Pablo Picasso The artist and his model 1933
“..bubbles are forming in global debt, China, Hong Kong, Singapore, emerging markets, Canada, Australia, New Zealand, European real estate, the art market, U.S. stocks, U.S. household wealth, corporate debt, leveraged loans, U.S. student loans, U.S. auto loans, tech startups, shale energy, global skyscraper construction, U.S. commercial real estate, the U.S. restaurant industry, U.S. healthcare, and U.S. housing once again.”
According to the New York Fed’s recession probability model, there is a 30% probability of a U.S. recession in the next 12 months. The last time that recession odds were the same as they are now was in July 2007, which was just five months before the Great Recession officially started in December 2007. July 2007 was also notable because that is when Bear Stearns’ two subprime hedge funds lost nearly all of their value, which ultimately contributed to the investment bank’s demise and the sharp escalation of the U.S. financial crisis.
Many bullishly-biased commentators are trying to downplay the warning currently being given by the New York Fed’s recession probability model, essentially saying “So? There is only a 30% chance of a recession in the next year, which means that there is a 70% chance that there won’t be a recession in the next year!” The reality is that, as valuable as this model is, it has greatly underestimated the probability of recessions since the mid-1980s. For example, this model only gave a 33% probability of a recession in July 1990, which is when the early 1990s recession started. It only gave a 21% probability of a recession in March 2001, which is when the early-2000s recession started. It also only gave a 39% probability of a recession in December 2007, which is when the Great Recession started.
[..] The New York Fed’s model is based on the Treasury yield curve, which is based on U.S. interest rates. The early-1980s recessions were anomalous because they occurred as a result of Fed Chair Paul Volcker’s unusually aggressive interest rate hikes that were meant to “break the back of inflation.” I have found that only considering New York Fed recession probability model data after 1985, and normalizing that data so that the highest reading during that time period is set to 100%, gives more accurate estimates of recession probabilities in the past three decades. For example, this methodology warned that there was an 85% chance of a recession in December 2007, when the Great Recession officially started (the standard model only gave a 39% probability). This methodology is warning that there is a 64% chance of a recession in the next 12 months, which is quite alarming.
The reason why a two-thirds chance of a recession in the next year is so alarming is because the next recession is not likely to be a garden-variety recession or a mere ebb of the business cycle, as I explained two weeks ago. Not only has global debt increased by $70 trillion since 2008, but scores of dangerous new bubbles have inflated in the past decade thanks to ultra-low interest rates and quantitative easing programs. These bubbles are forming in global debt, China, Hong Kong, Singapore, emerging markets, Canada, Australia, New Zealand, European real estate, the art market, U.S. stocks, U.S. household wealth, corporate debt, leveraged loans, U.S. student loans, U.S. auto loans, tech startups, shale energy, global skyscraper construction, U.S. commercial real estate, the U.S. restaurant industry, U.S. healthcare, and U.S. housing once again. I believe that the coming recession is likely to be caused by (and will contribute to) the bursting of those bubbles.
If reading financial markets is usually as inscrutable as reading tea leaves, bond investors have decided now is the time to send a message in big, bold letters. They want central banks to know they are concerned. Concerned about the strength of the global economy. Concerned about the US-China trade war. Concerned about geopolitics, particularly in the Middle East. Concerned about persistently low inflation. Investors are rushing to get their hands on the safest assets available, such as government bonds. So much so, that the amount of bonds with negative yields—meaning investors know they will get back less than what they paid if they hold the debt to maturity—has ballooned. Investors are anticipating a global shift in monetary policy towards lower interest rates, and loosening of financial conditions.
Meanwhile, the expectation of more stimulus has helped push stock markets close to record highs. Almost $12 trillion of investment grade corporate and government bonds have negative yields, predominately in Europe and Japan, according to Barclays data, the Financial Times reports. That’s the largest amount since the middle of 2016 when the UK voted to leave the European Union and the Bank of England restarted its bond-buying program, known as quantitative easing (QE), in response. Today, half of all European government bonds have a negative yield, with the total amount outstanding at €4.4 trillion ($5 trillion), compared to €3.3 trillion at the end of January, according to data from Tradeweb. At the end of May, 20% of European investment-grade corporate debt had negative yields.
“..why do you insist on using this antiquated broken method? One of the staffers raised his hand and said if we didn’t use it, then the models would not work.”
Ms. DiMartino Booth, why is the Federal Reserve bad for America?
Because of its intellectual dishonesty. The Fed noticed around 2009 that if they had had a more reliable and realistic inflation gauge on which to set policy, they would have seen the crisis coming. But despite that recognition, they chose to do nothing about it.
Are there more realistic inflation gauges?
Several Federal Reserve Districts have come up with alternative gauges. The underlying inflation gauge from the New York Fed for example also includes asset price inflation. And it runs about one percentage point higher than what the Fed measure is – they prefer the core Personal Consumption Expenditures Price Index, the core PCE.
What would monetary policy look like with a more realistic inflation gauge?
Monetary policy would be much different. The Fed would not have been able to maintain a monetary policy as easy as it has done over the last couple of years. Central bankers are hiding behind the core PCE being at 1,6%. They’re saying that this gives them cover to not normalize interest rates. But even the core Consumer Price Index has been north of 2% for 14 months.
What does this mean for current monetary policy?
Former Fed Chair Janet Yellen lead the slowest rate hiking campaign in the history of the Fed. Had she been using a more realistic inflation gauge, she would not have left current Chair Jay Powell with having to play catch-up. He wasn’t able to normalize interest rates, nor to run down the balance sheet as much as he would have been able to otherwise – and had Ben Bernanke not insisted on the 2% inflation target.
What is the reason behind the inflation target of 2%?
Alan Greenspan and Paul Volcker said that the best inflation rate as far as households and businesses are concerned is 0%. There is nothing that is damaging to a household about inflation being non-existent. As Greenspan and Volcker both pointed out: If you have 2% inflation steadily for 50 years, the value of the dollar in your wallet is diminished. Inflation is corrosive as a factor of time.
What about the risk of falling into deflation?
A deflation in wages, as we saw during the Great Depression, is the worst-case scenario. But Japan has served as a modern-day reminder that households are not going to be injured by very very low levels of inflation. In a disinflationary environment with a decent level of growth, you’re not running that risk. You’re still going to have job creation and economic growth. But you’re not going to have the pressure of rising prices on households. Housing makes up 33% of the average US household budget, and housing inflation has gone through the roof in recent years. Not that it’s captured correctly in the metric that the Fed uses.
So, why is the Fed aiming for 2%?
When Stanley Fisher was vice chair, he asked the same question during his first Federal Reserve meeting. He said, why do you insist on using this antiquated broken method? One of the staffers raised his hand and said if we didn’t use it, then the models would not work.
“Until they become conscious they will never rebel, and until after they have rebelled they cannot become conscious.”
We are increasingly ruled by multi-corporations wedded to the police state. What many fail to realize is that the government is not operating alone. It cannot. The government requires an accomplice. Thus, the increasingly complex security needs of the massive federal government, especially in the areas of defense, surveillance and data management, have been met within the corporate sector, which has shown itself to be a powerful ally that both depends on and feeds the growth of governmental overreach.
In fact, Big Tech wedded to Big Government has become Big Brother, and we are now ruled by the Corporate Elite whose tentacles have spread worldwide. For example, USA Today reports that five years after the 9/11 terrorist attacks, the homeland security business was booming to such an extent that it eclipsed mature enterprises like movie-making and the music industry in annual revenue. This security spending to private corporations such as Google, Amazon, Microsoft and others is forecast to exceed $1 trillion in the near future.
The government now has at its disposal technological arsenals so sophisticated and invasive as to render any constitutional protections null and void. Spearheaded by the NSA, which has shown itself to care little to nothing for constitutional limits or privacy, the “security/industrial complex”—a marriage of government, military and corporate interests aimed at keeping Americans under constant surveillance—has come to dominate the government and our lives. At three times the size of the CIA, constituting one third of the intelligence budget and with its own global spy network to boot, the NSA has a long history of spying on Americans, whether or not it has always had the authorization to do so.
All states tend towards the same model.
In China, censorship, now largely automated, has reached “unprecedented levels of accuracy, aided by machine learning and voice and image recognition”, according to a recent Reuters report. It quotes Chinese censors as commenting: “We sometimes say that the artificial intelligence is a scalpel, and a human is a machete… When I first began this kind of work four years ago there was opportunity to remove the images of Tiananmen, but now the artificial intelligence is very accurate”. China’s severe censorship runs parallel to its severe suppression of religious freedom.
The President of the Religious Freedom Institute, Thomas F. Farr, at a November 2018 hearing at the Congressional-Executive Commission on China, described China’s religious suppression as “the most systematic and brutal attempt to control Chinese religious communities since the Cultural Revolution”. As in other Communist regimes, such as that of the former Soviet Union, the Communist ideology does not tolerate any competing narratives. “Religion is a source of authority, and an object of fidelity, that is greater than the state,” Farr wrote. “This characteristic of religion has always been anathema to history’s totalitarian despots, such as Stalin, Hitler, and Mao…”
The brutal religious and cultural oppression of Tibetans in China has been ongoing for nearly 70 years, but China has not only sought to destroy the Tibetan religion. Christianity, for instance, was seen from the beginning as a threat to the People’s Republic of China when it was established in 1949. “This was especially true at the height of the Cultural Revolution (1966–1976), when places of worship were demolished, closed, or reappropriated and religious practices were banned”, according to the Council on Foreign Relations. Some Christian clerics have been imprisoned for nearly 30 years. In recent years, oppression of Christians in China has apparently surged. Since the late 1990s, the Chinese regime has also targeted the Falun Gong.
Why did it fly there?
Iran’s Revolutionary Guard said Thursday it had shot down a US “spy drone” over its territory after it violated Iranian airspace, according to Iranian state television. “The US-made Global Hawk surveillance drone was brought down by its Air Force” in the country’s southern coastal province of Hormozgan, the Revolutionary Guard added, according to the English-language Press TV. State television did not provide pictures of the drone. The incident comes at a time of heightened tensions between Iran and the United States. The US has accused Iran of being behind a series of operations against oil tankers in highly sensitive Gulf waters.
Tehran has denied involvement and instead suggested Washington could be the author of the attacks, using the operation to justify force against Iran. Hormozgan borders the Strait of Hormuz, where the tanker attacks took place. The relationship between Tehran and Washington has been particularly strained since the US last year quit the multilateral 2015 nuclear deal and reimposed sanctions on Iran. [..] Tehran’s top security official said Wednesday there was no reason to worry about a conflict breaking out. “There will be no war (between Iran and the US) since there is no reason for a war,” said rear admiral Ali Shamkhani, secretary of Iran’s Supreme National Security Council, quoted by the official news agency IRNA.
UN special rapporteurs are not taken serious.
There is “credible evidence” that Saudi Arabia’s crown prince and other high-level officials are liable for the murder of Jamal Khashoggi, a United Nations expert said in a report released Wednesday. The 101-page report by Agnès Callamard, the U.N. special rapporteur on extrajudicial executions, calls on the U.N. secretary-general to initiate a follow-up criminal investigation into the killing of Khashoggi at the Saudi consulate in Istanbul last October. “There is credible evidence warranting further investigation of high-level Saudi Officials’ individual liability, including the Crown Prince’s,” Callamard wrote.
Riyadh maintains that Khashoggi’s death was caused by a “rogue” operation, but Mohammed bin Salman, Saudi Arabia’s crown prince and de facto ruler, has long been suspected of ordering the journalist’s murder. The U.S. Central Intelligence Agency reached the same conclusion in November. “No conclusion is made as to guilt,” Callamard wrote in her report, referring to bin Salman — also known as MBS — and high-level government officials such as former top advisor Saud al-Qahtani. “The only conclusion made is that there is credible evidence meriting further investigation, by a proper authority, as to whether the threshold of criminal responsibility has been met.”
Will the GOP turn against MBS?
The U.S. Senate will vote on Thursday on legislation seeking to block President Donald Trump’s plan to complete $8 billion in arms sales to Saudi Arabia and the United Arab Emirates, lawmakers said, making clear they want a harder line against what they see as human rights abuses by the two countries. Trump declared an emergency tied to threats from Iran in order to go ahead with the military sales in defiance of congressional objections. Majority Leader Mitch McConnell announced an agreement on Wednesday to hold the vote, after a group of lawmakers, including some of Trump’s fellow Republicans, last month filed 22 separate resolutions of disapproval objecting to the deals.
Backers of the resolutions said they thought the measures had a good chance of passing both the Senate and House, but acknowledged the difficulty of garnering the two-thirds support to override an expected veto from Trump. Bipartisan support for the action was a rare rebuke of the president by his fellow Republicans, who generally have provided overwhelming support for Trump’s policies. There has been increasing frustration with Saudi Arabia in Congress for months, over the devastating human toll of the air campaign in Yemen it is waging with the UAE. Many senators also want Saudi Arabia held accountable for the murder of Saudi journalist Jamal Khashoggi at a Saudi consulate in Turkey.
What a mess this is becoming.
When the final chapter of the Russia collusion caper is written, it is likely two seminal documents the FBI used to justify investigating Donald Trump’s 2016 campaign will turn out to be bunk. And the behavior of FBI agents and federal prosecutors who promoted that faulty evidence may disturb us more than we now know. The first, the Christopher Steele dossier, has received enormous attention. And the more scrutiny it receives, the more its truthfulness wanes. Its credibility has declined so much that many now openly question how the FBI used it to support a surveillance warrant against the Trump campaign in October 2016.
At its best, the Steele dossier is an “unverified and salacious” political research memo funded by Trump’s Democratic rivals. At worst, it may be Russian disinformation worthy of the “garbage” label given it by esteemed reporter Bob Woodward. The second document, known as the “black cash ledger,” remarkably has escaped the same scrutiny, even though its emergence in Ukraine in the summer of 2016 forced Paul Manafort to resign as Trump’s campaign chairman and eventually face U.S. indictment. In search warrant affidavits, the FBI portrayed the ledger as one reason it resurrected a criminal case against Manafort that was dropped in 2014 and needed search warrants in 2017 for bank records to prove he worked for the Russian-backed Party of Regions in Ukraine.
There’s just one problem: The FBI’s public reliance on the ledger came months after the feds were warned repeatedly that the document couldn’t be trusted and likely was a fake, according to documents and more than a dozen interviews with knowledgeable sources. For example, Ukraine’s top anticorruption prosecutor, Nazar Kholodnytsky, told me he warned the U.S. State Department’s law enforcement liaison and multiple FBI agents in late summer 2016 that Ukrainian authorities who recovered the ledger believed it likely was a fraud. “It was not to be considered a document of Manafort. It was not authenticated. And at that time it should not be used in any way to bring accusations against anybody,” Kholodnytsky said, recalling what he told FBI agents.
Likewise, Manafort’s Ukrainian business partner Konstantin Kilimnik, a regular informer for the State Department, told the U.S. government almost immediately after The New York Times wrote about the ledger in August 2016 that the document probably was fake. Manafort “could not have possibly taken large amounts of cash across three borders. It was always a different arrangement — payments were in wire transfers to his companies, which is not a violation,” Kilimnik wrote in an email to a senior U.S. official on Aug. 22, 2016. He added: “I have some questions about this black cash stuff, because those published records do not make sense. The timeframe doesn’t match anything related to payments made to Manafort. … It does not match my records. All fees Manafort got were wires, not cash.”
Beekeepers across the US lost four in 10 of their honeybee colonies over the past year, as the worst winter on record for tracked bee populations raised fresh concerns over the plight of the crucial pollinators. Over the past winter, 37% of honeybee colonies were lost to beekeepers, the worst winter decline recorded in the 13-year history of a nationwide survey aimed at charting bees’ fortunes. Overall, 40% of colonies died off over the entire year to April, which is above the 38% average since the survey began. Researchers said the numbers were concerning given the intensive efforts to stem the loss of honeybees, which pollinate an estimated $15bn in US crops each year, enabling the farming of foods including apples, melons, cherries, almonds and blueberries.
Alarm over honeybee numbers has grown since 2006, when a phenomenon called colony collapse disorder became widely known. This problem, in which the majority of worker bees abandon the colony, has since receded but beekeepers are now faced with more general die-offs linked to disease, pesticide use and habitat loss. “It’s disconcerting that we’re still seeing elevated losses after over a decade of survey and quite intense work to try to understand and reduce colony loss,” said Geoffrey Williams, assistant professor of entomology at Auburn University. “We don’t seem to be making particularly great progress to reduce overall losses.”
[..] Native wild bee species, such as the American bumblebee, are also thought to be in sharp decline. The troubles faced by bees are part of a broader trend of stunning drops in insect abundance around the world, although the exact contours of this crisis are obscured by a lack of data in many places.
Water for 2 billion people?!
Himalayan glaciers are melting twice as fast now as they were before the turn of the century, according to a new study that relied on recently declassified Cold War-era satellite imagery. The study, which appeared in Science Advances on Wednesday, is the latest indication that climate change is eating the Himalayan glaciers, threatening water supplies for hundreds of millions of people downstream across South Asia. “This is the clearest picture yet of how fast Himalayan glaciers are melting over this time interval, and why,” said lead author Joshua Maurer, a doctoral candidate at Columbia University in New York.
Scientists combed 40 years of satellite observations spanning 2,000 kilometers (1,243 miles) across India, China, Nepal and Bhutan, and found that the glaciers have been losing the equivalent of a foot-and-a-half (45 centimeters) of ice each year since 2000. Many of the 20th-century observations came from recently declassified US spy satellite imagery. The figure is double the amount of melting that took place from 1975 to 2000.