12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis 30 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…

… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”

Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…

… rising  significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.

Meanwhile, as the world is blanketed by Edwards’ Ice Age, one can see the spread of negative rates both in space and in time. As JPMorgan shows, the spectrum of negative yielding universe expanded this year not only from shorter   duration to longer duration government bonds but also down the risk spectrum from core Euro area government bonds to bonds issued by Peripheral countries as shown below.

The next chart shows the proportion of bonds in negative territory as a % of total bonds in each maturity bucket across various countries within the JPM GBI Broad index. In Europe, we now have four counties, Denmark, Germany, Netherlands and Finland with their full maturity spectrum trading with negative yields. Most periphery countries have at least a portion of their maturity spectrum trading with negative yields.

Here, a perverse “negative gamma” type of feedback loop emerges, as this growing universe of negatively yielding bonds becomes self-reinforcing as certain investors such as insurance companies and pension funds rush to avoid locking in negative yields to maturity. This has been a contributing factor to the significant flattening of the Euro area and Japanese curves, with most curves now firmly in negative territory, and leaves USTs as the last high yielder left among core bond markets. Indeed, as BofA shockingly found yesterday, the US share of global investment grade yields has climbed to 94% in the entire world, and is set to become 100% in the coming days..

Making matters worse, when factoring in currency hedging costs, only the very long-end of the UST curve still offers a positive yield for European and Japanese investors, meaning they may be forced to consider spread product such as MBS or HG corporate bonds instead. Indeed, the latest TIC data showed that while USTs have seen cumulative outflows of nearly $30bn YTD, Agency and corporate bonds have seen inflows of $160bn.

And looking at the flows from Japanese and European investors into foreign bonds, both have seen an acceleration in outflows since the turn of the year as the bond market rally has intensified, with the cumulative outflows from Japanese investors YTD in particular running at their fastest pace since January 2016 when the BoJ cut deposit rates into negative territory.

So what are the global, economic and financial implications of this gradual Japanification and relentless decline into ever more negative interest rates?

As JPMorgan Nikolaos Panigirtzoglou writes in this week’s Flows and Liquidity, a broader issue concerns the impact of negative rates on asset allocation, noting that “there is little doubt that negative yields are causing a distortion in the pricing of duration and credit risk as pension funds and insurance companies are forced to move further up the maturity and credit curve  to avoid negative yields.” In other words, both duration, ie term premia and credit risk premia, are likely distorted and are likely to be distorted further if the universe of negatively yielding bonds expands further. The immediate implication is that, according to the JPM analyst, “government yield curves and credit spread curves are losing their information content.” Indeed, as Panigirtzoglou adds, “the fact that the 3m10y or 2y10y UST spreads have inverted is less of a reflection of US  recession risks and more of a reflection of the desperation for yield by foreign investors flocking into USD denominated bonds as bond yields turned more negative in Europe and Japan.”

Meanwhile, US recession risks are elevated by the inversion at the front end of US money market curves which are less distorted by foreign flows, rather than the inversion of 3m10y or 2y10y UST spreads. Similarly, the fact that credit spreads have tightened, especially in Europe, is less of a reflection of an improving economy and more a reflection of European pension funds and insurance companies being forced to shift into corporate bonds to avoid very negative yields in the government space. In addition, it is likely exacerbated by expectations of the ECB restarting QE, including corporate bond purchases.

What about the impact of negative bond yields on equities?

Specifically, will negative rates force pension funds and insurance companies or other investors that dislike negative rates to move to equities? Or will pension funds and insurance companies hoover everything with positive yields in the fixed income space, including alternatives such as private debt, and avoid equity asset classes?

If the latter is the case and pension funds and insurance companies, a $53 trillion AUM universe in the G4 economies, avoid equities either because of regulatory constraints or demographics or simply because negative bond yields create a sense of an abnormal and uncertain environment, then the yield compression in the fixed income space could fail to spill over to equity asset classes, according to JPM. This means that the mirror image of lower bond yields would be higher rather than lower Equity Risk Premia. Indeed, the bank’s Equity Risk Premium proxy for the S&P500 index shows that since negative yields started emerging in core bond markets post the first ECB move to negative policy rate territory in June 2014, Equity Risk Premia have risen rather than fallen. This, for central banks hoping that negative rates will force stock prices to record highs, is a truly stunning development.

There is a similar picture with real estate. By JPMorgan estimates, property yields for the most liquid real estate markets in the world, i.e. US commercial real estate, show that yields have declined only modestly over the past year despite a compression in government bond yields. The compression in government bond yields has failed to spill over in any strong way into real estate implying that real estate risk premia vs government bonds have risen rather than fallen over the past year

In other words, as the JPMorgan strategist warns, “the hope that central banks experimenting with negative rates have that negative rates will cause a compression in risk premia in riskier asset classes beyond fixed income markets, such as equities and real estate, might not materialize.

Needless to say this would be a historic catastrophe for capital markets, where central banks – in control over interest rates for the past century – will have officially lost control as lower rates no longer lead to easier financial conditions and higher asset prices.

A second and perhaps more important issue is about the unintended consequences of negative rates.

As readers will recall, it was back in February 2016 that we presented a JPMorgan analysis from Panigirtzoglou, in which he argued that there are several unintended consequences from very negative policy rates, with little evidence of a positive impact in Switzerland and Denmark, two of the earliest countries experimenting with very negative policy rates.

So now that there is a new record amount of negative-yielding debt, it is time revisit these unintended consequences below:

1. Lower bank profitability

It is true that a tiered deposit rate scheme, pioneered by Danish and Swiss central banks, introduced later by the BoJ and now considered by the ECB, reduces the burden on banks from taxing reserves. This is because only a portion of bank reserves are subjected to very negative interest rates. Indeed, the experience from Switzerland, Denmark and Japan is that subjecting even a small portion of reserves to the lower deposit rate could be enough to generate the marginal flow needed to push interbank rates or bond yields lower. In other words, a tiered deposit scheme can result in lower interest rates without penalizing banks too much.

However, even if the portion of reserves subjected to deeply negative rates is limited, banks are not immune to a reduction in net interest income, especially if interest rates move deeper into negative territory. This is because banks seem unable or unwilling to pass negative deposit rates to their retail customers, leaving them with few options to offset costs. These costs not only include the negative interest on their reserves with the central bank (which can be limited by a tiered scheme) but also include reduced income from security holdings as government bond yields turn negative and a potential loss in income from reduced credit creation and money market activity.

Indeed deeply negative policy rates have taken their toll on Danish, Swiss and Japanese banks’ net interest income

As JPM points out (and as it will find out soon enough personally), net interest income as % of assets has been on a declining trend since early 2015 for both Danish and Swiss banks following the introduction of very negative policy rates in these countries. In Japan, net interest margins had already deteriorated markedly by early 2016 when the BoJ adopted negative rates, but a shallower decline has continued. By contrast, net interest margins for Euro area banks appear to have held up somewhat better at least at the regional level. That said, there has been little decline in new lending rates after the ECB pushed lending rates into more negative territory in end-2015 and early 2016 even as the ECB’s second TLTRO program has helped reduce funding costs by providing funding at -40bp for banks that met relatively generous lending targets, likely supporting net interest margins.

And the contrast between banks in countries where central banks have experimented with negative deposit rates, where net interest margins have at best remained stable as in the case of the Euro area, and the US, is striking. In the latter, banks saw an improvement in net interest margins from a trough in 2016 against a background of rising central bank policy rates and despite credit creation if anything slowing modestly since early 2016, as well as a flattening  in the US yield curve.

2. Reduced rather than increased credit creation to the real economy

First the good news: according to Panigirtzoglou, the introduction of modestly negative policy rates appears to have had a positive impact on credit creation. Overall credit creation improved in Denmark during 2013 and 2014 following the introduction of modestly negative policy rates in the summer of 2012. The ECB introduced negative rates in the middle of 2014 and credit creation saw a marked improvement in the Euro area with a shift from contraction to modest expansion. Sweden introduced modestly negative policy rates in 2015 and during last year credit creation to the real economy including households and non-financial corporates improved (to SEK52bn in the first three quarters of last year vs. SEK46bn for the whole of 2014).

Now the bad: there was little evidence that very negative policy rates helped credit creation further. Denmark and Switzerland introduced very negative policy rates in 2015. Credit creation to the real economy deteriorated in Denmark during 2015 vs the previous year. Indeed, it deteriorated from around DKK80bn in 2014 to DKK74bn in 2015, before subsequently increasing above DKK80bn from 2016 onward. In Switzerland the total stock of loans rose by just CHF11bn in 2015 compared to CHF31bn in 2014. Subsequently, growth in the stock of loans has risen to CHF25-40bn per year in 2016-2018, but has not surpassed the CHF46bn seen in 2013. So the evidence from Denmark and Switzerland is that the introduction of deeply negative interest rates was initially accompanied by a deterioration rather than improvement in credit creation. The subsequent recovery in lending is likely at least in part tied to an improving global growth backdrop after 2015, though at least it suggests that credit growth was not permanently weakened.

The initial evidence on credit creation from the Euro area was mixed at best: net credit creation in the Euro area declined sharply during the Euro area crisis and remained weak even as the ECB pushed deposit rates to -20bp in 2014. It subsequently recovered, though to fairly muted growth rates by historical standards. And pushing deposit rates further into negative territory at the Dec15 and Mar16 meetings did not appear to boost lending growth rates further.

So the initial experience of policy rates being pushed into very negative territory was that it was associated at best with little clear impact on credit creation and in some cases in outright contraction in loan creation, and the subsequent recovery seems subdued by historical standards.

3. Higher rather than lower bank lending rates

The message is similar to that from credit creation: the introduction of modestly negative policy rates appears to have resulted in a decline in bank lending rates to the real economy, i.e. to households and non-financial corporations. Overall bank lending rates for new loans improved in Denmark during 2013 and 2104 following the introduction of modestly negative rates in the summer of 2012. The ECB introduced negative rates around the middle of 2014, pushing the deposit rate to – 20bp, and bank lending rates also declined since then. Sweden introduced modestly negative policy rates in 2015 and bank lending rates to the real economy, including households and non-financial corporates declined during 2015.

But there was less support for the idea that deeper negative policy rates helped to further reduce bank lending rates. Denmark and Switzerland introduced very negative policy rates in 2015. In Denmark bank lending rates for new loans to non-financial corporations declined by around 40bp during 2014, but rose from late 2014 to mid-2015 by around 20bp. Bank lending rates for new loans to households declined by around 100bp during 2014 but were essentially flat during  2015 after initially rising by 60bp in 1H15. In Switzerland, bank lending rates for new investment loans to non-financial corporations went marginally higher by around 5bp during both 2015 and 2014. Bank lending rates for 10y fixed-rate mortgage loans declined until January 2015, and increased until mid-2015 before drifting towards Jan-2015 levels over the following year. Bank lending rates for variable-rate mortgage loans linked to a base rate fell until Jan15, before rising modestly by mid-2015. In the Euro area, where lending rates on new business for both households and non-financial companies declined by around 50bp during 2014, declines from late 2015 to mid-2016 when deposit rates were pushed deeper into negative territory, were more modest at around 20bp for NFCs. And while households saw larger declines in mortgage rates, rates for new loans for consumption were essentially flat.

Subsequently, the experience with deeply negative policy rates has been mixed. In Denmark, new loan rates to both NFCs and households declined by around 60bp from late 2016 to mid-2019. In Switzerland, bank lending rates for new investment loans to NFCs stabilized and were little changed in 2016-17, and declined by 5bp during 1H18 before stabilizing again. Lending rates for new 10y fixed-rate mortgages drifted 20bp higher from late 2016 to October 2018, before the bond market rally since then have seen fixed rate mortgages decline. And, despite a 50bp cut in the policy rate to -75bp in early 2015, rates on new variable interest rate mortgages linked to the policy rate declined around 10bp in total from early 2015 to late 2016 before stabilizing. In the Euro area, by contrast, loan rates on new business to NFCs and households have been relatively little changed since mid-2016. And in Sweden, new loan rates to households and NFCs have been largely stable since mid-2015.

So the evidence from Switzerland, the Euro area and Sweden appears to be that deeply negative policy rates have overall seen little further decline of lending rates as banks, whose deposit rates are largely floored at zero, struggle to avoid depressing their net interest margins further. Only in Denmark have lending rates continued to decline in subsequent years

4. Higher rather  than lower savings rates by households and non-financial corporates.

This was a big shock when we first pointed it out back in 2015, and quickly became one of Jeff Gundlach’s favorite talking points. For example when we look at household sector savings rates in the US, Euro area and Japan there is little evidence of lower savings rates in the Euro area and Japan, which had introduced negative policy rates in recent years, relative to the US.

Similarly there is little evidence that the non-financial corporate sectors of Euro area and Japan have reduced their financial surplus by more than the US since the introduction of negative policy rates in 2014. Higher uncertainty and the pressure to save more for retirement are likely behind persistently high savings rates by both households and companies.

5. Impaired functioning of money markets

As previously discussed, negative rates coupled with QE had caused significant slowdown in money market activity: they quite literally are an ice age . Indeed, daily data show that both unsecured (EONIA volume) and secured (GC Pooling EUR overnight index volume) money market volumes have downshifted significantly since the ECB introduced negative rates in mid-2014 and accelerated once the ECB started its bond purchase program in early 2015, and pushed  rates into more negative territory in late 2015/early 2016.

And there has been at best modest signs of improvement after the ECB ended its QE program more recently. Indeed, unsecured volumes have declined further from a daily average of €4bn in 2018 to €2.4bn in 2019 to-date, though secured volumes have firmed modestly from a daily average of around €3.2bn in 2018 to €3.8bn in 2019 to-date. The collapse in money market volumes over the past years is concerning and shows that negative depo rates can make the functioning of money markets problematic even after QE is halted. Moving deeper into negative territory could exacerbate this problem.

6. Reduced liquidity in bond markets

There is also a risk that, not only the functioning of money markets that becomes impaired, but that according to JPM, liquidity in bond markets could also be affected by negative bond yields as real money investors are in principle less
willing to trade bonds with negative yields. The next chart shows that the market depth of 10-year German government bond futures declined sharply this year as yields turned negative, reversing much of the improvement that occurred since mid-2016, when 10y Bund yields also turned negative. Previous sharp declines in market depth have also been associated with sharp sell-offs such as the 2015 VaR shock and in the aftermath of the US presidential election in 4Q16, but the magnitude of decline in market depth since the start of 2019 stands out  nonetheless.

7. Increased rather than reduced fragmentation

According to JPM’s Panigirtzoglou, there has been no improvement in the “fragmentation” of interbank markets since the first ECB depo rate cut in June 2014. ECB data show that the share of cross-border unsecured overnight interbank activity stopped improving in 2014 after rapid improvement during the second half of 2012 and during 2013. Moreover, the Euro Money Market Survey for September 2015 showed that a greater portion of the unsecured market was with national counterparties at 46% in 2015 relative to 41% in 2014. The equivalent shares for the secured market were 27% for 2015 vs. 24% in 2014; i.e. there was also deterioration in cross peripheral government paper in Euro repo markets has in fact declined between mid-2014 and mid 2015 according to the semiannual ICMA repo market survey.

Since then, the latest ECB annual financial integration indicators, from July 2019, suggest the proportion of secured and unsecured money market transactions completed with domestic counterparties has increased from 25% in 2015 to 40% in 2019. The use of cross-border collateral in ECB monetary policy operations, which had recovered from a low of around 20% in late 2013 to close to 30% by early 2015 even as policy rates moved into modestly negative territory before stabilizing, has been declining steadily since mid-2016. And the interquartile range of euro area countries’ average unsecured interbank lending rates drifted higher from mid-2014 to mid-2016 as policy rates were pushed into steadily more negative territory. From mid-2016, when the ECB’s TLTRO 2 operations were conducted, the interquartile range narrowed until early 2018, after which it has widened again sharply.

In addition, there has been deterioration in Target 2 balances since mid-2014, the broadest among quantitative measures of fragmentation. The sum of Spanish and Italian Target 2 balances has deteriorated by moving deeply into negative territory since the ECB first cut its depo rate to negative. After hitting a high of -€347bn in July 2014, the sum of Spanish and Italian Target 2 balances have been steadily declining and reached a low of €893bn in November 2018 before increasing slightly.

The reasons for the Target 2 widening have been somewhat different after the ECB started QE compared to the Euro area sovereign crisis. As we have argued previously, the more recent decline has likely been exacerbated by investors from outside the Euro area, who often hold cash accounts in core countries, selling e.g. Italian bonds to the Bank of Italy, this registers as an increase in the Target 2 liability. Nonetheless, this decline in the Target 2 balances still represents a measure of fragmentation.

In all, the evidence from money markets and Target 2 balances is at best mixed in terms of fragmentation, with some deterioration in some metrics, since the ECB introduced negative depo rates in June 2014. This is not to say that negative depo rates didn’t bolster the search for yield in the government space and the velocity of reserves, i.e. passing on the “hot potato” within the Euro area banking system. It did, as evidenced by the collapse in interest rates, the rapid expansion of the universe of negatively-yielding government bonds in the euro area core, and the concentration of reserves in core banks’ balance sheets. But while there have been capital inflows into some periphery countries, notably Spain, Italy has seen outflows particularly from bonds.

What is the channel via which negative policy rates could increase fragmentation? One potential channel is the risk appetite of banks. To the extent that negative policy rates hurt bank profitability, banks might become less willing to take risk and thus less willing to lend in interbank markets or to take credit risk in their bond portfolios. On the latter, there appears to be support from much of the academic literature that negative rates have depressed lending volumes for banks with high deposit shares. At the same time, work by the ECB (by Demiralp et al, May 2019) using Euro area bank level lending data suggests when controlled for both high retail deposit ratios and high negatively yielding excess liquidity ratios, as banks particularly exposed to negative rates, there has been a positive relationship with lending. As the ECB contemplates pushing deposit rates into even more negative territory, this is clearly a key issue – could more negative rates backfire by putting more pressure on bank profitability and curb risk-taking?

8. Lower bond yields increase pension fund and insurance company deficits putting pressure on pension funds to match assets and liabilities.

This pressure to move further away from equities and other high risk assets into fixed income is even stronger in countries like Japan where demographic pressures are more intense. For example, old age dependency ratios, i.e. the proportion of the population aged 65 years and over as a percentage of the population aged 15-64 years, have been rising steadily, with Japan aging more rapidly than the US or Europe.

Generally, an aging population means that allocations are likely to shift towards relatively safer instruments as the ability  to withstand larger drawdowns on capital diminishes as individuals age. And the effect of these  demographic rends is likely a factor in the high share of total assets held in bonds by Japanese pension funds, especially relative to their US counterparts.

What is striking in Japan is that, in contrast to GPIF, which shifted towards equities post Abenomics most likely under political pressure, private Japanese pension funds have if anything reduced their equity allocations modestly

In general pension funds and insurance companies including those outside Japan are facing an increase in their liabilities and as a result a deterioration in their funded status. And the options pension funds and insurance companies are limited. On the asset side they can increase duration risk by shifting into even longer maturity bonds, increase credit risk by shifting into even riskier spread products, and increase fx risk by shifting into higher yielding foreign bonds. On the liability side they reduce benefits to new and sometimes existing plan beneficiaries, or they ask plan sponsors to increase their contributions.

Pension funds and insurance companies which are facing a big increase in their liabilities have limited options such as taking a lot more fx and credit risk by shifting to foreign government or corporate bond markets, reducing benefits to new and sometimes to existing plan beneficiaries, or ask plan sponsors to increase their contributions. The overall impact is that lower yields can induce households, or companies that act as plan sponsors, to save even more for the future, an argument we have made since 2014, and one which not a single economist appears able to grasp.

9. More income and wealth inequality as households and small businesses fail to benefit or are even hurt from negative rates.

The main beneficiaries of negative rates have been large corporates which have seen a collapse to their interest expense as well as private equity companies that are able to lever by even more than in previous cycles to amplify their profits. Indeed, the median debt to EBITDA ratio for both HG and HY companies has risen in recent years to well above the peaks seen in previous cycles.

10. Central banks are trapped.

Negative rates coupled with QE raise questions about central banks’ exit potentially becoming more difficult in the future and raise the risk of a policy error as well as perceptions about debt monetization. It potentially creates bond bubbles by lowering bond yields below their equilibrium or fair value, creating fears that an eventual return to normality could be accompanied by sharp price declines. Perceptions about bond bubbles can increase long term uncertainty. In turn, higher uncertainty might prevent economic agents such as businesses from spending.

11. The death of creative destruction and the zombification of corporations

Low credit spreads and corporate bond yields are an intended consequence of negative rates as pension funds
and insurance companies are forced to shift up both the maturity and credit curve, but not without distortions. By
potentially allowing unproductive and inefficient companies to survive, helped by low debt servicing costs, negative rates could potentially hinder the creative destruction taking place during a normal economic cycle. In principle, similar to QE, negative rates could thus make economies less efficient or productive over time. The debate about so called “zombie” companies has been particularly intense in Japan given the low business turnover rate. According to OECD, Japan’s business startup and closure rate is about 5%, roughly a third of that in other advanced economies with several commentators blaming the BoJ’s ultra-accommodative policies for this problem.

12. QE could exacerbate so called “currency wars”.

The value of the Japanese yen collapsed after Abenomics started in November 2012 and has stayed at historical lows since then helped by BoJ’s ultra-accommodative monetary policy. This is shown in the next chart by the real trade weighted index of the Japanese yen.

Japan’s main competitors across EM and DM have been feeling the pressure from this depreciation, though it is not clear that the depreciation necessarily means the yen is undervalued. Similarly, more recently, the ECB’s prospective shift towards more negative rates is currently putting downward pressure on the euro vs the dollar risking a response by the US administration

* * *

Putting all of the above together, JPMorgan warns that moving to very negative policy rates – as the world is clearly doing now – by central banks is not without risks or side effects. Modestly negative policy rates had perhaps an overall positive impact initially, but keeping rates in very negative territory for prolonged periods or navigating to even deeper negative territory could unleash more unintended consequences than benefits. Just like QE, which from an emergency medicine to prevent the world from dying became a laxative to be used daily to prop up stock markets for the better part of the past decade. 

Still, in JPM’s opinion, this does not mean that central banks are without ammunition. Shifting to purchases of assets  other than government bonds such as corporate bonds or bank loans has been used only sparingly so far. Even modest amounts of bank loan purchases could be more powerful than large purchases of government bonds, even if this implies central banks assuming more risk. This is especially true in the euro area where several countries face a persistent drag from non-performing loans, and where the ECB is very likely to get actively involved in reducing NPLs further by outright buying the loans.

Ironically, even the JPMorgan strategist warns that he is “rather reluctant to advocate purchases of equities given the lack of a positive impact from BoJ’s equity ETF purchases so far, either in terms of the relative performance or the liquidity of the Japanese equity market.”

Finally, in a claim that may spark a vendetta between Panigirtzoglou and Albert Edwards, the JPM strategist concludes that “negative rates are neither unavoidable nor necessary.” As he explains, “Japanization didn’t imply negative yields before the BoJ experimented with negative policy rates, following the experiment of the ECB. And negative rates do not appear to have delivered more effective stimulus and helped Japan to exit its longstanding economic malaise.”

Panigirtzoglou goes one further, and in debunking a rather vocal financial troll who somehow has a prime time presence on financial TV and media, says that according to conversations with clients “the experiments of central banks with negative rates are viewed more as a policy mistake rather than stimulus and create a sense of an abnormal and uncertain environment that damages not only banks but also consumer and business confidence.

It is this sense of abnormality and uncertainty that makes businesses and consumers less rather than more keen to spend and banks more rather than less averse to taking risk and extending credit to the real economy.

Which is also why if and when negative rates are adopted by every central bank in the world, the consequences for society, for the economy, and for capital markets will be nothing short of catastrophic.

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Author: Tyler Durden

The Biotech-Industrial Complex Gets Ready To Define What Is Human

Authored by Stuart Newman via Counterpunch.org,

Fabricating part-human-part-nonhuman animals, with features of both, seemed like something out of Greek mythology until the late 20th century. New research then on “geeps,” fully developed, viable mixtures of goats and sheep, showed that constructing such “chimeras” was a real possibility. Still, the warning by H.G. Wells, a century before, in his novel “The Island of Dr. Moreau,” that scientific experiments like this could go terribly awry, seemed fantastical. But this will soon change. At the end of July, it was reported that the biologist Juan Carlos Izpisúa Belmonte, director of a laboratory at the Salk Institute in California, produced fetal human-monkey chimeras. He did this in collaboration with researchers in China. And this month the Japanese government is expected to give the go-ahead to scientist Hiromitsu Nakauchi, leader of teams at the University of Tokyo and Stanford University in California, to conduct similar experiments with the goal of bringing human-pig chimeras to full term. These novel forms of life will soon be among us.

Dr. Nakauchi acknowledges that the concerns of Wells and later writers like Aldous Huxley, author of “Brave New World” (1932), which similarly envisioned technologically calibrating degrees of humanness, are not farfetched. The art of getting the human cells to the right places in the composite animals is worse than imperfect, as are most manipulations of embryos. Developmental biology is simply not the kind of science that can guide an engineering program. Will the resulting mice and pigs have human consciousness? How this will be ascertained is not clear, but if they do Dr. Nakauchi assures us he will destroy them and stop the experiments.

The newly approved human-animal chimera procedures are just some of a number of scientifically and ethically questionable techniques that are being soft-pedaled and normalized on a daily basis by panels of experts advised by financially motivated bioentrepreneurs. In 1997, I applied for a patent on such part-human creatures. I had no intention of producing a chimera. But as a biologist whose work requires close tracking of the relevant scientific literature, I knew that part-human organisms could eventually be produced and that we were quickly approaching an era of deconstruction, reconfiguration, and commodification of human biology. The public deserved a heads-up.

The announcement of the chimera patent application in 1998 was met with derision and accusations of bad faith by the then U.S. Patent Commissioner, and some biotechnology executives and scientists as well. The chair of genetics at Harvard Medical School, for example, asserted that “[t]he creation of chimeras is an outlandish undertaking. No one is trying to do it at present, certainly not involving human beings.” A little over two decades later, however, a once grotesque development has been normalized and approved by experts.

In fact, there are numerous cases in the past four decades of interested parties playing down individual risk and potential societal impact of medically related procedures while making inflated promises based on the claimed novelty of the same methods. Advocates from the entrepreneurial side will often advertise prospective cures with oversimplifications that attribute undue power and singular action to favored (often patented) genes. From the scientific side there have been corner cutting in qualifying patients for treatments and misleading characterizations of the nature of and uncertainties around techniques to alter prospective humans.

An egregious example was one motivated by the understandable desire to avoid propagation of mitochondrial disease. It involved the renaming of the methods for transferring one woman’s egg cell nucleus (containing about 20,000 genes) into a second woman’s egg, leading to embryos constructed from cells of three persons. What was, essentially, a type of cloning was rebranded as “replacement of mitochondria” (involving only 23 genes). This procedure was sold on these deceptive terms to the people of the U.K., where it was approved and is now under way.

The “CRISPR” gene modification of embryos is the latest development being dealt with by expert panels. They will be the arbiters of when the technologically inevitable will occur.  But any dispassionate consideration of the extreme nature of what these methodologies can produce should shake us into a realization that the public needs to be made aware of what is underway and have their voices heard on what will surely change our concept of human identity.

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Author: Tyler Durden

UPS Has Secretly Been Using Self-Driving Freight Trucks For Months

For the last few months, UPS has been using autonomous trucks to haul loads on a 115-mile route between Phoenix and Tucson, Arizona. 

The company announced that its venture capital arm had made a minority investment in San Diego-based autonomous software copmpany TuSimple, as confirmed with the company by GizmodoTheir system uses nine cameras and two LIDAR sensors. 

TuSimple claims it can cut the average cost of shipping in a tractor-trailer by 30 percent. In an announcement about the new partnership, UPS Ventures managing partner, Todd Lewis, said the venture arm “collaborates with startups to explore new technologies and tailor them to help meet our specific needs.” –Gizmodo

And according to Verge, TuSimple has implemented its autonomous techonlogy in Navistar vehicles. 

While the current system requires a backup human driver and an engineer, TuSimple has been working with UPS to achieve full, “Level 4” human-less autonomy

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Author: Tyler Durden

Mass Media’s Phony Freakout Over Bernie’s WaPo Criticism Is Backfiring

Authored by Caitlin Johnstone,

After days of ridiculous, hysterical garment rending by mass media talking heads in response to Senator Bernie Sanders’ utterly undeniable assertion that The Washington Post has displayed unfair bias against his campaign, people with extensive experience in the mainstream press who are fed up with the lies are beginning to push back. Hard.

Former MSNBC producer Jeff Cohen has published an article in Salon titled “Memo to mainstream journalists: Can the phony outrage; Bernie is right about bias”. Cohen details his experience with the way corporate media outlets keep a uniform pro-establishment narrative running throughout all their coverage without their staff having to be directly told to to do this by their supervisors (though sometimes that happens, too). He writes as follows:

“It happens because of groupthink. It happens because top editors and producers know — without being told — which issues and sources are off limits. No orders need be given, for example, for rank-and-file journalists to understand that the business of the corporate boss or top advertisers is off-limits, short of criminal indictments.

“No memo is needed to achieve the narrowness of perspective — selecting all the usual experts from all the usual think tanks to say all the usual things. Think Tom Friedman. Or Barry McCaffrey. Or Neera Tanden. Or any of the elite club members who’ve been proven to be absurdly wrong time and again about national or global affairs.”

Cohen’s exposé follows the phenomenal segment recently aired on The Hill’s show Rising, in which former MSNBC star Krystal Ball and her co-host Saagar Enjati both detailed their experience with the way access journalism, financial incentives, prestige incentives and peer pressure were used to push them each toward protecting establishment narratives in their respective mainstream media careers. Ball said at one point she was literally called into the office and forbidden from doing any critical Hillary Clinton coverage without prior approval in the lead-up to the 2016 election, saying that in mainstream journalism jobs “you are aware of what you’re going to be rewarded for and what you’re going to be punished for, or not rewarded for.”

“It’s not necessarily that somebody tells you how to do your coverage, it’s that if you were to do your coverage that way, you would not be hired at that institution,” Enjati said. “So it’s like if you do not already fit within this framework, then the system is designed to not give you a voice. And if you necessarily did do that, all of the incentive structures around your pay, around your promotion, around your colleagues that are slapping you on the back, that would all disappear. So it’s a system of reinforcement, which makes it so that you wouldn’t go down that path in the first place.”

Rolling Stone’s Matt Taibbi has also jumped in to push back against the absurd denials of bias from the establishment media, publishing a new article titled “The Campaign Press: Members of the 10 Percent, Reporting for the One Percent — Media companies run by the country’s richest people can’t help but project the mindset of their owners.” Taibbi, an award-winning journalist with lots of experience in the news media industry, writes that pro-establishment narratives are advanced in mainstream press not because some explicit order is handed down by a media-owning oligarch, but because “We all know what takes will and will not earn attaboys in newsrooms.”

Taibbi writes the following:

“The news media is now loathed in the same way banks, tobacco companies, and health insurance companies are, and it refuses to understand this. Mistakes like WMDs are a problem, but the media’s biggest issue is exactly its bubble-ness, and clubby inability to respond to criticism in any way except to denounce it as misinformation and error. Equating all criticism of media with Trumpism is pouring gasoline on the fire.

“The public is not stupid. It sees that companies like CNN and NBC are billion-dollar properties, pushing shows anchored by big-city millionaires. A Vanderbilt like Anderson Cooper or a half-wit legacy pledge like Chris Cuomo shoveling coal for Comcast, Amazon, AT&T, or Rupert Murdoch is the standard setup.”

Taibbi is correct. Trust in the mass media continues to plummet, and these stupid, nonsensical hissy fits they throw whenever criticized are only making it worse.

What cracks me up most about all this is that the faux outrage over Sanders’ criticisms of The Washington Post was completely unnecessary for everyone involved. They could have just ignored it and let the news churn bury it, but they’re so insulated in their little echo chambers that they seriously believed they could get the public rallying to their defense on this. The general consensus was something like “Ah ha! Bernie did that media-criticizing thing that we all agreed nobody’s allowed to do anymore! We’ve got him this time, boys!”

And all they accomplished in doing this was giving honest journalists an opportunity to inform the public about the insider tricks of their trade. You may be absolutely certain that the information that has been given to the public by Cohen, Ball, Enjati and Taibbi will remain in high circulation throughout the Sanders campaign in response to the increasingly shrill torrent of establishment smears, breaking the spell of mainstream media trust for all who view it.

All these damning insider criticisms of the mainstream American press are coming out at the same time a new Rasmussen poll finds that less than one third of the US population believes the story they’re being told by the corporate media about the highly suspicious death of accused sex trafficker Jeffrey Epstein. Despite the mass media’s mad push to tar anyone questioning the official narrative about Epstein as a loony “conspiracy theorist”, only 29 percent of those surveyed reported that they believed Epstein had committed suicide as they’ve been told, while 42 percent believe he was murdered. Never in my life have I seen such a widespread and instantaneous rejection of an establishment-promulgated narrative in the United States.

This is hugely significant. The entire imperial oppression machine is held together with aggressive plutocratic propaganda; the ability of the ruling class to manipulate the way people think, act and vote is the only thing stopping the public from using the power of their numbers to force real changes and create a new system that is not built upon endless war, ecocide and exploitation. The mass media propaganda engine is now at its weakest and most vulnerable point ever, and the narrative managers’ attempts to regain control are only exposing them more severely.

Power is the ability to control what happens. Absolute power is the ability to control what people think about what happens. Our rulers are rapidly losing this absolute power.

People are waking up.

*  *  *

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Author: Tyler Durden

Circular Investing 101: Softbank To Lend Billions To Founder, Employees To Invest In Second Fund

The Soft Bank Vision Fund Pt. II is supposed to pick up whee is predecessor left off. With some $108 billion from a smattering of corporate giants, pension funds and sovereign wealth fund already committed, the VFPt2 is expected to start putting money to work as soon as October, at which point it will likely be the largest pool of private capital ever raised. 

The timing is particularly important since, due to obligations and disbursements to its early investors, the original fund is almost officially tapped out.

Soft Bank’s Masayoshi Son

But in an unusual strategy intended to juice Pt. 2’s AUM, the FT and WSJ both reported over the weekend that the company is planning to lend money to the firm’s founder, Masayoshi Son, and several other high profile employees to the tune of some $15 billion to $20 billion so that they, in turn, can invest in VFPt2.

In other words, Soft Bank is doing everything it can to push the leverage for its latest Vision Fund to ensure that its debut is as grandiose as possible.

To describe this strategy as unusual is an understatement. Typically, investment firms reward employees for their hard work on assembling and marketing a fund by bequeathing them a share of the profits. Instead, Soft Bank is setting up a different system that will doubly expose both the company and its employees to the fund should returns head south.

At $20 billion, the employee pool would represent nearly 20% of the money that Soft Bank said it had raised last month for its second Vision Fund. Of course, this money comes on top of the $38 billion in Soft Bank’s own money that it’s planning on investing in to the fund (following the completion

On top of that, Soft Bank has committed $38 billion of its own money for the fund (much of which will ideally come from the T-Mobile Sprint merger). This, combined with the employee loans, means that more than half of VFPt2 will consist of Soft Bank’s own money, leaving the company, and its employees extremely exposed should its returns go south. Then again, despite high-profile flops like the Uber IPO, Vision Fund Pt.1 still posted blockbuster returns of roughly 50%, or more, according to Masayoshi Son.

A similar arrangement whereby the company lent money to employees for the explicit purpose of them buying into the fund, adding even more leverage than most investors realize. According to the FT, employee contributions to funds like this typical range around 5% of total AUM, and the money typically doesn’t come in the form of loans that boost the company’s exposure. All told, Soft Bank’s position into the fund is already being financed by debt, and these employee loans will only increase the leverage ratio.

Still, the company hasn’t finished raising money for VFPt2 yet. SoftBank is aiming to announce a first close of its latest Vision Fund by October, so that Masayoshi Son can continue his spending spree. In the mean time, he’s continuing to try and recruit Saudi Arabia and the UAE to commit more capital to the second fund.

Other investors in the fund include a Kazakhstan sovereign wealth fund, which is likely to contribute about $3 billion, and several banks, including Goldman Sachs Group Inc., Standard Chartered and Japan’s Mitsubishi UFJ Financial Group. SB’s bankers are still hard at work trying to win more capital.

Underscoring all of this is the WeWork IPO, which is expected to drop in September. Vision Fund Pt. 1 invested $2 billion in the ‘community lifestyle’ company.

Just like it did with its first Vision Fund, many expect Soft Bank will IPO Vision Fund Pt. 2, allowing early investors the opportunity to exit early.

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Author: Tyler Durden

Violence Breaks Out Between Antifa And Proud Boys Despite Heavy Police Presence; Bus Attacked, Chased

Update: 5:30 EST – While Portland PD did a reasonably sufficient job separating the protesters, there were several scuffles which broke out. In one instance, Antifa attacked conservatives who boarded a bus – hitting and kicking it, spraying mace, and throwing a hammer at one point. 

Earlier, a small group of conservatives were separated from the larger protest and an older man had his American flag snatched by an overweight Antifa. 

Update: 2:30 EST – Things are starting to heat up as Antifa and Proud Boys fill the area. Police have already begun to restrain Antifa protesters who are trying to approach the Proud Boys. 


Portland, Oregon is preparing for more violence between the right-wing group Proud Boys and leftists from Antifa – a group of black-clad left-wing extremists who have instigated several bloody brawls with conservatives. 

Police learned of the unlicensed protest and the Antifa counter-protest by monitoring social media, according to NBC News, which notes that based on what has been observed, there is concern over possible violence (where masked 100lb basement-dwelling Antifa soy boys get knocked into the next dimension). 

In recent years, Portland has become a magnet for protests, some of them turning ugly. Several groups from the far-left and far-right said they will converge in the city’s downtown. Police said its nearly 1,000 member force will be on duty.

We recognize these events can cause alarm, anxiety and even fear for certain members of our community,” said Lieutenant Tina Jones. –NBC News

Last year: 

In a Saturday tweet, President Trump put Portland Mayor Ted Wheeler on notice. 

“Major consideration is being given to naming ANTIFA an “ORGANIZATION OF TERROR.” Portland is being watched very closely. Hopefully the Mayor will be able to properly do his job!”

“I think they come to Portland because it gives them a platform,” said Wheeler of why right-wing groups are protesting in Portland. “They know that if they come here conflict is almost guaranteed.”

In 2017, a riot between the groups left the city with shattered windows and other property destruction.

“It’s sad to me because I think that a lot of people that come here to protest don’t actually live here or share a lot of values that I believe Portland stands for,” said resident Drew Edwards. 

The FBI will be on scene out of an abundance of caution, reports NBC


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Author: Tyler Durden

The Writing’s On The Wall

Authored by EconomicPrism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Not Adding Up

One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is.  In short, things don’t add up.  What’s more, the propaganda is so far off the mark, it is downright insulting.

Coming down from the mountain with the latest data tablet… [PT]

The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent.  The BLS also reports price inflation, as measured by the consumer price index (CPI), of 1.8 percent.  Yet big city streets are lined with tents and panhandlers grumble “that’s all” when you spare them a dollar.

In addition, good people of sound mind and honest intentions are racking up debt like never before.  Mortgage debt recently topped $9.4 trillion. If you didn’t know, this eclipses the 2008 high of $9.3 trillion that was notched at the precise moment the credit market melted down.

Total American household debt, which includes mortgages and student loans, is about $14 trillion – roughly $1 trillion higher than in 2008.  Credit card debt, which is over $1 trillion, is also above the 2008 peak.  To be clear, these debt levels are not signs of economic strength; rather, they are signs of impending disaster.  Moreover, they’re signs that American workers have been given a raw deal.

US CPI, “core” CPI and total consumer credit outstanding.

How is it that the economy has been growing for a full decade straight, but the average worker has seen no meaningful increase in his income?  Have workers really been sprinting in place this entire time?  How did they end up in this ridiculous situation?

US mortgage debt outstanding and real household wages (real hourly earnings of production and non-supervisory employees) [PT]

Pathological Madness

You can no more ignore these discrepancies and signs of impending disaster than you can ignore a gathering of pyromaniacs in the alley behind your residence. Most nights their penchants will be restrained to barrel fires.  But come the next full moon, they will let out a communal howl and burn down the city block.

On surface, it takes a downright pathological character to go into hock at the rate achieved by U.S. consumers, U.S. corporations, and the U.S. Treasury.  Only mental defectives, Scientologists, and university economics professors can justify it with a clear conscience.  Nonetheless, these debt loads are a symptom of the compulsive effort to hold onto an economic golden age that’s slipping and sliding away.

Components of the US debtberg – consumer, federal and corporate debt [PT]

Indeed, the golden age of American prosperity was fun while it lasted.  From the close of World War II into the 1970s, the rising tide of wealth lifted all boats.  Since then, the appearance of prosperity has been preserved through the massive accumulation of debt… which was made possible with the Federal Reserve’s fake money and fake interest rates.

Unfortunately, when debt runs up to these extreme levels bankruptcies follow.  In the State of New York, for instance, bankruptcy filings have risen steadily over the last three years; from 30,112 in 2016 to 34,711 in 2018.  As you can see, the game over button – via bankruptcy – is the only way out when debt loads become this overwhelming.

Naturally, American consumers have taken their spendthrift ways from a Congress with zero fiscal discipline.  The U.S. deficit through the first 10 months of fiscal year 2019 already exceeds last year’s deficit.  In July alone, the U.S. Treasury added $119.7 billion in new debt.

Writing on the Wall

Over the last 40 years, growth has been extracted from the future via massive infusions of corporate, consumer, and government debt.  Hence, future productivity will be spent paying for this episode of pathological madness. And having to service these massive debt burdens will condemn future growth to mere stagnation. This effect was fully apparent over the past decade’s period of anemic economic growth.

Now, at the worst possible time, the fabricated wealth of the stock market is beginning to crumble.  Blind faith in the Federal Reserve to keep stocks at a permanently high plateau has been shattered.  Fed Chair Powell has lost control.

Perhaps not anymeure, as Clouseau would say. [PT]

After peaking at 3,027 on July 26, the S&P 500 has lost 6 percent.  In reality, a 6 percent decline is nothing at all.  A 20 percent decline is needed to get to true bear market territory.  But given the degree and duration of this bull market, and the monetary deceit that has perpetuated it, a 50 percent top to bottom decline – or more – is possible.

To make matters worse, the U.S. Economy seems headed for recession. The Treasury market is even signaling it.  Specifically, on Wednesday the yield on the 10-year Treasury briefly fell below the 2-year Treasury yield.

10 year minus 2-year treasury yield spread – it briefly visited negative territory this week, but closed a smidgen above the zero level. Since then it is steepening again. If the steepening continues and accelerates, it will indicate that a recession is imminent. [PT]

The last time these two yields inverted was in 2007, during the run-up to the financial crisis.  And while a recession may not immediately follow this signal, you can already read the writing on the wall.  Call it an early warning.  Call it divine insight.  Call it spiritual graffiti, if you will.

But ignore it at your own peril.

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Author: Tyler Durden

Are Grisly Warning Labels Coming To US Cigarettes?

Soon US smokers could see the shocking visual warning labels on cigarette packets that Americans have come to identify with Europe. US health officials are making a new push to require graphic images to be placed on every cigarette pack by law across the US to discourage smoking, as the current mere textual warning hasn’t changed since 1984. The Associated Press reported this week:

The Food and Drug Administration on Thursday proposed 13 new warnings that would appear on all cigarettes, including images of cancerous neck tumors, diseased lungs and feet with amputated toes.

Other color illustrations would warn smokers that cigarettes can cause heart disease, impotence and diabetes. The labels would take up half of the front of cigarette packages and include text warnings, such as “Smoking causes head and neck cancer.” The labels would also appear on tobacco advertisements.

Image source: Medical Daily

Prior attempts of the FDA to enact the illustrations have been defeated on free speech grounds, such as a 2012 federal court ruling saying the tobacco companies can’t be forced to put grisly images on their products

Big tobacco has repeatedly invoked the first amendment as the bedrock foundation protecting them from being forced to include labels that are fundamentally “crafted to evoke a strong emotional response.”

Some among the FDA’s proposed graphic warnings.

However, the FDA has cited a national health crisis that includes 480,000 smoking-related deaths each year. FDA’s tobacco director Mitch Zeller says the new illustration labels are vital to educating the public. 

“While the public generally understands that cigarette smoking is dangerous, there are significant gaps in their understanding of all of the diseases and conditions associated with smoking,” the spokesperson said.

He added that should the agency be sued on free speech grounds, “we strongly believe this will hold up under any legal challenges.”

Examples of graphic labels in other countries:

Almost 120 countries around the world have thus far enacted legislation or policy requiring the graphic warning labels, with Canada having been the first in 2000. 

In some cases the disturbing illustrative warnings include cadavers and diseased lungs and hearts. 

* * *

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Author: Tyler Durden

Why ‘Common Knowledge’ Changes The World

Authored by Adam Taggart via PeakProsperity.com,

The private understanding that we’re in trouble is suddenly becoming realized by the public…

For those paying attention, there have been plenty of signs indicating that financial asset prices are dangerously overvalued and that the decade-long economic expansion is reversing towards recession.

But the mainstream — until just recently — has refused to see this.

Over most of 2019, investors have remained willing to push stocks, bonds and real estate to record prices. And the Federal Reserve, the Trump administration and the media have boasted about America’s “strong economy” on a weekly basis.

But suddenly, the herd has become skittish.

It’s not panicking (yet). But a lot of the predominant investor euphoria and complacency has vanished, along with more than a $trillion in market value as stocks have slid from their July highs.


Well, it’s a matter of private knowledge becoming common knowledge. An understanding that until recently was shared only by a small percentage of people is now starting to be adopted by the masses.

This is a very powerful transformation that often leads to swift changes in the status quo. Ben Hunt of Epsilon Theory explains this phenomenon very well:

The core dynamic of the Common Knowledge Game is this: how does private knowledge become  not public knowledge  but common knowledgeCommon knowledge is something that we all believe everyone else believes. Common knowledge is usually also public knowledge, but it doesn’t have to be. It may still be private information, locked inside our own heads. But so long as we believe that everyone else believes this trapped piece of private information, that’s enough for it to become common knowledge.

The reason this dynamic — the transformation of private knowledge into common knowledge  is so important is that the social behavior of individuals does not change on the basis of private knowledge, no matter how pervasive it might be. Even if everyone in the world believes a certain piece of private information, no one will alter their behavior. Behavior changes ONLY when we believe that everyone else believes the information. THAT’S what changes behavior. And when that transition to common knowledge happens, behavior changes fast.

The classic example of this is the fable of The Emperor’s New Clothes. Everyone in the teeming crowd possesses the same private information — the Emperor is walking around as naked as a jaybird. But no one’s behavior changes just because the private information is ubiquitous. Nor would behavior change just because a couple of people whisper their doubts to each other, creating pockets of public knowledge that the Emperor is naked. No, the only thing that changes behavior is when the little girl (what game theory would call a Missionary) announces the Emperor’s nudity loudly enough so that the entire crowd believes that everyone else in the crowd heard the news. That’s when behavior changes.


Hunt uses this private-to-common knowledge transition to explain the sudden fall of previously ‘untouchable’ power brokers such as Harvey Weinstein and Jeffrey Epstein. For decades, these abusers could get away with their crimes because the sins were only recognized by a social minitory. But once the world became aware, there was no way push them back into the shadows.

Recession Risk Suddenly Becoming ‘Common Knowledge’

In the case of today’s financial markets, few people have been willing to challenge their faith in the current expansion (now the longest in history). The ten-year ride has been easy, comfortable and dependably profitable.

They’ve been able to ignore reams of charts and data over the years warning that the lofty asset valuations weren’t supported by underlying fundamentals. What do those doomers know anyways? Just look at how well my FANG stocks keep doing!

But this week, two developments occurred that were too obvious for the complacent masses to ignore.

First, the US Treasury yield curve achieved full inversion. On Wednesday, the yield on the 10-year Treasury fell below the yield on the two-year for the first time since 2007.

Why is this a big enough deal to spook the majority of investors?

Because an inverted yield curve has preceded every US recession since 1955:

And this isn’t the only serious recession indicator received this week. Those thinking the US economy is too strong to succumb to slowing economic growth need look only as far as Europe, where Germany, by far the largest economy in the EU, just announced that it experienced negative growth in Q2:

If Germany and the rest of the EU slide into recession — along with other major countries like Brazil, Mexico, the UK, South Korea and Russia, which are all facing similar risk — will there be enough demand to keep the US out of one as well?

More and more folks are beginning to have serious doubts. As they should.

This newly-accepted “common knowledge” regarding recession risk goes far in explaining why the recent interest rate cut by the Federal Reserve failed to goose the financial markets higher as hoped. Finally, a critical mass of investors is beginning to realize that more cheap debt can’t solve the problems facing a global economy already drowning in debt.

With this loss of faith in the Fed’s omnipotence, the continued ability to maintain today’s near-record asset prices gets thrown seriously into question.

What Other Knowledge Is Suddenly Becoming ‘Common’?

Doubt breeds more doubts.

And there are many strings of ‘conventional’ wisdom that are unravelling fast when pulled on.

Rotten Apple?

Take Apple, as an example. For years, it has been celebrated as an engine of technological innovation. And its stock has been a bulletproof juggernaut; marching higher every year since 2009.

But Apple hasn’t released a game-changing product since the iPhone, which debuted back in 2006. And now, with global smartphone saturation and slowing economies, iPhone sales have dropped for the past 3 consecutive quarters.

The company is coasting on its bygone success. Without another truly transformative product launch (sorry, air pods and smart watches aren’t going to cut it), overall revenues will continue shrinking.

Investors, whose shares currently support Apple’s nearly $1 trillion market cap, haven’t all gotten the memo yet. But when enough of them do, expect this long-time darling stock to drop hard.

Low inflation?

The world’s central banks have justified their years of intervention as being necessary because inflation is “too low”.

But is it really?

Anyone who needs to eat, pay for a roof over their head, visit the doctor, educate their kids, or drive anywhere knows that the true cost of living is increasing at a far faster rate than the government’s official

Ben Hunt, the progenitor of our above Common Knowledge Theory, predicts this as the next smokescreen to dissipate:

There’s a lot of ubiquitous private information about powerful people and powerful ideas trapped in the crowd today, just waiting for a Missionary to release it as common knowledge. The more powerful the person or the idea to be brought low, the bigger the Missionary (and platform) required. But nothing’s too big, and once the common knowledge is created, behavior changes fast. My pick for the big idea that gets taken down? The idea that inflation is dead. We all know it’s not true. We all know in our own heads that everything is more expensive today, from rent to transportation to food to iPhones. But it’s not common knowledge. Each of us may believe that inflation walks among us, but none of us believes that everyone else believes that inflation is here.

Not yet. But we’re only one big Missionary statement away.

Trouble In China?

Many pundits see the raging trade war between the US and China as a pitched match between equal adversaries.

But those who have visited and done business inside the country for many years see China in a far weaker position than is customarily appreciated or portrayed.

Jim Rickards explains how China is much more of a paper tiger than realized. It’s Achilles Heel of social unrest is being exacerbated by the trade war (see: Hong Kong protests) in ways that the communist government can’t easily quell.

Permanent loss of trade is happening as manufacturing switches to other countries, at a time when capital outflows are increasing and Chinese stocks and real estate prices are falling. Meanwhile, the debt bomb inside China is staggering relative to the US, and it’s finally nearing its explosion point.

An implosion of China’s economy, perhaps coupled with serious social distemper, is a new — previously unthinkable — factor the world is suddenly realizing it needs to take into account.

Time Is Short

As Ben Hunt instructs:

Behavior changes ONLY when we believe that everyone else believes the information. THAT’S what changes behavior. And when that transition to common knowledge happens, behavior changes fast.

Amidst the market volatility this week, we issued an advisory to take action.

We reminded readers that market tops are processes. They occur over a long time.

But market corrections are events. They tend to happen suddenly and violently. If you’re not positioned for them in advance, there’s usually no time to react once they’re underway.

With the risks of recession quickly becoming common knowledge amongst the mainstream, we declare the time for planning is over. It’s now time to act, to get your advanced positioning in place. Because events are going to start happening fast, as Ben Hunt warns.

Specifically, we urge you to strongly consider taking the following steps in your portfolio (each one below links to a helpful primer with guidance):

  1. Moving to cash

  2. Adding gold & silver

  3. Hedging against a market downturn

  4. Investing for cash flow

  5. Developing resilience beyond your money

We’re loud advocates of taking these steps while working with a professional financial advisor who understands and appreciates the risks that are in play. There aren’t many out there who do, but their assistance in helping you make well-informed decisions can be extremely valuable.

Earlier this week we showed exactly how valuable this can be, providing an example of how one such advisor protected (and grew) client accounts while the S&P 500 dropped -5.4% from its July highs.

So if you have similar goals for your money — if, you place a higher priority on return OF capital vs return ON capital during this time of heightened risk — then we sure hope you’ve already positioned your portfolio wisely for the future you see coming.

If not — and we know from the emails we receive that many of you still have not — it’s not too late. But it may be very soon. Time looks to be getting very, very short.

Put your plan into action. If you don’t have your plan finalized yet, meet with a good professional advisor asap. And if you’re having trouble finding a good one, consider scheduling a portfolio review with the advisor endorsed by Peak Prosperity (it’s completely free)

Just don’t delay.

Sentiment is finally breaking as critical but previously-private knowledge is quickly becoming “common”.

Once it breaks fully, the ride downward will likely be very sharp, quick and brutal for everyone caught unprepared.

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Author: Tyler Durden

 Auto Bust At Heart Of Global Downturn Hits Oil Demand

John Kemp, the senior market analyst of commodities at Reuters, published a new report that details how global vehicle production is falling at the fastest rate since the financial crisis, leading to depressed manufacturing output, freight, and the consumption of energy and other commodities.

The Organization of Motor Vehicle Manufacturers (OICA) reports that global auto vehicle output weakened last year by 1%, the first time since 2009, and the third drop since the Dot Com Bust.

The epicenter of the auto bust is in China, India, and Germany. Production was slightly down in the US and up in Japan.

Global shifts in consumer demand of autos have rippled through the supply chain, all the way to manufacturers, which by the way, is the beating heart of the global economy.

“Motor manufacturers are among the world’s largest consumers of energy and raw materials, intermediate products such as plastic, steel and aluminium, and services such as marketing and advertising,” Kemp said.

The industry is an essential source of durable capital goods for major manufacturing hubs, centered in Asia, Europe, and the US. It’s a producer of high-value exports for countries, able to produce high wages and drive millions of people into the middle class.

But as soon as fluctuations in consumer demand are seen, the transmission of a bust cycle ripples through the supply chain and detonates at the manufacture, but can also have a more significant impact on producers of energy and other commodities.

Weakness in the global auto industry has pushed global freight demand lower and led to declining demand for petrol fuels, especially diesel.

Growth in worldwide vehicles could be stagnating, which would have severe consequences for the US and OPEC countries who extract crude and process it into refined fuels. And that’s maybe why crude and crude product stockpiles are near record highs across the world.

The industry’s problems have been building for the last several years, could explain why oil consumption across the world has been in a “severe slowdown” since mid-2018.

Kemp noted that China’s vehicle output plunged -13% in 1H19 and Germany hit levels not seen since 2009.

As we have detailed before, India’s auto production has gone bust, down -11% YoY from April to July. This has led to hundreds of thousands of job losses in that period.

Kemp said, “plunging vehicle production has been a major contributor to the weakness in global manufacturing and freight reported since the middle of 2018.”

The shift in consumer demand rippling through global supply chains of auto manufacturers will continue through 2H19 into 1H20.

In some cases, the downturn in auto production, especially in India, could last until 2021.

With that being said, oil consumption growth isn’t likely to accelerate again until production troughs and turns back up. This could take several years.

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Author: Tyler Durden