The Fed Balance Sheet Reduction is a Distraction From the REAL Crisis

Everyone is making a big deal about the Fed's so-called "balance sheet reduction” which starts next month.

Let’s assess some facts.

First of all, the Fed plans on shrinking its balance sheet by $10-$30 billion per month. The Fed balance sheet is currently $4.5 trillion. So at this pace of unwinding it would take somewhere between 13 and 33 years for the Fed to normalize its balance sheet back to pre-2008 levels.

So the notion that this is significant is off base. It borders on irrelevant.

Second of all, the only reason the Fed is even discussing a balance sheet reduction is because stocks are soaring. The second that stocks begin to correct, multiple Fed officials will appear on TV talking about how it’s time to “slow the pace” or even “halt” its balance sheet reduction.

Let’s get real here.

The reality is that the stock market is the ONLY thing the Fed can point to as a success. The economy from 2008 to 2016 was in the weakest recovery in 80+ years. Indeed, the Fed has all but given up on the farce that it cares about the economy: yesterday, Fed Chair Janet Yellen herself admitted publicly yesterday that the Fed takes account of “asset prices” when it comes to rate hikes.

In Fed-speak, asset prices=stocks. And that’s the #1 focus for the Fed when it comes to monetary policy.

So what does this mean?

The Fed is going to engage in some symbolic shrinking of its balance sheet, but the second things get messy for stocks, the Fed will start walking back this policy.

And THAT opens the door to the REAL crisis.

A crisis of inflation.

The $USD is imploding. It bounced a bit courtesy of the Fed announcement yesterday, but it's in SERIOUS trouble having taken out critical support.

The long-term chart is even uglier.

The real CRISIS is the collapse of the $USD. And it's one the Fed doesn't want to stop. Indeed, as soon as stocks begin to correct, the Fed will start walking back all talk of a balance sheet reduction. And if we enter another crisis, the $USD will drop even farther as the Fed cranks up the printing presses with more QE.

Put simply, the big crisis will be  the collapse of the $USD. And it's already underway.

If you’re not taking steps to actively profit from this, it’s time to get a move on.

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Chief Market Strategist

Phoenix Capital Research

 

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Equifax Accidentally Directs 200,000 Customers To Fake Phishing Website

And the hits just keep coming for Equifax, the once-trusted credit-monitoring firm that has been embroiled in one of the biggest corporate public-relations disasters in recent memory since disclosing that hackers had penetrated its cyber security defenses and absconded with sensitive personal and financial data belonging to 143 million Americans. Because of the types of data that were stolen, including drivers' license, social security and credit-card numbers, experts have described the hack as possibly the most damaging corporate hack yet.

As if this weren’t enough to permanently sully the firm’s reputation (amid cries of “you had one job!”) – the staggering irony of a credit monitoring firm inadvertently divulging the sensitive information that it was supposed to safeguard hasn’t been lost on consumers) a series of subsequent disclosures have portrayed the firm’s executives as bungling, at best, and nefarious, at worst.

In the nearly two weeks since the story broke…

  • It was revealed that three of the firm’s executives, including its CFO, cashed out of stocks and options worth some $2 million in the month between when the company first learned about the hack, and when it was disclosed to the public. A federal prosecutor in Atlanta has opened a criminal investigation into Equifax that will focus both on whether the firm was criminally negligent in failing to patch a hole in its cybersecurity systems, as well as whether the suspect stock sales constitute securities fraud.
  • The company’s head of cyber security was revealed to have no background in computer science or security – a fact the company tried to hastily cover up by scrubbing her social-media profiles. Susan Mauldin, Equifax’s chief information security officer, has a bachelor’s degree in music composition and a master’s in fine arts from the University of Georgia.
  • Several Congressional committees have asked the company to turn over information relating to the hack as multiple investigations appear to be getting under way. The attorneys general of a handful of states, including Massachusetts and Rhode Island, have joined a probe into the company’s handling of the breach.
  • The company has been hit with dozens of lawsuits from consumers alleging fraud, abuse and negligence.
  • Equifax CEO Rick Smith has been called to testify before a special House panel early next month.

When Equifax first set up a website to allow consumers to check whether their information was compromised, it carried a waiver stating that by using the service consumers would forfeit the right to sue Equifax. The internet quickly exploded in outrage, and the company quickly clarified that the waiver didn’t apply to this hacking incident, which…sure. Now, The Verge, The New York Times and a handful of other media outlets are reporting that Equifax accidentally tweeted the link to an imposter website set up by a white-hat hacker hoping to expose gllaring errors that the firm had made in setting up its verification website. This happened not once, but three times. And in at least one instance, the tweet with the phony link was left up for a whole day.

Here’s The Verge:

“Today, Equifax ended up creating that exact situation on Twitter. In a tweet to a potential victim, the credit bureau linked to securityequifax2017.com, instead of equifaxsecurity2017.com. It was an easy mistake to make, but the result sent the user to a site with no connection to Equifax itself. Equifax deleted the tweet shortly after this article was published, but it remained live for nearly 24 hours.”

Luckily for consumers, the fake site wasn’t malicious. Instead, it was set up by developer Nick Sweeting to try and expose the glaring security vulnerabilities that the company had embedded in its recovery website, which it set up as a separate domain, rather than making it a subdomain of Equifax’s main website.

“Luckily, the alternate URL Equifax sent the victim to isn’t malicious. Full-stack developer Nick Sweeting set up the misspelled phishing site in order to expose vulnerabilities that existed in Equifax's response page. “I made the site because Equifax made a huge mistake by using a domain that doesn't have any trust attached to it [as opposed to hosting it on equifax.com],” Sweeting tells The Verge. “It makes it ridiculously easy for scammers to come in and build clones — they can buy up dozens of domains, and typo-squat to get people to type in their info.”

Sweeting says no data will leave his page and that he "removed any risk of leaking data via network requests by redirecting them back to the user's own computer," so hopefully data entered on his site is relatively safe. Still, Equifax's team linked out to his page. That isn't reassuring.”

Prior to Equifax customer service sharing the imposter site, Sweeting says he emailed the company’s support team and tweeted to Equifax that he spotted a potential vulnerability. By the time the site was taken down, Sweeting says it had received more than 200,000 hits. In the spirit of transparency, Sweeting included a disclaimer on his site warning consumers that it was a fake – and blasting Equifax for its sloppy security practices.

According to the NYT, phishers cannot create a page on the equifax.com domain, so if the website were hosted there instead, it would be easy for users to tell that the page was legitimate.

“Fortunately for the people who clicked, Mr. Sweeting’s website was upfront about what it was. The layout was the same as the real version, complete with an identical prompt at the top: “To enroll in complimentary identity theft protection and credit file monitoring, click here.” But a headline in large text differed: “Cybersecurity Incident & Important Consumer Information Which is Totally Fake, Why Did Equifax Use A Domain That’s So Easily Impersonated By Phishing Sites?”

The legitimate Equifax domain was securityequifax2017.com. Sweeting’s was equifaxsecurity2017.com. And as one cybersecurity expert told the NYT, even the legitimate website looks fake because it’s not a subdomain of the larger Equifax site.

“You would think that would be the obvious place to start,” said Rahul Telang, a professor of information systems at Carnegie Mellon University. “Create a subdomain so that if somebody tries to fake it, it becomes immediately obvious.”

The company’s actions, Telang told the NYT, suggest that it had never anticipated or planned for a breach.

This has become clear in the last few weeks. Now, the only thing left to be decided is whether the fact that the company was almost comically unprepared for a hack rises to the level of criminal negligence.

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1 In 5 Students Endorse Violence To ‘Prevent’ Controversial Speakers

Authored by Nikita Vladimirov via CampusReform.org,

A new survey published by The Brookings Institution finds that about one-in-five undergraduate students approve of using violence to shut down controversial speakers.

A majority of undergraduate students at U.S. four-year colleges and universities also agreed with a hypothetical protest in which a group “opposed to the speaker disrupts the speech by loudly and repeatedly shouting so that the audience cannot hear the speaker.”

According to the survey, 51 percent of students agreed that such a demonstration would be acceptable, while 49 percent disagreed. Not surprisingly, the response to the hypothetical scenario was also largely partisan, with 62 percent of Democrats approving of the protest, compared to just 39 percent of Republicans .

“I find the numbers in the above table to be highly concerning, because they show that a very significant fraction of students, across all categories, believe it is acceptable to silence (by shouting) a speaker they find offensive,” wrote John Villasenor, the author of the survey and a Brookings Nonresident Senior Fellow.

The study further found that 19 percent of responders said that they approved of using violence “to prevent the speaker from speaking.” An 81 percent majority, on the other hand, did not approve of the violent approach.

“A surprisingly large fraction of students believe it is acceptable to act—including resorting to violence—to shut down expression they consider offensive,” Villasenor wrote.

While 39 percent of responders indicated that hate speech is protected by the First  Amendment, 44 percent said that it is not protected by the document. Another 16 percent remained undecided.

In one survey question, the students were also asked if they prefered a learning environment where certain views are prohibited versus an open learning environment “where students are exposed to all types of speech and viewpoints.”

According to the study, 53 percent of responders said that they prefer the former while only 47 percent chose the latter.

“The survey results establish with data what has been clear anecdotally to anyone who has been observing campus dynamics in recent years: Freedom of expression is deeply imperiled on U.S. campuses,” Villasenor wrote.

 

“In fact, despite protestations to the contrary (often with statements like ‘we fully support the First Amendment, but…’),” he asserted that “freedom of expression is clearly not, in practice, available on many campuses, including many public campuses that have First Amendment obligations.”

Villasenor surveyed a pool of 1,500 undergraduate students at U.S. four-year colleges and universities between August 17 – 31. The margin of error is between 2-6 percent.

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“Whole Towns Have Been Wiped Out” Hurricane Maria Devastates Tiny Caribbean Island Of Dominica

In a testament to the sheer power of Hurricane Maria, the most destructive storm to hit the Caribbean in nearly a century, civilization on the tiny island of Dominica was essentially wiped out after Maria – then a category 5 storm – battered the island with 160 mph gusts, leveling whole towns and wiping out the island’s electricity and communications infrastructure.

The death toll on the island has climbed to 7 – but a complete count of casualties likely won’t be possible for at least a few more days, as the island’s shaken residents sift through the debris and contemplate what to do now that everything they and their neighbors owned has been destroyed.

When CNN flew over the island to survey the damage, it captured startling footage depicting whole villages decimated and thousands of trees snapped in half across the island. Houses ripped open. Evidence of numerous landslides.

The island’s agriculture-based economy has been totally wiped out. As CNN points out, the complete destruction of the island’s economy will compound the damage wrought by the storm by hopelessly complicating the recovery effort. Officials of nearby islands confirmed that the only electricity available on the island is coming from backup generators and car batteries.

Philmore Mullin, head of Antigua and Barbuda’s National Office of Disaster Services, told CNN the only power available on the island was from emergency generators and car batteries. “Damage is severe and widespread. We know of casualties, but not in detail. We’ve heard of many missing but we just don’t know much at the moment.”

According to the Guardian, Ross University school of medicine, which is based in Dominica, said it would being to evacuate its students, more than 80% of whom are US citizens, with close to 10% from Canada, by boat to St Lucia on Thursday if the weather permits.

Some Caribbean relief agencies have managed to airlift supplies to some parts of the island. They’re hoping to send in aid workers equipped with satellite phones to help direct help to where it is needed.

“Ronald Jackson, the executive director of the Caribbean Disaster and Emergency Management Agency, said staff had managed to guide helicopters to Dominica to deliver some food, water and shelter materials on Wednesday.

 

In an interview with Jamaica’s RJR News, Jackson said the agency was planning to drop people into remote communities with satellite phones because many areas were completely inaccessible. Communications towers were snapped by winds of up to 160mph (260km/h).”

Even the island’s prime minister, Roosevelt Skerrit, and his family had to be rescued from their home on the island as it flooded, according to an aid.

“Hartley Henry, an adviser to the prime minister, Roosevelt Skerrit, said there had been a “tremendous loss of housing and public buildings”. There was no electricity and virtually no means of communicating with the outside world, he said.

 

Henry said he had spoken to Skerrit – who had to be rescued from his flooded residence during the hurricane – via satellite phone. “He and family are fine: Dominica is not,” he said.

 

“The main general hospital took a beating. Patient care has been compromised. Many buildings serving as shelters lost roofs, which means that an urgent need now is tarpaulins and other roofing materials.

 

“It’s difficult to determine the level of fatalities but so far seven are confirmed as a direct result of the hurricane. That figure, the prime minister fears, will rise as he wades his way into the rural communities.”

 

Some districts were reporting “total destruction” of homes, roads and crops, Henry said. “In summary, the island has been devastated.”

Maria weakened to a category two storm on Thursday as it moved away from Puerto Rico and toward the Dominican Republic. But the US National Hurricane Center warned that it could yet regain strength.  The NHC also warned that parts of PR remained vulnerable to flash flooding related to the storm.

The official death toll from Hurricane Maria is 10, with two deaths confirmed on the French island of Guadeloupe, and one so far in Puerto Rico.

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Oklahoma City Cops Tase, Shoot, Kill Deaf Man

Police in Oklahoma City tased and fatally shot a deaf man, Magdiel Sanchez, who they said was wielding a metal pipe. Police reportedly shot him when he was at least 15 feet away from any officers.

The cops were not wearing body cameras. Although the city council voted to introduce body cameras two years ago, not all officers are equipped with them, thanks to objections from the police union—more evidence of how police unions make reducing police violence and misconduct more difficult.

Police arrived at Sanchez’s home Tuesday after following his father, who had been involved in a hit and run. A police spokesperson, Capt. Bo Mathews, told the press he didn’t know if anyone was injured in the crash but knew that, at the very least, the car didn’t hit a pedestrian.

The cop who followed Sanchez’s father home saw Sanchez with a two-foot-long pipe, “perceived” a threat, and called for backup. A neighbor has told NBC News that Sanchez often carried the pipe to fend off stray dogs.

When other officers arrived, they ordered Sanchez to drop the weapon and get on the ground. Neighbors yelled to the police that Sanchez was deaf, but it’s unclear whether the police heard them.

After he failed to obey their commands, Sanchez was tased and shot.

Oklahoma City police shoot a lot of people—a resident of Oklahoma City is 20 times more likely to be shot and killed by police than a resident of New York City.

That makes the police union’s delay of the deployment of body cameras even worse.

The Oklahoma City Council first voted to equip officers with body cameras in September 2015, but it took until last November for the city to get the union onboard. The local Fraternal Order of Police objected to the cameras because of a policy that would have allowed supervisors to review footage at their discretion. An arbitrator agreed with the union.

You read that right: The police union objected to supervisors using body camera footage to supervise their subordinates, and an arbitrator thought this made sense.

When a cop shoots someone while another cop was tasing the same guy and neighbors are yelling that the person was deaf, it probably isn’t the first questionable incident in his career, just the first to be serious enough to gain widespread attention. Bad cops usually don’t start with killing. The same kinds of character flaws—sloppiness, jumpiness, lack of respect for others—lead to less severe misconduct as well.

When supervisors can review body camera footage at their pleasure, they’re more likely to identify such cops before they kill. Unions should not be able to thwart that kind of accountability.

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Stock Market Bubbles In Perspective (Or Why “This Won’t End Well”)

Authored by Howard Ma via Meritocracy Capital,

Last week marked the 9th anniversary of the collapse of Lehman Brothers. It was one of the biggest milestones of the Global Financial Crisis (“GFC”) that began approximately a year earlier in 2007. Corporate earnings were abnormally weak during the GFC. I bring that up because a much cited stock market valuation metric that has been prescient gauging past bubbles could be overstated due to those abnormally weak earnings. Those of you concerned about the valuation of the U.S. stock market should read on.

What Does Average Mean?

The cyclically-adjusted price-to-earnings (“CAPE”) ratio is normally credited to Nobel-prize winning economist Robert J. Shiller. It adjusts for the ups and downs of business cycles by comparing the price of the S&P Composite Index to the average, annual inflation-adjusted earnings of that index over the previous 10 years. There are three types of averages: mean, median and mode. The type of average the CAPE ratio uses is the mean (a.k.a. arithmetic mean). Though the CAPE ratio has been shown to be a reliable predictor of future long-term stock market returns, it has also been widely criticized.

One criticism is that the CAPE ratio is susceptible to outliers. For example, those abnormally weak earnings that occurred during the GFC drag the mean, annual inflation-adjusted earnings down. This could make the CAPE ratio of the S&P Composite Index look more expensive than it may actually be. It has been widely reported that the CAPE ratio is currently at a very high level behind only two other stock market peaks: 1) the Tech Bubble, and 2) the stock market bubble that occurred during the Roaring Twenties (immediately preceding the Great Depression). In both cases, the stock market eventually crashed and in spectacular fashion.

One way to adjust for this problem of abnormally weak earnings is to instead use the peak earnings of the past decade. This approach has been credited to investment manager John Hussman. Ironically, the lesser known Hussman P/E currently shows that the S&P Composite Index is at a very expensive level second to only the Tech Bubble. Those who argue the U.S. stock market is not expensive don’t care for this approach.

Using a Better Average

I agree that using an arithmetic mean makes the CAPE susceptible to outliers. I also agree the CAPE ratio can also make the valuation of the S&P Composite (or any stock market index) look more expensive than it may actually be. Though I believe the Hussman P/E is useful, I don’t believe it is a substitute to the CAPE ratio. An average measures a central or typical value. Using a peak figure, as in the case of the Hussman P/E, does not do this. By using peak earnings, the Hussman P/E is in fact driven by outliers.

Mentioned earlier, there are three types of averages. A better type of average would be the median. It literally represents the middle of a sequence of ranked numbers. In most cases, it is not influenced by outliers. By using median (instead of mean) earnings, I refer to this valuation approach as the CAPME ratio. It currently shows the S&P Composite is not the second or third most expensive stock market cycle. This finding supports those who criticize the traditional CAPE ratio of overstating the valuation of the S&P Composite Index. The problem for critics though is using the CAPME ratio still shows the U.S. stock market is very expensive right now. In fact, it is the fourth most expensive, behind the stock market cycle that occurred during the Subprime Mortgage Bubble. Based on the data Professor Shiller uses, you can see this in the graph below that looks back 135 years.

Valuations in Perspective

You will notice in the graph above that the past 5 stock market bubbles were all valued at one point at more than 20-times median, annual, inflation-adjusted earnings. The valuation range of those peaks is wide though given the Tech Bubble was valued at more than 40-times at its peak.  This makes the Tech Bubble potentially an outlier. Furthermore, all 5 stock market bubbles did not last long. They were fleeting.

To put this all into perspective, consider these valuations by their percentile ranks. You can see this from the orange lines in the graph below.

The graph above shows the aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached a very high level of roughly the 90th percentile (red dotted line). In other words, these bubbles formed when their valuations were near or at the most expensive decile. Investors beware: the valuation of the S&P Composite Index is currently ranked at the 94th percentile.

This puts the U.S. stock market smack-dab at the heart of bubble territory.

It has been argued lots that the high stock market valuation is justified by low interest rates. This argument does not work for me. Let me tell you why. Yields on 10-year U.S. treasury bonds in early-1941 were lower than they are now. Despite lower interest rates in early-1941, the stock market CAPME valuation ratio was quite low at that time ranking at around the 30th percentile. Furthermore, the amount of debt provided by stock brokers used to fuel the current stock market cycle is at a record level. This could prove problematic given bubbles driven by financial leverage are particularly dangerous.

Summary

The aforementioned 5 stock market cycles turned into bubbles when their CAPME valuation ratios reached the 90th percentile. The U.S. stock market is back there again. Its valuation is squarely in the middle of that very expensive decile looking back 135 years.

The 5 previous instances of stock market bubbles suggest this will not end well. Bubbles never do, particularly ones driven by financial leverage.

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Jamie Dimon Faces Market Abuse Claim Over “False, Misleading” Bitcoin Comments

A week after Jamie Dimon made headlines by proclaiming Bitcoin a "fraud" and anyone who owns it as "stupid," the JPMorgan CEO faces a market abuse claim for "spreading false and misleading information" about bitcoin.

Unless you have been living under a rock for the past week, you will be well aware of JPMorgan CEO Jamie Dimon's panicked outburst with regard the 'fraud' that Bitcoin's 'tulip-like' bubble is. To paraphrase:

"It’s a fraud. It’s making stupid people, such as my daughter, feel like they’re geniuses. It’s going to get somebody killed. I’ll fire anyone who touches it."

One week later, an algorithmic liquidity provider called Blockswater has filed a market abuse report against Jamie Dimon for "spreading false and misleading information" about bitcoin.

The firm filed the report with the Swedish Financial Supervisory Authority against JPMorgan Chase and Dimon, the company's chief executive. Blockswater said Dimon violated Article 12 of the European Union's Market Abuse Regulation (MAR) by declaring that cryptocurrency bitcoin was "a fraud".

The complaint said Dimon's statement negatively impacted "the cryptocurrency's price and reputation".

 

It also said Dimon "knew, or ought to have known, that the information he disseminated was false and misleading".

 

"Jamie Dimon's public assertions did not only affect the reputation of bitcoin, they harmed the interests of some of his own clients and many young businesses that are working hard to create a better financial system,” said Florian Schweitzer, managing partner at Blockswater.

Blockswater said JPMorgan traded bitcoin derivatives for their clients on Stockholm-based exchange Nasdaq Nordic before and after Dimon's statements (as we detailed here), which Schweitzer said "smells like market manipulation".

Blockswater works with blockchain-based assets based in London and Austria. Its full complaint is below:

Blockswater Files Market Abuse Report Against Jamie Dimon in Stockholm
Blockswater LLP believes that Dimon violated EU’s Market Abuse Regulation by "spreading false and misleading information" about bitcoin

 

STOCKHOLM/NEW YORK/LONDON/VIENNA, September 21, 2017 – Algorithmic liquidity provider Blockswater LLP filed a market abuse report with the Swedish Financial Supervisory Authority (FI) against JPMorgan Chase and Co. CEO Jamie Dimon. Blockswater believes that Dimon violated Article 12 of the European Union's Market Abuse Regulation (MAR) by declaring that cryptocurrency bitcoin was "a fraud.”

 

The complaint filed with the Swedish authorities demonstrates how Dimon's statement negatively impacted "the cryptocurrency's price and reputation.” The document also lists evidence that suggests Dimon "knew, or ought to have known, that the information he disseminated was false and misleading.”

 

"Jamie Dimon's public assertions did not only affect the reputation of bitcoin, they harmed the interests of some of his own clients and many young businesses that are working hard to create a better financial system,” says Florian Schweitzer, managing partner at Blockswater. JPMorgan traded bitcoin derivatives for their clients on Stockholm-based exchange Nasdaq Nordic before and after Dimon's statements fueled volatility in the market. “That’s a clear case of double standards and it smells like market manipulation.”

 

Article 12 of the European Union's Market Abuse Regulation prohibits the manipulation of markets through practices such as spreading false or misleading information. Nasdaq Nordic, where exchange-traded notes on bitcoin are listed, defines the term “market manipulation” in accordance with the EU’s definition as “dissemination of information through the media, including the Internet, or by any other means that gives, or is likely to give, false or misleading signals as to Listed Products, including the dissemination of rumours and false or misleading news, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading.”

 

FI confirmed receipt of the report but did not comment further except to state that the financial markets regulator "will handle it according to [FI's] procedures."

 

Blockswater LLP is an algorithmic liquidity provider for blockchain-based assets based in London (UK) and Vienna (Austria).
 
 

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Graham-Cassidy Promises States More Flexibility; Leaves Washington Fully in Charge of Americans’ Health Care

On the same day that 10 governors—a mix of Republicans and Democrats—announced their opposition to a new health care bill being positioned for a vote in the U.S. Senate, one governor’s statement of support stood out.

Arizona Gov. Doug Ducey, a Republican, said the Graham-Cassidy health care bill is “the best path forward to repeal and replace Obamacare,” in a Facebook post Monday, and called for “Congress and the Administration to give states more flexibility and more options moving forward.”

The extent to which the Graham-Cassidy bill—so named because its chief architects are Sen. Lindsay Graham, R-S.C., and Sen. Bill Cassidy, R-La.—increases flexibility for states is a subject of some importance, and much debate, as the Senate mulls the proposal.

Along with other changes to the Affordable Care Act, the bill would abolish Obamacare’s Medicaid expansion and would instead block grant more than $1.1 trillion in federal health care spending to the states between 2020 and 2026. It would also allow states to waive Obamacare rules prohibiting charging different insurance rates to women and to people with pre-existing conditions, for example, and rules requiring coverage of certain benefits on the individual market. The bill would grant states significant new flexibility to determine how Obamacare dollars are spent.

That might seem like a welcome sign that, as Ducey put it, Congress and the White House are interested in giving states more flexibility when it comes to health care policy.

“This bill—while imperfect—gives states a real opportunity to re-imagine their healthcare systems,” says Naomi Lopez Bauman, director of health care policy for the Arizona-based Goldwater Institute, a free market think tank. “If a state can figure out a way to use the subsidies to provide a direct benefit across the market, they can do it.”

That flexibility might only go so far.

While Bauman sees the proposal as a flawed-but-potentially-positive step towards greater state-level control of health care policy, other analysts warn that state control over health care might be counter-productive if the goal is reducing the role of government in health care decisions. Any movement towards federalism in the Graham-Cassidy bill would come only with the expressed permission of the federal government, could be rescinded at any time, and may not even survive next week’s expected Senate debate on the bill.

Already, there are movements to limit what states can do with those block grants.

“If you give a big chunk of money to California, they’re going to go set up a single-payer system run by the state and then come back and say ‘we don’t have enough money, we need more,'” Sen. John Kennedy, R-La., told the Washington Examiner on Monday. He’s proposed adding language to the Graham-Cassidy bill explicitly forbidding states from using the new block grants towards the establishment of a state-run single-payer system.

On one hand, Kennedy is right to be worried about the cost of single-payer plans set up by California or New York. “Given the renewed enthusiasm on the left for the abolition of private health insurance through single-payer systems, there can be little doubt that this is the direction that blue states will take under Graham-Cassidy,” predicts Avik Roy, president of the Foundation for Research on Equal Opportunity, a free market think tank. Those systems are likely to be far more expensive than what would be covered by the Graham-Cassidy block grants—and, once established, could be used as an argument for increasing federal funding to the states.

Allowing states to experiment with health care policy could help policymakers discover what works and what doesn’t. A single-payer plan in Vermont collapsed because the state could not pay for it, and efforts in New York, California, or elsewhere are likely to meet the same ends.

“Some states will get it right; others won’t,” says Lopez Bauman. “But it is far preferable to have fifty laboratories of democracy than to have top-down, Washington edicts dictating to the entire nation.”

Graham-Cassidy maintains Washington’s strong grip on health care policy even as it takes some tentative steps towards easing regulations. Chris Jacobs, senior health care policy analyst at the Texas Public Policy Foundation, argues that the block grants and state waivers “do not represent a true attempt at federalism.”

It remains unclear whether any states would actually seek the waivers from Obamacare’s regulations. States that don’t would keep the Affordable Care Act as the default health care policy. Future Democratic administrations or federal judges could squeeze the waiver rules in the bill and further limit the supposed flexibility for the states, and since the federal grant program ends in 2027, it’s unclear what would happen beyond the next 10 years.

A potentially bigger check on the bill’s federalism is the power granted to the federal Secretary of Health and Human Services to change the funding formula for that all-important $1.1 trillion in block grants to be doled out during the 2020s. In a post published Wednesday by The Federalist, Jacobs called that “a trillion-dollar loophole that leaves HHS bureaucrats with the ultimate say over how much money states will receive.” The only check on that power is a vague rule saying HHS must develop “legitimate factors” before changing block grant allocations.

The funding formula for the distribution of those dollars is complicated and fraught with politics, with the potential for favoritism and vote-buying, Jacobs notes.

In short, Graham-Cassidy introduces a bit more federalism to American health care policy, but only to the extent that the federal government agrees to keep funding it.

And the whole debate over increased flexibility of states be moot. The Senate Parliamentarian has yet to rule on the Graham-Cassidy proposal and could determine that the non-budgetary aspects of it (including potentially the regulatory changes) are not able to be passed with reconciliation. If so, they would require 60 votes to pass and would almost certainly fall short of that threshold with Democrats in opposition.

Senate Republicans have 10 days to pass the Obamacare repeal/rewrite bill before the opportunity to use the budget reconciliation process expires. After September 30, passing a major health care bill in the Senate would require 60 votes and Democrats would be able to block any such proposal.

Senate Majority Leader Mitch McConnell, R-Ky., said Wednesday there will be a vote on the Graham-Cassidy bill next week.

It’s still unclear whether the bill will pass. Sen. Rand Paul, R-Ky., says he will not vote for the Graham-Cassidy bill, which he called “more Obamacare-lite” on Twitter. If two more Republican senators join Paul in opposition, then the bill would fall short of the 50 votes (plus a tie-breaking vote from Vice President Mike Pence) needed to pass. Notably, neither Sen. Lisa Murkowski, R-Alaska, nor Sen. Susan Collins, R-Maine, the two senators who voted with McCain to sink the Senate’s so-called “skinny repeal” bill in July, have said they will support the new bill.

With U.S. Sen. John McCain, R-Ariz., seen a crucial swing vote on the Senate’s latest attempt to repeal, or at least rewrite, Obamacare, Ducey’s public assertion of support could be a small step towards the bill’s passage. Graham said Ducey’s showing of support made Monday “a great day for federalism, bad day for Obamacare.”

That’s probably overselling things on both points. The Graham-Cassidy bill represents a modest step towards letting states experiment with health policies, but it’s hardly going to get Washington out of Americans’ health care.

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Albert Edwards: “Citizen Rage” Will Soon Be Directed At “Schizophrenic” Central Banks

Perhaps having grown tired of fighting windmills, it was several weeks since Albert Edwards’ latest rant against central banks. However, we were confident that recent developments out of the Fed and BOE were sure to stir the bearish strategist out of hibernation, and he did not disappoint, lashing out this morning with his latest scathing critique of “monetary schizophrenia”, slamming all central banks but the Fed and Bank of England most of all, who are again “asleep at the wheel, building a most precarious pyramid of prosperity upon the shifting sands of rampant credit growth and illusory housing wealth.” 

Follows pure anger from the SocGen strategist:

These of all the major central banks were the most culpable in their incompetence and most prepared with disingenuous excuses. And 10 years on, not much has changed. The Fed and BoE are once again presiding over a credit bubble, with the BoE in particular suffering a painful episode of cognitive dissonance in an effort to shift the blame elsewhere. The credit bubble is everyone’s fault but theirs.

First, some recent context with this handy central bank holdings chart courtesy of Deutsche Bank’s Jim Reid which alone is sufficient to make one’s blood boil.

For those familiar with Edwards’ writings over the years, the gist of his note will come as no surprise: after all, how many different ways can you say that central banks have broken the market, have caused a credit bubble, and will be responsible for the crash when they finally run out of cans to kick.

In any event, the focus of Edwards’ latest note is the resurgent growth in unsecured household credit.

We have written on this topic before in the context of US and UK economic growth only being sustained by sharp declines in household saving ratios. But though I must revisit the issue after the UK?s Guardian newspaper (for non-UK clients it is similar to The New York Times) ran a huge feature on the desperate situation many of the JAMs (just about managing) now find themselves in – see article here.

Edwards points out the increasingly easy terms offered on unsecured consumer debt, i.e., credit cards and notes that he has “heard stories of credit card loan search engines spewing out money on 4 year, 0% teaser loans. What really shocked me is that after having been offered a credit card loan facility via a search engine, one is able to make multiple further self-certified applications and be offered similarly large amounts! Amazingly there was no question about existing debts!“

Edwards concedes that credit growth in a zero interest rate world is hardly surprising, and certainly “this debt time-bomb is specific to the UK.”

We are in a QE, zero interest rate world, where central banks are effectively force-feeding debt down borrowers? throats. They did it in 2003-2007 and they are doing it again. Most of the liquidity merely swirls around financial markets, but there is certainly compelling evidence now of a consumer credit bubble in both the UK and US (as well as a corporate credit bubble in the US).

But the catalyst that pissed Edwards off the most this time around, is the observed reaction from the BOE, which on one hand is railing against the current leveraging trends, and on the other is doing everything it can to encourage it, making Carney?’s cautious statements about consumer credit “look ridiculous and takes BoE monetary policy to a new level of schizophrenia”

Rather than the bubble itself it is the reaction of the BoE that I find most bizarre. Mark Carney warns darkly that ?banks are forgetting the lessons of the past? and he recently increased bank capital requirements on consumer loans.

 

But as Ed Conway of Sky News points out, at the same time it is warning of a consumer credit bubble, the BoE has just increased its programme of lending to banks at preferential rates to increase bank lending in things like, yes you?’ve guessed it, consumer credit! As Ed says, this is like having your foot on the brake and the accelerator at the same time. This makes Governor Carney?s cautious statements about consumer credit look ridiculous and takes BoE monetary policy to a new level of schizophrenia.

His conclusion is the same as that from three months ago, when Edwards, clearly sick and tired of the whole affair, predicted that it is only a matter of time now before the populace revolts against those who are truly responsible for its sad plight, and “citizens’? rage will be directed where it belongs” – at central banks.

The simple fact is monetary policy is way too loose in the UK as well as in the US, and let us not forget the BoE cut rates in the immediate aftermath of last July?s Brexit vote. Bubbles are appearing in areas like consumer credit because interest rates are far too low and need to be raised. And yes, when interest rates are excessively low, both borrowers and lenders do stupid things. But to ignore their own role in creating debt misery for millions, the BoE can only deal with its own cognitive dissonance by blaming someone else. When this debt bubble blows, I suspect citizens? rage will be directed where it belongs

We are far less optimistic that this will be the final outcome in a world in which a no less than 30% of Americans think the Federal Reserve is a national park…

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