Watch Out for “Inter-temporal Smoothing”

Posted On Jan 22, 2016 By Dave Gonigam

  • So we’re supposed to feel sorry for the Davos crowd?
  • Suddenly, global elites wake up to a phenomenon Stockman warned about…
  • …But they have to give it a funny name
  • The “meh” economy captured in two charts
  • Jim Rickards updates his outlook for 2016 Fed rate hikes
  • Federal employees’ misplaced outrage… The 5 skillfully straddles the partisan divide… still more hostile reaction to our “social income experiment”… and more!

After 46 seasons, the World Economic Forum’s annual shindig in Davos, Switzerland, has jumped the shark.

Among the 2,500 politicos, central bankers, CEOs and “journalists” in attendance, the star attraction today is… a fictional U.S. president.

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Hmmm… Maybe the global elites need a diversion from all the worries eating away at them in between bites of caviar and sips of champagne.

“A few preoccupations on display at Davos so far,” says a dispatch in The Atlantic, “include worries about global growth, emerging markets, China’s slowdown, Europe’s future, extremely low oil prices, the boardrooms’ gender gap, the automation of jobs and, perhaps the most pessimistic of all, the threat of another financial crisis and no regulatory tools left to fight it.”

Really? Took long enough, but it’s finally dawning on the elites that all their Humpty Dumpty solutions to the Panic of ’08 — all the fiscal and monetary equivalents of chewing gum and baling wire — haven’t done squat.

“World Faces Wave of Epic Debt Defaults, Fears Central Bank Veteran,” said the headline of a pre-Davos story from the London Telegraph that went viral this week.

The veteran in question is one William White, former chief economist at the Bank for International Settlements and now a big cheese at the Organization for Economic Cooperation and Development.

“Debts have continued to build up over the last eight years, and they have reached such levels in every part of the world that they have become a potent cause for mischief,” said Mr. White.

“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.”

Here’s the bit that stood out to us in the Telegraph piece: “Mr. White said QE and easy-money policies by the U.S. Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as ‘inter-temporal smoothing.’ It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you.”

“Inter-temporal smoothing”: You gotta love the gobbledygook these guys come up with to describe a simple concept: Central bank money printing has the effect of pulling demand forward from the future.

The result of “inter-temporal smoothing” was best described in this space last month by our newest editor, David Stockman — who knows the Davos set well but wore out his welcome with them long ago for his truth-telling.

There’s too much wealth out there. Too many empty skyscrapers in China, too many idle oil wells in the United States, too much “stuff” in general — far more than the world needs right now, or will need for a long while.

“There has been so much overinvestment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come,” said David. “The boom of the last two decades essentially stole output from many years into the future.

“So there will be a severe curtailment in the production of mining and construction equipment, oil field drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials-handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.”

To say nothing of the consumer goods from which those raw materials are made. Auto purchases made possible with 0% financing, clothing and electronics purchases made possible by 0% balance transfers — it’s all coming to a head.

Clearing this backlog of stuff will take years, “perhaps more than a decade,” says David. “Consequently, the world economy is actually going to shrink for the first time since the 1930s.”

There’s one company in the forefront of this too-much-stuff phenomenon… and David says its management might well deliver a rude surprise to Wall Street next Thursday.

“It’s one of the most well-respected and important businesses in modern American history,” he tells us… and he believes it’s set to tumble as much as 70% this year. Many everyday investors will be caught off guard. But if you act quickly and play it right… you can parlay this market shock into a gain of 300% or more.

It won’t cost you a thing to find out the name of the company David says will set off a market earthquake. Nor will it cost you anything to learn how to play this approaching market earthquake.

That’s right. We’ve never done anything like this before. We want you to take up a FREE trial of David Stockman’s Bubble Finance Trader. If you sign up today, you won’t pay a thing for one month… and you’ll get instant access to David’s recommendation. And there’s no cancellation fee if you decide this service isn’t for you.

But we think you’ll be more than pleased. David’s been on a roll since we launched David Stockman’s Bubble Finance Trader to a select group of readers three months ago. So far, he’s recommended closing two positions. The results — a gain of 88% in five weeks… and a gain of 58% in only two weeks.

Among the open portfolio positions, the average gain is 19% across an average holding time of seven weeks. Only one position is in the red, and that recommendation is only a day old.

Time’s running short. You want to act now to jump on David’s new recommendation, before the crowd is caught off guard next Thursday. Check out David’s research for yourself, right here.

To the markets… where the major U.S. stock indexes are rallying for a second day.

As we write, the Dow has recovered the 16,000 level. The S&P 500 is six points away from 1,900.

Crude continues to roar back from its lows near $27 on Wednesday, a barrel of West Texas Intermediate now $31.31. Gold is still holding the line on $1,100.

The most meaningful economic number of the day is “meh.”

Each month, the Chicago Fed crunches 85 numbers to compile its National Activity Index. It’s called every recession but one since 1970: It was late on the 1973 “oil shock.”

On this chart, zero indicates the long-term average. The number that points to a recession is a three-month average of minus 0.7. The latest three-month average is minus 0.2 — which is up a bit from the previous month.

The Meh Economy

Elsewhere, the Conference Board’s leading economic indicators fell 0.2% in December — dragged down by housing permits and manufacturing orders. If this decade plays out like the last one, the “recovery” is on increasingly borrowed time…

Borrowed Time

… but you already sense that’s the case, right?

Despite other economic numbers that look weak, and the stock market’s worst start to a year ever, Jim Rickards is sticking with his call on the Fed’s plans for interest rates in 2016.

“Obviously, market declines and bad economic data since the first of the year have turned around most predictions on this Fed tightening cycle,” he tells us. “The crowd went from belief in three–four rate hikes in 2016 to no rate hikes in 2016 almost overnight.

“Both views are overreactions. Our original view was for two rate hikes (March and June) followed by easing later in the year (in the form of forward guidance)…

“We’re sticking with the two rate hike forecast for now (although we have lowered the odds on the June hike from 93% to 84% using our inverse probability methods and Bayes’ theorem). In any case, the March rate hike is still expected with 94% likelihood. It would take an S&P 500 decline below 1,700 in the next few weeks to trigger a revision in that view.”

That’s not a prediction of 1,700 on the S&P — just a trigger point to keep in the back of your head. “We’re just setting the dials for a change in Fed thinking,” says Jim. “What this means is that the Fed is still on course to hike and markets are still on course to trade down (in stocks), up (in Treasuries) and flat (in gold).”

As we get closer to deadline, it’s time for federal employees in Washington, D.C., to head home for the day.

As you might be aware, a blizzard is bearing down on the nation’s capital. Last night, the federal Office of Personnel Management announced federal offices would close today at noon — much to the disappointment of federal employees hoping to get the whole day off.

Heh… We could practically hear the squawking all the way up here in Baltimore, 35 miles away.

Before we get to the mailbag, we give the last word today to the civil liberties and privacy writer Marcy Wheeler…

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“It is pure BS,” says the first entry in our mailbag.

We should back up a bit. On Wednesday, we sent you a sales message for our Laissez Faire unit’s 2016 Guide to Happiness (you really ought to check it out). But not all of you got the same email. We were conducting a test to see which kind of message got the strongest response.

Out of five messages we sent, the winner was an email with the subject line “Don’t vote.” Not a surprising thing if you’ve been with us for any length of time, but it inspired the ire of one reader: “Hey, this sounds like Democratic strategy. You should be ashamed!”

The 5: Yes!

The day before, someone writes in, “I bet you’re a Republican, and that’s the worst insult I can think of without using offensive language!” and now we’re accused of being in bed with Democratic strategists. It’s good to know we’re an equal-opportunity offender.

“Golly goodness,” writes one of our regulars after yesterday’s episode about “precious metals that pay ‘interest.’”

“Let’s see, I’m supposed to take my gold from my safe and give it to somebody else, and they will keep it and send me interest on it every year.

“And when TSHTF, they are going to bring it back to me. Yeah, sure. That is almost as good as giving it to the bank to keep — or buying stock and expecting its safe return when TSHTF. Say, I have bridge in New York you might like to buy, very, very cheap.”

The 5: Aw, c’mon. We’re not encouraging anyone to exchange their physical gold for the “paper” variety. We’re just saying that until TSHTF, Zach Scheidt’s perpetual income strategy is a way to parlay a cash stream from a precious metals ETF.

Of course, if you expect the lights to go out and humanity to turn feral next week, you probably won’t want to pursue this strategy. Otherwise, it comes with our team’s heartiest recommendation.

“Free income… REALLY!!” a reader spits about our “social income experiment.” “I’ve never read such crap in my life.

“Selling options is a long way from riskless and free. As I thought when I asked for my refund, you folks are a farce.”

The 5: I just ran a search function on the promotional copy and at no point does the term “free income” show up. Nor do we declare it to be riskless. Everything comes with risk. However, the strategy done right can be less risky than a traditional buy-and-hold approach.

As for being a “farce”… that’s up to each individual reader. Decide here.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. About this blizzard approaching Baltimore…

The timing is about as good as can be… as far as our ability to write to you and our customer service team’s ability to answer your phone calls and emails. The blizzard warning from the National Weather Service kicks in here at 6:00 p.m. EST, and it’s in effect till 6:00 a.m. Sunday.

weather

Infrared satellite as of 11:15 a.m. EST

Presumably most of us will be able to dig out in time for Monday morning… and those of us who can’t are equipped to work from home. Then again, the power outages could be significant. Out of an abundance of caution, we shut down for a day when Hurricane Sandy blew through in 2012. But for the moment, we still plan to bring you a full episode of The 5 on Monday.

To everyone in the storm’s path, stay safe…


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