Month: October 2018

While a strong economy isn’t a cure for racism, it sure is doing a lot to help smooth out inequality in the labor market. As economists have taken a closer look at Friday’s monthly labor-market update from the BLS, an interesting pattern has emerged that would seem to cut against the idea that only white Americans are benefiting from President Trump’s policies.

To wit, Axios pointed out that the employment-to-population ratio for blacks is rising much more quickly than that of whites. Presently, roughly 59% of black Americans are employed, compared with more than 60% for whites.

According to Axios, the rise in black relative employment can be attributed to black Americans being more willing to take relatively lower-paying jobs, while white Americans are typically more inclined to wait for a higher salary. And if unemployed whites truly are holding out for higher-paying jobs, they’re in for a wait, because as Deutsche Bank’s Torsten Slok pointed out back in August, high-paying jobs have actually been declining throughout 2018 as employers have shifted their hiring to low-wage occupations.

Also, the pay gap between white and black workers remains stubbornly wide. The median weekly earnings for white, full-time workers in September was $907, while African Americans made $683.

But while anecdotal reports are no substitute for cold, hard data, Axios spoke with several black workers in Harlem and found that lower wages didn’t deter them from taking another job.

• Tray Baynard, who is black, re-entered the workforce 3 weeks ago and took a pay cut. The 27-year-old was hired as a construction worker at World Class Demolition in New York with a salary of $18 an hour, significantly less than the $26 he earned at his previous job. “I’m not getting paid as much, but it’s a job so I took it,” he said.
• Onique Morris, who is also black, accepted a teaching position at New York-based P.S. 79 without shopping around for a better salary.
• “I would have taken it no matter what the pay was,” said Morris, who is studying for a master’s degree in education.
• Another black worker, Terrence Riley, left a job at a Carolina Herrera retail shop after two years, and went on to be a production coordinator at Oscar de la Renta. Riley said opportunity outweighed other factors, including pay.

* * *

While black unemployment is at an all time low, a little context paints a more alarming picture. For example, the unemployment rate for whites (3.3%) is roughly half that of blacks. And the black unemployment figure is also distorted by the fact that millions of incarcerated black Americans (and millions more who just aren’t looking for work) are excluded from employment figures because they aren’t considered participants in the labor market.

In summary, the overall employment picture for black Americans is improving under President Trump (which is perhaps one reason why the president’s support among blacks has nearly doubled over the past year) – just not as quickly as the headline numbers would suggest.

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Submitted by Joe Jervis of The Daily Bell

“No taxation without representation!”

That was a popular phrase during the decades leading up to the Revolutionary War. Colonists thought it was unfair to be taxed and subjected to English rule without consent.

Today Washington DC hands down laws and taxes to every one of the 320 million people living in the United States.

And just like under English rule, we are not represented in the federal government.

Now I know what you’re thinking… we have the right to vote for our leaders.

Our votes send Representatives, Senators, and the President to Washington DC. And they represent our interests in government.

US Representatives are elected by the people, split up into districts.

They go to Washington DC and make up the House of Representatives; one half of Congress.

Congress is the entire legislative branch. They write and pass all the laws in the USA.

When America was brand new, each Representative came from a district of about 40,000 people.

But as the US population grew, the number of Reps in Congress was limited to just 435. That meant the number of citizens each member represented grew as well…

Today, Representatives are elected by districts averaging about 713,000 people.

That means our votes for US Representative are about 6% as potent as they were when America was founded.

(I’m going by total population and not by voting population to keep it simple. But the same lesson applies if you do the math based on voting population.)

Our representation in the House of Representatives has been diluted by a factor of 17.

The US Senate makes up the other half of Congress.

Senators are elected by the entire population of each state, with a simple majority-wins vote.

But it wasn’t supposed to be like that.

Until 1913, Senators were elected by each state legislature.

Every state has its own Congress, mirroring the US system. You vote for state Representatives and state Senators and they run the state government.

It was the folks running your state government that once elected US Senators to send to Washington DC. This gave state governments representation in Washington DC.

So the citizens controlled the US House of Representatives by directly voting for who would represent them from their district.

And state governments controlled the US Senate by the state legislatures voting for who would represent the state in the federal government.

Of course, the people still elected the state Senators and state Reps who then elected US Senators.

But in 1913, the 17th Amendment allowed popular vote in each state to elect US Senators. So it became a state-wide race, just like Governor.

Sounds like this gives the people more voice in the federal government… but it actually gave us way WAY less of a say.

Let’s use Louisiana as an example…

By population size, Lousiana is the median state. Half of the states have a larger population, and half the states have a smaller population. Lousiana is smack dab in the middle.

Louisiana has a total of 105 state Representatives. Each state Rep is elected by a district of about 45,000 people.

39 state Senators are elected by districts of about 120,000 people each.

The entire population of Louisiana is about 4.7 million.

So in a statewide race for US Senator, your vote is just one out of 4,700,000.

Your vote is 105 times more powerful in a state Representative race (1/45,000 vs. 1/4,700,000).

It counts 105x more than your vote for US Senator.

Your vote is 39 times as potent in a state Senate race (1/120,000 vs. 1/4,700,000).

It matters 39x more than your vote for US Senator.

But imagine if the state Reps still chose the US Senator…

He or she has 1 vote out of 105 total Reps.

And your state Senator’s vote accounts for 1 out of 39 total Senators.

Remember, your vote for state Rep and state Senate actually matter… in these small districts you have 105x and 39x more power than in a state-wide race.

So compared to the US Senate race, your vote has a MUCH higher probability of influencing 2 seats out of the 144 member legislature (39 Senators + 105 Reps).

If both your choices get elected, you have chosen 1.4% of the state legislators who will choose your US Senator.

But your vote for US Senate in the state-wide race gives you just .00002% say in who gets elected US Senator.

If both your choices for state Rep and state Senate get elected, you have 70,000 times more control over who gets elected US Senator.

But what if neither of your choices for state Rep and Senate gets elected?

It means you have 0% say in who gets elected US Senator…

Which is statistically equal to your .00002% say you have right now.

So the worst possible scenario in the old system is statistically the same as the only scenario in the current system.

You have a 100% chance of having no voice in the current system.

But when state legislators elected US Senators, you had a much better shot at having some voice in the decision. And when you got that voice, it counted for so much more.

1913 was a bad year…

• The Federal Reserve system was implemented, cementing centralized federal control over the banking and monetary system…
• The 16th Amendment allowed the federal government to collect income taxes, ensuring a steady supply of big government funding…
• The 17th Amendment took control of the Senate away from state governments.

You could say it was the beginning of a new United States of America… which hardly resembled the old structure.

It was the beginning of taxation without representation… The complete reversal of everything Americans fought for and achieved during the American Revolution.

It began the era of the American Empire. A centralized government, large enough to do whatever it wanted without restraint.

Too large for the people to control through representative democracy.

We still have a chance to be represented in state governments. But secession is a topic for another day…

You don’t have to play by the rules of the corrupt politicians, manipulative media, and brainwashed peers.

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The Department of Justice (DOJ) and the FBI have repeatedly pointed to concerns over national security in their refusals to declassify evidence in the Russia investigation. It is now clear, however, that the agencies are simply covering up embarrassing facts, according to The Hill‘s John Solomon. 

How do we know this? 

A previously minor footnote on Page 57, Chapter 3 of the House Intelligence Committee report on Russian interference notes that FBI general counsel James Baker met with an unnamed person in September 2016 who provided information on the Russia case, including email hacking and a possible link to the Trump campaign. 

And who was this person whose information, if released, would threaten national security? 

A top attorney for Perkins Coie, the Democratic National Committee’s private law firm. 

It was the same DNC, along with Hillary Clinton’s presidential campaign, that funded the unverified, salacious dossier by a British intel operative, Christopher Steele, that became a central piece of evidence used to justify the FBI surveillance of the Trump campaign in the final days of the election.

And it was the same law firm that made the payments for the dossier research so those could be disguised in campaign-spending reports to avoid the disclosure of the actual beneficiaries of the research, which were Mrs. Clinton and the DNC.

And it was, in turns out, the same meeting that was so heavily censored by the intel agencies from Footnote 43 in the House report – treated, in other words, as some big national-security secret. –The Hill

So the “big scary national security secret” was nothing more than a meeting between the FBI’s former top attorney and a DNC attorney to discuss information the Committee had in the Russia investigation. 

Last week Baker was interviewed by lawmakers on Capitol Hill. While it was a closed-door hearing, much of Baker’s testimony has leaked because he was not interviewed in a SCIF – a “sensitive compartmented information facility” which would typically be used if, say, a witness might convey an actual threat to national security. As Solomon reports, here was no claim of classification over any of the information he provided to congress that day. 

“So we can now say with some authority that the earlier redaction in Footnote 43 was done in the name of a national-security concern that did not exist,” Solomon concludes. 

The DOJ similarly tried to conceal embarrassing information contained within text messages between FBI “lovebirds” Peter Strzok and Lisa Page, which had nothing to do with national security. 

Which raises the question of what the real reason was that it was hidden from public view. I think the answer can be found in an earlier set of documents that DOJ and FBI fought hard to keep secret – the text messages of those FBI love-birds Pete Strzok and Lisa Page. What we learned from their messages was that the investigation was a whole lot more about politics and and a whole lot less about verified intelligence.

There is now a concrete storyline backed by irrefutable evidence: The FBI allowed itself to take political opposition research created by one party to defeat another in an election, treated it like actionable intelligence, presented it to the court as substantiated, and then used it to justify spying on an adviser for the campaign of that party’s duly chosen nominee for president in the final days of a presidential election. –The Hill

Furthermore, when the FBI couldn’t prove any collusion between Trump and the Kremlin, unverified claims were leaked to the media to keep the Russia “witch hunt” rolling. 

And that, is extremely embarrassing to say the least – not to mention extremely illegal. 

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Authored by Peter Coy, op-ed via Bloomberg.com,

The incumbent international currency has been American for decades. Is it time for regime change?

There’s a paradox at the heart of global finance. The U.S. share of the world economy has drifted lower for decades, and now President Trump is retreating from the American chief executive’s traditional role as Leader of the Free World. Yet the U.S. dollar remains, as the saying goes, almighty. “American exceptionalism has never been this stark,” Ruchir Sharma, head of emerging markets and chief global strategist for Morgan Stanley Investment Management, said at a Council on Foreign Relations symposium on Sept. 24.

By the latest tally of the European Central Bank, America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. When Somali pirates hold up ships at sea, it’s dollars they demand. And threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. It’s no exaggeration to say that the dollar’s primacy is at least as valuable to the U.S. as a couple of aircraft carrier strike groups.

Now the dollar paradox shows signs of unraveling. Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are pushing back. Jean-Claude Juncker, the president of the European Commission, said in September that it’s “absurd” that European companies buy European planes in the American currency instead of their own. In March, China challenged the dollar’s dominance in the global energy markets with a yuan-denominated crude oil futures contract. Russia slashed its dollar holdings this year, claiming (inaccurately) that the greenback is “becoming a risky instrument in international settlements.” And French Finance Minister Bruno Le Maire told reporters in August that he wants financing instruments that are “totally independent” of the U.S., saying, “I want Europe to be a sovereign continent, not a vassal.”

How Much Is That in Dollars?

Each currency’s share of the category in the international monetary system as of the 2017 fourth quarter or latest available

Data: Bank for International Settlements, International Monetary Fund, Society for Worldwide Interbank Financial Telecommunication, and European Central Bank calculations

This disturbance in the force isn’t good news for the U.S. The dollar’s preeminent role in global finance is an “exorbitant privilege,” as Valéry Giscard d’Estaing, then France’s finance minister, said in 1965. If the dollar loses its central role—to be sure, not an imminent threat—the U.S. will be more vulnerable when there’s a loss of investor confidence. The Federal Reserve might even have to do what other nations do when global investors panic: jack up interest rates to painful levels to keep speculative money from flowing out. As it is now, when trouble breaks out, investors flood into U.S. markets seeking refuge, oddly enough even when the U.S. itself is the source of the problem, as it was in last decade’s global financial crisis.

A slippage in the dollar could also be viewed as a symptom of U.S. isolationism. “In a hypothetical scenario where the U.S. withdraws from the world,” damage to the dollar’s standing could cause average U.S. interest rates to rise by 0.8 percentage point, according to a December paper by Barry Eichengreen of the University of California at Berkeley and two researchers from the European Central Bank.

While any serious erosion of the dollar’s status would take years, the U.S. can’t take its preeminence for granted, says Eichengreen: “Being the incumbent international currency is an advantage, but it’s not the only thing that matters.”

The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, particularly those against Iran and countries that do business with Iran. In May the Trump administration withdrew from the 2015 deal that eased sanctions on Iran in exchange for that country’s promise to stop certain nuclear activities. The U.S. will reimpose sanctions on Nov. 4 and is successfully pressuring companies outside the U.S. not to do business with Tehran. European companies and banks could be punished by the U.S. if they inadvertently transact with sanctioned Iranian groups such as the Islamic Revolutionary Guard Corps.

European leaders, in response to what they perceive as an infringement on their sovereignty, are openly working on a payments system that would enable their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. One idea is to set up a government-funded organization, which would be less vulnerable to U.S. actions than a private company or bank, to arrange exchanges of Iranian oil for products from Europe and possibly Russia and China as well. French officials say the transactions might be structured as barter to avoid involving banks. “We cannot accept as Europeans that others, even our closest allies and friends, determine who we can do business with,” Federica Mogherini, the European Union’s foreign policy chief, said at the Bloomberg Global Business Forum on Sept. 26.

The Europeans’ progress has been slow, so there won’t be anything ready in time to alleviate the sanctions taking effect in November, says Carsten Brzeski, a former European Commission official who’s now chief economist of ING-DiBa, the German branch of the Dutch banking company ING Group. Indeed, U.S. national security adviser John Bolton dismissed the European plan from the sidelines of the United Nations General Assembly meeting in late September, calling the European Union “strong on rhetoric and weak on follow-through.” He needled, “So we will be watching the development of this structure that doesn’t exist yet and has no target date to be created.”

Still, Bolton may come to regret his dismissiveness. Even if Europe’s workaround isn’t ready for prime time, it needs to be viewed as part of the widespread dissatisfaction with the dollar’s dominance. That dissatisfaction is only mounting. In 2016, Jacob Lew, then-President Obama’s secretary of the Treasury, warned in a speech at the Carnegie Endowment for International Peace that “overuse of sanctions could undermine our leadership position within the global economy and the effectiveness of our sanctions themselves.” Broad support is best, he said. He added that the U.S. “must be prepared to offer sanctions relief if we want countries to change their behavior.” Trump’s reinstitution of sanctions against the wishes of the coalition partners, without clear evidence that Iran has meaningfully broken its commitments, appears to violate both of Lew’s principles. (A spokeswoman said Lew wasn’t available for comment.) Even Mark Dubowitz, chief executive officer of the Foundation for Defense of Democracies, which favors action against Iran, says that “there’s always risk of overuse of a single instrument. .., You need covert action, military, a regional strategy, political and information warfare.”

The best thing the dollar has going for it is that its challengers are weak. The euro represents a monetary union, but there’s no central taxing and spending authority. Italy’s recent woes are only the latest challenge to the euro zone’s durability. China is another pretender to the throne. But China’s undemocratic leadership is wary of the openness to global trade and capital flows that having a widely used currency requires. In a December interview with Quartz news site, Eichengreen said, “Every true global currency in the history of the world has been the currency of a democracy or a political republic, as far back as the republican city-states of Venice, Florence, and Genoa in the 14th and 15th centuries.”

On the other hand, the U.S. is hardly alluring these days. “When does the rest of the world turn to the U.S. and say, ‘What have you done for me lately?’ ” Beth Ann Bovino, chief U.S. economist of S&P Global Ratings, asked on Sept. 30 at the annual meeting of the National Association for Business Economics in Boston.

The biggest long-term challenge to the dollar’s standing is what economists term the Triffin dilemma. Belgian-American economist Robert Triffin observed in 1959 that for the U.S. to supply dollars to the rest of the world, it must run trade deficits. Trading partners stash the dollars they earn from exports in their reserve accounts instead of spending them on American goods and services. Eventually, though, the chronic U.S. trade deficits undermine confidence in the dollar. This is what forced President Richard Nixon to abandon the dollar’s convertibility to gold in 1971.

Harvard economist Carmen Reinhart cited the dollar’s Triffin dilemma at the Boston business economists’ meeting. “Now you say, well, that’s not a problem, our debt is not backed by gold,” she said. “But our debt, and anybody’s debt, is ultimately backed by the goods and services that an economy produces.” And, she noted, “our share of world [gross domestic product] is shrinking.”

When Giscard d’Estaing coined the phrase “exorbitant privilege,” he was referring to the fact that the U.S. gets what amounts to a permanent, interest-free loan from the rest of the world when dollars are held outside the U.S. As Eichengreen points out, it costs only a few cents for the U.S. Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 worth of actual goods and services to obtain one. Dollars that foreigners willingly accept and trade among themselves are like little green IOUs to the rest of the world. They allow Americans collectively to consume more than they produce—to live beyond their means.

The downside to America’s privilege is that the foreign demand for dollars raises the exchange rate, making American products less competitive in world markets. Especially in slack times, American workers can be thrown out of work when the U.S. imports products that could have been made domestically. And the accumulation of dollars outside the U.S. represents a transfer of wealth to other countries. If other countries suddenly decide to use their dollars to buy American goods and services, the U.S. will suddenly have plenty of work to do—but consumers will have to switch from living beyond their means to living beneath their means.

On the whole, though, U.S. leadership benefits from having a currency that’s in great demand. The issue is how to keep the dollar the favored currency of the world. Preserving diplomatic alliances is one way. Eichengreen’s research finds that countries that rely on the U.S. nuclear umbrella (Japan, Germany) have a much bigger share of dollars in their foreign exchange reserves than countries that have their own nukes, such as France, apparently because they feel their dollar dependence tightens their military protector’s ties to them. Another way is to make dollars freely available as needed to trading partners, as the Federal Reserve did via “swap lines” during the global financial crisis under Chairman Ben Bernanke. And yet another is to refrain from using the dollar’s dominance as a cudgel against allies. As Lew said in 2016, “the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”

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Argentina is emerging as a good example why politicians aren’t able to embrace proper monetary policy.

Take President Mauricio Macri, who finds himself in what Bloomberg has dubbed a “catch 22” – the more he tries to shore up Argentina’s deteriorating financial situation, the less likely he is to win reelection in 2019. That’s because the proper measures that need to be taken in order to help the country’s economy, while necessary, will also be extremely unpopular with the general public.

Recently, Macri accepted the largest loan ever from the International Monetary Fund and made a promise to brutally cut spending and raise taxes. This comes at the same time that the Argentine central bank pushed interest rates to the highest levels in the world. But money managers at firms like Blackrock simply aren’t convinced that he’s going to be able to retain his position long enough to have an impact.

Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute, told Bloomberg that “The determination of the Argentine government to do the right thing is not in doubt, but its ability to do it for long enough is. That has prevented markets from rallying more convincingly so far.”

Macri’s standing in the polls has dropped to all-time lows, with support for him falling to 31% in early September as Argentina fell into its second recession in three years.  Validating BlackRock’s view, every step that Macri has taken to shore up the economy has made him less popular and has given ammunition to his political opponents. Turning to the IMF for help has been seen as an especially unpopular move because many local believe that the country’s last sovereign default was caused by the IMF. It’s truly a lose/lose situation for Macri that has been reflected in his approval rating.

Adding insult to injury, the country’s currency has collapsed crushing the purchasing power of its citizens.

One of Macri’s opponents in 2019, former President Cristina Fernandez de Kirchner (CFK), will be the beneficiary of his unpopularity, just because of the hard line Macri has taken on monetary policy. James Gulbrandsen, a Rio de Janeiro-based money manager, told Bloomberg: “People will always vote with their wallets. The economy typically trumps outrage over corruption.”

In addition to Fernandez de Kirchner, Macri will face a field in 2019 that includes Juan Manuel Urtubey, centrist governor of Salta who’s affiliated with the Peronists and Sergio Massa, who is the ex-chief of staff to former President Fernandez.

Times are indeed desperate when Fernandez – who was indicted last month after a probe turned up enough evidence for corruption charges – looks to be one of the best options. According to Bloomberg, Fernandez was accused of:

…”illicit association” and of having received bribes from public works contractors during her tenure in the presidency between 2007 and 2015, according to court documents. Fund managers also blame her for years of currency controls that deterred foreign investors, a decade-long dispute with creditors and a system of subsidies that fueled the budget deficit.

Gulbrandsen then warned that “foreign investors will probably throw in the towel and give up on the country if it returns to Peronism.”

Some believe that Juan Manuel Urtubey would be better than other Peronists, as he is at least seen as providing tacit support to the mission of spending cuts after attending a recent press conference with Economy Minister Nicolas Dujovne. Macri making it to the election in 2019 would be an accomplishment in and of itself. According to Bloomberg, no non-Peronist has ever even finished their elected term over the past seven decades.

Meanwhile, seeing their economy collapse yet again, Argentinian residents who voted for President Macri went on record telling Bloomberg they “wouldn’t do it again.”

“I see a country that’s lost its way. They need to find a way to stop this slide,” one 46-year-old bank worker told Bloomberg after buying some dollars she hoped to sell later. She concluded, “The problem is, they don’t know what to say.”

The paradox facing Macri mirrors the one facing developed world politicians who are afraid of setting any kind of a hard line when it comes to supportive monetary policy. This has led not only the United States, but also Europe and Japan to engage in decades of quantitative easing that will, at some point, put most nations in the same boat as Argentina. The only question is when.

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Via The Economic Cycle Research Institute,

The overall jobless rate is now the lowest in nearly half a century, but most don’t understand why.

For college graduates, it’s the lowest in only 11 years, so the headline number exaggerates how tight the labor market is for them.

Today, over 34% of Americans are college graduates, more than triple their population share in 1969. Meanwhile, those without high school diplomas – who made up almost half the population in 1969 – are down to only a tenth of the population.

Because the jobless rate for college graduates is structurally much lower than for those who aren’t high school graduates – the difference typically being several percentage points – that pulls down the headline jobless rate, even though the job market for college graduates isn’t as tight as it was in the summer of 2006.

That’s notable because, while their wage share was already a quarter in 1969, it’s well over half today. But for those without high school diplomas, it’s under 4% now, so the huge plunge in their jobless rate since 2010 makes less of a difference to consumer spending.

Of course, it’s typical for the jobless rate to decline substantially in long expansions. But a key reason it’s so low today is the enormous increase in the proportion of college graduates over the decades.

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As we suggested on Saturday, the suspected extrajudicial torture, murder and dismemberment of a Washington Post columnist inside the Saudi consulate in Istanbul is already straining tensions between Riyadh and Ankara. To wit, on Saturday, Turkish prosecutors officially launched an investigation into the disappearance of Jamal Khashoggi, according to Turkey’s official Anadolou news agency, after a “Turkish security team” was allowed inside the consulate by Saudis (presumably under the assumption that they would produce a clean bill of health). Meanwhile, a handful of anonymous Turkish officials reportedly tipped off the Washington Post and Reuters about the murder.

Commenting on the potential fallout form this latest diplomatic crisis, the BBC’s Mark Lowen said Saturday that if these reports are accurate, the clandestine state-sponsored murder on Turkish soil of a high-profile dissident would further strain already deteriorating relations between Turkey and the Saudis. Tensions between the two countries date back to 2011, when Ankara encouraged the Arab Spring uprisings that helped plunge Syria into a brutal civil war, and also prompted a crackdown by the Saudi government on its own brush with domestic unrest.

And in the latest hint that Khashoggi’s disappearance is becoming a national issue, Turkish President Recep Tayyip Erdogan has confirmed to Reuters that Turkish authorities believe Khashoggi was murdered inside the Saudi consulate in Istanbul last week, in an example of KSA’s deliberate targeting of a prominent dissident.

Erdogan added that Turkish authorities were looking into all camera records and monitoring incoming and outgoing air transit, but cautioned that Turkey would “await the results of the investigation.” Khashoggi’s fiance, who was reportedly waiting for him outside the Consulate, said he simply never left the building. 

What’s more, Erdogan said that he would “personally” would be involved in the case (though he said he is holding out hope for a positive outcome).

Saudi officials have vehemently denied even detaining Khashoggi and have repeatedly said he freely left the embassy not long after he entered. Saudi Crown Prince MbS himself on Friday invited Turkish authorities to enter the building, saying “We are ready to welcome the Turkish government to go and search our premises.”

However, reports published by Middle East Eye claimed that Khashoggi was brutally tortured and murdered inside the consulate, and that his body was dismembered and disposed of by a 15-man hit squad “sent specifically for the murder.” Turkish police told MEE that about 15 Saudis, including government officials, arrived in Istanbul on two private flights on Tuesday and were at the consulate at the same time as Khashoggi. They left the same day, and reportedly smuggled out a video tape of the killing as “evidence” that Khashoggi had been dealt with.

While these gruesome details have horrified journalists across the world, there’s an interesting twist to this story that involves the US. Khashoggi became persona non grata in Saudi Arabia after criticizing then President-elect Trump in late 2016 at a sensitive time for US-Saudi relations. And if Turkey does pin the blame on Saudi Arabia, it could strain what has been a relatively placid relationship between the US and the Kingdom since Trump took office.

And why might Turkey want to meddle in the US-Saudi relationship? Well, for starters, it would be a convenient deflection as Erdogan’s feud with the US – and the sanctions enforced by Trump – has strained Turkish capital markets, send inflation soaring, and brought the country to the brink of a debt crisis.

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Authored by James Knightley, Jonas Goltermann, and Chris Turner via Think.ING.com,

It’s mid-term election time and opinion polls suggest the Republicans are under pressure. The loss of Congressional control would make life increasingly difficult for the President and have major implications for policy. Here we look at the possible election scenarios and assess their market implications…

Setting the scene

The 6 November mid-term election offers the electorate the opportunity to give their assessment on the first two years of Donald Trump’s Presidency. Does the “Make America Great Again” policy thrust continue to resonate to the same degree, have legal issues taken their toll, or is it still all down to “the economy, stupid”? The outcome will have major ramifications for economic and trade policy, which will set the battleground for the 2020 Presidential election.

Currently, the Republicans hold the Presidency and majorities in both the House of Representatives and the Senate, but Democrats will be looking to break this stranglehold. All 435 House of Representative seats are up for grabs along with 35 of the 100 Senate seats.

At present, the Republicans hold 237 seats in the House of Representatives versus the Democrats’ 193 while there are five vacant positions. This means the Democrats need to make a net gain of 25 seats to wrestle control of the House from the Republicans. 

In the Senate, the Republicans have a wafer-thin majority. They currently hold 51 of 100 seats (plus the Vice President’s vote if needed in a tied vote) while the Democrats have 47 and there are two independents, who invariably vote with the Democrats. However, of the 35 seats being contested in November the Democrats have 24 up for election along with the two independents, while the Republicans only have nine. As such, the Democrats need to win two of the nine Republican-controlled Senate seats, while holding on to all of the seats they currently occupy to gain control of the Senate.

Betting odds and polling analysts suggest the most likely outcome is that the Democrats will win control of the House of Representatives, but fall short in their quest for the Senate. A subsequent research note will go into details on the current state of the polls, what history tells us and what could yet influence voters. This note is focused on the possible post-election scenarios and look at the likely market reactions.

Odds of Democratic control of Congress after 2018 Mid-terms (26 September)

• The chance that the Democrats win the Senate but not the House is considered negligible.

Members of the House of Representatives serve two-year terms whereas the President has a four-year term and a Senator has a six-year term. Senators terms are staggered so one-third of the 100-member Senate are up for re-election every two years. This year there are 33 Senate seats being voted on in regular elections with two an additional two special elections due to Senators resigning before their term ended.

Key issues for the next two years

Donald Trump’s first two years as President has seen a big win for him on tax reform, but a defeat on healthcare. He is fully immersed in trade right now and can also celebrate a strong jobs market, but he has made little progress on his infrastructure spending plan. Certainly the economy is performing very well and interest rates continue to rise in a “gradual” fashion. In the run-up to mid-term elections global investors are quite heavily positioned; long dollars, long US equities and short US Treasuries. The context here is a pump-primed US economy, whose loose fiscal and tight monetary settings have driven US rates and the dollar higher, while at the same time pressure testing the external balance sheets of some of the largest emerging market economies.

Trade and infrastructure plus further tax and healthcare reform are likely to be his key policy thrusts in the second half of his term, but he will need support from Congress. This underlines the significance of these mid-term elections. In this regard, we feel that there are three major issues we should focus on before diving into the scenarios since they will have a major influence on the likely successes and the market reaction.

1) What happens to fiscal policy and fiscal sustainability?

Historically we have typically seen Federal budget deficits widen out during Republican presidencies and narrow under Democrat Presidents. President Trump has not bucked that trend with the Federal fiscal deficit approaching 4% of GDP even though the economy is set to grow 3% this year. Even without any further fiscal boost, the Congressional Budget Office believes the Federal deficit will hit 4.6% of GDP in 2019 at a time when unemployment is approaching 50-year lows.

US Federal Deficits: Republicans vs Democrats

Bloomberg, ING

As the chart below shows, the last time this divergence between a strong economy and weak government finances existed was 1968 when the US was spending nearly 10% of GDP on the Vietnam War – a very different situation to how the US finds itself today. If, for whatever reason, growth starts to disappoint, questions about US government debt sustainability may start to adversely affect financial markets and feed into economic sentiment, possibly creating a vicious downward cycle.

The Federal Deficit and unemployment 1956-2018

Macrobond, CBO, ING

Loss of Republican control of Congress would limit Trump’s ability to pass legislation, making further fiscal stimulus (such as his $1.5 trillion infrastructure spending plan) or changes to the US healthcare system less likely. However, should the Republicans retain control of Congress (both the House and the Senate) then there is scope for further fiscal expansion, which could put an additional strain on the medium- and longer-term government finances.

2) What happens to trade policy?

President Trump has been very vocal on trade, calling out what he believes are unfair practices and levying significant tariffs. China receives much of his ire, with a demand to more than halve the current bi-lateral deficit of $370 billion, but the EU and Nafta partners are not immune.

There had been some tentative signs of a softening in President Trump’s attitude given positive discussions with Europe and the agreement with Mexico and Canada to replace Nafta with a new trade agreement. However, the latest round of tariffs on $200bn of Chinese imports, combined with the threat that tariffs could be extended to all Chinese imports, reinforces the message that he will not back down until China changes its position. This does not look likely anytime soon with China’s retaliation measures already coming into force.

With the mid-term election out of the way pro-trade Republican politicians and corporates, who have been quiet in the lead up to polling, may be prepared to make a more forceful stand against protectionist measures. The President may well listen if there is growing evidence of a negative impact on the economy – so long as he can still portray the end result as a “big win”. However, Democrats have a history of being more protectionist and may well back the President to some degree on his attitude toward China. They are likely to advocate a softer approach to US allies such as Nafta and the EU though.

The alternative argument is that Trump instead chooses to double down and implement further protectionist measures. In the near term at least he may feel that a strong economy and buoyant asset prices will act as a backstop to becoming more aggressive on trade and protecting intellectual property. But if concessions are not forthcoming and the trade war intensifies this would risk hurting growth and also equity markets, which he often views as a key barometer of his performance. A weaker economy and falling US household wealth would not stand him in good stead for a defence of his presidency in 2020.

3) Could the President be impeached?

A topic never far from the lips of media commentators. The most plausible scenario is if the investigation of Russian interference in the 2016 election by special Counsel Robert Mueller shows direct and incontrovertible evidence to support impeachment. A simple majority in the House in favour of starting proceedings would result in a Senate trial. Given this would require a supermajority of 67 out of 100 Senators who are likely to largely vote on party lines, Trump would survive unless a substantial number of Republican senators turn on him. If the Democrats were to fail to make any gains in the Senate it would require 18 Republican Senators to cross the floor and vote with the Democrats. This sounds unlikely, especially if they believe President Trump can pardon himself – as he has stated.

Even with a Republican electoral “win”, Trump would, of course, remain vulnerable to new evidence from the Mueller investigation. And the campaign for 2020 will in effect start as soon as the mid-terms end. That suggests political tension will remain high in the US.

Scenarios and market implications

We see four broad scenarios for the post-November landscape and it is through a prism of fiscal, monetary and protectionist policy that we should view the market impact.

ING

Trump Unbound (medium probability)

Should the Republicans maintain control of both House and Senate this will be seen as a major victory and would be taken as a vindication of President Trump’s current policies. The President would push on with the ‘America First’ policy-mix, and with another electoral win under his belt could well get stronger support from the Republican Party. This may lead to further tax cuts and deregulation, a more hard-line stance on immigration and trade, and a generally belligerent approach to politics both at home and abroad.

In the near term, this may provide a further boost to equity markets and domestic demand, but concerns will likely increase around the US fiscal deficit, the impact from trade wars, and perhaps around the geo-political environment and the role America chooses to play. As such we see this as something of a boom-bust story, which risks an increasingly aggressive response from the Federal Reserve in the form of higher interest rates. That could put Fed Chair Jerome Powell on a collision course with the President.

Longer-dated yields will also rise in response to wage gains and higher inflation resulting from stronger growth, while the question of longer-term fiscal sustainability could add further upward pressure. This will be a tricky situation to manage before the inevitable bust when we see longer-dated yields drop on expectations of a policy reversal from the Federal Reserve. Likewise, the dollar could strengthen further into 2019 under this scenario. However, investors will become increasingly concerned by growing twin deficits and will be looking to sell dollars at the first signs that the fiscal stimulus is wearing off and the US is left with the baggage of higher deficits. Putting timings on this is difficult, but if the economy holds up until 2020 it may be enough to secure a second term for President Trump.

Trump tapered (high probability)

In this scenario – which betting markets and pollsters believe will be the most probable outcome – Democrats win control of the House with a modest majority, but fall just short in the Senate. President Trump was already somewhat limited by congressional deadlock, but this situation becomes even more challenging for him and he struggles to pass major legislation. Bi-partisan action may be possible on areas such as infrastructure spending, but for the most part divisions between and within the two parties remain material. Faced with this Trump focuses on areas executive powers give him more leeway to set the agenda (such as trade policy).

This makes the outlook for trade policy difficult to call. If trade is the only real source of authority the President has, he could continue pushing hard for China to make concessions to get the bi-lateral deficit lower. Given China’s response so far this is unlikely to happen quickly. While trade is not necessarily a critical issue for the Democrats, it is unlikely that they will support a trade war with traditional allies like the EU.

Likewise, withdrawal from the WTO is unlikely to get a lot of support from Democrats so overall Congress is likely to put up more resistance regarding trade policy than it did previously. Our trade team believes that if Trump does attempt to pull out of the WTO this will be challenged in court by Congress with the decision potentially settled by the Supreme Court.

Given there is a reduced prospect of additional fiscal expansionary policy in a split Congress the fears on debt sustainability may subside. We are also likely to hear more Trump criticism of the Federal Reserve if the central bank continues raising interest rates, but given the strong growth environment and with inflation above target we think the Fed will continue with their “gradual” policy hikes. We think this scenario will be fairly neutral for the economy, but there is the risk of government shutdowns given differences of opinion on government funding.

In terms of financial markets there is heavy long positioning regarding the US right now, so perceptions of a more limited room for fiscal manoeuvre might trigger some mild profit-taking on the dollar and US equities, but probably not a sharp sell-off. Rest of the World economies do not have particularly compelling growth stories right now and unless Trump surprises by scaling down protectionism it is hard to see a dramatic rotation into overseas asset markets. 

If the Democrat-controlled House were to vote in favour of impeachment there would likely need to be overwhelming evidence from the Robert Mueller investigation to get the required number of Republican Senators to cross the floor and vote to impeach their President. Given this challenge the Democrat leadership may be reluctant to act quickly and if they do pull the trigger there is a strong likelihood Trump would be found not guilty.

Grand Bargain (low probability)

If the Democrats win control of at least the House, their position would strengthen considerably. One possible, though perhaps unlikely result, could be that President Trump and his Democratic opponents choose to bury the hatchet and work together. Further fiscal spending (including infrastructure and potentially more tax cuts targeted at lower-income household) is at least in theory appealing to both sides. Compromise on trade (where Democrats are not necessarily opposed to some of Trump’s ideas) is also plausible.

This scenario would likely be positive for the domestic growth story with political risks dramatically scaled back. Further fiscal loosening with a benign backdrop may also lead to a slightly more aggressive Federal Reserve interest rate tightening cycle. Together with congressional consensus on the pursuit of the trade war with China, this should be a mild positive for US asset markets, but positioning probably restrains bigger moves. Worries about the medium-term fiscal sustainability could come more to the fore too with longer-dated yields pushing higher. Given these compromises, there would be little likelihood of impeachment.

All-out war in D.C. (medium probability)

If the Democrats win big in the House and Senate, Trump’s legislative position is in tatters as they can block the majority of the President’s agenda. This means complete gridlock, frequent risk of government shutdowns, and an even more volatile political environment ahead of the 2020 presidential campaign (which in effect begins as soon as the mid-terms are over). President Trump would be limited to Executive Powers only.

This scenario is not necessarily negative for growth, but could pose major headwinds for risk assets given greater political uncertainty. If Robert Mueller does find evidence of a Russian link, the Democrats may use the resulting political momentum to start impeachment proceedings against the President. A strong Democrat majority in the House would likely vote in favour but it would still need several Republican Senators to vote against the President to reach the 67 votes required to force him out.

The Federal Reserve may at the margin take a more cautious approach to policy tightening, particularly if the threat of shutdowns and impeachment are realised. Trump would also likely push his executive powers on trade, which may add to the headwinds for growth. However, he would likely be more restricted under this scenario. If the appointment of Brett Kavanaugh as a Supreme Court judge is delayed until after the mid-terms the Democrats could continue to reject President Trump’s picks. This would make it less easy for President Trump to win a case on pulling the US out of the WTO.

Complete gridlock in Washington and a higher risk of government shutdowns and impeachment proceedings argue that the correction in US asset markets is more aggressive than under the Trump-tapered scenario. Impeachment may be more an issue of noise for the dollar (Clinton’s impeachment process took over a year before being dismissed), but more impact would be felt were the Fed to acknowledge these headwinds and go slow/re-assess the need for future policy tightening.

An additional point to consider is that if Republicans lose their majority in the Senate as well as the House, Democrats will be able to block Trump’s appointments to federal courts or any new cabinet members. Further appointments to the Federal Reserve would also be at risk, though historically Fed appointments have been less of a partisan issue.

Conclusions

President Trump has primarily targeted healthcare, taxation and trade in the first half of his Presidential term. January’s State of the Union address suggested infrastructure and further tax reform would be the main thrust of the second half. The upcoming mid-terms could easily scupper that plan assuming the Democrats perform as well as pollsters expect.

Our base case is that a split Congress will mean his legislative agenda is curtailed, but not completely blocked though this will require working with the Democrats, such as on infrastructure. Trade policy will remain in focus, but if he can forge a united front with the EU, Canada and other key partners regarding China there are more likely to be concession he can label a “win” for his stance. Further tax reform is possible, but new initiatives would need to be focused at the lower end of the income distribution to get Congressional support.

This is a relatively benign story for the economy and asset markets. However, the challenges the US economy faces will intensify. The fading support from the fiscal stimulus, the strong dollar and higher interest rates together with growing concerns about the prospects for emerging markets are all likely to weigh on activity. An all-out trade war would compound these problems and risk a downturn in US growth prospects and asset markets. Such a situation would pose even bigger challenges for President Trump if, as most analysts expect, he seeks re-election in 2020.

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It’s been a long time coming.

Last November, still smarting from a year he would rather forget, Russell Clark and his Horseman Capital, i.e. the “world’s most bearish hedge fund” unveiled what he would short next: according to Clark, the next major source of alpha would be shorting fallen angel bonds.

Citing a recent IMF Global Financial Report, Clark said that “US investment grade debt is very low quality, and could produce some large fallen angels [and] mutual funds are much larger in the high yield market than they used to be. [L]ow rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me.”

Then, last June, one of the icons of credit and distressed investing, Oaktree Capital, joined the bandwagon of fallen angel hunters, saying that the fund “expects to see a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds.” Speaking at the Bernstein Strategic Decisions Conference, Oaktree Capital’s Chief Executive Jay Wintrob said that when the cycle turns it will be faster and larger than ever as “fallen angels” proliferate, and added ominously that “there will be a spark that lights that fire.”

Oaktree saw the potential opportunity as so pressing that the fund has now allocated about a quarter of its assets to troubled issuers: “Amid slim pickings in the U.S., the firm has looked to spread its distressed strategies into China, India and other emerging markets.”

To be sure, Horseman and Oaktree were not alone preparing for a surge in troubled issuers. The amount of “dry powder” held by fund managers to invest in low-quality debt has grown to around $150 billion, Wintrob estimated. Quoted by Bloomberg, he said this number has shown steady growth as the duration of bonds has increased, which could make the coming price drops even more significant than during the turn of the last credit cycle in 2008.

Meanwhile, the cadre of US bankruptcy advisors are ready: in late May we quoted Moelis’ co-head of restructuring Bill Derrough who said that “I do think we’re all feeling like where we were back in 2007,” adding that “there was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time.”

A few weeks later, the attention of fallen angel hunters jumped across the Atlantic, when BofA’s Barnaby Martin estimated that there is now some €800 billion in European BBB bonds at risk of a downgrade.

The vast size, and risk, of this sector which is 2.5x greater than the entire high-yield market in Europe, prompted Martin to warn that the next Eurozone recession – or merely revulsion to bonds once the ECB stops monetizing debt – could be devastating to the continental bond market. As the BofA strategist warned, should a Eurozone recession become a more plausible event down the line, then the prospect of negative rating migration would have overwhelming consequences for the credit market in Europe, as the “the potential for such a vast amount of Fallen Angels (BBBs being downgraded to high-yield) at a time when Euro high-yield bonds are shrinking would cause enormous ructions and indigestion in the market.“

Meanwhile, as we reported yesterday, the wheels are gradually coming off the European high yield market where spreads have blown out wider than US junk the most since 2012 …

… and it is only a matter of time before investors shift their focus, concerns and selling higher up the balance sheet, with BBB rated bonds next in line for a re-rating.

Fast forward to this week, when in a note from Morgan Stanley’s Adam Richmond, put it all together and warned that more than $1 trillion of investment grade US bonds could be cut to junk once the credit cycle turns, and warned that with US corporate spreads near record tights, investors aren’t being compensated for the risk.

As Richmond explains, a consistent rule of thumb that he has lived by when looking for problems in credit cycles: Follow the debt growth, and nowhere is it more obvious than in the outstanding amount of BBB investment grade debt which has grown to $2.5 trillion in par value today, a 227% increase since 2009, and just over 50% of the entire IG index.

To get a sense of just how large the risk of fallen angels in the US is, consider that like in Europe (see above), the BBB part of the IG index is now ~2.5x as large as the entire HY index. The majority of the increase in BBB debt in this cycle stems from net issuance ($1.2 trillion), followed by downgraded debt ($745 billion).

Downgrades in the Financial space have helped to propel this figure to all-time highs, a factor that we (and most investors) are not too concerned about, given very healthy Financial credit quality this time around. But Financials are only a small part of the story. Non-financial BBBs have also grown rapidly in this cycle (+181% since 2009), now totaling $1.84 trillion, or 52% of the total nonfinancial market (37% of the overall index).

Taking a step back, since the beginning of 2009, BBB par has more than tripled (3.3x), while the index has more than doubled (2.4x) – a shift in ratings composition that we can’t ignore. Breaking down this growth, the majority of the increase in BBB debt this cycle of the increase stems from net issuance ($1.2 trillion), followed by downgraded debt ($745 billion). Rising stars brought in less than $300 billion of new index debt, offset by approximately $300 billion of fallen angels.

Furthermore, the growth in BBB debt outstanding is not being skewed by a single sector or a small part of the market. Yes, large issuers have grown significantly. For example, the top 25 non-financial BBB names have a total of $685 billion in index debt (up from $257 billion in 1Q09) and median debt of $20 billion (up from $9 billion in 1Q09) . But the number of BBB issuers has also increased by 60% since 2009, while all sectors have increased BBB debt, large and small companies alike. However, the composition has changed significantly. For example, only 6 of the top 25 issuers from 2009 are still in the top 25 today and 7 of the names in today’s list have resulted from downgrades. TMT and Healthcare are again well-represented at the top, totaling $351 billion, or 51% of the top 25 names, up from $104 billion in 1Q09. Many of these issuers have seen debt loads grow as a result of M&A.

In light of the above, Richmond echoes Clark, Oaktree, Martin and many others, and warns that that “Along these lines, we see elevated downgrade activity as a “stress point” when the cycle eventually turns.“

And turn it will, if for no other reason than because alongside the issuance deluge, leverage has also grown resulting in weaker fundamentals, and with rates now rising rapidly, it is only a matter before a tipping point hits.

Some more details: Morgan Stanley’s IG fundamental universe of non-financial US names has median BBB gross leverage is 2.55x, vs. 1.98x for As. Gross leverage has ticked modestly lower very recently, as strong earnings growth and slowing debt growth have helped at the margin, but absolute leverage levels remain quite elevated, especially compared to past late-cycle  environments. Meanwhile, interest coverage has declined steadily since 2014, particularly for BBB issuers, vs. some recent improvement in interest coverage for the A-rated universe. This is only worsen as rates keep rising.

Additionally, BBBs make up the majority of the leverage “tail”, with 31% of BBB debt in our universe now leveraged at or above 4.0x.

Why is this notable? Because according to Richmond’s calculations, a whopping 55% of BBB debt would have a HY rating if rated based on leverage alone: this is a staggering number and is greater than the current size of the entire junk bond market.  Breaking down the implied ratings of BBB companies only, MS finds the that Healthcare, Telecom, and Consumer Staples (along with Energy) account for a large portion of the debt with implied HY ratings.

So what does this mean big picture?

Very simply, as a result of the tremendous debt growth and the decline in fundamentals in the current cycle, Morgan Stanley thinks BBBs will be one (of a few) stress points when the cycle does turn. Downgrade activity will likely be meaningful, and – as noted above – when thinking about other markets that could feel the effect, remember the BBB part of the IG index is now ~2.5x as large as the entire HY index.

First some perspectives from history.

Looking at the past three cycles, broad downgrade waves tend to last 2-4 years and tend to coincide with a recession at some point as well as with elevated high yield defaults. Credit markets have also experienced “mini” downgrade waves outside of recessions, but those have typically been narrower, concentrated around just one or two sectors, such as Autos in 2005 and Energy/Materials in 2016.

To evaluate the potential risk this time around, in the last three broad downgrade cycles (1989-91, 2000-03, and 2007-09) 7-15% of the IG index was downgraded to HY over the full period. Based on the size of the market today, that would equate to roughly $350-750 billion of total downgrades this time over a multi-year period. However, note that half the market is already BBB rated, compared to just 27% before the 2000-03 downgrade wave. So, adjust for the size of the BBB index over time, downgrade volumes in the next cycle could be even larger, rising as high as $1.1 trillion as shown below.

What are the specific implications for markets?

At the least, Morgan Stanley predicts that the liquidity issues experienced in early 2016, when Energy/Materials companies were getting downgraded at a rapid rate, will come back at some point – pushing credit markets (both IG and HY) to valuations that don’t make sense fundamentally for short periods of time, as we saw back then. Those liquidity challenges come from four drivers:

1. Credit markets have grown significantly in this cycle.
2. A large volume of bonds will have to change hands at some point, discussed in the downgrade analysis above. As we show in Exhibit 19, the BBB par outstanding in the IG index is now ~2.5x as large as the full HY index.
3. The buyer base of US credit has shifted in this cycle, with a greater percentage of bonds now held by mutual funds/ETFs and by foreign investors, which may impact the stickiness of the flows into or out of US credit as spreads are widening (a topic for another time).
4. the capacity to absorb risk on the way down is modest, with dealer balance sheets much smaller than pre-crisis levels.

However, while the $1 trillion in downgrades (worst case scenario) will roil the junk bond market, as demand tumbles once the total size of the market effectively doubles, leading to an explosion in bond spreads, the good news is that the big wave of downgrades will likely not come until credit spreads are much wider than they are today, which will take time to play out at least according to Richmond.

And while that may be good news, the only potential weakness with this analysis is that interest rates blow out at a much faster pace. Which in light of the dramatic blow out in yields last week, and the threat that it will continue, is becoming an increasingly greater threat. In fact, that may well be the the “spark” which Oaktree warned about in June, that lights that corporate bond fire and leads to the next US recession.

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Via Greg Hunter’s USAWatchdog.com,

Economist John Williams says the recent rate hikes mean the “Fed is killing off the economy.”

Williams says, “I heard President Trump make some comments to that effect, and he’s right…”

“The Fed is trying to raise rates. The idea is if you get higher rates, the banks will be able to make more profits on their lending. It will also encourage bank lending. Unfortunately, on the consumer end, it raises the consumers’ cost of borrowing as interest rates go up. It makes mortgages more expensive. It makes borrowing more expensive. Mortgages go up, people don’t buy as many houses.

What you are seeing right now is effectively a recession in the housing market, in the construction area. Existing home sales have been down for six or seven months in a row, and it’s down year over year.”

Williams says, “The Fed is trying to get the system back to normal.”

In doing so, the Fed could kill the system. Williams says,

“Well, that’s what they are doing. In many ways, it would have been easier if the banking system would have collapsed and had a banking holiday, and restructured it and reopened it back in 2007 and 2008. That would have been a very difficult time for the people who owned the banks, and again, the Fed owns the banking system.”

So, they are trying to fix the banks, and to do that, they will simply screw the consumer? Williams says,

“Well, they have an escape clause. Former Fed Head Janet Yellen said that if the economy falls back into recession, ‘we will just go back into quantitative easing’ (QE/money printing). I think that could easily happen here. When the economy goes down, it increases the liquidity stresses on the banking system. There is default on debt, and companies tend to go out of business. That will stress the bank earnings. QE was aimed at propping up the banks in tough times.

The Fed is very open to QE, and from the Fed’s standpoint, I think we are going to end up in a perpetual state of quantitative easing, unless they let the banking system reorganize and get a new functioning system. It’s still not functioning.”

John Williams has long said that this money printing orgy by the Fed will end in a hyperinflationary event. Williams says,

“Unfortunately, it is unavoidable. It is only a matter of when. It can only be avoided if the U.S. can get its long term financial house in order.”

We all know that is not going to happen. Williams says,

“As they keep going here, there is going to be hyperinflation. The dollar will weaken. Gold and silver will rally, and that will be part of a self-feeding cycle, which will get you into very high inflation…

If the Fed can’t get this banking crisis worked out, I would not be surprised to see a complete overhaul of the system.”

Join Greg Hunter as he goes One-on-One with economist John Williams, founder of ShadowStats.com.

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John Williams posts some free information on ShadowStats.com.

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