ECB

EU – 1.3m abortions, 5m births p.a.

DivMarr

Eurostat statistics on abortion reveal that Germany, France, UK, Spain and Italy alone terminate a combined 760,000 fetuses per annum. Across the EU-28 there are 1.25mn terminations. Without getting into a debate on abortion rights, the pure statistical number points to 20.4% of fetuses never make it out of the womb alive. Every. Single. Year. At that rate over 10 years that is 12.5 mn children that could have added to EU population sustainability do not occur but the EU seems to think embarking on mass migration is the only solution to plug the gap. Is it? Ironically child support is one area the EU is happy to cede control to individual Member States.

The fertility rate across the EU-28 is now 1.58 children per woman, flat for the last decade and down from 2.9 in 1964. Demographers suggest that a fertility rate of 2.1 is required in developed world economies to maintain a constant population (in the absence of any migration). The number of live births in the EU-28 peaked in 1964 at 7.8 million. In 2017 this had fallen to 5 million. There was a brief period (2003-2008) when live births in the EU-28 started to rise again, returning to 5.5 million by 2008 but the GFC sent it down again – as economic hardship tends to cause a decrease in births. So are economic incentives too low to cause a rebound?

France has the best incentives for children and the highest birth rate inside the EU at 2.0 up from 1.7 in the 1990s. Germany is around 1.4 drifting from 1.6 in the 1990s. The lives for child rearing French are eased by cheap health care, inexpensive preschools – for infants as young as 6 months old – subsidized at-home care and generous maternity leave. Mothers with three children can take a year off of work – and receive a monthly paycheck of up to €1,000 from the government to stay home. Families get subsidized public transportation and rail travel and holiday vouchers.

In order to stop the declining working population over time, imagine if Europe hypothetically put the onus back on consenting couples to take responsibility for their actions and makes abortions harder to access without compulsory consultation over options? Why not graphically show the entire process to get some sense of reality for both parties? You can gross yourself on this link.

Perhaps, in today’s electronic world, automatically deducting child support from fathers that run from responsibility might make sense? Why should the state pay for others’ lack of accountability? Even if the child is placed in foster care, why not wire child support to foster parents indirectly via the Ministry in charge of its administration? The population crisis is not going away in Europe. Why not provide more incentives to married/same-household couples?

Mathematically speaking the numbers are huge. Imagine if the million-plus fetuses every year had a vote to be raised with foster parents as opposed to being terminated, what they would choose? Consider the €23bn Merkel has spent on mainly economic migrants in the last 2 years being put toward preventing 200,000 abortions in Germany over that period? €115,000 to avert each one might have been better spent. That is a huge sum of money period.

CM is not advocating control over the womb but surely transparency in policy over individual responsibility is not a bad thing with respect to many issues, not just abortion. What level of economic incentives are required to prevent some couples/women choosing to terminate? Surely that plays a part in deciding to terminate. Consultation services with respect to the subject don’t seem too commonplace or at least structured in such a way as to prevent them.

According to Eurostat, since 1964 the divorce rate in EU-28 equivalents has doubled and the marriage rate has halved. For every eight marriages in 1964 there was one divorce, now there is one divorce for every two marriages.

The proportion of births outside of marriage now stands at 40%, from 27% in 2000 to less than 7% in 1964. 8.8 % of the EU-28 population aged 20+ lived in a consensual union (de-facto). In Japan the number of births out of wedlock is 25% according to the MHLW. The dynamics of the traditional nuclear family are fading.

51% of the Swedish population is now single household. 51%! While some is attributed to an aging population, 19 of the EU-28 members has a single household ratio of over 30%. 12 over 35%. By way of comparison, Japan’s single household ratio stands at 34.6% from 27.6% in 2000.

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To further analyse the new ways of living together and to complement the legal aspect, statistics on consensual unions, which take into account those with a ‘marriage-like’ relationship with each other, and are not married to or in a registered partnership with each other, can also be analysed.  Sweden (18.3 %) has the highest rate followed by Estonia (16.4 %), France (14.3 %) and the lowest in Greece (1.7 %), Poland (2.1 %), Malta (2.5 %) and Croatia (2.9 %).

Is employment a factor?  It is mixed. Eurostat reported in Germany, the fertility of non-employed women has increased and that of employed women decreased, while in Spain, the opposite occurred; in Greece, the total fertility rate (TFR) of non employed women fell below that of employed women, changing from a positive differential of about 0.2 average live births.

Is education a factor? Apart from Nordic countries (Denmark, Finland and Norway), Portugal and Malta, in general, women with lower education had higher TFR between 2007 and 2011. Eurostat state the fertility of women across the EU over the same period with a medium level of education dropped by about 9%, while the decrease for women with high or low education was less significant.

Eurostat argues that economic recessions have correlation to falling child birth rates. Apart from the direct impact of economic crises at an individual level, the economic uncertainty that spreads during periods of hardship seem to influence fertility. From this point of view Eurostat believes the duration of a crisis may play an important role and, the duration and the depth of the current recession are unprecedented in some countries. The agency states,

The expected relationship is that negative changes in GDP correspond to negative changes in the TFR, possibly with some delay, thus showing a high positive correlation at particular lags. The correlation with the TFR is relevant in Spain and Latvia without any lag; in Bulgaria, Poland and Romania with one year of lag; and in the Czech Republic, Denmark, Estonia, Greece, the Netherlands, Finland, Sweden, Iceland, Norway and Croatia with two years of lag. Taking the overall average across countries, a change in GDP is mostly positively correlated with a change in the TFR within about 19 months.”

Do we cynically argue that stagnant child birth rates aren’t just a factor of societal changes? Perhaps a truer reflection on the higher levels of poverty in the EU since GFC and the harsh realities for a growing number of people behind the growing levels of populism who are suffering greater economic hardship than statisticians are presenting to the political class? Hard decisions must be made before they are made by external factors.

Ultra High Net Worth Individuals (by country)

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In an ever growing world of haves vs have nots, Elliman has released an interesting update on the statues of global wealth and where it is likely to head over the next decade. It suggests North America has 73,100 UNHWIs at an average of $100mn each or $7.31 trillion. To put that in perspective 73,100 North Americans have as much wealth as Japan & France’s annual output combined. Over the next decade they expect 22,700 to join the ranks.

Europe has 49,650 UHNWI also at the magical $100mn mark (presumably the cut off for UHNWI or the equivalent of Japan.

Asia is growing like mad with $4.84 trillion split up by 46,000 or $105mn average. In a decade there are forecast to be 88,000 UHNWIs in Asia.

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I am not sure what the World Bank was smoking when coming up with the coming forecasts I’ve rthe next decade but the figures smel fishy.  Then it all comes down to this chart.

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1) Political uncertainty? Everywhere you look – Trump, Brexit, Catalonia, Australia, France, Germany, Austria, Czech Republic, The Netherlands, Hungary, Poland etc etc

2) Potential fall in asset values – looks a very high chance of that. Current asset bubbles are almost everywhere – bonds, equities, real estate etc

3) Rising taxes – maybe not the US or Canada (if you follow the scrutiny over Finance Minister Morneau), but elsewhere taxes and or costs of living for the masses are rising

4) Capital controls – China, India etc

5) Rising interest rates – well the US tax cuts should by rights send interest rates creeping higher. A recent report showed 57% of Aussies couldn’t afford an extra $100/month in mortgage – a given if banks are forced to raise lending rates due to higher funding costs (40% is wholesale finance – the mere fact the US is raising rates will only knock on to Aus and other markets).

Surely asset prices at record levels and all of the other risk factors seemingly bumping into one another…

So while UHNWIs probably weather almost any storm, perhaps it is worth reminding ourselves that the $100mn threshold might get lowered to $50m. It reminds me of a global mega cap PM who just before GFC had resplendent on his header “nothing under $50bn market cap”. Post GFC that became $25bn then eventually $14bn…at which point I suggested he change the header entirely.

I had an amusing discourse on LinkedIn about crypto currencies. The opposing view was that this is a new paradigm (just like before GFC) and it would continue to rise ( I assume he owns bit coins). He suggested it was like a promissory note in an electronic form so has a long history dating back millennia. I suggested that gold needs to be dug out of the ground – there is no other way. Crypto has huge risk factors because it is ultimately mined in cyber space. State actors or hackers can ruin a crypto overnight. There have already been hacking incidents that undermine the safety factor. It does’t take a conspiracy theory to conjure that up. To which he then argued if it all goes pear shaped, bitcoin was a more flexible currency. Even food would be better than gold. To which I suggested that a border guard who is offering passage is probably already being fed and given food is a perishable item that gold would probably buy a ticket to freedom more readily as human nature can adapt hunger far more easily in the fight for survival. I haven’t heard his response yet.

In closing isn’t it ironic that Bitcoin is now split into two. The oxymornically named Bitcoin Gold is set to be mined by more people with less powerful machines, therefore decentralizing the network further and opening it up to a wider user base. Presumably less powerful machines means fewer safeguards too although it will be sold as impervious to outsiders. Of course the idea is to widen the adoption rate to broaden appeal. Everyone I know who owns Bitcoin can never admit to its short comings. Whenever anything feels to be good to be true, it generally is. Crypto has all the hallmarks of a fiat currency if I am not mistaken? While central banks can print furiously, they will never compete with a hacker who can digitally create units out of thin air. Fool’s Gold perhaps? I’ll stick to the real stuff. I’ll take 5,000 years of history over 10 years any day of the week.

Italy proves the ECB Thinks some banks more equal than others

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The ECB proves it is powerless to push member states into banking solutions. It is in fact nothing more than an accomplice. No sooner had the ECB turned a blind eye to a bailout of two banks last week, this week saw the world’s oldest bank likely to get the same treatment.  The state-backed rescue of Banca Monte dei Paschi di Siena SpA may be approved by the European Commission as soon as today.

EU approval would pave the way for the third recapitalization of an Italian bank by the state this week. Last month, European authorities and Italian officials reached an agreement in principle on a rescue plan that may include a capital increase of about 8.3 billion euros ($9.4 billion) and the sale of about 26 billion euros of bad loans through securitization. Monte Paschi was forced to seek state aid after it failed to raise capital from investors in December.

All it shows is that for all the rhetoric of bail-ins and tough talk, the ECB has no choice but to let member states handle their own affairs. Italy has a banking sector with 20% NPLs with up to 50% in southern parts of the country.

In reality it shows up the ECB to be powerless to control its members. While the US can openly state it is paring back its balance sheet, the ECB has to be content with rolling over and playing dead. At the same time Italy sets precedents that become the benchmark for others to follow. Must be food for thought for all the banks that have been forced to bail-in…-all banks are equal…some more equal than others!

Make Italy Great Again (#MIGA)

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A quick one but a chart that maps the average strength of the NO vote vs the average youth unemployment rate in Italy. Similar to the statistics revealed from the chart in my report yesterday – the higher the unemployment rate the higher the NO vote – predominantly from provinces in the south.

It would appear Mr Draghi and co have propped up Italian bonds and the euro which undoubtedly squeezed shorts but as much as the motto to never fight the central bank, eventually the weight of market forces can’t sustain this indefinitely.

Not even the ECB can Make Italy Great Again. The ECB is about as welcome as the Carthaginians at the gates of Rome at this juncture. I recommend signing up to Beppo Grillo’s blog. It is in English too – gives more perspective on the shenanigans in Italian politics. Sure there is some bias but some of the stories read like Nero watching Rome burn.

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A record to be proud of?

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A lot of people may look at the unemployment statistics and marvel at the seemingly low rates. I noted Queensland’s Palaszczuk government now employs more than 250,000 staff with the bureaucracy ballooning by more than 2500 full-time-equivalent workers in three months supposedly in health and education. Don’t get me wrong – the public sector provides vital services – fire, police and ambulance, to name just three-which are served by top drawer people. However looking across the globe, we see since the turn of the decade the OECD reports that pretty much every country has grown its public sector payroll at the same time government debt climbs and the economy slows.

Forbes wrote an interesting article pointing out an obvious longer term issue as follows:

“In many states, public service has little to do with serving the public and everything to do with using the public’s money to serve politicians. Whenever we open the books, California is consistently among the worst offenders. Recently, we found ‘animal collection curators’ making $110,290; city librarians earning $222,320; public utility commission bosses at $550,028; and county hospital doctors making $1.274 million.

This spring, at Forbes, we exposed 50,000 Illinois public employees earning six-figure salaries who cost taxpayers $8 billion. In California the numbers are exponentially larger: 218,667 employees making six-figures who cost $35 billion. For example, Illinois has 72 ‘city managers’ out-earning every governor of the 50 states. But, in California, the salaries of 171 assistant city managers average $201,550!

Using our interactive mapping tool, quickly review (by ZIP code) the 220,000 California public employees who earn more than $100,000. Just click on a pin and scroll down to search the results rendered in the chart beneath the map.”(You can see that via the previous link)…

In total, there’s roughly $35 billion in total benefit flowing to highly-compensated government workers when counting the 21,332 federal employees based in California with six figure salaries.”

A while back I wrote on the awful state of government pension funds in the US and the risk of insolvency given the unfunded portions were multiples of the state tax collections (for California it was 3x annual tax intake). I wrote:

“To put this in perspective the California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumes an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. Furthermore suggesting the use of a more realistic 4% rate of return. CalPERS has an unfunded liability of $412bn (or the equivalent of 3 years’ worth of state revenue). California collects $138bn in taxes annually in a $2.3 trillion economy (around the size of Italy). With over-inflated asset markets and increasingly negative returns on highly rated paper, the growth in unfunded liabilities is even more concerning as any market correction (likely to be severe given such blatant manipulation to date). If the correction is huge it will push the unfunded portion to even more dizzying levels.”

Since the Global Financial Crisis (GFC) we’ve been living on borrowed time. It doesn’t take a genius to work out that this endless printing and hoovering up of toxic waste on the public purse then hiding it to mask reality can’t go on forever. It is a legalized Ponzi scheme at best. Even the legality can be questioned. Manipulation of financial markets is taking away the one way to reset and create price discovery.  Talking to some of my old pension fund manager clients, many lament that they are being buried by regulation on one side and government participation which is destroying fundamental performance based on individual company merits. Sure robotic (algorithmic trading) makes sense for a lot of capital allocation but not all.

I still hold that we are on the precipice of the largest economic shock since 1929. The worst part about it is that central banks have no ammunition left. Negative rates worked in Norway for a period but they aren’t working in Japan. Why? Well confidence remains the biggest neck. If you give money away and people stuff it between the mattresses then you aren’t instilling them with hope. Most Japanese know that the “national insurance” they put away is nothing but a massive black hole which will likely never return to them after retirement. So at negative rates, their investment opportunities are made riskier to get less return.

December 4th is a big day. Italian referendum which is likely to fail, throwing Italian politics back into its normal rhythm (volatility) and an Austrian presidential rerun which should favour the right wing FPO after the voter fraud discovered at the previous one held in May.

Throw on top of that Schulz taking an escape pod from the EU, Marine Le Pen edging closer to a presidency next year and we have the settings for overpriced asset markets, stretched government budgets, record levels of debt accumulation, insolvent pension funds, bloated public sectors and impotent central banks out of bullets to resurrect us. With thermonuclear fuel failing to reset us, the only way out of this is to massively cut taxes, deregulate and let the people’s confidence lead us out. In case you hadn’t noticed, more government doesn’t work.

Perhaps Reagan put it best about government – “if it moves tax it. If it keeps moving, regulate it. If it stops moving, subsidize it!”

Trump is actually just the type of politician to shake us from this drug induced slumber over the last few decades. Be thankful we didn’t get Clinton – it would have been more of the failed policies under Obama that crushed the middle class and small business, the incubator of innovation and jobs creation.

Does Mr Schulz’s resignation say more about fleeing a sinking EU ship than saving the Fatherland?

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EU Parliament President Martin Schulz has resigned. Just as the EU sinks deeper into the quagmire of its own making Herr Schulz seemingly wants to run against Angela Merkel for Chancellor next year.  The triumvirate of Schulz, Juncker & Tusk was supposedly inseparable but one wonders if it has become insufferable this year with the prospect of 2017 becoming even worse. Think about it – Brexit, the ditching of a free pass by the Swiss to join, the mess with Turkey over refugees, the parlous state of Greece, an Austrian presidential election that exposed the lack of respect for member state democracy by the EU, a touch and go referendum in Italy and the growing chances of a Le Pen presidency in France on top of an EU economy at stall speed with limited options.

Italy holds its referendum on Dec 4 this year. Italian politics is rarely devoid of scandal or controversy. The referendum is to do with reforming the constitution with a focus on limiting power in the Senate so laws can be passed quicker. If you believe polls, 42% don’t want change. 37% do. Referendums in 1993 and 1997 failed. PM Renzi has threatened to resign if it fails to carry. In a sense the referendum had been tracking ‘yes’ until he staked his career on it (are you listening David Cameron?) and the mood switched. Renzi thought the threat would work in his favour by alarming voters he’d throw the country into more political gridlock. The idea that Italians are “concerned by instability” is rather humorous. I am trying to work out a period when Italy had stable political leadership. Here is a list of  PMs since 1976 (all 24 of them):

1. Aldo Moro – 1974-1976
2. Giulio Andreotti – 1976-1978
3. Francesco Cossiga – 1979-1980
4. Arnaldo Forlani – 1980-1981
5. Giovanni Spadolini – 1981-1982
6. Amintore Fanfani – 1982-1983

7. Bettino Craxi – 1983-1987
8. Amintore Fanfani – 1987-1987
9. Giovanni Goria – 1987-1988

10. Ciriaco De Mita – 1988-1989
11. Giulio Andreotti – 1989-1992

12. Giuliano Amato – 1992-1993
13. Carlo Azeglio Ciampi – 1993-1994
14. Silvio Berlusconi – 1994-1995
15. Lamberto Dini – 1995-1996
16. Romano Prodi – 1996-1998
17. Massimo D’Alema – 1998-2000
18. Giuiliano Amato – 2000-2001
19. Silvio Berlusconi – 2001-2006
20. Romano Prodi – 2006-2008
21. Silvio Berlusconi – 2008-2011
22. Mario Monti – 2011-2013
23. Enrico Letta – 2013-2014
24. Matteo Renzi – 2014~

The stratospheric rise of the Euro-sceptic 5-Star Movement (M5S) could benefit from the electoral rules (Italicum law) which changed in July 2016 which grants a party that wins over 40% of the vote it wins 54% (a minimum of 340 out of 630 seats) of the Camera.

The Economist wrote of the party that aims to #draintheaqueduct “the M5S chooses its electoral candidates in online ballots. Save in municipal elections, it does not accept anyone who has served more than a term as a political representative of any sort. The intention is to guarantee that its lawmakers and office-holders are free of the compromising links that are rife in Italian politics. But one effect is to ensure they are equally untainted by experience and, sometimes, ability.” M5S is polling around 28% vs Renzi’s Democratic Party at 32%.

There in lies the rub for the establishment. Around the world, they are fast learning that political experience and ability are outweighed by the promise of change and the ability to call a spade a spade. Rome’s Mayor Ms. Raggi (M5S) has bounced from one problem to another after being left a city in deep debt and political scandal. Reality is often different to the dream.

Still if Renzi loses and he resigns, Italy maybe thrown into a snap election and if the M5S wins a majority that will have implications for the bond market. A party that looks to exit the euro will potentially raise large scale bank default risk. Holders of Italian euro-denominated debt would be stuck having to receive a devalued lira on top of wholesale dumping of Italian debt proving a double whammy. Banks are not required to hold capital against government bond holdings but such losses could well create insolvency issues. At the start of October this year, Italian 10-yr  government bonds traded at 1.2% yield. It is now 2.13%.

So the risk of the Italian referendum is perhaps being viewed by Schulz to take an emergency parachute to pursue a German state political career than his once Utopian ideal of the EU. It is telling. Surely he stood to gain much greater power in the long run if he truly believed in his beloved EU project. Resignation suggests he may believe the writing is on the wall and better to retreat to his homeland to keep what is left of a career alive. A true contender to Merkel? It remains to be seen but do not discount his move as a precursor to the dwindling fortunes of the EU movement.

Playing with Financial Plutonium

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I am still dumbfounded by the level of complacency in financial markets. How  can there be any confidence in our financial system?  Reality is that confidence continues to wane. I mentioned a while back that the headline stock index in Europe has no financial stocks in it. Never in my history in financial markets have I witnessed this. It isn’t because other stocks have got bigger. Financials in Europe have shrunk to such irrelevant levels that they don’t make the cut. Argue all you want about FinTech revolutionizing banking as we know it however don’t dismiss that the core of financial markets resembles a rotting carcass with so little meat that even vultures are considering vegetarianism so slim are the pickings. If the financial sector is sick and it is what greases the economy beware this signal.

One thing that hasn’t changed is the arrogance of the banks. Deutsche proudly protesting that the DoJ’s $14bn fine is just a “starting point” all the while its shares dwindle at all time lows.  Europe’s most powerful bank 1/3rd the size of Australia’s NAB. I’m working on a report looking at the deterioration of financial profitability and market relevance.

All the while though I keep shouting from the rooftops like the tramp from Blazing Saddles and the bell chimes right as I try to warn of impending  global economic disaster.

“The world economy is dying (clang!)”

“what did he say?”

“I think he said the world economy is flying!”

“No, goddamnit!, I said the world economy is dying (clang!)”

You get the picture. What people still haven’t grasped is the velocity of money continues to slow rapidly. For every dollar pumped into the economy, smaller fractions of GDP are created. In Europe it takes €7 to create €1. In China it takes RMB8 to create RMB1. In the US it takes around $4.5. The more morphine that is pumped into the patient the less efficacy. The debt burden mounts to unsustainable levels. Asset bubbles abound. Central banks keep pushing on sweeping the damage under the carpet. Europe is at stall speed. France and Italy didn’t grow last quarter. The US stumbled into 1% territory while the previous quarter was revised to 0.8% – hardly cracking growth.

The most recent worrying red flag is Greenspan weighing into the central bank policy debate. If there was ever a tail-end Charlie behind the curve he is it. I look at the propaganda pushed by the White House in a self congratulatory tone. This idea that everything is fine. American wealth at all time highs and poverty at 50 year lows. The problem with such fiction is that Main Street is actually living the struggle. They are not theory. They are reality. Whether crushing pensioners with a lack of sensible low risk income products, or celebrating recent inflation through rent rises and healthcare costs is not to pat one’s back over. Real wages are falling, consumption is waning and life is getting tougher. Steeper Obamacare prices and higher rents don’t boost economic growth. This is bad inflation and most other items continue to struggle under the weight of chronic overcapacity. Hanjin Shipping woke us up to that sad fact.

It’s brutal out there but the Democrats talk of prosperity at the same time complaining at the lack of progress on welfare despite having their wise sage Obama at the helm for the past 8 years.

More misguided central bank policy continues in group think like fashion.  It is as if they are enriching financial plutonium to such dangerous levels that imminent detonation could occur. The experiment keeps going but the scale of the collateral damage is growing exponentially. Many central bankers know how bad things have got but pray they can leave their ivory towers and seek shelter before it blows up on their watch so they can evade direct responsibility.

For all of the pump priming, toxic asset buying and NIRP strategies of central bankers, there is one constant in all of this. Pain must eventually be taken to restore equilibrium. The longer we store up the gangrenous irradiated mess that has and is being created for almost two decades the bigger the scale of fall out.

So many are totally unprepared for the coming event. People will still argue that the most experienced and brightest minds work within these banks so we should back their collective wisdom but I’d bet money that most if not all have no idea about how the average Joe and Joanne works. Funny thing is the average Joe and Joanne are feeling the pain everyday as they struggle to get by. They’ve had enough.

I’m surprised the Democrats, the party that is supposed to favour the afflicted, continue to miss the obvious. Trump would never have seen the light of day had the establishment listened to their cries for help.

In closing, I feel the same vibes I did when I called the impending crisis that was GFC1. This time will be much worse.  Financial plutonium is too rich and reaching fissile levels. Discount everything coming from the authorities. Pure common sense tells us the numbers don’t match reality.

There will be no “I told you so!” moment for me. Who would want to bask in misery?