- Britain: A Functioning Democracy It's Not
We discussed the farce that was/is the UK election last night… consider…
Or more clear…
- SNP + LibDems 4.3 million votes = 64 Seats
- UKIP 3.8 million votes = 1 Seat
The election results under a fair voting system: CON 244 LAB 201 UKIP 83 LD 52 SNP 31 Greens 25 DUP 3 PC 3 SF 3 UUP 2 SDLP 2 Alliance 1
— Electoral Reform Soc (@electoralreform) May 8, 2015
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And now The Automatic Earth's Raul Ilargi Meijer dives deeper into the fact "the people have not spoken…"
We at the Automatic Earth always try to steer clear of elections as much as possible, because there are no functioning democracies left in the west -no more than there are functioning markets-, and no journalists reporting on them either. Interesting question, by the way: how can a journalist report on a democracy that isn’t there? And where in that setting does news turn to mere opinion, and where does opinion then become news ?
Still, of course we caught some bits of the UK elections along the way regardless. The decisive moment for us must have been when Jeremy Paxman interviewed David Cameron at the BBC, and asked him if he knew how many foodbanks had been added in Britain since he took office 5 years ago.
Cameron, well duh obviously, had no idea, and instead of answering the question he started a flowery discourse praising the many volunteers who work in the foodbanks he didn’t know existed. Paxman cut him short and said there were 66 when Cameron came to power, and 421 now. Apparently in Britain, volunteers are needed to take care of the needy, they’re not going to pay people to do that. You would think that takes care of Cameron’s candidacy, but you couldn’t be more wrong.
At least Paxman seemed to try, but interviews like his should take place on the eve of an election, not 6 weeks before them like this one. That leaves far too much time for spin doctors to repair damage done by their candidate’s ignorance and gullibility. It’s crazy enough that party leaders can refuse to discuss each other, let alone the public, in public. Then again, that too would only be significant if there would be an actual democracy in Britain.
As things are, they might as well have put the royal baby in charge as soon as she was born, or for that matter the newborn macaque in Japan that ‘stole’ her name (at least there was an honest public ballot for that). Or perhaps the adorable little monkey can take over polling in the UK, since we can’t imagine any British pollsters still being employed tomorrow morning, not with the degrees to which they missed any and all election outcomes today.
A whole bunch of ‘leaders’ will leave too, but there’s plenty of shades of dull grey humanoids waiting in the wings to replace them. Besides, though Nigel Farage has often been dead on in describing, in the European Parliament, the inherent failures of Brussels, at home he’s never been more than a sad lost clown. I had to think hard about LibDem Clegg’s first name, even needed to look it up -it’s Nick- , and that sort of says it all: he would do well to change his name to Bland.
And perhaps Ed Milibland should do the same. Can anyone ever really have believed that this lady’s underwear salesman could have won this election? Or did they all just fudge the numbers so they had material to print? Ed Milibland never stood a chance. And Russell Bland can now go lick his wounds from supporting the guy, and no, Russell, saying now that you’re just a comedian won’t do the trick. You’ve been tainted. If it’s any consolation, you screwed up the same way Springsteen did when he played Obama’s support act. No surrender, no excuses.
Milibland, by the way, had one last no-no to offer in stepping down. He tweeted: “I am grateful to the people who worked on our campaign and for the campaign they ran. The responsibility for the result is mine alone.” Sorry, boyo, but that just ain’t so. The responsibility lies at least as much with the people who put you in the leader’s chair that doesn’t fit you, and with those who kept you in that chair throughout the campaign.
All Brits should feel blessed that they’re not in America, where these campaigns, which are equally hollow and devoid of democratic principles, last ten times as long. If your blessings are few, do count them.
But then, we all get what we deserve.
If the Brits want to be governed and gutted by the same people who raised the number of foodbanks the way they have, by a factor of seven in five years, and who fabricated the pretense of a functioning economy by blowing the biggest bubble in British history in selling off London town to monopoly money printing Chinese, Russian expat oligarchs and other such impeccable and blameless world citizens, if that’s what the Brits want, then let them have it.
One things’s for sure: Cameron and his ilk, now that they have a majority, will let them have it. And then some. In reality, though, even if they deserve what they get, there’s no vox populi here: the people have not spoken, the people have done what the press told them to do. Like in so many countries, there effectively is no press anymore in Britain, at least not in the sense that we used to knowl; the press no longer asks questions. Which begs yet another question: what is first to go, the media or the democratic values?
Peter Yukes wrote this for Politico just before the election:
For months polls have put Conservatives and Labour close with about third of the vote each, and smaller parties destined to hold some balance of power. But there has been no balance in the papers. Tracked by Election Unspun, the coverage has been unremittingly hostile to Ed Miliband, the Labour challenger, with national newspapers backing the Conservative incumbent, David Cameron over Labour by a ratio of five to one.
Veteran US campaign manager David Axelrod finds this politicization of the print media one of the most salient differences with the US. “I’ve worked in aggressive media environments before,” he told POLITICO, “but not this partisan.” Axelrod may have ax to grind as he advises the Labour Party, but even a conservative commentator and long-serving lieutenant of Rupert Murdoch has been shocked. “Tomorrow’s front pages show British press at partisan worst,” Andrew Neil, former editor of the Sunday Times rued. “All pretense of separation between news and opinion gone, even in ‘qualities.’”
Excuse me, but how is ‘this politicization of the print media one of the most salient differences with the US’? Which US paper has not long been grossly politicized? It’s a shame Yukes devalues his article with such statements.
And that’s the difference. The whole newspaper industry seems to be affected by the tabloid tendentiousness trade-marked by Murdoch’s best-selling the Sun when it roared, in 1992, “It’s the Sun Wot Won It.” The Daily Mail specializes in political character assassination and the ‘Red Ed’ tag was predictable. But when the paper went on from attacking Miliband’s dead father to a hit-job on his wife’s appearance, the politics of personal destruction sank from gutter to sewer.
In this precipitous race to the bottom, perhaps the Daily Telegraph had the steepest fall. Known as a bastion of the Tory thinking, it had long been respected for separating fact from comment. During this election cycle is was caught sourcing its front pages direct from Conservative Campaign HQ, seeming to confirm the parting words of its senior political commentator, Peter Oborne, that it was intent on committing “a fraud on its readership.”
Well, at least it’s no surprise that the Telegraph does what it’s always done. Nobody expects them to be impartial.
The paper of record, The Times, fared a little better, in that there has been two vaguely positive front pages about Miliband — compared to 18 for Cameron.Meanwhile, the publication that arose in rebellion to Murdoch’s acquisition of the Times in the 80s, The Independent, shocked most its staff and readership by backing a continued Lib Dem/Tory Coalition. Reports said the endorsement was a ‘diktat’ from the wealthy Russian-born owner, Evgeny Lebedev, causing many to mock its original ad slogan “The Independent: It’s Not. Are You?” or renaming it ‘The Dependent’.
Even the sober, tight-lipped Financial Times, which once supported Blair and endorsed Obama, lost credibility. The paper said it backed another Conservative-led coalition because Ed Miliband was too “preoccupied with inequality.” But that magisterial tone was undermined when it emerged the leader writer, Jonathan Ford, was pictured in the notorious 1987 photo of Oxford’s elite hard drinking Bullingdon Club next to the Tory mayor Boris Johnson and just below David Cameron.
A bigger problem would seem to be that Milibland can’t have been far from that club; he attended much of the same educational institutions the other ‘leader elites’ did. Yukes is on to something, but he’s missing the point.
Therein lies the problem, and an indication the newspaper world is a microcosm of a wider malaise. The Conservative politician John Biffen once said “whenever you find a senior politician and a powerful media owner in private conclave, you can be certain that the aims of healthy, plural democracy are not being well-served.” This election that conclave looks like an exclusive club.
Rarely have the economic interests of the handful of wealthy men who own most the press (nine men own 90% of all national and regional titles) appeared so brutally transparent. Most of the conservatives among them don’t like Cameron’s modernizing project, or the fact he looks set to fail to get a majority for a second time. But they fear Miliband with a passion because he threatens their power in several ways.
They fear(ed) Milibland? I don’t believe that for a second. I think it’s much more likely that they’ve all intentionally exaggerated Milibland’s poll numbers to make it look like there was an actual race going on. That they were only too happy to have a guy run against theirs that everybody could see from miles away would never be a contender (maybe if his first name would have been Marlon? or Stanley?)
Plus they have the outdated and somewhat inane electoral system, in which for instance the Green Party got – roughly – one million votes and 1 seat, while the Conservatives accumulated 10 million votes and 331 seats. If you can work that system in your favor, you’re half way home. Moreover, if and when you hire the cream of the crop American spin doctors, as the Cons have certainly done, who love purchasing media, you’re way past halfway.
The system can certainly be given some sort of name, but a functioning democracy it’s not. If anything, a democracy is “A system of government in which power is vested in the people”. Makes us wonder how many clients of the 421 foodbanks and counting have voted Conservative and figured they were proudly doing their democratic duty.
- Caught On Tape: Stunned Reporter Grills State Department Why Hillary's Breaches Won't Be Investigated
In the past several weeks, not a day has passed without a new scandal surfacing revealing Clinton’s lack of judgment whether it involves her abuse of email protocol, or some previously undisclosed financial relation between either Hillary Clinton or the Clinton foundation and an outside donor. The most egregious revelation took place a few days ago when it emerged that the Democratic presidential candidate had breached her agreement with the White House to name all foundation donors during her tenure as secretary of state.
Specifically, as Reuters reported, Clinton had promised the federal government that the Clinton Foundation and its associated charities would name all donors annually while she was the nation’s top diplomat. “She also promised that the charities would let the State Department’s ethics office review beforehand any proposed new foreign governments donations.”
In March, the charities confirmed to Reuters for the first time that they had not complied with those pledges for most of Clinton’s four years at the State Department.
The implication is that foreigners banned from donating to U.S. political campaigns could and likely did curry favor with her by giving to the charity that bears her name. The charities accepted new donations from at least six foreign governments while Clinton was secretary of state: Switzerland, Papua New Guinea, Swaziland, Rwanda, Sweden and Algeria. And, of course, Ukraine.
The charities never told the State Department about the new and increased donations. In two instances, the charities said this was the result of “oversights”; for the other six, they said those donations were exceptions to the agreement for various reasons.
The charities also stopped publishing full donor lists from 2010 onwards; the annually updated list omitted donors to the foundation’s flagship health initiative.
But the most shocking development took place yesterday when the US State Department, via spokesman Jeff Rathke, told reporters that while it “regrets” that it did not get to review the new foreign government funding, it does not plan to look into the matter further, spokesman Jeff Rathke said on Thursday.
“The State Department has not and does not intend to initiate a formal review or to make a retroactive judgment about items that were not submitted during Secretary Clinton’s tenure,” Rathke told reporters.
And while the objective, unbiased media would have been up in arms had this gross abuse of government privileges and clear pandering to foreign interests occurred under a Republican candidate, there has been barely a peep from said media as far as Hillary’s involvement is concerned.
One person, however, did speak up: that was AP’s Matt Lee who asked why the State Department wouldn’t investigate further to determine if the tens of millions of dollars in donations had influenced her, and thus the US State Department’s, decisions in the 2011-2013 period.
Rathke’s response: there is no evidence that these donations to the Clinton charities had any effect on Clinton’s decisions. “We’re not going to make a retroactive review on these cases and we will not make a retroactive judgment,” he said.
Of course, the circular logic involved is so twisted even hardened, conflicted government apparatchiks would not fail to recognize that there is no way to make a determination if said previously undisclosed donations had influenced her decisions without a further inquiry, an inquiry the State Department refuses to make because it assumes that it would find nothing.
Lee quickly noted this told Rathke that “the reason you are not aware of anything is because the building is refusing to go back and look at it to see if there is anything that might raise a flag.”
What followed was 6 minutes of squirming that would make even the most hard-core Clinton supporter blush red with embarrassment at the farce and the corruption evident at every single level of government, especially when certain pre-approved (by Wall Street) candidates are involved.
The full exchange below.
- Abenomics Is 2 Years Old – Households Even Deeper In The Hole
Submitted by Jeffrey Snider via Alhambra Investment Partners,
For Japan, the comparisons for March 2015 estimates are going to be tough as the yearly look-back aligns to March 2014 and the great surge prior to the tax increase. The distortive base effects make it more difficult to figure out just how little was gained (or lost) in spending and income. So the large granular declines are not suggestive of a massive downward turn, but they aren’t necessarily showing any recovery either. That is especially true in real terms where a reduction in official “inflation” rates has bolstered that side of the ledger.
I think we can get a sense of how things are still declining, though, from some of the subcomponents less aroused by the tax increase. For instance, household spending on food continues to be highly negative with a much smaller tax footprint for the yearly comparison.
In terms of spending on utilities, there was no tax change applicable so the general direction in spending is not distorted by the fiscal shift. Instead, the direction is all economics, specifically monetary economics.
The reason for that is income, or the very distinct lack of it. The reason why the tax increase was such a major alteration in the flow of spending was that incomes have been sinking steadily, including periods of nominal declines, since QQE began. In other words, QQE has accomplished the exact opposite of its stated purpose by bringing about inflation that did nothing toward furthering economic gains in labor and wages, instead blatantly robbing Japanese consumers of purchasing power – and thus proclivity to spend any actual nominal gains when they happen to appear.
This seems to be the common thread in every region suffering the blight of QE in all its forms, as there is an intentional narrowness in the standards by which its practitioners wish (demand) to be judged. In the US, as noted earlier today, that has meant a singular focus on the unemployment rate or the Establishment Survey but only from 2010 forward as if the relative change full cycle was not relevant. In Japan, economists only see the second derivative changes from April 2014 forward, measuring only that spending or income isn’t nearly as bad as that transition point.
The reason for that is obvious, because on a longer-term basis QE and QQE are utter failures. Japan has been at it far longer than the US, dating all the way back to March 19, 2001. While the Bank of Japan has not been in constant disruptive mode, it has been far more than it hasn’t.
Economists only talk about the far right hand side of the chart immediately above, and see “recovery” out of the fact that spending isn’t declining as fast because “inflation” has backed off contrary to what the BoJ actually wishes to see. So in response, the BoJ threatens and whispers about doing more of the thing that pushed spending so low to begin with.
But what is also plain is that from almost the very start of the very first QE there is almost a straight line of descent in household “demand” despite the clear monetary intent to conjure it. Again, for all the effort and yen created and expended in the pursuit of “aggregate demand” there is a shocking lack of it. The final line into QQE has only heightened that very obvious negative deflection.
You could even make the case that spending had begun to self-correct out of the earthquake/tsunami ravages in 2011, punctuated and deterred once more by the BoJ that just won’t sit still long enough for anything to actually bloom (economically speaking). It has become, nowadays, habitual as monetarists are taking the wrong lessons from all this.
I think that point is emphasized further and quite well by the longer-term trend in Japanese income. After the initial drop past QE1, incomes in Japan (real terms) were almost stable, interrupted only by global recession. That is, of course, deficient on its own, but at least there wasn’t a tendency toward making it obviously worse through monetary means; that all changed with QQE.
Notice the trends in both income and spending moved downward not at the inception of the tax increase but at the very start of QQE itself. Science is the study of observation whereas monetary economics has become the science of avoiding them. If economists want to see recovery in that they should be honest about so redefining the term. BoJ is two years into QQE and the hole that has been dug for the Japanese people is enormous, so it will be extremely difficult at this point just to get back to even without ever accounting for lost opportunity for compounding and time. Maybe that doesn’t count as the typical, natural recession but it is nothing short of a man-made disaster.
- American National Pride Plunges To 30th In The World
Only 56% of Americans said they were “very proud” of their nation, according to World Values Survey data, down from over 62% in 2009 (71.1% in 2004, and 77% in 1999). Behind nations such as Libya, Nigeria, Egypt, and Poland, ‘exceptional’ America now ranks only 30th in the world for national pride…
Source: @MaxCRoser via @ValuesStudies
- Nomi Prins: The Clintons & Their Banker Friends
In the coming months, however many hours Clinton spends introducing herself to voters in small-town America, she will spend hundreds more raising money in four-star hotels and multimillion-dollar homes around the nation. The question is: "Can Clinton claim to stand for 'everyday Americans,' while hauling in huge sums of cash from the very wealthiest of us?" This much cannot be disputed: Clinton's connections to the financiers and bankers of this country – and this country's campaigns – run deep. As Nomi Prins questions, who counts more to such a candidate, the person you met over that chicken burrito bowl or the Citigroup partner you met over crudités and caviar?
The Clintons and Their Banker Friends
The Wall Street Connection (1992 to 2016)
[This piece has been adapted and updated by Nomi Prins from chapters 18 and 19 of her book All the Presidents' Bankers: The Hidden Alliances that Drive American Power, just out in paperback (Nation Books).]The past, especially the political past, doesn’t just provide clues to the present. In the realm of the presidency and Wall Street, it provides an ongoing pathway for political-financial relationships and policies that remain a threat to the American economy going forward.
When Hillary Clinton video-announced her bid for the Oval Office, she claimed she wanted to be a “champion” for the American people. Since then, she has attempted to recast herself as a populist and distance herself from some of the policies of her husband. But Bill Clinton did not become president without sharing the friendships, associations, and ideologies of the elite banking sect, nor will Hillary Clinton. Such relationships run too deep and are too longstanding.
To grasp the dangers that the Big Six banks (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley) presently pose to the financial stability of our nation and the world, you need to understand their history in Washington, starting with the Clinton years of the 1990s. Alliances established then (not exclusively with Democrats, since bankers are bipartisan by nature) enabled these firms to become as politically powerful as they are today and to exert that power over an unprecedented amount of capital. Rest assured of one thing: their past and present CEOs will prove as critical in backing a Hillary Clinton presidency as they were in enabling her husband’s years in office.
In return, today’s titans of finance and their hordes of lobbyists, more than half of whom held prior positions in the government, exact certain requirements from Washington. They need to know that a safety net or bailout will always be available in times of emergency and that the regulatory road will be open to whatever practices they deem most profitable.
Whatever her populist pitch may be in the 2016 campaign — and she will have one — note that, in all these years, Hillary Clinton has not publicly condemned Wall Street or any individual Wall Street leader. Though she may, in the heat of that campaign, raise the bad-apples or bad-situation explanation for Wall Street’s role in the financial crisis of 2007-2008, rest assured that she will not point fingers at her friends. She will not chastise the people that pay her hundreds of thousands of dollars a pop to speak or the ones that have long shared the social circles in which she and her husband move. She is an undeniable component of the Clinton political-financial legacy that came to national fruition more than 23 years ago, which is why looking back at the history of the first Clinton presidency is likely to tell you so much about the shape and character of the possible second one.
The 1992 Election and the Rise of Bill Clinton
Challenging President George H.W. Bush, who was seeking a second term, Arkansas Governor Bill Clinton announced he would seek the 1992 Democratic nomination for the presidency on October 2, 1991. The upcoming presidential election would not, however, turn out to alter the path of mergers or White House support for deregulation that was already in play one iota.
First, though, Clinton needed money. A consummate fundraiser in his home state, he cleverly amassed backing and established early alliances with Wall Street. One of his key supporters would later change American banking forever. As Clinton put it, he received “invaluable early support” from Ken Brody, a Goldman Sachs executive seeking to delve into Democratic politics. Brody took Clinton “to a dinner with high-powered New York businesspeople, including Bob Rubin, whose tightly reasoned arguments for a new economic policy,” Clinton later wrote, “made a lasting impression on me.”
The battle for the White House kicked into high gear the following fall. William Schreyer, chairman and CEO of Merrill Lynch, showed his support for Bush by giving the maximum personal contribution to his campaign committee permitted by law: $1,000. But he wanted to do more. So when one of Bush’s fundraisers solicited him to contribute to the Republican National Committee’s nonfederal, or “soft money,” account, Schreyer made a $100,000 donation.
The bankers’ alliances remained divided among the candidates at first, as they considered which man would be best for their own power trajectories, but their donations were plentiful: mortgage and broker company contributions were $1.2 million; 46% to the GOP and 54% to the Democrats. Commercial banks poured in $14.8 million to the 1992 campaigns at a near 50-50 split.
Clinton, like every good Democrat, campaigned publicly against the bankers: “It’s time to end the greed that consumed Wall Street and ruined our S&Ls [Savings and Loans] in the last decade,” he said. But equally, he had no qualms about taking money from the financial sector. In the early months of his campaign, BusinessWeek estimated that he received $2 million of his initial $8.5 million in contributions from New York, under the care of Ken Brody.
“If I had a Ken Brody working for me in every state, I’d be like the Maytag man with nothing to do,” said Rahm Emanuel, who ran Clinton’s nationwide fundraising committee and later became Barack Obama’s chief of staff. Wealthy donors and prospective fundraisers were invited to a select series of intimate meetings with Clinton at the plush Manhattan office of the prestigious private equity firm Blackstone.
Robert Rubin Comes to Washington
Clinton knew that embracing the bankers would help him get things done in Washington, and what he wanted to get done dovetailed nicely with their desires anyway. To facilitate his policies and maintain ties to Wall Street, he selected a man who had been instrumental to his campaign, Robert Rubin, as his economic adviser.
In 1980, Rubin had landed on Goldman Sachs' management committee alongside fellow Democrat Jon Corzine. A decade later, Rubin and Stephen Friedman were appointed cochairmen of Goldman Sachs. Rubin’s political aspirations met an appropriate opportunity when Clinton captured the White House.
On January 25, 1993, Clinton appointed him as assistant to the president for economic policy. Shortly thereafter, the president created a unique role for his comrade, head of the newly created National Economic Council. “I asked Bob Rubin to take on a new job,” Clinton later wrote, “coordinating economic policy in the White House as Chairman of the National Economic Council, which would operate in much the same way the National Security Council did, bringing all the relevant agencies together to formulate and implement policy… [I]f he could balance all of [Goldman Sachs’] egos and interests, he had a good chance to succeed with the job.” (Ten years later, President George W. Bush gave the same position to Rubin’s old partner, Friedman.)
Back at Goldman, Jon Corzine, co-head of fixed income, and Henry Paulson, co-head of investment banking, were ascending through the ranks. They became co-CEOs when Friedman retired at the end of 1994.
Those two men were the perfect bipartisan duo. Corzine was a staunch Democrat serving on the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York (from 1989 to 1999). He would co-chair a presidential commission for Clinton on capital budgeting between 1997 and 1999, while serving in a key role on the Borrowing Advisory Committee of the Treasury Department. Paulson was a well connected Republican and Harvard graduate who had served on the White House Domestic Council as staff assistant to the president in the Nixon administration.
Bankers Forge Ahead
By May 1995, Rubin was impatiently warning Congress that the Glass-Steagall Act could “conceivably impede safety and soundness by limiting revenue diversification.” Banking deregulation was then inching through Congress. As they had during the previous Bush administration, both the House and Senate Banking Committees had approved separate versions of legislation to repeal Glass-Steagall, the 1933 Act passed by the administration of Franklin Delano Roosevelt that had separated deposit-taking and lending or “commercial” bank activities from speculative or “investment bank” activities, such as securities creation and trading. Conference negotiations had fallen apart, though, and the effort was stalled.
By 1996, however, other industries, representing core clients of the banking sector, were already being deregulated. On February 8, 1996, Clinton signed the Telecom Act, which killed many independent and smaller broadcasting companies by opening a national market for “cross-ownership.” The result was mass mergers in that sector advised by banks.
Deregulation of companies that could transport energy across state lines came next. Before such deregulation, state commissions had regulated companies that owned power plants and transmission lines, which worked together to distribute power. Afterward, these could be divided and effectively traded without uniform regulation or responsibility to regional customers. This would lead to blackouts in California and a slew of energy derivatives, as well as trades at firms such as Enron that used the energy business as a front for fraudulent deals.
The number of mergers and stock and debt issuances ballooned on the back of all the deregulation that eliminated barriers that had kept companies separated. As industries consolidated, they also ramped up their complex transactions and special purpose vehicles (off-balance-sheet, offshore constructions tailored by the banking community to hide the true nature of their debts and shield their profits from taxes). Bankers kicked into overdrive to generate fees and create related deals. Many of these blew up in the early 2000s in a spate of scandals and bankruptcies, causing an earlier millennium recession.
Meanwhile, though, bankers plowed ahead with their advisory services, speculative enterprises, and deregulation pursuits. President Clinton and his team would soon provide them an epic gift, all in the name of U.S. global power and competitiveness. Robert Rubin would steer the White House ship to that goal.
On February 12, 1999, Rubin found a fresh angle to argue on behalf of banking deregulation. He addressed the House Committee on Banking and Financial Services, claiming that, “the problem U.S. financial services firms face abroad is more one of access than lack of competitiveness.”
He was referring to the European banks’ increasing control of distribution channels into the European institutional and retail client base. Unlike U.S. commercial banks, European banks had no restrictions keeping them from buying and teaming up with U.S. or other securities firms and investment banks to create or distribute their products. He did not appear concerned about the destruction caused by sizeable financial bets throughout Europe. The international competitiveness argument allowed him to focus the committee on what needed to be done domestically in the banking sector to remain competitive.
Rubin stressed the necessity of HR 665, the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, that was officially introduced on February 10, 1999. He said it took “fundamental actions to modernize our financial system by repealing the Glass-Steagall Act prohibitions on banks affiliating with securities firms and repealing the Bank Holding Company Act prohibitions on insurance underwriting.”
The Gramm-Leach-Bliley Act Marches Forward
On February 24, 1999, in more testimony before the Senate Banking Committee, Rubin pushed for fewer prohibitions on bank affiliates that wanted to perform the same functions as their larger bank holding company, once the different types of financial firms could legally merge. That minor distinction would enable subsidiaries to place all sorts of bets and house all sorts of junk under the false premise that they had the same capital beneath them as their parent. The idea that a subsidiary’s problems can’t taint or destroy the host, or bank holding company, or create “catastrophic” risk, is a myth perpetuated by bankers and political enablers that continues to this day.
Rubin had no qualms with mega-consolidations across multiple service lines. His real problems were those of his banker friends, which lay with the financial modernization bill’s “prohibition on the use of subsidiaries by larger banks.” The bankers wanted the right to establish off-book subsidiaries where they could hide risks, and profits, as needed.
Again, Rubin decided to use the notion of remaining competitive with foreign banks to make his point. This technicality was “unacceptable to the administration,” he said, not least because “foreign banks underwrite and deal in securities through subsidiaries in the United States, and U.S. banks [already] conduct securities and merchant banking activities abroad through so-called Edge subsidiaries.” Rubin got his way. These off-book, risky, and barely regulated subsidiaries would be at the forefront of the 2008 financial crisis.
On March 1, 1999, Senator Phil Gramm released a final draft of the Financial Services Modernization Act of 1999 and scheduled committee consideration for March 4th. A bevy of excited financial titans who were close to Clinton, including Travelers CEO Sandy Weill, Bank of America CEO, Hugh McColl, and American Express CEO Harvey Golub, called for “swift congressional action.”
The Quintessential Revolving-Door Man
The stock market continued its meteoric rise in anticipation of a banker-friendly conclusion to the legislation that would deregulate their industry. Rising consumer confidence reflected the nation’s fondness for the markets and lack of empathy with the rest of the world’s economic plight. On March 29, 1999, the Dow Jones Industrial Average closed above 10,000 for the first time. Six weeks later, on May 6th, the Financial Services Modernization Act passed the Senate. It legalized, after the fact, the merger that created the nation’s biggest bank. Citigroup, the marriage of Citibank and Travelers, had been finalized the previous October.
It was not until that point that one of Glass-Steagall’s main assassins decided to leave Washington. Six days after the bill passed the Senate, on May 12, 1999, Robert Rubin abruptly announced his resignation. As Clinton wrote, “I believed he had been the best and most important treasury secretary since Alexander Hamilton… He had played a decisive role in our efforts to restore economic growth and spread its benefits to more Americans.”
Clinton named Larry Summers to succeed Rubin. Two weeks later, BusinessWeek reported signs of trouble in merger paradise — in the form of a growing rift between John Reed, the former Chairman of Citibank, and Sandy Weill at the new Citigroup. As Reed said, “Co-CEOs are hard.” Perhaps to patch their rift, or simply to take advantage of a political opportunity, the two men enlisted a third person to join their relationship — none other than Robert Rubin.
Rubin’s resignation from Treasury became effective on July 2nd. At that time, he announced, “This almost six and a half years has been all-consuming, and I think it is time for me to go home to New York and to do whatever I’m going to do next.” Rubin became chairman of Citigroup’s executive committee and a member of the newly created “office of the chairman.” His initial annual compensation package was worth around $40 million. It was more than worth the “hit” he took when he left Goldman for the Treasury post.
Three days after the conference committee endorsed the Gramm-Leach-Bliley bill, Rubin assumed his Citigroup position, joining the institution destined to dominate the financial industry. That very same day, Reed and Weill issued a joint statement praising Washington for “liberating our financial companies from an antiquated regulatory structure,” stating that “this legislation will unleash the creativity of our industry and ensure our global competitiveness.”
On November 4th, the Senate approved the Gramm-Leach-Bliley Act by a vote of 90 to 8. (The House voted 362–57 in favor.) Critics famously referred to it as the Citigroup Authorization Act.
Mirth abounded in Clinton’s White House. “Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the twenty-first century,” Summers said. “This historic legislation will better enable American companies to compete in the new economy.”
But the happiness was misguided. Deregulating the banking industry might have helped the titans of Wall Street but not people on Main Street. The Clinton era epitomized the vast difference between appearance and reality, spin and actuality. As the decade drew to a close, Clinton basked in the glow of a lofty stock market, a budget surplus, and the passage of this key banking “modernization.” It would be revealed in the 2000s that many corporate profits of the 1990s were based on inflated evaluations, manipulation, and fraud. When Clinton left office, the gap between rich and poor was greater than it had been in 1992, and yet the Democrats heralded him as some sort of prosperity hero.
When he resigned in 1997, Robert Reich, Clinton’s labor secretary, said, “America is prospering, but the prosperity is not being widely shared, certainly not as widely shared as it once was… We have made progress in growing the economy. But growing together again must be our central goal in the future.” Instead, the growth of wealth inequality in the United States accelerated, as the men yielding the most financial power wielded it with increasingly less culpability or restriction. By 2015, that wealth or prosperity gap would stand near historic highs.
The power of the bankers increased dramatically in the wake of the repeal of Glass-Steagall. The Clinton administration had rendered twenty-first-century banking practices similar to those of the pre-1929 crash. But worse. “Modernizing” meant utilizing government-backed depositors’ funds as collateral for the creation and distribution of all types of complex securities and derivatives whose proliferation would be increasingly quick and dangerous.
Eviscerating Glass-Steagall allowed big banks to compete against Europe and also enabled them to go on a rampage: more acquisitions, greater speculation, and more risky products. The big banks used their bloated balance sheets to engage in more complex activity, while counting on customer deposits and loans as capital chips on the global betting table. Bankers used hefty trading profits and wealth to increase lobbying funds and campaign donations, creating an endless circle of influence and mutual reinforcement of boundary-less speculation, endorsed by the White House.
Deposits could be used to garner larger windfalls, just as cheap labor and commodities in developing countries were used to formulate more expensive goods for profit in the upper echelons of the global financial hierarchy. Energy and telecoms proved especially fertile ground for the investment banking fee business (and later for fraud, extensive lawsuits, and bankruptcies). Deregulation greased the wheels of complex financial instruments such as collateralized debt obligations, junk bonds, toxic assets, and unregulated derivatives.
The Glass-Steagall repeal led to unfettered derivatives growth and unstable balance sheets at commercial banks that merged with investment banks and at investment banks that preferred to remain solo but engaged in dodgier practices to remain “competitive.” In conjunction with the tight political-financial alignment and associated collaboration that began with Bush and increased under Clinton, bankers channeled the 1920s, only with more power over an immense and growing pile of global financial assets and increasingly "open” markets. In the process, accountability would evaporate.
Every bank accelerated its hunt for acquisitions and deposits to amass global influence while creating, trading, and distributing increasingly convoluted securities and derivatives. These practices would foster the kind of shaky, interconnected, and opaque financial environment that provided the backdrop and conditions leading up to the financial meltdown of 2008.
The Realities of 2016
Hillary Clinton is, of course, not her husband. But her access to his past banker alliances, amplified by the ones that she has formed herself, makes her more of a friend than an adversary to the banking industry. In her brief 2008 candidacy, all four of the New York-based Big Six banks ranked among her top 10 corporate donors. They have also contributed to the Clinton Foundation. She needs them to win, just as both Barack Obama and Bill Clinton did.
No matter what spin is used for campaigning purposes, the idea that a critical distance can be maintained between the White House and Wall Street is naïve given the multiple channels of money and favors that flow between the two. It is even more improbable, given the history of connections that Hillary Clinton has established through her associations with key bank leaders in the early 1990s, during her time as a senator from New York, and given their contributions to the Clinton foundation while she was secretary of state. At some level, the situation couldn’t be less complicated: her path aligns with that of the country’s most powerful bankers. If she becomes president, that will remain the case.
- The Hard Landing Continues: China Trade Date Disappoints Amid Weak Demand
On Thursday, Goldman suggested that the combination of soft commodity markets and the Chinese transition from investment to consumption will weigh on dry bulk trade — and by extension, on shipping rates — until at least 2020. This assessment served to validate a theme we’ve been pushing for quite some time. Namely, that although a global supply glut caused by overly optimistic assumptions about both China’s economy and about central banks’ collective ability to engineer a robust post-crisis recovery has without question weighed on shipping rates, the more fundamental problem lies on the demand side and you can’t mention sluggish demand without discussing China. Here is how we summarized the situation:
Meanwhile, we’ve exhaustively documented the laundry list of signs that point to dramtically decelerating economic growth in China, including falling metals demand, collapsing rail freight volume, slumping exports, a war on pollution that may cost the country 40% in industrial production terms, and, most recently, a demographic shift that’s set to trigger a wholesale reversal of the factors which contributed to the country’s meteoric rise. All of this means that the world’s once-reliable engine of demand is set to stall in the years ahead.
Overnight, we got still more evidence of China’s hard landing when trade data for April missed estimates across the board as exports slumped more than 6% on the heels of March’s abysmal 15% decline and imports fell 16%. The data seems to point to lackluster demand both domestically and abroad, and as BNP notes, it’s not the yuan’s dollar link that’s weighing on trade — it’s demand.
Via BNP:
The April external trade data disappointed market again. Exports growth remains in negative territory, despite the decline has to some extent narrowed. The market consensus had expected a moderate recovery of export in April, mainly due to the favourable base effect. The decline in imports growth has further deteriorated in April, which has mirrored the lacklustre domestic aggregate demand.
The export weakness was still broad based for almost all trading partners. Export to US increased by 3.1% y/y, compared to 8% decline in March. It might reflect the demand from US has slightly recovered after a soft growth Q1 momentum. The decline in export to EU narrowed to -10.4% y/y from -19% y/y in March; Exports to Japan and ASEAN countries decreased by -13.3% y/y and -6.6% y/y, respectively, from -24.8% and -9.3% in last months.
The decline in imports growth expanded to 16.1% y/y, from 12.3% drop in March. The soft international commodity prices continue to drag the import growth. In the first four months, crude oil import plunged by 43.1% y/y at value, despite the imported volume has increased by 7.8% y/y. Imports in iron ore and coal also plunged by 44.8% and 49.7%, respectively.
In first four months, the total external trade declined by -7.3% y/y, which has been significantly lower than the official external trade target for 2015 at 6%.
Net exports rose to USD 34.1bn, from an average of USD 21.1bn in the three months before.
It is clear that the correction in external trade cannot be easily explained by the CNY distortion factor. The exports would be more struggling from the soft demands from the major trade partners and deteriorating international competitiveness in the low end manufacturing sector.
And as we discussed in detail in “How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable”, it’s not as simple as devaluing the yuan to boost exports when you’ve witnessed $300 billion in capital outflows over the past four quarters alone and so we’ll leave you with the following which can be summed up as simply as “between a rock and a hard place.”
The government should already clearly realize the further downward pressure of the foreign trade. But we still maintain the view that the governments would be reluctant to allow an aggressive RMB depreciation to stimulate the export.
- MoTHeR ZiRPS ENDGaMe…
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- Guest Post: Resentful Rage – Stage-4 Of Cancerous Inequality
White America’s ugliest, uncompassionate, punitive face came to life in 1994 politics as Bill Clinton signed the incommensurable largest crime bill Congress had ever legislated: the Violent Crime Control Act; now, in retrospect, perhaps the most anti human rights legislation in modern times, not just in the US but throughout the civilized world.
Clinton reasoned signing this bill as remedy to his view that gangs and drugs had taken over the streets of America and undermined its schools. But more than Clinton’s flawed reasoning; it has been rationalized politics which has cost the nation, and continues to cost, hundreds of billions of dollars by incarcerating a third of the male black population in their prime, productive years; that, while giving police a stronger arm, inviting all too often an aggressive conduct from people in uniform already predisposed to exceed of their own accord the force required in exercising their honorable mission to protect and serve us all.
America’s uniquely irrational behavior among civilized nations, whether or not a product of our diverse multi-racial society, has not served the country well during the past two decades adding the social problems created by racial inequality to an ever-widening economic inequality among Americans that Ronald Reagan legated to us.
And as social inequality merges with economic inequality, a synergy of resentful rage is being created in cities and communities largely populated by people of color. Enter the city of Baltimore with a two-thirds black population, America’s problem-du-jour.
Unlike many other major cities in America, Baltimore does not have a song-anthem by which it can be identified. As the largest city in Maryland, and keeper of proud historic tradition, it does, however, deserve a special place, as heir to two nicknames describing the state as “Little America” and “America in Miniature.” Shouldn’t Baltimore give us a model for many, if not all, major urban centers in America?
That introduction quickly brings us to a key question: is Urban America becoming a “Land of Thugs”? The president of the United States and the mayor of Baltimore, as well as many others in government and mainstream media, seem to readily make use of that term when describing rioters and lawbreakers even when confined to property crimes. Is that what we are dealing with in Baltimore now; or in Ferguson five months ago; or in the many black communities daily throughout urban America?
Whether by art or by design, much of white America simply just doesn’t get it; and neither does our representative government, or the media. Or one would expect better choice of words than “Thugs” to describe people who at their worst, as rioters and lawbreakers, are unveiling resentful rage and not solely criminality; yet, words from a black president, Barack Obama, and by the black mayor of Baltimore, Stephanie Rawlings-Blake bring an unintended image to the reality we are living.
The attitude in much of white America appears to be in lockstep with that expressed by Texas Senator, and declared Republican candidate to the presidency, Ted Cruz, who when confronted with the riots in Baltimore said that government has the responsibility to perform its central functions – to “preserve the peace, protect the people, and serve justice.” But as complete and responsible as that statement might seem, it may prove to be at odds with the accepted democratic theme of “a government of the people, by the people, for the people.” And that government, first and foremost, should be one to serve justice… preservation of peace and protection of people are societal byproducts of a proven free and just society… not one auto-designated as free and just.
One cannot ask black Americans to abide by an evolutionary process which is unlikely to bring them the equality they deserve, socially and economically, in our plural society. If evolution is not bringing about fair and equitable results, it’s inevitable for revolution to replace evolution in the hope to bring about equality. And the leading indicator for such an upcoming change can be found in the level of resentful rage building up in black communities traumatized by punitive crime legislation and the lack of a social-economic master plan, one as comprehensive as the post-WWII Marshall Plan, that could establish a firm foundation for transforming us into a more humane and egalitarian America.
Cries are beginning to be heard, even from unlikely Republican politicians, calling for an overhaul of the criminal justice system in America. Candidate to the presidency, Hillary Clinton, seen as a smiling wife during her husband’s signing of the horrendous 1994 crime bill at the White House, seems prepared, if elected, to undo or amend one of the most shameful pieces of legislation ever enacted by a bipartisan Congress, and signed into law by her visionless husband.
A fair and humane overhaul of the criminal justice system would certainly be a good first step in our needed walk towards a more equitable society.
- Class Of 2015 Sets Student Debt Record
Having been one of the very first sources for in-depth analysis about what has become a $1.3 trillion problem, we’ve happily watched as the mainstream financial news media has gone on what seems like a student loan debt story binge over the past several months. Indeed not a day goes by without a someone else commenting on either the inexorable rise in student debt, soaring tuition rates, or the rather dismal job prospects for recent graduates.
Here’s a remarkably concise recap of everything that’s happened in the past three months. With student debt soaring out of control (and government projections suggesting the burden may grow to $3.3 trillion by 2025), the White House is assessing ways to tackle the problem even as it closes down for-profit schools costing taxpayers hundreds of millions. Low oil prices are forcing Louisiana to consider deep cuts to education funding, which, if realized would send LSU to the edge of bankruptcy. We’ve been pounding the table on delinquency rates, arguing that if deferments, forbearance, and IBR are taken into account, actual delinquencies are probably above 40%, a sentiment echoed by Moody’s who warned that $3 billion in student loan-backed paper is at risk for default. Finally, a Georgetown study shows that if you want to survive in the post-crisis world, you’ll major in petroleum engineering and if you want to go broke once the student loan checks stop coming in, you’ll major in childhood education.
With that, we bring you the latest bit of news from the world of trillion-dollar education bubbles and it comes from WSJ who notes that the class of 2015 has something to be proud of: it’s the most indebted class of all time.
Via WSJ:
The class of 2015 is reaching new heights, though perhaps not the way it had hoped.
College graduates this year are leaving school as the most indebted class ever, a title they’ll hold exclusively for all of about 12 months if current trends hold.
The average class of 2015 graduate with student-loan debt will have to pay back a little more than $35,000, according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of websites about planning and paying for college. Even adjusted for inflation, that’s still more than twice the amount borrowers had to pay back two decades earlier.
All together, total education debt–including federal and private education loans–will tally nearly $68 billion this year for graduates with a bachelor’s degree and their parents, Mr. Kantrowitz estimates, a more than 10-fold increase since 1994…
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Dear Class of 2015,
Because we recognize your plight, allow us to provide you with a bit of friendly advice as it realtes to your student loans. Once you are uncerimoniously thrown from your dorm into the less-than robust US jobs market, you will likely discover that contrary to what you were told in your economics courses, the US economy is but a shadow of its former self. Because you probably didn’t study to become a petroleum engineer, you will likely find your student debt burden to be quite onerous. The key to having it discharged is to make just enough money to stay clear of bankruptcy, but not enough to really survive above the poverty line. This is because it’s hard to have student debt discharged in the event you go completely broke. However, if your discretionary income is so small as to render you incapable of making payments, the government will start you on a program whereby a monthly payment of zero dollars counts towards the 300 “payments” you need to make to have your debt forgiven. Toe this line carefully (i.e. don’t slip up and start making too much discretionary income) and the entirety of your student debt will be forgiven in 25 short years without your ever having to pay a dime.
You’re welcome,
Zero Hedge
- Smile, Nod, Lie, & Prepare For The Reset
Submitted by Thad Beversdorf via FirstRebuttal.com,
Seems as though we have perpetual state of hedge fund conference with all those biggest and brightest men (wish I could say and women) in the world of finance. The conferences are set to provide a forum of discourse and a sharing of ideas. Surely has nothing to do with egos. Actually I’m sure it does but that’s no different from Hollywood and all of the self celebratory events they now have. This is our world, love it or leave it.
Listening to these guys today and over the past few conferences we definitely hear less euphoria but we still hear very little honesty from this crowd. Almost no one is willing to admit that the US markets have gone complete retard and are not just overbought but grossly overvalued to levels never before seen. I can’t tell you how many guys suggest and/or agree that the markets are about average relative to historic valuations.
Such a view of course is based on PE’s that have been totally synthesized by way of share buybacks and diverting capex to income. That’s it. And if these guys honestly believe that corporate performance has been strong enough to support what can only be described as the absolute best market performance ever well then I’d like to sell them my magic porcelain genie pot just full of treasure I know they appreciate.
This is going to be a short and to the point post because there isn’t much we have to do to get at the truth this time. The view that markets are anything but euphoric is simply ingenuous or ignorant. Over the past year I’ve talked quite a bit about how sales seem to have disappeared from valuation models altogether. This is factual. I’ve had a look at BMO’s economic/market outlook (2yrs) and not once did they mention sales, not one time. So the reality is that when something is very ugly we just don’t bring it up. That pretty much sums up today’s market commentary. Another example of if it’s ugly leave it out is the U6 unemployment figure. We used to get it along with the U3 and that too has disappeared. Ugly is just so unloved.
But so let’s have a look at two periods of time. First is the 7 years following the peak year of the internet boom in 2000, so ’01 through ’07. And let’s compare that period to the 7 years following the peak year of the credit boom in 2007, so ’08 through ’14. Specifically I want to look at growth in S&P sales vs. S&P price level. The only single thing that all businesses in all the world MUST have is sales. Without sales there is no business, period. One would therefore expect sales to be a topic of much discussion when it comes to market valuations. But it isn’t and this is why.
What we find is that during the internet bust recovery, real sales growth led the market higher. That is perfectly reasonable. One would expect that as real sales grow the business expands and thus future expected cash flows too would grow pushing market valuations higher. So that period is a text book model of market growth. Then we move over to the credit crisis recovery. What we find here is that real sales have yet to make it back to pre crash levels. Given that sales growth has been sluggish one would expect market valuations also leave something to be desired. Remember real sales growth led market valuations higher during the previous recovery.
However, investors this time around have decided that those average PE’s coming by way of reducing the amount of shares outstanding (by about 5%) and by diverting capex to income justify just about a 40% increase in market valuation. That’s right, while CEO’s have been maintaining average PE ratios by shrinking the business, investors have been rewarding them with record high valuations. Investors have been getting rich, C-suite managers have been getting rich and employees have been getting laid off. Sounds like a can’t lose growth strategy eh??
Now this is the point where the market cheerleaders come to the rescue shouting that U3 is back to a 5 handle! Profits have never been higher! And those things support expected future cash flow valuations to increase by 40%! The problem is that growth of earnings through contraction of the business can only last a few years before the business is gone. This means no future business and no future cash flows. So I’m not sure how one increases future cash flow expectations by 40% when the strategy is actually contracting the capacity for the business to grow. And all companies are doing it.
Bottom line is very simple. Unless you are growing sales i.e. expanding the business, any growth in cash flow is temporary. And that is really the point of all this isn’t it? Today the market place has nothing to do with expected future cash flows because nobody is in a trade long enough to be around for future cash flows. So why pay any attention to them?? Well we don’t.
So go ahead boys tell me how the market is fairly valued. Tell me that PE’s prove it. Tell me how earnings are great and that unemployment is bang on in line with a full steam ahead economy. Tell me the lackluster economic growth year on year since the big bang is just transitory pains with a bit winter thrown in. I, like you, will smile and nod, both knowing it’s a lie and both of us preparing for the reset. But let’s see how many more retirees we can keep in this thing before the bottom falls out eh? Their loss is our gain and well that’s what it’s all about ain’t it boys?
- California's "Unprecedented" Drought In Pictures
California’s drought has reached epic proportions, prompting Governor Jerry Brown and state water regulators to adopt “unprecedented” (and some say draconian) measures to counter what is perhaps the only example of a liquidity crisis more acute than that which investors face in secondary bond markets.
Cities will be forced to cut consumption by as much as 36%, a mandate that is expected to cost utilities upwards of $1 billion, lost revenue which, as we noted earlier this week, will promptly be recouped in the form of higher prices for any consumer who isn’t a MotherFracker.
So with the state preparing to crack down on “wasters” in the form of $10,000 fines, and with more than 12 million dead trees greatly increasing the chances that wildfires could spread out of control, we bring you the drought in pictures:
We’ll leave you with the following rather somber assessment from a professor of public policy at USC (via Politico):
“Politicians are paying attention, because some people — mainly the media and interest groups — are paying attention,” said Sherry Bebitch Jeffe, a professor of public policy at the University of Southern California. “But I’m not at all sure it’s really hitting home yet with the average voter. When they start to see rate increases, and fines for overuse, and brown lawns, then they will be paying a lot of attention. I think the politicians are smart to be trying to get ahead of it, because this is the new normal. We are a desert, and we should have remained a desert.”
- Dismal Data Delivers Stock-Buying Frenzy
UPDATE: After the cash close, futures have tumbled – removing all post-US-Open gains…
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With a 'record number of Americans not in the labor force' and Wholesale Inventory data that strongly indicates a recession was enough to drive stocks up near all-time highs, there appears only one clip that is appropriate…
Jobs data was all that mattered and it appears it was just crap enough to warrant moar easy money… but it is clear FX and gold/silver traders appeared to get the news early…
Volume disappeared completely again…
But Stocks were what mattered…Today was The Dow & The S&P's best in over 3 months!! on shitty data!
And here are the cash indices from yesterday's lows…
As the greatest buying panic in 3 years hit at the open…the opening TICK count was extreme to say the least…
which lifted everything green for the week (even Nasdaq briefly) – and despite the best ramping efforts Nasdaq closed the week red
Thanks to the biggest short squeeze in over 3 months…
And even with Visa's jump helping stall the leak, from the first few minutes stocks faded all day long…
NOTE: Everything is awesome because Dow>18,000; S&P >2,100; Nasdaq>5,000
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Treasuries rallied notably on the jobs data but leaked back off in the afternoon to close modestly lower in yields on the day. Yields dropped for bonds out to 7Y on the week…
The Dollar was somewhat volatile around the payrolls print but was remarkably dead today, ending the week -0.5%. The dollar is down for 4 weeks in a row for the first time since June 2013… and the worst 4 weeks since Oct 2011
Copper was the only commodity to close lower on the week with Silver up 2%. Crude scrambled back into the green after a post-Payrolls plunge…
Stocks beat Silver post-payrolls…
Crude had another crazy week… but the head-and-shoilders is clear…
Charts: Bloomberg
- Americans Not In The Labor Force Rise To Record 93,194,000
In what was an “unambiguously” unpleasant April jobs payrolls report, with a March revision dragging that month’s job gain to the lowest level since June of 2012, the fact that the number of Americans not in the labor force rose once again, this time to 93,194K from 93,175K, with the result being a participation rate of 69.45 or just above the lowest percentage since 1977, will merely catalyze even more upside to the so called “market” which continues to reflect nothing but central bank liquidity, and thus – the accelerating deterioration of the broader economy.
End result: with the civilian employment to population ratio unchanged from last month at 59.3%, one can easily on the chart below why there will be no broad wage growth any time soon, which will merely allow the Fed to engage in its failed policies for a long, long time.
- Artist's Impression Of Obamatopia
- 5 Things To Ponder: Margin Of Safety
Submitted by Lance Roberts via STA Wealth Management,
In yesterday’s missive, I very briefly discussed “recency bias” as it related to sentiment based economic surveys. I spent much of last evening pondering the issue of “recently bias” as it relates to the overall macro market environment. Carl Richards, back in 2012, commented:
“We rely on habit to help us make things easier because few people want to reinvent their lives every day. But this habit of forming habits also does something else. In academic circles, it’s called the recency bias, and it can trick us into making decisions we might not make otherwise.“
“The recency bias is pretty simple. Because it’s easier, we’re inclined to use our recent experience as the baseline for what will happen in the future. In many situations, this bias works just fine, but when it comes to investing and money it can cause problems.
When we’re watching a bull market run along, it’s understandable that people forget about the cycles where it didn’t. As far as recent memory tells us, the market should keep going up, so we keep buying, and then it doesn’t. And unless we’ve prepared for that moment, we’re shocked and wondered how we missed the bubble.
When the market is down, we become convinced that it will never climb out so we cash out our portfolios and stick the money in a mattress. We know the market isn’t going back up because the recency bias tells us so. But then one day it does, and we’re left sitting on a really expensive mattress that’s earning nothing.”
The point Carl makes is important. The longer a bull-market runs, the more inclined we become to believe “it will never end.”
It is during these long, and seemingly unending runs, that we begin to dismiss the most simplistic rules of investing and opt for “buy and hold” strategies that are historically responsible for cataclysmic losses of investment capital.
What is most interesting about “buy and hold” investing is that the group that generally promotes it receive a direct benefit (i.e. fees) for keeping investors invested in the market. Secondly, why is it that every great investor in history from Benjamin Graham to Paul Tudor Jones to Bob Farrell all adhered to basic investment disciplines of buying low and selling high?
(For more on investing rules see this, this and this)
This week’s reading list is a view on investing, the markets and potential outcomes to try and limit the potential for “recency bias” by focusing on the potential for outcomes. In other words, what is the “margin of safety” for investors now?
1) When In Doubt, Stay Out by Ivanhoff via Ivanhoff Capital
“When an event repeats frequently, it becomes a pattern. A pattern, in which a lot of people wholeheartedly believe in and act upon. Buying oversold dips in the major indexes has been very lucrative in the past few quarters. Even more so, in the past few months, which have been a poster child of range-bound markets. Will the current dip be any different? No one really knows. There are some good reasons to believe so:
- seasonality;
- poor reaction to decent earnings reports;
- lack of great long setups;
I truly believe that knowing when to be out of the market is the single most valuable trading skill anyone could develop. Why do I think so? Because, when markets are trending most setups work, most breakouts work and have a decent follow-through, it is a lot easier to make money. When markets are choppy, everything turns upside down and it is becomes difficult not to lose money. Be aggressive when it pays to be aggressive. Make sure you don’t give back most of your gains when the market environment worsens for your approach. For better of for worse, financial markets are one of those business fields, where working smart always trumps working hard.”
Read Also: 13 Investing Rules From Paul Tudor Jones by Ivanhoff via Ivanhoff Capital
2) Yellen Says Stocks Might Be Overvalued by Matt O’Brien via The Washington Post
“Now, stocks have cooled off since the start of the year, but not that much. So does that mean stock prices are “quite high”? Well, that depends on how you look at it. Take Robert Shiller’s cyclically-adjusted price-earnings ratio, or CAPE, which looks at the past ten years of earnings to figure out how pricey stocks are today. The idea here is that it smooths out any big ups or downs, and shows us how fairly valued—or not—stocks are. And by this measure, as you can see below, stocks really are getting expensive.”
Read Also: Yellen, A “Bear” Late & A “Dollar” Short by Jeffrey Snider via ZeroHedge
Read Also: Charts That Should Give Traders Pause by Michael Kahn via Barron’s
3) Stocks Are The Most Expensive, Well Ever by Meb Faber via Meb Faber Research
“I jabber a lot about valuation metrics here, and I mentioned this one on Twitter the other day. Its doesn’t need much explanation – the median stock in the S&P 500 is the most expensive it has even been (for as long as we have data). That’s never a good sign!
If your favorite valuation indicator is not at “the highest ever” , many valuation indicators and now at “the highest ever except 2000?. That’s not good company unless you are a short seller.””
Read Also: US Equity Valuations: To Be Dismissed by BCA Research
4) What 118 Fed Rate Increases Since 1948 Show by Simon Kennedy via Bloomberg Business
“Since 1948, the Fed has increased its benchmark on 118 occasions against a quarterly backdrop in which the average growth in nominal GDP was an average 8.6 percent, Deutsche Bank’s strategists wrote in a report published Wednesday.
Only in the third quarters of 1958 and 1982 did the Fed shift when nominal growth was undershooting 4.5 percent and the latter action was even reversed a month later.
So for virtually every rate increase since Harry S. Truman was in the White House, nominal GDP was growing 4.5 percent or faster, with 112 occurring when it was above 5.5 percent.”
Read Also: The Mistake Everyone Is Making About Fed Rate Hikes by Lance Roberts
5) Little Margin Of Safety Left For Investors by Doug Kass via Doug Kass’ Tumblr
“Despite protestations from certain market prognosticators and fast talkers, no one knows this answer for sure (I certainly don’t). Neither economic forecasts nor risk ranges, quantitative models nor any other economic or technical signpost guarantees investment success in the hunt for intrinsic value. As I have written, there is no secret market sauce.
We can just try be logical, rely somewhat on history, depend on the statistical flow of economic statistics and, from there, make an educated guess, as there are few certain truths in the investing and trading games.
“After all, according to The Oracle, ‘price is what you pay, value is what you get.’
Read Also: The Trouble With Factors by Cam Hui via Humble Student Of The Markets
BONUS READS
Should Investors Unload Their Mortgage REITS? Probably! by Keith Jurow via Advisor Perspectives
“For the past several years, I have written extensively about the Fed’s dangerous efforts to drive interest rates low enough to stimulate a stronger recovery. As a consequence, large and small investors have been compelled to go out on the risk curve in a desperate search for higher yield.
Lured by almost irresistible double-digit yields in 2012 and early 2013, investors dived into mortgage REITs with abandon. Having discussed the serious risks of equity REITs in my previous article , now is a good time to examine whether mortgage REITs pose similar risks for the unwary.”
Why Record Margin-High Debt Should Make You Cautious by Jesse Felder via The Felder Report
“It’s recently become popular to dismiss the record level of margin debt in the market as meaningless. Notable bloggers like Josh Brown, Barry Ritholtz and Chris Kimble have all written some sort of ‘it just doesn’t matter’ commentary recently. Barry went so far as to call it, “statistically bogus.” To me, this sounds like just another version of, ‘it’s different this time.’
Here are the real statistics: Over the past 20 years, the level of margin debt relative to the economy has had nearly an 80% negative correlation to future 3-year returns in the stock market. What this means is, the higher the level of margin debt relative to GDP, the lower the returns for the stock market over the coming 3 years and vice versa. ‘Statistically bogus?’ I think not.”
Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” – Warren Buffett
Have a great weekend.
- What QE Hath Wrought (In 8 Stunning Charts)
First – always remember, what The Fed does is for Main Street, Not Wall Street (since 1987):
And with that in mind, here is what QE hath wrought…
S&P 500
- SPX QE Returns: +176.23%
- SPX Non-QE Returns: -32.73%
Europe STOXX 600
- Europe STOXX 600 QE Return: +106.16%
- Europe STOXX 600 Non-QE Return: -9.37%
Japan's Nikkei 225
- NKY QE Returns: +154.39%
- NKY Non-QE Returns: -7.49%
WTI Crude
- WTI QE Returns: +119.48%
- WTI Non-QE Returns: -105.14%
Spot Gold
- Gold QE Returns: +3.31%
- Gold Non-QE Returns: +41.59%
5Y5Y Inflation Breakevens
- QE: -97bps
- Non-QE: +204bps
US 10Yr Breakeven Rate
- QE: -104bps
- Non-QE: +275bps
US 10Yr Treasury Yield
- QE: -293bps
- Non-QE: +184bps
So – feel better now? Seems like QE really did the trick.
* * *
And now The Fed's balance-sheet is in decline…
On a rolling three-month basis, the Fed's balance sheet has been declining for the last two months.
And the three-month difference in total Fed assets has produced some interesting relationships since QE started. Below are some economic indicators that caught our eye…
As we noted previously, it appears Yellen is going to need to find an excuse to crank the flow once again…
Source: Jim Bianco of Bianco Research
- Pentagon Staff Given "Stern Warning" After Using Government Credit Cards For Hookers & Gambling
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Last month, we learned that DEA agents were caught attending sex parties with prostitutes paid for by drug cartels. No one was fired. We also learned that the DEA agents who left a California student in a cell without food or water for five days until he was forced to drink his own urine in order to survive, were given a slap on the wrist. Finally, we heard about how TSA screeners in Denver were intentionally manipulating the naked body scanners in order to allow a particular agent to sexually molest male passengers. While the offenders were fired, no criminal charges were filed, and the TSA refuses to release their names. All of this was revealed in the last month alone.
Well, we can now add another to the list. In the latest example of abuse by the unaccountable feds, we learn that Pentagon employees have been caught using their government credit cards on gambling and escorts, amongst other things. Their punishment? A “stern warning.”
Politico reports that:
A Defense Department audit has found that a number of Pentagon employees used their government credit cards to gamble and pay for “adult entertainment” — findings that are expected to lead department officials to issue stern new warnings.
The audit of “Government Travel Charge Transactions” by the Department of Defense Office of Inspector General, which is to be made public in coming weeks, found that both civilian and military employees used the credit cards at casinos and for escort services and other adult activities — in Las Vegas and Atlantic City.
A Pentagon official briefed on some of the findings stressed that the federal government did not necessarily pay the charges; holders of the cards pay their own bills and then submit receipts to be reimbursed for expenses related to their government business.
Wait a minute, “the federal government did not necessarily pay the charges?” How about you go ahead and find out for sure. It’d be nice to know if taxpayer money is paying to pad Sheldon Adelson and the Moonlight Bunny Ranch’s profit margins.
Because the review was an audit of the credit card system and not an investigation of particular individuals, the official said the likely result will be that the agencies and military branches most affected will be compelled to remind employees that the practice violates policy — and possibly the law.
Quite the deterrent. As punishment, they will be asked to please stop. Banker justice applies to Federal employees as well it seems, and they don’t even need to pay a fine!
Some estimates suggest that such prohibited purchases cost the government hundreds of millions of dollars a year.
It cited instances “where cardholders used purchase cards to subscribe to Internet dating services, buy video iPods for personal use and pay for lavish dinners that included top-shelf liquor.”
Late last year, federal auditors reported to Congress that the problem persists despite efforts to rein it in.
Well, when your effort to “rein it in” consists of asking the offenders to stop it “pretty please,” this is what you get.
In case you’re wondering why the Department of Justice is such an unmitigated joke, recall the following:
- Home Flipping Profits Hit Record As Wall Street Drives Speculation (Again)
Back in March, we were thrilled to discover that becoming a real estate speculator is easier than we thought. Although bank financing may have dried up post-crisis, it turns out BlackStone and a whole host of other PE firms will gladly loan credit-worthy borrowers money to accumulate distressed single-family properties. These newly-minted “investor-landlords” will likely have no trouble locating renters thanks to the fact that many former homeowners lost their residences in foreclosure during the crisis, and have found little economic respite in the anemic US ‘recovery.’ The PE firms who make this all possible are themselves driven by a desire to securitize the loans they make, meaning that in relatively short order, we should begin to see landlord loan-backed paper in the ABS market.
Today, we get what is essentially the same story, involving the exact same PE firms (BlackStone, Colony, and Cerberus) but with the wrinkle that instead of lending money to prospective landlords, the borrowers are house flippers. Here’s Bloomberg:
Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.
Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs — traditionally the highest in residential lending — are tumbling as the firms compete for customers.
The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors…
Of course PE firms, who have access to cheap capital, are passing the savings along to speculators (or, put simply, Fed policy is enabling this process)…
Since big investment firms have entered the industry, rates have already come down significantly and fees charged to borrowers, known as points, have decreased as well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based real estate firm that has been lending to house flippers for about 14 years.
“Rates historically were much higher, typically 15 percent with three to five points,” Lewis said. “In the last few months we’ve seen deals being done at 10 percent and two points.”
…and of course this time is different…
The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.
…except that it’s not…
The hard-money market is getting crowded, which may lead companies to loosen their standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired by credit investor Garrison Investment Group about six months ago. His business has more than 300 approved borrowers with credit lines.
“Everybody just jumped in,” said Filler. “The risk is people start to relax underwriting guidelines to chase loans. As this becomes more competitive, there will be more pressure to do that.”
So assuming one wanted to take advantage of the cheap hard money financing, one of the first things to figure out is where the largest profit opportunities lie. That is: where are the profits highest on flips?
Thankfully — as we first pointed out more than two years ago and continued to parody over an amusing series of satirical articles (here, here, and here) — definitive statistics on profitable home flipping are available from RealtyTrac. The latest figures (out this week), show that the average gross profit on completed flips hit its highest level on record in Q1, suggesting that the Housing Bubble, at least in one incarnation, has returned. Meanwhile, if you really want to maximize the return on your PE-funded speculative investment, there’s no better place to look than — wait for it — Baltimore. You can’t make this stuff up.
Via RealtyTrac:
The average gross profit — the difference between the purchase price and the flipped price — for completed flips in the first quarter was $72,450, up from $65,290 in the previous quarter and up from $61,684 in the first quarter of 2014 to the highest level going back to the first quarter of 2011, the earliest where data is available…
The challenge for flippers in 2015 will be finding inventory to flip…
Markets with the combination of distressed inventory, affordability and demand that are yielding the best flipping returns include places such as Baltimore, several metros in Central Florida, Detroit, Tucson, Pittsburgh, Memphis and Chicago.
Of course it’s all about making money the socially responsible way…
“Responsible flippers in these markets can do well by doing good — providing a superior product for buyers and renters — although in some cases this may mean betting on neighborhoods that are somewhere between down-and-out and up-and-coming (ZH: and presumably not on fire)
On average, you will double your money flipping homes in Baltimore…
Among markets with at least 50 completed single family home flips in the first quarter, those with the highest average gross ROI were Baltimore (94.1 percent), Deltona-Daytona Beach-Ormond Beach, Florida (74.7 percent), Ocala, Florida (73.9 percent), Lakeland, Florida (62.5 percent), and Detroit (58.3 percent)…
And of course the markets where flipping accounts for the highest percentage of total single family sales are none other than California, Florida, and Nevada, some of the very same markets which were at the epicenter of the housing bubble…
These homes are being flipped not to proud new homeowners at affordable prices (which would indicate that indeed, easy money policies are finally trickling down to places like Baltimore), but rather to other “investors”, as the percentage of completed flips going to non-owner-occupants hit its highest level in 4 years during Q1…
This leads us to one very sad (albeit comically absurd) conclusion. Let’s recap. PE firms are using their access to cheap cash to lend to both landlord-investors and to home flippers. The percentage of completed flips sold to “non-owner-occupants” is hitting multi-year highs with each passing quarter. “Non-owner occupants” are defined as “real estate investors and second home buyers.” The punchline to the whole thing then, is that there appears to be a very real possibility that Wall Street is effectively flipping homes to itself and securitizing the loans along the way.
So thank you Wall Street, for proving yet again that absolutely nothing has changed.
- What Is The Difference Between An ISIS Terrorist And A Freedom Fighter: "Appropriate Vetting"
As we reported yesterday, in addition to Turkey and Saudi forming an alliance to topple Syria’s despised anti-Qatar nat gas pipeline leader, Bashar Assad, the US has now begun training and arming Syrian rebels. But how will the US know it is arming Syrian rebels, aka opposition “freedom fighters” and al-Nusra or Islamic State jihadists who will promptly turn around and use the same weapons and training against the US?
The answer: “appropriate vetting.” No, really.
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