“Perilous Times” and Projection Bias

Posted On Jun 29, 2016 By Dave Gonigam

  • The Fed’s fruitless quest for inflation (in the amount the Fed wants)
  • The U.S. economy’s vulnerability to shocks…
  • … and Jim Rogers on Brexit
  • The computers called Brexit better than the humans? Wait a minute…
  • Risk-on trade returns… but Treasuries and gold show resilience
  • Property rights vs. petty tyrants in New York and Texas
  • How government is holding back mankind’s evolution

The mighty American consumer is spending out of an empty pocket. And the Federal Reserve’s ardent desire for more inflation is going unrequited.

Those are the takeaways this morning from the Commerce Department’s monthly “income and spend” report. Personal incomes grew 0.2% last month — less than the “expert consensus” was counting on. Consumer spending, meanwhile, grew 0.4% — largely a function of rising gasoline prices. That’s two straight months in which the growth in spending has outpaced the growth in incomes.

“With income growth stalling, consumers may have tapped into their savings slightly to fund May’s spending,” says a summary from Econoday, “as the savings rate edged 1/10th lower, to 5.3%, for the lowest rate of the year.”

This same report also delivers the monthly “core PCE” number — the Federal Reserve’s favorite measure of inflation. When the Fed says it’s aiming for 2% inflation, this is the number it’s talking about. Unfortunately for the Fed, it’s been stuck in neutral around 1.6% the last three months.

Stuck In Neutral

The myopic financial media usually look at this number — indeed, most economic numbers these days — in the context of whether it moves the needle on the Fed’s intentions with interest rates.

This morning, we look at it with a bit more foreboding: There’s a truism out there that says a healthy economy can withstand severe shocks better than a sickly economy.

There was no shortage of severe shocks in 2011 — the Arab Spring; the Fukushima disaster; a debt ceiling showdown; Standard & Poor’s downgrade of U.S. government debt; and the most severe phase of the debt crisis involving the “PIIGS” countries, led by Greece.

But the U.S. economy withstood all that and the stock market ended the year flat… because the economy was relatively healthy, at least by post-2008 standards. Indeed, Jim Rickards says the Fed missed its opportunity to raise interest rates back then.

But now? Job growth is decelerating. Manufacturing growth is at a standstill. As we noted yesterday, the GDP numbers are weak, even using a post-2008 yardstick.

Maybe you’ve already figured out where we’re going with this — Brexit. How resilient is the U.S. economy in the face of the next Brexit shoe that might drop?

Yes, we know. Heck, we acknowledged “Brexit fatigue” upfront in yesterday’s episode of The 5. Although we heard from one reader who said we have nothing to apologize for: “The mother of all financial crises may be unfolding right now — and it will be a process, not an event.”

Which brings us to the latest proclamation from the world’s foremost “adventure capitalist”…

“This is going to be worse than any bear market that you’ve seen in your lifetime,” Jim Rogers tells Yahoo Finance.

Rogers anticipates a “bad case scenario” in which Scotland and Northern Ireland leave the U.K. to stay in the EU (meaning Scotland gets all the North Sea oil revenue) and the City of London loses its clout to financial centers on the continent like Frankfurt.

“2008 was bad because of debt — the debt all over the world is much, much higher now. Stocks in the U.S., for instance, have been going sideways for 18 months, 24 months. That’s called distribution by many people, so when you have distribution for a year and a half, it usually leads to bad things.

“These are going to be perilous times. I hope I get it right.”

OK, enough of the doom and gloom. It wouldn’t be The 5 if we couldn’t find a little comic relief. The front page of today’s Wall Street Journal obliges…

Wall Street Journal

“Wall Street is tallying up the winners and losers,” says the story’s lead, “after the severe market reaction to last week’s Brexit vote. One theme has emerged early — the computers got it right and the humans got it wrong.”

Hedge funds that rely on custom trading algorithms made out just great on Friday and Monday: “They favored high-quality government bonds, gold and safer currencies like the yen, while mostly avoiding riskier bets like oil and emerging markets.”

What went wrong for nearly everyone else? “Too many investors bet on the outcome they preferred, economists and analysts say, a powerful example of ‘projection bias’ in the markets.”

Gee, what was it that one of the few humans who got it right was telling us before the vote?

“Market participants are personally heavily biased in favor of ‘Remain,’” said Jim Rickards in this space during his visit to London a week ago yesterday.

“Bank CEOs have already informed staff that there will be thousands of layoffs in London if ‘Leave’ wins. Since London is the financial center of the world, such threats are bound to skew the opinion of market makers somewhat. Global monetary elites, media, policymakers and bankers are united almost completely in favor of ‘Remain.’”

Some of the hedge funds that didn’t rely on computers and got clobbered relied instead on the guidance of Harvard historian Niall Ferguson — who’s been a consultant for hedge funds going back nearly a decade.

“Almost nobody got this one right,” Mr. Ferguson tells the Journal. “Anybody who called it right was more lucky than prescient.”

Sorry, we just can’t let that one pass. If you’re working with the right models, you can get it right — as Jim Rickards did.

Another short entry from the mailbag: “In response to your ‘bollocks’ correspondent yesterday, I have to say that Jim’s forecasts ARE the dog’s bollocks. On April 29, he accurately predicted that the Bank of Japan would stand pat and not add more stimulus, and of course, we all know how his Brexit forecast went down.

“With even the small amount of capital I have to trade, I have made back my subscription to Jim’s ‘Unrestricted Clearance’ suite of services in realized gains. Happy camper here!”

Hmmm… “The dog’s bollocks”?

Anyway, some of Jim’s subscribers have even taken to Twitter with praise…

Mara Lago

Leandro Barros

Rob Harrison

And the Brexit-related profits aren’t over yet: Using the same models that generated 129% from the Brexit “surprise” last week, Jim’s system is now flashing “go” on a trade with as much as 250% upside by the end of next year. Click here for access… and make sure to scroll down for an update from Jim on the Brexit fallout.

Major U.S. stock indexes have now recovered about half of their Brexit losses on Friday and Monday. At last check, the Dow and the S&P 500 are both up about 1.25%.

Seen in that context, the resilience of both Treasuries and gold is noteworthy. The 10-year T-note yield rests near Monday’s levels at 1.46%. Gold, meanwhile, has added $12 to reach last Friday’s levels, at $1,323.

And that gold strength isn’t just a function of dollar weakness; the dollar index is down only about a third of a percent as we write, at 95.7.

Property rights and petty tyrants, New York City edition: The city’s transportation department recently ordered Bronx resident Patrick Colletti to fix the cracks on the sidewalk in front of his house.

He complied, spending $6,000 to do so.

Then the parks department showed up two weeks later — spray-painting the sidewalk to mark the area that will soon be ripped up to plant a tree.

“Shouldn’t one agency talk to the other?” Colletti pleads his case to WCBS-TV. “They don’t even talk to each other, you know?”

Just recompense? Fuggeddaboutit. “All street trees are planted within the city-owned public right-of-way,” said an officious reply from the parks department.

Property rights and petty tyrants, Texas edition:

Dalles Morning News

Kirk Grady had a woodpile on some property he sold in 2002. Last year, the government of Hunt County sued him, seeking up to $2 billion in fines for “improper waste disposal.”

Grady is fighting back with a federal lawsuit. His lawyer says the county hired a private law firm to pursue the case — with a contingency-fee provision. Yep, the bigger the fine, the higher the take for the law firm.

“Such contingency-fee arrangements are legal under Texas law,” says The Dallas Morning News. “The law, passed almost 50 years ago, gave local governments the authority to file lawsuits seeking civil penalties for alleged violations of the state’s environmental laws.”

Y’know… We’ve heard chatter in recent days, after the “Brexit” vote, about a resurgent “Texit” movement. Which is interesting, and we’re all for the devolution of power around here… but secession wouldn’t do a damn thing to remedy this situation.

“Brexit fatigue? Really?” says the reader we referred to earlier.

“The whiners need to grab a cup of coffee and man up. Or just sit in the back of the room and take notes.

“No one else offers the kind of insight found here in The 5. The mother of all financial crises may be unfolding right now — and it will be a process, not an event. Rational thought will be invaluable every step of the way. Besides, you’re entitled to promote yourselves a little bit. It’s your newsletter, after all!”

“Hey, how can Obama talk about (individual) entrepreneurship?” a reader writes of the president’s alleged plans to promote “innovation” once he leaves office.

“Remember ‘You didn’t build that’?”

The 5: We do, and you’re not the only reader who brought it up. Just for old times’ sake, a quick 5 flashback to 2012…

“I’m a 5 reader from Day One,” writes an entrepreneur with a reply to a question we posed in yesterday’s mailbag section.

Here’s what we said…

Here’s a question directed at the shrinking percentage of working-age adults who remain in the workforce: Do we really have “too much time on our hands”… or are we so busy working for the man and for more consumer-y crap that Facebook, etc., serve as a narcotic distraction from the relentless process of earning and getting and spending?

“For context,” says our reader, “I started an energy technology business two years ago. My team of six employees are all millennials who have been plugged into technology since they were kids. We work hard and hustle to make ends meet while balancing high costs of living and debt loads. But what I’ve noticed in the daily approach to work between my generation and the millennial generation is a general lack of ability to focus and unplug the incessant barrage of noise driven by social media and online advertising.

“We live in a consumption- and service-driven economy and are incessantly reminded and encouraged by our corporate overlords to consume more.

“For those of us who earn and burn every day, I wouldn’t say we have ‘too much time on our hands.’ Actually, it seems we have just the opposite. Not enough time to focus on what’s really important thanks to a ceaseless ‘noise’ of technology and advertising-driven distractions constantly looming over us.

“The most successful earners will be those who can sift through the daily barrage of crap, think critically, focus on what’s important and act accordingly.

“Thanks, and keep sifting through the noise.”

The 5: Thanks for the input. Your editor’s been musing over this general subject for a while now. At long last, I think I can string together a few coherent thoughts. Warning: We’re going to go far afield here…

Among government’s many misdeeds, this might be the worst: Government is serving to retard the evolution of mankind — and at a critical juncture.

Anywhere on the globe that capitalism managed to get a foothold for a reasonable amount of time — and where war has not broken out — technology has reached a point of easily meeting the basic human needs for survival and safety. We’re talking food, clothing, shelter, heat.

Indeed, there’s a fair amount of material comfort to be had with a minimum of effort. If you define wealth as something you either grow or mine or manufacture, we’ve got a working template now. The bottom two levels on Maslow’s hierarchy of needs? Check ’em off. Done.

Maslow’s hierarchy, as depicted on Wikipedia by user FireflySixtySeven

Now, there’s not much that capitalism and technology can do about the next three levels. But it doesn’t need to. It’s already solved the conundrum of the first two.

That should free us up to pursue the top three with alacrity, right? The four-hour workday that Benjamin Franklin envisioned in the 18th century should be our birthright by now.

With the wonders wrought by capitalism and technology, there should be ample time we can devote to deepening our interpersonal relationships and our spiritual lives. To grow closer to each other, and to God (however you might define that). Isn’t that’s the logical endpoint of human evolution after these many millennia of physical struggle?

But as the reader says, there we are — “working hard and hustling to make ends meet while balancing high costs of living and debt loads.”

Or to borrow the excellent phrase often used by the financial blogger Charles Hugh Smith, we’re too busy being tax donkeys — in service to government, yes, but also to the institutions that have co-opted government to extract wealth from the productive classes. Wall Street. Health care. Higher education. The military-industrial complex. And behind it all, the dead hand of central banking and unsound money.

Of course, most tax donkeys have no idea that’s what’s going on. They’re too busy, as the reader says, “earning and burning.” Think about Federal Reserve policy? Sorry, that just fries the ol’ brain circuits after a day of work, doctor’s appointments and parent-teacher conferences.

And so when that too-rare moment of “downtime” and solitude comes along, they’re too exhausted — mentally, spiritually, perhaps physically — to do anything other than…

… zone out and check their Facebook feed.

So on further reflection, the fellow who wrote in yesterday is right. Mark Zuckerberg really is the face of 21st-century entrepreneurship. God help us…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. One more reader note: “I actually bought the put option on FXB on Thursday — the day of the Brexit vote — for $4.40 and missed the sell alert on Friday. So I sold on Monday for $12.20.

“That’s 275%. Brag on. Thanks Jim and company.”

We’re heartened to hear it worked out so well.

Don’t worry if you missed out. The next wave of profits generated by Jim’s proprietary “Kissinger Cross” technique is on the way. Start here to claim your share.


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