Insanity, like criminality, usually starts small and expands with time. In the Fed’s case, the process began in the 1990s with a series of (in retrospect) relatively minor problems running from Mexico’s currency crisis thorough Russia’s bond default, the Asian Contagion financial crisis, the Long Term Capital Management collapse and finally the Y2K computer bug. With the exception of Y2K – which turned out to be a total non-event – these mini-crises were threats primarily to the big banks that had unwisely lent money to entities that then flushed it away. But instead of recognizing that this kind of non-fatal failure is crucial to the proper functioning of a market economy, providing as it does a set of object lessons for everyone else on what not to do, the Fed chose to protect the big banks from the consequences of their mistakes. It cut interest rates dramatically and/or acquiesced in federal bailouts that converted well-deserved big-bank losses into major profits. The banks concluded from this that any level of risk is okay because they’ll keep the proceeds without having to worry about the associated risks. At this point – let’s say late 1999 – the Fed is corrupt rather than crazy. But the world created by its corruption was about to push it into full-on delusion. The amount of credit flowing into the system in the late 1990s converted the tech stock bull market of 1996 into the dot-com bubble of 1999, which burst spectacularly in 2000, causing a deep, chaotic recession.
The day before the 4th of July, when most Americans were hustling about preparing for family barbecues, the New York Times finally decided to publish an editorial warning about Wall Street’s potential threat to the nation. Unfortunately, it did so with the kind of timidity we see regularly from cowed or compromised Wall Street banking regulators. The editorial writers noted that: ‘It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate,’ and they called for ‘heightened vigilance of derivatives in particular’ without providing any detailed data. A more accurate assessment of the situation would have been this: There is only one industry in the United States that has twice in a period of less than 100 years brought about a devastating economic crisis in the country. Wild speculation coupled with poor regulation of mega Wall Street banks brought about the Great Depression in the 1930s, leading to massive job losses, bank failures, poverty and economic misery for tens of millions of innocent Americans. The precise same combination of wild speculation and crony regulators created the Wall Street crash of 2008, throwing millions of Americans into unemployment and foreclosure while creating obscene bailouts and bonuses for bankers, and leaving the U. S. with such a low economic growth rate to this day that many Americans feel they are still living in the Great Recession.
I claim no special power here, nor any inside information. This is simply arithmetic coupled with logic. I’ll give you a “decision tree” sort of format with the critical points outlined. Note that if you’re going to mitigate any of what I see coming around the bend you need to do it right damn now, not wait. By the time you get to those critical points it’s too late. For many people it’s already too late, but if you’re not in that batch then you need to make your lifestyle changes today. I am operating on the premise that the rank corruption that I outlined in the Ticker here will not be addressed. It will not be addressed for the same reason the 17th Amendment will be cited as the reason the American political experiment failed when the book on America is finally closed, as that Amendment permanently removed the ability of the States to call a hard-stop on any expansion of Federal Power they did not consent to. That was designed in to our government by the founders and it was removed intentionally by the 17th Amendment. That balance of power can never be restored absent a Revolution because to do so The Senate would have to literally vote themselves out of a job at a supermajority level which they will never do and there is no means to compel them to do so. For the same reason the 30-year trend in Medicare and Medicaid spending will not be stopped. It may be tinkered with around the edges but it won’t be stopped because to stop it without literally throwing people into the street and letting them die you have to break the medical monopolies and in doing so you will inevitably (1) destroy the graft machine that drives a huge part of DC and at least half of the jobs inside the Beltway, along with the asset values they support, (2) create an immediate and deep (15% of GDP, but temporary) recession on purpose which neither Congress or Trump will ever voluntarily initiate as it would cause a guaranteed 70% stock market crash along with the immediate detonation of about 1/3rd of all in-debt corporations in the United States and (3) expose the outrageous theft of trillions of dollars from taxpayers over the last several decades to fund the medical scam machine at all levels.
This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission. Bloomberg has nice piece on the battle between JPMorganChase’s Jamie Dimon and the Minneapolis Fed’s Neel Kashkari. (Bloomberg) Jamie Dimon is America’s most famous banker, and Neel Kashkari is its most outspoken bank regulator, so it’s not a shock that they would eventually come to blows. What’s interesting is that their contretemps is over an acronym that most Americans have never heard of, but one that may be central to preventing another recession. TLAC, which is pronounced TEE-lack, is something you need to know about if you want to judge the sparring between Dimon, the well-coiffed chief executive of JPMorgan Chase & Co., and Kashkari, the very bald man who ran for governor of California on the Republican ticket and is now president of the Federal Reserve Bank of Minneapolis. On April 6, Kashkari went after Dimon in a way that circumspect central bankers ordinarily don’t. In an essay published on Medium and republished on the Minneapolis Fed website, he challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion). Wrote Kashkari: ‘Both of these assertions are demonstrably false.’
A very inconvenient connection. Brazil is in the middle of a political and corruption crisis blooming on the verdant pastures of an economic and fiscal crisis that has now produced a second year of recession in a row, with the financial curse of the Olympics still hanging over the country for years to come. Nearly 12 million people were counted as unemployed in December. The number of employed fell to 90.4 million, from 92.1 million a year earlier. The unemployment rate has steadily climbed to reach 12% in December, up from 6.5% in December two years earlier (via Trading Economics):
This post was published at Wolf Street by Wolf Richter ‘ Feb 14, 2017.
Six months after Brazil’s former president Dilma Rouseff was removed from power as a result of a carefully orchestrated process by her former Vice President, Michel Temer, who as many suggested at the time, was merely trying to shift attention away from himself and to his former boss due to his “checkered past”, swirling with allegations of corruption on par with those of the deposed president, Temer himself may be in danger of impeachment when overnight, Brazil’s public prosecutor announced it was studying a possible investigation into whether President Michel Temer put pressure on a former minister to favor a Cabinet colleague’s property investment. Marcelo Calero, who resigned last week as culture minister, told federal police that the president pressured him to resolve a dispute with another Cabinet member, Geddel Lima, president Temer’s top government congressional liaison, who was seeking a permit for an apartment building in a historic preservation area of his hometown, a federal police source said. Calero’s accusations have set off new crisis for Temer for allegedly using his public office to obtain a permit for the luxury oceanfront building in the city of Salvador. Following the news, the Brazilian real slumped as much as 2.2% to 3.4679 reais to the dollar, the biggest intraday drop since Trump’s unexpected victory. Traders cited concern that the controversy could derail an overhaul of government finances favored by investors. Simiarly, Brazil’s main stock market index, the Bovespa, fell 1.3 percent on concerns of continued political uncertainty delaying recovery from the country’s worst recession since the 1930s. As Reuters adds, adding fuel to the crisis, the Estado de S. Paulo newspaper reported on Friday that Calero secretly recorded his conversations with Temer and Vieira Lima to back his case. If the chief prosecutor’s office finds grounds to investigate the allegations it would have to ask the Supreme Court for authorization to allow the probe involving the president, the spokeswoman said, effectively starting a new impeachment process. Confirming this, the leader of the Workers Party in lower house Afonso Florence said that former Culture Minister Calero’s allegation that President Michel Temer pressured him on Lima’s case is ‘very serious’ and may lead to an impeachment request.
This post was published at Zero Hedge on Nov 25, 2016.
Ukraine is the latest country to discover that cronyism and corruption in politics pays – a lot – and is very unhappy about it. As a result of an anti-corruption reform requiring senior Ukrainian officials to declare their wealth online, the local population has been been exposed to the vast difference between the fortunes of politicians and those they represent. As Reuters reports, some declared millions of dollars in cash. Others said they owned fleets of luxury cars, expensive Swiss watches, diamond jewelry and large tracts of land – revelations that will crush public confidence in the authorities in Ukraine, where the average salary is just over $200 per month. Officials had until Sunday to upload details of their assets and income in 2015 to a publicly searchable database, part of an International Monetary Fund-backed drive to boost transparency and modernise Ukraine’s recession-hit economy.
This post was published at Zero Hedge on Oct 31, 2016.
For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years. Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.
The third quarter was supposed to be when earnings growth returned to U. S. companies. Not anymore. Companies in the S&P 500 are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008. The prolonged contraction has raised questions about how far stocks can rise without corresponding strengthening in corporate earnings. As recently as three months ago, analysts estimated U. S. corporate earnings growth would return to positive territory by the third quarter. As of Friday, they were predicting a 2.3% contraction from the year-earlier period. Many of the factors pressuring U. S. corporate earnings in recent quarters – including a stronger dollar and falling oil prices – have abated in 2016. The WSJ Dollar Index, which measures the U. S. dollar against a basket of 16 currencies, is down 4% this year, versus up 8.6% for all of last year, and the price of U. S.-traded crude oil has risen 20% in 2016, rebounding from its extreme lows. Still, those moves haven’t been enough to project an end to the earnings recession.
Undue tightening by the US Federal Reserve could set off a perfect storm of recessionary effects Global stock and bond markets have been all over the place of late. Rarely have investors been so lacking in conviction. Confusion as to future direction reigns, and with good reason after the spectacular returns of recent years. For how much longer can stock markets keep delivering? Is there another recession on the way, or to the contrary, is growth likely to surprise positively, underpinning current valuations? Economic turning points are never easy to spot, but right now it’s proving harder than ever. The immediate cause of all this uncertainty is, however, fairly obvious. It’s the US Federal Reserve again, and quite how far it is prepared to go with the present tightening cycle. Few expect policy makers to act at this week’s meeting of the Federal Open Market Committee. Even so, a number of its members have once again been making hawkish noises, and another rise in rates by the end of the year is widely anticipated. Indeed, it is on the face of it quite hard to see how the Fed can avoid such action. Already at 2.3pc, core inflation in the US is trending higher. The US labour market continues to tighten, and money growth, for some a key lead indicator, is strong.
On July 14, 2006, the Bank of Japan raised its benchmark overnight rate off zero for the first time since introducing the world to ZIRP in 1999. In doing so, the BoJ noted that the Japanese economy in its view continued to ‘expand moderately’ and that risks inside the economy were ‘balanced.’ The central bank also sought to reassure, further commenting that despite one 25 bps rate hike ‘an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.’ These words, all of them, should sound frighteningly familiar, as they are being redeployed in nearly exactly the same phrasing by the Federal Reserve. Whether or not the FOMC votes for a second rate hike today still remains to be seen, as before that ‘news’ there is first the BoJ once more admitting that its prior efforts didn’t actually work. For the record, Japanese officials actually carried out two hikes, a second coming in February 2007 just in time for the open minded to finally see what really had been going on in the global economy. In other words, the Japanese policymakers made the same mistakes as are being made today. They assumed absence of further contraction was the same as recovery. In the singularly binary model of orthodox economics, if an economy isn’t in recession it must be growing; so if the economy isn’t in further recession and the economy is barely growing or even stagnating then it is assumed that growth is just being delayed. By the middle of 2006, the Bank of Japan believed there were enough signs the economic postponement had ended.
Over the years, the ‘wealth effect’ has been taken as a core component of monetary policy. Central bankers will not admit it, of course, but particularly stock prices are a central element of their strategy. It almost has to be that way given that the modern version of econometrics applies rational expectations theory as a literal condition. Since expectations form the basis of orthodox understanding about how an economy works and why it changes, the biggest effects, economists believe, of any policy are achieved when they impact consumer, financial, or business expectations the most. So it is with record stock prices. By the nature of the Great Recession in terms of its depth (not that it was actually a recession), monetary policy was hugely constrained in how it might respond. As then-former Chairman Ben Bernanke wrote in November 2010 explaining why QE2 was in his viewnecessary: This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Possibly the defining business trend coming out of the financial crisis has been a ‘startup boom.’ Everyone is building an app or starting their own business it seems. This image, however, may be just an illusion, according to Michelle Meyer, US economist at Bank of America Merrill Lynch. Both the formation of firms (for example, McDonald’s as a whole) and establishments (an individual McDonald’s restaurant), have dropped off precipitously since the financial crisis and remained low. This is important, according to Meyer, because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s postrecession problems, and is at least part of the reason for the steep drop in productivity. Additionally, Meyer says, it can end up affecting the nation’s gross domestic product. Here’s Meyer (emphasis added):
My last piece ‘The Matrix Exposed’ generated a bit of a stir. And as per usual the PhD’s had some fairly colourful things to say to me regarding the notion that more money and more credit may actually stall an economy. But look I’m not trying to be offensive to anyone. I’m simply making a case that when consumer credit becomes the basis of growth, well you have a real problem. And that is a pretty reasonable argument even without the hoards of data backing it up. But so allow me an attempt to mend some bridges. Let’s start by looking at the various existing frameworks that drive economic policy. We have Monetary policy (the banks), Fiscal policy (Congress), Microeconomic policy (Corporations). So let’s look at each. Let’s begin with Fiscal policy. The very first issue that should jump out to everyone is that Congress has been utterly ineffective for almost 2 decades now. That is because the partisanship has become so intense that there simply seems no room for compromise in an effort to get any reasonable piece of legislation done. What we are left with is a slew of outdated fiscal policies. Perhaps most detrimental is a corporate tax rate nearly twice that of many other developed nations. The problem with relatively (to other nations) high corporate tax rates is it means that any domestic investment, everything else equal, has a significantly longer breakeven point. Said another way, the return on domestic investment is much lower than the return on foreign capital investment (ceteris paribus). This is a very intuitive concept, easily digestible by all. The implication is that the relative level of corporate tax rates here in the US incentivize corporations to invest elsewhere.
The average cost of health coverage offered by employers pushed above $18,000 for a family plan this year, though the growth was slowed by the accelerating shift into high-deductible plans, according to a major survey. Annual premium cost rose 3% to $18,142 for an employer family plan in 2016, from$17,545 last year, according to the annual poll of employers performed by the nonprofit Kaiser Family Foundation along with the Health Research & Educational Trust, a nonprofit affiliated with the American Hospital Association. Employees paid 30% of the premiums for a family plan in 2016, compared with 29% last year, according to Kaiser. For an individual worker, the average annual cost of employer coverage was $6,435 in this year’s survey, with employees paying 18% of that total. The change in annual premium for individual coverage from 2015 wasn’t statistically significant. Economists have long debated the reasons for the slow pace of growth in premiums, which has continued for several years. Some have argued that the limited rate of increase is primarily linked to aftereffects of the recession and continued economic uncertainty.
Here’s a gut check for bond investors: corporate America is now more leveraged than ever. As this year’s corporate bond sales raced past $1 trillion on Wednesday – marking the fifth consecutive year of trillion-plus issuance – Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets ‘The investment-grade ‘safe’ part of the market is becoming the most dangerous,’ said Ashish Shah, chief investment officer at AllianceBernstein LP. ‘There are so little returns out there. People are crowding into whatever they can.’ The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U. S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times.
Why are so many men in their prime working years unemployed? The Obama administration would have us believe that unemployment is low in this country, but that is not true at all. In fact, one author quoted by NPR says that ‘it’s kind of worse than it was in the depression in 1940′. Most Americans don’t realize this, but more men from ages 25 to 54 are ‘inactive’ right now than was the case during the last recession. We have millions upon millions of strong young men just sitting around doing nothing. They aren’t employed and they aren’t considered to be looking for employment either, and so they don’t show up in the official unemployment numbers. But they don’t have jobs, and nothing the Obama administration does can eliminate that fact. According to NPR, ‘nearly 100 percent of men between the ages of 25 and 54 worked’ in the 1960s. In those days, just about any dependable, hard working American man could get hired almost immediately. The economy was growing and the demand for labor was seemingly insatiable. But today, one out of every six men in their prime working years does not have a job… In a recent report, President Obama’s Council of Economic Advisers said 83 percent of men in the prime working ages of 25-54 who were not in the labor force had not worked in the previous year. So, essentially, 10 million men are missing from the workforce. ‘One in six prime-age guys has no job; it’s kind of worse than it was in the depression in 1940,’ says Nicholas Eberstadt, an economic and demographic researcher at American Enterprise Institute who wrote the book Men Without Work: America’s Invisible Crisis. He says these men aren’t even counted among the jobless, because they aren’t seeking work.
The primary symptom of the economic malaise or depression that has developed since the Great Recession (which wasn’t a recession) is an economy that works less and thus earns less. Such a condition would suggest a shrunken system or at least vastly diminished potential. That much is well-established even in the orthodox literature though it isn’t ever talked about publicly. What happens, however, when an economy that is already working and earning less starts to reduce even further?
For October 2014, the ISM estimated that its Chicago Business Barometer was a blistering 66.2. Encompassing much of the Midwest and a good deal of auto and parts production, that level seemed to make sense. As any economist would say then, the US economy was on the verge of a breakout and according to the labor statistics maybe even one of unusually good strength and duration. Two months later, however, the Chicago BB was down almost eight points to 58.3; just two months after that, for February 2015, the PMI was shockingly below 50 and quite far below at 45.8. Since then, the index has been all over the place. It almost counts more as entertainment than actual meaningful interpretation from month to month, but there is, I think, something useful to the overall sawtooth of the past two years. It is emblematic of the unevenness of this economy as it swings from very real recession fears to almost pure elation of seeming to skate by; only to see such jubilation ruined in short order all over again. There is information in the schizophrenia. After falling below 50 again in summer 2015, the PMI was above 54 in July and August, only to drop to 48.7 in September in the aftermath of ‘global turmoil’ – and then rebound to 56.2 by October as the FOMC assured the world there was nothing lasting about it. Of course, the Chicago BB instead fell to a ‘cycle’ low of 42.9 in December before jumping almost 13 points in January alone, to 55.6 – and then dropping back below 50 again in February.