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THE PREMISE

Newsmakers

ARCHIVE - JULY 2015

Issues, News & Views

Who will be the
2016 candidates
for President of
the United States?


Republicans


SCOTT WALKER!

Walker has broad appeal to
GOP constituencies and is a
proven winner. Look for him
to select New Mexico
Governor Susanna Marinez
as his running mate.



Who, from among this
strong, diverse field , will
emerge victorious to return
the GOP to the White
House?

COMPETITORS
The road to the White House
leads past the Governor's
mansion. Marco Rubio, Rand
Paul and Ted Cruz need to
go back to their state capitals
and fill out their resumes.
Among governors, Jeb Bush
and Rick Perry are stale, and
worse, remind people of
GWB 43. John Kasich is
unappealing to the base.
Mike Pence is an intriguing
alternative to Walker; the
other Mike (Huckabee) is
NOT!

Democrats


ANDREW CUOMO!????

Look for Hillary to drop out
and open the way for Bill
Clinton's HUD Secretary.
Cuomo, also Cinton's
neighbor in Westchester
County, finished his 2014
re-election with $8.8 million
in the bank, and would have
no problem raising much,
much more. Look for him to
pick MA Senator Elizabeth
Warren - or even Hillary
Clinton! - as his running
mate.



Is Hillary a foregone
conclusion, or will
someone else swoop in and
steal the show?


COMPETITORS
A Clinton run is a 50/50
proposition at best, given
her failures as First Lady
(HIllaryCare) and SecState
(Reset). In the meantime the
prospect keeps her speaking
fees in the stratosphere, and
keeps a path open for the
Clinton's hand-picked
designee: Cuomo. Warren is
an instant contender if she
jumps in. Everyone else is an
also-ran at this point. Webb
is an interesting Presidential
candidate, but a non-starter
in the Primaries: this is the
extreme left Democratic
Party of Sanders and
Warren.

THE GREAT FALL OF CHINA

2015/07/08 - With so many flash points in the world there is no lack of subjects to broach in our take on world affairs.

The Economy: Notwithstanding the negative first quarter GDP figures, we do not believe the US economy is heading for recession. Due to the President’s stifling regulatory burdens and distortive economic policies, significantly sub-standard economic growth will be the norm, but we do not see an actual recession on the horizon. Not much better than treading water, but at least not drowning, which is the most we could hope for from socialist Obamanomics. Unless China unravels. Don't fear Greece - instead fear China.

Iran: Since when is nuclear power - and the embedded fast track to nuclear weapons - a “right”? At best it is a privilege earned by only the most civilized of nations. That’s not Iran, at least not the Iran we presently face. This regime must never be allowed a pathway to nuclear weapons, and the American military option most certainly must remain on the table. A bad deal is way worse than no deal. What is Obama thinking? Is it possible that he actually does see it as his duty to undercut America?

Inflation: The Fed can print all the money it wants but inflation is not on the horizon either. Notwithstanding that the Fed is printing at a prodigious rate, the velocity of money is simultaneously dropping at a precipitous rate to historic lows, so the actual money supply growth is quite muted, and so is inflation as a result. The St. Louis Fed has a graph that distinctly illustrates the velocity trend. If the Fed prints money but people just stuff it into a mattress, the net effect is the same as if the money had never been printed. Our "Day of Reckoning" comes when individuals and businesses rip open the proverbial mattress and start spending. Keep an eye on that Velocity Graph, that will be your inflation alert.

Since the point is so fundamental yet receives no airplay, let's emphasize, reiterate and belabor it. You can be forgiven for thinking that Velocity of Money is an arcane, unimportant topic, but it isn't. At least not now. As long as M2V remains low, inflation will be low, and the dollar will resist weakening. And that means low commodity prices - witness the moves in copper, oil, gold. And that means low interest rates. Couple that with the potential for a further slowing in China, and commodity prices will remain under pressure. The decline in US M2V is at the core of just about every Monetary Policy decision.

China: Since last summer China’s stock market (SSEC - the Shanghai Stock Exchange Composite) has resembled a skyrocket, first increasing by 150% (yes, more than doubling), and now crashing straight back to earth having plummeted 35% in the last month! Mercy, where now from here? China has problems. The population level has flat-lined if it hasn’t already started decreasing, and it is aging; yet the Central Planners have taken on ridiculous levels of debt to excessively over-build infrastructure that it may not ever need.

Worse, the self-interested provincial governments erred just as badly with the mix of infrastructure they built, as they were excessive in total spending. Of course we are not surprised that the Central Planners erred badly in their allocation of capital, that's what those Big Governments do - it overspends, and what it spends is spent on the wrong stuff. In this case Big Government constructed far too many buildings - ghost cities - and invested far too little in transportation to service and interconnect them, thus rendering them useless. As a result, China's logistical riddle is almost as bad as its environmental nightmare.

We’re not predicting disaster for the biggest Keynesian debacle in history - aka China - just yet, but the day may soon be upon us when the very same pundits who six years ago were holding up China as the poster child of the glories of central planning will be… denying, unsuccessfully, that they ever said such things. We still prefer market forces to determine resource allocation.

The Stock Market: The S&P 500 is fully and fairly valued at this point. It doesn’t have much further to run without (an unlikely) economic acceleration, but it isn’t over-extended either, so the downside is limited as well. The S&P should probably - perhaps an 80% probability - cross 2200 this year, but 2300 is a lot less likely, probably less than a 40% chance. And with commodity prices under pressure, there is little incentive for the Fed to raise interest rates. A 10% correction at any point in the next six months seems quite unlikely, as is a year-end close below 2100. Unless the unwind in China accelerates, then all bets are off.

Greece: Greece is not a big deal for anyone but the Greeks. Too bad the media can't point the hype machine toward China where the real global threat is. The Greeks must go back to the Drachma, restructure their economy, and stop blaming everyone else. Their government has far more debt than it can service. Any kind of refinancing arrangement will only make the problem worse later. They cannot survive without drastically haircutting their debt, but doing so while allowing Greece to remain in the Eurozone will create two problems: first, it will allow the Greek politicians to resume these same irresponsible policies and repeat this same disaster; and second, failing to enforce discipline and instead rewarding the Greek’s fiscal flatulence will only encourage shortsighted political hacks from other countries to attempt the same fiscal recklessness for the sake of short-term electoral gain.

Should common sense prevail and the Grexit transpires, the US will be expected to contribute to a forgiveness and restructuring package to ensure that the Greeks remain in NATO. This time it will be our job to play the good cop against the Eurozone bad cop in order to hold NATO together. Lots of us will be unhappy about it, but it is what it is. But we should not cave to ridiculous demands either. If the Greeks want to play us off against the Russians, and really want to play hardball, then so be it - they can have each other. Initially it might seem like a tragic strategic blunder; but longer term, the Russians are hard task masters and a marriage with the Greeks could make for excellent comedy (a tragedy tonight, a tragedy tonight, a comedy tomorrow, a tragedy tonight...). A Grexit with both a debt write-down and a pathway to return to the Euro is the only viable strategy.

Oil: Has there ever been a stranger pair of bedfellows - stranger even than the Russians and the Greeks - than "The 2 O’s"? Oil and Obama? Timing is everything. Bill Clinton had the Internet greasing the wheels, George Bush had 9/11 foisted upon him, and Obama won the lottery with “Frackin’ in the Bakken”. Remember oil at $140/barrel? That’s when hydraulic fracturing came along, and the rest is history. Today West Texas Intermediate crude traded around $52, and Obama can thank frack-induced, domestically produced, cheap oil for keeping his economy afloat.

The interplay between supply-side cheap energy and the economy is crucial. Not only did fracking re-energize the energy sector of the economy, the resultant low energy prices stimulated other sectors of the economy. Now there is a ceiling on the price of oil. At some price in the $55 to $65 range our innovative, free-market, free-enterprise petroleum entrepreneurs are incentivized to open the spigots, saturate the market, and prevent OPEC from squeezing our parts. Don’t look for oil above $65 for a long time. Of course, Obama hates oil, just loathes it, and yet it has saved his economy, strengthened his diplomatic hand, and made his re-election possible. Dumb luck, like his entire life.

Ukraine: Putin’s actions in Crimea and Ukraine must not be allowed to stand. Keep moving more equipment closer to the Russian frontier, in the Balkans, Scandinavia, and the Ukraine. Lean forward diplomatically, economically and militarily. Putin understands strength, and exploits weakness. We have shown too much weakness; and sooner rather than later we will have no choice but to show real strength, or simply allow this latter-day Hitler to continue amassing the spoils of victory.

The Debt: Doesn't it seem a bit odd that our National Debt has been stuck at about $18,152,000,000,000 for about five months now? Check our debt clock. Yet over the first five months this year the Federal Government's outlay has exceeded receipts by $345,000,000,000, so we are obviously increasing the debt. We are being flat out lied to by this Administration, arguably the least transparent Administration in our history. Just asking the Administration: Why are you lying to us?

Daesh: Don't we have Special Ops tactical teams on the ground directing airstrikes at the personnel, equipment and facilities of Daesh (aka ISIS)? Or do we? In May the Daesh army rolled into the city of Ramadi and conquered it with hardly firing a shot. We would not have allowed that to happen - beheadings, sex slaves, throwing gays from rooftops - in the good old days, before Obama was Commander-in-Chief. Apparently we tolerate that kinda stuff now, unlike in 1991 when we destroyed Saddam's army, turning the Basra Road into the "Highway of Death". If you were born after 1975 and didn't see it in real time, and also missed your chance to click on the link the first time, here's a second chance to click on the link and check out the "Highway of Death". Amazing the havoc just a few Warthogs can wreak! Now, in the Obama era, is it possible that we have lost the capability to crush bad guys; or, is the problem an utter absence of leadership? Why weren’t a few A-10’s and AH-64’s dispatched to the Ramadi Road to obliterate those miserable creeps, like in the good old days? Is Obama trying to lose, or is he just a really lousy President?

So keep an eye on oil and copper prices, and the Shanghai Composite - together, that's your canary in the coal mine. And that’s the world according to Garp.




Analysis


July 27, 2015 - What is going on in China? Are we witnessing an epic collapse?

Last week Ray Dalio, the general partner of Bridgewater, the world's largest Hedge Fund, threw in the towel and went bear on China. Meanwhile the world's most diplomatic and polticially correct organization everm, Citigroup, has for all intents and purposes accused the Chinese government of lying, claiming that genuine GDP growth is probably less than 5% rather than the claimed 7%+.

Now, after recovering a bit these past few weeks, the Shanghai Stock Exchange plunged 8.5% today.

Keep in mind that the ChiComms are doing their best to prop up the market - trading has been suspended in pretty well any stock that might go down, short-selling has been banned, and institutions are being forced to buy. And still the market falls. The underlying economy is probably to blame - global demand for oil, copper, iron ore and virtually every other commodity has dried up and prices are falling in response.

Think about the colateral damage - Brazil is a leading exporter, and China a leading importer, of iron ore and sugar. The collapse in Chinese demand for raw materials is crushing Brazil, with S&P on the brink of downgrading their debt to Junk status.

The signs are ominous.




July 17, 2015 - So Iran gets a bailout. Their reward for being a pariah is the lifting of sanctions and a fast track to nuclear weapons.

One can only hope that the Iranians understand that without Congressional approval, this is only a deal with Obama, Nothing more, and nothing more.

The deal is revocable, and when Obama is gone - which will be soon - hopefully it will indeed be revoked.

Obama's scorched earth policy towards America as he recedes from the Presidency is something to behold. History will remember him unkindly.



July 14, 2015 - Greece gets a bail out. Disappointing, yes; surprising, no. Just delays the inevitable, and makes it worse, later.

The politicians kick the can down the road past their next election, thus solving the politicans' personal problem, but only making the problem worse for Europe and the people of Greece down the road.

What good can come from Greece raising tax rates when the country is already sputtering on the back side of the Laffer Curve?

Greece is beyond austerity: it needs a restructuring, a reboot, a reformation. Of not just its debt, but of the entire country. And it needs to go through this exercise outside the Euro, so it can truly come to an honest acceptance of its structural standard of living.

When will we see a real, substantive resolution? Probably when Merkel retires and her successor can pull back the rug and show all the grime that's been swept under it.



July 13, 2015 - We can't help but wonder - and worry - about the Shanghai Stock Exchange.

Ignoring even the rapid increase in the second half of last year, the SSEC increased 60% just this year, topping on June 12 at 5166. Then, it dropped 33% over three weeks, bottoming at 3507 lest Wednesday. And now, in the three days since, it has climbed 13%. Clearly, this is not a market driven by fundamentals.

Our worst stock market crash - 1929 - did not happen in one day. There was a period of carnage in March, but that was merely the beginning of the end. Markets seemed to stabilize through the summer, but then the end of the end came during a very bad week in October.

Will Shanghai experience a two-stage crash, like our crash of 1929, that plunges the country into confusion? Was June 2015 merely the first stage, like March of 1929? The Chinese government's embrace of market euphoria is a major concern to us.


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