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Australia Central Bank Warns “High Debt Levels Are Affecting Household Spending”

Australia Central Bank Warns “High Debt Levels Are Affecting Household Spending”

For those wondering why despite global markets trading at all time highs, consumer spending has yet to show a substantial pick up, Reserve Bank of Australia governor Philip Lowe has some ideas. Speaking at the Asutralia-Canada Economic Leadership Forum, in which he provided various comaprisons between the Australian and Canadian economies and monetary policies, the central banker warned that, “there are some signs that debt levels are affecting household spending” and notes that “the household sector is coping reasonably well with the high levels of debt. But there are some signs that debt levels are affecting household spending.”
In Australia, the household sector is coping reasonably well with the high levels of debt. But there are some signs that debt levels are affecting household spending. In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination.

As a result, Lowe says that the RBA’s latest forecasts “were prepared on the basis that growth in consumption was unlikely to run ahead of growth in household income over the next couple of years; in other words the household saving rate was likely to remain constant. This is a bit different from recent years, over which the saving rate had trended down slowly.”

Graph 8: Household Savings Ratio

He adds that “in relation to the risks from additional borrowing, it is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets.

…click on the above link to read the rest of the article…

The Art and Pseudoscience of Monetary Policy

Definitely Maybe

Everyone’s got a plan for sale these days.  In fact, there are so many plans out there we cannot keep up with them all.  Eat celery sticks and lose weight.  Think and grow rich.  Stocks for the long run.  Naturally, plans like these run a dime a dozen.

All social engineers who get to impose their harebrained schemes on the rest of the world through the coercive powers of the State, as well as all armchair planners regaling us with their allegedly “better plans”, should have this highly perceptive quote by Robert Burns tattooed on their foreheads. In case you’re wondering, “gang aft a-gley” is slightly old English for “usually turn out to be total crap”. The second part that points out that as a rule, we get nothing but grief and pain instead of promised joy, is applicable to interventionism in general; the so-called “unintended consequences” of interventions almost always turn out to be their main feature and defining characteristic.

Good plans, however, are scarcer than hen’s teeth.  You can’t possibly see them no matter how closely you look.  They simply don’t exist. This was the case on Capitol Hill this week, where money and politics collided at the biannual monetary policy gala.

Despite all the hubbub, no good plans were offered.  What’s more, on first glance, no bad plans were offered too. When Fed Chair Janet Yellen’s testimony was finally over, Congress knew less about the Fed’s plans than when it started.

For instance, when asked if the Federal Reserve would raise rates next month, Fed Chair Janet Yellen replied, “I can’t tell you exactly which meeting it would be.  I would say every meeting is live.”

What does this mean, really?  Does it mean she’ll definitely maybe raise rates?  Does it mean she absolutely ‘might could’ increase them?  Only time will tell.

…click on the above link to read the rest of the article…

Fischer Admits Fed Is Clueless About What Happens Next

Fischer Admits Fed Is Clueless About What Happens Next

In a moment of rare honesty, during a conference in England, Fed Vice Chair Stanley Fischer admitted that the Fed is clueless about what happens next, blaming the Fed’s lack of clarity on Trump and saying there is significant uncertainty about U.S. fiscal policy under the Trump administration.

“There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows what’s going to come out of the process which involves both the administration and Congress in the deciding of fiscal policy and a variety of other things.” Fischer said in response to audience questions about the Fed’s next steps. “At the moment we are going strictly according to what we see as our responsibility according to law.”

Traders have echoed Fischer’s confusion, with the Trump rally sputtering in on-again, off-again mode in recent weeks, demanding details about Trump’s various economic policies. Following the December rate hike, Fed officials have given no indication on the timing of their next hike in response to improvements in the U.S. economy, which however have manifested mostly in the area of “soft” indicators, such as sentiment and confidence surves. In recent days, even these have started to roll over, as the Trump honeymoon slowly ends and the euphoria over the Trump victory – mostly among Republicans as the latest UMichigan consumer sentiment survey showed – begins to fade. 

Of course, “confusion” at the Fed is a sobering and welcome change from its traditional stance of being “certain” about the future, if constantly wrong.

Ironically, none other than the Fed’s own James Bullard trolled his institution, commenting on the Fed’s chronic inability to accurately predict the future and be consistently wrong in its forecasts in a speech on Friday laying out his “2017 Outlook for U.S. Monetary Policy.”

…click on the above link to read the rest of the article…

 

President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending.

President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending.

Unfortunately, he is unlikely to have the room for manoeuvre to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state.

It is also becoming increasingly likely that the next fiscal year will be characterised by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector. With the pending appointment of a new President with ideas of his own, this article turns our attention to the effects on government finances.

Government outlays are already set to increase, due to price inflation, more than the GDP deflator would suggest. The deflator is always a dumbed-down estimate of price inflation. At the same time, tax receipts will tend to lag behind any uplift from price inflation. Furthermore, the wealth-transfer effect of monetary inflation over a prolonged period reduces the ability of the non-financial private sector to pay the taxes necessary to compensate for the lower purchasing power of an inflating currency.

Trump is a businessman. Such people often think that running a country’s economy is merely a scaled-up business project. Not so. Countries can be regarded as not-for-profit organisations, and democratic ones are driven by the consensus of diverse vested interests. The only sustainable approach is to stand back and give individuals the freedom to run their own affairs, and to discretely discourage the business of lobbying.

…click on the above link to read the rest of the article…

Doomed to Failure

We’ve been waiting for the U.S. economy to reach escape velocity for the last six years.  What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out.  Unfortunately, this may not be possible the way things are going.

fischersAs Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went downhill quickly” (his other grandfather drowned in a bowl of cheerios). A similar fate may await the larded up US economy.

In short, the U.S. economy may never reach “escape velocity” unless it is first allowed to crash.  It has been too larded up and larded over with debt for any real sustainable growth to take root.  More evidence, to this effect, was revealed this week.

For example, the International Monetary Fund (IMF) anticipates the U.S. economy will expand by just 1.6 percent this year.  That’s about one percent less than last year’s estimated growth.  In other words, the rate of economic growth in the United States isn’t increasing; rather, it’s decreasing.

According to the IMF, “the slower-than-expected activity comes out of the ongoing oil industry slump, depressed business investment and a persistent surplus in business inventories.”  Could this be the twilight of the weakest economic recovery in the post-World War II era?  Only time will tell, for sure.

But anyone with an ear to the ground and a nose to the grindstone knows the answer to that question.  Business ain’t booming.  Moreover, it has become near impossible for corporations to grow their earnings.

…click on the above link to read the rest of the article…

Fed Vice Chair Fischer Admits Fed is Waiting for Godot

Fed Vice Chair Fischer Admits Fed is Waiting for Godot

The Fed’s fourth mandate.

In his keynote speech on the usual suspects of central-bank topics at the Institute of International Finance’s big shindig in Washington DC today, Fed Vice Chair Stanley Fischer nevertheless managed to develop a new theory for a fourth Fed mandate.

This new mandate would come on top of the third mandate: inflating asset bubbles at all costs (unlimited asset price inflation). The other two mandates are “full employment” (whatever that means) and “price stability,” which is ironically defined as consumer price inflation, the way the Fed counts it, of at the moment 2%, and a lot more in most people’s real-life experience.

Fischer has been grumbling about the slow growth of the US economy for a while – “Everybody is trying to find out what is going on,” he said today, and then went on to explain what’s going on. Turns out, what’s restraining economic growth and investment is a lack of “confidence” and “animal spirits.”

“Confidence has to be turned on for people to want to invest and we’re waiting to see that happen,” he said, according to MarketWatch. “It will happen at some point. But precisely when” is unknown he said.

“Animal spirits aren’t there – people aren’t excited about growth prospects.”

So no interest rate increases until these “animal spirits” and “confidence” show up?

But, but, but… the Fed’s monetary policies for the past eight years have created the biggest credit bubble in US history, including the biggest junk bond bubble ever, a stock market bubble, housing bubbles in numerous cities around the country that exceed by far the peaks of the prior housing bubbles that imploded so spectacularly, the most gigantic commercial real estate bubble, now according to the Green Street Commercial Property Price Index, 26.5% above its totally crazy bubble peak of August 2007….

…click on the above link to read the rest of the article…

John Mauldin: The Fed Is Leading Us to Economic Hell

John Mauldin: The Fed Is Leading Us to Economic Hell

The Fed argues that low rates have worked. The economy emerged from recession. Unemployment drifted back down. “Yay for us,” said the Fed.

Don’t buy that statistical economic garbage. The economy recovered in spite of Fed policy, not because of it. The economy recovered because business owners, entrepreneurs, and workers rolled up their sleeves and made things happen.

It involved a lot of pain: layoffs, asset sales, lost customers, and more. But the hard-working citizens of this country slowly and painfully pulled themselves out of the nosedive.

Those are the people who deserve the credit, not the Fed. Keeping rates at artificially low levels did nothing other than push our economy into the mother of all corners.

Look where we are now.

The next recession means rates will go below zero

The US economy is going to suffer another recession in the not-too-distant future. So, for lack of anything else to do, the Fed is preparing to send rates below zero when the economy next needs goosing. That was clearly the message from Jackson Hole.

What then? Here is the most likely scenario I think we are facing—and you are not going to like it.

We are going to go into the next recession with interest rates still stuck in the sub-1% range. This doesn’t give the Fed much ammunition.

Economists (who could certainly qualify as High Priests) have done studies on recent Fed policies. These show that quantitative easing didn’t really do anything, other than maybe goose the stock market.

There is also no data that shows any positive benefit from the so-called wealth effect, which was all the academic rage at the beginning of this process. Forget the wealth effect. The fact is that when the stock market goes up, it does not trickle down to the average guy on Main Street.

…click on the above link to read the rest of the article…

Traveling Circus

Traveling Circus

After Wednesday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias.

Central banks in G7 economies have been carrying a heavy load for a very long time, especially noticeable to all since 2009. Zero and negative sovereign interest rates, asset purchase programs and whack-a-mole currency devaluations have avoided a counterfactual that would have included credit exhaustion, debt deflation and economic contraction.

Their now conventional unconventional monetary policies have been overlaid by communications policies that have fostered a narrative of economic normality and cyclicality. It all seems rather disingenuous given their successful coup de marché, and maybe a bit delusional too given their serious demeanors discussing Philips curve stuff in the face of balance sheet time bombs.

And now…central banks seem exhausted too, not only in terms of being able to stimulate consumption and levitate asset prices, but also in terms of their communications policies that suggest they can.

The BOJ may have jumped the shark when it embarked on a new program called “QQE with yield curve control” whereby it will pin 10 year JGB yields at 0%. The BOJ also signed on to a new program called “inflation overshooting commitment” whereby it will keep creating sufficient base money until CPI inflation exceeds 2%. Let there be no mistake: this is formalized QE Infinity.

It was a tacit admission that lowering funding rates further would have no stimulative impact on the Japanese economy, and that all it can do at this point is expand the size of its balance sheet. BOJ watchers do not understand why more attention wasn’t paid to the short end of the curve, which would be easier to manage.

…click on the above link to read the rest of the article…

Our uncomfortable ride with central bankers who can’t take us home again: Neil Macdonald

Our uncomfortable ride with central bankers who can’t take us home again: Neil Macdonald

The great post-Great Recession money-printing bonanza was supposed to be temporary

Chair Janet Yellen decided this week to keep the U.S. Federal Reserve's interest rate where it is, saying the U.S. economy isn't yet ready to withstand a modest increase.

Chair Janet Yellen decided this week to keep the U.S. Federal Reserve’s interest rate where it is, saying the U.S. economy isn’t yet ready to withstand a modest increase. (Gary Cameron/Reuters)

The value of that money is another question.

Money is the ultimate confidence game; $10 is worth $10 because we all agree it is worth $10, and for no other reason.

Common sense would seem to dictate that creating unimaginable amounts of new money, the way central banks have been doing since the Great Recession, would erode the value of a dollar, or a euro, or a yen.

The U.S. Federal Reserve alone has printed about $3.8 trillion since 2009. That’s enough to buy 38 million million-dollar homes.

DOLLAR/

The U.S. Federal Reserve has printed about $3.8 trillion since 2009. (Reuters)

Put another way, the American central bank has printed more money than the entire Canadian economy generates in two years. Most of it was spent buying U.S. government treasury bonds — basically creating money with one hand of government and handing it to the other to spend.

Of course, the money printing distorted everything. As intended, it drove down interest rates to nearly zero, punishing old-fashioned, “virtuous” behaviour, robbing savers of return on their investments, while rewarding those who live beyond their means and bailing out scoundrels.

Risky behaviour

As intended, the creation of that money encouraged even more risky behaviour. Stock markets set new records, floating on all that cash. People bought homes they probably couldn’t afford (to a point that has scared the government of Canada; our central bank has pursued low interest rates, too).

…click on the above link to read the rest of the article…

Like Everything Else, History Repeats (Almost Exactly) Because Power Truly Corrupts

Like Everything Else, History Repeats (Almost Exactly) Because Power Truly Corrupts

With both the Bank of Japan and Federal Reserve today undertaking policy considerations at the same time, it is useful to highlight the similarities of conditions if not exactly in time. As I wrote this morning, what the Fed is attempting now is very nearly the same as what the Bank of Japan did ten years ago. In the middle of 2006, after more than six years of ZIRP and five years of several QE’s, the Bank of Japan judged economic conditions sufficiently positive to begin the process of policy “exit” by first undertaking the rate “liftoff.”

If you read through the policy statement from July 2006 it sounds as if it were written by American central bank officials in July 2016. Swap out the year and the country and you really wouldn’t be able to tell the difference.

Japan’s economy continues to expand moderately, with domestic and external demand and also the corporate and household sectors well in balance. The economy is likely to expand for a sustained period…The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend.

With incoming data judged as meeting predetermined criteria (they were somewhat “data dependent”, too), the Bank of Japan voted to raise their benchmark short-term rate but were careful, just like the Fed since December, to assure “markets” that it would be a gradual change only in the level of further “accommodation.”

The Bank has maintained zero interest rates for an extended period, and the stimulus from monetary policy has been gradually amplified against the backdrop of steady improvements in economic activity and prices…

…click on the above link to read the rest of the article…

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

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.

…click on the above link to read the rest of the article…

Lord Rothschild: “This Is The Greatest Experiment In Monetary Policy In The History Of The World”

Lord Rothschild: “This Is The Greatest Experiment In Monetary Policy In The History Of The World”

Two months ago, the bond manager of what was once the world’s biggest bond fund had a dire prediction about how “all of this” will end (spoiler: not well).

Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day


Now, it is the turn of another financial icon, if from a vastly different legacy –  and pedigree – that of Rothschild Investment Trust Chairman himself, Lord Jacob Rothschild, who appears to be the latest entrant to the bearish billionaire club.

We were surprised to find his summary of recent events downright gloomy, and certainly non-conforming with a stock “market”, manipulated by central banks as it may be, trading at all time highs. Here are the key excerpts:

The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.

To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility on the whole has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the developed world.

…click on the above link to read the rest of the article…

Helicopter Money——The Biggest Fed Power Grab Yet

Helicopter Money——The Biggest Fed Power Grab Yet

The Cleveland Fed’s Loretta Mester is a clueless apparatchik and Fed lifer, who joined the system in 1985 fresh out of Barnard and Princeton and has imbibed in its Keynesian groupthink and institutional arrogance ever since. So it’s not surprising that she was out flogging—-albeit downunder in Australia—- the next step in the Fed’s rolling coup d’ etat.

We’re always assessing tools that we could use,” Mester told the ABC’s AM program. “In the US we’ve done quantitative easing and I think that’s proven to be useful.

“So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.

This is beyond the pale because “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt—–that is, purchase of government bonds with central bank credit conjured from thin air.

It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers.

As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank funding of public debt make a wit of difference.

Suppose Washington issues treasury bonds to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for 3 days, 3 months or even 3 years, and then sell them back to the Fed under QE (and most likely at a higher price).

So what!

 

…click on the above link to read the rest of the article…

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

Friday’s unprecedented surge to all time highs in both stock and treasury prices, has got analysts everywhere scratching their heads: which is causing which, and what happens if there is a violent snapback in yields like for example the infamous bund tantrum of May 2015.

But first, the question is what exactly will pause what the WSJ calls the “Black Hole of Negative Rates” which is dragging down yields everywhere.  Here is how the WSJ puts it:

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries. Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to a near-record high, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds.

As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt.

“What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly, an investment director at Standard Life Investments. ” The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

…click on the above link to read the rest of the article…

A Look Inside Europe’s Next Crisis: Why Everyone Is Finally Panicking About Italian Banks

A Look Inside Europe’s Next Crisis: Why Everyone Is Finally Panicking About Italian Banks

Back in May 2013, we wrote an article titled “Europe’s EUR 500 Billion Ticking NPL Time Bomb” in which we laid out very simply what the biggest danger facing European banks was: non-performing, or bad, loans.

We further said, that “Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

The conclusion was likewise simple:

The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time – the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks.”

Now, three years later, the bomb appears to be on the verge of going off (or may have already quietly exploded), and nowhere is it more clear than in an exhaustive article written by the WSJ in which it focuses on Italy’s insolvent banking system, and blames – what else – the hundreds of billions in NPLs on bank books as the culprit behind Europe’s latest upcoming crisis.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai III: Cataclysm
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