Category Archives: Economy

Trump’s Fed Picks? More of the Same! by Ron Paul

It’s not clear if Ron Paul thinks the right personnel, policies, and an audit will cure an institution that rests on an illogical foundation, is inherently corrupt (if you or I counterfeit money, we get thrown in jail), and is the apex of a bankers’ cartel. Paul is not happy with Trump’s candidates for the next Fed head. From Paul at ronpaulinstitute.org:

This week President Trump revealed his final five candidates for Federal Reserve chair. Disappointingly, but not surprisingly, all five have strong ties to the financial and political establishment. The leading candidates are former Federal Reserve governor and Morgan Stanley banker Kevin Warsh and current Fed governor, former investment banker, Carlyle Group partner, and George H.W. Bush administration official Jerome Powell. Gary Cohn, current director of the president’s National Economic Council and former president of Goldman Sachs, is also on Trump’s list.

Trump is also considering reappointing Janet Yellen, even though when he was running for president he repeatedly criticized her for pursuing policies harmful to the middle class. Of course candidate Trump also promised to support Audit the Fed and even voiced support for returning to the gold standard. But, he has not even uttered the words “Audit the Fed,” or talked about any changes to monetary policy, since the election.

Instead, President Trump, in complete contradiction to candidate Trump, has praised Yellen for being a “low-interest-rate-person.” One reason Trump may have changed his position is that, like most first-term presidents, he thinks low interest rates will help him win reelection. Trump may also realize that his welfare and warfare spending plans require an accommodative Fed to monetize the federal debt. The truth is President Trump’s embrace of status quo monetary policy could prove fatal to both his presidency and the American economy.

The failure of the Fed’s post-2008 policies of unprecedented money creation and record-low interest rates shows our experiment with fiat money is nearing its inevitable end. All of Trump’s potential picks are likely to continue the Fed’s current policies. Even the ones who say they favor higher rates will likely bow to the wishes of their friends in the financial and political establishment and make sure any rate hikes are minuscule. Appointing a Fed chair who will continue, or only make marginal changes to, these failed policies will hasten the collapse while making the resulting depression more painful.

To continue reading: Trump’s Fed Picks? More of the Same!

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Catalonia’s Political Crisis Snowballs into an Economic Crisis, by Don Quijones

A Catalonian separation from Spain would be economically detrimental to both sides. From Don Quijones at wolfstreet.com:

Independence would be “horrific” and amount to “financial suicide,” said Spain’s Economy Minister. But financial suicide for whom?

It’s not easy being a Catalan bank these days. In the last few weeks the region’s two biggest lenders, Caixabank and Sabadell, have lost €9 billion of deposits as panicked customers in Catalonia have moved their money elsewhere. Many customers in other parts of Spain have also yanked their savings out of Catalan banks, but less out of fear than out of anger at the banks’ Catalan roots.

Moving their official company address to other parts of Spain last week may have helped ease that resentment, allowing the two banks to recoup some €2 billion of deposits. But the move has angered the roughly 2.5 million pro-independence supporters in Catalonia, many of whom have accounts at one of the two banks. Today they expressed that anger by withdrawing cash en masse.

Many protesters made symbolic withdrawals of €155 — a reference to Article 155 of the Spanish constitution, which Madrid activated today to impose direct rule over the semi-autonomous region. Others opted for €1,714 in a nod to the year 1714, when Barcelona was captured by the troops of King Felipe V, who then proceeded to suppress the rights of rebellious regions.

Some bank customers withdrew a lot more than that. The council of Argentona, a small town outside Barcelona, closed its accounts at Caixabank and Sabadell and transferred all €2.25 million of its funds to a branch of the Dutch lender Triodos. If other institutional or business customers follow Argentona’s example, Caixabank and Sabadell could have a big problem on their hands.

The fallout of political instability in Catalonia is being felt across the whole economy. Real estate investment in the region, both domestic and foreign, is drying up. Starwood European Real Estate Finance, the European subsidiary of the U.S. property giant Starwood Capital, has announced that it’s shifting its focus away not only from Catalonia but Spain as a whole, and toward more stable European markets.

It’s not just investments that have been put on hold. People are not spending much either. Important consumer purchases have been put on hold until some semblance of stability returns, and people are not going out as much as before. Based on my own observations, the bars are emptier and the streets are quieter.

To continue reading: Catalonia’s Political Crisis Snowballs into an Economic Crisis

Into the Cold and Dark, by James Howard Kunstler

The fake reality so much of Washington and the media is caught up in can’t obscure actual reality: we’re on track for a prodigious fiscal train wreck. From James Howard Kunstler at kunstler.com:

It amuses me that the nation is so caught up in the sexual mischief of a single Hollywood producer when the nation as a whole is getting fucked sideways and upside down by its own political caretakers.

Behind all the smoke, mirrors, Trump bluster, Schumer fog, and media mystification about the vaudeville act known as The Budget and The Tax Cut, both political parties are fighting for their lives and the Deep State knows that it is being thrown overboard to drown in red ink. There’s really no way out of the financial conundrum that dogs the republic and something’s got to give.

Many of us have been waiting for these tensions to express themselves by blowing up the artificially levitated stock markets. For about a year, absolutely nothing has thwarted their supernatural ascent, including the threat of World War Three, leading some observers to believe that they have been rigged to perfection. Well, the algo-bots might be pretty fine-tuned, and the central bank inputs of fresh “liquidity” pretty much assured, but for all that, these markets are still human artifacts and Murphy’s Law still lurks out there in the gloaming with its cohorts, the diminishing returns of technology (a.k.a. “Blowback”), and the demon of unintended consequences.

Many, including yours truly, have expected the distortions and perversions on the money side of life to express themselves in money itself: the dollar. So far, it has only wobbled down about ten percent. This is due perhaps to the calibrated disinformation known as “forward guidance” issued by this country’s central bank, the Federal Reserve, which has been threatening — pretty idly so far — to raise interest rates and shrink down its vault of hoarded securities — a lot of it janky paper left over from the misadventures of 2007-2009.

I guess the lesson is that when you have a pervasively false and corrupt financial system, it is always subject to a little additional accounting fraud — until it’s not. And the next thing you know, you’re sitting in the rubble of what used to be your civilization.

To continue reading: Into the Cold and Dark

Tales from a Late Stage Bull Market, by MN Gordon

“Late Stage” implies the bull market will be over soon, which is SLL’s prognostication as well. From MN Gordon at economicprism.com:

An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.

Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just one Bigfoot.  According to a local farmer, there was a family of five or six Bigfoot running across his ranch in the middle of the night.  Paranormal expert Jeffery Gonzalez offered the following Bigfoot sighting anecdote:

“One of them, which was extremely tall, had a pig over its shoulder.  And the five scattered and the one with the pig was running so fast it didn’t see an irrigation pipe and it tripped, with the pig flying over.”

What to make of it?

Bigfoot sightings, no doubt, are pro-growth.  They’re bullish for stock prices.  So, too, are warnings from North Korea that nuclear war “may break out at any moment.”

How do we know these two unrelated events are bullish?  Because if you plot the S&P 500’s price movement since their occurrences, you’ll find that the market is up.  There is a direct – albeit false – correlation.

And these days a correlation of any kind is what matters.  No one cares that correlation does not imply causation.  Such a pesky detail doesn’t matter to Phillips Curve adherents.  Why should it matter for anything else?

Indeed, there are plenty of things that used to matter, which no longer matter.  For example, stock valuations don’t matter.  Profits don’t matter.  Most of all, deficits don’t matter.

To continue reading: Tales from a Late Stage Bull Market

 

GDP Is Bogus: Here’s Why, by Charles Hugh Smith

The title is not hyperbole. GDP is in fact bogus, and the article offers a concise and easy to understand explanation why. From Charles Hugh Smith at oftwominds.com:

Here’s a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation.
The theme this week is The Rot Within.
The rot eating away at our society and economy is typically papered over with bogus statistics that “prove” everything’s getting better every day in every way. The prime “proof” of rising prosperity is the Gross Domestic Product (GDP), which never fails to loft higher, with the rare excepts being Spots of Bother (recessions) that never last more than a quarter or two.
Longtime correspondent Dave P. of Market Daily Briefing recently summarized the key flaw in GDP: GDP doesn’t reflect changes in the balance sheet, i.e. debt.
So if we borrow money to pay people to dig holes and then fill them with the excavated dirt, GDP rises to general applause. The debt we took on to fund the make-work isn’t accounted for at all.
Here’s Dave’s explanation:
Once I learned about accounting, I figured out why the GDP metric wasn’t sufficient. What is missing?
The balance sheet.
Hurricanes are a direct hit to your nation’s balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the “equity” part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred.
Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased.
We know this because we use the balance sheet equation: equity = assets – liabilities. Equity is another word for wealth.
Before hurricane:
wealth = (house + car) – (home debt + car debt)
After hurricane, you rebuild your house, and buy a new car, using borrowed money:
wealth = (house + car) – (2 x home debt + 2 x car debt)
Wealth (equity) has declined by the sum (home debt + car debt)
So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn’t actually matter; that equity is just gone. Destruction is always a downside for equity – even if there is a temporary positive impact on the income statement.
To continue reading: GDP Is Bogus: Here’s Why

Surprisingly, I’m Quite Optimistic About the Future, by Michael Krieger

It’s nice to hear some optimism once in a while. From Michael Krieger at libertyblitzkrieg.com:

To summarize, in just the last few years the world has invented a way to create software services that have no central operator. These services are called decentralized applications and they are enabled with crypto assets that incentivize entities on the internet to contribute resources — processing, storage, computing — necessary for the service to function.

It’s worth pausing to acknowledge that this is kind of miraculous. With just the internet, an open protocol, and a new kind of asset, we can instantiate networks that dynamically assemble the resources necessary to provide many kinds of services.

– From Adam Ludwin’s: A Letter to Jamie Dimon

I’m actually pretty optimistic about the future. I know some of you might be surprised to hear that, but it’s true. This might not be the case if I had only five years left on the planet, but assuming I’m fortunate enough to stay healthy for another few decades, I think the world will be a much better place when I leave it than when I came in.

The simple fact of the matter is this. For things to get substantially better from any situation, it’s always easier to start from a pretty bad place. When I write articles describing the U.S. economy as a rent-seeking, oligarch controlled swindle, I don’t do this to fill you with a sense of insurmountable dread. Rather, the purpose of those posts is to shake as many people as possible out of their slumber. There’s simply no way we can come up with appropriate and conscious solutions to our problems unless we can identify the various scams that govern so much of life around us.

The most lucrative scams are simultaneously extremely bold and well hidden. As such, there’s no greater scam on earth than the scam of the monetary system. A system where a small group of unelected technocrats (central bankers) are given power to create and distribute money at their discretion. The power that these people wielded during the financial crisis was historic in nature and dastardly in its results. Essentially, the monetary system was used as a weapon to bailout and further enrich those already entrenched in positions of power and wealth at the expense of everyone else. There’s simply no way Donald Trump would be President today had it not been for the extraordinarily lopsided “recovery,” which was a direct result of government’s extremely unethical and arguably criminal response to the financial crisis.

To continue reading: Surprisingly, I’m Quite Optimistic About the Future

Asset-Stripping by Private Equity Firms Is Booming, by Wolf Richter

There are many ways to legally steal money, and asset-stripping ranks close to the top of the list. From Wolf Richter at wolfstreet.com:

Here are the numbers. Peak chase-for-yield by institutional investors?

Most of the brick-and-mortar retailers that have filed for bankruptcy protection to be restructured or liquidated over the past two years have been owned by private equity firms – including the most recent major casualty, Toys ‘R’ Us. Part of how PE firms make money is by stripping capital out of their portfolio companies via special dividends funded by “leveraged loans” – more on those in a moment – leaving these companies in a very precarious condition.

So just how much have PE firms paid themselves in special dividends extracted from their portfolio companies? $4.76 billion in the third quarter, bringing the year-to-date total to $15.3 billion. So the year-total for 2017 is going to be a doozie.

In all of 2016, this sort of activity – “recapitalization,” as it’s called euphemistically – amounted to $15.7 billion, up from $10.5 billion in 2015, according to LCD, of S&P Global Market Intelligence. LCD’s chart shows the quarterly totals:

“This high-profile recap activity is a sign of the times in today’s still-overheated leveraged loan market,” LCD says:

Deals such as these typically proliferate when there is excess investor demand, allowing borrowers to undertake “opportunistic” issuance, such as corporate entities refinancing debt at a cheaper rate or, here, PE firms adding debt onto portfolio companies, then paying themselves an often hefty dividend with the proceeds.

As private-equity-owned retailers that are now defaulting on their debts have shown: this type of activity where cash is stripped out of the portfolio company and replaced with borrowed money is very risky.

Leveraged loans are provided by a group of lenders to junk-rated over-indebted companies. They’re structured, arranged, and administered by one or several banks. But leveraged loans are too risky for banks to keep on their balance sheet. Instead, banks sell the structured products to loan mutual funds or ETFs so that they can be moved into retirement portfolios, or they repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

To continue reading: Asset-Stripping by Private Equity Firms Is Booming