Category: Finance

Tax Reform & The “Japanification” Of America

Authored by Lance Roberts via RealInvestmentAdvice.com,

On Friday, Kevin Brady of the House Ways and Means Committee was on my radio program discussing the “Tax Cuts & Jobs Act” bill which was released later in the day.

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Here are the details of the release he referenced in the interview.

Of course, the real question is how are you going to “pay for it?”

Even as Kevin Brady noted in our interview, when I discussed the “fiscal” side of the tax reform bill, without achieving accelerated rates of economic growth – “the debt will balloon.”

The reality, of course, is that is exactly what will happen because there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.

Those, of course, are the long-term concerns that will lead to lower rates of returns for equity-based investors and will continue to suppress interest rates for the next decade as the “Japanification” of the U.S. continues.

Let’s Be Like Japan

“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the ‘painkilling’ effect wears off, U.S. and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.”Keiichiro Kobayashi, 2010

While Kobayashi will ultimately be right, what he never envisioned was the extent to which Central Banks globally would be willing to go. As my partner Michael Lebowitz pointed out last week:

“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”

As he noted, the belief was that by driving asset prices higher, economic growth would follow. Unfortunately, this has yet to be the case as debt both globally and specifically in the U.S. has exploded.

“QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.”

While Mr. Brady is very optimistic about future rates of economic growth, even Ms. Yellen in her latest policy announcement was not so sure. The Fed’s average of long-term growth expectations is currently running at just 1.9%.

The continuing mounting of debt from both the public and private sector, combined with rising health care costs, particularly for aging “baby boomers,” are among the factors behind soaring US debt. While “tax reform,” in a “vacuum”  should boost rates of consumption and, ultimately, economic growth, the economic drag of poor demographics and soaring costs, will offset any of the benefits.

The complexity of the current environment implies years of sub-par economic growth ahead as noted by the Fed last week. Of course, the US is not the only country facing such a gloomy outlook for public finances, but the current economic overlay displays compelling similarities with Japan in the 1990s.

Also, while it is believed that “tax reform” will fix the problem of lackluster wage growth, create more jobs, and boost economic prosperity, one should at least question the logic given that more expansive spending, as represented in the chart above by the surge in debt, is having no substantial impact on economic growth. As I have written previously, debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service.

Of course, one only needs to look at Japan for an understanding that QE, low-interest rate policies and expansion of debt have done little economically. Take a look at the chart below which shows the expansion of the BOJ assets versus growth of GDP and levels of interest rates.

Notice that since 1998, Japan has not achieved a 2% rate of economic growth. Even with interest rates now pushing into negative territory, economic growth remains mired below one-percent, providing little evidence to support the idea that inflating asset prices by buying assets leads to stronger economic outcomes.

But yet, the current Administration believes our outcome will be different.

The reality is that the U.S. is now caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.

This is the same problem that Japan has wrestled with for the last 20 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:

  • A decline in savings rates to extremely low levels which depletes productive investments
  • An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
  • A heavily indebted economy with debt/GDP ratios above 100%.
  • A decline in exports due to a weak global economic environment.
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve
  • Weak industrial production
  • Dependence on productivity increases to offset reduced employment

The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.

If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.

Japan, like the U.S., is caught in an on-going “liquidity trap”  where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.

More importantly, while there are many calling for an end of the “Great Bond Bull Market,” this is unlikely the case. As shown in the chart below, interest rates are relative globally. Rates can’t rise in one country while a majority of economies are pushing negative rates. As has been the case over the last 30-years, so goes Japan, so goes the U.S.

Unfortunately, for the Administration, the reality is that cutting taxes, and MORE debt, is unlikely to change the outcome in the U.S. The reason is that monetary interventions and government spending don’t create organic, and sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.

But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, hoping for a different result. 

What’s the worst that could happen? 


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Bitcoin, Tulips, and Power Consumption

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FS Staff – On the day we are writing this, bitcoin traded as high as $19,227.08. The price increase for 2017 has been so explosive that major media outlets are now providing regular price updates around the clock while profiling a new crop of bitcoin millionaries…

Vía Financial Sense http://ift.tt/2BsTlqz

How to Act Compassionately Towards Transgender People: Do Not Encourage a Delusion

Via The Daily Bell

I’m not allowed to say what I am about to say, according to the mainstream media.

They claim the only reason I would make this argument is that I am full of hate.

The truth is, I don’t want to see the media dupe people with a mental health condition into making destructive decisions.

I came across a news story about an entire family in transition. First, the son began a transition to female, and then the daughter to male, followed by their mother to male. The mother then met someone transitioning to female, and they are now engaged.

Is it “wrong” to say, mother, son, and daughter? Is that now considered “hate speech”? It is almost impossible to coherently discuss transgender issues without running afoul of politically correct speech.

All I know is that I had to read the article twice to understand who started as male, who was female, and what they now identified as. Already politically correct speech is clouding the ability to convey basic facts.

The Media Bullies Anyone Who Wants to Have a Rational Discussion

CNN invited Ben Shapiro on as a stand-in punching bag to discuss Caitlyn Jenner. This was in 2016 just after Jenner won some award for being super brave about transitioning.

 

Do you see the way they all team up on Shapiro and try to beat him into submission? They tell him he is full of hate. They say he is angry inside. They bully him. They yell at him.

And the strong-jawed person with long blond hair sitting next to Shapiro threatens him with violence while laying hands on him saying, “You cut that out now, or you’ll go home in an ambulance.”

What the hell is going on?

Shapiro is simply trying to have a discussion about biology and sex. He can’t even get his point out because all the other guests attack him for using the correct words to describe objectively true facts.

What is accepted as true on CNN is the statement, “We both know, that the chromosomes do not necessarily mean that you are male or female.”

But in the real world of biology, that is exactly what that means.

Yet the public is supposed to accept the falsity without protest, or even discussion. Shapiro was threatened with violence for asking a transgender person what chromosomes are present in their cells. The message is if you don’t want to be singled out and bullied, accept what we tell you as the truth.

The media uses phrases like “gender confirmation surgery” and “sex assigned at birth.”

A surgery which changes superficial indicators of sex confirms your gender. A biological fact at birth is an arbitrary assignment.

What Does the Science Really Say?

Make no mistake, the people pushing all this confusion are not at all consistent nor scientific.

They say that gender is a social construct that can be chosen. That is redefining what the word gender means, but fine. We can make a distinction between gender (cultural expression of sex) and sex (biological anatomy).

So then who cares if a boy likes dresses and tea parties, and a girl likes getting dirty and playing video games?

But the media isn’t done. They turn around and say you can change your biological sex to match your gender expression.

This is not true.

They can redefine the word gender to refer to stereotypical expressions of sex. But they cannot ignore the science that sex is defined by the chromosomes in your cells.

You can’t even get an accurate picture of any science behind gender dysphoria from supposedly scientific publications. They join in to blur the lines between science and propaganda.

National Geographic ran a story exploring the lives of transgender children. Except that they also throw in a case of a chromosomal condition where a child is born with both male and female genitalia. Another case details an enzyme deficiency which causes a child’s sexual organs to appear female until puberty when a surge of testosterone causes the male development of the sexual organs.

These conditions are real medical anomalies which blur the biological lines between the male and female sex. They are entirely different from the mental condition in which people self-identify as the opposite sex but show absolutely no physical attributes of that sex.

I don’t doubt that these people feel like the opposite sex. They are allowed to feel and act as they wish.

What they cannot do is force me to play along. They cannot force me to ignore science, and pretend that they are capable of becoming the opposite sex. They cannot force people to lie to their children and teach them that you can switch from one sex to the other. You cannot.

But you can go to extremes in how you express your gender. This includes irreversible mutilation meant to make your genitals look like those of the opposite sex. This also includes barely tested hormones and drugs which could very well cause serious health issues.

The media is helping to push life-altering drugs and surgery on people, including children.

The media is convincing people to make decisions they may regret, and imbibe substances that are untested, and carry serious risks.

And the media’s lies about the science behind “gender reassignment surgery” is making life harder for people with the mental condition called gender dysphoria.

What is Going on Here?

It all seems like an elaborate test to see how easy it is to control people. When the news says jump, we are supposed to say how high. There is to be no discussion of science, and no room for dissenting opinions.

I agree with Ben Shapiro. There is no hatred in my opinion. I don’t even have a problem with adults transitioning if that is what they want to do. I believe in freedom, so I would never want to restrict any individual’s action that doesn’t hurt anyone else.

But I think the media is using and abusing people with a serious mental health issue.

I don’t think the “solutions” put forward are healthy. And I will not be bullied into joining a mass delusion about the ability to change sexes.

I won’t join in and encourage transgender people to get surgery and take drugs that are dangerous. I certainly won’t lie to kids about the definition of male and female.

And I believe it is child abuse to allow a kid to take hormones and mutilate their genitals in an attempt to appear as the opposite sex.

On the other hand, think parents should allow their kids the freedom to dress and act however they want. If their interests are those more typical of the opposite sex, so be it. If your son wants to wear dresses, grow his hair out, and be addressed as she, I don’t think it is crazy for a parent to allow this. By all means, let your kids express themselves freely.

But once you start giving hormones and life-altering surgery to ten-year-olds, that is child abuse.

When it comes to adults, I also have absolutely no problem with people dressing however they want to dress, and cutting their hair in whatever way they want. By all means, eschew traditional gender roles. Act the way you want to act. Honestly, who cares what other people think? Who cares what I think?

But it is from a compassionate standpoint that I urge people who identify as the opposite sex to think twice about surgery and drugs. What happened to not having to change in order to love yourself? What happened to being perfect the way you were born?

I understand that people may truly wish they had the opposite sexual organs. But it is not at this point possible to acquire functioning sexual organs of the opposite sex. You can mimic the way they look, but you cannot change your biological sex.

The Compassionate Way to Deal With Gender Dysphoria

In the transgender family, the kids wanted to express the opposite gender before the mother. So the parents do not appear to have directly influenced the kids’ gender identification. The mother claims transgenderism runs in the family. And this may very well be the case. Mental conditions are often hereditary.

But again Shapiro brings up a good point. We don’t tell schizophrenics that they are hearing real voices in their heads. That would be cruel. Instead, we attempt to help them.

The suicide rate for transgender people is alarmingly high. But Shapiro claims the rate is the same before and after a transition. That means transitioning does not alleviate mental anguish.

So is it really so crazy to think of other possible solutions?

Maybe mutilating sexual organs and taking hormones to make the body mimic the opposite sex is not the best treatment.

You cannot change the chromosomes in your body. You cannot produce sperm if you are a woman, and you cannot ovulate if you are a man. That is science. And still, when Shapiro says these things, he is called a bigot, a hate-monger, and so on and so forth.

But like Shapiro, we should not yell back at the bullies. We should not engage them at their level.

Now more than ever, rational people must stay cool, calm, and collected. This is a message of compassion, not of hate.

The media is not compassionate to transgender people suffering from mental anguish. They feed into their delusions. They encourage “solutions” that do not actually solve the problem. The media tells transgender people that they can mask their condition with surgery and drugs.

They should encourage people to get psychological help to accept themselves without altering their bodies. And they should be honest about the science behind sex changes.

Except for some rare medical disorders, you are the sex you are born.

If people want to express themselves as a gender typically associated with the opposite sex, that is their choice. I would never bully someone for that, and I sincerely hope others would treat them with respect as well.

But compassion and civility do not require the denial of biological fact.

Turning Point

Is this a deliberate attempt by the media to brainwash people? It certainly seems like a concerted effort to derail an objective discussion. It’s like they are testing how easily they can control what people say and think.

This is a crucial point where we will decide if freedom of speech and freedom of thought still exist. Will we move forward “allowed” to discuss science and mental health without being threatened with violence?

Or will we be bullied into submission, afraid to speak or even think the wrong way? Will we become thought criminals for daring to think against the mainstream viewpoint?

Labelling people as hateful for disagreeing ensures a narrow perspective. It is a way to ignore legitimate viewpoints by pretending they come from a position of ignorance and anger.

Rational people should have no problem putting emotions aside to discuss the science behind gender and sex.

Finally, why do they need my, or Ben Shapiro’s approval anyway? Why does that even matter to them? We aren’t saying they should be stopped from expressing themselves. We aren’t threatening them with violence–quite the opposite!

There are people that don’t like the way I live my life. In fact, Ben Shapiro considers certain things I do sinful. And I don’t care because I don’t need Ben Shapiro to endorse and accept every aspect of my behavior.

Live the life you want to live, and by all means resist anyone who tries to stop you. But don’t try to force others to endorse or praise your actions and beliefs.


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Beware The Falling Knives: The ECB Has Some Bad News For Junk Bond Buyers

Two weeks ago, as part of our continuing coverage of the Steinhoff fiasco in which it emerged that the ECB was the mystery and (not so) proud buyer of just issued Steinhoff (now junk) bonds (maturing in 2025 but set for bankruptcy much sooner) and which lost more than half of their value overnight when it the company announced it was caught in what may be a terminal accounting fraud scandal, we said that “, it seems virtually guaranteed that the banks will suffer steep haircuts on their Steinhoff exposure” and “so will the ECB, which on Friday was rumored it was considering selling its Steinhoff bonds. It is not exactly clear how this would take place, since the ECB’s QE by definition only buys, not sells, at least for now.

This just barely perceptive shift in the ECB’s posture from “buyer of first, last and only resort” to “potential seller“, has potentially huge implications, and was duly noted by one of the best credit strategists on Wall Street, BofA’s Barnaby Martin, who in a note over the weekend look at the “gift that keeps on giving”, or at least “kept on giving”, and adds to our speculation, writing that “one consistent feature of the last year and a half has been the ECB buying copious amounts of corporate bonds week-in, week out. Such has been the need to promptly restore inflation in the Eurozone – to ensure the debt sustainability of the periphery – that unique monetary policy has been the order of the day. No other central bank has dived headlong into buying corporate bonds. And given the slow return to 2% inflation in Europe, as confirmed by the ECB yesterday, for 2018 we again expect Draghi to be pronounced in buying credit, pushing spreads even tighter.”

We showed the ECB’s unprecedented impact on the bond market this July, when we charted the collapse in Eurozone credit spreads following the announcement of the ECB’s CSPP, or corporate bond buying program.

And while until just two weeks ago, Draghi’s dedication to purchasing virtually any and every piece of (non-junk) corporate paper in Europe was undisputed, “2017 is ending on somewhat of a sour note, in the form of rising idiosyncratic risk…the most distinctive of which has resulted from the Steinhoff bonds.

While Martin doesn’t see the Steinhoff fiasco as derailing the ECB’s drive to purchase corporate debt next year, “we do see a risk that the CSPP becomes more cautious. The risk, therefore, is that the ECB’s efforts to compress credit spreads is reduced. And if they start to buy more higher quality names then this would weaken the compression trade in corporate bonds next year.

And while one can speculate about Drahig’s intentions, it looks like the ECB’s language towards owning Fallen Angels has become more explicit, and more tentative of late. This is a major risk for what until recently was one of the best performing bond categories – those which have been recently downgraded from IG to junk, i.e. fallen angels – because, “If true, we think that this has the potential to make the spreads of Fallen Angels behave more like Falling Knives. Credit investors should therefore anticipate more pronounced price drops in names that migrate from IG to HY” the BofA strategist warns.

Putting the Steinhoff Debacle in Context

As we have repeatedly written here in the past year, there has been no bigger buyer of European corporate credit in the past two years than the European Central Bank: the ECB, which currently owns just over €131 billion of European corporate bonds, or 17.9% of the total outstanding amount, is likely to finish 2017 having bought just over €80bn of Euro-denominated corporate bonds in 2017 alone. According to BofA, such is the quantum of monthly QE buying relative to net supply, that CSPP creates an obvious “scarcity of product”, causing credit spreads to keep grinding tighter. As Chart 1 highlights, Euro high-grade spreads have widened in only 5 of the last 19 months (and have only widened in 2 months of this year).

Further, as shown in Chart 2, the share of SMEs reporting higher turnover increased significantly from April to September 2017 as the ECB program continued compressing spreads to record tights. The move is especially visible in Italian SMEs’ turnover. According to BofA, this provides further encouragement for the ECB, as the latest survey on Access to Finance for Enterprises shows that Euro Area SMEs reported increasing profits for the first time since the beginning of the survey in 2009.

That was then, this is now

Until two weeks ago, and the revelation that the ECB is a deep holder of an unknown amount of Steinhoff bonds, the confidence autopilot was solidly engaged, and it seemed like there is nothing on the horizon that could deter the ECB from being the corporate bond buyer of last resort.  That’s when Steinoff hit, and as discussed here first, the 2025 bonds fell from 83 to 39 since the end of November on the back of the CEO resigning due to suspected accounting irregularities.

 

Latest ECB disclosure shows that the ECB own some of the recently issued Steinhoff Europe AG bond – an €800m 2025 issue. Note that Steinhoff International Holding’s headquarters are in South Africa, yet the recent Euro bond was issued out of an Austrian entity, ensuring CSPP eligibility.

Here there was some good, and some bad news for buyers and holders of junk bonds.

During last week’s ECB press conference, Draghi said that the ECB’s losses with respect to the Steinhoff holdings were a lot less than consensus has been suggesting, although he did not divulge an actual number (in light of Draghi’s previous lies, one should apply a giant grain of salt to anything the ECB claims is or isn’t the case). The history of CSPP new issue “allocations” suggests an average of 11%, but we do not know what the facts are here, and the ECB refuses to provide them.

Whatever the real loss and exposure, in Chart 4 Martin shows that the mark-to-market drop on the Steinhoff bond is far greater than anything else the ECB has realised on their CSPP portfolio to date.

To be sure, Draghi downplayed the Steinhoff debacle, arguing in last week’s ECB meeting that the Steinhoff loss is very small in the grand scheme of things to the ECB’s CSPP portfolio, of which roughly 90% of the CSPP portfolio has tightened since purchase (green line in Chart 4).

And yet – and this is the punchline – this event risk which we flagged back all the way in March 2016 when we said that “It is unclear what happens to those IG bonds that the ECB has purchased if and when they get downgraded to junk“, will be a notable talking point for the Governing Council according to the BofA strategist, who writes that “If, going forward, it reduces the ECB’s efforts to buy lower quality credit and compress spreads, then we see a risk that the compression trade in credit is less powerful in 2018.

Things Are Already Changing

Indeed, as BofA observes, there are some small signs already of the ECB stepping back slightly from their blanket approach to credit buying, and addressing the question we first asked almost two years ago. In particular, Draghi seems to be taking a more defensive stance with regards to owning Fallen Angels. Note that the CSPP Q&A has been updated as of 29th November 2017, and the paragraph on ECB selling now reads as follows:

Q1.5 Will the Eurosystem sell its holdings of bonds if they lose eligibility?

 

The Eurosystem may choose to, but is not required to sell its holdings in the event of a loss of eligibility, e.g. in case of a downgrade below the credit quality rating requirement.

Previously this phrasing was far more specific, with forced selling (or otherwise) not even presented as an option:

Q8 Will the Eurosystem sell its holdings of bonds if they lose eligibility? For example, if they are downgraded and lose investment grade status?

 

The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.

And, as far as BofA can see, the ECB still owns 3 K+S bonds, which now have a BB S&P rating (the only agency to rate them) following a downgrade to high-yield last October. What can’t be determined, however – despite Draghi’s assurances of the ECB’s “unprecedented operational transparency” – is whether the ECB have been reducing their holdings of these bonds over time.

* * *

Which brings us to the biggest risk as identified by Bank of America’s credit strategist: what until two weeks ago was merely a fallen angel is now a falling knife. Here’s why:

With the ECB’s language towards owning Fallen Angels having become more tentative of late, we think that this has the potential to make the spreads of Fallen Angels behave more like Falling Knives in 2018.

 

Even though the European economy is enjoying a robust cyclical recovery, downgrade risk is still an issue for investment grade fund managers at present. Chart 5 shows that, by par amount, IG downgrades continue to outpace upgrades, and the ratio has actually deteriorated this year. Moreover, Chart 6 shows that credit markets globally have been experiencing negative ratings migration of late. In fact, BBBs now make up almost 50% of Euro, US and Japanese investment-grade markets.

 

According to Martin, this likely means that the ECB will take a growing interest in Fallen Angels.

So how much of a problem will this be for Draghi? Using S&P’s historical rating transition matrices, BofA estimates that €7bn of corporate bonds that the ECB own will end up as Fallen Angels prior to maturity (by bonds impacted, this is equivalent to €38bn of total outstanding debt). Chart 8 shows that over the last decade, the price drop severity of Fallen Angels has been declining. But if the ECB become a motivated seller of downgraded credits, we feel this dynamic could reverse. 

In conclusion, and in Bank of America’s explicit warning, credit investors should therefore anticipate more pronounced price drops in names that migrate from IG to HY next year.

“After all, there may now be a big buyer (ECB) behind some of these credits that chooses to become a seller upon downgrade.”

The silver lining – if only for deep junk investors – is that Falling Knives could produce a source of technically cheap BBs for yield-starved investors to mull over…


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Zombie Corporations: Over 10% Of Global Companies Depend On Cheap Fed Money

Authored by Mike Shedlock via http://ift.tt/2wOif0B,

Ten percent of corporations survive only because central banks have kept real interest rates negative.

The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

In simple terms, Zombies are those firms that could not survive without a flow of cheap financing.

The above chart shows the median share of zombie firms across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US.

According to the BIS Quarterly Report one out of ten corporations in emerging and advanced countries is a "Zombie".

Let's dive into the report for more details.

The inability to come to grips with the financial cycle has been a key reason for the unsatisfactory performance of the global economy and limited room for policy manoeuvre.

 

Since 2007, productivity growth has slowed in both advanced economies and EMEs. One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates.

 

Over the past 10 years, there has been a close positive correlation between the growth of corporate credit and investment. A build-up of corporate debt has financed investment in many economies, particularly in EMEs, including high investment rates in China. Turning financial cycles in these economies could therefore weigh on investment.

 

As with consumption, the level of debt can affect investment. Rising interest rates would push up debt service burdens in countries with high corporate debt.

 

Moreover, in EMEs with large shares of such debt in foreign currency, domestic currency depreciation could hurt investment. As mentioned before, an appreciation of funding currencies, mainly the US dollar, increases debt burdens where currency mismatches are present and tightens financial conditions (the exchange rate risktaking channel).

 

Empirical evidence suggests that a depreciation of EME currencies against the US dollar dampens investment significantly, offsetting to a large extent the positive impact of higher net exports.

End of the Rate Hike Cycle

For the above reasons, I believe the end of the global recovery is at hand.

And when the next bust happens, the last thing central banks will be doing is raising interest rates.

 


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Today’s The Day: Twitter To Start Purging Users And Prevent “Certain Content From Trending”

Twitter will begin suspending accounts which engage in “hateful conduct” or affiliate with organizations which “use or promote violence against civilians to further their causes” both on and off the platform, following a November announcement. The new rules apply to whatever Twitter deems “hateful,” including “hateful images or symbols in your profile image or profile header.” 


Jack Dorsey, Twitter CEO

Moreover, Twitter will officially begin restricting “trending” content, to wit:

At times, we may prevent certain content from trending.

While many conservative Twitter users have suffered unfair account suspensions, mysterious drops in retweets and likes on controversial tweets, overnight drops in follower count, and unexplained disappearances of trending topics which paint liberals in a bad light, Twitter’s new rules effectively allow the social media giant to openly engage in censorship without repercussion. 

Via Twitter Help Center

Abusive Behavior


We believe in freedom of expression and open dialogue, but that means little as an underlying philosophy if voices are silenced because people are afraid to speak up. In order to ensure that people feel safe expressing diverse opinions and beliefs, we prohibit behavior that crosses the line into abuse, including behavior that harasses, intimidates, or uses fear to silence another user’s voice.

 

Context matters when evaluating for abusive behavior and determining appropriate enforcement actions. Factors we may take into consideration include, but are not limited to whether:

 

  • the behavior is targeted at an individual or group of people;
  • the report has been filed by the target of the abuse or a bystander;
  • the behavior is newsworthy and in the legitimate public interest.

 

Violence: You may not make specific threats of violence or wish for the serious physical harm, death, or disease of an individual or group of people. This includes, but is not limited to, threatening or promoting terrorism.

 

You also may not affiliate with organizations that – whether by their own statements or activity both on and off the platform – use or promote violence against civilians to further their causes.

 

Abuse: You may not engage in the targeted harassment of someone, or incite other people to do so. We consider abusive behavior an attempt to harass, intimidate, or silence someone else’s voice.

 

Hateful conduct: You may not promote violence against, threaten, or harass other people on the basis of race, ethnicity, national origin, sexual orientation, gender, gender identity, religious affiliation, age, disability, or serious disease.

 

Hateful imagery and display names: You may not use hateful images or symbols in your profile image or profile header. You also may not use your username, display name, or profile bio to engage in abusive behavior, such as targeted harassment or expressing hate towards a person, group, or protected category.

While Twitter’s new rules are sure to lead to the purge of countless supremacists, you can say goodbye to Pepe the Frog – a cartoon meme made popular during the 2016 election among Trump voters, which the ADL considers to be a hate symbol despite a small percentage of Pepe memes expressing anti-Semitism or bigotry. 

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Last month Twitter suspended it’s “blue check mark” verification policy, stating that it will rescind a user’s verified status if a person violates company guidelines. With blue checks having become a status symbol over the years, Twitter thinks the system is flawed and needs an overhaul. 

“Our agents have been following our verification policy correctly, but we realized some time ago the system is broken and needs to be reconsidered,” CEO Jack Dorsey tweeted in November. “And we failed by not doing anything about it. Working now to fix faster.”

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The announcement was quickly followed by the removal of blue checks from white nationalist Richard Spencer’s account, Unite the Right organizer and former Obama activist Jason Kessler, and conservative Jewish journalist Laura Loomer – who compared the loss of her blue check to the holocaust. 

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Twitter’s recent changes have sparked a stampede of users to competing social network Gab.ai, “a social network that champions free speech, individual liberty, and the free flow of information online. All are welcome.” 

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At this rate, someday you’ll hop on Gab to tell your grandchildren where you were when the great Twitter purge began.


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The 5 Oil Factors To Watch In 2018

Authored by Nick Cunningham via OilPrice.com,

Oil prices are set to close out the year somewhere around 15 percent up, and the oil market looks more stable than it has in years.

But what does 2018 have in store?

Most analysts believe more of the same – inventory declines, some shale growth, a gradual increase in the oil price and eventually an end to the OPEC deal. But a lot of uncertainty remains.

Here are 5 key issues to watch as we head into 2018.

#1 U.S. shale growth

There is no doubt that U.S. shale output is continuing to rise, but there is quite a bit of uncertainty about the magnitude of growth. Expectations have fluctuated over the course of 2017. At the beginning of the year, outlets like the EIA and IEA had very bullish predictions for shale output, with the EIA expecting U.S. output to average 10 million barrels per day in 2018.

As the year wore on, numerous red flags began to pop up that raised a lot of questions about the health of the shale industry. Drilling costs began to rise again; some shale companies ran into operational problems; drilling activity fizzled when oil prices dipped below $50 per barrel, a sign that the shale industry’s breakeven prices (on average) were not as low as many thought; the rig count dipped; and investors began demanding more restraint and a slower pace of drilling. These problems seemed to suggest shale was sputtering.

However, more recently, data suggests shale is back on track, posting strong production gains in September. In their December reports, the IEA and OPEC predicted U.S. shale would add 870,000 bpd and 1 mb/d of new supply in 2018, respectively. That threatens to overwhelm demand growth. But the extent to which actual growth lives up to those forecasts will go a long way in determining the pace of rebalancing next year.

#2 OPEC Compliance

OPEC production fell in November for the fourth consecutive month, dipping by 130,000 bpd compared to a month earlier. That puts the group’s compliance rate with the production cuts at 115 percent, the highest number yet. The ability of OPEC to stick with its commitments is a positive sign heading into 2018 that they will be able to keep compliance rates high. To be sure, involuntary declines in Venezuela are somewhat masking less-than-100-percent compliance from Iraq and the UAE, but a reduction of supply is a reduction of supply. Related: Santa Is Putting Christmas On The Blockchain And Saving Billions

The big question is the durability of high compliance throughout 2018. An oil market that rebalances too quickly could lead OPEC members to abandon their pledges if they become tempted by higher oil prices. Russia has signaled that it is anxious to abandon the deal as soon as inventories fall back to average levels. The flipside is also true – a steep drop in prices could lure members into cheating as they become desperate for more revenues. But that is all speculation. For now, compliance looks good.

#3 OPEC’s Exit Strategy

OPEC has restored some stability to the oil market with its resolve to maintain output limits, and the strong cooperation, particularly between Saudi Arabia and Russia, reassured the oil market at the last OPEC meeting.

Yet, they left the details of an exit strategy for a later date, and the June 2018 meeting will carry extra weight, especially as the inventory surplus narrows. Exiting the production cuts is fraught with danger; even hinting that a return to full production could spook jittery oil traders, which is exactly why top OPEC officials were eager to push off that conversation. But by mid-2018, they won’t be able to avoid the issue. It’s likely OPEC will opt for some sort of glide path, a gradual lifting of the production limits, but we’ll have to wait and see.

#4 Inventories

OPEC’s strategy will largely come down to what happens to global inventories. OECD commercial stocks declined by more than 40 million barrels in October, putting total stocks at 2,940 million barrels, the lowest level in more than two years. The stock surplus is now at about 100 million barrels more than the five-year average, down two-thirds from the start of 2017. It’s likely that the surplus will be erased at some point in 2018, at which point OPEC will be under pressure to abandon its production limits. Related: The ‘Unknown Unknowns’ That Threaten U.S. Shale

However, the IEA said in its December Oil Market Report that it expects inventories to begin rising again in 2018, largely because of blistering growth from U.S. shale (see #1 above). The first half of the year, the IEA predicts, will see inventories rise at a pace of 200,000 bpd. If the agency is correct, zeroing out the surplus could prove elusive.

#5 Unexpected outages

All of these forecasts and predictions go out the window if supply disruptions occur. Just days ago, the Forties pipeline cracked and shut down, and the pipeline’s operator declared force majeure on oil shipments. The 450,000-bpd pipeline could be shut for weeks, leading to shutdowns at North Sea oil fields. This incident is exactly the type of event that can catch the oil market by surprise, leading to sharp and sudden price increases even if all seems well elsewhere in the world.

There are plenty of potential flashpoints that could lead to supply outages in 2018. The most obvious is Venezuela, which is suffering from steep and ongoing declines. Venezuela’s output fell by 41,000 bpd in November from a month earlier, after suffering a decline of 26,000 bpd in October. Production is at a 30-year low and is heading south. Other outages are entirely possible in unstable countries like Nigeria and Libya. Conflict between the U.S. and Iran would be a whole different animal, with serious implications for the oil market. Then, there are other potential outages that are entirely unpredictable beforehand. The crack in the Forties pipeline, the spill from the Keystone pipeline in the U.S. from a few weeks ago and the massive wildfires in Alberta in 2016 are just a few examples. It only takes one major disruption to upend the most carefully crafted oil forecast.


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Trump Takes Aim At China, Russia In Unipolar-World-Order-Defending National Security Strategy

President Trump is expected to release the new National Security Strategy for the United States this afternoon. We discussed the potential drivers behing his reportedly aggressive stance yesterday, but the bigger questions remain…

Will it rein in some of the global adventurism of the Bush and Obama presidencies?

 

Will it correct the gaping disconnect between what the White House says about places like North Korea and what the Secretary of State says?

 

Will the neocons successfully parlay the document into a road-map for more wars?

While initial reports showed Trump attacking China…taking a much tougher stance on China than previous administrations.

“The national security strategy is likely to define China as a competitor in every realm. Not just a competitor but a threat, and therefore, in the view of many in this administration, an adversary,” said one person.

 

“This is not something that they just cooked up. Mar-a-Lago interrupted the campaign rhetoric, and Xi Jinping took a little gamble and came here and embraced Trump. Trump said ‘fine, do something on North Korea and on trade’, but that didn’t work out so well.”

It appears that Russia is also in the crosshairs – merely serving to confirm our perspective that this is a pro-unipolar-world-order-defending national security strategy – as opposed to trade-related nonsense.

As for Russia’s ambitions, The Wall Street Journal reports that the strategy says the Kremlin is developing new military systems, cyber capabilities and subversive tactics, including the use of paid social-media actors, to interfere in the internal political affairs of other nations. American intelligence officials have concluded that Russia interfered in the 2016 U.S. presidential election.

Russia’s broader calculation is that it can engage in such activities without risk of a military confrontation.

 

The Kremlin assumes that “the United States often views the world in binary terms, with states being either ‘at peace’ or ‘at war,’ when it is actually an arena of continuous competition.”

 

But Russia’s actions have led to an increased risk of a military conflict as a result of Russian miscalculation, according to the strategy.

As Reuters reports, the singling out of China and Russia as “revisionist powers” in the document reflects the Trump administration’s wariness of them despite Trump’s own attempts to build strong relations with Chinese President Xi Jinping and Russian President Vladimir Putin.

“They are determined to make economies less free and less fair, to grow their militaries, and to control information and data to repress their societies and expand their influence,” according to excerpts of Trump’s strategy released by the White House.

 

A senior administration official who briefed reporters said Russia and China were attempting to revise the global status quo – Russia in Europe with its military incursions into Ukraine and Georgia, and China in Asia by its aggression in the South China Sea.

And while 'trade' is the cover, perhaps it was comments from HR McMaster, US national security adviser who oversaw the strategy, this week that confirm the threat to dollar hegemony as he said China – along with Russia – was a “revisionist power” that was “undermining the international order."

And that would be the unipolar world order with Washington on top.

The Daily Caller has seen a copy of the document and Peter Hasson notes the stark contrast between President Trump’s America First National Security Strategy and former President Barack Obama’s most recent national security strategy in 2015.

Renewed Focus On Islamist Terrorism

Trump’s new national security strategy places an emphasis on stopping Islamist terrorism and calls it out by name. Obama’s 2015 national security strategy referred to Islam just twice: once because it’s part of ISIS’ name and once to say the administration rejected “the lie that America and its allies are at war with Islam.”

The new national security strategy explicitly links Islamist ideology to jihadist terrorism.

“The United States continues to wage a long war against jihadist terrorist groups such as ISIS and Al Qaeda. These groups are linked by a common radical Islamist ideology that encourages violence against the United States and our partners and produces misery for those under their control,” the new strategy states.

Trump’s strategy also notes, “jihadist terrorists such as ISIS and al-Qaida continue to spread a barbaric ideology that calls for the violent destruction of governments and innocents they consider to be apostates. These Islamist terrorists attempt to force those under their influence to submit to Sharia law.” A source familiar with the strategy’s drafting process described the reference to Sharia law as a “huge” inclusion by the Trump administration.

Dumping Climate Change As A ‘National Security Threat’

Obama’s 2015 national security strategy prioritized climate change as a national security threat. Obama’s strategy devoted more space to the threat posed by climate change than to the threat posed by North Korea. “Climate change is an urgent and growing threat to our national security, contributing to increased natural disasters, refugee flows, and conflicts over basic resources like food and water,” Obama’s national security strategy said.

Trump’s national security strategy reverses that approach and does not identify climate change as a national security threat. In fact, it goes one step further.

“U.S. leadership is indispensable to countering an antigrowth energy agenda that is detrimental to U.S. economic and energy security interests,” the new strategy states. “Given future global energy demand, much of the developing world will require fossil fuels, as well as other forms of energy, to power their economies and lift their people out of poverty.”

The 2015 strategy noted that the administration was “working toward an ambitious new global climate change agreement,” which became the Paris Climate Accords.

Trump withdrew the United States from the climate deal last summer, denouncing it as a threat to American sovereignty.

In what appears to be a reference to the Paris deal, Trump’s new strategy states that “it should be clear that the United States will not cede sovereignty to those that claim authority over American citizens and are in conflict with our constitutional framework.”

Iran — Not Israel — Is The Threat To Peace In The Middle East

In perhaps the sharpest contrast to Obama’s national security strategy, Trump’s new strategy takes a hardline stance on Iran, which it describes as “the world’s most significant state sponsor of terrorism.” Obama’s strategy emphasized the need to protect the Iran nuclear deal — a pillar of his legacy as president.

Trump’s strategy notes that Iran “has taken advantage of instability to expand its influence through partners and proxies, weapon proliferation, and funding. It continues to develop more capable ballistic missiles, intelligence capabilities, and it undertakes malicious cyber activities.”

Trump’s strategy states that — despite Obama officials’ claims to the contrary — the Iran nuclear deal has done nothing to stop any of the above activities.

“These activities have continued unabated since the 2015 nuclear deal,” the document states. “Iran continues to perpetuate the cycle of violence in the region, causing grievous harm to civilian populations. Rival states are filling vacuums created by state collapse and prolonged regional conflict.”

Trump’s national security strategy explicitly blames Iran, rather than Israel, for conflicts in the Middle East.

“For generations the conflict between Israel and the Palestinians has been understood as the prime irritant preventing peace and prosperity in the region,” the strategy states.

“Today, the threats from radical jihadist terrorist organizations and the threat from Iran are creating the realization that Israel is not the cause of the region’s problems. States have increasingly found common interests with Israel in confronting common threats.”

The strategy notes that the U.S. will work “with allies and partners to deter and disrupt other foreign terrorist groups that threaten the homeland—including Iranian-backed groups such as Lebanese Hizballah.”

The Obama administration, in contrast, torpedoed a DEA operation against Hezbollah for money laundering and narcotics trafficking in order to preserve the Iran nuclear deal, according to a bombshell report in Politico Sunday night. The report said that the Obama administration’s reluctance to confront Hezbollah allowed the group to grow rapidly in size and expand its influence across Lebanon in particular and the Middle East as a whole.

Immigration: Ending Chain Migration, Increasing Vetting, Tougher Border Security   

Obama’s 2015 national security strategy placed an emphasis on giving amnesty to illegal immigrants by giving them a “pathway to citizenship,” while paying lip service to the need for border security. The 2015 strategy framed the flood of illegal immigrants to the US-Mexico border as a “major consequence of weak institutions and violence” and emphasized the need for America to help those countries.

“American leadership, in partnership with these countries and with the support of their neighbors, remains essential to arresting the slide backwards and to creating steady improvements in economic growth and democratic governance,” the Obama strategy stated.

Trump’s strategy frames the immigration issue in terms of sovereignty, saying the U.S. “affirms its sovereign right to determine who should enter our country and under what circumstances.”

The document emphasizes the importance of knowing and controlling who enters the country through tactics like increased vetting, ending chain-migration, end the Diversity Visa Lottery program and increase border security.

“The United States affirms its sovereign right to determine who should enter our country and under what circumstances. The United States understands the contributions immigrants have made to our Nation throughout its history. Illegal immigration, however, burdens the economy, hurts American workers, presents public safety risks, and enriches smugglers and other criminals,” the Trump strategy states.

The document continues:

The United States will continue to welcome lawful immigrants who do not pose a security threat and whose entry is consistent with the national interest, while at the same time enhancing the screening and vetting of travelers, closing dangerous loopholes, revising outdated laws, and eliminating easily exploited vulnerabilities. We will also reform our current immigration system, which, contrary to our national interest and national security, allows for randomized entry and extended-family chain migration. Residency and citizenship determinations should be based on individuals’ merit and their ability to positively contribute to U.S. society, rather than chance or extended family connections.

Two recent terrorist attacks, the October truck attack in New York City and last week’s attempted bombing, were committed by individuals who entered the country through either chain migration or the Diversity Visa Lottery program. (RELATED: Trump’s Desired Immigration Reforms Could Have Stopped Last Two Terror Attacks)

Economically Competing With China

President Obama’s national security strategy emphasized its “scope of cooperation with China” on economic issues, which the administration touted as “unprecedented.” Trump’s national security strategy rejects this approach as a failure and embraces a more competitive view of global economics.

“For decades, U.S. policy was rooted in the belief that support for China’s rise and for its integration into the post-war international order would liberalize China,” the document states. “Contrary to our hopes, China expanded its power at the expense of the sovereignty of others in the region. China gathers and exploits data on an unrivaled scale and spreads features of its authoritarian system, including corruption and the use of surveillance.”

Under the subhed “A Competitive World,” the strategy reads: “China and Russia challenge American power, influence, and interests, attempting to erode American security and prosperity. They are determined to make economies less free and less fair, to grow their militaries, and to control information and data to repress their societies and expand their influence.”

“These competitions require the United States to rethink the policies of the past two decades—policies based on the assumption that engagement with rivals and their inclusion in international institutions and global commerce would turn them into benign actors and trustworthy partners. For the most part, this premise turned out to be false,” the section concludes.

Elsewhere in the document, the Trump administration notes that “China is gaining a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries, sensitive technologies, and infrastructure.”

The Trump strategy also calls out China by name for stealing American intellectual property — something Obama’s strategy did not do.

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Finally, here is Ron Paul, joined by veteran foreign affairs analyst and former US diplomat Jim Jatras, to discuss the hopes and fears for Trump's critical strategy outline…


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Nasdaq Tops 7,000 For First Time Ever As VIX Crashes

Having passed 6,000 for the first time in April, Nasdaq has now soared 17% since then to surpass 7,000 today…

 

As soon as cash markets closed last Friday (quad witch), US equity futures spiked… then spiked again on Sunday night’s open, and again at the US equity cash open this morning…

 

And VIX has been crushed this morning…


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Regulating Cryptocurrencies… And Why It Matters

Authored by Charles Hugh Smith via OfTwoMinds blog,

Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

There's a great deal of confusion right now about the regulation of cryptocurrencies such as bitcoin. Many observers seem to confuse "regulation" and "banning bitcoin," as if regulation amounts to outlawing bitcoin.

Further confusing things is the regulation of cryptocurrency exchanges, where cryptocurrencies are bought and sold.

In China, for example, cryptocurrencies are not outlawed, but exchanges were shut down until regulators could get a handle on how to deal with the potential for excesses such as fraud, misrepresentation, etc.

A Wild West free-for-all is conducive to scammers, and so some thoughtful regulation that protects users is to be welcomed.

Governments tax income and capital gains. This is how they fund their activities. Clearly, gains reaped from cryptocurrencies are no different from gains reaped from other speculations and investments, so they should be recorded and taxed in the same manner.

Some enthusiasts of cryptocurrencies seem to think that regulations requiring the reporting and taxation of gains made buying and selling cryptocurrencies is tantamount to destroying cryptocurrencies.

I think this view has it backwards: fully legalizing and regulating cryptocurrencies as financial instruments legitimizes them in a much wider circle of potential users, and common-sense regulations are to be encouraged and welcomed, not viewed as threats to cryptocurrencies.

I want to stress that beneath all the speculative frenzy we see in the cryptocurrencies, what will retain value and remain scarce and in demand is whatever solves problems.

Cryptocurrencies have the potential to solve two problems:

1. reducing the cost and friction of financial intermediaries.

2. holding value as the $250 trillion in phantom wealth created in the asset bubbles of the past 12 years vanishes.

These are real problems: financial intermediaries introduce a great amount of friction and cost globally, and even a modest reduction in cost and friction (time, effort, compliance, recording transactions, etc.) would add up very quickly.

The global value of real estate, stocks, bonds and debt-assets such as mortgages and auto loans is around $500 trillion. By my rough estimate, about half of this was created in the past 12 years as central banks inflated enormous bubbles.

A house that was worth $200,000 in 2005 is now worth $500,000, but it provides no additional value as shelter; it is the exact same house with the exact same utility value. So the additional $300,000 of current market value is entirely phantom wealth.

The same can be said of all the other assets whose value has skyrocketed: the underlying assets/collateral haven't changed enough to justify the current valuations.

Once the bubbles in stocks, bonds, housing, commercial real estate and debt-assets start popping, the owners of all that phantom wealth will be desperate to sell what is dropping in value and convert that wealth into assets that are either holding their value or appreciating.

Virtually all of this newly created financial "wealth" is ephemeral. Bitcoin et al. are routinely criticized as being "worthless" due to their digital/ephemeral nature.

But critics rarely if ever examine the equally ephemeral nature of $250 trillion in financial "wealth."

Bitcoin in particular has two features which may be viewed as having value as all these coordinated bubbles pop:

1. The organization and distribution of bitcoin is mathematical. It is not something that can be changed at the whim of a handful of self-serving people in a room (i.e. central bankers).

2. It is limited in quantity.

Some critics claim this can be changed, but that's not the way it works. A group of bitcoin miners can propose a new version of bitcoin that will issue a trillion coins, but if nobody supports their new version, it dies.

In other words, the marketplace of users decides what has value and what doesn't.

Regulations that enable cryptocurrencies to solve the two problems listed above should be welcomed, as these problems are structural and impact everyone in some fashion.

Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

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I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20). Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


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