Incrementum Advisory Board Meeting Q1

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Comprehensive Discussion of the Economy and Financial Markets

The Incrementum Fund’s advisory board has held its quarterly meeting on January 10, and the transcript has just become available. Readers can download the transcript via the link below this post.

 

 

Unfortunately two board members (Dr. Frank Shostak and Rahim Taghizadegan) were unable to attend this time. We hope that you will nevertheless find the board’s discussion of a wide range of topics relevant to today’s financial markets interesting.

 

1-Gold vs commoditiesGold rises to an all time high against commodities – a strong sign that economic confidence is waning – click to enlarge.

 

We would especially point to the debate surrounding central bank credibility (or the “confidence bubble” as Mark Valek refers to it), which we believe is probably the most important subject investors need to confront these days. As we have recently mentioned, Jim Rickards has as always made a number of very interesting remarks on the finer points of Fed policy.

He inter alia pointed out that the Fed’s flexibility tends to be hampered in election years, as it doesn’t want to be seen as influencing the election outcome. This could be especially relevant this year (a similarity to the years 2000 and 2007/8, we might add), as it happens just as the economy and the markets appear to be at a crossroads.

 

2-DXYUS dollar index, daily – the board’s consensus was that the dollar would no longer make much headway against major currencies, as the Fed was likely to soften its stance. So far this seems to be the case – not even the ECB and the BoJ were able to put pressure on their currencies beyond a single trading day – click to enlarge. Continue reading

Shorting the yuan is dangerous

Submitted by Alasdair Macleod – FinanceAndEconomics.org

Last Sunday (31 January) Zero Hedge ran an article drawing attention to the big names in the hedge fund community who are betting heavily that the yuan will suffer a major devaluation any time between the next few months and perhaps the next three years. The impression given is that this view is universal, almost to the exclusion of any other.

A market cynic would point out that when everyone is short, there is no one left to sell, so it is a good time to buy. This may indeed be true, and gives the Chinese authorities the opportunity to squeeze the bears mercilessly should they so choose. However, as Zero Hedge points out, some bear positions are in the form of put options rather than naked shorts, so hedge fund losses in this case would be limited to option money if the trade goes wrong. Instead, whoever sold the options to them will ultimately absorb the losses to the extent they have not hedged their corresponding positions in turn.

The advantage of buying long-dated OTC put options is that you can wait for a financial strategy to come right. The motivation for buying them is therefore less to do with market timing, and more to do with economic expectations.

At its simplest, the common view appears to be that China is suffering from the debt problems that follow an excessive expansion of bank credit, the unwinding of which is expected to lead to crippling deflation. This view is variously informed by the findings of Irving Fisher in his analysis of the 1930s depression, and perhaps the Austrian school’s description of credit-driven business cycles thrown in. To these can be added the experience of modern credit bubbles, particularly the aftermath of the sub-prime crisis of 2007/08, which remains fresh in hedge-fund managers’ minds. It amounts to a rag-bag of impulsive thought, and consequently it is assumed a large devaluation will be required to reduce the prices of China’s exports, so that China’s labour force will remain competitive and employed.

There are many empirical examples that disprove the idea that devaluation is the route to export success, so it is something of a mystery why it should be seen as a certain outcome for the yuan. The root of the idea that devaluation for China is an economic cure-all is the supposed improvement it gives to the balance of trade. And here the mystery deepens, because the fall in prices for imported commodities has actually increased China’s trade surplus, so much so that the trade surplus for all of 2014, which was $382bn equivalent, was exceeded by just the last seven months of 2015, while at the same time the economy was supposed to be collapsing. The total trade surplus for 2015 at $613bn was a record by a very large margin. A devaluation is definitely not required on trade grounds. Continue reading

Why The Bulls Will Get Slaughtered

Well, they got that right. Detecting that “parts of the U.S. jobs report for January seem fishy”, MarketWatch offered this pictorial summary:

Needless to say, none of that stink was detected by Steve Liesman and his band of Jobs Friday half-wits who bloviate on bubblevision after each release. This time the BLS report actually showed the US economy lost 2.989 million jobs between December and January. Yet Moody’s Keynesian pitchman, Mark Zandi described it as “perfect”

Yes, the BLS always uses a big seasonal adjustment (SA) in January——so that’s how they got the positive headline number. But the point is that the seasonal adjustment factor for the month is so huge that the resulting month-over-month delta is inherently just plain noise.

To wit, the seasonal adjustment factor for the month was 2.165 million. That means the headline jobs gain of 151k reported on Friday amounted to only7% of the adjustment amount!

Any economist with a modicum of common sense would recognize that even a tiny change in the seasonal adjustment factor would mean a giant variance in the headline figure. So the January SA jobs number cannot possibly reveal any kind of trend whatsoever—-good, bad or indifferent.

But that didn’t stop Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services, from dispatching the usual all is swell hopium:

“Today’s numbers are about momentum, so while 151,000 new jobs in January is below expectations and off pace from prior months, the data shows America’s recovery is continuing. Amid all the global economic turmoil and domestic market gyrations, positive job growth, the drop in the unemployment rate to 4.9%, and the uptick in wages show the U.S. is heading in the right direction.”

Actually, it proves none of those things. For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January—-suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession. Continue reading

Are The Payroll Jobs Reports Merely Propaganda Statements?

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

US economics statistics are so screwed up that they do not provide an accurate picture.

Consider the latest monthly payroll jobs report. According to the report, in January 151,000 new jobs were created. Where are these jobs? According to the report, 69% of the new jobs are accounted for by retail employment and waitresses and bartenders. If we add in health care and social assistance, the entirety of the new jobs are accounted for. This is not the employment picture of a First World economy.

According to the report, in January the retail sector added 57,700 jobs. Considering that January is the month that followed a disappointing Christmas December, do you think retailers added 57,700 employees? Such a large increase in retail employment suggests an expected rise in sales, but transportation and warehousing lost 20,300 jobs and wholesale trade added only 8,800.

Perhaps it is mistaken to think that employment in these sectors should move together. Possibly the retail jobs, if they are real, are part-time jobs replacing a smaller number of terminated full-time jobs in order that employers can avoid benefits costs. If this is the case, then the retail jobs are bad news, not good news.

The reported unemployment rate of 4.9% is misleading as it does not count discouraged workers. When discouraged workers are added, the actual rate of US unemployment is about 23%, a number more consistent with the decline in the labor force participation rate. In January 2006 the labor force participation rate was 66%. In January 2016 the labor force participation rate is 62.7%.

The government has a second official unemployment rate that counts short-term discouraged workers (discouraged for less than one year). That rate, known as U-6, is 10%, twice the “headline rate” which is always the U-3 measure that excludes all discouraged workers not currently looking for a job.

In his reports John Williams (shadowstats.com) explains that the jobs reported can be an artifact of seasonal adjustments. Perhaps a simple way of seeing the influence of seasonal adjustments is to compare the not seasonally adjusted jobs numbers for December 2015 and January 2016. These numbers are 144,112,000 jobs in December and 141,123,000 jobs in January, a decline of 2,989,000. However, with seasonal adjustments the January number rises to 143,288,000 and the December number falls to 143,137,000, producing a January jobs gain of 151,000. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• $100 Trillion Up in Smoke (Mauldin)
• As Big Oil Shrinks, Boards Plot Different Paths Out Of Crisis (Reuters)
• Exxon Ends Share Buybacks – It Must Be Acquisition Time (Forbes)
• Hess Oil: A “Folly For The Ages” (ZH)
• Debt, Defaults, And Devaluations: A Crash Like Nothing Before (Telegraph)
• Our Dysfunctional Monetary System (Steve Keen)
• Why The Bulls Will Get Slaughtered (Stockman)
• Obscure Chinese Firm Dives Into $22 Trillion US Market (BBG)
• China’s FX Reserves Decline to $3.23 Trillion (BBG)
• The Great Escape from China (Rogoff)
• Albert Edwards: China Has Only “Months Left” To Stop Collapse (VW)
• Why Doesn’t 4.9% Unemployment Feel Great? (CNN)
• Risk of WWIII as Saudi Arabia, Turkey –and Ukraine– Wade Into Syria (Trayner)
• EU Ministers Want To Buttress Borders To Stem Refugee Flow (AP)
• Austria Threatens To Extend Border Controls (Reuters)
• Austria Wants EU To Cover Costs Of Additional Migrants (Reuters)