Japanese Government Admits First Fukushima Radiation Death

Over seven years after the devastating earthquake and tsunami that crippled Japan’s Fukushima nuclear power plant, the Japanese government has admitted that a former plant worker has died as a result of radiation exposure.

While the 2011 earthquake and tsunami killed approximately 19,000 people, as NPR’s Elise Hu reported, and “most drowned within minutes,” this is the first radiation-exposure-based death since the incident (the radiation plumes caused by Fukushima’s meltdowns spread up to 25 miles away)

A radiation monitoring post next to one of the temporary homes. It indicates 0.276 micro sv/h, which is three to four times higher than the normal level.

NPR reports that the country’s health and labor ministry has said the man’s family should be paid compensation, according to state broadcaster NHK.

It’s not clear precisely when the man died. He was in his 50s, NHK said, and his duties included “measuring radiation levels at the plant immediately after the severe nuclear accident.”

He left his job there in 2015, and was diagnosed with lung cancer before his death.

The ministry said that he “developed cancer due to total radiation exposure of around 195 millisieverts,” NHK reported. 

According to Reuters, exposure to 100 millisieverts of radiation in a year “is the lowest level at which any increase in cancer risk is clearly evident.”

While this is the first fatality that was attributed to radiation, NHK says four workers who have cancer have been deemed eligible for compensation (while at least five applications for compensation have been denied).

One of them, who is suffering from leukemia, was awarded compensation last December, according to The Asahi Shimbun.

He “was engaged in emergency operations to send water to cool the reactor containment vessels and assess the extent of damage,” the newspaper said, and did so for months after the disaster started.

We suspect there will be considerably more to come as NPR notes that Nature reported in 2012, two assessments by the United Nations Scientific Committee on the Effects of Atomic Radiation and the World Health Organization, showed that “167 workers at the plant received radiation doses that slightly raise their risk of developing cancer.”

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The Pension Crisis Is Bigger Than The World’s 20 Largest Economies

Submitted by Simon Black of Sovereign Man

If your retirement plans consist entirely of that pension you’ve been promised, it’s time to start looking elsewhere.

As you probably know, pensions are giant pools of capital responsible for paying out retirement benefits to workers.

And right now many pension funds around the world simply don’t have enough assets to cover the retirement obligations they owe to millions of workers.

In the US alone, federal, state, and local governments, pensions are about $7 TRILLION short of the funding they need to pay out all the benefits they’ve promised.

(** And that doesn’t include another $49 trillion in unfunded Social Security obligations…)

America’s private pensions are in bad shape too — a total of around 1400 corporate pensions are a combined $553 billion in the hole. Plus, 25% of those funds are expected to go broke in the next decade. But the pension problem is much bigger than just what’s happening (though the US problems are SEVERE).

In 2015, the total worldwide gap in pension funding was $70 TRILLION according to the World Economic Forum. That is larger than the twenty largest economies in the world combined.

And it’s only gotten worse since then…

The WEC said that the worldwide pension shortfall is on track to reach $400 trillion by 2050.

And what solutions did they suggest?

“Provide a ‘safety net’ pension for all.” You know, sort of like Social Security… which as we mentioned is $49 trillion in the hole. Not exactly a sound solution.

Another solution the WEC offered was to increase contribution rates– in other words, forcing current workers pay more to support retired workers.

Only one problem with that… global demographics are awful. There just aren’t enough young people being born to pay out benefits for retirees.

And that problem is coming to a head in South Korea, where about 13% of the population is currently of retirement age: 65 or older.

By 2060, 40% of the population will be over 65.

And, you guessed it, there aren’t close to enough people being born to burden that load.

This is a nightmare scenario for pensions (in addition to fact that low interest rates have made the returns pensions need to break even basically unachievable).

But worry not, South Korea has an answer for the problem…

The government spent $113 billion over the past 12 years trying to get people to have more kids (I’m curious what this money was spent on… removing condom dispensers from bathrooms?).

But more importantly, this should give you a hint of how the government views you… Much like a dairy cow. Not enough milk? Breed more cows!

But for all the money and effort, South Koreans are actually having FEWER babies– a decline of 1.12 babies per woman in 2006, to just 0.96 this year.

So when you look a few decades out, South Korea clearly isn’t going to have enough workers paying into the pension system to support all the retired beneficiaries.

Even the government acknowledges this. And they’ve already started managing expectations…

One of the government’s proposals is to slash retirement payments by 10%.

At the same time, the government wants to increase current contributions (i.e. payroll TAX) by almost 50%.

These people have been planning their futures based on promises the government has been making for decades. Unfortunately, those promises have no basis in reality.

And if you think higher pension contributions and lower payouts are contained to South Korea, you’re nuts.

Earlier this year, the US Office of Personnel Management proposed $143.5 billion worth of pension cuts for current AND already retired federal workers.

But that’s a band-aid on a bullet wound… It won’t actually come even close to solving the problem. You know more cuts will come.

Remember, US government pensions are $7 TRILLION in the hole. And the demographics are just as bad (the US currently has the lowest fertility rate on record).

Look, I’m not trying to be alarmist. These are just the cold hard facts that everyone needs to understand.

We’re talking about long-term challenges to retirement. But it’s retirement… ergo we’re SUPPOSED to think long-term about retirement: years, decades out. Retirement requires having a plan.

Or, in this case, a Plan B… as anyone depending on a pension or social security for retirement is out of luck.

Governments have lulled hundred of millions of people into a false sense of security based on financial promises they are not going to be able to keep.

It’s not a political problem. It’s an arithmetic problem. And one they’re unable to solve.

But you can.

While you might not be able to fix the pension gap in your home country, you can definitely secure your own retirement.

There’s no need to rely on empty promises and broken pension funds. With some basic planning, education, and a bit of early action, you can safely sidestep the consequences of this looming financial crisis that is larger than the world’s 20 largest economies combined.

 

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Apple Drops To Session Lows After Admitting Its Products Would Be Hit By Tariffs

Apple stock slumped near the close of trading, dragging down the Nasdaq and killing any hopes for a green close, after the company told the US government in a letter that the proposed tariff list covers a wide range of Apple products and the products used in the company’s U.S. operations.

The list includes Apple digital health and wireless connectivity products, including Apple Watch, Apple Pencil and Air Pods; Apple computing tools such as MacMini; Apple adapters, cables and chargers engineered for efficiency and safety; Apple- designed components and made-to-specification tooling for Apple’s U.S. manufacturing and product repair facilities; specialty testing equipment for Apple’s U.S. product development labs; and servers, hard drives and cables for Apple’s U.S. data centers that support our global services such as the App Store, it said.

While hardly material for AAPL’s $1 trillion + market cap, the sharp drop in AAPL stock which wiped out over $10 billion in market cap, shows that should Trump continue to push China and more companies are caught in the net, not even the untouchable tech sector would be spared, a scary preposition for the S&P500, in which over half the gains have come from just six tech stocks, with AAPL among them.

 

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Trump Tariff Threat Trounces Tech Turnaround, Tesla Tattered

It was supposed to be a blockbuster day for stocks, if not so much for bonds, and it started off well.

One hour after the BLS reported the strongest growth in average hourly earnings in 9 years…

… stocks started off strong, even if the performance through mid-day left something to be desired.

The early rebound was driven by tech stocks, with a rebound in the battered semis and chip sector…

…helping FANGs reverse two days of sharp declines, at least in early trading.

Treasury yields showed more enthusiasm, with a sharp bond selloff after the bell sending 10Y yield to 2.95%, after opening at 2.88%. The move was matched across the curve, even if yield curve remained perfectly flat intraday and was last seen fractionally lower.

However the pleasant mood in the market was promptly spoiled just around noon, when Bloomberg carried over comments from Trump aboard Air Force 1, in which the president threatened to impose an additional $267BN in tariffs on China imports, in addition to the $200BN already contemplated, capturing virtually all Chinese exports. The latest salvo from Trump in the trade war rattled U.S. stocks a day after top American executives made a last-minute push to convince the president to not impose fresh tariffs. The result in the Dow Jones was instant, sending the multi-national heavy index tumbling by 100 points. At its low point, the Dow was down nearly 180 points… 

… although as the day progressed, and as traders realized that the big “risk-off” event of the day, Trump’s announcement of $200BN in new Chinese tariffs, would be delayed, stocks recouped much of their losses, and the Nasdaq was virtually unchanged after peeking into the green on a few occasions.

The dour mood returned shortly after 3:30pm however, when Apple announced that it would likely be hit by the Chinese sanctions:

  • APPLE: PROPOSED TARRIFS AFFECTS WATCH, AIRPODS, APPLE PENCIL
  • APPLE SAYS PROPOSED TARRIFS ALSO AFFECT MAC MINI, SOME CABLES

Although even fears that Apple margins would be impacted failed to put too much pressure on stocks, and the S&P never really moved too far below the unchanged line.

Earlier in the session, dollar weakness helped emerging-market stocks snap seven days of declines while a gauge of currencies also rose.

The rebound, however, will be brief as today’s surge in the dollar which guarantees at least two more rate hikes this years, and potentially more in 2018, means that the pain for EMs will return as soon as Monday.

In summary, another day of whiplashes, in which Trump proved that with one phrase he can crush sentiment on a moment’s notice.

Meanwhile, as LPL Financial ‘s Ryan Detrick tweeted this morning, it’s been a tough start to the month of September for the S&P 500, which has fallen for the fourth day in a row. This is notable, because as he notes, “going back to the Great Depression, only two times did it start down the first four days. 1987 and 2001.

And, as Bloomberg shows, a 20-year seasonality chart bears that out, with “2018 a far cry from recent history.”

Which is troubling for hedge funds, because as Nomura showed earlier in the week, September has traditionally been a month of two-halved: a strong first half, and then a slide in the second.

It may be the case that have decided to skip the first half and go straight to the selloff.

Finally, it’s worth noting that just hours after Elon Musk gave a controversial interview in which he showed off his flamethrower and smoked pot, first Tesla’s Chief accounting officer quit after just one month on the job, followed immediately by an announcement that Tesla’s head of HR would not be returning to the company. The news sent TSLA stock plunging as much as 10%, its biggest one day drop in 2 years…

… While Tesla bonds plunged to the lowest on record.

Is the long-overdue bursting of the Tesla bubble emblematic of the sentiment shift in the market in general? Tune in next week and find out.

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Obama Slams Trump, “Nazi Sympathizers” In Fiery Speech Warning Of “Dangerous Times” 

Former President Obama jumped into the political fray on Friday, lashing out at Donald Trump by name in what appears to be his first crack at energizing Democrats for midterms. 

Trump says he fell asleep. 

I’m sorry. I watched it, but I fell asleep. I found he’s very good — very good for sleeping,” the President said during a Fargo, ND fundraiser. 

While giving an acceptance speech for the Paul H. Douglas award for Ethics in Government at the University of Illinois at Urbana-Champaign, Obama said that President Trump is simply capitalizing on discontent whipped up over many years, while asking “What happened to the Republican Party?” while adding that Americans have “moments” when people who are “genuinely, if wrongly, fearful of change” have pushed back against progressive American ideals. 

“You happen to be coming of age during one of those moments,” Obama said. “It did not start with Donald Trump, he is a symptom, not the cause. He is just capitalizing on resentment that politicians have fanning for years. A fear, an anger that is rooted in our past but is also borne in our enormous upheavals that have taken place in your brief lifetimes.”

Perhaps fanning a few flames himself, Obama then said “we sure as heck supposed to stand up clearly and unequivocally to Nazi sympathizers,” asking “How hard can that be, saying that Nazis are bad?” 

“When you vote, you’ve got the power to make sure white nationalists don’t feel emboldened to march with their hoods on or hoods off in Charlottesville,” Obama said.

This hasn’t sat well with conservatives: 

Obama also pushed back against the controversial New York Times op-ed allegedly written by an anonymous White House official claiming to be part of an internal “resistance” within the administration. 

And by the way, the claim that everything will turn out okay because there are people inside the White House who secretly aren’t following the president’s orders—that is not a check. I’m being serious here. That’s not how our democracy is supposed to work. These people aren’t elected. They are not accountable. They are not doing us a service by actively promoting 90 percent of the crazy stuff that is coming out of this White House and then saying don’t worry, we’re preventing the other 10 percent. That’s not how things are supposed to work! This is not normal. These are extraordinary times, and they are dangerous times.

The former President then made his midterm pitch, telling the audience “In two months, we have the chance—not the certainty, but the chance—to restore some semblance of sanity to our politics. Because there is actually only one real check on bad policy and abuses of power, and that’s you. You and your vote.”

Obama then took credit for the economic progress made under the Trump administration, saying “let’s just remember when this recovery started. I mean, I’m glad it’s continued, but when you hear about this economic miracle that’s been going on, when the job numbers come out, monthly job numbers, and suddenly Republicans are saying ‘it’s a miracle!’ I have to kind of remind them—actually those job numbers are the same as they were in 2015 and 2016. Anyway, I digress.” 

One might argue that the recovery started when Hank Paulson and Ben Bernanke held a gun to Congress’s head in September of 2008, during the Bush administration, when they described how the US economy would implode if they didn’t urgently apply taxpayer dollars to fix decisions created in large part by Bill Clinton’s repeal of Glass Steagall. But we digress…

Trump responded to Obama’s economic diss, telling the Fargo crowd “He was trying to take credit for this incredible thing that’s happening to our country,” adding that Obama presided over the “weakest recovery in the history of our country.” 

Obama also hit Trump on tac cuts for wealthy Americans, claiming: “With Republicans in control of Congress and the White House, without any checks or balances whatsoever, they’ve provided another $1.5 trillion in tax cuts to people like me, who I promise don’t need it, and don’t even pretend to pay for them,” adding “It’s supposed to be the party supposedly of fiscal conservatism… Suddenly deficits do not matter.”

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Trump Touts GOP Bill To Deport Criminal Aliens That “Crazy Dems Opposed”

President Trump on Friday touted a new bill which would allow federal officials to more easily deport criminal illegal aliens. 

The Community Safety and Security Act passed in the House 247-152 after its introduction last week by Rep. Karen Handel (R-GA). It is a response to an April Supreme Court ruling that said federal law lacks clarity over how to charge immigrants with aggravated felony, since that determination is based on whether the perpetrator committed a “crime of violence” – an undefined term in federal code. 

Under the bill, the term would be defined in a way that includes a range of offenses, including assault, voluntary manslaughter, attempted kidnapping, sexual assault, domestic violence, murder, human trafficking, and others. With that change in place, the government could again charge immigrants with aggravated felony, a charge that opens up criminal aliens to mandatory removal from the U.S. –Washington Examiner

Friday morning, President Trump tweeted: “Under our horrible immigration laws, the Government is frequently blocked from deporting criminal aliens with violent felony convictions. House GOP just passed a bill to increase our ability to deport violent felons (Crazy Dems opposed). Need to get this bill to my desk fast!”

Supporters of the bill add that the legal clarification will also help federal officials prosecute people for crimes unrelated to immigration – and would boost safety and security across the country, according to Handel. 

This legislation provides critical clarity to the definition of crime of violence in the United States code in order to keep violent criminals and ensure the safety of our communities,” Handel said ahead of the Friday vote, speaking from the House floor while touting support of the legislation from the Fraternal Order of Police. “Failure to address this issue would foster vagueness and uncertainty in our courts.”

Democrats and immigrant rights groups criticized the legislation, claiming it will be used to target immigrants and could lead to an increase in deportations. 

“Because this definition is cross-referenced widely throughout the criminal code and incorporated into federal immigration law, this bill will trigger a significant expansion of the penalties attached to even minor criminal conduct in federal criminal court, exacerbate the mass incarceration crisis, and render even more immigrants subject to the disproportionate penalty of deportation,” wrote the National Immigrant Justice Center, the Immigrant Defense Project, and other organizations said in a combined statement reported by the Examiner

Texas Rep. Sheila Jackson Lee (D) said on Friday that the bill was brought to the floor in a “hasty, precipitous manner.” 

 

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When Up Is Down: Why The Jump In Hourly Earnings Confirms Economic Slowdown

Submitted by the Economic Cycle Research Institute

Earnings growth has risen for an unfortunate reason: growth in hours has fallen faster than pay growth. The chart below shows income growth slowing, and growth in hours worked slowing even faster.

Contrary to popular belief, such a slowdown is not a credible signal of an inflation upturn. And if the jump in wage growth pushes the Fed to be more hawkish, it could actually worsen the slowdown.

As we first publicly explained in May 2014, since AHE is the ratio of total weekly pay to total weekly hours, it’s useful to look at the growth rates of each, shown in the lower panel of the chart (purple and gold lines, respectively), which tells the real story. Following the post-hurricane pop, year-over-year payroll growth has edged up, while yoy hours growth has actually fallen back to its lowest reading since January 2017, excluding its September low, which was due to the hit from the hurricanes. So, rising yoy AHE growth may seem like a good thing, but in this case it is actually confirms the slowdown in economic growth that’s starting to take hold.

The bottom line is that the latest pop in overall AHE growth is not a sign of economic strength or inflation.

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Brazil’s Bolsonaro Lost 40% Of Blood After Knife Attack By Crazed ‘Socialist’

We previously detailed the shocking stabbing incident involving Brazil’s far-right candidate for president Jair Bolsonaro – called “Brazil’s Donald Trump” due to his at time eccentric behavior and policy suggestions – during a parade in the city Juiz de Fora Thursday. Bolsonaro’s had suffered severe blood loss and arrived to the hospital “almost dead” according to his family, but his situation has stabilized as he remains in intensive care. 

Significantly, only one month ahead of a presidential election in Brazil, the man commonly described in local media as “Brazil’s Donald Trump” and who was a presidential front-runner and current congressman will take at least two months to recover from the serious wounds, according to medical staff treating the presidential candidate

Hospital director Eunice Dantas told reporters on Friday that Bolsonaro had lost about 40 percent of his blood, or more than two liters, resulting in his being in shock upon arrival after the knife penetrated 12cm (4.7in) into his abdomen. Doctors now report him to be “in excellent clinical condition” after emergency surgery

Citing medical sources, Reuters reports of Bolsonaro’s medical status after he suffered the deep wound to his lower stomach:

Congressman Bolsonaro, who has enraged many Brazilians for years with controversial comments but has a devout following among conservative voters, could take two months to fully recover and will spend at least a week in hospital, said Dr. Luiz Henrique Borsato, who operated on the candidate.

“His internal wounds were grave and put the patient’s life at risk,” Borsato said. The challenge now is preventing infection that could result from the perforation of Bolsonaro’s intestines, he said.

He’s since tweeted that he’s doing well and recuperating; however, in a video message ot his supporters Bolsonario acknowledged he had been in “intolerable” pain and had “never hurt anyone”.

Numerous videos on social media showed Bolsonaro, who has promised to crack down on crime in Latin America’s largest nation, being stabbed with a knife to the lower part of his stomach. At the moment of the attack, Bolsonaro was on the shoulders of a supporter, looking out at the crowd and giving a thumbs up with his left hand. According to Folha, Bolsonaro’s liver – which was perforated by the stabbing – suffered a “grave injury.”

Police have arrested 40-year-old Adelio Obispo de Oliveira, and say they are currently investigating his mental health. He reportedly told police he was “on a mission from God” and has been described as a socialist

Immediately after the attack he was beaten by angry supporters of the 63-year old presidential candidate before being taken into custody.

Video footage of the attack has since gone viral, and Brazilian media reports the political process ahead of the upcoming presidential election is in tatters and remains uncertain.

The suspected attacker, Oliveira, was reportedly a member of the left-leaning PSOL party from 2007 to 2014. And multiple reports further note that just prior to the attack he posted messages criticizing Bolsonaro and praised the socialist government of President Nicolas Maduro in Venezuela.

Adelio Bispo de Oliveira is suspected of stabbing Jair Boslanaro while he was campaigning in Brazil, via Brazilian Military Police official photo

According to local media reports, Pedro Augusto Lima Possa, the suspect’s lawyer said his client has confessed to the knife attack.

Possa said, “Adelio confessed and claimed responsibility for the attack. But he said he had not intended to kill [Bolsonaro].”

The incident comes after a tumultuous period in Brazilian history that saw a president impeached 2 years ago and the still popular former president Luiz Inacio Lula da Silva jailed and barred from running in the election. It is the most unpredictable election since Brazil’s return to democracy in 1985 with a highly splintered field of candidates.

According to the latest Ibope poll, Bolsonaro had 22% of first-round vote intentions, more than 10% points ahead of his closest rivals. Former Environment Minister Marina Silva and left-wing candidate Ciro Gomes each have 12 percent while former governor of Sao Paulo, Geraldo Alckmin, has 9%. Fernando Haddad, the likely substitute for Luiz Inacio Lula da Silva, has 6%, although it remains unclear how much of Lula’s vote, which was in the 30% range, would transfer over to Haddad now that Lula has been barred from running for president.

Bolsonaro has relied heavily on social media and rallies across the country in a grass roots populist oriented campaign, thus his inability to take to the streets and give speeches could greatly impact the results.

President Temer, an unpopular leader, is not standing for re-election, and millions of voters remain undecided.

Mr Bolsonaro is expected to have a strong first round but lose a run-off to leftist Ciro Gomes, environmentalist Marina Silva or ex-Governor of Sao Paulo Geraldo Alckmin, according to leading research company Ibope. BBC 

However, Flavio Bolsonaro, the candidate’s son, made a surprise statement on Friday, saying “the attack was a political boost”.

Indeed with Bolsonaro’s story of surviving this vicious attack now spread across the globe, and with an outpouring of sympathy from Brazilians, many of which are still on the fence regarding the upcoming election in October, this could be the very thing that pushes him over the edge to victory

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Ratings For NFL Opener Sink To Lowest Level In Nearly A Decade

Days after the NFL issued a statement in support of controversial new Nike spokesman Colin Kaepernick (who is suing the league), ratings for last night’s season opener between the Super Bowl champion Philadelphia Eagles and the Atlanta Falcons dropped to its lowest level since 2009.

NBC announced a 13.4 overnight rating – a drop of over 8% over last year, and nearly 25% since 2015, marking the third year of declines.

That said, many have suggested the dip in ratings was due to extenuating circumstances, after the kickoff was delayed by nearly an hour due to thunderstorms in Philadelphia.  

As NBC Sports‘ Michael David Smith notes, however: 

there are only so many times that the NFL can spin its ratings decline as being the result of extenuating circumstances. Whatever the reasons, the league’s television ratings are not the juggernaut they once were. The NFL still gets national television ratings that any other sport (or, for that matter, any entertainment program) would kill for, but it no longer gets the kinds of television ratings it got a few years back. –NBC Sports

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The Fed’s QE Unwind Hits $250 Billion

Submitted by Wolf Richter of Wolf Street

Here’s my math when this “balance sheet normalization” will end.

In August, the Federal Reserve was supposed to shed up to $24 billion in Treasury securities and up to $16 billion in Mortgage Backed Securities (MBS), for a total of $40 billion, according to its QE-unwind plan – or “balance sheet normalization.” The QE unwind, which started in October 2017, is still in ramp-up mode, where the amounts increase each quarter (somewhat symmetrical to the QE declines during the “Taper”). The acceleration to the current pace occurred in July. So how did it go in August?

Treasury Securities

The Fed released its weekly balance sheet Thursday afternoon. Over the period from August 2 through September 5, the balance of Treasury securities declined by $23.7 billion to $2,313 billion, the lowest since March 26, 2014. Since the beginning of the QE-Unwind, the Fed has shed $152 billion in Treasuries:

The step-pattern of the QE unwind in the chart above is a consequence of how the Fed sheds Treasury securities: It doesn’t sell them outright but allows them to “roll off” when they mature; and they only mature mid-month or at the end of the month.

On August 15, $23 billion in Treasuries matured. On August 31, $21 billion matured. In total, $44 billion matured during the month. The Fed replaced about $20 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Wall Street – the “primary dealers” with which the Fed normally does business. Those $20 billion in securities were “rolled over.”

But it did not replace about $24 billion of maturing Treasuries. They “rolled off” and became part of the QE unwind.

Mortgage-Backed Securities (MBS)

The Fed is also shedding is pile of MBS. Under QE, the Fed bought residential MBS that were issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Holders of residential MBS receive principal payments as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off.  To keep the balance of MBS from declining after QE had ended, the New York Fed’s Open Market Operations (OMO) kept buying MBS.

The Fed books the trades at settlement, which occurs two to three months after the trade. Due to this lag of two to three months, the Fed’s balance of MBS reflects trades from the second quarter. In August, the cap for shedding MBS was $16 billion. But at the time of the trades reflected on the August balance sheet, the cap was $12 billion.

Over the period from August 2 through September 5, the balance of MBS fell by $11.5 billion, to $1,697 billion, the lowest since October 8, 2014. In total, $73 billion in MBS have been shed since the beginning of the QE unwind:

The QE unwind is scheduled to reach cruising speed in October, when the unwind is capped at $50 billion a month. The plan calls for shedding up to $420 billion in securities in 2018 and up to $600 billion a year in each of the following years until the Fed deems its balance sheet adequately “normalized” – or until something big breaks. Based on current discussions, as part of this “normalization,” the Fed is likely to get rid of all its MBS and retain only Treasury securities.

Total Assets on the Balance Sheet

The balance sheet also reflects the Fed’s other activities. Total assets for the period from August 2 through September 5 dropped by $47 billion. This brought the decline since October 2017, when the QE unwind began, to $252 billion. At $4,208 billion, total assets are now at the lowest level since March 12, 2014:

When will this Balance Sheet Normalization end?

It took the Fed about six years to pile on these securities. It’s going to take a number of years to shed them. But the balance sheet will never go back to where it had been before QE for the simple reason that as the economy grows, the Fed’s balance sheet expands along with it.

The chart below shows this relationship as it existed before the Financial Crisis. It depicts the total assets on the Fed’s balance sheet (black line) and nominal GDP seasonally adjusted annual rate (red line). All data is quarterly:

There is no telling what the Fed will do in terms of its balance sheet. But by looking at the past and extrapolating into the future, we can a least get a feel for the lower range — the level below which the Fed will certainly not go.

GDP: Since 2008, nominal GDP has grown 38% from $14.8 trillion to $20.4 trillion.

Balance sheet: In 2008, just before the Fed’s gyrations started, total assets amounted to $892 billion. If the Fed’s balance sheet had grown since then at the same rate as nominal GDP, it would be $1.23 trillion today. That’s sort of a base line.

The Future:

If nominal GDP (not adjusted for inflation) grows at 5% per year (slightly below the current rate), it will reach $24.8 trillion in Q2 2022.

If the Fed’s balance sheet had not experienced QE, and if it had grown since 2008 at the same rate as nominal GDP, it would reach about $1.5 trillion in Q2 2022.

So, if the QE unwind proceeds at $550 billion a year (below the cap of $600 billion), the Fed’s total assets will drop to about $2 trillion by Q2 2022.

This range between $1.5 trillion and $2 trillion will mark the absolute low end of the Fed’s balance sheet by the time normalization ends in 2022. And most of those assets will be Treasury securities. What little MBS will be left on its balance sheet by then will be shed in future years. This is my math, and I’m sticking to it.

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