Thursday, April 28, 2016

Trump Appeal Growing on Realization of “Globalization” False Promises

Having started my working career in the mid 1980s, I can truly say I have witnessed from the ground level the destruction of the American working class economy described in the recent CNN Money article - Yes, China has won big from U.S. trade.  Back in the late 1980s, good jobs were plentiful as the tech and telecom sector were booming and Americans were the beneficiaries.  Income growth was likewise very strong.  And the internet as we know it today was not available.

But something happened after the Berlin Wall fell in 1988, and Bush I was elected as President.  The U.S. foreign policy began to emphasize, more than ever before, the concept of “Globalization.”  Simply put, the term is used to describe the processes by which people of the world are incorporated into a single world society.  Bush I use of the term “New World Order” remains vividly etched in my mind to describe the opening of trade relations with the developing economic countries known as the BRICs – Brazil, Russia, India and China in the early 1990s.

The “New World Order” is now rapidly turning into disorder for the U.S. economically, and Donald Trump is capitalizing on the discontent.  The “establishments” in both the Republican and Democratic parties have no intention of changing U.S. direction on this policy.  They were commenced under Bush I, the Republican establishment, and perpetuated under Clinton and Obama, the Democrat establishment.  In fact, the two parties are blatantly promoting the rules of their nomination process to favor candidates that will perpetuate the process.  A growing number of American voters are now getting suspicious about what is actually happening, as 50% of voters are now saying the nomination process is rigged.  The money trail into the campaigns is a likely at the root of voter suspicion, as international, not American interest are behind establishment candidates more than ever before, whether it is through the “Clinton Foundation” in the democratic race, or the large multinational business PAC money behind Cruz and Kasich.

What is the false promise of globalization? Simply put, there is no such thing as “free trade”, just as there is no “free lunch” in economics.  The whole process being under-taken by the establishment in both political parties at the expense of the American people has a cost.  And that cost has a price tag that is easily measured – it is the U.S. budget deficit of over $19.2T dollars, and a debt to GDP ratio of over 106%.  In 1988 the U.S. budget deficit was $2.4T and the debt to GDP ratio was a reasonable 49.8%.  And to top it off, it is foreign governments and multinational companies that are financing the tearing down of the U.S. middle class.  In 1988 foreign direct ownership of the U.S. publicly traded debt was only 16.7% of market traded Treasuries (TLT) (SHY).  Today foreign ownership of marketable U.S. Treasury debt is $6.2T, or 45.1% of the debt outstanding! (see graph)

The U.S. deficit, driven by large trade imbalances between the U.S. and its world trading partners, is only possible to correct if U.S. policies structurally defend the U.S. workers who pay taxes rather than continuing to finance the false promises of “free trade” on the backs of the U.S. taxpayer.  Multinational corporations are expertly dodging their responsibility to pay their share and foreign governments assume no responsibility for U.S. financial problems.  It is time for the U.S. represent its own interest in the global economy.  Otherwise, the U.S. goes bankrupt and globalization dies a more horrible death.

Daniel Moore is the author of the book Theory of Financial Relativity: Unlocking Market Mysteries that will Make You a Better Investor.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

Thursday, April 7, 2016

Odds Rising for a Return of Stagflation

Stagflation is an financial market phenomenon in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

Since President Obama was elected in 2008, the U.S. financial market has traded with a haunting fear of a return to much higher levels of inflation combined with low economic growth.  The low growth part of the prediction has been born out throughout Obama’s now seven plus years in office.  However, inflation fears have turned out to be overdone.  When President Obama took office, the CPI index stood at 211.4.  As of year-end 2015 the index stood at 237.85.  (See CPI Data)  Inflation thus far in the Obama years has been on 1.68% annually.

Meanwhile nominal economic growth as measured by the Gross Domestic Product was $14.6T at the end of 2008, and measured $18.2T at the end of 2015, a growth rate of 3.19%.  (See GDP Data)  Nominal GDP is calculated including inflation, so real economic growth during the time period has been growing at an anemic pace of approximately 1.51%.

If you look at the recent trends in the economic statistics, the growth versus inflation performance is actually better.  In 2015 the CPI increased by only 0.72%, while GNP expanded by 3.12%.  Again, the numbers have trended toward very low inflation, and low to moderate growth.

A recent MarketWatch article on 3/24/2016, Stagflation could be latest 1970 trend to make a comeback, raised the specter that risk is increasing that U.S. economic growth is headed for a slowdown, meanwhile inflation is likely to head higher in the next year and beyond, just as Obama exits office.  For stagflation to recur, according to Bank of America’s standards, GDP growth would need to slip below 1.4% while the quarterly growth rate for core inflation (ex-energy and food price changes) rises above 2.3%.

Looking at general economic trends, the forecast for stagflation this time around, versus the false alarms throughout the Obama tenure in office, now has greater likelihood of being borne out in future economic results.  Why?  Here are 3 market signals which investors should follow which are trending toward higher inflation in the future, and lower economic growth:

Oil Prices:  At $38 per barrel, the price o f oil is down 17.80% over the past year, and down substantially since June of 2014 when it traded at over $100 per barrel.  However, the trend in prices is definitively upward since February of 2016, and forecasts are for oil prices to return to $50-$60 per barrel in 2017.  With the major cutbacks in drilling investment throughout the world, it should surprise no one if the current forecasts underestimate the price rebound strength of oil once the current over-supply in the U.S begins to dwindle by year end 2016.  Just as in the 1970s, a spike in oil prices was the precursor to a very serious bout of stagflation.

Corporate Cut-backs:  The U.S. economy is currently past peak in the employment growth cycle.  In the latest monthly total non-farm employment data, new job creation was 215,000.  This data was accompanied by a tick upward in the unemployment rate from 4.9% to 5.0%.  Many economist view the current U.S. government employment data as severely over-estimating the health of the current U.S. economy due to the magnitude high number of workers excluded from the survey because they have stopped looking for work.  More concerning data, however, is visible in the increasing number of company lay-offs in 2016.  For instance, in its recent report, Challenger reports 63% rise in layoff announcements on oil-price collapse.  The strong U.S. dollar is also wrecking havoc in many U.S. tech firm operations like Hewlett, Intel, Microsoft and Unisys.  (Tech Sector Shed Over 79K in 2015, 13 Percent of All Cuts).

Federal Reserve Easy Money:  In December of 2015 the U.S. Fed increased short-term interest rates for the first time since 2006.  Many critics of the Fed have voiced opinions that the Fed left rates too low for too long, and continues to be too slow.  However, the Fed is mandated by Congress to respond with easy monetary policy as long as inflation is low and unemployment is considered too high.  The statistics show that this has been the case in the U.S. economy since Obama took office.

The real issue is whether the Fed extreme policy of leaving rates at 0% for so long has set the stage for the stagflation to now return.  In the 1960’s and 70’s, the Fed monetary policy was very similar in approach to the current policy – they lowered interest rates substantially to encourage unemployment to fall.  The technique is based on an economic theory known as the Phillips Curve.  The results in the early 1970s were disastrous, as President Nixon found out, and his predecessors in office until 1980 when Paul Volker assumed the Fed chairmanship took the painful steps to extract the country from the misguided monetary policy measures.

Policies in place for Stagflation to make a return

Will the upcoming bout of stagflation, if it occurs, rival the intense high interest rate, high inflation rate scenario encountered in the 1970s.  My research which is published in the book, Theory of Financial Relativity, predicts that the outcome will depend largely on the U.S. government policy going forward, in particular the U.S. Treasury demands for low rates to finance the U.S. deficit relative to the rate of growth in federal budget expenditures.

In November of 2015, Republican Paul Ryan took over as House Speaker, and ironically his first action was to lead the approval of a 2016 budget that dramatically increased federal spending levels when compared to the previous 5 years.  When this action is combined with a Federal Reserve that is hesitant to take action to return interest rates to a historical normal level, the odds are now much higher for stagflation to return as it did in the 1970s.  All this said, the U.S. economy has a long way to go before the situation can return to the extreme situation faced in the 1970s.  These issues take time to materialize.

In this financial environment, I favor commodity based investments and gold, which have been severely beaten down over the last several years.  Note the correlation in the decline in these sectors to the very low growth rate in the U.S. fiscal expenditures.  Now that these sectors have all been severely reduced in value, and U.S> policies in the process of changing, these investments will be much better stores of value than U.S. stocks (SPY) (DIA) (QQQ), or U.S. Treasuries (TLT).

Daniel Moore is the author of the book Theory of Financial Relativity: Unlocking Market Mysteries that will Make You a Better Investor.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.  He holds no positions is securities referenced in this article.

Saturday, February 13, 2016

What would Negative Interest Rates Mean for America?

Negative interest rates (NIRP) in Europe and Japan are a function of central banks out of control defending their country banking systems by cornering the market in so-called "risk-free" government bonds. The lack of lendable collateral in these economies at low rates is a function of poor fiscal policy (a.k.a. crony socialism), not a failure of the central banks since they are really only taking their cue from hopeless government leaders and entrenched, concentrated wealth pools, who own the banks. The utter failure of this scheme was predictable, and the repercussions on the country stock markets that have been affected are an appropriate market response. Likewise, both the EU and Japan currencies have suffered greatly in this race to the bottom.

Fast forward to a world in which the major reserve currency in the world today, the U.S. dollar, is positioned through Fed policy to have a negative carry interest rate, to all the holders of dollars throughout the world. Chaos is the predictable outcome. It is the equivalent of both a default on the U.S. debt, and a tax on all foreign capital which is funding the U.S. debt. Cue up a major flight to hard assets, like gold, and anything else bolted to the ground, and a major run on the U.S. debt. This issue is far more critical to the potential economic outcome of such a decision than the effect on U.S. savers who are hopelessly tied to the policy decisions of their brain dead elected, and appointed in the case of the Fed, leaders. The problem is, the U.S. people alone do not have the $6.1T in funds needed to fill the gap left if the foreigners leave town. And if they do, they probably don't want to give $100 to the government to get $99 back, or even less, every year.

If you want less of something, tax it. A NIRP direction in the U.S. is a stepping stone to an outright depression, not only in the U.S., but world-wide. The upcoming election is critical to making sure this path is not chosen by the U.S., assuming Obama doesn't make this his final nail in the coffin for the U.S. economy as he departs silently out of town.

Thursday, February 4, 2016

Can Cheap Oil Trigger a U.S. Recession?

Historically, major drops in oil do not equate to causing a U.S. recession. However, cheap oil can tear down an over valued stock market, which is what is happening right now.

For recent evidence, look at Black Monday in October 1987.  Twenty-one (21) months after the Saudis started a similar oil pricing strategy as the market faces today, where the Saudis raise production to maintain market share, the U.S. stock market plummeted 40%. But there was no U.S. recession.

Fast forward to 1998, oil prices plummet 55% over a two year period (1997-1998) as emerging markets faced a currency crisis. Russia defaulted; however, there was no U.S. recession. The stock market swooned in sympathy intra-year by over 20%, with the peak of the decline happening 20 months after oil prices began to crater. We are now at month 18 of the time frame in which oil prices started their decent starting in August of 2014. I estimate that $20-$25 per barrel in oil would force a similar emerging market crisis today, and trigger a similar U.S. stock flash crash as experienced in 1998.

Wednesday, February 3, 2016

Oil Prices Bottoming? – What Changes in the Futures Curve Say

The oil futures curve over the past half year, dating from August 2015 to the end of January 2016, has undergone a radical downward move.

In August 2015 the current March contract level was priced at over $48 per barrel. By mid January the contract dipped below $28 per barrel concurrent with the point in time the February contract expired. After expiration, the futures curve rallied over 25%, with the front month contract increasing to about $33 per barrel. The rally overall has been uniform across the entire contract spectrum, with mid-term longer dated contracts faring better.

For this price rally to hold, signs should continue to become evident that future supply relative to demand is tightening, forcing the longer dated contracts to become more expensive while the front-end of the curve exhibits volatility as traders maneuver to make money in the process of clearing excess oil in storage

Why the Current Oil Rally has Stronger Legs 


Thursday, January 28, 2016

Fed Powerless to Solve Current Stock Market Valuation Problem

On January 27, 2016, the Fed announced its decision not to raise interest rates.  The policy statement with the decision was considered slightly more dovish than when the Fed raised rates in December.  In particular the statement made reference to international market unrest which if continued would likely delay the ability of the Fed to raise rates as often in 2016 as previously forecast.  Post announcement, Fed Funds futures moved to a price which predicted only one additional rate hike in 2016.  And, the DOW (DIA), which initially traded up after the announcement due to a perceived more dovish stance by the Fed, ended the day down 223 points.

The only take away investors should have from the Fed statement is that they don't see any reason to raise rates - yet.  However, it is clear the FMOC does not anticipate lowering rates or using QE anytime soon.  Going slow is really their only option right now because the primary ingredient that will stoke inflation and tighten labor market conditions, the two mandated variables which dictate Fed policy, is still not strong enough, or even highly visible when it comes to inflation.  And what, you ask, is the primary ingredient?  Answer, a major change in U.S. fiscal policy.

Wednesday, December 30, 2015

Is OPEC Still Relevant in an Oversupplied, Low Price Oil Market?

  • The world oil market is estimated to be over-supplied by 1.5M BBL/d, yet Saudi Arabia and OPEC continue to maintain higher rates of production.
  • Prices of oil have plummeted since mid 2014 from highs above $100 per barrel to recent lows below $35 per barrel in December 2015.
  • This article reviews the oil supply and pricing dynamics since the Arab Oil Embargo, including 5 other points in time over the past 40 years when oil prices went up or down dramatically.
  • The data reveal that if you inflation adjust prices back to a time pre-Embargo, using 2015 prices, $50 per barrel is currently the point that prices are likely to stay below until over-supply clears.
  • Additionally, market price and supply levels post 1986 provide valuable investor insight into the geopolitical landscape changes required to change the current market trajectory.

Market discussion was heated after the December 4, 2015 OPEC meeting about whether the organization was “losing its relevance”.  The argument was that since the price of oil continued to free fall after the meeting because the Saudi led cartel did not scale back production to support the price, that somehow the organization had lost its grip on the world oil market.  The inability of the group to agree on an official quota left organization members producing at a rate of 31.5M BBLs a day.  The result of the meeting was not received well by the market.  Subsequent to the meeting the prices of crude dropped below $35 per barrel for WTI and $40 per barrel for Brent and show little sign of quickly rebounding.

To understand the relevance of OPEC today, I believe you need to review the history of points in time that the price of oil moved significantly, both up and down.  And, since oil is priced in U.S. dollars, the prices need to be normalized for U.S. inflation through time so that changes in the supply of oil relative to demand can be better understood.  With this framework in mind, I went back to the point in history when OPEC was arguably at the peak of its power as an organization, the Arab Oil Embargo, and examined 5 major price discontinuity points since that time.  The results of the research are shared in this article I recently published on Seeking Alpha.

Wednesday, December 16, 2015

Oil Prices Lower for How Long? You decide

The business media is currently full of year end predictions, and many concern the future price of oil.
Goldman Sachs lead the charge in predicting much lower prices for oil back in September of 2015 when analysts for the firm published a report saying prices could drop as low as $20 per barrel.  here

And now that oil spot market prices have dropped to the $35 range in mid-December, the market is now set-up for an epic battle for the game of “who is going to be right?”  Ron Insana injected his view on 12/8/2015 that an Oil recovery by 2017? Not likely.  He foresees price levels approaching $20 per barrel and shale oil drillers surviving through higher productivity.  Alternatively, on 12/4/2015 Daniel Yergin, Vice Chairman of IHS, explained his view on Why oil prices cannot stay this low, here.  He sees a range bound trade of $40-$60 for oil over the intermediate future.

Not one to be satisfied with just following the news cycle to assess the probable direction of the market, I gathered some useful facts about the current oil market.  I share them in this article to help investors make their own informed decision about their energy market positions and investment strategy.

U.S. oil market prices on a roller coaster ride since 2008


Oil prices hit an all-time high over $147 per barrel in the summer of 2008, and 6 months later were below $40 per barrel as the U.S. financial crisis left no asset class unscathed, with the exception of sovereign government bonds like U.S. Treasuries.  The price of oil experienced a similar downward juggernaut from June of 2014 into early 2015, dropping from over $100 per barrel in June 2014 to below $40 per barrel by the winter of 2015.  The price of oil has since stayed stubbornly on average below $50, and now seems to be making $40 the over / under zone.