Even with a political career full of controversy and condemnation, Jair Bolsonaro built a new coalition of voters and won the Brazilian presidential election in a landslide. Now, he’ll need every bit of fervent support he’s gained as a cascade of political crises and one of the world’s worst coronavirus outbreaks threaten to sink his presidency.
#Brazil#Politics#BloombergProfiles ——-
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We are reposting a piece we wrote two-years ago.
Ironically, when we were back on the east coast in August 2018, we told one of our friends Trump’s racist dog whistles and blatant racism would lead to riots in the American streets. Well, here we are.
The results of last night’s primaries led the Drudge Report to proclaim,
We also find it interesting Mike Huckabee — a so-called “Christian” minister — took down his racist tweet and we had to go out and find it and paste it back into the post. Nothing Christ-like about his post, by the way.
We try to remain nonpartisan at the Global Macro Monitor, have no problem taking shots at both parties, and, personally, are comfortable splitting tickets on an election ballot. However, this tweet from Mike Huckabee strikes a deep nerve in us that really, really pisses us off.
My Late Brother
Today is the birthday of my late brother who was murdered by an undocumented immigrant. As his killer stabbed him in the chest, he declared, “all Anglos need to be exterminated.”
My brother left a two and five-year daughter. It was an incredibly tragic experience that I wish on no family.
If any family has a right or reason to be angry at the immigration situation, it it ours.
However, the Mexican national that killed my brother did so, not because he was Mexican or an immigrant, but because he was a murderous psychopath. Just as the school shooters that are terrorizing and killing our nation’s children do so, not because they are white, and predominantly middle class, but because they are mentally ill.
Not all white students are shooters but a very infinitesimally small fraction are. Should we therefore keep all white students out of high school because they fit the profile of a shooter? That is the same asinine logic driving current immigration policy, if one exists at all.
Stoking Fear and Exploiting Tragedy
Shame on the president and his aides for exploiting the families of those who have suffered the tragedy of losing a loved one in such a situation. Stoking fear, racism, and bitterness to divide us is not going to bring any of our family members back nor will it do anything to solve the problem or prevent further tragedies. On the contrary, it will only instigate more violence.
We need to focus on fixing the problem by first thinking hard and deciding what we want as a nation, not retreating to our default positions of what economists call corner solutions, that is completely open or completely closed borders.
What About Our Ancestors?
Under current law, most, if not all, our ancestors who immigrated to this great country would be deemed illegal and, before last week, would have had their children separated from them. The generous immigration policies of a younger America is what made this nation great. In a graying society immigration is essential to economic growth and cultural dynamism.
Yes, we should enforce the law but what law?
Such an important question needs to be debated in a forum where there is mutual trust and respect. We can start by stopping and condemning the racist tweets like the one below.
https://twitter.com/GovMikeHuckabee/status/1010497564435730434
[The orginal tweet was removed but we found a copy]
And this guy calls himself a Christian, much less a minister of the Gospel? Governor Huckabee’s tweet is pure evil — racist, intended to instill fear and to divide us. Not to mention the tweet bears false witness against the minority leader, his sister in Christ, who graduated from Trinity College in Washington, D.C…
I fear for my brother, Governor Huckabee, on Judgement Day,
Then he will say to those on his left, ‘Depart from me, you who are cursed, into the eternal fire prepared for the devil and his angels. For I was hungry and you gave me nothing to eat, I was thirsty and you gave me nothing to drink, I was a stranger and you did not invite me in, I needed clothes and you did not clothe me, I was sick and in prison and you did not look after me.’
They also will answer, ‘Lord, when did we see you hungry or thirsty or a stranger or needing clothes or sick or in prison, and did not help you?’
He will reply, ‘Truly I tell you, whatever you did not do for one of the least of these, you did not do for me.’ Then they will go away to eternal punishment, but the righteous to eternal life. – Gospel Of Matthew, Chapter 25
Best Policy In Our View
Finally, we favor a relatively tolerant immigration policy because some of the greatest Americans we know are first-generation immigrants and generate a multiple of benefits to our society and economy, much more than they take from it. It also is true at the macro level as reflected in a recent study by the NY Times,
The study found that between 2005 and 2014, refugees “contributed an estimated $269.1 billion in revenues to all levels of government” through the payment of federal, state, and local taxes — which far outweighed their cost to the country. “Overall, this report estimated that the net fiscal impact of refugees was positive over the 10-year period, at $63 billion.” When the study was completed in July, however, it was never publicly released, and the Trump administration dismissed the findings. – Vox, Sep. 2017
Why would the administration spike such a report?
By the way, some of our friends were granted amnesty by the darling of conservatives, President Ronald Wilson Reagan.
We Need More Risk Taking Labor
Finally, we have written about the labor shortages the country faces, especially in construction, which are driving up the price of homes putting, say, a starter home out of reach of most young Americans.
Why wouldn’t we want more of these workers, who are willing to risk their lives to come to this country to make a better life for their families. You know, just as the pilgrims did? Is not that the kind of work ethic that will Make America Great Again? Just askin’.
We are better than this, America. Let’s work together to do a good immigration deal. One that secures the borders, maximizes our country’s interest, is respectful to all, and is fair and just. Amen.
Xi is playing that guy like a Stradivarius fiddle. – GMM, Oct 2019
John Bolton’s new book is now in the hands of journalists and the deets are beginning to leak out. We state categorically GMM is not a big fan of Mr. Bolton or his neocon cabal. He just seems like a guy that has never met a country he doesn’t want to bomb.
We were also very upset Bolton refused to testify during the impeachment trial, choosing, what we perceived, money over country by not offering up to the Senate jurors what he has just unloaded on the POTUS in his new book.
In hindsight, however, it probably wouldn’t have changed any votes, and the timing and release of the book now almost seals the fate of the President and his Senate Republican enablers’ for defeat in November.
That’s a good thing for the country, the world, and the economy.
Let’s hope the Democrats do not misread their coming mandate but instead use it as an opportunity to implement the difficult economic and political structural reforms, which have long been needed. It’s time for some real leadership led by a government filled with policy wonks, experts, and the best that science can offer.
Strong Economy
All of the Dems’ objectives and goals will be neutered unless they create an economic environment where small businesses can thrive and a strong, competitive, and dynamic private sector drives the economy.
We won’t get into much detail here but let’s start with getting big money out of politics, where rent-seeking corporations, labor unions, and all the above lobby the pols in order to change the rules of the game in their favor. K Street in Washington needs to be leveled.
Then onto to tax reform and dealing with the country’s wealth and income distribution problems. Education, training, and providing opportunities trump income redistribution though some of that will be needed.
We also do worry there is no turning back as pols have discovered the “free money” of the digital printing press to monetize every one of their pet projects. If I wanted to live in a high inflation economy, I’d move to Argentina.
High inflation disproportionately hurts the poor more than any other income group.
Market In Denial
Corporate taxes are going higher and so are capital gains taxes.
Biden is already on record saying he wants the capital gains tax — 15-20 percent on most assets — to correspond to ordinary income tax brackets (currently 10%, 12%, 22%, 24%, 32%, 35% or 37%). And don’t expect the income tax brackets to remain at current levels either.
The tax changes, especially on long-term capital gains, will go along way in making the U.S. tax system appear “fairer” and will eliminate the nonsense, such as following,
Mitt Romney made $13.7 million last year and paid $1.94 million in federal income taxes, giving him an effective tax rate of 14.1%, his campaign said Friday.
His effective tax rate was up slightly from the 13.9% rate he paid in 2010. — CNN Money
The market seems to think it’s business as usual and not one peep about this from the FinMedia geniuses and the potential for massive tax selling as the general election approaches.
You know our mantra, folks, always best to panic sell before everyone else does.
Social Issues
The time has come for the country to deal with its racism problem and the legacy of America’s original sin of slavery.
The American Street is demanding it and must be dealt with in the context,
No peace without justice, no justice without forgiveness.
How it all plays out is anyone’s guess but we are thankful it finally appears the country is taking it serious, thanks, mostly, to the younger generation, by the way. We saw a lot of young white voters in the recent nationwide protests. We are certain they were not members of Antifa either.
We also believe we’re witnessing in the American Street, before our very eyes in lightspeed fashion, the torch being passed to a new generation of a more racially diverse and colorblind America. That’s a good thing.
John Bolton’s Revelations Confirm GMM
.
The following are some excerpts to remind our readers that the revelations that are now coming out in Bolton’s book were said on this site first without insider information based purely on our political analysis.
Some more,
Curb Your Enthusiasm
George W. doesn’t have a Nobel Peace Prize that we know of.
We also hope it is not an all or nothing negotiation with Trump and Kim. – GMM, Aug 2018
Get over it, China is not going away and they are not going to change the structure of their economy just because the self-proclaimed “world’s greatest negotiator” demands it. Xi is playing that guy like a Stradivarius fiddle. – GMM, Oct 2019
If the Trump team makes concessions to China, it could raise doubts they went easy in order to get some oppo for his campaign, for example. That weakens the American negotiating position and lessens the chance of a deal…
We have no doubt the arms of the People’s Liberation Army (PLA) intelligence agency, including the MSS, have the sophistication and technology to cook up, say, a deep fake video of Hunter Biden even bribing Jesus and generating a viral sensation on social media. – GMM, Oct 2019
Upshot
Here’s to hoping the prediction market is right and the country can limp through the next six months.
You’d think the Fed governors would have the sense the political problem they are creating for themselves. Pumping up the stock market — supporting corporate bonds will do that — while Main Street suffers is a recipe for sweeping changes to come to the Federal Reserve Act.
The Federal Reserve Act has undergone many amendments after its implementation.
In 1933, by way of the Banking Act of 1933, the Federal Reserve Act was amended to create the Federal Open Market Committee (FOMC), which consists of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the Federal Reserve Banks. The FOMC is required to meet at least four times a year (in practice, the FOMC usually meets eight times) and has the power to direct all open-market operations of the Federal Reserve banks.
12 USC § 225a
On November 16, 1977, the Federal Reserve Act was amended to require the Board and the FOMC “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The Chairman was also required to appear before Congress at semi-annual hearings to report on the conduct of monetary policy, on economic development, and on the prospects for the future. The Federal Reserve Act has been amended by some 200 subsequent laws of Congress. It continues to be one of the principal banking laws of the United States. — Wikipedia
We have no doubt a People’s Quantitative Easing (QE) is coming. We had a small taste of it during the COVID crisis response That is a direct credit by the Federal Reserve into individual checking accounts.
Not that we oppose it in political spirit but the economics will be a disaster over the long-term. We can think of much better ways to deal with America’s income and wealth distribution problem but we are already down that rabbit hole and there is no way back. Do you really think the pols are going to give up what they percieve as “free money?”
The United States is on the fast track to a Japanese style zombie economy, where the Nikkei 225 is still 45 percent below its December 1989 high, even after massive fiscal stimulus and quantitative easing, which includes direct equity purchases by the central bank. Japan is also a net saver and the U.S. is not.
John Authors of Bloomberg pretty much nails it on today’s Fed announcement,
Meanwhile, the case for intervention is slim, as Brian Chappatta explained forcefully for Bloomberg Opinion. There was no way the Fed needed to do this…..In the short run, it grows ever harder not to buy stocks. In the long run, this will look like a mistake. – Boomberg
Prepare For A Massive Blue Tsumami
Hat Tip: @matthewjdowd
It makes us a little nervous when we see our ideas, opinions, and charts starting to be adopted as conventional wisdom.
A New Bull Market…In Bullshit
Though the cheerleaders are still preaching a new bull market, the only new bull market I can conceive of is one in FinMedia bullshit.
Seriously? Look at the chart?
The start of a new bull market at these valuations would be tantamount to a 95-year old woman having her first child.
I guess it’s possible if her name is Sarah and married to a man named Abraham, coupled with a little divine intervention.
As always, strong convictions held loosely, and we reserve the right to be wrong.
Seemingly defying all that‘s going on in the United States at the moment, the stock market continued its general upward trend in the beginning of June. The tech-heavy NASDAQ Composite Index even reached a new all-time high, closing above 10,000 points for the first time on Wednesday, shrugging off the COVID-19 pandemic and the slew of negative economic indicators that came with it. While the NASDAQ’s latest rally was greeted with celebrations by some people, others were eyeing it with suspicion, worried about what looks like a growing disconnect between the stock market and reality.
All three major indices in the U.S. are now up more than 40 percent from their late March lows, despite the fact that the U.S. is now officially in a recession and the world economy is facing its biggest contraction since World War II this year. “The gap between markets and economic data has never been larger,” Matt King, global head of credit strategy at Citigroup wrote in a research note in April and several analysts have chimed in since, calling the recent rally a huge disconnect from reality. So is the stock market really overheated or are investors simply looking beyond present conditions, anticipating a strong recovery for 2021?
One way of looking at stock valuations is the market value of all publicly traded companies as a percentage of GDP, which Warren Buffett described as “the best single measure of where valuations stand at any given moment” in a Fortune interview in 2001. “Two years ago the ratio rose to an unprecedented level,” Buffett said shortly after the tech bubble had burst. “That should have been a very strong warning signal.”
As the following chart shows, the ratio of market capitalizations (as measured here by the very broad Wilshire 5000 index) to GDP is even higher now than it was shortly before the dot-com bubble burst. Using quarterly average closes of the Wilshire 5000 Total Market Index and dividing it by quarterly GDP figures shows that the ratio is unprecedentedly high at the moment, which, following Buffett’s rationale, could be seen as an ominous sign of things to come. — Statista
Summary
Good question, easy answer.
Probabilities Are Against Bears
First, the bears begin in a big hole with the probabilities stacked against them. We wrote an extensive analysis on this subject in our March 2019, Permabulls For Long Run.
The above data show the stock market in terms of the Dow Jones Industrials has generated positive returns for almost 70 percent of the past 100 years. Those are difficult probabilities to bet against and remain solvent.
Growth
The stock market is invariably linked to the economy over the long run, and the natural state of the economic trajectory is for growth, which, in most cases, generates profits that fuel stock rallies. Betting against that scenario for a prolonged period is the fastest way to the poor house.
Rent-seeking Shareholder Class
Second, we have been working on a piece for weeks, which has turned into a tome, Rent-Seeking Nation. It should be out soon but our idea was sparked by an excellent piece written by our good friend, Joe Calhoun, CEO of Alhambra Investments, titled Here Come The Crony Capitalists. If you haven’t read it, run don’t walk to consume it.
Joe understands what is current at stake for the global economy, the consequences of bad policy, and understands risk, and how to manage it. We mentioned in an earlier post that we live in times where it is important to have an experienced portfolio manager, who understands how to manage left-tail risk. Joe is one of the best.
Rent-Seeking
Rent-seeking
the fact or practice of manipulating public policy or economic conditions as a strategy for increasing profits. “cronyism and rent-seeking have become an integral part of the way our biggest companies do business – Lexico
Bears face another difficulty in that the investor class, led by Wall Street and the financial media have tremendous influence over public policy, monetary policy, in particular.
It seems evident, at least to us, that when market forces assert themselves to pressure stocks to move back to more realistic and reasonable valuations, monetary policymakers intervene and change the rules of the game against the bears. We are not arguing this the primary objective of monetary policy but it is, in fact, the end result.
The Stock Market and Economy
The chart below illustrates how divorced the current stock market is from economic reality. It is just another form of our favorite valuation metric, stock market capitalization-to-GDP.
The above data show that the annual trend growth of the S&P500 and nominal GDP tracked quite well up until the dot.com bubble, which began in the mid-1990s. The major bear markets of 2000–02 and 2007-09 caused the stock market to revert back close to trend GDP but stocks were soon reflated again by easy monetary policy.
There are many plausible reasons that caused this structural shift, which we won’t go into now. Contact us if you’re interested.
Economic Stability
The optimal and most stable dual path, in our opinion, is where both series track each other as was the case pre-1995.
At current levels, the stock market is way out of line with trend GDP. Yet, we heard, even today, on the financial television that we may be at the start of a new bull market. Seriously?
Stare at the chart for a few minutes and ask yourself, is that a realistic, high probability scenario? It is possible the laws of gravity with respect to stock valuations have been permanently suspended but we don’t think it is likely.
What is also notable from the chart is that the bubbles keep getting larger and larger. In fact, stocks may now be so far out of line with the economy that it is impossible to “land the plane” without destroying the world. How did we allow ourselves to get here?
Laws Of Economics Suspended
There is now a rapidly growing group of people who think the laws of economics have been suspended. That is there are no constraints on financial resources and don’t seem to have a problem with trillion-dollar deficits, most of which are now monetized, weak bond auctions (today’s 10-year), and a weakening currency
As macro observers, we are not fond of that cocktail, though, given the COVID crisis we don’t seem to have much choice on the massive deficit and debt monetization.
The macro boys at GMM remain uncomfortable, however, and that is why our position remains in cash and gold. Let them have their bull market.
Note this is not the case with our stock picker, Carol, who is fighting some health issues and probably would have weighed in here.
Initial Conditions For A New Bull Market
By the way, the average initial valuation of new bull markets from 1974 to 2009, was a stock market capitalization-to-GDP of 53.1 percent. The new bull market, which they tell us began on March 23rd was almost double that at 105.3 percent and now approaching 170 percent, more the 25 points above the peak level of the dot.com bubble. Sure the economy has bottomed and should get a record bounce in Q3, but stunning, nonetheless.
Upshot
The market — well, not really a market anymore after the Fed has effectively nationalized the bond markets — looks like a screaming short given the above chart. Just remember bears, you’re betting against the long-run probabilities skewed against you, and also understand that the referees will change the rules of the game if you start winning big. Rent-seeking is ubiqutious and now trumps market forces, which is a major factor why even the United States is morphing into a zombie economy.
COTD: Chart of the Day
The World Bank published its latest Global Economic Prospects report on Monday, providing us with another glimpse of the expected economic fallout of the COVID-19 pandemic. According to its revised forecasts, the global economy will shrink by 5.2 percent this year, which would mark the deepest recession since World War II.
“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu, who urged the global community to “unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”
While countries with high case and death counts and those relying heavily on tourism, global trade and commodity exports are expected to be hit hardest by the pandemic, this is a truly global crisis affecting more countries than any other economic downturn since 1870, according to the World Bank. As our chart shows, the economic impact of the coronavirus outbreak is expected to be severe across the globe, with no regions spared. Compared to its January 2020 projection, the World Bank revised its global growth estimate by 7.7 percentage points, with the Euro Area and Brazil suffering the biggest hit to their economic growth prospects. – Statista
Global Macro Monitor 