"Markets Are Nervous": JP Morgan Co-President Sees 40% Correction In Stocks

In what sounds more like yet another warning to President Trump than an actual market call, Daniel Pinto, the head of JP Morgan Chase & Co.'s colossal investment bank (which houses its M&A and trading operations) warned that equity markets coulddecline by as much as 40% over the next 2-3 years - though he believes the present cycle has at least another year left to run.

Pinto said markets are "nervous" - not just about trade, but also by the prospect of higher interest rates globally (they might receive more inadvertent insight today if the ECB's Mario Draghi pulls a Jerome Powell and sends markets reeling with a hawkish misstep).

The prospect that President Trump could start a trade war also has investors on edge - and they could dump stocks if the tariffs end up being larger than the market expects, according to Bloomberg.

A 40% drop would wipe out most of the market's gains from the past two years.

"There is never just one trigger, it's a combination of factors and it depends on valuation at the time. The market probably has some way to go probably for the next year or two, but the correction could be 20% to 40%. And for us, we just try to be prepared because during those times, the clients really need you."

Nonetheless, Pinto says the probability of a recession in the US in the near term is "very low" and the present cycle - in the US, at least - probably has another year before a prolonged downturn begins.

"At the moment the scenario is, the economy will continue growing globally very strongly in the US and everywhere else, the Fed and the other central banks are being very prudent with how they adjust monetary policy, and inflation is moving up but its very reasonable - so those are the things you want to watch: That inflation doesn't go up to fast, that forces the Fed and central banks to raise faster...you want to look at geopolitical issues that are playing out...and you want to look at geopolitical issues."

Circling back to today's ECB meeting, Pinto says that, considering the outcome of last weekend's vote in Italy, the ECB will probably do its best to make Thursday's announcement an "uneventful" one as it waits to see whether Italian lawmakers can successfully form a government.

Pinto was promoted to co-president under chief Jamie Dimon this year. The banker has advanced through the trading side of JPMorgan and has helped that business climb to the top of Wall Street.

Pinto's near-term bullishness mirrors JP Morgan quant Marko Kolanovic, who recently doubled-down on his cheerful outlook following last month's volocaust.

EURUSD, Bund Yields Spike After ECB Drops Pledge To Increase QE If Needed

The market's base-case scenario was for ECB President Draghi to manage expectations by keeping a balanced approach to latest developments in the euro area and abroad, with no significant change in forward guidance, which was confirmed by the fact that overnight volatility in the euro trading at its second lowest reading before an ECB meeting in the past year.

As Bloomberg's Carolynn Look noted, top on everyone's mind today is future policy and what clues fresh economic forecasts and even the slightest change in wording might offer. Draghi is likely to err on the side of caution. Although the ECB previously hinted that forward guidance could be changed "early" this year -- paving the way for a gradual exit from bond buying -- market anxiety over sooner-than-anticipated tightening by global central banks has already caused plenty of volatility. Economists expect Draghi to keep a tight lid on additional changes, for now.

Ahead of the statement, money markets are signaling an increasingly dovish ECB stance, with bets on a 10 basis point hike in the deposit rate pushed back to the second quarter of next year.

*  *  *

The ECB statement confirms no change to its key rates:

• *ECB LEAVES DEPOSIT FACILITY RATE UNCHANGED AT -0.4%
• *ECB LEAVES MAIN REFINANCING RATE UNCHANGED AT 0%

And forward guidance

• *ECB SEES INTEREST RATES AT PRESENT LEVELS FOR EXTENDED PERIOD
• *ECB SEES RATES AT PRESENT LEVELS WELL PAST END OF NET PURCHASES

But The ECB went a little more hawkish on its QE program...

• *ECB SEES QE RUNNING UNTIL END OF SEPTEMBER OR BEYOND IF NEEDED
• *ECB: QE TO RUN UNTIL INFLATION PATH HAS SUSTAINABLY ADJUSTED
• *ECB WILL REINVEST MATURING DEBT FOR AS LONG AS NECESSARY
• *ECB WILL REINVEST FOR EXTENDED PERIOD AFTER NET BUYING ENDS
• *ECB SAYS REINVESTMENTS WILL HELP DELIVER APPROPRIATE STANCE

The ECB dropped its pledge to "increase the asset purchase program in terms of size and/or duration" if necessary -- suggesting they want to define a clearer path for the direction of stimulus. By removing the so-called easing bias on QE, they're showing more confidence that they'll be able to phase the program out.

Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the new monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

The ECB has left all three rates unchanged as expected but was overall hawkish, by tweaking the press release language and removing the easing bias on asset purchases.

EURUSD is spiking on the statement...

As are Bund yields...

Bloomberg's Carolynn Look does however point out that it's not a huge change. They still say that QE will run for as long as is necessary to meet the ECB's inflation goal. They also kept their guidance on interest rates the same. And frankly, I haven't heard of anyone who actually expected them to increase QE again this year.

As a reminder, here is ING's cheat sheet for trading the statement and the press conference...

Corporate Bond Market Gets Ready for Big Reset

Investors are still blowing off the Fed. But not much longer.

CVS Health Corp. sold $40 billion of bonds on Tuesday to help fund its $69 billion acquisition of Aetna, which is still pending regulatory review that may conclude later this year. CVS will also obtain a $5 billion loan, use $4 billion in cash, and issue a lot of stock to pay for the deal. In total, CVS will take on $45 billion in debt, which is a lot for a company that is rated two notches above junk. S&P's and Moody's have put CVS on credit watch with negative outlook as the acquisition "will materially weaken credit metrics," Moody's says.

Yet there was strong demand: $120 billion in orders for $40 billion in bonds. The deal was offered in seven tranches. According to investors, the 30-year portion sold with a yield of 1.96 percentage points above the equivalent Treasury yield.

CVS won't even need the money until later this year when the deal closes, assuming it closes. But it went out there to borrow now, rather than wait, to benefit from the still extraordinarily low interest rates in the corporate bond market and to front-run a flood of new issuance by other companies.

In addition, the US Treasury Department will issue large amounts of debt to cover the ballooning federal deficits.

And in addition, the Fed has raised rates four times since December 2016 and will likely raise rates three or four times this year, and more next year.

So CVS tried to get its bonds sold before all this hits the fan. Because bond buyers – mostly institutional investors, such as bond funds and pension funds – are still in denial. They're still chasing yield, especially those speculating on the riskiest corporate bonds.

The average yield of junk bonds rated CCC or below – the riskiest category – was at 10.4%, according to the index that tracks them, the ICE BofAML High Yield CCC or Below Effective Yield index. This is down from about 12% in mid-December 2016, when the Fed stopped flip-flopping and embarked in serious on the current rate hike cycle.

In other words, since mid-December 2016, the Fed has hiked rates four times, in total by 1 percentage point, but over the same period, junk bond yields rated CCC or below have declined 1.5 percentage points as the bonds haverallied.

During the oil-and-gas bust, the CCC yield spiked to 21%. During the Financial Crisis, it spiked north of 40%. These are very risky bonds, and when financial conditions tighten – which is what the Fed is trying to accomplish by raising rates and unwinding QE – these companies may not be able to refinance maturing bonds or raise new money to fund their money-losing operations and pay interest. Defaults ensue. Investors normally want to be compensated for those risks, but not today.

At the high end of junk bonds, just below investment grade, the average yield of BB-rated bonds has begun to tick up in recent months. But at 4.91%, according to the ICE BofAML US High Yield BB Effective Yield index, it remains very low – about where it had been in mid-December 2016. In the longer-term chart, that little uptick over the past two months is barely visible:

When we talk about "yield," it is from the investor's point of view, meaning the return on the investment. From the company's point of view, this is the cost of capital. And this cost of capital even for risky junk-rated companies remains extraordinarily low. These are precisely the financial conditions that the Fed wants to tighten.

In the investment-grade arena, corporate bonds trade more in parallel with equivalent US Treasuries. According to the ICE BofAML US Corporate AA Effective Yield index, the average yield of AA-rated bonds has risen to 3.27%. While this is still very low by historical standards, it's the highest since April 2011. So these investment-grade-rated companies have started to see their costs of capital rising — even as junk-rated companies have not:

By contrast to corporate bond-market moves, the three-month Treasury yield has done this:

There are measures of risk premiums — what investors demand in order to take greater risks: one of them is the difference in yield (the "spread") between junk bonds and Treasuries. This spread is now at just 3.53 percentage points, according to the ICE BofAML US High Yield Master II Option-Adjusted Spread index, barely up from historic lows. Investors are not demanding to be compensated for the large extra risks they're taking, and they're still blowing off the Fed:

The spread between the yields of AA-rated investment grade bonds and equivalent Treasury securities has risen from a minuscule 0.52 percentage points to a still minuscule 0.64 points, and also remains near historical lows. You can barely see the uptick over the past few weeks:

When the Fed hikes its target range for the federal funds rate, and when it sheds securities on its balance sheet – both of which it has been doing with clockwork predictability – it attempts to tighten "financial conditions" to make credit more expensive and harder to get for credit-dependent companies (and consumers) in a credit-dependent economy. It's attempting to get investors to be more prudent and circumspect and demand to be compensated more for taking risks. But the corporate bond market continues to thumb its nose at the Fed.

The Fed will succeed in tightening financial conditions. It always does. And when this starts to click, the adjustment will be sharp and possibly harsh for those companies that have relied on cheap and easy money to fund their operations. But for now, investors are still blithely oblivious to the coming reckoning in the corporate bond market.

It started before the sell-off.

Oops, Extra-Gloomy Numbers on the US Trade Deficit in Goods & Services for January

A sharp deterioration that started in Aug. 2017.

With the immaculate timing of coincidence, given the current spat over Gary Cohn's departure from the White House, the Bureau of Economic Analysis this morning released some extra-gloomy numbers on the US trade deficit in goods and services for January. The consensus estimate by economists tracked by the Wall Street Journal projected that this deficit would widen to $55.1 billion, up from a nine-year high in December of $53.1 billion "amid a surge in imports." But that was wishful thinking.

The deficit in goods and services widened to $56.6 billion, the worst since October 2008, and December deficit was revised to $53.9 billion. In the chart below, note the sharp deterioration since August 2017:

Year-over-year, the trade deficit in goods and services jumped 16.2% (or by $7.9 billion). Exports rose by $9.7 billion (or 5.1%), but that wasn't nearly enough to balance out the surge in imports of $17.6 billion (or 7.4%).

The US still has a trade surplus in services with the rest of the world, but after growing for years, it peaked in February 2015 at $22.6 billion and has since been declining, In January, the surplus in services fell 2.1% year-over-year to $19.9 billion:

The trade deficit in goods widened by 10.8% year-over-year to $76.5 billion in January, barely above the worst-ever goods deficit during the trough of the Great Recession when global trade came to a halt for a brief moment. And note what has happened since August 2017:

These trends of growing imbalances are not propitious for the US economy. At some point, there will be an adjustment, either in some kind of "contained" and gradual manner, or something more out of control. Note how trade reacted in the Great Recession.

Whatever the solutions may be, to be functional rather than destructive, I suspect they'd be complex and nuanced and should include Corporate America because that's where a big part of the causes lie. But at least the issue is on the table today, and is being publicly discussed, with policy makers lining up on all sides of the issue and taking a stance, after prior administrations have pussyfooted around it for two decades.

Meet The New Fed Boss, Different From The Old Fed Boss

The Fed officially has a new Fed Chair, Jerome Powell. And ever since he took office, it is clear that "something" has changed at the Fed.

That something is the famed "Fed put" or the idea that the Fed would immediately move to prop up stocks any time they began to fall.

Jerome Powell was sworn in as Fed Chair on February 5th 2018. At that time, the market was in the sharp sell-off annotated in the chart below:

Powell made ZERO mention of the sell-off or of stocks in his prepared statements during the swearing in ceremony. Indeed, he didn't mention the markets once.Instead he mentioned rate normalization, balance sheet shrinkage, and regulations.

He also mentioned the Fed has, "important responsibilities for the stability of the financial system and for the regulation and supervision of financial institutions, including our largest banks…

Again… Powell focuses on Too Big to Fail, normalization, balance sheet shrinkage, and regulations.

It would be easy to shrug this off as a one-time deal, except that I've picked up on a note shift in Fed official rhetoric since Powell took office.

Three days after Powell's swearing-in ceremony, when the markets were falling even farther, NY Fed President Bill Dudley appeared in the media to make the following astonishing statement:

Judging by remarks this week from policy makers, who were unmoved by rising yields and the losses in stocks, the Powell Fed isn't rushing to signal that tendency. New York Fed President William Dudley on Thursday called the stock selloff "small potatoes" and said it has no economic implications.

Source: Bloomberg.

To understand why this statement is astonishing, you first need to understand the source: Bill Dudley is one of the BIGGEST doves in Fed history. This is a man who always pushes for more Fed intervention/ liquidity.

In 2010, when QE 2 wasn't even over yet, Dudley was already pushing for another round of stimulus.

In 2011 he was calling for the Fed to literally "prop" up the housing market.

In 2012, at a time when the Fed had already printed over $2 trillion and the US was supposedly three years into a "recovery" Dudley was calling for even "more aggressive" monetary policy.

By the way, Dudley was calling for this AFTER the Fed had already launched QE 3.

In 2013 Dudley called for more QE if unemployment didn't fall. Again, this was in 2013… after the Fed had already implemented QE 1, QE 2, Operation Twist AND QE 3.

You get the idea.

With that in mind, the idea that Dudley would call a violent 10% stock market collapse such as the one the markets faced in early February "small potatoes" is incredible. And it indicates that the Powell Fed will have a very different attitude towards the markets.

We get confirmation from this on February 13 (the very next day after Dudley's comments) when Cleveland Fed President Loretta Mester, stated the following:

The recent stock market sell-off and jump in volatility will not damage the economy's overall strong prospects, Cleveland Fed president Loretta Mester said on Tuesday in warning against any overreaction to the turbulence in financial markets.

"While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario," Mester said of a market rout that cut more than 10 percent from major stock indexes.

Source: Reuters.

The fact Mester uses practically the same language as Dudley (that a stock drop won't impact the economy) suggests that Mester's statement is part of a coordinated effort by the Powell Fed to remove the famed "Fed Put."

Put simply, the new boss is not the same as the old boss for the Fed… at least for now. The Powell Fed is clearly not interested in propping up stocks at every single drop.

Which means, stocks have a long ways down before they finally bottom. Indeed, as I write this, the S&P 500 is forming a clear downward channel. The ultimate downside target for this move is 2,450.

Big gains are there to be made by those who play this move with the right investments.

ECB Preview: Draghi Set To "Avoid Any Sudden Moves" But Watch Forward Guidance

Recent news events, including an anti-establishment surge in Italy, and President Trump's tariff tirade, underpin the argument for Mario Draghi to avoid any sudden moves in tomorrow's ECB statement and press conference.

"Draghi is likely to err on the side of caution at the meeting of the Governing Council on March 8. The next major change to forward guidance probably won't materialize until June -- only concessionary tweaks are likely this month." -David Powell and Jamie Murray, Bloomberg Economics

With the euro having traded somewhat sideways for a month as most of the European equity markets collapsed, analysts suggest that Draghi may take his currency-strength-jawboning foot off the pedal and tweak forward guidance estimates to signal the beginning of the end for easing.

SocGen's Kit Juckes pointed out, "If we get a slight language tweak on Thursday and a drop in average hourly wage growth in the U.S., we'll be above $1.25 by the weekend."

As Ransquawk notes, last time round, the central bank refrained from providing much of a blueprint as to how they intend to unwind their current stimulus program after its current end-date of September with Draghi stating that no discussion took place with regards to tapering. When asked about EUR appreciation, Draghi stated that it was a source of uncertainty and it is too early to say whether FX moves have had a pass-through effect.

ECB JANUARY MINUTES: The highlights from the January minutes saw policymakers state that changes in communications were viewed as premature with some expressing the preference for dropping their current easing bias.

SOURCE REPORTS: In the immediate aftermath of the previous meeting, source reports revealed that ECB rate setters were split about the next move as the Euro's rise complicates the outlook.Thereafter, further reports suggested that the Bank's PSPP will conclude with a short taper and some officials want clearer guidance on interest rate hikes. However, the most pertinent of the sources for the March meeting came last week with ECB policymakers seen to be unlikely to signal a policy shift this time round but could discuss a dropping of their current easing bias. 

ECB RHETORIC: Perhaps the most significant recent contribution from ECB policymakers came from ECB's Coeure who noted the ECB might end its net purchases even before it can see a sustained rise in inflation. However, this is likely to be more relevant for meetings later in the year than this time round. Elsewhere, Draghi highlighted last week that inflation is yet to show more convincing signs of sustained upward adjustment while the Euro area economy is expanding robustly.

DATA: From a growth perspective, Q4 GDP figures printed at 0.6% and thus in-line with the Bank's current forecasts. On the inflation front, prelim Eurozone CPI slipped to 1.2% from 1.3% during the month of February with core measures still uninspiring. However, prospects for wage growth will likely appease some policy makers. Elsewhere, survey data via Markit saw the EZ composite figure slip to 57.1 from Jan's 58.8 but remains firm by historical standards nonetheless.

Ransquawk points out that potential adjustments to the forward guidance are as follows:

RATES: No adjustment expected on this front until details of the curtailing of asset purchases have been announced later in the year. N.b., at the previous meeting Draghi stated that he sees "very little chance" that the ECB will raise interest rates this year.

ASSET PURCHASES: As revealed by the latest ECB source reports, a discussion around dropping the easing bias for asset purchases is expected to take place. After the notion being rejected by policymakers in January on the basis that fundamentals had not changed enough to warrant such an adjustment, this meeting might be too soon for consensus at the Bank to adopt such a change in communication. Note, consensus before the source reports suggested that this will not be actioned by the bank until June with the Bank to not reveal their method of curtailing bond purchases until the following meeting in July.

GROWTH: No adjustment expected on this front.

INFLATION: No adjustment expected on this front.

And here is what to watch out for...

ECB STAFF PROJECTIONS: Changes are widely expected to be particularly minor/non-existent with information since the previous forecasts unlikely to provide much incentive for the Bank to make any major adjustments.

From a growth perspective, Pictet suggest that there is some minor upside risk to the 2018 forecast but ultimately any changes are likely to be tweaks rather than the mass adjustments seen in December. On the inflation front, the firmer EUR is set to negate any upside pressure from the climb in oil prices and upside in food prices. However, BAML believe that 2018 inflation could see a minor nudge higher on the basis that the Dec projections were too soft at the time. See below for the December projections.  

PRESS CONFERENCE: Ultimately, aside from the macroeconomic projections and potential tweaks to the introductory statement, this week's press conference could be one of the more uneventful presentations by the ECB President with Draghi set to 'kick the can down the road' on unveiling any major clues as to how and when the ECB will conclude their asset purchase programme. 

In terms of subjects the ECB President will likely be quizzed on by journalists, aside from the future path of the PSPP, Draghi will likely be questioned on the ECB's view of 'trade wars' during the Q&Aafter the recently announced measures by US President Trump. This comes in the context of the ECB Jan minutes stating that "…the balance of risks to the global economic expansion was considered to remain tilted to the downside… uncertainty regarding the policy outlook in some major economies, including the risk of an increase in trade protectionism, continued to constitute downside risks." However, as if often the case with Draghi it is likely that he will adopt a non-committal tone and state that the ECB are monitoring events abroad.

As far as other political issues are concerned, Sunday's inconclusive Italian election result will also likely be a talking point given the success of the populist 'anti-Euro' parties. However, both the Northern League and MS5 have scaled back their desire for a EUR-referendum with the leader of the former stating that a vote on the issue would be 'unthinkable'. That's not to say that both parties (should they obtain power) wouldn't opt for reform of the Euro-area but it is unlikely to impact the ECB's thought process at this stage with the matter currently more of an issue for domestic Italian assets. 

There's also a possibility that Draghi will be asked about the Bank's view on the EUR exchange rate given how much of a focus it was last time round. However, since then, the EUR has seen little deviation from Jan levels on a trade-weighted basis and as such, Draghi may opt to reiterate his previous stance of labelling it as "a source of uncertainty and it is too early to say whether FX moves have had a pass-through effect".

Here is a selection of analysts' views on bonds and the euro ahead of the meeting, via Bloomberg:

Barclays

Changes to forward guidance are coming but in "small doses,"strategist Cagdas Aksu writes in a note

Sees ECB dropping the asymmetric forward guidance in QE first, coming as early as this week

Societe Generale

The meeting should confirm a gradual shift in the policy outlook, loosening forward guidance slightly, according to strategists including Jorge Garayo

Remain bearish on euro rates, with the belly of the curve having further room to re-price

NatWest Markets

Minor alterations are in the cards for forward guidance, but base case is for no change, according to analysts including Anna Tokar

"It appears there is little reason to disrupt the markets at the moment, when the ECB views the current pricing as fair"

See Draghi making further mention of the strong euro in the question and answer session

Rabobank

"Any adjustment to the forward guidance will have a minimal impact given the market has already accepted the fact that the program will be wound down between end-September and December this year," said strategist Matthew Cairns

"The material lack of wage growth and still-low inflation expectations will serve to keep a lid on a sustained, significant rise in yields"

In summary:

• Unanimous expectations look for the ECB to leave its three key rates unchanged

• ECB set to discuss a dropping of their current easing bias

• Macro projections unlikely to be subject to major revisions

And finally here is ING's guide to trading tomorrow's ECB meeting...

What Economic Recovery? Half Of U.S. Companies Are Losing Money

Article from Baruch Lev, he is the Philip Bardes Professor of Accounting and Finance at the Stern School of Business, NYU. This article first appeared on the Lev End Of Accounting Blog and is shared on the net with his permission.

We are inundated with great economic news: The stock market is at all-time high (despite wide fluctuations), unemployment is the lowest in two decades, consumer confidence is the highest in many years, and corporate profits are surging from quarter to quarter. A real economic recovery to be sure.

So, you will be shocked to see the following figure (developed with my colleague Feng Gu), which I haven't seen anywhere else, nor mentioned by economists and pundits. The figure shows the percentage of U.S. public companies reporting an annual loss, from 1960 through 2016. The two curves portray the percent "losers" from all public companies (lower curve), and the percent "losers" from all technology and science-based companies (computers, software, pharma, biotech, etc.), presented by the upper curve.

The main finding: Both curves are fast increasing.

The percent losers from all companies increased from 18% in 1980 to 46% in 2016.

For high tech and science-based companies the losers reached 69%! In 2016.

The loss reporting epidemic rivals now the flu. High tech and science-based enterprises seem to be perennial losers rather than growth drivers.

So, where is the economic recovery if half the companies are reporting losses? Shouldn't a recovery be reflected by an increasing number of profitable companies? I felt that there is something fishy in those GAAP-based earnings numbers, leading me to look deeper into the data.

The effect of one-time (transitory) items: Since the FASB switched in the 1980s to a "balance sheet model," emphasizing the valuation at fair (current) values of assets and liabilities, corporate income statements increasingly included the consequences of these valuations: one-time items, such as gains/losses from adjustments of assets and liabilities to fair values, impairments of assets and goodwill, restructuring costs, etc. Most of these items reflect past events and are irrelevant for forecasting future firm performance―the focus of investors. Indeed, analysts routinely disregard some of these items in their "Street Earnings," and managers delete them from their non-GAAP earnings.

So, I computed the percentage of loss firms due to one-time items ("special and extraordinary items" and restructuring charges) during 2010-2016. Namely, firms that would have reported a profit if the one-time charges were eliminated. These percentages ranged between 8-10% for all loss reporters, and 5-8% for high tech and science based companies. So, one-time items are one reason for loss reporting, though not the major one. I kept digging into the data.

The effect of intangible investments: Internally-generated intangible investments―R&D, brands, IT, human resources, organizational capital―are immediately expensed, following GAAP rules, despite the obvious fact that in modern economies these investments are the most important and consequential long-term value-drivers of business enterprises. This massive expensing in the income statements of U.S. companies―total corporate investment in intangibles during 2016 exceeds $2.1 trillion (yes, trillion!)―turns the profits of many successful and promising companies into losses. Tesla's massive losses are mainly due to the expensing of R&D ($834 million in 2016).

So, how many loss reporting companies would have reported a profit if their R&D was capitalized? The data show that 9-10% of all "losers" and 20-26% of the loss reporting high tech and science-based companies would have reported profits if R&D were not expensed. Think about it: a quarter of all high tech and science-based firms report losses just because they invest in future growth. And you call this accounting?

But R&D is just one, and not even the largest, intangible expenditure. Other intangible investments, such as on IT, brands, human resources, designs, consulting engagements, etc., are not reported separately in the income statement by firms, and generally "buried" in SG&A (sales, general and administrative) expenses. So, what is the percentage of loss reporting firms who would have reported profits if SG&A expenses were added back to earnings (SG&A includes R&D in my data source―Compustat)? This is a big number: 43-51% of all losers and 50-56% of science-based and high tech losers during 2010-2016 would have reported profits before SG&A.

So, if I add the two major reasons for loss reporting - intangible investments and one-time items - I account for 50-60% of all the loss reporting. The fast increase in loss reporting portrayed by the figure above is thus mainly due to the increasing proliferation of new-age firms (high tech, science-based, telecom, media, etc.) whose investments are mostly intangible, and their reported earnings seriously misstated by GAAP-based financial reports.

So, while the above figure seems to contradict the economic recovery, it really doesn't. If the archaic, detached from reality accounting rules will not be changed, we will continue to witness more and more "losing companies," by GAAP misleading yardstick, while the economy continues to prosper. The real losers are investors who rely on GAAP-based financial reports.

Trump Trade Wars Are A Perfect Smokescreen For A Market Crash

First, I would like to say that the timing of Donald Trump's announcement on expansive trade tariffs is unusual if not impeccable.

I say this only IF Trump's plan was to benefit establishment globalists by giving them perfect cover for their continued demolition of the market bubbles that they have engineered since the crash of 2008.

If this was not his plan, then I am a bit bewildered by what he hopes to accomplish. It is certainly not the end of trade deficits and the return of American industry. But let's explore the situation for a moment...

Trump is in my view a modern day Herbert Hoover. One of Hoover's first actions as president in response to fiscal tensions of 1929 was to support increased tax cuts, primarily for corporations (this was then followed in 1932 by extensive tax increases in the midst of the depression, so let's see what Trump does in the next couple of years).  Then, he instituted tariffs through the Smoot-Hawley Act.  His hyperfocus on massive infrastructure spending resulted in U.S. debt expansion and did nothing to dig the U.S. out of its unemployment abyss. In fact, infrastructure projects like the Hoover Dam, which were launched in 1931, were not paid off for over 50 years. Hoover oversaw the beginning of the Great Depression and ended up as a single-term Republican president who paved the way socially for Franklin D. Roosevelt, an essential communist and perhaps the worst president in American history.

This is not to say Hoover was responsible for the Great Depression.  That distinction goes to the Federal Reserve, which had artificially lowered interest rates and then suddenly raised them going into the economic downturn causing an aggressive bubble implosion (just like the central bank is doing right now).  But Hoover did actually aid the Fed in their undermining of economic stability by pursuing policies which were poorly timed.

I'm hitting readers with all of this because I am growing rather tired of the contingent of Trump apologists in the liberty movement scrambling to defend every single Trump action no matter how illogical. These people should know better.  Sorry, but Trump is not "playing 4D chess" against the globalists.  His primary initiatives have only served so far to create a useful distraction away from the globalists.

The disturbing key to all of this is the fact that many of Trump's policies are things that I and many others have argued for in the past. The problem is, he is implementing them out of order and with bad timing, which will only make such policies appear destructive in the end, rather than constructive.

In terms of the implementation of tariffs, the people who are defending this action at this time do not seem to understand the basics of international trade. Tariffs can only be enacted from a position of economic strength and resource development. This strength comes from internal self-sufficiency in production; meaning, in order for the U.S. to force a trade balance (which is what tariffs are supposed to do) the U.S. must have a strong industrial base and MUST be capable of producing most if not all necessary goods and goods in broad demand.

The fact is, U.S. manufacturing has been utterly outsourced by the very corporations Trump just gave a 10% tax cut to, and rebuilding that industrial base would take decades. Why? Because there are no incentives for corporations to bring manufacturing back.

As I already stated, Trump is instituting potentially solid policies but he is doing so out of order. Tax cuts for corporations should have been enacted only as an incentive for manufacturing jobs to be returned to America. Instead, corporations got tax cuts for absolutely nothing. And will those tax cuts go towards more jobs or innovation? Nope. They will be going to pay off unprecedented corporate debts, and stock buybacks, most of which were accrued through borrowing from the Federal Reserve.

Will this stock buyback bonanza even generate new highs in the Dow? Probably not. But I'll explain why that is later.

If Trump had given tax incentives for corporations to bring manufacturing back into the U.S., and then given those corporations a few years to make the shift, only then would tariffs have been an effective action. But as the situation stands now, we have minimal tangible production in this country, and, historic debts held by the same overseas competitors that Trump is now seeking to "teach a lesson."

Debt is the next issue which needs to be addressed before tariffs can ever be implemented in a practical way. In terms of national debt, rather than setting up a plan to reduce U.S. debt expenditures, Trump is increasing debt by reducing taxes while at the same time increasing spending. Trump did not take a hard stand on the debt ceiling debate as he originally claimed he would, and so, the debt train continues unabated.

Who is going to purchase this debt, I wonder? Over the past several years the largest buyer of U.S. treasury debt was the Federal Reserve through fiat money creation. Now, the Fed has tapered quantitative easing and is dumping their balance sheet at a rate faster than anyone expected. The Fed is pulling the plug on its artificial support of the economy.

The next largest buyers are major foreign central banks in countries like China, Japan and to some extent the supranational EU. If the debt buyers of last resort are now the very same countries Trump is seeking to enact tariffs over, how do you think this little theater will end? Yes, with a dump of U.S. treasury bonds and perhaps the dollar as world reserve by those nations.

But what about the U.S. consumer? Isn't the consumer market in America so enticing that nations like China would "never dare" dump U.S. debt or the dollar? No, not really. If we are talking about a trade "war," then a country like China, which has a vast manufacturing base and which has also been building up its own domestic consumer market, would be willing to make the sacrifice. America would be hurt far more by the threat of debt default and the loss of the dollar's international buying power than China ever would be by the loss of American consumers.  With tariffs being implemented, they may lose the American consumer anyway.

Our retail market is hardly as appetizing as it was 10 years ago given the decade of drudgery Americans have endured, with the largest number ever of working age citizens no longer participating in the jobs market, as well as real worker wages in continued decline while the American consumer is now more indebted than at any other time in history.

All of these negative effects are weighing down our economy while the Federal Reserve is quickly deflating the fraudulent markets that the establishment used during the Obama administration to argue that America was "in recovery." Of course, alternative economists have known since the beginning that this was a lie, and that the only thing propping up the economy and stock markets was central bank manipulation.

The Fed under Jerome Powell has made it crystal clear that they WILL be raising interest rates and cutting the Fed balance sheet, perhaps more than their dot plots had indicated in the past. Without low rates and a steadily rising balance sheet we have already seen the results. Stocks in particular have gone crazy compared to the past few years, dumping nearly 10% one week, spiking about half that the next week. One thing is certain, the supposedly endless bull market induced by the Fed years ago is now over. Stocks are in heart attack mode.

It is no coincidence that the first two times the Fed reduced its balance sheet the Dow plunged over 1,000 points. The latest dump of $23 billion at the end of February resulted in a drop of around 1,500 points. It is too early in this process to know what the trend will be, but it seems to me that stocks are being steam valved down every month. With a marked decline just after a balance sheet dump, followed by a less impressive dead cat bounce the week after.

In the meantime, Trump's "trade war" is now being blamed in the mainstream for the decline in stocks that the Fed is actually responsible for. As I have always said, Trump is the ideal scapegoat for the inevitable economic crisis the central bankers have staged.  Trump's tariffs might exacerbate the problem, just as Hoover's policies did in the beginning of the Great Depression, but the blame rests squarely on the Federal Reserve and central banks around the world.  Will the average person understand this dynamic once the dust settles on our financial system?  Probably not.

So, to summarize, while Trump has indeed set in motion policies that conservatives in general tend to approve of, he has done so in an impractical way that will ultimately be blamed for a market crash the Fed created.  If conservative ideals such as limited government and sovereign trade protection get the blame for an unprecedented economic crisis then this could sabotage conservatism for generations to come.  If elections are still even a factor as this crisis unfolds, the chances of the public accepting a socialistic nightmare regime after Trump exits the White House are high. And, the banking elites that conjured the whole mess will escape once again without any punishment.

The question we must ask is this - Is Trump aware that his policies are creating a perfect distraction for those same banking elites? I believe we will know for certain the answer to that before 2018 is over.