Democracy and Liberty

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

We can take Prof Williams' observation a step further. Not only are democracy and liberty not the same, but they work against each other.

"Democracy and liberty are not the same. Democracy is little more than mob rule, while liberty refers to the sovereignty of the individual."
--Walter Williams (@WE_Williams) pic.twitter.com/u5XjkJqPWt

— Larry Elder (@larryelder) August 24, 2019

Democracy, defined as decisions made by majority rule, implies that those who can marshal a majority vote can trample on the liberties of those in the minority.

The greater the reliance on political decisions using democratic process, the lower the liberty.

Our founding ancestors understood this negative relationship well.

Assault-Style Rifles and Self-Defense

You keep your distance with a system of touch
And gentle persuasion
--Tears for Fears

The wrath of gun control advocates commonly focuses on AR-15 or 'assault-style' rifles. These people often express their concerns in some variation of the following question. Why on earth would everyday citizens need such weapons to defend themselves?

If they genuinely want to answer that question, then anti-gun enthusiasts should first obtain basic understanding of the functionality of various weapons available for self defense purposes. They are then in a better position to assess potential self-defense situations where an AR-15 or similar weapon may be preferable. This is what prospective gun owners do, after all.

Let's summarize some of the characteristics of AR-15 weapons that make them unique to other options.

• Loading mechanism. Semi-automatic. One round fires with each trigger pull. When a round is fired, loading mechanism puts new bullet in chamber for next trigger pull.
• Selective fire capability to fully automatic mode. None. Switching to fully automatic ('machine gun') mode, where rounds are continuously discharged upon single trigger pull, is not available to everyday citizens. However, selective fire to automatic mode is standard issue to military and law enforcement personnel. 
• Capacity: Standard magazine capacity 30 rounds, although regulations in some states reduce this capacity.
• Range: Flexible. Better in longer ranges but can be manipulated in closer quarters with effectiveness.
• Accuracy: Very good. Low recoil, light rifle that is easy to aim.

What, then, are possible self-defense situations that match well with the AR-15's features?  If you're lost for answers, then you might research situations where these weapons have actually been used by people to defend themselves. Include in your research situations where people have defended themselves against hostile regimes.

You might also reframe the question in the context of people who are issued these weapons on a routine basis. Why are 'assault-style' rifles preferred by military and law enforcement personnel? Would these personnel be willing to surrender these weapons as part of a general 'assault-style' weapons ban? If not, why not?

If you seek truth, then answers should begin to crystallize. Discussion forthcoming.

Let the Kids Play

"Just kids having fun."
--Crocodile Dundee

Always amusing how, when the price of gold starts moving, naysayers come out of the woodwork to slam the metal. It's just a rock. It pays no dividend. It has no cash flow. Etc. The higher the price, the louder the chants.

And, of course, when the price of gold declines, the narrative turns to a pleasurable 'I told you so' with a faint sigh of relief.

Why get in the way of the fun? Why not just let the kids play?

position in gold

Precious Things

"I know what it's like to lose precious things...and then, of course, to find them again."
--Laura Charles (The Last Dragon)

The precious metals complex continues to act well. Gold is homing in on $1550 while silver crossed $18/oz for the first time since mid 2017.

The miners are doing their thing as well. Pan American Silver (PAAS), for instance, is still stepping higher consistent with classic box theory. Each step into the next box higher has been accompanied by a volume spike.

Textbook bullish move off of what increasingly appears to be a durable low.

position in gold, silver, PAAS

Emergency Fund

"I'm tapped out, Marv. American Express has got a hit man looking for me."
--Bud Fox (Wall Street)

An early step toward financial independence involves establishing an emergency fund. An emergency fund is cash savings that can be used to pay expenses in the event that either a) you have no income (e.g., temporarily unemployed) and must pay routine expenses such as mortgage, rent, utilities, insurance, entertainment, etc, or b) you are subject to a large, unusual expense that your regular income can not easily fund (e.g., big car repair, medical expense).

It is commonly proposed rule that an emergency fund should be large enough to cover six months of living expenses. Personally, I would recommend more than that--a year's worth of expenses is a better target.

To determine how large your emergency fund needs to be, you first need to estimate your expenses. I recommend estimating expenses on a monthly basis for an entire year. An easy way to do this is to make a spreadsheet. Put months JAN thru DEC in the rows. In the columns, put various categories of expenses (school payments, clothes, entertainment, transportation, insurance, etc). When you are young, you won't have many expense categories but it is a good habit to begin tracking them.

Once your spreadsheet is set up, forecast your expenditures for each month throughout the year. If you think you'll spend $100 for clothes this month, then put that estimate in the appropriate cell. Sum up your expenses each month, and then sum the months to get an annual estimate of expenses. That number serves as the initial target for your emergency fund.

As the year unfolds and you pay actual bills, replace the estimates on your spreadsheet with the actual amount you spent. If you actually spent $121 on clothes this month, then revise accordlingly. On my spreadsheet, I boldface actual expenses to distinguish them from my forecasts. Over the course of the year, you'll get a better idea of what you actually spend, and that bottom line number for annual expenses will become a more accurate target for your emergency fund.

The other thing you have to do, of course, is save money to build your emergency fund. Put your savings in accounts where you can easily access cash to pay bills if you have to. Although it would be nice to earn as much interest on these savings as possible, the priorities here are safety and ease of access. If you have to sacrifice some returns in order to ensure liquidity, then do so.

Be patient. Emergency funds are not completed overnight, especially when you're just starting out. Over time, though, tracking your expenses and building savings to fund life's expenses will put you in better control of your financial future.

Trading Trump Tweets

General Frank Savage. McIllhenney. I heard about those two FWs. Put the chevrons back on.
Sgt McIllhenny: Yes, sir!
General Frank Savage: And if we're going to keep having these ups and downs, you better get them with zippers.
Sgt McIllhenny: Yes, sir!
--Twelve O'Clock High

Pretty good one. Few algos are capable of front running the Trump twitter feed.

This will never get old $spy $qqq $tvix pic.twitter.com/b9RsbAh5oo

— Jason Spatafora (@WolfOfWeedST) August 22, 2019

Nice demonstration this morning. After losing about 2% Friday on escalation by both the US and China (once again) on the trade front, markets gapped about 1% higher out of the gate this am on the back of Trump tweets that things are (once again) looking better w China.

Maybe those algos need zippers too.

Chartgazing

The heat is on
On the street
Inside your head
On every beat
--Glenn Frey

Charts of several stocks with anchor-like characteristics that, after the recent market downdraft, are at or nearing technical support.

Johnson & Johnson (JNJ) 3.0% dividend yield, healthcare:

Exxon Mobil Corp (XOM) 5.2%, energy:

Intel Corp (INTC) 2.8%, technology:

Cisco Systems Inc (CSCO) 3.0%, technology:

Wells Fargo & Co, 4.6%, finance:

Doesn't mean they can't go lower from, and in some cases technicals point to additional price weakness. But the risk/reward tilts more favorably when prices go down and (correspondingly) yields go up in stalwart names like these.

positions in CSCO, INTC, JNJ, WFC, XOM

International Emergency Economic Powers Act

Carol Finnerty: Henry, the President wants to do The Thing.
President Sawyer: Hold on tight!
--White House Down

Dan Mitchell discusses yesterday's presidential tweetstorm that roiled markets once again. In his series of tweets focused on escalating tariff-led trade war with China, President Trump 'ordered' US companies to look for supply chain alternatives outside of China.

"Good luck with that," I muttered when first reading the president's 'order.'

But Dan Mitchell suggests that such an order could be legally valid under the International Emergency Economic Powers Act. Passed by Congress in 1977, the IEEPA delegates extensive power to the president to regulate economic transactions during a state of emergency. It essentially grants the president a blank check to intervene in international economic affairs--a check that presidents have cashed 50+ times since the IEEPA's enactment.

There is question, of course, as to just how far this law extends. But don't doubt that President Trump isn't willing to push the legal limits of the IEEPA. Indeed, he signaled just that late last night:

For all of the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!

— Donald J. Trump (@realDonaldTrump) August 24, 2019

These pages have frequently marveled at the willingness of people to cede discretionary power to the executive branch far beyond constitutional intent. When it's you guy in office advancing lawlessness, no problem. You're riding the wave of a friendly ideologue.

But what happens when it's not your guy?

Government Scope

And baby I'll rule, 
I'll rule, I'll rule, I'll rule
Let me live that fantasy
--Lorde

The natural unit of government is the individual--i.e., self-government. God gifted us with the unalienable right to govern ourselves.

For various reasons, most of them nefarious, man has sought to expand the scope of government beyond himself. Stated differently, he seeks to govern others.

The possibilities range from reigning over a few nearby neighbors to dominion over multitudes spread far and wide. The categorical possibilities correspond to the geographic scopes associated with various units of expanded government:

local
state or provincial
national
regional
global

When the Constitution was in the process of being ratified, debate centered on whether government power should be tilted toward state or national authority--although many anti-federalists argued that only designs that brought more authority to the local level would be effective.

Ongoing disagreements in Europe center on power struggles between nations and regional government (i.e., the EU).

One-world socialists contend that all people on earth should be subject to a single governing body.

Man's persistent quest to expand the scope of government has quite literally put liberty under attack since the beginning of social time.

Temporary Friends

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Kyle Bass echoes other comments I've read recently. Currently, investors see the US as the best house in a bad neighborhood. Global investments will therefore flow our way. Thus, we see phenomena like the present yield arbitrage in government bonds.

Happening now: @MorningsMaria @FoxBusiness "we have some of the best growth across the world. People will buy US companies w great yields, they'll buy our bonds. The rest of the world is a basket case" - @Jkylebass "where are you going to invest? China w no rule of law?"

— Maria Bartiromo (@MariaBartiromo) August 22, 2019

But friendly flows of capital toward the US are likely to be temporary. As more money flows in our direction to take advantage of relative price differences, those differences diminish as the benefits get arbitraged away.

Directional bias toward the US will also diminish as investors seek better opportunities.

Slavery and Prosperity

Gerald O'Hara: Now gentlemen, Mr Butler has been up North, I hear. Do you agree with us, Mr Butler?
Rhett Butler: I think it's hard winning a war with words, gentlemen.
Charles Hamilton: What do you mean, sir?
Rhett Butler: I mean, Mr Hamilton, there's not a cannon factory in the whole South.
Man: What difference does that make, sir, to a gentleman?
Rhett Butler: I'm afraid it's going to make a great deal of difference to a great many gentlemen, sir.
Charles Hamilton: Are you hinting, Mr Butler, that the Yankees can lick us?
Rhett Butler: No, I'm not hinting. I'm saying very plainly that the Yankees are better equipped than we are. They've got factories, shipyards, coalmines...and a fleet to bottle up our harbors and starve us to death. All we've got is cotton, slaves, and arrogance.
--Gone With the Wind

Salient point by Bob Murphy. Leftists have been coming out of the woodwork claiming that slavery was a boon to economic activity in the South and formed the basis for an unfair but lucrative capitalistic system in America. The ulterior motive behind this movement is to build political rationalization for reparations and, more generally, for delegitimizing America's founding principles.

While the portion of the claim explicitly linking 'brutality' and 'American Capitalism' can be set aside on grounds of pure absurdity, the portion about slavery being an economic blessing for large groups of people merits scrutiny. On the surface, the claim seems valid. After all, slave owners, particularly those who operated businesses, had access to low cost (although not 'no cost), forced labor that seemingly permitted higher profit margin businesses.

While there can be little doubt that small groups of people can benefit from this arrangement in the short term, the question is whether benefits flow to society at large over time. This is where the reasoning mind starts chipping away at the proposition. Several obvious questions arise that Murphy doesn't even mention. One is that many people in the South did not own slaves. How precisely did these people benefit? Weren't they put at an unfair disadvantage in labor and product markets? In addition, for those proprietors who did employ slave labor, wouldn't competition drive down prices such that their labor cost advantages would be competed away over time--particularly as markets opened to external competitors?

Proponents of the 'slavery was good for the economy' argument offer various statistics from the period showing that output of slave-using plantations increased significantly over time and that the US economy grew in size relative to the world economy while slavery was still in force.

But such statistics do little to validate the 'slavery was an economic godsend' case. After all, as Murphy notes, one could just as easily draw from post-Civil War economic data and cite booming farmer productivity, technological improvements, and rise of the United States to largest economy in the world as 'proof' that getting rid of slavery was the real boon to the economy.

Murphy contends that the real question to ask when considering whether slavery constitutes an economic boon to society is: As compared to what? The comparison in this case is between servile labor and labor, producers, and consumers that are free to do what they want as long as their action is peaceful.

It is on this ground that the 'slavery is great for the economy' falls apart. The institution of slavery rigidifies labor and stifles the entrepreneurial quest for technological improvement. Unhampered markets do the opposite. Labor is free to contract where opportunities are deemed bright. Entrepreneurs must innovate in order to become more productive and serve customers.

Of course, Antebellum America offered a side-by-side comparison of the two systems at work. Productivity in the relatively unhampered North increased orders of magnitude that of the relatively hampered South--as did median standard of living. As Mises observed:

"Servile labor disappeared because it could not stand the competition of free labor; its unprofitability sealed its doom in the market economy."

As these pages have observed, war was not necessary to end slavery in the United States. It was destined to die a peaceful death at the hands of competitive markets.

Support and Resistance

It's not in the way that you hold me
It's not in the way you say you care
--Toto

A while back we introduced technical analysis by studying the basic patterns of uptrends and downtrends. Two more basic technical patterns are known as support and resistance.

Support occurs when a horizontal line can be drawn to connect several low points in a series of prices. Support reflects latent demand at a particular price level. Every time price drops to a particular level, buyers show up to 'support' the security at that price and keep it from moving lower yet.

Technicians often view support levels as attractive entry points because they often coincide with near term lows in the stock price.

Be aware, however, that a general rule of technical analysis is that each time prices come down to support levels, latent demand gradually gets stripped away and those support levels weaken. Buyers slowly get their fill and at some point the support level gives way.

Recent price action in Cisco Systems (CSCO) offers a good example. You can see that the stock bounced off support at about $51 several times over the past few months. With each touch, however, latent demand weakened as buyers at that level gradually acquired all they wanted. A few days ago, the stock broke thru support when no latent demand remained.

Now that Cisco's stock price has moved substantially lower, that $51 level has now become a technical level of resistance. Resistance occurs when when a horizontal line can be drawn to connect several points high points in a series of prices. Resistance reflects latent supply.

In CSCO's case, think of it this way. Many of those buyers that materialized to purchase the stock at $51/share are now underwater on their positions. Consequently, some of them wouldn't mind selling if/when the stock gets back up to $51 so that they break even on their trades. Thus, every time the stock gets back up to the $51 area, we can expect at least some hesitation in further gains as some of those previous buyers become sellers.

Technicians sometimes view resistance levels as good places to sell positions because chance favors a pullback in prices. However, just as continued touches of support strip away latent demand, continued touches of resistance strip away latent supply. As sellers 'get done,' there is less supply to restrain further price increases.

A multi-year chart of monthly gold price demonstrates. You can see that gold prices were repelled several times over the past few years by resistance in the $1350-1375 price range. A couple months back, prices broke thru resistance as demand finally outstripped remaining supply at that level. Now, previous resistance has morphed into a level of technical support.

And so it goes...

Being able to identify support and resistance levels adds context for better investment decisions.

positions in CSCO, gold

Global Ten Year Yields

It ain't no use
We're headed for disaster
Our minds said no
But our hearts were talking faster
--Donnie Iris

Panoramic view of yields on 10 yr sovereign debt from various countries. That the US t-note has been catching a bid should be no wonder as fixed income buyers worldwide seek some modicum of positive yield.

The common interpretation of this pattern of behavior is 'recession coming.' Investors pile into sovereign debt for protection when perceived economic and market risk goes up.

On the other hand, central banks have so thoroughly distorted risk markets that it is difficult to identify just what is driving this unusual behavior.

It is less difficult to imagine that it will end in disaster.

Fire Starter

The men of steel, the men of power
Are losing control by the hour
--Genesis

Once again, we reflect on Christ's words that his mission was to set the earth on fire. The Prince of Peace knew that his message of peace would not be accepted peacefully. Truth and freedom find no quarter in a status quo vested in forcible dominion.

Jesus knew that his message of peace would ignite a firestorm of pushback and division.

The fire still burns today. And He invites us to add to the blaze.

Elephant Walk

I stopped an old man along the way
Hoping to find some forgotten words or ancient melodies
--Toto

Good to know there's an 'elephants declining in size' technical pattern.

Horrified to realise that European bank stocks have formed an 'elephants declining in size' technical formation. A global recession/pandemic beckons. pic.twitter.com/fV9zz8suZf

— Mike Bird (@Birdyword) August 16, 2019

His point, of course, is that euro banks, a proxy for European markets in general, are painting an increasingly bearish technical picture.

Serious Questions for Gun Control Advocates

Jordon Tate: I told you, I don't like guns.
Casey Ryback: I know. Neither do I.
--Under Siege

After mass shooting events, anti-gun zealots come out of the woodwork claiming that it's time for a serious conversation about more gun control. Of course, the fact that the appropriate time for such a conversation is proposed to be immediately following a tragedy offers some insight into its emotional content.

Inevitably, the foremost topic that anti-gunners want to converse about is the 'assault rifle'--whether the shooting that motivates the conversation employed such a weapon or not (which also speaks to their agenda).

Unfortunately, the 'serious conversation' that gun grabbers claim to desire never gets started. Instead, they bring demands for gun restrictions or outright confiscation.

If anti-gun zealots ever seek to sponsor an authentically 'serious conversation' about gun control, then one would think they would first do some 'serious' research on the guns that they seek to converse about.

Here are some basic questions that many gun control advocates, as revealed by their rhetoric, clearly do not know (or want) answers to:

What does the 'AR' in AR-15 stand for? How long has the design been around? What is its history?

What is the definition of a military assault rifle? What are the common types or models? Can citizens legally own an assault rifle?

What is the difference between an automatic and a semi-automatic weapon? Can citizens legally own automatic weapons?

What is a selective fire rifle? Can citizens legally own selective fire rifles?

Consider these three types of 'long guns': shotgun, bolt-action rifle, AR-15. How do they compare on the following characteristics:

• how ammunition is loaded into the firing chamber
• number of rounds (bullets) that the weapon can carry (carrying capacity)
• time to reload new batch of rounds
• speed of round when fired (muzzle velocity)
• diameter of bullet that can be fired from the weapon (caliber)
• how far bullet can travel when fired (range)
• mobility in close quarters
• noise level when fired
• recoil when fired
• weapon accuracy at various distances

If gun control advocates knew the answers to the above questions then they would demonstrate at least a rudimentary understanding about the guns that they want to have a 'serious' conversation about. This is because individuals who own guns answer similar questions when selecting weapons for self-defense purposes. Armed (!) with this knowledge, a gun owner makes better decisions about which weapons match well with various self-defense situations that could be encountered.

This motivates an additional tranche of questions that guns control advocates should research if they really want to sponsor 'serious' conversations about gun control. We'll consider these questions in a future post.

In Awe

"My soul glorifies the Lord
And my spirit rejoices in God my Savior"
--Luke 1:46-47

Today we celebrate Mary's assumption into Heaven.

"Blue Madonna" (Carlos Dolci, 1616-1687)

Am simply in awe of what she did here on earth. And of what she continues to do for us each day from above.

Testing Nerves

I'm falling down a spiral
Destination unknown
Double crossed messenger
All alone
--Golden Earring

The central story amidst the ongoing market volatility continues to be falling long bond yields. Ten Year yields are at 1.6% this am.

This spells deeper yield curve inversion. A shorthand proxy for the yield curve is the spread between Two Year and Ten Year Treasury yields. Yesterday the 2s10s spread went negative for the first time since the credit crisis days.

Recession Countdown Begins: UST 2s10s Yield Curve Inverts For First Time In 12 Years https://t.co/NqkncuwspJ

— zerohedge (@zerohedge) August 14, 2019

Meanwhile, the gold complex continues marching higher.

The bulls' nerves are certainly being tested here.

position in gold

Beginner's Portfolio Template

"First learn stand. Then learn fly. Nature's rule, Daniel-san. Not mine."
--Miyagi (The Karate Kid)

How to tie what we've discussed about investing so far into actionable outcomes? Here's a template of sorts for what a beginner's investment portfolio might look like:

Equities* 
stock 1
stock 2
stock 3
stock 4

Fixed Income 
CD

Cash and Money Market
money market fund
residual cash

*Shoot for four equity positions of the dividend paying, anchor stock variety

How much to allocate to each asset class? Because young investors have time on their side, they can afford asset allocations tilted toward more equity exposure. Aggressive designs might even ignore fixed income in favor of more stocks (particularly if those stocks generate income).

On the other hand, if your risk tolerance is lower or if you are less confident in the outlook for equities, then a more balanced or cash rich allocation with fewer equity positions makes more sense.

Keep this template in mind while assembling your own portfolio.

Crisis and Liberty

Vasily Borodin: The crew know about the saboteur and they are afraid.
Captain Marko Ramius: That could be useful when the time comes.
--The Hunt for Red October

Why are people prone to surrender liberty in times of crisis? One theoretical explanation is grounded in threat-rigidity theory. Under conditions of threat, people become more 'rigid' in their thinking. They tend to look at less alternatives and centralize decision-making authority.

Stated differently, critical thinking goes down and willingness to cede power to government goes up.

This theory is complemented by research on judgment and decision-making. When we are threatened, our minds remain fixed in fast-thinking mode. We are reactive, emotional, and less rational. It is difficult to reason well.

In this mode, we are subject to emotional capture by opportunistic statists.

Although they rarely admit it, big government proponents look forward to the next terrorist attack, the next mass shooting, et al. The committed ones may try to facilitate the occurrence of such events. They understand theory about how the masses are likely to respond in times of threat. They know that serious statists never let a good crisis go to waste.

Vigilance

"Hey, be careful, will you? This whole event's been advertised in advance. Just be alert."
--Frank Horrigan (In the Line of Fire)

The theme of today's readings is vigilance. Vigilance is the act of staying alert for onset of a situation or event. The situation or event is anticipated to be of great significance or consequence.

Vigilance is required because, although we may be confident that the event will occur, we do not know when it will occur. Therefore we must remain watchful so that we are not caught off guard.

The words and actions of the Lord tell us that the most important events in our lives will happen when we least expect them.

Vigilance keeps us on our toes.

Gold Over Copper

Sarah Connor: What did he just say?
Gas Station Attendant: He said there's a storm coming in.
Sarah Connor: I know.
--The Terminator

These pages have often observed that gold is a bet on disorder. As gold price rises, those bets increase. Stephanie Pomboy presents another way to look at what's going on by plotting the ratio of gold to copper prices.

at the risk of piling-on,the canary in the financial crisis coalmine has been singing loudly. the relationship btw the metallic barometer of financial insecurity (gold) and the metallic barometer of economic activity (copper) has been a reliable predictor of trouble in the past. pic.twitter.com/K6rjNSpRcB

— steph pomboy (@spomboy) August 7, 2019

When the ratio goes up, it tends to correspond to crisis.

The ratio is going up.

Suicide or Homicide?

"She must go. But it must happen slowly."
--Madame Sebastian (Notorious)

Ron Paul likens last week's congressional deal on a two year spending budget to committing national suicide. With federal debt approaching $23 trillion and a trillion dollar spending deficit already locked in for this fiscal year, more deficit spending pushes us closer to the brink.

Of course, the term 'suicide' implies intentionality--a willingness to destroy oneself. While it may appear that the United States is collectively committing suicide, the country is home to many individuals who understand the gravity of the situation and by no means condone what is going on. Political factions who currently control the strong arm of government are, quite literally, forcing the issue.

Although these political factions seem willing to commit economic suicide, to the extent that they are willing to force others over the cliff with them, these factions are engaging in an act of economic homicide.

Gold's Secret

I try hard not to get upset
Cause I know all the trouble I'll get
--Til Tuesday

Gold continues to act well. Pushing up thru boxes on volume spikes. Spot gold now around $1500/oz.

Remember that gold is a bet on disorder--economic, social, etc. When gold starts firing up in a technically bullish manner as it is now, it is worth watching.

The question on inquiring minds: What secret is gold sniffing out?

position in gold

Yield Arbitrage

"So, arbitrage...talk about adrenaline, huh?"
--Tess McGill (Working Girl)

Jaw dropping move in long bonds this am. 10 yr yields down over 8%(!) as money pours into US Treasuries.

You pick the cause(s). Flight to safety/mounting risk aversion. Front-running more Fed cuts--anticipating perhaps FOMC caving to presidential demands. Yield starved fixed income investors in other parts of the world seeking a positive coupon. Leveraged black boxes jumping on the momentum bandwagon of a trade that's 'working.'

Regardless, yield differential between US and rest of world is quickly being arbitraged away.

Cracking Seven

Seven
That's the time we leave
At seven
--Doris Day

Interesting developments late yesterday and overnight demonstrate the bipolar nature of this tape. In response to the Trump administration's pronouncements of additional tariffs on Chinese goods, China began intervening in currency markets to significantly weaken the yuan vs the dollar. Yesterday the yuan/USD cross rate significantly exceeded the psychologically important 7.0 level for the first time in years.

China also announced that it would stop buying US agricultural goods and that additional bans would be pending.

Consequently, Treasury Secretary Steve Mnuchin declared that China was a currency manipulator. Big deal, you might say. Just more political name calling. Not only have members of previous administrations muttered similar allegations, but the fact is that all countries seek to manipulate the values of their currencies in their sovereign interests.

Well, the big deal is the degree of formality this time around. It turns out that countries can be brought up on currency manipulation charges before the international community--a prospect that I find laughable given the monetary policy activism in motion worldwide.

Nevertheless, the specter of massive Chinese blowback in response to these charges sent US futes reeling last night. Following yesterday's 3% down day, Dow futures quickly lost 500 more pts overnight post the Treasury secretary's comments.

Subsequently, however, representatives of the People's Bank of China put a soothing spin on its currency intervention, suggesting that what has become known as 'Cracking Seven' should not be viewed as a political statement and is unlikely to mark the start of a larger depreciation campaign.

That's all US markets needed to hear. Quickly ditching their fears, futes quickly reversed and this morning's open ushered in a 1% upside pop.

Not sure this gap higher is what the bulls really needed. But for now, Cracking Seven has been deemed less daunting.

Bonds Bid

"I don't need your help."
--Kurt Sloane (Kickboxer)

Bonds catching a serious bid today as the 'risk off' trade gains steam. Dow currently down over 800 pts.

Ten yr yields down over 6% today to about 1.73%. Who needs the Fed for lower rates?

Hole Thing

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Major indices have opened 1-2% in the hole this morning. Intraday, they have decisively broken below their 50 day moving averages.

The 200 day is up next a couple of percent lower, and then the late May/early June lows.

Interest Rate Arbitrage

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Perhaps the president won't have to wait for the Fed to lower rates some more. The bond market appears to be leading the way.

After the past week's events, Ten Year yields have broken to new lows for the move. They now sit at about 1.86%.

Interest rate arbitrage between those at zero or lower (e.g., EU, Japan) and those at greater than zero (US) is revving up.

Trumping the Fed

"I can be a real serious bitch if I don't get what I want."
--Lisa (Weird Science)

After the FOMC voted to lower rates by a quarter this week, stock markets expressed general disappointment that the Fed didn't cut more. President Trump was not happy either, tweeting that he had hoped that the Fed would announce a multi-cut campaign to reduce rates toward the zero bound--similar to what other central banks have been doing.

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world....

— Donald J. Trump (@realDonaldTrump) July 31, 2019

....As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

— Donald J. Trump (@realDonaldTrump) July 31, 2019

Let's be clear. All presidents running for re-election want lower rates ahead of the vote. What makes this president unique is that he is not afraid to admit it in public. His predecessors have generally taken the quiet route--lobbying behind the scenes for low rates or to keep them low prior to the election.

The next day President Trump announced an additional 10% tariff on Chinese goods:

Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

...buy agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said that he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die! Trade talks are continuing, and...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

...during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

Upon learning of the president's intentions early Thursday afternoon, the Dow quickly swung from being up 300 pts on the day to being minus 300 pts on the day.

Trump's stated justification is that China is being sanctioned for the country's refusal to keep its word during past rounds of trade talks. However, it is easy to construe that his real message was to the Fed. Trump knows that the Fed is in the back pocket of financial markets. If he needs to create some market turmoil to get what he wants from the Fed, then he is not opposed to do so.

Trump's actions demonstrate what can occur when control of money is taken away from the people and put in the hands of bureaucrats who are open to political manipulation.

We would not be subject to such brinksmanship under a gold monetary standard.

position in gold

Profits and Recession

Sometimes I never leave
But sometimes I would
Sometimes I stay too long
Sometimes I would
--The Motels

The Pomboy girl displays US corporate profits as a % of GDP. She observes that in past instances where profits cycle back down from highs and hit 7% on the way back, two things have happened. One is that profits went on to drop another 2% on average. Two is that recessions have ensued an average of 7 months later.

Per friday's revisions, BEA now shows domestic profits have plunged to 7% of GDP. When they did that in 1979, 1989, 2000 & 2007, they went on to drop another 2 ppts, on average. Not surpris'ly, eco recession ensued--(an avg. 7 mo's later). That wld put us @ Oct. pic.twitter.com/xjqWWuOz4n

— steph pomboy (@spomboy) July 31, 2019

The BEA has just revised profits earlier this yr to 7%. That projects a recession window on the fall season.

Dove Love

How can you just leave me standing
Alone in a world that's so cold?
--Prince

As expected, the FOMC cut rates by 25 bips yesterday. It also announced that it would end its QT bond buyback program a couple of months early.

Initially markets disappointed by 'only' 25 pt cut. 10 yr yields reflecting more doves ahead, though, as they are back on recent lows.

Markets realizing the Fed has their back...as usual.