My conviction is that you can better protect and grow your wealth when you understand the often-confused dynamics driving economies and markets.
Sorting that out isn’t easy.
But we work hard with each issue to crack open actionable insights about how the world is tending. You deserve the most perceptive, lucid analysis we can muster. That is what we aim to give you.
Michael Mauboussin: Here’s what active managers can do
The debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More
Consider this excerpt from our October 2016 issue of Strategic Investment:
“…The deflation dynamic could point to one of the best risk/reward trades you could currently make — long gold and long twice as large a position in the U.S. Dollar Index.”
If you were subscribed to Strategic Investment in October of last year, you got your money’s worth. We spelled out the hidden logic of hyperdeflation that will dominate markets over the coming years.
Unlike the conventional wisdom that holds that gold will go up largely due to inflation because the dollar is going down, we told you to buy gold for completely the opposite reason. We forecast that the dollar would continue to rise in foreign exchange markets. It has, and our subscribers have profited.
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The Jobs Fraud
Today’s economy struggles with problems that were set in motion decades ago. Some of the most serious are tied to limits that have reduced the net energy available to do the world’s work.
Another ill-understood factor that makes it next to impossible to turn back the clock and “make America great again” is the overhang of trillions in debt piled up since World War II. That debt weighs heavily on economic growth. Until the excess debt is liquidated, the economy will grow slowly, if at all. And the more debt that is added, the worse things will get.
The gossip among foreign exchange traders is that the dollar could be facing a “massive top.” And you might have even read Forbes talk about the prospect of “downside risk for the dollar … in which U.S. economic data unexpectedly weakens, putting Fed rate hikes on hold.”
I had to laugh when I read that.
Why the difference between Strategic Investment’s take on the impact of economic weakness and that of conventional investment analysts?
For one thing, the idea that the economy could “unexpectedly weaken” should only occur to Rip Van Winkle or someone else who has been sleeping for 20 years.
At Strategic Investment, we have been paying close attention. We know that reported employment gains are mostly piffle — fake jobs engineered through concerted accounting fraud.
For example, the real news for January 2017’s jobs report was not the headline gain of 227,000 jobs. It was the fact that “help wanted” advertising was at low levels you never see outside of formally declared recessions.
In fact, supposedly strong job growth — hailed by Fed governors as indicating the economy is close to “full employment” — is nothing of the sort.
Job numbers are actually weak. The data have been exaggerated by bogus revisions, imaginary job gains in imaginary startup businesses and doubtful seasonal adjustment modeling.
And note: The ever-creative Bureau of Labor Statistics (BLS) has just ostensibly increased its upside annual bias to about 993,000 fictitious jobs (an average of 82,750 fake jobs a month), up from an admitted 841,000 (about 70,000 fake jobs a month).
Does that mean it is finally coming clean?
Not a chance. As John Williams of Shadow Government Statistics has demonstrated, the BLS’ apparent concession to honest accounting is itself dishonest. The BLS has only fessed up to about 40% of its labor market fabrications.
“Due to birth/death modeling issues, the total annual overstatement runs in excess of 2.4 million (200,000 per month), as estimated by ShadowStats.”
Do a little arithmetic.
What does “227,000 jobs” in a month mean when the BLS adds 200,000 fake jobs per month? What it means is that the actual number of jobs created was about 27,000.
What is more, even with the inclusion of almost 2.5 million fake jobs in employment ranks in 2016, payroll growth by year’s end was so weak that — you guessed it — it has rarely been seen outside of recessions.
As Williams summarizes, annual employment growth in December 2016 of 1.46% “was the lowest level of growth in 62 months, since October 2011.”
The question remains: Is there any basis in fact for increasing the “birth/death” job additions to the monthly employment report? None that I can see. That might be the case if new ventures were thriving, but Bloomberg’s U.S. Startups Barometer shows that the number of startups in the U.S. tumbled over the past year. They were down 20.25% — one of the steepest drops on record.
A Soaring Dollar
Meanwhile, every period of price consolidation should alert us to the possibility of a reversal in trend, particularly as the long dollar trade is crowded by hedge fund managers hoping to earn big bonuses.
That said, consolidation can also be viewed as a “stop” before the next all-time high. But while I know we need to be humble before the market’s judgment, we also have to think clearly.
I believe the dollar’s period of consolidation is probably nearing an end. I expect the dollar to rally much higher. It will probably approach or possibly surpass its all-time high of 128 (reached in March 1985).
And I would expect the euro to sink to the vicinity of US$0.75 — if the euro survives at all. It may not.
Any of a number of influences could dissolve the European common currency. Greece is nearing collapse again. Anti-EU politicians could win office in France and Italy. Europe’s banks are reeling. A collapse of the euro cannot be ruled out.
The crucial point to bear in mind: The dollar is underpinned by a massive $10 trillion structural short position that predominates the eurodollar market — the leading source of funding for the world economy.
In addition, the specific policies President Donald Trump apparently intends to implement will tend to make the dollar stronger. Trump’s plan to restructure U.S. corporate taxes to encourage U.S. firms to repatriate their overseas profits has implications for the future exchange value of the dollar. Obviously, repatriating overseas dollars will drain still more liquidity from the shrinking eurodollar market, making it more difficult for overseas debtors to roll over or refinance their obligations. Shriveling liquidity will raise the dollar’s value and increase the incidence of debt default.
Other Trump policies that will unequivocally tend to increase the dollar’s exchange value are his various protectionist programs. To the extent that they succeed in reducing the U.S. trade deficit, they will leave fewer dollars in foreign hands, making dollar liquidity scarcer relative to the trillions of outstanding dollar obligations.
The result to be expected: The exchange value of the dollar will rise.
Yet another projected tax change that stands to raise the value of the dollar is the so-called “border adjustment tax.” This would tax American firms on their imported components, but products that were exported would not be subject to tax. According to economic theory, the exchange value of the dollar should adjust almost immediately. Mainstream economists have projected gains as high as 20%.
Also tending to increase the dollar’s value are other tax changes Trump proposes that should improve the return on investment in the U.S. If you remember the great dollar bull market of the 1980s, it was triggered by Ronald Reagan’s tax reforms that increased return on investment in the U.S.
As Strategic Investment has analyzed in the months since Trump’s election, markets have seemingly hailed Trump as a superman who can revive vigorous growth as it could not be ignited during Obama’s reign. But don’t be fooled. The Trump reflation trade is a mirage.
To the extent it proves to be real, it will be self-limiting. If Trump does manage to eke more growth from the collapsing system, the dollar will rally.
A stronger dollar automatically tightens global monetary conditions. Monetary tightening in a slow- or no-growth world can only accelerate debt liquidation. As debt liquidation gathers speed, it will raise the attraction of holding gold.
I expect the market price for gold to begin to rally in anticipation of a hyperdeflationary resolution of history’s greatest orgy of debt.
Remember, the debt overhang compounded through seven decades of inflation promises a deeper contraction in hyperdeflation than anything seen in the past.