Sep 212017
 
 September 21, 2017  Posted by at 8:57 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Pablo Picasso Jacqueline in Turkish costume 1955

 

Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate Hike (BBG)
Federal Reserve Will Continue Cutting Economic Life Support (Smith)
What Shiller Says Is Preventing A 1929-Like Stock Market Crash (CNBC)
Stock Market Bubbles in Perspective (Ma)
We’re Officially In The 2nd-Largest Bull Market Since World War II (BI)
Who’s Pulling The Strings? (Ren.)
144 Years Ago A Panic Shut Down The Stock Market For The First Time (Cashin)
China’s Dangerous House Price Boom Is Spreading (BBG)
Japan’s “Deflationary Mindset” Grows (ZH)
Greece Considers Bond Swap As It Looks To Bailout Exit (R.)
Abbas Says Trump May Have Mideast ‘On the Verge’ of Peace Deal
4-6 Months To Restore Puerto Rico Electricity After Hurricane Maria (NBC)
Global Mass Extinction Set To Begin By 2100 (Ind.)

 

 

Inflation is arguably the Fed’s no. 1 concern left. Yellen admits they don’t know what it is or does, though. Still, decisions concerning billions and trillions are taken. No direction home.

Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate Hike (BBG)

Federal Reserve Chair Janet Yellen acknowledged that the fall in inflation this year was a bit of a “mystery” but suggested that the central bank was on course to raise interest rates again in 2017 nonetheless. She told reporters on Wednesday that the economy was robust enough to withstand further rate increases and an imminent reduction in the Fed’s $4.5 trillion balance sheet, as it exits from a crisis-era policy a decade after the onset of the Great Recession.“We continue to expect that the ongoing strength of the economy will warrant gradual increases” in rates, she told a press conference after the Federal Open Market Committee announced that it will slowly begin to pare its bond holdings next month. As expected, the target range for the federal funds rate was held at 1% to 1.25%. The central bank’s intention to press ahead with another rate hike this year and three more in 2018 caught investors by surprise, sending bond yields and the dollar higher.

The strategy represents a bit of a gamble because it risks cementing inflation permanently below the Fed’s 2% target. As measured by the personal consumption expenditures price index, inflation has ebbed this year even as the economy and the labor market have continued to improve. After briefly poking above 2% earlier this year, it fell to 1.4% in June and July. “I will not say that the committee clearly understands what the causes are of that,” Yellen, 71, said. While transitory forces such as a one-time cut in mobile-phone service charges were part of the story, they did not fully explain the shortfall, she said. The Fed chief though argued that the ongoing strength of the economy and the labor market would ultimately help lift inflation, while she kept open the possibility the central bank would alter course if that proved not to be the case.

Read more …

The Fed doesn’t serve the people. Never forget.

Federal Reserve Will Continue Cutting Economic Life Support (Smith)

First, let’s be clear, historically the Fed’s predictable behavior has been to skip major policy actions in September and then startle markets with renewed and aggressive actions in December. People placing bets on a Fed rate hike in September would look at this pattern and say “no way.” However, the narrative I see building in Fed rhetoric and in the mainstream media is that stock markets have become “unruly children” and that the Fed must become a “stern parent,” reigning them in before they are crushed under the weight of their own naive enthusiasm. In my view, the Fed will continue to do what it says it is going to do — raise interest rates and reduce and remove stimulus, and that the mainstream narrative will soon be adjusted to suggest that this is “necessary;” that stock markets need a bit of tough love.

If the Fed means to follow through with its stated plans for “financial stability” in markets, then the only measure that would be effective in shell-shocking stocks back to reality would be a surprise hike, a surprise announcement of balance sheet reduction or both at the same time If the Fed intends to continue cutting off life support to equities and bonds in preparation for a controlled demolition of the U.S. economy, then there is a high probability at the very least of a balance sheet reduction announcement this week with strong language indicating another rate hike in December. I also would not completely rule out a surprise rate hike even though September is usually a no-action month for central banks. This would fit the trend of central banks around the globe strategically distancing themselves from artificial support for the financial structure.

Last week, the Bank of England surprised investors with an open indication that they may begin raising interest rates “in the coming months.” The Bank Of Canada surprised some economists with yet another rate hike this month and mentions of “more to come.” The European Central Bank has paved the way for a tapering of stimulus measures according to comments made during its latest meeting early this month. And, the Bank of Japan initiated taper measures in July. Even Forbes is admitting that there appears to be a “coordinated tightening of monetary policy” coming far sooner than the mainstream expects. If you understand how the Bank for International Settlements controls policy initiatives of national central bank members, then you should not be surprised that central banks all over the world are pursuing the same actions and the same rhetoric. The only difference between any of them is the pace they have chosen in taking the punch bowl away from the party.

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Psychology and obesity. Gee, thanks Bob! Feel much more confident now.

What Shiller Says Is Preventing A 1929-Like Stock Market Crash (CNBC)

It’s a comparison no one wants to hear — that this stock market bears striking similarities to that of 1929. The observation is coming from Nobel Prize-winning economist Robert Shiller, who’s been arguing valuations are extremely expensive. But instead of predicting an epic stock market crash, he’s finding reasons to be optimistic. “The market is about as highly priced as it was in 1929,” said Shiller on Tuesday’s “Trading Nation.” “In 1929 from the peak to the bottom, it was 80% down. And the market really wasn’t much higher than it is now in terms of my CAPE [cyclically adjusted price-to-earnings] ratio. So, you give pause when you notice that.” In his first interview since penning an op-ed on Sept. 15 in The New York Times, the Yale University economics professor reiterated to CNBC that there’s one vital characteristic protecting investors from losing their nest eggs: Market psychology.

“It’s not just a matter of low interest rates, it’s something about the American atmosphere. It’s partly the Trump atmosphere. Investors love this. I can’t exactly explain – maybe it has something to do with prospective tax cuts. But I don’t think it’s just that. It’s something deeper, and it’s pushing the American market up,” he added. Unlike 1929, Shiller points out there’s not much talk about people borrowing exorbitant amounts of money to buy stocks. Plus, he notes there’s now more regulation. But don’t mistake the Yale University economics professor for a bull. “I don’t want to encourage people too much to put a lot into the most expensive market in the world,” said Shiller. “The U.S. has the highest CAPE ratio of 26 countries. We are number one.”

[..] Shiller may see red flags, but he isn’t ruling out a market that continues to churn out fresh records for months, if not years. “I wouldn’t call it healthy, I’d call it obese. But you know, some of these obese people live to be 100 years, so you never know,” said Shiller.

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Still feeling good, Shiller?

Stock Market Bubbles in Perspective (Ma)

A better type of average would be the median. It literally represents the middle of a sequence of ranked numbers. In most cases, it is not influenced by outliers. By using median (instead of mean) earnings, I refer to this valuation approach as the CAPME ratio. It currently shows the S&P Composite is not the second or third most expensive stock market cycle. This finding supports those who criticize the traditional CAPE ratio of overstating the valuation of the S&P Composite Index. The problem for critics though is using the CAPME ratio still shows the U.S. stock market is very expensive right now. In fact, it is the fourth most expensive, behind the stock market cycle that occurred during the Subprime Mortgage Bubble. Based on the data Professor Shiller uses, you can see this in the graph below that looks back 135 years.

You will notice in the graph above that the past 5 stock market bubbles were all valued at one point at more than 20-times median, annual, inflation-adjusted earnings. The valuation range of those peaks is wide though given the Tech Bubble was valued at more than 40-times at its peak. This makes the Tech Bubble potentially an outlier. Furthermore, all 5 stock market bubbles did not last long. They were fleeting. To put this all into perspective, consider these valuations by their percentile ranks. You can see this from the orange lines in the graph below. [It] shows the aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached a very high level of roughly the 90th percentile (red dotted line). In other words, these bubbles formed when their valuations were near or at the most expensive decile.

Investors beware: the valuation of the S&P Composite Index is currently ranked at the 94th percentile. This puts the U.S. stock market smack-dab at the heart of bubble territory. It has been argued lots that the high stock market valuation is justified by low interest rates. This argument does not work for me. Let me tell you why. Yields on 10-year U.S. treasury bonds in early-1941 were lower than they are now. Despite lower interest rates in early-1941, the stock market CAPME valuation ratio was quite low at that time ranking at around the 30th percentile. Furthermore, the amount of debt provided by stock brokers used to fuel the current stock market cycle is at a record level. This could prove problematic given bubbles driven by financial leverage are particularly dangerous.

The aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached the 90th percentile. The U.S. stock market is back there again. Its valuation is squarely in the middle of that very expensive decile looking back 135 years. The 5 previous instances of stock market bubbles suggest this will not end well. Bubbles never do, particularly ones driven by financial leverage.

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Whcih goes to show how easily markets are manipulated.

We’re Officially In The 2nd-Largest Bull Market Since World War II (BI)

We’re officially in the second-largest bull market since World War II. A week ago Monday, the S&P 500 index’s bull market became the second-best performing in the modern economic era. Stocks have climbed by about 270% from their March 2009 low over the past eight years, according to data from LPL Financial. Today’s bull market has eclipsed the 267% gain seen from June 1949 to August 1956. But the bull market from October 1990 to March 2000 remains in the top spot. “The logical question we continue to receive is: how much further can it go? We have an old bull market and an old expansion. When will the music stop?” Ryan Detrick, the senior market strategist for LPL Financial, wrote in commentary. “The current bull market is officially 101 months old, which might sound old (and it is), but remember that bull markets don’t die of old age, they die of excesses.”

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“The central bankers of the world have dumped $30 trillion into the global economy over the last eight years and we’ve got 2% growth and change..”

Who’s Pulling The Strings? (Ren.)

Feierstein cited the Resolution Trust debacle as an example of what should have happened. The Trust was declared insolvent as a consequence of the 1980s Savings and Loans Crisis and up to 300 bankers were jailed. “This is what should have happened this time around, instead of taking hundreds of trillions of dollars taxpayer’s money and placing the taxpayer at incredible peril and just added liquidity to the markets,” he said. “Giving more money to an insolvent institution is not the solution. You cannot pay your way out of debt with borrowed money. It’s not going to cure the underlying problem of insolvency.” This is why Feierstein refers to the entire global economy as a Ponzi scheme. “The amount of debt in the global financial system is a Ponzi scheme because the United States government has over $240 trillion in debt which is more than three times global GDP.

That’s the sum of all goods and services produced with zero consumption for three years. We’ll never pay out the debt that’s owed.” Feierstein says the government has tried to replace consumer demand with debt and printed money and consumers haven’t come back into the market. “That’s why we’ve got a huge government that thinks they can control everything and price action manipulating volatility to unrealistically low levels,” he said. “They think the consumer will eventually come back but they won’t because the jobs have disappeared and the unemployment rate which we’ve spoken about before is a lie. It’s not 4.3%, it’s closer to 20% because you’ve got people who aren’t participating in the workforce. And that’s probably over 100 million people in America.” Financial times journalist, Rana Foroohar says consumers are all tapped out.

“Credit is what we do to sort of keep middle class voters happy,” she said. “We’re tapped out.” The good news and the bad news is that when the next financial crisis comes the US government will not have as much firepower to throw at it. “The central bankers of the world have dumped $30 trillion into the global economy over the last eight years and we’ve got 2% growth and change,” she said. “It’s pathetic.” Feierstein said it is important to highlight how derivative products have contributed massively to this problem. “When I say there is too much leverage, basically derivative products allows financial institutions and investors to create 100 to 1 leverage. You put up $1 to control $100, or $500 dollars in assets. Think about that on a big scale. If you take $1 million you can control something worth $100 million, or even $500 million depending upon how you gear the leverage ratio.

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Art Cashin tells a story.

144 Years Ago A Panic Shut Down The Stock Market For The First Time (Cashin)

“[O]n Saturday, September 20, 1873, for the first time in its history, the NYSE closed in response to a panic. (The word circuit breaker had not been invented yet….er…..neither had circuits.) A week or more before, one of the most renowned firms in American finance and especially U.S. Treasury auctions came under a cloud of suspicion. The firm was Jay Cooke & Company. And, on most continents, it was seen as a key player. After all, its aggressive style had made it the key underwriter for the billions of Treasury bonds issued during and after the Civil War. (Contemporary competitors had shied back fearing that deficit spending had gotten out of control.) Anyway, the concern about in this key brokerage firm only confused the market at first. But as this day approached, there were hints that the problems would spread to other brokers. On the 18th, liquidation of equities showed up at the ‘first call.’

For most of its first century of existence, the NYSE was a ‘call market.’ The chairman, or other senior officer, would call out the name of one of the listed issues. Brokers who had an interest in that ‘issue’ would arise from their ‘seats’ and begin to bargain with any other brokers arisen from their ‘seats’. When transactions ended in that issue (assuming they were not all buyers), brokers returned to their ‘seats’ and the chairman called the next issue on the roll. When the last issue was called, the session officially ended. There were two sessions each day. […] So, here they were. Rumors surfaced that, perhaps some other brokers were involved and the first call on the 18th turned soft. The second call turned soggy. Prices were down and with no on-going after market; all you could do (as the banks did) is await the next call.

The morning call on the 19th was messy and the afternoon call was just a disaster. Outside, in a heavy rain, crowds gathered on Wall Street to withdraw securities and money from brokers. By the morning of the 20th anyone who was in the phone book (if there had been one at the time) was rumored to have been impacted by the problem. So, naturally the morning call on Saturday the 20th was a disaster. So much so that the Exchange opted to close until the crisis calmed (skipping the P.M. call). Close they did and for a lot more than one ‘call.’ But, but perhaps because banks and investors naturally needed some means of evaluating holdings, they reopened about ten days later. However, the rumors would not go away and liquidations and defaults continued. The history books call it the Panic of 1873. And, it put the American economy in a tailspin for years. (Nearly 10,000 businesses failed.)”

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Until recently, Chinese hardly borrowed at all. Now, debt is the only way to keep up.

China’s Dangerous House Price Boom Is Spreading (BBG)

Hefty mortgages have pushed up Chinese household debt, reducing their room for maneuver should income growth stall, according to recent research by Gene Ma, chief China economist at the Institute of International Finance in Washington. In general, it’s debt that’s the warning sign. As developers and households become more leveraged, the risk is that a price downturn doesn’t remain contained within the property market. “The high leverage will amplify the damage to the economy if a property bust happens,” said Bloomberg Intelligence economist Fielding Chen. “The shock wave will be passed onto the entire financial system, and losses will be greater,” he said. Once home prices tumble, about 40% of Chinese banks will be hit hard, according to a recent research note from Ping An Securities.

Analysts have argued that the debt load in the Chinese property market is far from a carbon copy of the situation in Japan’s bubble era before its bust in the 1990s, nor is it similar to the sub-prime crisis in the U.S. a decade ago. With down payment requirements of at least 20% for first purchases and as much as 70% for second homes, China’s household mortgages still stand at relatively safe levels, said Wang Qiufeng, an analyst at China Chengxin International in Beijing. Ping An Securities also argues that the odds of a property crash happening in the near term are very small. But as household debt-to-income ratios have risen almost to levels seen in advanced economies, the potential impact on the economy of a popping bubble would be considerable.

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Abenomics is (was) an attempt to force people into spending. That scares them into not spending. It doesn’t come any simpler.

Japan’s “Deflationary Mindset” Grows (ZH)

After being force-fed more stimulus than John Belushi, and endless rounds of buying any and every asset that dares to expose any cracks in the potemkin village of fiat folly, Japan remains stuck firmly in what Abe feared so many years ago – a “deflationary mindset.” As Bloomberg reports, cash and deposits held by Japanese households rose for 42nd straight quarter at the end of June as the nation’s consumers continued to favor saving over spending. The “deflationary mindset” that the Bank of Japan is battling to overcome was also evident in the money laying idle in corporate coffers, which stayed near an all-time high, according to quarterly flow of funds data released by the BOJ on Wednesday. Still, as Bloomberg optimistically notes, with the economy expanding much faster than its potential growth rate, greater inflationary pressures could be on the way, which may prompt a shift in behavior by consumers and companies… or not!

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Musical chairs.

Greece Considers Bond Swap As It Looks To Bailout Exit (R.)

Greece is considering swapping 20 small bond issues for four or five new ones, government sources said, as it prepares to exit its international bailout and resume normal financing operations. The country has been surviving on rescue funds since 2010 and is anxious to draw a line under its bailout phase next year. The government is considering a swap that would consolidate the secondary market into a few benchmark issues, replacing 20 separate bonds with a face value of around 32 billion euros, said officials familiar with the proposal. “We are planning to proceed with some debt management actions … to improve liquidity and tradeability,” one senior government official said. Officials said the move was still under discussion and did not say when it might happen, adding that bondholders had yet to be sounded out.

The 20 bonds were issued in 2012 in a voluntary scheme whereby private bondholders took a 53.5% haircut on their investments. It was the world’s biggest debt restructuring involving bonds with a total face value of 206 billion euros. Major holders included banks and pensions funds in Greece and abroad. Two years later in 2014, Greece made two forays as part of a plan to regain full bond market access. This time the plan is more modest but would represent a major step toward for bigger debt issues. Greece issued a five-year bond in July, and investors that bought the new bond are already making a profit of about 1.5% since the beginning of the year. Greece’s borrowing costs have fallen sharply this year back to pre-crisis levels, as investors see the prospect further bailouts diminishing as well as signs of economic improvement.

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Wouldn’t that be something.

Abbas Says Trump May Have Mideast ‘On the Verge’ of Peace Deal

Palestinian Authority President Mahmoud Abbas said Wednesday that President Donald Trump’s diplomatic efforts in the Mideast give him confidence that the region is “on the verge” of peace. Abbas said his government has met with U.S. diplomats more than 20 times since Trump took office in January. “If this is an indication of anything, it indicates how serious you are about peace in the Middle East,” Abbas said through a translator at a meeting with the U.S. president during the United Nations General Assembly in New York. “I think we have a pretty good shot, maybe the best shot ever,” Trump said. “I certainly will devote everything within my heart and within my soul to get that deal made.” “Who knows, stranger things have happened,” he added. “No promises, obviously.”

Trump met with Abbas two days after a similar meeting with Israeli Prime Minister Benjamin Netanyahu, where the U.S. president said he was hopeful Israelis and Palestinians would be able to come to a peace agreement during his presidency. The president recently dispatched his son-in-law and senior adviser, Jared Kushner, to the region in a bid to restart peace talks. Kushner was joined by Jason Greenblatt, the president’s envoy for Israeli-Palestinian peace, and deputy national security adviser Dina Powell. The White House is trying to take advantage of a period of relative calm following violent clashes earlier this summer over Israeli security arrangements at the Jerusalem shrine known to Jews as Temple Mount and to Muslims as Haram al-Sharif, said a senior administration official who requested anonymity to discuss the negotiations.

Trump has said he’s hopeful Kushner can help restart a peace process that has made little headway over the past 25 years. He made addressing the Israeli-Palestinian conflict an early priority, hosting both Abbas and Netanyahu at the White House during the opening months of his presidency and visiting Israel during his first international trip as president. The last round of U.S.-led talks, a pet project of former Secretary of State John Kerry, broke down three years ago amid mutual recriminations.

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How does a country, state, territory survive without power for half a year?

4-6 Months To Restore Puerto Rico Electricity After Hurricane Maria (NBC)

Hurricane Maria is likely to have “destroyed” Puerto Rico, the island’s emergency director said Wednesday after the monster storm smashed ripped roofs off buildings and flooded homes across the economically strained U.S. territory. Intense flooding was reported across the territory, particularly in San Juan, the capital, where many residential streets looked like rivers. The National Weather Service issued a flash flood warning for the entire island shortly after 12:30 a.m. ET. Yennifer Álvarez Jaimes, Gov. Ricardo Rosselló’s press secretary, told NBC News that all power across the island was knocked out. “Once we’re able to go outside, we’re going to find our island destroyed,” Emergency Management Director Abner Gómez Cortés said at a news briefing. [..] Maria, the strongest storm to hit Puerto Rico since 1928, had maximum sustained winds of 155 mph when it made landfall as a Category 4 storm near the town of Yabucoa just after 6 a.m. ET.

But it “appears to have taken quite a hit from the high mountains of the island,” and at 11 p.m. ET, it had weakened significantly to a Category 2 storm, moving away from Puerto Rico with maximum sustained winds of 110 mph, the agency said. [..] “Extreme rainfall flooding may prompt numerous evacuations and rescues,” the agency said. “Rivers and tributaries may overwhelmingly overflow their banks in many places with deep moving water.” San Juan San Juan Mayor Carmen Yulín Cruz told MSNBC that the devastation in the capital was unlike any she had ever seen. “The San Juan that we knew yesterday is no longer there,” Yulín said, adding: “We’re looking at four to six months without electricity” in Puerto Rico, home to nearly 3.5 million people. “I’m just concerned that we may not get to everybody in time, and that is a great weight on my shoulders,” she said.

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Nice math, but many questions.

Global Mass Extinction Set To Begin By 2100 (Ind.)

Planet Earth appears to be on course for the start of a sixth mass extinction of life by about 2100 because of the amount of carbon being pumped into the atmosphere, according to a mathematical study of the five previous events in the last 540 million years. Professor Daniel Rothman, co-director of MIT’s Lorenz Centre, theorised that disturbances in the natural cycle of carbon through the atmosphere, oceans, plant and animal life played a role in mass die-offs of animals and plants. So he studied 31 times when there had been such changes and found four out of the five previous mass extinctions took place when the disruption crossed a “threshold of catastrophic change”. The worst mass extinction of all – the so-called Great Dying some 248 million years ago when 96 per cent of species died out – breached one of these thresholds by the greatest margin.

Based on his analysis of these mass extinctions, Professor Rothman developed a mathematical formula to help predict how much extra carbon could be added to the oceans – which absorb vast amounts from the atmosphere – before triggering a sixth one. The answer was alarming. For the figure of 310 gigatons is just 10 gigatons above the figure expected to be emitted by 2100 under the best-case scenario forecast by the IPCC. The worst-case scenario would result in more than 500 gigatons. Some scientists argue that the sixth mass extinction has already effectively begun. While the total number of species that have disappeared from the planet comes nowhere near the most apocalyptic events of the past, the rate of species loss is comparable. Professor Rothman stressed that mass extinctions did not necessarily involve dramatic changes to the carbon cycle – as shown by the absence of this during the Late Devonian extinction more than 360 million years ago.

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Sep 192017
 
 September 19, 2017  Posted by at 8:14 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Edouard Manet Portrait of Emile Zola 1868

 

When The Market Finally Implodes, Don’t Say These Charts Didn’t Warn You (MW)
S&P 500 Buybacks Have Dropped By 25% Since The First Quarter Of 2016 (MW)
Fed’s Balance-Sheet Unwind Will Be Moment Of Truth For Financial Markets (MW)
$700 Billion Unpaid Mortgage Balances In Harvey And Irma Disaster Areas (ZH)
Rand Paul’s Senate Vote Rolls Back the Warfare State (Ron Paul)
US Senate Backs Massive Increase In Military Spending (R.)
US Government Wiretapped Trump Campaign Manager Manafort Since 2014 (ZH)
Equifax Suffered a Hack Almost Five Months Earlier Than It Disclosed (BBG)
Toys ‘R’ Us Files For Chapter 11 Bankruptcy (MW)
The IMF Needs to Stop Torturing Greece (Kyle Bass)
Flags, Symbols, And Statues Resurgent As Globalism Declines (SCF)
Hurricane Maria Hits Dominica: ‘We Have Lost All That Money Can Buy’ (BBC)
2017 Atlantic Hurricane Season Is Far From Over (Accuweather)

 

 

“..it will end, and like all previously over-valued, over-extended, over-leveraged and overly-complacent bull cycles in history, it ends badly..“

When The Market Finally Implodes, Don’t Say These Charts Didn’t Warn You (MW)

The perennial headline: Stock market shrugs off everything. North Korea (shrug). Terrorist attacks (shrug). Hurricanes (shrug). Investor complacency (shrug). Lofty valuations (shrug). Trump (the best shrug, believe me). Whatever it is — screw it, buy! On the flip side, bears, of course, have spent the better part of the past few years missing out in one of the greatest bull stretches in market history. But that won’t stop them from revelling in their I-told-ya-so moment when it finally comes. Lance Roberts, chief portfolio strategist for Clarity Financial, is not one of those wild-eyed market alarmists, though he did earn our chart(s) of the day honors with this trio, which he says illustrates his “biggest concern” at the moment.

Chart 1) This just shows how this bull cycle is on pace to become the longest ever. “Regardless, it will end, and like all previously over-valued, over-extended, over-leveraged and overly-complacent bull cycles in history, it ends badly,” Roberts writes.

Chart 2) See those little bends in each red dotted line? There may be something to that. “One of the hallmarks of a late-stage bull-market cycle is the acceleration in price as investors capitulate by ‘jumping in’ as prices accelerate,” Roberts explains.

Chart 3) There might be a tell in what we’re seeing in corporate earnings. “The second downturn in earnings, particularly when sales are stagnating as they are now, tends to be the demarcation point of a repricing phase,” Roberts says.

Obviously, he’s unloading stocks, right? Not exactly … “For now, the bullish trend remains intact which keeps portfolios allocated towards equities,” he says. “BUT, and that is a Kardashian-sized one, we do so with a ‘clear and present’ understanding of the risk that we are undertaking.”

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If the Fed unwinds at the same time buybacks plummet, what would you expect to happen?

S&P 500 Buybacks Have Dropped By 25% Since The First Quarter Of 2016 (MW)

It isn’t just investors who are doing less trading these days: companies seem to be as well, and have been dramatically pulling back on the amount of their own shares that they purchase. Buybacks for companies in the S&P 500 index have been steadily dropping and reached $120.1 billion in the second quarter, according to preliminary data from S&P Dow Jones Indices. That’s down 9.8% from the first quarter of 2017, and off 5.8% from the year-ago period, when companies repurchased $127.5 billion of their own stock. Compared with the first quarter of 2016, the last time the stock market saw a pronounced pullback in prices, buybacks have slowed by more than 25%, per S&P’s data.

The lower buyback activity in the quarter came “as share prices increased, resulting in fewer share repurchases and a weaker tailwind for [earnings per share],” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Corporate profits are measured in earnings per share, or the amount of profit they make divided by their shares outstanding. Reducing the number of shares outstanding through buybacks is a way to boost this metric, aside from organic earnings growth.

About 13.8% of S&P 500 issues “substantially” reduced their year-over-year share out in the second quarter, compared with 26.6% in the second quarter of 2016, as well as the 14.8% that did in the first quarter of this year. Sixty-six issues in the S&P reduced their share count by at least 4%, a level that is seen as having an impact on EPS, down from 134 in the year-ago period and 71 in the first quarter of 2017. The reduction in buybacks isn’t necessarily a signal that companies view their own shares to be overvalued. Silverblatt said investors were interpreting the decline as “a positive sign,” because “while there is less support for EPS growth, companies are showing an ability to meet their EPS targets without the buyback tailwind, as their Q2 2017 record earnings show.”

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Most interesting: what will ECB and BOJ do?

Fed’s Balance-Sheet Unwind Will Be Moment Of Truth For Financial Markets (MW)

If investors have guessed correctly, the Federal Reserve will start reducing its $4.5 trillion portfolio of government securities after its two-day meeting finishes on Wednesday. But for a meeting that could herald the reversal of quantitative easing, a policy credited by some with sparing a cataclysmic economic depression but also blamed for frothy asset valuations and low volatility, investors across all markets appear remarkably sanguine. The ICE Dollar Index, a measure of the U.S. currency against a basket of six major rivals, is trading near a three-year low, bond yields have steadily fallen since the end of last year, and U.S. stock indexes continue to notch all-time highs. “Inching us out of this parallel universe of endless liquidity is going to be a fraught process. No one’s done it before so no one can credibly claim to know what will happen,” said James Athey, senior investment manager at Aberdeen Standard Investments.

After slashing official interest rates nearly to zero in December 2008, the Fed was left scrambling for additional ways to provide stimulus to an economy stunned by the fallout from the financial crisis. The central bank, under the leadership of former Chairman Ben Bernanke, began buying up billions of dollars worth of bonds and other assets each month in an effort to drive down long-term interest rates, push investors into riskier assets and, in turn, boost borrowing, spending and the overall economy. The program went through various iterations, but purchases were eventually wound down and then halted in 2014. The assets, however, have remained on the Fed’s balance sheet.

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I wasn’t kidding when I wrote America Can’t Afford to Rebuild recently: “While they will get some federal relief, if rebuilding would cost more than the principal in their homes, they could decide to walk away..”

$700 Billion Unpaid Mortgage Balances In Harvey And Irma Disaster Areas (ZH)

Even as the damage from Hurricanes Harvey and Irma is still being tallied, a preliminary assessment released last week by Black Knight Financial Services estimated that as many as 300,000 borrowers in the vicinity of Houston could become delinquent on their loans and 160,000 could become seriously delinquent, or more than 90 days past due. That number is roughly four times the original prediction because new disaster zones were designated and more homes flooded when officials released water from reservoirs to protect dams, according to CNBC’s Diana Olick. In total, the number of mortgaged properties in Texas disaster zones is 1.18 million, with Black Knight adding that Houston disaster zones contain twice as many mortgaged properties than Katrina zones, with four times the unpaid principal balance.

Putting the Harvey damange in context, after Hurricane Katrina mortgage delinquencies in Louisiana and Mississippi disaster areas spiked by 25%. The same could happen in Houston, as borrowers without flood insurance weigh their options and decide to walk away from the property. While they will get some federal relief, if rebuilding would cost more than the principal in their homes, they could decide to walk away according to Olick. What about Irma? According to a preliminary analysis by Black Knight released today, Florida FEMA-designated disaster areas related to Hurricane Irma include a whopping 3.1 million mortgaged properties. As Black Knight’s EVP Ben Graboske explained, both the number of mortgages and the unpaid principal balances of those mortgages in FEMA-designated Irma disaster areas are significantly larger than in the areas impacted recently by Hurricane Harvey.

Quantifying the damage, Black Knight calculates that Irma-related disaster areas contain nearly three times as many mortgaged properties as those connected to Hurricane Harvey, and nearly seven times as many as those connected to Hurricane Katrina in 2005. In dollar terms, this means that there is some $517 billion in unpaid principal balances in Irma-related disaster areas, nearly three times the amount as in those related to Harvey and more than 11 times of those connected to Katrina.

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The Paul team’s enthusiasm is commendable. But…

Rand Paul’s Senate Vote Rolls Back the Warfare State (Ron Paul)

Last week, Senator Rand Paul (R-KY) reminded Congress that in matters of war, they have the authority and the responsibility to speak for the American people. Most Senators were not too happy about the reminder, which came in the form of a forced vote on whether to allow a vote on his amendment to repeal the Afghanistan and Iraq war resolutions of 2001 and 2002. It wasn’t easy. Sen. Paul had to jump through hoops just to get a vote on whether to have a vote. That is how bad it is in Congress! Not only does Congress refuse to rein in presidents who treat Constitutional constraints on their war authority as mere suggestions rather than as the law of the land, Congress doesn’t even want to be reminded that they alone have war authority. Congress doesn’t even want to vote on whether to vote on war!

In the end, Sen. Paul did not back down and he got his vote. Frankly, I was more than a little surprised that nearly 40% of the Senate voted with Rand to allow a vote on repealing authority for the two longest wars in US history. I expected less than a dozen “no” votes on tabling the amendment and was very pleasantly surprised at the outcome. Last week, Rand said, “I don’t think that anyone with an ounce of intellectual honesty believes that these authorizations from 16 years ago and 14 years ago … authorized war in seven different countries.” Are more Senators starting to see the wars his way? We can only hope so. As polls continue to demonstrate, the American people have grown tired of our interventionist foreign policy, which burns through trillions of dollars while making the world a more dangerous place rather than a safer place.

Some might argue that losing the vote was a defeat. I would disagree. For the first time in years we saw US Senators on the Senate Floor debating whether the president should have authority to take the US to war anywhere he pleases. Even with just the small number of votes I thought we might have gotten on the matter, that alone would have been a great victory. But getting almost 40% of the Senate to vote our way? I call that a very good start!

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…but this is the reality.

US Senate Backs Massive Increase In Military Spending (R.)

The U.S. Senate passed its version of a $700 billion defense policy bill on Monday, backing President Donald Trump’s call for a bigger, stronger military but setting the stage for a battle over government spending levels later this year. The Republican-controlled chamber voted 89-8 for the National Defense Authorization Act for fiscal year 2018, or NDAA, which authorizes the level of defense spending and sets policies controlling how the money is spent. The Senate bill provides about $640 billion for the Pentagon’s main operations, such as buying weapons and paying the troops, and some $60 billion to fund the conflicts in Afghanistan, Iraq, Syria and elsewhere.

The 1,215-page bill includes a wide range of provisions, such as a 2.1% military pay raise and $8.5 billion to strengthen missile defense, as North Korea conducts nuclear weapons and ballistic missile tests. It also bans Moscow-based Kaspersky Labs products from federal government use. The House of Representatives passed its version of the NDAA at a similar spending level in July. The two versions must be reconciled before Congress can consider a final version. A fight over spending is expected because Senate Democrats have vowed to block big increases in funds for the military if spending caps on non-defense programs are not also eased. The versions of the bill increase military spending well beyond last year’s $619 billion, defying “sequestration” spending caps set in the 2011 Budget Control Act.

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The FBI was listening in to conversations of a sitting president. Hmm..

US Government Wiretapped Trump Campaign Manager Manafort Since 2014 (ZH)

Meanwhile, and perhaps more interestingly, CNN’s anonymous sources have apparently revealed that Manafort has been under an ongoing wiretap, approved by the FISA courts, going back to 2014 and tied to his consulting arrangements with Ukraine’s former ruling party. Ironically, CNN notes the “surveillance was discontinued at some point last year for lack of evidence” but was then restarted with a “new FISA warrant that extended at least into early this year”…all of which sounds an awful lot like the Obama administration using FISA courts to spy on a political opponent. Speaking of “shock and awe”, the NYT piece goes on to cast an even greater shadow over the Trump campaign by comparing it to an “organized crime syndicate.”

Finally, and to our complete shock, the NYT goes on to point out at the bottom of the article (you know about 2,000 words in after most folks have already fallen asleep or just moved on) that Manafort is under investigation for “possible violations of tax laws, money-laundering prohibitions and requirements to disclose foreign lobbying”…all of which seem related to the FBI’s 2014 investigation of Manafort’s consulting practice and not the Trump campaign. Conclusion, Mueller’s team is desperately trying to scare anyone they can into confessing something/anything that might possibly implicate the Trump campaign. Of course, as Katy Harriger, a professor of politics at Wake Forest University, points out, the longer Mueller’s investigation goes on, the more vulnerable he will be to allegations that he is on a fishing expedition…

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Criminal intent?!

Equifax Suffered a Hack Almost Five Months Earlier Than It Disclosed (BBG)

Equifax learned about a major breach of its computer systems in March – almost five months before the date it has publicly disclosed, according to three people familiar with the situation. In a statement, the company said the March breach was not related to the hack that exposed the personal and financial data on 143 million U.S. consumers, but one of the people said the breaches involve the same intruders. Either way, the revelation that the 118-year-old credit-reporting agency suffered two major incidents in the span of a few months adds to a mounting crisis at the company, which is the subject of multiple investigations and announced the retirement of two of its top security executives on Friday.

Equifax hired the security firm Mandiant on both occasions and may have believed it had the initial breach under control, only to have to bring the investigators back when it detected suspicious activity again on July 29, two of the people said. Equifax’s hiring of Mandiant the first time was unrelated to the July 29 incident, the company spokesperson said. The revelation of a March breach will complicate the company’s efforts to explain a series of unusual stock sales by Equifax executives. If it’s shown that those executives did so with the knowledge that either or both breaches could damage the company, they could be vulnerable to charges of insider trading. The U.S. Justice Department has opened a criminal investigation into the stock sales.

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A curious move just ahead of the holiday season. Then again, remember this from a few days ago: “The company has been saddled with debt since buyout firms KKR and Bain Capital, together with real estate investment trust Vornado Realty took Toys “R” Us private for $6.6 billion in 2005.”

Toys ‘R’ Us Files For Chapter 11 Bankruptcy (MW)

Toys ‘R’ Us Inc. filed for chapter 11 bankruptcy protection Monday night. In a statement, the retailer said it intends to use bankruptcy proceedings “to restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth.” The retailer has been hurt by shrinking sales and increased online competition, and has still not recovered from a massive debt load from a leveraged buyout more than a decade ago. “Today marks the dawn of a new era at Toys ‘R’ Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” said Chairman and Echief Executive Dave Brandon, in a statement. “Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet. .

. . We are confident that these are the right steps to ensure that the iconic Toys”R”Us and Babies”R”Us brands live on for many generations.” Toys ‘R’ Us said it has already received a commitment for $3 billion in debtor-in-possession financing, part of which is from a bank syndicate led by JP Morgan. While that financing needs court approval, the company was confident it would be granted. The bankruptcy filing had been expected, and the retailer tried to settle fears that it would be cut off from its holiday inventory. “Toys ‘R’ Us is committed to working with its vendors to help ensure that inventory levels are maintained and products continue to be delivered in a timely fashion,” the company said.

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Kyle is too optimistic about the Greek economy.

The IMF Needs to Stop Torturing Greece (Kyle Bass)

[..] the banks have been fully recapitalized twice. They have bolstered their provisions against bad loans, and their capital ratios are now significantly higher than the European average, providing a buffer against any future losses. Greece, however, still carries a heavy burden: the roughly 250 billion euros that the IMF and its European partners lent the country to save its economy and most likely the entire euro area. This stock of official bail-out debt remains due even though private creditors have been amply haircut, restructured and wiped out. In 2012, for example, the government’s private-sector bondholders were forced to accept a loss of nearly 80%. Greek bank shareholders have seen their investments wiped out twice in recapitalizations.

The IMF could write off its debt and lighten Greece’s burden. This would benefit the country’s long-term economic health, and therefore Europe’s, too. Instead, the fund is demanding further austerity measures and insisting on “structural” reforms of dubious value. By sticking to this economic ideology, it is neutering the nascent economic growth and stifling any hope of real prosperity. The IMF came forward as Greece’s savior during Europe’s financial crisis, but now it looks more like a frenemy. Consider the history of the debt. When a country joins the IMF, it is assigned an initial “quota,” based primarily on its GDP. A member country can typically borrow up to 145% of its quota annually and up to 435% cumulatively – or possibly more in “exceptional circumstances.”

These are essentially credit limits, designed to not overburden the borrower with debt. Yet amid the crisis, the IMF agreed to lend an eye-popping 3,212% of Greece’s quota. Together with loans from the fund’s European partners, Greece’s official-sector debt amounts to more than 135% of GDP. The IMF knew perfectly well that its loans could never be repaid. I have heard this directly from officials involved in the process. All the participants at the time – including U.S. Treasury Secretary Tim Geithner, ECB President Jean-Claude Trichet and IMF Managing Director Dominique Strauss-Kahn – made a conscious and very political (not financial) decision to prevent the crisis from spreading and keep the euro area together.

[..] The IMF’s stance is preposterous. It is motivated by self-interest, rather than by what would be best for Greece. The fund has simultaneously tried to block Greece’s return to the capital markets and attempted to undermine Europe’s new banking union by demanding yet another recapitalization. Considering that the country – like all euro members – can’t achieve macroeconomic adjustment by devaluing its currency, extreme care must be taken. Consumer and investor confidence, not exports, will ultimately drive growth.

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With the economy’s demise, centralization dies.

Flags, Symbols, And Statues Resurgent As Globalism Declines (SCF)

As the forces of globalism retreat after numerous defeats in the United States, the United Kingdom, Turkey, and other nations, there is a resurgent popularity in national, historical, and cultural symbols. These include flags, statues of forbearers, place names, language, and, in fact, anything that distinguishes one national or sub-national group from others. The negative reactions to cultural and religious threats brought about by the manifestations of globalism – mass movement of refugees, dictates from supranational organizations like the European Union and the United Nations, and the loss of financial independence – should have been expected by the globalists. Caught up in their own self-importance and hubris, the globalists are now debasing the forces of national, religious, and cultural identity as threats to the “world order.”

The most egregious examples of globalist pushback against aspirant nationhood and the symbols of national identity are Catalonia and Kurdistan. Two plebiscites on independence, a September 25, 2017 referendum on the Kurdistan Regional Government declaring independence from Iraq and an October 1 referendum on Catalonia beginning the process of breaking away from the Kingdom of Spain, are expected to achieve “yes” votes. Neither plebiscite is binding, a fact that will result in both votes being ignored by the mother countries. Iraq, the United States, Turkey, and Iran have warned Kurdish Iraq against holding the independence referendum. The United States is prepared to double-cross its erstwhile Kurdish allies for a fourth time. President Woodrow Wilson, who has been cited as the “first neoconservative or neocon, reneged on Kurdish independence during the post-World War I Versailles peace conference.

Henry Kissinger double-crossed Kurdish leader Mustafa Barzani in 1975 with the Algiers Accord between Iraq and Iran, a perfidious act that forced 100,000 of Barzani’s Kurdish forces into exile in Iran. George H. W. Bush promised the Kurds help after Operation Desert Storm in 1991 if they revolted against Saddam Hussein’s government. US military aid was not forthcoming and the Kurds were forced into a small sliver of northern Iraq, over which a US “no-fly zone” was imposed. Now, Donald Trump’s administration has warned the Kurds not to even think about independence, even though the Kurdish peshmerga forces helped the US and its allies to drive the Islamic State out of Kirkuk and the rest of northern Iraq.

In Spain, the conservative prime minister is trying to emulate the Spanish fascist dictator Generalissimo Francisco Franco in making threats against Catalonia’s independence wishes. In response to the Catalan Parliament’s vote to hold an October 1 referendum on Catalonia’s independence from Spain, Prime Minister Mariano Rajoy and his People’s Party government have promised to round up the pro-independence members of the Catalan government, as well as pro-independence legislators of the parliament and mayors, and criminally charge them with sedition. Rajoy’s stance should be no surprise since his party, the Popular Party, is the political heir of Franco’s Falangist party. Franco’s version of the Nazi Gestapo, the Guardia Civil, brutally suppressed Catalan and Basque identity. Particular targets for suppression, according to Falangist doctrine, were “anti-Spanish activists,” “Reds,” “separatists,” “liberals,” “Jews,” “Freemasons,” and “judeomarxistas.”

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Dominica was hit from south to north, the entire island. 70,000 inhabitants.

Hurricane Maria Hits Dominica: ‘We Have Lost All That Money Can Buy’ (BBC)

Dominica has suffered “widespread damage” from Hurricane Maria, Prime Minister Roosevelt Skerrit says. “We have lost all that money can buy,” he said in a Facebook post. The hurricane suddenly strengthened to a “potentially catastrophic” category five storm, before making landfall on the Caribbean island. Earlier Mr Skerrit had posted live updates as his own roof was torn off, saying he was “at the complete mercy of the hurricane”. “My greatest fear for the morning is that we will wake to news of serious physical injury and possible deaths as a result of likely landslides triggered by persistent rains,” he wrote after being rescued. Maria is moving roughly along the same track as Irma, the hurricane that devastated the region this month.

It currently has maximum sustained winds of 250km/h (155mph) and has been downgraded to a category four hurricane after hitting Dominica, but it could increase again as it moves towards Puerto Rico and the Virgin Islands, according to forecasters. Dominica’s PM called the damage “devastating” and “mind boggling”. “My focus now is in rescuing the trapped and securing medical assistance for the injured,” he, and called on the international community for help. “We will need help, my friend, we will need help of all kinds.” Curtis Matthew, a journalist based in the capital, Roseau, told the BBC that conditions went “very bad, rapidly”. “We still don’t know what the impact is going to be when this is all over. But what I can say it does not look good for Dominica as we speak,” he said.

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Maria is headed straight for Puerto Rico.

2017 Atlantic Hurricane Season Is Far From Over (Accuweather)

Additional hurricanes, beyond that of Jose and Maria, are likely over the Atlantic and may threaten the United States for the rest of the 2017 season. Hurricane season runs through the end of November, and it is possible the Atlantic may continue to produce tropical storms right up to the wire and perhaps into December. “I think we will have four more named storms this year, after Maria,” according to AccuWeather Hurricane Expert Dan Kottlowski. “Of these, two may be hurricanes and one may be a major hurricane,” Kottlowski said. The numbers include the risk of one to two additional landfalls in the United States. As of Sept. 18, there have been four named systems that made landfall, including Harvey and Irma that made landfall in the U.S. as Category 4 hurricanes.

The other two tropical storms were Cindy, near the Texas/Louisiana border in June, and Emily, just south of Tampa, Florida, at the end of July. Jose will impact the coast of the northeastern U.S. much of this week; Lee and Maria are in progress over the south-central Atlantic. Lee will likely remain at sea and is not expected be a threat to the U.S. or any land areas. However, major hurricane Maria will have direct impact on some of the islands of the northern Caribbean. Maria will, at the very least, have indirect impact on the U.S. Maria has the potential to reach the middle or upper part of the U.S. coast next week. On average, strong west to northwest winds with cooler and drier air tend to scour tropical systems out of the western Atlantic during October and November. However, this year, AccuWeather meteorologists are concerned that these winds may not occur until later in the autumn or may be too weak to steer tropical threats away from the U.S.

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Sep 152017
 
 September 15, 2017  Posted by at 9:16 am Finance Tagged with: , , , , , , , , , ,  13 Responses »
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Juan Gris Portrait of the artist’s mother 1912

 

Fed To Take Historic Leap Into The Unknown (MW)
Janet Yellen’s Right-Hand Man Is Hanging Up His Boots (BI)
97 Million American Workers Are Living Paycheck To Paycheck (ZH)
“Markets Are Wrong” (Hugh Hendry)
Japanese Told To Find Shelter After North Korea ‘Fires New Missile’ (Y.)
JPMorgan Is In A Bubble And Not Bitcoin – Max Keiser (RT)
Why Europe Will Miss The Disruptive Brits (Gardner)
Brexit’s Irish Question (Fintan O’Toole)
IMF Is Set On Asset Quality Review For Greek Banks (K.)
Greece Sells Its Railway Company To Italian State Operator (AP)
Greek Oil Spill Forces Closure Of Athens Beaches (G.)
100% Wishful Thinking: the Green-Energy Cornucopia (Cox)
China Takes The Lead In Building Quantum Data Security Networks (Axios)

 

 

No. The Fed took that leap in 2008. Bernanke himself talked about uncharted territory. Which is where they’ve been ever since. They literally don’t know what they’re doing.

Fed To Take Historic Leap Into The Unknown (MW)

The Federal Reserve is set to take a leap into the unknown next week by beginning to sell some of the roughly $3.7 trillion of bonds and mortgage securities it amassed during the financial crisis. The Fed will meet on Tuesday and Wednesday and is widely expected at the end of the meeting to announce it plans to allow the run-off of its massive balance sheet beginning sometime in October. Fed Chairwoman Janet Yellen will hold a press conference afterwards to explain the decision. “It will be an historic day” for the Fed, said Lewis Alexander, chief U.S. economist at Nomura Securities, one the central bank has long thought about but was unsure when it would come. And still the final destination is unknown. “We are heading for a place that is very different from where we are now. It will take years to get there and figure out where we are,” Alexander said.

Trying to keep financial markets calm, the Fed is not celebrating this turning point. Officials have openly admitting they have designed the first steps to be so small it will be like watching paint dry. But economists have no doubt that bond yields will eventually move higher. “The Fed is just hoping desperately it has been transparent enough so that the adjustment will be orderly,” said Jim Glassman, head economist for the commercial bank at J.P. Morgan Chase. The central bank is trying to avoid a repeat “taper tantrum,” the swift run up of nearly 1 percentage point on the yield of the 10-year Treasury in 2013 after then-Chairman Ben Bernanke discussed the tapering of bond purchases for the first time. Fed officials have known they would have to reverse course eventually. Hawks and doves agree the policy is not sustainable over the medium term because it potentially adds too much stimulus to a healthy economy.

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I don’t get how or why people can praise a man whose entire career has been one long litany of either wrong or intentionally bad decisions and policies. He was the teacher to all those central bankers who made all those decisions that the entire world will still be paying for many years from now. Fisher is the one outstanding symbol of everything that’s wrong in the shady area where finance touches politics.

Janet Yellen’s Right-Hand Man Is Hanging Up His Boots (BI)

Federal Reserve Vice Chair Stanley Fischer announced last week he was resigning for personal reasons before the end of his term, opening yet another seat in the central bank’s powerful board for President Donald Trump to fill. The departure of Fischer, 73, represents a big loss of institutional knowledge and gravitas for the Fed at a time when many American institutions are sorely lacking in technocratic expertise. Fischer is considered the leader of a generation of prominent academic and professional economics, in part because he taught many of them at MIT. “He is often referred to as the dean of central bankers, having taught most central bankers including former Fed Chairman Ben Bernanke and ECB president Mario Draghi,” Shawn Baldwin, the chairman of AIA Group, wrote in a LinkedIn post. “Fischer’s departure creates a vacuum not easily filled, adding to the uncertainty in monetary policy.”

Larry Summers, the Harvard economist and former Treasury secretary, dubbed Fischer’s resignation “the end of an era.” Fischer, who was born in Zambia and later studied in London, started his career as an academic but became a policymaker at the World Bank and later the International Monetary Fund, where he rose to the role of first deputy managing director. Fischer then spent three years at Citigroup as a vice chairman before moving to Israel in 2005 to become the head of its central bank. Fischer returned to the US as Fed vice chairman in 2014. His term was not set to end until June 2018. “The Fed and the international monetary system will be weaker for his departure from official responsibility,” Summers wrote in a blog post. “Stan’s has been a singular career,” he said. “As an MIT professor he coauthored, with his close friend Rudi Dornbusch, the macro textbook that defined the basics of the field for a generation.

With Olivier Blanchard,” the former IMF chief economist, “he wrote the treatise that defined the state of the art for graduate students. His lectures were models of lucid exposition and balanced judgment. My view of monetary economics was shaped by my experience auditing his class in the Fall of 1978.” Not everyone is complimentary about the arc of Fischer’s career. To some, he represents the kind of establishment economics that led to financial instability and income inequality in many parts of the world. During his time at the IMF, Fischer became the face of austerity measures gone wrong. Many of his and the IMF’s recommendations for drastic spending cuts during the Asian financial crisis of the late 1990s have since been widely discredited as having made matters worse.

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And that’s just the workers. Not their dependents. Or the unemployed.

97 Million American Workers Are Living Paycheck To Paycheck (ZH)

As we’ve noted time and time again, the number of Americans scraping by with almost no money in their savings account (if they even have a savings account) is staggeringly high – and growing. As the Motley Fool pointed out in a recent post, the St. Louis Federal Reserve, the personal saving rate in June 2017 was a measly 3.8%, or $3.80 for every $100 they earn. With the median household income in the US at just north of $50,000, that would amount to about $4,000 a year. And that’s when they’re saving money. Another study from GoBankingRates found that 69% of Americans surveyed had less than $1,000 in savings. And about one-third had no money in reserve.

Considering that the US economy is 70% based on consumption, Americans are probably over-consuming rather than saving. The Federal Reserve recently released data showing that aggregate credit card debt had hit an all-time high of $1.027 trillion, eclipsing the previous high that was set before the Great Recession. Add in another trillion of auto-loan debt and $1.4 trillion in student-loan debt, and the aggregate debt pile is not only larger than ever before – it’s growing at its fastest rate in decades. And in what’s perhaps the most troubling statistic highlighted by Motley Fool, a recent survey by CareerBuilder and The Harris Poll found that 78% of full-time US workers – nearly 100 million Americans – are now living paycheck to paycheck, up from 75% in 2016.

The survey suggested that only 19% of workers save more than $501 monthly, while at the other end of the spectrum, 56% were saving less than $100 a month, including 26% who saved nothing monthly. Fewer than one-third of respondents admitted to following a budget. Meanwhile, about half of respondents said they wouldn’t give up their internet, phone or car to save money. Maybe once the Federal Reserve has succeeded in “normalizing” interest rates, spendthrift Americans will have more of an incentive to save, while also making it more expensive to pay down debt – a powerful disincentive. Now, if only the central bank could find a way to revive stagnant wages…

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Hendry has fallen prey to the central bankers. And shut his hedge fund.

“Markets Are Wrong” (Hugh Hendry)

What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in? It wasn’t supposed to be like this and it is especially frustrating as nothing much has gone wrong with the economy over the summer. If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time. It’s just that our substantial risk book became strongly correlated over the short term to the maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula; that and the increasing regulatory burden which makes it almost impossible to manage small pools of capital today. Like I said, it wasn’t supposed to be like this…

But let me bow out by sharing my team’s views. For the implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay long. It’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news. But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets (when they go up like this I go down…), avoid large drawdowns and post consistent high risk adjusted returns. Oh, and I forgot, macro fund clients don’t like us investing in the stock market for the understandable fear that we concentrate their already considerable risk undertaking.

That proved to be an almighty puzzle for a fund like mine that has been proclaiming the stock market as a “safe-ish” bet ever since 2013. Let me explain the “markets are wrong and we boom now” argument. To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today. The first die was cast by the central bankers in early 2009: having stared into the abyss of a deflationary spiral in 2008 the Fed and the BoE announced a radical new policy of bond purchases named Quantitative Easing. The bond market hated the idea as it was expected to cause a severe inflation problem.

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Just yesterday I was telling a friend they would soon fire the next.

Japanese Told To Find Shelter After North Korea ‘Fires New Missile’ (Y.)

North Korea has fired a ballistic missile directly over Japan. US Secretary of State Rex Tillerson branded the launch ‘reckless’ and called on China and Russia to take ‘direct action’ against Kim Jong-un, while Seoul responded to the test by launching the missiles of its own. The test sparked panic in Japan, where residents were immediately told to take shelter as the missile passed directly overhead – the second time Pyongyang has done so in the past few weeks. It flew over Hokkaido in northern Japan and fell into the Pacific Ocean, sparking a nationwide alert. South Korea said the missile probably reached an altitude of 770km and travelled 3,700km and called an urgent National Security Council meeting.

The North’s launch comes a day after it threatened to sink Japan and reduce the United States to “ashes and darkness” for supporting a U.N. Security Council resolution imposing new sanctions against it for its nuclear test on September 3. The severe sanctions include limits on imports of crude oil and a ban on exports of textiles – which is the country’s second biggest export, worth more than $700m a year. The North previously launched a ballistic missile from Sunan on August 29, which flew over Japan’s Hokkaido island and landed in the Pacific waters

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Max is very crypto. But bitcoin et al had big overnight losses.

JPMorgan Is In A Bubble And Not Bitcoin – Max Keiser (RT)

“JP Morgan, along with the entire finance sector, has been subsidized by the Federal Reserve’s corrupt practice of ‘financial repression’ that moves hundreds of billions from savers and pensioners, and workers, into JP Morgan and Jamie Dimon’s pocket. Jamie’s compensation is tied directly to manipulating JP Morgan’s stock and option prices, thanks to the Fed’s conflicted, corrupt, cozy malfeasance,” [..] “The US dollar, bond markets, and many property markets are in bubbles. Bitcoin and gold are the only financial assets not in bubbles.

To say bitcoin is fraudulent would be like saying gold is fraudulent. Some might say this, but no rational person would agree,” he said. “As the bubbles in fiat money, bonds and stocks pop, capital will flow into bitcoin, gold, and silver. At some point, when his customers start leaving JPMorgan and move to more bitcoin-focused options, Jamie will be forced to capitulate, or get replaced,”[..] “Bitcoin makes banks, essentially price gouging intermediaries and socially unacceptable leeches, obsolete. Bankers rightfully fear for their jobs as bitcoin replaces them,”

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Nigel Gardner is a former European Commission spokesman.

Why Europe Will Miss The Disruptive Brits (Gardner)

The UK’s constant digging-in of heels has allowed other governments to steer clear of negotiating clashes, safe in the knowledge that Britain and its Eurosceptic media would do the blocking of unpopular measures for them. Take the seemingly trivial example from 2013, of rules about how olive oil could be served in restaurants. “There was a daft proposal that it couldn’t be served in bowls or glass jugs at the table, but only in sealed sachets,” recalls a senior Dutch official. “We didn’t have to do anything – the Brits and their tabloids did the heavy lifting for us, and the proposal was withdrawn … Every time the European Commission proposes something, we know we can rely on the British to kick and shout so it’s blocked. With Brexit, that’s no longer going to be possible.”

Even that opt-out over the 48-hour week for which the UK fought its lonely battle is now – 20 years later – quietly being used by 15 other member states. So which country may end up replacing Britain as Europe’s new troublemaker-in-chief? Poland and Hungary are the obvious candidates because, across a whole range of areas, from civil liberties to media freedoms, the two countries find themselves at odds with the EU. As one senior EU official put it: “They are simply not in line with fundamental EU policies. As new member states they should be enthusiastic, but it’s the opposite.” Beata Szydlo, for example, tells us a lot about what the EU will look like after 2019 when Britain is supposed to exit. The Polish prime minister’s intemperate language at a recent European summit was previously the kind of thing the EU’s top brass expected only from the British.

She would not accept “blackmail from a leader with an approval rating of 4%” she raged against France’s then president François Hollande. Poland is now facing EU legal action over judicial reforms which Brussels says would undermine Polish democracy. Ironically, we may need to look to a more unlikely quarter to find Europe’s true new bad boy. Because post-Brexit, the Germans will end up being much more unpopular. “Without Britain,” one EU official told me, “they will have to assume the role they are historically reluctant to play.”

Indeed, the eurozone crisis provided a foretaste of how this could play out. With Britain outside the single currency, all the anger was directed against Germany and its chancellor, Angela Merkel, when things went wrong. Pictures of Merkel with a Hitler moustache were everywhere in the Greek press. And the old joke about Merkel arriving at Athens airport – the one where the border guard asks “Occupation?” and Merkel replies, “No, just visiting” – took on new life. Expect much more of this.

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He might as well have called it Brexit’s British Question.

Brexit’s Irish Question (Fintan O’Toole)

Brexit is, in a sense, a misnomer. There are five distinct parts of the UK: Scotland, Wales, Northern Ireland, the global metropolis that is Greater London, and what the veteran campaigner for democratic reform Anthony Barnett, in his excellent new book The Lure of Greatness, calls England-without-London. In three of these parts—Scotland, Northern Ireland, and London—Brexit was soundly rejected in last year’s referendum. Wales voted narrowly in favor of Brexit. But in England-without-London Brexit was triumphant, winning by almost 11%. It was moreover a classic nationalist revolt in that the support for Brexit in non-metropolitan England cut across the supposedly rigid divides of North and South, rich and poor. Every single region of England-without-London voted to leave the EU, from the Cotswolds to Cumbria, from the green and pleasant hills to the scarred old mining valleys.

This was a genuine nationalist uprising, a nation transcending social class and geographical divisions to rally behind the cry of “Take back control.” But the nation in question is not Britain, it is England. The problem with this English nationalism is not that it exists. It has a very long history (one has only to read Shakespeare) and indeed England can be seen as one of the first movers in the formation of the modern nation-state. The English have as much right to a collective political identity as the Irish or the Scots (and indeed as the Germans or the French) have. But for centuries, English nationalism has been buried in two larger constructs: the United Kingdom and the British Empire. These interments were entirely voluntary. The gradual construction of the UK, with the inclusion first of Scotland and then of Ireland, gave England stability and control in its own part of the world and allowed it to dominate much of the rest of the world through the empire.

Britishness didn’t threaten Englishness; it amplified it. Now, the empire is gone and the UK is slipping out of England’s control. Britain’s pretensions to be a global military power petered out in the sands of Iraq and Afghanistan: the British army was effectively defeated in both Basra and Helmand and had to be rescued by its American allies. The claim on Northern Ireland has been ceded, and Scotland, though not yet ready for independence, increasingly looks and sounds like another country. In retrospect, it is not surprising that the reaction to these developments has created a reversion to an English, rather than a British, allegiance. In the 2011 census, 32.4 million people (57.7% of the population of England and Wales) chose “English” as their sole identity, while just 10.7 million people (19.1%) associated themselves with a British identity only.

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The torture never stops.

IMF Is Set On Asset Quality Review For Greek Banks (K.)

Greece looks set for another difficult series of negotiations with its international creditors in the third review of its third bailout program, as IMF spokesman Gerry Rice made it clear on Thursday that the issue of the asset quality review of Greek banks (AQR) “will form part of the review.” He also said the Fund may demand new measures for next year, stressing that the programs evolve and conditions change. Citing the IMF report dated July 20 – when the Fund approved its participation in the Greek program “in principle” – Rice left no doubt as to whether the AQR would be discussed, branding it an important matter. This will likely cause friction with the European Central Bank, which has scheduled its own stress tests for the banks in 2018.

Sources in Frankfurt have noted that only if the Greek government asks for an AQR will the ECB authorize it. However, Athens, as a senior Finance Ministry official has said, has no such intention. Greek banks are obviously against any such project that would upset their operations, and had hoped that the IMF would eventually decide against raising the issue. In July the IMF had estimated that local lenders would need at least 10 billion euros in additional capital, raising the prospects of another recapitalization. Rice said on Thursday that the Fund is cooperating with the ECB and other European institutions on all issues, but added that “the stability of the credit system is of great significance for the program.”

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For €45 million? An entire railway national company? How much is the kitchen sink?

Greece Sells Its Railway Company To Italian State Operator (AP)

Greece has agreed to sell its railways company to Italy’s own state-owned operator for 45 million euros ($54 million) as part of its privatization drive. The country’s Asset Development Fund said Thursday that the sale of Trainose to Ferrovie Dello Stato Italiane completed a four-year process. Greece has pledged to carry out an ambitious privatization program as part of its international bailout, under which it has received billions of euros in emergency loans in return for overhauling its economy. Many of the privatizations have been met with resistance from unions. No trains were running on Thursday as the railway workers’ union called a 24-hour strike to protest the company’s sale.

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An awful mess in more ways than one.

Greek Oil Spill Forces Closure Of Athens Beaches (G.)

An emergency operation is under way to clean up an oil spill from a sunken tanker that has blackened popular beaches and bays in Athens’ Argo-Saronic gulf. What had been thought a containable spill is being described by officials as an ecological disaster after thick tar and oil pollution drifted toward residential coastal areas. By Thursday, four days after the 45-year-old Agia Zoni II sank off Salamína island, mayors in suburbs south of the capital were forced to close beaches, citing public health risks. “This is a major environmental disaster,” said the mayor of Salamína, Isidora Nannou-Papathanassiou. “Clearly the danger [of pollution] was not properly gauged, the currents have moved the spill.” The vessel sank while at anchor in the early hours of Sunday. It was carrying 2,500 tonnes of fuel oil and marine gas when it went down in mild weather.

It has emerged that only two of its 11-strong crew – the captain and chief engineer – were on board when it began to take on water. Both men have since been charged with negligence but freed on bail. The company operating the small, Greek-flagged vessel insisted it was seaworthy. Merchant marine officials said initial emphasis had been placed on sealing the vessel’s cargo holds to stop further leakage. The merchant marine minister, Panagiotis Kouroumblis, who has brought in help from abroad including an anti-pollution truck to collect the oil, ruled out further seepage on Tuesday, saying the ship’s hull had been secured. Late on Wednesday, however, the ministry’s general secretary, Dionysis Kalamatianos, raised the possibility that oil was still leaking from the vessel, telling Skai TV that efforts to seal it were “almost complete”.

The contradictory statements sparked accusations that authorities had not only underestimated the scale of the spill, but also lost valuable time in tackling it. The slick extends for miles, and some officials said the cleanup could last four months – much longer than the 20 days Kouroumblis estimated. In the Athens suburb of Glyfada, where floating dams have been set up and chemicals used to dissolve the spillage, the mayor, Giorgos Papanikolaou, said 28 tonnes of fuel had been removed from one beach alone. Images of of dead and oil-coated turtles and birds underscored the economic and environmental impact, and experts estimated it could take years before the affected area fully recovered.

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The only good alternative energy is the one you don’t use.

100% Wishful Thinking: the Green-Energy Cornucopia (Cox)

At the People’s Climate March back last spring, all along that vast river of people, the atmosphere was electric. But electricity was also the focus of too many of the signs and banners. Yes, here and there were solid “System Change, Not Climate Change” – themed signs and banners. But the bulk of slogans on display asserted or implied that ending the climate emergency and avoiding climatic catastrophes like those that would occur a few months later—hurricanes Harvey and Irma and the mega-wildfires in the U.S. West—will be a simple matter of getting Donald Trump out of office and converting to 100-percent renewable energy.

The sunshiny placards and cheery banners promising an energy cornucopia were inspired by academic studies published in the past few years purporting to show how America and the world could meet 100% of future energy demand with solar, wind, and other “green” generation. The biggest attention-getters have been a pair of reports published in 2015 by a team led by Mark Jacobson of Stanford University, but there have been many others. A growing body of research has debunked overblown claims of a green-energy bonanza. Nevertheless, Al Gore, Bill McKibben (who recently expressed hope that Harvey’s attack on the petroleum industry in Texas will send a “wakeup call” for a 100-percent renewable energy surge), and other luminaries in the mainstream climate movement have been invigorated by reports like Jacobson’s and have embraced the 100-percent dream.

And that vision is merging with a broader, even more spurious claim that has become especially popular in the Trump era: the private sector, we are told, has now taken the lead on climate, and market forces will inevitably achieve the 100-percent renewable dream and solve the climate crisis on their own. [..] America does need to convert to fully renewable energy as quickly as possible. The “100-percent renewable for 100% of demand” goal is the problem. Scenarios that make that promise, along with the studies that dissect them, lead me to conclude that, at least in affluent countries, it would be better instead to transform society so that it operates on far less end-use energy while assuring sufficiency for all. That would bring a 100%-renewable energy system within closer reach and avoid the outrageous technological feats and gambles required by high-energy dogma. It would also have the advantage of being possible.

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Quantum is per definition unbreakable. The CIA is not going to like it.

China Takes The Lead In Building Quantum Data Security Networks (Axios)

For decades, physicists have looked to use the behavior of particles of light to securely send information. The basic science underlying quantum cryptography has been determined over the past 40 years, but a slew of papers published this summer by physicist Jian-Wei Pan establishes China as the early leader in deploying the technology on a global scale. Why it matters: Networks using quantum keys theoretically allow for very private communications and safe transactions — because if attacked, the key would be altered and the parties would know it wasn’t secure. That would be valuable for financial transactions or voting that involves transmitting information between two points. But beyond a handful of field tests, there hasn’t been a commitment to develop the technology at this scale until now.

How it works: Two people who want to communicate would share a number key encoded in a string of single photons (particles of light) that can be used to encrypt and decrypt a message. It’s secure because if someone tries to intercept the message, the photons would be physically altered and the key would no longer work, but the data would be secure. The vision: Optical fibers carry photons short distances on the ground (anything more than about 200 kilometers and the fiber absorbs the photon signal). So researchers want to pair them with satellites that can relay the signal and then drop it back down to a receiver on Earth. That goes on and on, ultimately carrying the information around the globe to the intended receiver. What they did: China built a 2,000-km fiber optic network between Beijing and Shanghai and launched a satellite last year — both dedicated to basic research on quantum satellite communications. So far, they’ve used it to:

• Send photons from the satellite to telescopes 1,200 km apart on the ground that acted as receivers. • Transmit quantum-encoded information from the ground to the satellite. • Distribute an actual quantum key string of photons from the satellite to the ground. • Shared the key between two ground receivers — during the day. (That’s key because light from the sun, moon and cities on Earth can drown out the photon signal. The current satellite only operates at night.) “They all together prove that a number of different concepts relevant for the quantum internet really do work in a space setting,” says Anton Zeilinger, a quantum physicist at the University of Vienna who was Pan’s advisor.

The bottom line: China’s achievements are more technological than scientific, but they represent a true advance in the development and deployment of these technologies, says Ray Newell of Los Alamos National Laboratory. He points out that many of the fundamental science and technologies for quantum key distribution were invented in the United States. (Satellite-based quantum key distribution was invented at Los Alamos, which holds the original patent for the technology.) Other countries possess the knowledge to build these systems, but China is the first to make a major investment. “In China, the decision to build it was done at the beginning, and then they went through with a lot of manpower and money,” says Norbert Lutkenhaus from the University of Waterloo.

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Sep 142017
 
 September 14, 2017  Posted by at 9:30 am Finance Tagged with: , , , , , , , , , ,  5 Responses »
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Edward Hopper Chop Suey 1929

 

Top Democrats Announce Deal With Trump To Protect ‘Dreamers’ (MW)
Fed Balance Sheet Reduction Will Reduce Funds Sent To Treasury (BI)
“You Should Take the Fed at Their Word” (WS)
“Markets Have Always Been Wrong” – Jamie Dimon (ZH)
10% of Global GDP Is Stashed In Tax Havens (BI)
Did You Know Housing Gets Counted Twice In GDP? (Murray)
The Real Earnings of Men (WS)
China’s Steel Mills Run at Full Tilt as Output Hits New Peak (BBG)
China’s Economy Cools Again (BBG)
US Senate Rejects Bid To Repeal War Authorizations (R.)
Has the NYT Gone Collectively Mad? (Robert Parry)
Crisis Brings Sea Change To Greek Housing Market (K.)
More Austerity May Be Ahead (K.)

 

 

They dine together, close a deal, and then can’t wait to tell entirely different stories to the press. But Trump has forced them into action.

Top Democrats Announce Deal With Trump To Protect ‘Dreamers’ (MW)

Top Democratic leaders said Wednesday night that they had reached a compromise agreement with President Donald Trump to enact protections for the children of undocumented immigrants in exchange for increased border security measures that do not include funding for a wall — which the White House then disputed. “We had a very productive meeting at the White House with the president,” read a joint statement from Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi. “The discussions focused on DACA. We agreed to enshrine the protections of DACA into law quickly, and to work out a package of border security, excluding the wall, that’s acceptable to both sides.” But shortly after that statement, White House press secretary Sarah Huckabee Sanders disputed that border-wall funding was off the table. “Excluding the wall was certainly not agreed to,” she said.

Schumer, of New York, and Pelosi, of California, had dinner with Trump at the White House on Wednesday night. It was apparently the second bipartisan agreement between Democrats and Trump in the past week, after last week’s surprise deal that provided funding for Hurricane Harvey relief and extended the debt ceiling for three months, much to Republicans’ chagrin. Extending protections for the Deferred Action for Childhood Arrivals program, which were rescinded by the Trump administration last week, is a top priority for Democrats and many Republican lawmakers. Without new legislation, the 690,000 children of undocumented immigrants — so-called “Dreamers” — enrolled in the program could face deportation as their status expires over the next two years. Trump had said he may “revisit” the issue of Dreamers in six months if Congress didn’t act.

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It’s like driving into a dark and wet dead end alley.

Fed Balance Sheet Reduction Will Reduce Funds Sent To Treasury (BI)

The Federal Reserve is not expected to raise interest rates again until at least December, and even that increase is now in doubt given low inflation and high political uncertainty in the United States. That doesn’t mean the central bank has no plans to tighten monetary policy, however. Officials are widely expected to announce the start of a gradual reduction of the Fed’s $4.4 trillion balance sheet, which more than quintupled in response to the Great Recession and financial crisis of 2007-2009. Policymakers are hoping the shrinkage, which they intend to accomplish by ceasing reinvestments of maturing bonds back into the central bank’s portfolio, will have minimal market impact. But a previous episode in 2013 known as the “taper tantrum,” when bond yields spiked sharply higher at the mere mention of a possible end to the Fed’s bond-buying program, offers a cautionary tale.

Regardless of immediate market impact, there will be a longer term effect on the government budget, currently the subject of heated debate, that most investors and politicians are ignoring. That’s because the Fed’s bond-buying program, in addition to lowering the government’s borrowing costs at a time when weak economic activity called for bigger budget deficits, created a stream of yearly returns of nearly $100 billion for the Federal Reserve which it then siphoned back to the Treasury. Sometimes these are referred to as the Fed’s “profits,” but that is a deceptive way of describing what is in effect an intra-government transaction. “As assets under management drop, so too will revenue on that portfolio. This will be a lost revenue source for the Treasury that will raise deficits and add to the Treasury’s financing” costs, writes Societe Generale Economist Stephen Gallagher in a research note to clients.

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Downward volatility.

“You Should Take the Fed at Their Word” (WS)

The markets have been brushing off the Fed and have done the opposite of what the Fed has set out to accomplish. The Fed wants to tighten financial conditions. It’s worried about asset prices. It’s worried that these inflated assets which are used as collateral by the banks, pose a danger to financial stability. It has mentioned several inflated asset classes by name, including commercial real estate, which backs $4 trillion in loans heavily concentrated at regional banks. And yet, markets have loosened financial conditions since the Fed started its tightening cycle in earnest last December. Markets are hiding behind “low” inflation, when the Fed is focused on asset prices. So longer-term yields have been falling even as short-term yields have moved up in line with the Fed’s target rate, and thus the yield curve has flattened.

The dollar has been falling. Equities have been soaring to new highs. And companies, if they’re big enough, are able to get funding for the riskiest projects at stunningly low rates. “I think there is maybe too much confidence that the Fed is not really going to do too much more on interest rates, that we’ll have one or two more rate hikes and that’s it,” Brian Coulton, chief economist for Fitch Ratings, told Reuters on Tuesday. Market participants are expecting “just one or two interest rate increases a year” despite the Fed’s stated expectation of seeing long-run interest rates at around 3.0%. “When the Fed says they’re going to engage in a gradual rate of interest rate increases, they mean three or four rate hikes every year and we think that’s what they’re going to do,” Coulton said. “We think that you should take them at their word and it may even be a little faster than that.”

This disconnect between market expectations and the Fed’s stated intentions could create volatility in fixed-income markets when markets finally catch up, he said. Volatility, when it’s used in this sense, always means downward volatility: a sudden downward adjustment in prices and spiking yields – a painful experience for the coddled bond market with big consequences for the stock market. “We think they’re going to be … getting more worried about some of the negative consequences of QE, the fact that it encourages risk taking and may create some issues for the banks,” he said. And he expects – this is “more of a personal view,” he said – that the Fed will continue with the rate hikes, or even accelerate them, even if consumer price inflation remains low.

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“There’s low volatility until they’re highly volatile.” Sounds like Minsky.

“Markets Have Always Been Wrong” – Jamie Dimon (ZH)

Oh, listen, markets are markets. There’s low volatility until they’re highly volatile. The stock market is high until it goes low. Markets therefore have always been wrong. And I think people are making mistakes. I can give you reasons why it might be low. We’ve had this fairly consistent, coherent, consistent growth. But forget the geopolitical noise and stuff like that. We’re chugging along, 2%. Europe is doing 2%. Russia – I mean, Japan is doing 1.5%, China’s doing their 6%. You know, earnings are doing okay. We’ve had a fairly benign economic environment. That’s a reason. I can give you another reason is that the Central Banks of the world that bought $12 trillion of securities. 12 trillion. Since they started doing QE. And that’s only just the U.S. That’s an awful lot of security purchases that might – in all things be equal, and remember things are never all equal – can reduce volatility.

And there may be other sides that are known. And once other sides happen, watch out. Then volatility goes way up. They’ll say they’re a genius, they figured out when it’s going to happened. I don’t guess on which kind of volatility. Like I said, we do a business. And we have to manage the volatility.” [..] The hurricanes are irrelevant. I wouldn’t have any policy matter as a function of hurricanes. Going to reduce GDP in the short run, they’ll probably increase it after that. I’ll let the economists figure it out. But almost a $20 trillion economy, that isn’t a reason to change monetary policy. It will create a lot of noise in the numbers, but I wouldn’t overreact to that. Advice, it’s very sympathetic. We’re doing – just so you know, we’re going to do a lot for affordable housing, get these people in these states 20,000 people in Florida, 6,000 in Houston. Most of the banks are waiving fees, delaying loan payments, offering special services for your employees and stuff like that.”

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Saw the graph before. Greece is the big one here.

10% of Global GDP Is Stashed In Tax Havens (BI)

The Panama Papers and other major leaks from offshore tax havens have helped shed light on just how much money the world’s wealthiest people are parking in untaxed obscurity, away from the authorities and, importantly, economic researchers. This new evidence has helped economists gain greater insight into just how steep disparities between the rich and the poor have become, because having actual data on offshore holdings tends to widen wealth gaps considerably. Three of these researchers have teamed up on two important papers that offer a more in-depth look at what the world’s worst tax-evading and -avoiding nations are, and they find that the existence of tax havens makes inequality much worse than it appears with standard, publicly available economic data.

“The equivalent of 10% of world GDP is held in tax havens globally, but this average masks a great deal of heterogeneity—from a few % of GDP in Scandinavia, to about 15% in Continental Europe, and 60% in Gulf countries and some Latin American economies,” Annette Alstadsæter at the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen, and Gabriel Zucman of the University of California at Berkeley write in the first of the two articles. Global gross domestic product is about $75.6 trillion, according to World Bank figures. They then apply these estimates to build revised series of top wealth shares in 10 countries accounting for nearly half of world GDP. “Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively,” the authors write. “It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore.”

About 60% of the wealth of Russia’s richest households is held offshore, the economists estimate. “More broadly, offshore wealth is likely to have major implications for the concentration of wealth in many of the world’s developing countries, hence for the world distribution of income and wealth.” “These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world,” they continue. They say that despite lip service to transparency, “very little has been achieved” in recent years. “With the exception of Switzerland, no major financial center publishes 18 comprehensive statistics on the amount of foreign wealth managed by its banks.”

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GDP is a lousy measure.

Did You Know Housing Gets Counted Twice In GDP? (Murray)

Your car gets counted once in GDP when it is built, not when it is driven. Your clothes, your bicycle, your furniture, all get counted once when they are manufactured, and not again when they are worn, ridden, or sat on. But homes are counted twice: Once when they are constructed, and again when they are occupied. The argument to include both housing construction (as a new capital investment good) and housing occupancy (as a consumption good) arises from a conceptual trick at the heart of national accounting. That trick is to separate out two types of ‘final’ goods when adding up the ‘value-added’ in the economy, which is what GDP does. One good is a consumption good. These are goods (and services) that households consume, like clothes, food, entertainment, and so forth. All the value added at intermediate stages in the production chain of these goods can be captured by looking only at the final retail value of the goods.

That value represents the total value-added across the economy to produce that good. The other type of good is an investment good. This is a good that lasts a long time and contributes to future production. A new rail line, for example, is classified a new investment good, and the value of its production is counted in GDP, even though households don’t get any value from it until it is used to run trains. Once the rail line is being used to run trains, the value of those travel services is also counted in GDP as a consumption good, which will include within it the value contribution of the rail line itself. Thus there is a type of double-counting when it comes to investment goods — you count them when they are made, and you count them again when they are used to make consumption goods.

This is intentional. The production of investment goods is a large share of GDP — between 20 and 40% in most countries. By ignoring this production, which is also the more volatile part of production over the business cycle, GDP loses much of its value as a measure of how economically active a country is. The construction of new homes is, therefore, an investment good, which gets counted in GDP. But then the occupancy of these same homes gets counted gain as a consumption ‘home rental’ good each period after. This applies to the 70% of households (in Australia at least) who own their own home, not just the renters. Although they don’t pay themselves rent to occupy their home, GDP is calculated as if they do by ‘imputing’ the rent that homeowners would have to pay themselves if they instead rented their home.

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” On this inflation-adjusted basis, men had earned more than that in 1972″
..

The Real Earnings of Men (WS)

For women who were working full-time year-round, median earnings (income obtained only from working) rose 0.7% on an inflation-adjusted basis from a year ago to $48,328, continuing well-deserved increases over the data series going back to 1960. The female-to-male earnings ratio hit a new record of 80.5%, after steady increases, up from the 60%-range, where it had been between 1960 and 1982. And while that may still be inadequate, and while more progress needs to be made for women in the workforce, it was nevertheless the good news.

Men in the workforce haven’t been so lucky. They have experienced the brunt of the wage repression over the past four decades, obtained in part via inflation, where wages inch up, but not quite enough to keep up with the Fed-engineered loss of purchasing power of the dollar. Median earnings for men who worked full-time year-round fell 0.4% in 2016, adjusted for inflation, to $51,640. On this inflation-adjusted basis, men had earned more than that in 1972 ($52,361). And it’s down 4.4% from the earnings peak in 1973 ($54,030). This translates into 44 years of real earnings decline:

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Just in time for the Party Congress. What a lucky coincidence!

China’s Steel Mills Run at Full Tilt as Output Hits New Peak (BBG)

Steel production in China chalked up a fresh monthly record as mills in the world’s top supplier increase output to profit from a rally in prices to six-year highs before government-ordered pollution curbs are implemented. Crude steel output climbed to 74.59 million metric tons last month, surpassing the previous peak of 74.02 million in July, and up from 68.57 million in August 2016, according to the statistics bureau Thursday. While that’s an all-time high for the month, daily output was less than the record in June. Production surged 5.6% to 566.4 million tons in the first eight months, also a record. Steel prices have been supercharged this year in the country that accounts for half of global output. A crackdown on illegal mills shuttered some supply, boosting the remaining producers, while demand has been underpinned by significant state-backed stimulus.

Investors are also eyeing signals that the government will press ahead with anti-pollution curbs over winter. “Steel mills have boosted output as profit margins are good,” said Helen Lau at Argonaut Securities in Hong Kong. “Production cuts won’t set in until September or October, so steelmakers are churning out as much as they can in the meantime.” Spot reinforcement bar in China, a benchmark product used in construction, hit 4,396 yuan a ton early this month, the highest level since October 2011. Prices have gained 30% this year. Steel output may drop in coming months as Asia’s top economy presses ahead with supply-side reforms. Hebei province, the center of China’s mammoth steel industry, has plans that’ll allow for winter output cuts of as much as 50% to reduce pollution. Citigroup Inc. has estimated daily production could shrink 8% because of the environmental crackdown.

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But wait! Same source, same day, opposite views.

China’s Economy Cools Again (BBG)

The pace of China’s economic expansion unexpectedly cooled further last month after a lackluster July, as factory output, investment and retail sales all slowed. • Industrial output rose 6.0% from a year earlier in August, versus a median projection of 6.6% and July’s 6.4%. That’s the slowest pace this year • Retail sales expanded 10.1% from a year earlier, versus a projection of 10.5% and 10.4% in July, also the slowest reading in 2017 • Fixed-asset investment in urban areas rose 7.8% in the first eight months of the year over the same period in 2016, compared with a forecast 8.2% rise. That’s the slowest since 1999.

The continued cooling of the world’s second-largest economy suggests that efforts to rein in credit expansion and reduce excess capacity are hitting home ahead of the key 19th Party Congress in October. Still, producer-price inflation and a manufacturing sentiment gauge both exceeded estimates earlier this month, signaling some resilience. The Shanghai Composite Index reversed earlier gains to fall 0.4%. “Today’s data shows that the economy clearly already peaked in the first half of this year,” said Larry Hu at Macquarie in Hong Kong. “Recently both property and exports are slowing down and that’s why the whole economy is slowing.” “Regulatory tightening in the financial sector is putting a squeeze on highly indebted firms reliant on shadow bank financing,” said Frederic Neumann at HSBC in Hong Kong.

“And officials are unlikely to take their foot off the regulatory brakes any time soon. Growth therefore looks set to weaken further into year end, as regulators step up their campaign to rein in shadow banking.” “That’s still on track to a gradual moderation,” Chang Jian, chief China economist at Barclays in Hong Kong, said in a Bloomberg Television interview. “The government has been closing capacity, especially those that don’t meet environmental standards, and enforcement this year has been much stricter in the run-up to the 19th Party Congress.”

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An empire built on war.

US Senate Rejects Bid To Repeal War Authorizations (R.)

The U.S. Senate rejected an amendment on Wednesday that would have forced the repeal of war resolutions used as the legal basis for U.S. military actions in Iraq, Afghanistan and against extremists in Syria and other countries. The Senate voted 61 to 36 to kill the measure, which six months after it became law would have put an end to authorizations for the use of military force (AUMF) passed in 2001 and 2002. The legislation was offered by Republican Senator Rand Paul as an amendment to a must-pass annual defense policy bill, which lawmakers are using as a vehicle to gain a greater say in national security policy. Paul’s measure was aimed at asserting the constitutional right of Congress to approve military action, rather than the president.

Some of the other amendments address issues such as sanctions on North Korea and President Donald Trump’s ban on transgender troops in the military. Many members of Congress are concerned the 2001 AUMF, passed days after the Sept. 11 attacks to authorize the fight against al Qaeda and affiliates, has been used too broadly as the legal basis for a wide range of military action in too many countries. The majority of support for the amendment came from Democrats, who joined Paul in arguing that it is long past time for Congress to debate a new authorization for the use of force. “We should oppose unauthorized, undeclared, unconstitutional war. At this particular time, there are no limits on war,” Paul said.

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Not really. They’re just chasing illusions.

Has the NYT Gone Collectively Mad? (Robert Parry)

For those of us who have taught journalism or worked as editors, a sign that an article is the product of sloppy or dishonest journalism is that a key point will be declared as flat fact when it is unproven or a point in serious dispute – and it then becomes the foundation for other claims, building a story like a high-rise constructed on sand. This use of speculation as fact is something to guard against particularly in the work of inexperienced or opinionated reporters. But what happens when this sort of unprofessional work tops page one of The New York Times one day as a major “investigative” article and reemerges the next day in even more strident form as a major Times editorial? Are we dealing then with an inept journalist who got carried away with his thesis or are we facing institutional corruption or even a collective madness driven by ideological fervor?

What is stunning about the lede story in last Friday’s print edition of The New York Times is that it offers no real evidence to support its provocative claim that – as the headline states – “To Sway Vote, Russia Used Army of Fake Americans” or its subhead: “Flooding Twitter and Facebook, Impostors Helped Fuel Anger in Polarized U.S.” In the old days, this wildly speculative article, which spills over three pages, would have earned an F in a J-school class or gotten a rookie reporter a stern rebuke from a senior editor. But now such unprofessionalism is highlighted by The New York Times, which boasts that it is the standard-setter of American journalism, the nation’s “newspaper of record.” In this case, it allows reporter Scott Shane to introduce his thesis by citing some Internet accounts that apparently used fake identities, but he ties none of them to the Russian government.

Acting like he has minimal familiarity with the Internet – yes, a lot of people do use fake identities – Shane builds his case on the assumption that accounts that cited references to purloined Democratic emails must be somehow from an agent or a bot connected to the Kremlin. For instance, Shane cites the fake identity of “Melvin Redick,” who suggested on June 8, 2016, that people visit DCLeaks which, a few days earlier, had posted some emails from prominent Americans, which Shane states as fact – not allegation – were “stolen … by Russian hackers.” Shane then adds, also as flat fact, that “The site’s phony promoters were in the vanguard of a cyberarmy of counterfeit Facebook and Twitter accounts, a legion of Russian-controlled impostors whose operations are still being unraveled.”

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See my article yesterday.

Crisis Brings Sea Change To Greek Housing Market (K.)

“What we are experiencing is the end of the era of home ownership in Greece as households can no longer save to buy property,” says Nikos Hatzitsolis, chief executive at real estate firm CB Richard Ellis-Axies, underscoring the fundamental changes that the crisis has triggered in the Greek property market. This change, the experts explain, is not just evident in the case of those just flying the nest who wouldn’t be in any position to own their home anyway unless it was given to them by their family, but also existing homeowners who are opting to leave their property and rent it out or sell it. “Around 70% of homeowners are becoming renters because they choose to sell their property to pay off debts such as mortgages, late taxes or credit card debt,” says Lefteris Potamianos, vice president of the Athens-Attica Estate Agents Association.

“If any money is left over from the transaction, it is not reinvested in another property, as was the case in the past, but used to rent another home. Basically, the dream of ownership that drove past generations has come to an end.” A significant%age of homeowners choosing to rent out their home and lease a different property for themselves also consists of young people who see their accommodation requirements increasing, due to the birth of a child for example, or want to live in an area with better schools or security. “We are seeing more and more such cases in the property market,” says Potamianos. “Given that sales prices are very low and it is hard to find a buyer, many owners prefer to rent out their property and then rent another for themselves, as getting bank funding for a purchase is incredibly difficult. Some even move around to see which area suits them best. Renting has this flexibility, allowing you to relocate if you’re not happy.”

For the overwhelming majority, however, renting is the only option, as buying is seen as bringing no advantages whatsoever anymore. “Even from a purely economic perspective, it’s not worth owning a home today. In contrast, people who rent avoid all the additional tax costs and are not exposed to the instability of the tax framework for real estate assets, which has become a tool of politics and results in no taxpayer knowing what tomorrow will bring,” explains Hatzitsolis. “Previous generations believed that buying houses was a form of investment. This is no longer the case, as we’re seeing a completely different mentality in younger people.”

The expert also draws attention to the cases of people who are stuck with their properties. “I know an owner who inherited a house in [the upscale Athenian suburb of] Ekali and has to pay 80,000 euros a year in property tax,” he recounts. “At best, the house could fetch 50,000 euros a year in rent, which means that this man has to cover losses of 30,000 euros every year, something that is a complete dead end.” This owner has little choice but to sell, says Hatzitsolis, adding that such cases also explain why an increasing number of people are refusing their inheritances.

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Europe won’t rest until they have created their very own Somalia.

More Austerity May Be Ahead (K.)

Greek authorities will honor their commitments as laid out in the latest loan deal with international creditors, even if this results in the need for additional austerity measures next year, a top government official indicated Wednesday. In an unusual show of honesty and realism, the same official suggested that there might not be a “clean exit” for Greece after its third bailout expires next summer but something more restrictive. There are a range of possible scenarios between that of a clean exit, which Prime Minister Alexis Tsipras has heralded, and the prospect of a credit line for Greece, the official said. On the prospect of more austerity next year, the official said he believed that there would not be a big divergence in fiscal targets next year. “If there is, we’ll see what happens, but were are committed to a target of 3.5% of GDP,” the official said, referring to the primary surplus goal set by creditors.

The official also noted that, once a primary surplus target is reached, residual revenue will go toward boosting the Social Solidarity Income program for 2017 for Greeks who have been hardest hit by austerity but also toward paying off state debts to the private sector and to growth programs. Decisions on these matters are expected to be taken following talks with the mission chiefs representing Greece’s foreign lenders, who are expected to travel to Athens next month and to assess the progress of authorities in boosting tax collection and curbing spending. Although Greek officials have underlined the importance of completing the next bailout review by the end of the year, sources suggest that the process might drag into January.

The most important thing, the official noted, is “that we are not part of the problem” when important discussions about the future of the Greek program get under way in the first quarter of next year, touching on the participation (or not) of the IMF in Greece’s third bailout and relief for the country’s debt burden. Greek authorities are concerned about the IMF’s stance opposite Athens. Apart from the Fund’s traditionally tough position on fiscal matters, there are concerns too about its demands for a further recapitalization of Greek banks. The official, however, assumed the stance of the ECB on this issue, noting that there is no need for Greek banks to receive further capital. The official said that Greece planned to tap international bond markets in the next 6-9 months following a successful return in July.

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Sep 072017
 
 September 7, 2017  Posted by at 9:14 am Finance Tagged with: , , , , , , , , , , , ,  6 Responses »
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St. Maarten seen through the eye of Irma

 

Irma Devastates The Caribbean (AlJ)
Trump Sides With Democrats On Debt Limit In Rare Bipartisan Deal (R.)
Fed’s Fischer Resigns, Leaving Trump Earlier Chance To Shape Central Bank (R.)
Deutsche Bank Boss Calls On ECB To Halt Cheap Money (R.)
New Leak Of Brexit Papers Reveals Fissures Between Britain And EU (G.)
Consumption Exhaustion (Lebowitz)
China Realizes It Needs Foreign Companies (Balding)
Apple Needs iPhone 8 To Solve A Giant Financial Headache (BI)
Catalonia Launches Its Independence Challenge Against Spain (AFP)
Emmanuel Macron To Outline Vision For Europe’s Future In Athens Speech (G.)
Crisis-Ridden Greek Households Cut Even On Milk And Bread (KTG)

 

 

Too early to say much of anything. Barbuda is gone. So is much of St. Martin. Close to uninhabitable.

If Irma hits Puerto Rico anywhere near full force, that would be exceedingly dramatic. Ditto for Haiti, Miami. This has just started.

NOAA Hurricane Hunters flight director Richard Henning on CNN: “Irma “is actually getting stronger. … You can’t overhype this storm”.

Irma Devastates The Caribbean (AlJ)

Nearly every building on the island of Barbuda has been damaged and almost 900,000 people have been left without power in Puerto Rico as the Category 5 Hurricane Irma continues its journey towards mainland US. About 60 percent of Barbuda’s roughly 1,400 people were left homeless, Gaston Browne, Antigua and Barbuda prime minister, told the Associated Press news agency, when the eye of the storm passed almost directly overhead early on Wednesday. “Either they were totally demolished or they would have lost their roof,” Browne said after returning to Antigua from a plane trip to the neighbouring island. “It is just really a horrendous situation.” Browne said roads and telecommunications systems were destroyed and recovery will take months. A two-year-old was killed as a family tried to escape a damaged home during the storm, he said.

Puerto Rico was buffeted by powerful winds and heavy rain as authorities struggled to get aid to small Caribbean islands already devastated by the storm. The US National Weather Service said Puerto Rico had not seen a hurricane of Irma’s magnitude since Hurricane San Felipe in 1928, which killed a total of 2,748 people in Guadeloupe, Puerto Rico and Florida. But as the storm moved west, it devastated the small islands in its path. Significant effects were reported on St Martin, an island split between French and Dutch control. Photos and video circulating on social media showed major damage to the airport in Philipsburg and the coastal village of Marigot heavily flooded. The US National Hurricane Center said Irma’s winds would fluctuate, but the storm would probably remain at Category 4 or 5 for the next day or two as it moves past just to the north of the Dominican Republic and Haiti on Thursday, nears the Turks & Caicos and parts of the Bahamas by Thursday night and touches Cuba on Friday night.

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“Less than an hour before the meeting, Republican House of Representatives Speaker Paul Ryan had called the Democratic proposal that Trump later embraced a “ridiculous and disgraceful” idea..”

Trump Sides With Democrats On Debt Limit In Rare Bipartisan Deal (R.)

President Donald Trump forged a surprising deal with Democrats in Congress on Wednesday to extend the U.S. debt limit and provide government funding until Dec. 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord. Trump, living up to his reputation for unpredictability, met at the White House with congressional leaders from both parties and overruled Republicans and U.S. Treasury Secretary Steven Mnuchin, who wanted a longer-term debt-limit extension rather than the three-month Democratic proposal the president embraced. “We could have done a one-year deal today,” Mnuchin told reporters aboard Air Force One later in the day en route back to Washington from an event in North Dakota where Trump spoke about taxes.

Mnuchin said Trump chose a short-term deal to keep his options open on possibly raising military funding later this year, suggesting a longer-term government funding deal might have blocked that. Trump is very focused on military spending, “particularly with what’s going on in North Korea and other parts of the world today,” Mnuchin said. “The president wasn’t willing to give up his need for additional military spending.” If passed by the Republican-led Congress, the three-month agreement would avert an unprecedented default on U.S. government debt, keep the government funded at the outset of the fiscal year beginning Oct. 1 and provide aid to victims of Hurricane Harvey. “It was a really good moment of some bipartisanship and getting things done,” top Senate Democrat Chuck Schumer said. Less than an hour before the meeting, Republican House of Representatives Speaker Paul Ryan had called the Democratic proposal that Trump later embraced a “ridiculous and disgraceful” idea that would “play politics with the debt ceiling.”

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Curious timing. Note that Reuters has fully entered the anti-Trump echo chamber.

Fed’s Fischer Resigns, Leaving Trump Earlier Chance To Shape Central Bank (R.)

U.S. Federal Reserve Vice Chair Stanley Fischer, a veteran central banker who helped set the course for modern monetary policy, said on Wednesday he will step down from his position in mid-October, potentially accelerating President Donald Trump’s opportunity to reshape the direction of the central bank. In a letter to Trump, Fischer, 73, said he was resigning for personal reasons effective on or around Oct. 13, eight months before his term as vice chair expires in June. In the letter, Fischer said jobs growth had returned to the United States and that “steps to make the financial system stronger and more resilient” had been taken – actions that may now be weakened by the Trump administration.

His departure leaves the seven-person board of governors with as few as three sitting members, depending on whether and when the Senate confirms Trump nominee Randal Quarles to the role of vice chair for supervision, a job distinct from Fischer’s vice chairmanship. The Senate Banking Committee is scheduled to vote on the nomination on Thursday. The White House said it had no immediate comment on Fischer’s departure or on the timing for filling his spot or other positions at the Fed. Though the Fed often operates with fewer than its full complement of seven governors, it has never dipped as low as three. Fischer’s earlier-than-expected departure intensifies the urgency for Trump to decide how deeply he wants to overhaul U.S. monetary policy. Fed Chair Janet Yellen’s term expires in February. While Trump has spoken approvingly of her performance he has also kept the door open to naming his top economic adviser Gary Cohn, or someone else, to the job.

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He thinks he’s taken all he’s going to get.

Deutsche Bank Boss Calls On ECB To Halt Cheap Money (R.)

Deutsche Bank chief executive John Cryan has called on the European Central Bank to change course on providing cheap money, warning he sees price bubbles in stocks, bonds and property. “The era of cheap money in Europe should come to an end – despite the strong euro,” Cryan told a room full of bankers in Frankfurt on Wednesday, a day before the ECB’s governors meet to discuss policy. Low interest rates, money printing and a penalty charge for hoarding cash have been at the heart of attempts by the central bank to reinvigorate the 19-country euro zone economy in the wake of the 2008-09 financial crisis. But the policy, which has seen the ECB print more than €2 trillion ($2.4 trillion) so far, has been politically divisive, prompting fierce criticism from famously thrifty Germans.

It has also imposed a heavy cost on still fragile banks, turning deposits into a hot potato that many would rather avoid so as not to pay charges to their central bank for storing them. The head of Germany’s largest commercial bank warned of the fallout from cheap money, cautioning against using the strong euro as a justification for printing more. “We are now seeing signs of bubbles in more and more parts of the capital market,” he said. Cryan also said Frankfurt was the most natural location as a financial hub as banks move from London after Britain’s decision to leave the European Union – ahead of Paris, Dublin and Amsterdam. “There is only one European city which can fulfil these requirements and that city is Frankfurt,” he said, pointing to Frankfurt’s supervisory authorities, law firms, consultancies and airport.

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Multiple papers have been leaked in recent days. They won’t be the last.

New Leak Of Brexit Papers Reveals Fissures Between Britain And EU (G.)

The EU will risk heightening tensions with the UK on Brexit by publishing five combative position papers in the coming days, including one that places the onus on Britain to solve the problem of the Irish border, according to documents leaked to the Guardian. The Irish document shows that Michel Barnier, the EU’s chief negotiator, will call on the UK to work out “solutions” that avoid the creation of a hard border and guarantee peace on the island. The leaks come a day after the Guardian obtained a draft memo showing the British government’s position on post-Brexit EU migration, which has been denounced as “completely confused”, “economically illiterate” and “a blueprint on how to strangle London’s economy”. The Ireland paper is one of five due to be published by the European commission in the coming days. Each is dated 6 September and was drawn up by Barnier’s article 50 taskforce in Brussels.

Together, the papers lay bare the complexity of disentangling Britain from the European Union. Each paper is focused on withdrawal day, 29 March 2019, delving into technical minefields not dealt with during the referendum campaign. EU proposals include:
• A demand – likely to inflame Brexiters – for the UK to legislate for the “continued protection” of special foods such as Parma ham and feta cheese, as well as French burgundy and Spanish cava. Brussels wants to ensure that more than 3,300 food and drink products are protected from British copycats after Brexit.
• Ensuring that any goods in transit on Brexit day would be subject to the jurisdiction of the European court of justice. In effect, British companies and the British government would be liable to fines from Brussels for breaking EU VAT and customs rules.
• A warning to the government that it must guarantee EU data protection standards on classified EU documents. If not, the EU wants these documents erased or destroyed.
• Asking Britain not to discriminate against EU companies which are carrying out state-funded infrastructure projects that began before Brexit day.

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How to spell deflation.

Consumption Exhaustion (Lebowitz)

Debt serves as a regulator of economic growth and is the focus of ill-advised fiscal and monetary policy. It is no coincidence that no matter what economic topic we explore, debt is usually a central theme. Illustrated in the chart below is the actual trajectory of total U.S. debt outstanding (black) through March 2017 and a calculated parabolic curve (red). The parabolic curve uses 1951 as a starting point and a quarterly 1.82% compounding factor to create the best statistical fit to the actual debt curve. If we start with the $434 billion of debt outstanding on December 1951 and grow it by 1.82% each quarter thereafter, the result is the gray line. If debt outstanding continues to follow this parabolic curve, it will exceed $60 trillion by the first quarter of 2020, or nine quarters from now.

Many economists point to the stability of debt service costs as a reason to ignore the parabolic debt chart. Despite rising debt loads, falling interest rates have served as a ballast allowing more debt accumulation at little incremental cost. While that may have worked in the past, near zero interest rates makes it nearly impossible to continue enjoying the benefits of falling interest rates going forward. Importantly, social safety net obligations, demographics, and political dynamics argue that debt growth is likely to continue accelerating as implied by the chart above. Without interest rates falling in step with rising debt burdens, debt service costs will begin to rise appreciably.

The power of compounding, extolled by Albert Einstein as the eighth wonder of the universe, is as damning in its demands as it is merciful in its generosity. Barring negative interest rates, debt service costs will be an insurmountable burden by 2020. However, if the debt trajectory slows as it did in 2008 that too will bring about painful consequences. In other words, all roads lead to trouble.

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“China maintains a quasi-pegged exchange rate, which requires balancing the inflow and outflow of capital. That means attracting foreign investment is a necessary precondition for investing abroad..”

China Realizes It Needs Foreign Companies (Balding)

China is increasingly desperate for foreign investment. Yet foreign companies are less and less interested in what it has to offer. How this problem gets resolved may be one of the most important questions facing China’s economy. After China joined the World Trade Organization, in 2001, overseas investors couldn’t wait to jump in. Foreign direct investment grew at an annualized rate of 10.8% from 2000 to 2008. Enticed by China’s market size and development capacity, companies were willing tolerate almost any kind of restriction. They turned over intellectual property; entered into joint ventures as junior partners, essentially training their eventual competitors; and accepted restricted access to wide swathes of the economy. Since the financial crisis, however, things have changed.

Wages in China have risen by an average of 11% a year, making it less attractive for outsourcing. Despite years of complaints, intellectual property theft hasn’t abated (just ask Michael Jordan, who had to wage a four-year court battle to get ownership of his own name in China). Add in an increasingly hostile business environment, and it’s not surprising that overseas companies are losing enthusiasm. Since 2008, utilized foreign direct investment has increased by an average rate of only 4% a year. According to quarterly balance-of-payment data, FDI has amounted to only $55 billion this year through June. The last time China’s mid-year inflows were that low was in 2009, the year after the financial crisis. This could have serious economic consequences.

Due to shady invoicing – which many firms use to evade capital controls – the money flowing into China through its trade surplus has shrunk. From 2010 through 2014, banks reported net settlement inflows from goods trade of nearly $1.7 trillion. Since January 2015, net settlement by banks has amounted to only $278 billion, while the official trade surplus is $1.3 trillion. For a country that relies on capital accumulation to sustain growth, this is a significant problem. Making matters worse, China maintains a quasi-pegged exchange rate, which requires balancing the inflow and outflow of capital. That means attracting foreign investment is a necessary precondition for investing abroad, which is China’s main method of advancing its foreign-policy objectives.

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All on red.

Apple Needs iPhone 8 To Solve A Giant Financial Headache (BI)

Apple will launch its next-generation iPhone (expected to be called the iPhone 8 or the iPhone Edition) on September 12, and this chart from Guggenheim Securities analyst Robert Cihra gives you a good idea of the giant headache Apple needs that new phone to solve. The graph is interesting because it shows Apple’s business in a seldom-seen way: It charts only the revenue growth of the company, broken out by product. The chart does a good job of showing how Apple’s various product lines have increasingly stalled over the years. In each of the last four years, Apple had one or more major product lines with shrinking sales. In 2016, that came to a head, and Apple’s overall revenue went into decline for the first time ever.

Note that in 2016, Apple’s worst year, the only division growing revenues was Services — apps, content, and software in iTunes. The stakes for iPhone 8 and its kindred models — iPhone 7s and iPhone 7s Plus — couldn’t be higher. If they don’t grow revenues, then the company as a whole doesn’t grow. The task facing Apple is not trivial. As this chart from Deutsche Bank shows, the iPhone tends to grow more slowly than the smartphone market as a whole — and the smartphone market has flatlined.

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Spain threatens criminal charges for people seeking self-determination.

Catalonia Launches Its Independence Challenge Against Spain (AFP)

Catalonia’s regional parliament passed a law on Wednesday (Sep 6) paving the way for an independence referendum on Oct 1 which is fiercely opposed by Madrid, setting a course for Spain’s deepest political crisis in decades. The looming showdown comes three weeks after militant attacks in Barcelona, the capital of Catalonia, and a seaside resort which killed 16 people and wounded more than 120. The law was adopted with 72 votes in favour and 11 abstentions after 12 hours of often stormy debate in the regional assembly. Lawmakers who oppose independence for the wealthy northeastern region of Spain quit the chamber before the vote. After the law was passed, separatist lawmakers, who have a majority in the assembly, sang the Catalan anthem, “Els Segadors”, which recalls a 1640 revolt in the region against the Spanish monarchy.

Lawmakers approved the bill despite a February ruling by Spain’s Constitutional court declaring it would be unconstitutional. Shortly after the law was passed the president of Catalonia, Carles Puigdemont, and the rest of his cabinet signed a decree calling the referendum, presenting a show of unity in the face of threats of legal action by Madrid, which deems the plebiscite illegal. Deputy Prime Minister Soraya Saenz de Santamaria said before the law was passed that the government had asked the Constitutional Court to declare “void and without effect the agreements adopted” by the Catalan parliament. She also denounced the regional assembly’s agreement to quickly vote on the bill with little debate as an “act of force” characteristic of “dictatorial regimes”. At the same time, public prosecutors announced they would seek criminal charges for disobedience against the president of the Catalan parliament, Carme Forcadell, and other Catalan officials for allowing the vote on the referendum law.

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Macron can only do what Merkel allows him.

Emmanuel Macron To Outline Vision For Europe’s Future In Athens Speech (G.)

Emmanuel Macron will make Greece the launchpad for a major policy speech on the future of Europe as he starts his first official trip to the country on Thursday. From the dramatic setting of the ancient Pnyx in Athens, the French president is expected to outline his vision for the continent in what is being called his most important overseas address since taking office in May. Amid the rocky hills of the Pnyx beneath the Acropolis, the speech will focus on the virtues of democracy as the European Union – and Greece – finally show signs of economic revival. “It will be a message of confidence in Greece but also a European symbolic message, given that in many ways Greece has been a symbol of Europe’s crisis,” said an Élysée Palace source. “The restart of Greece is the restart of the eurozone.”

It is a measure of the significance the Greek government is attaching to the visit that Macron is making the address from such an august setting. From the earliest days of Athenian democracy, the Pnyx was a meeting place for popular assemblies. In more modern times its use has been limited to the rare photo op. The young president will be the first French leader to speak from it, in what Greeks are also calling a subliminal message of hope. Macron has been criticised at home for his carefully choreographed media appearances evoking the grandeur of eras past, and has seen his approval ratings drop dramatically. But officials say the rich symbolism of Macron’s Athens speech will underscore the argument that, despite its battle to stay in the eurozone and keep bankruptcy at bay, Greece remains at the heart of Europe’s tradition and history.

“We see it is as a very important visit,” said the deputy minister of economy and development, Stergios Pitsiorlas. “We are very much hoping it will not only deepen economic cooperation but also herald a change in the political dynamic in the EU which for so long has been dominated by a single state, Germany.” France has stood by Greece, often defending it in fraught negotiations, since international creditors, led by Berlin, were forced to come to the debt-stricken country’s rescue issuing the first of three bailouts in return for tough reforms in May 2010. Macron, a former economy minister, has long advocated debt relief for Athens – echoing the view of its leftist-led government that without it the Greek economy can never fully recover.

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While politicians on all sides cheer the ‘recovery’.

Crisis-Ridden Greek Households Cut Even On Milk And Bread (KTG)

The economic crisis continues to plague Greek households struggling too make ends meet – month in, month out. A survey conducted by Nielsen shows a decline in consumption and therefore the plight of thousands of families. Greeks cut on essential goods like milk and bread. The drop in the category of milk in the organized retail market reached 8.6% in the first half of 2017. Sales of essential consumer goods continue to drop, according to a Nielsen survey of the Greek market. Sales of milk, bread and alcoholic beverages are among the goods that suffer most. In the first half of 2017 the drop in the sale of milk reached 8.6%, while sales of packaged bread shrank by 5.3%. Sales of alcoholic beverages also recorded significant losses, as whiskey sales dropped by 6.8% over the same period.

Overall, retail trade lost 1.1% in value in the first half of the year compared to the same period last year. More pronounced downward trends were recorded in personal care products at 4.4%, and household goods at 3.5%. Sales of deodorants and diapers dropped by 7.3% and 7.2% respectively. In household goods, chlorine dropped by 8.9% and kitchen paper towel by 7.7%. The only positive trend in all sectors was in fresh / bulk products where sales increased by 2.0%. An earlier Nielsen survey has shown that food sales in Greece have dropped by 18 percent since 2009, when the current economic crisis begun. In 2009, food sales reached a record high, totalling 13.15 billion euros. However, as Greece entered the first bailout program in 2010, the demand for food items started to drop. The decrease was also attributed partly to the closing down of small grocery and convenience stores..

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Aug 272017
 
 August 27, 2017  Posted by at 12:27 pm Finance Tagged with: , , , , , , , , ,  9 Responses »
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Henri Cartier-Bresson Trafalgar Square on the Day of the Coronation of George VI 1937

 

The Jackson Hole gathering of central bankers and other economics big shots is on again. They all still like themselves very much. Apart from a pesky inflation problem that none of them can get a grip on, they publicly maintain that they’re doing great, and they’re saving the planet (doing God’s work is already taken).

But the inflation problem lies in the fact that they don’t know what inflation is, and they’re just as knowledgeable when it comes to all other issues. They get sent tons of numbers and stats, and then compare these to their economic models. They don’t understand economics, and they’re not interested in trying to understand it. All they want is for the numbers to fit the models, and if they don’t, get different numbers.

Meanwhile they continue to make the most outrageous claims. Bank of England Governor Mark Carney said in early July that “We have fixed the issues that caused the last crisis.” What do you say to that? Do you take him on a tour of Britain? Or do you just let him rot?

Fed head Janet Yellen a few days earlier had proclaimed that “[US] Banks are ‘very much stronger’, and another financial crisis is not likely ‘in our lifetime’. “ While we wish her a long and healthy life for many years to come, we must realize that we have to pick one: it has to be either a long life, or no crisis in her lifetime.

Just a few days ago, ECB President Mario Draghi somehow managed to squeeze through his windpipe that “QE has made economies more resilient”. Even though everybody -well, everybody who’s not in Jackson Hole- knows that QE has blown huge bubbles in lots of asset classes and caused severe damage to savings and pensions, problems that will reverberate through economies for a long time and rip entire societies apart.

But they really seem to believe what they say, all of them. Which is perhaps the biggest problem of all. That is, either they know better and lie straight-faced or they are blind to what they’re doing. Which might be caused by the fact that they are completely blind to what goes on in their countries and societies, and focus exclusively on banking systems. But that’s not where financial crises reside, or at least not only there.

How do we know? Easy. Try this on for size.

78% of Americans Live Paycheck To Paycheck

No matter how much you earn, getting by is still a struggle for most people these days. 78% of full-time workers said they live paycheck to paycheck, up from 75% last year, according to a recent report from CareerBuilder. Overall, 71% of all U.S. workers said they’re now in debt, up from 68% a year ago, CareerBuilder said. While 46% said their debt is manageable, 56% said they were in over their heads. About 56% also save $100 or less each month, according to CareerBuilder.

Haven’t seen anything as ironic in a long time as having a company called CareerBuilder report on this. But more importantly, when almost 4 out of 5 people live paycheck to paycheck, that is a financial crisis right there. Just perhaps not according to the models popular in Jackson Hole. What do they know about that kind of life, anyway? So why would they care to model it?

Yellen’s Fed proudly report almost full employment -even if they felt forced to abandon their own models of it. But what does full employment constitute, what does it mean, when all those jobs don’t allow for people to live without fear of the next repair bill, the next hospital visit, their children’s education?

What does it mean when banks are profitable again and pay out huge bonuses while at the same time millions work two jobs and still can’t make ends meet? How is that not a -financial- crisis? In the economists’ models, all those jobs must lead to scarcity in the labor market, and thus rising wages. And then inflation, by which they mean rising prices. But the models fail, time and time again.

Moreover, talking about inflation without consumer spending, i.e. velocity of money, is empty rhetoric. 78% of Americans will not be able to raise their spending levels, they’re already maxed out at the end of each week, and 71% have debts on top of that. So where will the inflation, rising wages, etc., come from? When nobody has money to spend? Nobody can put that Humpty Dumpty together again.

An actual -as opposed to theoretical- recovery of wages and inflation will certainly not come from QE for banks, that much should be clear after a decade. And that is exactly where the problem is. That is why so many people work such shitty jobs. The banks may be more resilient (and that comes with a big question mark), but it has come at the cost of the economies. And no, banks are not the same as economies. Moreover, ‘saving’ the banks through asset purchases and ultra low rates has made ‘real economies’ much more prone to the next downturn.

The asset purchases serve to keep zombie firms -including banks- alive, which will come back to haunt economies -and central banks- when things start falling. The ultra low rates have driven individuals and institutions into ‘investments’ for which there has been no price discovery for a decade or more. Homes, stocks, you name it. Everyone and their pet hamster overborrowed and overpaid thanks to Bernanke, Yellen and Draghi, and their ‘policies’.

QE for banks didn’t just not work as advertized, it has dug a mile deep hole in real economies. No economy can properly function unless most people can afford to spend money. It’s lifeblood. QE for banks is not, if anything it’s the opposite.

 

Another -joined at the hip- example of what’s really happening in -and to- America, long term and deep down, and which will not be a discussion topic in Jackson Hole, is the following from the Atlantic on marriage in America. And I can hear the disagreements coming already, but bear with me.

Both the above 78% paycheck to paycheck number and the Atlantic piece on marriage make me think back of Joe Bageant. Because that is the world he came from and returned to, and described in Deer Hunting with Jesus: Dispatches from America’s Class War. The Appalachians. I don’t believe for a moment that Joe, if he were still with us, would have been one bit surprised about Trump. And reading this stuff, neither should you.

This is not something that is new, or that can be easily turned around anymore. This is the proverbial oceanliner which requires a huge distance to change course. Victor Tan Chen’s piece is a worthwhile read; here are a few bits:

America, Home of the Transactional Marriage

Over the last several decades, the proportion of Americans who get married has greatly diminished—a development known as well to those who lament marriage’s decline as those who take issue with it as an institution. But a development that’s much newer is that the demographic now leading the shift away from tradition is Americans without college degrees—who just a few decades ago were much more likely to be married by the age of 30 than college graduates were.

Today, though, just over half of women in their early 40s with a high-school degree or less education are married, compared to three-quarters of women with a bachelor’s degree; in the 1970s, there was barely a difference. [..] Fewer than one in 10 mothers with a bachelor’s degree are unmarried at the time of their child’s birth, compared to six out of 10 mothers with a high-school degree.

The share of such births has risen dramatically in recent decades among less educated mothers, even as it has barely budged for those who finished college. (There are noticeable differences between races, but among those with less education, out-of-wedlock births have become much more common among white and nonwhite people alike.)

And then you make education so expensive it’s out of reach for a growing number of people… Insult and injury.

Plummeting rates of marriage and rising rates of out-of-wedlock births among the less educated have been linked to growing levels of income inequality. [..] Why are those with less education—the working class—entering into, and staying in, traditional family arrangements in smaller and smaller numbers? Some tend to stress that the cultural values of the less educated have changed, and there is some truth to that.

But what’s at the core of those changes is a larger shift: The disappearance of good jobs for people with less education has made it harder for them to start, and sustain, relationships. What’s more, the U.S.’s relatively meager safety net makes the cost of being unemployed even steeper than it is in other industrialized countries—which prompts many Americans to view the decision to stay married with a jobless partner in more transactional, economic terms.

And this isn’t only because of the financial ramifications of losing a job, but, in a country that puts such a premium on individual achievement, the emotional and psychological consequences as well. Even when it comes to private matters of love and lifestyle, the broader social structure—the state of the economy, the availability of good jobs, and so on—matters a great deal.

This is the erosion of social cohesion. And there is nothing there to fill that void.

Earlier this year, the economists David Autor, David Dorn, and Gordon Hanson analyzed labor markets during the 1990s and 2000s—a period when America’s manufacturing sector was losing jobs, as companies steadily moved production overseas or automated it with computers and robots. Because the manufacturing sector has historically paid high wages to people with little education, the disappearance of these sorts of jobs has been devastating to working-class families, especially the men among them, who still outnumber women on assembly lines.

Autor, Dorn, and Hanson found that in places where the number of factory jobs shrank, women were less likely to get married. They also tended to have fewer children, though the share of children born to unmarried parents, and living in poverty, grew. What was producing these trends, the researchers argue, was the rising number of men who could no longer provide in the ways they once did, making them less attractive as partners.

The perks of globalization. Opioids, anyone?

[..] In doing research for a book about workers’ experiences of being unemployed for long periods, I saw how people who once had good jobs became, over time, “unmarriageable.” I talked to many people without jobs, men in particular, who said that dating, much less marrying or moving in with someone, was no longer a viable option: Who would take a chance on them if they couldn’t provide anything?

It’s not only Joe Bageant. These are also the people Bruce Springsteen talked about when he was still the Boss.

[..] The theory that a lack of job opportunities makes marriageable men harder to find was first posed by the sociologist William Julius Wilson in regard to a specific population: poor, city-dwelling African Americans. [..] In later decades of the last century, rates of crime, joblessness, poverty, and single parenthood soared in cities across the country.

[..] In a 1987 book, Wilson put forward a compelling alternative explanation: Low-income black men were not marrying because they could no longer find good jobs. Manufacturers had fled cities, taking with them the jobs that workers with less in the way of education—disproportionately, in this case, African Americans—had relied on to support their families. The result was predictable. When work disappeared, people coped as best they could, but many families and communities frayed.

By now it’s all Springsteen, Darkness on the Edge of Town. That album is some 40 years old. That’s -at least- how long this has been going on. And why it’ll be so hard to correct.

Decades later, the same storyline is playing out across the country, in both white and nonwhite communities, the research of Autor, Dorn, and Hanson (as well as others) suggests. The factory jobs that retreated from American cities, moving to suburbs and then the even lower-cost South, have now left the country altogether or been automated away.

[..] “The kinds of jobs a man could hold for a career have diminished,” the sociologists wrote, “and more of the remaining jobs have a temporary ‘stopgap’ character—casual, short-term, and not part of a career strategy.” The result: As many men’s jobs have disappeared or worsened in quality, women see those men as a riskier investment.

This next bit is painful: life ain’t gonna get any better, so we might as well have kids.

At the same time, they are not necessarily postponing when they have kids. As the sociologists Kathryn Edin and Maria Kefalas have found in interviews with low-income mothers, many see having children as an essential part of life, and one that they aren’t willing to put off until they’re older, when the probability of complications in pregnancy can increase.

For mothers-to-be from more financially stable backgrounds, the calculation is different: They often wait longer to have children, since their career prospects and earnings are likely to improve during the period when they might otherwise have been raising a child. For less-educated women, such an improvement is much rarer.

Tan Chen follows up with a comparison of European and American safety nets, and suggests that “It’s not a matter of destiny, but policy”, but I don’t find that too relevant to why I found his piece so touching.

It describes a dying society. America is slowly dying, and not all that slowly for that matter. The Fed is comfortably holed up in Jackson Hole after having handed out trillions to bankers and lured millions of Americans into buying -or increasingly renting- properties that have become grossly overpriced due to its ZIRP policies, and congratulating itself on achieving “full employment”.

Why that ever became part of its mandate, g-d knows. I know, ML King et al. But. Thing is, when full employment means 78% of people have such a hard time making ends meet that they can’t afford to keep each other in a job by spending their money in stores etc., you’re effectively looking at a dying economy. Maybe we should not call it ‘full’, but ’empty employment’ instead.

Yeah, I know, trickle down. But instead of wealth miraculously trickling down, it’s debt that miraculously trickles up. How many Americans have mortgages or rents to pay every month that gobble up 40-50% or more from their incomes? That’d be a useful stat. Model that, Janet!

The article on marriage makes clear that by now this is no longer about money. The 40+ year crisis has ‘transcended’ all that. If and when money becomes too scarce, it starts to erode quality of life, first in individuals and then also in societies. It erodes the fabric of society. And you don’t simply replace that once it’s gone, not even if there were a real economic recovery.

But there will be no such recovery. As bad as things are for Americans today, they will get a whole lot worse. That is an inevitable consequence of the market distortion that QE has wrought: a gigantic financial crisis is coming. And the crowd gathered at Jackson Hole will be calling the shots once more, and bail out banks, not people. What’s that definition of insanity again?

 

 

Aug 272017
 
 August 27, 2017  Posted by at 9:00 am Finance Tagged with: , , , , , , , , , ,  5 Responses »
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Elliott Erwitt Downtown Hat Shop Window, Pittsburgh 1950

 

Phillips Curve Doesn’t Help Forecast Inflation, Fed Study Finds (BBG)
Where Do Consumers Spend The Most Money? (Mish)
Should California Spend $3 Billion To Help People Buy Electric Cars? (LAT)
Tesla: A Canary in the Wall Street Coal Mine (Barron’s)
UK Labour Party Makes Dramatic Shift On Brexit And Single Market (G.)
Controlled Demolition (Jim Kunstler)
The War That Time Forgot (CP)
It’s Time To Accept Carbon Capture Has Failed (Conv.)
Industrial Farming Is Driving The Sixth Mass Extinction Of Life On Earth (Ind.)

 

 

The incompetence is deafening. Trillions have been washed away on the theory.

Phillips Curve Doesn’t Help Forecast Inflation, Fed Study Finds (BBG)

A fundamental relationship of mainstream economic theory at the heart of the Federal Reserve’s strategy for setting interest rates has been a poor guide for policy makers for at least three decades, according to a study by the Philadelphia Fed’s top-ranking economist. The paper, co-authored by Philadelphia Fed Director of Research Michael Dotsey, shows that forecasting models based on the so-called Phillips curve, which asserts a link between unemployment and inflation, don’t actually help predict inflation. “Our results indicate that monetary policymakers should at best be very cautious in their reliance on the Phillips curve when gauging inflationary pressures,” Dotsey and Philadelphia Fed economists Shigeru Fujita and Tom Stark wrote.

Their study is timely. Fed officials have been surprised by a deceleration in U.S. inflation over the past several months despite a continued decline in unemployment, the opposite of what the Phillips curve relationship would predict. Minutes of the last meeting of the central bank’s rate-setting Federal Open Market Committee in July revealed that “a few participants cited evidence suggesting that this framework was not particularly useful in forecasting inflation,” while “most participants thought that the framework remained valid.” If the majority view on the FOMC is that the Phillips curve framework is still valid, it implies that central bankers should continue raising interest rates with unemployment at a 16-year low, because they expect inflation will rise in the medium term even though prices pressures have been disappointingly soft.

Kansas City Fed President Esther George, who has been more forceful than many of her colleagues in recent years about the need to raise rates, lent support to that view on the sidelines of this week’s annual gathering of central bankers from around the world in Jackson Hole, Wyoming. “There may in fact be something wrong with the models, I don’t know, I think that continues to be a question that many economists are asking,” George said during a TV interview with Bloomberg’s Michael McKee that aired Thursday. Even so, she favors another rate increase this year.

Read more …

Cars + gasoline account for almost 30% of all spending. Crazy.

Where Do Consumers Spend The Most Money? (Mish)

In Dealers “Wildly Overweight” SUVs as Sales Slow, I commented “Vehicles account for 20% of retail spending. A crash or even a significant slowdown will impact retail sales and thus GDP.” A reader asked me how I calculated that. Let’s take a look. My number came from the latest Census Department Advance Retail Sales Report. Here are some charts I created from 7-month totals (January-July) 2017.

Key Points
• Motor vehicles and parts account for 21.18% of retail sales. Gasoline stations account for 7.94%. Together that adds up to 29.12%.
• Food and beverage stores (grocery and liquor stores) account for 12.62 percent of retail sales. Food services and drinking places (restaurants and bars) account for 12.14. The food and drink total is 24.76%.
• Nonstore retailers (think Amazon) account 10.39% of retail sales.

Read more …

Yeah, let’s subsidize the car culture.

Should California Spend $3 Billion To Help People Buy Electric Cars? (LAT)

Over seven years, the state of California has spent $449 million on consumer rebates to boost sales of zero-emission vehicles. So far, the subsidies haven’t moved the needle much. In 2016, of the just over 2 million cars sold in the state, only 75,000 were pure-electric and plug-in hybrid cars. To date, out of 26 million cars and light trucks registered in California, just 315,000 are electric or plug-in hybrids. The California Legislature is pushing forward a bill that would double down on the rebate program. Sextuple down, in fact. If $449 million can’t do it, the thinking goes, maybe $3 billion will. That’s the essence of the plan that could lift state rebates from $2,500 to $10,000 or more for a compact electric car, making, for example, a Chevrolet Bolt EV electric car cost the same as a gasoline-driven Honda Civic.

Already approved by several Senate and Assembly committees, the bill will go to Gov. Jerry Brown for his approval or veto if the full Legislature approves it by the end of its current session on Sept. 15. California aims to reduce greenhouse gas emissions by 2030 to a level 40% below what they were in 1990. “If we want to hit our goals, we’re going to have to do something about transportation,” said Assemblyman Phil Ting (D-San Francisco), sponsor of Assembly Bill 1184. Without a dramatic boost in subsidies, Ting said, the state risks falling short of Gov. Brown’s goal of 1.5 million zero-emission vehicles on California highways by 2025, and the California Air Resources Board’s goal of 4 million such cars by 2030. The bill is opposed by Republicans averse to taxpayer subsidies and even the Legislature’s own analysts have called it “duplicative,” “unclear” and “problematic.”

Read more …

“Once again, history and reality are replaced by dreams with little substance.”

Tesla: A Canary in the Wall Street Coal Mine (Barron’s)

Those who think today’s stock market is unlike that of 2000, when baseless enthusiasm pushed stocks up to wild valuations, only to collapse in subsequent years, should take another look. Do they remember counting eyeballs as a basis for value? Once again, history and reality are replaced by dreams with little substance. Tesla, in which I have a short position, is becoming the loudest canary in Wall Street’s coal mine. Tesla requires repetitive capital raises to fund persistent operating losses. This requires bullish analysts and holders to keep the stock aloft with projections of imagined earnings from future products, while they overlook existing businesses, which continue to lose vast sums of money. Morgan Stanley, one of Tesla’s major underwriters, has an analyst covering Tesla named Adam Jonas. Astonishingly, he raised his price target for the stock, despite recognizing the need to slash his earnings forecast.

In May, Jonas had estimated per-share losses (excluding stock-option expense) of $3.53 in 2017 and $1.14 in 2018, and a profit of $2.43 in 2019. His latest estimates: losses of $7.60 and $3.66, and a 2019 profit of $2.01. Raising the target price while more than doubling the company’s projected loss indicates the craziness of the times. Price targets are fantasies, discounting distant earnings estimates by analysts who show little accuracy in estimating only a year ahead. For most companies, profit is the major objective. Tesla is different because its founder is different. Elon Musk is driven by a mission to replace fossil fuels with renewable energy. Unlike companies seeking profit maximization by using patents to establish exclusive rights to products, Musk encourages competitors and has made virtually all of his patents available. Almost all auto companies have imminent plans to compete.

Tesla has been first-to-market in electric cars, but this in no way guarantees success, as competition and technological change are major challenges. Remember Atari, Blackberry, AOL, Napster, Netscape, and Palm? Musk is smart and imaginative, but none of his major companies are profitable. Tesla has been around for 14 years and has cumulatively lost more than $3.7 billion, despite the massive subsidies that it and its customers have received. SolarCity, also a beneficiary of alternative-energy subsidies, lost hundreds of millions of dollars before being bailed out by Tesla. As subsidies diminish, and competition emerges, profits will be even more elusive. Tesla tries to convey the illusion of inexhaustible demand for its cars, yet sales of the Model S and Model X have been flat for four quarters. Tesla’s rising inventory and shrinking deposits suggest declining demand.

Tesla claims to have more than 400,000 deposits for the Model 3, but these aren’t orders. They reflect a decision by potential buyers to get in line for a $7,500 tax credit at virtually no cost. Shifting $1,000 from a savings account into a refundable Tesla deposit costs only about $1 per year in lost interest. Fewer than 100,000 of these depositors will actually get full tax credits before Tesla consumes its allowable allotment of them. Its competitors will be able to offer such credits to prospective buyers, just as Tesla’s expire.

Read more …

Jockeying for votes?

UK Labour Party Makes Dramatic Shift On Brexit And Single Market (G.)

Labour is to announce a dramatic policy shift by backing continued membership of the EU single market beyond March 2019, when Britain leaves the EU, establishing a clear dividing line with the Tories on Brexit for the first time. In a move that positions it decisively as the party of “soft Brexit”, Labour will support full participation in the single market and customs union during a lengthy “transitional period” that it believes could last between two and four years after the day of departure, it is to announce on Sunday. This will mean that under a Labour government the UK would continue to abide by the EU’s free movement rules, accept the jurisdiction of the European court of justice on trade and economic issues, and pay into the EU budget for a period of years after Brexit, in the hope of lessening the shock of leaving to the UK economy.

In a further move that will delight many pro-EU Labour backers, Jeremy Corbyn’s party will also leave open the option of the UK remaining a member of the customs union and single market for good, beyond the end of the transitional period. Permanent long-term membership would only be considered if a Labour government could by then have persuaded the rest of the EU to agree to a special deal on immigration and changes to freedom of movement rules. The announcement, revealed in the Observer by the shadow Brexit secretary, Keir Starmer, means voters will have a clear choice between the two main parties on the UK’s future relations with the EU after a year in which Labour’s approach has been criticised for lacking definition and appeared at times hard to distinguish from that of the Tories.

The decision to stay inside the single market and abide by all EU rules during the transitional period, and possibly beyond, was agreed after a week of intense discussion at the top of the party. It was signed off by the leadership and key members of the shadow cabinet on Thursday, according to Starmer’s office.

Read more …

“..to reassure the masses that effective spells for favor of the Gods have been cast — except that in our civilization money is God.”

Controlled Demolition (Jim Kunstler)

This is the week-of-weeks when the official grand viziers of finance gather at Jackson Hole, Wyoming, to confab and interpret the lay of animal neck-bones and other auguries scattered in the sand, with the hope of steering the awesome powers of the universe this was or that as they affect the operations of money. The exercise is hardly different in function from the sort of rude ceremonials that took place on top of Sumerian ziggurats and Aztec temples — to reassure the masses that effective spells for favor of the Gods have been cast — except that in our civilization money is God. Or “money,” we should say, because the old definitions don’t fit so well anymore. It used to have a straightforward relationship with the work required to produce actual things of value, but those days are gone.

“Money” nowadays is a byproduct of wishful analytics and computer legerdemain seasoned with generous measures of fraud and larceny. This is a big problem when everything is measured in money and it becomes quite impossible to state with assurance what the value of money actually is. Obviously, you end up not knowing the value of anything. That’s the perilous situation the world faces. And since the USA is the straw the stirs the world’s drink — at least for now — the utterances emanating from Jackson Hole may determine which way that situation turns. We should suppose that the officers of the Federal Reserve are upright, well-intentioned, patriotic people. No doubt they think they are. But the perilous situation is largely one of their own making, and seems to be veering out of their control, and reputations are at stake.

Their task at this year’s Jackson Hole confab is to maintain the appearance of confidence in their own rituals. But with a kicker. That kicker is named T-r-u-m-p. This modern Balaam, riding the ass of the Deep State into wickedness, must be stopped, perhaps at all costs. On his way to the oval office last fall, Trump prophesied that the stock markets represented “one big, fat, ugly bubble.” That was an offense to the grand viziers, for whom the elevated stock market valuations stood as the main testament to their power and wisdom. In fact, it was the only testament, and a rather flimsy one. More recently, though, the wicked Trump changed his tune and declared that the tower of stock market exaltation was his own doing, setting himself up for the revenge of the grand viziers.

Since nothing else has worked so far to dislodge Trump from the White House, a tumbling tower of stocks might seal his fate. The tower has to fall anyway, lest the moiling masses of flyover America think about besetting Wall Street with pitchforks and torches. A controlled demolition might be just the thing to appease these suffering holders of three part-time jobs (if they are so lucky) who have stood by in wonder and nausea while a tiny fraction of the elite gather unto themselves all the dwindling riches of the realm — at least in paper securities denominated in US dollars — while the wicked Trump will be left to the jackals of the Deep State, to be torn apart with the 25th Amenedment.

Read more …

Elizabeth War(ren).

The War That Time Forgot (CP)

If it’s Independence Day, then you can count on John McCain to be bunkered down in a remote outpost of the Empire growling for the Pentagon to unleash airstrikes on some unruly nation, tribe or gang. This July the Fourth found McCain making a return engagement to Kabul, an arrival that must have prompted many Afghans to scramble for the nearest air raid shelter. From the press room at NATO command, McCain announced that “none of us could say we are on a course to success here in Afghanistan.” The senator should have paused for a reflective moment and then called for an end to the war. Instead, McCain demanded that Trump send more US troops, more bombers and more drones to terrorize a population that has been riven by near constant war since the late 1970s.

McCain’s martial drool is now as familiar as the opening notes to the “Law & Order” theme song. What may surprise some, however, is the composition of the delegation that signed up to travel on his frequent flier program, notably the presence of two Democratic Senators with soaring profiles: Sheldon Whitehouse and Elizabeth Warren. Whitehouse, the former prosecutor (aren’t they all?) from Rhode Island, has lately taken a star turn in the role of chief inquisitor of suspected Russian witches in the Senate intelligence committee hearings. Perhaps he finally located one selling AK-47s to the Taliban to replace the guns they’d gotten from the CIA. (We now know that it’s the Saudis–not the Russians–who have been covertly funneling money to the Taliban, though don’t expect the Trump to impose any sanctions on the Kingdom of the Head-choppers.)

For her part, Warren largely echoed McCain’s bellicose banter that Trump needs to double down militarily to finish off the Taliban, the impossible dream. No real surprise here. To the extent that she’s advanced any foreign policy positions during her stint in the senate, Warren has been a dutiful supplicant to the demands of AIPAC and the Council on Foreign Relations, rarely diverging from the neocon playbook for the global war on Islam. Warren’s Afghan junket is a sure sign of her swelling presidential ambitions. These days “national security” experience is measured almost exclusively by how much blood you are willing to spill in countries you know almost nothing about. It didn’t take long for Warren to matriculate to the company position.

[..] Nothing better illustrates the eclipse of US global power than the fact that Afghanistan refuses to be subjugated or even managed, despite 16 years of hard-core carnage. Since the first US airstrikes hit Kandahar in October 2001, more than 150,000 Afghan civilians have been killed. Still Afghanistan resists imperial dictates. Even after Obama’s shameful troop surge in 2010, an escalation that went almost unopposed by the US antiwar movement, the Taliban now retains almost as much control of the country as it did in 2001. And for that Afghanistan must be punished. Eternally, it seems.

Read more …

There’s always a new theory. Don’t let’s stop using as much of the stuff as we can.

It’s Time To Accept Carbon Capture Has Failed (Conv.)

For years, optimists have talked up carbon capture and storage (CCS) as an essential part of taking emissions out of electricity generation. Yes, build wind and solar farms, they have said, but they can t be relied on to produce enough power all the time. So we ll still need our fleet of fossil-fuel-burning power stations; we just need to stop them pumping carbon dioxide (CO2) into the atmosphere. Most of their emphasis has been on post-combustion capture. This involves removing CO2 from power station flue gases by absorbing them into an aqueous solution containing chemicals known as amines. You then extract the CO2 , compress it into a liquid and pump it into a storage facility the vision in the UK being to use depleted offshore oil and gas fields. One of the big attractions with such a system is it could be retrofitted to existing power stations.

But ten years after the UK government first announced a £1 billion competition to design CCS, we re not much further forward. The reason is summed up by the geologist Lord Oxburgh in his contribution to the government-commissioned report on CCS published last year: “There is no serious commercial incentive and it will stay that way unless the state demonstrates there is a business there.” The problem is that the process is costly and energy intensive. For a gas-fired power station, you typically have to burn 16% more gas to provide the capture power. Not only this, you end up with a 16% increase in emissions of other serious air pollutants like sulphur dioxide, nitrogen oxides and particulate matter. Concerns have also been expressed about the potential health effects of the amine solvent used in the carbon capture.

You then have to contend with the extra emissions from processing and transporting 16% more gas. And all this before you factor in the pipeline costs of the CO2 storage and the uncertainties around whether it might escape once you ve got it in the ground. Around the world, the only places CCS looks viable are where there are heavy state subsidies or substantial additional revenue streams, such as from enhanced oil recovery from oilfields where the COC is being pumped in. Well, say the carbon capture advocates, maybe another technology is the answer. They point to oxy-combustion, a system which is close to reaching fruition at a plant in Texas.

First proposed many years ago by British engineer Rodney Allam, this involves separating oxygen from air, burning the oxygen with the fossil fuel, and using the combustion products -water and CO2- to drive a high-pressure turbine and produce electricity. The hot CO2 is pressurised and recycled back into the burners, which improves thermal efficiency. It has the additional advantage that CO12 is also available at pressures suitable for pipeline transportation.

Read more …

Small is beautiful.

Industrial Farming Is Driving The Sixth Mass Extinction Of Life On Earth (Ind.)

Industrial agriculture is bringing about the mass extinction of life on Earth, according to a leading academic. Professor Raj Patel said mass deforestation to clear the ground for single crops like palm oil and soy, the creation of vast dead zones in the sea by fertiliser and other chemicals, and the pillaging of fishing grounds to make feed for livestock show giant corporations can not be trusted to produce food for the world. The author of bestselling book The Value of Nothing: How to Reshape Market Society and Redefine Democracy will be one of the keynote speakers at the Extinction and Livestock Conference in London in October. Organised by campaign groups Compassion in World Farming and WWF, it is being held amid rising concern that the rapid rate of species loss could ultimately result in the sixth mass extinction of life.

This is just one reason why geologists are considering declaring a new epoch of the Earth, called the Anthropocene, as the fossils of soon-to-be extinct animals will form a line in the rocks of the future. The last mass extinction, which finished off the dinosaurs and more than three-quarters of all life about 65 million years ago, was caused by an asteroid strike that sent clouds of smoke all around the world, blocking out the sun for about 18 months. Prof Patel, of the University of Texas at Austin, said: “The footprint of global agriculture is vast. Industrial agriculture is absolutely responsible for driving deforestation, absolutely responsible for pushing industrial monoculture, and that means it is responsible for species loss. “We’re losing species we have never heard of, those we’ve yet to put a name to and industrial agriculture is very much at the spear-tip of that.”

Speaking to The Independent, he pointed to a “dead zone” – an area of water where there is too little oxygen for most marine life – in the Gulf of Mexico that has grown to the same size as Wales because of vast amounts of fertiliser that has washed from farms in mainland US, into the Mississippi River and then into the ocean. “That dead zone isn’t an accident. It’s a requirement of industrial agriculture to get rid of the sh*t and the run-off elsewhere because you cannot make industrial agriculture workable unless you kick the costs somewhere else,” he said. “The story of industrial agriculture is all about externalising costs and exploiting nature.” “Extinction is about the elimination of diversity. What happens in Brazil and other places is you get green deserts — monocultures of soy and nothing else. “Various kinds of chemistry is deployed to make sure it is only soy that’s grown on these mega-farms. “That’s what extinction looks like. If you ever go to a soy plantation, animal life is incredibly rare. It’s only soy, there’s nothing there for anything to feed on.”

Read more …

Aug 242017
 
 August 24, 2017  Posted by at 9:11 am Finance Tagged with: , , , , , , , , , ,  7 Responses »
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Egon Schiele Meadow, Church and Houses 1912

 

Wall Street Banks Warn Downturn Is Coming (BBG)
Big US Banks Could See Profit Jump 20% With Deregulation (BBG)
ECB Chief Draghi: QE Has Made Economies More Resilient (BBC)
Yellen’s Coming Speech Could Mark The ‘End Of An Era’ (BI)
Here’s Why New Home Sales Tanked (CNBC)
Autos Put Economic Downside Risks on Full Display (DDMB)
Merkel Aide Says Germany Has ‘Vital Interest’ in Diesel Survival (BBG)
China’s ‘Belt And Road’ Could Be Next Risk To Global Financial System (CNBC)
Being Here (Brodsky)
All The Countries The USA Has Invaded, In One Map (Indy)
America, Home of the Transactional Marriage (Atlantic)

 

 

More cycles.

Wall Street Banks Warn Downturn Is Coming (BBG)

HSBC, Citigroup and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop. “Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday. His bank’s model shows assets across the world are the least correlated in almost a decade, even after U.S. stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.

Just like they did in the run-up to the 2007 crisis, investors are pricing assets based on the risks specific to an individual security and industry, and shrugging off broader drivers, such as the latest release of manufacturing data, the model shows. As traders look for excuses to stay bullish, traditional relationships within and between asset classes tend to break down. “These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07,” Sheets wrote. He recommends boosting allocations to U.S. stocks while reducing holdings of corporate debt, where consumer consumption and energy is more heavily represented. That dynamic is also helping to keep volatility in stocks, bonds and currencies at bay, feeding risk appetite globally, according to Morgan Stanley. Despite the turbulent past two weeks, the CBOE Volatility Index remains on track to post a third year of declines.

Oxford Economics macro strategist Gaurav Saroliya points to another red flag for U.S. equity bulls. The gross value-added of non-financial companies after inflation – a measure of the value of goods after adjusting for the costs of production – is now negative on a year-on-year basis. “The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters,” he said in an interview. “That, along with the most expensive equity valuations among major markets, should worry investors in U.S. stocks.” The thinking goes that a classic late-cycle expansion – an economy with full employment and slowing momentum – tends to see a decline in corporate profit margins. The U.S. is in the mature stage of the cycle – 80% of completion since the last trough – based on margin patterns going back to the 1950s, according to Societe Generale.

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They warn about a downturn, but not for themselves. Their asses are covered.

Big US Banks Could See Profit Jump 20% With Deregulation (BBG)

The deregulation winds blowing through Washington could add $27 billion of gross profit at the six largest U.S. banks, lifting their annual pretax income by about 20%. JPMorgan Chase and Morgan Stanley would benefit most from changes to post-crisis banking rules proposed by Donald Trump’s administration, with pretax profit jumping 22%, according to estimates by Bloomberg based on discussions with analysts and the banks’ own disclosures. Goldman Sachs would have the smallest percentage increase, about 16%. Bloomberg’s calculations are based largely on adjustments banks could make to the mix of securities they hold and the interest they earn from such assets. The proposed changes would allow the largest lenders to take on more deposits, move a greater portion of their excess cash into higher-yielding Treasuries and municipal bonds, and issue a lower amount of debt that costs more than customer deposits.

Of the changes proposed in June by Treasury Secretary Steven Mnuchin, the one that would probably have biggest impact on profit is allowing banks to buy U.S. government bonds entirely with borrowed money. Three others could also boost income: counting municipal bonds as liquid, or easy-to-sell, assets; requiring less debt that won’t have to be paid back if a bank fails; and making it easier to comply with post-crisis rules. Regulators appointed by Trump could make these changes without congressional approval. Doing so would reverse their agencies’ efforts since 2008 to strengthen capital and liquidity requirements for U.S. banks beyond international standards. While bringing U.S. rules in line with global ones probably wouldn’t threaten bank safety, some analysts and investors worry the pendulum could swing even further.

“Since the crisis, we’ve had the luxury of excess capital buildup in the banking system and regulators reining in risky activities,” said William Hines at Standard Life Aberdeen. “If there’s too much pullback on minimum capital requirements, too much relaxation of restraints, we’re concerned there’ll be more risk-taking by banks, and the system will become vulnerable.”

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Blowing bubbles everywhere and claiming they bring strength. It’s Orwell.

ECB Chief Draghi: QE Has Made Economies More Resilient (BBC)

European Central Bank President Mario Draghi has said unconventional policies like quantitative easing (QE) have been a success both sides of the Atlantic. QE was introduced as an emergency measure during the financial crisis to pump money directly into the financial system and keep banks lending. A decade later, the stimulus policies are still in place, but he said they have “made the world more resilient”. But he also said gaps in understanding these relatively new tools remain. As the economic recovery in the eurozone gathers pace, investors are watching closely for when the ECB will ease back further on its €60bn a month bond-buying programme. Central bankers, including Mr Draghi, are meeting in Jackson Hole, Wyoming, later this week, where they are expected to discuss how to wind back QE without hurting the economy.

On Monday, a former UK Treasury official likened the stimulus to “heroin” because it has been so difficult to wean the UK, US and eurozone economies off it. In a speech in Lindau, Germany on Wednesday, Mr Draghi defended QE and the ECB’s policy of forward guidance on interest rates. “A large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the United States,” he said. The ECB buying relatively safe assets such as government bonds means that banks can lend more and improve access to credit for riskier borrowers, Mr Draghi said. He added: “Policy actions undertaken in the last 10 years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.”

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End the Fed.

Yellen’s Coming Speech Could Mark The ‘End Of An Era’ (BI)

Janet Yellen could be on her way out as chair of the Federal Reserve. On Friday, she’s set to deliver a speech on financial stability at the Fed’s annual economic symposium in Jackson Hole, Wyoming. It could be her last, following months of speculation that President Donald Trump plans to nominate a different candidate when her four-year term ends in February. And Yellen’s successor could have a very different approach to the job. Yellen’s Jackson Hole showing could be the last one, for now, under a Fed chair who takes a technocratic approach to monetary policy, according to Luke Bartholomew, an investment strategist at Aberdeen Standard Investments. “There could be an end-of-an-era feel to Jackson Hole this year,” Bartholomew told Business Insider.

The Fed chair could be replaced by someone who’s “probably not the sort of academic economist that’s been leading it through the Bernanke/Yellen period,” he said, adding that there’s “a broader feeling that under the Trump administration, the technocratic approach of the Fed is increasingly out of favor.” Yellen, 71, was a career economist and academic before President Barack Obama nominated her to replace Ben Bernanke in 2014. Trump told The Wall Street Journal last month that Gary Cohn, Yellen, and “two or three” other candidates were in the running for the job. One of those other people could be Kevin Warsh, a former Fed governor who is now a fellow at the Hoover Institution. But Cohn, the National Economic Council director and Trump’s top economic adviser, is reportedly the top contender. He’s the “archetype of Wall Street, given his job at Goldman in the past,” Bartholomew said. “He certainly brings financial acumen to the job. I’m not sure that’s what the job of Fed chairman is, but he’s a fine candidate.”

Walsh brings some years of Fed experience to the table. But he has worked for seven years in investment banking, at Morgan Stanley, and isn’t an academic policymaker like Yellen or Bernanke. That’s not the only red flag Yellen’s exit would raise. On one extreme, Yale School of Management’s Jeffrey Sonnenfeld thinks markets would crash if Cohn were to leave the White House for the Fed. Stocks dipped last week as rumors spread that he was leaving the administration following Trump’s response to the white-nationalist rally in Charlottesville, Virginia. “I don’t want to be an alarmist, but there is a lot of faith that he is going to help carry through the tax reform that people are looking for,” Sonnenfeld told CNBC last week.

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“Long term, the new home median price has been mostly 10% to 20% above the existing home median since 1990. Since 2011, however, new home prices have been at a 35% to 40% premium over resale prices..”

Here’s Why New Home Sales Tanked (CNBC)

Newly built homes are more expensive than they’ve ever been before. They are also more expensive when compared to similar existing homes than they’ve ever been before. And that is why sales are suffering, dropping an unexpected 9.4% in July compared to June, according to the U.S. Census. They are simply out of reach for too many potential buyers. You don’t have to do a lot of math to see it. The median sale price of a newly built home in July jumped more than 6% compared to July 2016, to $313,700. That marks the highest July price ever. Last December, the median price hit the highest of any month on record. In addition, the price premium for newly built homes compared to comparable existing homes has more than doubled since 2011, according to John Burns Real Estate Consulting.

“Long term, the new home median price has been mostly 10% to 20% above the existing home median since 1990. Since 2011, however, new home prices have been at a 35% to 40% premium over resale prices,” John Burns wrote in a recent note to clients. “While the exact percentages aren’t perfect due to ‘apples and oranges’ comparisons, our consultants have been confirming for years that new home sales have been slowed by larger than usual new home premiums.” The supply of existing homes for sale is still extremely low, but the supply of newly built homes moved higher in July to 5.8 months of inventory. “The scars of the housing bust are still fresh in the minds of many homebuilders, so it is not surprising that many are taking a cautious approach to ramping up production,” noted Aaron Terrazas, a senior economist at Zillow, in reaction to the July report.

Homebuilders are feeling slightly better about their business lately, but they continue to complain about the costs of land, labor, materials and regulation. They claim that is why they cannot build cheaper homes. Unfortunately, the lower end of the market is where most of the demand is and where supply is weakest. “There is still no pickup in sales for homes priced below $300,000, and this is where most of the first time households would be shopping in,” wrote Peter Boockvar, chief market analyst at The Lindsey Group in a note following the Census release on new home sales. “I repeat that the housing industry needs a moderation in home price gains in order to better compete with renting where rents increases are now moderating.”

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Auto loans are a huge part of money creation.

Autos Put Economic Downside Risks on Full Display (DDMB)

Federal Reserve data released last week on July industrial production offered little more than more of the same. Despite post-election optimism for a rebound in activity on the nation’s factory floors, the data reveal a continued throttling down in the growth rate to just over 2% compared with this time last year. The main drag on activity – the auto sector – should come as no surprise to investors. Rather than rising by 0.2% over June as projected, manufacturing production contracted by 0.1%, marking the third decline in five months. Motor vehicles and parts production fell by 3.6% on the month, taking the year-over-year slide to 5%. Evidence continues to build that a sampling error may be to blame for the surprising strength in June and July car sales.

Inventory continues to pile up, suggesting more production cuts are in the offing: As of June, the latest data on hand, auto inventories were up 7.4% over last year, leaving manufacturers choking for air. In July, General Motors alone was sitting on 104 days of supply, well above its target of 70 days. Industry-wide, the July/August average of 69 days ties the August 2008 record and sits above the historic average of 56 days of supply. In all, automakers have 3.9 million units of unsold light vehicles, up 324,600 from last August and the highest on record for the month. For context, July and August tie for the leanest stock levels of the year. The decline in July sales was already the steepest this year. Fresh loan delinquency data suggest more pain ahead.

“Deep subprime” borrowers have been a big boost at the margin, propelling back-to-back record years of sales in 2015 and 2016 as lending standards loosened sufficiently to allow millions with credit scores below 530 to access financing. Equifax, the consumer credit reporting firm, didn’t hold back in its second-quarter update, saying the performance of recent vintages of deep subprime loans was “awful.” While industry insiders are quick to point out that the overall pace of defaults across all borrowers remains in check, up just marginally over last year, there is growing concern that deep subprime delinquencies are back at 2007 levels. “The bottom line is excess auto inventories are clearly evident and the auto sector is now in recession,” said The Lindsey Group’s Peter Boockvar.

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We’re about to winess the political power of German carmakers. How many execs are being prosecuted? Right.

Merkel Aide Says Germany Has ‘Vital Interest’ in Diesel Survival (BBG)

Chancellor Angela Merkel’s chief of staff said Germany has a “vital interest” in ensuring diesel engines survive, defending the embattled technology as the industry comes under fire for cheating on emissions tests. Excessive pollution from diesel, as well as traditionally close ties between the government and auto industry, have emerged as a campaign issue in the run up to the country’s federal election in September. Merkel has been confronted by voters on the campaign trail, who accused the government of being too lenient on automakers, prompting the chancellor to question high bonuses for auto executives embroiled in Volkswagen’s cheating scandal. “We have a vital interest in preserving diesel as a technology because it emits far less CO2 than other technologies,” Peter Altmaier, Merkel’s chief of staff, said in a Bloomberg TV interview in Berlin.

“At the same time we have to make sure that all the rules are respected and all the regulations are fully implemented.” Car bosses and government officials reached a compromise deal earlier this month to lower pollution that calls for software updates on million of vehicles instead of more costly hardware fixes. Volkswagen, Daimler and BMW also agreed to a trade-in bonus for cars with outdated emissions controls. The measures have been criticized as a slap on the wrist for Germany’s biggest industry. “We have the responsibility to fight for a good deal but also to preserve the strength and the performance of the automobile industry,” Altmaier said in the interview late on Tuesday. “I’m very optimistic that we will overcome this.”Diesel software updates alone are “insufficient” for many cities to meet the legal limit for nitrogen oxides in the air, Environment Minister Barbara Hendricks told reporters on Wednesday, citing ministry tests conducted this month.

Excessive pollution impacts 70 German towns and cities, and the fixes agreed earlier this month would cut car emissions by a maximum of 6%, she said. Hendricks – a member of Merkel’s junior coalition partner, the Social Democrats – said her ministry and others will ascertain in the coming weeks whether hardware changes in diesels currently on the road are necessary to further lower emissions and will present their findings after the election. “Nobody wants to ban diesels from our cities,” she said. Merkel, who has so far largely steered clear of the debate, is hosting a meeting on Sept. 4 with representatives of the major cities, including the hometowns of BMW, Mercedes-Benz and Porsche, struggling to lower their pollution levels. A number of cities and courts continue to evaluate potential diesel driving bans as the most effective means to meet regulation quickly.

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China exports its Ponzi.

China’s ‘Belt And Road’ Could Be Next Risk To Global Financial System (CNBC)

China has pitched its mammoth, pan-Eurasian “Belt and Road” infrastructure initiative as a means of promoting economic prosperity and fostering diplomatic ties on a global scale. That rhetoric may win plaudits at a time when other global powers are voicing increasingly protectionist agendas, but it also comes with risks, and increasing levels of state-backed funding have raised concerns about just how safe of a gamble it is. Reports on Tuesday claimed that some of China’s biggest state-owned commercial banks will begin raising capital to fund investments into the initiative, also known as “One Belt, One Road,” which aims to connect more than 60 countries across Asia, Europe and Africa with physical and digital infrastructure. China Construction Bank, the country’s second-largest bank by assets, has been conducting roadshows to raise at least 100 billion yuan ($15 billion) from on- and offshore investors.

Bank of China, Industrial and Commercial Bank of China, and Agricultural Bank of China are also said to be raising tens of billions of dollars. The news highlights the risk that the state could amass hundreds of billions of dollars in nonperforming loans if the projects fail. For Xu Chenggang, professor of economics at Cheung Kong Graduate School of Business in Beijing, it was not a surprise. “It supports my concerns,” Xu told CNBC over the phone. “The impact could be damaging not just for China, but for the global financial system.” “These loans are being extended to governments in risky countries to fund risky infrastructure projects. If the projects were launched by private firms we wouldn’t have to worry because they would know they had to bear the consequences. But here we are talking about government-to-government lending and, ultimately, intergovernmental relations.”

[..] It took decades of economic reforms and loss-making firms before it succeeded in what Xu termed a process of “quiet privatization” at the turn of the 21st century. However, the process has lost momentum over the past 10 years, and the state remains burdened with issues of overcapacity and myriad “zombie firms,” especially within the metals and construction and materials sectors. Xu said that has partially been the motivation for the “Belt and Road” initiative: “Instead of solving the overcapacity problems, they are expanding the problem to projects overseas.” “They (China) are proposing lending money to foreign governments, who will then use the Chinese funds to pay the Chinese companies,” he explained.

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“.. one might say Mr. Trump represents a triumph of democracy..”

Being Here (Brodsky)

It should not surprise anyone that Western societies are becoming restless. Trump, Brexit, Charlottesville and, arguably, even radical Islamic terrorism are bi-products of global economic distortions largely created by the unwillingness of the Western political dimension to let the global factors of production naturally settle global prices and wages. (Sorry, it had to be said.) Donald Trump is a sideshow. His ascension, or someone like him, was inevitable. He may have official authority to behave like the leader of the free world (even if he is unable to do so), but so far he has only shown that virtually anyone can become president. Indeed, one might say Mr. Trump represents a triumph of democracy. Behold the robustness of America: the most powerful nation on Earth is unafraid to elect a cross between P.T. Barnum and Chauncey Gardner!

This is not to say a US president cannot raise and emphasize truly meaningful economic goals and mobilize countries around the world to help achieve them; but it is to say that this President seems to not know or be interested in what those goals might be. As discussed, the biggest challenges facing the US economy and US labor stem from a distorted global price and wage scale. Mr. Trump’s domestic fiscal, regulatory, tax and immigration goals seek only to raise US output and wages. This cannot be achieved without the participation of global commerce. There is no such thing anymore as a US business that makes US products sold only in the US without being influenced by global prices, wages and exchange rates. The romantic, patriotic “made in the USA” theme does not comport with the reality that the US also seeks to keep the dollar the world’s reserve currency and that maintaining America’s power requires the US to control the world’s shipping lanes.

Mr. Trump and his base cannot have one without the other. (Do we really have to articulate this?) Mr. Trump’s “Being There” presidency is reflecting an inconvenient truth back on a society that has, until maybe now, successfully deluded itself into believing government is functionally the glue holding society together. Though he does not mean to, Mr. Trump is single-handedly demonstrating to groups ranging from idealistic Washington elites to social media zombies to southern white supremacists that Madisonian government has become a dignified cover for the financial, commercial and national security interests that control it. We suspect those interests would rather the reach of their power be less visible.

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Two maps, actually. Click the link for fully interactive versions.

All The Countries The USA Has Invaded, In One Map (Indy)

From Montezuma to the shores of Tripoli, the US has had a military presence across the world, from almost day one of her independence. What constitutes invasion? As one map below shows, the US has a military presence in much of the world without being an occupying force (though some would dispute that definition). For instance, although the Confederacy considered the US to be a hostile invading power, indy100 are not counting the Civil War or any annexation within the continental United States as an ‘invasion’. Using data on US military interventions published by the Evergreen State College, in Olympia Washington, indy100 has created this map (below). The data was compiled by Dr Zoltan Grossman, a professor of Geography and Native Studies. The map documents a partial list of occasions, since 1890, that US forces were used in a territory outside the US.

Caveats: This includes: Deployment of the military to evacuate American citizens, Covert military actions by US intelligence, Providing military support to an internal opposition group, Providing military support in one side of a conflict (e.g. aiding Iraq during the Iran-Iraq War 1988-89), Use of the army in drug enforcement actions (e.g. Raids on the cocaine region in Bolvia in 1986 It does not include threats of nuclear weapons against a territory, such as during the Berlin Air Lift (1948-49). It also excludes any time US military personnel were deployed to a foreign country for an exclusively humanitarian purpose – e.g. sending troops to the Democratic Republic of the Congo to provide assistance to refugees fleeing the Rwandan genocide (1996-97).

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The demise of a society. Not because of marriages declining, but because of why they are.

America, Home of the Transactional Marriage (Atlantic)

Over the last several decades, the proportion of Americans who get married has greatly diminished—a development known as well to those who lament marriage’s decline as those who take issue with it as an institution. But a development that’s much newer is that the demographic now leading the shift away from tradition is Americans without college degrees—who just a few decades ago were much more likely to be married by the age of 30 than college graduates were. Today, though, just over half of women in their early 40s with a high-school degree or less education are married, compared to three-quarters of women with a bachelor’s degree; in the 1970s, there was barely a difference. The marriage gap for men has changed less over the years, but there the trend lines have flipped too: 25% of men with high-school degrees or less education have never married, compared to 23% of men with bachelor’s degrees and 14% of those with advanced degrees.

Meanwhile, divorce rates have continued to rise among the less educated, while staying more or less steady for college graduates in recent decades. The divide in the timing of childbirth is even starker. Fewer than one in 10 mothers with a bachelor’s degree are unmarried at the time of their child’s birth, compared to six out of 10 mothers with a high-school degree. The share of such births has risen dramatically in recent decades among less educated mothers, even as it has barely budged for those who finished college. (There are noticeable differences between races, but among those with less education, out-of-wedlock births have become much more common among white and nonwhite people alike.)

[..] Autor, Dorn, and Hanson found that in places where the number of factory jobs shrank, women were less likely to get married. They also tended to have fewer children, though the share of children born to unmarried parents, and living in poverty, grew. What was producing these trends, the researchers argue, was the rising number of men who could no longer provide in the ways they once did, making them less attractive as partners. Furthermore, many men in these communities became no longer available, sometimes winding up in the military or dying from alcohol or drug abuse. (It’s important to point out that this study and similar research on employment and marriage focus on opposite-sex marriages, and a different dynamic may be at work among same-sex couples, who tend to be more educated.)

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Aug 172017
 
 August 17, 2017  Posted by at 9:02 am Finance Tagged with: , , , , , , ,  2 Responses »
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Laura Gilpin The Rio Grande 1947

 

The ‘Wall Of Worry’ That Stocks Have Climbed To Rally 271% Since 2009 (MW)
Global Negative-Yielding Debt Surges To Highest Since October (ZH)
The Fed Is Asking Questions, Not Providing Answers (BBG)
Fed Starts to Wonder If Cornerstone Inflation Model Still Works (BBG)
Goldman Sachs Is Infiltrating The Fed In Ways Most People Haven’t Noticed (BI)
Chinese Takeovers Of US Companies Plummet This Year (CNBC)
The World’s Most Ridiculous Constitutional Crisis (BBG)
Hell Hath No Fury Like An Australian Retiree Scorned (BBG)
Americans Are Rapidly Descending Into Madness (Krieger)
A Primer On Bitcoin: The Ultimate Fiat Currency (Lebowitz)
Spain Rescues 600 Migrants, Refugees In Busiest Day as 120 Drown (BBC)

 

 

Stocks have been disconnected from reality. But that can’t last.

The ‘Wall Of Worry’ That Stocks Have Climbed To Rally 271% Since 2009 (MW)

This may be the most sedated stock-market rally of our times. Even as tensions heightened between the U.S. and North Korea and violence broke out on the streets of Charlottesville, Va., stocks took the alarming news in stride, continuing to scale the “wall of worry” in defiance of doomsday predictions of an imminent selloff. “It seems like every day the headlines outside of the market get more and more frightening,” said Michael Batnick, director of research at Ritholtz Wealth Management, who illustrated the resilience of the market in the chart below. As the graph shows, since stocks bottomed in March 2009, the S&P 500 index has soared 271% to multiple records, meandering higher through the European debt crisis, Brexit, and the U.S. presidential election.

Batnick had originally published the chart in March but updated it Wednesday given the recent developments. “This year has been the perfect reminder that political volatility does not necessarily translate into the stock market, with this being the quietest year since 1965,” he said. The S&P 500’s daily trading range averaged 0.32% in the first half of the year, the narrowest in over half a century, underscoring the gap between market volatility and the political upheaval that has marked Trump’s presidency so far, according to Batnick.

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We can all figure what could happen if you throw $20 trillion or so into non-functional markets. Can we figure what happens when they start to function again?

Global Negative-Yielding Debt Surges To Highest Since October (ZH)

The market value of bonds yielding less than zero percent has jumped by a quarter over the past month to $8.68 trillion, the highest since October… which is odd given the mainstream narrative that everything is awesome and global growth is heading for escape velocity?

“probably nothing”

As Bloomberg notes, slower-than-forecast inflation data and haven demand on geopolitical risk have revived bond bulls around the world. With global borrowing costs already so low, central banks should be prepared to cut interest rates deep into negative territory in the next economic downturn, warn economists including Harvard professor Kenneth Rogoff.

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Oh well, it’ summer after all.

The Fed Is Asking Questions, Not Providing Answers (BBG)

The Federal Reserve is either lucky or clever. By signaling that it won’t touch interest rates again until December, it’s bought itself time to have a longer – and much needed – conversation about inflation. Good. There are very legitimate doubts that traditional models explain what’s happening or, rather, what’s not happening. Minutes of the Federal Open Market Committee’s July meeting show a growing debate about inflation and why it’s retreating, instead of advancing, in the face of 4.3% unemployment. The central bank is puzzled that prices have been soft for several months. In the absence of any real inflation pressure, the Fed might be reasonably expected to take a break from raising rates while it got a handle on what’s happening. By acting in March and June and hinting that September will be about balance sheet reduction, the Fed gave itself some wiggle room.

Policy makers basically have until December to either see inflation head back toward their 2% target or figure out how to respond if it doesn’t behave. There’s a meeting scheduled for late October, but the Fed’s historical aversion to moving in the absence of new forecasts and a press conference effectively rules out a surprise then. Delaying until December gives officials at least four more months of inflation data. Most still see it returning to its target, in keeping with traditional economic models. And to be fair, as I have written, this isn’t exclusively an American phenomenon. Inflation is weak in Europe and Japan despite a pronounced pickup in growth. (It’s above target in the U.K.; Brexit complicates that particular picture.) But the U.S. is still the world’s largest economy, and the Fed is still the world’s de facto central bank.

The country’s financial markets dwarf others despite frequent predictions of decline. How this inflation mystery ends will matter greatly. What if the book doesn’t have an end? The minutes show some self-doubt starting to creep in alongside the confidence of the majority: Most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee’s 2% objective over the medium term. Many participants, however, saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. The account of the July conclave even suggested some heretical questioning of the link between very low unemployment and wages and inflation. The majority are still wedded to the traditional models.

Until we start to see a convincing swing back to the Fed’s target of 2%, we will probably see more of this public questioning of assumptions. Something less contentious was skepticism about the prospects for large-scale fiscal stimulus, the domain of Congress and the White House. A few participants at the Fed meeting doubted it would happen and, if it did, they suspected the boost would be less than might have once been anticipated. That observation went unchallenged. Stay tuned for the last day of August. That’s when the Commerce Department publishes closely watched inflation figures. Enjoy the debate.

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Over 1000 utterly useless PhD economists work for the Fed. The world doesn’t behave like my models do!

Fed Starts to Wonder If Cornerstone Inflation Model Still Works (BBG)

Federal Reserve officials are looking under the hood of their most basic inflation models and starting to ask if something is wrong. Minutes from the July 25-26 Federal Open Market Committee meeting showed a revealing debate over why the economy isn’t producing more inflation in a time of easy financial conditions, tight labor markets and solid economic growth. The central bank has missed its 2% price goal for most of the past five years. Still, a majority of FOMC participants favor further rate increases. The July minutes showed an intensifying debate over whether that is the right policy response. “These minutes to me were troubling,” said Ward McCarthy, chief financial economist at Jefferies in New York. “They don’t have their confidence in their policy decisions; and they don’t have confidence that they can provide the right kind of guidance.”

The FOMC tried hard to avoid that kind of message. In several passages, the minutes asserted that “most” officials were sticking with a forecast that higher inflation would eventually show up. However, the debate over resource slack models and whether standard data sources were telling them the whole story also showed convictions about their forecast are fraying. Price indexes have shown unusual inertia even as the U.S. unemployment rate has fallen, matching a 16-year low of 4.3% in July. The U.S. consumer price index rose 1.7% for the 12 months ending July, while the Fed’s preferred measure, which is tied to consumption, rose 1.4% in June. Another gauge calculated by the Dallas Fed, which trims index outliers to highlight the underlying price trend, rose 1.7% for the 12 months ending June.

That was the same as May, which was down from 1.74% in April. The minutes said “a few” officials described resource slack models as “not particularly useful” while “most” thought the framework was valid. The committee also pondered a number of theories as to why inflation wasn’t responding to tightening labor resources, such as “the possibility that slack may be better measured by labor market indicators other than unemployment.” “It is a battle between data and theory,” said Ethan Harris, head of global economic research at Bank of America in New York.

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A silent coup.

Goldman Sachs Is Infiltrating The Fed In Ways Most People Haven’t Noticed (BI)

Since when do underlings get to chime in on who their next boss should be? That’s just what William Dudley, president of the Federal Reserve Bank of New York, did in an interview with AP this week. His fairly strong recommendation of Gary Cohn, Donald Trump’s economic advisor and apparent favorite, was especially egregious since Cohn is former president at Goldman Sachs, where Dudley essentially spent most of his career as chief economist and partner. The Fed’s chairperson is appointed by the president of the United States. Dudley should stick to monetary policy and regulating big banks. As a matter of central bank independence and integrity, he has no business opining on future candidates.

As Bloomberg’s veteran Fed watcher, Rich Miller, put it: “It’s rare for Fed officials like Dudley to comment publicly on such personnel matters because they usually want to avoid doing anything that might be seen as undermining the central bank’s political independence.” “AP: On a personal level, Gary Cohn has been mentioned as potentially a Fed Chair if Yellen were not to be reappointed or declined. Did you work with Gary Cohn at Goldman Sachs? What is your impression of him as a potential Federal Reserve Chair? DUDLEY: I don’t want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don’t think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks. I think it’s important to have a committee that has diversity. That has different backgrounds and perspectives. So I think Gary’s a reasonable candidate.

[..] Despite the clear conflict, he apparently sees nothing wrong with recommending Cohn while saying nothing to praise his current boss, Fed Chair Janet Yellen, who is also supposedly in the running for reappointment (but not really, it’s just another Trump reality TV suspense stunt). Dudley then coyly declines to discuss other names being floated for the post. Dudley has crossed a line, although it’s not a new one for his institution. The New York Fed was home to one of the financial crises most blatant conflicts of interest, and it’s all related to how Dudley was hired to head it in the first place.

This is what happened: Stephen Friedman was chairman of the New York Fed at the height of the crisis — but at the same time he was a member of Goldman Sachs’ board of directors. He also held a significant financial stake in the megabank, even as he was involved in the bank bailout negotiations. Yes, really (The New York Fed is supposed to play a pivotal role in regulating Wall Street). And here’s the kicker: The Fed’s board granted Friedman a waiver to buy Goldman stock just as prices had hit bottom and the central bank was stepping in to make all the banks, including Goldman, whole on their misguided bets on housing and related assets. Friedman was eventually pressured to step down, but that’s about it. In his role as NY Fed board chair, Friedman got to pick its next president. Who did he run with? Bill Dudley.

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it’s about foreign reserves.

Chinese Takeovers Of US Companies Plummet This Year (CNBC)

As the Trump administration looks to take a tougher stance against Beijing, Chinese investments in the U.S. have more than halved this year, according to Dealogic. “Amid growing regulatory scrutiny of China outbound M&A targeting the U.S., volume has seen a 65% year-on-year decline in 2017 year-to-date,” Nicholas Farfan and Karl But of Dealogic Research said in an Aug. 8 note. “In comparison, such deals peaked at $65.2 billion last year, with high-profile deals including HNA’s acquisition of 25% of Hilton Worldwide.” “With tightening restrictions, Chinese buyers may look to stop pursuing or shelve potential acquisitions in the U.S.,” the note said. The pressure and uncertainty are coming from both countries. On Beijing’s side, authorities are reportedly targeting some of the largest Chinese dealmakers to try to keep capital from fleeing the country and contributing to yuan weakness.

On the American side, reports indicate the Committee on Foreign Investment in the United States is looking to use national security concerns to prevent more Chinese purchases of U.S. firms, especially in technology. Anecdotally, Gregory Husisian, chair of the export controls and national security group at law firm Foley & Lardner, noted that an increasing number of clients are concerned about working with Chinese buyers due to the potential for regulatory intervention. The dealmaking industry could also suffer some significant business setbacks. The Dealogic analysts estimate about $9.7 billion in pending Chinese deals to buy U.S. firms could fall under regulatory scrutiny, potentially putting $75 million in advisor fees at risk.

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Baffling. They really don’t seem to know their own laws. Which might be a problem if you’re in government?!

The World’s Most Ridiculous Constitutional Crisis (BBG)

Australia’s parliament is in the grip of the world’s most ridiculous constitutional crisis. The situation threatens the country’s democratic process, which is reason enough for politicians and courts to work to unpick it. More importantly, though, it raises questions the rest of the world would do well to ponder. Over the past month, five members of Australia’s 226-member parliament have admitted that they may have unwittingly held dual citizenship – a condition that, under Australia’s 1900 constitution, disqualifies them from political office in Canberra. The latest blow on Monday ensnared Deputy Prime Minister Barnaby Joyce, putting into jeopardy the government’s one-seat majority in the governing House of Representatives. Joyce’s father was born in New Zealand in 1924. As a result, Kiwis officially consider him one of their own.

Journalists and political staffers have launched a hunt to see who will fall next. The country’s justice minister Michael Keenan took to social media Thursday to confirm he renounced his British citizenship 13 years ago, after the Sydney Morning Herald reported that he may have been a dual citizen. In total, 13 senators and 11 House members were born overseas, equivalent to about 17% and 7.3% of the respective chambers. More may be caught, like Joyce, as a result of their parentage. With both chambers finely-balanced between parties – and renouncing foreign citizenship, in many cases, a long and complex process – the crisis could hamstring the government’s ability to pass legislation. Australia has one of highest proportions of foreign-born residents among democratic countries. Nearly half of permanent residents are first- or second-generation migrants, with about 28% born overseas and 21% having at least one foreign-born parent.

About 4.6% were, like me, born in the U.K.; another 2.6% in China, Hong Kong and Macau, plus 2.2% from New Zealand and 1.9% from India. More than 27% of the population speaks a language other than English at home. That’s a vast population whose ability to serve in parliament is potentially restricted. There are so many different regulations around the world that it’s not always obvious to individuals which countries might claim them as citizens. Larissa Waters, a Greens senator who was born in Winnipeg but has lived in Australia since infancy, quit last month after discovering that a Canadian law that entered into force when she was seven days old meant Canada still considered her a citizen. A week later, Australia’s then-Resources Minister Matthew Canavan was caught out after discovering his mother had once sought Italian citizenship for herself and for him. “Until last week I had no suspicion I could be an Italian citizen,” he wrote on Twitter. “I was not born in Italy and have never been to Italy.”

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Your pension has left the building. Those are its foorprints over there.

Hell Hath No Fury Like An Australian Retiree Scorned (BBG)

Hell hath no fury like an Australian retiree scorned.Shares in the country’s giant phone company Telstra fell as much as 12% after it announced annual results Thursday, wiping off some A$6.2 billion ($4.9 billion) of value. The reason for this massive hissy fit was a cut to Telstra’s historically lavish dividend policy. Investors who’ve been scraping by on payouts equivalent to about 100% of underlying earnings will in future have to subsist on a mere 70% to 90%. Why should Telstra shareholders be so sensitive about dividends, especially as net income came in ahead of analyst estimates at A$3.89 billion? The answer lies in the nature of Australia’s equity market, and in particular the 1.1 million retirees managing their own investments via self-managed superannuation funds.

Helped by years of tax breaks and laws mandating that companies fund their employees’ retirement savings, Australia’s gray army has built up a A$648 billion piggy bank. The A$340 billion they have in equities and investment funds is equivalent to a fifth of the benchmark S&P/ASX 200 index, and their might is such that some analysts, such as Credit Suisse’s Hasan Tevfik, argue they’ve distorted the investment priorities of the wider market. Retirees’ love of a household-name stock that provides a steady income without the fuss of buying or selling helps explain the Australian share market’s obsession with dividend yield. There’s certainly something unusual in the water: Of the 42 companies in developed markets with dividend yields above 5% and market capitalizations above $10 billion, 11 are Australian, according to data compiled by Bloomberg.

In some ways, this trend is a favorable one. Australia’s big four retail banks and Macquarie, which all meet the key criteria of familiarity and generous payouts, trade on some of the highest price-book multiples in the world. As a result, when they want to raise equity capital – as they all did in 2015, to the tune of an aggregate A$18.5 billion – it works out rather cheap. Still, Telstra’s experience is a lesson that playing footsie on dividends can be a dance with the devil. Its desire to hold back just a thin slice of earnings alongside a 70% to 90% payout ratio would be considered reasonable in most markets. Chinese companies are notoriously stingy, as Gadfly’s Shuli Ren wrote this week. Among major equity indexes, only the U.K. boasts ratios on a par with Australia’s; the Shanghai Composite rarely turns more than a third of earnings into dividends.

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No kidding. Conversation is impossible just when it’s most needed.

Americans Are Rapidly Descending Into Madness (Krieger)

I don’t live in an echo chamber, partly because there aren’t enough people out there who think like me, but also because I constantly and intentionally attempt to challenge my worldview by reading stuff from all over the political map. I ingest as much as I can from a wide variety of intelligent sources, picking and choosing what makes sense to me, and then synthesizing it the best I can. Though I’m certainly grounded in certain key principles, my perspective on specific issues remains malleable as I take in additional information and perspectives. I try to accept and acknowledge my own ignorance and view life as a journey of constant mental, emotionally and spiritual growth. If I’m not growing my capacity in all of those realms until the day I die, I’m doing it wrong. Life should be seen as a battle against one’s own ignorance, as opposed to an obsession with the ignorance of others.

You can’t legislate morality, nor can you legislate wisdom. The only way the world will improve on a long-term sustainable basis is if more of us get wise. That’s a personal journey and it’s our individual duty to accept it. While I’m only in control of my own behavior, this doesn’t mean that the behavior of others is irrelevant to my life. Unfortunately, what I see happening to the population of America right now seems very troublesome and foreboding. What I’m witnessing across the board is hordes of people increasingly separating themselves into weird, unthinking cults. Something appears to have snapped in our collective consciousness, and many individuals I used to respect (on both sides of the political spectrum) are becoming disturbingly polarized and hysterical. People are rapidly morphing into radicalized mental patients.

What’s worse, this environment is providing a backdrop for the most destructive people of my lifetime – neoconservatives and neo liberals – to preen around on corporate media as “the voices of reason.” This is one of the most perverse and dangerous side-effects of the current political climate. If in your disgust with Trump, you’re willing to run into the cold embrace of these destroyers of the middle class and the Middle East, you’ll get what you deserve. In contrast, if we really want to deal with our very real and very systemic problems, the last thing we need is a population-level mental breakdown that leads to a longing for the criminally destructive political status quo, yet that’s exactly what seems to be happening.

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Every single Bitcoin transaction uses as much energy as 15 UK households do daily. Whatever you think about crypto, that is a problem no matter what.

A Primer On Bitcoin: The Ultimate Fiat Currency (Lebowitz)

Cryptocurrency is an independent, digital currency that uses cryptology to maintain privacy of transactions and control the creation of the respective currency. While not recognized as legal tender, cryptocurrencies are becoming more popular for legal and illegal transactions alike. Bitcoin (BTC), developed in 2009, is the most popular of the cryptocurrencies. It accounts for over half the value of the more than 750 cryptocurrencies outstanding. In this article we refer to cryptocurrencies generally as BTC, but keep in mind there are differences among the many offerings. Also consider that, while BTC may appear to be the currency of choice, Netscape and AOL shareholders can tell you that early market leadership does not always translate into future market dominance.

Before explaining how BTC is created, acquired, stored, used and valued, it is vital to understand blockchain technology, the innovation that spawned BTC. [..] Blockchain is an open database or book of records that can store any kind of data. A blockchain database, unlike all other databases, is stored real time and is accessible for anyone to view its complete history of data. The term block refers to a grouping of transactions, while chain refers to the linkages of the blocks. When a BTC transaction is completed BTC “miners” work to solve the cryptology algorithm that will enable them to link it to the chain of historical transactions. As a reward for being the first to solve the calculation, the miner receives “newly minted” BTC. As the chain grows, the effort needed to solve and verify the algorithms increase in complexity and demand greater computing power. As an aside consider the following statement by Bitcoin Watch (courtesy Goldman Sachs):

“BTC worldwide computational output is currently over 350 exaflops – 350,000 petaflops – or more than 1400 times the combined capacity of the top 500 supercomputers in the world.”

Needless to say, a tremendous amount of computing resources and energy are being used by BTC miners, and it is still in its infancy. Could these resources be better employed in other industries, and if so, how much productivity growth is BTC leeching from the economy? The takeaway is that blockchain is an open, real-time database that provides anonymity to its users. It is not controlled or regulated (yet) by any government. BTC miners, driven by the incentive to earn BTC, and fees at times, verify and authenticate the database. Blockchain technology is incredibly powerful and will likely revolutionize data management regardless of whether cryptocurrencies thrive or disappear.

New Bitcoins are created as payment to BTC miners that solve the aforementioned calculations that verify transaction data and link it to the blockchain. This ingenious reward system incentivizes miners to compete to perform these calculations, enabling the blockchain to exist. Currently there are approximately 16 million bitcoins outstanding out of a proposed limit of 21 million. As the blockchain grows, the calculations required to mine BTC and add to the chain become more complex, making each bitcoin harder and more costly to earn than the prior one.

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The value of life, all life. must trump all else. Or else.

Spain Rescues 600 Migrants, Refugees In Busiest Day as 120 Drown (BBC)

Spain’s coastguard says it has rescued 600 migrants crossing from Morocco in a 24-hour period amid a spike in the number of migrant arrivals. The rescued migrants were in 15 vessels including toy paddleboats and a jet ski and included 35 children and a baby. The UN says more than 9,000 people have arrived in Spain so far this year – three times as many as the previous year. More than 120 people are believed to have drowned attempting the crossing. The increase in crossings means Spain could overtake Greece this year in the number of migrants arriving by sea, the UN’s International Organization for Migration (IOM) said earlier this month.

Most are sailing across the 12km (seven-mile) Strait of Gibraltar and many are choosing cheap, child-sized paddle boats without motors that allow them to bypass people smuggling networks and their fees. Some migrants are using social media to contact the Spanish authorities and inform them of their location once they are in territorial waters, the BBC’s Gavin Lee in the Spanish city of Tarifa says. However, a much larger number – nearly 100,000 – have crossed from Libya to Italy since the start of the year. The IOM says 2,242 people have died on that route. In June, about 5,000 people were rescued in one day in the Mediterranean off Libya, Italian coastguards said.

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Jul 242017
 
 July 24, 2017  Posted by at 8:40 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Jackson Pollock The She Wolf 1943

 

We Are Now In The Frightening Endgame (Egon von Greyerz)
China’s Dollar Debt Specter Haunts Fed’s Policy Meetings (R.)
Federal Reserve Faces Prospect Of Global Monetary Policy Tightening (R.)
Bank of Japan Dot Plot Paints a Pessimistic Picture of Inflation (BBG)
European Banks Struggle To Solve Toxic Shipping Debt Problem (R.)
Saudi Economic Pain Will Test Resolve of Prince’s Reform Push (BBG)
While Hammond Looks For A Magic Money Tree, Labour Has Found One (G.)
Strip Mining the World (Robert Gore)
Alexis Tsipras: ‘The Worst Is Clearly Behind Us’ (G.)
European and African Ministers Discuss Plan To Tackle Flow Of Refugees (G.)
The Strange Similarity of Neuron and Galaxy Networks (Vazza & Feletti)

 

 

Sorry for you lovely summer day, but it’s time to get serious. Excellent read. “The gullibility of people today is exacerbated by the power of the internet and social media.”

We Are Now In The Frightening Endgame (Egon von Greyerz)

“Stock investors are rejoicing about stock markets making new highs in many countries, totally oblivious of the risks or the reasons. It seems that this is an unstoppable rally in a “new normal” market paradigm. No major increase is expected in the inflation rate or the historically low interest rates. The present rally has lasted 8 years since the 2009 low. There is virtually no fear in the stock market so investors see no reason why this favorable climate would not continue for another 8 years at least. Yes, of course it could. All that is needed is that governments worldwide print another $20-50 trillion at least and that global debt goes up by another $200-500 trillion. “The gullibility of people today is exacerbated by the power of the internet and social media. Anything we read is accepted as fact or the truth, while a major part of it is just fake news.

[..] The power of the internet and other media has facilitated spreading news and propaganda to billions of people and very few can distinguish if they hear or read “real” news or “fake” news. Anyone in government is incapable of telling the truth. Automatically when someone assumes an elected position their Pinocchio nose grows extremely long since their entire purpose is then to be all things to all people in order to be re-elected. This is why virtually no elected official has a backbone nor any morals or principles. Because if they had, telling the truth would make them unelectable.

[..] The system we now have is based on Fake News, Fake Money with no morals, no principles and no moral or ethical values. In spite of, or more correctly because of, all the lawyers, government legislation, compliance and regulations, the financial system is today functioning much worse than ever with more fraud, more government intervention and more manipulation of markets. Also, clients today are secondary. Instead, it is all about lining the pockets of the bankers with their multi-billion dollar deals and multi-million dollar bonuses and options. As we experienced in 2006-9, profits are for the bankers and losses for governments and customers. During that time of the Great Financial Crisis, many Investment Bankers received the same bonuses during the crisis years as before, in spite of the fact that most of them would have gone under without the government support they benefitted from to the extent of $25 trillion.

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Yellen is lost in China. How can they keep the dollar low in the face of this? And how long for? Trump likes it, China needs it. But the numbers say no.

China’s Dollar Debt Specter Haunts Fed’s Policy Meetings (R.)

In September 2015, the U.S. Federal Reserve cited risks from China as a key reason for delaying its first interest rate hike in a decade. A wall of Chinese debt maturing in the next few years could jolt the country back into the U.S. central bank’s policy deliberations. Two years ago, it was a collapse in Chinese stocks, a surprise yuan devaluation and shrinking foreign exchange reserves that roiled financial markets that delayed the Fed, but it did raise rates three months later and has tightened further since. Now, some see risks emerging in China’s dollar-denominated bonds that could give the Fed greater pause for thought as it raises rates, even as other central banks signal a shift from ultra-easy policy. To be sure, Fed officials have not publicly flagged China’s debt as a major risk in their policy discussions.

However, debt analysts point to the possibility of another September 2015 moment in which the Fed takes its cues from concerns about China. “Back then, I said that U.S. monetary policy is not made in Washington, it’s made in Beijing,” said Joachim Fels, global economic advisor at bond giant PIMCO. “China does have a major impact on monetary policies elsewhere … This year has been smooth sailing for global central banks because there were no shockwaves from China but I expect that to change if we think beyond the next few months.” The outstanding amount of dollar bonds issued by Chinese entities has grown almost 20 times since the 2008-09 global financial crisis to just over half a trillion dollars, according to data from the Bank for International Settlements.

Since September 2015, it has grown almost 50%. China’s dollar bonds are now almost a third of the emerging market total dollar issuance, up from a quarter in September 2015 and less than 5% before the Fed first began printing money in December 2008. A fifth of China’s dollar bonds mature within a year, according to BIS data. More than half are due in the next five, Thomson Reuters data show. If U.S. borrowing costs start rising as a result of the Fed’s exit from its unconventional monetary policy, that debt would have to be rolled over at higher costs, chipping away at the real economy in China. Alternatively, Chinese companies might decide to refinance their debt in local currency, creating weakening pressure on the yuan.

Either development would reverberate globally and create a major external challenge for Fed policy. For its part, the Fed doesn’t see any immediate dangers with China’s dollar debt. “You’ll find if you look at China they certainly have dollar-denominated debt but … you’ll see that they are not as reliant on external debt as people might have thought,” Dallas Fed chief Robert Kaplan said in Mexico City on Friday. Also, a significant portion of Chinese dollar borrowing makes economic sense – such as companies funding overseas investment projects. And if those dollars are converted into yuan, they could help ease any weakening pressure on the Chinese currency.

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They’re stuck. Nobody wants to admit it, but they are. One way out: a huge crisis, so they can put the blame there.

Federal Reserve Faces Prospect Of Global Monetary Policy Tightening (R.)

Prospects for tighter monetary policy in Europe and other countries could pose a fresh problem for the Federal Reserve when it meets next week to ponder its plan to reduce its $4.2 trillion bond portfolio purchased after the 2008 financial crisis. The Fed bought U.S. Treasuries and mortgage-backed securities (MBS) for about six years in a program known as “quantitative easing” which kept interest rates at record lows to spur borrowing and economic recovery. But at its June meeting this year, as well as raising interest rates for the third time in six months, the Fed also announced a plan to begin by letting $6 billion a month in Treasuries mature without reinvestment and to increase that amount at three month intervals up to $30 billion. Similarly, the Fed said it would run down its agency debt and mortgage backed securities by $4 billion a month until it reaches $20 billion.

Now, the ECB also appears likely to decide later this year on when to scale back its monthly bond purchases. When ECB President Mario Draghi first hinted at the prospect last month, world bond yields rose sharply for a while. Moreover, Canada’s central bank raised interest rates for the first time in seven years this month, and the Bank of England is expected to raise rates next year to combat rising inflation. The Fed led the way in tightening monetary policy as the global economy recovered from the 2008 recession but must now determine how plans by other central banks’ plans may affect their own policy. While a stronger European economy has been welcomed by the Fed, lessening risks to the global economy, a move by major central banks to all tighten monetary policy simultaneously has not been seen for a decade.

“The effects of ECB tapering are not limited” to euro zone countries, Cornerstone analyst Roberto Perli wrote recently. Draghi’s comments in June drove up 10-year Treasury yields US10YT=RR by the most since the U.S. election last November, and a move by the ECB to stop printing money could prompt the Fed to slow its plans for fear that financial conditions would tighten too fast. When Fed policymakers meet on July 25-26 they will need to decide a start date for reducing their bond holdings or leave more time to evaluate what Fed Governor Lael Brainard recently cited as a possible “turning point” in global monetary policy that may affect economic growth.

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The failure of Abenomics is taking on comical forms.

Bank of Japan Dot Plot Paints a Pessimistic Picture of Inflation (BBG)

Even a quick glance at the Bank of Japan’s latest inflation forecasts makes for disappointing reading. The BOJ pushed back its timetable for hitting 2% price gains for a sixth time since Governor Haruhiko Kuroda took over. And it cut its estimates for core CPI for this fiscal year and the next two. A close look at the individual projections of the board’s nine members released after its July 19-20 policy meeting is cause for even more pessimism. Eight of them see risks “tilted to downside” for their price forecast for fiscal 2019 – the year when the BOJ currently hopes to reach its inflation goal. Put another way, the chances of prices dropping below forecast are way higher than beating it. Downward pointing triangles in the dot plot below represent estimates from board members who see downside risks to their projection while circles indicate risks are evenly balanced.

There are no upward pointing triangles giving reason for optimism. When the BOJ released its previous dot plot in April, there were only six downward triangles for 2019. Kuroda said it’s “regrettable” that the BOJ has had to repeatedly push back the timing of when it will reach the inflation goal, while repeating that he still sees momentum to get there eventually. “The BOJ seems to be losing a lot of confidence in its inflation outlook,” Chotaro Morita, chief rates strategist at SMBC Nikko Securities, wrote in a report Friday. So what does this mean for policy? According to former BOJ executive director Hideo Hayakawa, the delay to fiscal 2019 is an acknowledgment that the central bank will continue stimulus even beyond 2020, as it’s very unlikely the BOJ would start cutting stimulus at the same time as the government makes a planned increase to the sales tax.

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Grossly overbuilt. No easy way out: “an estimated capital shortfall of $30 billion this year.”

European Banks Struggle To Solve Toxic Shipping Debt Problem (R.)

Dutch shipowner Vroon is finding talks with banks tough going as it tries to navigate a way out of a long slump in the shipping industry. But it is not an easy time for the lenders either. Vroon, a 127-year-old family-owned group which operates about 200 vessels and transports livestock, oil and other commodities, wants to extend its credit lines and adjust repayment schedules. But European banks that lent heavily to the sector when it boomed more than a decade ago have a heavy toxic debt burden following the 2008-09 global financial crisis and a shipping markets crash in 2010. Shipping firms and banks are caught in a vicious circle of debt, causing a credit crunch that is hindering the industry’s recovery. Overcapacity – a glut of available ships for hire – is a big concern, and another is a lack of profitability caused by problems such as slower demand and global economic turmoil.

One of the major companies, South Korean container line Hanjin, has gone under. “We have difficulty in meeting all repayment obligations that we have and that is what we are in discussion with our banks about. Those discussions are constructive but are not easy — not for us, or the banks,” Herman Marks, the chief financial officer at Vroon, told Reuters. “It is the lack of profitability for the industry that is causing the lack of availability of finance.” Shipping finance sources say the shipping industry, which transports 90% of the world’s goods including oil, food and industrial products such as coal and iron ore, has an estimated capital shortfall of $30 billion this year. Some banks are being driven out of shipping and those that remain are now more conservative in their financing, Marks said. “It is an industry that requires consolidation,” he added.

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One day we will know how poorly Saudi is doing. But not now.

Saudi Economic Pain Will Test Resolve of Prince’s Reform Push (BBG)

Saudi Arabia’s drive to reduce the economy’s reliance on oil has hit a snag: its reliance on oil. More than a year after the kingdom’s dominant leader, Crown Prince Mohammed bin Salman, unveiled a blueprint for the post-oil era, the drop in crude prices is making economists more skeptical about whether some of the plan’s medium-term targets can be met. The reason: lower oil revenue deprives the government of money needed to balance its books by 2020 while trying to stimulate growth to ease the transition’s burden on the population. IMF data released Friday underscored the challenge. The fund lowered its forecasts for Saudi economic growth this year to “close to zero.” Analysts at Citigroup, EFG-Hermes and Standard Chartered see a bleaker picture, expecting the economy to shrink for the first time since the global financial crisis in 2009.

Deeper economic pain will test the authorities’ resolve to pursue tough reform measures as they seek to go against the run of history, which suggests that successful diversification efforts depended largely on policies put in place before a price shock. “Unless you start seeing some economic growth drivers kicking in, which would really have to come from the government and would require higher oil prices, the pace of fiscal reforms would likely remain slower than in 2016,” when authorities cut spending and lowered costly subsidies, Monica Malik, chief economist at Abu Dhabi Commercial Bank, said in an interview. “We see the possibility of having a very low growth or stagnant economic environment with the deficit still remaining high,” she said. “This is a key risk.”

Brent crude prices have declined 15% this year to $48 a barrel, well below the level that the kingdom needs to balance its budget, as producers grapple with how to eliminate a global supply glut. Under an accord between OPEC and other major producers, Saudi Arabia has cut its output. The IMF revised its forecast for Saudi growth this year to 0.1% from 0.4%. And while it now expects non-oil GDP to grow 1.7% after stalling last year, the new figures compare with an earlier estimate of about 2%.

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Transaction tax. It will come.

While Hammond Looks For A Magic Money Tree, Labour Has Found One (G.)

If Hammond is to find money for higher public spending without increasing borrowing, he will either have to ditch government plans to reduce personal and corporate taxes or find new sources of revenue. One option would be for the government to embrace the idea of a financial transaction tax, AKA the Robin Hood tax. This idea, fleshed out in detail last week by Prof Avinash Persaud at an event in London, ticks all the right boxes. Persaud’s starting point is that Britain already has a financial transaction tax, and has had one for more than 300 years. It is called stamp duty, which is levied on the purchase of shares issued by British companies, and raises just over £3bn a year, half of it from citizens of other countries. Some trading activities are exempt from stamp duty and Persaud believes these exemptions should be restricted.

He also proposes that the tax should be broadened to cover transactions in corporate bonds and cash flows arising from equity and derivative transactions. He estimates that this would raise £4.7bn a year. One argument against a financial transaction tax is that it would lead to fewer transactions and so would not raise any money. Persaud said he accepted that the tax would change behaviour (indeed, that is part of the reason for having one), but that he had already made allowances for the reduction in activity in his calculations. If there was no change in behaviour, the tax would raise £13bn a year. Nor does he accept that a tougher stamp duty regime would lead to a relocation of business. Liability for the tax would depend on where the financial instruments were issued and who owned them.

A US investor, for example, would pay the tax on shares issued in the UK, but not on securities traded in the UK but not issued there. Likewise, a British investor would pay the tax on securities wherever they were issued and traded. Persaud, himself a former banker, thinks big finance is a bit of a racket. If a company wants to raise money in the City, the charges amount to 2% of the trade – a rate unchanged in more than 100 years. Put another way, all the efficiency gains since the late 19th century have been captured by those who run the industry rather than shared with the customers. It is hard to think of any other sector where this is true.

The Treasury has always been opposed to a financial transaction tax, in large part due to its institutional capture by the City. Official attitudes would change, though, with a Labour government. Why? Because Persaud’s presentation was organised by the Labour party and he was introduced by the shadow chancellor. While Spreadsheet Phil is looking for a magic money tree, John McDonnell has already found one.

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Can’t beat a good rant.

Strip Mining the World (Robert Gore)

The government is a strip mining operation, plundering the dwindling residual value of a once wealthy America. Forget ostensible justifications, policy is crafted to allow those who control the government to maximize their take and put the costs on their victims, leaving devastation in their wake. Wars are no longer about defending the country or even making the world safe for democracy. They are about appropriations, not to be won, but profitably prolonged. The Middle East and Northern Africa have been a mother lode. You would think their sixteen-year war in backward and impoverished Afghanistan would be a shameful disgrace for the military and the intelligence agencies. It’s not. They’ve milked that conflict for all its worth, and now brazenly talk about a “generational war”: many more years of more of the same.

We can also look forward to generational wars in Iraq, Syria, Libya, and Yemen. The strip miners are agitating for an Iranian foray. That’s got Into The 22nd Century written all over it, a rich, multi-generational vein, perhaps America’s first 100-year war. The only rival for richest mother lode is medicine. Health care is around 28% of the federal budget, defense 21%. Medical spending no longer cures the sick; it’s the take for insurance, pharmaceutical, and hospital rackets. The US spends more per capita on health care than any other nation (36% more than second-place Switzerland) but quality of care ranks well down the list. In education there is the same gap between per capita spending (the US ranks at or near the top) and value received, in this instance as measured by student performance.

What’s paid is out of all proportion to what’s received, especially at a time when computer and communications technology should be driving down the costs of education across the board. Indoctrination factories formerly known as schools, colleges, and universities dispense approved propaganda. For students, higher education is now on the government-sponsored installment plan. There’s a litany of excuses why Johnny, Joan, Juan, Juanita, Jamal and Jasmine can’t read, compute, or think, but lack of funding and student loans don’t wash. Education dollars fund teachers’ unions, their pensions, administrators, and edifice complexes; learning is an afterthought. This vein will play out as the pensions funds, and the governments that have swapped promises to fund them for educators’ votes, go bankrupt. Probably around the same time as the student loan bubble pops.

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Tsipras is trying to put the blame on Varoufakis. He won’t find that an easy road, even if many Greeks agree. And no, the worst is not behind either him or Greece.

Alexis Tsipras: ‘The Worst Is Clearly Behind Us’ (G.)

Today, Tsipras wants to dwell neither on Varoufakis – blamed widely by Greeks for the bungled “game of chicken” that led to the EU and IMF enforcing the harshest austerity measures yet – nor his nemesis, Germany’s finance minister, Wolfgang Schäuble. “Yanis is trying to write history in a different way,” he allows himself to say. “Perhaps the moment will come when certain truths are told … when we got to the point of reading what he presented as his plan B it was so vague, it wasn’t worth the trouble of even talking about. It was simply weak and ineffective.” Far from being a hate figure, Varoufakis held Schäuble in high esteem, Tsipras says. “I think he was his alter ego. He loved him. He respected him a great deal and he still respects him.”

Attempting to set the record straight, Tsipras says that while the Syriza government’s original strategy was one of collision politics – “in line with our mandate” – quitting the single currency, and by extension the EU, was never in question, even in the white heat of crisis when Athens was days away from default. “Leave Europe and go where … to another galaxy?” he quips. “Greece is an integral part of Europe. Without it, what would Europe look like? It would lose an important part of its history and its heritage.” Besides, Grexit would have amounted to acceptance of the “punishment plan” concocted by Schäuble that foresaw Athens taking “time out” of the bloc.

Compromise was the only option, says Tsipras, likening the measures that came with it to a ghastly medicine endured when life is at stake. “You hold your nose, you take it … You know that there is no other way … because you have tried everything else to survive, to stay alive.” Despite the firestorm of criticism he now endures, non-Greek observers say, the once firebrand leader has also shown courage in implementing policies he evidently loathes. Tsipras has managed to persuade many of those opposed to austerity to swallow the bitter pill that has kept Greece in the family of nations it has long identified with. The scenario of a “left parenthesis”, peddled by political enemies at the start of his tenure, has been put to rest.

[..] Ultimately, the great clash between Athens and the lenders keeping Greece afloat will be what is left imprinted on the collective memory, but Tsipras’s legacy, he says, will rest on something else. “It will be that I managed to take the country out of the bog in which it had been led by those who bankrupted it … and move ahead with a programme of deep reform.” That, at least, is the hope. For Greece has become an unpredictable place and, as with history itself, there are no straight lines. “No one,” he says, “can ever be sure that the crisis won’t come back.”

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They found a new term: regularize. As in: regularized refugees. This can only go horribly wrong.

European and African Ministers Discuss Plan To Tackle Flow Of Refugees (G.)

European and African ministers are to meet in Tunis on Monday to discuss a plan to try to regularise the flow of refugees from Africa to Europe to about 20,000, coupled with a much tougher strategy to deport illegal migrants from Italy and break up smuggling rings. The plan to regularise the migrant flow is being pushed by the UNHCR, the UN refugee agency, which warns that EU efforts to train the Libyan coastguard along with Italy’s intention to impose a new code of conduct on NGO rescue ships operating in the Mediterranean do not match the scale of the problem, or recognise the extent to which the flow of refugees and migrants is likely to become permanent. The aim is to set up screening systems for EU-bound migrants in countries en route to Libya, such as Mali, Niger, Burkina Faso, Ethiopia, Chad and Sudan.

The EU at a meeting in July set aside enough cash for 40,000 regularised refugees, with as many as half coming from claimants in Syria, and the remainder from Africa. Although the European commission has struggled to persuade all countries to take migrants after a similar scheme set up in following the 2015 migration crisis from Syria, the new scheme would represent a form of solidarity, and provide Italy with some relief. Italy is gripped by deep political and civil divisions on the issue, with more than 90,000 migrants reaching Italy from Libya this year. A reduction to 20,000 from Africa would represent a transformation.

Explaining the thinking, Vincent Cochetel, UNHCR’s new special envoy to the central Mediterranean, said: “We need to regularise the system and stop these dangerous journeys into Libya. Any remedy that focuses on trying to stop the flow of migrants at sea, such as a code of conduct for a NGOs, cannot be the solution. The issue has to be addressed earlier in the countries of origin and transit. “Italy also needs to be able to process claimants so the economic migrants are returned much more quickly, or else there will be no deterrent to travel to Italy. Only a third of the migrants reaching Italy are found to be in need of international protection.” He added that by the time migrants reached Libya it was often too late.

It is thought there are 300,000 Africans from outside Libya trying to get across to Europe or to get some work in Libya. They are living in Libyan detention centres or in warehouses or so-called “connection houses” in the hands of traffickers. The refugees need to be taken out of Libya and these detention centres so they can be processed elsewhere.

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Self-similarity. The ultimate fractals.

The Strange Similarity of Neuron and Galaxy Networks (Vazza & Feletti)

The total number of neurons in the human brain falls in the same ballpark of the number of galaxies in the observable universe.

Christof Koch, a leading researcher on consciousness and the human brain, has famously called the brain “the most complex object in the known universe.” It’s not hard to see why this might be true. With a hundred billion neurons and a hundred trillion connections, the brain is a dizzyingly complex object. But there are plenty of other complicated objects in the universe. For example, galaxies can group into enormous structures (called clusters, superclusters, and filaments) that stretch for hundreds of millions of light-years. The boundary between these structures and neighboring stretches of empty space called cosmic voids can be extremely complex. Gravity accelerates matter at these boundaries to speeds of thousands of kilometers per second, creating shock waves and turbulence in intergalactic gases.

We have predicted that the void-filament boundary is one of the most complex volumes of the universe, as measured by the number of bits of information it takes to describe it. This got us to thinking: Is it more complex than the brain? So we—an astrophysicist and a neuroscientist—joined forces to quantitatively compare the complexity of galaxy networks and neuronal networks. The first results from our comparison are truly surprising: Not only are the complexities of the brain and cosmic web actually similar, but so are their structures. The universe may be self-similar across scales that differ in size by a factor of a billion billion billion.

The task of comparing brains and clusters of galaxies is a difficult one. For one thing it requires dealing with data obtained in drastically different ways: telescopes and numerical simulations on the one hand, electron microscopy, immunohistochemistry, and functional magnetic resonance on the other. It also requires us to consider enormously different scales: The entirety of the cosmic web—the large-scale structure traced out by all of the universe’s galaxies—extends over at least a few tens of billions of light-years. This is 27 orde
rs of magnitude larger than the human brain. Plus, one of these galaxies is home to billions of actual brains. If the cosmic web is at least as complex as any of its constituent parts, we might naively conclude that it must be at least as complex as the brain.

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