Bitcoin & ICBMs up, Inflation, Retail Sales & Productivity Down, Political Instability Continues

In his first speech to the UN, Trump denounced NK and Iran, who in turn denounced him.  Trump said he would “totally destroy” NK if necessary.  Chancellor Merkel won her re-election in Germany, but by the weakest majority since WWII, and with the anti-EU parties gaining seats.  Catalonia passed an Independence Referendum to secede from Spain and become their own nation.  Spain is calling the referendum illegal, Catalonia says it is legal, and so ensues another version of Crimea vs Ukraine.  The EU sides with Spain because Catalonia doesn’t want to be a part of the EU and, as with the UK Brexit, they are afraid other parts of the EU might resort to this method of exiting the EU.  The Kurds voted overwhelmingly for independence, which has upset Turkey, Iraq and Iran who consider the Kurds a threat politically and economically as they would control some large oil reserves.

Retail sales and inflation are down in both the US & EU.  Bitcoin is still up from its value at the beginning of the year, but down 40% from its highest point.  The one thing that keeps going up is North Korean ICBMs.  Not be out done, Iran also felt it necessary to do a nuclear test.   Needless to say stability is not a part of the equation.

 

Central Banks

Central banks are all talking about raising interest rates, printing less currency and beginning to unwind their portfolios, which means they will stop buying bonds and/or start selling some of their holdings.  So far the only major central bank to raise interest rates has been the US.  The Federal Reserve has set October for the start of their previously announced plan to shrink its $4.5 trillion balance sheet. As expected, policy makers left the benchmark interest rate unchanged in a range of 1 percent to 1.25 percent.  In a press conference, Fed Chair Janet Yellen called this year’s inflation undershoot a “mystery.” They have missed their target for the past five years.  Actually, the Fed has missed the target for 25 years, which begs the question, why anyone pays any attention to a Fed estimate.  The WSJ wrote, “In her press conference, Ms. Yellen acknowledged the inflation shortfall had proved more persistent and was more broad-based than officials had anticipated. “I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been as low,” she said.”  Vincent Reinhart, chief economist at Standish Mellon Asset Management and former head of the Fed’s monetary affairs department said, ““Central bankers feel guilty about where they are and if given an opportunity to renormalize policy, they’ll take it.”

Fed to Start Paring Holdings, Keeps December Rate Rise on the Table (9-20-17) WSJ

https://www.wsj.com/articles/fed-keeps-december-rate-rise-on-the-table-eyes-slower-path-for-increases-1505930513

Fed to Shrink Assets Next Month, Boost Rates by Year End (9-20-17)

https://www.bloomberg.com/news/articles/2017-09-20/fed-asset-shrinking-to-start-next-month-rate-hike-seen-in-17

 

Debt & Signs of Recession

Bloomberg reported that Canada, Turkey, Thailand and many other nations would be on the edge of a banking crisis, if global borrowing rose by 250 basis points (2.5%).  The Bank for International Settlement (BIS) warned that, “Credit-to-GDP ratios remained well above trend levels for a number of jurisdictions, including Canada, China and Hong Kong SAR.”

A forensic study conducted by the BIS, concluded: “enormous liabilities have accrued through FX swaps, currency swaps, and “forwards.” The data is tucked away in the “footnotes” of bank reports. Contracts worth tens of trillions of dollars stand open and trillions change hands daily. Yet one cannot find these amounts on balance sheets. This debt is, in effect, missing. “These transactions are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured,” said BIS’s quarterly report.  Signs of excess are visible everywhere, as the London Telegraph Financial Post reported, “Corporate debt is now considerably higher than it was pre-crisis. Leverage indicators have reached levels reminiscent of those that prevailed during previous corporate credit booms.  A growing share of firms face interest expenses exceeding earnings before interest and taxes.

Bloomberg reported that, S&P Global Ratings cut China’s sovereign credit rating for the first time since 1999, citing the risks from soaring debt, and revised its outlook to stable from negative.  The sovereign rating was cut by one step, to A+ from AA-.  Analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. would be unlikely to avoid default should the nation default on its sovereign debt.  Moody’s cut its rating on China to A1 from Aa3 in May, citing similar concerns over economy-wide debt and effects on state finances.

Both Trump & Treasury Secretary Mulvaney said Puerto Rico will receive hurricane aide but no bailout for their bankrupt nation.  Bloomberg reported that Mulvaney said the administration is devising an aid package to send to Congress that will deal with rebuilding and repair:  “We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bond holders,” he said.  Puerto Rico is not alone in its financial struggles, as the sub-prime problems which helped create the 2008 crisis are happening again in nations across the board, and Fannie & Freddie may need a $100 billion bailout.

No U.S. Bailout for Puerto Rican Debt, Trump’s Budget Chief Says (10.3.17) https://www.bloomberg.com/news/articles/2017-10-04/trump-suggests-puerto-rico-s-debt-may-need-to-be-wiped-out

S&P Cuts China’s Credit Rating, Citing Risk from Debt Growth (9-21-17)

https://www.bloomberg.com/news/articles/2017-09-21/s-p-lowers-china-s-rating-to-a-from-aa-says-outlook-stable

Canada Flagged as Hidden $14 Trillion Credit Bubble Stokes Global Crisis Fears (9-18-17) http://www.nationalpost.com/m/canada+flagged+hidden+trillion+credit+bubble+stokes+global+crisis+fears/14739264/story.html

Fannie-Freddie Might Need $100 Billion in New Crisis, FHFA Says (8-7-17) https://www.bloomberg.com/news/articles/2017-08-07/fannie-freddie-might-need-100-billion-in-new-crisis-fhfa-says

New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring (7-17-17) https://www.bloomberg.com/news/articles/2017-07-17/new-u-s-subprime-boom-same-old-sins-auto-defaults-are-soaring

 

World Economies & Markets

WSJ reported that: Eurozone wages rose at the fastest pace in more than two years during the three months leading up to June, a sign inflation may be set to rise to the European Central Bank’s target.  The 19-nation eurozone economy has grown more strongly than expected this year, shrugging off the uncertainty created by a series of elections in the Netherlands, France and Germany that threatened, but failed, to yield gains for anti-euro nationalists.  The ECB’s economists now forecast the eurozone economy is on course for its best year since 2007, reducing the need for support from policy makers.  Just like in the U.S., however, inflation has yet to show signs of a sustained rise toward the central bank’s target, which is just under 2%.  Despite this, retail sales declined across the euro area for the second straight month in August, signaling a warning to the European Central Bank as it considers a reduction in its stimulus measures from early 2018.

WSJ reported: “Canadian factory sales plunged in July on a pullback in auto production, in a further sign that the economy has hit a rough patch following a year of roaring growth.   Manufacturing shipments declined 2.6% in July, on a volume, or price-adjusted, basis, factory sales fell 1.4%.New Zealand’s gross domestic product expanded 0.8% in the second quarter from the previous three months and along with Australia is preforming very well.  China’s consumer-price index increased 1.8% from a year earlier, compared with a 1.4% gain in July, but that did not prevent China from being downgraded by Moody & the S&P.”

In her Global Outlook report, Gail Fosler wrote, “We see the U.S. stock market as fragile and increasingly vulnerable to a downshift in employment. While stock prices lead unemployment in recoveries, an unemployment upturn tends to lead stock price downturns at peaks. Recent trends in recession indicators point to a pending reversal in unemployment, and hence a prospective decline in stock prices.  These trends are consistent with the discussion of financial risk and the notion of a U.S. reset/recession.”

Eurozone Retail Sales Fall Again, Posing Quandary for ECB (10.4.17) WSJ

https://www.wsj.com/articles/eurozone-retail-sales-fall-again-posing-quandary-for-ecb-1507107753

Stock Market Risks (9-21-17) By Gail Fosler | https://www.gailfosler.com/stock-market-risks

Eurozone Wage Growth Hits Two-Year High (9-15-17) WSJ

https://www.wsj.com/articles/eurozone-wage-growth-hits-two-year-high-1505470250

New Zealand Economy Rebounds Ahead of Election (9-20-17) WSJ

https://www.wsj.com/articles/new-zealand-economy-rebounds-ahead-of-election-1505951236

China Inflation Rebounds in August, Beating Expectations (9-20-17 WSJ

https://www.wsj.com/articles/china-inflation-rebounds-in-august-beating-expectations-1504933096

Canada Factory Sales Plunge in July (9-19-17) WSJ

https://www.wsj.com/articles/canada-factory-sales-plunge-in-july-1505826312

 

The EU, Political Uncertainty & Shifting Allegiances

The WSJ reported that the EU is trying to get more tax revenue from multinational companies and they say they are trying to level the corporate playing field across the continent.  The Journal went on to say, “This move risks exacerbating tax disputes among member states, and undermining the bloc’s unity.   And the European Commission, the bloc’s executive, is considering adopting a French-led proposal to tax digital companies on revenue—as opposed to profit—generated in Europe to better account for what they believe companies should be paying.  Bureaucrats always prefer to tax economic activity rather than profits because it secures tax revenues even in downtimes. 

The EU bureaucracy in Brussels, doesn’t care about companies or their employees, it only cares that it has tax revenue to spend.  It should be irrelevant what the EU thinks they should get, they aren’t a nation and they weren’t voted into office; they are an unelected bureaucratic body which answers to no one and has no checks or balances on their power.  The WSJ explains that this is why several EU countries, such as Luxembourg and Ireland, have already expressed skepticism, and larger more indebted EU members want to protect their revenues from what some smaller countries see as a power grab by the EU.   EU member countries are supposed to agree unanimously on tax matters, but the smaller states have insisted on maintaining their freedom to maneuver on tax matters.  EU antitrust chief Margrethe Vestager stressed the importance of a level playing field and a functioning single market, and wants to usurp that power from member nations.  This is the MO of federal bureaucracies, they usurp an ever increasing amount of control and authority. This is why the UK and Switzerland left, why Italy, Poland, the Czech Republic and Hungry may leave, and why Germany’s Chancellor Merkel and the Netherlands establishment party lost seats.  In spite of her dwindling support, Chancellor Merkel arrogantly declares the UK must pay the EU divorce settlement.  The EU and UK are no closer to an agreement than they were in March when negotiations began.

Taxation Tests European Unity (10.5.17) WSJ |  https://www.wsj.com/articles/taxation-tests-european-unity-1507236355

German Results Reflect European Unease Over Identity, Economy (9.24.17) WSJ

https://www.wsj.com/articles/german-results-reflect-european-unease-over-identity-economy-1506288918

Merkel Warns U.K. It’ll Have to Pay EU Obligations in Brexit (8-26-17)

https://www.bloomberg.com/news/articles/2017-08-26/merkel-warns-u-k-it-ll-have-to-pay-eu-obligations-under-brexit

EU Takes Action Against Poland Over Judiciary Overhaul (7-29-17) WSJ

https://www.wsj.com/articles/eu-takes-legal-action-against-poland-over-judiciary-overhaul-1501329235?mod=nwsrl_world_news&cx_refModule=nwsrl

Bloomberg wrote: “A tainted election victory for the German chancellor betrays the east-west divide in Europe. The surge in support for Germany’s anti-immigrant party in weekend elections is a stark reminder of the fault line that cuts through the European Union.  Chancellor Angela Merkel’s conservative alliance won the German election, but a steep drop in its support and an anti-immigrant party surge signaled political turbulence ahead for Europe’s largest economy.”

Another article in the WSJ went on the say, “The election result signaled a sudden turn for a political system whose relative stability has underpinned the European Union in recent years as it lurched from crisis to crisis.  Ms. Merkel’s Christian Democrats and their Bavarian sister party saw their worst result since 1949, losing around a fifth of the 41.5% support they garnered just four years ago. The Social Democrats suffered their worst election since World War II.  The nationalist AfD (AfD is the alternative for Deutschland Party, which wants to exit the EU) party was predicted to get 13.5%, which would make it the first time in more than half a century that a party this far to the right has won seats.”   Germany’s election result confirms the overriding trend of European politics in the past year: the crumbling of the Continent’s established parties in the face of voter anxiety over economics and identity.

The WSJ reported that in Hungry the ANO party’s mantra is to reject the euro because it would be “another issue that Brussels would be meddling with,” said Hungarian Prime Minister Viktor Orban.  His approval ratings are very high, even after he scoffed at a European court defeat over having to accept migrants.  Orban suggested the EU is trying to “rape” his country into being like Western Europe.  The leadership in Warsaw appears unfazed, as do financial markets. The zloty is among the world’s 10 best-performing currencies against the euro this year, along with the Czech koruna.

Poland angered Germany by asking for as much as $1 trillion of World War II reparations.  The French Prime Minister showed his support for Germany by skipping a scheduled meeting with Kaczynski and cancelling a defense contract for new helicopters.  “Nobody will impose their will on us from abroad,” said Polish the President.  “Even if in certain matters we’ll be alone in Europe, we’ll remain an island of freedom.”

In New Zealand, like in Europe and the US, immigration is one of the biggest issues and political party differences.   The WSJ reported that, “Immigration to New Zealand hit 72,400 this year, fanning criticism that the National-led government has fueled economic growth with this influx.  The New Zealand First Party takes an especially tough line on immigration. Nationalism, the desire to be a sovereign nation, is on the rise all over the world.  The people in New Zealand want to be New Zealanders, the UK want to British, Italians want to be Italian, Germans want to German, US citizens want to be Americans etc.

WSJ reported that, “…voters in the Spanish region of Catalonia overwhelmingly backed independence on Sunday in a referendum that was boycotted by opponents and marred by violence, putting Spain on the brink of a political and constitutional crisis.  Preliminary results showed that approximately 90% of votes were cast in favor of a split with Spain.”  The EU is calling the vote illegal, because Catalonia didn’t ask permission and doesn’t want to be a part of the EU.  The vote is also upsetting other European Union members, concerned it could fuel discontent in independence-minded regions such as the U.K.’s Scotland and Belgium’s Flanders. The vote could also lead to Spanish Prime Minister Rajoy to resign.

Catalans Support Secession from Spain in Vote Boycotted by Opponents (10-1-17) WSJ https://www.wsj.com/articles/voters-turn-out-in-catalonia-for-independence-referendum-1506838287

European Commission Calls Catalonia Vote Illegal (10.2.17) WSJ

https://www.wsj.com/articles/european-commission-calls-catalonia-vote-illegal-1506943214

Catalonia’s Independence Referendum: What You Need to Know (9.29.17) WSJ

http://www.wsj.com/video/catalonia-independence-referendum-what-you-need-to-know/F812FC12-C32A-49DE-BB89-BE6E69E7C567.html

Kurds Vote Overwhelmingly in Favor of Independence from Iraq (9-27-17) CNN http://www.cnn.com/2017/09/27/middleeast/kurdish-referendum-results/index.html

Iraq Imposes Flight Ban on Kurds After Independence Vote (9-29-17) WSJ

https://www.wsj.com/articles/iraqi-forces-close-in-on-islamic-state-stronghold-in-iraq-1506689055

Merkel’s Bavarian Ally Wages Rebellion from the Right (10.6.17) WSJ

https://www.wsj.com/articles/merkels-bavarian-ally-wages-rebellion-from-the-right-1507282202

The Dark Past in Merkel’s Backyard (9-26 -17) WSJ

https://www.bloomberg.com/politics/articles/2017-09-26/the-dark-past-in-merkel-s-backyard

Merkel’s Coalition Wins German Election, but Share of Votes Drops (9-24-17) WSJ

https://www.wsj.com/articles/merkel-on-track-for-victory-in-german-election-exit-polls-show-1506269223

After New Zealand’s Unclear Election, Populists Play Kingmaker (9-23-17) WSJ

https://www.wsj.com/articles/after-new-zealands-unclear-election-populists-hold-power-1506165974

Even in Staid Germany, Protest Parties Poised to Gain Ground (9-21-17) WSJ

https://www.wsj.com/articles/even-in-staid-germany-protest-parties-poised-to-gain-ground-1506025444

 

Conclusion

The EU, the UN and other global entities’ influence and control are currently diminishing.  The global establishment is being challenged and shaken by the rise of nationalism and the desire of individual citizens to keep their national sovereignty, history, culture and identity.  Bloomberg reported that, UK Prime Minister May’s threat to withhold funding from the UN, echoes a call for reform.  Secretary-General Antonio Guterres, is pushing for overhaul of some of the organization’s troubled peacekeeping programs. Tests that will need to be met before U.K. funding is released include centralizing UN operations in each country, and improvements in transparency, including the UN publishing its expenditures, according to May’s office.

The US is also questioning many of the UN’s programs and considering not funding things they deem detrimental to the US and its citizens.  North Korea, Iran, China and other nations are forcing the US to go it alone and form its own policy to deal with trade, international disputes and military threats, due to the lack of cooperation from the UN, EU and other globalist groups with their own agendas.   The exact outcomes of the political, social and economic unrest and irregularities currently brewing are undeterminable at this time.  It is certain however, as water in a kettle, this economic and political instability will eventually come to a boil and no matter which area hits the boiling point first, it will spill over into other areas.

A North Korea Nuclear Test Over the Pacific Logical, Terrifying (9-22-17) Reuters

http://www.reuters.com/article/us-northkorea-missiles-atmospheric-test/a-north-korea-nuclear-test-over-the-pacific-logical-terrifying-idUSKCN1BX0W5

May Says U.K. to Withhold Part of Funding If UN Doesn’t Reform (9-21-17) https://www.bloomberg.com/news/articles/2017-09-20/may-says-u-k-to-withhold-part-of-funding-if-un-doesn-t-reform

Russia and China Hold First Joint Naval Exercises in Baltic Sea (7-25-17) Bloomberg https://www.bloomberg.com/news/articles/2017-07-25/russia-and-china-hold-first-joint-naval-exercises-in-baltic-sea

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US House & Senate Make Grave Mistake – US Will Suffer for their Foolishness

The House and Senate have foolishly and purposely made it almost impossible for the US to have any credibility in the eyes of the rest of the world. By passing new Russian sanctions with a veto proof majority, they have at least at the moment, completely eliminated any chance for the US and Russia to be able to work together to stop North Korea and China, and have severely damaged Trump’s ability to be commander-in-chief. They have ignored the century long strategy of balancing of the super powers, which has always been to side with Russia against China or China against Russia, but never allow Russia and China against the US. We have already begun to enter a trade war against China which is going to get very nasty, not to mention our differences with them in the South China Sea. I didn’t think it possible for any US House and Senate to be worse than during the Obama years, but I was wrong. I have never seen a more foolish, inept, ineffective and damaging House and Senate than the one we have today. Their conduct and actions over the last seven months have made the US the laughing stock of the world.

Russia warned that if the US passed sanctions and did not stop all this foolishness there would be consequences and unlike the US, these are not empty threats. They have now expelled 700-1000 US diplomats and seized US compounds and I guarantee you this is only the beginning. Russia is devastatingly better at intelligence gathering, espionage, negotiation and military strategy than the US. This move may very well go down as one of the worst mistakes the US House and Senate have ever made and hopefully will not lead to even greater consequences. The damage is not irreparable, however the whole politically motivated, meaningless and baseless Russian collusion investigation needs to cease, or the US will continue to descend into greater dysfunction and irrelevance at home and abroad.

Russia to Cut 755 U.S. Diplomats, Staff Amid New Sanctions (7-30-17) WSJ
https://www.wsj.com/articles/russia-to-force-out-755-u-s-diplomats-and-staff-1501447537
Vladimir Putin Expels More Than 700 U.S. Diplomats From Russia, Seizes U.S. Compounds (7-30-17) http://www.theblaze.com/news/2017/07/30/vladimir-putin-expels-more-than-700-u-s-diplomats-from-russia-seizes-u-s-compounds/
China Parades New Missile in Warning to Rivals Abroad and at Home (7-30-17) WSJ
https://www.wsj.com/articles/chinas-new-missile-a-warning-to-rivals-abroadand-at-home-1501409739?mod=nwsrl_asia_news&cx_refModule=nwsrl
Russia and China Hold First Joint Naval Exercises in Baltic Sea (7-25-17) Bloomberg https://www.bloomberg.com/news/articles/2017-07-25/russia-and-china-hold-first-joint-naval-exercises-in-baltic-sea
Russian Scientists Design Stormtrooper Uniform for Military (7-1-17) Blaze http://www.theblaze.com/news/2017/07/01/russian-scientists-design-stormtrooper-uniform-for-military-and-it-looks-incredible/
Is Putin the Preeminent Statesman of Our Times (3-31-17) American Conservative – Patrick Buchanan http://www.theamericanconservative.com/buchanan/is-putin-the-preeminent-statesman-of-our-times/

G-20 Summit & 2.5 Hour Meeting with Putin (7.10.17)

Contrary to most media reports, the G-20 Summit on Friday and Saturday was a great success.  Previous to the meeting most US media posted articles expressing fear that Trump would be taken advantage of by Putin, but the results and an EU body language expert point to an opposite conclusion.  Trump doesn’t get intimidated by anyone, especially the media.  Apparently, the G-20 Summit participants were intimidated by Trump, as he was able to change the G-20 member positons:

  • Trump persuaded them to ‘agree to disagree’ on climate issues and soften the trade language associated with it
  • He also helped protect the US steel industry from illegal and unfair trade practices of various nations, like China dumping steel and under cutting the rest of the world

His scheduled 30 minute meeting with Putin lasted 2.5 hours, and apparently the press has no idea what they talked about or you would be hearing about it.  The one thing we do know is that Trump and Putin in two hours did what the rest of the world hasn’t been able to do in two years, which was to establish a Syrian cease fire.  I have no doubt that much more will come from that 2.5 hour meeting.

 

In my July 1, 2017 Economic Update I wrote:

“The US House and Senate are focused on Russian conspiracies and alleged collisions, they can’t seem to get anything done and Russia and the rest of the world are laughing, not at Trump, but at Washington.  At the same time, whether deserved or undeserved, most of the western world is demonizing Putin and the last thing anybody wants is for Trump and Putin to meet face to face.  Although they don’t agree on everything, they both are disrupters and are not part of the global leader good old boy club.  The other G-20 leaders are very afraid of what could happen if two of the most powerful nations and leaders got together and started resisting their agenda. July 7-8, the G-20 nations will gather in Hamburg Germany and Trump and Putin will finally meet face to face, just like Obama & Bush did.  This certainly will be the most significant meeting in the G-20 gathering.”

It looks like that’s exactly what happened.

 

Body Language Expert Shows Who Dominated the Putin Trump Meeting (7.7.17) TheBlaze

http://www.theblaze.com/news/2017/07/07/body-language-expert-shows-who-dominated-the-putin-trump-meeting/amp/

Jobs, Climate and Steel Highlight Trump’s Effect on the G-20 (7-8-17) Bloomberg

https://www.bloomberg.com/news/articles/2017-07-08/ivanka-trump-sits-in-for-her-father-at-g-20-meeting-table

G-20 Leaders Find Trade Compromises but Are Split on Climate (7-8-17) WSJ

https://www.wsj.com/articles/g-20-leaders-set-to-reach-compromise-on-trade-at-summit-1499513260

Trump, Putin Spar on Hacks, Act on Syria (7-8-17) WSJ

https://www.wsj.com/articles/trump-putin-shake-hands-in-first-face-to-face-meeting-1499423683?mod=nwsrl_world_news

G-20 Forges Trade Compromise as US Tariff Threat Lingers (7-8-17) Bloomberg

https://www.bloomberg.com/news/articles/2017-07-08/g-20-reaches-compromise-on-trade-after-wrangles-on-first-day

Central Bank Hikes, DC Stalls & Political Unrest Create Uncertainty

As the 2nd Quarter ends, World Markets are mostly up, but have been radically shifting on almost a daily basis because of direct and indirect effect of events going on all over the world. Central banks are both talking about and taking direct action in regard to raising interest rates and unwinding their portfolios and holdings, which have dominated the global bond markets since 2008, but especially the last two years.

Along with Central banks, elections have created all kinds of uncertainty and it looks like that trend will continue. UK Prime Minister May called for a snap election in June and lost her conservative majority, but was able to form a coalition government with Northern Ireland’s Democratic Unionist Party to keep her position as Prime Minister. Macron beat back Le Pen for the French Presidency and created quite the stir when he purposely squeezed Trump’s hand for an extended time in a photo shoot. Looks like Merkel has a lock on German elections, but she is being criticized for being too nice to Trump, maybe she should squeeze Trump’s hand too. Italian Elections are still in play and the anti-EU candidate is leading in the polls, as two of Italy’s largest banks have to be bailed out, which the Italian government blames on the EU.

India’s cash ban continues to create havoc and protests. Venezuela continues its descent into dysfunction and default. The state of Illinois may become the first state in the union to default. Cash is beginning to be squeezed from all directions, as Bitcoin and Ethereum are entering into the mainstream and their market values have climbed to record levels. Financial institutions, international corporations and governments are both discussing and taking action toward eliminating cash and utilizing blockchain technologies.

Europe’s Banking Union Fails Its Latest Test (Audio) (6-28-17)
https://www.bloomberg.com/news/audio/2017-06-28/europe-s-banking-union-fails-its-latest-test-view-audio
Italy’s Padoan on Commitment to Two Failed Banks (6-26-17)
https://www.bloomberg.com/news/videos/2017-06-26/italy-s-padoan-on-commitment-to-two-failed-banks-video
India Economy Trails Forecasts as Cash Ban Continues to Weigh (5-31-17) https://www.bloomberg.com/news/articles/2017-05-31/india-economy-trails-forecasts-as-cash-ban-continues-to-weigh
A New Financial System Is Being Born (5-26-17) by Tyler Durden
http://www.zerohedge.com/news/2017-05-25/new-financial-system-being-born?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Cryptocurrency Mania Goes Beyond Bitcoin (5-24-17)
https://www.bloomberg.com/news/articles/2017-05-24/cryptocurrency-mania-goes-beyond-bitcoin-as-altcoins-lead-gains
Post-Bitcoin Technology Has Geeks, Giants, and Hackers Excited (3-28-17) https://www.bloomberg.com/news/articles/2017-03-23/post-bitcoin-technology-has-geeks-giants-and-hackers-excited?cmpid=socialflow-twitter-businessweek&utm_content=businessweek&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social
The Future of Cryptocurrency – By Investopedia Staff | http://www.investopedia.com/articles/forex/091013/future-cryptocurrency.asp

Central Banks
The Federal Reserve decided to begin to unwind (reduce) their bond holdings and purchases, but they have to be careful because too much too soon could drive down treasuries and hurt the US and global bond markets, as they begin to shrink liquidity levels. As expected, the Fed raised interest rates a quarter point and is planning to raise them again in September or October. Historically, 84% of the time the Feds have raised interest rates the economy has gone into recession; this has happened in 16 of the last 19 rate hike cycles. The Fed is confused and not sure what to do, because inflation and the stock market are not responding like they have in the past. They continue to error, because their methods of analyses are too narrow in their scope and insufficient for today’s global marketplace. In the June 16th – 5 Minute Forecast, Jim Rickards said, “the Fed blithely dismisses all the lousy economic data and recent dis-inflationary trends as ‘transitory,’ that’s the Fed’s favorite word when the data don’t fit their thesis… The Fed also saw strength based on job creation and a low unemployment rate — which totally ignores declining productivity and labor force participation.” Jim believes the Fed has grossly miscalculated and this will cause the Fed to flip to easing later in the year, and that the financial markets don’t see this coming.

Reuters has reported: “The Federal Reserve is inconsistent in the way it monitors big banks and that lack of consistency could make it difficult to identify emerging risks across banks, according to a study by auditors at the U.S. central bank released on Monday. Each of the 12 regional Federal Reserve Banks nationwide had different guidance for how they continuously monitored large financial institutions, the study from the Office of the Inspector General found.”

Bloomberg also reported: “The Fed raised interest rates again on June 14, even though inflation is below its target. That’s because it’s counting on low unemployment to push up wages and prices. The U.S. central bank isn’t sure why inflation is staying so low—but it’s raising rates anyway, risking a recession. But those who set interest rates are in the awkward position of not understanding how things got so good—and are therefore confused about what to do next.”

According to the WSJ: The Bank of Mexico lifted the overnight interest rate target by a quarter percentage point to 7%, the highest level since early 2009, and indicated that the tightening cycle that began in September has ended for now. Bloomberg reported: At the ECB Forum in Sintra, Portugal, Mario Draghi hinted at how he may sell a gradual unwinding of European Central Bank stimulus and how the ECB may, if appropriate conditions exist, become less accommodative in 2018. The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. “Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them.” The Canadian Central Bank has also signaled that they are going to raise interest rates in July and the UK said they may as well.

Pound Surges as Bank of England’s Carney Hints at Rate Rise (6-28-17) WSJ
https://www.wsj.com/articles/boes-carney-some-removal-of-stimulus-may-be-necessary-if-economy-improves-1498658542
Bank of Canada’s Poloz Signals July Rate Rise in Play (6-28-17)
https://www.wsj.com/articles/boc-gov-stephen-poloz-signals-july-rate-rise-in-play-1498652646
Global Bonds Gyrate as Investors Try to Parse Central Banks Next Stimulus Moves (6-28-17) WSJ
https://www.wsj.com/articles/eurozone-bonds-extend-selloff-on-hints-of-ecb-taper-1498638797
Draghi Sees Room for Paring Stimulus Without Tightening Policy (6-27-17) https://www.bloomberg.com/news/articles/2017-06-27/draghi-says-stimulus-still-needed-even-as-euro-area-reflates
Mexico’s Central Bank Lifts Rates to 7% (6-22-17)
https://www.wsj.com/articles/mexicos-central-bank-lifts-rates-to-7-1498156813
Central Bank Cash Flood Swells Bond Danger (6-2-17)
https://www.bloomberg.com/gadfly/articles/2017-06-02/central-banks-are-raining-cash-and-flood-is-swelling-bond-danger
The Fed Is Flying Blind (6-14-17) Bloomberg | https://www.bloomberg.com/news/articles/2017-06-15/the-fed-is-flying-blind?cmpid=BBD061517_MKT&utm_medium=email&utm_source=newsletter&utm_term=170615&utm_campaign=markets
Federal Reserve Inconsistent in Monitoring Big Banks Say Auditors (10-12-17) Reuters http://mobile.reuters.com/article/idUSKBN1752HW

Political Unrest & Elections
UK’s PM made a huge mistake when she called for early elections and lost her conservative majority and had to form a coalition government with Northern Ireland’s Democratic Unionist Party. The 3rd Brazilian president in two years has been charged with corruption and has only been in office about 7 months since the last president was impeached. Merkel called the UK and US unreliable partners, because each has disagreed with her and the EU on different issues. Since WWII, the US and the UK have never been accused of not being reliable partners, so this is pretty significant rhetoric, especially when issues of global climate control and the right of a nation to determine its own national sovereignty are the divisive issues trumping international security and trade.

The US House and Senate are focused on Russian conspiracies and alleged collusion, they can’t seem to get anything done and Russia and the rest of the world are laughing, not at Trump, but at Washington. At the same time, whether deserved or undeserved, most of the western world is demonizing Putin and the last thing anybody wants is for Trump and Putin to meet face to face. Although they don’t agree on everything, they both are disrupters and are not part of the global leader good old boy club. The other G-20 leaders are very afraid of what could happen if two of the most powerful nations and leaders got together and started resisting their agenda. July 7-8, the G-20 nations will gather in Hamburg Germany and Trump and Putin will finally meet face to face, just like Obama & Bush did. This certainly will be the most significant meeting in the G-20 gathering.

The WSJ reported: the EU’s executive launched legal proceedings against Poland, Hungary and the Czech Republic for refusing to take in asylum seekers, reigniting a fight that is likely to widen as the bloc seeks unity in Brexit negotiations with the U.K. The former communist countries that joined the EU about a decade ago have almost no experience integrating Muslim populations. Poland and Hungary refused to take any asylum seekers, while the Czech Republic took 12 last year. It recently announced it would quit the program. Legal proceedings against member states can end up in EU’s top court and bring financial penalties unless the countries reverse course. None of the three countries have indicated they would change their minds. European Commission chief Jean-Claude Juncker has warned that refusing to admit refugees might result in Central and Eastern European states receiving less financial support. Polish Foreign Minister Witold Waszczykowski said that the threat of funding cuts amounted to “blackmail” and questioned the legality of such a move. “We will keep on defending our principles,” Waszczykowski said. The Blaze reported: “The European Union is so dedicated to the relocation of Muslim refugees from the Middle East to Europe that it is threatening members who don’t participate with economic sanctions. Poland answered the threat with a defiant message.” EU bureaucrats seem hell bent on pushing their immigration agenda in both Brexit negotiations as well as against its own member states. If they continue to arrogantly make their members give up their national identity and sovereignty to fit their European utopian ideal, they will be the cause of more nations exiting the EU.

Trump to Meet Putin at G-20 Summit for First Time as Leaders (6-29-17)
https://www.bloomberg.com/news/articles/2017-06-29/trump-to-meet-putin-at-g-20-summit-for-first-time-as-president
Brazil’s President Michael Temer is Charged with Corruption (6-27-17) WSJ
https://www.wsj.com/articles/brazil-president-michel-temer-is-charged-with-corruption-1498520407
May Clinches Deal With Northern Irish Party to Support Minority Government (6.27.17) https://www.wsj.com/articles/theresa-may-clinches-deal-with-northern-irish-party-to-support-minority-government-1498473399?mod=nwsrl_world_news
EU Raises Stakes Over Refusal to Take Asylum Seekers (6-13-17) WSJ
https://www.wsj.com/articles/eu-raises-stakes-over-refusal-to-take-asylum-seekers-1497366799
The EU Threatens Poland for not Accepting Muslim Refugees & Their Response (6-19-17) Blaze http://www.theblaze.com/news/2017/06/19/the-eu-threatens-poland-for-not-accepting-muslim-refugees-heres-how-they-responded/
Putin Praises Trump and Suggests Russian Hand in Hacking (6-1-17)
https://www.bloomberg.com/politics/articles/2017-06-01/putin-says-he-likes-guys-like-trump-and-hopes-for-better-ties
Merkel Warns US, Britain no Longer Reliable Partners (5-28-17) MSN
http://www.msn.com/en-us/news/world/merkel-warns-us-britain-no-longer-reliable-partners/ar-BBBB462?li=BBnb7Kz&ocid=UE07DHP
Russians Are Laughing at the U.S., Not Just at Trump (5-19-17) By Leonid Bershidsky https://www.bloomberg.com/view/articles/2017-05-19/russians-are-laughing-at-the-u-s-not-just-at-trump

Brexit
Bloomberg reported: “Britain is ready to fight the European Union’s demand that judges on the continent hold sway in the U.K. after Brexit. Brexit Secretary David Davis, in a direct challenge to officials in Brussels, said the European Court of Justice won’t have a role protecting the rights of 3.2 million EU nationals living in U.K. after the country leaves in 2019.” PM May said, she’ll be ‘bloody difficult’ in Brexit talks. “EU ministers finalized their Brexit negotiating position a day after the U.K. threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112 billion). Even a 1 billion pound settlement would be “a lot of money,” Brexit Secretary David Davis said in an interview published in the Sunday Times. Davis went on to say, “We don’t need to just look like we can walk away, we need to be able to walk away.” As the war of words continues, the EU has threatened the UK, the US and other EU nations, while decrying the demise of the British economy, which continues to out preform the EU. The UK and EU can’t seem to come to terms on any of the main points, so their supposed two years of negotiations will most likely be cut short and the UK will initiate a hard Brexit.

Brexit Fight Looms Over Role of European Court, U.K. Warns (6-23-17)
https://www.bloomberg.com/news/articles/2017-06-25/u-k-credit-binge-may-spur-boe-s-carney-to-rein-in-exuberance
London’s Brexit Apocalypse Is Nowhere in Sight (6-1-17)
https://www.bloomberg.com/news/features/2017-06-01/the-whistleblower-behind-caterpillar-s-massive-tax-headache-could-make-600-million
EU Finalizes Brexit Position as U.K. Threatens to Quit Talks (5-20-17)
https://www.bloomberg.com/politics/articles/2017-05-23/trump-seeks-3-6-trillion-in-spending-cuts-to-reshape-government
Ted Cruz Destroys European Leader After he Taunts America Don’t Mess with Texas (4.1.17) http://www.theblaze.com/news/2017/04/01/ted-cruz-destroys-european-leader-after-he-taunts-america-dont-mess-with-texas/
EU to Trump Mess With Brexit and We’ll Mess With Texas (3-30-17)
https://www.bloomberg.com/politics/articles/2017-03-30/eu-s-juncker-to-trump-back-brexit-i-ll-push-texas-independence

Global Markets & Economies
The IMF, in its annual review, lowered its forecast for the U.S. economy from 2.3 to 2.1%, because they don’t think the Trump Administration can deliver tax cuts and higher infrastructure spending. The IMF believes the US growth rate will fall to 1.7%, over the next five years, if US policy does not significantly change. WSJ reported: “China’s efforts to open up its markets to global investors won a long-awaited endorsement when MSCI Inc. said it would add Chinese shares to its emerging-markets index. MSCI’s decision Tuesday to add China A-shares, stocks denominated in yuan and listed in either Shanghai or Shenzhen, to its MSCI Emerging Markets Index stands to boost demand for Chinese stocks by billions of dollars over time.”

The June 21st 5 Minute Forecast reported: “Russia updates its gold purchases on the 20th of the month. Over the last month the Central Bank of Russia added 21.8 metric tons to its stash. At 1,708 metric tons, Russia’s gold holdings are the sixth largest in the world, right behind China’s. Well, except that China is lowballing its numbers.”

Germany, unlike most of the EU, is doing very well and has been pressuring the ECB to stop printing money and raise interest rates. Hong Kong’s financial secretary announced a budget surplus of $92.8B ($11.9B in USD) and their total fiscal reserve was nearly HKD $1 trillion, around $120 billion USD.

IMF Lowers Forecast for U.S. Economy Amid Rising Policy Uncertainty (6-27-17) WSJ https://www.wsj.com/articles/imf-lowers-forecast-for-u-s-economy-amid-rising-policy-uncertainty-1498568402
IMF Cuts U.S. Outlook, Calls Trump’s Growth Target Unlikely (6-27-17)
https://www.bloomberg.com/news/articles/2017-06-27/imf-cuts-u-s-outlook-calls-trump-s-growth-target-unrealistic
Take Advantage of this Free Insurance Policy for your Savings (6-26-17) SMC
https://www.sovereignman.com/trends/take-advantage-of-this-free-insurance-policy-for-your-savings-22063/?inf_contact_key=a061246253755f6f97afe7738e76a5ce8fcf6c273a246fafef79b709fbdc5eb9
MSCI to Add China Shares to Indexes, Opening Market to More Foreign Investors (6-19-17)
https://www.wsj.com/articles/msci-to-include-china-a-shares-in-indexes-1497992319
Booming German Economy in Election Year Puts ECB in Crossfire (5-23-17) https://www.bloomberg.com/politics/articles/2017-05-23/booming-german-economy-in-election-year-puts-ecb-in-crossfire

Recessionary Signs, Debt & Defaults
Most markets continue to hold their own despite recessionary signs, rising debts and looming defaults. Housing starts dropped 5.5%. U.S. new-home construction declined for the third straight month in May, signaling a softening in home building at a time of tight supply. Bloomberg reported: “Illinois may soon become the first state on record to have its bond rating cut to junk. Illinois is on track this fiscal year to spend over $6 billion more than it brings in, and public universities are reeling from the loss of state aid. On June 1, S&P Global Ratings warned that the loss of its investment-grade rating is likely unless action comes soon. States aren’t eligible to petition U.S. courts to escape from their debts, the way cities such as Detroit have. While Congress amended the law to allow for Puerto Rico to do so, any effort to extend that to states is extremely unlikely, would face intense opposition and may not pass constitutional muster. Mutual funds that are only allowed to own investment-grade securities would be unable to purchase its bonds, leaving it potentially more dependent on non-traditional buyers such as high-yield and hedge funds. Putting the state’s bonds just one step below investment grade indicates that’s a fairly distant possibility. No state has defaulted since Arkansas did in the Great Depression.’ As international bond raters are about to lower Illinois municipal bonds to junk status, we’ll have to see what the US will do, if the state of Illinois does default. The US is only one of many nations dealing with debt. India has one of the fastest growing economies on the globe, but they have a growing mountain of bad debt at the nation’s banks. China was also downgraded because of its growing mountain of debt.

Italy’s Newest Bank Bailout Cost as Much as its Annual Defense Budget (6-26-17) SMC https://www.sovereignman.com/trends/italys-newest-bank-bailout-cost-as-much-as-its-annual-defense-budget-22088/?inf_contact_key=01fa71ed74275c2c2e276333889ade4ee3e27225c53853e98e4b9ccc96020d6e
Here’s One Record Illinois Doesn’t Want to Attain QuickTake Q&A (6-20-17) https://www.bloomberg.com/news/articles/2017-06-20/here-s-one-record-illinois-doesn-t-want-to-attain-quicktake-q-a
S&P, Moody’s Downgrade Illinois to Near Junk, Lowest Ever for a U.S. State (6-1-17) https://www.bloomberg.com/news/articles/2017-06-01/illinois-bonds-cut-to-one-step-above-junk-by-s-p-over-stalemate
Illinois Budget Crisis Is About to Get Even Harder to Solve (5-31-17)
https://www.bloomberg.com/politics/articles/2017-05-31/illinois-budget-crisis-is-about-to-get-even-harder-to-resolve
Why India’s Zombie Debt Imperils Modi’s Plans (5-29-17)
https://www.bloomberg.com/politics/articles/2017-05-30/why-india-s-zombie-debt-imperils-modi-s-plans-quicktake-q-a
China’s Downgrade Could Lead to a Mountain of Debt (5-24-17)
https://www.bloomberg.com/news/articles/2017-05-24/china-downgrade-may-build-debt-mountain-as-firms-borrow-at-home
China’s Stocks, Yuan Erase Losses Triggered by Moody’s Downgrade (5-23-17) https://www.bloomberg.com/news/articles/2017-05-24/china-stocks-slump-yuan-falls-after-moody-s-cuts-credit-rating
U.S. Housing Starts Fall for Third Consecutive Month in May (6-16-17) WSJ
https://www.wsj.com/articles/u-s-housing-starts-fall-for-third-consecutive-month-in-may-1497616335
U.S. Consumer Sentiment Declined in Early June (6-16-17) WSJ
https://www.wsj.com/articles/u-s-consumer-sentiment-declined-in-early-june-1497622592
Sloppy Subprime Loans Will Deepen Auto Woes (5-22-17)
https://www.bloomberg.com/gadfly/articles/2017-05-22/sloppy-subprime-auto-loans-will-deepen-car-makers-woes
Retail Bankruptcies March Toward Post-Recession High (3-31-17) CNBC
http://www.cnbc.com/2017/03/31/retail-bankruptcies-march-toward-post-recession-high.html

In the June 21st Daily Reckoning report, Jim Rickards wrote, “The systemic dangers are clear. The world is moving toward a sovereign debt crisis because of too much debt and not enough growth. Declining productivity is the last nail in the coffin in terms of countries’ ability to deal with the debt. Unlike 1998 and 2008, the next panic will be unstoppable without extreme measures — including IMF money printing, lock-downs of banks and money market funds”

In the article below, Simon Black shares his experience with our current banking system. Black explains, “SWIFT is a worldwide banking network, it’s how one financial institution sends and receives wire transfers and payments and it is absolutely critical to global banking. SWIFT runs on Windows Vista, an obsolete operating system that Microsoft no longer supports. And the absurdity of having to find an obsolete computer running an obsolete operating system to connect to the supposedly most advanced and important international payment network in the world.” I think you will find the other Simon Black articles below both entertaining and insightful.

Argentina Issues 100-year Bond What Could Possibly go Wrong (6-20-17) SMC https://www.sovereignman.com/trends/argentina-issues-100-year-bond-what-could-possibly-go-wrong-22073/?inf_contact_key=dab2de50286192df63e50f0588d7ca12b211e72db24695a49e25561b502997a3
Record Wealth in America 72% of US Businesses Are Not Profitable (6-12-17) SMC https://www.sovereignman.com/trends/record-wealth-in-america-72-of-us-businesses-are-not-profitable-21989/?inf_contact_key=3676b5325ffbc03f7544ce0b4cb585118315c396cd6042b822d8cc22fccb2d66
I Never Knew How Screwed up Global Banking was Until I Started my Own Bank (5.2.17) Simon Black https://www.sovereignman.com/trends/i-never-knew-how-screwed-up-global-banking-was-until-i-started-my-own-bank-21494/?inf_contact_key=0240d362cd9efe62fa004640b004eb1ff6654304520e20ce16520eb2921c68cd
Mining CEO Explains Why Silver Could Reach $136.67 (5-8-17) SMC
https://www.sovereignman.com/trends/mining-ceo-explains-why-silver-could-reach-136-67-21608/?inf_contact_key=ae2f32a529ded7de057b1b7f4aca86bace4cc610effc4d454966754b761956da

Elections, Political Upheaval, Brexits Create Volatility (5-19-17)

As May comes to a close, both market and political volatility have increased; it’s hard to separate the two.  The Trump presidency seems to be self-destructing with Trump tweets, allegations of interfering with a Federal investigation and a former FBI Director being appointed as a special council/prosecutor sent the Dow falling 370 points in one day.  The establishment candidate Macron won in France, but the anti-EU party gained more seats than ever before, just like in the Netherlands two months earlier.  In Italy, anti-EU populist candidate Beppe Grillo has consistently led in all the polls. On May 18th, Brazilian markets fell because their current PM, who less than a year ago replaced the previously impeached PM, paid hush money and it looks as though he will be forced to resign.

Ex-FBI Chief Mueller Named Special Counsel on Russia Probe (5-17-17)

https://www.bloomberg.com/politics/articles/2017-05-17/former-fbi-chief-mueller-named-special-counsel-on-russia-probe

Dow Falls 370 Points, Bonds Rally on Trump Turmoil: Markets Wrap (5-17-17) https://www.bloomberg.com/news/articles/2017-05-16/yen-climb-to-weigh-on-japan-stocks-gold-gains-markets-wrap

Brazil Markets Plunge as President Caught in Scandal (5-18-17)

https://www.bloomberg.com/news/videos/2017-05-18/markets-react-to-brazil-in-political-crisis-video

A Populist Storm Stirs in Italy (5-12-17) WSJ

https://www.wsj.com/articles/a-populist-storm-stirs-in-italy-1494596762?mod=nwsrl_world_news

 

Brexit Battle

In the UK Prime Minister May called early elections on June 8th to strengthen her negotiating position in their divorce from the EU, while at the same time issuing the Tory manifesto that no deal is better than a bad deal and setting a stage for a hard Brexit.  The EU is regularly warning the UK that they do not have the upper hand and will suffer if they don’t relent.  German Chancellor Merkel (also running for reelection) arrogantly warned that there will be repercussions if the UK refuses to allow free and unhindered immigration.  In my opinion these negotiations are going nowhere.

U.K.’s May Commits Tories to Hard Brexit Stance in Manifesto (5-18-17) https://www.bloomberg.com/politics/articles/2017-05-18/u-k-s-may-commits-tories-to-hard-brexit-stance-in-manifesto

U.K. Picks New Fight With EU Over Citizens’ Rights, Brexit Bill (5-12-17) https://www.bloomberg.com/politics/articles/2017-05-14/u-k-picks-new-fight-with-eu-over-citizens-rights-brexit-bill

EU Rejects May’s Charge of Election Meddling, Appeals for Calm (5-4-17)

https://www.bloomberg.com/politics/articles/2017-05-04/eu-rejects-may-s-charge-of-election-meddling-appeals-for-calm

EU Throws Down Brexit Gauntlet to U.K. as Talks Edge Closer (4-29-17) https://www.bloomberg.com/politics/articles/2017-04-29/eu-throws-down-brexit-gauntlet-to-britain-as-talks-edge-closer

 

The EU

The EU is a mixed bag of economic reports.  Bloomberg reported:

“U.S. protectionist measures and China’s economic adjustment may risk Europe’s recovery.  The European Union raised its 2017 economic growth forecast Thursday, saying the bloc’s revival is strengthening despite geopolitical risks that could undermine its fifth year of recovery.  Gross domestic product in the 28-country EU will grow by 1.9% in both 2017 and 2018.”

Italy’s recovery is 0.9%, but Greek estimates were pared to 2.1%, as their economy slipped back into recession in the first quarter.  EU officials are optimistic, pointing to declining unemployment and positive French elections.  France’s unemployment numbers dropped to the best level in five years.  Germany’s GDP grew at 0.6%, or 2.4% in annualized terms, comfortably outpacing the U.S., which expanded by 0.7% annualized in the first quarter.

Greek Economy Limps Onto Launchpad After Late-Night Vote (5-19-17) https://www.bloomberg.com/politics/articles/2017-05-19/greek-economy-limps-onto-launchpad-after-late-night-budget-vote

France’s Unemployment Rate Falls to Lowest Since 2012 Chart (5-18-17)

https://www.bloomberg.com/news/articles/2017-05-18/france-s-unemployment-rate-falls-to-lowest-since-2012-chart

German Growth Outpaces U.S. on Rising Exports, Construction (5-12-17) WSJ

https://www.wsj.com/articles/german-growth-outpaces-u-s-and-u-k-as-mild-weather-boosts-construction-1494571069

EU Raises Growth Forecasts but Warns on Threat from Brexit and Trump (5-12-17)

https://www.wsj.com/articles/eu-raises-growth-forecasts-but-warns-on-threat-from-brexit-and-u-s-1494493064

 

Australia

Australia is not without problems, but conditions seem to be improving.  The value of the Australian Dollar has fallen, but business confidence has risen to its highest level in seven years.  Employment surged in March, along with the biggest gain in full-time jobs in almost 30 years, as a recovering jobs market joined a spike in business conditions to suggest a stronger economy.  The recovery in Australia’s labor market, coupled with the best business conditions since 2008, as well as the improvement in full-time employment, could lead to a November rate hike.  Chairman Lowe said:

My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks.  Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Both from an individual and an economy-wide perspective, we need to pay attention to how the higher level of debt affects our resilience to future shocks.”

Lifting interest rates to pop the bubble is too risky: it would threaten the recovery given slack in the labor market and already record-low wage growth.

Australia’s Full-Time Employment Surges Most in Nearly 30 Years (4-12-17) https://www.bloomberg.com/news/articles/2017-04-13/australian-employment-surges-in-march-on-full-time-jobs-rebound

Surging Debt Has Weakened Australia’s Resilience, RBA’s Lowe Says (5-3-17) https://www.bloomberg.com/news/articles/2017-05-04/rba-s-lowe-says-surging-debt-has-weakened-economy-s-resilience

Australian Business Confidence Jumps to Highest in Seven Years (5-7-17)

https://www.bloomberg.com/news/articles/2017-05-08/australian-business-confidence-jumps-to-highest-in-seven-years

The Australian Dollar’s Outlook Darkens (5-15-17)

https://www.bloomberg.com/news/articles/2017-05-15/australian-dollar-s-outlook-darkens-as-long-positions-dwindle

 

Emerging-market companies have increased their borrowing by a staggering $17 trillion since 2008, according to the Institute of International Finance.  Worry grows over impact on repayments if global growth eases or interest rates increase.  Emerging-market companies are binging on U.S. Dollar debt and that could become a source of trouble in some parts of the world if growth slows, interest rates rise or the USD resumes its ascent.  China continues to deal with its spending and debt problem, but still has 6% GDP growth.  India is also dealing with debt problems and is still reeling from its prime minister’s attempt to change from a cash economy to a banking economy; however its growth rate is 7.2%, better than China and dwarfing the US at 1.8%.

 

RBI Says Infusing Funds Into India Lenders Won’t Solve Debt Mess (5-9-17) https://www.bloomberg.com/news/articles/2017-05-19/rbi-says-infusing-funds-into-india-lenders-won-t-solve-debt-mess

Inflation Drop Unlikely to Sway India’s Hawkish Central Bank (5-19-17)

https://www.bloomberg.com/news/articles/2017-05-17/inflation-plunge-unlikely-to-sway-india-s-hawkish-central-bank

Flood of Dollar Debt Could Come Back to Haunt Emerging Economies (4-23-17) WSJ https://www.wsj.com/articles/flood-of-dollar-debt-could-come-back-to-haunt-emerging-economies-1492945204

 

Central Banks

The Federal Reserve is planning to raise interest rates in June, and to begin to unwind their balance sheet, which means not purchasing new bonds and allowing their current holdings to mature and fall off the books.  In a WSJ interview, “Bank of Japan Gov. Haruhiko Kuroda defended the drastically expanded monetary stimulus he has overseen. The BOJ holds more than 40% of outstanding Japanese government bonds, its policy centers on keeping interest rates very low through enormous bond purchases—as well as trillions of yen worth of Japanese shares, so many investors have a stake in the unwinding.  Mr. Kuroda said a policy divergence between Japan and the U.S.—where the Federal Reserve has begun to raise interest rates—is a “natural” phenomenon. Europe and Japan are “lagging behind” the U.S., he said.”  The minutes of the ECB’s latest policy meeting underlined that a minor change in language could cause investors to quickly price in a completely new policy path toward higher interest rates.”  Whatever course is chosen, the combined balance sheets of the US, Japan and the EU, total over $13 Trillion and the unwinding will be a massive undertaking and will certainly affect global markets.

ECB Wary of Repeat of Fed’s Taper Tantrum (5.18.17) WSJ

https://www.wsj.com/articles/ecb-wary-of-repeat-of-feds-taper-tantrum-1495125177

Bank of Japan Chief: Unwinding Stimulus Won’t Bring Turmoil (5-16-17) WSJ

https://www.wsj.com/articles/bank-of-japan-chief-unwinding-stimulus-wont-bring-turmoil-1494916140

Warsh Calls for Fed-Treasury Plan to Smooth Balance-Sheet Unwind (5-5-17) https://www.bloomberg.com/news/articles/2017-05-05/warsh-calls-for-fed-treasury-plan-to-smooth-balance-sheet-unwind

Fed Sticks to Gradual Rate-Hike Approach Despite Slowdown (5-3-17)

https://www.bloomberg.com/news/articles/2017-05-03/fed-signals-gradual-rate-hike-approach-intact-despite-soft-patch

Markets Start to Ponder the $13 Trillion Gorilla in the Room (4-19-17)

https://www.bloomberg.com/news/articles/2017-04-19/markets-start-to-ponder-the-13-trillion-gorilla-in-the-room

 

Conclusion

US markets and world markets are based far more on perception than they are on reality.  As long as consumers and investors keep spending and investing, things will continue to move forward.  However, this can be problematic, because “no fear” can cause investors to invest stocks with high PE (price to earnings) and many stocks are already 50% overvalued.  This means people would lose a lot in a downturn.  Bloomberg reported that Global shadow banking assets grew to an estimated $80 trillion in 2014, with $36 trillion of that deemed risky  to the financial system, by the Financial Stability Board.  However, trying to regulate it would create more problems than it solves and could severely damage commerce which has relied on alternative banking for centuries.  The Chinese and U.S. stock markets are going in opposite directions.  The divergence means the two markets are the least in tune since August 2008 – just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system. On a final note, China’s President Xi will be hosting a Summit with the leaders of over 30 nations this weekend, however, the US wasn’t invited.  I have no doubt the US will be one of the main topics of discussion.  I have included two articles from Simon Black which I found quite illuminating, one on banking and the other on silver.  Like it says in Mathew 24 & 25, we need to be watchful and pay attention.

Beijing Puts Its Best Foot Forward for Xi’s Summit (5-14-17) Bloomberg News https://www.bloomberg.com/politics/articles/2017-05-14/beijing-suddenly-has-blue-skies-clean-air-as-xi-hosts-summit

Market’s ‘Fear Gauge’ Nears 1993 Low (5-8-2017) WSJ

https://www.wsj.com/amp/articles/markets-fear-gauge-nears-1993-low-1494263976

Mining CEO Explains Why Silver Could Reach $136.67 (5-8-17) SMC

https://www.sovereignman.com/trends/mining-ceo-explains-why-silver-could-reach-136-67-21608/?inf_contact_key=ae2f32a529ded7de057b1b7f4aca86bace4cc610effc4d454966754b761956da

I Never Knew How Screwed up Global Banking was Until I Started my Own Bank (5.2.17) SMC https://www.sovereignman.com/trends/i-never-knew-how-screwed-up-global-banking-was-until-i-started-my-own-bank-21494/?inf_contact_key=0240d362cd9efe62fa004640b004eb1ff6654304520e20ce16520eb2921c68cd

Shadow Banking (5-19-17) https://www.bloomberg.com/quicktake/shadow-banking

China’s $8.5 Trillion Shadow Bank Industry Is Back in Full Swing (4-18-17) https://www.bloomberg.com/news/articles/2017-04-18/china-s-8-5-trillion-shadow-bank-industry-is-back-in-full-swing

World’s Biggest Stock Markets Haven’t Been This Split Since 2008 (4-25-17) Bloomberg News https://www.bloomberg.com/news/articles/2017-04-25/world-s-biggest-stock-markets-haven-t-been-this-split-since-2008

 

 

International Unrest, Political Uncertainty & Shaky Global Economies 4-26-2017

As April ends and May begins the soil in the north central states in the USA is very wet, not firm, and if you were to drive over it you would most likely get stuck.  The current political and financial state of the US, EU, Japan, and China are also not very firm, filled with potential potholes and sinkholes.

In the last four weeks international unrest has greatly increased: Syria was accused of using chemical weapons against its own people. Russia is accused of lying about the removal of the chemical weapons from Syria and of aiding and abetting Assad.  President Trump without asking the world’s permission, during his meeting with Chinese Premier Xi, bombed Syria and the military installation which the US believes the chemical weapons came from.  Russia then accused the US of acting illegally according to international law.

North Korea has been firing ballistic missiles toward Japan and others and making threats against the whole world.  The US issued statements that NK needs to behave or else, causing military dictator Kim Jung Un to say he would destroy the US and daring them to retaliate.  Trump then sent 5 ships off the coast of Korea to participate in war games with Japan, Australia and South Korea.  Russia then sent an aircraft carrier 25 miles off the coast of the US and the Chinese have mobilized 250,000 troops on the northern border of NK.  Putin has made it clear that things are spiraling out of control and cautions all sides not to take military action in a speech on Thursday April 27th.

Along with these events the US dropped the largest non-nuclear bomb in existence on top of a series of ISIS tunnels in Afghanistan.  ISIS, however, has continued terrorist actions in France and other nations over the last week.

Politically, the Netherlands is trying to form a coalition government in the next 60 days or they will have another set of elections.  France has just had the first round of elections leaving LaPenn (the anti-establishment, anti-EU candidate) and Macron (the establishment candidate) to battle one another in a runoff election on May 9th.  PM May of the UK has called elections 3 years early hoping to gain more seats and strengthen her ability to negotiate the Brexit from the EU, as the negotiations are not going well.  Italy has not called elections yet, but the anti-establishment candidate has a commanding lead.

On the economic front: the EU is treading water with a nearly zero growth rate, the US growth rate was reduced after the first quarter from 2.8% to .2% by the Atlanta Fed, China’s debt is scaring everyone including them, but Russia had one of the most improved economies in 2016 and is pegged to be one of the best preforming economies in 2017.

President Trump unveiled his tax plan this week which doubles the deduction for married couples, lowers the US Corporate tax from one of the highest rates at 35% to 15%, and reduces the number of tax brackets from 7 to 3. It eliminates the estate/death tax, retains mortgage and charitable deductions, but eliminates other deductions… more details to follow.

On April 28th, the government is slated to run out of money, but will probably pass a temporary extension for a week.  A huge fight is brewing whether to raise or not raise the debt ceiling and at this point the various Washington factions each think they can win, so unless something changes a battle is almost guaranteed.  If the debt ceiling isn’t raised in the next month or two there will be a government shutdown, like there was during the Obama administration.  This time, however, things are different and no one knows what Trump, the Freedom Caucus, the Dems or the rest of the House and Senate will do.

US and global markets have not factored in a US government shutdown, a new war, another EU exit or non-establishment elected leader, so if one or more of the events occur, it will certainly rattle global markets.

Until next time,

Fulton Sheen

Media Source Links

Congress Does Bare Minimum to Keep Government Open Next Week (4-28-17

https://www.bloomberg.com/politics/articles/2017-04-28/house-does-bare-minimum-to-keep-u-s-government-open-next-week

US Economy Expands at the Slowest Pace in Three Years (4-28-17) Bloomberg Video https://www.bloomberg.com/news/videos/2017-04-28/u-s-economy-expands-at-slowest-pace-in-three-years-video

Federal Reserve Bank of Atlanta GDP Forecast for 2017 (4-27-17) https://www.frbatlanta.org/cqer/research/gdpnow  |

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

White House Unveils Trump’s Opening Tax-Cut Bid (4-26-17)

https://www.bloomberg.com/news/articles/2017-04-26/white-house-unveils-trump-s-opening-bid-for-biggest-tax-cut

EU Toughens Brexit Stance in Sign U.K. Vote Won’t Alter Approach (4-20-17) https://www.bloomberg.com/politics/articles/2017-04-20/eu-toughens-brexit-stance-in-sign-u-k-vote-won-t-alter-approach

These Economies Are Seen Improving Dramatically This Year (3-20-17)

https://www.bloomberg.com/news/articles/2017-03-20/these-economies-are-seen-improving-dramatically-this-year

 

Hold On It’s About To Get Rocky (3-11-17)

So How Did It Turn Out (updated 4-3-17)

The following events will very likely create a lot of volatility in both the political landscape as well as the global marketplace.  Any one of these events would be sufficient to create reverberations, but put together, they should create a high degree of uncertainty. Two of the four of the events below happened.

  • The Federal Reserve meets next week on March 14-15 and will raise interest rates
  • Dutch Elections will be held on March 15th
  • The UK plans to trigger Article 50, which will actually exit the EU
  • French Elections are April 23rd

There looks to be an almost 90% certainty that the Federal Reserve will raise interest rates, (they raised them .25 points) which normally means the USD will go up and the stock & bond market will go down.  This will cause borrowing in the US to become more expensive and businesses may choose to hold back expanding, mortgage payments will rise and consumers may not want to take on more debt at higher rates.  It also makes US debt (US bonds & treasuries) rates rise which increases the debt service payments that the US Treasury has to make on the now $20 trillion it owes the rest of the world, creating even a greater deficit.  This is especially true since a vast majority of the $20T is short term debt, a year or less which means it automatically goes up with interest rates like an ARM-mortgage.

On the same dates next week, the citizens of the Netherlands will be voting in their parliamentary elections, the results of which will not only decide which party will be in the majority, but also whether the Netherlands will stay or exit the EU.  Gerritt Wilder and the freedom party are currently leading in the polls and the same dire predictions which were made against Donald Trump and the UK exiting the EU are being made against him. Wilder’s party didn’t win the majority, but his party came in second in the amount of seats.  In a parliamentary system, if one party does not win an outright majority, it must form a coalition government which means they must work with other parties to achieve the number of seats necessary to form a working majority under one prime minister; if this can’t be achieved in 90 days they have to have new elections.  The winning party may or may not achieve this as they have already vowed not to work with Wilder’s party.  So what happens next? We’ll have to wait and see for the next 90 days, which continues to create uncertainty in the EU.   The EU is scared to death that another country may have a referendum and exit, but this would be the first exit of an EU nation currently using the Euro, which means it would go back to its original currency.  The Netherlands along with Germany is the only other solvent nation in the 19 Euro nations.  Their exit would hurt the European Central Bank (ECB) making them less solvent than they are already.

Prime Minister May, wants to trigger Article 50 before the end of March, which will mark the UK’s formal departure from the EU.  The only question is whether that will be a soft/negotiated exit or a hard/complete expulsion from the EU markets.  A soft/negotiated exit could take years, a hard exit with no negotiations would be immediate and would completely close EU markets to the UK.  Either option will create problems for both the EU and UK.  However, realistically the chances of a deal are not good.  In my opinion, the UK is in a no win situation and it would be in their best interest to do a hard Brexit.  They should ignore the EU, who want to make an example out of Britain, because they want to scare off other EU nations planning on exiting.  The UK’s future may be bumpy this year, but the EU’s prospects look much worse, and they are not in very good negotiating position because they are going to have to focus their attention on other potential exits of major members such as the Netherlands, France and Italy.  If these nations exit, the EU is over.

In April, French elections will determine the final two candidates who will run against each other in the final election a few months later.  Currently, another Trump-like candidate, Marie Le Pen, is leading all the polls.  If she is elected, she has promised to have a referendum to exit the EU.  Just like with Trump, Wilder and Brexit, all kinds of dire predictions and consequences are being pronounced if Le Pen wins.  Following the April elections, there will be an additional three months of uncertainty which will continue to rock world markets.  Although elections are not currently scheduled after the resignation of Italy’s prime minister in December, the leading candidate and party is another Trump-like figure who has promised an EU exit referendum.  Also three-time Prime Minister Berlusconi is proposing to bring back the Lira, the former Italian currency.

So hold on, as a whole lot of shaking is coming our way in the coming weeks.  For those of you waiting to exit before a lot of expected shaking, this may be one of those times.

U.K.’s May Battles Party Rebels for Power to Trigger Brexit (3-11-17)
https://www.bloomberg.com/news/articles/2017-03-10/u-k-s-may-faces-tory-brexit-backlash-over-her-no-deal-threat
Traders Prepped for the Fed. Then What (3-10-17)
https://www.bloomberg.com/view/articles/2017-03-10/traders-prepped-for-the-fed-then-what
Enter Berlusconi A Man a Ban and His Plan to Restore the Lira (3-9-17)
https://www.bloomberg.com/news/articles/2017-03-09/enter-berlusconi-a-man-a-ban-and-his-plan-to-restore-the-lira
The Euro Is Drifting Apart and the End of QE Could Worsen It (3-3-17)
https://www.bloomberg.com/politics/articles/2017-03-03/that-ever-closer-euro-still-hasn-t-arrived-as-qe-nears-its-end
Dutch Election Wide Open as All Vie to Pick Up Wilders Votes (3-5-17)
https://www.bloomberg.com/politics/articles/2017-03-06/dutch-election-wide-open-as-parties-vie-to-pick-up-wilders-votes
The Euro Is Drifting Apart and the End of QE Could Worsen It (3-3-17) https://www.bloomberg.com/politics/articles/2017-03-03/that-ever-closer-euro-still-hasn-t-arrived-as-qe-nears-its-end
Rutte Warns of Dutch Chaos If Populist Wilders Wins Election (3-2-17)
https://www.bloomberg.com/politics/articles/2017-03-03/rutte-warns-of-dutch-chaos-if-populist-wilders-wins-election
Italy Splitting into Oblivion (2-24-17) http://www.reuters.com/article/us-italy-eu-commmentary-idUSKBN1631QK
Populism Is Shaking the Edifice of Central Bank Independence (2-27-17)
https://www.bloomberg.com/news/articles/2017-02-27/age-of-populism-shakes-pedestal-of-central-bank-independence
Le Pen Gains in French Polls as Security Concerns Win Voters (2-20-17)
https://www.bloomberg.com/politics/articles/2017-02-20/le-pen-advances-in-french-polls-as-security-concerns-sway-voters-izef48iu