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By EconMatters

We discuss the final catalyst for the global asset market crash in this video, it starts and ends with Mario Draghi and the ECB, take away this 80 Billion Euros from hitting developed financial markets each month, and the entire system collapses, the quintessential Ponzi Scheme if ever there was one. The FTSE is overvalued by a substantial margin, and is a long-term short!

Central Bankers have been more irresponsible than any malfeasances that occurred in the Financial Crisis of 2007, they have set the stage with unsound, extreme monetary policies that barely helped the real economy, and succeeded in inflating the biggest bubble in Financial Markets History, that is going to cause The Biggest Global Recession in Modern History. The amount of Capital getting destroyed from such ridiculous levels is going to make the financial crisis look like a speed bump in comparison when this Ponzi Scheme Can Kicking Extreme Monetary Policy Experiment Implodes! 

 

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Submitted by Ryan McMaken via The Mises Institute,

Colorado was among the four states where voters approved a minimum wage hike in November. Among the specific provisions for the new wage hike was the stipulation that tipped workers — such as waiters who receive tips and are paid below the standard minimum wage — will receive a mandated wage hike of 99 cents.

Naturally, this will lead to an increase in costs for restaurant owners who will then seek to raise prices and/or reduce costs. KDVR in Denver reports: 

Kanatzer owns The Airplane Restaurant in Colorado Springs and said he has already increased his kids menu prices. …

 

"I increased it a dollar — my kids menu prices went from $4.99 to $5.99," Kanatzer said.

Raising prices can only go so far, however. Contrary to what many non-economists seem to believe, it is not possible to simply "pass on the extra cost to customers." As any economics-major undergraduate knows, it is only possible to pass on a portion of the increased cost to the customer because higher prices and competition from other firms will lead to fewer sales if the owner simply attempts to "pass on the cost." And even if all restaurants are subject to the same wage hike, there are always substitutes in the form of take-out and other types of dining.

Specifically, in response to the forced wage hike we can expect to see more food-service business go the way of so-called "fast casual dining" which include brands such as Chipotle and Noodles and Company. These are restaurants where patrons order food at the counter, and then take their food to their tables themselves. These places often offer alcoholic beverages and higher-quality food than "fast food" places such as McDonalds, and somewhat approximate the "casual dining" experience at lower cost thanks to the elimination of servers. 

Thus, in order to control costs, restaurants that have in past hired wait staff will become more like fast casual restaurants. The KDVR report suggests exactly this, in fact:

Kanatzer estimates most restaurants will adjust prices and change staffing levels as a result, which could mean fewer servers and longer waits.

 

"I've got a friend who has a restaurant and he's going to do counter service from 2-4 (p.m.) so he's not going to have a server at all," Kanatzer said.

 

…Kanatzer suspects more restaurants will install kiosks at tables in the hopes technology might eliminate the need for most servers.

So, we should expect restaurants to hire fewer servers and move toward more counter service and use of technology to replace servers. 

Some waiters have become concerned that the new wage hike is endangering their jobs. They should be concerned:

Even some servers who are recipients of the pay raise fear possible impacts.

 

"I'm more worried about [the restaurant owner] and how it might affect him — not how it impacts me," said Lisa Bowen, a server at The Airplane Restaurant.

The effect on workers will be that many of them will need to move to lower-wage jobs due to there being fewer waiter opportunities. Many people who are now waiters and potential waiters will have to take jobs as cashiers and other workers at fast food and fast casual restaurants instead of waiting tables. As anyone who has worked in food service knows, these sorts of jobs often pay far less per hour than traditional waiter jobs. So, the minimum wage hike will mean an actual pay cut for many people who could have made more as waiters, were it not for the minimum wage hike. 

Moreover, it means that in the future, waiter positions that might have existed in the absence of the minimum wage hike will never exist. More restaurants that rely on a large wait staff will change their model, close down, or never be opened at all, further cutting the job opportunities for workers who would benefit from working as waiters. 

However, these unseen positions that never came into existence will not show up in any unemployment data, and thus the proponents of minimum wage hikes will claim that higher wages to not lead to less employment. The media will interview the lucky waiters who managed to keep their jobs and wait tables in an environment of higher prices — and higher tips. Competition for these remaining jobs will become more fierce meaning lower-skill waiters will find themselves locked out of waiter jobs. In the end, proponents of minimum wage hikes will declare victory and ignore all the unseen consequences imposed on the most vulnerable, unskilled, and marginal members of the workforce. 

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It’s official. As previewed earlier this morning, when we reported that according to media reports, Sullivan & Cromwell lawyer Jay Clayton, a long-time favorite of Wall Street and especially Goldman Sachs (Sullivan is a key outside legal adviser for Goldman and is more closely associated with Wall Street than perhaps any other law firm per the WSJ) has been nominated to lead the Securities and Exchange Commission. Donald Trump spokesman Sean Spicer told reporters in a daily conference call.

Who is the relatively unknown Clayton, who incidentally is an M&A and not a securities layer? Here is a brief bio from earlier this morning:

Clayton’s clients have included Goldman Sachs and Barclays Capital; he would succeed SEC Chairman Mary Jo White, another lawyer with a history of representing Wall Street banks before becoming a regulator. Clayton has spent his career working on the kinds of securities deals that the SEC has a hand in regulating.

 

Clayton represented Goldman when it received a $5 billion investment from billionaire Warren Buffett’s company during the peak of the credit crisis in September 2008. He’s also represented Goldman in connection with other investments and acquisitions, according to the law firm. Sullivan is a key outside legal adviser for Goldman and is more closely associated with Wall Street than perhaps any other law firm.

 

Clayton has a wide-ranging corporate practice spanning mergers and acquisitions, IPOs, corporate governance, and investment advice for high-net-worth families. Other matters that Mr. Clayton has worked on include advising Morgan Stanley on the sale of its physical oil-trading division and Bear Stearns on its sale to J.P. Morgan Chase & Co.—two deals shaped heavily by the financial crisis and its aftermath—and the 2014 IPO of Moelis & Co., a boutique advisory firm. He’s also represented an ownership group for the Atlanta Hawks and British Airways in its 2010 merger with Iberia.

But for a far better glimpse into his deal acumen, here is the breakdown of Clayton’s Wall Street deal list taken from his bio page. Considering that the Sullivan & Cromwell website is currently down, we can only imagine that most Wall Street participants are quite unfamiliar with the M&A and IPO banker.

* * *

Jay Clayton’s practice involves public and private mergers and acquisitions transactions, capital markets offerings, regulatory and enforcement proceedings, and other matters where multidisciplinary advice and experience is valued. Mr. Clayton also advises several high-net-worth families regarding their public and private investments.

M&A/Private Equity

• Castleton Commodities in its acquisition of Morgan Stanley’s global oil merchants business; and a consortium of investors in connection with the acquisition of Castleton from Louis Dreyfus and Highbridge
• An ownership group for the Atlanta Hawks NBA franchise in connection with the purchase and later sale of the franchise
• Ally Financial Inc. in the $4.2 billion sale of its operations in Europe and Latin America to General Motors (GM), as well as in the $4.1 billion sale of its Canadian auto finance business to the Royal Bank of Canada (RBC) and in the sale of its Mexican insurance business (ABA Seguros) to ACE Group
• TeliaSonera in connection with various transactions involving Turkcell and Megafon, including arrangements with Altimo and various other acquisitions and dispositions of telecom-related assets
• British Airways in its merger with Iberia and the formation of International Airlines Group and various other transactions
• Barclays Capital in connection with its purchase of assets of Lehman Brothers out of bankruptcy
• Goldman Sachs in connection with the investment of $5 billion by Berkshire Hathaway and the U.S. Treasury’s TARP Investment
• Bear Stearns in connection with the sale of Bear Stearns to JPMorgan Chase and related matters
• Goldman Sachs and affiliated funds in connection with various acquisitions and investments in companies involved in financial services, banking, telecom and other industries
• Capital Maritime in connection with the combination of Crude Carriers Corporation and Capital Product Partners L.P. and the formation of a container carrier joint venture with a private equity firm
• Michael Krasny (founder) in the $7.2 billion sale of CDW
• Altor Equity Partners in connection with various acquisitions and financing transactions

Capital Markets/Leveraged Finance

• Initial public offering of $25 billion by Alibaba Group Holding Limited
• Initial public offering of $190 million by Moelis & Company
• Initial public offering of $2.375 billion by Ally Financial and private placements of $3 billion and $1.3 billion of common stock in Ally Financial
• Initial public offering of $230 million by Blackhawk Network Holdings
• Initial public offering and multiple public and private offerings of equity, preferred and debt securities of Capital Product Partners L.P.
• Initial public offering of $380 million by Oaktree Capital Group
• Initial public offering of $150 million by Higher One
• Initial public offering of $260 million by Crude Carriers Corporation
• Initial public offering of $1.2 billion by Och-Ziff and follow-on offerings and refinancing
• $1 billion 144A equity offering by Oaktree Capital (the first issuer to use the GSTrUE/Portal Alliance trading procedures)
• Public offering of $6.0 billion of common stock and mandatory convertible preferred stock by Lehman Brothers
• Public and private offerings of $1.5 billion in equity and equity-linked securities of AMBAC

Corporate Governance, Regulatory and Contested Matters

• A large financial institution in connection with the settlement of mortgage related securities claims with the FHFA
• A large financial institution in connection with the settlement of mortgage related claims with the DOJ, HUD and FHFA
• A large financial institution in connection with a regulatory review of transactions in government securities
• A hedge fund in connection with a regulatory review of various credit market transactions
• A group of financial institutions in connection with their challenge to MBIA’s restructuring
• Ally Financial in connection with the $25 billion mortgage origination and servicing settlement with the DOJ, HUD and state attorneys general
• Eni and subsidiaries in connection with an FCPA investigation by the SEC and DOJ
• A financial institution in connection with a civil investigation of its ECN currency facility by the Federal Reserve Bank of New York
• The group of 100 general counsels of leading UK companies in connection with establishing audit protocols with the PCAOB
• A financial institution in connection with various issues arising from its employees’ membership on the boards of public and private companies

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While mortgage applications tumbled across the two-week holiday period – even seasonally-adjusted…

 

It was the complete collapse in the refinancings that is most notable. Down over 60% since August, the refi index crashed over 22% over the xmas/new year period to its lowest since the post-Lehman collapse in Oct 2008.

Complete bloodbath in mortgage apps…

 

And judging from the taper tantrum in 2013 (which saw applications collapse over 70%) there is more to come…

 

Of course, this is no surprise, as we recently explained…

The Rate Surge Changes Housing Affordability Statistics

Redfin.com did a purchase market survey of 2400 ready-buyer users between Nov 7 and 11 – right when rates first started surging and were much lower than today – on how a 1% jump in interest rates would impact their purchase decision, if at all.

Note, today rates are 50 bps higher than when the survey was done and up greater than the 1% referred to in the questioning.

Bottom line: A 1% rate surge changes everything. Especially, considering the macro housing market – demand and prices – is controlled by the incremental buy or sell pressure.

• 68% weigh rates heavily into their purchase decision; only 11% don't care.
• 72% of buyers would have to change strategy on a 1% rate-surge; 29% wouldn't.
• 46% OF BUYERS WOULD HAVE TO BUY A LESS EXPENSIVE HOUSE.

The metric I highlighted red is what I find the most important. It is exactly why I always assume most people buy as much as they can afford using contemporary mortgage rates and guidelines.

It's important to remember, however, that a RATE-SURGE OVER A SHORT TIME-PERIOD actually creates a month or two of higher numbers followed by a sharper give-back period, which portends a much weaker than a year-ago Spring and Summer (when yy comps haven't been so steep since 2006).

PART 2) AFFORDABILITY LOST ON THE RATE SURGE (from my recent note on post rate-surge affordability).

Bottom line: The rate surge took away 11% of purchasing power, which will drag on house prices. It comes as houses cost the most ever to the end-user, shelter-buyer (see FOUR charts below).

 

ITEM A) MOST EXPENSIVE HOUSING EVER

BUILDER HOUSES

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

 

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

 

RESALE HOUSES

2) The average $274k RESALE house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Resale prices are down 1% from 2006 but the monthly payment is 32% greater and annual income needed to qualify for a mortgage 68% more.

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It will probably not come as a big surprise that the head of Deutsche Bank’s global anti-financial crime unit, a post also known as the bank’s top “crime fighter”, plans to leave that position after just six months at the bank, and will be replaced as soon as next week, Germany’s Manager Magazin first reported.

Peter Hazlewood, who joined Deutsche Bank to oversee anticrime compliance as recently as July 2016, could stay at the German lender in a different position, but that hasn’t been determined, the WSJ reports. 

Considering the ongoing barrage of civil and criminal accusations lobbed relentless at the German lender, which over the past few years has been accused of manipulating and rigging virtually every market, culminating with the recent RMBS settlements with the DOJ which briefly sent its stock price to all time lows amid concerns of bank failure in late 2016, it is perhaps more surprising that he lasted as long as he did.

The job includes overseeing controls to prevent money laundering and assuring compliance with other financial laws and regulations. The anti-financial crime chief reports to Sylvie Matherat, Deutsche Bank’s Chief Regulatory Officer and a member of the management board.

It was not immediately clear what the reason was behind the accelerated transition.

The WSJ added that Deutsche Bank execs plan to name a replacement as soon as next week, pending management approval of an internal candidate who’s likely to take the position.

Hazlewood, whose official title is global head of anti-financial crime and group money-laundering reporting officer, previously worked at JPMorgan, as well as HSBC Holdings and Standard Chartered PLC, two other banks embroiled in allegations of global impropriety.

Deutsche Bank has faced a series of legal and regulatory hurdles including improving its policing of trades and controls to avoid violations of sanctions and money laundering. After a high-level management shake-up in 2015, which included the appointment of John Cryan as chief executive and a near-complete makeover of the management ranks, senior executives have focused in part on overhauling compliance, seeking to end a series of legal missteps that have cost Deutsche Bank billions of dollars.

Cryan is trying to resolve the bank’s remaining legal battles, following last year’s $7.2 billion settlement with the U.S. over its role in the sale of mortgage securities in the run-up to the 2008 financial crisis. Deutsche Bank is still being probed by U.S. and U.K. authorities over whether it failed to catch transactions that may have moved billions of dollars out of Russia from 2012 to 2015, Bloomberg added.

After settling the U.S. case last month, Cryan said in a memo to staff that an internal investigation by the bank had found “no indication of a breach of sanctions” in Russia. The probe did detect “deficiencies” in the bank’s systems and controls that were being addressed, according to the memo.

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The Mexican Peso is plunging once again this morning – very close to all-time record lows – as fears spread that Ford’s decision yesterday may become the norm…

 

 

As Bloomberg details, the economic outlook for Mexico remains challenging after disappointing results in 2016. Tighter global financial conditions and uncertainty about the future of bilateral relations with the U.S. since the election of Donald Trump in November are a drag on investment. Potential trade and immigration-policy changes in the U.S. may prompt additional downside risks for activity and external accounts in 2017. Tight monetary and fiscal policy to contain accelerating inflation and rising public debt should also weigh on growth.

A weak and more competitive peso already support net exports, but the relief could be limited if bilateral trade with the U.S. comes under pressure from potential protectionist measures. Higher oil prices are also positive, but the upside is limited by falling output and lingering problems in Pemex.

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Dow futures exploded vertically at the cash open – perfectly tagging yesterday’s highs, running stops – before the algos ran out of ammo. The Dow has now erased the entire opening ramp as once again, the machines were unable to squeeze to Dow 20k at the open…

 

 

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