Here are all the ways inflation is happening today
November 8, 2018
Something strange happened in the markets last month that signals trouble ahead…
When stocks fell from their September highs, you would have expected investors to run for cover in the world’s safe-haven asset – US Treasurys.
But that’s not what happened.
While stocks were plunging, Treasurys also fell. Yields on 30-year Treasurys increased to 3.4% from 3.22% (and yields have already more than doubled from their 2016 lows).
It’s a sign that the market is worried about the US government’s ability to pay its exploding debts and that inflation is creeping back into the market. That makes me a bit nervous because we haven’t seen inflation in a decade.
We’ve seen an increase in oil prices, food prices, rent and many other things that eat into people’s savings. Unemployment is low and US wages increased 3.1% in September (the highest in nine years). And core inflation is already running above the Fed’s target of 2%.
In general, inflation is nothing to panic about. The Fed is supposed to raise rates when inflation heats up, which it’s been doing.
But as rates have moved higher, we’ve already seen stocks and real estate fall.
The entire financial system has been dependent on super low rates for the past ten years. The Fed held rates at zero for a decade and printed trillions of dollars.
The increase in prices and interest rates to date is only the beginning.
Just take a look at what’s happening in the economy right now…
Food companies like Coca-Cola, Mondelez, Hershey and Kellogg are all raising prices as both ingredient and transportation costs increase. Kellogg’s CEO recently said in an interview, “We think 2019 will be more inflationary than we have seen historically since the recession.”
McDonald’s and Chili’s both raised prices.
Airlines are paying 40% more for jet fuel than they were a year ago.
Manufacturing companies are paying 8% more for aluminum and 38% more for steel than a year ago… and they’re dealing with a 10% tariff on Chinese goods.
Paint company Sherwin-Williams increased prices in its stores as much as 6% last month, with the CEO saying “Raw material inflation has been unrelenting and accelerating.”
Even Apple is falling victim to inflation. The company raised prices on its new MacBook Air and iPad Pro by 20% and 25%, respectively.
Companies are passing along price increases to you, the consumer. And that makes it harder for you to “tread water” financially.
The Fed will have to further boost interest rates in reaction to this inflation.
But it’s raising rates while the US government is running trillion-dollar deficits into perpetuity. And now it will have to pay more interest on that debt (which it already can’t afford).
The world hasn’t seen inflation in a decade now. But it’s coming. And while the Fed is raising rates to combat inflation, there’s zero chance it hits the perfect mix to keep markets chugging along.
Remember, we’ve already seen the stock market and real estate panic crash in response to a small interest rate hike.
And I think there’s more pain ahead as inflation really starts to work its way into the economy.
With inflation looming, I’d want to own some gold. I’m also happy waiting it out in 28-day Treasury bills, so I’m liquid when buying opportunities arise.
And next week, I’ll share another interesting asset you can hold to combat inflation (something that’s trading close to its post-crisis lows).
GE was once a fine company that was engaged in research & innovation of all kinds of various products, until the bean-counters got ahold of and gutted it transforming the company into a financial holding company... and ironically they couldnt even manage a holding company much less a company that produces real things in real time...
The package for newcomers to this Oklahoma city includes a free membership at a co-working space
Tulsa claims it is ‘the ideal city’ for remote workers due to its array of museums, low cost of living, and food and drink scene.
Go West, young entrepreneur.
Tulsa, Okla. is offering remote workers $10,000 to move there. The city is joining the ranks of other locations in the U.S. including Vermont and Maine advertising incentives to workers for relocating.
Tulsa claims it is “the ideal city” for remote workers due to its array of museums, low cost of living, and food and drink scene.
“Tulsa is gaining international recognition for the use of modern technology to better serve citizens, and one of the areas where we see great opportunity is as a home for remote workers,” Tulsa Mayor G.T. Bynum said.
One catch: You have to stay in Tulsa for a full year to cash the complete prize.
One catch: You have to stay in Tulsa for a full year to cash the complete prize. Each $10,000 grant comes in the form of $2,500 to be put towards relocation expenses, a $500 per month stipend, and $1,500 at the end of a 12-month program.
The grant, which is offered in partnership with the City of Tulsa and the George Kaiser Family Foundation, also includes a free membership to 36 Degrees North, a co-working space in the city. The folks behind the program are hoping remote workers will choose to stay beyond that 12-month finish line.
“We are looking for talented and energetic people who not only will consider relocating permanently to Tulsa but especially for people who want to make something happen here — to add to the dynamism, idealism and get ‘er done spirit of Tulsa.” Ken Levit, executive director of George Kaiser Family Foundation, said.
The rate of violent crimes there is 565.7 per 100,000 people, according to the FBI.
The cost of living in Oklahoma is 8% lower than the national average, according to salary-comparison site Payscale. But based on its cost of living, quality of life, and job market, Oklahoma was ranked 43 out of 50 in a recent U.S. & World Report ranking of the best states in which to live.
The Tulsa Remote program comes as flexible work is on the rise. The number of people quitting their jobs for flexible work doubled from 2014 to 2017 and the number of remote jobs rose 115% between 2005 and 2018, according to FlexJobs, a job-search site for remote work.
Remote workers are shown to be more productive than non-remote workers: A 2017 study of 24,000 workers from the video and voice collaboration technology company Polycom Inc. found that 98% of people said the ability to work anywhere has a positive impact on productivity.
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Bitcoin prices tumbled on Wednesday, crashing through the psychologically important $6,000 level and making a new low for 2018.
A single bitcoin BTCUSD, -2.57% was last fetching $5,466.59, down 13.6% since Tuesday at 5 p.m. Eastern Time on the Kraken crypto exchange. Bitcoin reached a session low of $5,405.97.
“After the recent attempt to clear $6,500 bitcoin has lost all its momentum and now we are seeing some very bearish signals,” said Naeem Aslam, chief market analyst at Think Markets U.K. Aslam added that a break of the 2018 low, would open up a move towards the $5200 to $5300 level.
sure thing, as people try to figure the future and the impact of the us house lost to dems,
they all claim it is related to the chin trade along with needing a correction of decent magnitude,
I disagree with the talking heads and think it is more related to the former as intelligent people hedge against the dems restricting progress and maybe causing just the opposite.
as for oil, that one is interesting as the story lays the blame at demand. Demand here in the US seems to be quite steady if not rising. If that is the case, then is world demand down? What does that state for world economies then?
(Reuters) - U.S. farmers finishing their harvests are facing a big problem - where to put the mountain of grain they cannot sell to Chinese buyers.
For Louisiana farmer Richard Fontenot and his neighbors, the solution was a costly one: Let the crops rot.
Fontenot plowed under 1,000 of his 1,700 soybean acres this fall, chopping plants into the dirt instead of harvesting more than $300,000 worth of beans.
His beans were damaged by bad weather, made worse by a wet harvest. Normally, he could sell them anyway to a local elevator - giant silos usually run by international grains merchants that store grain.
But this year they aren’t buying as much damaged grain. The elevators are already chock full.
“No one wants them,” Fontenot said in a telephone interview. As he spoke, he drove his tractor across a soybean field, tilling under his crop. “I don’t know what else to do.”
Across the United States, grain farmers are plowing under crops, leaving them to rot or piling them on the ground, in hopes of better prices next year, according to interviews with more than two dozen farmers, academic researchers and farm lenders. It’s one of the results, they say, of a U.S. trade war with China that has sharply hurt export demand and swamped storage facilities with excess grain.
In Louisiana, up to 15 percent of the oilseed crop is being plowed under or is too damaged to market, according to data analyzed by Louisiana State University staff. Crops are going to waste in parts of Mississippi and Arkansas. Grain piles, dusted by snow, sit on the ground in North and South Dakota. And in Illinois and Indiana, some farmers are struggling to protect silo bags stuffed with crops from animals.
U.S. farmers planted 89.1 million acres of soybeans this year, the second most ever, expecting China’s rising demand to give them better returns than other bulk crops.
But Beijing slapped a 25 percent tariff on U.S. soybeans in retaliation for duties imposed by Washington on Chinese exports. That effectively shut down U.S. soybean exports to China, worth around $12 billion last year. China typically takes around 60 percent of U.S. supplies.
The U.S. government rolled out an aid program of around the same size - $12 billion - to help farmers absorb the cost of the trade war. As of mid-November, $837.8 million had been paid out.
Some of that money will pass from farmers to grain merchants such as Archer Daniels Midland Co (ADM.N) and Bunge Ltd (BG.N), who are charging farmers more to store crops at elevators where there is limited space. Bunge and ADM did not respond to requests for comment on storage fees.
The storage crunch and higher fees have boosted revenues at grain elevator Andersons [ANDE.O], Chief Executive Officer Pat Bowe said in an interview.
“It’s paying a grain handler to store - it’s the old-fashioned way to make money,” Bowe said.
These are also boom times for John Wierenga, president of grain storage bag retailer Neeralta. Sales of their bags - white tubes up to 300 feet now littering Midwest fields - are up 30 percent from a year ago.
“The demand has been huge,” Wierenga said. “We are sold out.”
Farmers are feeling the pinch. Those in central Illinois could pay up to 40 percent more than in previous years to store crops over the coming weeks, agricultural consultant Matt Bennett estimated.
That amounts to between 3 cents to 6 cents a bushel, Bennett said, a painful expense for a crop that was already expected to deliver little income to farmers.
Storage rates are swinging wildly, depending on the elevator location. Grain dealers at rivers typically charge more than their inland counterparts because they are more dependent on export markets.
At some Midwest river terminals, farmers were paying 60 cents a bushel to store soybeans until the end of the year - more than twice as much as a year ago. Some commercial terminals are charging farmers to just drop off their soybeans.
The trade war has only exacerbated the strain on storage, which has been a persistent problem in recent years due largely to a worldwide oversupply of grains.
Even before this fall’s harvest, around 20 percent of total grain storage available in the U.S. was full with corn, soybeans and wheat from previous harvests, according to the U.S. Department of Agriculture. That was the highest in 12 years for this time of year.
Some grain merchants are also charging additional fees for farmers who deliver less-than-perfect soybeans, said Russell Altom, a soybean farmer and senior vice president of agricultural lending at Relyance Bank in Pine Bluff, Arkansas.
“I’ve never seen things this bad,” Altom said. “I know several farmers who hired lawyers, to see if they can sue over the pricing and fees issues.”
Eric Maupin, a farmer in Newbern, Tennessee, said he was facing so-called dockage rates of between 60 cents at $1.20 per bushels at Bunge Elevators in his area - more than three times as high as a year ago.
“Damage can be anything - a split bean, one that’s too small, one that’s too big - whatever,” Maupin said.
Some farmers are pulling farm equipment out of barns to make room for the overflow of grains.
After packing nearly half a million bushels of corn and soybeans in their usual steel bins, Terry Honselman and his family found some additional space in 35-year-old shed on their Casey, Illinois, farm.
Most years, the building protects farm equipment and bags of seed. Now, it is stuffed with 75,000 bushels of corn.
Like others, Honselman is banking on a resolution to the trade war before this spring - when he says he will need the space back for his planting supplies.
As global growth continues, some think we may be in the later stages of the economic cycle. What should fixed income investors be watching in this environment?
We sat down with six senior portfolio managers in Morgan Stanley Investment Management’s fixed income group to get their take on where risks and opportunities lie. These managers oversee public as well as private and liquidity strategies. As active managers, they have the latitude to dynamically adjust their portfolios.
When market conditions change, they adapt by fine-tuning their portfolios’ duration, credit exposure, yield curve positioning, currency exposure and security selection. Their goal: To capture alpha – wherever it exists – across global financial markets.
**Warning** - it's a hard read below because it's copied from a PDF format.
For a better layout click the link. I think it's worth the read.:
Built for Change
Fixed Income: From
the Fed to Blockchain
| MACRO INSIGHT | 2018
MORGAN STANLEY INVESTMENT MANAGEMENT
BUILT FOR CHANGE
Let’s start high level. What is
your outlook for Fed policy,
interest rates and inflation?
The consensus around
the Fed is that they will probably hike rates
twice more this year, though there’s a chance
that they may skip December. It depends on
We don’t see a lot of movement higher in
interest rates and don’t think the 10-year yields
will materially rise (and stay) above 3% unless
we get a significant change in inflation or
growth expectations. Core inflation so far has
been running around 2%. It may drift a little
higher than that but probably not materially.
So I don’t really see an inflation impetus.
Growth has been good in the U.S. and second
quarter growth is likely to be strong. But as we
move into the third and fourth quarters, we
may find it peaked for the year in the second
quarter. So we may have lower growth, but by
lower we mean it could be 2.8%, 2.9% or so.
I don’t see any economic events taking place
right now that would push inflation rates or
growth expectations higher, so interest rates
are likely to remain bound within a benign
range—say, in the 2.7% to 3.1% range.
Our view is that the Fed will
likely raise rates twice more, for a total of
four moves this year. I think some of the
geopolitical stuff that’s going on
tariffs, turmoil in Europe and foreign policy
questions with China and North Korea
play into the Fed’s decision-making. The
market is priced for one and a half moves
for the rest of this year, so whether the Fed
ultimately raises rates once or twice more, the
market won’t be overly surprised either way.
Looking into next year, I see a bit of a
disconnect: The Fed is signaling three more
hikes, but the market is priced for much less
than that. That will be interesting to watch.
On the inflation front, I think the Fed is
confident that inflation will meet their 2%
target and are willing to let it run slightly above
2% if the numbers get there. I don’t think
that the Fed would tolerate a huge inflation
overshoot for a prolonged period of time, but I
think it is likely to run at or slightly above the
Fed’s target later this year and into next year.
What do you think the
yield curve is telling us?
Because the Fed is
increasing interest rates, the path
of least resistance for the yield curve is for it
to flatten. And I choose my words carefully
here, because the Fed is not “tightening”
is simply removing excess accommodation.
I would argue that the Fed will not start
tightening until the nominal Fed funds
rate rises above 3%, and that might not be
A very flat or inverted curve that comes
coincident with a Fed’s fund rate at or above
3% would send a signal about a potential
recession nine, 12 or possibly 18 months later,
but the idea behind a flat-to-inverted curve
signaling a coming slowdown in the market is
based on an assumption that the Fed is actually
Moreover, the Fed still holds a lot of Treasuries
on its balance sheet. As a result of this
continued “stock effect” of quantitative easing
(QE), we calculate the term premia and yield
curve are probably about 40 basis points flatter
than they would be otherwise. So making an
apples-to-apples comparison of the shape of
the curve with historical context would require
adding about 40 basis points to the curve
right now in order to control for lingering
The flattening of the yield curve does signal
an expectation that growth may be peaking,
but we also have to ask how much growth will
slow, how quickly and whether that necessarily
signals a recession. Right now what I would
say is that we’re watching it but we’re not
As Jim pointed out, although
historically an inverted yield curve has been
a fairly strong recession indicator, today’s
inversion is not typical. Normally, the
Fed raises rates in order to slow down an
overheating economy or to contain inflation
that’s getting a little bit too hot for their liking.
The current “tightening” campaign is totally
different in that the Fed is simply trying to
normalize monetary policy from extreme
not to slow the economy or contain
inflation. They are not tightening in the
The flattening of
the yield curve
does signal an
The Fed is
hikes, but the
market is priced
for much less
FIXED INCOME: FROM THE FED TO BLOCKCHAIN
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MORGAN STANLEY INVESTMENT MANAGEMENT
There are also factors in the broader market
that are holding down long-term rates. Some
of the major central banks of the world
example the ECB or the Bank of Japan
still continuing quantitative easing and
expanding their balance sheet. Taking
that duration and those bonds out of the
marketplace has helped hold down longer-term
interest rates. With the Fed raising rates but
not tightening and the amount of quantitative
easing still in the global system, the predictive
importance of a flattening or an inverted curve
might not be as high this time around.
What key indicators should we
be watching at this juncture?
The number one market
indicator is the dollar. It has the most far-
a strengthening dollar
would help slow the global economy, which
would in turn feedback and slow the U.S.
economy. It would signal risk-off, causing
people to move out of risky assets.
The second key indicator is jobs. The
unemployment rate staying relatively low,
at 4% or lower, is going to be critical for
continued strength and consumption. And the
third indicator would be wages. We need to
see wages start to move a little higher. To some
extent, slow wage growth has been keeping
inflation down, but I would also look at wage
growth pretty closely. Those three are the key
indicators at this point.
I come at this from the liquidity
part of the market, at the short end of the
curve. We look at eurodollar contracts, which
are forward three-month LIBOR proxies.
These are showing not only a slowing of the
pace of tightening in 2019 and into early
2020, but also slightly lower yields for those
end-of-2020 contracts. We’re talking about
single-digit basis points, but that eurodollar
curve nevertheless indicates not only a Fed
that is pausing at some point in mid-2019 but
maybe even a Fed that’s starting to move in the
Those forward contracts don’t jibe with the
path the Fed is projecting, so I think watching
those contracts to see how they develop over
the next 12 to 24 months will be interesting.
Right now they are showing a picture that
would require some fairly significant changes
in terms of how the Fed is viewing their
outlook for monetary policy.
If we continue to see front-end rates rising
against the backdrop of some uncertainty
in the longer end of the curve, it can create
some real opportunities in front-end liquidity-
What asset classes offer
the best opportunities today?
We generally think this
is a good environment for credit, specifically
investment-grade corporates. Among the
say single-A financials
and single-A industrials
we have a strong
preference for the financials even though
they’re trading at roughly the same spread. The
financials, the banks in particular, continue to
be in a period of secular de-risking and remain
supported by strong regulatory oversight. Most
financials have been raising capital, reducing
the risk of their businesses and generally doing
the kinds of things that bondholders like.
Financials have been, and continue to be, our
favorite segment of the investment-grade credit
market given this combination of improving
fundamentals and attractive valuations.
We are a bit more cautious on the nonfinancial
side given some weaker fundamentals, mergers
and acquisitions (M&A) risks and evolving
technology and disruption risks. We’ve seen
a fair bit of financial engineering
you might call bondholder unfriendly
activity like increasing leverage for M&A or
stock buybacks, especially among some of
the higher-rate companies. Many of these
companies don’t mind getting downgraded
so long as they can remain investment grade.
Companies already at the lower end of
investment grade tend to be more careful about
engaging in these kinds of activities because
they are sensitive to avoiding a downgrade into
high yield. Our credit research team has found
some attractive opportunities in this segment
of the market.
We also remain focused on growing
technologies. Blockchain, autonomous driving
and renewable energy could produce winners
and losers in the years ahead. So all else being
equal, we have a preference for higher-rated
financials and for the lower end of investment
grade for nonfinancial companies.
losers in the
MORGAN STANLEY INVESTMENT MANAGEMENT
BUILT FOR CHANGE
I’ll touch on high yield.
Our approach is to invest in middle-market
credits, which we define as companies with
$150 million to $1 billion in total bonds
outstanding, and within that space, focusing
on lower-duration credit given the rising-rate
environment. Our preference has been to
keep duration in our portfolios around three
quarters of a year shorter than the index, while
maintaining a yield advantage of 50 to 100
basis points relative to the index, so we are
looking for middle-market companies with
higher yields and shorter durations.
We are overweight in cyclical areas: energy,
diversified manufacturing, building materials,
transportation services and industrial other,
which ties in with Jim’s outlook. The economic
backdrop is good, default rates continue to
decline and technicals remain strong. Through
June, U.S. high-yield new issuance is down
27% year-over-year, which has been supportive
of the market.
Additionally most of the bond
issuance is being used to retire older, higher
With no sector currently facing overwhelming
default issues, we are underweight sectors with
a lot of low-coupon, long-duration bonds such
as wireless, wirelines, cable and media. We
don’t have default concerns, but don’t believe
these sectors offer good relative value at the
moment given the duration risk.
We are also broadly underweight financials due
to credit concerns. These financials are very
different from the investment-grade financials
that Neil was talking about. In high yield,
financial companies tend to be smaller, with a
subprime client base, focusing on things like
payday lending, auto lending, student loan
lending or mortgage servicing. These are much
riskier than large investment-grade financial
Finally, we’re also underweight health care
due to idiosyncratic news and uncertainty
surrounding what a new health care bill might
look like coming out of Washington.
After the fairly dramatic
sell off in the second quarter of this year, there’s
a lot of value across a wide breadth of emerging
market assets, whether it be sovereign debt,
local or external, or corporate debt. And with a
backdrop of good global growth and an interest
rate environment that isn’t too challenging, we
could expect emerging market assets to recover
Our biggest concern is global trade conflicts
that lead to lower trade and a drop in
commodity prices. A step backward in
globalization would be tough for emerging
markets, but that’s not our central case. After
the re-pricing, some countries were fairly
penalized due to their policy mix, but many
were penalized unfairly, in our opinion
a result, we’ve seen opportunities across
Based on valuations, we are overweight local
market issues and emerging market corporates
at the expense of sovereign bonds. We think
Argentina represents a lot of value with the way
that they have embraced a reform program, are
favorably disposed to Nigeria mainly through
their banking sector, and like local markets in
Egypt, Mexico and South Africa and external
debt in Ukraine and Kazakhstan. Although
Lopez Obrador won the presidency, we felt that
the fears of him were overblown, creating an
opportunity in Mexican assets.
What opportunities do you
see in the alternative fixed
alternative lending offers investors exposure
to a secular shift in the way consumers and
small businesses access capital. The lending
model grew out of small balance, peer-to-
peer unsecured consumer loans financed by
retail investors, but as the asset class matured,
institutional investors came in and now fund
most such loans.
At the same time, the types of credit risk
underwritten by alternative lenders have
expanded beyond unsecured consumer to
include small-business lending, student loans,
auto finance and other forms of specialty
finance. Alternative lending provides a
potential combination of better yield and
low duration. Its lower duration helps reduce
sensitivity to rising interest rates, while outsized
credit spreads provide a cushion against
credit loss. Alternative lending has exposure
making it a good
Bloomberg Barclays data as of June 30, 2018
FIXED INCOME: FROM THE FED TO BLOCKCHAIN
BUILT FOR CHANGE
MORGAN STANLEY INVESTMENT MANAGEMENT
to consumer credit, rather than corporate or
government credit, making it a good diversifier
when paired with other asset classes.
It has exhibited attractive absolute and risk-
adjusted returns. And it reflects a highly
diverse opportunity set, with a variety of
strategies providing multiple sources of
by loan segment, credit
quality, security interest, ticket size or duration.
What are your views
We have a
favorable view of the Mexican peso,
the South African rand and the Russian ruble.
The ruble could be volatile depending on
sanctions and relations with Russia, but Russia
has based their budget on a $40 oil price and
we’re well above that. The excess money is
going into an oil stabilization fund and toward
reserve accumulation. That’s all positive for the
We also like the Egyptian pound. It’s a fairly
stable currency and has high rates, both
real and nominal, that make it attractive.
More recently, we have turned more positive
on the Malaysian ringgit as well, based on
Prime Minister Mahathir looking to be far
more fiscally responsible than people had
feared, while doing a good job cleaning out
corruption. We also think the big sell-off in
the Argentine peso has made local floating-
rate bonds in Argentina fairly attractive. We
are still avoiding Turkey, even though the lira
had a huge sell-off, and feel that the market is
right in punishing Turkey for the direction of
its policy. We do not see measures being taken
that would reduce their current account deficit,
and we expect their fiscal position to weaken.
I agree with everything that Eric
said against the dollar. Thematically, I like to
think of it as being long the high yielders as
opposed to the low yielders, with many of the
high yielders being in the emerging market
space. The only ones that I would potentially
add are Australia and New Zealand, which are
h ig h qu a l it y.
Trying to get carry within currencies and
owning the high yielders is a consistent theme.
The only exception would be the dollar
could be considered a high yielder these days,
but we think the dollar may be overvalued.
Thanks to all of you for sharing your views. Clearly, today’s bond market requires
a new mindset. The kind of flexibility you demonstrate – in being able to tap a wide range of
alpha sources globally – will be crucial in helping to deliver competitive returns in this new era of
It may be impossible to hedge against the next major cyberattack, but there are some lessons from recent history and some clues from the private sector on what may be the next devastating cyberattack.
Many experts have warned for years about an impending “cyber 9/11,” and despite a nearly endless list of scenarios, there are a few that are more likely than others.
Attacks that spill into the physical world, those that cause a financial sector “contagion” or attacks on data integrity -- rather than theft or destruction -- are top-of-mind, frightening scenarios for experts.
For years, government security specialists have predicted the inevitable “cyber 9/11,” an event originating as a digital attack that spills over into other aspects of society, causing widespread harm to people and the global financial sector.
Former NSA head Admiral Michael Rogers told CNBC last month that “nothing is beyond the pale of possibility” for cyberattacks.
Fear sells. So it can be hard to know what experts really fear might happen, versus hype meant to market a new cybersecurity product or service, or drum up attention on social media.
But there are some nightmare scenarios that have precedent. These are the scenarios that truly concern independent cybersecurity experts.
They fall into three common themes: physical attacks that shut off or damage some aspect of critical services, financial attacks that spin out of control and lead to bank runs, and hackers changing data in a way that erodes trust in the economy and critical institutions.
Knocking out basic services
Cyberattacks that cause major disruption to public services have happened many times in the real world.
Some of them are very old news, in fact. But it’s easy to imagine how a similar attack could shut down basic services, like electricity or water, that affect millions of people.
In 2000, a disgruntled sewage treatment plant worker in Queensland, Australia hacked into his employer’s industrial control system to unleash torrents of raw sewage onto public grounds, flooding the city’s local Hyatt hotel. The perpetrator was sentenced to two years for the attack.
In 2007, the country of Estonia was subject to widespread outages in its entire telecommunications network, following a cyberattack stemming from a dispute with Russia over a military statue. The incident was so damaging, it led to a decision to place the North Atlantic Treaty Organization’s Cyber Security organization in Tallinn, the country’s capital.
In 2015, Ukraine’s power grid had massive outages after a cyberattack — which some officials have attributed to Russia — two days before Christmas, during a cold snap. Around a quarter-million residents were left without power, but the outages only lasted a few hours before government agencies were able to restore service.
Major cyberattacks aimed at taking down official services don’t need to be strictly nation-state sponsored or terrorist-backed.
They can be strictly criminal in nature, or come from a malevolent backer under the guise of a criminal attack.
The NotPetya cyberattacks of June 2017, known by the name of the criminal ransomware-inspired computer virus behind it, were notorious for the real-world harm they caused to companies. In Germany, consumer goods-maker Reckitt Benckiser halted shipments of numerous products. Ships belonging to logistics giant Maersk were at a standstill, and the company later said it took a $300 million hit from the attack. In the U.S., a facility owned by Merck that makes the HPV vaccine Gardasil was shut down to such a big extent, the company had to borrow hundreds of millions of dollars worth of back-up vaccines stockpiled by the Center for Disease Control.
Power outages or water supply corruption are the most worrisome to Peter Beshar, general counsel for risk management firm Marsh & McLennan. Loss of electricity, he said, is just one piece of the greater risk for physical security stemming from a cyberattack.
“Utilities are one vital resource. But it’s not just power, water is another type of utility. If all of a sudden, the quality of drinking water is called into question, and then manufacturers who rely on using untainted water for making drugs or food is called into question. That is a potential crisis,” he said.
A financial-sector attack that triggers a run
Financial regulators often talk about the risk of “contagion” as a result of an attack on banks or institutions like the New York Stock Exchange. The fear is that a cyberattack could send customers rushing to banks in a panic to pull out funds.
“When you have significant impact to financial systems and people can’t get to their money, they can cause just as much duress to the system as a major network outage,” said Jacqui McNamara, head of cyber security services at Australia’s largest telecom, Telstra, at an Oct. 23 cybersecurity conference in Australia.
These scenarios are both possible and alarming enough that companies and private-sector organizations have spun up some huge projects to protect against them.
“Imagine a cross-cutting attack that just ripples through the financial sector,” said Beshar. “If consumers couldn’t get cash out of ATM machines, if credit cards weren’t functioning, that would be very problematic.”
One of those initiatives, Sheltered Harbor, is a not-for-profit subsidiary of the Financial Services Information Sharing and Analysis Center. It’s got about 70 participants, including big names like Citi, Morgan Stanley and Goldman Sachs.
The purpose is to ensure banks can pull up the right information about customer accounts and still reconcile transactions in the face of a catastrophic cyberattack. The initiative is especially focused on an event that significantly destroys data, or takes critical systems out of service for an extended period of time.
For banks that are a part of Sheltered Harbor, the organization provides standards designed to back up the financial data they generate each day. This would give banks a way to restore data that’s lost in any attack.
Changing data so it’s wrong
Criminals or nation-states could also change data, like financial information on balance sheets or commands going into an industrial machine, instead of merely stealing it or deleting it.
That’s a big concern for Dmitry Samartsev, CEO of BI.ZONE, a Russian cybersecurity coordination organization for the country’s
“The worst case scenario is when [cybercriminals] are making several attacks at one time,” he said at the Oct. 23 conference.
For instance, an attacker might launch a simple denial-of-service assault on a corporation, shutting down its web site other services, then combine that with a slew of fake news on social media meant to imply major institutions are going to be out of service. The result could be panic.
There’s some precedent here, too. In 2015, BNY Mellon had a technical glitch that mispriced some securities. That jammed up the algorithms that are used for executing automated trades, and the result was a swift 1,000-point drop in the Dow.
A hacker took over the Twitter account of the Associated Press in 2013, tweeting “Breaking: Two Explosions in the White House and Barack Obama is injured.” The stock market instantly fell 143 points.
Tom Kellermann, a former top cybersecurity officer for the World Bank and chief cybersecurity officer of security firm Carbon Black, agreed that he’s most afraid of data being altered, instead of stolen or lost.
“Integrity of data is key. If you lose your ability to trust the information that is coming out of the financial sector, that is when things can turn dark and very quickly,” he said.
OECD Recommends Potential Major National Debt Increases: The Impact On Retirement
By Daniel R. Amerman, CFA
The Organization For Economic Cooperation and Development (OECD) is urging the nations of the world to be prepared for and have a coordinated plan to simultaneously engage in major "fiscal stimulus" in the event of a downturn in the global economy.
"Fiscal stimulus" is how economists refer to a government substantially increasing spending, while holding taxes constant or even reducing them. By pouring more money into the economy, while not taking more money out (or taking even less money out), the theory is that the economy and employment will get a large and positive jolt, and that this jolt will hopefully create sustainable economic and employment growth rates that persist after the stimulus is gone.
In other words - the OECD is urging the aging and heavily indebted major economic powers of the world, to be prepared to act in concert to simultaneously and rapidly borrow more money to pay for the fiscal stimulus, and thereby rapidly increase their national debts (and ongoing budget burdens in paying for those debts thereafter).
This premise of this analysis is that what is "in play" with such recommendations is not just the abstractions of international economics, but properly understood, this is the sort of reality-based information that should potentially have a quite direct impact on individual decisions for long term investment strategies, as well as retirement planning.
This analysis is part of a series of related analyses, an overview of the rest of the series is linked here.
As covered in a recent Wall Street Journal article titled "With Central Banks Out of Ammo, Governments Urged To Ready Stimulus for Next Downturn" (11/21/18, link here), the OECD is urging the governments of the world to prepare big and coordinated spending plans.
"Governments around the world must prepare spending plans they can roll out quickly and in concert should the global economy slow sharply, given that central banks have largely run out of ammunition to fight a slowdown, the Organization for Economic Cooperation and Development said."
The reason for this recommendation is that the central banks of the world have not yet recovered from the last crisis, and they are currently "out of ammo" to fight another economic slowdown or recession.
"Central banks did most of the heavy lifting in steering the global economy out of the sharp slowdown that accompanied the financial crisis. But they are largely out of ammunition, the OECD said. Policy interest rates are already negative across much of Europe and Japan..."
"With central banks sidelined, it would be down to other parts of governments to provide the stimulus needed to support growth in a future crisis."
Now, Laurence Boone, who is the chief economist for the OECD, was clear that they still officially expect a "soft landing", even though they have reduced their forecasts for global growth in the next few years. (The OECD is also forecasting real economic growth for the U.S. slowing to 2.7% in 2019, and 2.1% in 2020.)
However, the OECD sees interlinked dangers from tariff wars, trade barriers, further deteriorations in emerging market economies and higher oil prices that could pose an imminent threat to the global economy. And they are therefore recommending that the nations of the world act immediately to develop coordinated spending plans so they can take quick stimulus actions in concert if and when needed. Stacking Debt On Top Of Debt
Keeping in mind that "stimulus" by definition means major deficit spending which means major increases in the national debt - the OECD's recommendation might seem more than a bit surreal to many people.
The United States is already more than $21 trillion in debt. Near term annual deficits are already estimated to be in the $1+ trillion range. Those annual deficits are already projected to sharply increase into the $2+ trillion range as aging Boomers increasingly claim their promised Social Security and Medicare benefits.
And over and above all of that, the OECD is urging that the United States and other member nations immediately set up contingency plans to quickly spend still more trillions upon trillions of dollars, and ramp up the national debts that much faster still.
The United States is not alone. Japan already has a national debt that is in excess of 230% of its GDP. And yet, the OECD is recommending that Japan be prepared to rapidly increase spending without increasing taxation - and thereby rapidly drive up their national debt as well.
From a common sense perspective, such recommendations might seem absurd. Why would a nation in normal circumstances even consider such actions?
The answer is that a nation in normal circumstances would not - but neither the United States or much of the rest of the world is currently in "normal circumstances". Interest rates are still far below average in the United States, as a direct result of the last cycle of the containment of crisis. If a new cycle of crisis leads to a new cycle of the containment of crisis, attempting to limit the damage while rebooting the economy is likely to require drastic measures. This is even more true for Europe and Japan. Retirement Security & The Ongoing Costs Of The Last Stimulus
So what does any of this have to do with retirement planning?
Some people might say "everything", and other people might say "nothing".
A potentially useful perspective for practically answering that question can be seen in the graph below, which shows that we already just "did this." In the attempt to contain the damage from the 2008 Financial Crisis, the United States did use fiscal stimulus policies, which did produce enormous deficits and enormous borrowing, and did rapidly double its national debt in the space of few years.
If we look around us, the cost of those few years of stimulus is still very much with us today, and is likely to be with us for many years and decades to come.
The government is likely to only have so much money at any given point now or in the future, all else being equal. So major increases in national debt levels have the potential to lead to major conflicts of interest, with some of those conflicts of interest being with retirees and retirement investors.
One example is that if that if the national debt soars, then (all else being equal) interest payments on the national debt soar as well. Which means that that much less money is then available for paying for normal government services, or defense and national security - or Social Security and Medicare.
The graph above (detailed analysis link here) shows the projected national debt as a percent of GDP (per underlying CBO assumptions) under two scenarios. The gold scenario is the world as it is, with the national debt having rapidly doubled due to stimulus spending in the attempt to contain the financial crisis of 2008.
The purple scenario shows the world as it could have been, if the enormous previous stimulus spending had not occurred, and if the national debt were half what it is.
Huge annual deficits are projected for the future, if we look at the discrepancies between expected payroll taxes and expected Social Security and Medicare payments. What the purple area shows is what happens if every dollar of those promises were to be paid in full - with the shortfalls not being made up with tax increases, but simply borrowing every dollar of it.
The interesting part is that if the debt had not been doubled to pay for stimulus payments, and the borrowing power had been used instead to cover Social Security and Medicare deficits in full, then that same borrowing power could have covered every dollar of benefit payments in full through 2043, with no reductions in benefits or increases in taxes, and with the nation nonetheless being in continually better financial shape for that entire time than it is today.
So, rephrased, the borrowing power did exist to make Social Security and Medicare payments in full for life for the great majority of current retirees, as well as the substantial majority of most Boomers who have yet to retire - but that particular borrowing power is no longer there because it was used up instead for stimulus spending.
Now, the government at that time was of course very, very careful to never say "oh by the way, this throwing money at the economy as fast as we can will be taken out of your retirement benefits in 20 or 30 years". Even as the current government is careful not to present higher deficits today being potentially paid for by lower benefit payments in the future.
But that said, using up borrowing power is not a difficult concept, even if governments using deficit spending don't like to talk about it. A young person running up the credit card to buy clothes this week, means that the borrowing power isn't there to go to take the beach vacation next year. Run up the national debt to pay for stimulus spending now, and the same borrowing power is not available to use to pay retirement benefits in full in the future.
(None of these comparisons are meant to endorse the idea of running up debts for current spending, which is generally a really bad idea for both governments and individuals. But reality is what it is, and this is a useful way of looking at the real costs and tradeoffs for individuals when it comes to what is usually the abstraction of government deficit spending.
The other obvious issues that go well beyond the scope of this particular analysis relate to whether the previous or potential future rounds of stimulus were or will be "successful" or not. How long would the recessions last absent fiscal stimulus, and what would GDP be without stimulus spending?) Economic Theory Can Have Life Changing Implications For All
The past is the past, and the reason for this review is not to revisit the past - but to consider the quite real world effects of a government following the recommendation of the OECD, and potentially running up the national debt in the future. This may seem an abstraction to many people - but the individual impacts can be very real and even life changing.
According to the OECD - the world may effectively be stuck between a rock and a hard place. There are rising risks - not certainty, but rising risks - that a global slowdown could hit. If another cycle of recession and potential crisis hits, then in the OECD's opinion the global central banks simply don't have the ammunition to attempt to contain the crisis in the same way as they did the last time. This is because they never have recovered, the balance sheets are already expanded, and negative interest rates still prevail in the Eurozone and Japan.
So, the OECD's thinking is that if monetary policy is mostly unavailable, that leaves fiscal policy to reboot economic growth, and that necessitates a rapid return to stimulus spending, which requires running up the deficits and sending national debts soaring upwards again around the world.
This may seem like a quite twisted logic - but it also contains critically important investment information. Individuals all too often think in terms of either bad things happen or they don't, and either there is a crisis or there is not. International organizations and governments move right ahead to cycles of crisis and the containment of crisis.
The economists involved don't stop at considering a possible future downturn or recession - but go straight to how to get out of that crisis. And, as I have been exploring, that process can often involve turning the investment world upside down, which can then create a cyclical sequence of major losses and profits in all the major investment categories in a non-random manner.
Because the central banks still haven't recovered the ammunition used in containing the last crisis, a different approach may be required in the event of another crisis, and the best option the OECD sees for the globe in general when it comes to another cycle of the containment of crisis is to have a detailed and concerted plan for spending - that will as an unavoidable side effect, send those national debts leaping upwards.
If that happens, and the U.S. were to follow the OECD's advice and a second major stimulus round were to begin less than ten years after the last round ended - then yes, the resulting increases in the national debt could indeed have numerous and powerful effects on retirement investments and on retirement planning. Realistic Possibilities & Prudent Retirement Planning
There is an easy sort of categorization that many people do when it comes to subjects such as the one covered in this analysis. That categorization involves putting it in a slot such as "negative / pessimism / gloom & doom thinking", and to either embrace it as such, or to discount it and ignore it as such.
There is a different approach, and that is say that this is reality, this is the reality of how the world actually is at this point in time, and factors like this may very well turn out to be a governing reality when it comes to how our future retirements work in practice.
With the corollary being that if it is reasonable for a prudent person to believe that there is a respectable chance that this or something related to it could be our future reality, and we choose to completely ignore it because we just don't like it - then necessarily, we have introduced elements of fantasy and wishful thinking into the very heart of our retirement planning process. And this is true no matter how eminently respectable or widespread the retirement planning approach is which completely discounts such factors.
None of this to say that recession is inevitable within the next year or two, or that some sort of financial armageddon will necessarily occur in the near future. That is going too far the other direction. There is a vast, vast gap between completely ignoring the current still financially troubled state of the world, and going all the way to gloom, doom, retreating into a financial bunker and closing the door. And let me suggest the chances are very good that the reality of what is to be will fall somewhere in that vast gap.
The OECD is far from all-knowing - but they are in the top tier when it comes to international economic organizations. So, when the OECD has just urgently warned its member states of the need to prepare coordinated plans to massively boost their respective national debts (as a necessary part of financial stimulus) in the event of a global economic downturn - that does meet the test of being materially important information that a reasonable and prudent person should at least be aware of and take into account as a possibility when evaluating their individual retirement and other financial planning.
One very practical implication is that savers should be prepared for the possibility of even lower interest rates into the indefinite future. Higher national debts mean a much greater conflict of interest between heavily indebted nations needing very low interest rates, and retirees hoping to live off of their interest earnings.
Another very practical implication is that those planning for retirement should consider increasing their "discount rate" when it comes to evaluating the likely true value of payments from such government retirement programs as Social Security and Medicare in future years and decades. Higher national debts create another form of conflict of interest, which is the ability to service those much higher debts while still paying retirement promises in full.
A third very practical consideration is that the OECD believes that the chances are rising that the nations of the world will be going through another cycle of crisis and the containment of crisis, and they feel so strongly about it that they are urgently warning their member governments to be prepared. As discussed in the analysis linked here, that means investors should also be prepared for another cyclical sequence of rapid price movements for stocks, bonds, home prices, REITS and precious metals, that could involve some of the largest cyclical profits and losses that we have seen to date.
To take the already staggering national debts of the United States and other nations, and to consider deliberately rapidly adding still more trillions on top of that, might seem like a highly unlikely nightmare scenario. But yet - making detailed plans for exactly that scenario is what the OECD is now recommending for its member nations.
Hopefully this scenario will not come to pass. However, if the chances are increasing, then making realistic retirement plans requires being at least aware of that rising possibility, why the possibility exists, and to be thinking through the potential personal implications before it is too late to do anything about them.
438 Stocks on the NYSE Have Already Plunged 40%-94% from 52-Week Highs
6 stocks have plunged 90% or more from their 52-week highs. This includes number 1, Parker Drilling down 93.6%.
11 stocks have plunged between 80% and 90% from their 52-week highs. This includes a bunch companies in the shale-oil space, retail-technology provider Diebold Nixdorf, and addiction rehab provider AAC.
26 stocks have plunged between 70% and 80% from their 52-week highs. This includes meal-kit highflier and former unicorn Blue Apron and 2-day-miracle super-duper unicorn Snapchat parent Snap that had soared to $30 billion in market cap on day two after its IPO (to $29.30 a share). It’s now at $6.35, down 78.3% from its all-time high and down 70.1% from its 52-week high. This category also sports former retail-icon now retail-zombie J.C. Penney.
54 stocks have plunged between 60% and 70% from their 52-week highs. This includes wannabe-blockchain-scam outfit Eastman Kodak, Och-Ziff Capital management, Tata Motors (ADR), Lumber Liquidators, homebuilders Hovnanian and William Lyon Homes, and Luby’s (Luby’s, Fuddruckers, Koo Koo Roo, Cheeseburger in Paradise).
122 stocks have plunged between 50% and 60% from their 52-week highs. This includes General Electric (at -59.7%, it barely missed the category above), crane maker Manitowoc, Winnebago Industries, Eldorado Gold, Rite Aid, teetering California utility PG&E (-56%, even after its regulator-induced 40% bounce over the past four trading days), Container Store, Deutsche Bank (-53.3%), homebuilder Beazer Homes, real estate focused Colony Capital, Dean Foods, Korean LCD manufacturer LG Display, Marriott’s former timeshare outfit Marriott Vacations Worldwide, and Aurora Cannabis.
219 stocks have plunged between 40% and 50% from their 52-week highs. This includes Owens Corning, Alcoa, US Steel, Grubhub, Lions Gate Entertainment, PittneyBowes, Abercrombie & Fitch, DuPont spin-off Chemours, Halliburton, Tenet Healthcare, chemicals maker Huntsman, Chesapeake Energy, formerly red-hot online-only furniture retailer Wayfair, Yelp, Del Monte, Manpower, Schlumberger, Michael Kors, GE’s partial acquisition Baker Hughes, homebuilders KB Home and Lennar, megadealer AutoNation, Credit Suisse, and Legg Mason.