It’s not just Donald Trump. Many political leaders around the world operate under the misconception that a trade deficit is a problem to be reckoned with. This misconception has been the root of countless bad policies over the centuries.

Trade, by definition, is not an adversarial situation resulting in a winner and a loser. Rather, both parties believe that they are benefiting, otherwise the trade would not take place. Most of the time, both parties do benefit. In general, one side wants a particular product more than a certain quantity of money and the other side wants the quantity of money more than the product. When the exchange takes place, both sides get the thing to which they assign the higher value at the time.

All the hand-wringing about international trade deficits is based on the ridiculous notion that the side receiving the money is the winner and the side receiving the product is the loser, but how could this be? If the side receiving the product was losing-out then it wouldn’t enter into the trade. Furthermore, given that today’s money is created out of nothing, if a trade were to be viewed as a win-lose situation then surely it’s the side receiving the product that should be viewed as the winner.

That being said, I don’t want to confuse the argument by asserting that it makes sense to view the side receiving the product as the winner in the exchange of money for product. Both sides are winners, because both sides get what they prefer at the time of the exchange.

For example, if you shop at Wal-Mart then you run a trade deficit with Wal-Mart. Is this trade deficit a problem for you? Obviously not, otherwise you wouldn’t shop there. Would it make sense for the government to step in and slap a tax on all Wal-Mart products, thus forcing you to buy less products from Wal-Mart and thereby reducing your trade deficit with that company?

Some will claim that a trade deficit is only a problem when it happens between different countries, but countries aren’t entities that trade with each other. People trade with each other, and political borders don’t determine what is and isn’t economically beneficial. If John and Bill have been trading with each other for years to their mutual benefit within the same political region, placing a political border between them wouldn’t mysteriously alter the mutually-beneficial nature of their trading.

Another point that should be understood is that a “trade deficit” for a country results in an investment surplus for that country. The reason is that the monetary surplus on the trade account doesn’t disappear or get placed under a mattress, it gets invested in securities (stocks and bonds), real estate, businesses and projects. A trade deficit therefore isn’t associated with a net flow of money out of the economy, it is associated with a re-routing of money within the economy. There is no good reason to expect that this re-routing will lead to a net loss of jobs. In fact, the opposite is the case.

Unfortunately, while a so-called trade deficit is not a problem, the taxes, tariffs, subsidies and other government measures that are implemented to reduce a trade deficit definitely do cause problems.

Here are a few of the charts that currently have my attention:

1) The industrial metals bottomed (in price) as a group early last year. They were then led higher as a group by iron-ore, the metal that according to many analysts had the most bearish fundamentals and could therefore not sustain a rally.

The following chart (from barchart.com) shows that the iron-ore price has more than doubled since its early-2016 bottom. It made a marginal new high this week, so there is no evidence yet that the rally is over.

When the iron-ore price eventually reverses it will be a warning that the broad-based industrial-metals rally is close to an end.

2) The following chart compares the euro with the difference in yield between 10-year German Government bonds and 10-year US Treasury notes. The euro has tracked this interest-rate differential quite closely over the past two years and very closely over the past 6 months.

The implication is that for the euro to extend its short-term rebound, German yields will have to remain in an upward trend relative to US yields. How likely is that?

3) The Dow Transportation Average (TRAN) traded comfortably above its November-2014 high during December-2016 and January-2017, but in each case it failed to give a monthly close above the November-2014 close. This means that TRAN still hasn’t broken above its 2014 peak on a monthly closing basis, which represents an interesting non-confirmation of the breakouts achieved by other indices.

Will TRAN finally break out on a monthly basis this month?

4) In early-July of last year the Commitments of Traders (COT) data indicated that speculators were as bullish as they ever get on long-dated Treasury securities. This set the stage for an important price top. By December the sentiment situation had shifted 180 degrees, with the COT data indicating that speculators were as bearish as they ever get on long-dated Treasury securities. The stage was therefore set for an important price bottom.

The recovery from the December-2016 bottom is probably not yet close to being over.

In response to the 3rd January blog post in which I pointed out the straightforward fact that evidence of market manipulation is not necessarily evidence of price suppression, a reader sent me a link to a year-old GATA article. The GATA article was presented by the reader as a refutation of what I had written.

It is certainly possible to construe the aforelinked GATA article as having at least partly refuted what I wrote, but only if you take the article’s headline (“State Dept. cable confirms gold futures market was created for price suppression”) and conclusion (“…[the cable confirms] the assertions by GATA and others in the gold-price suppression camp that futures markets function largely as mechanisms of commodity price suppression and support for government currencies”) at face value and give no further thought to what is being presented and asserted.

However, if you take the time to read the excerpt from the 1974 State Dept. cable included in the GATA article you will see that it does NOT say that the gold futures market was created for price suppression; it says that re-legalising private gold ownership in the US (it had been illegal since 1933) would result in the formation of a large and liquid futures market. In effect, it says that the formation of a futures market would be a natural consequence of the gold market becoming freer.

The State Dept. cable does express an opinion that large-volume futures dealing would create a highly volatile market, and that the volatile price movements would diminish the initial demand for physical holding and most likely reduce the long-term hoarding of gold by U.S. citizens. This opinion is certainly debatable, as a good argument can be made that futures markets tend to bring about LESS long-term volatility in the price of a commodity. In any case, it is just an opinion as to the price-related consequences of a naturally-occurring futures market.

It is also worth mentioning that the cable is from an embassy bureaucrat with no say in government policy.

So, in no way does the State Dept. cable do what the author of the GATA article claims it does. Moreover, the assertion that “futures markets function largely as mechanisms of commodity price suppression and support for government currencies” is not only in no way backed-up by the evidence presented, it is so illogical as to be laughable. There have been futures markets for many widely-traded commodities for hundreds of years. These markets were not created by and do not exist for the benefit of governments.

Sometimes, no specialised knowledge is needed to figure out that a conclusion doesn’t follow from the information presented. For example, detailed knowledge of the gold futures market is not needed to see that the State Dept. cable cited in the GATA article does not come remotely close to confirming GATA’s assertions. Sometimes, all that’s needed is a modicum of logic.

In a blog post last Friday I provided evidence that the extent to which a US president is “pro-business” has very little to do with the stock market’s performance during that president’s term in office. Regardless of whether the associated policies are good or bad for the economy, the key to the stock market’s performance over the course of a presidency is the market’s position in its long-term valuation cycle. On this basis there’s a high probability that the stock market’s return over the course of Trump’s first — and likely only — 4-year term will be dismal, no matter what Trump does. However, the policies of a president can have a big effect on the performance of the economy.

It’s obviously early days for the Trump Administration, but the initial signs are not positive. The main reason is that “regime uncertainty” is on the rise.

“Regime uncertainty” is the name given to the tendency of private investors to pull back from making long-term financial commitments due to uncertainty about what the government will do next. According to an essay by Robert Higgs, it was one of the factors that prolonged the Great Depression of the 1930s. Government intervention is generally bad for the economy, but it tends to be even worse when it happens in an ad hoc way.

As discussed in a Bloomberg article last month, the economically-depressing effect of government by ad-hoc command was also addressed by Friedrich Hayek in “The Road to Serfdom”. The problem, in a nutshell, is that if the government’s actions are predictable then people are able to plan, but if officials are regularly issuing commands it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

The signs were not good when Trump started singling-out individual companies for special treatment even before he took the oath of office and got worse when Trump started talking about imposing a 20% tax on Mexican imports as a way of forcing Mexico to pay for a wall between the two countries. Does he really believe that forcing US consumers to pay 20% more for products made in Mexico amounts to making Mexico pay for the wall?

And the signs recently became more worrisome due to the sudden imposition of immigration and refugee bans. The effects of these bans on the US economy will not be significant, but the concern is what they imply about the decision-maker’s level of understanding and willingness to ‘shoot from the hip’.

The immigration ban imposed on seven Muslim-majority countries is a particular concern because of its blatant irrationality. Making America safe from terrorism is the official justification for the action, but over at least the past 40 years there has not been a single fatal terrorist attack perpetrated on US soil by anyone from any of the banned countries. On the other hand, Saudi Arabia is not covered by the ban despite having supplied 15 of the 19 terrorists directly involved in the 9/11 attacks and being well known as a state sponsor of terrorist organisations. I am not suggesting that the ban should be expanded to include other countries, I am questioning the knowledge and logicalness of a political leader who would decide to do what has just been done.

To top it all off, late last week Trump began threatening Iran for no good reason via his preferred medium for conducting international diplomacy: Twitter. What will he do next?

Taking a wider angle view, the protectionist agenda that the Trump Administration seems determined to implement will have numerous adverse consequences, most of which aren’t quantifiable at this time because it isn’t known exactly what measures will be taken and how other governments will react. All we know for sure is that Trump wrongly believes that international trade is a win-lose scenario and that trade deficits are problems for governments to actively reckon with.

Perhaps the initial warning signs are not indicative of what’s to come and Team Trump will settle into a more logical, impartial and cool-headed approach, but right now it looks like Donald Trump is going to make uncertainty great again. If so, private investment will decline.

Putting aside the fact that prior to the US Presidential election last November almost everyone believed that a Trump victory would result in a weak stock market, the popular view now is that the stock market has strengthened since the election due to the incoming Trump Administration being more pro-business. It is arguable whether the Trump Administration really will be “pro-business” (early signs are that it won’t be), but in any case the historical record indicates that the currently-popular view is total nonsense.

According to the historical record, the stock market’s performance during a Presidential term has nothing to do with the extent to which the Administration is pro-business. Let’s consider some examples to help make this point, using the Dow Industrials Index as our stock-market proxy and the November election dates as the starting and ending points of a presidential term. It makes sense to use the election dates rather than the inauguration dates given that the financial markets will begin to discount the economic effects of a new president immediately after the election result is known.

First, F.D.Roosevelt probably led the most anti-business administration in US history, but during FDR’s first 4-year term the stock market had a phenomenal gain of about 160%.

Second, Ronald Reagan was supposedly a very pro-business president, but during his first 4-year term the stock market gained only 26%. The stock market’s gain during Reagan’s first term was not only a tiny fraction of the gain achieved during FDR’s first term, it was also less than the roughly 40% gain achieved during the first term of the supposedly anti-business Obama Administration.

Third, the stock market did much better during Reagan’s second term, enabling Reagan to chalk up an 8-year stock-market return of about 120%. This, however, wasn’t substantially better than the 90% gain chalked up by the anti-business Obama and pales in comparison to the 240% gain achieved by the Dow over the course of Bill Clinton’s two terms.

Fourth, two of the worst stock-market performances occurred during the supposedly pro-business administrations of Herbert Hoover and GW Bush. The Dow was down by a little more than 10% over the course of GW Bush’s two terms and by an incredible 70+% during Hoover’s single term in office.

To summarise the above, the historical record isn’t consistent with the view that a more pro-business President results in a stronger stock market.

There are, of course, a number of influences on how the stock market performs during any presidential term, including the amount of domestic monetary inflation and what’s happening throughout the world. One influence, however, dominates all others. That influence is the point in the valuation cycle at which a presidential term starts and ends. The reality is that some presidents get lucky with timing, others don’t.

I’ll explain what I mean with the help of the following long-term Dow chart. The chart was created by Nick Laird at goldchartsrus.com, but I added the red notes to indicate the first election victories of various presidents.

The above chart shows that when it comes to the gains achieved by the stock market during a presidency, timing is critical. For example, despite FDR implementing a set of policies that were economically disastrous, the stock market rocketed upward during his first term because at the start of the term the Dow was well below the bottom of its long-term channel. However, by the start of FDR’s second term the Dow had recovered to near the middle of its long-term channel, resulting in much weaker subsequent performance. For another example, there is no doubt that Hoover and GW Bush were terrible presidents, but they were certainly no worse than their successors and yet the stock market’s performance was relatively dismal during their presidencies. This is mainly because their presidencies began with the Dow above the top of its long-term channel.

Trump’s presidency is beginning with the Dow at the top of its long-term channel. This pretty much guarantees that the US stock market’s performance over the course of the next 4 years will be dismal, regardless of whether or not Trump’s policies are “pro-business”.

[This post is an excerpt from a TSI commentary published two days ago]

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984″ had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

The US Constitution is often held up as an ideal to be aspired to, but it is actually far from ideal.

One reason it is far from ideal is that the section setting out the powers of Congress (Article 1 Section 8) is too general. For example, it gives Congress the power to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” The terms “Taxes” and “general Welfare” had different (much narrower) meanings back then, but it’s not hard to understand how this statement could be construed to justify much of the growth in the federal government over the ensuing 200+ years. Another example concerns money. The Constitution gives Congress the power to “coin Money [and] regulate the Value thereof.” It’s not hard to understand how the words “coin Money” could be interpreted to mean “create Money”, since “coin” and “create” (in reference to money) were effectively the same thing when the Constitution was penned.

It is often claimed that the Constitution requires money to be gold or silver coin, but this is not the case. The only mention of gold or silver is in the section that sets out the limitations on the powers of individual states (Article 1 Section 10). This section prohibits any State from making “any Thing but gold and silver Coin a Tender in Payment of Debts”, but imposes no restrictions on the power of Congress to coin money and regulate the value thereof.

Should the Constitution have been much clearer in defining money as gold and/or silver?

The answer is no, because the government should not have the right to determine what is and isn’t used as money by private individuals. The Constitution should simply have forbidden the government from having anything to do with money. In particular, rather than empowering the government to coin money and regulate the value thereof it should have prohibited the government from exerting any influence over the supply or value of money.

What is/isn’t money should be chosen by ‘the market’. It’s likely that the market would choose gold and/or silver if it were free to make the choice, but the freedom to choose something other than a precious metal should always be available. That’s why a “Gold Standard” is not a worthwhile objective. The government doesn’t have the legitimate right to impose gold as money any more than it has the legitimate right to impose pieces of paper as money.

The US Constitution opened the door to much of what happened later. It’s therefore likely that if the writers of the Constitution had the chance to do it over again knowing what is known today, they would cobble together a very different document.

Doug Casey recently predicted that we are heading for financial chaos. Should this prediction be taken seriously? The answer is no, but not because Doug Casey doesn’t know what he’s talking about or is necessarily wrong.

Doug Casey has been right about enough trends/events in the past to have become wealthy and is one of my favourite writers. Also, throughout his career he has fought the good fight against government coercion, the fake information that’s routinely put forward to ‘justify’ bigger government, and the political-correctness tyranny. However, he is ALWAYS predicting financial chaos and/or economic collapse and/or a crash in the stock market or the bond market.

I have no problem with Doug Casey’s crisis predictions. I understand his bias in this area and can take it into account when reading his opinions/analyses. I do, however, have a problem with the way that Doug’s predictions are used to promote the Casey Research service.

This post was prompted by an email from Casey Research that appeared in my inbox last week. The email contained something along the lines of: “Doug Casey correctly predicted the Dot.com crash of 2000 and the financial-market crash of 2008. Given this amazing forecasting record, you won’t want to miss Doug’s latest prediction. Click the link below to find out what it is.”

I didn’t click the link so I don’t know the specific prediction that is currently being used to attract new subscribers, but I cringed at the misleading way that the forecasting record was portrayed. It’s certainly true that Doug Casey correctly predicted the market crashes of 2000 and 2008, but if you are always predicting a crash then of course you will be right every year the market crashes. And you will be wrong every year the market doesn’t crash.

Betting on a crash year after year after year is actually a viable speculative strategy. It’s the strategy that has been used by Nassim Taleb with success over the past few decades. Taleb bets on a market crash every year with a small portion of his investment portfolio while keeping the rest of his portfolio in cash or cash-like securities. The result is that he makes a small loss in the vast majority of years and a huge profit once or twice per decade.

I’m only guessing, but Doug Casey has probably applied a similar approach to good effect.

The Taleb approach is not suited to most people, though. This is because most people do not have the required combination of knowledge, patience and nerve, and even if they do there are ways to generate excellent long-term returns without having to go 5-10 years between pay-offs.

Getting back to the main point of this post, there is some chance that Doug Casey’s recent prediction of financial chaos will be correct in 2017, but it shouldn’t be taken seriously. The reason it shouldn’t be taken seriously is that regardless of whether or not it pans out this year, there will be a similar prediction for next year and the year after and so on. The prediction is bound to be right…eventually.

Don’t be hoodwinked by the relentless propaganda into believing that the efforts being made to eliminate physical cash are motivated by a desire to reduce crime and corruption. Fighting crime/corruption is just a pretext.

The logic behind the propaganda goes like this: Criminals often use physical cash in their dealings, therefore cash should be eliminated. This makes as much sense as saying: Criminals often use cars, therefore cars should be banned. From an ethical standpoint, the fact that criminals use an item will never be a good reason to prevent law-abiding citizens from using the item.

That being said, the anti-cash propaganda is not just wrong from an ethical standpoint; it is also wrong from a utilitarian standpoint if we assume that the stated reasons (to reduce the amount of crime and strengthen the economy) are the real reasons for wanting to eliminate physical cash. This is because neither logic nor historical data provide any basis for believing that forcibly reducing the use of physical money will reduce crime or boost the economy.

With regard to the crime-fighting claim, yes, criminals often use cash due to cash transactions being untraceable, but no criminal is going to change his ways and ‘go down the straight and narrow’ in response to physical money becoming obsolete. If physical money were eliminated then genuine criminals would find some other way of doing their financial transactions. Perhaps they would start using gold, which would give governments a pretext for the banning of gold. Or perhaps they would use Bitcoin, which would give governments a pretext for the banning of Bitcoin. The point is that there will always be many media of exchange that could be used by genuine criminals to conduct their business. The banning of cash would only be a short-lived and relatively-minor inconvenience to this group.

The economy-strengthening claim stems from the crime-fighting claim, in that all else being equal a change to the monetary system that resulted in less genuine crime (the only genuine crimes are those that result in the violation of property rights) would lead to a stronger economy. Since there is neither a logical reason nor a reason based on the historical record to expect that banning physical cash would lead to less genuine crime, the economy-strengthening claim is baseless.

On a side note, if the elimination of physical cash would actually provide a benefit to the overall economy, that is, if it would result in a higher average standard of living, then it is something that would happen without government intervention. In general, a greater amount of government economic intervention is only ever required when the desired change will NOT create a net benefit for the overall economy.

The reasons being put forward for the elimination of cash are therefore bogus. What, then, are the real reasons?

The main real reason is to maximise tax revenue. If all transactions are carried out electronically via the banking system then every transaction can be monitored, making it more difficult to avoid tax. In other words, the main reason that governments are very keen to eliminate physical cash is that by doing so they increase the amount of money flowing into government coffers. Unless you believe that the government generally uses resources more efficiently than the private sector you must acknowledge that this would result in a weaker rather than a stronger economy.

There is, however, an important secondary reason for the forced shift towards a cashless society, which is that it would help the banks in two ways.

First, it would help the banks by ensuring that 100% of the economy’s money was always in the banking system. Currently about 90% of the money in developed economies is in the banking system, with a physical float (currency in circulation outside the banking system) making up the remaining 10% of the money supply. The move to eliminate physical cash can therefore be thought of as the banking industry going after the final 10% of the money supply.

Second, it would ensure that there was no way for the public to avoid the cost of negative interest rates or any other draconian charge on monetary savings/transactions implemented by the banking establishment. Any single member of the public could avoid the charge, but only by transferring money — and the associated liability — to another person’s account.

So, any economist or financial journalist who advocates the elimination of physical cash is clueless at best and a government/banking-system stooge at worst.

Here is an excerpt from a recent TSI commentary:

Until the S&P500 Index (SPX) broke out to the upside in early-July of 2016 we favoured the view that an equity bear market had begun in mid-2015. Supporting this view was the performance of NYSE Margin Debt, which had made what appeared to be a clear-cut downward reversal from an April-2015 peak.

As we’ve explained in the past, leverage is bullish for asset prices as long as it is increasing, regardless of how far into ‘nosebleed territory’ it happens to be. It’s only after market participants begin to scale back their collective leverage that asset prices come under substantial and sustained pressure. For example, it was a few months AFTER leverage (as indicated by the level of NYSE margin debt) stopped expanding and started to contract that major stock-market peaks occurred in 2000 and 2007. That’s why, during the second half of 2015 and the first few months of this year, we considered the pronounced downturn in NYSE Margin Debt from its April-2015 all-time high to be a warning of an equity bear market.

As at the end of November-2016 (the latest data) NYSE Margin Debt still hadn’t exceeded its April-2015 high, but the following chart from Doug Short shows that it is close to doing so. Furthermore, given the price action in December it is likely that NYSE Margin Debt has since made a new all-time high.

Even if it didn’t make a new high in December, the rise by NYSE Margin Debt to the vicinity of its April-2015 peak is evidence that leverage is still in a long-term upward trend and that the equity bull market is not yet complete.

More timely evidence that the US equity bull market is not yet complete is provided by indicators of market breadth, the most useful of which is the number of individual stocks making new 52-week highs.

The number of individual stocks making new highs on the NYSE and the NASDAQ peaked with the senior stock indices at multi-year highs during the first half of December. The number of individual-stock new highs has since fallen sharply, but this is normal and is not yet a significant bearish divergence.

The change over the past 6 weeks in the number of individual stocks making highs is consistent with the view that a sizable short-term decline is coming, but at the same time it suggests that neither a long-term top nor an intermediate-term top is in place. The reason is the strong tendency for the number of individual-stock new highs to diverge bearishly from the senior indices for at least a few months prior to an intermediate-term or a long-term top.

The US equity bull market may well continue, but that doesn’t mean it’s worth participating in. No investor should attempt to buy into all, or even into most, bull markets. In our opinion, it’s best to restrict participation to those bullish trends that are underpinned by relative value.

If the US equity bull market continues it will definitely not be because the market is underpinned by relative value. As illustrated by another chart from Doug Short (see below), based on an average of four valuation indicators the S&P500′s valuation today is the same as it was at the 1929 peak and second only to the 2000 peak.

The market has primarily been propelled by and to a certain extent remains underpinned by the combination of monetary inflation and artificially-low interest rates, that is, by the machinations of the Fed.