A US economic snapshot in the middle of 2018 — not all is well

Let’s take a quick look at the US economy and where it may be headed in the near term.

While unemployment is said to be very low, the rate is still artificially low due to the uncounted Americans no longer in the workforce because of chronic joblessness.

Producer and consumer pricing are rising — not because of tariffs as the left will cite — due to the excessive capital washing out of the stock and bond market. The stock price run up over the last three years was engineered by the Federal Reserve’s quantitative easing capital finding safe haven in stocks and bonds.

Now that capital is exiting the security markets and finding better treatment with private equity firms that are buying out manufacturing and consumer brand companies, which drives up prices in order for the new owner — the PE firm — to make money from the investment through putting the brands deeper into debt to make special payments to them.

So this capital is not from the average American, but the repercussions are being felt by these average Americans through higher prices. Look at the biggest PE firms raising record amounts for new funds.

Taking a quick look at the US bond market to see where the real problems are. The difference in return rates between lending Uncle Sam money over 2 years versus 30 years.

The 2-year return is 2.61%, the 30-year interest rate is 2.96%. The delta between these two 0.35 percentage points return over 28 years. This is what is called a flat yield curve, since the interest curve is very shallow.

In the environment of the bond market capital is not treated well at all with artificially low returns, so this is pushing additional big money out of the public capital markets and into the private funding markets.

What is the down side of this move? Look at the number of bankruptcies in the retailing sector over the last year. These stores: Toys R US and a dozen or so women’s apparel stores are all closed or limping along because these companies were so leveraged up on debt that they could not pay off their huge debt levels imposed on them by their private equity owners.

But don’t worry about these PE firms because they took their money upfront and more than likely owed some of the companies bonds, which were paid off in the bankruptcy.

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Equities see "known unknowns" as bullish

Let’s say it is safe to say that the level of animosity in Washington will lead to divided government for the foreseeable future, despite the Republicans holding a sliver of power within Congress.

That premise can only be good for equities as investors see gridlock as a means to remain with the status quo. Markets hate the unknown, but today we have the “known unknowns” through partisan inaction.

As I wrote earlier the White House tax cuts will probably not come up until late this year or early next year since the House wants these to come due closer to the mid-year elections in 2018.

I believe the infrastructure spending may come a little sooner since that cash will take on the additional steps of creating jobs and hiring people before it becomes salary and then works its way into the economy through consumer spending.

If this economy is ever going to see even 3% GDP growth in the next few years, then the velocity of the money supply will need to be accelerated.

Both tax cuts and middle-class earning level hiring — as oppose to Fed propping up banks through bond purchases ie: Quantitative Easing — should give a larger boost to growth since it bypasses the gatekeepers in Washington.

The Fed through its closed-loop QE system — where bank “profits” through the Fed’s bond buying was not released or trickled down to the general population through additional lending or by chance interest on savings — restrained velocity for fear of inflation if the $3 trillion or so it created hit Main Street.

So none of those measures will come out of Washington anytime soon, but in the meanwhile stocks will trade in a range from here for the next few months as bickering and finger-pointing and of course Tweets fly on who is wrong or corrupt.

Kuroda has no yen to ease

This is what equity markets look like when central bankers run out of bullets.

The Japanese central bank did nothing with rates and stood pat on its QE level and stocks around the world sold off hard.

The Nikkei sold off 3.6% and major Europe exchanges are down between 1% ans 2%. Dow futures are down 0.8% in pre-market.

Japan followed the Federal Reserve in jawboning the markets about future easing, but had worse results.

The yen strengthened on the lack of additional easing, which is the driver of stock plunge.

Bank of Japan chief Kuroda said afterward that he was prepared to go further down the negative interest rate road if needed.

This negative rate environment is a real-time experiment, which most economist support because there is little left for central bankers to do.

Providing cheaper and cheaper liquidity into a broken banking system has been a boon for traders using cheaper yen to buy global equities, but has done little to boost economic growth.


As I wrote on Monday, the first look at Q1 2016 GDP came in at 0.5%. This number has little to say about the US economy since it will be revised down in the following two months.

The Obama administration was looking for a “robust” headline number (this is the best you can get from this ailing economy) for Hillary Clinton to continue running on his policy.

 

QE is coming to prop up the Potemkin bank balance sheets

If we take the position that the world’s central bankers have no answers on how to right what their policies has wrecked on the economic welfare on the globe, then we have a sense of what is driving the markets.

The amount of debt created from between 2008 and 2015 through various easing programs, which created trillions in electronic assets placed on banks balance sheets that cannot be used for private industry growth.

These trillions of 1s and zeros created by the Federal Reserve, the ECB and the Japanese central bank were placed on the banks balance sheets to keep the ATMs operating.

The fictitious cash was used by the banks to buy government debt and used by the banks as collateral against the toxic non-performing paper that created the Great recession in 2008.

These Potemkin bank balance sheets look good enough for stress tests run by the same people who created the false documents, but there are no assets that can be used for lending to allow the global economy to grow.

If the vast amount of treasury bonds and notes on the banks’ balance sheets were to be “sterilized” or put to work in the economy, then the runaway inflation some central bankers fear would be realized.

The false notion that the Dodd-Frank financial regulations law took away the ability for banks to lend is often cited as the devil behind the handcuffs put on banks.

Much of Dodd-Frank has not been implemented due to Washington’s stagnant political malaise. However the Federal Reserve — who again created these fictitious balance sheets — now oversee more of the banks lending activities and the stress tests.

So to say the banks are hamstrung by regulations is not factually correct. The are constrained by the quality of their balance sheets to the extent that the debt sitting there is considered an asset for all purposes except being able to be utilized for economic good.

And although no one on Wall Street will talk about this, it is apparent in their actions. While the Fed has raised the Fed funds rate from 0.25% to 0.5% the effective rate on the Street is below that range signaling that the bond mavens know much more than the public.

So going forward as the bonds that sit on the bank’s balance sheets run off and mature, the banks return that cash to the Fed, thereby deteriorating the balance sheets further. This is why the banking stock index has fallen roughly 22% so far this year.

Make no mistake there will be further easing in 2016 if for no other reason that to prop up these ailing balance sheets again with fresh government debt.

The numbers behind the greatest wealth transfer ever

A new Oxfam International study confirms my Great Fleecing article from Sunday’s New York Post.

The result of the greatest transfer of the wealth the world has ever seen, facilitated by the Federal Reserve and its Quantitative Easing programs under President Obama, shows the richest 1% now have more wealth than the rest of the world combined.

The study released this week to coincide with the World Economic Forum in Davos, Switzerland, where many of the 1% congregate, also states that just 62 individuals held the same amount of wealth as 3.6 billion people, about half the world’s population.

“Power and privilege are being used to rig the system to increase the gap between the richest and the rest to levels we have not seen before. Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate,” said Raymond C. Offenheiser, president of Oxfam America, in a statement.

Here are some dramatic milestones reached since Fed chief Ben Bernanke began his wealth transfer program in December 2008:

  • In 2015, just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity. This figure is down from 388 individuals as recently as 2010.
  • The wealth of the richest 62 people has risen by 44% in the five years since 2010 – that’s an increase of more than half a trillion dollars, to $1.76 trillion.
  • Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period – a drop of 41%.

So as I said in the article, “these actions — to the greatest extent — are the reasons the American middle class has been decimated and no longer makes up the majority of the US population.”

And all this wealth transfer was made possible by the Obama Administration, not a Republican White House.

The president’s economic advisers working through the Federal Reserve under Bernanke and then Janet Yellen bailed out the banks with more than $4.5 trillion in cash, but left out any wage growth or access to capital that may have lifted the struggling middle class and lower economic classes to reach for the American Dream.

As a matter of fact, the White House actually made matters worse for the middle class, as it gave Wall Street an out on the toxic mortgages it wrote, while swiping from US homeowners almost half the value in their biggest investment — their homes.

When the Wall Street banks did a mortgage modification under Obama’s Home Affordable Refinance Program (HARP) program, the principle was not cut to reflect current value, the rate was simply tweaked down slightly. And the banks collected big fees from the government to get themselves off the hook.

So the 62 richest people in the world, Warren Buffett for example, made huge profits off of investing in Goldman Sachs and Wells Fargo beginning in 2009.

I could go down the list and a good majority profited handsomely from this Wall Street bailout, but quite frankly it’s too sickening.

So get your children out there working, because they have to pay off this debt. This way by next year only 40 of the richest people in the world have the same amount of cash as you and I.