Month: March 2021

The Arctic blast and severe winter storms that pounded Texas weeks ago have claimed another victim as the credit crisis widens. Texas’s largest power cooperative filed for bankruptcy protection in federal court in Houston Monday, citing a $1.8 billion bill from the state’s grid operator, ERCOT, according to Reuters. 

According to court documents, Brazos Electric Power Cooperative, the largest generation and transmission co-op in the Lone Star State, filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas. The company said it could not pay a $1.8 billion bill from ERCOT stemming from a severe cold snap last month.

Brazos and other utility companies who have committed to providing power to the grid were unable to during the mid-February crisis that left up to 4 million customers without power. This meant utilities had to purchase replacement power at extremely high rates, and some of these extra costs were passed on to customers. 

Clifton Karnei, executive vice president of Brazos, said in the filing that the magnitude of the charges “could not have been reasonably anticipated or modeled” and surpassed Brazo’s highest liquidity levels in years. On Feb. 25, Brazos told ERCOT that would it wouldn’t be able to pay what was owed. Leaving the company with “no choice” but to file for bankruptcy. Brazos has assets and liabilities between $1 billion and $10 billion.

“Brazos Electric suddenly finds itself caught in a liquidity trap that it cannot solve with its current balance sheet,” Karnei said in the filing. 

Readers may recall, we were one of the first to uncover the “mind-blowing” power bills some Texans were slapped with. Some people, who opted into variable power bills, were charged as much as $17k for power. We even did that math and said it would cost $900 to charge a Tesla in Texas during the energy crisis. 

“The municipal power sector is in a real crisis,” Maulin Patani, a Volt Electricity Provider LP founder, an independent power marketer who is not affiliated with Brazos, told Reuters. He said ERCOT should suspend the service charges to stop the waterfall of defaults. 

Fitch Ratings warned last week about downgrades for all Texas municipal power firms on ERCOT’s grid. The debt rating company said costs from the storm “could exceed the liquidity immediately available to these issuers.” 

The first causality of the Texas energy crisis was Just Energy, which saw shares last week crash by more than 20% after the company released a statement about steep losses incurred last month, warning of doubts about remaining a ‘going concern’ (translation: it may not survive).

ERCOT recently suggested some market participants have not posted collateral to cover some of the bills as defaults begin. 

Kenan Ogelman, ERCOT’s vice-president of commercial operations, said market participants who buy power from them have to post collateral as a down payment on energy purchases. He said some entities have “failed to deliver it.”

“Defaults are possible, and some have already happened,” Ogelman warned.

Dozens of other energy providers face massive charges for electricity during February’s freak Arctic blast in Texas. The default domino has begun… 

Authored by Lance Roberts via RealInvestmentAdvice.com,

The expected “sugar rush” from more stimulus is why the economy will “run hot” then crash. As every parent knows, giving a child too much “sugar” leads to a “rush” of energy. Then comes the crash, where you find them in some odd place taking a nap.

The Coming Economic “Rush”

Recently, JP Morgan joined the rest of the Wall Street banks in predicting a surge in economic activity for 2021 of 6.4%. Of course, the entire reasoning behind the rise in activity was due to “stimulus.”

“In a note to clients, JPM’s chief economist Michael Feroli made the following forecast revisions:

• We now look for a $1.7 trillion fiscal stimulus package (up from $900 billion) to be passed in March

• Even before that kicks in, growth appears to be on firmer footing at the start of the year

• All told we now expect 6.4% (4Q/4Q) GDP growth this year and 2.8% next year

• We see the labor market getting back to full employment, or around 4% unemployment, by 2Q22 and expect core PCE inflation to reach 2.0% by 4Q22, with balanced risks around the outlook.

• While the outlooks for growth and inflation are moving up, Fed rhetoric appears to be getting more dovish” – Zerohedge

The statement quickly lays out the premise of the “rush and crash” syndrome.

The chart below shows annual real GDP growth rates from 2008 to the present. The surge in GDP in 2021 is a continuation of the “sugar rush” of monetary interventions. However, notice economic growth “crashes” back to annual norms in 2022.

The dashed black line is the average annual growth of GDP from 2007 at just 1.7%. (Without the addition of JP Morgan’s estimates, the actual growth rate through 2020 was only 1.3%). 

For reference, a rate of growth below 2% isn’t strong enough to absorb population growth.

(Note: Prior to 2000, an economic growth rate of 2% was considered “pre-recesssionary.” In order to justify excess spending and Government interventions, 2% growth is now considered a “success” of policy.”

It’s All Been Artificial

Here is the more significant issue. The vast majority of the growth in the U.S. over the last decade was due to a variety of artificial inputs which are not indefinitely sustainable. From increasing federal expenditures:

And a litany of “bailouts,” which are a function of increased debts and deficits and massive monetary interventions.

While the economy may have “appeared” to grow during this period, economic growth would have been “negative” without debt increases. The chart below shows what economic growth would be without the increases in Federal debt.

Such is why, after more than a decade of monetary and fiscal interventions totaling more than $37 Trillion and counting, the economy remains on “life support.”

(It required roughly $12 in support to generate $1 of economic growth.)

While the claims of a robust economy rely heavily upon a surge in consumer spending, it is a mirage of the increase in “social benefits.”

Real Incomes Not Improving

A significant problem with a bulk of the analysis put out by mainstream economists, and the media is that it often fails to examine the underlying causes. An excellent example has been that consumer incomes are surging, which will support the economic “sugar rush.” A look at the chart below would undoubtedly suggest that to be true.

However, the reality is much less optimistic when you strip out “government transfer payments.”  While the economy has rebounded, real disposable incomes remain below previous highs. Notably, of the next $1.9 trillion in stimulus, only roughly $900 billion flows to households. Such won’t boost incomes markedly.

The chart below shows the problem more clearly. As noted above, the “real” economic prosperity of household incomes has not improved markedly without government supports. Such is why, at roughly 2% economic growth, nearly 1-in-3 households are dependent on some form of government handout.

A Surge In The “Welfare Trap”

There is a massive disconnect between the “stock market” and the “real economy.” As we have discussed previously, the top 10% of income earners own nearly 90% of the stock market.

For the bottom 80%, which drives the bulk of personal consumption expenditures (PCE), they continue to struggle to make ends meet. Such is why the dependency on social welfare now comprises 1/3rd of total incomes. Other statistics are just as daunting.

• 38-million Americans on food stamps

• According to the Census Bureau, an estimated 50% of the 330 million Americans get at least one federal benefit.

• An estimated 63 million get Social Security; 59.9 million get Medicare; 75 million get Medicaid; 5 million get housing subsidies, and 4 million get Veterans’ benefits.

Those numbers continue to rise.

Without government largesse, many individuals would be living on the street. The chart above shows all the government “welfare” programs and current levels to date.

The problem with “stimulus programs” is that you can see the immediate subsequent contraction once the benefit depletes. Since 1/3rd of incomes dependent on government transfers, it is not surprising that the economy struggles as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

In fact, in the ongoing saga of the American economy’s demise, U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression.

Such occurs when the current administration remains enthralled with finding some universe where socialistic programs lead to sustainable economic growth.

It doesn’t.

The Coming “Crash”

As the stimulus hits consumers, they spend it rather quickly, which leads to a “sugar rush” of economic activity. Such as:

1. Consumers use the funds to make either necessary or discretionary purchases creating demand.

2. In anticipation of demand, companies boost “inventories.”

3. The boost in “inventory stocking” boosts manufacturing metrics.

We are seeing this currently as manufacturing and inventory metrics surge.

As shown, the stimulus will lead to a short-term boost in PCE, which will correspond with increased economic growth. (PCE comprises nearly 70% of the calculation.)

However, there is a “dark side” to stimulus-fueled activity.

1. Since companies know the stimulus is “temporary,” they don’t make long-term hiring and capital expenditure plans.  

2. The increase in activity leads to an inflationary rise that companies have difficulty passing on to consumers, ultimately reducing profit margins.

3. Again, since companies know the stimulus is temporary, they opt for “efficiencies,” such as outsourcing and automation, to lower labor and production costs. 

4. After the stimulus gets depleted, consumers struggle with higher costs which further deteriorates their standard of living. 

Unless the Government is committed to a continuous stimulus, once the “sugar rush” fades, the economy will “crash” back to its organic state.

The bottom line is that America can’t grow its way back to prosperity on the back of social assistance. The average American is fighting to make ends meet as their living cost rises while wage growth remains stagnant.

Deflation Set To Return

That brings us to the hard truth.

If we assume even the most optimistic economic outcome of the current stimulus bill, the reality is that economic growth will remain mired in its long-term downtrend.

As the budget deficit grows over the next few years, interest payments alone will absorb a larger chunk of tax revenue. Such comes at a time when that same dollar of tax revenue only covers the entitlement spending of the 75-million baby boomers migrating into the social safety net.

By the way, the only other time government income support exceeded taxes paid was during the “Great Depression” from 1931 to 1936.

The debt problem remains a massive risk to monetary and fiscal policy. If rates rise, the negative impact on an indebted economy quickly depresses activity. More importantly, the decline in monetary velocity clearly shows that deflation is a persistent threat.

No Real Options

There are no real options unless the system is allowed to reset painfully.

Unfortunately, given we now have a decade of experience of watching monetary experiments only succeed in creating a massive “wealth gap,” maybe we should consider the alternative.

Ultimately, the Federal Reserve, and the Administration, will have to face hard choices to extricate the economy from the current “liquidity trap.”  However, history shows that political leadership never makes hard choices until those choices get forced upon them.

Most telling is the current economists’ inability, who maintain our monetary and fiscal policies, to realize the problem of trying to “cure a debt problem with more debt.”

The Keynesian view that “more money in people’s pockets” will drive up consumer spending, with a boost to GDP being the result, has been wrong. It hasn’t happened in 40 years.

As Dr. Woody Brock aptly argues:

“It is truly ‘American Gridlock’ as the real crisis lies between the choices of ‘austerity’ and continued government ‘largesse.’ One choice leads to long-term economic prosperity for all; the other doesn’t.”

Take your pick.

While we likely see a spark of inflation, it probably won’t last long. Eventually, the grip of the debt-driven deflationary cycle will regain its burdensome hold.

What is going on at Goldman?

Whereas previously bankers would give at least one kidney to work at what until recently was the most admired investment bank on Wall Street, lately the flow of talent has completely reversed and one day after Bloomberg reported that none other than boring, old Walmart had poached Goldman’s two top bankers in charge of its consumer banking division to join the retailer’s fintech startup, Eric Lane, the co-head of Goldman’s $8 billion asset-management business, is making a sudden exit from the firm.

Even more striking: Lane is leaving the bank less than six months after taking over the firm’s newly expanded asset-management business along with Julian Salisbury, according to an internal memo seen by Bloomberg. The 25-year veteran of Goldman Sachs and a member of its most important decision-making body is expected to take a role at another investment firm, with a subsequent report from Goldman adivisng that Lane is heading to one of 2020’s superstar funds, Chase Coleman’s Tiger Global as the hedge fund’s COO and President.

Just like Marcus – which has been hammered with departures in recent months (in the clearest sign yet that higher rates are just a mirage) – the asset-management division is a critical focus of CEO DJ D-Sol, who hopes to rake in more client assets to generate a steady stream of fee income for the bank. That, along with the consumer business, are two new strategic projects that the bank has hoped will grow fast enough for it to reduce its reliance on its traditional strengths in investment banking and trading.

And now, in an unexpected reversal, it is Goldman’s two biggest bets on the future that are suddenly hemmorhaging top talent. One wonders if there is much more turbulence below the Goldman surface than the bank’s impressive recent earnings would suggest.

Authored by Joanthan Turley,

Democratic members this week attacked Senate parliamentarian Elizabeth MacDonough after she (correctly) ruled that the inclusion of the $15 minimum wage hike in a reconciliation bill violated Senate rules. The response from Democratic members and many in the blogosphere was withering.  Rep. Ilhan Omar called for MacDonough to be fired and others denounced her actions and called the Senate to simply overrule her – and the long-standing rules. 

It is not just the effort to gut or flip the “Byrd Rule” but vicious attacks on this parliamentarian that are so disconcerting.

The use of a reconciliation bill was an effort to circumvent the filibuster and allow a majority vote on the hike. However, by using reconciliation, the Democrats triggered the ‘Byrd rule’ –  which limits the type of provisions in the reconciliation process to taxing and spending. The purpose is to limit an add-ons through reconciliation to measures designed to have a direct impact on the federal budget—barring the use of reconciliation to introduce “extraneous” measures.  Otherwise, reconciliations could circumvent the normal legislative process and the filibuster option for the minority. The rule allows a senator to object when a reconciliation bill is brought to the floor through a Point of Order on the bill. After the Byrd Rule is raised, the Senate Parliamentarian informs the Presiding Officer on how to rule and the Presiding office conveys that to the Senate.  Senators can then vote to overrule the Presiding Officer but the process protects the minority and the parliamentarian by requiring that a vote to overrule secure a three-fifths majority.

The Parliamentarian’s role is key to a system of orderly legislative process. To simply disregard such rules (and fire those who seek to maintain them) is yet another example of the rage that has replaced reason in our current politics. Byrd was famous for putting the interests of the Senate and the Constitution before his own party. This effort shows increasingly rare such institutional defenders have become in this age of rage.

Rep. Alexandria Ocasio-Cortez was one of the first to balk at any rules standing in the way of reform:

“I think the parliamentarian is verging on, you know, just really intruding in this legislative process in a very concerning way.”

I am not really sure what that actually means.

Parliamentary rules are the thing that defines the legislative process and guarantees a neutral and ordered process of deliberation and enactment.

Yet, she was joined by others who dismissed the notion that such rules should matter. Rep. Ro Khanna declared

“I’m sorry – an unelected parliamentarian does not get to deprive 32 million Americans the raise they deserve.” 

Rep. Pramila Jayapal declared

“Twenty-seven million Americans are not going to be much convinced when we go back in two years and say, ‘Sorry, the unelected parliamentarian told us we couldn’t raise the minimum wage.’”

It was a grossly unfair statement that made it sound like MacDonough is against Americans getting deserved wages. Her job is to rule on the procedural means for bringing matters to the floor. Statements like those of Khanna and Jayapall incite those who have attacked MacDonough on the Internet and trashed her reputation.

Omar was one of the first to seek action against MacDonough:

“Replace the parliamentarian. What’s a Democratic majority if we can’t pass our priority bills? This is unacceptable.”

It was a telling statement.

Omar would fire this woman because she is standing in the way of letting Omar and others of having their way. That is the point of parliamentary rules. You do not simply have a right to do what you want in any way that you want to.

Yet, publications like Slate noted “Democrats could also fire MacDonough and replace her with someone who’s a little more go-with-the-flow on all these tedious ‘rules’ issues.”

To its credit, the Biden White House shot down calls for Vice President Kamala Harris to move to overrule the parliamentarian. White House chief of staff Ron Klain told MSNBC

“Certainly, that’s not something we would do. We’re going to honor the rules of the Senate and work within that system to get this bill passed.”

Sen. Bernie Sanders insisted that the hike would have an impact on the federal budget and thus the Parliamentarian is wrong. However, his rationale could be used to gut the Byrd Rule by claiming that any bill would have positive impacts on the budget in the long term. All bills are defended on that basis. Sanders notes that the Congressional Budget Office found the $15 wage proposal would cost jobs but would also lift nearly one million out of poverty.  That finding however was mixed and the point of the rule is the force such important measures to go through the full legislative process, including being subject to the filibuster rule. This is a massive increase with enormous impacts on the economy.  It is the type of action that legislative process is designed address through deliberation and compromise. The filibuster forces such compromise. In this case, even Democratic senators like Kyrsten Sinema of Arizona and Joe Manchin of West Virginia have objected to the hike. In the past, Democrats have recognized the value of that process.  Hillary Clinton stated “I learned some valuable lessons about the legislative process, the importance of bipartisan cooperation and the wisdom of taking small steps to get a big job done.”

I will leave the merits of the hike to others. However, the attack on the Parliamentarian, including the call for her being fired, is reprehensible. In a prior column, I wrote how Democrats are adopting the rhetoric and tactics that they denounced in former President Trump.  It is also a type of “myside bias” where Democrats disregard any countervailing limits or rules. (They are not alone in such bias. Many of us were critical of former Majority Leader Trent Lott replacing Parliamentarian Robert Dove in 2001, a move that Democrats denounced).

It is not just the attacks on MacDonough that are so reprehensible but the failure of many Democratic senators to denounce those calls for her firing and the abusive comments being made against her in the popular press. When the rage of our politics turns on parliamentarians, you know that we have become entirely untethered from our core values.

The ECB has gone and done it once again: the world’s most incompetent and confused central bank – which has a habit of saying one thing and doing the opposite – has managed to shock markets once again, because after unleashing full-blown verbal diarrhea late last week with one of its members even going so far as suggesting boosting QE to keep the yield surge in check, the ECB moments ago unveiled that last week, the pace of pandemic bond-buying last slowed to a two-month low even as officials warned that a global rise in yields could derail the economic recovery.

In a nutshell, this is what the ECB reported today, indicating a slowdown in purchases across most QE lines:

• ECB PEPP: +€12.037bln (prev. +€17.223bln).
• APP: PSPP +€1.570bln (prev. +€5.245bln).
• CSPP +€0.085bln (prev. +€0.704bln).
• CBPP3 -€0.067bln (prev. +0.273bln).
• ABSPP +€0.063bln (prev. -0.152bln)

The key number here is that the ECB settled 12 billion euros ($14.5 billion) of purchases under its emergency program, compared to 17.2 billion euros the week before. As Bloomberg notes, while an ECB spokesman said that the decline was due to much higher redemptions, it hardly inspired confidence in bond traders that the ECB was doing “whetever it takes” to keep rates low at a time when the global central bank commitment to yield curve control was put in question.

Putting the number in context, for the last two weeks purchases had been in proximity to the €17bln mark, while today’s €12.037bln figure was a drop from this it is still well within the range of recent weeks data, according to Newsquawk.

While ECB officials pledged last week to avoid any undue rise in yields, their verbal interventions only briefly stopped investors from selling which is why the market was focused on today’s disappointing bond purchase report.

In response to the report, German bonds pared gains, leaving the 10-year yield seven basis points lower at minus -0.32% compared to minus -0.34% earlier.

That said, the latest ECB data did not reflect orders made Thursday and Friday, as transactions take a couple of days to settle and show up in the ECB’s accounts. Which may explain the unexpectedly big decline in purchases. As such, traders will need to wait until next Monday for next week’s data to see the full impact of purchases as the reports only encapsulate purchases up until the prior Wednesday. Additionally, desks have noted talk of the ECB accelerating purchases of BTPs seemingly from today rather than undertaking any real increase last week. If this proves the case, such activity will not be evident until next Monday’s PEPP report and even then it will not be possible to discern changes to BTPs explicitly in the weekly release alone.

Realizing that the market would be less than excited about the latest ECB purchase data, at the same time the central bank returned to what it does best, verbal jawboning, and governing council member Francois Villeroy de Galhau scrambled to reassure markets that the ECB “must react against any unwarranted rise in bond yields, firstly by using its pandemic asset purchase program and should be clear it does not exclude cutting rates to ensure favorable financing conditions.”

The Bank of France Governor spoke in a conference immediately after the above data showed the ECB slowed pace of pandemic bond-buying last week.

“There are other elements in this tightening of financing conditions, including excessive spillovers and tensions on the term premia. In so much as this tightening is unwarranted, we can and must react against it, starting with an active flexibility of our PEPP purchases” Villeroy said, adding that the ECB’s forward guidance could be strengthened to make it clear it could tolerate inflation running above 2% for some time.

“We cannot completely ignore the past inflation shortfalls, and that in the future we should be ready to accept inflation above target for some time. As necessary, our forward guidance could be strengthened to make this tolerance explicit.”

Villeroy also said the latest consumer data showed signs of an upturn in inflation expectations and that “this is good news, but it shouldn’t be overstated” as it “it primarily reflects temporary factors rather than a persistent and significant change in the inflation path”

In conclusion, the French central banker also says the ECB will keep policy accommodative as long as necessary and stands ready to adjust all its instruments, inlcuding possibly lowering interest rates.

As Newsquawk notes, this was the first weekly release that has been accompanied by such commentary from an ECB spokesperson; serving to highlight the ECB’s attention on yields and perhaps their concerns as to how a ‘drop’ in purchases may be received by market participants given the heightened focus on the data.

After initially dipping, European bonds have since stabilized encouraged by Villeroy’s comments, although at some point the world’s biggest hedge fund central bank will have to put some (freshly printed) money where its endlessly jawboning mouth is.

Authored by Steve Watson via Summit News,

The free speech alternative to Twitter, Gab has been hacked, with those behind the action promising to release a treasure trove of information including passwords, private posts, and messages.

The hacking group calling itself ‘DDoSecrets’ says it has obtained 70-gigabytes of data, and has dubbed it “Gableaks”.

NEW: Far-Right Platform Gab Has Been Hacked—Including Private Data https://t.co/FaeQDfQTgI

The transparency group #DDoSecrets will make the 70GB of passwords, private posts, and more available to researchers, journalists, and social scientists.

— Emma Best 🏳️‍🌈🏴 Demon Hacker (@NatSecGeek) March 1, 2021

Among the “private posts, user profiles, hashed passwords for users, DMs, and plaintext passwords for groups,” is data for an account supposedly belonging to President Trump, as well as an account owned by Gab’s own CEO, Andrew Torba.

DDoSecrets cofounder Emma Best told Wired that the data “contains pretty much everything on Gab, including user data and private posts, everything someone needs to run a nearly complete analysis on Gab users and content.”

“It’s another gold mine of research for people looking at militias, neo-Nazis, the far right, QAnon and everything surrounding January 6,” Best claims.

Gab released a statement Gab announcing that it is “aware of a vulnerability” on its platform, claiming it has fixed it.

Torba charged that Wired is “in direct contact with the hacker and [was] essentially assisting the hacker in his efforts to smear our business and hurt you, our users.” 

The Gab CEO labelled those behind the action “mentally ill tranny demon hackers”, further suggesting that they are “The same people” who “targeted law enforcement officers and their family members last summer.”

pic.twitter.com/aNZFUkXKDK

— Gab.com (@getongab) February 28, 2021

In addition to Trump, the hackers also claim that they have obtained the passwords of Infowars’ Alex Jones, Republican congresswoman Marjorie Taylor Greene, and MyPillow CEO Mike Lindell.

It is claimed that so far neither Wired nor DDoSecrets has attempted to decrypt the passwords, or gain access to the accounts.

After dipping in January (and in flash Feb data), US Manufacturing survey data was expected to ‘stabilize’ in February (despite a resurgence in Services) tracking the relative stabilization (albeit at low levels) of the broad macro picture.

• Markit US Manufacturing PMI fell to 58.6 from 59.2 (this was above the 58.5 flash print)

• Markit US Services PMI rose to 58.9 from 58.3 (highest since 2014)

• ISM Manufacturing rose to 60.8 from 58.7 (highest since 2004)

• ISM Services rose from 57.7 to 58.7 (highest since Feb 2019)

So take your pick?

Source: Bloomberg

As we have detailed previously, the headline PMI figure was wrongly buoyed by a substantial lengthening of supplier delivery times amid significant supply chain disruption. Ordinarily a signal of improving operating conditions, longer lead times for inputs reportedly stemmed from supplier shortages and transportation delays due to coronavirus disease 2019 (COVID-19) restrictions. The extent to which wait times lengthened was the greatest since data collection began in May 2007.

Prices exploded to their highest since 2008 – when oil was trading at $140 – while new orders remain notably lagging…

Source: Bloomberg

Chris Williamson, Chief Business Economist at IHS Markit said:

“Another month of strong production growth suggests that the US manufacturing sector is close to fully recovering the output lost to the pandemic last year, and a renewed surge in optimism suggests the recovery has much further to run.

“Business expectations about the year ahead jumped to a level only exceeded once over the past six years, buoyed by a cocktail of stimulus and post-COVID recovery hopes as life continues to return to normal amid vaccine roll outs.

“Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending.

“However, new orders for consumer goods showed the strongest back-to back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production.

“A concern is that shortages of raw materials have become a growing problem, with record supply chain delays reported in February, contributing to the steepest rise in material costs seen over the past decade.

“Prices charged for a wide variety of goods coming out of factories are consequently rising, which will likely feed through to higher consumer inflation.”

Smells like stagflation to us…

Slower growth but soaring inflation!?