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Europe’s Stoxx 600 index is now down over 10% from its January highs, officially entering correction…
As (major exporter) Germany leads the drop this month…
And bank stocks continues to get battered…
Though we note that the last two weeks have seen US banks underperform EU, as credit risk spikes on global funding stress…
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An excellent example of the screwy process that led to the omnibus budget bill that passed last week—and of the ways special interests can manipulate that process—is the inclusion of a provision that exempts minor league baseball players from federal minimum wage laws and laws regarding overtime pay.
The provision has little, if anything, to do with the federal budget. But it is by no means insignificant. Major League Baseball successfully lobbied for its inclusion in the omnibus bill as a way to codify a longstanding de facto exemption and to undermine a lawsuit being brought by several players who argue they are due additional pay under federal rules, according to The Washington Post, which first reported on the provision’s inclusion in the omnibus.
In other words, Congress bowed to the wishes of a powerful special interest and used the federal budget bill to put a big thumb on the scale of a lawsuit that has nothing to do with the budget. It did all that as part of a piece of legislation that totaled more than 2,200 pages and was made public just over a day before both chambers passed it. The baseball provision is found on page 1,967 of the bill, tucked in between a grant for increasing background checks for people who work with children and a grant to “protect young athletes from abuse.”
The language included in the budget omnibus was lifted from a bill introduced by Rep. Brett Guthrie (R-Ky.), called the “Save America’s Pastime Act.” The bill did not get any cosponsors and has not received so much as a committee hearing or a vote. Yet it’s now law.
It’s an example of “how our government is operating right now,” Garrett Broshius, a minor league player turned attorney who is the players in their lawsuit, told Bloomberg Law. “You have billionaires lobbying on something proposed in secret and rushed into a spending bill even though it has nothing to do with spending.”
In the suit filed against Major League Baseball and its minor league affiliates, players argue that some athletes make as little as $3,000 for a season that lasts about five months. Ballplayers have been exempted from federal minimum wage laws in the past because they’ve been considered employees of an “amusement or recreational establishment.” The players were challenging that de facto arrangement (which dates back to 1922), but Congress’ action last week means the arrangement is no longer de facto and the lawsuit is likely to fail now.
This doesn’t mean—as Mother Jones and others have suggested—that Congress has condemned minor league ballplayers to work for “poverty wages.” No one is forcing anyone to become a minor league baseball player, nor to sign a $3,000 contract for five years of work. Each player chooses to work for those terms, and most are doing so in hopes of reaching the major leagues and getting a much larger paycheck in the future. There are many circumstances in which people might choose to defer compensation in the present for the promise of greater opportunity.
It’s also not clear to me that the ballplayers were headed toward victory in their lawsuit before Congress stepped in. Courts had been split, so far, on the question of whether minor league ballplayers are amusement or recreational employees—certainly, professional ballplayers, even minor league ones, don’t have much in common with most people who fall into this class, which is mostly reserved for summer jobs and the like—and the two lawsuits have progressed slowly since they were launched in 2014.
Yet Congress’ decision to kneecap those lawsuits and include the minimum wage rider in the omnibus bill is still a mistake, one that highlights just how broken the legislative process is.
If Congress believed legislation was necessary to address the situation raised by the ballplayers’ lawsuit, it should have crafted that legislation in an open and honest process, with all interested parties having an opportunity to have their say. Instead, lawmakers slipped a bill that had zero co-sponsors into massive, completely unrelated piece of legislation and didn’t allow any time for debate or amendments.
This sort of thing happens all the time, but that’s no excuse. Every time it happens, the same message gets sent: If you have the money and resources to lobby Congress, you can short-circuit the legislative process and get what you want.
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Authored by Chris Wood via Grizzle.com,
The new Federal Reserve chairman’s first FOMC meeting last week, and subsequent press conference, confirmed that Jerome Powell is not an egghead obsessed with macroeconomic models. This is refreshing given the highly academic nature of his predecessors Janet Yellen and Ben Bernanke, and suggests that he will alter his view on the economy based on the reported data rather than theoretical projections of the future.
This also suggests that the so called ‘dot plots’, which are nothing more than the forecasts of individual Fed governors, should become less important. But for now the financial markets will still pay attention to those dots, most particularly as they are showing three rate hikes next year on top of the three projected this year (though that three has nearly become four).
Fed Dot Plot: FOMC Members’ Fed Funds Rate Forecasts
Note: Based on midpoint of Fed funds rate target range. Red dots denote median forecasts. Source: Federal Reserve
This would take the upper end of the federal funds rate target range to 3.0% by the end of 2019. That is a level of interest rates which Grizzle has a hard time believing will happen given the sensitivity of the indebted American economy to higher interest rates.
But if short-term rates really go that high, the view here is that the yield curve will by then have inverted in terms of short-term interest rates moving above long-term interest rates. On this point, the yield curve has already begun to flatten again of late. The spread between the 10-year and the 2-year Treasury bond yields has declined from a recent high of 78bp reached in mid-February to 54bp (see following chart).
US Yield Curve (10Y – 2Y Treasury Bond Yields)
Source: Bloomberg
Meanwhile, it remains remarkable how the US dollar still cannot rally given the relative optimism on the American economy suggested by this week’s Fed statement and given the hawkish signal provided by the ‘dots’ with the US Dollar Index declining by 0.9% since the Fed rate hike on Wednesday. This is a further sign that investors should continue to assume for now that the US dollar remains weak (see following chart), which remains a positive for emerging markets.
US Dollar Index
Source: Bloomberg
It is also not bullish for the dollar that the US Dollar Index speculative net futures position has switched from a net short of 5,787 contracts in late January to a net long of 847 contracts in the week ended 13 March (see following chart).
CFTC US Dollar Index (DXY) Speculative Net Futures Positions
Source: US Commodity Futures Trading Commission (CFTC), Bloomberg
It is also interesting how the gold price rallied by US$21 on the day of the Fed rate hike. This follows a pattern whereby gold sells off prior to monetary tightening and then rallies on the news. Indeed gold has rallied on each of the six rate hikes that have taken place so far in this Fed tightening cycle which began in December 2015 (see following chart).
The obvious reason for gold’s relative resilience this year despite rising Fed tightening forecasts is the weak dollar and the growing belief that inflation is returning. But, whatever the reason, Grizzle remains positive on the yellow metal.
If inflation really returns, an outcome about which skepticism is maintained here, gold will clearly do well. If it does not, then Fed policy is going to reverse dramatically since there is no way the indebted American economy can handle the higher level of real interest rates implied by the above mentioned ‘dots’.
Gold Bullion Price and Fed Rate Hikes
Source: Federal Reserve, Bloomberg
Meanwhile, the latest American wage data has, for now at least, eased monetary tightening concerns. This is because wage growth slowed. US average hourly earnings rose by 2.6%YoY in February, down from a downward revised 2.8%YoY in January (see following chart).
US Average Hourly Earnings Growth and Change in Nonfarm Payrolls
Source: US Bureau of Labour Statistics
It is also a positive that job growth picked up markedly and the non-participation rate declined. Nonfarm payrolls increased by 313,000 jobs in February, up from 239,000 in January — the biggest increase since July 2016. Also, Americans not in the labour force declined from a record 95.7 million in January to 95.0 million in February, while the labour force participation rate increased from 62.7% to 63% (see following chart). This is a reminder that there remains considerable slack in the American labour market despite all the talk of “full employment”.
US Labour Force Participation Rate and Americans Not in the Labour Force
Source: US Bureau of Labour Statistics
The next average hourly earnings growth data will be reported on April 6th. Meanwhile, if a guess had to be made as to the timing of the next monetary tightening scare, it would be the announcement of core CPI for March due on April 11th. This is because the base effect suggests that this month should show the greatest statistical evidence in 2018 of a pickup in price pressures.
Core CPI declined by 0.1% MoM in March 2017, the only monthly decline in 2017. As for the February CPI inflation, core CPI inflation remained unchanged at 1.8% YoY, still below the Fed’s 2% target (see following chart).
US Core CPI Inflation
Source: Bureau of Labour Statistics
Investors should also be aware that offshore dollar rates have picked up in recent weeks resulting in a widening of the so-called ‘Ted spread’ — which is the spread between the 3-month Libor and the 3-month Treasury bill rate.
The 3-month Libor has risen by 58bp so far this year to 2.27%, while the Ted spread has risen from a low of 18bp in mid-November to 56bp (see following chart).
The best guess as to why this is happening is due to the dollar funding pressures created by the repatriation of offshore US corporate cash as a result of the one-off tax rate offered to American corporates under the Trump administration’s tax reform to incentivize them to repatriate the estimated US$2.6 trillion of cash they hold offshore.
Three-month USD Libor and the TED Spread
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The Federal Trade Commission has confirmed that it has opened a nonpublic probe into Facebook’s privacy practices, saying it’s committed to protecting consumers’ privacy and data and will hold accountable companies that abuse the FTC guidelines.
In a statement, the FTC said it takes “very seriously” recent press reports raising concerns about the data security at the social media giant, according to Bloomberg.
And with that, the public is getting an important early clue into the shape of the federal response to revelations about Facebook’s handling (abuse?) of user data for commercial purposes.
German Justice Minister Barley said Monday in Berlin that Facebook’s data practices couldn’t be tolerated.
Facebook shares, which plunged into correction territory last week, turned lower on the news.
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Authored by Ray Dalio via LinkedIn,
Politics is playing a bigger role in influencing the markets than is typical, and I (and others) am still trying to figure out where Donald Trump is taking us, especially as it regards trade and other wars. Besides prompting me to think hard and dig deep into what’s now happening, it is leading me to delve deeper into past trade and military wars to see their effects on economies and markets.
I will pass along my findings when I complete the examination. In the meantime, I will share some of my ruminations for the little that they are worth.
Since Donald Trump sounds more willing to enter into a trade war than any president since Herbert Hoover, and since starting a trade war is like throwing rocks in the gears of the world economy, his recent moves are naturally scary to the markets.
However, thus far what he has actually done is modest and appears significantly politically motivated, so what we are seeing could be a negotiation tactic and a political move that needn’t mean a trade war is likely.
Also, as expected, the Chinese response to his move was modest, so thus far we have seen a lot of threatening without much damage, which is understandable ahead of midterm elections. If this is the negotiating that I expect, the next move will be toward some trade agreements that will look like victories for Trump, so tensions will subside and the markets will like it.
That’s the most likely scenario. I would consider that scenario to be broken if there is any new worsening in trade relations with China from here.
We will find out soon enough.
At the same time, I can’t help but wonder if the trade war is part of a bigger impending conflict.
The analogy with the late 1930s continues to echo in my head – i.e., the confluence of wealth gaps and economic stress leading to moves to populism of both the left (communism) and the right (fascism), accompanied by the shifts in the world order from a dominant power coming out of the Great War to a rising power rivaling that dominant power (if you don’t know about this dynamic, read up on Thucydides’s Trap), all leading to military conflicts.
During such times, chaotic democracy and laissez-faire commerce tend to give way to more directed authoritarianism and “state capitalism” (i.e., government redirecting “business” activities into the service of the country’s interests and away from the service of the shareholders’ interests). It is notable that Donald Trump, at the same time as his tariffs were announced, changed key leaders from moderates to hardliners, who are more inclined to believe that broader conflicts are likely/warranted. One could conjecture that some of Donald Trump’s recent interventions in the economy – e.g., his executive order that prevented Broadcom from buying Qualcomm, protectionism to assure domestic production capabilities, and limiting of Chinese purchases of technology and other key resource companies – are all straws in the wind pointing in that direction.
We are certainly in a period in which the world order is transitioning from being U.S.-dominated to being multipolar (so Thucydides’s Trap is worth considering), wealth gaps are large and rising, and populism, nationalism, and militarism also appear to be rising – and these factors will likely play larger roles in affecting economies and markets (e.g., populism in Mexico as manifest in the upcoming July election could have a bigger effect on Mexico’s economy and markets than anything else).
At such times, I believe that it is especially important to keep one’s portfolio liquid (to be flexible) and diversified (to not have concentrated risks).
* * *
Dalio’s comments echo Eric Peters’ view that throughout history, great nations and empires fail when they surrender their institutions to an individual. The Chinese know this. Why’d they do it?
Is Beijing preparing for instability? Chinese banks have $40trln balance sheets (50% of global GDP, 3x Chinese GDP). US banks hold $17tlrn balance sheets (less than 1x US GDP).
Might China be preparing for internal economic instability? Or perhaps it’s that the West is in deep political disarray, fractured, fighting itself.
The unipolar American world order is crumbling, the US relinquishing leadership. Such transitions have historically produced periods of profound global risks, opportunities – Beijing knows this.
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Despite the interviews and the full-page ads, Zuckerberg and his pals are losing once again as investors continue to aggressively unfriend the social network…
Despite a yuuge rebound in the Nasdaq today, Facebook is tumbling almost 3%…
To its lowest since July 2017…
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Authored by Tsvetana Paraskova via OilPrice.com,
The latest gas dispute between Russia and Ukraine flared up just as most of Europe was gripped by Arctic cold and just before the spy poisoning scandal in which the UK accused Moscow of poisoning a former double agent in England by a military-grade nerve agent of a type developed by Russia.
Russia’s gas giant Gazprom, which delivers around one-third of Europe’s gas, uses the Ukrainian gas system as a key route for its gas supplies. While European Union institutions want to reduce European dependence on Russian gas, Russia wants to cut its dependence on the Ukrainian transit route for its supplies to the EU by building pipelines to bypass Ukraine.
Yet, according to Ukraine, Russia will need the Ukrainian route to ship gas to Europe even after 2019, when the current transit agreement expires, the chief executive of Ukraine’s national company Naftogaz, Andriy Kobolyev, told Bloomberg in an interview this week.
“Gazprom will not be able to cope without the Ukrainian gas transportation system after 2019, so they will need to sign a new contract with us,” Kobolyev told Bloomberg, noting that Russia uses gas supplies to advance its political goals.
“Russia is totally unwilling to separate gas and politics — from their perspective it’s the same and gas plays a very important instrument in achieving a wider geopolitical agenda,” Kobolyev said.
The gas companies of Russia and Ukraine have been locked in bitter disputes for more than a decade, and the relations were further strained by the 2014 Russian annexation of Crimea.
At the end of February, the Stockholm arbitration court ruled in favor of Naftogaz in the payment dispute with Gazprom, ordering the Russian company to pay Naftogaz US$2.56 billion for failing to supply Ukraine with the agreed amount of natural gas over a period of several years and also for failing to pay the full transit fees for the gas it did pump in that direction. After the ruling, Naftogaz said that it expects payment. Gazprom, on the other hand, said the court decision was unfair and applied double standards, and said it would start a procedure to terminate the transit contract and the gas supply contract with Ukraine.
By the end of this month, Gazprom and Naftogaz will meet to discuss the differences, and the transit deal and the payment ordered by the court will be the key topics of discussion.
According to London-based consultancy Energy Aspects, Gazprom won’t be able to replace the entire Ukrainian transit volumes with other routes, even if it were to build the Nord Stream 2 offshore pipeline to Germany, so the Russian company’s plan to cancel the transit deal is possibly a negotiating tool.
“So the threat to cancel the transit contracts should be seen as gaining leverage to renegotiate a more favorable transit deal,” Energy Aspects said in a note last week, quoted by Bloomberg.
While Russia and Ukraine are locked in the transit deal dispute, Gazprom boosted its gas supplies to Europe to record levels, taking advantage of the cold snap at the end of February and early March.
The Russian giant also wants to build the Nord Stream 2 pipeline to twin the existing Nord Stream pipeline between Russia and Germany via the Baltic Sea. This project bypasses Ukraine, but the EU – especially Poland and the Baltic states – and U.S. lawmakers oppose it, as it would further increase Europe’s dependence on Russian gas.
Last week, a group of bipartisan U.S. Senators sent a letter to Treasury Secretary Steven Mnuchin and Deputy Secretary of State John Sullivan, urging the U.S. Administration “to utilize all of the tools at its disposal to prevent its construction.”
“Nord Stream II, which follows the route of the Nord Stream I pipeline from Russia across the Baltic Sea to Germany, will make American allies and partners in Europe more susceptible to Moscow’s coercion and malign influence. The pipeline would be a step backwards in the diversification of Europe’s energy sources, suppliers and routes,” the Senators wrote.
In Europe, the Energy Committee at the European Parliament approved on Wednesday draft amendments to the EU rules to state that all gas pipelines from third countries into the EU must comply fully with EU gas market rules on EU territory, including Nord Stream 2 that was specifically mentioned in the press release. These EU gas market rules include third-party access, transparency requirements, fair tariffs, and a proper separation of the supply chain from production to distribution of gas, while Nord Stream 2 is far from complying with those.
“Far too often, gas supply has been used as a political weapon. We cannot ‘disarm’ the impure intentions of others but we can arm ourselves with full legal clarity and consistency of existing legislation,” said Jerzy Buzek, a Polish politician Member of the European Parliament and chair of the Energy Committee.
We have yet to see how the EU will handle Nord Stream 2, because Germany – the project’s key beneficiary – is not opposed to it. But the latest Russia-Ukraine gas spat, like in all their previous disputes, is not just a bilateral dispute about transit fees.
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The S&P 500 bounced perfectly – to the tick – off its 200-day moving average…
And The Dow is now up 500 points from Friday’s close, erasing the losses and inching back into the green from Thursday.
The question is – what happens next?
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When the history of Donald Trump’s presidency is written, one major theme will be how much he got away with. You can imagine him tweeting about it: Worst president ever? I didn’t do anything @billclinton & JFK didn’t do, but I did it bigly and openly. Sad!
Last night’s 60 Minutes interview with porn director and actress Stormy Daniels (Stephanie Clifford) is the most recent case in point. (Watch the clip and read a transcript here.) I’m not sure that anyone at this point doubts that she had a relationship with Trump, but she’s convincing on that score and describes the one time she says they had fully consensual sex. At no point does she suggest he was coercive or violent, thus adding little to what has already been widely discussed.
He was married at the time, but the American public seems to care little that he may have committed adultery in his pre–White House years. He was dangling the possibility of an appearance on The Apprentice in front of Daniels as part of his come-on to her, but she insists that she’s “not a victim,” either of sex-by-force or a transparent ploy by Trump to get her into bed. The one note of terror she strikes comes in May 2011, after she had agreed to sell her story to a tabloid.
I was in a parking lot, going to a fitness class with my infant daughter. Taking, you know, the seats facing backwards in the backseat, diaper bag, you know, gettin’ all the stuff out. And a guy walked up on me and said to me, “Leave Trump alone. Forget the story.” And then he leaned around and looked at my daughter and said, “That’s a beautiful little girl. It’d be a shame if something happened to her mom.” And then he was gone….I was rattled. I remember going into the workout class. And my hands are shaking so much, I was afraid I was gonna drop her.
That’s disturbing for a million different reasons, but also hard to corroborate. It sounds exactly like something a Trump minion would do. (Read this account of a young Trump trying to intimidate Jerome Tuccille, his first biographer, back in the 1980s.) Again, precisely because it’s expected from Trump, it becomes less damaging.
But here is where Trump is more media-savvy than many in the media and many of his opponents in both the GOP and the Democratic Party. He knows we’ve seen this movie before, with Bill Clinton back in the 1990s, and with John F. Kennedy long before that. Kathleen Willey, a Democratic Party donor and White House volunteer, said that Clinton groped her while she was asking for a job and that his people killed her cat as a warning. Juanita Broaddrick accused Clinton of rape and a physical attack that included biting her lips so hard she bled. (His alleged parting comment to her, “You better put some ice on that,” even became a dark tagline in the pre-meme era.) People still talk about JFK’s sex life, which included strippers, Mafia molls, and interns. As Joshua C. Kendall writes in The Los Angeles Times,
While Trump presumably confined his grabbing of women’s genitals to his pre-presidential days, Kennedy continued to do so while living in the people’s house. As described by biographer Geoffrey Perret, Kennedy “brazenly put his hand up their skirts, propositioned them within minutes of meeting and groped their breasts and buttocks even as he danced with them.”
None of this exonerates Donald Trump, especially from the charges of nonconsensual sexual behavior that have been levied by over a dozen women, but it strongly suggests that the Stormy Daniels story is unlikely to take him down a peg, much less remove him from office. There remains a question of whether hush money paid to Daniels by Trump’s personal attorney violates campaign finance laws, but as former Reason staffer Radley Balko notes, that question is an indictment more of the law than of the president:
That no one seems to know for sure if the payment to Stormy Daniels violated campaign finance laws would seem to be a pretty damning indictment of campaign finance laws.
— Radley Balko (@radleybalko) March 26, 2018
Here is where Trump is very much like Bill Clinton, but even more so: He is not embarrassed by anything that comes out about his personal or even professional life. Trump may well be the raging narcissist that his critics suppose, but being a narcissist means never having to say you’re sorry. Clinton survived endless scandals because he “ignored traditional Washington wisdom for dealing with exploding scandal and instead used the capital’s notorious scandal machine against itself,” Charles Paul Freund wrote in Reason back in April 2000.
Clinton refused to give in to calls for the conventional morality and common decency that everyone simply expected politicians to heed back then, he didn’t try to get “ahead of the story” with preemptive apologies that inevitably lead to more trouble, he used the power of the presidency to shift the focus to new areas, and he wasn’t afraid to launch the odd missile strike or two to distract attention from domestic tumult. (He delayed his own impeachment trial via bomb runs!) “The lesson of the Clinton example is that [Richard] Nixon should have bombed somebody,” Freund wrote. “While it probably wouldn’t have saved his presidency, it would have bought him some time.”
Trump has taken all of these lessons to the next level. He may not be playing 10-dimensional chess, but he doesn’t have to. He’s dealing with a press corps and political opponents who simply aren’t at his level. This is the guy who managed to squeak out a win against Hillary Clinton, perhaps the only living politician who might have been able to take it to Trump.
Early on in Trump’s ascendancy, Politico‘s Jack Shafer counseled that we should all “stop being Trump’s Twitter fool,” that we should focus on the song and not the singer. The Stormy Daniels interview lands just a few days after the president signed a ridiculously swollen omnibus spending bill that pours more gas on the nation’s dumpster fire of debt while accomplishing virtually none of his party’s legislative or policy goals. Turn away from conversations about whether the pre-presidential Trump used a rubber during his adulterous assignation with a smart and serious adult-film auteur and start reading the budget bill that nobody in Washington had time to read. It is, like the budget deal preceding it, the worst of all possible worlds: It gives defense fanboys everything they want and more, while also blowing out any possible restraint on the domestic-spending side.
That’s where the real damage that Trump and our elected representatives on both sides of the aisle is buried, in plain sight. Trump has already made history, his biggest ambition, simply by improbably becoming president. Whether he and other politicians crater our future through out-of-control spending and other actions is in our hands. But not yet in our sights.
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Authored by Economic Prism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,
What are the chances of Federal Reserve Chairman Jerome Powell being wrong? The chances he’ll be wrong on the economy’s growth prospects, the direction of the federal funds rate, and inflation itself? Our guess is his chances of being wrong are quite high.
The new central planner-in-chief. Central banks are facing a special case of the socialist calculation problem pertaining to the financial system. Like the comrades in the former Eastern Bloc, who tried to adjust their plans based on prices they were able to observe in the capitalist West, their best bet is to simply follow market rates. Unfortunately market rates – especially at the short end of the yield curve – are subject to an observer-participant feedback loop with the Fed, so the dilemma cannot be entirely avoided. The ritual pouring over reams of “data” may feel like a sensible activity, but ultimately it cannot solve the problem either. [PT]
What you see, unfolding before your very eyes, is a great exercise in futility. To this endeavor, the Federal Reserve has claimed central authority of the command center. The federal funds rate, the Fed’s balance sheet, economic stagnation, massive asset bubbles, and the limits of central planners are the topics of focus. Where to begin?
Powell got into the central banking business through uncommon means. To his credit, he’s not an economist. This is a great improvement over former Fed Chair, and intellectual ditherer, Janet Yellen. Like President Trump, we didn’t have the patience for her egghead PhD economist act.
Powell, on the other hand, is a lawyer turned investment banker. He didn’t spend his formative college years being indoctrinated at the church of Keynes. But that doesn’t mean his brain hasn’t been equally softened over. For Powell received an indoctrination of another sort – one that began the moment he inhaled his first breath.
You see, Powell is a son of the Washington D.C. Imperial City. He was born and raised in D.C. and has lived nearly his entire life there. He knows how the nation’s capital works. Namely, that ever expanding debt levels are needed to keep the banks of the Potomac River firm enough to support its giant command and control money suck operation.
Money sucking operation on the banks of the Potomac [PT]
Several years ago, as visiting scholar at the Bipartisan Policy Center, a D.C. think tank, Powell tirelessly worked for an annual salary of $1. Behind the scenes, he labored with a singleness of purpose to persuade members of Congress – one-by-one – to raise the debt ceiling.
President Obama rewarded Powell with a nomination to the Federal Reserve Board of Governors. President Trump, an ardent proponent of debt without limits, took a quick liking to Powell. He cut Yellen loose the first chance he got.
Powell is the perfect Fed Chairman at the imperfect time. Not since Alan Greenspan has there been a Fed Chairman that truly understands the purpose of their job. Ben Bernanke and Yellen, in the interim, were true believers in the power of monetary policy. They actually believed their policies were improving the world. Clearly, they missed the point altogether.
Powell, on the other hand, like Greenspan, understands that Fed policy serves one primary and one secondary purpose. The primary purpose is to keep the gravy train flowing to the Fed’s member banks. The secondary purpose is to keep the gravy train flowing to Washington. The Fed attains both of these ends through similar means: by extracting maximum tribute from dollar holders across the planet.
Plain and simple, central bank fiat money creation, multiplied by commercial banks through fractional-reserve banking, propagates financial and economic chaos. Long periods of money supply expansion and debt over-extension punctuated by abrupt, episodic contractions, has the effect of whipsawing the efforts of both the dollar savers and debtors to get ahead.
A mountain of money – has it made us richer? Only some of us. Money printing cannot create an iota of real wealth, but among other pernicious effects, it certainly leads to a redistribution of existing wealth from later to earlier receivers. [PT]
Presently, Fed policy is transition from the long money supply expansion period to the abrupt, rug-yank period of contraction. This is when those who levered up their lifestyle – from jumbo mortgage home buyers, faux-wealth pretenders, and retail zombies – are bankrupted. Shortly after, the ultra-wealthy swoop in to scoop up the wreckage at a discount, which further concentrates wealth during the subsequent money expansion period.
To this end, Powell was on point at his first press conference as Fed Chairman on Wednesday. Following the two-day FOMC meeting, he announced the Fed will raise the federal funds rate 25 basis points – 0.25 percent – to a range of 1.5 to 1.75 percent. Then, following several utterances on inflation, unemployment, and the economy, Powell concluded his press conference opening remarks with the following words:
“Finally, I’ll note that our program for reducing our balance sheet, which began in October, is proceeding smoothly. Barring a very significant and unexpected weakening in the outlook, we do not intend to alter this program. As we’ve said, changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy. As always, the Committee would be prepared to use its full range of tools if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
Say what? Powell manages to confuse the punters into selling. [PT]
What Powell forgot to mention, yet is acutely aware of, is that the Fed’s quantitative tightening balance sheet reduction efforts will be flooding the bond market with massive amounts of government debt. Who’s going to buy this debt? And, on top of that, who’s going to fund the Treasury’s $1 trillion deficit?
Obviously, someone will buy U.S. Treasuries. But at what price, and what yield?We suspect this massive influx of government debt for sale will be bought at a much lower price and a much higher yield. We also suspect these mechanics will mount as the year progresses and will, eventually, prick the many cheap credit asset bubbles that distort today’s economy.
Then, when the economy begins shrinking or the market crashes, whichever comes first, Powell and the Fed, as buyers of last resort, will flood the financial system with an abundance of cheap credit, and transmit greater and greater economic disparities.
Quite frankly, this is getting old.
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