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Unsolicited Advice to Fed Chair Powell

Unsolicited Advice to Fed Chair Powell

American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].

US non-financial corporate debt takes flight – the post 2008 crisis trajectory is breath-taking, to say the least [PT]

What is the significance of $9.1 trillion?  And what are its looming repercussions?  Here, for your edification, we’ll take a moment to properly characterize this number.

For one, non-financial corporate debt of $9.1 trillion is nearly half of real U.S. gross domestic product.  Hence, the realization of profits by private businesses has required a substantial accumulation of debt.  And this debt, like much of today’s outstanding debt, is shaping up to be reckoned with at the worst possible time.

Remember, when corporate debt is increasing faster than profits, it is like a plucked tomato sitting on a store shelf.  It goes bad with little notice.  Frank Holmes, by way of Forbes, offers the grim particulars:

This by now slightly dated chart shows the upcoming wall of maturities in junk bonds and leveraged loans as of mid 2017 – n.b., this doesn’t even include BBB-rated liabilities, which represent the by far biggest potential concern (“Titans’ debt” refers to the debt maturity profiles of the companies carrying the largest securitized debt in absolute terms, such as e.g. AT&T). [PT]

But that is not all…

Compounding Dishonesty

Whereas $9.1 trillion of non-financial corporate debt is nearly half of real U.S. GDP.  And whereas this $9.1 trillion of non-financial corporate debt is the junkiest corporate debt ever seen.  This $9.1 trillion of non-financial corporate debt is nearly double what it was just moments before the financial system exploded a decade ago.

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

The Fed’s Body Count

The Fed’s Body Count

The problem with the war (Vietnam), as it often is, are the metrics. It is a situation where if you can’t count what’s important, you make what you can count important. So, in this particular case what you could count was dead enemy bodies.” – James Willbanks, Army Advisor, General of the Army George C. Marshall Chair of Military History for the Command and General Staff College

If body count is the measure of success, then there’s a tendency to count every enemy body as a soldier. There’s a tendency to want to pile up dead bodies and perhaps to use less discriminate firepower than you otherwise might in order to achieve the result that you’re charged with trying to obtain.” – Lieutenant Colonel Robert Gard, Army and military assistant to Secretary of Defense Robert McNamara

Verbal Jenga

In recent press conferences, speeches, and testimony to Congress, Federal Reserve (Fed) Chairman Jerome Powell emphasized the Fed’s plan to be “patient” regarding further adjustments to interest rates. He also implied it is likely the Fed’s balance sheet reductions (QT) will be halted by the end of the year. 

The support for this sudden shift in policy is obtuse considering his continuing glowing reports about the U.S. economy. For example, the labor market is “strong with the unemployment rate near historic lows and with strong wage gains. Inflation remains near our 2% goal. We continue to expect the American economy will grow at a solid pace in 2019…” The caveats, according to Powell, are that “growth has slowed in some major foreign economies” and “there is elevated uncertainty around several unresolved government policy issues including Brexit, ongoing trade negotiations and the effect from the partial government shutdown.” 

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

Interest Rates, Funny Money, and Economic Malaise

Interest Rates, Funny Money, and Economic Malaise

Since the 2007–8 financial crisis, more and more economists have entertained the idea that there might be some connection between artificially low interest rates and business cycles. By “artificially low” I mean interest rates that are pushed below their natural levels by expansionary monetary policy. The relationship between monetary policy and interest rates is tricky; beyond the immediate short run, it is hard to say whether liquidity effects (which tend to push down rates) or rising income effects (which tend to push up rates) dominate. But in the short run, to the extent that expansionary monetary policy is a surprise, there should be a fall in market interest rates that is not justified by economic fundamentals — namely, real saved resources available for investment projects.

The way the business cycle unfolds looks like this: The monetary authority injects new money into capital markets in an attempt to give the economy a shot in the arm. Investors see artificially low rates and increase their investments in projects that will pay out in the future. But households are not saving any more real resources. In fact, households will probably respond to low interest rates in the same way: the costs of reallocating purchasing power from future you to present you have fallen, so you are more likely to borrow to equalize your intertemporal marginal utility of consumption. With both consumers and investors using up more real resources in ways that are fundamentally at odds with each other’s plans, something’s got to give. The comovement of consumption and investment beyond the economy’s production possibility frontier is ultimately unsustainable. When everyone wakes up to the fact that the low interest rates were the result of funny money, rather than real economic forces, the bubble bursts.

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

The Federal Reserve’s Controlled Demolition Of The Economy Is Almost Complete

The Federal Reserve is an often misunderstood entity, not only in the mainstream, but also in alternative economic circles. There is this ever pervasive fantasy on both sides of the divide that the central bank actually “cares” about forever protecting the US economy, or at least propping up the US economy in an endless game of “kick the can”. While this might be true at times, it is not true ALL the time. Things change, agendas change, and sometimes the Fed’s goal is not to maintain the economy, but to destroy it.

The delusion that the Fed is seeking to kick the can is highly present today after the latest Fed meeting in which the central bank indicated there would be a pause in interest rate hikes in 2019. As I have noted in numerous articles over the past year, the mainstream media and the Fed have made interest rates the focus of every economic discussion, and I believe this was quite deliberate. In the meantime, the Fed balance sheet and its strange relationship to the stock market bubble is mostly ignored.

The word “capitulation” is getting thrown around quite haphazardly in reference to the Fed’s tightening policy. And yet, even now after all the pundits have declared the Fed “in retreat” or “trapped in a Catch-22”, the Fed continues to tighten, and is set to cut balance sheet assets straight through until the end of September. Perhaps my definition of capitulation is different from some people’s.

One would think that if the Fed was in retreat in terms of tightening, that they would actually STOP tightening. This has not happened. Also, one might also expect that if the Fed is going full “dovish” that they would have cut interest rates in March instead of holding them steady at their neutral rate of inflation.

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

On The Edge Of Collapse: Turkish Lira Plummets As Central Bank Burns Through A Third Of Reserves

On The Edge Of Collapse: Turkish Lira Plummets As Central Bank Burns Through A Third Of Reserves

The Turkish lira resumed its plunge on Thursday following a sharp rebound on Tuesday when Turkish authorities unleashed an unprecedented assault on lira shorts, helping push the TRY briefly higher ahead of regional elections, after a disappointing reading on the central bank’s net FX reserves stoked fears that the country was even closer to a full-blown currency crisis than investors had feared, while local accounts continued to accumulate foreign currency after overnight swaps on the Turkish Lira collapsed to just 40% from a historic high around 1,338% on Tuesday.

After nearly a week of chaos that one trader described as unprecedented in his two decades in the market (“I’ve never seen a move like this in the 21 years I’ve been watching the market“), it appears President Erdogan has relented, and following a vocal outcry from the international community which was effectively trapped in lira positions, both long and short, after overnight swaps hit rates well above 1,000%, on Tuesday the swap plunged as low as 18.5%, in line with recent historical prints, and an indication that after doing everything in its power to squeeze shorts (and longs) the central bank appears to have capitulated.

As we reported previously, bankers and analysts at large international banks reported that Turkish lenders appeared unable or unwilling to provide lira in exchange for currency this week, in an attempt to prevent short selling. While Turkey’s banking association (TBB) on Wednesday night denied claims that the country’s lenders had been limiting or halting sales of lira to foreign banks, one London-based analyst told the FT on Tuesday that Turkish banks told him they had been ordered “not to lend even a single lira to foreign counterparties” That squeeze sent the cost of borrowing lira soaring for foreign banks and hedge funds, although as shown above, it has since tumbled.

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

Our Flawed Monetary System & Why it is Doomed

Our Flawed Monetary System & Why it is Doomed 

QUESTION: You mentioned that Rome had no national debt and no central bank. Exactly how did it function for 1,000 years?

JY

ANSWER: In addition to not having a national debt or a central bank, Rome had no police force or agency charged with enforcing the law. There were specific crimes against the state that would be prosecuted such as arson and treason. But the prosecution of a murder would be carried out by the family. The responsibility for enforcing the law thereby fell on the kin, tribe, gens and patron of the offended individual.

It was the King of England after Magna Carta who began to prosecute people for what was private crimes all so he could make money. By the time of the American Revolution, there were 240 felonies all of which carried the death penalty. So the king got to confiscate all your property and throw your family out on the street all based on what had historically been a private dispute.

As far as finances, the government simply minted coins to pay its expenses. As I have said, if we just created the money to fund the government rather than borrow, it would be far less inflationary. Because we borrow, with no intention of paying anything off, we must keep paying interest to roll the debt. That suppresses the economy, for it is competing with the private sector. It is a contributing factor as to why 70% of small business get turned down for loans that would expand the economy.

As shown here, the accumulative interest expenditures eventually exceed 70% of the total debt so the money never went to anything such as schools, roads, or social programs. If the government simply created the money, as did Rome, then the economy is segregated between public and private.

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

The Federal Reserve: A Failure of the Rule of Law

The Federal Reserve: A Failure of the Rule of Law

“Money is power.” We’ve all heard this aphorism many times before. Too often it’s a lazy shorthand dismissal of the finding of mainstream economics, which show that the pursuit and possession of money often entails innocuous or even beneficial consequences for society. Dr. Johnson was right after all: “There are few ways in which a man can be more innocently employed than in getting money.”

But there are some contexts in which the saying is apt. An obvious case is the Federal Reserve. The Fed has a monopoly on the creation of base money, the fundamental asset underlying the banking and financial system. And over decades, with each instance of financial turbulence, the Fed has become less constrained in how, when, and why it creates base money. Since the Great Recession, the Fed has been able to bestow purchasing power, liquidity, and solvency on just about any financial organization it pleases. If that isn’t power, there’s no such thing.

The Federal Reserve System was created in 1913. It was intended to be a formalization of the interbank clearing system that then existed in the National Banking System. It was not intended to be a central bank. Even in the early 20th century, economists and politicians had some idea of what central banks did and how they behaved, and the existence of such an institution was widely regarded as inherently un-American, in the sense that it could not be reconciled with a self-governing society. That’s why so many proponents of the Federal Reserve System bent over backward to insist they were not advocating the creation of a central bank. And at the time, their repudiations were reasonable; there was no reason the Federal Reserve System had to acquire the powers it did.

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

Super Mario Draghi’s Day of Reckoning Has Arrived

Super Mario Draghi’s Day of Reckoning Has Arrived

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” — MARIO DRAGHI JULY 26TH 2012

No quote better defines Mario Draghi’s seven-plus years as the President of the European Central Bank than that quote. Draghi has thrown literally everything at the deflationary spiral the Euro-zone is in to no avail.

What has been enough has been nothing more than a holding pattern. 

And after more than six years of the market believing Draghi’s words, after all of the alphabet soup programs — ESM, LTRO, TLTRO, OMB, ZOMG, BBQSAUCE — Draghi finally made chumps out of traders yesterday.

Draghi reversed himself after December’s overly hawkish statement in grand fashion but none dare call it capitulation. For years he has patched together a flawed euro papering over cracks with enough liquidity spackle to hide the deepest cracks. 

The Ponzi scheme needs to be maintained just a little while longer.

He’s not alone. In fact, all the major central banks have been working in concert since the day they broke the gold bull market back in September 2011, when the Swiss National Bank pegged the Franc to the euro which began the era of coordinated central bank policy.

And since 2013’s Taper Tantrum when then FOMC-Chair Ben Bernanke  
timidly announced a future without QE the markets have consistently tore at their resolve to normalize monetary policy.

Because when you paper over reality you don’t fix the underlying problems. The losses are still there, hidden in plain sight, held at mark-to-model prices, on central bank balance sheets. 

Ben retired and Janet took over. She held the fort for nearly her entire term, refusing to raise rates while Draghi sent rates negative alongside Japan’s Kuroda. 

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

What Caused the Recession of 2019-2021?

What Caused the Recession of 2019-2021?

The banquet of consequences is now being served, but the good seats have all been taken.As I discussed in We’re Overdue for a Sell-Everything/No-Fed-Rescue Recession, recessions have a proximate cause and a structural cause. The proximate cause is often a spike in energy costs (1973, 1990) or a financial crisis triggered by excesses of speculation and debt (2000 and 2008) or inflation (1980).

Structural causes are imbalances that build up over time: imbalances in trade or currency flows, capital investment, debt, speculation, labor compensation, wealth-income inequality, energy supply and consumption, etc. These structural distortions and imbalances tend to interact in self-reinforcing dynamics that overlap with normal business / credit cycles.

The current recession has not yet been acknowledged, but this is standard operating procedure: recessions are only declared long after they actually start due to statistical reporting lags. Maybe the recession of 2019-21 will be declared at some point in the future to have begun in Q2 or Q3, but the actual date is not that meaningful; what matters is what caused the recession and how the structural imbalances are resolved.

So what caused the recession of 2019-21? Apparently nothing: oil costs are relatively low, U.S. banks are relatively well-capitalized, geopolitical issues are on the backburner and stocks, bonds and real estate are all well-bid (i.e. there is no liquidity crisis).

This lack of apparent trigger will mystify conventional economists who generally avoid the enormous structural imbalances in our economy because those imbalances are the only possible output of our Neofeudal Power Structure in which a New Nobility/Oligarchy dominates financial and political power and skims the vast majority of gains the economy generates.

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

Italy’s Gold enters the Political Fray. But who really owns it?

Italy’s Gold enters the Political Fray. But who really owns it?

Italy’s unpredictable political situation continues to throw up surprises with a controversial claim in national newspaper La Stampa this week that the country’s coalition government wants to sell part of Italy’s gold reserves to cover spending plans and to prevent the need to increase VAT in a forthcoming Italian budget.

While the claims by La Stampa are not really based on anything new, they still managed to cause an international media frenzy as they came a few days after Italy’s governing coalition launched verbal attacks on Italy’s central bankers and financial regulators.

Note that Italy claims to be the world’s third largest sovereign gold holder behind the US and Germany, with claimed monetary gold holdings of 2451.8 tonnes. Interestingly, unlike most countries where sovereign gold is owned by the State but managed by the country’s central bank, the Italian gold is officially owned by Italy’s central bank, Banca d’Italia (Bank of Italy), and not owned by the Italian State.

The Banca d’Italia furthermore claims that 1199.4 tonnes of the gold (or roughly half), is stored in the Bank’s gold vaults under it’s Palazzo Koch headquarters building in Rome, with most of the other half stored in the vaults of the Federal Reserve Bank of New York (FRBNY), and a small balance kept the Bank of England in London, and in an account of the Bank for International Settlements (BIS) in the vaults of the Swiss National Bank (SNB) in Berne, Switzerland. But without any documentary evidence or independent auditing or verification of any of its gold, especially the foreign held gold, these claims are impossible to verify.

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

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Why the Fed, Nor Any Central Bank, Can Ever Truly “Normalize”

Last week, I highlighted that since ’00, when the Federal Reserve has ceased adding to its balance sheet or begun “normalizing” (via rolling off assets), equity markets have swooned (detailed HERE).
A simple idea today…that the end of population growth (where it matters) has long been upon us (detailed below).  Absent population growth among the nations that do nearly all the consuming, a debt based economic and financial system (to coerce ever higher levels of debt fueled consumption) can’t ultimately succeed.  That is, without population growth, assets generally don’t appreciate, homes are just shelter rather than “investments”, and debt is generally only a drag on future spending.  Likewise, without population growth, total global energy consumption is on the precipice of secular decline (detailed HERE).

In this reality, the only means of maintaining or lifting asset prices further is ever more central bank monetization (aka, centrally planned and executed counterfeiting).  Of course, this monetization scheme is doomed to fail but while it continues, the gains are privatized while the losses are socialized.  But ultimately markets (and economies, as a means of honest exchange), will get cleared.  So, without further ado, I detail the end of population growth (particularly where it matters):

1- Simply put, topline global population growth (births) ceased increasing almost 30 years ago!  Looking solely at the top-line (dashed black line, chart below), note that from 1950 to 1989, annual global births increased 73% (+57 million).  Conversely, from 1989 to 2018, annual global births have risen just 1% (+1 million).  Based on UN data and UN median (overly optimistic) future estimates.

However, the distribution of those births among the differing groupings of nations (by income) has dramatically changed from 1950 to present…and will shift further by 2050.

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

Venezuela’s gold in limbo amid tug-of-war at the Bank of England

Venezuela’s gold in limbo amid tug-of-war at the Bank of England

In early November news was placed into the British media (Reuters and The Times) revealing that the Bank of England in London, one of the world’s largest custodians of gold bars on behalf of other central banks, was refusing to allow the withdrawal and repatriation of 14 tonnes of gold belonging to Venezuela’s central bank, the Banco Central de Venezuela (BCV).

According to these media reports, the delays / refusals by the Bank of England to allow the Venezuelan gold repatriation ranged from excuses about the prohibitive cost of transport insurance to concerns about future money laundering. In all cases, these excuses were bogus, as I explained in the article “Bank of England refuses to return 14 tonnes of gold to Venezuela” on the BullionStar website, dated 15 November, and that the real reasons for the Bank of England’s refusal were political. As I stated at the time in my conclusion:

The reasons put forward by official sources in the Reuters and Times articles for why Venezuela can’t withdraw its gold from the Bank of England are clearly bogus. The more logical and likely explanation is that the US, through the White House, US Treasury and State Department have been liaising with the British Foreign office, HM Treasury to put pressure on the Bank of England to delay and push back on Venezuela’s gold withdrawal request.”

According to the Reuters report dated 5 November, the Venezuelan central bank gold withdrawal plan had “been held up for nearly two months”, which would put the original withdrawal request by the BCV to the Bank of England at a date in at least September and probably earlier. So the BCV had been looking for its gold back for sometime, and the Bank of England was stalling.

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

Inflation Targeting Madness: Russia Raises Rates Again

Inflation Targeting Madness: Russia Raises Rates Again

I continue to wonder who Bank of Russia President Elvira Nabuillina works for.  Seriously.  On Friday, in response to solid growth in Russian economic statistics over the past few months, Nabuillina again raised interest rates 0.25%.

She still adheres to idiotic IMF-style ‘inflation targeting’ dogma.

Price inflation in Russia finally got off the roughly 2.5% mat in August steadily rising to 3.8% in November.  This prompted Nabuillina to raise rates again, stifling growth which itself was stifled by her overly-cautious rate cutting earlier in the cycle.

The recovery in Russia after the Ruble crisis of 2014/15 was exasperated by her holding interest rates too high for too long.  The Russian bond market took way to long to normalize because of this lack of liquidity.

In 2017 and early 2018, every time the Bank of Russia cut rates the Ruble would strengthen, that’s how high demand was for them.  The Russian yield curve was approaching normalcy.

And Nabuillina is now, again, undermining it by trying to control price inflation as opposed to letting the market regulate itself.

The short-term Russian bond market is screaming for some relief and the Bank of Russia won’t accomodate.  Remember, inflation in Russia is running just 3.8%, so we’re talking a positive real yield on overnight money of 4%.  This is not making it easy to liquefy a growing economy.  Real yields of 4% on 3 to 5 year money?  Ok.

But overnight?   I’m all for a cautious central bank that does not inflate massive bubbles but I’m also not for a central bank to do the bidding of a country’s adversaries either by undermining growth with needless austerity.

Central Bank Fallacies

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

For The First Time Ever, Bank Of Canada Buys Mortgage Bonds

Three weeks ago we reported that, the Bank of Canada announced for the first time that in order to prop up the sliding Canadian housing market help increase the tradeable float of its benchmark securities, the central bank would start buying government-backed mortgage bonds, also known as Canada Mortgage Bonds which are guaranteed by Canada Mortgage and Housing Corp.

Well, it took less than a month for the BoC to execute on its intentions, because on Thursday, the central bank purchased Canada Housing Trust bonds for the first time ever, scooping up C$250 million ($187 million) of the federal agency’s C$5.5 billion five-year notes which priced today.

Canada Housing Trust, the special issuer of Canada Mortgage and Housing Corp.-backed debt, priced the 2.55% bonds due 2023 at a spread of 40.5 bps over comparable debt issued by the country’s federal treasury, National Bank Financial, the lead coordinator of the deal, said. The housing agency first offered these notes in September at a relatively narrow spread of only 31.5 basis points.

As we reported at the time, the Bank of Canada said in late November it would broaden the range of high quality assets it acquires to include purchases of government-guaranteed debt issued by federal Crown corporations. While the central bank said the expansion is “only for balance sheet management” and would give it added flexibility to offset the continued growth of bank notes, the cynical skeptics immediately accused the BoC of implicitly stepping in to prop up Canada’s deteriorating housing market.

The expansion, the BoC said, would also provide more freedom to reduce its participation in primary Canadian government bond auctions and help boost the tradeable float, supporting secondary market liquidity.

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

The Trade War Distraction: Huawei And Linchpin Theory

The Trade War Distraction: Huawei And Linchpin Theory

Since the beginning of this year, I have been warning that trade tariffs initiated by Donald Trump would develop into a full-blown trade war with China, and perhaps other nations, and that the timing of this trade war is rather suspicious. Suspicious how? Almost every instance of further escalation was made by Trump around the exact time that the Federal Reserve was also making a large cut to its balance sheet or raising interest rates. Instead of focusing on the fact that extreme volatility has returned to markets because central banks are pulling the plug on life support, the mainstream media is holding up the trade war as the ultimate culprit behind the accelerating crash.

In other words, Trump’s trade war is acting as a perfect distraction from the crisis which the banking establishment has now deliberately triggered.

The initial response to my suggestion by a minority of liberty movement activists and skeptics was outright denial. Some people argued that the trade war would be over before it even began and that China would immediately capitulate in fear of losing the U.S. consumer market. Others argued that the trade war “had been started by the Chinese years ago” and Trump was simply “fighting back.”

Clearly, the trade war is not fading away as many assumed. As I predicted, it is only continuing to grow. And the notion that a trade war is necessary at this time in defense of the U.S. economy ignores certain realities. For example, the trade deficit itself was never “theft” by the Chinese, but a BARTER between the Chinese and the U.S. government and U.S. corporations.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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