03/12/2016

Financial Pressure Cooker Bomb Cooking Now - Greg Hunter with Jim Sinclair

Jeff Fitchett: This is a good interview and worth your time.  I agree with Jim's assessment. 


Italian Referendum And The EU - by Jeff Fitchett

The outcome of the Italian referendum, this coming Sunday (Dec 4th), will be interesting to watch.  As I stated in previous weekly updates, I think Italian voters will vote against the proposed constitutional amendments and this will be a blow against the status quo within Italy and the EU.  


The financial markets will likely react negatively to a ‘no’ vote.  Check out the chart below that displays Italian 10-year Government Bond Yields.  As you can see, yields are increasing rapidly as worries build that the Italian population is going to vote against the establishment.


Volatility in the bond market should be expected given that over $13 trillion in sovereign debt, around the world, is trading with negative interest rates.  At some point bonds will be revalued to reflect the risk that is steadily growing.

The Eurozone is extremely susceptible to financial market volatility because of the fragility of the monetary union and lacklustre economic conditions.  In 2010 I stated that the European Union will likely collapse by 2020.  At that time I mentioned that a common currency would not survive without a political union.  To be clear, I was not suggesting that a political union should be formed.  I do not like the idea of sovereign nations surrendering their sovereignty to an outside bureaucracy. 

Every country has unique cultural differences and the differences equate to economic conditions that differ from country to country.   The idea that a common currency can be shared amongst nations that are politically different will only lead to instability and societal unrest.  

The Brexit vote was not enough to collapse the European Union because England does not use the Euro as their currency.  If Italy or France, whom both use the Euro, decide to leave the Eurozone I believe that the European Union will cease to exist shortly thereafter.   

Currently, there are too many nations with disenfranchised populations for the status quo to continue on as is. If a major nation such as Italy votes to leave the EU other nations will follow suit and the grand experiment will come to an end. Only time will tell.

27/11/2016

Systemic Risks Are Increasing - by Jeff Fitchett

The Financial Crisis in 2008 was the trigger event that made me revaluate pretty much everything that I had been told about economics, finance and geopolitics.  Essentially, what I was being told differed from what my observations were.  Since that time the disparity has grown immensely as it pertains to the manufactured consensus versus reality.  

Last night I was scanning through the latest European Central Bank’s ‘Financial Stability Review’ paper.  In the Foreword of the review Vítor Constâncio, VP of the ECB, wrote that; “Systemic risk can best be described as the risk that the provision of necessary financial products and services by the financial system will be impaired to a point where economic growth and welfare may be materially affected. Systemic risk can derive from three sources: an endogenous build-up of financial imbalances, possibly associated with a booming financial cycle; large aggregate shocks hitting the economy or the financial system; or contagion effects across markets, intermediaries or infrastructures.”

Endogenous (having an internal cause) build up of financial imbalances. - Check - We have had an insane build up of financial imbalances.  Two examples come to mind: Debt and entitlement benefits. (both of which are unsustainable and are causing havoc globally) I think the positive statement about “being caused by a booming economy” is misleading because the shocks have come from underperforming economies and perpetual debt issues that many nations are dealing with. 

Large aggregate shocks hitting to the economy or financial system. - Check - The hits have been too numerous to mention within this missive, but here are a number of examples: Greek debt crisis, Brexit vote, derivatives contagion between Deutsche Bank and Banca Monte dei Paschim di Siena SpA (causing both banks share prices to collapse and multiple government bailouts of the Italian bank with the likelihood of a German government bailout of Deutsche Bank), Japanese monetary and fiscal policy failures, bank bailouts, deficits,…

* Contagion effects across markets, intermediaries or infrastructures. - Check - I think this is a major issue that is being completely misunderstood and in fact becoming downright dangerous.  I highly recommend this 19 minute video with Nassim Nicholas Taleb (at the 13 minute mark in the video many examples are discussed and it highlights my concern).  The European Union is destined to fail because of the disconnect between the bureaucrats in Brussels and the citizens of each uniquely different country that make up the EU.  

There is no denying the instability caused by debt, deficits, underemployment, resource depletion, ecological damage, social unrest, war and so on.  The more drastic policy makers decisions are the more likelihood for contagion.  

As mentioned numerous times over the past months; the global populace is growing uneasy and leaders are now enacting policies to try to soothe the masses with ideals that will bring about the desired changes.  The changing of the guard, so to speak, via moving form the status quo to ‘fringe’ leaders will more than likely lead to further degradation of our societies, economies, governments, financial markets and in many other areas.  

As mentioned in last week’s missive: “for every action, there is an equal and opposite reaction” - Newton’s third law.  Donald Trump is looking to make significant changes in an effort to ‘Make America Great Again’.  (I could have used the policies of any government for this example)  “Hopeism" has taken over and the financial markets are spiking higher as if Donald Trump’s policies have already been a success and that the good times are back.  What has changed? (Nothing)  If he cancels TPP, rewrites NAFTA, builds a wall, targets the Chinese currency and trade flow, runs massive deficits by increasing military and infrastructure spending and lowers taxes; will this make America great again?  What made America great in the first place?  Please check out this short clip from The Newsroom "America is not the greatest country in the world anymore”  

The Media

One of the largest revelations from the aftermath of the US election and the Brexit vote has to do with the media.  The mainstream media tried to create a desired outcome rather than reporting objectively.  ‘Official’ polls in both cases had lead us to believe that Hillary Clinton would win the presidential election and that UK citizens would vote to remain in the EU.  

Last week, I mentioned that Marine Le Pen will likely win the support of French citizens.  On Wednesday November 16th, the Independent reported; “Marine Le Pen unlikely to win France presidential election, say pollsters”


Anyone who is not an ‘establishment’ politician is labeled ‘Far-Right’, ‘Fascist’ or other buzz terms that play on peoples emotions.  The status quo is being contested as the global populace becomes more and more disenfranchised with the direction political leaders are taking them.   Geopolitical risks are increasing by the day and this will spill over into the financial markets.  

Final Thoughts

I understand why people do not like too much reality.  Most of what has been highlighted in this missive can be construed as negative, scary, complex and hard to understand. Whether we take a 30,000 ft view of the world or look under a microscope and study the innards of a cell - life is complex. Our day to day lives are enough to consume our attention let alone worrying about macro-economics and geopolitics.  


The reality of it all is that we are in the midst of major change.  The balance of power is shifting from the West to East, governments are in turmoil, populations are disgruntled, ecological issues are growing and the financial markets do not reflect the underlying sea change.  Change is one of the only constants in life.  Awareness allows us to learn, think critically and subsequently make informed decisions as to how we carry ourselves on a day to day basis.  

21/11/2016

More Economic Change Is In The Air - by Jeff Fitchett

Change is in the air.  Over the past handful of years, many mainstream political parties have been removed from office. “Fringe” politicians and new political parties are resonating with disenfranchised voters.   Donald Trump is an example of this as is Alexis Tsipras (The Prime Minister of Greece).

Discontent is spreading. People want a new direction to travel.  Many people who are living comfortably are unaware of the hard times that billions of people are experiencing. Each continent is experiencing upheaval in some manner. 

Too much debt and stretched budgets are negatively impacting many nations. Peripheral countries often experience economic & political hardship before G20 nations experience hardship. Our globalized economy allows for vast sums of money to flow in and out of nation states with relative ease.  During good times investors shower money in developing countries and this boosts the economies of these countries.  When times get tough the same money flows out and leaves behind economic carnage and political upheaval.  

For example, Greece was a major benefactor of cheap money prior to the 2008 Financial Crisis.  They were able to borrow money at the same rate of interest as Germany.  However, fiscally speaking, Germany and Greece could not be more different.  Germany’s government and citizens tend to be more prudent as it pertains to fiscal responsibility. Greece on the other hand is much more socialist in nature and this has lead the country into serious financial difficulties. 

In my opinion, the European Union is like a noose around Greece’s neck.  The majority of independent countries outside of the EU have currencies that float up and down depending on how well the said country is doing.  

If Greece were out of the EU their currency would drop significantly in price when compared to the Euro, US dollar, Chinese Yuan, etc.  If Greece left the EU they could take advantage of their low valued currency.  Exports would pick up because the cost of production would be lower given the decline in the value of their currency.  Tourism would increase because of the lower costs.

However, Greece’s debt has reached the point where government sponsored social benefits such as pension plans are no longer affordable.  Austerity measures are negatively impacting society.   I think everyone is aware of the troubles that Greece is experiencing.  They have already passed the point of being able to maintain the status quo.  In turn, the Greek population voted out of power mainstream political parties and chose a party that many (incorrectly) believed would be able to bring about positive change.  

In Italy, the Five Star Movement (anti-establishment and populist party), lead by Beppe Grillo (who happens to be a comedian that many liken to George Carlin), is gaining significant traction and will likely garner enough support to lead the Italian government after the next general election.  In the meantime, a constitutional referendum will be held on December 4th, 2016.  It appears the current Prime Minister, Matteo Renzi, will resign if he loses the referendum. He is blaming the Five Star Movement for the lack of support for the constitutional changes he wants to make. 

In France, Marine Le Pen leads the National Front Party (NFP).  The NFP is considered socially conservative, nationalist and against the EU and the EU’s immigration policies.  Over the past number of years the National Front has been gaining major wins in municipal, regional, EU and national elections.  

From a global perspective

Eventually a crisis will occur that engulfs the world as it did during the Tech Bubble in 2000 and the Great Recession in 2008.  I have felt that we have been sitting close to the edge of a cliff for quite a few years.   Debt and budget deficits are now problematic.  Political policies that maintain the status quo are beginning to fail.  As the problems deepen so to will the discontent.  

For every action, there is an equal and opposite reaction - Newton’s Third Law 

Check out the number of major elections, referendums and meetings that will be occurring over the next year and a bit. 

The Brexit vote and the election victory of Donald Trump are both major examples of the sea change that is occurring around the world.  I suspect ‘surprise’ victories will continue unabated over the coming months and years.  

Final Thoughts - near term observations

Volatility will continue to increase as political change occurs.  Financial market pundits will prognosticate that the polices Donald Trump intends to initiate will spur economic growth and cause inflationary conditions.  ‘Infrastructure spending’ has been a common theme anytime there is a recession or economic crisis.  The fact of the matter is that increased government spending leads to an increase in budget deficits and government debt.  

More often than not, politicians and central banks are able to use words to move the financial markets.  The equity market frenzy we have witnessed since the election is a prime example of this.  Nothing has changed fundamentally yet the financial markets have pushed to new highs.  

I think that financial market exuberance has given the Federal Reserve the cover to increase interest rates in December.  As I have stated repeatedly in past missives, economic fundamentals do not support an interest rate increase at this point in time.  Over the past several weeks bond prices have undergone a revaluation given the increased likelihood of interest rates going up by 25 bps.  As well, the US dollar has strengthened.  

In my opinion, the dichotomy of the situation is that the financial markets are reacting positively to proposed monetary and political policy changes where as economic fundamentals and societal issues are in stark contrast to these policy changes.  The danger for the average person is that these new policy changes will likely spark the next crisis and cause further hardship for the average person.  

Debt issues cannot be solved by issuing more debt.  For the past 20 years debt has fuelled economic growth globally.  Now that we have reached an unsustainable level of debt the idea that a country can grow their economy out of the debt issues they face is a fallacy.  As is the meme ‘Making America Great Again’.  

Stagflation will likely ensue as was the case in the 1970’s.  Stagflation is a period of time where persistent high inflation combined with high unemployment and stagnant demand in a country's economy.  


Interesting times to say the least!

12/11/2016

Reality Bites - Post US Election - by Jeff Fitchett

The topic de jour is Donald Trump.  

Hopefully over the coming weeks the constant barrage of media attention and conversation dedicated to the aftermath of the US presidential election and President-elect Donald Trump will slowly dissipate.  

I figured Donald Trump would win.  The reason I felt he would win is because the reality experienced on “Main Street” differs considerably from the reality that is being painted by the establishment.  


The US has not recovered from The Great Recession in 2008 and societal conditions are worsening.  This has been highlighted on a weekly basis within the Trivium Report.  The establishment point of view is that the economy is strong and so much so that the Federal Reserve should consider raising interest rates.  The media consistently backs up the recovery meme and this is a prime example of the disparity between reality and the optimistic reality portrayed by the powers that be.  

Hillary Clinton is part of the ruling class. The ruling class in the US exercises considerable power and influence over government policies, the mainstream media and multinational corporations.  This powerful group of people are extremely resistant to change. They benefit from the current environment.

A majority of the problems the world is facing has been caused by failed policies from successive governments (Democrats and Republicans).
A growing number of Americans are seeing the corruption and blatant propaganda from the government and media. The ‘people’ are beginning to blame the establishment.  People want change.  

Occupy Wall Street occurred because of the extreme social & economic inequality, greed, corruption, and the overbearing influence of corporations on government. 

The decline in the manufacturing sector has been occurring for decades.  After World War Two, the US was the only major power that had an intact manufacturing sector.  Most war-torn nations were left in shambles.  The US benefited immensely economically and enjoyed three decades of prosperity (1940/50/60’s).                                                          Picture courtesy of redstatewatcher.com

Over time nations rebuilt their manufacturing sectors and US global dominance began to diminish.  Perpetual wars, budget deficits, offshoring of jobs, free trade agreements, trade deficits, corruption,  social benefit programs, lobbying, etc. has left the US in an unenviable position.  Look at Detroit.

Detroit is representative of the decline in the United States.  People are experiencing hardship.  

As Matt Taibbi highlighted succinctly in his book, The Divide: American Injustice in the Age of the Wealth Gap, there are two sets of laws; one for the elites and one for everyone else.                                 

Wall Street executives, who were partially responsible for the collapse of the financial system in 2008, had committed financial fraud and were subsequently rewarded with billions of dollars of money to paper over their economy wrecking decisions they had made.  Hillary Clinton broke the law countless times and was able to run for the President of the United States.
The average person has had their constitutional rights taken away through new laws such as the National Defense Authorization Act and the Patriot Act.  The militarization of police forces and increased rates of police brutality has caused further hostility between the government and the populace.  Gun owners have felt under siege by the Democrats push for a ban on firearms.  Government subsidies to large corporations through programs such as Obamacare have squeezed family cashflows and caused small businesses to suffer greatly.  These are just a few areas of concern and many people are questioning the direction the current government is heading.  Hillary Clinton is viewed as a continuation of the same old, same old.

I think it is reasonable for people to look for change.  There are so many serious issues playing out right now yet the media does their best to keep us distracted with the likes of Kim Kardashian, Hollywood fiction, iGadgets and so on.  Donald Trump and Hillary Clinton are undesirable people.  However, given the two options available the majority voted for an outsider (Trump) rather than the establishment (Clinton).  


What follows is Donald Trump’s 100-day action plan to “Make America Great Again”. It is a contract between him and the American voter – and begins with restoring honesty, accountability and change to Washington.

Therefore, on the first day of his term of office, his administration will immediately pursue the following six measures to clean up the corruption and special interest collusion in Washington, DC:

  • FIRST, propose a Constitutional Amendment to impose term limits on all members of Congress;

  • SECOND, a hiring freeze on all federal employees to reduce federal workforce through attrition (exempting military, public safety, and public health);

  • THIRD, a requirement that for every new federal regulation, two existing regulations must be eliminated;

  • FOURTH, a 5 year-ban on White House and Congressional officials becoming lobbyists after they leave government service;

  • FIFTH, a lifetime ban on White House officials lobbying on behalf of a foreign government;

  • SIXTH, a complete ban on foreign lobbyists raising money for American elections. On the same day, he will begin taking the following 7 actions to protect American workers:

  • FIRST, he will announce his intention to renegotiate NAFTA or withdraw from the deal under Article 2205

  • SECOND, he will announce the withdrawal from the Trans-Pacific Partnership

  • THIRD, he will direct his Secretary of the Treasury to label China a currency manipulator

  • FOURTH, he will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately

  • FIFTH, he will lift the restrictions on the production of $50 trillion dollars’ worth of job- producing American energy reserves, including shale, oil, natural gas and clean coal.

  • SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward

  • SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure

Additionally, on the first day, he will take the following five actions to restore security and the constitutional rule of law:

  • FIRST, cancel every unconstitutional executive action, memorandum and order issued by President Obama

  • SECOND, begin the process of selecting a replacement for Justice Scalia from one of the 20 judges on his list, who will uphold and defend the Constitution of the United States

  • THIRD, cancel all federal funding to Sanctuary Cities

  • FOURTH, begin removing the more than 2 million criminal illegal immigrants from the country and cancel visas to foreign countries that won’t take them back

  • FIFTH, suspend immigration from terror-prone regions where vetting cannot safely occur. All vetting of people coming into the country will be considered extreme vetting.

Next, he will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of his Administration:

  1. Middle Class Tax Relief And Simplification Act. An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with 2 children will get a 35% tax cut. The current number of brackets will be reduced from 7 to 3, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35 to 15 percent, and the trillions of dollars of American corporate money overseas can now be brought back at a 10 percent rate.

2. End The Offshoring Act Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.

3. American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.

4. School Choice And Education Opportunity Act. Redirects education dollars to gives parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year college more affordable.

5. Repeal and Replace Obamacare Act. Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds. Reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.

6. Affordable Childcare and Eldercare Act. Allows Americans to deduct childcare and elder care from their taxes, incentivizes employers to provide on-side childcare services, and creates tax-free Dependent Care Savings Accounts for both young and elderly dependents, with matching contributions for low-income families.

7. End Illegal Immigration Act Fully-funds the construction of a wall on the southern border with the full understanding that the country Mexico will be reimbursing the United States for the full cost of such wall; establishes a 2 -year mandatory minimum federal prison sentence for illegally re-entering the U.S. after a previous deportation, and a 5-year mandatory minimum for illegally re-entering for those with felony convictions, multiple misdemeanour convictions or two or more prior deportations; also reforms visa rules to enhance penalties for overstaying and to ensure open jobs are offered to American workers first.

8. Restoring Community Safety Act. Reduces surging crime, drugs and violence by creating a Task Force On Violent Crime and increasing funding for programs that train and assist local police; increases resources for federal law enforcement agencies and federal prosecutors to dismantle criminal gangs and put violent offenders behind bars.

9. Restoring National Security Act. Rebuilds our military by eliminating the defense sequester and expanding military investment; provides Veterans with the ability to receive public VA treatment or attend the private doctor of their choice; protects our vital infrastructure from cyber-attack; establishes new screening procedures for immigration to ensure those who are admitted to our country support our people and our values
10. Clean up Corruption in Washington Act. Enacts new ethics reforms to Drain the Swamp and reduce the corrupting influence of special interests on our politics.

Reality Bites - Final Thoughts 

For the record: I am a political atheist. I am not a Liberal or a Conservative.  I am neither left or right.  I don’t agree with the broad based policies of any government.  I think our leaders are blind to the reality we find ourselves in.  I think it is impossible for us to “grow” out of this financial malaise.  I do not like Donald Trump or Hillary Clinton.  

Once upon a time in the US, and in many other nations, a household could live off of the income of one person.  25% of a bread winners income would be used to pay for housing costs.  Things began to change in the late 1960’s as the Vietnam war was raging and government benefit programs grew larger.  This caused budget and trade deficits.  Inflation took root and went up approximately 50% during the 1970’s within the US.  Women began entering the workforce en masse and it became necessary for two wager earners to support a household.  As the 1990’s and 2000’s came about debt began to supplement income as the cost of living outpaced income growth.  We currently have the biggest bubble in human history: The Debt Bubble.  Housing prices of skyrocketed in price because of low interest rates and lots of easy to access credit.

This has left us at a cross roads.  Perpetual growth is a fantasy especially when governments, corporations and citizens are mired in debt.  Donald Trump talks about making America Great again, but I am of the opinion that the time for addressing the systemic issues has already passed us by.

The problem with exponential growth in debt is that eventually the interest payments on the debt will supersede the amount of employment income or tax revenue that is required to maintain the debt.  The majority of the population is struggling to maintain their standard of living.  Too much debt, not enough savings and income are plaguing the population and therefore the economy.  Negative interest rates are allowing governments, and now some multinational corporations, to continue taking on even more debt without having to worry about the medium term consequences of trying to pay the debt back.

The United States of America has benefited considerably from the strength of the US dollar when compared to any other nation.  What other nation do you know of that has close to $20 trillion in debt, has more than a half a trillion dollar budget deficit and trade deficit, has printed over $3 trillion dollars (out of thin air I might add) in less than 10 years, and continues to be able to import consumer goods using the US dollar as the medium of exchange?  US military dominance helps maintain the value of the dollar.  The likelihood of this continuing is highly unlikely.  As Voltaire once said; “Paper money eventually returns to its intrinsic value - zero”

Donald Trump talks about reviving the manufacturing sector via putting tariffs on imported goods, cancelling/renegotiating trade deals and reducing taxes, etc. He expects this to cause an economic resurgence.  It has been a luxury for US consumers to be able to buy cheaply priced foreign made goods using debt.  I struggle to see how an indebted US citizen will be able to afford the purchase of domestically produced goods that cost more to produce than goods produced in  lower wage jurisdictions.  

Globalization has killed local economies.  Trade deals favour large corporations at the detriment of small businesses. Big box stores full of foreign made goods have replaced locally produced goods and businesses. Donald Trump has made it clear that he is going to change strategies with the US’s most important trading partner: China.  China holds over $1 trillion in US government debt and over $3 trillion in US currency.  They also happen to supply the US consumer with the majority of their consumer products.  A US isolationist strategy, within the current globalized economic setting, will likely hurt the US more than benefit them over the foreseeable future.  

In addition, we are already extracting resources at an unsustainable pace and Donald Trump intends to push aside environmental concerns and rubber stamp new initiatives that will exploit ecologically sensitive areas and our overall environment.  I find it strange that he talks about making America Great Again, yet is pushing for policies that will destroy the carrying capacity of the land Americans rely on.  

Looking back in history provides us with many examples of populations of people being seduced by individuals promising hope and change. I think Donald Trump was a protest vote against mainstream ideology. Many people are hanging their hats on the idea that Donald Trump will be able to break up the establishment and a new dawn will appear. The US population is divided and firmly entrenched in opposing camps and it is highly unlikely that this will change any time soon.

I think you will find that Donald Trump will have a difficult time getting all of his proposals through the House of Representatives and the Senate.  The global economy will likely damper his expectations for what is possible economic growth wise given that the next financial crisis is right around the corner.  

This country, with its institutions, belongs to the people who inhabit it.  Whenever they shall grow weary of the existing government, they can exercise their constitutional right of amending it, or exercise their revolutionary right to overthrow it.
Abraham Lincoln
The control of information is something the elite always does, particularly in a despotic form of government.  Information, knowledge, is power.  If you can control information, you can control people. 
Tom Clancy