Economic News: Economy is Rapidly Slowing

In an economic news report posted on YouTube (link above) by X22 Report, it cites how the average Millennial has less than $1,000 saved to buy a home. Not only do I think that’s true, I would add that the average Millennial has zero money saved for retirement.

Economic News Forecasts Recession

Most younger people have low paying service sector jobs like McDonald’s or Carl’s Junior, and most are dealing with student loan debt.

X22 Report says that the economy has already entered into a recession and is on the verge of a complete collapse.

Please keep in mind that the X22 Report is a perma-bear YouTube channel and they make money off of doomsday preppers and pitching gold and silver. They operate in the alternative news niche and so understand the alternative news industry. Don’t go bipolar and go out and short the market just yet. Nevertheless, it’s good to listen to the bearish perspective to balance against the bull perspective of the mainstream financial media.

Don’t Double Down On Wrong Prediction, Just Move On

Whether we are talking about individual stocks, the stock market, or the economy, when you’re wrong just admit it and then move on. The goal is to make money, not to be right 100% of the time so you can stroke your ego.

AM TV and Peter Schiff predicted that the Federal Reserve could not stop their monthly QE injections into the economy. Even though the Fed kept cutting the monthly injection all the way down to zero, alternative media outlets AM TV and Peter Schiff kept saying the Fed wouldn’t stop the monthly infusions because they couldn’t as the patient (the economy) would die. Peter Schiff then went on to say that the Fed was not going to hike rates in December 2015 but instead actually cut rates. The Fed increased rates a quarter point right on schedule. For all of 2016, Peter Schiff has been saying that the Fed isn’t going to hike rates again but instead reverse course and lower rates. In December of 2016, the Fed will likely increase rates another quarter point.

Most alternative media outfits think they have to be crazed perma-bears to get viewers. Maybe they do. Rather than AM TV and Peter Schiff admitting they were wrong about the Federal Reserve, they double down on their wrong predictions and do another “interview” together, check it out.

There are some really good points in this interview, don’t get me wrong. However, to be a successful traders and investor, you can never be a perma-bear. You can never be a perma-bull. You have to adapt and respond to market conditions. That adaptation means you have to be willing to admit when you’re wrong and then to just move on.

Folks, watch out for fear mongering. Fear drives viewership and video view counts on YouTube but being forever fearful is a great way to lose all your money at trading. Some parts of the economy will no doubt suffer under a Trump Administration and higher interest rates; however, higher rates will be good for other parts of the economy like Banking. A Trump Administration will be bad for multinationals and the Dow and parts of the S&P 500; however, Trump will be great for domestic businesses and the Russell 2000.

Stocks With Bullish Money Flow 11-23-16

Stocks that have a positive divergence between the Twiggs Money Flow and price. Today’s stocks include DAR, GME, MMS, OPHT, PEIX.

Darling Ingredients Stock Chart

Comments: BlackRock, EMINENCE CAPITAL, and SOUTHERNSUN ASSET MANAGEMENT have been accumulators of DAR during 2016. Solid valuation at P/E 16.4, and forward P/E 19.6. Huge buy side volume on 11/23/16, more than 500% higher volume than the average volume.

GameStop Stock Chart

Comments: Awesome valuation P/E 6.8, forward P/E 6.7. Lower taxes and an increase in consumer discretionary income will result in better demand for video games. Still, I like this for a short term swing trade to 200-day MA resistance at $28.44.

MAXIMUS Stock Chart

Comments: Wall Street is expecting 54% YoY EPS growth for Maximus. Maximus has cleared all its moving average resistance levels. My concern with this stock would be its exposure to the Affordable Care Act and how much changes from a Trump Administration would impact earnings and profits.

Ophthotech Corporation Stock Chart

Comments: Rising Twiggs Money Flow but still below 0% line. Somebody is buying this biotech stock.

Pacific Ethanol Stock Chart

Comments: Boom! Beautiful revenue growth over the last four years.

Disclosure: I do not have any positions in any stocks mentioned.

Macroeconomics of Rising Interest Rates

The prospect of a Federal Reserve rate hike is driving up the US dollar. The rising US dollar has a significant impact on the US economy and thus stock market. It’s important that traders understand the implications of a rising US dollar from a macroeconomic perspective.

Rising US interest rates mean that a lot of people around the world will want to take advantage of higher interest rates inside the US. For simplicity sake, we will use just one country, Brazil, to illustrate what happens.

On the supply and demand graph S equals the supply of the Brazilian real and D equals demand for the real. If the exchange rate were one dollar for two reals, then the price of one real would be 50 cents.

When the Federal Reserve raises US interest rates, Brazilians will want to take advantage of higher interest rates on their savings, and so they will want to put more money in the US. To get the relatively higher interest rates in the US, Brazilians need to exchange Brazilian reals for US dollars. Thus, the supply of reals increases which shifts the supply curve outward.

The increased supply of reals is now used to buy US dollars, so the demand for dollars goes up which shifts the demand curve for dollars outward. This increase in demand for US dollars pushes the value of the dollar up. The supply and demand graph is S equals the supply of US dollars and D equals the demand for US dollars.

The dollar will now buy more reals, and it would take more reals to buy a dollar. The dollar has appreciated, and the real has depreciated.

The rising value of the dollar is good for US consumers as it makes imports cheaper and so demand for imports goes up. That’s bad for the domestic US economy because cheaper imports are purchased over more expensive domestically produced goods.

Another reason why a rising US dollar is not good for the US economy has to do with exports. A strong US dollar is bad for the US economy as it makes US exports more expensive and thus decreases US export sales.

A rising US dollar increases imports and decreases exports. If the value of the imports is greater than the exports, the country is said to have a trade deficit. The rising US dollar makes the trade deficit worse.

A trade deficit (Exports – Imports) subtracts from the GDP. In the GDP formula:
GDP = C + I + G + (Exports – Imports)

Having more imports than exports means US dollars are flowing out of the country and not going into the “I” (business investment) component of the GDP formula. All the business investment is going into manufacturing plants overseas instead of into the domestic economy.

The US dollar is exploding higher right now.

The rising US dollar is why the durable goods orders and shipments activity in the US continue to languish.

New manufacturing orders just can’t get going in a rising US dollar environment.

Saudi Arabia Bond – Fat Chance You Oil Pumping Sharks

Saudi Arabia is now offering an international bond that yields 4.6%. The WSJ writes

The $6.5 billion 30-year portion of Saudi Arabia’s bond is set to pay 2.1 percentage points more in yield than a comparable U.S. Treasury, or around 4.6%. That is a sizeable pickup in a world where developed-market bond yields are on the floor or in negative territory.

Let me get this straight. Saudi Arabia targeted the US oil industry by flooding our markets with cheap oil. Mainstream media groups like the WSJ and CNBC were complicit in the scheme with only a few alternative bloggers like me critical of what Saudi Arabia was doing. Folks, what Saudi Arabia did was illegal according to international trade laws and it could even be viewed as an act of war.

The US is one of the biggest consumers of Saudi Arabia oil. By increasing supply to force down the price of oil, Saudi Arabia made a lot less money and hurt themselves in an attempt to hold on to market share. Saudi Arabia is going deeper into debt by the week.

Now Saudi Arabia has issued a bond to shovel their debt off onto Americans. Saudi Arabia wants you and me to buy their debt, and they’re willing to pay us a 4.6% yield to do so! The WSJ and other mainstream media groups seldom if ever criticize Saudi Arabia because the Saudis have a lot of influence, power, and money around the world.

Any American that buys this Saudi Arabia bond has lost sight of the forest for the trees. Buying Saudi Arabia debt is un-American in my opinion.

Folks, I hope debt crushes, Saudi Arabia. They deserve it. They put tens-of-thousands of Americans out of work and have forced many American businesses into bankruptcy. Saudi Arabia’s debt problem is of their own making, and as the Bible tells us, you reap what you sow.

I don’t buy China stocks because China is a horrible communist country that runs over its citizens with tanks. I won’t buy Saudi Arabia bonds because Saudi Arabia nationals were responsible for 911 and Saudi Arabia targeted the US shale oil industry to keep market share.

Think about it. It’s evil genius brilliant. Go into debt by oversupplying the US oil market and put US oil drillers out of business. Then get those same Americans to finance the debt that hurt their very own economy!

I’m by no means an “ethical” investor but come on folks, you don’t give your enemy weapons to turn around and shoot you with. It’s just common sense IMO.

We need to get smart, fast folks. We are getting beat at every turn. Everywhere you look the politicians that are running our government and negotiating international trade deals are doing so because of corrupt “pay-to-play” schemes and special-interest groups instead of what is best for America. If we don’t start putting America first, there won’t be an America to call home.

Illegal Immigration and Job Wage Stagnation In the US

Illegal immigration negatively impacts the hourly wage of US citizens. Illegal immigrants are pouring across the Mexico border, and we have no way of counting them but what we can do is track legal immigration from Mexico then double the number for a fuzzy-math estimate.

With legal immigration and an impenetrable border, economists working for the US government can control and set the upper limit on the number of immigrants competing with existing US citizens for jobs. With illegal immigration, the flow of people into this country that are competing with US citizens for jobs and resources can not be controlled.

With the flow of millions of illegal immigrants into our country, the labor supply of workers with less than a high school education significantly increases. That puts even more downward pressure on the wages of the poorest Americans. That, in turn, limits their ability to climb the economic ladder. Limiting the number of jobs available for American citizens is not a smart economic policy for the long-term economic development of our nation.

The following graph illustrates the effects of importing illegal workers on the American labor market.

The “Y” axis shows wages paid per hour for a job, and the “X” axis shows the quantity of labor available for that job. Equilibrium (thin black line) is where the supply and demand curves cross. In this hypothetical example, at $16 per hour, there are 33 applications for a particular job.

An increase in the supply-of-labor from illegal immigration shifts the supply curve down from S1 to S2 as available labor rises. A new market equilibrium is established (thin red line). The business listing the job can lower the hourly wage to $13 per hour as there are now 45 applications for the job.

Without illegal immigration, the business would have to offer $19 per hour (w1) to get 45 applications for the job because the higher the hourly wage offered, the more people would apply for the job. The loss (shaded area) from illegal immigration, therefore, is w1 – S2 = -$6 per hour lost.

Macroeconomics and the supply and demand graph above proves that the effect of illegal immigration is to shift the supply-of-labor curve downward, causing it to intersect the demand-for-labor curve at an equilibrium point with a much lower wage level and a higher quantity-of-labor level. This shift signifies the willingness of illegal immigrants to perform more labor for lower wages than American citizens. This effect on the labor market affects all laborers, both illegal and legal.

Lower and lower wages caused by more and more illegal immigrants means consumers have less purchasing power because they make less per hour. Businesses will have to lower prices to sell their goods and services which creates a negative feedback loop and deflation. Remember, deflation is a decrease in general price levels throughout an economy. Massive illegal immigration during the Obama Administration explains in part why the Federal Reserve is having trouble getting inflation going (CPI) even after spending trillions of dollars of tax payers money to boost the economy.

But I Heard That Americans Are Unwilling To Take The Jobs Mexicans Take

It is not true that Americans are “unwilling to take the jobs” in question. The issue is not whether Americans are or are not willing, but at what hourly wage level. In a free market, American citizens have the right not to take a low paying job. In a free market, having some jobs go unfilled because businesses are not willing to pay higher wages is a legitimate outcome.

Illegal immigrants should not be able to compete with American citizens for jobs because their presence in our country is a violation of the law. The number of people granted citizenship in the US has to be at a controlled rate else our economy will crash under the weight of a deflationary spiral. This dire outcome of a deflationary crash is not an opinion but instead fact based on macroeconomics.

We have to get our immigration and borders under control else America’s shining beacon of light will burn out.

With So Much Debt In the US Economy, Is It Even Possible To Grow Faster?

The US national debt just broke above $19.5 trillion. Both Democrats and Republicans are to blame, but it is important to note that President Obama and Democrats increased the national debt more than all President’s before combined.

George Bush exploded the national debt by $3 trillion in response to an imploding economy and 911. Obama exploded the national debt by $10 trillion in response to an imploding economy.

Debt increases are a function of the government not being able to pay its bills because it has too little revenue (taxes) compared to costs (spending). When spending exceeds revenue you have a deficit. Since 2002, this is what quarterly deficits (or surpluses) have looked like.

The last time we have a surplus was back in 2001, some 16 years ago. That’s sad.

The interest on the $19.5 trillion dollar debt is about $482 billion a year or more than $60,000 per US citizen.

How does the US government finance the deficit?

The Crowding Out Effect

The U.S. Treasury sells IOUs in the form of bonds or treasury bills directly to the private capital markets and uses the proceeds of the sales to finance the deficit.

The US Treasury is competing directly in the capital markets with private corporations, which may also be seeking to sell bonds and stocks to raise money to invest in new plant equipment. To compete for these scarce investment dollars, the Treasury typically must increase the interest rate it is offering to attract enough funds. Running a huge deficit is largely a zero sum game because funds to finance the deficit would otherwise be spent on private sector investment (the I variable in the GDP formula).

Money used to finance the deficit is money that would otherwise have been borrowed and spent by corporations and businesses on private investment. Deficit spending by the government is said to crowd out private investment. Crowding out is the offsetting effect on private expenditures caused by the government’s sale of bonds to finance the deficit. The larger the deficit and the more government needs to spend on financing that deficit, the more crowding out occurs.

The crowding out effect, which is one of the most important concepts in macroeconomics, is illustrated below.

The initial equilibrium is at Y, where the aggregate expenditure curve AE, crosses the aggregate production curve AP. However, expansionary fiscal policy shifts the aggregated expenditure curve up to AE1. This leads to a new equilibrium of Y1. However, because the government has had to borrow money from the private capital markets to finance these expenditures, interest rates rise. This reduces investment and a resulting contractionary effect shifts the aggregate expenditure curve back down from AE1 to AE2.

The final equilibrium is now at Y2 as the net economic expansion equals Y2 minus Y. At the same time, the partial crowding out of private investment may be measured by Y1 minus Y2. The level of partial crowding out rises the more government borrows from the private sector.

It is my opinion that government deficits are a weak fiscal policy tool at best, and I think the last eight years of President Obama increasing the national debt and running the largest deficits in US history has proven that point.

A few readers have asked me if crowding out can be reduced by printing money. The idea is to avoid crowding out by printing money and here is how that scheme works. The Federal Reserve accommodates the Treasury’s expansionary fiscal policy by buying Treasury’s securities itself rather than letting the securities be sold in the open capital markets. In essence, the Federal Reserve simply prints new money.

The problem with this option is that the increase in the money supply can cause inflation. Moreover, if such inflation drives interest rates up and private investment down, as it is likely to do, the result of the print money option will be a crowding out effect as well. In other words, there is no escaping the crowding out effect when it comes to financing the deficit. Again, look at the last eight years of President Obama and look out how much he has put this country in debt and ask yourself has it really benefited the U.S. economy that much? Perhaps some, but ultimately crowding out took away much of the initial gains from Democrat’s expansionary fiscal policy.

Deficits Impact On International Trade

Deficits and a rising government debt is a serious threat to the US. Chronic budget deficits have not only been responsible for crowding out private investment, but also for America’s huge trade deficits over the last several decades. The macroeconomic relationship between deficits and international trade is illustrated below.

As government deficits drive interest rates up in boxes 1 and 2, we observe crowding out in box 3. Now look at box 4. Higher US interest rates attract foreign investors but, for these investors to invest, they must exchange their foreign currencies for dollars. This not only leads to an increase of US external debt in box 5, but it also drives up the value of the dollar in box 6. A stronger U.S. dollar makes U.S. exports less competitive, and exports decrease in box 7 even as imports increase in box 8. The result is a larger trade deficit in box 9, and that’s why economists refer to budget and trade deficits as the “twin deficits.”

A trade deficit means a country is not exporting enough to pay for its imports. The difference can be paid by either borrowing from abroad or by selling US assets.

Mortgaging America

To finance its trade deficit, the US has had to sell off assets such as factories, shopping centers, hotels, golf courses, and farms to foreign investors. This mortgaging of America has reduced both the rate of economic growth and the level of real income of Americans.

Deficit Doves Say Don’t Worry

Deficit dove economists that work for Democrats and the Obama Administration say don’t worry about the national debt because most of that debt is internal debt owned by the country to its citizens. Obviously, that argument by Democrat economists is not so good as evidenced by the broken US economy some eight years after Democrats and Obama took office. I list four reasons below why this “don’t worry be happy” argument is wrong and how it has hurt the US economy.

#1: Internal Debt Leads to Higher Taxes

Internal debt requires payments of interest to bondholders. This, in turn, means higher taxes which distort the allocation of national resources and lead to an efficiency loss.

#2: Internal Debt Redistributes Income From Poor To Rich

Paying interest on the internal debt unfairly redistributes income from the poor and middle class to the rich. This happens because government bondholders as a group tend to be wealthier than taxpayers as a group.

#3: Servicing The Debt Cuts Government Services

Paying interest on the debt uses $482 billion each year, and this money could otherwise be spent on providing taxpayers with more education, health care, and other government services. The size of the interest payments to service the debt, relative to total tax revenues, has been rising every year. If nothing is done, we will eventually wind up using all available tax revenues simply to service the debt.

#4: A Burden On Future Generations

The accumulation of such a large debt places an unreasonable burden on future generations, which must pay this debt off. I don’t know what to even tell my daughters about the $19.5 trillion national debt, so I choose to say nothing. I could say I voted for Obama because I wanted to vote for the first African-American President and I thought he would save our household money on medical care. Then say, oops, my bad, now here’s the $9 trillion he added to the national debt during his Presidency that you have to pay off when you’re old enough to work. Thank you and have a nice day.

Niall Ferguson thinks that the “age of debt” is coming to an end. Apologies for the sub-titles but this Hard Talk interview has an important message.

With a growing crowding out effect, it may be impossible to increase GDP in a meaningful way until the national debt and deficit spending is reduced.

Government Spending and the Crowding Out Effect

The velocity of money has hit the lowest level ever recorded as I wrote about here. I believe the crowding out effect is at least partially to blame for the slowdown in the velocity of money.

President Obama has run the national debt up to nearly $20 trillion, more than all President’s before him combined. This expansionary fiscal policy has crowded out private sector investment.

Crowding out is the offsetting effect on private expenditures caused by the government’s sale of bonds to finance expansionary fiscal policy. When the Federal government borrows money to finance a budget deficit, the U.S. Treasury sells IOU’s in the form of bonds or treasury bills directly to the private capital markets and uses the proceeds from the sales to finance the deficit. The Federal Reserve is out of the loop as the U.S. Treasury is competing directly in the capital markets with private corporations, which may also be seeking to sell bonds and stocks to raise money to invest in new plant and equipment.

To compete for these scarce investment dollars, the Treasury typically must raise the interest rate it is offering in order to attract enough funds. This means that running a deficit is largely a zero sum game. The money used to finance the deficit is money that would otherwise have been borrowed and spent by corporations and businesses on private investment. This is how deficit spending by the government is said to crowd out private investment. This crowding out effect is illustrated by these two figures.

On the left-hand figure, an increase in investment demand by the government shifts the investment demand curve from Id1 to Id2. This raises the interest rate and reduces private investment as is made clear by the right-hand figure. Note that in this figure, if the economy starts at point a and moves to point b, crowding out will be equal to h1 minus h2; however, if the economy starts at point C in a recession and moves to point B, crowding out need not occur.

I believe that substantial crowding out has occurred during the Obama Administration and their expansionary fiscal policy which has reduced the velocity of money.

Banks don’t need savers money because they have large surpluses of cash and can borrow money cheaply from the Federal Reserve; thus savers are penalized as they are paid very low-interest rates on their savings.

The next President of the United States needs to reverse course in my opinion and reduce the crowding out effect to get the velocity of money going up again. The way to do that is to stop using fiscal policy and government spending to drive economic growth. In the GDP formula: GDP = C + I + G + (Exports – Imports), the reliance on fiscal policy should be reduced because increases in G (government spending) are largely being offset by declines in I (investment by businesses).

Unfortunately, most modern Keynesian economists recognize the possibility of crowding out, but they do not think it is a major problem when business borrowing is depressed because that’s what usually happens in a recession; therefore, an activist expansionary fiscal policy is appropriate.

Fed Puts Markets On Notice For Rate Hike

Fed’s Eric Rosengren was clear in his speech early Friday that rates need to be raised. Mr. Rosengren said that if we don’t raise rates soon, we could crash the economy. Mr. Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Fed’s Kaplan (Dallas Fed) spoke about the need to raise rates very slowly but said that the Fed “has put markets on notice.”

Atlanta Federal Reserve chief Dennis Lockhart said on Monday, September 12, 2016, that a “serious discussion” of a rate increase was needed. Lockhart said, “I believe the economy is sustaining sufficient momentum to substantially achieve monetary policy objectives in an acceptable medium-term time horizon.”

Not only do banks need rates to move up as they have suffered for years under low-interest rates, but inflation is also coming on strong.

Jeffrey Gundlach of DoubleLine said last week, “This is a big, big moment.” The bond investor warned his peers that interest rates are ready to rise from their historically low levels and asset managers need to be “defensive.” Quartz writes

Gundlach said investors should reduce duration in their portfolios, move money into cash and buy protection against volatility before rates rise and inflation picks up.

Gundlach uses the recent jump in the ECRI (index of leading indicators) to suggest that we are about to see more inflation in the US.

The ECRI US leading index continues to rise so the market should be pricing in higher inflation and therefore higher interest rates.

Consumer credit confirms an overheating market and the likelihood that inflation will explode higher. Consumer credit as a percentage of GDP is exploding higher to levels never seen before.