Reality

Government interference by both central banks and regulators (the latter are desperately fighting the “last crisis”, bolting the barn door long after the horse has escaped, thereby putting into place the preconditions for the next crisis) has created an ever more fragile situation in both the global economy and the financial markets. As the below charts and data show, price distortions and dislocations have been moving from one market segment to the next and they keep growing, which indicates to us that there is considerable danger that a really big dislocation will eventually happen.

Between commodity-backed financing deals and the centrally-planned mal-investment boom-driven excess capacity, China has a lot of 'liquidation' to do to normalize from a credit-fueled smoke-and-mirrors world to a painful reality. As Bloomberg notes, there’s no let-up in the onslaught of commodities from China. While the country's total exports are slowing in dollar terms (as we noted last night), shipments of steel, oil products and aluminum are reaching for new highs, flooding the world with unwanted inventories. China's de-glutting is now the rest of the world's problem as the deflationary tsunami grows ever higher. This is not going to end well. Not for anybody. Other than the arms lobby. What it will do is change geopolitics forever, and a lot.

Of the many economic policies that are accepted as true yet are absolute nonsense, perhaps none is more achingly nonsensical than the notion that weakening a nation's currency will magically make that nation prosperous. No empire has ever prospered by weakening its currency. Reducing the purchasing power of one's money is the road to ruin, not prosperity.

Over the weekend, in its latest quarterly presentation, the Bank of International Settlements made what may have been a very premature assessment that China is now contained. Judging by events in the past 24 hours, the reality is anything but.

The suicide rate in Alberta has increased dramatically in the wake of mounting job losses across the province. According to the chief medical examiner's office, 30 per cent more Albertans took their lives in the first half of this year compared to the same period last year. "This is staggering," said Mara Grunau, who heads the Centre for Suicide Prevention.  "It's far more, far exceeds anything we would ever have expected, and we would never have expected to see this much this soon."

"We’re broke. We’re basically living off of debt. We’ve had a huge transformation of the American economy. Look at all the Americans now on food stamps, on disability, on unemployment... The whole economy has imploded... the bottom hasn’t dropped out yet because we’re able to go deeper into debt. But the collapse is coming."

The dream and demand of Bernie Sanders and all of the other "democratic socialists" of all political parties is that all or at least significant parts of human life need to be micromanaged and controlled by government so people may be liberated from the "tyranny" of not having all they may want without finding effective ways of acquiring it through honest and peaceful work. The "freedom" about which Bernie Sanders speaks, and before him Franklin Roosevelt, in fact, involves a loss of liberty into an even greater degree of political paternalism.

Confidence in central bankers is now hanging by a thread. Mario Draghi (and his fellow Goldman Sachs alum Mark Carney at the Bank of England, for that matter) might want to adopt a little humility before that thread snaps completely. It is always tragic when we filthy peasants stop banging rocks together momentarily to listen to the awe-inspiring intellects at the central banks, only to misunderstand them. Perhaps the real problem is one of overconfidence. Not our overconfidence. Theirs.

While countless overzealous obituaries have been written about OPEC’s vanishing influence, OPEC is indeed acknowledging that it cannot influence prices to the degree that it once could. However, the result at least shows that OPEC is going to see its current strategy through to its logical conclusion, to the chagrin of most of its members.

“We have come with our honor to recognize these adverse results, to accept them and tell Venezuela that the constitution and democracy have triumphed, We accept the results just as they have been announced by the electoral body.”

Terrorism works on the perception of the victims. It seems incredible that ten mediocre individuals, with a few primitive weapons, could cause world-wide panic. But it is a fact. Bolstered by the mass media, which thrive on such events, local terrorist acts turn themselves nowadays into world-wide threats. The modern media, by their very nature, are the terrorist’s best friend. Terror could not flourish without them. The next best friend of the terrorist is the politician. It is almost impossible for a politician to resist the temptation to ride on the wave of panic. Panic creates “national unity”, the dream of every ruler. Panic creates the longing for a “strong leader”. This is a basic human instinct.

“There have been arrests and crackdowns before on grass-roots labor organizations here,” one activist, He Shan, said in a telephone interview from Shenzhen, a mainland city that abuts Hong Kong. “But this is the most concentrated, the most serious. For us, this is unprecedented.”

As we approach the Fed meeting expect markets to get more volatile. While the odds favor a move, it isn’t a sure thing until it is actually done. We found out last week what happens when forward guidance turns out to be forward misdirection. All those traders who thought they had a sure thing, who assumed that Draghi wouldn’t dare disappoint the market, got whipped. Whipped good.

Until pro-growth, low taxation and less regulation policy changes are enacted, we don’t foresee any changes to central bank policy nor the unsustainable market divergences and asset price distortions. Expect more media propaganda on how great the economy is while the reality is another story. Early signs are that retail sales this holiday season are poor. Nobody can predict when reality will set in and equity markets revert back to pre QE levels in 2008/09. The longer this charade continues, the lower equity markets will eventually go, and in the short-term so will commodities. Then the super cycle in commodities will begin anew. Much this will hinge on next fall’s election cycle.