Month: May 2016

Submitted by Tony Sagami via MauldinEconomics.com,

Get a load of this headline from a German newspaper, which translates into “Extreme Low Interest: Who Saves Is the Fool.”

The reason for that insulting headline is simple: central bankers have been waging a war against savers.

 

Example #1: Former President of the Federal Reserve Bank of Dallas, Richard Fisher, offered this sage (sarcasm alert) advice last week: “I would be prepared when they move – and I hope they move sometime in June – there’ll be a settling in of the market place. There will be a correction. Suck it up. Deal with it. That’s reality.”

 

Example #2: ECB President Mario Draghi had this to say: Negative interest rates are “not the problem, but a symptom of an underlying problem” caused by a “global excess of savings.”

“If central banks did not do this, investing would be unattractive,” said Draghi. In other words, shut up and buy some stocks!

What those central bankers want you to do is either (1) spend money to increase demand, or (2) buy stocks to increase capital.

Well, it sure looks like American consumers are not doing the former.

How many times have you heard experts say that the US economy is consumer driven? It’s true; almost 70% of our GDP is attributable to consumer spending.

However, the latest Census Bureau numbers show that retail sales fell 0.2% in March following a contraction in both February and January. In other words, retail sales fell over the entire first quarter.

Of course, the people who know how consumers are really doing are the people who sell to them, such as Sally Smith, the CEO of Buffalo Wild Wings, which just reported an awful quarter:

“The macro environment for casual dining has had a rough quarter and a rough couple of quarters. I just don’t think there is a robust consumer out there.”

If Smith and the Census Bureau are right, our economy is headed for a recession. EVERY time the yearly growth rate of retail sales has fallen below 3%, the US economy has gone into recession.

At the same time our consumer-driven economy is hitting a brick wall, there is a regulatory change coming that could knock the stock market off its feet.

SEC Ready to Stop Accounting Shenanigans

I’m talking about the Securities and Exchange Commission finally doing its job and putting a stop to the accounting hanky-panky that artificially inflates profits.

According to Dow Jones, the SEC is getting ready to step up its scrutiny of companies’ “homegrown earnings measures,” signaling it plans to target firms that “inflate their sales results and employ customized metrics that stray too far from accounting rules.”

It looks like the SEC is waking up to the misleading picture that pro forma earnings—compared to generally accepted accounting principles, or GAAP—generate. Now the commission is launching a campaign to crack down on made-to-order earnings.

Mark Kronforst, chief accountant of the SEC's corporation finance division, said, “The point is, now the company has created a measure that no longer reflects its business model. We’re going to take exception to that practice.”

So what will the SEC do? According to the Dow Jones article:

The agency plans to issue comment letters in the coming months that critique firms that booked revenue on an accelerated basis. Mr. Kronforst, who plans to speak Thursday at a Northwestern University legal conference about the issue, declined to name them.

 

Mr. Kronforst said regulators also plan to challenge companies that report their adjusted earnings on a per-share basis. The results are often higher than per-share GAAP earnings and look too much like measures of cash flow, which decades-old rules prevent from being presented on a per-share basis, Mr. Kronforst said. That is because investors could confuse cash flow with actual earnings, which truly represent the amounts that could be distributed to investors.

 

“We are going to look harder at the substance of what companies are presenting, rather than what the measures are called,” he said.

In other words, the SEC is finally going to do its job!

To see the impact of such a crackdown, all you have to do is take a look at the growing difference between GAAP profits and pro forma profits.

By the way, I suggest you re-read my March 8, 2016 column about corporate America’s accounting razzle-dazzle.

Yes, my bear market radar is on high alert, and the new SEC scrutiny could be just the thing that knocks the bull market off its feet.

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With the FBI’s noose closing around Hillary and her closest State Department cohorts as the Federal agency nears the end of its criminal probe, some are getting increasingly concerned about what they will and will not say on the record. One such person is Hillary’s former State Department Chief of Staff, Cheryl Mills, who according to the WaPo walked out of an interview with federal investigators when an FBI official began to discuss a topic considered off-limits.

The off-limits questions reportedly concerned the way in which emails were given to the State Department to be distributed to the public. According to the Post, Mills worried that the questions would violate the attorney-client privilege, and investigators had previously agreed not to broach the subject. It is unclear when the interview occurred.

The Post adds that Mills and her lawyer left the room,  though both returned a short time later. It is not completely uncommon for FBI agents and prosecutors to diverge on interview tactics and approach, and the people familiar with the matter said Mills answered investigators’ questions. Mills and her lawyer, Beth Wilkinson, also asked for breaks more than once to confer, the people said.

Investigators consider Mills  to be a cooperative witness but the episode demonstrates the tension surrounding the criminal probe into possible mishandling of classified information involving the leading Democratic presidential candidate. In the coming weeks, prosecutors and FBI agents hope to be able to interview Clinton herself as they work to bring the case to a close.Cheryl Mills, Clinton’s former State Department chief of staff, and her lawyer both returned to the interview room a short time later, according to the newspaper, citing several unidentified people.

As the Hill adds, the Tuesday afternoon report comes as the federal investigation related to Clinton’s exclusive use of a private email server throughout her time at the State Department appears to be coming to a close. Interviews of Mills and other top aides have reportedly been conducted in recent weeks, and Clinton herself is expected to answer investigators’ questions soon.

Still, the episode with Mills shows the process has not been entirely smooth Clinton and her top allies, who have repeatedly shrugged off concerns about the server. The Post reported that Mills was seen as a cooperative witness despite the brief walkout. Clinton, the likely Democratic presidential nominee, has said that the setup was a mistake made out of a desire for convenience and not a desire to circumvent federal recordkeeping or transparency laws.

In response to this story, Wilkinson said, “Ms. Mills has cooperated with the government.” The Clinton campaign also did not provide a response, but spokesman Brian Fallon has said repeatedly that Clinton is willing to answer investigators questions, and he added in a recent statement that “we hope and expect that anyone else who is asked would do the same.”

So far, investigators have no found evidence tying Clinton to criminal wrongdoing, though they are still probing the case aggressively. Charges have not been ruled out. In recent weeks, they have been interviewing Mills and other aides.

One former State Department staffer who worked on Hillary Clinton’s private email server, Bryan Pagliano, was granted immunity so he would cooperate as part of the probe. In a hilarious update, the State Department “admitted” on Sunday that it was unable to track down any emails between Pagliano and Clinton, and apologized for its incompetence, even though it is common knowledge that at least one email during the time period in question was sent out and has been captured.

 

There is no indication a grand jury has been convened in the case, although according to some this is largely due to alleged intervention on behalf of the DOJ which has been eager to quash the investigation since day one.

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Submitted by Jim Quinn via The Burning Platform blog,

The chart below is simply horrifying. Not only are these median net worth figures scary, realize that 50% of the households in the country have less than these figures. Having a a net worth of less than $200,000 as you approach or enter retirement is a recipe for disaster. When 70% to 80% of that net worth is tied up in your house, you are nothing but a dead retiree walking. You should acquire a taste for cat food and learn how to panhandle for money.

The $25,000 to $45,000 of non-home related net worth would also include vehicles, furniture, electronics, and appliances. The amount of this net worth in usable cash or investments is microscopic. How can people expect survive for decades on virtually no savings? This chart reveals that a huge percentage of American households will face miserable retirement years and/or having to work until the day they die. They will have to sell their homes to live off the proceeds. Who will they sell to? You can see the younger generations don’t have a pot to piss in. This does not bode well for home prices over the next couple decades, despite the artificial boom engineered by the Fed and Wall Street since 2012.

The unequivocal facts in that chart are the result of globalizing good jobs to foreign lands, the utter failure of our educational system, the success of Wall Street/Mega-Corporation propaganda in convincing a vast swath of America to live for today using easy money credit, politicians squandering the national wealth on the welfare/warfare state, and a Federal Reserve that has debased our currency by 96% in just over 100 years.

This chart will look even worse when the stock/bond/housing bubble implodes for the third time in the last sixteen years…

 

We are sitting down to a banquet of consequences.

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In a recent note, Eric Peters, CIO of One River Asset Management, summarizes everything that's been happening over the past few years in one tidy anecdote. Citing an unnamed CIO, he points out that the central bank was created to help its member banks, and it attempts to impact the real economy by using interest rates as a mechanism to control the attractiveness of lending money. However, throughout all of the meticulous planning done by the creaters of the Federal Reserve, nobody bothered to ask what would happen if the central bank suddenly couldn't influence the attractiveness of lending money, thus not being able to affect the real economy – which is precisely where we are today.

From Eric Peters:

“Central banks were created to be the banks for banks,” said the CIO. “They were structured to influence the economy by increasing or decreasing the attractiveness of lending money.” If central banks wanted to spur banks to lend to the real economy, they reduced the interest rate they could earn from parking their money at the central bank. If they wanted to reduce bank lending, they increased the attractiveness of making risk-free loans to the central bank by raising interest rates.  

 

“But no one ever asked the question of what to do if the central bank was somehow unable to increase the attractiveness of lending money? If that happened, how could central banks influence the real economy?” Which is basically where we are today.

 

“It’s one of those questions that seemed so implausible that no one ever really considered it.” With central banks perplexed by this dilemma, they turned to negative interest rates. Hoping that by taxing banks for keeping money with the central bank, they’d spur lending to the real economy. “But by going negative, they simply push longer-dated interest rates lower, further reducing the attractiveness of making loans.”

 

By reducing the yield on every investment asset, pushing prices to overvaluation, this policy also destroyed the ability of investors to build diversified portfolios capable of withstanding even the slightest economic disruption. Which ultimately results in reduced private sector risk-taking; the lifeblood of every economy. “This is the most obvious disaster in finance. Central bankers don't quite understand it.”

 

It’s one of the key reasons Japan and Europe are performing so poorly.

 

 

“They never thought this through. And they should probably give up and raise rates to reverse this dynamic.” But that will cause extreme volatility. “And the irony is that central banks are creating precisely what they’re trying to avoid.”

We would just add that in addition to the the inability to control the attractiveness of lending money, what the central planners also overlooked (and continue to ignore) is, more importantly, the fact that central banks can not create individual demand. A bank can lend at whatever rate it chooses, but if there is no demand for that loan, the game comes to an abrupt end.

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Following Genscape's 1.4mm build estimate at Cushing, and expectations of a 1.1mm build, API reported a 1.46mm build. Chatter across trading desks was that API data had been leaked and that is what drove oil prices higher (after their Genscape-driven dump) which proved 100% incorrect as total crude inventories soared a shocking 3.5mm barrels (against expectations of no change) – the most in 5 weeks. Gaosline built less than expected and Distillates saw a draw but the damage was done and prices of WTI started to give back the days gains.

 

API

• Crude +3.45mm (Exp unch)
• Cushing +1.46mm (+1.1mm exp)
• Gasoline +271k (+710k exp)
• Distillates -1.36mm

The biggest weekly  build in 5 weeks…

 

Which spoiled the party in crude…

 

 

Charts: Bloomberg

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