The MIDTERM election- Armstrong Economics

Martin Armstrong writes….”The one thing that is ABSOLUTELY guaranteed is there will be ZERO cooperation and everything will become even more obstructive now so we can expect the economy to decline going into the 2020 turning point on the ECM. The Democrats have vowed to seek impeachment and they will now have subpoena power to obstruct Trump and this will bring a swift end to Draining the Swamp. While impeachment is not likely, they will do the same as they just did in the Kavanaugh hearings and throw whatever allegations they can hope someone will believe them as they did before. They have vowed to force the release of Trump’s tax returns. All of this will be designed to make the 2020 Presidential elections far worse than any in the past.”

https://www.armstrongeconomics.com/international-news/politics/the-midterm-elections/

The FANTASY of Fiscal Stimulus

WSJ writes…Big deficits did not speed up recoveries. In fact, the relationship is negative, suggesting fiscal profligacy led to contraction and fiscal responsibility would have been better.If fiscal stimulus is not effective in combating a recession, what about monetary stimulus—increasing the supply of money or reducing the cost of money in relation to the return on capital? We can perform a similar test: Did countries where monetary stimulus in the years after they hit bottom was relatively strong—measured by the average quantity of monetary assets purchased by the central bank from 2011-17—have relatively speedy recoveries? This is a complicated question, but preliminary explorations do not give strong support to that thesis either.

https://www.wsj.com/articles/the-fantasy-of-fiscal-stimulus-1540852299

 

Fissures amidst GROWTH

Omkar Goswami writes….From a cross-country perspective, we still don’t have frighteningly large inequalities in consumption expenditure or income, such as in Brazil, Mexico, Malaysia, South Africa and, nearer home, Pakistan. However, wealth inequalities are becoming obviously large. Juxtapose the image of Antilla off Peddar Road with the slums of Mumbai and you will know what we mean. In a country where everyone has a voice, the worse off are seeing too many signs of excess wealth and “in-your-face” consumption. Over 2.5 million people died of starvation in the Bengal famine of 1943 without any large-scale riots or killings. Don’t expect such other-worldly quiescence when people start taking to the streets against inequalities.https://indianexpress.com/article/opinion/columns/india-economy-female-foeticide-infanticide-sex-ratio-india-girl-child-education-system-5436456/

Supply crunch looms in commodities market

WSJ writes….”Global miners are spending a third of what they did five years ago on new projects. They’re on track to invest roughly $40 billion for the third straight year—down from more than $120 billion five years ago and $80 billion almost a decade ago, according to commodities consultancy Wood Mackenzie”.

I know it is almost unpatriotic to be bullish raw materials these days ,but couple of years back the same phenomenon played out in OIL markets. The dream investment for tomorrow will have investors apathy today, bankruptcy at small players, almost no media or sell side coverage and as

WSJ quotes
“A prolonged period of underinvestment by commodity producers is setting the stage for large price increases in raw-materials markets, say bullish investors who focus on the metals and energy industries“.

Indian Govt wants USD 50 billion from RBI, a third of its reserves, central bank says no

Well, if you thought govt has backed off in its tussle with RBI think again. This news in Indian express https://indianexpress.com/article/india/govt-wants-rs-3-6-lakh-crore-from-rbi-a-third-of-its-reserves-central-bank-says-no-5435504/ is a sad reminder of changing realities in world run by strong men. Demonetisation was all about the expected windfall of USD 50 billion to the Indian govt which did not play out the way it was envisaged. This is the same amount which govt is now asking RBI to pay on the pretext of paring down the excess capital . Different govt agencies and committee have observed that RBI is holding excess reserve which can be used for the greater good of the society, for e,g recapitalizing PSU bank, building infrastructure etc.

There is no doubt that cash starved govt is boxed into corner in run up to election and any access to large amount of LIQUIDITY will make their task easier. On the other hand RBI’s stance on this issue has not got desired media attention as institutions voice world over is getting drowned out by strong personalities.

How will this get solved… Dr Acharya (deputy governor)has already shot a warning to govt,not to meddle with central bank independence and that financial markets will not take kindly to this interference . I reckon the day is not far when RBI governor Dr Urjit Patel will find his position untenable with his beliefs and will step down before seeing any harm done to the institution .

Goodbye ‘Goldilocks’, Hello Lackluster Returns And Higher Volatility

you don’t know what you’ve got till it is gone

Heisenberg writes…..”For nearly a decade, investors have enjoyed a backstop from a never-ending, price insensitive bid emanating from a buyer armed with a printing press. That buyer is now pulling back (collectively speaking). The results will be predictable as legions of investors who long ago confused the generosity of their benefactors with their own supposed market acumen, will be forced to fend for themselves.”

https://heisenbergreport.com/2018/11/05/goodbye-goldilocks-hello-lackluster-returns-and-higher-volatility/

The next Financial crisis

Danielle writes…….What will the next crisis look like?
“Nothing like the last one. Contagion is much more difficult because there have been some lessons learnt from the Lehman crisis. There are stronger mechanisms to avoid a widespread domino effect in the banking system.
When the biggest bubble is sovereign debt the crisis we face is not one of the massive financial market losses and real economy contagion, but a slow fall in asset prices, as we are seeing, and global stagnation.
The next crisis is not likely to be another Lehman, but another Japan, a widespread zombification of global economies to avoid the pain of a large re-pricing of sovereign bonds, that leads to massive tax hikes to pay the rising interests, economic recession and unemployment”

https://www.dlacalle.com/en/the-next-financial-crisis/

Return of the “FEAR HEDGE”

Gold is not an investment. Gold is not a hedge against fear or a flight to safety, gold is not to be treated as a reliable hedge against stock market corrections. Gold is a hedge against protracted bear markets that are underpinned by FIAT debasement damaging corporate earnings. And gold is something to trade. Finally, Gold is not officially money. That is to say gold is not money by FIAT (order), but is de-facto money in government hands. It is also the only universally accepted means of exchange across nation-state borders. It is a store of wealth
Golds is money that is all. Gold is not currency again… yet
https://opportunistictrader.com/wp-content/uploads/2018/11/GS-Gold-Portfolio-Diversifier-30-Oct-2018.pdf

Long Short Report

Rohit at Indiacharts writes one more fascinating view in this Months Long Short Report…”It has been a year long period of global divergences that has people thinking about decoupling all over again. However what may have transpired is a slow topping process of global equities that started from Europe and then took on Asia and the Emerging Markets, and only now India and Finally the US. Compared to 2008 the US from being the first shoe to drop is now the last shoe to drop. Within that India by holding its own in terms of Nifty has a lot of people hanging on to the bull market narrative. Add to that the big declines in stocks that can make you comfortable about the idea that stocks have fallen far enough and might be near a bottom. A fair argument. But the Long Short report published this chart of the Relative Strength of Midcaps to Large Caps for the last two years to identify this as the top end of the range for the sector. Now that the trend has turned down for the Midcaps the typical cycle is a two year period of underperformance”

So picking stocks is not going to be easy and the globally synchronised movements that we have seen recently across world equities should now become a permanent phenomenon as volatility reverts to the mean. All said and done we are in for interesting times. In the backdrop we have a bond market bubble that is starting to unfold in a series of interest rate hikes.
What does all this mean for trends in equities interest rates precious metals and the dollar medium term and long term? I carve that out with the road map for Nifty in great detail with 20 odd charts ahead of Dipawali as we ”Prepare for the Fireworks” (subscription required for this report)that should follow.

My two cent

The US fiscal deficit is blowing up at the wrong point of time where funding needs are getting bigger. FED is left with no choice but to raise the rates to attract global savings/capital to fund US fiscal deficit. Think for a moment, if US 10 year treasury yield spike to 4% what happens to Emerging market (including India)debt and equity ? The capital will just sell everything and rush back to the reserve currency i.e US.The only difference of opinion I have with Rohit is on the direction of US dollar( DXY) which I believe is headed to 110-120 mainly simply because of attractiveness of US rates led by weakness in euro and EM currencies.