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Costs Are Spiraling Out of Control

Costs Are Spiraling Out of Control

And how do we pay for these spiraling out of control costs? By borrowing more, of course. 

If we had to choose one “big picture” reason why the vast majority of households are losing ground, it would be: the costs of essentials are spiraling out of control. I’ve often covered the dynamics of stagnating income for the bottom 90%, and real-world inflation, i.e. a decline in purchasing power. 

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of big-ticket essentials: housing, education and healthcare.

The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and government in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise. 

Rising rents push the cost structure of almost every enterprise and agency higher.

Then there’s the asset inflation created by central bank ZIRP (zero interest rate policy) which has inflated a second echo-bubble in housing that has pushed home ownership out of reach of many, adding demand for rental housing that has pushed rents into the stratosphere in Left and Right Coast cities.

The increasing dominance of monopolies and cartels has eliminated competition in sector after sector. Monopolies and cartels skim immense profits even as the value, quality and quantity of their products and services decline: The U.S. Only Pretends to Have Free Markets From plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year.

Thanks to their political influence, monopolies and cartels have legalized looting, raising prices and evading anti-trust regulations because they can pay whatever it takes in our pay-to-play political system.

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

Ex-BOJ Chief Regrets Not Hiking, Hated QE, Says Sub-1% Interest Rates Don’t Work

Ex-BOJ Chief Regrets Not Hiking, Hated QE, Says Sub-1% Interest Rates Don’t Work

Things are going from bad to worse in Japan: 7 years after BOJ chief Kuroda launched QQE (subsequently with yield curve control) while monetizing tens of billions in ETFs, the central banks has failed to boost either Japan’s economy or its inflation, both a dismal byproduct of Japan’s record debt load. So now that the BOJ has failed to remedy what was the consequence of massive debt loads, Japan has a cunning plan: unleash another tsunami of debt.

According to the Japan Times, Japan is set to “re-embrace the power of public spending” – because apparently the country with the world record setting 250% debt/GDP somehow did not embrace public spending before – with one of its biggest ever stimulus packages. Pointing to slowing global growth, a higher sales tax and a string of natural disasters, policymakers in Tokyo are the latest to join the worldwide shift toward a double-barreled approach of supporting the economy through fiscal measures and ultraloose monetary policy, which as we have noted before is a preamble to MMT and full-blown debt monetization by the government.

That’s good news for the Bank of Japan, which has “appeared” (but only appeared, because it now owns so many of Japan’s ETFs it has to start lending them out to prevent a market freeze) reluctant to ramp up its own massive stimulus program, as it strains at the limits of effectiveness.

As a result, in less than a month, expectations in Japan for a “modest” stimulus package with a face value of ¥5 trillion ($46 billion) have quadrupled to ¥20 trillion, despite having the developed world’s largest public debt load. And there is much more to come.

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

Central Bankers Panic Over Exuberant Financial Market “Fragility”, Warn Risks Are “Underestimated”

Central Bankers Panic Over Exuberant Financial Market “Fragility”, Warn Risks Are “Underestimated”

You know it’s bad when… even the central bankers are warning that the monster they’ve created is out of control.

As stocks have exploded higher in the face of declining earnings…

Source: Bloomberg

And collapsing macro-economic data…

Source: Bloomberg

Policy makers from the world’s central banks are suddenly raising cautionary flags at the potentially unsafe investing environment stoked by their efforts to flood economies with ultra-cheap money.

  • “While vulnerabilities related to low interest rates have the potential to grow, thus calling for caution and continued monitoring, so far, the financial system appears resilient” — Federal Reserve, Nov. 15.
  • “Very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialize” — ECB, Nov. 20.
  • “This type of environment can lead to an increase in risk‐taking, to assets being overvalued and to indebtedness increasing in an unsustainable manner” — Riksbank, Nov. 20.
  • “Many investors are focused on the search for yield and could be tempted to take on greater risk” — Bundesbank, Nov. 21.

Most notably, Bloomberg reports that the spate of recent financial stability assessments began Nov. 15 with the Fed, which warned that low rates could encourage riskier behavior such as eroding lending standards.

A prolonged period of low rates could also “spur reach-for-yield behavior, thereby increasing the vulnerability of the financial sector to subsequent shocks,” it said.

However, as Bloomberg notes, despite central banks’ qualms about side effects, there’s little sign that they’ll do any more than issue warnings. 

“The Fed since September, the ECB as well, the BOJ, even the central bank of China is starting to provide some more easing,” Kevin Thozet, an investment strategist at Carmignac Gestion, told Bloomberg TV on Wednesday.

That’s contributed to “a bull market of everything in 2019.”

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

The Lessons From Japan’s Monetary Experiment

The Lessons From Japan’s Monetary Experiment

A recent article in the Financial Times, “Abenomics provides a lesson for the rich world“, mentioned that the experiment started by prime minister Shinzo Abe in the early 2010s should serve as an important warning for rich countries. Unfortunately, the article’s “lessons” were rather disappointing. These were mainly that the central bank can do a lot more than the ECB and the Fed are doing, and that Japan is not doing so badly. I disagree.

The failure of Abenomics has been phenomenal. The balance sheet of the central bank of Japan has ballooned to more than 100% of the country’s GDP, the central bank owns almost 70% of the country’s ETFs and is one of the top 10 shareholders in the majority of the largest companies of the Nikkei index. Government debt to GDP has swelled to 236%, and despite the record-low cost of debt, the government spends almost 22% of the budget on interest expenses. All of this to achieve what?

None of the results that were expected from the massive monetary experiment, inventively called QQE (quantitative and qualitative easing) have been achieved, even remotely. Growth is expected to be one of the weakest in the world in 2020, according to the IMF, and the country has consistently missed both its inflation and economic growth targets, while the balance sheet of the central banks and the country’s debt soared.

Real wages have been stagnant for years, and economic activity continues to be as poor as it was in the previous two decades of constant stimulus.

The main lessons that global economies should learn from Japan are the following:

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

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

One week ago, we showed in one chart why the global economic recovery that so many expect is just a few months away, won’t happen: as the chart below shows, China’s credit intensity since 1994 has exploded. This means that before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.

This explosion in China’s credit intensity in the past decade has directly fueled China’s debt engine, the same debt engine that single-handedly pulled the world out of a global depression in 2008/2009. Alas, this will not happen again: China’s public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis. Overall, China’s debt to GDP is fast approaching an unprecedented 320%!

Which brings us to Saxo’s dour conclusion for all those who believe that the global economy is about to enjoy another period of sustainable growth (and has confused the Fed’s QE for economic resilience and fundamentals):

Contrary to previous periods of slowdown, notably in 2008-2010, 2012-2014 and in 2016, China is unlikely to save the global economy once again.

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

Fear of “Reversal Rates” Sets in, Says the Fed

Fear of “Reversal Rates” Sets in, Says the Fed

The fear that today’s negative or low interest rates render central banks helpless in face of the next economic crisis.

There is now a new theory cropping up in Fed-speak and more generally in central-bank speak. It’s not actually a new theory. I have been saying the same thing for years. In fact, it’s not even a theory, but reality. But it’s newly cropping up in reports from the Fed and the ECB. It’s the concept of what is now called “reversal rates.”

It’s an official admission that “reversal rates” exist. The term crops up alongside the fear that countries with negative interest rates are at, or are already beyond, those “reversal rates.”

The idea of interest rate repression is to induce businesses to borrow and invest, and to induce consumers to borrow and spend, and the hope is that all this will crank up the overall economy as measured by GDP.

“Reversal rates” is the term for a situation where interest rates are so low that they’re doing more harm than good to the overall economy, and that lowering rates further will screw up the economy rather than boost it.

Central bank monetary policy, such as cutting interest rates and doing QE, takes wealth and income from one group of people and delivers it to another group of people. This is how monetary policy works. It’s not a secret. In central-bank speak, it’s called the “distributive effects of monetary policy.” The idea is that for the overall economy, this income and wealth transfer from these people over here to those people over there translates into more overall economic activity that adds to GDP.

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

The Next Wave of Debt Monetization Will Also Be A Disaster

The Next Wave of Debt Monetization Will Also Be A Disaster

According to the IMF (International Monetary Fund) and the IIF (Institute of International finance) global debt has soared to a new record high. The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. This has happened in the middle of an unprecedented monetary experiment that injected more than $20 trillion in the economy and lowered interest rates to the lowest levels seen in decades. The balance sheet of the major central banks rose to levels never seen before, with the Bank Of Japan at 100% of the country’s GDP, the ECB at 40% and the Federal Reserve at 20%.

If this monetary experiment has proven anything it is that lower rates and higher liquidity are not tools to help deleverage, but to incentivize debt. Furthermore, this dangerous experiment has proven that a policy that was designed as a temporary measure due to exceptional circumstances has become the new norm. The so-called normalization process lasted only a few months in 2018, only to resume asset purchases and rate cuts.

Despite the largest fiscal and monetary stimulus in decades, global economic growth is weakening and leading economies’ productivity growth is close to zero. Money velocity, a measure of economic activity relative to money supply, worsens.

We have explained many times why this happens. Low rates and high liquidity are perverse incentives to maintain the crowding out of government from the private sector, they also perpetuate overcapacity due to endless refinancing of non-productive and obsolete sectors t lower rates, and the number of zombie companies -those that cannot pay their interest expenses with operating profits- rises.  We are witnessing in real-time the process of zombification of the economy and the largest transfer of wealth from savers and productive sectors to the indebted and unproductive.

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

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

After a month of constant verbal gymnastics (and diarrhea from financial pundit sycophants who can’t think creatively or originally and merely parrot their echo chamber in hopes of likes/retweets) by the Fed that the recent launch of $60 billion in T-Bill purchases is anything but QE (whatever you do, don’t call it “QE 4”, just call it “NOT QE” please), one bank finally had the guts to say what was so obvious to anyone who isn’t challenged by simple logic: the Fed’s “NOT QE” is really “QE.”

In a note warning that the Fed’s latest purchase program – whether one calls it QE or NOT QE – will have big, potentially catastrophic costs, Bank of America’s Ralph Axel writes that in the aftermath of the Fed’s new program of T-bill purchases to increase the amount of reserves in the banking system, the Fed made an effort to repeatedly inform markets that this is not a new round of quantitative easing, and yet as the BofA strategist notes, “in important ways it is similar.”

But is it QE? Well, in his October FOMC press conference, Fed Chair Powell said “our T-bill purchases should not be confused with the large-scale asset purchase program that we deployed after the financial crisis. In contrast, purchasing Tbills should not materially affect demand and supply for longer-term securities or financial conditions more broadly.” Chair Powell gives a succinct definition of QE as having two basic elements: (1) supporting longer-term security prices, and (2) easing financial conditions.

Here’s the problem: as we have said since the beginning, and as Bank of America now writes, “the Fed’s T-bill purchase program delivers on both fronts and is therefore similar to QE,” with one exception – the element of forward guidance.

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

Blain’s Morning Porridge – Nov 15th 2019

Blain’s Morning Porridge – Nov 15th 2019

“Liberty, equality, fraternity, or death; the last, much the easiest to bestow, O Guillotine!”

As it’s a Friday I am contractually entitled to have a rant and whine about whatever I want to write about. Which, today, isn’t really the cut and thrust of markets. 

To be brutally frank – we all know what the problems are: Too much money in the markets pushing up the prices of market assets. The fact is too much of that too much money is owned by too few people who use their too much money to buy all these financial assets. These too few people who own all the financial assets get richer everyday as their too much money makes their too many financial assets even more valuable. And these too few people get even richer by getting even more too much money to put into the already too expensive financial markets by “persuading” central banks to keep rates low, to buy financial assets through QE, and get their in-the-pocket politicians to enact tax cuts so their too much money is even more too much money… 

With me so far??

Meanwhile, politicians pay for the too much money they give to too rich people, by taking it away from the much more numerous too many too poor people through Austerity. The too many people who don’t have any assets and owe any money they have to the people who have too much money and too many assets – aren’t happy. They blame society, they blame governments and as they get even more unhappy they get angry. These too poor too angry people then get very angry and start blaming people. which is what is happening across the globe..

Still there?… 

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

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

Starting in late March, something unexpected happened: as the Effective Fed Funds rate drifted higher, it broke above the implicit upper bound on the interest rate corridor defined by the Interest on Excess Reserves. It was not meant to do this.

This loss of control over the effective Fed Funds rate prompted many to speculate that reserves (i.e. liquidity) in the system was too low, and sure enough, it all culminated with the end of the Fed’s tightening cycle which was followed by 3 rate cuts in the past 4 months, but more importantly, resulted in the repo crisis in late September (which we had previewed in August) and which served as the catalyst for Powell to launch “NOT QE” in October, whereby the Fed is now injecting $60 billion per month in liquidity via monetization of T-Bills, a process that has promptly sent the Fed’s balance sheet back over $4 trillion, an increase of $280 billion in 7 weeks.

Yet while the Fed’s emergency response to the repo crisis helped restore a “normal” level of liquidity to the system, another unexpected consequence has emerged: the Fed is now losing control of rates again, only this time in the opposite direction!

As Bloomberg points out this morning, as a result of its recent interference with market liquidity levels, the Fed’s key effective fed funds rate – aka the “main interest rate” that the Fed controls – is getting close to the edge of the range the Fed is targeting.

As shown in the chart below, after the Effective Fed Funds rate kept drifting ever high during the period of reserve scarcity, we now find ourselves on the other side of the boat, and as a result of the Fed’s actions such as repo operations and T-bill purchases, the effective fed funds rates has been pushed to 1.55%, just shy of the Fed’s lower bound target of 1.50% (the upper is at 1.75%). 

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

The Federal Reserve is a Barbarous Relic

The Federal Reserve is a Barbarous Relic

The Sky is Falling

The man from the good place. “As I was going up the stair, I met a man who wasn’t there. He wasn’t there again today, Oh how I wish he’d go away!” [PT]

Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian Gulf.’  According to Ptolemy’s account, which survives via quote by Arrian of Nicomedia some 450 years later, when Alexander asked the Celtic envoys what they feared most, they answered:

Today, at the risk of being called Chicken Little, we tug on a thread that weaves back to the ancient Celts.  Our message is grave: The sky is falling.  Though the implications are still unclear.

Various Celts – left: fearsome warriors; middle: fearsome warriors afraid of the sky falling on their heads; right: Cernunnos, fearsome Celtic horned god amid his collection of skulls. [PT]

The sky, for our purposes, is the debt based dollar reserve standard that has been in place for the past 48 years. If you recall, on August 15, 1971, President Nixon “temporarily” suspended convertibility of the dollar into gold.  The dollar  became wholly the fiat money of the Treasury.

At the G-10 Rome meeting held in late-1971, Treasury Secretary John Connally reduced the new dollar reserve standard to a bite-sized nugget for his European finance minister counterparts, stating:

The Nixon-Connally tag team in the White House. [PT]

Predictably, without the restraint of gold, the quantity of debt based money has increased seemingly without limits – and it is everyone’s massive problem.  What’s more, over the past 30 years the Federal Reserve has obliged Washington with cheaper and cheaper credit.

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

Peter Schiff: When Is the Market Going to Wake Up to this Con?

Peter Schiff: When Is the Market Going to Wake Up to this Con?

As expected, the Federal Reserve cut interest rates another 25 basis points on Wednesday.

The mainstream read the post FOMC meeting comments to be relatively hawkish, saying Powell and Company seemed to indicate that future rate cutting is on pause.

Peter Schiff opened up his podcast reminding us that just one year ago, the Fed was raising rates and telling us it would continue to do so through 2019. It also claimed that quantitative tightening was on “autopilot.”

And they said this with a straight face. And everybody believed them.”

At the time, Peter was saying it wasn’t going to happen. He said the central bank would start cutting rates and relaunch QE. And here we are.

The central bank removed the phrase saying it was committed to “act as appropriate to sustain the expansion” from its forward guidance. This was widely viewed as a more hawkish stance. The Fed replaced that language, instead saying, “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.” Powell was more emphatic during his press conference, saying bank officials “see the current stance of monetary policy as likely to remain appropriate.”

Of course, Powell again claimed that the Fed is not engaged in quantitative easing despite the repo operations and bond-buying program. He tried to draw a distinction between QE and today’s operations by pointing out that the central bank is buying short-term bonds today while it bought longer-term debt during QE.

This is really a distinction without a difference. I mean, who cares what the maturity of the bonds are?”

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

Fed Cuts Interest Rate 3rd Time in 2019 With Hints of a Pause

Fed Cuts Interest Rate 3rd Time in 2019 With Hints of a Pause

The FOMC committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Following the third rate cut in 2019, the Federal Reserve issued this short FOMC Statement.

Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and re

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

Fed Cuts Rates Again, But Drops “Act As Appropriate” Pledge Signaling It Is Done Cutting

Fed Cuts Rates Again, But Drops “Act As Appropriate” Pledge Signaling It Is Done Cutting

While the assumption is that Fed officials (having passed on the opportunity to lean against dovish market expectations) would not shock the market and vote to keep rates unchanged (96% odds and Fed has never surprised at that level), that’s precisely what happened when the Fed announced it would cut rates by another 25bps, the 3rd rate cut in the past 4 months, and now the big question is whether this will be the last rate cut for the foreseeable future.

Key takeaways (via Bloomberg) from the FOMC decision:

  • Fed cuts federal-funds rate target range by a quarter point to 1.5%-1.75% — as investors and most economists expected — in the third straight reduction aimed at protecting the record-long U.S. expansion from threats posed by tariff wars and weak global growth, amid “muted inflation pressures”
  • But FOMC signals it could pause, as the statement omits the familiar pledge from recent months to “act as appropriate to sustain the expansion”; Fed instead says it will monitor incoming information as it “assesses the appropriate path” of rates
  • Fed still leaves door open to easing, saying that uncertainties remain around its outlook even as it calls labor market and consumption “strong”; acknowledges that business investment and exports “remain weak”
  • Kansas City Fed President Esther George and Boston Fed President Eric Rosengren also dissent for third straight time, preferring no rate move at this meeting; St. Louis Fed President James Bullard votes with FOMC majority after dissenting at prior meeting in favor of half-point cut
  • Fed lowers two other key interest rates by quarter point, bringing interest on excess reserves rate to 1.55% and discount rate to 2.25%

As expected, and priced in, The Fed cut rates 25bps and shifted the wording in the statement to a more hawkish stancefrom:

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

BOJ To Start Lending ETF Shares To Prevent Market Freeze

BOJ To Start Lending ETF Shares To Prevent Market Freeze

While most central banks are contemplating how to gently break it to the public that since they are out of ammo with interest rates at all time low, and $15 trillion in global sovereign debt is now yielding negative – a financial abortion which suggests the value of money is negative – the only hope markets have to avoid collapse is for central banks to start buying stocks in the open market, the BOJ has no such problems: after all the Japanese central bank (alongside its Swiss peer) has for years been quite open that it purchases stocks and ETFs directly. Unfortunately, in its efforts to stabilize the market, the BOJ has been purchasing a little too many ETFs and it now owns far too much.

Last May, speaking to Japanese parliamentarians, BOJ Governor Haruhiko Kuroda noted that the central bank now owns nealry 80% of the country’s stock of ETFs, the result of a program begun in 2010 and ramped up in 2013.

Unfortunately, the program failed in its immediate task: the main goal of ETF buying was to lower Japan’s equity-risk premium – the extra returns investors expect for buying stock rather than simply parking their money in riskless government debt. A lower premium should raise stock prices and make equity financing easier for listed companies. But at just shy of 7%, Japan’s premium remains stubbornly above the U.S.’s 6%—with the gap little changed in six years – according to Aswath Damodaran, professor of finance at New York University’s Stern School of Business.

Now what is truly terrifying is that the impact of the BOJ’s massive equity purchases is actually not easily visible in Japanese stock valuations as share prices have actually fallen as a multiple of earnings during the course of the program.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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