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The predominant theme in the second quarter was inflationary pressure in the financial markets, and how this might impact the Federal Reserve’s policy decisions on interest rates. The inflation rate in May was 5% compared with a year earlier. Year-on Year price increases in almost all commodities have been very elevated, evidenced by the copper market (+51%), wheat (up 21%), US median home prices (up 23%), and oil (up over 50% this year).


The Federal Reserve believes that this inflation is transitory, and appears elevated due to the “look-back” effect, i.e., the fact that the basis of comparison was so low last March, April, and May.


In June, the Fed raised its expectations f...

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Investors wondering why the stock market continues to rise as we face the worst economic conditions since the Great Depression need only look at the Federal Reserve’s balance sheet, which has increased in size by $3 trillion since February.


That represents printed money which the Fed is using to purchase Treasury bonds, mortgage bonds, corporate bonds, and asset backed securities, which brings the total amount of printed money to $7 trillion. In doing so, they have driven bond yields down, which justifies a higher multiple for stocks.
This is currently the only reason for a rising stock market. Markets have become completely divorced from reality, and stocks in particular are ignoring th...

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2019 is likely to be volatile, but it is unlikely that the U.S. falls into recession. The one thing that could change that is if the partial U.S. government shutdown lasts long enough.

The shutdown is becoming more expensive than the very reason for the shutdown. The U.S. President signed legislation this week promising back pay for Federal workers when the shutdown ends. The problem is that the American taxpayer will then be paying for services which never took place at a rate of $200 million per day, or around $5 billion so far, which equates to the price of the border wall. Economists estimate the partial government shutdown is costing 0.1% of GDP growth to the U.S. every two weeks. We are...

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The Sleep of Reason Produces Monsters- Francisco Goya, 1799




Investors enter the fourth quarter with elevated and asymmetrical downside risk until after the elections, likely subsequent interest rate hike, and probable market shakeout. There will be ample opportunity to reinvest at lower levels.



The U.S. election should be seen as binary, as the outcome is still uncertain despite any outrageous recent findings about the candidates. The financial risks of a Trump presidency are large, and Wall Street is underestimating the influence of the anti-establishment sentiment which may not be reflected in the polls. If Trump wins, there be sharp adverse effects on the stock market due to:


• His at...

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S&P Global Ratings downgraded its forecast for U.S. growth this year, due to the Brexit vote and lower-than-expected first quarter growth. Chief Economist Beth Ann Bovino announced that she now expects U.S. real GDP to grow by 2.0% in 2016 (down from 2.3% in March) and 2.4% in 2017 (down from 2.5%). S&P now feels that the risk of recession over the next 12 months is now between 20% to 25%, up from 15% to 20% in March. S&P has revised its forecast downward many times for 2016 growth since last year, and yet, the stock market remains expensive due to Central Bank intervention. It should be noted that S&P’s outlook is still higher than the consensus view.



Brexit will certainly bring more...

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(Artist: PepperAna, used with permission)




The economic landscape has become extremely complex, beyond the understanding of even many famous economists, so I will attempt in this letter to keep things very simple and brief.


The Federal Reserve and most other central banks have spurred an unparalleled rise in borrowing since 2009, and the debt has been used for unproductive purposes such as stock buybacks and mergers instead of research, development, and capital expenditures.



This is true in the U.S., Europe, Japan, and China.



As a result of these central bank policies, we have negative real interest rates in much of the developed world, which is without historical precedent, even going back to...

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