- "Good News" – China GDP Beats Expectation Leaving Fed 'Relieved', Stocks Disappointed
AsiaPac stocks were generally lower heading into the all-important Chinese macro data (S&P -6pts, Japan -0.7%, China -0.2%) as JPY erased Friday's ramp and crude dropped back below $47. The PBOC left the Onshore Yuan fix practically unchanged (following Friday's significant devaluation). Then the data hit… China GDP beat expectations (printing 6.9% YoY vs 6.8% exp) but is still the lowest growth since Q1 2009. Industrial Production missed (printing 5.7% YoY vs 6.0% exp). Retail Sales beat (10.9% YoY vs 10.8% exp). The initial reaction was kneejerk buying in USDJPY and stocks but that is fading as "good news" will relieve The Fed's angst over growth…
Before… USDJPY and S&P Futs lower (along with most of AsiaPac stocks, gold, and crude)
Then the data hit…
And then we had Chinese Retail Sales, which Beat expectations of a 10.8% YoY gain with an "easily explainable" +10.9% YoY
And Chinese Industrial Production missed, printing +5.7% YoY(against expectations of a 6.0% YoY gain)
And then the big one…
38 "qualified" economists saw China's GDP between 6.9% and 6.4% (with a 6.8% median estimate)… notably China's monthly (higher frequency data based) estimate of GDP was 6.64%.. BUT CHINA GDP BEAT EXPECTATIONS printing +6.9%!! It's a Fall Miracle!!
Bear in mind, as Bloomberg reports that China has tweaked how it reports gross domestic product to meet the International Monetary Fund’s data reporting standards.
The National Bureau of Statistics will release output for each quarter on Monday, plus a cumulative reading. It previously released quarterly economic growth but didn’t specify GDP for each three-month period.
The new figure makes it easier to calculate the change in output (unadjusted for inflation) in the last quarter from a year earlier, as the aggregate ones usually smoothed out volatility. This may signal a sharper third-quarter slowdown than the stable headline growth reading.
In other words, what "changes" that historically were implemented that juiced historical GDP, are now evolving out of the data and detracting from what must be 'stellar' performance given the actual data beat expectations… Thus relieving an anxious Fed and opening the door to a December rate hike no matter what…
* * *
The reaction… disappointment…
* * *
There was one more significant data item out of China tonight – Fixed Assets Investment – which rose just 10.3% Cumulative YoY… the lowest growth since Dec 2000…
Because who needs CapEx after all? Oh wait… 50% of China GDP is CapEx (never mind though, we are sure all these numbers are 'accurate').
* * *
Finally there is this utterly reflexive crap…
- *CHINA'S SLOWDOWN PARTLY DUE TO FED RATE HIKE EXPECTATION: SHENG
And this…
- *SURVEY BASED UNEMPLOYMENT STAYS AROUND 5.2%: SHENG (seems oddly familiar!!??)
- *TPP IMPACT ON CHINA ECONOMY WON'T BE BIG, SHENG SAYS (don't tell Obama)
Charts: Bloomberg
- The Sad Fate Of America's Whistleblowers
Paul Craig Roberts believes Washington persecutes America's greatest patriots…
John Kiriakou is an American patriot who informed us of the criminal behavior of illegal and immoral US “cloak and dagger” operations that were bringing dishonor to our country. His reward was to be called a “traitor” by the idiot conservative Republicans and sentenced to prison by the corrupt US government.
Manning revealed US war crimes and after years of illegal pre-trial prison abuse was sentenced to 35 years in prison for keeping the vow to the US Constitution. Some of the idiot conservative Republicans thought the sentence was too light.
Tom Drake was ruined, and he kept his complaints about NSA illegality within the chain of command.
Julian Assange is confined by the US and UK governments in violation of international law to the Ecuadoran Embassy in London for doing his job and publishing leaked documents revealing the mendacity, immorality, and illegality of Washingtonn’s policies.
Edward Snowden is protected by Russia against Washington’s retribution for revealing that Washington’s illegal and unconstitutional spying is universal and includes the personal communications of all of the leaders of Washington’s own vassal states.
The American people accept the persecution of truth-tellers, because they have been brainwashed into believing that patriotism means defense of the government no matter what. As truth is so unfavorable to Washington, Americans believe that it must not be revealed, and if revealed, covered up, and those who reveal truth must be punished.
A country with such a population as this is a police state, not a free country.
It is an irony of history that a government and a population that believes truth must be covered up at all cost parades around the world acting as if Washington is the history’s agent for ?“bringing freedom and democracy to the world.”
As John Kiriakou most recently noted at OtherWords.org, history may smile on these guardians of the public trust, but during their lifetimes they remain outcasts…
What is it about whistleblowers that the powers that be can’t stand?
When I blew the whistle on the CIA’s illegal torture program, I was derided in many quarters as a traitor. My detractors in the government attacked me for violating my secrecy agreement, even as they ignored the oath we’d all taken to protect and defend the Constitution.
All of this happened despite the fact that the torture I helped expose is illegal in the United States. Torture also violates a number of international laws and treaties to which our country is signatory — some of which the United States itself was the driving force in drafting.
I was charged with three counts of espionage, all of which were eventually dropped when I took a plea to a lesser count. I had to choose between spending up to 30 months in prison and rolling the dice to risk a 45-year sentence. With five kids, and three of them under the age of 10, I took the plea.
Tom Drake — the NSA whistleblower who went through the agency’s chain of command to report its illegal program to spy on American citizens — was thanked for his honesty and hard work by being charged with 10 felonies, including five counts of espionage. The government eventually dropped the charges, but not before Drake had suffered terrible financial, professional, and personal distress.
This is an ongoing theme, especially in government.
Chelsea Manning is serving 35 years in prison for her disclosure of State Department and military cable traffic showing American military crimes in Iraq and beyond. And Edward Snowden, who told Americans about the extent to which our government is spying on us, faces life in prison if he ever returns to the country.
The list goes on and on.
Baltimore Police Department whistleblower Joe Crystal knew what he was getting into when he reported an incident of police brutality to his superiors after witnessing two colleagues brutally beat a suspect. Crystal immediately became known as a “rat cop” and a “snitch.”
He finally resigned from the department after receiving credible death threats.
It’s not just government employees either. Whistleblowers first brought attention to wrongdoing at Enron, Lehman Brothers, Stanford International Bank, and elsewhere.
And what’s their reward? Across the board, whistleblowers are investigated, harassed, fired, and in some cases prosecuted.
That’s the conclusion of author Eyal Press, whose book Beautiful Souls: The Courage and Conscience of Ordinary People in Extraordinary Times documents the struggles of whistleblowers throughout history. Press’s whistleblowers never recover financially or professionally from their actions. History seems to smile on them, but during their lifetimes they remain outcasts.
This is a tragedy. Blowing the whistle on wrongdoing should be the norm, not the exception.
I recently visited Greece to help the government there draft a whistleblower protection law. The Greek word for “whistleblower” translates as “guardian of the public trust.” I wish our own government’s treatment of whistleblowers could reflect that understanding.
Yet even legal guarantees of protection from prosecution and persecution aren’t enough — especially if, as in the case of existing law, national security employees are exempt from these safeguards.
Instead, society must start seeing things differently. Like the Greeks, all of us need to start treating whistleblowers as guardians, not traitors. And if we value what freedoms we have left, we should demand that our government do the same.
- "The Bankers Have Gone Through This Before. They Know How It Ends, And It’s Not Pretty"
When even the commodity traders got caught in the crossfire of the energy rout – those supposedly smartest men (and women) in the room who were so smart, they not only never saw the commodity price crash nor did they hedge for any such possibility, leading to such snafus as both Glencore and Noble Group calling their investors and assuring them day after day that they won’t go bankrupt overnight – one question many have asked is how have the major banks gotten through unscathed so far.
This is especially true when one considers that the energy exposure of the big 3 TBTF banks is just over $150 billion. According to Bloomberg calculations Citigroup’s energy portfolio, including loans and unfunded commitments, swelled to $59.7 billion as of June 30, Bank of America’s to $47.3 billion, and JPMorgan’s to $43.6 billion, according to company filings.
And while some smaller banks such as Jefferies took massive charge offs on their energy prop book, which pushed Q3 FICC revenue negative for the first time ever, none of the big banks have disclosed any material, or even immaterial impairments on their tens of billions in energy loan books.
One explanation, and by far the simplest and most logical one, is that banks floating on $2.5 trillion in excess reserves, can not reveal, or otherwise mark to market, their loan book simply because they are, well, soaking in liquidity. This is what happened in late 2008, when instead of excess reserves banks were huddled by the Fed’s discount window liquidity spigot, pledging such “collateral” as the stock of bankrupt companies (as we have previously shown). That, and also cranking up leverage to 35x, 40x or more. The repricing of all this leverage and Fed generosity once Lehman could no longer kick the can on its day to day funding, is what led to the great financial crisis.
This time, everyone is in on it, and if a TBTF bank fails, it will drag not only the Fed, but all central banks down with it, and everyone knows it, so why would or should Jamie Dimon bother telling the truth about his true energy exposure? It is not as if the regulators will make him tell the truth, even if they know he is lying: case in point – all those “unsavory” events that JPM has spent $35 billion in legal settlements “neither admitting nor denying” they happened.
There is another explanation, one suggested by Bloomberg, namely that banks have allowed US shale producers, most of whom would otherwise already be insolvent, to kick the can by selling $61.5 billion in equity and debt in 2015, generating more than $700 million in fees. Half the money was raised to repay loans or restructure debt, the data show. This follows nearly half a trillion in loan originations and stock and bond underwriting in 2014.
Case in point, Whiting Petroleum. Bloomberg has the details:
When Whiting Petroleum needed cash earlier this year as oil prices plummeted, JPMorgan Chase, its lead lender, found investors willing to step in. The bank helped Whiting sell $3.1 billion in stocks and bonds in March. Whiting used almost all the money to repay the $2.9 billion it owed JPMorgan and its 25 other lenders. The proceeds also covered the $45 million in fees Whiting paid to get the deal done, regulatory filings show.
In other words, JPMorgan was paid by its clients for the privilege of repaying JPM. Meanwhile the energy risk was offloaded to the dumbest men in the room, those who bought the stocks and bonds JPM had to sell. Which, naturally, is not how JPM sees it: “Being there for our clients in all market environments, particularly the tough ones, is something we feel very strongly about,” says Brian Marchiony, a JPMorgan spokesman. “During challenging periods, companies typically look to strengthen their balance sheets and increase liquidity, and we have helped many do just that.”
Actually, what JPM did is find a way to offload its risk to third parties. As for the fate of Whiting, it all depends on where the price of oil goes:
Analysts expect Whiting, one of the largest producers in North Dakota’s Bakken shale basin, to spend almost $1 billion more than it earns from oil and gas this year. The company has sold $300 million in assets, reduced the number of rigs drilling for oil to eight from a high of 24, and announced plans to cut spending by $1 billion next year. Eric Hagen, a Whiting spokesman, says the company has “demonstrated that it is taking appropriate steps to manage within the current oil price environment.” Whiting has said it will be in a position next year to have its capital spending of $1 billion equal its cash flows with an oil price of $50 a barrel.
Maybe it will. For now, however, anyone who took advantage of the JPM underwritten stock and bond offerings, has lost dearly: “the stock is down 36 percent, as of Oct. 14, since the March issue, and the new bonds are trading at 94¢ on the dollar. More than 73 percent of the stocks and bonds issued this year by oil and gas producers are worth less today than when they were sold, data compiled by Bloomberg show.”
In any event, it is clear that banks are taking advantage of the rabid chase for yield and FOMO, and while most are pitching an “imminent” rebound in the price of oil (over and over), are actively derisking their energy book, and letting others benefit from the upside should oil indeed surge. Or as Bloomberg summarizes it, “Banks’ sell-the-risk strategy underpins the shale oil boom.”
Lenders extended low interest credit to wildcatters desperate for cash, then—perhaps remembering the 1980s oil bust—wheeled the debt off their books by selling new stocks and bonds to investors, earning sizable fees along the way. “Everyone in the chain was making money in the short term,” says Louis Meyer, a special situations analyst at Oscar Gruss & Son. “And no one was thinking long term about what they’re going to do if prices fall.”
Still, something doesn’t quite add up: $700 million 2015 fees is about 0.5% of the total energy exposure by the big banks, if one trusts Bloomberg’s calculation laid out above. In the current illiquid, volatile market, that kind of capital loss can take place in minutes if not milliseconds. To say that banks have hedged their exposure through underwriting fees is naive, and while many banks have “urged” their clients to refi out of secured debt and into unsecured junk bonds, few have actually succeeded. In other words, banks are still massively exposed to the energy sector.
Which is the opposite of Bloomberg’s argument which notes:
When crude prices plummeted in the early 1980s, hundreds of banks failed across such oil-rich states as Louisiana, Oklahoma, and Texas. This time around, banks were keen to limit their exposure to a boom-and-bust industry. Every year since 2009, about half the debt and equity sold by North American exploration and production companies was intended, at least in part, to restructure debt or repay loans, data compiled by Bloomberg show. Often the banks selling the securities were the ones getting repaid.
Only that’s not really true, because while banks are deleveraging their energy exposure to the shale companies such as Whiting, they are massively adding energy exposure to such names as Glencore, Noble Group, Trafigura, whose credit lines they have been boosting by billions of dollars to avoid even one imploding in a liquidity supernove, one which shows just how naked everyone in the energy space truly is.
So to say that banks have learned from the past, is disingenuous as best.
And while we believe Bloomberg had best intentions when “explaining” away bank risk, we don’t buy it. To wit: when asked why lenders weren’t seeing more losses from energy defaults, BofA Chief Executive Officer Brian Moynihan said in a conference call, “A lot of that risk is distributed out to investors.” Perhaps Brian can explain just which investors, because aside from a few hedge funds here and there, we are talking tens of billions in losses.
The final words belong to Oscar Gruss’s Meyer who says that “The bankers have gone through this before. They know how it works out in the end, and it’s not pretty. Most of the lenders have been more on top of things this time. They are not going to get caught short in the ways they got caught short before.”
Unfortunately before every single crash someone says that bankers have learned their lesson, and every single time we find out – after the fact, and after billions in losses and/or taxpayer bailouts – that this never actually happened.
But assuming that all this is correct (which we doubt) and that banks have indeed “passed the energy risk” to other investors, that may be the worst possible outcome: after all the Big 3 banks getting hit with a $150 billion charge will be painful but hardly lethal at a time when the Fed still has a few trillion in excess reserves on bank balance sheets. For them, it would be a pinprick. However, a few dozen billion in the hands of smaller investors, those who never directly benefited form the Fed’s QE generosity, and suddenly the ability to mask such losses becomes impossible (see Jefferies).
Because the cascade of events that brings down even the biggest dominoes, always starts with the fall of the smallest one.
- Yes, The US Government Really Is Bankrupt
Submitted by Simon Black via SovereignMan.com,
I’ve long-stated that the government of the United States is completely insolvent.
And that is 100% true statement.
The government’s own numbers show that official liabilities, including debt held by the public and federal retirement benefits, total $20.7 trillion.
Yet the government’s assets, including the value of the entire federal highway system, the national parks, cash balances, etc. totals just over $3 trillion.
In total, their ‘net worth’ is NEGATIVE $17.7 TRILLION… a level that completely dwarfs the housing crisis.
If you include the government’s own estimates of the Social Security shortfall, this number declines to NEGATIVE $60 TRILLION.
And it gets worse every year.
Now, is this balance sheet an accurate reflection of reality? Do we really trust the bean counters to tell us what the United States of America is really worth?
Surely there must be significant intrinsic value to the United States military, for example.
Or the US government’s ability to collect taxes.
Or what about the value of all the natural resources underground?
These must all be HUGELY positive and would swing the government’s net worth back in the right direction.
Guess again.
The US military is certainly one of the best-trained and most effective forces in history.
But it’s difficult to place a substantial value on it when the government can no longer afford to use it.
And even when they do use it, the overall cost of doing so is negative.
The wars in Iraq and Afghanistan have cost the taxpayers $4 trillion. But where’s the financial benefit?
Aside from a few defense contractors profiting handsomely, the Chinese got most of the oil.
ISIS ended up with much of Iraq. And Iran made out like a bandit, with the US government taking out its most threatening neighbors free of charge.
Mission accomplished.
Bottom line, even the best asset in the world can end up being a big liability if it’s used improperly.
So what about the tax authority of the US government? If Uncle Sam can collect $3 trillion in tax revenue each year, surely that must count as a huge asset.
And it absolutely is. If you conduct a Present Value calculation of the future tax revenue of the US government discounted by the official 2% rate of inflation, the US government’s ability to tax its citizens is ‘worth’ $150 TRILLION.
But… if you’re going to count the government’s tax authority as an asset, you have to be intellectually honest and consider the expenses as liabilities.
Think about it: yes, the government brings in tax revenue every single year. But for nearly every year over the last seventy years, they’ve spent far more money to deliver on the promises they’ve made to their citizens.
Those promises are liabilities. And given the government’s spending history since the end of World War II, the liabilities far exceed the tax authority asset.
More importantly, though, isn’t it a little bit scary to consider that the government’s #1 asset is its ability to steal money from you?
Or that the only way the government can make its liabilities go away is by defaulting on the promises it has made to its citizens?
That’s their only way out: steal from you, and default on you.
* * *
Join me in today’s very sobering (and inspiring) podcast as we dive deep into the government’s own numbers and discover the truth… and what you can do about it.
(click image below for audio)
- A CaSe OF ACuTe ZaKaRia: THe FooLS a TooL
- Trump Says Yellen Keeping Rates Low To Protect Obama
Make no mistake, what you saw with the Fed’s September meeting and subsequent (in)decision was an FOMC that simply froze like a deer in headlights. As we’ve documented exhaustively, there are no right answers and Janet Yellen only made it worse by, in Deutsche Bank’s words, “removing the fourth wall” and admitting that the committee is reflexive.
The Fed cannot hike for fear that a soaring dollar will accelerate EM outflows and plunge the world’s most important emerging economies into chaos.
But remaining on hold risks precipitating the very same outcome because by missing the window for liftoff, the FOMC has fostered an environment in which all EMs are constantly on their toes with no idea when or even if the “symbolic” 25bps hike will ever come. The attendant uncertainty engenders the very same capital outflows as a hike might.
And then there are of course considerations about what the FOMC is telegraphing about the risks to the US economy. September’s “clean relent” telegraphed a dour outlook and that, in turn, weighed on domestic risk (apparently bad news is bad news again). But hiking and thereby conveying a positive outlook for the US economy could well cause the dollar to soar (because if the ECB and BoJ are still easing, the policy divergence would be exacerbated in a liftoff scenario, giving the USD a strong tailwind) which would be a negative for some US corporates and could well weigh on the economy going forward.
So this is the impossible scenario the Fed finds itself in and it’s all complicated by the fact that we are heading into an election year. For his part, Donald Trump believes Yellen is deliberately delaying liftoff not because she is simply confused as to what to do, but because she’s trying to help the Obama administration. Here’s more via Bloomberg:
According to Donald Trump, Janet Yellen’s decision to delay hiking interest rates is motivated by politics.
“This is a political thing, keeping these interest rates at this level,” Trump, the billionaire Republican presidential candidate, said in a Wednesday interview with Bloomberg Television’s Stephanie Ruhle. “Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem.”
That problem spurred by raising rates, Trump argued, could be “a recession or worse.”
On the other hand, Trump faulted the Federal Reserve for not having acted sooner. “Yellen is keeping rates too low, too long,” Trump said.
Here are some other highlights from the interview:
“Yellen is doing this with the blessing of the President because he doesn’t want to have a recession – or worse- in his administration.”
“I’m a developer, I’m not complaining from my own standpoint, I’m just saying that at some point, you have to raise interest rates, you pay nothing. They are trying to put the recession – and it could be a beauty into the next administration.”
//
Now, it’s probably safe to say that Trump doesn’t understand just how convoluted the Fed’s reaction function has become at this point, which means he’s likely predisposed to thinking that the FOMC’s decision making is more political than it actually is. That’s not to suggest that the Fed is truly “independent” per se, it’s just to say that at this point, Obama’s legacy is probably not particularly high on the list of things that keep Janet Yellen up at night.
That said, there are very real questions as to whether the Fed will risk raising rates in an election year and on that note, we’ll leave you with some thoughts from BofAML as presented here first earlier this month.
Via BofAML’s US Economics Team,
Experience and independence both say “yes”
A popular view among some market participants is that the Fed is unlikely to hike in a presidential election year. While many economic and market factors may influence when and how often the Fed hikes in the upcoming months, we do not expect the timing of US elections to play any meaningful role in the Fed’s policy deliberations. Neither historical experience during the past several hiking cycles, nor the Fed’s own desire for policy independence, suggests this will act as any constraint on the hiking cycle. Rather, we expect the Fed to gradually tighten policy in a data dependent manner during 2016 — regardless of how the political winds may blow.
Recent history: most hikes during election years
Historically, presidential election years have not precluded policy tightening by the Fed. Of the last five Fed hiking cycles, four either began during or continued into an election year. Two of these — 1988 and 2004 — started in an election year, some months before Election Day (in March and June, respectively). Two others — 1983 and 1999 — began the year before an election, with hikes continuing well into the following year. Both these hiking cycles stopped before Election Day (in August and May, respectively), perhaps fueling speculation about the Fed’s motives. But the Fed did not resume hiking once Election Day passed — in contrast to what one should expect if the Fed were temporarily holding back hikes around an election. Rather, each of these tightening cycles concluded as the Fed returned rates to a more neutral stance.
Guarded independence
Is past performance a good predictor of future policy? Given how strongly independence is held at the Fed, we suspect it is. Numerous studies show that politically independent central banks deliver the best inflation and growth outcomes, and Fed officials know that even the perception of political influence can undermine their best intentions. Rather than trying to avoid being news by keeping policy unchanged in an election year, the best strategy would be to move in a very deliberate, well-communicated and datadependent way — one that not only has nothing to do with the political cycle, but wouldn’t even give that impression. Indeed, if the Fed really wanted to minimize political pressure today, it is not at all obvious if the better choice would be to hike to appease its most vocal Congressional critics or to stand pat. Any action or inaction is bound to upset (at least) one party — so why even try?
Unlikely variations on an unlikely theme
Finally, the view that the Fed cannot or will not hike in an election year yields some unlikely implications for monetary policy. One is that the Fed has to get going very soon — and perhaps somewhat aggressively front-load rate hikes — in anticipation of sitting on its hands for some time. In contrast, Fed officials have warned that they don’t want to hike prematurely, and they have emphasized both a data dependent and gradual approach to normalizing policy. Another variation is that if the Fed delays this year, they won’t be able to lift off for nearly another year — and thereby put policy significantly “behind the curve.” But it’s hard to believe the Fed would choose to wait that long and potentially let inflation get out of control because of politics; recent speeches note the risks of hiking too late. In the end, while several factors could potentially delay Fed rate hikes, we very much doubt next year’s presidential election will be one of them.
- A Perilous Possibility: Weaponizing The Fed
The world sits at a very precarious point once again in time. There is a very real possibility, as well as an ever-increasing chance one wrong unintended or misunderstood event could trigger an all out war of global proportions. Yes, I said it, and I don’t take it lightly. Nor do I say it cavalierly. As a matter of fact my blood ran cold just typing it. For the matter at hand, the players involved, the possibilities of doing just the slightest of wrong moves whether intentional or not. At precisely the wrong time; has the inherent risk of triggering world events in ways and at magnitudes not seen since (dare I say) WW2. And if you think that’s hyperbole – you’ve just not been paying attention.
Currently as we sit events that were expressed by the main stream outlets as having no chance of ever happening (implying they weren’t worth contemplating) are not only happening – they’re turning out to be far more dangerous in both their escalation, as well as speed. The only thing rivaling my level for concern are the reasons being touted via both official, as well as media interpretations on why or, what is to be expected. The current double speak, plausible denials, moving of heavy armaments, ships, troop deployments, kinetic engagement, finger wagging from not one, but more than several world military powers has been breathtaking. All this over the course of just two or three weeks. The risks in my opinion for misstep with global ramifications haven’t been this perilous in decades.
One of the real reasons for my concern stems from the players involved. I’m far more concerned and have a greater sense of foreboding when it appears the “intellectual” set are the one’s playing against adversaries or circumstances they themselves only understand through textbooks or debate. i.e., A relative example could be the proverbial college professor that teaches business theory and application yet, has never been outside the walls of academia.
Back in April of 2014 the situation in Ukraine was all the media channels cared about. They touted how X, Y, and Z would be the obvious resolution. (X,Y, and Z represented everything breaking decisively, as well as matter of factually in the U.S.’s favor) The problem was, anyone with any understanding of what one “thinks” should take place because they “believe” that it should be so; as opposed to actually looking at the situation, the players, the posture, and verifiable resolve through previous actions; it was clear to see the outcome was going to be far different from what the “intellectual” crowd proposed as well as believed.
During that period I wrote an article titled “Why Intellectual Leadership Can Get You Killed” in that article I made one of the following arguments:
“The intellectual prowess of the so-called “smart crowd” can not only be dwarfed by the truly ruthless leader, but can put both themselves as well as their company or followers in grave peril. For intellectuals think out processes far too much. Then do nothing.
They’ll over think why someone would do X, Y, or Z. They put themselves into shoes that don’t fit, then spend more time contemplating if their opponents should be wearing leather vs rubber soles. All the while their opponent laughs running circles around them barefoot.”
That first line could be used to describe the Fed.’s past inaction on rate hikes. For if you listen to the arguments made by the members themselves – over intellectualized the consequences is exactly what describes their reasoning and resulting decision. And the second? You could say the same for just how Ukraine ended. My premise was utterly mocked during this period – today it fits far closer to the ending results than even I dared think. Which is also the basis for my concern today.
Currently the once advocated U.S. involvement in Syria is not only turning into an all out political humiliation, but what might be worse is it’s not coming at the hands of just a perceived or noted adversary. It’s also coming at the hands of another military power that for all intent and purposes is being held up as “a regime we can work with” as they work in concert against U.S. stated warnings to the contrary. I wish this all we had to worry about, but as usual, it’s not.
Since our involvement in Syria (however it was achieved) one of the stated reasons why was for the goal of extinguishing terrorist threats seated there that could eventually turn up here. So far the progress has been seen, as well as reported, to be less than inspiring. Then suddenly not only is the U.S. brushed aside. It was basically told – move aside; and stay aside – while we show how it’s done. Moves like this, by these powers, on this level of stage and engagement are done precisely to test “intellectual” resolve against forceful resolve. A calculus not played for checkers or chess, but for far more dangerous games with onerous consequences.
Add to this the simultaneous display of “Watch this!” alarm bells as Iran launched its newest long-range missile in an apparent thumbing-its-nose enticed provocation to any one caring to watch. All while the U.S. (and supposedly other U.N. bodies) are negotiating a weapons treaty. Forget about “the ink not even dry.” It’s not even fully signed.
Concurrently as all this is playing out, it’s been announced the U.S. is indeed going to send warships to challenge China in an outright confrontation styled game of “who blinks first” to contest their proclamation that both the territory around and of the Spratly Islands is irrefutably theirs.
Who on this earth believes this is the time to do such a provocation? I’ll tell you who: the intellectual set. That’s who. For the belief of “we can handle this” by debating and game playing override what begs clear, common sense, level-headed, outright caution. And that’s a problem on so many levels from my perspective.
The warning signs of danger are flashing everywhere, but they seem to be falling not only deaf ears, but those that might be blind to the speed one misstep could turn every contingency plan – to absolute useless trash. These are the times I believe Mike Tyson summed up best, “Every one’s got a plan – till they get punched in the face.” I’m of the opinion we’re now walking round chin out, and chip shouldered. The problem is someone just might take the shot. And who, where, or why might not be exactly what the intellectual set ever contemplated. And that’s a very big concern.
Then there’s what I stated in title of this article: The Fed. And here’s where things begin to rattle my cage even more. With the current global marketplace intertwined as tightly and as correlated to what happens with the U.S. Dollar as well as outright policy changes or stances by the Fed. The question begs to be answered or asked: Would or could the powers that be look to the Fed. and state (or demand) “Raise rates, drop rates, ___________ (fill in the blank) now!?”
I think it would be crazy not to contemplate the possibilities of such a move out-of-the-blue, unannounced with what is transpiring currently. That’s why I intentionally used the word “weaponize.” For it’s one thing for the Fed. to try to dance the line of the body politic when decisions are being made. It changes into something far different if, or when – they are instructed to do something. Not asked, or advised.
Currently it is more than fair to say the current language, as well as position of where they (the Fed.) believe policy should be heading is all over the board. Again, that’s to say the least. However, all this has to be wrapped up in the assumption the powers that be at the Fed. are making the choices whether one thinks they’re correct or wrong is a side argument.
Wall Street, as well as the global markets are working from the assumption they need to game play what the Fed. and its players are stating. And I’m not saying that’s incorrect – it’s the possibility of that changing overnight by means of some outside dictate which may be demanded that’s the real reason for concern. For it changes everything where the resulting chaos of the markets could make ’08 look like a “good day” compared to what might transpire following such an intervention.
Some will say or argue, “That wouldn’t happen for it would hurt us probably just as much as anyone else. That’s just crazy talk.” And there is a point to that argument. However, I will pose this rebuttal: If that were true; then why do people die in wars and infrastructure destroyed in epic proportions when both sides know exactly that – and do it anyway? This is precisely the way intellectual arguments are at first proposed, then result in consequences the proposers of that intellectual strategy get blindsided. Many times with appalling repercussions. Hence lies the reasoning for my concerns.
Even if we take out all of the above, another overarching possibility that could throw the markets (whether from a misstep or, by design) into an outright tailspin of epic proportions and consequences overnight, fueled by a sudden carry trade unwind within the forex markets which could (if not would) simultaneously crush global equities. All of which could transpire via a HFT fueled algorithmic ignited frenzy brought on by an intentional media headline like: WAR! Think that’s crazy talk? Just look back to August for clues.
With the way the current global markets are now predisposed to HFT – If one wanted to put a hurt on a presumed or proposed adversaries economy; why wait for sanctions to be reimposed or, tightened or, a number of other financial weapons that need to be brought for a vote or, announced or, whatever: when it could be done today through various other means with only a nod-of-the-head.
This is the place we currently find ourselves. And if you own a business, regardless of size, you need to have contingency plans in at least a cursory overview understanding on actions to implement either for yourself, or with your people; for all hard plans usually go out the window the moment they’re needed. But understanding and contingency discussions ahead of time help quell panic during business disruptions.
Circumstances can change rapidly as to what may or, may not be available in as much as operations funding, supply lines, currency exposure, and more. This holds true not only for the global entity, but also for small businesses. You need to be actively thinking “what if” scenarios if your serious about business during times like these. Others won’t understand and that’s fine – they aren’t in business: you are. It comes with the position.
These are the circumstances of the day, and those circumstances have changed with the very real possibility that what was once taken as “We believe we have an idea of what the Fed. may do for the rest of the year.” Is now only part of the equation. With the current military changes, positioning, as well as rhetoric coming from global leaders around the world; what the Fed. may or, may not do or, signal – might be out of their decision-making process altogether. As implausible as this may sound today: It’s a risk that any prudent business person must now consider. Again, regardless of how far-fetched it might appear at first glance.
I’m completely aware all the above will be argued away by many as “crazy talk” and that’s fine. However, seeing around corners or, trying to anticipate circumstances that have real chances for disruption on one’s business is a crucial requirement of any prudent entrepreneur, CEO, or solo-practitioner. There is no alternative – it falls on you. With that said I’ll ask you to ponder one last point.
Back in May of 2014 I wrote an article titled “Will History Record The Ending Of QE As An Archduke Moment?” In that article I proposed why one needed to take prudent steps as to help prepare one’s business to possible global changing consequences that could come from nowhere with blinding speed. Where the consequences could have both local, as well as, global concerns. Again, like many before this was brushed out-of-hand, mocked, and shouted down as some form of “crazy talk” from some kind of “alarmist” or “Chicken Little.”
Today? Since QE did in fact end, not only have the markets around the world sputtered and set off alarms bells; it’s now being widely reported via main stream media channels Russia and the U.S. are now engaging in a proxy war in Syria. Along with Iran who not only is also engaged in direct opposition to the U.S., but is also launching newly developed missiles in open defiance of U.S. concerns. All this while not only is the U.S. sending warships to challenge China’s claims around the Spratly Islands, it’s also been announced we are reversing policy in Afghanistan and staying with troops for who knows how long. And I didn’t even mention NATO jets or bases in other countries saber-rattling against Russian flyby’s. Or the Saudi’s who are also voicing troubling warnings towards Russia.
This has all taken place in the course of two to three weeks. Not months, not years. And it’s seems to be getting worse – not better.
If you started to at least begin taking precautions when I first warned, you would at the least have some form of contingency plan or idea of what preparations you may take if such events did ever take place. Those events have now moved from “possibly” to a razors edge of “highly plausible” if not outright likely.
Bombs are dropped when no one expects. That’s a fact of war. And to not think that somewhere within the bowels of some “think tank” the “intellectual argument” isn’t being made or, considered which involves using the Fed. or a monetary equivalent to act as a first-strike capability weapon is ludicrous. When it comes to the world stage where global entities are out-rightly challenging one and other for supremacy, hegemony, or even respect – all considerations – and I do mean all will be on the table.
The time for contemplating “what if’s” has passed. The time to prepare for “there’s a greater chance than not” is now the prudent policy. Your business now depends far too greatly like it or not to a Fed. policy move. The problem is – the Fed. could be the contingency that drops the first one. And there will be no announcement, no speech, no meeting, no nothing as to preempt its happening. All one can do is plan for the worst – hope for the best. But to ignore the possibility of either could be business suicide. Plain, and simple.
- Clinton Considers Mandatory Gun "Buy-Backs" – Ignites Confiscation Concerns
Just days after talk of President Obama's gun control executive orders, and following a disappointing showing at the Democrat Debate, Hillary Clinton has jumped back on the populist bandwagon suggesting that, as Fox reports, it is "worth looking into" mandatory gun buy-back programs like ones in Australia. "This validates what the NRA has said all along," said Chris Cox, executive director of The NRA, with Clinton's comments making “very clear” that the underlying goal of gun-control advocates is confiscation.
Hillary Clinton said Friday that mandatory gun buy-back programs like ones in Australia are “worth looking into,” sparking criticism that the Democratic presidential front-runner would, if elected, impose gun-confiscation efforts.
Clinton made the comments during a campaign stop in Keene, N.H., when an attendee asked about Australia’s 1996 and 2003 buy-back programs that collected roughly 700,000 banned semi-automatic rifles and other firearms.
“I think it would be worth considering doing it on the national level, if that could be arranged,” Clinton responded.
“This validates what the NRA has said all along,” said Chris Cox, executive director of the National Rifle Association’s Institute for Legislative Action. “The real goal of gun control supporters is gun confiscation.”
Cox said Clinton’s comments echo recent ones by President Obama, making “very clear” that the underlying goal of gun-control advocates is confiscation.
…
"Hillary Clinton just doesn’t get it," Cox said. "The NRA’s strength lies in our five million members and the tens of millions of voters who support the Second Amendment.
"A majority of Americans support this freedom, and the Supreme Court was absolutely right to hold that the Second Amendment guarantees the fundamental, individual right to keep and bear arms," he added. "Hillary Clinton's extreme views are completely out of touch with the American people."
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As a reminder, there is no correlation between murder rates and gun ownership/control…
Of course, when someone points out the lack of a correlation here, gun-control advocates are quick to jump in and say "but you didn't control for this" and "you didn't control for that." That's true. But what I do show here is that the situation is much more complicated than one would think from absurd claims like "states with fewer guns have fewer murders" and so on. Apparently, claims that new gun laws are commonsensical can't be true if the relationship between gun laws and murder rates require us to adjust for half a dozen different variables. In fact, by looking at the data, I could imagine any number of other factors that might be more likely a determinant of the murder rate than gun ownership.
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As we noted previously, The Democratic Party's focus on guns has drawn fierce criticism from Republican White House hopefuls, who largely say mental health, and not gun control, is the correct policy response. They say Democrats are using the shootings to roll back Second Amendment rights.
Meanwhile, just like in 2012, the threat of more gun control is having just the opposite effect of what the president intends, and as we reported earlier this week, gun sales are soaring in the aftermath of the most recent cluster of shootings. In fact, "gun sales this year could surpass the record set in 2013, when gun purchases surged after the December 2012 Sandy Hook murders."
In the first nine months of this year, 15.6m of the background checks needed to purchase guns from federally licensed sellers have been processed, compared with the 15.5m applications in the same period in 2013, according to the National Instant Criminal Background Check System.
Why the surge? Simple: "Once the public hears the president on the news say we need more gun controls, it tends to drive sales,” said Mr Hyatt, who owns one of the largest gun retailers in the US. "People think, if I don’t get a gun now, it might be difficult to get one in the future. The store is crowded."
Because if you want something to be truly broken, just invite the government to "fix" it. Which is not to say that everyone is a loser – two clear winners from Obama's repeated attempts to enforce gun control are shown in the chart below.
- CNN Anchor Demands Americans "Stop Swooning Over Putin"
We’ll just put this bluntly: when you, as a country, do something incredibly stupid from a foreign policy perspective, you open the door for your global critics and adversaries to i) call you out on it publicly, and ii) use your gross incompetence and general disregard for anything that even approximates common sense, to their geopolitical advantage.
And make no mistake, in Syria, Washington, Riyadh, and Doha did something incredibly stupid.
They financed, armed, and trained a hodgepodge of Sunni extremists in Syria in an attempt to destabilize a regime that was deemed to be unfriendly to the interests of the West and its regional allies.
Not to put too fine a point on it, but from the perspective of human suffering, the results have been simply horrific: hundreds of thousands dead and millions displaced.
From a reputational perspective, the results have been equally catastrophic. Not only did the US, Saudi Arabia, and Qatar have a hand in creating the group that ultimately morphed into what we never tire of characterizing as an insane band of white basketball shoe-wearing, black flag-waving, sword-wielding desert bandits bent on establishing a medieval caliphate, but subsequent efforts to arm and train “moderate” rebels were wildly unsuccessful, and the entire effort culminated in the embarrassing admission that the Pentagon’s latest “program” – designed to field 5,400 fighters by the end of the year – had only managed to produce “four or five” soldiers at a cost to the US taxpayer of $41 million.
Finally, the US just threw up its hands and resorted to paradropping hundreds of tons of ammo into the middle of nowhere and hoping the “right” people pick it up.
So one could be forgiven for being slightly enamored with the Russians at this juncture because in one extraordinarily elegant geopolitical chess move, Vladimir Putin has all at once i) exposed the fact that perhaps the US has ulterior motives for wanting to (gasp) keep ISIS around, ii) marked a triumphant return for Russia to the world stage, iii) strengthened Moscow’s relationship with Tehran ahead of the latter’s re-emergence as a force in the world of oil exporters, and iv) effectively restored Bashar al-Assad on the way to establishing a major Russian presence in the Mid-East.
And that’s in the space of, oh, let’s just call it three weeks.
This has been nothing short of a humiliation for Washington and just as Beijing simply instructed people not to sell when the SHCOMP rout embarrassed the Communist Party, the US wants you to know that it’s enough already with the Putin worship. Here’s CNN’s Fareed Zakaria: demanding that you to “Stop swooning over Putin”:
From a WaPo op-ed:
Vladimir Putin has the United States’ foreign policy establishment swooning.One columnist admires the “decisiveness” that has put him “in the driver’s seat” in the Middle East. A veteran diplomat notes gravely, “It’s the lowest ebb since World War II for U.S. influence and engagement in the region.” A sober-minded pundit declares, “Not since the end of the Cold War a quarter-century ago has Russia been as assertive or Washington as acquiescent.”
It’s true that it has been a quarter-century since Moscow has been so interventionist outside its borders. The last time it made these kinds of moves, in the late 1970s and 1980s, it invaded Afghanistan and interfered in several other countries as well. Back then, commentators similarly hailed those actions as signs that Moscow was winning the Cold War. How did that work out for the Soviet Union?
And now that we’ve given you a chance to thoroughly deride the American media for the anti-Putin line, we will once again prove that we are in fact fair and balanced. Here’s what Zakaria gets right:
Washington deposed Saddam Hussein’s regime in Iraq (Syria’s next-door neighbor, with many of the same tribes and sectarian divides). It did far more in Iraq than anyone is asking for in Syria, putting170,000 soldiers on the ground at the peak and spending nearly $2 trillion. And yet, a humanitarian catastrophe has ensued — with roughly 4 millioncivilians displaced and at least 150,000 killed. Washington deposed Moammar Gaddafi’s regime in Libya but chose to leave nation-building to the locals. The result has been what the New Yorker calls “a battle-worn wasteland.” In Yemen, the United States supported regime change and new elections. The result: a civil war that is tearing the country apart.
Of course he then skips directly to this:
Those who are so righteous and certain that this next intervention would save lives should at least pause and ponder the humanitarian consequences of the last three.
To which we say: Fareed, you seem to have forgotten that it wasn’t Russia who trained and armed the groups who plunged Syria into civil war, it was the US and its regional allies.
You might want to mention that next time before you go getting too “righteous and certain.”
- "We Are Facing Social Unrest" – German Police Union Chief Demands Building Of Border Fence Around Germany
One month after Germany implemented border controls with Austria in order to stem Europe’s worst refugee crisis in history, in a move that we predicted is the beginning of the end of Europe’s Schengen customs union, things are going from bad to worse. As we wrote on Friday, following the latest escalation in the European anti-Schengen falling dominoes which took place after Hungary closed off its border with Croatia only to unleash a new migrant passage through Slovenia, which is likewise expected to close its border shortly…
… Germany’s untouchable until recently Iron Chancellor Angela Merkel is facing of a “national disaster” at home, where politicians across the spectrum increasingly demand shuttering the borders as Germany expects up to one million migrants this year, or else hinting it will be Merkel’s scalp.
“The chancellor is walking on thin ice,” judged the conservative daily Die Welt, pointing to a “growing gap” between Merkel and the base of her centre-right Christian Democrats (CDU) who demand she stem the record influx. “The chancellor believes the nation can manage the crisis, but this belief is rapidly vanishing in the country,” said the newspaper.
Popular unease with Merkel’s actions has also manifested itself in tumbling support for Merkel’s CDU, which according to a Bild poll, has seen its approval rating drop to 37%, the lowest since May 2013.
But until now, despite rising anger, there has been no firm recommendation how to approach the unprecedented inflow of Syrian migrants, among which there are increasingly more frequent media reports of terrorists, either of ISIS or al Qaeda origin.
That changed earlier today when none other than Germany’s police union chief, Rainer Wendt, called for a fence to be built along the country’s border to stem the flow of migrants.
Wendt’s call is simple: end Europe’s customs union, one where cold war border fences are once again the norm.
He told the “Welt am Sonntag” newspaper that after Germany led by example, other countries would then follow suit: the police union chief said the move would trigger a chain reaction in other European countries which have seen hundreds of thousands of refugees from Syria and elsewhere flood over their borders.
“If we close our borders in this way, Austria will also close the border with Slovenia. That’s exactly the effect we need,” Wendt, the chairman of the German Police Union (DPolG), is quoted as saying.
Hungary enlisted prisoners and the country’s military to help construct a fence along its border with Serbia.
Indeed it is, however such a domino effect would confirm what many have been saying for years, namely that Europe simply can not exist as a borderless zone.
According to Deutsche Welle, the German then voiced support Germany’s plans to create temporary migrant transit zones along its border, which would see people filtered according to their likelihood of gaining asylum. But he said that would only work with a frontier sealed by a new fence.
The transit zone concept has been criticized by one of the German chancellor’s main coalition partners, the Social Democrats (SPD), as inhumane and impossible to implement.
Not surprisingly, Wendt’s comments contradict the German government’s fierce condemnation of a similar 3.5 meter (11.5 foot) fence built by Hungary, along its 175 kilometer (108 mile) border with Serbia , to keep irregular migrants out. The structure, which was finished last month, was accompanied by new draconian measures to punish anyone who tried to cross the frontier.
And just to make sure that Merkel heard the police union chief, he also hinted at a veiled warning of what will happen if Merkel keeps ignoring the migrant crisis: Wendt said Germany was facing “social unrest” due to the large number of migrants entering the country.
“Our internal (law and) order is at risk…Someone needs to pull the emergency brake now,” he cautioned.
Germany expects more than 800,000 people to apply for asylum this year and has recently toughened its regulations surrounding the asylum process. But Merkel has ruled out placing limits on the number of refugees taken in, adding that she was convinced the country could cope.
The southern German state of Bavaria, which has been inundated with refugees crossing from Austria, has threatened legal action against the Federal government, adding that it may consider sending migrants back across the border.
Finally, for those wondering how this, too, is spun as bullish for stocks – just like everything else for the past 7 years – the answer is simple: since Germany will have to fund billion in social payments to accommodate all the new refugees, and since that spending will have to be funded with new debt, these incremental debt sales will provide the ECB with much needed debt which to monetize, which in turn will inject even more outside “money” into the stock market, if not the economy, and push the Eurostoxx, and why not the S&P500, to fresh all time highs.
Once again, everyone wins, except for the traditional loser: the middle class.
- The 'Problem' With Bernie Sanders
Submitted by Yonathan Amselem via The Mises Institute,
Bernie Sanders’s entry into the presidential race has sparked a nationwide conversation about socialism and its potential to remedy the real and perceived pathologies suffered by Americans. Throughout Sanders’s extensive political career, he has proudly labeled himself a socialist while being careful to distance his ideological roots from basket cases such as North Korea, Cuba, Venezuela, Bolivia, and other collectivist nightmares. Rather, as with most progressive socialists, he considers himself a “democratic” socialist sharing more in common with the relatively wealthy Scandinavian countries.
It is interesting that progressives like Sanders can look at a rich country like Sweden and automatically conclude that the nation’s high living standards do not result from a laissez-faire past, low levels of national debt, monetary independence, no centrally mandated minimum wage, strong legal protection of property rights, a level-headed central bank, low corporate tax rates, or even Sweden’s gradual move toward more privatization in healthcare, social security, and education. Rather, progressives naturally assume that Sweden’s high living standards are a product of their high taxes and nationalized industries.
But, imagine if LeBron James took up smoking. Any success on the court would be despite his destructive habit not because of it. Sweden’s economic success has come in spite of its socialism.
I will focus on just one Scandinavian country, Sweden, given that it has often been touted by progressives as a sort of heaven-on-earth. A (very) brief history of this fascinating country might help us better understand Sweden’s current high living standards and the many ways in which Swedish socialism has set an unnecessary cap on the nation’s productivity.
Sweden: From Crippling Poverty to Unheralded Prosperity Through Laissez-Faire Capitalism
Some 250 years ago, the area we recognize now as “Sweden” was a frozen tundra inhabited by a huddled mass of starving peasants. Their lives were tightly controlled by a series of kings, aristocrats, and other men of artificially high esteem. As award-winning author, Johan Norberg points out in this excellent piece on Sweden, it took a series of classically-liberal minded revolutionaries to wrestle control from the elites and put Sweden on a path to prosperity.
Licensing czars, an oppressive guild system, and a litany of other onerous regulations on free exchange were dramatically reduced or eliminated. In the century from 1850–1950, the population doubled and real Swedish incomes multiplied nearly tenfold. Despite the almost non-existence of a welfare state or any major state control of economic sectors, by 1950 Sweden was the fourth richest nation in the world. Sweden’s extraordinary growth during that century rivaled even that of the United States (Sweden was not a participant in the two World Wars). As a matter of fact, capital formation and wealth creation proved so abundant in Sweden during the global depression of the 1930s that even social democrats in the legislature practiced a form of salutary neglect to ensure the prosperity would continue. As with any other country, Sweden’s impressive capital stock was built by entrepreneurs operating in a free market system.
Sweden’s Experiment with “Nordic Socialism” is Relatively New and Has Been Disastrous for Growth
Big business looking for government protection worked alongside ambitious politicians and union leaders to force Sweden into adopting socialist policies in the decades following its impressive growth. Over time, government spending more than doubled and taxes in certain sectors were doubled or even tripled. Despite these calamitous changes, by 1970, the OECD still ranked Sweden as the fourth richest nation in the world. However, by 2000 Sweden sank to number fourteen. Dr. Per Bylund from Oklahoma State University has previously pointed out that from 1950–2005, Sweden did not add one net private sector job. Nordic Socialism has frozen a once entrepreneurial and prosperous people in time. With few exceptions, Sweden’s large businesses have very little incentive to innovate (and they have not), and many enterprises now survive purely on government contracts whose value is impossible to ascertain without a system of free exchange to establish prices for goods and services.
Sweden has managed to live comfortably for decades despite its many heavy-handed socialist policies only because so much capital stock was created in the decades prior (not to mention a sane monetary policy). Yet this capital consumption is eroding Sweden’s wealth. In 2007, Professor Mark J. Perry from George Mason University pointed out that if Sweden were to be admitted as a 51st state to the Union, it would be the poorest state in terms of unemployment and median household income. Yes, even poorer than Mississippi. In fact Sweden’s current welfare state suppresses household incomes so effectively for Swedes that a 2012 IEA study found that American Swedes have roughly the same unemployment rate as Swedes in Sweden yet earn, on average, 53 percent more annually.
In recent years, Swedish lawmakers have begun slowly privatizing chunks of their socialized sectors such as healthcare, social security, and education. Last year, Reason magazine pointed out that private health insurance has exploded in a country where cancer patients may wait up to a year for treatment in the state-run system. This trend has grown. Sweden, furthermore, has begun outsourcing education to private providers and seen not only a reduction of costs but an increase in parent satisfaction and learning outcomes for graduates.
Bernie Sanders has Picked up the Wrong Lessons from the Nordic Model
Bernie Sanders has stated now, and in the past, that he would like to see an America with universal healthcare, paid maternity leave, expanded social security through higher payroll taxes, mandatory vacation days and sick leave, free secondary education, and the enactment of a slew of other progressive policies. It seems he has only forgotten to promise yachts for the homeless.
The underlying problem with socialists like Bernie Sanders is that they do not actually believe (or understand) in economics at all. As Ludwig von Mises himself has pointed out, socialism is not an economic theory — it is a theory of redistribution. Only free exchange can coordinate entrepreneurs and their resources in a way that creates actual goods and services that satisfy consumer needs and wants. Socialists like Bernie Sanders take no part in this process of wealth creation; they merely show up after the fact and demand title. Sweden has practiced this form of parasitic socialism on their accumulated wealth and it has significantly stifled Swedish productivity.
Nordic-style policies advocated by Sanders have (predictably) restricted Sweden’s growth for decades. The notion that we can implement Nordic socialism in a nation of 320 million people without destroying labor mobility, taxing capital out of existence, and absolutely crippling innovation where it’s needed most is pure delusion. Sweden is slowly returning to its productive capitalist roots. We should do the same.
- Global Debt And GDP: Spot The Odd One Out
Actually, sorry, that was a trick headline: there is no odd one out, because when it comes to debt and GDP, it’s the same around the entire world.
Source: Citi
- Getting History Right – Saving Capitalism From Monetary Mismanagement
Submitted by Doug Noland via Credit Bubble Bulletin,
October 16 – Wall Street Journal (Alan S. Blinder and Mark Zandi): “Don’t Look Back in Anger at Bailouts and Stimulus… Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession. The Recovery Act and other stimulus measures were costly to taxpayers, and thus much-maligned. But the slump would have been much deeper without them. The Federal Reserve has also come under attack for its unprecedented actions, especially its quantitative easing or bond-buying programs. Yet QE lowered long-term interest rates and boosted stock and housing prices—all to the economy’s benefit.
Yes, QE has possible negative side-effects, but for the most part they have yet to materialize. Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011 can hardly be considered flawless. Yet one major reason why the U.S. economy has outperformed the plodding European and Japanese economies is the timely, massive and unprecedented responses of U.S. policy makers in 2008-09. So let’s get the history right.”
Getting “history right” has been a CBB focal point From Day One.
In last week’s media barrage, Dr. Bernanke repeatedly stated that fiscal policy had turned contractionary – (or at best neutral) suggesting that fiscal stringency was a key factor in the Fed sticking with ultra-loose policies. In Friday’s WSJ op-ed, Blinder and Zandi write: “Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011.”
Since the end of 2007, outstanding Treasury Securities (from Fed’s Z.1) have increased $8.302 TN, or 137%. As a percentage of GDP, outstanding Treasuries almost doubled to 83% (from 42%) in seven years. By calendar year, Treasury borrowings increased $1.302 TN (8.8% of GDP) in 2008, $1.506 TN (10.4%) in 2009, $1.645 TN (11.0%) in 2010, $1.138 TN (7.3%) in 2011, $1.181 TN (7.3%) in 2012, $858 billion (5.1%) in 2013 and $736 billion (4.2%) last year.
In nominal dollars, Federal expenditures increased from 2007’s $2.933 TN, to 2008’s $3.214 TN, 2009’s $3.487 TN, 2010’s $3.772 TN, 2011’s $3.818 TN, 2012’s $3.789 TN, 2013’s $3.782 TN and 2014’s $3.897 TN.
Federal expenditures spiked during the crisis and remain about a third above 2007 levels.
“US Post Smallest Annual Budget Deficit since 2007” was a Thursday WSJ headline. “The deficit declined 9% from the prior year to $439 billion—around 2.5% of gross domestic product and below the average the U.S. has run over the past 40 years.”
I remember all too clearly the jubilation that surrounded federal budget surpluses in the late-nineties. Supposedly, a disciplined Washington had made tough choices and finally put its house in order. There was even talk of Treasury completely paying off its debts. It was, however, all a seductive Bubble Illusion. In particular, receipts were inflated by Credit excess-induced capital gains taxes (on inflating stock and asset prices) and booming incomes (especially tech and finance related!). Actually, it all seemed obvious even at the time. It didn’t make sense to me that the Fed and analysts were so prone to misinterpreting underlying dynamics.
Blinder and Zandi: “Yes, QE has possible negative side-effects, but for the most part they have yet to materialize.”
There are myriad deleterious side-effects, and anyone paying attention would agree that many have begun to materialize. One prominent consequences of Federal Reserve rate manipulation has been the loss of the markets’ ability to discipline policymaking. How does it ever make sense to allow politicians access to years of virtually free “money”? Ominously, despite Treasury paying basis points to service a large chunk of our outstanding debts, the federal government is still running significant deficits. While outstanding Treasury debt has increased almost 140% in seven years, 2014 interest payments were up only 8% from 2007 (to $440bn). Government social payments, on the other hand, were up 48% from 2007 levels to $1.897 TN.
Slashing Treasury borrowing costs is not the only way the Fed has temporarily boosted the U.S. fiscal position. Funding a nearly $4.5 TN Fed balance sheet with virtually interest-free funding is (for now) a “money”-making endeavor. Last year the Fed remitted “profits” back to Treasury to the tune of almost $100 billion. Reflationary monetary policies have also been instrumental in resurgent Fannie Mae and Freddie Mac. A hiatus in loan losses allowed Fannie and Freddie to remit almost $140 billion in “profits” back to Treasury (funds that should have remained as a capital buffer).
At this point, markets assume Treasury yields will not rise meaningfully in the foreseeable future. And, apparently, a deep recession remains out of the question. Yet Bubbles inevitably burst. Even a typical recession-induced slump in receipts and jump in spending would at this point see the almost immediate return of enormous federal deficits. Then ponder taking away Fed remittances to the Treasury and factor in another GSE bailout -and things deteriorate dramatically. A reasonable forecast would also incorporate a boost in defense spending. In a few short years federal debt would surpass GDP. Worse yet, at any time an unexpected surge in market yields would rather quickly endanger the balance sheets of the Treasury, the GSEs and the Federal Reserve – with nasty ramifications for the banking system, the economy and finance more generally.
Blinder and Zandi: “Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession.”
I am reminded of an invaluable “Austrian” insight (paraphrased): “The scope of the down cycle is proportional to the excesses of the preceding Credit boom.” From this perspective, there is major problem with conventional “logic.” These so-called “proportional” monetary and fiscal responses have over the past 25 years fueled serial Bubbles – and attendant progressively more dangerous Boom and Bust Dynamics. Especially when it comes to monetary policy, it was recognized a long time ago that the problem with giving central bankers too much discretion was that policy mistakes would invariably be followed by greater blunders.
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It’s sad to see Capitalism under such attack in the national discourse. Washington seems only somewhat less despised than Wall Street. Somehow socialist ideas appeal to a growing number of Americans – especially the young. On this score, I’m content to be repetitive: Federal Reserve activism and inflationism bear primary responsibility.
In this week’s Democratic debate, Hillary Clinton stated, “Sometimes Capitalism must be saved from itself” and “It’s our job to rein in the excesses of capitalism so that it doesn’t run amok and doesn’t cause the kind of inequities that were seeing in our economic system.”
I’ll argue passionately the notion that politicians must save Capitalism from itself is the materialization of a dreadful “negative side-effect” of monetary mismanagement. If politicians are determined to get involved, they should foremost insist on sound money. Since politicians have throughout history demonstrated their proclivity for the exact opposite, Capitalism has been essentially entrusted to sound central bank principles. And while this may have not yet materialized to most, central banking has failed. It goes back to flawed doctrine where the Federal Reserve refused to address inflating Bubbles, preferring instead a policy of aggressive post-Bubble reflationary “mopping up.” It goes back to the Greenspan Fed’s tinkering with the markets to the Bernanke Fed’s crisis management QE to the Bernanke/Yellen/Kuroda/Draghi central bank non-crisis open-ended QE.
Regrettably, I fully expect to be defending Capitalism throughout the remainder of my life. I’ll try to explain how Capitalism isn’t – wasn’t – the problem. The culprit instead was unsound finance and deeply flawed monetary management. In short, Capitalism cannot function effectively within a backdrop of unfettered cheap finance. Things appear miraculous during the boom, and then the bust discombobulates.
Contemporary central bank rate administration essentially abandoned the self-adjusting and regulating market system for determining the price of finance – so fundamental to Capitalism. The results have been predictable: gross misallocation of real and financial resources, economic stagnation, financial fragility, wealth redistribution, rising social and geopolitical tension and central bankers absolutely incapable of extricating themselves from inflationism and market manipulation.
I doubt there are too many traders or hedge fund operators these days that would argue against the Monetary Disorder Thesis. While the major indices appeared more quiescent this week, there remains plenty of instability below the surface. The week saw the broader market underperformed the S&P500. The Transports dropped 2%, while the Utilities gained 2%. The Biotechs were again notable for their inability to sustain a rally.
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The thesis remains that the global Bubble has been pierced. In a world of open-ended QE, unprecedented policy activism and Trillions of trend-following and performance-chasing finance, there will be erratic ebb and flow to market activity – including EM. There were more announcements of hedge funds closing shop this week. For the industry overall, I doubt the recent market rally has relieved much pressure. Many funds were likely caught up in the powerful equities, EM and commodities short squeeze.
It seems apropos to note that shorting is not really the inverse of investing on the long side. The risk profiles are altogether different. On the long side, risk is limited. If an investor is right on the research and is willing to wait out market swings, risk is generally manageable. It’s another story on the short-side. Risk is unlimited. You can be right on the analysis but still lose money in a hurry if caught in the vortex of a powerful short squeeze dynamic.
This short squeeze dynamic has come to wield significant general market impact. With hedge fund and ETF industry assets each now at around $3.0 TN, the level of trend-following trading activity is unprecedented. In theory, one would expect such a backdrop to spur market overshooting both on the upside and down. Except that central bankers have repeatedly backstopped the markets to ensure that downside momentum does not gather pace.
In the past, the Fed and central banks used various backstop measures, including rate cuts, QE or simply talk of further policy loosening. Post-August “flash crash” market assurances have included the Fed delaying “lift off” and even chatter of negative rates. The ECB hinted at boosting QE. Chinese officials responded with a laundry list of stimulus and market controls.
By repeatedly intervening to arrest market downside momentum, the Fed and central banks nurtured a backdrop conducive to powerful short squeezes. The current exceptionally speculative marketplace plays right into this dynamic. After all, few (if any) market themes offer the quick trading profit opportunities as squeezing the shorts. And with the faltering global Bubble and elevated risk generally, short positions and bearish hedges had been mounting in recent months.
It’s worth recalling that Nasdaq went on its final speculative melt-up in early 2000, right in the face of rapidly deteriorating industry fundamentals. Short squeezes and a dislocation in equities derivatives played prominently. And there were some decent squeezes and a collapse in the VIX just prior to the 2008 fiasco. Just because the market is within striking distance of record highs does not indicate that the downside of a historic Bubble period isn’t materializing. It would be much healthier if (self-adjusting) markets were capable of letting some air out gradually.
- "We're Out Of Yellow Bricks"
- Malaysian Lawmakers Call For No Confidence Vote Against PM Amid Goldman Slush Fund Probe
Back in August, it became readily apparent that the scandal surrounding Malaysia’s 1MDB threatened the political career and even the legacy of the country’s Prime Minister Najib Razak.
Street protests in Kuala Lumpur emboldened by loud calls from highly influential former PM Mahathir Mohamad suggested that, much like Brazil and Turkey, Malaysia is yet another example of an emerging economy wherein deteriorating fundamentals are set to conspire with idiosyncratic political risks to create the conditions for a descent into full-on crisis.
As a reminder, the development bank at the heart of the scandal benefited from early financing provided by Goldman, which used its connections with the PM to help secure deals that saw the bank effectively write 1MDB several large checks while simultaneously taking newly-issued debt onto its own books at a discount to par.
The outsized underwriting “fees” have been the subject of some debate, but the real questions revolve around how some $700 million ended up in personal bank accounts linked to Najib.
The premier’s government has been variously accused of obstructing domestic investigations into 1MDB and now, the FBI is not only looking into the fund, but also into Goldman’s role in the financing, while authorities in Switzerland are asking their own questions.
Meanwhile, the UAE has begun to look for billions in collateral payments that a subsidiary of an Abu Dhabi wealth fund supposedly received from 1MDB but which have apparently disappeared.
In short, it looks as though this was nothing more than a slush fund that everyone was dipping into and now, the whole thing is about to unravel.
On Sunday we learn that the opposition in Malaysia has called for a vote of no confidence against Najib. Here’s Bloomberg:
Malaysia’s opposition escalated pressure on Prime Minister Najib Razak over a multimillion-dollar funding scandal, seeking a no-confidence vote against him as parliament resumes after a four-month hiatus.
While the motion faces obstacles even getting heard, let alone voted on, the opposition is looking to gain momentum from the vocal criticism of former premier Mahathir Mohamad, who has called on Najib to step aside.
Najib retains the support of many divisional heads in his ruling party and in the budget is expected to increase handouts to the poor, many of them rural Malays, a core support base. Even so there are signs of discontent, including from former deputy premierMuhyiddin Yassin, whom Najib fired in July.
People’s Justice Party lawmaker Hee Loy Sian said he filed the no-confidence motion over Najib’s failure to address claims he received funds linked to debt-ridden state investment company 1Malaysia Development Bhd. in his bank accounts. Najib has denied any wrongdoing, and he and investigators have both said the funds were political donations from the Middle East.
“Najib has tarnished the country’s image in the world and caused investors to lose faith in the government,,” Hee wrote in the motion that was posted on the parliament website on Saturday. “Malaysians do not believe in this prime minister.”
The opposition needs the support of 25 Barisan Nasional MPs in order to pass a no-confidence vote. However, the opposition alliance has itself been wracked by infighting for months over issues including one party’s push for Islamic criminal law in a state it governs. It remains divided after former leader Anwar Ibrahim was jailed for sodomy, a charge he denies.
The no-confidence vote will be for “BN MPs to rebel if they would want any move against Najib to result in a new BN/UMNO majority government,” said Wong, referring to Najib’s United Malays National Organisation. “They will want the cake and eat it too, which then makes the mathematics of getting a rebellion much tougher.”
Here’s a bit of color on the budget announcement (via Citi):
PM Najib will announce Budget 2016 on 23 Oct. To mitigate elevated political risks, the focus will be on cushioning the pain to lower and middle income voters from fiscal reforms, whilst continuing with a more gradual path of fiscal consolidation to avoid risk of sovereign ratings downgrade. The 3.2% of GDP deficit target for 2015 announced in January will likely be reiterated, as stronger than expected GST and corporate tax revenues should offset a slump in petroleum income taxes, whilst allowing for flexibility for some overshoot in operating expenditure. The smaller 3% of GDP deficit target for 2016 will be predicated on higher GST collections, which will both offset a lower dividend from Petronas and be used to fund larger direct cash transfers to the poor. BR1M handouts are likely to be expanded to RM5.5-6bn from RM4.9bn, but still significantly less than the RM10-11bn of fuel subsidy savings. Though there are calls for cuts in tax rates, it would be more prudent to offer one-off personal tax rebates and targeted tax/GST reliefs instead. Likewise, any minimum wage hike should be accompanied by productivity-enhancement measures so as to preserve competitiveness. Reducing EPF employee contribution rate is likely the most cost-effective way of boosting disposable incomes and shielding domestic demand without burdening employers or the fiscal position.
So ultimately, Najib will try to bribe poor voters with the budget in an effort to mitigate the political risks of the 1MDB scandal.
As we’ve said before, this is exactly what Malaysia does not need as it attempts to grapple with a ringgit that’s down 16% on the year and as the fundamental picture for the world’s most important emerging economies continues to deteriorate. The market hates uncertainty and the spectre of a no confidence vote certainly falls into the “uncertainty” category.
- America's "Inevitable" Revolution & The Redistribution Fallacy
Here’s the good news: The chaos and upheaval we see all around us have historical precedents and yet America survived.
The bad news: Everything likely will get worse before it gets better again.
That’s NYPost.com's Michael Goodwin's chief takeaway from “Shattered Consensus,” a meticulously argued analysis of the growing disorder. Author James Piereson persuasively makes the case there is an inevitable “revolution” coming because our politics, culture, education, economics and even philanthropy are so polarized that the country can no longer resolve its differences.
To my knowledge, no current book makes more sense about the great unraveling we see in each day’s headlines. Piereson captures and explains the alienation arising from the sense that something important in American life is ending, but that nothing better has emerged to replace it.
The impact is not restricted by our borders. Growing global conflict is related to America’s failure to agree on how we should govern ourselves and relate to the world.
Piereson describes the endgame this way: “The problems will mount to a point of crisis where either they will be addressed through a ‘fourth revolution’ or the polity will begin to disintegrate for lack of fundamental agreement.”
He identifies two previous eras where a general consensus prevailed, and collapsed. Each lasted about as long as an individual’s lifetime, was dominated by a single political party and ended dramatically.
First came the era that stretched from 1800 until slavery and sectionalism led to the Civil War.
The second consensus, which he calls the capitalist-industrial era, lasted from the end of the Civil War until the Great Depression.
It is the third consensus, which grew out of the depression and World War II, which is now shattering. Because the nation is unable to solve economic stagnation, political dysfunction and the resulting public discontent, Piereson thinks the consensus “cannot be resurrected.”
That’s not to say he’s pessimistic — he thinks a new era could usher in dynamic growth, as happened after the previous eras finally reached general agreement on national norms. But first we must weather a crisis that may involve an economic and stock-market collapse, a terror attack, or simply a prolonged and bitter stalemate.
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Piereson also considers possible elements of the next national consensus, including a renewed focus on growth instead of redistribution and a bid to depoliticize government.
But he is ultimately uncertain what will come next because we are far from reaching a consensus on almost anything. There are so many fault lines that the nation seems consumed by a conflict of all against all… and as James Piereson most recently detailed at commentarymagazine.com, the Fallacy of Rediustribution remains among the highly divisive of all…
Hillary Clinton launched her presidential campaign last spring by venturing from New York to Iowa to rail against income inequality and to propose new spending programs and higher taxes on the wealthy as remedies for it. She again emphasized these dual themes of inequality and redistribution in the “re-launch” of her campaign in June and in the campaign speeches she delivered over the course of the summer. Clinton's campaign strategy has been interpreted as a concession to influential progressive spokesmen, such as Senators Elizabeth Warren and Bernie Sanders, who have loudly pressed these redistributionist themes for several years in response to the financial meltdown in 2008 and out of a longstanding wish to reverse the Reagan Revolution of the 1980s. In view of Clinton's embrace of the progressive agenda, there can be little doubt that inequality, higher taxes, and proposals for new spending programs will be central themes in the Democratic presidential campaign in 2016.
The intellectual case for redistribution has been outlined in impressive detail in recent years by a phalanx of progressive economists, including Thomas Piketty, Joseph Stiglitz, and Paul Krugman, who have called for redistributive tax-and-spending policies to address the challenge of growing inequalities in income and wealth. Nobel Laureate Robert Solow, of MIT, put the matter bluntly last year in a debate with Harvard's Gregory Mankiw, saying that he is in favor of dealing with inequality by “taking a dollar from a random rich person and giving it to a random poor person.”
Public-opinion polls over the years have consistently shown that voters overwhelmingly reject programs of redistribution in favor of policies designed to promote overall economic growth and job creation. More recent polls suggest that while voters are increasingly concerned about inequality and question the high salaries paid to executives and bankers, they nevertheless reject redistributive remedies such as higher taxes on the wealthy. While voters are worried about inequality, they are far more skeptical of the capacity of governments to do anything about it without making matters worse for everyone.
As is often the case, there is more wisdom in the public's outlook than in the campaign speeches of Democratic presidential candidates and in the books and opinion columns of progressive economists. Leaving aside the morality of redistribution, the progressive case is based upon a significant fallacy. It assumes that the U.S. government is actually capable of redistributing income from the wealthy to the poor. For reasons of policy, tradition, and institutional design, this is not the case. Whatever one may think of inequality, redistributive fiscal policies are unlikely to do much to reduce it, a point that the voters seem instinctively to understand.
One need only look at the effects of federal tax-and-spending programs over the past three and a half decades to see that this is so. The chart below, based on data compiled by the Congressional Budget Office, displays the national shares of before- and after-tax income for the top 1 and 10 percent of the income distribution from 1979 through 2011, along with the corresponding figures for the bottom 20 percent of the income distribution. For purposes of this study, the Congressional Budget Office defined income as market income plus government transfers, including cash payments and the value of in-kind services such as health care (Medicare and Medicaid) and cash substitutes such as food stamps. The chart thus represents a comprehensive portrait of the degree to which federal tax-and-spending policies redistribute income from the wealthiest to the poorest groups and to households in between.
The chart illustrates two broad points. First, the wealthiest groups gradually increased their share of national income (both in pre- and after-tax and transfer income) over this period of more than three decades. Second, and more notable for our purposes, federal tax and spending policies had little effect on the overall distribution of income.
Across this period, the top 1 percent of the income distribution nearly doubled its share of (pre-tax and transfer) national income, from about 9 percent in 1979 to more than 18 percent in 2007 and 2008, before falling back after the financial crisis to 15 percent in 2010 and 2011 (some studies suggest that by 2014 it was back up to 18 percent). Meanwhile, the top 10 percent increased its share by one-third, from about 30 percent in 1979 to 40 percent in 2007 and 2008, before it fell to 37 percent in 2011. Through all this, the bottom quintile maintained a fairly consistent share of national income.
Many will be surprised to learn that the federal fiscal system—taxes and spending—does not do more to reduce inequalities in income arising from the free-market system. Yet there are perfectly obvious reasons on both the tax and the spending side as to why redistribution does not succeed in the American system—and probably cannot be made to succeed.
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A 2008 study published by the Organization for Economic Cooperation and Development found that the United States had the most progressive income-tax system among all 24 OECD countries measured in terms of the share of the tax burden paid by the wealthiest households. According to the Congressional Budget Office, the top 1 percent of earners paid 39 percent of the personal income taxes in 2010 (while earning 15 percent of the country's overall before-tax income) compared with just 17 percent in 1980 and 24 percent in 1990. The top 20 percent of earners paid 93 percent of the federal income taxes in 2010 even though they claimed 52 percent of before-tax income. Meanwhile, the bottom 40 percent paid zero net income taxes—zero. For all practical purposes, those in the highest brackets already bear the overwhelming burden of federal income tax, while those below the median income have been taken out of the income-tax system altogether.
There is a more basic reason that the tax system does not do more to redistribute income: The income tax is not the primary source of revenue for the national government. In 2010, the federal government raised $2.144 trillion in taxes, with only 42 percent coming from the individual income tax. Forty percent came from payroll taxes, 9 percent from corporate taxes, and the rest from a mix of estate and excise taxes. Since the early 1950s, the national government has consistently relied upon the income tax for between 40 and 50 percent of its revenues, with precise proportions varying from year to year due to economic conditions. For several generations, progressive reformers have looked to the income tax as the instrument through which they aimed to take resources from the rich and deliver them to the poor. But in reality, in the United States at least, the income tax is not a sufficiently large revenue source for the national government to do the job that the redistributionists want it to do.
And here's the rub: Payroll taxes fall more heavily upon working- and middle-class wage and salary income earners than upon the wealthy, whose incomes come disproportionately from capital gains or whose salaries far exceed the maximum earnings subject to those taxes. In 2010, the wealthiest 1 percent paid 39 percent of income taxes but just 4 percent of payroll taxes. The top 20 percent of earners paid 93 percent of the nation's income taxes but just 45 percent of payroll taxes. Meanwhile, the middle quintile paid 15 percent of all payroll taxes—but just 3 percent of income taxes. In other words, the more widely shared burdens of the payroll tax tend to mitigate the progressive effects of the income tax.
An increase in the top marginal tax rate from 39.6 to, say, 50 percent might have yielded around $100 billion in additional revenue in 2010.(This assumes no corresponding changes in tax and income strategies on the part of wealthy households and no negative effects on investment and economic growth, which are risky assumptions.)
That would have been real money, to be sure, but it would have represented only about one half of 1 percent of GDP (using 2010 figures) or less than 3 percent of total federal spending. This would not have been enough to permit much in the way of redistribution to the roughly 60 million households in the bottom half of the income scale.
Turning to the spending side of fiscal policy, we encounter a murkier situation because of the sheer number and complexity of federal spending programs. The House of Representatives Budget Committee estimated in 2012 that the federal government spent nearly $800 billion on 92 separate anti-poverty programs that provided cash assistance, medical care, housing assistance, food stamps, and tax credits to the poor and near-poor. The number of people drawing benefits from anti-poverty programs has more than doubled since the 1980s, from 42 million in 1983 to 108 million in 2011. The redistributive effects of these programs are limited, however, because most funds are spent on services to assist the poor and only a small fraction of these expenditures are distributed in the form of cash or income.
As it turns out, most of the money goes not to poor or near-poor households but to providers of services. The late Daniel Patrick Moynihan once tartly described this as “feeding the horses to feed the sparrows.” This country pays exorbitant fees to middle-class and upper-middle-class providers to deliver services to the poor.
Why have matters devolved in this way? The American welfare state was built to deliver services rather than incomes in part because the American people have long viewed poverty as a condition to be overcome rather than one to be subsidized with cash. Many also believe that the poor would squander or misspend cash payments and so are better off receiving services and in-kind benefits such as food stamps, health care, and tuition assistance. With regard to aid to the poor, Americans have built a social-service state, not a redistribution state.
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And so, of the $800 billion spent on poverty programs in 2012, less than $150 billion was distributed in cash income, if one includes as cash benefit the tax rebate under the EITC. That is a grand total of 18 percent of the whole. The rest was spent on services and in-kind benefits, with the money paid to providers of various kinds, most of whom have incomes well above the poverty line.
With respect to the recipients of federal transfers, the CBO study reveals a surprising fact: Households in the bottom quintile of the income distribution receive less in federal payments than those in the higher income quintiles. Households in the bottom quintile of the income distribution (below $24,000 in income per year) received on average $8,600 in cash and in-kind transfers. But households in the middle quintile received about $16,000 in such transfers. And households in the highest quintile received about $11,000. Even households in the top 1 percent of the distribution received more in dollar transfers than those in the bottom quintile. The federal transfer system may move income around and through the economy—but it does not redistribute it from the rich to the poor or near-poor.
It is well known in Washington that the people and groups lobbying for federal programs are generally those who receive the salaries and income rather than those who get the services. They, as Senator Moynihan observed decades ago, are the direct beneficiaries of most of these programs, and they have the strongest interest in keeping them in place. The nation's capital is home to countless trade associations, companies seeking government contracts, hospital and medical associations lobbying for Medicare and Medicaid expenditures, agricultural groups, college and university lobbyists, and advocacy organizations for the environment, the elderly, and the poor, all of them seeking a share of federal grants and contracts or some form of subsidy, tax break, or tariff.
This is one reason that five of the seven wealthiest counties in the nation are on the outskirts of Washington D.C. and that the average income for the District of Columbia's top 5 percent of households exceeds $500,000, the highest among major American cities.
Washington is among the nation's most unequal cities as measured by the income gap between the wealthy and everyone else. Those wealthy individuals did not descend upon the nation's capital in order to redistribute income to the poor but to secure some benefit to their institutions, industries, and, incidentally, to themselves.
They understand a basic principle that has so far eluded progressives: The federal government is an effective engine for dispensing patronage, encouraging rent-seeking, and circulating money to important voting blocs and well-connected constituencies. It is not an effective engine for the redistribution of income.
James Madison wrote in the Federalist Papers that the possession of different degrees and kinds of property is the most durable source of faction under a popularly elected government. Madison especially feared the rise of a redistributive politics under which the poor might seize the reins of government in order to plunder the wealthy by imposing heavy taxes. He and his colleagues introduced various political mechanisms—the intricate system of checks and balances in the Constitution, federalism, and the dispersion of interests across an extended republic—to forestall a division between the rich and poor in America and to deflect political conflict into other channels.
While Madison's design did not succeed in holding back the tide of “big government” in the 20th century, it nevertheless proved sufficiently robust to frustrate the aims of redistributionists by promoting a national establishment open to a boundless variety of crisscrossing interests.
The ingrained character of the American state is unlikely to change fundamentally any time soon, which is why those worried about inequality should abandon the failed cause of redistribution and turn their attention instead to broad-based economic growth as the only practical remedy for the sagging incomes of too many Americans.
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- Goldman Mocks "Constitutionally Dovish" Fed, Sees December Rate Hike Odds At 60% To Offset "Credibility Problem"
One month ago, in the aftermath of the FOMC decision which stunned all WSJ-polled economists who were certain a rate hike was imminent by not hiking, instead blaming its on Chinese and global weakness, and when both the market and the credibility of the Fed were about to crack, Goldman did its part to restore the “BTFD” bid when it called, as we previously reported, that no Fed hike would come until at least mid-2016.
A few short days later, as always happens when Goldman makes a contrarian call, this quickly became the new Wall Street mantra, and stocks soared as even more terrible economic news were unveiled.
Then overnight, Goldman’s chief economist Jan Hatzius, who realizes that the only variable that matters for the Fed’s binary decision is where the S&P 500 is trading, and now that the S&P500 is solidly back above 2000 and is fast approaching its all time highs (not to mention is 30 points above Goldman’s year end price target of 2000) says that the possibility of a December rate hike is a substantial 60%, nearly double the Fed Funds futures implied rate of 30-40%, and suggests that yet another volatility risk flaring is in the immediate future, especially if there is even one economic data point in the coming weeks that is not an absolutely disaster.
Of course, if Goldman is wrong, and the economy slips recession and goes straight into depression, then the S&P will not only open limit up, but hit new all time highs before one can say “global thermonuclear war is the best possible news stock bulls can get.“
None of this is news. What is news is that even Goldman dares to take a jab at the Fed’s credibility: to wit:
… the Fed may have developed a credibility problem by failing to follow through on guidance that it never actually provided!
And not only that, but Goldman’s own chief economist dares to call the Fed’s bluff:
A more likely reason for the difference is that some market participants have developed a view that the FOMC is just “constitutionally dovish” and will abandon its current guidance even if the economy does fine in the next two months.
Will Yellen dare to admit that none other than Goldman – which benefits the most from easy money policy – and who is implicitly criticizing the Fed for not only losing credibility but is dictated entirely by asset price levels, is right – not to mention every “tinfoil blog” who has said this for years – and that the Fed is nothing more than a device to preemptively attack any market declines by assuring the BTFDers that the only way to profit in this broken market and depressed economy is to buy each and every market dip on what little faith remains in the US central bank?
Look to Fed’s mouthpiece Jon Hilsenrath for any hints that after pushing the market higher at an epic pace in the past month on nothing bad bad after worse news, that the Fed has had enough of being the topic of derisive laughter among all Wall Street participants.
Below is the full Hatzius note, in the form of a rhetorical Q&A, in which the Goldman chief strategist explains why the time to take profits on the latest “bad news is good news” whiplash has come.
Q&A on Fed Liftoff
- We still expect a rate hike at the December FOMC meeting. The leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our forecast is similar to theirs. However, we are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment—or in a broad sense, “the data”—will be worse than the FOMC’s (and our) expectations.
- The low market-implied probability of a December hike of only 30%-40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). The low market-implied probability is not a problem now, but Fed officials will need to find a way to move it much higher by the time of the meeting if they really do want to hike.
- The Fed’s rationale for wanting to start the normalization process is straightforward. In their view, labor market slack has diminished substantially, the link between slack and inflation is stronger than widely believed, and the funds rate is far below the longer-term equilibrium rate so they need to get started well before the economy is back to normal. Consistent with this, even versions of the Taylor 1999 rule that focus on broad labor market slack and assume a low short-run equilibrium funds rate suggest that liftoff is appropriate soon.
- Our own view is that it might make sense to start normalizing in December if we were perfectly confident in our baseline forecast for the economy. But uncertainty around that forecast still argues for waiting longer. The main reason is risk management. At or near the zero bound and with inflation well below target, easing policy in response to a renewed negative shock is both harder and more urgent than tightening in response to a positive shock. This means that there is a greater-than-normal incentive to avoid anything—such as an interest rate increase that ultimately turns out to be unwarranted—that could generate a negative shock.
Today we discuss the possibility of a December funds rate hike in Q&A form.
Q: Why do you still expect the FOMC to hike rates in December?
A: Because the FOMC leadership has said that a rate hike by the end of the year is likely if the economy and markets evolve broadly as expected. Our near-term forecast is similar to theirs, so our baseline is also that they hike.
Q: But didn’t they also signal a hike in the run-up to the September meeting and nevertheless decided to take a pass, despite good economic data?
A: No, the September meeting was very different. First, the committee never clearly signaled a September hike, despite much commentary to the contrary. In fact, our interpretation of Chair Yellen’s June 17 press conference and her July 10 speech was that she had shifted her liftoff expectation from September to December even prior to the turmoil in global markets during August. Second, while the economic numbers between June and September broadly matched expectations, Fed officials have made clear that “data dependence” should be interpreted broadly and also includes shifts in financial conditions that could affect future numbers. Thus, the turmoil sealed the case against a move in September.
Q: Aren’t you overstating the strength of the current signal from the FOMC for the December meeting? After all, Governors Brainard and Tarullo seem to have a very different view from Chair Yellen.
A: True, but this is not a surprise. At the September meeting, 4 out of 17 participants projected no hikes until 2016 or later. Presidents Evans and Kocherlakota had already declared themselves to be part of that group. And once most other participants with past dovish leanings—including Boston Fed President Rosengren—had indicated their support for a 2015 hike, it seemed clear that Brainard and Tarullo were the other two 2016 hikers.
Q: Whether or not it is a surprise, isn’t such open disagreement within the Board of Governors highly unusual historically? And doesn’t it undermine Chair Yellen’s authority?
A: No, we don’t think so. The long-term history of the Board of Governors is not a good guide because the Yellen/Bernanke Fed is a very different institution from the pre-Bernanke Fed. Perhaps because of their backgrounds in academia—a world that prizes open debate—Yellen and Bernanke seem more comfortable with disparate views than their predecessors. And even within the Board of Governors there are instances of open disagreement in recent years that did not undermine the authority of the chair. For example, Governor Warsh wrote an op-ed in the Wall Street Journal just after the “QE2” announcement in November 2010 that was highly critical of the committee’s decision (even though he had not formally dissented at the meeting). Nevertheless, Chairman Bernanke writes in his new book that he was “comfortable” with Warsh’s article at the time.
The introduction of the dot plot in early 2012 has probably further enhanced the spirit of open debate because it forces every participant to write down an explicit funds rate path. Although the dots are technically anonymous, committee members have been moving in the direction of revealing their own policy preferences for some time, well before the recent Brainard and Tarullo comments. This is true not only for regional bank presidents but also for governors. For example, Governor Powell gave an interview shortly after the June 2015 meeting in which he (narrowly) projected a September hike, even though it seemed at that time (at least to us) that Chair Yellen had already moved to a December baseline.
Q: Is the leadership starting to back away from a December hike? New York Fed President Dudley acknowledged on Thursday that the economy was slowing.
A: Dudley did seem a bit less confident on growth—and rightly so, because the recent data really have been worse than expected. Largely because of the weakness in employment, retail sales, and the manufacturing surveys, our current activity indicator (CAI) for September stands at 1.8%, in line with our 1¾% estimate of potential GDP growth. If the economy really is slowing to a trend or sub-trend pace, then liftoff will probably shift into 2016.
But such a conclusion still looks premature. Some of the timeliest indicators such as jobless claims and consumer sentiment in October have been quite strong, and part of the weakness in our CAI may reflect short-term noise, including a big drop in the (very volatile) household employment survey. And while payrolls really were materially softer than expected, the FOMC may have a lower “hurdle rate” for payrolls than we thought previously. In his CNBC interview last week, Dudley said that 120,000-150,000 jobs per month would probably be sufficient to push down the unemployment rate over time. Taken literally, this statement is close to a truism because most economists now probably agree that the “breakeven” pace of job growth is 100,000 or less. But the fact that he used these numbers suggests that the FOMC might view an average payroll growth pace of 150,000 (or perhaps even a bit less) as sufficient to meet its goal of “some further labor market improvement.” This is a slightly smaller number than we would have guessed.
Moreover, it is not just growth that matters. The core CPI rose more than expected in September, and financial conditions have eased significantly since the September meeting. If we take a broad view of whether the environment is surprising on the upside or downside relative to the committee’s expectations, the jury is therefore still out.
Q: What odds would you put on a hike in December?
A: About 60% at this point. Most of the uncertainty relates to the possibility that the economic and market environment will significantly undershoot the FOMC’s expectations. We don’t expect this, but are not very certain. There is also some risk from the renewed fiscal uncertainty in Washington, although our baseline forecast remains that the debt limit will be extended and a government shutdown averted.
Q: So why is the market only pricing 30%-40%? Are others so much more pessimistic about the economic environment than you?
A: No, we don’t think that is the reason. Our near-term economic views are probably fairly similar to the consensus. A more likely reason for the difference is that some market participants have developed a view that the FOMC is just “constitutionally dovish” and will abandon its current guidance even if the economy does fine in the next two months. This view was probably strengthened by the outcome of the September meeting, which went against the predictions of many forecasters; two weeks before the meeting, 80% of economic forecasters were projecting a hike, and even on the eve of the meeting that share still stood near 50%. After the decision, some of these same forecasters then criticized the committee for its misleading communication in the run-up to the meeting. Thus, the Fed may have developed a credibility problem by failing to follow through on guidance that it never actually provided!
Q: Is the low market-implied probability of a hike in itself a reason not to hike?
A: If we are still around 30% on the day of the announcement, then the answer would be yes. We recently showed that the FOMC has a strong revealed preference for seeing rate hike decisions well discounted by the time of the meeting; since 1990, about 90% of all hikes were at least 70% discounted, and at least the last two “first hikes”, in June 1999 and June 2004, were practically 100% discounted. In our view, the FOMC will likely want a decision to hike on December 16 to be largely discounted if and when it occurs.
Of course, there is still plenty of time for the market to change its mind about December, so the low market-implied probability is not a pressing issue at the moment. It is too early for Fed officials to jawbone the market strongly since a lot of the relevant information has yet to be released. But if the economy and markets evolve in a way that is similar to the FOMC’s expectations as of the September meeting but the market is still not pricing a hike after the November employment report released on December 4, then we would expect a strong effort from Fed officials to prepare the market for a hike.
Q: Why does the FOMC even want to hike interest rates? Are they just desperate to get off the zero bound?
A: No. In our view, the “one and done” strategy does not make much sense, and we suspect the FOMC agrees. The reason to hike is a desire to start the interest rate normalization process because the committee thinks it is sufficiently close to its goals. We do not believe that they would hike unless they were at least somewhat confident that they will want to hike again within the next three months.
Q: Do you agree that it makes sense to start normalizing so soon?
A: If we were perfectly confident in our baseline forecast for the economy, it might make sense to start in December.
First, the labor market has improved rapidly, and we recently lowered our estimate of the structural labor force participation rate. As a result, we now think that the remaining amount of slack is no longer all that large. The broad underemployment rate U6 currently stands at 10.0%, about 1 percentage point above our estimate of its full-employment rate; adjusting for the greater volatility of U6, this is equivalent to about a ¾-point gap when translated into headline unemployment rate terms.Second, our recent research using both regional US data and cross-country data provides some a reasonable amount of support for the Phillips curve. Although the explanatory power of slack alone is still not huge, this does support the Fed’s view that further labor market improvement should eventually push inflation back to the target.
Third, the current funds rate is far below our estimate of the longer-term neutral rate, so it makes sense to lift off from zero some time before the economy is at full employment and inflation back at the target. Consistent with all this, even versions of the Taylor rule that use U6 instead of the headline unemployment rate and build in a depressed short-term equilibrium funds rate suggest that the funds rate should rise above zero soon.
Q: What’s the problem with getting started, then?
A: Uncertainty around our forecasts combined with the fact that erring on the side of hiking too early looks riskier than erring on the side of hiking too late. At or near the zero bound for short-term rates and at a time when inflation is well below target, easing policy in response to a renewed negative shock is both harder and more urgent than tightening in response to a positive shock. This means that there is a greater-than-normal incentive to avoid anything—such as an interest rate increase that ultimately turns out to be unwarranted—that could generate a negative shock. Moreover, financial conditions have already tightened significantly and thereby done much of what the Fed typically hopes to achieve by lifting the funds rate (although some of this tightening has reversed in recent weeks). Finally, while our recent research finds a reasonable amount of support for the Phillips curve, there is still uncertainty about the strength of the link and the most appropriate measure of labor market slack. We therefore think it would be better to wait for confirmation—in the form of at least a modest pickup in wage and price inflation—that the economy is really starting to push up against resource constraints before starting the normalization.
- Caught On Tape: Inside Iran's Secret Underground Missile Tunnels
On Monday, in “Iran Openly Flouts Obama, Launches New Ballistic Missile,” we highlighted the The Emad, Tehran’s first precision-guided, ballistic missile with the capability and range to hit Israel. The weapon is a liquid-propelled rocket with a range of 1,056 miles, is apparently accurate to within about 1,600 feet, and can carry a 1,653-pound payload.
Iran test-fired the Emad last weekend. Here’s footage of the launch:
And here’s an excerpt from our analysis putting it in context given recent events:
One of the truly interesting things about Iran’s stepped up involvement in Syria (be it through Tehran’s various Shiite militias, the Quds, or most visibly, via Hezbollah) is that it demonstrates an outright disregard for the nuclear deal.
That’s certainly not an attempt to scold Iran. In fact, it’s never been entirely clear why Washington gets to play world nuclear police with Tehran when history has definitively proven that if there’s any country that can’t be trusted with nuclear bombs, it’s the US.
That said, the Ayatollah’s ravings leave something to be desired when it comes to diplomacy and if you’re going to threaten to wipe entire countries off the map you shouldn’t necessarily be surprised when those other countries try to prevent you from obtaining a nuclear weapon.
Well the ink on the deal is barely dry and not only has Iran i) effectively invaded Syria, and ii) flouted inspectors at Parchin, they’ve now test-fired a long-range surface-to-surface ballistic missile.
As Michael Elleman of the US Institute Of Peace (and yes, we’re aware that there’s something oxymoronic about the name of that organization) reminds us, “Iran has the largest and most diverse ballistic missile arsenal in the Middle East.”
Here’s a rundown of their arsenal, again from USIP:
- Shahab missiles: Since the late 1980s, Iran has purchased additional short- and medium-range missiles from foreign suppliers and adapted them to its strategic needs. The Shahabs, Persian for “meteors,” were long the core of Iran’s program. They use liquid fuel, which involves a time-consuming launch. They include:
- The Shahab-1 is based on the Scud-B. (The Scud series was originally developed by the Soviet Union). It has a range of about 300 kms or 185 miles
- The Shahab-2 is based on the Scud-C. It has a range of about 500 kms, or 310 miles. In mid-2010, Iran is widely estimated to have between 200 and 300 Shahab-1 and Shahab-2 missiles capable of reaching targets in neighboring countries.
- The Shahab-3 is based on the Nodong, which is a North Korean missile. It has a range of about 900 km or 560 miles. It has a nominal payload of 1,000 kg. A modified version of the Shahab-3, renamed the Ghadr-1, began flight tests in 2004. It theoretically extends Iran’s reach to about 1,600 km or 1,000 miles, which qualifies as a medium-range missile. But it carries a smaller, 750-kg warhead.
- Although the Ghadr-1 was built with key North Korean components, Defense Minister Ali Shamkhani boasted at the time, “Today, by relying on our defense industry capabilities, we have been able to increase our deterrent capacity against the military expansion of our enemies.”
- Sajjil missiles: Sajjil means “baked clay” in Persian. These are a class of medium-range missiles that use solid fuel, which offer many strategic advantages. They are less vulnerable to preemption because the launch requires shorter preparation – minutes rather than hours. Iran is the only country to have developed missiles of this range without first having developed nuclear weapons.
- This family of missiles centers on the Sajjil-2, a domestically produced surface-to-surface missile. It has a medium-range of about 2,000 km or 1,200 miles when carrying a 750-kg warhead. It was test fired in 2008 under the name, Sajjil. The Sajjil-2, which is probably a slightly modified version, began test flights in 2009. This missile would allow Iran to “target any place that threatens Iran,” according to Brig. Gen. Abdollah Araghi, a Revolutionary Guard commander.
- The Sajjil-2, appears to have encountered technical issues and its full development has slowed. No flight tests have been conducted since 2011. IfSajjil-2 flight testing resumes, the missile’s performance and reliability could be proven within a year or two. The missile, which is unlikely to become operational before 2017, is the most likely nuclear delivery vehicle—if Iran decides to develop an atomic bomb. But it would need to build a bomb small enough to fit on the top of this missile, which would be a major challenge.
- The Sajjil program’s success indicates that Iran’s long-term missile acquisition plans are likely to focus on solid-fuel systems. They are more compact and easier to deploy on mobile launchers. They require less time to prepare for launch, making them less vulnerable to preemption by aircraft or other missile defense systems.
- Iran could attempt to use Sajjil technologies to produce a three-stage missile capable of flying 3,700 km or 2,200 miles. But it is unlikely to be developed and actually fielded before 2017.
Now that you have an idea of what Tehran’s capabilities are, we present the following video which gives you an inside look at one of Tehran’s secret underground missile facilities preceded by some color from Sputnik:
The state-run Islamic Republic of Iran Broadcasting (IRIB) channel was permitted to enter the base, located 500 meters below ground, and shoot the vido, which was aired on Wednesday, The Tehran Times newspaper reported.
Commander of the IRGC Aerospace Force Brigadier General Amir Ali Hajizadeh said during a visit to the site that
“Iranian missiles of varying ranges are ready to be launched from underground bases once Supreme Leader Ayatollah Ali Khamenei orders to do so.”
He added that Iran had built a number of missile arsenals throughout the country at depths of 500 meters.
“We are not worried if the enemies of the Islamic Revolution use the newest and most advanced generations of satellites and spying equipment,” Hajizadeh emphasized.
He further said that Iran plans to replace the current home-made missiles with new generations of long-range, advanced missiles, which run on liquid and solid fuel.
“Those who threaten Iran with their military option on the table would better take a look at Iran’s ‘options under the table,’ namely the missile arsenals. Iran’s known military power is only the tip of the iceberg.”
By the way, happy “Adoption Day” (via CNN):
It’s Sunday, October 18, the day the Iran nuclear deal gets rolling.
“Adoption Day” for the Joint Comprehensive Plan of Action, as the deal is formally called, means that officials from Iran, the United States and other world powers involved in the deal get started turning it into reality.
- Scandal-Plagued Deutsche Bank Terminates Head Of I-Banking As Part Of Sweeping Restructuring
We first realized that something was off at Deutsche Bank in the summer of 2013, when long before the bank’s unprecedented management, regulatory and litigation problems surfaced, we first pointed out that while Europe was supposedly undergoing a “recovery” (a “recovery”… which led directly to NIRP and QE), Europe’s biggest bank was deleveraging its balance sheet at a pace suggestive of an economic recession if not depression. As the chart below shows, from nearly €900 billion in market value of derivatives (either asset or liability), DB had shrunk its net derivative book to just over €600 billion less than two years later.
To be sure, the management team did try to lever up notably since then, with the Q1 positive and negative market exposure rising to the highest since 2014 courtesy of the ECB’s QE…
… and then the biggest litigation scandal to hit the German bank dropped like a ton of bricks on DB’s head, resulting in a collapse in the balance sheet and leading not only to the prompt exit of its co-CEOs, Anshu Jain and Jurgen Hitschen, but to a whopping capital raise announcement and ever increasing billions in litigation fees and penalties, as it has emerged in the past year that Deutsche Bank was systematically rigging every single market it participated in but far worse, not making virtually any profit in the process!
Moments ago, Europe’s largest bank by assets and by gross notional derivatives, announced a raft of high-level management changes as part of an anticipated and sweeping restructuring of key divisions and senior-level committees.
As WSJ reports, Colin Fan, the investment-banking co-head responsible for securities trading, will resign effective Monday. Garth Ritchie, the current global equities head, would be promoted to take his spot.
As a reminder, this is the same Colin Fan who exactly one year ago was scolding his traders through a video clip that quickly went viral. As the FT remind us, Colin Fan, “is annoyed with traders who are giving his industry a bad name. He made that much clear in an internal video that swiftly went viral in May after being leaked to the Financial Times.”
In the video, the 41-year-old faces the camera and scolds his employees, telling them he has “lost patience” with reckless messages similar to those discovered by global regulators and used in part to justify huge multimillion fines on banks like his own.
“That almost caused my wife a heart attack,” he admits. “Somebody texted her and said ‘OMG, Colin’s video has gone viral’. The first thing she thought was: what stupid thing have you done that went viral?”
The video was part of Mr Fan’s attempt to bring “cultural change” to Deutsche Bank: which, in non-banker speak, means stopping traders from saying stupid things.
One year later, the 42-year old has realized that if you remove fraud and crime from the equation, banks are just not that profitable. And his hope that this is not the case, caused both the board and the market to lose patience with him.
His replacement, Garth Ritchie will have oversight of global markets and trading and will also join a revamped management board.
Besides Mr. Fan, other senior executives closely affiliated with former co-CEO Anshu Jain, who left in July, will leave, including Michele Faissola, currently head of the bank’s asset and wealth-management business.
Why the dramatic change?
According to the WSJ, “directors want to make Deutsche Bank less complicated and more responsive to regulators, following a series of financial and regulatory missteps.” Which probably means that the announcement of a massive gold rigging cartel, one in which Deutsche Bank was speculated to be among the ring-leaders, is also imminent.
Under new co-chief executive officer John Cryan, Deutsche Bank is abolishing committees and streamlining how its main units are represented on the management board, which is responsible for overseeing strategy, compliance, personnel and governance of businesses globally.
But the most profound change is that Deutsche Bank will split its investment bank into two pieces: one, the underwriting and advisory part, focused on mergers and other deals, corporate finance and transaction banking services such as cash management, and the other on trading and global markets.
While not as profound as imposing an internal Glass-Steagall wall, or creating a “bad bank” (at least not yet), this may be the first step to much more dramatic org chart overhauls, some which will likely end up in splitting off depositor assets from risk-trading activity.
WSJ also adds that the current investment-bank co-head Jeff Urwin will run the investment-banking division starting in January, with Mr. Ritchie overseeing the hived-off trading and markets division. Mr. Urwin will replace Stefan Krause, Deutsche Bank’s former finance chief, on the management board. Mr. Krause will leave the bank at the end of this month.
DB’s new co-CEO JOhn Cryan said that “we want to create a better controlled, lower cost, and more focused bank that delivers long-term value to shareholders and great experiences to clients,” Deutsche Bank Chairman Paul Achleitner said the restructuring requires tough decisions, and that the bank “rarely underwent such a fundamental reorganization in its history.”
Of course, this is merely the latest in a long series of Deutsche Bank restructurings, each of which has found it more and more difficult to generate substantial profits in the day and age of global pervasive QE. We expect the deleveraging process to continue as this latest management shake up realizes that unwinding (or otherwise novating) over €50 trillion notional in derivatives in an environment as illiquid as this one, is far more complicated than some macrotourists make it sound.
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