Russia: 📈 Germany: 📉

This wasn’t supposed to happen… [Morning Reckoning] August 10, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Russia: 📈 Germany: 📉 - Germany’s deindustrialization is so bad, its economy is now smaller than Russia's. - Yes, that Russia, whose sanctions were supposed to hit it so hard. - This is according to the World Bank, not some tinfoil-hatted blogger. [Pentagon City “BOMBSHELL” Just Dropped]( There are two things I believe could change your life in the coming months. - A major financial war could be set to go nuclear just a few weeks from now - A [special strategy]( my team has developed that historically could have allowed investors to take home profits 50-100 higher from these Currency Wars than what most people get trading stocks But with these Currency Wars playing out as we speak, and my live recording set to come down at any moment. You may not have long to prepare. [So click here to see an urgent rebroadcast of my announcement.]( [LEARN MORE]( Milan, Italy August 10, 2023 [Sean Ring] SEAN RING Good morning Reader, Happy Thursday! Boy, oh boy. This wasn’t supposed to happen. Russia was supposed to be suffering. The West was supposed to be prospering. Someone at the Office of Unintended Consequences didn’t inform Biden, Blinken, and Nuland that their strategy was asinine. And ace vassal state Germany just let them do it. Now, we’ve got tangible evidence sanctions were a strategic failure. By the end of 2022, Russia’s economy surpassed Germany’s as the largest economy in Europe. They’ve kept the news quiet. You probably didn’t hear about it. But we’ve got proof. From the World Bank, no less: Credit: [The World Bank]( To be fair, Russia’s economy is nearly half the size of Germany’s without adjusting GDP by PPP. But that’s not what most economists look at. They adjust. Let’s examine what those numbers mean, what PPP is, and why it matters. But before that, I just had a horrible flashback… Bodrum, Turkey, September 2015 I’ll never forget it as long as I live. It was boat day at Hans Hoppe‘s libertarian shindig in Bodrum. On the Sunday before the conference concludes, we go out on boats into the Mediterranean. It’s usually mid-September with gorgeous weather and cool water. My ship, colloquially known as the Bad Boys, is always stocked full of booze from around the world. It’s a great day, full of mischievous behavior and uproarious laughter. This particular year Captain America, as we call him, decided to have some fun with our friend, who we’ll call Mad King Lud. Lud is very well endowed. Lud was getting out of the water, climbing up a ladder on the side of the boat, and Captain America was right behind them. Captain America, who still serves in the US military and is one of the brightest guys I know, maintains a 15-year-old’s sense of humor. He decided to “pants” Mad King Lud. Luckily, I was nowhere near the ladder. However, I had an unobstructed view from the deck. I’ll never forget what I saw: Lud‘s pendulous tallywhacker, swinging as if it was one of the Kraken‘s tentacles, nearly knocked out Captain America’s teeth! The good Captain was hanging onto the ladder for dear life, bobbing and weaving the ginormous dong. Pam was facing me and had her back to the infamous incident. I hugged her as hard as possible so she couldn’t turn around to see what she was missing. I had gotten in the wrong queue when God handed out skinflutes. I had finally understood what it was to be a flat-chested junior high school girl whose best friend suddenly sprouted double Ds. It was humiliating. Right now, I suspect Germany feels the same way. [Over 62 And Collect Social Security? Take Action Immediately!]( [Click here to learn more]( [If you’re over the age of 62 and currently collect Social Security, you need to prepare now](. Because Biden has given our country the worst inflation in decades – and many warn things will only get worse from here. Worse yet, the Social Security check you receive now may not keep pace with inflation… [Which is why, if you don’t act now, you could fall behind in the months ahead](. Is your retirement at immediate risk? [Click here now to get the simple, step-by-step actions to survive inflation](. [LEARN MORE]( Time To Steel-Man: PPP is Flawed Peter Thiel uses the term “steel-manning” to describe how you should argue against your opponent’s best arguments to win an argument, rather than his weakest. (It’s supposed to be the opposite of “straw-manning.”) I would guess that most people would say purchasing power parity (PPP) is highly flawed. [Mish Shedlock just published a post]( calling PPP “horrendously flawed.” I encourage you to read it, as it compares the US and Chinese economies. After reading it, you’ll have more data to decide your thoughts on PPP. So what is PPP? In plain English, every country has a different currency, inflation rates, interest rates, and prices. Purchasing power parity (PPP) tries to correct for this to make better comparisons between countries. A more formal definition of PPP: an economic theory and a method used to compare the relative value of currencies in terms of their purchasing power. The concept is based on the idea that without transportation costs and other trade barriers, identical goods should have the same price when expressed in a common currency. In other words, the exchange rate between two currencies should adjust to equalize the prices of a basket of goods and services in both countries. The theory suggests that over the long term, exchange rates between two currencies should adjust to reflect differences in inflation rates between the two countries. Suppose one country has a higher inflation rate than another. In that case, its currency should depreciate relative to the other country's currency, so the prices of goods and services become more balanced. There are two main forms of PPP: - Absolute PPP: This theory states that the exchange rate between two currencies will be in equilibrium when the purchasing power of each currency is the same for a common basket of goods. In other words, the exchange rate should reflect the relative price levels of the two countries. - Relative PPP: This theory considers changes in the inflation rates between two countries. It suggests that the change in exchange rates over time should reflect the difference in inflation rates between those countries. The purported advantages of using PPP to “equalize” the comparison of economies are: Comparing countries' Gross Domestic Product (GDP) using Purchasing Power Parity (PPP) has several purposes and advantages. But I’ll highlight the top five. - Accurate Comparison of Economic Size: GDP is a commonly used measure to assess the size of an economy. However, when comparing the GDPs of different countries using nominal exchange rates, the comparison is distorted by fluctuations in exchange rates. PPP-adjusted GDP allegedly provides a more accurate measure of the relative economic size by accounting for differences in price levels and currency values. - Global Economic Rankings: Using PPP-adjusted GDP allows for a different ranking of countries' economic sizes compared to nominal GDP rankings. Some countries with relatively low nominal GDP but lower price levels can have higher PPP-adjusted GDPs, reflecting their larger economic capacity when considering local price differences. - Cross-Country Economic Analysis: PPP-adjusted GDP facilitates cross-country economic analysis by providing a more consistent and comparable measure. Researchers, policymakers, and analysts use PPP-adjusted data to study economic trends, growth rates, and economic development across countries. - Trade and Investment Decision-making: Businesses and investors use PPP-adjusted GDP data to make informed international trade and investment decisions. It helps them understand the potential market size and consumer purchasing power in different countries. - Allocation of Resources: International organizations and aid agencies use PPP-adjusted GDP data to allocate resources and assist countries based on their economic capacity and needs. So, it’s not an altogether useless metric. You just need to know its limitations. And there are loads of them: - Quality and Availability of Data - Assumptions and Methodology - Non-Tradable Goods and Services - Subsidies and Taxes - Exchange Rate Volatility - Quality of Life and Non-Market Activities - Urban-Rural Disparities - Homogeneity Assumption - Dynamic Changes - Data Collection Challenges While PPP is indeed a flawed metric, it’s the best thing we’ve got for now. Sanctions: The Vassal Suffers According to [Politico]( Confronted by a toxic cocktail of high energy costs, worker shortages, and reams of red tape, many of Germany’s biggest companies — from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones — are experiencing a rude awakening and scrambling for greener pastures in North America and Asia. Not only that, but foreigners aren’t interested in the high costs of Germany if they can find comparable expertise in cheaper places: [chart] Credit: [Politico]( Germany is now drawing comparisons to America’s Rust Belt and the UK’s Midlands. They were once thriving industrial hubs that fell because of mismanagement. Unfortunately, Germany doesn’t have a diverse economy. Its banking sector is a mess, and manufacturing counts for 27% of its economy. (The US is 11% by comparison.) Like the rest of Europe, Germany's demographics work against it. That’s why its reliance on cheap Russian energy wasn’t to be underestimated. Alas, the USG didn’t give a toss, and the German elites stupidly went along with the poor policy. Now the country, and perhaps the entirety of the EU, will pay for the mistake. Wrap Up Meanwhile, Russia is whistling Dixie, or whatever their equivalent is. Somehow, despite the barrage of sanctions, blackballing at international institutions, and seizure of its assets abroad, Russia emerges the winner. Now, by one measure, it’s Europe’s biggest economy. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com Twitter: [@seaniechaos]( [Exposed: Biden’s 2022 mistake to cost him election?]( [Click here to learn more]( Will this ugly scandal doom Biden in 2024? In February 2022, [Joe Biden made the most dangerous mistake]( any President has made in the past 150 years. If it all plays out like Jim Rickards is predicting… Biden’s blunder will soon cost good Americans EVERYTHING. There’s still time to protect your money. But you can’t wait. [>>See Biden’s terrible mistake here<<]( [LEARN MORE]( In Case You Missed It… The Danger of Flat-Footed Trading Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, Last week’s abrupt stock market drop was just the beginning. Yes, there’s probably more pain on the way for the bulls in the weeks ahead. But if you know what to look for — and how to play a potential rotation out of the tech leaders and into what’s working now — you’ll have no problem navigating the dog days of summer trading. Let’s dive right into the nitty-gritty… The S&P 500 slipped lower by more than 2.5% last week. The Nasdaq Composite fared a bit worse, coughing up nearly 3%. While these aren’t earth-shattering crashes, the red-hot summer rally is clearly losing its momentum. No trader or investor can gaze into the future — not with any consistency. But last week’s reset should have been painfully obvious to anyone paying attention to seasonality and just how stretched the rally had become in late July. One of the stock market’s most devastating tricks is its ability to get us to act on our extreme emotions at the worst possible time. As we discussed last week, no one was interested in buying back in January as the averages began to shoot off their bear market lows. But following a historic first half, everyone’s getting sucked back into stocks. Those rascally retail traders aren’t the only ones hypnotized by this year’s rally. The pros have also piled back into stocks to appease their clients and play catch-up with their pesky benchmarks. It’s been an all-out chase into the third quarter. But here’s the tricky part: Can these new bulls hang with their bets if the first half winners in mega-cap tech, semiconductors, and the tech-growth bubble basket begin to correct? Here Comes Some Seasonal Chop… Last year’s bear market beatdown is still fresh on the minds of most investors. So I’m guessing continued downside action from these leaders could cause a little anxiety. Just remember — stocks can’t move higher in a straight line. Pullbacks and downside moves lasting for several weeks (or longer!) are perfectly normal events. We should also keep in mind seasonal trends, including how the S&P typically performs during a pre-election year. Back in June, I showed you how the S&P tends to out around the end of June and remain in a range until a year-end push. And while the large-cap index did rally more than I expected into the end of July, it’s still well within what we should consider a normal pre-election year cycle. August is generally a weaker performing month, giving way to a choppy, corrective fall. We can then look forward to a final push higher into December. My usual caveat for this type of seasonal analysis is that we shouldn’t worry about the S&P’s performance perfectly mirroring the pre-election year composite. The trend is what counts. And as of this week, the S&P is more or less following these seasonal trends. Is it a perfect match? Absolutely not. But our composite continues to offer a general idea of what we should expect during Q3 and Q4. I’m sticking with it as our guide unless it completely falls off the rails. Energy Over Tech If you missed the majority of the tech rally — or you’re just looking to pivot to a stronger trend — the energy sector could be the perfect play right now as seasonal weakness weighs on the first-half leaders. Last month, I showed you how the Energy Sector ETF (XLE) was pushing back toward a major area of resistance following months of sloppy, range-bound action. XLE has since broken out, revisited the scene of the crime, and extended its move above its April highs. [chart] That’s a huge move for the year’s worst performing sector, and I’m betting it’s setting these stocks up for higher prices. We’ve already highlighted some of the early movers. The VanEck Vectors Oil Services ETF (OIH) was arguably the catalyst for this energy breakout as it ripped nearly 40% off its June lows to post new 2023 highs before the calendar flipped to August. Now, we’re seeing the bigger exploration and production firms perk up. These breakouts are going to catch more than a few investors flat footed since most market watchers are laser focused on the mega-caps and first-half tech snapbacks. To be clear: I’m not calling for a major tech stock crash. But I do believe the evidence is pointing toward a deeper reset in the greater tech space. That will leave the door open for energy to take the baton and make a serious run. What do you think? Will the energy rally continue into the end of the year as tech cools? Or are we set for a broader move lower throughout the market? Let me know by emailing me [here](mailto:feedback@dailyreckoning.com). Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. 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