This Week in Barrons – 9-4-2016:
“Say it loud, and say it often”… LaQuan Lunford
I’m convinced that if you say something loud enough and often enough – people will believe it. People love a good story. Remember Paul Revere (during his midnight ride) signaling by lantern ‘one if by land’ and ‘two if by sea’? Truth be told, that story didn't happen. Actually, Paul was with two friends and the British captured them all. But Mr. Prescott (a local doctor) escaped, made it to Concord and warned everyone. I’m trying not to further burst your bubble – BUT also:
- Napoleon was NOT short,
- Einstein did NOT fail math as a kid,
- Bats are NOT blind,
- Lemmings do NOT commit suicide by hurling themselves off cliffs, and
- Lightening can strike twice, 3, or even 4 times in the same place.
It’s often the STORY that matters, and a story that really upsets me concerns inflation. The dictionary defines inflation as: “1) an increase in the money supply, 2) a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.” For some reason, our FED is convinced that inflation does NOT exist, and that it IS a requirement for a strong economy. First, inflation is roaring. We've seen huge increases in the money supply, and there is certainly no shortage of credit when every furniture store is offering no money down, and no payments for 2 years. As for rising prices, if you eat, buy electricity, go to college, see a doctor, enjoy a movie, take a taxi, repair a car, buy insurance – you know that prices are rising. Yet the FED tells us that inflation is lower than their 2% target rate. Why?
Moreover, the FED is forever warning us of ‘deflation’ – falling prices. Now, I personally LOVE falling prices, and have never heard someone say: “I’m waiting for that product to go UP in price before I buy it”. The free market system also seems to like lower prices because they have made Wal-Mart (the leader in low prices) the largest employer in the world. But our FED is convinced that if you know prices are going to fall, you will WAIT to buy that appliance, car, or dress. And consumers waiting to purchase will cause a recession and then a depression. I’m wondering if that is just a STORY that they’ve been telling each other so long that they have started to believe it themselves? After all, people don't delay their purchases FOREVER waiting on lower prices. This is the ‘dot com’, instant gratification era. Lower prices cause us to act NOW instead of later. With electronics, I can assure you that prices will fall year over year, but people continue to camp out on sidewalks just to get the newest iPhone.
The FED itself has said in it’s own writings: “The only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. ... What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”
Our own FED tells us that deflation will send our economy into a death spiral, but their research suggests nothing of the sort. If falling prices don't kill economies, then why is our FED so rabid about the 2% per year inflation mantra? The answer is that it gives them the ultimate freedom in their decision-making. Think about it, 2% per YEAR is a LOT of money in a $17T dollar economy. If our FED did NOT need inflation, then where would the justification for creating those tens of billions of dollars go? Maybe then everyone would start asking: Why is the country broke? Why aren't there any real jobs? Where's all the money going? Why don't we have a balanced budget?
The facts are that inflation is running around 8%, we really don't need any inflation at all, and deflation isn't the kiss of death – it just allows consumers to get more value for their dollar. History shows us that lower prices (except for real estate) cause more buying and more investment for expansion. The inflation story is just that, a story from our unelected and unaccountable Federal Reserve.
Enjoy your Holiday weekend. Eat too much, drink just enough, and spend some quality time talking to those that really matter to you.
Factually, this week brought us empirical evidence that the world is slowing:
- The 7th largest shipping company in the WORLD (South Korea’s Hanjin Shipping Company) declared bankruptcy and its assets were frozen. After almost $1B in additional financial assistance, the company’s creditors called it quits. The court will determine wither Hanjin should be liquidated or given a chance to restructure. In the meantime, approximately 540,000 containers have become stranded in ports around the world just in time for retailers gearing up for the Holiday season.
- Thanks to SF for reporting that rail freight volume has dropped almost 6% from a year ago, and that 2015’s volume even plunged 13.4% from 2014. Unfortunately 2014’s rail volume dropped 5.8% from 2013, giving 2016 the excellent chance to set a low in rail freight volume for the decade.
- SF also reported that automation could be the great global jobs equalizer. As China automates it’s manufacturing plants (replacing humans with computers and robots) its cost structure will approach that of the U.S. – effectively killing the ‘cheap’ labor component associated with offshore manufacturing. Therefore, more manufacturing many come back onto our shores. But the blue-collar jobs associated with it are never to return. In fact the future of any low education jobs (or even those with a vo-tech background) are in great jeopardy.
- Wal-Mart announced that it was laying-off 7,000 people.
- Caterpillar said that it was laying-off 2,000 more in Europe.
- Factory Orders and Corporate Earnings fell in August, and have fallen every month since 2014.
- Productivity fell (just above recessionary numbers) to an annual rate of 0.6% this past quarter.
- The Shiller 10-year Price to Earnings ratio is 26.9 – making it comparable to 1999 levels, and definitely NOT levels for risk-taking.
- The Swiss National Bank (SNB) now owns more publically traded shares in Facebook than Mark Zuckerberg (the owner and founder of Facebook).
- Bank of America reported that the ‘smart-money’ continued to be net SELLERS of U.S. stocks for the eighth consecutive week.
- Our mainstream news must have forgotten to report that Deutsche Bank (DB) defaulted on its ability to deliver physical gold. Our Central Bankers did not want this making the news because it would have sent the price of gold skyrocketing and DB into default.
- The U.S. Government’s Non-Farm Payrolls (Jobs) Report was one that only a mother could love. After hoping that 180k new jobs were created in August, we found out that only 151k were created. We also found out that 2/3rds of those jobs (106k) were fake jobs – created mathematically – so we really only created 45k jobs in August.
With all that news, you would have thought the market was down 300 points on the week, but instead the market was up on the week – proving that nothing matters but Central Bankster intervention. The capital markets are the ONLY thing keeping the wheels on our global economy, and our Central Banksters are desperate to keep them rolling.
How long this charade goes on is anyone's guess. On July 14th we opened the day at 2157 and punched over 2160. Since that time, we've bounced between 2157 and 2190. On Thursday morning we re-touched the 2157 number, only to see a ‘magic levitation’ take place and push us all the way up to 2170. Friday we gapped higher out of the box and ended the day at 2179.
I would expect to see our markets try and assault 2190. However, the previous agenda was to make new highs. Interestingly, since August 15th, it seems the game has changed. Our Central Banksters seem to not be as concerned with new highs as they are just keeping the markets from rolling over and dying. They're okay with ‘sideways’.
September is often a cruel month. If normal market forces were in charge, I would be telling you that a wise move would be to sell-out and go short. But this isn't a normal market, and I don't know exactly what the Central Banksters are willing to do. So use the 2157 and 2190 levels as your guide to trading. If we close a few days over 2190, then we should go even higher. If we lose 2157 on a closing basis for a few days, then I could see 2120 coming quickly.
The next 100 days are going to be very interesting. Will Trump win? Will Hillary finally admit to being ill, or could she be removed from running over the latest FBI dump? Will someone along the Russian/Ukrainian border make a mistake and start a war? Will a major bank finally admit it is broke beyond repair? Will someone screw up in the 3 way chess match going on in Syria? Maybe none of the above will occur, but it sure feels like something big is brewing.
Some likely trades this week:
- Don’t fight the FED = buy September Options in Facebook (FB):
o Buy the 124 / 130 Call Debit Spread,
o Buy the 128 / 130 / 132 Call Butterfly,
o Sell the 126 / 124 Put Credit Spread, and
o Sell the 122 / 118 Put Credit Spread
- Gold this week (GLD):
o One morning this past week someone (with very deep pockets) sold $5B worth of paper gold on the exchange. No person would do this because it destroys the price (which it did). But Central Banksters can do it because they want people NOT to buy gold and instead - put their money in negative interest rate accounts.
o Deutsche Bank analysts came out and said that gold should be trading around $1,700/oz.
- The metals have lived through a normal pullback in the past week and I continue to like: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.