All posts by Moderator

Is Putin Winning The War Of Attrition With The U.S.?

Authored by Tom Luongo,

The news that President Donald Trump offered to hold a meeting with his counterpart in the Kremlin, Vladimir Putin, has the political world in an uproar.

Furiously keyboards are chattering away as laptop bombardiers are worried that perpetual war for perpetual empire will end if Trump and Putin see eye to eye on anything.

From the bowels of MI-6 to the think tanks that line K Street schemes are hatched to make it politically unacceptable for Trump to do what he apparently did, if TASS is to be believed.

If true, the offer represents the biggest shift in U.S./Russian relations since Trump’s election and the subsequent hissy fit thrown by his political opposition in every corner of the political landscape.

Because they know what’s happening even though you could never get them to admit it in public, the U.S. is vulnerable.

We’re not vulnerable in any ultimate weapons sense. The U.S. can certainly lob enough nukes at Russia to wipe them out and vice versa.  No, we are vulnerable where our real power comes from: our dominance of the world’s capital markets backed up by both the political will to isolate anyone who doesn’t toe our line and/or the military might to put down any marginal challenges.

Real Might, Real Power

So, China finally launching an oil futures contract denominated in Yuan, the so-called petroyuan, and convertible to gold is a financial WMD which doesn’t dwarf Putin’s new hypersonic missiles today.  But, over time that weapon will grow in power and destructive capability.

China is the world’s largest importer of oil.  That makes it the source of marginal demand for oil in the world.  Russia is the world’s second largest oil exporter, that makes them one of the suppliers of the marginal barrel of oil on the world market.

While the Saudi Arabians export a lot more oil than Russia, they do so at a much higher all-in-sustaining-cost basis than Russia does (see volatility of the Saudi Budget relative to oil prices below).  At current oil prices Russia’s slowly growing economy is capable of meeting its social needs as measured by the government’s budget, which ran a very modest 1.5% of GDP in 2017 and should contract again this year.

On the other hand the Saudis ran an 8.9% budget deficit in 2017 and has zero hope of closing that much further without higher oil prices. The Saudis are simply at the mercy of the oil price.

Therefore, the Russians are, in my opinion, the producer of the marginal barrel of oil because of their greater economic diversity.

Economically speaking, the marginal supplier and marginal buyer set the price.  No one else does.

And when you are the marginal buyer you decide what currency you’ll pay in.  In the 1970’s when the U.S. was so “dependent on foreign oil” we were also the price setters.  This was the framework for the petrodollar deal.  Saudi Arabia got U.S. cover for its crimes against humanity and the U.S. got to export dollars around the world and build up confidence in our government bond markets.

Today China is where the U.S. was and it’s position is getting stronger by the day.  And that’s why this petroyuan contract can and will succeed where others have failed in the past.

At some point China will tell the Saudis they no longer are willing to subsidize the U.S. dollar and offer up only Yuan in payment.

And guess what folks?  The Saudis will play ball.  So will the U.S.

If they don’t China will continue to buy more and more oil from Russia who will be only too happy to accept Yuan in payment for services rendered.  The Saudis will see their power eroded over this.  The dollar will fall as a percentage of reserves.

The Waiting Game

And this brings me to Putin and his near infinite patience.  It is easy to have patience with your opponent when you know your opponent has no end-game strategy other than war.

Putin understands that the U.S. is living on borrowed time.  That moves like this ‘petroyuan’ contract are the beginning of a new landscape.

When Chinese banking giant ICBC bought a London Bullion Market Association vault, a seat on the fixing board and became one of thirteen market makers we all wondered what the end game was.  But, it should be plainly clear now.

The LBMA is the means by which China can make good on its promise to back its Shanghai Oil Futures contract with gold, allaying the fears of institutional investors and traders of an exit strategy for their profits.

China gets a way to deepen its yuan-denominated debt markets and expand the Yuan’s base via organic growth of demand for it as a trade settlement currency.  Investors are safe knowing they can hold yuan-denominated debt because it is convertible to gold as a hedge.

The Russians get a willing partner with tremendous capital reserves to invest in Russia and benefit from the growth of their relationship.  Russia gets to diversify its reserves and lessen the impact of an exchange rate shock between the ruble and the U.S. dollar.

Putin knew the Chinese were making the right moves to pull off what marginal players like Qaddafi in Libya and Saddam Hussein in Iraq could not do, defy the U.S.’s control over the pricing of oil.

The petrodollar is the U.S.’s Achilles’ heel.  Trade matters despite Martin Armstrong’s downplaying of it.  It is the basis on which an economy can or cannot sustain a virtuous credit cycle in our absurd fractional reserve banking system.

It is the M-zero of the international monetary system, as it were.  And if anything about central banking is to be believed, shrinking a particular currency’s portion of global M-zero means shrinking its multiplier through asset valuations, c.f. Exter’s Pyramid.

Because of this the petrodollar is one of the main conduits that allow us to finance our current spending habits.  If the U.S. only ran a trade deficit, then Triffin’s Paradox would be in play and the current system would be sustainable for a lot longer than it is today.

But with the fiscal and demographic nightmare unfolding in the U.S. and Europe all Russia has to do is deflect the worst of their aggressions while waiting for time to catch up with their profligacy.

And that time is catching up with us rapidly.

And that’s been Putin’s plan all along.  Simply win a hybrid war of attrition with the U.S. and Europe.  Trump, I think, understands this, though he’d never admit it in public and nor should he.

The very fact that he’s willing to meet Putin now after a deadly clash between U.S. forces and Russian mercenaries in the oil fields near Deir Ezzor and Putin’s unveiling weapons that render moot much of the U.S.’s current defense spending means he knows it’s time to begin pulling the world back from the brink of catastrophe.

That Trump made this offer despite the virulent protestations of the foreign policy wonks in his cabinet (many of whom he recently fired) and the chattering class in Congress and the Media speaks to how serious the situation truly is behind the scenes.

So, while I don’t believe this petroyuan contract will change the world now, it is another bit of leverage China has in its trade and geopolitical negotiations with Trump over Iran, North Korea, Syria and China’s One Belt, One Road project.

Putin’s very prudent means of getting Russia’s own house in order put her in the position to outlast the U.S. who will, over the next few years have to retreat or destroy the world.

*  *  *

To support more work like this as well as receive the Gold Goats ‘n Guns Investment Newsletter sign up at my Patreon Page beginning at just $4/month.

It’s The Trump Slump – But David Stockman Says “Don’t Blame The Donald!”

Authored by David Stockman via Contra Corner blog,

The are few snarkier defenders of the current rotten financial status quo than Ben White of Politico’s Money Morning. So it’s not surprising that he is out this week with the latest Trumb-o-phobe meme from Swamp Dweller’s Central.

To wit, the renewed stock market swoon is purportedly all the Donald’s fault owing to his unhinged tweet storms, protectionist trade initiatives and attacks on the casino’s sacred cow of the moment, Amazon:

WELCOME TO THE TRUMP SLUMP – President Donald Trump is killing his own stock market rally. The president’s tweet storm attacking Amazon and his protectionist trade actions against China and other nations helped crush the stock market on Monday with the Dow falling over 700 points in late afternoon trade before closing down 458, or close to 2 percent.

The tech-heavy Nasdaq fell even further, led by a five percent drop in Amazon after the president ripped the company over its delivery deals with the United States Postal Service. The Dow, Nasdaq and S&P are all now down for the year. The Dow has plunged 11 percent since its all-time high of 26,616 on Jan. 26, entering official correction territory.

Traders, money managers and economists on Monday laid much of the blame for recent declines on Trump, who spent most of 2017 bragging on a near daily basis about the massive run-up in stock prices that followed his election and the passage of sweeping corporate tax cuts.

The above is just unadulterated rubbish, of course. It’s a tribute to the mindless anti-Trump bias that dominates the Imperial City press and the context-free Recency Bias that passes for financial analysis.

On at least this matter, the Donald is definitely not guilty because he hasn’t been around nearly long enough to take the blame or the praise for anything related to the economy. The phony stock market boom has been gestating for three decades owing to central bank monetary madness; the up-leg since election day reflects nothing more than the final phase of an horribly metastasized financial bubble that has now reached its sell-by date.

In fact, our clueless medicine show impresario has confused the last gasp of the robo-machines and dip-buyers for an endorsement of his cockamamie brew of protectionism, nationalism, populism and unhinged Keynesian borrow and spend. So rather than puncturing the bubble he accurately identified during the campaign, he’ll soon be dripping with implosion splatter from comb-over to toe.

Likewise, the market’s post-election rip has nothing to do with a putative Trump economic boom because there hasn’t been one. A 2.0% or lower real GDP growth rate is now virtually baked into the cake for Q1 based on the economic releases to date. That would amount to a $75 billion gain over the Q4 annualized level of real GDP.

Accordingly, the first five quarters of the Trump Economy will have generated an average real GDP gain of $102 billion per quarter. Then again, during the previous three years (2014-2016) the quarterly growth rate was $99 billion per quarter.

We’d call that a distinction without a difference. Indeed, the notion that there has been some-kind of Trump fostered economic acceleration is, well, Fake News.

In fact, what we have is a plodding business expansion that is freighted down by debt and financial engineering—both gifts of a rogue central bank that has been inflicting harm on the main street economy for decades.

As we have frequently demonstrated, the C-suites of corporate America have been strip-mining their cash flows and balance sheets in order to goose near-term share prices and stock option packages, thereby drastically short-changing investments in long term productivity and growth. Since the turn of the century, in fact, upwards of $20 trillion has been shunted into unproductive M&A deals, stock buybacks and leveraged recaps of every dimension.

Not surprisingly, this massive diversion of cash and capital into Wall Street has left main street high and dry. What counts for growth and productivity, of course, is net investment after inflation and replenishment of capital consumed in current year depreciation and amortization.

As the chart makes clear, there hasn’t been much of it. Real net investment in 2016 was still 28% below its level in the year 2000. And relative to real GDP, the story is even more dismal: The average net investment level in 1999-2001 computed to 3.8% of GDP, whereas during the most recent three years it averaged only 2.5% of GDP.

Given this dismal long-term trend in real net investment, it is not surprising that real final sales growth since the pre-crisis peak in 2007 has slipped to just 1.3% per annum, or only one-third of its historic 3.3% trend. So even if the Donald had an honest money/pro-growth agenda, which he most definitely does not, it would be nearly impossible to quickly extricate the US economy from the low growth rut shown in the chart below.

And that get’s us to the real cause of the so-called Trump Slump. What’s happening is that the Keynesian doctors at the Fed have been taking the boys and girls in the casino off their meds, and the latter are now beginning to feel wobbly.

While the Donald’s tweets and policy lurches have been the proximate triggers for the recent plunges, the real cause is the reluctant recognition in the casino that all the Fed’s epic money pumping has failed to ignite any real economic acceleration, and that an epochal tightening shift in monetary policy is now actually happening—both here and abroad.

Indeed, we think the punk number that will be added to the bar chart below when the initial Q1 results are posted by the Commerce Department in three weeks will be the straw that breaks the camel’s back.

After that, the business expansion will be bumping up against its 1990s tech era expansion record of 119 months—–even as the headwinds of steadily rising bond yields, faltering growth in Europe and Asia and a sharp slowdown of the post-coronation economy in China gather intensity.

The truth is, the Donald has done absolutely nothing to help the US economy since January 20, 2017, but has piled on immense harm by stumbling into the most irresponsible fiscal policy in modern history.

Yet with the Federal deficit now heading toward $1.2 trillion or 6% of GDP in the year ahead, there is no way to avoid a conflagration in the bond pits. The resulting “yield shock”, in turn, will finally puncture the Great Bubble that has been inflating since Greenspan panicked at the time of the October 1987 stock market meltdown and launched the present era of monetary central planning.

Still, when one arm of the US government is borrowing at a $1.2 trillion rate at the tippy-top of the business cycle, while the central banking arm is dumping bonds at an annual rate (i.e. $600 billion) which exceeds the level outstanding as recently as 2003, you are talking about a fiscal/monetary collision like never before.

Needless to say, there is not a chance that the debt-bloated US economy can weather that conflagration unscathed. Indeed, it can be well and truly said that the entire nine year so-called recovery has been wasted. If nothing else it was at least a chance to modestly deleverage the US economy—-so that monetary normalization could occur with a minimal amount of breakage and disruption on main street.

To the contrary, there has been no deleveraging at all. Compared to the modern 100 year norm (from 1870 to 1970) of a 1.5X debt-to-national income ratio, the national leverage ratio now stands at 3.47X and that’s virtually no change from the 3.58X level that triggered the financial crash in 2008.

Stated differently, had the US stayed on the straight and narrow, and had it not launched into a rolling national LBO over the last 35 years, the total public and private debt outstanding would now be $30 trillion, not the $68 trillion shown below from the Fed’s flow-of-funds report for Q4 2017.

The irony, therefore, is that the main street economy is failing because it is lugging around $38 trillion of extra debt—yet its supposed to be rescued by the very King of Debt.

We’ll take the unders on that one, but also note that the Donald inherited an economy that was leveraged at 3.49X national income in December 2016. That’s not even a smidgeon of difference from where we are now.

So don’t blame the Donald for the impending day of reckoning. He inherited the current debt-bloated monetary deformation.

And like all the Presidents before him—- since Ronald Reagan got bamboozled by Wall Street into abandoning his desire to return to a Bretton Woods style hard money standard—-he has no clue about how to avoid the financial crack-up which lies around the corner.

 

 

During our appearance on the Cavuto Show today on Fox Business we expanded on these very same points.

Kurt Eichenwald Bullies Parkland Survivor, Then Finds Out He’s Unemployed

Journalist Kurt Eichenwald seems to have particular talent for finding himself in bizarre, unbelievable situations – then offering up even more bizarre, unbelievable excuses for how he got there in the first place. This week was no exception, which we’ll get to.,,

First there was Kurt’s 2013 prediction that Bitcoin would collapse nearly 3,000% ago, or how he pulled his kids’ college fund out of stocks in case Trump won the 2016 election (which he later said he invested “overseas” while browbeating a “stupid” Twitter user).

Then there was Eichenwald’s alleged seizure – reportedly caused after a Twitter user sent him a flashing gif – hours after Kurt appeared on Tucker Carlson Tonight to defend his unfounded claims that President Trump had been in a mental hospital. 

Eichenwald was somehow able to convince the FBI to arrest the Twitter user, John Rayne Rivello – before federal prosecutors subsequently dismissed the case

Who could forget the time Eichenwald was busted “researching” tentacle porn – after he tweeted a picture showing his open browser tabs – one of which was a repository of the cephalopod-themed hentai (maybe he is just a closet fan of Goldman Sachs). Kurt says he was innocently surfing tentacle porn with his kids in order to show his wife:

Then there was the episode where Kurt blamed his epilepsy for “severe memory disruptions” which caused him to forget paying an underage boy, Justin Berry, over $2,000 via Berry’s internet porn site for a New York Times article he was working on.

Kurt said in his defense that he’s rescued “100’s of kids from pedos” – while threatening to sue YouTuber Diversity & Comics for finding the above payment weird.

Now that we’re mostly up to speed on Kurt Eichenwald – skipping over the time Julian Assange wrecked him over Twitter, let’s review Kurt’s latest comedy of errors from this week – which include: 

  • Bullying Parkland shooting survivor Kyle Kashuv over Twitter, two hours after he railed against conservative pundits. Eichenwald then claimed he mixed up Kashuv with another teenager he meant to argue with (oops!).

  • Kurt was then forced to admit he’s no longer an MSNBC contributor despite it being in his Twitter bio – after Kashuv’s supporters called on advertisers to boycott MSNBC.

  • Eichenwald then sent Kyle Kashuv pal Ben Shapiro a letter in which he said Kashuv was “in desperate need of psychiatric help,” after a Direct Message exchange with the Parkland survivor – an email Shapiro promptly tweeted out. Eichenwald send Shapiro the letter under the guise of an article he was writing – however one wonders which outlet it’s for – considering his unclear employment status.  
  • Kurt then told Shapiro that he would hold him responsible if any of Shapiro’s followers “harms” him with another seizure. 

  • After Shapiro’s email exchange, Kurt says he found out he’s no longer a Vanity Fair contributing editor – despite it also being in his Twitter bio. 

Let’s take a look at Kurt’s shrinking credentials…

At least he is still a NYT bestselling author.

Meanwhile, Kyle may have a case against Kurt according to legal website Law and Crime

During an email exchange with right-leaning commentator Ben Shapiro, liberal journalist Kurt Eichenwald made several scurrilous comments about pro-gun Parkland teen Kyle Kashuv.

As a result of this email, Kashuv likely has a valid defamation case against Eichenwald if he decides to take legal action. Specifically, he could sue for defamation by libel. At issue would be various statements Eichenwald made about Kashuv’s alleged mental deficiencies.

Kyle Kashuv lives in Florida, so Florida would be the most likely jurisdiction. Under Florida law, the elements of a defamation claim are: (1) the defendant published a false statement; (2) about the plaintiff; (3) to a third party; and (4) the falsity of the statement caused injury to the plaintiff. This restatement of Florida’s defamation test comes by way of fairly recent precedent from the case Border Collie Rescue v. Ryan. Let’s take each element in turn.

1. Eichenwald Likely Published A False Statement

2. The False Statement Was About Kashuv

3. Eichenwald Published The False Statement To A Third Party

4. The Falsity Of Eichenwald’s Statement Is Presumed to Have Caused Kashuv Injury

Law and Crime

If Kashuv does end up suing Eichenwald, we can only imagine the courtroom antics…