a critical juncture, striving to maintain a delicate balance amid a changing economic landscape. Recent data shows that the 10-year yield, which the BOJ has endeavored to keep below 1%, has touched 0.8, a peak unseen since 2013. Simultaneously, the BOJ has labored not to let the Yen weaken, yet it continues to be pressured as it drops further against the US dollar, crossing the 150 mark for the first time in over a year.

There is burgeoning speculation about possible BOJ interventions in these market movements. As the central bank continues to uphold negative interest rates, a shift towards positive rates might become inevitable in the foreseeable future. It’s a precarious fulcrum of financial strategies that the BOJ is balancing on, with market tempests stirring on one side and the stability of the national currency on the other.

This scenario highlights the intricate dynamics of monetary policies and the profound impact they can have on both national and global economies. A closer look at the situation illuminates the complexities in the BOJ’s policy decisions and the broader implications on the financial landscape.

JPY: (Source: Trading View)

The post As yen weakens and interest peaks, Bank of Japan balances on a policy precipice appeared first on CryptoSlate.

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Poland, Austria, & Czechia Introduce Temporary Border-Checks With Slovakia To Curb Illegal Migration

Poland, Austria, & Czechia Introduce Temporary Border-Checks With Slovakia To Curb Illegal Migration

Authored by Thomas Brooke via Remix…

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Poland, Austria, & Czechia Introduce Temporary Border-Checks With Slovakia To Curb Illegal Migration

Authored by Thomas Brooke via Remix News,

Poland, Austria and Czechia will all introduce random checks at the countries’ borders with Slovakia from midnight on Wednesday following an influx of illegal immigration.

Temporary checks will be conducted along the length of the border for an initial 10-day period until Oct. 13.

They will focus specifically on road and railway border crossings, although, pedestrians and cyclists may also be asked for documentation. Anyone within the vicinity of the border may be requested to identify themselves.

“The numbers of illegal migrants to the EU are starting to grow again,” said Czech Prime Minister Petr Fiala following the announcement. “We don’t take the situation lightly.”

“Citizens need a valid passport or identity card to cross the border,” the Czech Interior Ministry added.

The Czech policy would also be adopted by neighboring Austria, the country’s Interior Minister Gerhard Karner confirmed.

Poland had already announced its intention to reintroduce checks on the Slovak border with the number of migrants along the Balkans migration route continuing to surge. Prime Minister Mateusz Morawiecki said last week he was “instructing Minister of Interior Mariusz Kamiński to check on buses, coaches, and cars crossing the border when it is suspected there could be illegal migrants on board.”

“In recent weeks, we detected and detained 551 illegal migrants at the border with Slovakia. This situation causes us to take decisive action,” Kaminski added.

Slovak caretaker Prime Minister Ludovit Odor acknowledged the growing issue of illegal migration in his country but insisted that the problem needs a European solution rather than individual nations restricting border access.

He claimed that the decision by the three neighboring countries had been fueled by the Polish government, which is involved in a tightly contested election campaign, with Poles heading to voting booths on Oct. 15.

“The whole thing has been triggered by Poland, where an election will soon take place, and the Czech Republic has joined in,” Odor said.

Slovakia revealed last month that the number of illegal migrants detained by its authorities this year had soared nine-fold to over 27,000. The majority of detainees comprise young men from the Middle East using the Balkan migratory route through Serbia as they seek to migrate to northwestern Europe.

The winner of Sunday’s general election in Slovakia, former Prime Minister Robert Fico, has vowed to tackle the issue more robustly by promising to reintroduce border checks with neighboring Hungary.

“It will not be a pretty picture,” Fico told journalists as he threatened to use force to dispel illegal migrants detected on Slovak territory.

Tyler Durden Wed, 10/04/2023 - 02:00

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