Month: November 2018

Authored by Chris Hamilton via Econimica blog,

Back in 2009, then Federal Reserve chief, Ben Bernanke, was quite clear and adamant that the Federal Reserve would not monetize the US debt.  What did that mean?  Simply put, the Fed would not use money creation as a permanent source of financing for US government spending…(nor as a means to artificially boost asset prices???).  In his own words, testifying before Congress, on this clip…“The Fed will not monetize the debt…”.

Subsequently, in a November 2010 speech, then St. Louis Fed president James Bullard said:

“The (FOMC) has often stated its intention to return the Fed balance sheet to normal, pre-crisis levels over time.  Once that is done, the Fed will be left with just as much debt held by the public as before the Fed took any of these actions.”

Seems with a bit of hindsight, almost ten years down the road, we should ask: Did the Fed monetize the debt?  Yes.  Will the Fed return its balance sheet to the $800 billion of publicly held debt it held prior to 2008?  Unequivocally, no!  The Fed is now communicating their goal is a balance sheet somewhere from 2x’s to 3x’s larger than in 2008 ($1.6 to $2.4 trillion…but I’ll be amazed if they ever get it close to 4x’s that of 2008, or $3.2 trillion). 

At present, the Fed’s balance sheet is still over 5x’s that of 2008…Fed Chief Powell has signaled that the conclusion to the interest rate hike cycle appears to be dead ahead, with one to two more hikes remaining (perhaps December and March).  And from there, the next economic crisis in an acutely interest rate sensitive economy/financial system, will likely be at hand despite the slightest and slowest set of hikes in Fed history.

But before the next chapter begins, let’s finish the overview on the current chapter, particularly noting the moonshot in public debt (red line, chart below) and then checking the monetization question.

1- Fed holdings of Treasury’s (blue line) and MBS (maroon line) versus private bank excess reserves (black line).  Since QE ended at year end 2014, Fed combined holdings of Treasury and MBS have fallen by less than $300 billion, bank excess reserves have fallen nearly $1.1 trillion.  The point?  Bank excess reserves continue falling faster than the Fed’s balance sheet…or put otherwise, the banks are a like a sponge and the excess reserves being wrung out faster than the Fed’s QT are  like an ongoing QE.

2- Fed balance sheet (brown line), bank excess reserves (black line), IOER (Interest paid On private bank Excess Reserves…blue shaded area), and monetization (amount above and beyond QE created and that held as excess reserves by banks…yellow line).  Quite noteworthy is the ongoing rise in monetization throughout the QE and post QE periods.

3- Same as above but starting from later half of 2014 with “QE end” and “QT begin” (quantitative tightening) callouts.  In 2016, the Fed began regular rate hikes (hiking IOER’s), effectively stemming the flood of excess reserves and monetization (at least temporarily) and by late 2017 undertook quantitative tightening.  But still, the pace of tightening combined with higher IOER’s hasn’t kept pace with declining excess reserves resulting in the maintenance of monetization.

4- What impact could declining excess reserves (resulting in monetization…with who knows what amount of leverage) have on asset prices?  Chart below shows monetization (yellow line) versus the Wilshire 5000 (black line, representing all publicly traded US stock).  FYR – A trillion and a half dollars of monetization sitting with private banks, levered anywhere from 5 to 10 times, is a quick $7.5 to $15 trillion in purchasing power?!?

5- Same as above, but from 2015 (QE end) through present.  Note, the quantity of monetization has become rather stable at the present quantity…and the Wilshire has essentially become range-bound.  Correlation?  Causation? You decide.

Conclusion:

In the post QE era world, $1.5 trillion in direct monetization has already slipped into the economy/financial assets.  Banks still sit on another $1.6 trillion in excess reserves and the Fed pays them billions to neither lend nor invest those trillions.  However, as the Fed has now signaled they will soon cease raising rates, which is probably the pre-cursor of the next set of interest rate cuts…what are these mega-banks, presently sitting on trillions of inert dollars, to do?  Perhaps the Fed will continue to raise IOER’s in an attempt to slow the release of reserves to be more in-line with the Fed’s QT?  Or will the “sponge”, still with $1.6 trillion in excess reserves (awaiting leverage) continue to be wrung out faster than the Fed’s QT, rushing of in search of assets?  Of course, I don’t know the answers but I hope to at least be asking some of the right questions.  I am quite confident this is not the cause of our problems but a coping mechanism for a terribly flawed system, as I’ve described previously, HERE and HERE.

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Many would speculate that the White House would undoubtedly have some biometric facial recognition system in place. However, that is not the case in 2018. Odd right?…

The US Secret Service (USSS) this month just launched the Facial Recognition Pilot (FRP) using the existing Crown Closed Circuit Television (CCTV) “in order to biometrically confirm the identity of volunteer USSS employees in public spaces around the complex,” and, “to test USSS’s ability to verify the identities of a test population of volunteer USSS employees.”

This is according to the November 26 Privacy Impact Assessment (PIA) published by the Office of Technical Development & Mission Support USSS, and the Department of Homeland Security (DHS).

The PIA indicates that volunteer USSS agents started the pilot test on November 19, images of the agents were added to the facial recognition system’s database, and the video collected by the CCTV system will be reviewed for target acquisition. According to the PIA report, images that match the faces of the agents will be saved in the system for research purposes. Images that do not trigger a hit will be automatically deleted. All image libraries will be purged from the system when the pilot concludes on August 30, 2019.

The PIA further explains the pilot test would not be monitoring agents in real time. Hits generated on the system will be reviewed on a weekly basis by researchers. 

There is no opt-out for agents who frequent two locations around the White House, with one area including part of the sidewalk and street. “However, individuals who do not wish to be captured by White House Complex CCTV and cameras involved in this pilot may choose to avoid the area,” the PIA states.

The latest trend with the government has been the rapid adoption of facial recognition systems.

As of recent, Customs and Border Protection (CBP) is testing facial recognition as part of its biometric entry and exit screening program to monitor international travelers.

Officials from Immigration and Customs Enforcement (ICE) have been in talks with Amazon about the Rekognition software, an intelligent facial recognition platform, to monitor immigrants.

There have even been reports of law enforcement agencies across the country who are embracing Rekognition to track people in their communities.

The Orwellian trend is evident: the government is embracing facial recognition systems to monitor highly secured places (like the White House) and as a massive surveillance system to track its citizens.

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Authored by James Howard Kunstler via Kunstler.com,

Watergate had tragic Shakespearean overtones, with Nixon as King Lear, but Russia-Gate – perhaps the last gate America goes through on its giant slalom run to collapse – is but a Chinese Fire Drill writ large.

The reason? In 1973, we were still a serious people. Today, the most lavishly credentialed elite in history believe the most preposterous “stories,” or, surely even worse, pretend to believe them for political advantage.

Now, an epic battle of wills is setting up as Robert Mueller’s investigation concludes its business and its primary target, the Golden Golem of Greatness, girds his loins to push back. Behind the flimsy scrim of Russia collusion accusations stands a bewildering maze of criminal mischief by a matrix of federal agencies that lost control of their own dark operation to meddle in the 2016 election.

The US intel community (CIA, NSA, FBI, etc), with the Department of Justice, all colluded with the Hillary Clinton campaign and the intel agencies of the UK and Australia, to derail Mr. Trump as a stooge of Russia and, when he shocked them by getting elected, mounted a desperate campaign to cover their asses knowing he had become their boss.

The Obama White House was involved in all this, attempting to cloak itself in plausible deniability, which may be unwinding now, too. How might all this play out from here?

One big mystery is how long will Mr. Trump wait to declassify any number of secret files, memoranda, and communications that he’s been sitting on for months.

My guess is that this stuff amounts to a potent weapon against his adversaries and he will wait until Mr. Mueller releases a final report before declassifying it. Then, we’ll have a fine constitutional crisis as the two sides vie for some sort of adjudication.

Who, for instance, will adjudicate the monkey business that is already on-the-record involving misdeeds in the Department of Justice itself? Will the DOJ split into two contesting camps, each charging the other? How might that work? Does the Acting Attorney General Mr. Whitaker seek indictments against figures such as Bruce Ohr, Andrew McCabe, Peter Strzok, et al. Will he also rope in intel cowboys John Brennan and James Clapper? Might Hillary find herself in jeopardy — all the while on the other side Mr. Mueller pursues his targets, characters like Mr. Manafort, Michael Cohen, and the hapless Carter Page?

Or might Mr. Mueller, and others, possibly find themselves in trouble, as spearheads of a bad-faith campaign to weaponize government agencies against a sitting president? That might sound outlandish, but the evidence is adding up. In fact the evidence of a Deep State gone rogue is far more compelling than any charges Mr. Mueller has so far produced on Trump-Russia “collusion.” An example of bad faith is former FBI Director James Comey’s current campaign to avoid testifying in closed session before the House Judiciary and Oversight committees — he filed a motion just before Thanksgiving. Mr. Comey is pretending that an open session would be “transparent.” His claim is mendacious. If he were questioned about classified matters in an open session, he would do exactly what he did before in open session: decline to answer about “sensitive” matters on the basis of national security. He could make no such claims in a closed session. The truth is, his attorneys are trying to run out the clock on the current composition of the house committees, which will come under a Democrat majority in January, so that Mr. Comey can avoid testifying altogether.

There are other dicey matters awaiting some kind of adjudication elsewhere.

For instance, who is going to review the chain of decisions among the FISA judges who approved of warrants made in bad faith to spy on US citizens? Perhaps the shrinking violet, Mr. Huber, out in the Utah Prosecutor’s Office of the DOJ, is looking into all that. He’s been at something for most of the year (nobody knows what). He has to answer to Mr. Whitaker now, or the permanent AG who replaces him. And why is Mr. Trump dragging his heels on nominating a permanent AG? I suppose the FISA court matter will fall to the Supreme Court, but how does that process work, and how long might it take?

The potential for a stand-off exists that will confound any effort to untangle these things, and I can see how that might lead to an extraordinary crisis in which Mr. Trump has to declare some form of emergency or perhaps martial law to clean out this suppurating abscess of illegality and sedition.

That can only be the last and worst resort, but what if the US judicial system just can’t manage to clean up the mess it has made?

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The US military has apparently cracked down on “phallus-shaped” drawings since two pilots traced a rather unusual cloud pattern in the sky above Okanogan County, Washington. Case in point: The Air Force recently relieved from duty a commander of a B-52 Stratofortress squadron at Minot Air Force Base, North Dakota after “sexually explicit and phallic drawings” were discovered inside the bomber’s, um, cockpit during a recent deployment, according to Military.com.

An investigation that’s expected to be released by the Air Force Global Strike Command is explained to recount how Lt. Col. Paul Goossen was removed from command of the 69th Bomb Squadron last week after penis drawings were discovered drawn on a high-tech mapping interface inside the nuclear-powered B-52’s cockpit.

Lt. Col. Paul Goossen

Screenshots of the images were taken to be displayed for “laughs” at a party. Goossen was reportedly removed “due to a loss of trust and confidence from his failure to maintain a professional workplace environment.”

The system, used to display common data such as pre-planned routes for sorties and target coordinates, captured the data for post-sortie debriefs. Screengrabs of the images were later used for laughs at an end-of-deployment party, sources said.

“Any actions or behavior that do not embody our values and principles are not tolerated within the Air Force,” said Air Force Global Strike spokesman Lt. Col. Uriah Orland in response to Military.com’s request for comment.

Orland would not confirm the contents of the CDI, but added the zero-tolerance policy “includes creating or contributing to an unhealthy, inappropriate work environment.”

During the 69th’s deployment to Al Udeid Air Force Base, Qatar, between September 2017 and April 2018, penis drawings were repeatedly created by members of the unit and were captured as screengrabs for a CD montage, the source said. The montage was played at the end of the deployment, and then left behind and later turned in to officials. The suggestive material prompted an investigation.

Goossen had been in charge of the squadron since the summer of 2017, including during a recent deployment where the squadron during a recent deployment overseas where it flew bombing missions targeting ISIS and Taliban fighters.

Goossen was commander of the 69th Expeditionary Bomb Squadron when the B-52 flew its last missions against the Islamic State before the B-1B Lancer took over the mission in the Middle East, according to the Air Force.

During its eight-month deployment, Air Force units to include the 69th launched “834 consecutive B-52 missions without a maintenance cancellation,” while targeting ISIS and Taliban fighters across the U.S. Central Command region, the service said in a release.

He recently participated during a conference call with President Donald Trump, and was photographed while speaking on the phone with the president. Goossen said at the time that being invited to participate on the call was “a real honor.”

Crews, including Goossen, even took part in a holiday conference call with President Donald Trump Dec. 24 while on station. Goossen was photographed speaking to the president during the conference call.

“Having the 69th Expeditionary Bomb Squadron be selected to receive a morale phone call from the President of the United States is a true Christmas gift and a real honor,” Goossen said of the phone call. “We feel fortunate to represent all Air Force deployed personnel and we are humbled to have the opportunity out of so many deserving units,” he said in the release.

While it’s terrible that a distinguished veteran who served the US bravely during wartime has been dismissed in such a humiliating fashion for something so trivial, we must admit: Being fired for drawing pictures of cocks in a cockpit will at least leave him with a good story to tell at parties.

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 A 6.6 magnitude earthquake hit Anchorage, Alaska Friday morning, prompting people living in the city to run out of their offices and hide under their desks until the tremor had passed. The US Geological Survey said the earthquake’s epicenter was located roughly 7 miles (12 kilometers) north of Anchorage, Alaska’s largest city, according to the Associated Press.

A reporter in Anchorage witnessed cracks in a 2-storey building after the quake, which was followed by a smaller aftershock that sent people running back out into the streets. It was unclear whether there were any injuries.

Alyeska Pipeline Service said it is checking on its Alaska pipeline after the quake. A company spokeswoman said the company currently isn’t aware of any problems, according to Bloomberg.

USGS issued a tsunami warning shortly after the quake, warning people to evacuate coastal areas of the Cook Inlet and Southern Kenai Peninsula.

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Authored by Daniel Nevins via FFWiley.com,

In “You Might Like to Watch This Picture as Asset Prices Fall,” we discussed a composite indicator called thin-air spending power (TSP). We also promised that this chartbook would track thin-air spending power during every business-cycle expansion since 1954, among other charts. Here are the business-cycle expansion charts.

TSP in an Average Expansion

Now for the other charts. In the next one, we constructed an average TSP path for the expansions shown above. Our average path includes five expansions (all of those that lasted four years or longer) for the first data point, which is sixteen quarters before the onset of a recession, and then it blends in the shorter expansions as soon as they fit completely into the remaining window.

The average TSP path becomes interesting when we compare it to our estimate for Q4 2018. As noted in the main article, we estimated Q4 TSP using high frequency data (including weekly data from the Fed’s H.8 report, home price data from the Case-Shiller Index and the S&P 500’s close on November 27). Here’s the Q4 TSP estimate alongside our final readings for 2018’s first two quarters.

The chart shows the Q4 estimate lying directly on top of the average TSP path at a point that’s just two quarters before the end of an expansion. That’s not to say we’re predicting a recession in two quarters time (other key indicators haven’t yet deteriorated alongside TSP as in past expansions), but the chart certainly has our attention.

(As an aside, if you’re interested in watching the Q4 estimate unfold in real time, join our mailing list for indicator updates. You can do this by sending an email with “indicator updates” in the subject line to queries@nevinsresearch.com. Note that this is different to our blog subscriptions—we only update indicators on the blog when we find the time to write an article about those indicators, meaning the blog doesn’t report most of our research.)

TSP versus the Yield Curve

For any readers who’ve decided to dismiss TSP only because they think the yield curve is all they need to forecast the economy, we have a special chart to show you. To create it, we reduced TSP to a single dimension using our recession-warning line’s ten to one ratio between the spending effects of real new bank credit and the spending effects of real holding gains. (See the main article for explanation.)

More exactly, we combined real new bank credit with 10% of real holding gains to calculate TSP in a single dimension. Then we calculated the correlation between TSP and changes in economy-wide spending (real final domestic demand) and compared it to the correlation between the yield curve and changes in spending. Here’s the comparison.

To be clear, we’re not disputing that the yield curve can help predict the economy—we think it can. In fact, if we had a longer history for other curve measures (especially for the short end of the forward curve), we would possibly see higher correlations with spending. But the measure we used (the 10-year minus the 1-year, which we chose because it has a history that goes all the way back to 1953) sits right in the middle of the mix of most popular curve measures. And based on the results for that measure, anyone who bets on the yield curve should know there’s another horse—TSP—that run laps around traditional curve measures when it comes to predicting spending.

TSP versus Spending and the Business Cycle

So the correlations tell us that TSP is closely related to spending, and the next chart shows the same relationship in line form.

Our last chart compares TSP to the last nine recessions, and once again, we can see that recent developments carry a strong warning. When TSP drops as severely as suggested by our latest estimate, a recession virtually always follows in five quarters or less, and typically less. As noted in the main article, we suggest watching this picture.

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