Social Exclusion is a Bigger Threat
Than China

Angry, hungry, impoverished people tend to riot

The Trump top and the oil bottom

$5 trillion up in smoke

By Vern Gowdie in the Gold Coast

All steady on markets last night. The long weekend in the US obviously calmed a few nerves.

Gold was down a little.

Everyone wants to pretend China’s economy grew at 6.9% last year so markets can keep up appearances.

Our market should take some comfort today from a stronger ore price and a steady US lead.

From where I sit, it’s an uneasy calm.

‘The vast and growing gap between rich and poor has been laid bare in a new Oxfam report showing that the 62 richest billionaires own as much wealth as the poorer half of the world’s population.’

The Guardian, 18 January 2016

This is the unintended (or perhaps it was an intended) consequence of what happens when you print trillions of dollars to prop up an economy.

Those standing closest to the money get the lion’s share and the rest get to squabble over the scraps.

QE was supposed to deliver the wealth effect and it sure did. It just wasn’t the wealth effect the central bankers theoretical models predicted would happen.

The theory was to make money freely available to push up asset prices. Those owning the assets would feel wealthier. Apparently the feel-good effect of being wealthy would result in purses and wallets being opened wider. All this anticipated caring and sharing would then trickle down through the economy and everyone’s lives would be enriched.

Great storyline for a children's book…we all live happily ever after with milk and honey flowing freely from our central bank saviours.

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Back to reality.

Anything designed by academic bureaucrats — ably assisted by Wall Street appointed consultants — is all but guaranteed to result in an outcome where 1% get 99% and 99% get diddly.

The Fed’s ‘trickle up’ wealth effect has been an outstanding success. According to Oxfam, in 2010 it required 388 of the world’s richest billionaires to own as much as the poorer half…compared to 62 today.

Making the wealthy wealthier and the poor poorer is a recipe for social discontent.

This divide between the haves and have nots is also playing out in Europe.

Germany’s intake of one million immigrants is not going as smoothly as planned.

The sexual assault allegations in Cologne are the thin edge of the wedge. Far right wing groups will no doubt use the events in Cologne to incite racial divisions. According to NBC News, the first 4,000 copies of Adolf Hitler’s Mein Kampf have sold out in less than a week after hitting German bookstores.

The son of a good friend is working in Munich. He tells me the neo-Nazi skin heads are on the trains, in the streets and itching for a fight.

Angela Merkel is under pressure from her allies to stem the flow of refugees. According to the Financial Times on 18 January 2016:

‘A prominent ally of German Chancellor Angela Merkel has threatened to take her government to court over its "open doors" refugee policy as political pressure grows for the chancellor to reduce the number of new arrivals.

‘Bavarian state premier Horst Seehofer said he would send the federal government a written request within the next two weeks to restore "orderly conditions" at the nation's borders, through which one million migrants and refugees passed last year alone.’

1 million refugees are creating tensions within Europe, what about another 20 million?

This is the estimated number of people who have been displaced or are escaping violence in the Middle East and Africa. What does Europe do? Close its borders? Turn back the boats? Watch as people starve, are murdered or drown?

This is a human rights, social and financial problem on a scale we cannot imagine.

Some European nations may open their borders to increased refugee intakes, but others may not — for political and/or economic reasons.

Do we go back to a Europe with border controls? The potential collapse or at least significant restructuring of the Euro zone may be the end result from this humanitarian crisis.

Adding to Europe’s list of woes is Greece.

Greece is out of sight and out of mind. But it hasn’t gone away. Greece’s financial problems haven’t be solved…just postponed.

Murphy’s Law almost assures us that Greece’s debt crisis will once again be front and centre just when the refugee crisis is at a flashpoint. Perhaps, Greece — with a leftist Government — will opt to exit and leave a trail of sovereign defaults in its wake.

If Europe is teetering, then the political willpower in Britain may wane. Britain might also opt to exit the European Union.

Social discontent provides political opportunists with the perfect platform to appeal to the masses.

Anti-Muslim parties are gaining traction in central and northern Europe — Sweden, Denmark, Finland and the Netherlands.

In France, the far right National Front gave a good account of itself at the recent regional elections…nearly winning power. France also has a very strong anti-Muslim and anti-refugee political movement. The National Front leader, Marine LePen, is contesting France’s 2017 Presidential election and has a very real prospect of winning…especially if there are more terrorist attacks and social unrest.

As mentioned previously, the almost untouchable Angela Merkel is under a lot more friendly fire these days. Her position is no longer as assured as it once was. Will she bow to political pressure and close Germany’s borders?

In Italy two anti-euro parties are attracting a lot of attention in recent opinion polls.

Spain’s recent general election, held on 20 December 2015, provided no clear winner. The left-wing Podemas Party — established in 2014 with a platform of fixing unemployment, inequality and economic malaise — managed to win 69 out of 350 seats.

If a government cannot be formed and another election is called, the opinion polls predict Podemas would increase its number of seats.

While China and its slowing economy dominate the headlines, for me the real issue is the growing level of social exclusion in the world.

Angry, hungry, impoverished people tend to riot.

If you want proof of this in recent times, look no further than the Arab Spring uprising. People had enough of being oppressed and not being listened to.

People power is a very potent weapon for change. But that change may not be for the better…opening doors for crackpot politicians with protectionist economic theories.

It is only whispered — for fear of spooking the masses — but we are in a deflationary world.

China is taking measured steps to protect its economy by devaluing its currency…to make exports cheaper and imports more expensive.

Europe will follow with further measures to take the euro lower to maintain the competitiveness of Germany’s export machine…they need the money to fund social integration programs.

Japan won’t sit idly by and watch their export sector lose ground.

All these measures make the US dollar stronger, which squeezes emerging markets loaded with US dollar debt.

The squeeze is on. Financial hardship will only intensify the simmering social unrest caused by the wealth divide and wholesale displacement of people from their lands.

While all eyes are on the markets, an increase in social tensions could be the X factor that brings this debt laden world to its knees.

Vern Gowdie

…………………………………….

Deep Breaths, Market, Deep Breaths

UK futures were up this morning. The sun is out. The world hasn’t ended.

Did you see that retailing giant Walmart announced the closure of 267 stores on Friday? 154 of those are in the US, with another 60 in Brazil. And to put things in perspective, the big-box discount retailer still has over 11,000 stores around the planet. Amazon hasn’t crushed it just yet.

Still, now you know how China’s stockmarket and the rest of the planet are linked. If China’s slow-down is more like a debt-deflation/depression, then the entire world is going to grow less fast (if at all). That’s why equity markets freaked out. They are pricing in much slower global growth — or even the end of the globalisation as we know it.

Meanwhile, in the world of exploration and opportunity, Elon Musk pushes the envelope. Last month it was the Falcon rocket delivering a payload to space and then safely returning to a landing pad. The company upped the ante over the weekend.

The first part went okay. The Falcon delivered a payload into orbit. But this time it tried to land on a barge in the ocean. If it were a figure skating move, the degree of difficulty would have been ‘very high’. One of the struts on the rocket failed. It tilted over and exploded.

That may not seem like it has anything to do with the oil price or the level of the FTSE or the vote to leave the European Union. It doesn’t. But that’s my point. There’s a whole other world out there.

Here’s an idea of how politics, oil, the pound, and the dollar may converge. Not ‘how’ so much as ‘when’. Try 1 February, or 9 February. More or less. Why?

I’ll get to it in a moment. But let’s take oil first. It keeps falling, both Brent and West Texas Intermediate crude. Iran enters the race to the bottom for control of market share in Opec this week. Most sanctions freezing the country out of global capital and energy markets were officially lifted over the weekend. The Iranians are free to pump as much oil as they’d like. Because that’s what the world needs more of!

Last week I asked how much of oil weakness was really dollar strength? The reason I asked is that, all things being equal, you’d expect a bottom in the oil price to coincide with a top in the dollar. The price action in the pound also tells you a bit about dollar strength. Namely, you’ve seen global capital reallocated away from ‘risk’ and emerging markets and into the dollar. Dollar strong. Greenback smash!

Keep your eye on the first 10 days of February. That’s when you’ll know how seriously to take Donald Trump and Bernie Sanders. The Iowa caucuses take place on the first. New Hampshire has its primary eight days later. What will you learn?

Iowa and New Hampshire are small states. They don’t represent much of America. And most of the campaigning there is pure theatre, meant to winnow out the field of candidates for ‘Super Tuesday’ in March.

But, Iowa and New Hampshire will be the first time anybody actually casts a vote for Trump or Sanders. Up until now, it’s all been polling. Trump’s enjoyed support from between 30–40% of Republican voters in the polls. Will that carry over to actual votes? And can Sanders narrow his double-digit gap on the presumptive Democratic nominee, Hillary Clinton?

I’d suggest that a poor performance by Trump and a strong performance by Clinton would actually be dollar bearish. Why? It would mean America is not a car being driven by Thelma (Trump) and Louise (Clinton) headed over the proverbial cliff. The prospect of a radical result from the US election having been diminished means it will be safe to put some more ‘risk on’ bets in markets.

Oil would rally. The dollar would fall. And emerging markets might catch a bid. Gold?

That’s the wild card. Charlie Morris reckons gold has about a 30% premium to ‘fair value’, based on his calculations. Gold has retained that ‘premium’ despite dollar strength. And in a generally ‘fearful’ world, you haven’t seen a correspondingly bullish move in gold.

That’s the risk. Yes, it would be weird to see both gold and the dollar fall together. But you’re seeing all sorts of weird things these days. And if you’re a gold investor or a bullion owner it’s a risk you should be well aware of as political season hits high gear.

There’s more than a political aspect to it, too. Everything falls in a deflationary depression. That includes gold. It’s just such a fall that has me worried right now.

It’s a good week to not be Angela Merkel. The German chancellor will spend most of today chairing a contentious executive meeting of the Christian Democratic Union party. It’s her party. But they are not happy with her. Inviting a million immigrants into your country without a plan for the economic and cultural backlash will do that. Meanwhile, her finance Minister, Wilhelm Schaeuble, has called for an EU-wide petrol tax to pay for the European Union’s crisis.

Good luck to David Cameron showing how the UK will be safer and more secure as a member of the EU. As a member of the EU, Britain can argue against a petrol tax. But it will likely pay it anyway, which is to say you will (while having no say in how the funds are spent). That’s life in the EU.

Yet British papers were full of stories this weekend on how the prime minister expects to get a good deal when he meets with EU boffins on 18 and 19 February. He can take the result of those ‘negotiations’ to the British public, and argue that Britain is better off in Europe. It is certainly the conservative position.

In fact, the Conservatives for Reform in Europe came out of the closet this weekend. Led by MP Nick Herbert, they will argue that leaving the EU now is a ‘jump into the void’. It may not be a ‘tantrum’ or a ‘betrayal’ of the EU in its hour of need. But the language of fear has made its appearance.

Here’s an idea: if a ship is sinking, you should jump while you can.

But the idea that conservatives — some of them — are for staying in a bad deal reminded me of Friederich Hayek’s great essay, Why I’m not a conservative. You’ll find some key excerpts below. But the basic idea is simple: conservatives tend to be fond of authority and tradition when it suits their purposes, even if siding with the state comes at the expense of individual liberty.
What is the modern European Union but an institution of unaccountable and arbitrary power? Conservatives who support that power do so out of a fondness for authority (and an aversion to democracy). They also do so out of a basic misunderstanding of economics. They fear the ‘void’ more than they believe in the ‘free market’.

Britain can’t lead Europe from within Europe as long as the European Union dominates. It is relentless drive to political centralisation, no matter what ‘concessions’ the prime minister earns next month. If Britain wants to lead Europe, it should leave the EU first and show everyone else the way.

Regards, Dan Denning…………………..

Bill Bonner in Poitou, France

Pessimism is a sin against God, said money manager Charles Gave.

It suggests ingratitude. And a lack of faith.

After all, this is God’s world…

What, not good enough for you?

That’s why we are always optimistic at the Diary. Things don’t always go the way we would like, but they always go the way they should.

Yes, the world may be headed to Hell in a handcart…but it’s for its own damned good!

$5 trillion up in smoke

It is cold and snowy this morning. But we are crossing to the sunny side of the street today.

Look how easy it is…

About $6 trillion has been lost in the world’s stock markets so far this year.

Well, boo hoo! It was only ‘on paper’ anyway.

Meanwhile, the New York Fed’s Empire State Manufacturing Survey — which takes the pulse of New York’s manufacturing industry — just hit its lowest level since the last recession.

But what do factories make?

Stuff…and do we really need more stuff?

New York City is also reporting retrenchment in its luxury real estate market. Prices are down for the last eight months in a row.

To that, we say: It serves those rich SOBs on Wall Street right. They bought their digs with money they got from the Fed on super sweet terms. It’s a pleasure to see them take a loss.

You see what we mean?

No matter how dreary the weather, you can always use your portfolio statements to start a cosy fire.

With so much bad news coming from the economy, it is amazing we are not already in recession.

Perhaps we are. The Atlanta Fed now puts the growth rate in the fourth quarter of last year at just 0.6%. Given the squishiness of the numbers, the economy could have easily shrunk more since then.

And now — with even more bad news — the recession may well be deepening.

But hey, what’s wrong with recessions?

Aren’t they part of God’s plan too? Don't they serve a purpose? Don’t they clear the gunk out of the economy?

Too much debt. Too many gambles that don’t make sense. Too many rich people who don’t deserve their money. It will be nice to get this trash out of the system. That’s what recessions are for.

Meanwhile, CNBC is telling viewers to ‘watch out’ because important economic data in China comes out this week.

With $28 trillion in debt outstanding…it wouldn’t take much to cause a financial disaster in the ‘Red Ponzi.’

Well, que sera, sera. As composed and content as we are with disasters in the US, we are even more composed and content when they happen to other people.

Rich Bast**ds!

Yes, we’re basking in the good news — no matter how awful it is.

So give us a high-five, dear reader, because a new report from charity Oxfam reveals that members of the ‘One Percent’ now have more wealth than the other 99% combined.

And the 62 richest people on the planet have as much wealth as 3 billion of the poorest people.

You may be thinking, ‘Those rich bast**ds! How is that good news?’

But wait…Because you, too — dear reader — are most likely among ‘the rich.’

According to the Oxfam report all it takes is $68,000 in assets to get into the top 10%.

And if you want to be in the top 1%, all you need is $760,000 — which is about the present value of a typical house in the Washington suburbs…or a cheaper house combined with Social Security payments.

But the poor Oxfam people see the glass as half empty. Pessimists whine that the ‘rich have been getting richer.’ The BBC reported:

‘Oxfam calls on governments to take action to reverse this trend.

‘It wants workers paid a living wage and the gap with executive rewards to be narrowed.

‘It calls for an end to the gender pay gap, compensation for unpaid care, and the promotion of equal land and inheritance rights for women.

‘And it wants governments to take action on lobbying, reducing the price of medicines, taxing wealth rather than consumption, and using progressive public spending to tackle inequality.’

Rage, rage against the dying of the light…

Gloomy meddlers

Oxfam has no faith.

It cannot imagine that things can work themselves out. It has no idea what caused the concentration of wealth. It doesn’t even seem to care.

Had it looked more carefully, it would have seen that the rich got richer because they used the power of government to shove most of the chips to their side of the board.

Twice in the last 15 years, nature tried to put the rich in their place. The crash of 2000 reduced their Nasdaq wealth by almost 80%. Then the crisis of 2008-2009 cut their stock market holdings by more than half.

Each time, the fix was in. The gloomy meddlers got central bankers to rig the system on their behalf. The phony fiat money flowed. The wealth of the One Percent ballooned.

But don’t worry. Markets still work. Fate still functions. Bear markets and recession still happen.

Have faith. Be happy. The easy wealth earned by the rich since 2009…can vanish as easily as it came.

Regards,

Bill Bonner,The Daily Reckoning