Marcel Duchamp Sonata 1911
The Fed should tell the world they’re done interfering in the markets. And they’re sorry they ever did.
The Federal Reserve should use its meeting in two weeks to aggressively cut interest rates, one U.S. central banker said on Tuesday. Less than an hour later, a second U.S. central banker said he saw no need to use up the Fed’s precious firepower when the economy is growing, inflation looks stable and labor markets are in good shape. The dueling views – from St. Louis Fed President James Bullard, who called for a half-a-percentage-point rate cut, and Boston Fed President Eric Rosengren, who saw no immediate need for any move – show the tight spot Fed Chair Jerome Powell finds himself in as the Fed’s next policy-setting meeting approaches.
On one hand, the escalating U.S.-China trade war and a global economic slowdown have begun to pinch U.S. business spending and manufacturing output, posing a threat to the broader U.S. economy. President Donald Trump has demanded the Fed cut rates to bolster growth as he piles tariffs on Chinese imports to try to win a better trade deal. But Americans continue to spend, wages are rising and employers keep adding jobs, suggesting a downturn is not on the horizon. Although Powell has said the Fed will act “as appropriate” to keep the economy growing, there is plenty of disagreement among his fellow rate-setters about what that two-word phrase means in practice.
In an interview with Reuters on Tuesday, Bullard argued that the Fed needs to get ahead of both financial market expectations for a small rate cut and a global trade war that has become a broader “reckoning” over how the world economy is organized. Underscoring his concerns, data released earlier on Tuesday showed the U.S. manufacturing sector had contracted for the first time in three years. U.S. stocks slid and benchmark Treasury yields hit their lowest in three years on concern the drawn-out trade war was taking an increasing toll on the U.S. and global economies. “We are too high,” Bullard said of Fed interest rates, noting that the central bank’s current target policy rate of between 2% and 2.25% was higher than the current yield of all U.S. Treasury securities. Even the 30-year bond has dipped below 2%.
Half the economy is made up of zombies by now.
Excessively low interest rates support assets, favor the rich over the poor, favor the rentier over the business investor, encourage leverage and stock buybacks over capital expenditure and equity-capital formation. Income inequality grows, and social instability follows. Corporations that, under a more normal interest rate regime, would have been placed into receivership are able to continue to operate. New, more innovative enterprises, which should thrive as inefficient incumbent corporations exit the gene pool, are stifled at birth by a dearth of investment and lack of opportunity. Trend economic growth suffers. In an excessively low–interest rate environment, financial sleight of hand trumps improvement in total factor productivity every time.
Since the great financial crisis of 2008–9, global economic growth has been sluggish when compared with past recoveries. The slashing of interest rates spawned a new credit cycle, protecting the overextended corporations and individuals who, during the previous boom, borrowed too heavily. The problem in 2008 was too much debt, and the predictable knee-jerk regulatory response was to tighten bank capital requirements. Had that been the sole response, an even-deeper recession would have ensued. Many companies would have defaulted, investors would have been wiped out, and asset markets would eventually have cleared. Painful, but necessary, capital destruction is the nuclear solution to an overblown credit binge, but in a caring modern democracy the collateral damage to the electorate is too great for any elected administration to contemplate.
The actual policy response took different forms from country to country. Forsaking the advice of Walter Bagehot, who stated that the function of a central bank during a panic was to lend freely at a penalty rate against good collateral, the Federal Reserve cut interest rates, lending freely, at a far-from-penalty rate, against poor collateral. Even this monetary largesse failed to suffice, prompting the U.S. Treasury to introduce the Troubled Asset Relief Program, enabling bloated U.S. financial institutions to walk away from large swathes of their nonperforming loans.
Hold on for dear life?! Like, literally?
The U.S. Federal Reserve’s balance sheet could end up between $3.8 trillion and $4.7 trillion by 2025, according to projections collected by the New York Fed. The regional arm of the central bank, which manages the Fed’s massive bond holdings, released the projections in a report on Tuesday drawn from surveys of Wall Street traders. The New York Fed’s report showed the Fed could start buying Treasuries as soon as 2019 or as late as 2025, but the decision would depend on the growth of bank reserves and other Fed liabilities, including currency. The Fed currently holds about $3.8 trillion in assets, including bonds purchased to stimulate the economy after the 2008 global financial crisis.
After the crisis, the Fed bulked up its holdings by buying Treasuries using bank reserves it created. Eventually, it started letting bonds and reserves decline to bring policy back to normal. In July, Fed officials decided to end that bond roll-off by August. They made the decision at the same time as they cut rates for the first time in more than a decade, citing inflation that has fallen below their target, the U.S.-China trade war and other economic concerns. To keep control of rates, officials will eventually have to start buying bonds again and building up bank reserves.
He could have known it was coming. Did he?
Boris Johnson faces a new battle in the Commons after his first vote as PM saw him lose to rebel Tories and opposition MPs who object to a no-deal Brexit. The Commons voted 328 to 301 to take control of the agenda, allowing them to bring a bill requesting a Brexit delay. The PM said he would call for a general election if he was forced to request an extension to the 31 October deadline. MPs will now vote on the Brexit delay bill. If it passes, the vote on whether to hold an election will follow. Wednesday in the Commons will also see Chancellor Sajid Javid outline the government’s spending plans, with the health service, education and the police expected to fare well.
Speaking late on Tuesday to a packed House of Commons, the prime minister said the MPs’ bill would “hand control” of Brexit negotiations to the EU and bring “more dither, more delay, more confusion”. He told MPs he had no choice but to press ahead with efforts to call an October election, adding: “The people of this country will have to choose.” The BBC understands the government intends to hold an election on 15 October, two days before a crucial EU summit in Brussels. This is a day later than the BBC was previously reporting. Jeremy Corbyn said the bill needed to be passed to take the no-deal option completely “off the table” before his party would support the call for a general election.
Does Corbyn pull the strings now, or does Cummings have something up his sleeve?
The government is tabling a motion for a general election in the wake of a humiliating Commons defeat on Boris Johnson’s strategy of putting Britain on course to crash out of the EU. The prime minister said he would put forward the motion, which must win the support of two-thirds of the Commons in order to trigger a poll, after rebel Tories defied his threat to throw them out of the party and united with opposition MPs to seize control of Commons business, paving the way for a vote tomorrow on a bill that would outlaw a no-deal Brexit. However, Labour leader Jeremy Corbyn said that in order for Labour to back the government motion, which would see the UK hold its third general election in the space of five years, tomorrow’s bill would first have to become law.
Labour fear that when the election is called Mr Johnson may simply move the date beyond October 31, the date Britain is due to leave the EU, which – given that there is little sign of his administration striking a deal with the bloc – would cause a no-deal exit by default. “The leader of the opposition has been begging for an election for two years,” Mr Johnson told the Commons immediately after losing the vote. “He has thousands of supporters outside calling for an election. I don’t want an election but if MPs vote tomorrow to stop negotiations and to compel another pointless delay to Brexit potentially for years then that would be the only way to resolve this.
“I can confirm that we are tonight tabling a motion under the Fixed Term Parliament Act.” Mr Corbyn responded that while Mr Johnson was free to table a motion for a general election, his party would not back it while no-deal remained as an option. He said the government must “get the bill through first in order to take no-deal off the table”. “We do not have a presidency, we have a Prime Minister who governs with the consensus of the House of Commons representing the people within whom the sovereignty rests,” he said. “There is no majority to leave without a deal within the country”.
Another vote today. If it doesn’t pass, there will be no election.
Rebel MPs have defied threats from Boris Johnson to vote through a motion paving the way for legislation to block a no-deal Brexit. MPs voted to seize control of the Commons agenda on Wednesday afternoon in order to force through a bill requiring the prime minister to request an extension in Brexit talks to 31 January unless he secures a deal with Brussels or parliamentary approval for no deal by 19 October. The government’s defeat by a margin of 328 to 301 leaves Mr Johnson’s Brexit strategy in tatters by potentially robbing him of the threat of no-deal, which he has repeatedly said is essential to obtain concessions from the EU. Responding from the despatch box immediately after the crushing result, Mr Johnson confirmed he is tabling a bill to trigger a general election, with a vote expected to take place soon after the anti-no deal bill completes its passage through the Commons on Wednesday.
“That’s fortunes of war. I knew what I was doing.”
Nicholas Soames, the grandson of Britain’s World War Two leader Winston Churchill, will be expelled from the Conservative Party after voting against Prime Minister Boris Johnson on Brexit. The move against the Conservative Party grandee marks one of the most bizarre turns in the three-year Brexit crisis that has gripped a country once touted as a confident pillar of Western economic and political stability. Soames was one of 21 Conservative lawmakers who rebelled, including Ken Clarke, 79, the longest continuously sitting British lawmaker in the House of Commons, and former finance minister Philip Hammond. All are to be expelled.
When Soames was asked if this was the end of the Conservative Party his grandfather would have known, he said: “No. But it’s a bad night. “It is a pity – a great pity – that this has in my view all been planned: this is exactly what they wanted and they will try to have a general election which is what they wanted.” Since he took office as prime minister six weeks ago, Johnson has been ruthless: He oversaw one of the biggest purges of cabinet ministers in modern British history and has cut short a session of parliament to increase the likelihood Britain will leave the EU, with or without a deal.
[..] “I have been told by the chief whip, who is my friend and who I like very much, that it will be his sad duty to write to me tomorrow to tell me I have had the whip removed after 37 years as a Conservative member of parliament,” Soames said. “That’s fortunes of war. I knew what I was doing.” Soames, 71, who was knighted by Queen Elizabeth in 2014, has been a member of parliament since 1983 and previously served as a junior defense minister. He is the son of Mary Soames, the youngest of Churchill’s five children. [..] As a young boy, Soames said he was unaware of his grandfather’s significance and has recounted how, when aged five, he once visited Churchill in his bedroom and asked him: “Grandpapa, is it true that you are the greatest man in the world?” Churchill replied: “Yes, now bugger off.”
“..troubled airliner Cathay Pacific soaring nearly 9 percent.”
Hong Kong’s stock market soared Wednesday after local media reported that the city’s embattled leader is planning to fully withdraw a loathed extradition bill, one of the main demands of pro-democracy protesters. The Hang Seng index leapt more than three percent in afternoon trade after the South China Morning Post and HK01 both published reports that the city’s pro-Beijing chief executive Carrie Lam was planning to shelve the bill. The semi-autonomous city has been battered by three months of huge, sometimes violent, protests that were initially sparked by a plan to allow suspects to be extradited to the Chinese mainland for the first time.
The protests evolved into a wider democracy campaign involving clashes between protesters and police, in the biggest challenge to China’s rule of Hong Kong since its 1997 handover from the British. For the last three months both Lam and Beijing have refused to make any concessions to the protesters beyond agreeing to suspend the bill, a move that fell far short of demands that it be permanently shelved. But on Wednesday the first indications that some type of compromise might be offered began to emerge. [..] Citing sources, the South China Morning Post reported that Lam would announce a full withdrawal of the bill later in the afternoon. Local news website HK01 had similar reports.
[..] That speculation sparked jubilation on the stock market which has been battered by both China’s trade war with the United States and Beijing’s refusal to find a political solution to the weeks of protests in the international financial hub. Shares leapt on the news with companies like HSBC rising 3.4 percent and troubled airliner Cathay Pacific soaring nearly 9 percent.
How much of this is due to the state of the Chinese economy?
If the nightly images of water cannons and molotov cocktails were not enough to spark fears about the state of Hong Kong’s economy, tonight’s almost unprecedented collapse in IHS Markit Hong Kong Purchasing Manager’s Index should slap reality back to the top of mind. The whole economy PMI crashed to 40.8, the lowest reading since Feb 2009. This is the 17th consecutive month of contraction (sub-50) for the survey. Business activity fell at the steepest rate since the end of 2008, reflecting a sharper decline in new order intakes. Pessimism spread to more firms, with business confidence slumping to its lowest on record.
“The rates of decline in output, new orders and export sales accelerated sharply in August, with the only other time that the PMI survey has recorded a steeper downturn, in its more than two decades of history, been during the SARS epidemic in 2003 and the global financial crisis in 2008-2009.” Nearly half of survey respondents reported reduced Chinese demand, citing the ongoing US-China trade dispute, a sharp depreciation in the renminbi and large-scale protests as reasons.
Commenting on the latest survey results, Bernard Aw, Principal Economist at IHS Markit, said: “The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis. “The executive authorities of the Hong Kong SAR recently unveiled an economic stimulus plan to support flagging growth momentum, but any further economic weakness will mean policymakers are likely to consider larger stimulus measures.
Remember: 400,000 deaths.
A U.S. judge on Tuesday rejected efforts by major drugmakers, pharmacies and distributors to dismiss claims that they caused the nation’s opioid crisis, clearing the way for a scheduled landmark trial even as he pushes for a nationwide settlement. U.S. District Judge Dan Polster, who oversees roughly 2,000 opioid lawsuits by states, counties and cities, said the plaintiffs can try to prove that drugmakers’ deceptive marketing of the painkillers caused a harmful, massive increase in supply that pharmacies and distributors did not do enough to stop. “A factfinder could reasonably infer that these failures were a substantial factor in producing the alleged harm suffered by plaintiffs,” the Cleveland-based judge wrote.
The ruling was among seven decisions and orders totaling 80 pages from Polster ahead of a scheduled Oct. 21 trial by two Ohio counties against Purdue Pharma, the OxyContin maker accused of fueling the epidemic, and several other defendants. Polster also refused to dismiss civil conspiracy claims against drugmakers, pharmacies and distributors, and said federal law did not preempt much of the plaintiffs’ case. Other defendants included the drugmakers Endo International Plc and Johnson & Johnson; pharmacy operators CVS Health Corp, Rite Aid Corp, Walgreens Boots Alliance Inc and Walmart Inc; and distributors AmerisourceBergen Corp, Cardinal Health Inc and McKesson Corp.
Our best and bravest need our help: “..he pled guilty to hacking Stratfor in 2013 in order to avoid giving up information on his fellow activists, including those at WikiLeaks, and has no intention of doing so now.”
Jeremy Hammond, who helped feed millions of emails from ‘private CIA’ Stratfor to WikiLeaks, has reportedly been moved to Virginia to testify before a grand jury, which he refuses to do, jeopardizing his early release from prison. Hammond has been moved to the same Eastern District where whistleblower Chelsea Manning is currently being held for refusing to testify against Julian Assange, the Jeremy Hammond Support Committee revealed on Tuesday in a statement. While neither Hammond nor his supporters are certain of the nature of the summons, he pled guilty to hacking Stratfor in 2013 in order to avoid giving up information on his fellow activists, including those at WikiLeaks, and has no intention of doing so now.
While Hammond received the maximum 10 year sentence in exchange for his non-cooperating guilty plea, he was granted immunity from further prosecution in all other federal courts and was due to be released in December, having received a sentence reduction for participating in the Federal Bureau of Prisons’ Residential Drug Abuse Program. Transferring him from Memphis, Tennessee, where he was incarcerated, to Alexandria, Virginia, cuts short his participation in the program and guarantees he will serve at least another year in prison. And he could be locked up much longer, given his refusal to testify, which will place him in the same legal limbo where Manning is currently entrapped.
Grand Bahama island. 70% is below water level.