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Tough Questions Generate Weak Common Assumptions

Tough Questions Generate Weak Common Assumptions

Picture Of Space Tourists 

An article suggesting how common space travel is about to become highlights how willing people are to accept opinions as fact. Most people make assumptions based on a number of factors. These include what they see, what they hear, and more importantly, based on the general direction that things have been going. This means we as a population have developed “kind of a feeling” about what the future is likely to hold. Sadly, the way people form assumptions is heavily swayed by mainstream media and big tech’s hold over how we get information. We live in a world where reason and critical, independent thinking is in very short supply. This has created a situation where, we may someday find that we as a society, have been a bit overly optimistic about our potential. Black swan events do occur and when they do they can be game-changers. The world and life as a whole is full of risk. With this in mind I write this article to address a few questions that have been bothering me and a few other people that make a concerted effort to see past the hype, propaganda, and bull shit we are constantly fed by those with an agenda.

Frontline, on PBS, recently ran a program titled, Power Of The Fed. It reiterates how when COVID-19 struck, the Federal Reserve rapidly stepped in to avert an economic crisis. It looks at how as America’s central bank continues to pump billions of dollars into the financial system daily, who is benefiting, who is not, and whether their policy is working. The question is also raised as to what happens if they try to turn off the flow of easy money

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

Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt takes on the widespread belief that sustained inflation is on the way in his latest quarterly review.
Money Velocity and the Commercial Bank LD Ratio

Hoisington Quarterly Review and Outlook 2nd Quarter 2021

Here are some snips to the latest at Hoisington Management Quarterly Review (Emphasis Mine).

Too Much Debt

In highly indebted economies, additional debt triggers the law of diminishing returns. This fact is confirmed when the marginal revenue product of debt (MRP) falls, where MRP is the amount of GDP created by an additional dollar of debt. In microeconomics, when debt is already at extreme levels, a further increase in debt leads to an increase in the risk premium on which a borrower will default suggesting that the bank or other lender will not be repaid.

Combining both the falling MRP with a declining loan to deposit (LD) ratio, results in a reduction in the velocity of money. In terms of the impact on monetary activities, a drop in the LD ratio means that more of bank deposits are being directed to the purchase of Federal, Agency and state and local securities in lieu of private sector loans. The macroeconomic result is that funds are shifted to sectors that are the least productive engines of economic growth and away from the high multiplier ones.

More than thirty years ago, Stanford Ph.D. Rod McKnew demonstrated that the money multiplier, referred to as “m”, is higher for bank loans than bank investments in securities. The money multiplier, which is money stock (M2) divided by the monetary base should not be confused with the velocity of money. The latest trends strongly support McKnew’s analysis.

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

Too Much Money Chasing Too Few Goods and Services

Too Much Money Chasing Too Few Goods and Services

Inflation can be considered a tax, an especially regressive one, falling harder on those with lower income and/or assets.

As we’ve noted previously, the Federal Reserve’s “M2” monetary aggregate began growing significantly faster than the “GDP” measure of economic output in the United States beginning around 2008, amidst the 2007-2009 financial and economic crisis.

With the federal government’s massive fiscal and economic “stimulus” policies arriving together with a pandemic and government lockdowns, M2 growth has recently risen dramatically higher than GDP growth.

Earlier this week, the Bureau of Labor Statistics (within the U.S. Department of Labor) reported that the Consumer Price Index (CPI) rose in June at one of its fastest growing rates in more than a decade. Some people have been pointing to the fact that year-over-year changes in the CPI may be high recently in part because the comparisons to last year’s levels were amidst the onset of the pandemic. But in the second quarter of 2021, compared to the first quarter of 2021 and on a seasonally adjusted basis, the CPI rose at an annualized rate of more than 8 percent, which is the highest quarterly growth rate since the third quarter of 1981.

It’s always worthwhile to keep an eye on alternative inflation measures, given the estimation issues associated with government statistics, and considering the source of those statistics.

Along those lines, a recent survey of small businesses by the National Federation of Independent Business (NFIB) returned a result for prices that hasn’t been reached since 1981.

And the prices component of the monthly Institute for Supply Management survey of business purchasing managers rose in June 2021 to its highest reading since July 1979.

Inflation can be considered as a tax, and an especially regressive one, falling harder on those with lower income and/or assets. Inflation can be considered one cost of government.

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

The Ugly And Difficult Hunt For The True Economy

The Ugly And Difficult Hunt For The True Economy

Good luck with acquiring a clear view of our economic future. It is shrouded and cloaked under an ocean of often irrelevant facts and figures. Somewhere between what we are told is occurring in the economy and what we see happening on Main Streets across America is the real and true authentic economy. It is ironic that every sign the economy is not getting better only reinforces the idea that the Fed needs to goose things and pour even more fuel on the fire. This is exactly what many of us oppose and consider pure insanity.

A false economy of fraud is created by seizing on a few positive numbers that can be spun and hyped to convince people all is well. Even as I’m writing this, a MarketWatch article just came out saying the U.S. stock-index futures were trading higher after a report on June retail sales came in stronger than expected. To that, I say, what do you expect, people are busy spending what they see as “free money.” Sadly, people buying goods made in China from Amazon does little to enrich our communities or the American economy.
The justification for continued Fed intervention is often attributed to the idea inflation is not a threat and further action poses little risk. Those behind increased and continued easing say more action is needed or a loop will develop that feeds on itself and ends in a deflationary depression.
Most of us are familiar with former President Bill Clinton’s infamous line; “It depends on what the meaning of the word ‘is’ is.”

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

Grocery Stores Are Masking Price Hikes Via “Shrinkflation”

Grocery Stores Are Masking Price Hikes Via “Shrinkflation”

The continued decline in Treasury yields has prompted many short-sighted arm-chair analysts to declare that the Fed was right about inflationary pressures being “transitory”. Of course, as Treasury Secretary Janet Yellen herself admitted, a little inflation is necessary for the economy to function long term – because without “controlled inflation,” how else will policymakers inflate away the enormous debts of the US and other governments.

As policymakers prepare to explain to the investing public why inflation is a “good thing”, a report published this week by left-leaning NPR highlighted a phenomenon that is manifesting in grocery stores and other retailers across the US: economists including Pippa Malmgren call it “shrinkflation”. It happens when companies reduce the size or quantity of their products while charging the same price, or even more money.

As NPR points out, the preponderance of “shrinkflation” creates a problem for academics and purveyors of classical economic theory. “If consumers were the rational creatures depicted in classic economic theory, they would notice shrinkflation. They would keep their eyes on the price per Cocoa Puff and not fall for gimmicks in how companies package those Cocoa Puffs.”

However, research by behavioral economists has found that consumers are “much more gullible than classic theory predicts. They are more sensitive to changes in price than to changes in quantity.” It’s one of many well-documented ways that human reasoning differs from strict rationality (for a more comprehensive review of the limitations of human reasoning in the loosely defined world of behavioral economics, read Daniel Kahneman’s “Thinking Fast and Slow”).

Just a few months ago, we described shrinkflation as “the oldest trick in the retailer’s book” with an explanation of how Costco was masking a 14% price hike by instead reducing the sheet count in its rolls of paper towels and toilet paper.

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

Wells Unexpectedly Shuts All Existing Personal Lines Of Credit, Hinting US Economy On The Edge

Wells Unexpectedly Shuts All Existing Personal Lines Of Credit, Hinting US Economy On The Edge

Wells Fargo just announced that it’s shutting down all of its existing personal lines of credit – a popular product offered by the retail-focused Wall Street giant – a move that will likely infuriate legions of customers.

The revolving credit lines, which will be shut down in the coming weeks, typically allow users borrow $3K to $100K, were pitched as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts attached to the loan.

Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments, according to the statement.

According to CNBC, it’s the latest “difficult decision” facing Wells CEO Charlie Scharf, who is being forced to make cutbacks to the banks’ business thanks to restrictions imposed by the Federal Reserve years ago as punishment for the bank’s criminal scandals like the now-infamous scandal whereby branch managers opened credit lines for customers without permission. a scandal that outraged the public.

“Wells Fargo recently reviewed its product offerings and decided to discontinue offering new Personal and Portfolio line of credit accounts and close all existing accounts,” the bank said in the six-page letter. The move would let the bank focus on credit cards and personal loans, it said.

The sudden closures will leave many customers without what may be a critical source of liquidity. What’s worse, many will be penalized for the decision, making it more difficult for them to receive credit from a new source. Per CNBC, those whose credit lines are involuntarily closed will still see their FICO scores penalized as if they had elected to close the credit line willingly.

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

While Fed Is in Denial, Hawkish Bank of Russia Sees Inflation as “Not Transitory,” Warns of Possible Shock-and-Awe Rate Hike

While Fed Is in Denial, Hawkish Bank of Russia Sees Inflation as “Not Transitory,” Warns of Possible Shock-and-Awe Rate Hike

US Inflation is almost as hot as in Russia, but the Fed is still blowing it off.

Consumer price inflation in Russia is red-hot, having jumped 6.0% in May compared to a year ago, 2 percentage points above the Bank of Russia’s target of 4.0%. Polls in Russia show that food inflation is a top concern, currently running at 7.4%.

But inflation in the US isn’t lagging far behind: The Consumer Price Index (CPI) jumped 5.0% in May. Yet the central banks are on opposite tracks in their approach to inflation.

Federal Reserve governors keep jabbering about this red-hot inflation being “temporary” or “transitory,” and likely to disappear on its own despite huge government stimulus and the Fed’s huge and ongoing monetary stimulus, though some doubts are creeping in among a couple of them. So they’ll keep interest rates at near-zero until at least next year, and they’re still buying $120 billion a month in securities to push down long-term interest rates.

Russia has been on the opposite trajectory, “surprising” economists at every step along the way. This trajectory started on March 19 with a 25 basis point rate hike, to 4.5%, against the expectations of 27 of the 28 economists polled by Reuters, who didn’t expect a rate hike. On April 23, the Bank of Russia hiked its policy rate by 50 basis points, to 5.0%. On June 11, it hiked by another 50 basis points to 5.5%. The next policy meeting is scheduled for July 23.

Is a shock-and-awe rate hike next? Bank of Russia Governor Elvira Nabiullina is preparing the markets for this possibility – so it won’t be a shock, but just awe.

At the July meeting, the central bank “will consider” an increase in the range from “25 basis points to 1 percentage point,” she told Bloomberg TV in an interview.

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

Cornered Fed Weighs Dilemma: Market Crash or Runaway Inflation?

The U.S. economy is at a fork in the road.

One route leads to the return of market fundamentals and sane stock valuations, at the cost of a historic market correction.

The other route leads to runaway hyperinflation that eats up the debt almost as fast as it devours the dollar’s buying power. That would likely cause the dollar to lose its hegemony as global reserve currency and bring about a simultaneous market collapse.

Here’s where we are, and where we might be going…

How did we get here?

For the most part, through Fed interventions that suppressed interest rates for the last 13 years, creating artificial demand for U.S. IOUs in the form of bonds, and generally maintaining an “easy money” policy. (And let’s not forget the hundreds of millions of stimulus checks, unemployment extensions, fraud-riddled Payroll Protection Program and the other boondoggles associated with the pandemic lockdown.)

Now, all this works great. For a while. The Fed came out of the Great Recession with $2 trillion on its balance sheet. Today, over a decade later, its balance sheet sits at $8 trillion. And climbing.

Let’s reiterate: This works great. For a while.

Junk-rated companies are able to borrow massive amounts of money (and spend it all on bitcoin, sure, why not?) at absurdly low rates, only 3% over the “safe rate” offered by Treasurys. Everyone who owns stocks made money, at least on paper. We’ve already watched stock valuations climb into the stratosphere as lockdown-addled day-traders took their stimmies to the Robinhood casino to play with the /WallStreetBets and AMC apes. We’ve seen home values skyrocket (15% annually in April 2021 and currently about 30% higher than the peak of the housing bubble).

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

When Expedient “Saves” Become Permanent, Ruin Is Assured

When Expedient “Saves” Become Permanent, Ruin Is Assured

The Fed’s “choice” is as illusory as the “wealth” the Fed has created with its perfection of moral hazard.

The belief that the Federal Reserve possesses god-like powers and wisdom would be comical if it wasn’t so deeply tragic, for the Fed doesn’t even have a plan, much less wisdom. All the Fed has is an incoherent jumble of expedient, panic-driven “saves” it cobbled together in the 2008-2009 Global Financial Meltdown that it had made inevitable.

The irony is the only thing that will still be rich when the whole rotten, corrupt, fragile financial system of illusory stability collapses in a heap of runaway instability. The irony is that the Fed’s leaky grab-bag of expedient “saves” was not designed to ensure systemic stability, though that was the PR cover story.

The Fed’s leaky grab-bag of expedient “saves” had only one purpose: save the fat-cats, skimmers, scammers, fraudsters and embezzlers who had gotten rich off the Fed’s cloaked transfer of wealth: the purpose of all the 2008-2009 extremes was not to impose the discipline required to truly stabilize the financial system; the purpose was to elevate moral hazard— the separation of risk from the consequences of risk–to unprecedented heights, backstopping every skimmer, scammer, fraudster and embezzler from well-deserved losses as the entire pyramid of fraud collapsed under its own enormous weight of risky bets gone bad.

To save its cronies from the catastrophic losses that should have been taken by those making the bets, the Fed instituted one expedient “save” after another: backstopped global banks with $16 trillion, dropped interest rates to zero, eliminated truthful reporting by ending mark-to-market pricing of risk, flooded the financial system with free money for financiers, all designed to signal that the Fed will never let its cronies suffer the consequences of their risky bets, i.e. the perfection of moral hazard.

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

Peter Schiff: Political Hypocrisy Provides Cover for Fed on Inflation

Peter Schiff: Political Hypocrisy Provides Cover for Fed on Inflation

From 2016 to 2020, Republicans were constantly trying to play up the economy. You’ll recall Donald Trump claiming it was the greatest economy in history. Meanwhile, Democrats were trying to play it down. Now, the roles have reversed. Since the Democrats own the economy now, they’re talking about how great the recovery is while Republicans are sounding warnings. As Peter Schiff explained in his podcast, this political hypocrisy is letting the real culprit get away without blame.

We saw this political hypocrisy on display during Jerome Powell’s recent testimony before the House Select Committee on COVID-19. The Democrats on the committee took the opportunity to grandstand about how great the economy is doing.  As Peter put it, “They own the economy and they want to pretend that everything is great.” Their questions and statements focused on what a good job Powell is doing.

It’s interesting in that the Democrats are the ones that are trying to play down the inflation fears. They’re the ones that are trying to agree with Powell and reiterate the fact that everything is transitory and so we’ve got nothing to worry about.”

The Democrats don’t want to admit there is an inflation problem because that would be a blemish on this otherwise wonderful economy.

Meanwhile, the Republicans are pushing Powell on inflation and talking about it as a tax. But they’re not blaming Powell or the Fed. They’re placing the blame on Biden and the Democrats’ spending.

They’re not even really trying to blame the Fed for all the money printing. They’re just blaming Biden for all the money spending. But of course, Biden couldn’t be spending any money if the Fed wasn’t printing it…

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

Pay More, Get Less: Consumer Income & Spending Chewed Up by Red-Hot Inflation

Pay More, Get Less: Consumer Income & Spending Chewed Up by Red-Hot Inflation

Inflation ate my homework?

You saw this coming after today’s release of the Personal Consumption Expenditure inflation index. “Core PCE” inflation, which excludes food and energy – the lowest lowball inflation index the US offers and which the Fed uses to track its inflation target – spiked by 6.4% annualized for the past three months. In May alone it rose by 0.5% from April.

Consumers got some remaining stimmies and extra unemployment checks and other stimulus funds from the government in May, which still puffed up their income, but less than in prior months. Consumers then spent this income in a heroic manner. But inflation ate a chunk out of their spending in May, and adjusted for inflation, it fell.

Adjusted for inflation, “real” consumer income from all sources fell 2.4% in May from April, and was down 1.1% from May last year, according to the Bureau of Economic Analysis today. Not adjusted for inflation, consumer income fell 2.0%. Each of the three waves of stimmies triggered a glorious WTF spike in income. Those stimmies are now petering out, but consumers are still receiving other payments from the federal government, including special unemployment benefits:

How this bout of inflation, the highest since the early 1980s, is starting to add up month by month, inexorably, and cumulatively, is depicted in the chart below. It tracks personal income from all sources, adjusted for inflation (red line) and not adjusted for inflation (green line), both expressed as an index set at 100 for January 2019. Note the sharply widening gap between the two lines. That’s the effect of inflation. I’m going track it that way going forward:

Inflation ate my homework?

American consumers are still trying to spend heroic amounts of money as fast as they can – they just didn’t keep up with inflation.

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

Transitory Inflation Takes Hold of the Economy – How Long Will It Last?

Just a couple of weeks ago, Bloomberg reported that Federal Reserve Chairman Jerome Powell sold investors on the idea that rising inflation wasn’t going to last. Officially, as of May 2021, inflation had risen 5%, the highest since August 2008.

Here’s how we know investors bought it: while the CPI is running at 5%, the yield on the 10-year Treasury languishes around 1.5%. For comparison, back in 2008, the 10-year Treasury yield stayed above 3.5% from January through November (and even broke 4% on a few occasions).

Bond buyers do not want interest rates to rise. A 10-year bond yielding 1.5% looks pretty pitiful if interest rates rise to, say, 3.5% (like back in 2008). So clearly bond investors aren’t expecting interest rates to rise in response to this little blip of inflation.

Maybe you remember the specific term Powell used to describe a temporary period of excessive inflation?

“Transitory.”

Whew, that’s a relief! At least we won’t have to tolerate this way-over-target inflation situation forever.

Today’s inflation: how high is too high?

We know that real-world inflation is somewhere between 9-12%, depending on which Federal Reserve methodology is used to calculate it. Either way, it’s quite high.

That’s right, we can get a closer look at the realities of inflation using methods developed and employed by the Federal Reserve itself.

In the 1980s, the Fed was aware that Americans spent money to maintain their standard of living (in other words, your level of income, comforts and services like healthcare you purchase). Official inflation calculations took this into account.

Using the 1980s formula, you can see how today’s Fed “official inflation” stacks up on the chart below:

If you thought 5% inflation was bad, 13% is much worse.

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

How to Buffer the Fallout from America’s Third World Death Spiral

How to Buffer the Fallout from America’s Third World Death Spiral

“What the hell?!” – President Joe Biden, June 16, 2021

Out of Control

American workers are trying to make their way in an economy that’s rigged against them.  We made this claim many years ago.  Today, for fun and for free, we revisit this assertion…starting with the latest from those doing the rigging.

This week, after a two day meeting, the Federal Open Market Committee (FOMC) released their statement.  Nothing material changed.  The Fed will continue to hold the federal funds rate near zero.  The Fed will also continue to create at least $120 billion per month from thin air to buy Treasuries and mortgage-backed securities.

Bond yields spiked and the price of gold dropped because 13 Fed officials now plot dots that project two hikes to the federal funds rate in 2023.  Fed Chair Jay Powell also mentioned the Fed is “talking about talking about” bond tapering.  These technocrats likely know – though they won’t admit – they’ve already lost control.

Consumer price inflation is ‘officially’ rising at a 5 percent annualized rate.  However, the ‘unofficial’ rate of consumer price inflation, as calculated using methodologies in place in 1980, is about 13 percent.  This rate of inflation is remarkably destructive to household budgets.

‘Talking about talking about’ tapering and telegraphing federal funds rate increases some two years from now will do little to contain consumer price inflation.  The fact is, it has already veered out of control.  We expect gas prices to top $5 per gallon in California this summer.  Many Americans are not prepared for sustained, unrelenting price inflation.

Here’s the hard, back of the napkin math they are facing…

Sour Grapes

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Translating Yellen-Speak into Golden-Speak

Translating Yellen-Speak into Golden-Speak

Given the increasingly politicized interplay (cancer) of central bank policy and so-called free market price discovery, it’s becoming increasingly more important to track the actions of central bankers rather than just traditional market signals alone.

Like it or not, the Fed is the market.

Toward this end, we’ve had some substantive fun deciphering the past, current and future implications of “forward guidance” from our openly mis-guided crop of central bankers, most notably Greenspan, Bernanke and Powell.

But let’s not forget Janet Yellen.

As we see below, translating Yellen-speak into blunt speak tells us a heck of a lot about the future.

The Open and Obvious Debt Crisis

Back in 2018, Janet Yellen (former Fed Chairwoman and current Treasury Secretary, eh hmmm) along with Jason Furman (current Biden economic advisor) observed in a Washington Post Op-Ed that, “a U.S. debt crisis is coming, but don’t blame entitlements.”

As I like to say, “that’s rich.”

As in all things economic, the motives and thinking coming out of DC are largely political, which means they are self-serving, partisan and predominantly disastrous.

As for translating Yellen’s political-speak into honest English, the motives for this 2018 warning were two-fold: 1) Yellen and Furman were making a partisan attack on Trump’s then $1T budget proposal, and 2) Yellen actually believed what she said and that the US was indeed careening toward “a debt crisis.”

In fact, we were already in a debt crisis in 2018, a crisis which has simply risen to much higher orders of magnitude in the three short years since Yellen’s “warning” was made.

Stated otherwise, Yellen will get her debt crisis. It’s ticking right in front of her.

Tracking the Debt Trail

Ironically, the most obvious metrics of the current and ever-expanding debt crisis began just months after Yellen’s infamous Op-Ed.

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

Two Pins Threatening Multiple Asset Bubbles

Two Pins Threatening Multiple Asset Bubbles

“Powell Says Fed Policies “Absolutely” Don’t Add To Inequality” -Bloomberg May 2020

The headline above is but one of countless times Fed Chairman Powell and his colleagues confidently said their policies do not result in wealth or income inequality. Their political stature and use of complex economic lingo give weight to their opinions in the media. Nevertheless, a deep examination of the Fed’s practices and their consequences leaves us to think otherwise.

In our opinion, the Fed’s contribution to wealth inequality is significant and grossly misunderstood. We have written articles explaining why QE and low interest rates generally benefit the wealthy and harm the poor. This article backs up those prior arguments with quantitative muscle.

Timely for investors, we also draw some lines between wealth inequality and financial stability and their relationship to monetary policy. We think it is becoming increasingly possible wealth inequality, and in particular, the outsized effect inflation has on the poor, could be the needle to pop many asset bubbles. The other possible needle is the Fed’s wanting for financial stability.

**Due to the importance of monetary policy from economic, societal, and market perspectives we are breaking this article into two. We will share part two next week.

Background

More inflation and financial stability (rising asset prices) are two of the three core tenets backing monetary policy. A strong labor market is the third objective. We focus on inflation in this article and financial stability in part II.

In our article Two Percent for the One Percent, we explain why inflation is detrimental to the poor, while rising asset prices (financial stability) primarily benefit the wealthy. The following paragraphs from the article explain:

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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