Tag: news

The Pentagon revealed Thursday that China’s People’s Liberation Army (PLA) “warning” to the US on Wednesday involved the firing of “four medium-range missiles into [an] area between Hainan and the Paracel Islands,” a defense official was quoted in FT.

Among them included nuclear-capable DF-26 missile and the anti-ship DF-21D ballistic missile. Beijing said they demonstrated the PLA’s ability to deny outside military access to the South China Sea.

The missiles were fired in response to the major incident from Tuesday, wherein China’s PLA military angrily charged that a US U-2 spy plane entered a ‘no-fly zone’ off China’s coast while the PLA conducted live-fire military drills.

The PLA has since ratcheted up its drills, with FT reporting Thursday the military “announced it was conducting another live fire exercise in waters off the eastern city of Taizhou, bringing the number of drills off its coast this week to five.”

Defense Secretary Mark Esper, meanwhile, vowed the US would never “cede an inch” in the Pacific and accused China of ultimately putting soldiers’ lives at risk with its hugely escalatory actions. 

Ironically this is precisely what China accused the US of doing on Tuesday with the U-2 flyover. It’s defense ministry had issued what appeared veiled threat saying an “unexpected incident” could have easily resulted over the US spy plane operation.

Esper said in Wednesday comments: “To advance the CCP’s agenda, the People’s Liberation Army continues to pursue an aggressive modernization plan to achieve a world class military by the middle of the century.” 

He said this on the same day the Trump administration blacklisted 24 Chinese companies also along with targeted individuals related to their construction activities which assist the PLA in their South China Sea territorial ambitions and expansionist claims.

“This will undoubtedly involve the PLA’s provocative behavior in the South and East China Seas, and anywhere else the Chinese government has deemed critical to its interests,” Esper added. 

With all of this building tension now showing itself in US spy missions and reactionary PLA missile firings into the South China Sea, the situation is indeed dangerous and ripe for a dreaded “unexpected incident” scenario which China watchers have long warned about, or rather, barreling toward a Thucydides Trap.

And if that seems overly alarmist, consider this: “The US Navy has 38 ships under way in the Indo-Pacific region right now, and we will continue to sail, fly and operate wherever international law allows. Our naval forces remain ready to respond to any threat to our allies and partners” — Vice-Admiral Scott Conn, commander of the US Navy’s Third Fleet, boastfully stated.

Authored by Paul Joseph Watson via Summit News,

A CNN reporter described the mayhem in Kenosha as “mostly peaceful” even as cars set on fire by rioters burned behind him.

Omar Jimenez describes “multiple locations that have been burning in Kenosha, Wisconsin over the course of the night” before characterizing the unrest as “largely peaceful.”

The CNN chyron below Jimenez described the events as “fiery but mostly peaceful.”

.@CNN chyron: “Fiery But Mostly Peaceful Protests After Police Shooting” #KenoshaRiotspic.twitter.com/W7TVmmmUhf

— Andy Ngô (@MrAndyNgo) August 27, 2020

Next time someone’s house is burning down, I’m sure the scene will be described as “fiery but mostly peaceful.”

Earlier this week, CBS News pulled a similar stunt when host Gayle King described “a second day of peaceful protests, which is what the Black Lives Matter is really about.”

In reality, there have been no “peaceful” protests in Kenosha. Every night has been a running battle between police and rioters.

Every night, car dealerships were set ablaze, stores were looted and people trying to protect their businesses were viciously assaulted.

A second day of peaceful protests gave way to clashes overnight in Wisconsin.

This comes after 29-year-old Jacob Blake was shot multiple times in the back by police as he tried to get into his car. He remains hospitalized in stable condition.@MolaReports has the latest. pic.twitter.com/4Ljb0hZFq0

— CBS This Morning (@CBSThisMorning) August 25, 2020

*  *  *

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After new- and existing-home-sales soared in July, analysts expected the rebound in pending-home-sales to slow dramatically, and while it did, it beat expectations – rising 5.9% MoM (vs +2.0% expectations).

This leaves pending home sales up a stunning 15.4% YoY…the biggest annual jump since Oct 2012

Source: Bloomberg

This is the highest level for the pending home sales index since Oct 2005…

Source: Bloomberg

“We are witnessing a true V-shaped sales recovery as homebuyers continue their strong return to the housing market,” Lawrence Yun, NAR’s chief economist, said in a statement.

Anecdotally, agents are saying that “scarce inventory remains a problem,” Yun said.

Pending home sales rose 25.2% in the Northeast and 6.8% in the West. Gains were smaller in other regions, with a 3.3% increase in the Midwest and 0.9% in the South.

Hours after TikTok’s American CEO quit the company due to the increasingly untenable geopolitical pressure, the financial press is reporting that a deal for Microsoft to buy TikTok’s US business could be announced in the next 48 hours.

Mayer resigned earlier  amid reports that Oracle and Microsoft were both pursuing a deal, while Google parent Alphabet affirmed that it was not considering an offer for TikTok.

Now, it appears Microsoft has managed to convince TikTok’s management that a tie-up with one of the world’s biggest and most storied tech firms would carry fewer risks and be more lucrative than a deal with Oracle.

Trump has signed two executive orders targeting TikTok and seeking to bar its use in the US if Chinese parent ByteDance doesn’t agree to sell the US business to an American company.

• TIKTOK SALE TO MICROSOFT COULD COME IN THE NEXT 48 HOURS: CNBC

It all sounds vaguely contradictory: why would Mayer quit if a deal was within his grasp? We feel like now would be a good time to remind readers to take all of this deal speculation with a grain of salt.

It’s official: as Powell unveiled moments ago, the Fed is now operating under an explicit Average Inflation Targeting platform, with the Fed seeking inflation that averages 2% over time, a step that implies allowing for periods of overshoots, and assures no rate hikes for years to come (according to BofA simulations, a 2% AIT would mean no rate hikes for up to 42 years). At the same time, the Fed’s shift on maximum employment will allow labor-market gains to run more broadly.

Regarding price pressures, the document says the committee will target “inflation that averages 2% over time” and will aim to bring inflation above the 2% target following periods when inflation runs below that level.

“The maximum level of employment is a broad-based and inclusive goal,” Powell said in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

In its statement, the Fed also said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version as Bloomberg notes had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.

To be sure, pragmatic Fed watchers will immediately admit that there is nothing new here: after all the Fed’s implicit core PCE inflation target has already been 2% yet even with a record $7 trillion balance sheet, the Fed failed to hit it for years.

In other words, the Fed failed to even sustainable reach its target, but this time will be different. Yeah right.

But there are bigger problems with AIT: as BofA wrote earlier this week, explicit AIT could also cripple the Fed’s already waning credibility, not least of all because “it would also bring up difficult issues around the appropriate time period to calculate averages and the maximum realized inflation rates the Fed would tolerate while the average climbs higher.” Indeed, the Fed’s credibility is already on the line given:

• the market’s pricing of inflation expectations well below 2% for the next 30 years, and
• its decade-long miss in achieving its inflation mandate

Additionally, as we discussed on Tuesday, the Fed now needs to reveal the specific time period over which PCE inflation is required to average 2% before beginning a policy normalization (hiking) process. This is a problem, because in simulations conducted by the BofA rates team, it found this could in require the Fed to remain on hold for 42 years!

Rabobank’s Michael Every had a more pragmatic criticism:

Does anyone think this will work to generate inflation and jobs in the US economy? No. Is the cost of borrowing really the problem now? No. Is anybody pricing in a rate hike for at least five years? No. If they were to make that ten years would it make a firm any more likely to hire someone right now? No. Has YCC worked to create reflation in Japan? No. Yes, at the margin it’s USD negative in that it implies future yields would not be allowed to rise even if inflation did: but presumably once (IF!) inflation (and WAGES!) rise sustainably, the Fed will just hold another Jackson Hole speech and change its operating framework again.

But the best explanation why AIT could be a disaster comes from none other than the Fed itself which in a January report titled “Raising the Inflation Target: Lessons from Japan”, wrote the following:

… in thinking about whether to raise the inflation target to a certain level, central banks need to take into account whether they are able to raise inflation to the new target level. If a new inflation target is too ambitious, and the central bank fails to attain it, the central bank may lose its credibility, which may render less effective any other policies it pursues. Also, the central bank may face the risk of getting trapped in a never-ending monetary accommodation even when real economic activity is strong or when financial stability risks accumulate.

As events in the past decade have shown, the Fed is already trapped in “never-ending monetary accommodation” – the coronavirus pandemic which boosted the Fed’s balance sheet by $3 trillion only made things worse. As for whether a 2% inflation target is too ambitious, well consider that we saw all of this 7 years ago with Bank of Japan in January 2013, when it adopted a higher inflation target in an effort to end chronic deflation. Nearly a decade later it has been an epic disappointment

Via Global Macro Monitor,

Money Fueled Bubble

Speculative manias gather speed through expansion of money and credit. Most expansions of money and credit do not lead to a mania; there are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit. –Kindleberger & Aliber

M2 Money Supply Growth

Social Movement 

Stock prices are likely to be among the prices that are relatively vulnerable to purely social movements because there is no accepted theory by which to understand the worth of stocks….investors have no model or at best a very incomplete model of behavior of prices, dividend, or earnings, of speculative assets. – Robert Shiller

Galloway attributed part of Tesla’s (TSLA) meteoric rise to the buying influence of “mostly young men, mostly spending their stimulus checks, levering up their purchases and juicing the stocks.”  – Yahoo Finance

Know Thy Marginal Buyer

This person willing to pay top dollar is called the “marginal buyer”. Most of us don’t really think about him [her] much, but he (or she) is very, very important.

Why? Because the marginal buyer not only determines price levels, but also their stability and degree of volatility. The behavior of the marginal buyer, as well as the degree of competition for his/her “top dog” spot, sets the prices of nearly every asset class held by today’s investors.  – Peak Prosperity 

Crazy Town Valuation

This Time Is Different

• The central bankers, policymakers and investors involved in every financial bubble are utterly convinced that, in terms of economic events, “this time is different.”

• Otherwise-savvy people ignore the telltale signs of a bubble when they are in the grasp of “this-time-is-different syndrome.”

• Even brilliant thinkers like former Federal Reserve Chairman Alan Greenspan fall victim to this syndrome.

• Bankers and economists in the ’20s predicted that wars would not recur and the future would be stable.

• From 2003 to 2007, conventional wisdom said central bankers’ expertise and Wall Street innovations justified soaring home prices and rising household debt.

• In fact, rising home prices and financial innovation are strong indicators of a bubble.

• Currency debasement was common for centuries. In the past 100 years, inflation has replaced debasement.

• Financial crises have occurred regularly over the past two centuries. 

–  Reinhart & Rogoff

As Fed Chair Powell appears to be somewhat disappointing investors with his lack of enthusiasm for driving inflation higher fast.

As Bloomberg Intelligence Chief U.S. Rates Strategist Ira Jersey notes:

“With Chair Powell’s prepared remarks at Jackson Hole short on details, the markets appear concerned that the Fed won’t dramatically shift policy as was expected. While it’s still possible for the final framework release to create a bear steepening of the curve, today’s reaction appears to be a reversal of some positions that would have benefited from longer-term inflation and growth expectations rising.”

The markets are reacting ominously with the dollar being dumped…

Stocks kneejerking higher…

But, bonds are bid…

breakevens tumbling..

and gold surging…

Evercore ISI’s Dennis DeBusschere calls this excerpt the “money paragraph”:

“Our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound. By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation. To counter these risks, we are prepared to use our full range of tools to support the economy.”

It would appear credibility is fading fast.

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Full Fed Statement:

Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and serves as the foundation for its policy actions. The updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy. The updated statement is also intended to enhance the transparency, accountability and effectiveness of monetary policy.

“The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

Among the more significant changes to the framework document are:

• On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The original document referred to “deviations from its maximum level.”
• On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
• The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.

The Committee first adopted a framework statement in 2012.

This first public review of the FOMC framework was announced by Chair Powell in November 2018, and involved three distinct components. First, the Federal Reserve hosted a series of 15 Fed Listens events across the country to engage with employee groups and union members, small business owners, residents of low- and moderate-income communities, retirees, and others to hear a wide range of perspectives about how monetary policy decisions affect their communities. A report summarizing all of those events is available here: https://www.federalreserve.gov/publications/files/fedlistens-report-20200612.pdf.

Second, the Federal Reserve in June 2019 convened a research conference at which prominent academic experts addressed economic topics central to the review. That conference program, links to the conference papers and presentations, and links to session videos are available here: https://www.federalreserve.gov/conferences/conference-monetary-policy-strategy-tools-communications-20190605.htm.

Finally, the Committee explored the range of issues that were brought to light during the course of the review in five consecutive meetings beginning in July 2019. Analytical staff work put together by teams across the Federal Reserve System provided essential background for the Committee’s discussions. Minutes of those meetings are available here: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm and a collection of those papers is available here: https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-system-analytical-work.htm.

The FOMC reported it would continue its practice of considering the Statement of Longer-Run Goals and Policy each January and that it intends to undertake a public review of its monetary policy strategy, tools, and communication practices roughly every 5 years.

Federal Reserve Chairman Jerome Powell is expected to reveal the conclusions of the central bank’s review of its monetary policy framework, and announce new measures to ‘control’ inflation – so-called “Inflation Averaging” at his annual speech on the U.S. central bank’s policy approach during the ‘Virtual’ Jackson Hole symposium this morning.

As Shard Capital’s Bill Blain notes, “this is going to be a profoundly significant moment” for all the Fed-Watchers who have spent years deciphering every syllable and nuance for signs of what policymakers will do next, because “this is basically the end of everything they have have been doing…”

“Although The Fed is going to continue with its 2% inflation target, instead of worrying about its price stability mandate, if inflation looks likely to go above their target, then ‘inflation averaging’ enables The Fed to ‘not’ react.”

Instead, Blain explains, “it will allow inflation to remain higher, for longer, i.e. averaging for the periods that it’s been sub-target.”

This is just words, Blain concludes, “it’s the meaning that’s more important – it means The Fed can ignore inflation and it is signaling that to the market… whioch means The Fed won’t hike rates if and when the economy overheats and inflation rises.

Simplifying:

‘Inflation Averaging’ means “don’t worry about rate-hikes, or any normalization of rates, we are so desperate for inflation we are going to encourage it and we want markets to love it… it’s a way of reassuring markets that there’s never going to be another interest rate rise!”

All of which leads to Blain’s final words – “hedge! …with gold… for the inevitability of this all going wrong!”

And Powell is doing this despite a Fed study earlier this year warned that adopting a higher inflation target raises the risk of getting caught in “never-ending monetary accommodation even when real economic activity is strong or when financial stability risks accumulate.”

As Bloomberg’s Laura Copper adds, this time around, it’s central bank credibility that will be at stake with such a policy shift.

We saw this with the Bank of Japan in January 2013, when it adopted a higher inflation target in an effort to end chronic deflation — only to be met with disappointment.

Other potential pitfalls could revolve around policy mechanics. In a working paper published earlier this month on average inflation targeting, the San Francisco Fed noted that it will be challenging to determine how much inflation the central bank would want to see to consider it on target.

There’s also uncertainty over the extent that the Fed is willing to let inflation run hot and for how long — all of which could send mixed signals to the bond market and spur investors to demand greater compensation.

As Blain said – this won’t end well – got gold?

So, without further ado, watch Jay Powell live (starting at around 0910ET) explain how higher inflation for years to come is ‘good’ for America!!

Full Speech:

Powell 20200827 A by Zerohedge