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Albert Edwards on Trump’s Legacy:15% Deficits then a Deflationary Bust

February 17, 2018

Albert Edwards at Society General does not have kind words for Trump’s stimulus package.

In his latest Email, Albert Edwards at Society General fires a shot at Trump’s tax cut.

Edwards says the “fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly.”

I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.

Here are a few clips from Edwards.

After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.

Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.

The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.

Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that … US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”

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

Musical Tribute to Bribes in the US, Israel, Nigeria, Everywhere

February 15, 2018

Israeli PM Netanyahu and Shell executives face bribery charges. US politicians are second to none when selling votes.

Bribes Israeli Style

Israeli police are urging the attorney general to indict Prime Minister Benjamin Netanyahu in two corruption cases involving bribery, fraud and breach of trust.

The recommendation is the result of more than a year of investigations into allegations that Netanyahu improperly accepted expensive gifts including pink champagne and cigars from Israeli Hollywood producer Arnon Milchan and Australian billionaire James Packer in exchange for favors.

Netanyahu appeared on TV denying the charges. It came across as follows: I took bribes and smoked cigars for the good of the nation.

Bribes Nigerian and Italian Style

The Wall Street Journal takes a peek Inside the Bribery Scandal Sweeping Through the Oil Industry.

A top oil executive walked into the marble lobby of an exclusive Milan hotel on a chilly winter night. His dinner date was a former Nigerian oil minister offering to sell one of Africa’s biggest untapped oil discoveries.

Eight years later, the question of whether the $1.3 billion paid for the license to that prized oil field was mostly a bribe is at the heart of one of the biggest bribery scandals the oil industry has ever seen.

Part of a broader crackdown, the case has reached into the highest levels of the executive ranks of Royal Dutch Shell, the second-largest Western oil company—including wiretaps on its chief executive—and into Eni, Italy’s state-backed oil company.

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

Interbank Loan Series Update: Message From “Fred”

February 14, 2018

Lots of people, including me, were wondering what happened with interbank loans. The series is now discontinued.

This post is in reference to my previous article Plunge in Interbank Lending: The Straw that Broke the Fed’s Back.

Here is an email a reader Andy sent from the Fred team.

Dear user,
There have been some structural changes to that data in addition to the corrections.
More information can be found at https://www.federalreserve.gov/feeds/h8.html
The Interbank Loans have been discontinued and we are confirming the validity of the last value in that series.

Sincerely,
FRED Team

FRB: DDP: Assets and Liabilities of Commercial Banks in the United States (Weekly) (H.8)
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.
www.federalreserve.gov
FRB: DDP: Assets and Liabilities of Commercial Banks in the United States (Weekly) (H.8)

The chart has been updated one last time, removing the plunge.

Reverse Repo Adjustment

Reader Parker commented:

Through the end of 2017, the Fed tracked “interbank loans” which included “Fed Funds and reverse repos with banks” and “loans to commercial banks”; starting in 2018, the Fed is now tracking “Federal Funds and Reverse Repo” for bank and non-banks together (one number) and breaking out “Loans to commercial banks separately”; as a consequence, it looks like the chart you showed basically had the Feds data feed of Fed Funds and Reverse repo with banks + loans to commercial banks through 12/31/17 and subsequently it is only picking up “loans to commercial banks” because “Reverse repo with banks” is no longer reported as a standalone. I track the Fed H8 report every week which is why I noticed the change in reporting classifications across years.

Fed Funds and Reverse Repo is getting tighter which is still news worth but it didn’t suddenly drop by 90% in a week.

Please let me know any questions – best, Parker

Tightening Analysis

My analysis stands as to what is happening even though the previous chart is inaccurate. Note the lead-in chart for this article. Securities in bank lending took a sudden dive.

My overall message stands as previously delivered, just not the chart itself.

Apologies for the error.

Plunge in Interbank Lending: The Straw that Broke the Fed’s Back

February 13, 2018

Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate.

Interbank Lending Long Term

The plunge in interbank lending is both sudden and dramatic. What’s going on?

Fed Tightening Two Ways

The short answer is a straw broke the Fed’s back.

A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.

Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it.

We can see the effect in other charts.

LIBOR

Year-Over-Year M2 Growth

Money supply growth is falling as are excess reserves.

Excess Reserves

The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.

  • The treasury unwind started at $6 billion per month, increasing by $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
  • The mortgage debt unwind started at $4 billion per month, increasing in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Does the Fed Know What It’s Doing?

Janet Yellen answered that question directly in her speech A Challenging Decade and a Question for the Future, at the Herbert Stein Memorial Lecture National Economists Club on October 20, 2017.

The FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions. Indeed, as the so-called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions.

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

Peace: The One Thing the US Warmongers Do Not Want

February 12, 2018

Vice President Mike Pence made fools of the US at the South Korea Olympics. Kim Jong Un’s sister stole the show.

For a welcome change of pace, a thaw between North and South Korea is taking place. Unfortunately, the US wants no part of it as vice president Pence showed the world at the Olympics.

ian bremmer
✔@ianbremmer

Kim Jong Un’s sister and Pence, trying very hard to pretend the other isn’t there.

New York Magazine describes the great lengths Pence took to make a fool of the US at the opening ceremonies (above Tweet) and even more so at at a dinner party on Friday put on by South Korean president Moon Jae-in.

After showing up late, the VP intended to quickly leave after a photo session. Moon asked him to greet the other dignitaries at the event and Pence did, shaking the hands of everyone at the VIP table except for Kim Yong-nam [Kim Jong Un’s sister].

By leaving early, Pence missed out on a special dessert — a chocolate representation of the Korean peninsula with a dark chocolate piece of barbed wire laying over it.

And then, during the ceremonies, as North and South Korean athletes entered the stadium together under a unified flag, Pence and his wife Karen remained seated while everyone around them rose to applaud.

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

Necessary Fantasy: White House Estimates 3% Growth For a Decade

February 11, 2018

Here’s one for the “not going to happen” category. Trump believes his policies will lead to 3% sustained growth.

The White House’s budget proposal, to be released Monday, estimates 3% Growth for 10 Years, on average.

The budget proposal projects the economy will grow about 3% annually over the coming decade, though officials now expect a slightly larger near-term boost, with output rising 3.2% next year before declining to 3% in 2021 and 2.8% by 2026, according to projections reviewed by The Wall Street Journal.

Many private forecasters also expect economic growth to pick up this year because of consumer and business spending encouraged by tax cuts signed by the GOP president in December, plus a two-year, $300 billion funding deal signed Friday.

But many don’t see quite as large an increase as the administration, and they don’t see the boost lasting for nearly as long. On Friday, economists at J.P. Morgan said they now expect the economy to grow 2.6% this year and 1.9% next year.

In December, Federal Reserve officials raised their projection of GDP growth for the current year to 2.5%, and for next year to 2.1%. They still see the economy growing around 1.8% over the long run.

Optimists Every One

A single recession in the next 10 years will likely ruin even the 2.0% projections.

Contrary to popular thinking, the increased deficits will not add to growth.

Moreover, a sustained stock market decline is guaranteed to subtract from consumer spending.

Necessary Fantasy

It is uncertain if the Trump forecasters really believe the nonsense they spew.

They had to make rosy projections to get their policies passed.

Had they claimed their policies would lead to 1.8% growth, the Senate would have rejected the tax cuts and spending bills.

The question here is: Are they liars, fools, or both?

I vote both.

“This Isn’t a Drill” Mortgage Rates Hit Highest Level Since May 2014

January 30, 2018

“This Isn’t a Drill” Mortgage Rates Hit Highest Level Since May 2014

A housing bust may be just around the corner. Rates have climbed to a level last seen in May of 2014.

The chart does not quite show what MND headline says but the difference is a just a few basis points. I suspect rates inched lower just after the article came out.

For the past few weeks, rates made several successive runs up to the highest levels in more than 9 months. It was really only the spring of 2017 that stood in the way of rates being the highest since early 2014. After Friday marked another “highest in 9 months” day, it would only have taken a moderate movement to break into the “3+ year” territory. The move ended up being even bigger.

From a week and a half ago, most borrowers are now looking at another eighth of a percentage point higher in rate. In total, rates are up the better part of half a point since December 15th. This marks the only time rates have risen this much without having been at long term lows in the past year. For example, late 2010, mid-2013, mid-2015, and late 2016 all saw sharper increases in rates overall, but each of those moves happened only 1-3 months after a long term rate low.

Not a Drill

So far this month, MBS have stunningly dropped over 200 bps, which easily translates into a .5% or more increase in rates. I’ve been shouting “lock early” for quite a while, and this is precisely why, This isn’t a drill, or a momentary rate upturn. It’s likely the end of a decade+ long bull bond market. LOCK EARLY. -Ted Rood, Senior Originator

Housing Bust Coming

Drill or not, if rising rates stick, they are bound to have a negative impact on home buying.

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

Rajoy Slapped in the Face: Catalonia Elects Pro-Independence Speaker

January 18, 2018

Spain’s prime minister Mariano Rajoy received a well-deserved slap in the face today. Independents again rule Catalonia.

In October, prime minister Mariano Rajoy took direct control of Catalonia, jailing its leaders and dissolving its parliament after Catalan president Carles Puigdemont declared independence in October. Puigdemont is now in exile in Belgium.

Rajoy forced a new election, but the results are the same.

Catalan Parliament

Back in Control

Today, in a well-deserved slap in the face to prime minister Mariano Rajoy, Pro-Independence Groups Take Back Control of Catalonia’s Parliament.

Pro-independence parties took control of the Catalan parliament on Wednesday in what they hailed as the first step towards restoring the regional government after almost three months of direct rule from Madrid.

Celebrations erupted among flag-waving supporters in Barcelona as Roger Torrent, of the pro-independence Republican Left (ERC), was voted head of the speaker’s committee, the chamber’s decision-making body.

Addressing the chamber, Mr. Torrent denounced the legal proceedings against much of the pro-independence leadership. He said the imprisonment of three parliamentarians – including Oriol Junqueras, the former vice president and ERC leader – was “absolutely unjustified, and impedes them being able to freely exercise their rights”.

Opposition parties had tried to thwart the election of Mr. Torrent with a request – swiftly denied – that the parliament reject delegated votes from the three jailed politicians, whose empty seats were marked with yellow ribbons. Mr. Puigdemont and four former cabinet members in self-imposed exile in Brussels dropped their attempts to vote via delegates after Mariano Rajoy, the Spanish prime minister, warned he would appeal such a move at the Constitutional Court.

Parliament Reconvenes Pro-Independence Groups Win

The BBC reports Catalonia MPs Elect Separatist Speaker as Parliament Reconvenes.

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

Drastic Pension Cuts Will Hit California, Kentucky, Other States

January 16, 2018

The CA Supreme Court will rule on pension cuts. Curiously, the court’s ruling will be irrelevant in case of bankruptcy.

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a “hunch” the courts would “modify” the so-called California rule, which holds that benefits promised to public employees can’t be rolled back. The state’s Supreme Court is set to hear a case in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers.

“There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities. For the fiscal year beginning in July, the state’s contribution to Calpers is double what it was in fiscal 2009.

“In the next downturn, when things look pretty dire, that would be one of the items on the chopping block,” Brown said.

Pension Cuts Are Coming

It’s refreshing to hear a politician admit the obvious: Pension cuts are coming.

However, whether or not the cuts are “reasonable” is irrelevant in cases of bankruptcy. Bankruptcy is under federal, not state law.

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

Reflections On “Pushing the Wrong Button” and US Drone Policy

January 15, 2018

A “ballistic missile threat inbound to Hawaii” notification was caused by an employee who “pushed the wrong button.”

Wrong Button

ABC News reports an [emergency alert notification] (http://wnep.com/2018/01/13/wrong-button-pushed-during-shift-change-blamed-for-false-hawaii-missile-alert/) sent out on Saturday claiming a “ballistic missile threat inbound to Hawaii” was a false alarm caused by an employee pressing the “wrong button” during a shift change, according to Hawaii Gov. David Ige.

‘Wrong button’ pushed during ‘shift change’ blamed for false Hawaii missile alert
An emergency alert notification sent out on Saturday claiming a “ballistic missile threat inbound to Hawaii” was a false alarm caused by an employee pressing the “wrong button” during a shift change, according to Hawaii Gov. David Ige. “BALLISTIC MISSILE THREAT INBOUND TO HAWAII.
wnep.com
‘Wrong button’ pushed during ‘shift change’ blamed for false Hawaii missile alert

“BALLISTIC MISSILE THREAT INBOUND TO HAWAII. SEEK IMMEDIATE SHELTER. THIS IS NOT A DRILL,” the initial emergency alert read.

False Alarm Timeline

“I know first-hand how today’s false alarm affected all of us here in Hawaii, and I am sorry for the pain and confusion it caused. I, too, am extremely upset about this and am doing everything I can do to immediately improve our emergency management systems, procedures and staffing,” said Gov. David Ige.

Synopsis

  • 8:05 a.m. – A routine internal test during a shift change was initiated. This was a test that involved the Emergency Alert System, the Wireless Emergency Alert, but no warning sirens.
  • 8:07 a.m. – A warning test was triggered statewide by the State Warning Point, HI-EMA.
  • 8:10 a.m. – State Adjutant Maj. Gen. Joe Logan, validated with the U.S. Pacific Command that there was no missile launch.
  • Honolulu Police Department notified of the false alarm by HI-EMA.

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

Food: What’s In Your Basket? How Fast Are Prices Rising?

January 12, 2018

The BLS says the CPI rose 2.1% in December from a year ago. Food rose 1.6%. I called the BLS and filled in some numbers.

In CPI Up 0.1 Percent: How Much is the CPI Understated? I disputed the BLS’s year-over-year overall inflation figure of 2.1%, specifically citing housing and the cost of health insurance.

I found the reported food increase reasonable, others didn’t. Whether or not you find the food index believable depends on two things.

  1. What you buy
  2. How you shop

Reader AWC pointed out this BLS article from March of 2017: Prices for meats, poultry, fish, and eggs down 7 percent since August 2015 peak.​

I downloaded the data and started plugging in numbers for December 2017. The index numbers did not match, so I called the BLS. The person directed me to data downloads which I also found on my own. I still could not match the downloaded numbers.

What happened is the data for the the preceding chart was indexed to 2007 but the main index is to 1982.

I asked the BLS agent for year-over-year increases of items and the percentages matched.

CPI Select Food Items

I calculated all but the last row from the March article after verifying percentages with the BLS. The last row was read to me over the phone.

I created the main graph from the above chart.

How Do You Shop?

​Your percentages may vary substantially from the above chart.

Mine are cheaper because I buy items on sale and freeze them. Sale prices fluctuate less than non-sale prices.

Properly wrapped food will last a year or more.

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

Dangerous Idiot Category: “It’s Time to Bomb North Korea”

January 10, 2018

Edward Luttwak, an armchair foreign policy idiot, proposes bombing North Korea.

It’s Time to Bomb North Korea says Edward Luttwak, idiot of the day for Foreign Policy Magazine.

Check out his rationale:

It’s true that North Korea could retaliate for any attack by using its conventional rocket artillery against the South Korean capital of Seoul and its surroundings, where almost 20 million inhabitants live within 35 miles of the armistice line. U.S. military officers have cited the fear of a “sea of fire” to justify inaction. But this vulnerability should not paralyze U.S. policy for one simple reason: It is very largely self-inflicted.

OK so let’s not worry about 20 million people, disruption in trade, or the threat of starting WWII involving Russia or China for the very simply reason that if the US starts the war it will be “largely self inflicted.”

Luttwak’s Predictions

Wikipedia has an interesting list of Luttwak’s Predictions.

  • In 1983, Luttwak pronounced the Soviet invasion of Afghanistan a success.
  • Luttwak thought it likely that the Soviet Union would launch a limited war against China, especially if the West increased its military power (as it did in the 1980s, under President Ronald Reagan).
  • Just a few months before the Berlin Wall came down, Luttwak was worrying that Soviet President Mikhail Gorbachev’s policies of glasnost and perestroika would augment the military power of the Soviet Union. Instead, those policies precipitated the end of the Cold War and the dissolution of the Soviet Union”.
  • Luttwak predicted, shortly before the first Persian Gulf War, that Iraqi President Saddam Hussein would evacuate Kuwait “after a week or two of bombing (the bombing continued for six weeks without inducing him to do so).

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

Median Family Net Worth Under 1989 Level: Debt-to-Money Worst Since 62 

January 9, 2018

As the stock market soars to new highs, here’s some sobering statistics to consider.

The stock market is at an all-time high but Americans Owe More, Save Less, and are Poorer Than in Decades.

Negative Wealth Percentage On the Rise

Sobering Stats

  1. A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok.
  2. 30.4% of US families have negative net worth despite the recovery in housing and the stock market.
  3. Median net worth is below where it was in 1989.
  4. Inflation adjusted, net worth may be the worst in history. $78,000 is not worth what it was in 1989, to say the least.

Bomb Cyclone Hits East Coast: Record Tide Floods Boston

January 5, 2018

Blizzards hit the East coast, record high tides flood Boston and in New Jersey, Christie declared a state of emergency.

The National Guard has been called out in several states as a bombogenesis or bomb cyclone makes its way up the East coast of the US.

“it is not the lowest pressure that defines bombogenisis but rather how quickly the pressure within the storm plummets. When the barometric pressure falls at least 0.71 of an inch (24 millibars) in 24 hours, a storm has undergone bombogenesis.”

Record High Tide

✔@NWSBoston

We appear to be near the record high water level in . However, it is within a few tenths of an inch and this will need to be confirmed with the NOAA’s National Ocean Service (NOS) @noaaocean before we can confirm or deny whether the record was tied or broken

Record or near-record high tides accompanied the cyclone causing severe coastal flooding. Over 4,000 flights have been canceled. Newark and LaGuardia account for about half the total.

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

Economists Think Inflation Will Rise Sharply in 2018: They’re Wrong 

January 4, 2018

Let’s investigate six reasons economists think inflation is about to pick in 2018, and why I think they are dreaming.

Reason Number One – Wage Hikes

Minimum wages rise in 18 states starting in 2018.

Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Wage Hike Rebuttal

The National Bureau of Economic Research paper: Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle, 2017 concludes there was a negative benefit to low wage workers as a result of wage hike.

  1. A 9% reduction in hours worked at wages below $19/hour.
  2. A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.
  3. The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.

This is an issue that’s debated over and over again, mostly with poor methodologies to come to the desired conclusion.

In contrast, the NBER had “exceptional individual-level data”.

Adding support the NBER’s conclusion, the Bank of Canada estimates Minimum Wage Hikes Could Cost Canada’s Economy 60,000 jobs by 2019.

By the way, and as discussed in Staggering Rent Increases in 2017, the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.

Next, factor in student debt.

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

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