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Economic Conditions Continue to Worsen

It must be China. Or the weather, which is usually either too cold or to warm – somehow the weather is just neverright for economic growth. Surely it cannot be another Fed policy-induced boom that is on the verge of going bust? Sorry, we completely forgot – the Fed is never at fault when the economy suffers a boom-bust cycle. That only happens because we have “too few regulations” (that’s what Mr. Bernanke said after the 2008 bust – no kidding).

forgotten-heritage

Photo credit: Matthew Emmett

No matter what economic data releases one looks at lately, one seems more horrendous than the next. This is apart from payrolls of course, which are not only a lagging indicator, but are apparently a number that is occasionally made up out of whole cloth – such as in December, when 281,000 of the reported 292,000 in non-farm payroll gains were the result of “seasonal adjustment”, which is bureaucrat-speak for “didn’t actually happen”.

Today the markets were inundated with data that strongly suggest that the negative trends observed over much of 2015 continue to accelerate. In what is by now a well-worn tradition, Fed district surveys of the manufacturing sector continued their decline with today’s release of the Empire State survey. One no longer risks being accused of hyperbole by calling its recent trend a “collapse”:

Empire State Survey, general business conditions index. Such readings are usually not seen during economic expansions – click to enlarge.

As is often the case, not a single economist came even remotely close to correctly forecasting this meltdown. As Mish noted earlier today, it was quite a big miss:

“The Econoday Consensus estimate was for a slight improvement to -4 from a November reading of -4.59. The actual result was -19.37 with the lowest economic estimate -7.50.”

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

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

January 15, 2016

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

Earlier today, Art Cashin summarized most (very desperate) traders’ thoughts when he said that as a result of today’s market crash, “the Fed will try anything” to prop up the wealth effect it had so carefully engineered with seven years of central planning in the aftermath of the financial crisis. Perhaps the only question left is “where is the put”, or where on the S&P 500 is the Fed’s breaking point beyond which Yellen will have no choice but to make a statement, or take action, in support of the market.

Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation’s Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.

Here’s why:

The Fed Put Call

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.

The Fed knows exactly what it’s doing.

Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.

Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt.

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

You Can Either Surf, or You Can Fight

January 15, 2016

You Can Either Surf, or You Can Fight

Kilgore:	Smell that? You smell that?
Lance:	What?
Kilgore:	Napalm, son. Nothing else in the world smells like that.

– “Apocalypse Now” (1979)

Hello, hello, hello, how low? [x3]
– Nirvana, “Smells Like Teen Spirit” (1991)

Outside the bus the smell of sulfur hit Bond with sickening force. It was a horrible smell, from somewhere down in the stomach of the world.
– Ian Fleming, “Diamonds Are Forever” (1956)

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere.

For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?

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

The Chart That Explains Everything

January 15, 2016

The Chart That Explains Everything

Why is the economy barely growing after seven years of zero rates and easy money? Why are wages and incomes sagging when stock and bond prices have gone through the roof? Why are stocks experiencing such extreme volatility when the Fed increased rates by a mere quarter of a percent?

It’s the policy, stupid. And here’s the chart that explains exactly what the policy is.

Screen Shot 2016-01-14 at 12.06.21 PM

(Richard Koo: The ‘struggle between markets and central banks has only just begun’, Business Insider)

What the chart shows is that the vast increase in the monetary base didn’t impact lending or trigger the credit expansion the Fed had predicted. In other words, the Fed’s madcap pump-priming experiment (aka– QE) failed to stimulate growth or put the economy back on the path to recovery. For all practical purposes, the policy was a flop.

QE did, however, touch off an unprecedented 6-year bull market rally that pushed stocks into the stratosphere while the real economy continued to languish in a long-term slump. And the numbers are pretty impressive too. For example, the Dow Jones Industrial Average, which bottomed at 6,507 on March 9, 2009, soared to an eye-popping 18,312 points by May 19, 2015, an 11,805 point-surge in just five years. And the S&P did even better. From its March 9, 2009 bottom of 676 points, the index skyrocketed to a record-high 2,130 points on May 21, 2015, tripling its value at the fastest pace in history.

What the chart shows is that the Fed knew from 2010-on that stuffing the banks with excess reserves was neither lowering unemployment or revving up the economy. The liquidity was merely driving stocks higher.

It’s worth noting, that the Fed knows that credit does not flow into the economy without a transmission mechanism, that is, unless creditworthy borrowers are willing to to take out loans. Absent additional lending, the liquidity remains stuck in the financial system where it eventually creates asset bubbles.

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

What Does The Federal Reserve Have to Hide?

January 14, 2016

What Does The Federal Reserve Have to Hide?

Over the years, dissidents in Congress (notably including former US Representative Ron Paul and current Republican and Democratic presidential contenders Rand Paul and Bernie Sanders) have periodically proposed legislation to audit the Federal Reserve. The legislation is always rejected and, when it gets any significant attention at all, roundly denounced by the Federal Reserve itself and groups like the US Chamber of Commerce.

Such was the case on January 12, when the US Senate defeated a motion to bring the latest version of “Audit the Fed” to the floor for full debate and a vote. What’s up with that?

Supporters paint a Fed audit as simple common sense; opponents as an attempt to “politicize” US monetary policy.

It seems to me that logic and reason are entirely with the pro-audit side. The Federal Reserve system was established by Congress in 1913 for the express purpose of manipulating the national currency pursuant to statutory objectives (creating and maintaining “maximum employment, stable prices, and moderate long-term interest rates”). That’s inherently “political.”

It’s not “politicization” that audit opponents really object to. What they object to, their dark references to “conspiracy theory” and other attempts at distraction notwithstanding, is transparency.

Why? Well, given that the primary opposition to an audit comes from the the political class and the usual Wall Street suspects — the rest of us either support an audit or, more likely, don’t think much about the matter at all — it’s pretty obvious:

The Federal Reserve operates, its statutory goals be damned, for the purpose of protecting the interests of “the 1%” in preference to the interests of, and when necessary at the expense of, the rest of us.

That’s the only plausible motive for audit opponents’ insistence that the Fed be allowed to operate in secrecy, immune from public inspection or even inspection by the political authority that created it and gave it its alleged mission.

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

Gold – No Time Left for Conspiracy Theories

January 14, 2016

Gold – No Time Left for Conspiracy Theories

To some, this is a religious battle. To others, it is just a time to rip off a lot of people by selling fantasies and sophistry. I have stated this many times, so here it goes again: Gold rises when people lose confidence in government. It has nothing to do with inflation. So, you start to worry about government survival or who’s going to win a war when gold rises — not before.

Short term, we still have the risk of gold going under $1,000 per ounce. It’s going to flip when everything is right — not before. It will probably max out at $5,000 per ounce or perhaps $6,000 at best. That we will not know until we have the low and the projection angle from that low. We’re dealing with a very profound event, religion aside. Such events of political-economic trend resets come around every 309.6 years. The last one was the global revolution against monarchy which began in the United States.

If you just step back and look OBJECTIVELY at what is unfolding from electronic currency to G20 demanding info on everyone and every penny that changes hands, then you can see where the future is headed. We do not have a democracy; that is total nonsense. The president appoints the heads of all departments. Nobody stands for election right down to the head of the Federal Reserve.

In Europe, you have the three-headed dragon they call the Troika — the European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF). None of those three members heads have EVER stood for election. They too are undemocratic appointments. So the European population cannot even vote for their future.

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

Billary Buddy Marc Lasry’s Last Rodeo——The Jig Is Up On 25 Years Of Bottom Fisher Bailouts

January 13, 2016

Billary Buddy Marc Lasry’s Last Rodeo——The Jig Is Up On 25 Years Of Bottom Fisher Bailouts

As the Fed’s third and last bubble of this century heads for its splatter spot, the stench of desperate crony capitalism fills the air. You can count hedge fund mogul and Billary Buddy, Marc Lasry, among the upchucking financiers.

A few months back I heard him say on bubble vision that energy debt was a “once in a lifetime opportunity”. My thought was good luck with that, but even better luck to your investors—–who will need to get out of Dodge fast.

The truth is, Lasry had it upsidedown. Energy prices over the last 15 years were carried skyward by a once in a lifetime central bank driven credit explosion. The latter fueled a surge of phony demand and a tidal wave of malinvestment——not only in oil and gas, but practically everything else in the material and manufacturing economy of the world.

The reason that 2016 will prove to be a great historical inflection point is that the central banks of the world have finally run out of dry powder. After a 20 year spree in which their balance sheets exploded by nearly 11X—–from $2 trillion to $21 trillion—-they are being forced to shutdown their printing presses.

China has been obliged to stop because it has been slammed with a $1 trillion capital flight in the last year, and it’s accelerating. The BOJ and the ECB have already shot their wad and it’s done no good at all. The Fed spent 84 months dithering on the zero bound and now it has no dry powder left as the US economy slides into recession.

Accordingly, the great global credit bubble has finally run out of new central bank fuel. It has now surely reached its apogee at about $225 trillion compared to only $40 trillion back in 1994 when oil prices were still well under $20 per barrel.

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

Banksters Win Again – “Audit the Fed” Bill Fails in the Senate

January 13, 2016

Banksters Win Again – “Audit the Fed” Bill Fails in the Senate

When it comes to the Fed, Congress is mired in hypocrisy. The anti-regulation, de-regulation crowd on Capitol Hill shuts its mouth when it comes to the most powerful regulators of all – you and the Federal Reserve. Meanwhile, Congress goes along with the out-of-control, private government of the Fed—unaccountable to the national legislature. Moreover, your massive monetary injections scarcely led to any jobs on the ground, other than stock and bond processors.

– From the post: Ralph Nader Destroys the Federal Reserve in Open Letter – Calls it “Out of Control, Private Government”

Rand Paul’s signature “Audit the Fed” legislation failed to garner the 60 votes needed in the Senate to move the measure forward. Of course, this is merely the latest in a never-ending series of banker victories, and a truly devastating blow against liberty, free markets, transparency and any hope for government by the people and for the people. Ensuring that light is never shined on the Fed’s shady, corrupt and unaccountable bailout activities has always been a key goal of the American oligarchy, and they succeeded once again.

Kudos to Rand Paul for trying, and respect to Democrat Bernie Sanders for voting in favor. Elizabeth Warren voting against is inexplicable and indefensible.

What’s Behind the Fed’s Decision to Raise Interest Rates in a Struggling Economy?

January 12, 2016

What’s Behind the Fed’s Decision to Raise Interest Rates in a Struggling Economy?

Much has been written and broadcast over the past few weeks in the financial media and the business pages of general-interest newspapers debating the wisdom of the decision in December by Fed Chair Janet Yellen and the Federal Reserve Board to raise interest rates for the first time in almost a decade.

On one side of this debate are people who say that the Fed needs to do this to prevent inflation from taking off. On the other side are people who warn that pushing up interest rates at a time when unemployment is still at a historically high level (and when real unemployment is more than double the official 5% rate) risks making things worse.

The increase of 0.25% in the Federal Reserve’s benchmark federal funds rate — the rate banks charge each other for holding short-term funds — was pretty minimal, but the arguments for raising the rate at all are absurd on their face.

The New York Times quoted Yellen as saying interest rates needed to be pushed up lest the economy begin “overheating”! As she put it, had rates not been raised last month, “”We would likely end up having to tighten policy (meaning raising rates) relatively abruptly to prevent the economy from overheating,” which she said could then throw the US back into recession.

What planet, or more specifically, what national economy does Yellen inhabit?

The US is so far from being an “overheating” economy it’s not funny. Official unemployment has remained stalled at 5.1% for three months now, but that is really a bogus number created during the Clinton administration when the Labor Department obligingly eliminated longer-term unemployed people who had given up trying to find a job from the tally of the unemployed, so their numbers wouldn’t embarrass the administration.

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

Sen. Rand Paul: The Fed Is Crippling America

January 11, 2016

Sen. Rand Paul: The Fed Is Crippling America

Anadolu Agency—Getty ImagesThe Federal Reserve Building in Washington, D.C., on Oct. 27, 2014.

Rand Paul is a U.S. senator from Kentucky and a Republican presidential candidate. Mark Spitznagel is the chief investment officer of Universa Investments and senior economic adviser to the Paul campaign.

The country deserves to understand the extent of its balance sheet

We aren’t the first to be wary of the powers of central banks. Founding Father Thomas Jefferson viewed the powers of central banks as being contrary to the protections of the Constitution. As Jefferson wrote: “I sincerely believe that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

In a similar vein, the great Austrian economist Ludwig von Mises also recognized that limiting government power in the realm of money was a matter of liberty, not merely economics. Mises explained that “the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

How far we have come as a country that these words from Jefferson and Mises sound so foreign today. Perhaps we have all been blinded by the credit and equity bubbles that surround us. But what better wake-up call to rally support for legislation that would shine a bright light on the government institution that today has created these bubbles, subsidizes small subsets of the population (thus amplifying wealth inequality), and enables endless government debt?

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

Fed Official Confesses Fed Rigged Stock Market — Crash Certain

January 10, 2016

Fed Official Confesses Fed Rigged Stock Market — Crash Certai n

In a dynamite interview, Richard Fisher, former president and CEO of the Federal Reserve Bank of Dallas, gave what may be the biggest confession you’ll ever see and hear from a Federal Reserve insider: the Federal Reserveknowingly “front ran” the US stock market recovery (i.e., manipulated the market) and created a huge asset bubble. Fisher expresses certainty that the “juiced” stock market will come down and is coming down now that the Fed has taken its foot off the accelerator … and that it has a long way yet to go.

While that is no news to readers here whose eyes are wide open, a “market put” has been denied by the Fed and by many market advisors. That the market was an overinflated bubble created by the Fed has been denied, too; but Fisher clearly and gleefully admits the Fed created a bubble that will have to deflate now that the Federal Reserve’s stimulus is off.

As one of the members of the Federal Reserve’s FOMC (the Federal Open Market Committee, which sets US monetary policy), Richard Fisher participated in and voted on all of the Fed’s policies of zero interest and quantitative easing, so he has inside knowledge of all the discussions behind the scenes at the Fed.

Here are the significant quotes from Richard Fisher on CNBC’s video:

What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.

It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.

I’m not surprised that almost every index you can look at … was down significantly. [Referring to the results in the stock market after the Fed raised rates in December.]

Basically, we had a tremendous rally, and I think there’s a great digestive period that is likely to take place now, and it may continue.

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

Fork the Economy

January 8, 2016

I’ve given up on fixing the economy. The economy is not broken. It’s simply unjust. There’s a difference.

We have to stop looking at our economy as a broken system, but one that is working absolutely true to its original design. It’s time to be progressive — and this means initiating systemic changes.

For example, Bernie Sanders’ well-meaning calls to rein in the banking industry by restoring the Federal Reserve’s function as a “regulatory agency” reveals the Left’s inability to grasp the true causes for today’s financial woes. We are not witnessing capitalism gone wrong — an otherwise egalitarian currency system has not been corrupted by greedy bankers — but, rather, capitalism doing exactly what it was programmed to do from the beginning. To fix it, we would have to dig down to its most fundamental code, and rewrite it to serve people instead of power.

First off, the role of the Federal Reserve was never to serve as an “agency.” It’s not like the Environmental Protection Agency, which is charged with regulating corporate destruction of the natural world — however woefully it may be carrying out that purpose. Rather, the Fed is a private corporation — a banker’s bank owned by the banks — created to guarantee the value of currency. It was built to serve the dollar and maintain its value by fighting inflation. When the Fed is feeling magnanimous, it can also lend extra money into existence, in the hope that it will be invested in enterprises that employee people.

The actions of the Fed, however, are limited by the way our money, central currency, was designed to work. It was developed back before the Industrial Age, as a waning European aristocracy sought to stem the rise of the merchant middle class.

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

US Economy – on the Verge of Recession?

January 6, 2016

US Economy – on the Verge of Recession?

US Manufacturing Sector Weakens Further – Alea Iacta Est?

On the first trading day of the year, China’s stock market crumbled, seemingly waylaid by yet another weak manufacturing PMI report and a further slide in the yuan. On the same day, a few Fed members came out affirming that several more rate hikes would be seen in the US this year (such as SF Fed president Williams and Cleveland Fed president Loretta Mester).

dice

Image vie pixabay.com

Meanwhile here is the latest update of the Atlanta Fed’s GDP Now indicator:

A-gdpnow-forecast-evolution The GDP Now model declines to just 0.7%, once again way below the consensus range

When we last mentioned this indicator in passing, it still stood at 1.7% – and that was on December 18! Not long after that, we posted a year-end overview of US manufacturing data with updated charts from our friend Michael Pollaro. This was on December 23, but in the meantime a wealth of additional data has been released, primarily in the form of district surveys and finally the manufacturing ISM release on January 4.

Michael has provided us with a fresh set of charts, showing the evolution of the most important data points of the district surveys as an average and comparing them to the respective National ISM data. In previous updates on manufacturing data, we have mentioned that we see little reason why the trends that have been in motion since early 2015 should reverse. And indeed, they haven’t – on the contrary, they seem to be accelerating.

The most upsetting releases of late have been the Chicago ISM (which contains services as well) and the national ISM released on January 4. Both came in way below already subdued expectations, with the Chicago number falling totally out of bed, posting a headline reading of just 42.9 – well in contraction territory.

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

The Big Short is a Great Movie, But…

January 5, 2016

The Big Short is a Great Movie, But…

Paris — Michael Lewis is the chronicler of Wall Street. He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling. Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010). Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.

The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life. Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining. Lewis does this with two essential ingredients of any film: a simple story and compelling characters.

Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking. Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion. Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.

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

Are We Headed for Another Bust?

January 5, 2016

Are We Headed for Another Bust?

On Wednesday December 16, 2015, Federal Reserve Bank policymakers raised the federal funds rate target by 0.25 percent to 0.5 percent for the first time since December 2008. There is the possibility that the target could be lifted gradually to 1.25 percent by December next year.

Fed policymakers have justified this increase with the view that the economy is strong enough and can stand on its own feet. “The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident the inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement.

Unwarranted Optimism

Various key economic indicators such as industrial production don’t support this optimism. The yearly growth rate of production fell to minus 1.2 percent in November versus 4.5 percent in November last year. According to our model the yearly growth rate could fall to minus 3.4 percent by August.

Although the yearly growth rate of the CPI rose to 0.5 percent in November from 0.2 percent in October according to our model the CPI growth rate is likely to visibly weaken.

The yearly growth rate is forecast to fall to minus 0.1 percent by April before stabilizing at 0.1 percent by December next year.

So from this perspective Fed policymakers did not have much of a case to tighten their stance.

%Chng US Industrial Production YOY

Fed policymakers seem to be of the view that the almost zero federal funds rate and their massive monetary pumping has cured the economy, which now seems to be approaching a path of stable economic growth and price stability, so it is held.

With this way of thinking the role of monetary policy is to make sure that the economy is kept at the “correct path” over time.

Following in Greenspan’s Footsteps

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

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