Month: February 2019

Though Kim Jong Un has a long train ride back to Pyongyang to ponder how the collapse of Thursday’s talks in Hanoi might impact his relationship with Trump, senior officials in his government are already signaling that the detente between the two geopolitical rivals might be over, having deliberately undermined President Trump by contradicting his version events during a midnight press conference – even going so far as to suggest that Kim has “lost the will” to continue negotiating (since North Korea’s “reasonable” position “will never change” – something that US intel analysts have been saying for months).

And as we wait for a rebuttal from President Trump (who will arrive back home much quicker than Kim despite the greater geographical distance), it’s worth noting that the reaction to Trump’s performance in Hanoi – which provoked some twitter wits to joke that he managed to find another way for America to “lose” in Vietnam – hasn’t been as negative as one might have expected.

In one of the few examples of true bipartisanship during the Trump era, lawmakers from both parties chimed in on Twitter and on the floor of the Senate to praise President Trump for having the temerity to walk away from the table.

Confounding Trump’s allies and his enemies, Senate Minority Leader Chuck Schumer even praised the president during a speech on the Senate floor for choosing to walk away instead of accepting an inferior deal that would have made the US less safe in the long run.

All 47 @SenateDems are introducing a resolution today that affirms 3 things:

1. Climate change is real.
2. It’s caused by humans.
3. Congress must act.

Will the @SenateGOP sign on? https://t.co/PNiaAMWFxk

— Chuck Schumer (@SenSchumer) February 28, 2019

And Schumer wasn’t the only Democratic leader to offer praise. According to Bloomberg, Nancy Pelosi told reporters “It’s good that the president did not give him anything for the little he was proposing,” and that “diplomacy is important; we all support it,” but the prospects for a deal were dim.

Connecticut Sen. Chris Murphy tweeted that, while he wished Trump had stood up to Kim on the North’s “brutal” human rights record (a sentiment that was echoed by other Democrats), “talking is never a bad idea and no deal is better than a bad one.”

I wish Trump stood up to Kim more forcefully on his brutal human rights record. But talking is never a bad idea and no deal is better than a bad one. If outcome is that both missile test moratorium and our sanctions continue, and we keep dialogue going, that’s not a bad outcome.

— Chris Murphy (@ChrisMurphyCT) February 28, 2019

Marco Rubio took a brief break from tweeting about Venezuela to contradict an Axios report about his reaction to the talks, saying that, while he would love to “deal with a #NorthKorea that eliminates their nuclear weapons”, agreeing to “sanctions relief while allowing them to hide warheads” would not only be a bad deal, but a “dangerous one.”

I would love to have a deal with #NorthKorea that eliminates their nuclear weapons & missiles in exhange for lifting many sanctions.

But agreeing to sanctions relief while allowing them to hide warheads & keep missiles would not just be a bad deal,it would be a dangerous one. https://t.co/SIrOw9hR9v

— Marco Rubio (@marcorubio) February 28, 2019

Taking a slightly more belligerent tack, Senator Lindsey Graham applauded Trump for walking away, affirmed that the only good deal would be complete denuclearization and warned that, if relations with NK completely break down, there may come a time when the nuclear threat posed by North Korea must be dealt with “one way of the other.”

I appreciate the effort by President @realDonaldTrump to reach a peaceful conclusion to the North Korean nuclear threat.

It’s better to walk away than sign a bad deal.

— Lindsey Graham (@LindseyGrahamSC) February 28, 2019

There is only one good deal: the complete denuclearization of North Korea in return for security guarantees and economic assistance.

— Lindsey Graham (@LindseyGrahamSC) February 28, 2019

I am encouraged that there are plans to continue talking.

We must not go back to the status quo.

If negotiations fail, it would be time to end the nuclear threat from North Korea – one way or the other.

— Lindsey Graham (@LindseyGrahamSC) February 28, 2019

Senate Majority Leader Mitch McConnell, meanwhile, said Trump should be “commended” for his performance.

The President should be commended for his personal commitment to persuading Kim Jong Un to pursue a different path — and for walking away when it became clear North Korea was not ready to commit enough to de-nuclearization.

— Leader McConnell (@senatemajldr) February 28, 2019

But the response wasn’t all positive. Virginia senator and former vice presidential candidate Tim Kaine questioned why Trump decided to ‘stick up’ for Kim by telling reporters he believed Kim had no knowledge of the brutal treatment suffered by US student Otto Warmbier in a “rough” North Korean prison.

President Trump continues to praise Kim Jong Un despite zero evidence of denuclearization from North Korea in the entire year since the last summit. Before he heaps on more, we ought to see something in return. https://t.co/IP59cxNXMu

— Tim Kaine (@timkaine) February 26, 2019

Trump says Kim Jong Un didn’t know about brutalization of VA student Otto Warmbier. MBS had no knowledge of VA resident Jamal Khashoggi’s murder. Oh, and Putin had nothing to do with 2016 election interference… Why does he keep sticking up for dictators over his own people??

— Tim Kaine (@timkaine) February 28, 2019

Both Pelosi and Kaine agreed that Trump’s willingness to defend dictators was troubling.

Still, it’s hardly surprising given all of the evidence that the intelligence community has unearthed showing that NK has continued its nuclear program at several clandestine sites exposed by satellites. Trump said that Kim expressed surprise when he presented him with evidence of the secret sites during the talks.

While it’s still unclear exactly what impact the collapse of the Hanoi talks might have on Trump’s negotiations with China, equity bulls better hope that Trump doesn’t take the phrase “no deal is better than a bad one” to heart.

via ZeroHedge News https://ift.tt/2HdWgIH Tyler Durden

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

A scorpion asks a frog to ferry it across a river. The frog tells the scorpion he fears being stung. The scorpion promises not to sting the frog saying if I did so we would both drown. Considering this, the frog agrees, but midway across the river the scorpion stings the frog, dooming them both. When the frog asks why the scorpion replies that it was in its nature to do so.

On February 20, 2019, the Federal Reserve released the minutes from their January policy (FOMC) meeting. As leaked last week by Fed Governor Loretta Mester, and discussed HERE, it turns out that in January the committee did indeed discuss a process to end the systematic reduction of the Fed’s balance sheet, better known as Quantitative Tightening (QT).

Within the minutes was the following sentence:

“Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve balance sheet.”

The message implies that when the process of reducing the balance sheet ends the Fed’s balance sheet will be normalized. Is that really the case?

This article was made exclusive to RIA Pro subscribers on February 25th. We share it with you to demonstrate one of the many benefits of subscribing to RIA Pro. If you would like to take us for a test ride, use the coupon code PRO30 for a 30-day free trial. To learn more please click here.

The New Normal

Before discussing the implications regarding the present size of the Fed’s balance sheet, we help you decide if the balance sheet will truly be normal come later 2019. The graph below plots the Federal Reserve’s Adjusted Monetary Base, a well-correlated proxy for the Fed’s balance sheet, as a percentage of GDP. The black part of the line projects the current pace of reduction ($50 billion/month) through December.

Data Courtesy: St Louis Federal Reserve

As shown, even if the Fed reduces their holdings through the remainder of the year, the balance sheet will still be nearly three times larger as compared to the economy than in the 25 years before the financial crisis. Would you characterize the current level of the balance sheet as normal?  

Implications

If you answered no to the question, then you should carefully consider the implications associated with a permanently inflated Fed balance sheet. In this article, we discuss three such issues; inflation, safety/soundness, and future policy firepower.

Potential Inflation

When the Fed conducted Quantitative Easing (QE) with the primary purpose of injecting fresh liquidity into the capital markets, the size of their balance sheet rose as they purchased Treasury and mortgage-backed securities from their network of banks and brokers. To pay for the securities the Fed digitally credited the accounts of those firms for the dollar amount owed. A large portion of the money used to buy the securities ultimately ended up in the excess reserve accounts of the largest banks.  Before explaining why this matters we step back for a brief banking lesson.

Under the fractional reserve banking system, banks can lend a multiple of their reserves (deposits and capital). The multiple, governed by the Fed, is known as the reserve ratio. Banks maximize profits by leveraging reserves as much as the reserve ratio allows. Before 2008 the amount of excess reserves was minimal, meaning banks maximized the amount of loans they created based on reserves.

Currently, banks are sitting on about $1.5 trillion of excess reserves that are unconstrained. To put that in context, the average from 1985 to 2007 was only $1.3 billion. This large sum of untapped reserves means that banks can lend, and create money far easier than at any time in the past. If they were to do this the growth in the amount of credit in the system could surge well beyond the rate of economic growth and generate inflation. This potential did not exist before 2008.

Safety and Soundness

Banks and brokers in 2008 were leveraged as much as 40:1. Lehman Brothers, for example, was levered 44:1 at the time they filed for bankruptcy. Many banks failed, and a good majority required unprecedented action by the Fed and U.S. government to bail them out. Clearly the combination of declining asset values and too much leverage broke the financial system.  

The Fed currently has $39 billion of capital supporting $3.9 Trillion of assets. They are leveraged 100:1, meaning a 1% percent loss on their assets would wipe out their capital. This amount of leverage is approximately three times that which was normal prior to the crisis.

Fortunately, the Fed does not re-value their assets so the daily volatility of the fixed income markets cannot bankrupt them. Regardless, one would think the Fed would apply similar safety and soundness measures that they require of their member banks.

Ultimately, this inordinate amount of leverage raises questions about Federal Reserve integrity and the value of the dollar which is issued and supported by the Fed. Fiat currency regimes perch delicately on trust. Should we trust the entity that controls the money supply when they employ such unsound banking practices? More importantly, if I am a foreigner using U.S. dollars, the world’s reserve currency, should I be concerned and possibly question my trust in the Fed?  What is the risk that a problem emerges and to recapitalize the Fed simply prints dollars causing a significant devaluation of U.S. dollars? At what point does the risk-free status of U.S. Treasuries become challenged due to unsound Fed practices?

Next Recession

The Fed’s balance sheet is about four times larger today than it was at the start of the last recession. With the Fed Funds rate only at 2.25%, the Fed has little room to stimulate the economy and support the financial markets using traditional measures. During the next recession the onus will assuredly be put on QE. The questions raised above and many others are of much greater concern if the Fed were to boost their balance sheet to $6, $8 or even $10 trillion. Such growth would further increase the already high level of leverage and potentially introduce fresh concerns about the real value of the U.S. dollar. This raises the specter of a negatively self-reinforcing feedback loop. 

Summary

Over the last year, the market has struggled as the Fed steadily reduced the size of their balance sheet. The S&P 500 is unchanged over the past 13 months. The liquidity pumped into the markets during QE 1, 2, and 3 is being removed, and asset prices which rose on that liquidity are now falling as it is removed. The Fed is clearly taking notice. In December Jerome Powell said the QT process was on “autopilot” with no changes in sight. A week later, with the market swooning, he discussed the need to “manage” QT. “Autopilot” became “manage” which has now turned to “end” in only two months.

If the Fed’s mandate is to support asset prices, this behavior makes sense.

To the contrary, the congressionally chartered mandate is clear; they are supposed to promote stable prices and full employment. Our concern is that capital markets, which are heavily dependent on the Fed and seemingly insensitive to price and valuation, are promoting instability and gross misallocation of capital. One cannot fault markets; they are responding as one should expect on the basis of Fed posture and the prior reaction function. Markets are properly agnostic under such circumstances. It is the Fed that has created an environment that leads markets to react in the ways that it does.

Like the fable of the scorpion and frog, the Fed is trusting markets to not destabilize as long as the Fed gives it a ride. While the relationship may seem cooperative today, it is not in the nature of markets to comply with foolish policy-making. Just like it is natural for scorpions to sting, it is natural for markets to find and expose weakness.

Regardless of the Fed’s characterization of a normal balance sheet, the normalization process is far from normal. What the Fed is doing is redefining “normal” to support inflated and over-valued asset prices and accommodate an unruly market. This will only aggravate any deeper problems lurking.

“At the end of the day, are we ever going to have price discovery in the natural way or is the Fed going to step in every single time the markets try to normalize?” –Danielle DiMartino Booth

via ZeroHedge News https://ift.tt/2IJ6nYj Tyler Durden

Two weeks ago we reported that as a result of less tax withholding in 2018, millions of Americans (who got more money in their pocket in 2018 compared to 2017) will be “angry” once they see the amount of their tax refund. Now, with tax session approaching its peak, we can quantify just how big the “shortfall” at least relative to taxpayer expectations and Wall Street estimates will be. As UBS calculates, the realized net payments to households are now running below the bank’s forecast, with the cumulative shortfall rising to a whopping $45.5bln, an amount which could have significant adverse implications on Americans’ spending habits if most taxpayers had expected their 2019 refund to be similar to 2018. 

That said, there is a specific reason why refunds have been running behind expectations: last week’s dramatic shortfall in tax refunds arises largely from timing of refunds that include the earned income tax credit and the child tax credit. According to the Department of Treasury, the IRS had processed less than half of those payments, whereas in 2018 all such credits had been completed (Treasury statement). As a result, in 2018, Treasury issued $60bln in refunds on February 22. On the same day in 2019, refunds were $24.5bln.

So, if one assumes Treasury’s estimate of 50% is correct, we should get another bulk payment of equal size next week. Another reason to expect makeup this week is from the calendar. Last year, the 22 fell on a Thursday, this year on a Friday. That timing, while seeming inconsequential, could easily have pushed payments from last week to this week, according to UBS.

Still, whatever the reason, refunds are now well behind last year’s pace as shown in the chart below… 

… even as the gap between tax payments this year and last narrowed to near zero (payment season starts in late March).

Calendar issues aside, UBS asks why might refunds be smaller or larger than last year, and provides the following observations:

The IRS tries to set withholding rates to minimize payments and refunds at filing, aiming for a small net positive. But tax reform made meeting this goal hard, resulting in great uncertainty over tax refunds (and may have led to the sharp recent drop in retail sales). Three factors drive that uncertainty.

1. Fewer households qualify for AMT, reducing April tax payments.

2. Increases in the child tax credit boost refunds.

3. Withholding tables for 2018 were likely not adjusted correctly.

As a result, nobody—not Wall Street, not economists, not the US government—knows whether refunds will be larger or smaller than in past years, as small changes in the assumptions on any of the three factors lead to large changes in net payments to households. Accordingly, individual analysts track tax payments and refunds relative to historical data and their own forecasts of weekly net payments to households (the sum of refunds and tax payments).

And lest there be any confusion, as we explained two weeks ago, lower tax refunds, of course, say nothing about the size of the 2017 tax cuts. Refunds represent an overpayment of taxes during the year not the level of taxes paid overall. Nonetheless, and this should be obvious to most, refunds influence the timing of household spending, with UBS warning that a substantial shortfall in net payments to households will reduce consumption in 2019.

This would have potentially adverse consequences for the US economy, but it doesn’t stop there.

According to Bloomberg, fewer people getting refunds will give U.S. Democrats, who now hold a majority in the House of Representatives, an opening to question how much the tax law benefited the middle class – even though as noted above the net amount of tax paid between withholdings and refunds may well have declined!  That said, only about 45% of voters approve of the tax cut, according to recent polls, and many Republicans in high-tax states already lost their seats in the 2018 midterm elections due to the changes in the deductibility of state and local taxes. Looking ahead to the 2020 presidential election, dissatisfaction with the tax law may give Democrats an opening to promise tax changes of their own, ones that favor the middle class, even if in reality all the democrats will do is give the optical illusion of beneficial tax reform, one which boosts tax withholdings and results in a modest increase in refunds, which however, successfully fool most of the people most of the time into believing they ended up paying less taxes.

via ZeroHedge News https://ift.tt/2GPBZd0 Tyler Durden

Authored by Ben Hunt via EpsilonTheory.com,

Let’s take a walk down memory lane, shall we?

“My relations with the Fed,” Nixon said, “will be different than they were with [previous Federal Reserve chairman] Bill Martin there. He was always six months too late doing anything. I’m counting on you, Arthur, to keep us out of a recession.”

“Yes, Mr. President,” Burns said, lighting his pipe.

“I don’t like to be late.” Nixon continued. “The Fed and the money supply are more important than anything the Bureau of the Budget does.” Burns nodded. “Arthur, I want you to come over and see me privately anytime . . .”

“Thank you, Mr. President,” Burns said.

“I know there’s the myth of the autonomous Fed . . .” Nixon barked a quick laugh. “. . . and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you.”

January, 1970 (John Ehrlichman, “Witness to Power”)

Nixon: [If I’m not re-elected] this will be the last Conservative administration in Washington.

Burns: Yes, Mr. President.

Nixon: This liquidity problem is just bullshit.

October 10, 1971 (Secret Nixon Tape No. 607-11)

Burns: I wanted you to know that we lowered the discount rate . . . got it down to 4.5 percent.

Nixon: Good, good, good.

Burns: I put them [the FOMC] on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.

Nixon: Great. Great. You can lead ‘em. You can lead ‘em. You always have, now. Just kick ‘em in the rump a little.

December 10, 1971 (Secret Nixon Tape No. 16-82)

Shultz: Money supply is beginning to move. The economy has to be good, strong expanding economy this year. So much at stake on that. He [Burns] recognizes that and he needs to do everything that he can do. Why worry about interest rates going down? . . . We want low interest rates. What’s the problem there? So, we don’t have a return flow of money from Europe? So what? Keep the money supply going up!

Nixon: Another defense he’s building up for not raising the money supply . . . I’d rather he weren’t so optimistic. … This is the last time I want to see him [garbled] or get the hell out of here. War is going to be declared if he doesn’t come around some. … He’s talking with the Jewish press.

February 14, 1972 (Secret Nixon Tape 670-5)

In 1971, Richard Nixon had a problem. The US economy was pretty strong and the Fed wanted to tighten. But Nixon had an election to win in 18 months, and he needed loose monetary policy to do that. Also, the global economy wasn’t that strong, and the rest of the world needed an expanding supply of dollars and an expanding US trade deficit to keep its motor running. Nixon didn’t really care about that, but a lot of his oligarch cronies did.

So Nixon alternately bullied and cajoled and threatened and rewarded his hand-picked Federal Reserve Chair, Arthur Burns, to do the right thing and keep the money spigot open … wide open. Complaints about too much liquidity sloshing around were “bullshit”, and so what if they were running the economy hot? Good lord, man, imagine who would take over the White House in 1972 if he were defeated! Imagine the insane fiscal spending policies that those Democrats would push on the country if he lost!

Donald Trump has EXACTLY the same problem.

Donald Trump has found EXACTLY the same solution.

Jay Powell is the Arthur Burns of our day.

The only difference is that Nixon did all of his bullying and cajoling and threatening and rewarding in private, and Burns wouldn’t dream of saying out loud what Powell is shouting about the “important signal” of financial market “volatility” on monetary policy decisions.

They’re not even pretending anymore.

via ZeroHedge News https://ift.tt/2TazgBh Tyler Durden

Michael Cohen has been accused of committing perjury and making “numerous wilfully and intentionally false statements of material fact” during Wednesday testimony in front of the House Oversight and Reform Committee. 

In a criminal referral letter to Attorney General William Barr, Republican Reps. Jim Jordan (R-OH) and Mark Meadows (R-NC) said that President Trump’s former personal attorney was “at times in direct contradiction to assertions contained in pleadings authored by the United States Attorney’s Office for the Southern District of New York (SDNY).” 

In other instances, Cohen’s statements were “immediately contradicted by witnesses with firsthand knowledge of the subject matter.” 

Via the letter (in part): 

1. Several times during his testimony, Mr. Cohen denied committing various fraudulent acts that he has pleaded guilty to in federal court. Specifically, Mr. Cohen said “I never defrauded any bank.” These denials are intentionally false. Mr. Cohen pleaded guilty to five counts of income tax evasion, one count of making false statements to a banking institution, one count of causing an unlawful corporate contribution, one count of excessive campaign contribution, and one count of making false statements to Congress. 

2. Mr. Cohen repeatedly testified that he did not seek employment in the White House following President Trump’s election. This is demonstrably, materially, and intentionally false. This testimony is in direct conflict with court filings made by the United States Attorney’s Office for the SDNY, which state:

During and after the campaign, Cohen privately told friends and colleagues, including in seized text messages, that he expected to be given a prominent role and title in the new administration. When that did not materialize, Cohen found a way to monetize his relationship with and access to the President. 

Michael was lobbying EVERYONE to be “Chief of Staff.” It was the biggest joke in the campaign and around the office. Did he just perjure himself again?

— Eric Trump (@EricTrump) February 27, 2019

Cohen: “I didn’t want to go to the White House.” LIAR. He complained to me on numerous occasions about the fact that POTUS didn’t offer him a job at the WH. #CohenTestimony

— Arthur Schwartz (@ArthurSchwartz) February 27, 2019

3. Mr. Cohen testified he did not direct the commission of the Twitter account @WomenForCohen. Specifically, Mr. Cohen testified “I didn’t actually set that up” and “it was done by a young lady that worled for [the IT firm] RedFinch.” Mr. Cohen’s statement in this respect may also be false. The owner of RedFinch, John Gauger, reportedly told The Wall Street Journal that RedFinch established the @WomenForCohen account at Mr. Cohen’s direction. 

Read the rest below: 

2019 02 28 JDJ MM to Barr Re Cohen DOJ Referral by Zerohedge Janitor on Scribd

Interestingly, there is nothing in the referral regarding an alleged violation of the Foreign Agents Registration Act (FARA), as Rep. Mark Meadows (R-NC) alleged following a heated exchange on Wednesday. 

via ZeroHedge News https://ift.tt/2EBr444 Tyler Durden

CNN has been accused of ambushing Bernie Sanders and tricking viewers by passing off Democratic political operatives as everyday people during a Monday evening town hall as part of his campaign for the 2020 election. Internet sleuths looked into the backgrounds of those asking Sanders various questions – most of which could be considered fair game to ask a presidential candidate, only to find that there was more than meets the eye as noted by Paste Magazine. 

For example, Sanders was asked a tough question about allegations of sexual harassment on his 2016 campaign by “American University Student” Shadi Nasab. What CNN didn’t mention is that she’s also an intern for a large D.C. lobbying firm, Cassidy & Associates. 

“It will not happen again.” Sen. Bernie Sanders addresses allegations of sexual harassment on his 2016 campaign and describes protocols he says his campaign has implemented. #SandersTownHall https://t.co/ZcDCSQIMOm pic.twitter.com/qRMMiHCz5O

— CNN (@CNN) February 26, 2019

Another question came from Tara Ebersole, a humble “Former Biology Professor” according to CNN. She’s also the chair of the Baltimore County Democratic Party according to her LinkedIn page. What’s more, Ebersole’s husband is a Maryland state delegate, and was on Hillary Clinton’s leadership council in 2016. 

Abena McAllister was labeled by CNN as a “Mother of Two,” but failed to mention that she’s also the Charles County Democratic Central Committee Chair. 

“Maryland Voter” Michelle Gregory is yet another ‘everyday person’ who turns out to be politically active as the chair of the Lower Shore Progressive Caucus. 

There are several more examples – as nearly everyone who asked Bernie a question is linked to some type of Democratic activism. 

One explanation for why so many political operatives asked Bernie question might be that political activists are more likely to choose to participate in a Bernie Sanders town hall. That said, CNN made it appear as though these were ‘everyday voters’ – not people people involved in politics themselves. 

As Paste‘s Jacob Weindling reports, most of the questions weren’t unfair. 

I watched the entire town hall last night, and none of the questions asked by these people resonated as unfair to me. There were a couple asked by other people that were based on wrong assumptions (like the myth that Bernie’s only support comes from young white dudes), but it’s hard to blame individuals for coming to wrong conclusions like that when the Democratic Party’s infrastructure has invested so much time and energy gaslighting the public into thinking that way.

…

But back to my main point: really the only problem in all this is that because CNN did not disclose many of these questioners’ ties to politics, one cannot help wonder why. The famed Bobby Knight quote of “stupid loses more games than smart wins” is Occam’s Razor here, as Wolf Blitzer isn’t exactly universally respected and we have documented CNN’s struggles with the truth before, but the nefarious angle is the elephant in that Washington D.C. room. –Paste Magazine

As Weindling notes – “being politically-involved doesn’t disqualify these folks from asking questions, and it doesn’t automatically make their motivations disingenuous,” however “had CNN been more accurate in describing the questioners, I wouldn’t be writing this column.”  

via ZeroHedge News https://ift.tt/2Vuydcm Tyler Durden