Last week, the Supreme Court heard oral arguments involving the Texas Omnibus Abortion Bill (HB 2), which would restrict the procedure to surgical centers and require doctors who perform it to be near a hospital. (Elizabeth Nolan Brown first noted this at Hit & Run last week.)
If the court decides Texas’ bill is unconstitutional, it’ll set a precedent that will stop other states looking to close abortion clinics.
In 2013, Reason TV reported on Virginia’s 2011 Senate Bill 924, which led to the closure of three clinics before state doctors lobbied the Board of Health to remove the restrictions in 2015. Click below to watch.
It’s probably safe to say that most central bankers aren’t particularly enamored with the idea that post-crisis monetary policy has contributed to rising income inequality.
Take Ben Bernanke for instance, who took a few moments away from advising Citadel and PIMCO last year to throw on his blogger Ben hat and explain why he and his “courage” aren’t responsible for the widening gap between the rich and the poor.
“First, widening inequality is a very long-term trend, one that has been decades in the making,” he explained. “The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, [and by] comparison, the effects of monetary policy on inequality are almost certainly modest and transient,” he added.
Right. So basically, poor people have been getting poorer for a long time and to the extent that monetary policy contributes to the wealth gap, that contribution is minimal at best.
Others of Bernanke’s vaunted ilk also dispute the notion that wealth inequality has anything at all to do with official policy. Of course to deny ZIRP and QE have driven an even larger wedge between the haves and the have nots than existed in the past is absurd. Post-crisis policy was (and still is) specifically designed to drive up the prices of the assets (financial assets that is) that are most concentrated in the hands of the wealthy. And make no mistake, these policies have been very good at doing just that – blowing bubbles in everything from stocks, to fixed income, to Modiglianis. In other words, if you are deliberately making these assets more expensive and you know that they are disproportionately held by the wealthy, how can you deny you’re increasingly the wealth gap?
For some reason (and we say that sarcastically), most of this “wealth” just hasn’t managed to “trickle down” to the common folk. As it turns out, the benefits of cheap liquidity simply don’t accrue to “everyday” people like they do to the rich and because QE was also a miserable failure at juicing aggregate demand, the rich simply watched as their paper wealth grew in tandem with asset prices while the poor watched as they, well, just got poorer by comparison.
In any event, the BIS, in their latest quarterly report, is out with a look at “wealth inequality and monetary policy,” and we should caution that while the bank offers quite a few ways to look at the issue that are worth considering (read the full report here), the following graphics are about as unequivocal as one could possibly hope to find.
Change in inequality is equal to the difference in the growth rate of net wealth between the fifth and second quartiles. Simple instructions: 1) spot 2008, 2) watch the red line head “up and to the right.”
France Germany Italy
United States
But don’t worry, we’re sure this is, as Ben says, “…modest and transient.”
Former First Lady Nancy Reagan, wife of 40th president of the United States Ronald Reagan, has died of congestive heart failure at the age of 94.
Mrs. Reagan was a politically influential figure both during an after her time in the White House. Her tenure as First Lady is perhaps best remembered for the “Just Say No” anti-drug campaign she launched in September 1986. In a televised address, the first lady pushed for a ramped-up War on Drugs and zero tolerance for drug abusers.
During her statement, Mrs. Reagan said to the nation:
There’s no moral middle ground. Indifference is not an option. We want you to help us create an outspoken intolerance for drug use. For the sake of our children, I implore you to be unyielding and inflexible in your opposition to drugs.
As Ronald Reagan was dying of Alzheimer’s disease, Mrs. Reagan notably took the Republican Party’s staunchly pro-life policies to task when she challenged the George W. Bush administration’s opposition to public funding of embryonic stem cell research.
A new report from JP Morgan Chase & Co. finds that the summer employment rate for teenagers is nearing a record low at 34 percent. The report surveyed 15 US cities and found that despite an increase in summer positions available over a two year period, only 38 percent of teens and young adults found summer jobs.
This would be worrying by itself given the importance of work experience in entry-level career development, but it is also part of a long-term trend. Since 1995 the rate of seasonal teenage employment has declined by over a third from around 55 percent to 34 percent in 2015. The report does not attempt to examine why summer youth employment has fallen over the past two decades. If it had, it would probably find one answer in the minimum wage.
Most of the 15 cities studied in this report have minimum wage rates above the federal level, with cities such as Seattle having a rate more than double that. Recent data from the Bureau of Labor Statistics seen in the chart show exactly how a drastic rise in the minimum wage rate affects the rate of employment.
Seattle has experienced the largest 3 month job loss in its history last year, following the introduction of a $15 minimum wage. We can only imagine the impact such a change has had on the prospects of employment for the young and unskilled.
Raising the minimum wage reduces the number of jobs in the long-run. It is difficult to measure this long-run effect in terms of the numbers of never materializing jobs. However, the key mechanism behind the model—that more labor-intensive establishments are replaced by more capital-intensive ones—is supported by evidence. That is why recent research suggesting that minimum wages barely reduce the number of jobs in the short-run, should be taken with caution. Several years down the line, a higher real minimum wage can lead to much larger employment losses.
Several empirical studies have been conducted over the course of more than two decades, with all evidence pointing toward negative effects of minimum wage rises on employment levels among the young and unskilled. A study conducted by David Neumark and William Wascher in 1995 noted that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. These findings are consistent with the predictions of a competitive labor market model that recognizes skill differences among workers. In addition, we find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.”
Policy makers who continuously raise the minimum wage simply assure that those young people, whose skills are not sufficient to justify that kind of wage, will instead remain unemployed. In an interview, Friedman famously asked “What do you call a person whose labor is worth less than the minimum wage? Permanently unemployed.”
The upshot: Raising the minimum wage at both federal and local levels denies youth the skills and experience they need to get their career going.
As it becomes increasingly likely that Donald Trump will be the GOP nominee, some party leaders are throwing up their hands.
“The one argument for libertarians to vote Republican that still remains is the Supreme Court. Other than that, I really can’t see very much endearing for a libertarian in these Republican candidates,” said Rep. Thomas Massie (R-Ky) at the International Students for Liberty Conference.
Click below to watch that interview:
Reason also spoke with Rep. Justin Amash (R-Mich.) who despite reservations is supporting Ted Cruz because he is a “person I can work with and he’s a person I can persuade.” Amash also pointd to Trump as the biggest threat to limited government of all the candidates.
It never ceases to amaze (and amuse) us how much time big bank “economists” and “strategists” spend on Zero Hedge – even though we have never compensated said banks either directly or with soft dollars – instead of doing research, or spending time with their paying clients.
Just one week ago, it was CitiFX’s Brent Donnelly who was “critical” why the financial media is, supposedly, “highlights bearish stories” (perhaps has has missed the past 8 years of CNBC “reporting”, we don’t know). This is what he said:
trade of the year” which we presented on February 12, and which returned 30% in just two days was to go long Chesapeake bonds – but are observations always backed by facts, virtually all of which have to do with documenting and narrating the plight of an overhyped recovery which never took place (something which incidentally the following slide from, uh… Citi, shows)
As for whether Mr. Donn>Give the people what they want
In an email I sent Monday, I was critical of the financial media for highlighting bearish stories but ignoring bullish ones. I was thinking about this and realized that maybe you can’t blame the commentators… People just gravitate towards bad news—humans are much more interested in watching a car crash or shooting on TV than a feel-good story.
I looked at Google searches related to the stock market. The results (Chart1) speak for themselves. My conclusion is that it’s not fair to blame Zerohedge and friends for the permabear newsflow… They’re just giving the people what they want!
As for the question whether Zero Hedge traffic correlates with market volatility, we would like to help Brent and everyone else who would rater extrapolate rather than use actual data, with the following self-explanatory chart.
* * *
And just as we though that bankers had learned their lesson and gone back to actually doing what they are paid to do – i.e., forecasting the future instead of reading blogs, yesterday we found that that was not the case.
In a note released on Saturday, Jefferies’ Thomas “TJ” Thornton, wrote the following epic trolling of Zero Hedge by invoking none other than Donald Trump:
US – “Lightweights like Zero Hedge might point to a sub-50 ISM as another reason to hate equities, but there’s a reason why little ZH is a choker, a reason he’s got one of the worst records in predicting markets anywhere, just a harrable record, harrable, I mean, successful people have pointed out that he’s 0 for 2600. He’s succeeded at being wrong. Success is my son-in-law, I’m successful, my daughter is both beautiful and successful. I have many successful friends.” Made up quote, but the point is that it’s hard to be successful when just reacting to backward looking information. Our work suggests that by the time the ISM breaks 50 to the downside the market is already pricing in much of the concern–actually a break through 50 to the downside tends to be quite positive for the market over the next 12M even when you include recessionary periods. When that break of 50 hasn’t been associated with an immediate recession (i.e. perhaps now), median market performance is up 11% over the next 6M, and 21% over the next 12M. This week we got a better than expected ISM, and skeptics point to the fact that it’s still below 50, but that may be a positive. See supporting chart, table and methodology below. (T.J. Thornton, US Product Management).
We are curious just what the explanation of “0 for 2600” means, since those who actually read the articles instead of regurgitating what they read about it on Twitter, know that “little ZH” does not make forecasts or predictions, as our recurring annual year end piece very clearly notes, to wit:
With all that behind us, what is in store for 2016? We don’t know: as frequent and not so frequent readers know, we do not pretend to be able to predict the future and we don’t try (despite endless allegations that we constantly predict the collapse of everything): we leave the predicting to the “smartest people in the room” who year after year have been dead wrong. We merely observe and try to find what is entertaining, amusing, surprising or grotesque in an increasingly sad world.
In other words, we are merely a data-conveying messenger, one which increasingly more banks feel obligated to shoot for some unknown reason, although to be honest we are grateful for the constant advertising. We couldn’t hit record traffic in February with a zero advertising budget if it wasn’t for their tireless efforts to namedrop.
We do know, however, who Jefferies is: for years CEO Dick Handler has been scrambling to create something more than just a middle-market broker whose bread and butter have been two things: trading and underwriting junk bonds for small and medium companies (B2/B with an EBITDA of $50MM or less is the sweetspot), and hiring recently fired UBS and other bulge bracket bankers in hopes of getting over its perpetual chip on its shoulder. Bankers such as disgraced ex-UBS healthcare banker Sage Kelly who was recently described as a “bed-pooping, cokehead.” He was promptly terminated after details of how senior Jefferies bankers allegedly attract new business, namely cocaine binges interspersed with forced group sex.
Dick failed.
Jefferies, or Jeffries as it is known in all offering memos before the bank has to spend tens of thousands in hourly lawyer fees to correct the bank’s official name, is also the place where novelty economists are hired to make loud noises and write hypnotically stupid sentences just to attract attention and stand out above the crowd. Case in point – the junk bond-focused bank’s “chief market strategist” shown below in a recent Bloomberg interview wearing his “I Heart QE” hat.
That said, going back to Jefferies masterful trollery of Zero Hedge, we promptly responded with a question of our own: a tweet showcasing Jefferies revenue success in its most important group: fixed income, which to be honest was at least positive in Q4. That’s more than Jefferies can say about its Q3 fixed income results when revenue was, drumroll, negative.
Oddly enough, it was these same Jefferies strategists who were supposed to react to forward looking information in 2015 when instead their lack of “vision” resulted in the worst quarter in recent Jefferies history. This is what Jefferies CEO Dick Handler said in mid-December:
“Fixed Income, which has been a solid to excellent business for Jefferies in prior years, did not perform well in 2015. Almost all our Fixed Income credit businesses were impacted by the prolonged anticipation of the lift-off in Federal Reserve rate-setting, the collapse in the global energy markets (where we have long been an active adviser, capital raiser and trader), reduced originations in leveraged finance and meaningfully reduced liquidity. There were a number of periods of extreme volatility, which were followed by periods of low trading volume.”
He hopefully added that “with our exposures in distressed securities reduced to current levels, there should be no similar impact on our future results.”
Wait, isn’t it the job of Jefferies’ crack economists to look at “forward looking information” and make appropriate adjustments before the bank is slaughtered with its two worst trading quarters in years? It almost appears as if “TJ” was too busy reading Zero Hedge in 2015 than actually advising his boss to dump those billions in junk bonds Jefferies carried on its balance sheet and which led to “TJ” having a “junk” bonus to go with his forecasting effort.
And to think there were those who predicted, looking at “forward looking information” that with its purchase of Jefferies, the “mini Berkshire’ known as Leucadia would promptly soar in value. Using “backward looking data” that appears not to have happened.
But the moment of crystal-shattering poetic justice came just hours after “TJ” trolled “lightweight choker Zero Hedge” for being too negative when Reuters reported that…
Jefferies Group LLC will merge its junk-rated loans and bonds business with the junk debt unit of its joint venture with MassMutual Financial Group, according to people familiar with the matter, in the biggest reorganization by a U.S. investment bank since the leveraged finance markets seized up last year. As a result, Kevin Lockhart, global head of leveraged finance, and Adam Sokoloff, global head of sponsors, have left Jefferies, the sources said, asking not to be identified as the moves have not been announced.
Banks have had trouble selling debt related to leveraged buyouts since late last year. Junk bond markets seized up on concerns about the prospect of higher interest rates, the health of the U.S. economy, and how those two factors would affect companies with the shakiest financial footing.
According to the people familiar with the matter, Jefferies’ leveraged finance business will be combined with the junk debt origination team of Jefferies Finance LLC, the joint venture between Jefferies and U.S. life insurer MassMutual.
The punchline: “Jefferies’ management presented the changes internally as a way to boost efficiency and focus on clients, rather than a response to troubled deals, the sources said. It was not immediately clear if the combination would offer Jefferies more financial resources to increase lending.“
Translation: the question is whether Jefferies “forward looking”Q1 fixed income revenues will be positive or will revert to negative for the second quarter in three.
We could continue but frankly we are starting to feel bad writing about the troubles facing the mid-tier junk bond underwriter.
As for whether a “backward looking” sub-50 PMI is irrelevant, we will let “TJ” ask his just fired former co-workers if it suggests the worst is behind us, no matter how one looks at it…
The BIS’ Claudio Borio was vindicated in January – and it was a long time coming.
When last we checked in with Claudio, it was December and the bank’s Head of the Monetary and Economic Department was busy explaining what may befall $3.2 trillion in EM USD debt in the persistently strong dollar environment. “The stock of dollar-denominated debt, which has roughly doubled since early 2009 to over $3 trillion, is still there [and] in fact, its value in domestic currency terms has grown in line with the US dollar’s appreciation, weighing on financial conditions and weakening balance sheets,” he warned.
We also laid out the progression of Borio’s most recent warnings as delineated in the banks’ widely-read, if on occasion perfunctory, quarterly reports. Below, is a brief review.
From 2014, warning about the market’s dependence on central bank omnipotence:
To my mind, these events underline the fragility – dare I say growing fragility? – hidden beneath the markets’ buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets’ buoyancy hinges on central banks’ every word and deed.
From March of 2015, speaking out about the dangers of increasingly illiquid secondary markets for corporate bonds:
As a result, market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions. And, more broadly, investors may find that liquidating positions proves more difficult than expected, particularly in the context of an adverse shift in market sentiment.
What do the changes in market-making described here mean for markets and policy? There are at least two key issues. First, reduced market-making supply and increased demand imply upward pressure on trading costs, reduced secondary market liquidity, and potentially higher financing costs in new-issue markets. Second is the question of how markets will behave under stress – that is, whether they will be able to function in an orderly fashion in response shocks or broad changes in market sentiment…
Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening. This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills.
Right. So pretty much everything Claudio could be worried about, Claudio was worried about, and the most amusing thing about his concern over undue central banker influence is that the BIS board looks like this:
Well in any case, Borio is back at it and now he can say “I told you so.” In the BIS’ latest quarterly report, the bank wastes no time in describing the first two months of the year: “uneasy calm gives way to turbulence.”
After noting that January was one of the most abysmal months for stocks in market history, the bank breaks the meltdown into two distinct “phases”:
At first, markets focused on slowing growth in China and vulnerabilities in emerging market economies (EMEs) more broadly. Increased anxiety about global growth drove the price of oil and EME exchange rates sharply lower and fed a flight to safety into core bond markets. The turbulence spilled over to advanced economies (AEs), as flattening yield curves and widening credit spreads made investors ponder recessionary scenarios.
In a second phase, the deteriorating global backdrop and central bank actions nurtured market expectations of further reductions in interest rates and fuelled concerns over bank profitability. In late January, the Bank of Japan (BoJ) surprised markets with the introduction of negative interest rates, after the ECB had announced a possible review of its monetary policy stance and the Federal Reserve issued stress test guidance allowing for negative interest rates.
On the back of poor bank earnings results, banks’ equity prices fell well below the broader market, especially in Japan and the euro area. Credit spreads widened to a point where markets fretted about a first-time cancellation of coupon payments on contingent convertible bonds (CoCos) at major global banks.
And then came the obligatory nod to dwindling counter-cyclical capacity:
Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.
But the real punchline comes in the end, when the BIS touches on a topic that we’ve been discussing since mid-January. Namely that this seems to be the year in which the world woke up to the fact that central bankers are not, in fact, omnipotent. We went further:
That rather unpleasant revelation has in turn caused some to reconsider the wisdom of the policies that drove stocks to nosebleed levels off the 2009 lows. That is, if it’s now clear that ZIRP, NIRP, and QE have failed when it comes to stimulating global demand and trade and reinvigorating the inflationary impulse, one is left to wonder what happens when the world careens back into recession against a backdrop of extreme capital misallocation and exhausted counter-cyclical policy maneuverability.
Almost as if the BIS had simply read the quoted excerpt above and paraphrased it for their own report, here is what the central bank for central bankers says:
Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options. Markets pushed out further into the future their expectations of a resumption of gradual normalisation by the Fed. And as the BoJ and ECB signalled their willingness to extend accommodation, markets showed greater concerns about the unintended consequences of negative policy rates. In the background, growth remained disappointing and inflation stubbornly below targets. Markets had seemingly become uncertain of the backstop that had been supporting asset valuations for years. With other policies not taking up the baton following the financial crisis, the burden on central banks has been steadily growing, making their task increasingly challenging.
We couldn’t have said it better ourselves. Except that we did.
“The prospect of having all your benefits cut off…or a significant part of your benefits cut off makes people look on earning income as risky,” says Harvey.
The co-authors sat down with Reason TV’s Nick Gillespie to talk about what they learned from hundreds of welfare recipients they interviewed around the country.
One of the core aspects of mainstream financial media in general, and outlets like CNBC in particular, more so even than their chronic permabullish bias, is the seemingly endless gallery of “experts”, “pundits”, and other talking heads whose only requirement is wearing a business suit (in some very notable exemptions) who show up on TV, offer trade advice and recommendations – while either pitching their own trading services or hoping to offload their own existing positions – and if (or rather when) said advice leads to material losses are not heard from again until a certain period of time passes, and those who suffered listening to said “experts” have moved on, at which point the farce repeats itself.
The legendary example of this is none than Jim Cramer declaring loudly that “Bear Stearns is fine, don’t be silly” when asked by a viewer in early March 2008 if they should pull their money out of the bank. The stock was trading at $63; six days later JPM “bought” Bear for $2/share to prevent it from liquidating.
Why is Cramer still on the air? Because he was never held accountable to any standard of fiduciary responsibility. In short: he acted as an entertainer.
Furthermore, some have speculated that all financial media outlets like CNBC are ultimately nothing but an infomercial sounding board for bullish pundits to pitch their ideas (while at the same time doing the opposite of what they recommend as David Tepper and Jeff Gundlach recently demonstrated), or sell their services while giving outlets like CNBC 5 minutes content slots (for which CNBC pays a few hundred dollars per appearance) which in turn may explain CNBC’s collapsing ratings which as we reported a year ago, stopped using Nielsen out of embarrassment.
This all may be coming to an end thanks to the recently issued “fiduciary rule.”
Courtesy of Forbes, here is some background on what this rule is:
In April, the Department of Labor issued a fiduciary rule proposing that a “best interest standard” be applied across a broader range of investing advice such that any advisor getting paid to provide personalized investment advice — on things like what assets to buy or whether or not to roll a 401k into an IRA — be considered a fiduciary and have to put their clients’ interests first. Currently, brokers and advisors must only comply with a “suitability standard,” which means that they must make recommendations that are suitable to an individual’s investment needs, but they can also consider their own and their firms’ interests.
In the months since the DOL put forth this fiduciary rule, Republicans and financial firms have excoriated the proposal as being bad for America and placing an undue burden on firms’ business. It turns out that putting your clients’ interests ahead of your own is practically impossible, and here is, according to Wall Street, why:
“It will be very difficult, if not impossible, for financial professionals and firms to comply with the requirements,” Jackson National Life Insurance president James Sopha wrote in a letter to the DOL in July. In an 83-page letter sent to the DOL the same day, Lincoln CEO Dennis Glass called the fiduciary proposal “immensely burdensome” and “extremely intrusive,” while also noting that “it would be a mistake to assume that fee-based compensation models are always better for retirement savers than commission-based models.”
This surreal defense of frontrunning and abusing one’s clients went on: Kent Callahan, the president and CEO of Transamerica’s investment and retirement division, told the DOL that “the re-proposal would substantially change our ability to provide the range of retirement services and products from which investors can choose to meet their own specific needs.” And Susan Blount, executive vice president at Prudential, noted that the proposed fiduciary requirements posed a “significant challenge” that could lead to “increased compliance costs” and will “significantly” increase firms’ servicing expenses.
One person who recently called out advisors hypocrisy quite vocally, was Elizabeth Warren, who in a letter sent to the Department of Labor and the Office of Management and Budget called the firms’ claims baloney. Why? Because, in her view, each company made completely contrasting comments about the fiduciary rule in public comments to their investors.
“Publicly traded companies are rarely held accountable for assertions they make when lobbying in Washington, even if these assertions are untrue,” Warren writes. “But when communicating with investors, publicly traded companies are required by law to provide full and accurate information about any material matters that may affect their business models or stock valuations.”
This wasn’t Warren’s first attempt at supporting the DOL’s proposal for less conflict-laden investment advice. In an October report titled “Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry,” Warren blasted firms for giving kickbacks and Caribbean vacations to agents who sell annuities to consumers.
Meanwhile, as the government’s intention to pursue the “fiduciary rule” is only picking up steam and supporters, the financial pundits who have finally read the small print are starting to panic because they realize that if the pending regulation passes, they may be locked out of the financial infomercial circuit for good.
Case in point, popular financial radio show host Dave Ramsey, who as Forbes writes, “caused a firestorm on Twitter last week when he weighed in against the “fiduciary rule.” Ramsey Tweeted, “this Obama rule will kill the Middle Class and below ability to access personal advice” – actually it will merely kill the ability of a vast majority of charlatans to pretend they can forecast the financial future. A war of Tweets then broke out between opponents of the rule, and supporters, the latter of which includes fee-based investment advisers expected to benefit from the new costs the rule will shower on their broker competitors.
Fittingly, even before Ramsey came out against the rule, one of his critics called for using the rule against Ramsey, supposedly for providing advice said critic deemed harmful to savers. In an October article in LifeHealthPro, an online trade journal for insurance agents and financial advisers, Michael Markey, an insurance agent and owner of Legacy Financial Network, called for Ramsey to “be regulated and to be held accountable” by the government for the opinions he gives to listeners. Markey hailed the Labor Department rule as ushering a new era in which “entertainers like Dave Ramsey can no longer evade the pursuit of regulatory oversight.”
What a novel concept: holding financial “advisors” accountable for their advice. No wonder the industry is panicking. And ironically, nobody should be more panicked than CNBC and its head entertainer, Jim Cramer. As Forbes John Berlau writes, “experts both for and against the rule I have talked to agree its broad reach could extend to financial media personalities who offer tips to individual audience members, a group that includes not just Ramsey but TV hosts like Suze Orman and Jim Cramer, as well as many other broadcasters who opine on business and investment matters. They would be ensnared by the rule’s broad redefinition of a vast swath of financial professionals as “fiduciaries” and its mandate that these “fiduciaries” only serve the “best interest” of IRA and 401(k) holders.”
The aftermath of the fiduciary rule is aleady facing a backlash among the financial advisory lobby and its lawyers among whom is Kent Mason, a partner at the law firm Davis & Harman, who said that “under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Mason said in an email. It doesn’t matter that Ramsey and other hosts aren’t compensated by listeners, he adds, as the DOL rule explicitly covers those who give investment advice and receive compensation “from any source.” Mason agrees with Markey that the compensation Ramsey receives from radio stations that carry his show and from book sales are enough to define Ramsey as a “fiduciary” under the rule.
To be sure not every financial visionary would be immediately taken off the air: just those who get too specific: the rule containa an exemption for “recommendations made to the general public,” this wouldn’t protect Ramsey and other radio and television personalities if they gave specific answers to callers or audience members, argue both Mason and Markey. Similarly, Mason adds, while the main part of investment seminars would be exempt, “if during the seminar, someone from the audience asks a question about his or her situation and the speaker answers the question with respect to specific investments, that answer would be fiduciary advice.”
It would however, make the CNBC career of such entertainers as Jim Cramer virtually impossible, and would lead to a dramatic overhaul of the way financial outlets like CNBC, Fox Business and 24/7 Bloomberg Terminal infomercials as Bloomberg TV run their business.
Worst of all, though, it would mean that all those frontrunning mutual fund orderflow and fund managers will actually have to go back to doing research and trading instead of going on TV for many hours every day, in some cases as much as 5x a week on 4 different stations. And that is clearly unacceptable.
And while we are confident that the “fuduciary rule” will ultimately be watered down to lead to no real actionable changes, perhaps it will prompt some thinking among the general population who see their own personal advisor on CNBC every other day, and ask: “if my professional finance advisor is in such dire need of marketing that he spends most of his or her waking hours on TV, or writing columns, or tweeting, maybe I should get a different financial advisor.”
We have heard a lot of chatter about a potential negative interest rate policy, and whilst the general market consensus in the USA is still expecting to see at least two rate hikes by the Federal Reserve before the end of this year, the situation is completely different in Japan and in Europe. The Japanese central bank was the first central bank to openly discuss a potential negative interest rate in an attempt to boost the country’s economy again, but the grand scheme of things seems to be going much further than that.
About six months ago, some European economists started to make a case for a cashless society, referring to some Scandinavian countries where the majority of the payments was conducted through non-cash means. Thus, they argued, there was no need to keep on working with cash, as a cashless society seemed to be working just fine. Technically and theoretically, they are right. It is much easier to just swipe a card or just tap with a cell phone to make a payment, but the real issue at hand is that you’d have to have full confidence in the financial system.
And that’s exactly where the first issues occur. The financial system in Europe isn’t as safe as one would expect it. After all, we’ve had the Greek banking crisis, a Spanish banking crisis, a Portuguese banking crisis, an Irish banking crisis, … in just the past 8 years, so why would any sane European citizen trust the banks when the entire system was on the verge of a breakdown in the past few years.
Source: voxeu.org
However, as the negative interest rate policy is becoming a serious option, a cashless society might happen faster and earlier than expected as the NIRP might collapse the banking system. In a recent enquiry, the Dutch banking group ING asked 13,000 of its clients (so that’s quite a representative group) what they would do if the interest rate on the savings and chequing accounts would turn negative. This poll was conducted in Belgium and the Netherlands, which have the highest saving rates of Europe (the Belgian banking system for instance has approximately $300B in cash on savings accounts which is quite a substantial amount for a country with a GDP that is less than 50% higher than that).
Source: ibidem
The results of the poll were quite interesting, as approximately 80% of the respondents said they would withdraw cash from the bank and either put it under the mattress (literally) or in vaults. Should this happen, the entire financial system would collapse.
Source: ibidem
Even assuming just 15% of the total amount of cash on the accounts would be withdrawn, this would result in a total cash outflow of $45B, and it’s unlikely the banking system would be able to handle this without having to deal with severe consequences. And we don’t even dare to imagine what would happen if 25% would be withdrawn. Or 40%. The snowball-effect would be huge and devastating, resulting in a deteriorating capital position of almost any bank in the Eurozone as they are all intertwined anyway.
What does this have to do with the recent ‘test balloons’ to bring up the subject of a cashless society? From the (central) banks’ perspective it would be very smart to first push forward to realize a cashless society to close that escape route for the Europeans. If you can’t withdraw any cash, then everybody will be trapped in the system of a negative interest rate and there will be no way to escape it.
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