Month: June 2018

Last October, just as the Fed started shrinking its balance sheet, we published yet another article on what is arguably the biggest threat to not only risk assets, but also the global economy: “The Dollar Funding Shortage: It Never Went Away And It’s Starting To Get Worse Again.“

While hardly a novel problem, we first discussed the return of the dollar funding shortage in March 2015, the fact that global stocks kept rising, and that overall funding conditions remained relatively loose keeping the global economy well-lubricated, prevented said dollar funding shortage from becoming a major concern to policymakers, despite occasional recent hiccups such as the Libor-OIS spread blow out which both we and Citi explained w as a byproduct of a creeping dollar  funding shortage.

That has now changed.

In an op-ed published overnight in the FT, a central banker writes that when it comes to the turmoil gripping the world’s Emerging Markets, whether it is the acute, idiosyncratic version observed in Argentina and Turkey, which according to JPM may be doomed…

… or the more gradual selloffs observed in places like Indonesia, Malaysia, Brazil, Mexico and India, don’t blame the Fed’s rate hike cycle. Instead blame the “double whammy” of the Fed’s shrinking balance sheet coupled with the dollar draining surge in debt issuance by the US Treasury.

That’s the message from the current Reserve Bank of India, Urjit Patel, who writes that “unlike previous turbulence, this episode cannot be attributed to the US Federal Reserve’s moves on interest rates, which have been rising steadily since December 2016 in a calibrated manner.” But does that mean that the Fed is not to blame for what increasingly looks like another budding EM crisis? Not at all: according to Patel, the dollar funding shortage “upheaval” stems from what he sees as the confluence of two significant events of which the Fed’s balance sheet reduction is one, while the second is the dramatic increase in US Treasury issuance to pay for Trump’s tax cuts; what is notable is that both events are drastically soaking up dollar liquidity.

As a result, Patel blames a lack a coordination between the Fed and Treasury on the adverse flow through across global funding markets as a result of this decline in dollar liquidity, and writes that “given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.“

Putting these two parallel processes – which threaten to materially impair dollar funding markets – in context, on one hand there is the so called “Quantitative Tightening”, or the gradual decline in the Fed’s balance sheet which is set to peak at a rate of $50BN/month by October, while at the same time US net Treasury issuance is set to jump to $1.2 trillion in 2018 and 2019 to cover the forecasted budget deficit of $804BN and $981BN in 2018 and 2019, respectively.

And visually:

And in a curious coincidence, the withdrawal of dollar funding by the Fed in monthly terms, as it reduces its reinvestment of income received, is proceeding at roughly the same pace as that of net issuance of debt by the US government. Furthermore, both processes are open ended which means that over the next few years, the government’s net issuance will stabilize, albeit at a high level, whereas the Fed’s balance-sheet reduction will keep rising.

Both are terrible news for Emerging Markets, which are in desperate need of reversing the ongoing dollar outflows; however as long as Trump continues to make America great, and funds said stimulus with excess debt issuance, emerging market turmoil is virtually guaranteed.

As Patel further explains, this unintended coincidence has proved to be a “double whammy” for global markets, and especially emerging markets, largely as a consequence of one key event: the evaporation of dollar funding, not only from sovereign debt markets but in short-term funding markets as well as the recent spike in the Libor-OIS spread showed.

This has manifested in a sharp reversal of foreign capital flows out of Emerging Markets over the past six weeks, often exceeding $5bn a week, resulting in a sharp drop in emerging market bonds, stocks and currencies.

And here, for the first time this tightening cycle, a prominent foreign central banker has accused the Fed of stirring trouble for emerging markets, with its ongoing tightening, and specifically, the balance sheet reduction coupled with the Treasury debt issuance surge, to wit:

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

Patel’s advice? Immediately taper the tapering, or rather, the Fed should “recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.”

Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank’s Aleksandar Kocic two weeks ago, and which we explained in “Why The Soaring Dollar Will Lead To An “Explosive” Market Repricing.”

Of course, the Fed has a choice: it can simply ignore the ongoing crisis it is causing for Emerging Markets – after all the Nasdaq just hit a new all time high – but in that case Powell risks a broader contagion, first in EMs and then everywhere else. Instead, reducing the pace of balance sheet reduction…

would help smooth the impact on emerging markets and limit effects on global growth through the supply chains that span both developed and emerging economies. Otherwise, the possibility will increase of a “sudden stop” for the global economic recovery.

Patel’s punchline: if left unchecked, the EM turmoil “might hurt the US economy as well. Circumstances have changed. So should Fed policy. It would still reach the same destination, but with less turmoil along the way.”

The irony: one look at the Fed’s balance sheet shows that it has barely declined, and already reputable foreign central bankers are demanding the Fed stop the pain.

One can only imagine the chaos and turmoil in EMs (and then DMs) in four months time, when not only the peak of the Fed’s monthly shrinkage hits some time in October, but when for the first time since the financial crisis, global central bank liquidity will shift from a net injection to a net drain and then accelerate as both the ECB and BOJ proceed to taper their own Fed monetization.

 

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Authored by Simon Black via Sovereign Man,

Read #1- Debt here…

Read #2- The Looming Retirement Crisis here…

Read #3- Destruction of the Currency here…

We’ve all seen the headlines: the middle class in the United States (and much of Europe for that matter) has been in decline for years.

CNN May 18, 2018: “Almost half of US families can’t afford basics like rent and food”

Marketwatch June 2, 2018: “50 million American households can’t even afford basic living expenses”

Wall Street Journal February 13, 2018 : “US households shoulder record $13.15 trillion debt”

This is the opposite of what we’ve witnessed here in Asia – an astonishing, almost unprecedented rise in the middle class.

In China, just 4% of the population was middle class in 2000 according to consulting firm McKinsey. By 2012, China’s middle class had exploded to 68% of the population.

Vietnam’s middle class has nearly doubled just since 2013. And there are similar trends across the region.

This is a pretty big deal, signaling not only a game-changing shift in global wealth and power, but also trouble ahead for millions of households on the edge.

My team and I have spent time combing through Federal Reserve data trying to explain this trend. And it’s worth starting with an obvious question: what does it mean to be ‘middle class’ ?

This varies from country to country. To be middle class here in Thailand is something entirely different than to be middle class in Denmark.

But in general, being middle class means you’re neither rich nor poor.

You earn enough money to be able to pay the bills without want or worry, enjoy modern conveniences and recreation, and still have some funds left over for savings and investment.

This a very delicate balance. And maintaining it depends heavily on the rate of inflation.

If wages rise faster than prices, the middle class thrives. If prices rise faster than wages, the middle class perishes. And that’s what’s been happening in the west, especially in the US.

Here’s a great example: housing. For the vast majority of people it’s their biggest expense. Most of us spend more on rent or mortgage than anything else.

Housing prices have obviously increased over time. But what’s really interesting is how much more rapidly home prices have increased over wages.

In late 2011, for example, the average home cost around 3.56 times the average salary in the US, according to data published by the Federal Reserve Bank of St. Louis.

By the end of 2017, the average home cost 4.73 times the average salary, even though mortgage rates were essentially unchanged.

In other words, even when you adjust for the fact that people are earning more, housing became 33% more expensive in just six years– and that doesn’t account for increases in property taxes, home owners association dues, insurance premiums, etc.

It’s the same with rent: back in 2000, the average monthly rent in the United States was 7.38 times the average weekly wage.

By 2017, rents had risen to 8.66 times the average weekly wage, an increase of 17%.

So even though people are technically earning more money, their money buys them less and less house.

Medical care costs show the same trend: in 2000, average annual medical care spending in the United States accounted for 10.8% of the average salary.

By the end of 2016, medical care consumed 15.5% of income, a proportional increase of 43%.

So again, people are earning more. But despite those wage increases, they’re spending 43% more on medical care than they used to.

My team and I spent some time analyzing the Department of Commerce’s “Personal Consumption Expenditures” (PCE) data series; the PCE is an account of consumer spending, and it is the Federal Reserve’s primary metric in measuring inflation.

In an ideal world, inflation would be 0%, i.e. prices would be stable, and the PCE wouldn’t budge. But that’s rarely the case.

Inflation (as measured by PCE) has averaged 2.4% per year for the past decade, and 4.8% per year since 1980.

Now, one would hope that, as consumer prices increased, wages would at least keep up.

But that hasn’t happened.

According to the Commerce Department’s data, inflation has exceeded wage growth for 33 out of the past 38 years, averaging a loss of 1.35% per year.

This is crucial. One or two years of losing 1.35% of your income’s purchasing power would be no big deal… just a rounding error.

But decades of this sustained erosion can really take a toll on the middle class. And it did.

In aggregate, inflation has outpaced wage increases by 66% since 1980. This means that the average American salary buys 66% less than it used to four decades ago.

People have made up for it by going into debt.

Back in 1980, the average amount of debt per worker in the US was 1.96 times his/her monthly salary.

Today the average American worker’s debt is 5.00 times his/her monthly salary.

Same theme– yes, people are earning more. But the amount of debt that they owe relative to their wages is more than 2.5x greater.

Simply put, this isn’t the path to prosperity. There are precisely zero examples from history of a major power achieving long-term economic success by slowly degrading its middle class.

This is a very long-term story.

Just like the gargantuan size of the national debt, the major funding crisis plaguing US pension funds (including Social Security), and the steady debasement of the currency, this slow erosion of the middle class will take years and years to play out.

But the impact of all these trends cannot be understated, as they will truly shape the history of things to come, both in the United States, and across the world.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

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Not to be outdone by the US, Russian President Vladimir Putin has reportedly invited North Korean leader Kim Jong Un to visit Russia in September,  Russian-language media reported.

The report by Russian news agency RIA News was picked up by Reuters. RIA cited Ivan Melnikov, the deputy speaker of the lower house of Russia’s parliament, as the source for the announcement. Last week, Bloomberg reported that Putin had sent a confidential message to Kim via Russian Foreign Minister Sergei Lavrov.

Reports of the summit invitation followed allegations that North Korea’s detonation of its nuclear-testing site had been fabricated. Kim famously promised to close the site as a gesture of good faith toward Washington (though several reports by independent observers had previously claimed that the site was already unusable following a catastrophic tunnel collapse in the wake of a September nuclear test).

Of course, Putin isn’t the only world leader planning a meeting with Kim. Sky News reported on Sunday – citing the North’s state-run KCNA news agency -that Syrian President Bashar al-Assad is planning a visit to the DPRK to meet with Kim.

A KCNA report quoted Mr Assad as saying: “I am going to visit the DPRK (Democratic People’s Republic of Korea) and meet Kim Jong Un.”

It said Mr Assad made the comments on Wednesday while receiving diplomatic credential documents from North Korean ambassador Mun Jong Nam.

There was no indication such a trip had been planned and Syria has not confirmed the comments.

The report also quoted Mr Assad saying he was sure Mr Kim would “achieve the final victory and realise the reunification of Korea”.

According to KCNA, Mr Assad said: “The world welcomes the remarkable events in the Korean Peninsula brought about recently by the outstanding political calibre and wise leadership of Kim Jong Un.”

If the Assad meeting goes ahead as planned, it would be the first time a world leader met with Kim in Pyongyang. North Korea and the Syrian regime have maintained strong relations during the Syrian civil war, as the North has been accused of helping arm the Syrian regime.

Kim has been in an uncharacteristically diplomatic mood since the beginning of the year. He has repeatedly met with Chinese officials, including President Xi Jinping, and has also signed a historic agreement with South Korean President Moon Jae-in.

Meanwhile, we pointed out earlier this morning that Kim has replaced North Korea’s top three military officials with younger officials who might be more amenable to Kim’s denuclearization agenda (and also less likely to stage a palace coup in his absence during talks with the US next week).

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With the exit of Monsanto – due to M&A – Twitter has been chosen to join the S&P 500 after making new highs in the day session. After the news, it is up over 5% after-hours… to its highest since July 2015

Because “efficient markets”…

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Authored by James Howard Kunstler via Kunstler.com,

Driving south on I-5 into Seattle, the Cascadia Subduction Zone came to mind, especially when the highway dipped into a gloomy tunnel beneath Seattle’s relatively new skyscraper district. This fault line runs along the Pacific coast from north of Vancouver down into California. The western “plates” move implacably east and downward under the North American plate, building up massive tectonic forces that can produce some of the most violent megathrust earthquakes on the planet.

The zone also accounts for a chain of volcanoes that tend to produce titanic explosions rather than eruptions of lava and ash as seen in the hula movies. The most recent expression of this tendency was Mt. St. Helens in 1980, an impressive cataclysm by the standards of our fine-tuned complex civilization, but a junior event of its type compared to, say, the blow-off of Mt. Mazama 7,500 years ago, which left Crater Lake for the tourists. A publicity-shy correspondent writes:

By all accounts Mazama was floating upon a vast lake of steamy rhyolite. It was a structurally unstable stratovolcano the size of Mount Shasta with a net volume of 80 cubic miles. A 5 minute Triple Junction 9.3 Richter Scale shaker uncorked the Mount Mazama champagne bottle via massive lahars which removed the overpressure. Geologists estimate that the eruption lasted for about one day.

It’s only been in the last thirty years that Seattle hoisted up its tombstone cluster of several dozen office and condo towers. That’s what cities do these days to demonstrate their self-regard, and Seattle is perhaps America’s boomingest city, what with Microsoft’s and Amazon’s headquarters there — avatars of the digital economy. A megathrust earthquake there today would produce a scene that even the computer graphics artistes of Hollywood could not match for picturesque chaos. What were the city planners thinking when they signed off on those building plans?

I survived the journey through the Seattle tunnel, dogged by neurotic fantasies, and headed south to California’s Bay Area, another seismic doomer zone. For sure I am not the only casual observer who gets the doomish vibe out there on the Left Coast. Even if you are oblivious to the geology of the place, there’s plenty to suggest a sense of impossibility for business-as-usual continuing much longer.

I got that end-of-an-era feeling in California traffic, specifically driving toward San Francisco on the I-80 freeway out in the suburban asteroid belt of Contra Costa County, past the sinister oil refineries of Mococo and the dormitory sprawl of Walnut Creek, Orinda, and Lafayette.

Things go on until they can’t, economist Herb Stein observed, back in the quaint old 20th century, as the USA revved up toward the final blowoff we’ve now entered. The shale oil “miracle” (so-called) has given even thoughtful adults the false impression that the California template for modern living will continue indefinitely. I’d give it less than five years now.

The movers and shakers of that state dwell in an extra-special political bubble of their own that doesn’t accommodate much thought about the actual future in which all their recent investments in public infrastructure fail spectacularly.

There will be no Tesla utopia of self-driving electric cars to “solve” the dilemmas of internal combustion, despite the prototype demonstrations among status-seeking tech executive millionaires. From the Berkeley highlands at night, you could see across the fabled bay to the twinkling new skyscrapers of San Francisco — like Seattle’s, another expression of the inordinate riches spawned by computers. How was that a good idea, considering what happened there as recently as 1906?

What you see out there along the Pacific rim of the USA is a giant booby-trap of certain cataclysm. It’s part of the even greater tectonic phenomenon called the Ring of Fire, which circles the whole western ocean from the Aleutian Islands to Japan through Indonesia and up again along the western edge of South America. Things are livening up all over the darn thing right now, including the rumblings of a bunch of big volcanoes in the South Pacific and the Fuego volcano in Guatemala, uncorking lethally as I write. And, of course, none of the foregoing includes the giant magma dome of worthless stock and bond values swelling under the towers of Wall Street back east.

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Starbucks executive chairman Howard Schultz will leave the company at the end of the month, according to the New York Times, ending 40 years of leadership during which the Seattle coffee chain grow into a global giant with over 28,000 stores in 77 countries. He will be replaced as chairman with Myron “Mike” Ullman, former chairman of JCPenny, while Schultz will be given the honorary title of “chairman emeritus.”

Schultz’s departure was outlined to the board a year ago, says the Times, and is likely to stoke speculation over a run for the White House in 2020. 

Mr. Schultz’s decision to retire, a plan he said he privately outlined to the board a year ago, will most likely stoke speculation that he is considering a run for president in 2020. He is frequently mentioned as a potential candidate for the Democratic Party and has become increasingly vocal on political issues, including criticizing President Trump earlier this year as “a president that is creating episodic chaos every day.”

While Mr. Schultz, 64, typically bats away speculation about his political ambitions with an eye roll or a pithy answer, on Monday he acknowledged for the first time that it is something he may consider. -NYT

“I want to be truthful with you without creating more speculative headlines,” he told The New York Times. “For some time now, I have been deeply concerned about our country — the growing division at home and our standing in the world.”

“One of the things I want to do in my next chapter is to figure out if there is a role I can play in giving back,” he continued. “I’m not exactly sure what that means yet.”

When asked about a run for the White House, Schultz cryptically responded “I intend to think about a range of options, and that could include public service. But I’m a long way from making any decisions about the future.”

“Intend to think”?

We intend to wait with baited breath – though Schultz also said “I want to be of service to our country, but that doesn’t mean I need to run for public office to accomplish that.”

The possibility that Mr. Schultz, who has spent three decades leading Starbucks, could run for president has become far more realistic with the election of President Trump, a real estate developer and reality-television star before his political career. -NYT

Translation: he is running.

* * *

Schultz says that his departure was supposed to be announced last month but was delayed following an embarrassing episode at a Philadelphia store in mid-April in which two black men who hadn’t bought anything were arrested while waiting inside a Starbucks for a friend. In response, the coffee chain closed its doors last week for four hours for a “racial bias training” session which made employees very uncomfortable.

Starbucks has always been somewhat of an activist organization, wading into debates over issues such as gay rights, race relations, the 2nd amendment, veterans’ rights and student debt. 

Mr. Schultz was an early champion of the idea of a corporate executive as a moral leader as he sought to achieve what he described as “the fragile balance between profit and conscience.”

Schultz left his role as CEO last April, handing the company over to Kevin Johnson, saying he planned to work on his family foundation and write a book about “social impact work and the efforts to redefine the role and responsibility of a public company.” 

On Monday, just hours before Mr. Schultz planned to send a letter to the company’s 350,000 employees around the world announcing his decision, he visited Starbucks’ first store at Pike Place Market for the last time as its leader.

“I’ve been doing this for almost forty years,” he said. “Taking my green apron off is hard. It is emotional. More emotional than I thought it would be. “I told myself a long time ago that if I was ever going to explore a second act, I couldn’t do it while still at the company,” he added.

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Authored by Michael Snyder via The American Dream blog,

Many were hoping that once Barack Obama was out of office we would see less of this Big Brother surveillance nonsense, but instead it seems to be getting even worse. 

In fact, the Department of Homeland Security has just announced that it intends to compile a comprehensive list of hundreds of thousands of “journalists, editors, correspondents, social media influencers, bloggers etc.”, and collect any “information that could be relevant” about them. 

So if you have a website, an important blog or you are just very active on social media, the Department of Homeland Security is going to put you on a list and will start collecting information about you.  The DHS has already announced that it will hire a contractor to aid in monitoring media coverage, and they will definitely need plenty of help because it is going to be a very big job…

As part of its “media monitoring,” the DHS seeks to track more than 290,000 global news sources as well as social media in over 100 languages, including Arabic, Chinese and Russian, for instant translation into English. The successful contracting company will have “24/7 access to a password protected, media influencer database, including journalists, editors, correspondents, social media influencers, bloggers etc.” in order to “identify any and all media coverage related to the Department of Homeland Security or a particular event.”

“Any and all media coverage,” as you might imagine, is quite broad and includes “online, print, broadcast, cable, radio, trade and industry publications, local sources, national/international outlets, traditional news sources, and social media.”

If this sounds extremely creepy to you, that is because it is extremely creepy.

I run several prominent websites including The Most Important News and The Economic  Collapse Blog, and so without a doubt I will be on this list.  And if I was just a name on a list in some database somewhere, that would be bad enough, but instead it sounds like the DHS will be collecting any “information that could be relevant” about all of us…

As Gizmodo noted, the DHS’ vagueness is also a concern. It leaves itself an opening for collecting “any other information that could be relevant” about these influencers, and there’s no hint as to what that could be.

Is it strictly functional information like work histories, or sensitive data that could be abused? Either way, the database could be troublesome for bloggers and social media stars who aren’t usually under such close government scrutiny.

This is one of the reasons why I wanted to get to Washington.  This kind of Orwellian monitoring of our freedoms is unnecessary, it is a colossal waste of taxpayer dollars, and it violates our most basic freedoms.

So why does the Department of Homeland Security need to do this?

The explanation that they are giving the public is extremely week.  The following comes from Forbes…

DHS says the “NPPD/OUS [National Protection and Programs Directorate/Office of the Under Secretary] has a critical need to incorporate these functions into their programs in order to better reach Federal, state, local, tribal and private partners.” Who knows what that means, but the document also states the NPPD’s mission is “to protect and enhance the resilience of the nation’s physical and cyberinfrastructure.”

But we are not supposed to ask questions about government programs such as this.

In fact, just a few days ago a Department of Homeland Security representative stated that those that are questioning this program are “tinfoil hat wearing, black helicopter conspiracy theorists“…

If you find yourself skeptical of this proposal of mass state monitoring of the press, consider yourself a bonafide member of the “tinfoil hat wearing, black helicopter conspiracy theorists,” DHS representative Tyler Houlton said Friday. It’s all very routine, he argued, casting the project as an innocent means of “monitoring current events.” Just shut up and let us do this, crackpots.

That kind of response should make all of us very angry.

If the government is going to monitor us and put our information in a database, we should have the right to ask questions.

Freedom of speech is one of our most foundational rights, and many are concerned that “monitoring and tracking” are initial steps that could lead to a significant crackdown on Internet activity.  Just check out what is about to happen over in Europe.  The Internet has made it possible for ordinary people to communicate with one another on a massive scale, and any efforts by national governments to interfere with that must be greatly resisted.

Unfortunately, it appears that this new Department of Homeland Security program is moving ahead rapidly.  In fact, it is being reported that seven different companies have “already expressed interest” in participating…

Seven companies, mainly minority- or women-owned small businesses, have already expressed interest in becoming a vendor for the contract, according to the FedBizOpps web site.

All it takes for evil to flourish is for good men to be nothing.  Please spread word about this creepy new surveillance program to everyone that you know, because what they are doing is not right.

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