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NY Fed President Dudley Complains Unemployment is Too Low, Rate Hikes Needed

June 16, 2018

NY Fed President Dudley Complains Unemployment is Too Low, Rate Hikes Needed

NY Fed President William Dudley is worried about the low unemployment rate. He thinks the Fed needs to be above neutral.

New York Fed President William Dudley will retire Monday. Current San Francisco Fed chief John Williams will take over.

“The federal funds rate will probably have to climb a little bit above neutral, because the unemployment rate is already — from most people’s vantage points — below a sustainable level of unemployment consistent with stable inflation,” Dudley told reporters Friday. “So, I think the move will be eventually to a slightly tight monetary policy.”

“I’m sort of expecting that the peak in the federal funds rate in this cycle will be lower than in past cycles, but I have quite a bit of uncertainty about that,” Dudley said during a conference call.

The unemployment rate is too low now, so we need to hike.

Last year he said consumers should “unlock” housing equity to boost the economy.

“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” and people are leaving the wealth generated by rising home prices “locked up” in their homes.

“A return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth.”

Dudley is a real gem. He will be missed for the comedy he provides.

Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

June 14, 2018

Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

The Fed upped the interest it pays on excess reserves to 1.95% today. This is free money (taxpayer funded) to banks.

The Fed bumped up the interest it pays on excess reserves today to 1.95%. Currently, excess reserves sit at $1.894 trillion.

The math is simple enough. At the current rate, the Fed will hand over approximately $36.93 billion of taxpayer money to banks. That assumes the status quo, but things will change.

Factors

  1. The Fed is shrinking its balance sheet slowly. That reduces excess reserves the Fed pays interest rates on.
  2. When the Fed hikes interest rates, it also increases the interest it pays on excess reserves.

The first point acts to reduce free money, the second acts to increase free money.

Note to ECB

If you want to recapitalize Italian banks, just give them free money instead of your profit-reducing policy of holding rates negative.

Taxpayer money?

Yes! Otherwise the Fed would return this money to the US Treasury.

Some claim free money is paying banks to not lend. The claim is fallacious. Banks do not lend from excess reserves.

That was the amount I calculated on April 17, 2017. Interest then was 1.0%.

Even though the Fed’s balance sheet is lower, the increased rate bumped up the free money calculation to $36.93 billion.

No Outrage!

Why isn’t $36.93 billion in free money to banks an outrage?

Europe’s Nationalism and Trump’s Trade Policies Look Like WWI Prelude

June 7, 2018

Europe’s Nationalism and Trump’s Trade Policies Look Like WWI Prelude

In conversations with friends, one thought the current political scene was like the prelude to WWII. Another said WWI.

​Tuesday evening I struck up a conversation with “Max”, a friend that I frequently see at a Tuesday karaoke bar.

Max is not a reader of my website, so it stuck me when he stated events today remind him of the prelude to WWII. Max is aware of Trump’s trade policies and disputes with Canada and Mexico, but he was not aware of immigration problems in Italy.

Wednesday afternoon, I mentioned that conversation in a podcast with Peak Prosperity’s Chris Martenson. Chris said Max’s comment was quite appropriate but the setup was more like WWI.

Chris is correct. The parallels to WWI are quite amazing.

Seven Causes for WWI

After the podcast with Chris, a bit of digging led me to 7 Causes of the First World War.

It was point number 7 that caught my attention.

7. People Being People

Canadian historian Margaret Macmillan has published a major book, The War That Ended Peace (2013), which presents a synthesis of many different factors: alliances and power politics; reckless diplomacy; ethnic nationalism; and, most of all, the personal character and relationships of the almost uncountable number of historical figures who had a hand in the coming of war.

War That Ended Peace

The above snip led me to the PDF synopsis on The War That Ended Peace.

So you would have thought that increased trade between Britain and Germany would have fostered that sense of having something in common. In fact, it didn’t. What common trade did sometimes was to create fears in both countries that the other was jealous, or that the other was cutting into natural markets.

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

Brazil Steps Up Intervention to Support the Real: Reflections on Currency Wars

June 6, 2018

Brazil Steps Up Intervention to Support the Real: Reflections on Currency Wars

Winning currency wars is easy. As with trade wars, one may not care for the end result.

Brazil’s central bank bolstered efforts to shore up the currency after it tumbled to the weakest level since former President Dilma Rousseff’s tumultuous impeachment in 2016.

The real has weakened 12 percent since the end of March, the worst performance among 16 major currencies tracked by Bloomberg, as investors grow concerned that October elections could usher in a new president less attuned to investors and business. Fear that moves seen as key to fixing fiscal problems would be derailed have exacerbated what’s already been a lackluster year in emerging markets. The real fell 0.9 percent to 3.7791 per dollar as of 11:55 a.m. in New York, and earlier reached 3.8056, the weakest since March 2016.

Brazil Declares Currency War

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

What a Hoot

Note the irony. The Brazil currency war was really about trade.

This was my comment at the time: “Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result.”

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

Liquidity Crisis Coming: Here, There, Everywhere

May 31, 2018

Liquidity Crisis Coming: Here, There, Everywhere

Jim Puplava thinks a liquidity crisis is on the horizon. I agree, adding that the problem is global.

Please pay attention to Jim Puplava at Financial Sense. He says a Liquidity Crisis Looming.

In total, index funds represent $7 trillion of U.S. stock funds that have no active manager. All buying and selling are done automatically. Active management has gone out of fashion, Puplava noted, and as this sea change occurs, the market’s ability to price companies diminishes.

Ownership of stocks in the S&P 500 is concentrated with three companies; Vanguard, BlackRock, and State Street. They represent about 88 percent of the S&P 500, and if we include Schwab and Fidelity, over 90 percent of the S&P 500 is basically now in the hands of five companies.

“It’s really mindless investing,” Puplava said. “The crux of the problem is that mutual funds own more bonds that seldom trade than ever before, but they’re still promising to pay out investors within seven days of redemption, a promise they may not be able to fulfill in the next downturn or crisis.”

Global Problem

The problem is global.

Central bank actions explain most of what you need to know. Italian bonds provide a good example.

Despite the recent, massive selloff in Italian bonds, 10-year Italian bonds still trade at roughly the same yield as US 10-year bonds.

Is there no default risk? No eurozone exit risk?

Of course there is. But those bonds trade where they do because the ECB is engaged in QE to a far greater extent than the the Fed ever did. How nuts is that?

88% of the S&P is with Vanguard, BlackRock, and State Street. How nuts is that?

Close to $7 trillion in bonds trade with a negative yield. The figure was close to $10 trillion at one point. How nuts is that?

According to LCD, covenant-lite loan now account for a record 75% of the roughly $970 billion in outstanding U.S leveraged loans.

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

Fed’s Dilemma: Debt-to-GDP Ratios Dramatically Understate the Debt Problem

May 25, 2018

Fed’s Dilemma: Debt-to-GDP Ratios Dramatically Understate the Debt Problem

Reader Lars writes Debt-to-GDP ratios understate the true nature of the problem. He uses Greece as an example.

Reader Lars from Oslo, the capital of Norway, and a long-time reader of this blog, questions the widespread use of debt-to-GDP as the true measure of the debt problems of a country.

Hello Mish

As we approach the next debt crisis it’s time to ask some questions.

The widespread measurement of the debt problems of a country is DEBT as a percentage of GDP.

Few analysts question this ratio. But this is how I see things.

GDP = Consumption + Investment + Government Spending + Net Exports.

In simpler terms, GDP is the sum of the private sector plus the public sector plus the net trade balance.

However, only the Private Sector pays taxes and that is what enables debt service. In fact, the private sector must service its own debt as well as that of the public sector.

Thus, a better metric to measure debt levels is private sector GDP as reflected in tax income. This tells us the true brutal story of the debt problem.

Using Greece as an example, the real public debt is over 300% of GDP. Given that Greece’s private sector is less than 50% of GDP, the brutal reality is that Greece has a debt level which is over 600% of Private Sector GDP.

The Greek state takes in around €65 billions in tax. This is approximately 10% of total debts.

During the previous Greek debt crisis, economists noted that Greek debt was less than 2% of global debt.

The problem is that the rest of the world is not going to service the Greek debt. The Greek taxpayer will service the Greek debt, and for him the bill is insurmountable.

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

Germany Accuses Italy of “Debt Blackmail”: Hello EU, Time for Reform Expired

May 24, 2018

Germany Accuses Italy of “Debt Blackmail”: Hello EU, Time for Reform Expired

For 10 years, the EU and EMU promised reform. None was delivered. Time is Up. Populists have taken control of Italy.

Merkel’s CDU/CSU coalition is in a state of panic regarding Italy. The German parties went on the attack accusing Italy of “debt blackmail”

Eurointelligence Snips

This was the day when people who were left speechless by the political events in Italy started to talk. In Germany it was the now cancelled request for a monetary financing of Italy’s debt that triggered a collective nervous breakdown.

The CDU’s economic council warned about a eurozone endgame, and said that Angela Merkel’s policy of kicking the can down the road had led to a situation where the debtors are now in a position to blackmail the creditors. Its general secretary was quoted by FAZ as saying: why should German households pay for rich Italians? The head of the CSU in the Bundestag, Alexander Dobrindt, also demanded that under no circumstances Germany should pay for Italy’s debt programme. His colleague in the European Parliament, Manfred Weber, says Italy was playing with fire, and was risking another eurozone crisis.

Eurozone Reform Officially Dead

French President Emanuel Macron has a vision for Europe. Germany did not agree with it.

Heck, Germany did not agree with any Eurozone reforms for over a decade. Chancellor Angela Merkel blew with the wind in a perpetual can-kicking exercise, accomplishing nothing.

Now, it’s too late. The new Italian government will kill any proposal that Germany and France may agree on.

And of course one of the major Eurozone flaws is that every country must agree to change the pact.

One Day

​This is what I said at the time regarding Italian complacency.

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

Reflections on Late-Stage Inflation

May 19, 2018

Reflections on Late-Stage Inflation

Without a doubt, we are in a period of late-stage inflation. But how long can it last?

A few days ago I noted that “inflation expectations” were the same or nearly the same for every period from seven years through thirty.

Actually, the thirty-year expectation was slightly less than the 10-year expectation. For discussion, please see Traders Expect Less Inflation Over a 30-Year Period than a 10-Year Period.

I do not think much of inflation expectations but the Fed strongly believes in them, and so do some others.

Pater Tenebrarum at the Acting Man blog commented “I agree . It is typical for the late stage of the business cycle, you get price inflation going, but it cannot last long. Note though that at some point (depending on central bank actions in response to the next bust and contingent circumstances) there could be a tipping point toward another stagflation period.”

Tenebrarum emailed two links where he discussed the setup.

Part 1 Snips

Ben Hunt, author of Epsilon Theory and chief risk officer of Salient Partners, mentioned a specific narrative that has accompanied quantitative easing for almost a decade now (even longer, if we take Japan into account). At first glance it appeared reasonable enough: central bankers argued that QE would help increase “inflation”. This is of course unequivocally true in terms of monetary inflation, but they referred to consumer price inflation. Alas, both CPI and inflation expectations obviously failed to respond appreciably to their ministrations. Ben posits that this narrative may be set to falter in a rather unexpected manner, by continuing to defy widespread expectations.

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

It’s Now Clear: Five Star Lega Deal is a Commitment to Leave the Eurozone

May 16, 2018

There was some confusion Tuesday over the exact wording of an Italian coalition agreement. The agreement is now clear.

Italy Coalition Agrees to Leave the Eurozone

I typically do not agree with Eurointelligence regarding views on what “should” happen. However, I nearly always agree with them on what “is” happening.

Eurointelligence is pro-big-Europe, I am not. Tonight Eurointelligence lays it on the line:

“And By the Way: We are Leaving the Eurozone”

The Huffington Post Italia had an extraordinary scoop last night when it got ahold of a 39-page draft document setting out a coalition agreement between Lega and Five Star. It is unbelievably extreme – right out of the 1930s. The copy of the contract is dated 14 May at 9.30am. It precedes Monday’s discussions between the party leaders and President Sergio Mattarella, and the parties have already said that it is out of date. It may be, but the document gives a good reflection of the sheer radicalness of two parties.

The parallel governance is probably the single most important, and hitherto unknown, proposal. We translate its name as a Reconciliation Committee, and its role is to adjudicate when there is a conflict between the two parties inside the government. Since such a committee is not foreseen in the Italian constitution, it would only have an informal role. But, as Huffington Post Italia rightly points out, the creation of such a committee would undoubtedly give rise to inter-institutional conflict, and possibly even to a constitutional crisis. The committee would take formal decisions in areas such as international crises, natural disasters, law and order, and public health. It would comes together whenever any of the parties requested it. Its members would be the prime minister, the presidents of Five Star and Lega, the political leaders of the chamber of deputies and the Senate, and any ministers relevant to a particular decision.

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

Argentina Seeks IMF Financing Following Yesterday’s Hike in Rates to 40%.

May 9, 2018

Argentina once again seeks help from the IMF following yesterday’s 40% interest rate hike.

Last year, Argentina was a favorite destination for investors. This year, Argentina is facing yet another currency crisis.

A run on the Peso started last month as investors soured on the country. To combat the run, the Argentine central bank hiked rates to 40%.

“The market has been in total panic mode the last few days,” said Brendan Murphy, head of global and multisector fixed income at BNY Mellon Asset Management North America.

The declines are the latest sign that rising U.S. interest rates and a strengthening dollar are prompting investors to pull money out of some of the world’s riskiest markets, especially those with the largest trade and budget deficits.

Other higher-risk markets like Indonesia and Turkey also have suffered big declines in recent days. Standard & Poor’s Global Ratings on Tuesday cut Turkey’s sovereign-debt rating further into junk, citing the country’s debt, rising inflation and volatile currency. Turkey’s main stock market has fallen 4.7% last week, while its currency has declined 4.4%. Indonesia’s JSX Composite Index slumped 6.6% the week ending April 27—the most of any major index globally, according to FactSet—when foreigners fled the market.

Argentina Calls IMF

Once again, Argentina finds itself in a currency crisis. Reuters reports Argentina president says seeking financing from IMF.

“Just a few minutes ago I spoke with Director Christine Lagarde, and she confirmed we would start working on an agreement today,” Argentina’s President Mauricio Macri said in an address to the nation.

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

Australians Face Huge Spike in Repayments as Interest-Only Home Loans Expire

May 8, 2018

Day of Reckoning: Hundreds of thousands of interest-only loan terms expire each year for the next few years.

The Reserve Bank of Australia (RBA), Australia’s central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.

Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.

What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.

Interest Only Period

​In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.

That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.

Loan Payments

​RBA Unconcerned

For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.

Good luck with that.

Wave of Corporate Bankruptcies Coming: GE Warns About its Subprime Mortgage Unit

May 3, 2018

Earlier today I commented to a friend about corporate bankruptcies. A few hours later, another friend Emailed about GE.

Earlier today a friend pinged me with this story: U.S.Personal Spending Outpaces Income Growth For 26th Straight Month.

He commented: “Hey, a lot of good bankruptcies are coming.”

I replied: “Yes – the killer will actually be corporate! Many Zombie firms are on life support – low interest rates.”

Roughly three hours later, a second friend pinged me with this headline: GE warns its subprime mortgage unit could file for bankruptcy.

GE shut down WMC, its mortgage business, in 2007 after the market for lending to risky borrowers collapsed. But the business still faces legal trouble, including lawsuits from investors and an investigation by the Justice Department.

GE warned in a filing on Tuesday evening that WMC could file for bankruptcy if it loses one of those lawsuits.

Investors lost billions of dollars when subprime loans went bust across the country during the foreclosure crisis. Federal bank regulators ranked WMC as one of the worst subprime mortgage lenders in major metro areas, with more than 10,000 foreclosures between 2005 and 2007.

The investors who are suing claim that WMC misrepresented the quality of the mortgages it sold. The investors are demanding that WMC buy the mortgages back.

Story Irony

The irony in this story is that I was not at all referring to legacy businesses, but rather more recent corporate actions. This Tweet explains.

✔

With Zero Interest Rates and Massive Liquidity, The Percentage of Zombie Companies Has Soared. Promoting Excess Debt, Malinvestment and Overcapacity.

(Source BIS)

A “zombie” corporation is one that needs constant refinancing at low interest rates or repetitive debt offerings to survive. Zombies are unable to pay down debt.

With rising interest rates, it gets increasingly harder for zombies to survive.

Here is another interesting Tweet:

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

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

May 2, 2018

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

The velocity of money is picking up. What does it mean?

Velocity of money is defined as (prices * transactions) / (money supply). Economists substitute GDP for (prices * transactions).

This tweet caught my eye today.

View image on TwitterView image on Twitter

Velocity of Money has increased for third quarter in a row after a long steady decline, strong evidence that inflation is heading higher. Given weak economy and tighter monetary policy, based on the data we have today, we are clearly entering a period of imho.

I suspect that opinion represents the majority view, but does it make any sense?

Let’s investigate with a series of charts.

Velocity of Money vs. CPI

Velocity of Money vs. CPI (Percent Change From Year Ago)

The above chart is particularly amusing. There are periods of correlation, inverse correlation, and periods of major random meanderings of velocity while the CPI does nothing at all.

Velocity vs GDP

​

Since 1998, the year-over-year trend in velocity has strongly correlated with the year-over-year trend in GDP. In the stagflationary 1970s Velocity and GDP were often inversely correlated.

Velocity “Magic”, Tax Receipts, and GDP

I have written about velocity several times previously. Please consider some snips from Velocity “Magic”, Tax Receipts, and GDP.

Velocity Magic

Austrian economist, Frank Shostak, took apart conventional wisdom years ago with his column Is Velocity Like Magic?

“The Mainstream View of Velocity

According to popular thinking, the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.

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

Global Pension Gap Expected to Hit $400 Trillion: US Leads the Way

April 27, 2018

The global pension gap of 8 nations is $70 trillion. The US alone is $38 trillion. By 2050 the total gap will hit $400T.

The Visual Capitalist reports The Pension Time Bomb: $400 Trillion by 2050. The above image is a small section of a huge pension infographic.

  • According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.
  • The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.
  • In the United States, it is expected that the Social Security trust fund will run out by 2034. At that point, there will only be enough revenue coming in to pay out approximately 77% of benefits.

Worse Than You Think

Lance Roberts at Real Investment Advice added to the report in his take The Pension Crisis Is Worse Than You Think.

What follows are excerpts of Roberts’ excellent presentation, withoutblockquotes. His name will mark the end of his report.

Problem 1: Demographics

With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems. One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this “support ratio” is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.​

​

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

Japan Expects to Hit 2% Inflation in 5 Years, Aggressive Easing Will Continue

April 24, 2018

The BOJ thinks Japan may hit its 2% inflation target in 5 years. Kuroda says risks are to the downside.

It may take Japan five more years to reach its 2% inflation targetaccording to BOJ governor Haruhiko Kuroda.

“Sometime within the next five years, we will reach [our] 2 percent inflation target,” Governor Haruhiko Kuroda told CNBC’s Sara Eisen over the weekend. Once that level is reached, we will start “discussing how to gradually normalize the monetary condition.”

Inflation remains low. Japan reported its consumer price index, excluding fresh food and energy, rose half a percent in the 12 months through March.

“In order to reach [our] 2 percent inflation target, I think the Bank of Japan must continue very strong accommodative monetary policy for some time,” Kuroda added in his interview with CNBC.

Protectionism, unexpected rapid tightening of monetary policy in some countries, and geopolitical tensions in North Korea and the Middle East pose potential risks, Kuroda said.

It’s pretty amazing how Japan has failed to destroy its currency despite decades of trying. Once again, I repeat my foolproof plan to cure low inflation in Japan.

Mish’s Four Pronged Proposal to End Japanese Deflation

  1. Negative Sales Taxes
  2. One Percent Tax, Per Month, on Government Bonds
  3. National Tax Free Lottery
  4. Hav-a-Kid

Why wait another five years?

Here is my follow-up article that brings MMT into the picture: Note to BoJ: Try Something Different or Look Perpetually Foolish.

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