ECONOMICS101, Danielle DiMartino Booth, Federal Reserve

Economics 101: Divining a New Mouse Trap

If only we had more rhabdic force to go around.

Not familiar with the term? It is the Greek derivative for the word ‘rod,’ as in the ones used by Diviners to direct them to riches of the mineral or water variety in ancient days of yore. The key is placement, into the right hands, that is. Before the gifted few were scientifically overanalyzed out of existence or persecuted as witches and subsequently burned at the stake, Diviners were romanticized as the rainmakers of their day.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — August 4, 2017

Dear friends,

Happy Nonfarm Payrolls Friday from Grand Lake Stream, Maine! Grand Lake Where, you may be asking? THIS is where you fish, for small mouth bass, that is, in paradise. It’s a bit tricky to get here from Dallas, but it’s worth the trek to spend time with David Kotok, who organizes the annual campout. I also get to visit with some of the brightest minds in economics and finance I’m delighted to now call friends seven years into this annual tradition.

About those jobs…there are still plenty of them in the making. And they continue to be ho-hum in the income generation department, you know the drill – in the eating, drinking and getting sick sectors. Janet Yellen will be encouraged by the folks who’ve come off the sidelines to get the paltry paying positions. And away we go, to debate even more vigorously how the Fed’s balance sheet unwind will affect the bond market, or not.

Believe it or not, it’s not easy to get to the easternmost county in the United States. So, I made a stop in New York on the way and co-hosted a special Friends of Fermentation with my great friend, UBS’ Arthur Cashin. Friends, new and old, joined us to discuss the prospects for the market to continue moving up in 1,000-point increments and whether the Fed really will have the gumption to pull the trigger on shrinking its balance sheet (we really need to get out more and find some new materials over which to marinate ice cubes).

The consensus, if you must know, is that yes, the melt-up will continue, and that yes, the Fed seems hellbent on shrinking its mammoth balance sheet. Mind you, we also agree that the balance sheet will be blown up again in about a year’s time or so. That’s when most of us figure the economy will be in recession.

In the meantime, I’ve enjoyed writing my weekly column for Bloomberg, linked below. The editors are top notch and the readers, well – they’re well read.

Bloomberg: Back to School Means More Retail Agony

 

I also made a brief stop at the New York Stock Exchange to chat with CNBC’S Kelly Evans and Bill Griffeth, two journalists who can always be depended on to do their homework.

CNBC — Closing Bell Exchange: Underlying feeling the market is getting top heavy

 

Earlier in the week, I did a longer form interview on the job market, also linked below.

RT — Boom Bust — Re-Examining the Jobs Market

 

Signing off for now as my guide is itching to get going. The lake and fish (aka lunch) are a calling!

 

How could I not wish you well?

 

Danielle

 

 

 

Moderation, Money Strong, Federal Reserve, Economy, Danielle DiMartino Booth,

The Greater Moderation

5:12 am, April 18, 1906. A foreshock rocked the San Francisco Bay area followed 20 seconds later by one of the strongest earthquakes in recorded history. The quake, which lasted a full minute, was felt from southern Oregon to south of Los Angeles and inland as far as central Nevada.

In the aftermath, the shock to the financial system was equally violent. Precious gold stores were withdrawn from the world’s major money centers to address the City by the Bay’s devastation. What followed was a run on liquidity that culminated in a recession beginning in June 1907. A decline in the U.S. stock market, combined with tight credit markets across Europe and a Bank of England in a tightening mode, set the stage.

Against the backdrop of rising income inequality spawned by the Gilded Age, distrust towards the financial community had burgeoned among working class Americans. Into this precarious fray, a scandal erupted centered on one F. Augustus Heinze’s machinations to corner the stock of United Copper Company. The collapse of Heinze’s scheme exposed an incestuous and corrupt circle of bank, brokerage house and trust company directors to a wary public. What started as an orderly movement of deposits from bank to bank devolved into a full scale run on Friday, October 18, 1907. Revelations that Charles Barney, president of Knickerbocker Trust Company, the third largest trust in New York, had also been ensnared in Heinze’s scheme sufficed to ignite systemic risk. Absent a backstop for depositors, J.P. Morgan famously organized a bailout to prevent the collapse of the financial system. Chief among his advisers on aid-worthy solvent institutions was Benjamin Strong, who would become the first president of the Federal Reserve Bank of New York.

Nearly 100 years later to the day, on May 2, 2006, California-based subprime lender Ameriquest announced it would lay off 3,800 of its nationwide workforce and close all 229 of its retail branches. There’s no need to rehash what followed. It remains fresh in many of our minds. Still, as we few skeptics who were on the inside of the Federal Reserve at the time can attest, that watershed moment also shattered the image of the false era that had sowed so many doubts, dubbed simply, The Great Moderation.

It is said that the Great Inflation gave way to the Great Moderation, so named due to the decrease in macroeconomic volatility the U.S. economy enjoyed from the 1980s through the onset of that third ‘Great,’ The Great Financial Crisis.

This from a 2004 speech given by none other than Ben Bernanke, who presided over this magnificent epoch:

“My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

How very modestly moderate of him. To be precise, standard deviation gauges the volatility of a given data set by measuring how far from its long-run trend it swings; the higher the number, the more volatile, and vice versa. According to Bernanke’s own research, the standard deviation of GDP fell by half and that of inflation by two-thirds over this period of supreme calm.

In late 2013, Fed historians published a retrospective on The Great Moderation, which concluded as such:

“Only the future will tell for certain whether the Great Moderation is gone or is set to continue after the harrowing interruption of recent years. As long as the changes in the structure of the economy and good policy explained at least part of the Great Moderation, and have not been undone, then we should expect to return at least partially to the Great Moderation. And perhaps with financial stability being a more prominent objective and better integrated with monetary policy, financial shocks such as those seen over the past several years will be less common and have less severe impacts. If the Great Moderation is still with us, its reemergence in the aftermath of the Great Recession will be as welcome now as its first emergence was following the turbulence of the Great Inflation. As for its causes, economists may disagree on the relative importance of different factors, but there is little question that ‘good policy’ played a role. The Great Moderation set a high standard for today’s policymakers to strive toward.”

Strive they have, and succeeded spectacularly, by their set standards.

It matters little. Insert the observable phenomenon with anything that pertains to the macroeconomy and the financial markets, and you will see that volatility is all but extinct.

The volatility on stocks, as gauged by the VIX index, hit its lowest intraday level on record July 25 of this year. As for how much stocks are jostling about on any given day, that’s sunk to the lowest in 50 years. Treasury market volatility is at a…record low. A lack of volatility in the price of oil is peeving those manning the commodities pits. Even go-go assets are dormant. The risk premium, or extra compensation you receive to own junk bonds, is negative. Negative!

But this non-news spreads far beyond asset prices and presumably hits policymakers’ sweetest spot. According to some excellent reporting by the Wall Street Journal’s Justin Lahart, “Over the past three years, the standard deviation of the annualized change in U.S. gross domestic product…is just 1.5 percentage points, or about as low as it has ever been. It is a trend that is being matched elsewhere, with global GDP exhibiting the lowest volatility in history.”

Lahart goes on to add that job growth and corporate profits also seem stunned into submission. And then he goes for the jugular: “In the years since the financial crisis, the Federal Reserve and other central banks have acted like overprotective parents of a toddler, rushing in whenever the economy looks as if it might stumble. That risk-averse behavior has extended to businesses, making them unwilling to take chances.”

The WSJ goes on to report that at no time in at least 30 years has not one of the three major stock indexes in the U.S., Asia and Europe avoided a five percent decline in a calendar year…until what we’ve seen thus far in 2017, that is.

Is it any wonder the ranks of those who would profit from stocks declining have fallen to a four-year low? Why bother in such a perfect world?

In other words, we’ve never had it this good, or perhaps this bad. In that case, this must be The Greater Moderation. And by the looks of things, it’s gone global.

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

The Economist recently featured a report on “corporate zombies”, firms that in a normal world would not walk among the living. Defining a ‘zombie’ as a company whose earnings before tax do not cover its interest expenses, the Bank for International Settlements placed 14 developed countries under the microscope. On this basis, the average proportion of zombies among publicly listed companies grew from less than six percent in 2007 to 10.5 percent in 2015.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

You have Greece returning to the debt markets after a three-year exile and investors falling over themselves to get their hands on the junk-rated bonds; the offering was more than two times oversubscribed. Argentina preceded this feat, selling the first-of-its kind, junk-rated 100-year-maturity, or ‘century’ bond; it was 3.5 times oversubscribed.

Closer to home, Moody’s reports that lending to corporations has gone off the rails. Two-in-three loans offer no safeguards to lenders in the event a borrower hits financial distress; that’s up from 27 percent in 2015. Meanwhile, the kingpins of private equity have assumed such great powers, they’ve built in provisions that prohibit secondary market buyers of loans from assembling to make demands on their firms’ managements. Corporate lending standards in Europe are looser yet.

What are investors, big and small, to do? Apparently, sit back and do as they’re told to do: Buy in, but passively, and let the machines do their bidding. For institutions, add in alternative investments at hefty fees and throw in leverage to assist in elevating returns.

In late June, the recently retired Robert Rodriguez, a 33-year veteran of the markets, sat down for a lengthy interview with Advisor Perspectives (linked here). Among his many accolades, Rodriguez carries the unique distinction of being crowned Morningstar Manager of the Year for his outstanding management of both equity and bond funds. He likens the current era to that of the nine years ended 1951, a period during which the Fed and Treasury held interest rates at artificially low levels to finance World War II. His main concern today is that price discovery has been so distorted by the Fed that the stage is set for a ‘perfect storm.’ His personal allocation to equities is at the lowest level since 1971.

The combination of meteorological forces to bring on said storm, you ask? It may well be an act of God, an earthquake. It could just as easily be a geopolitical tremor the system cannot absorb; it’s easy enough to name a handful of potential aggressors. Or history may simply rhyme with the unrelenting shock waves that catalyzed the subprime mortgage crisis, coupled per chance with a plain vanilla recession.

We may simply and slowly wake to the realization that the assumptions we’ve used to delude ourselves into buying the most expensive credit markets in the history of mankind are built on so much quicksand.

The point is panics do not randomly come to pass; they must be shocked into existence as was the case in advance of 1907 and 2007.

One of Rodriguez’s observations struck a raw nerve for yours truly, who prides herself on being a reformed central banker: “The last great central banker that we had in the last 110 years other than Volcker was J.P. Morgan. The difference is, when Morgan tried to contain the 1907 crisis, he wasn’t using zeros and ones of imaginary computer money; he was using his own capital.”

It is only fair and true to honor history and add that Morgan’s efforts rescued depositors. Income inequality in the years that followed 1907 declined before resuming its ascent to its prior peak, reached at the climax of the Roaring Twenties.

The Fed’s intrusions since 2007, built on the false premise of a fanciful wealth effect concocted using models that have no place in the real world, have accomplished the opposite. Income inequality has not only grown in the aftermath of The Great Financial Crisis and throughout The Greater Moderation; it has long since smashed through its former 1927 record and kept rising. The Fed’s actions have not saved the little guy; they’ve skewered him.

The Smell of Dry Paint in the Morning, Danielle DiMartino Booth, Money Strong LLC

The Smell of Dry Paint in the Morning

Irish Playwright Oscar Wilde defied Aristotle’s memorable mimesis: Art imitates Life. In his 1889 essay The Decay of Lying, Wilde opined that, “Life imitates Art far more than Art imitates Life.” Jackson Pollock, the American painter, aesthetically rejected both philosophies as facile. We are left to ponder the genius of his work, which in hindsight, leaves no doubt that Art intimidated Life.

Engulfed in the flames of depression and the demons it awakened, Pollock’s work is often assumed to have peaked in 1950. The multihued vibrancy of his earlier abstract masterpieces descends into black and white, symbolically heralding his violent death in 1956 at the tender age of 44. Or does it? Look closer the next time you visit The Art Institute of Chicago. Greyed Rainbow, his mammoth 1953 tour de force, will at once arrest and hypnotize you. As you struggle to tear your eyes from it, you’ll ask yourself what the critics could have been thinking, to have drawn such premature conclusions as to his peak. Such is the pained beauty of the work. Rather than feign containment, the paint looks as if it will burst the frames’ binding. And the color is there for the taking, if you have the patience to slow your minds’ eye and see what’s staring back at you.

Perhaps it was the being written off aspect that drove Pollock to embark upon the final leg of his tour de force. We’ll never know. Renaissances to sublimity are the preserve of those with gifts beyond most our grasps. Hence the curious hubris driving so many pensions to reinvent themselves to full solvency by taking on undue risks. Heedless of what should be so many warning signs, so many managers continue to herd blindly into unconventional terrain hoping to find that perfect portfolio mix. The more likely upshot is their choices will drive them straight off a rocky cliff.

For now, the craggy landscape of pension canvases continue to be painted. Or in the case of the country’s largest pension, the stage continues to be set. This from Ted Eliopoulos, chief investment officer of the California Public Employees Retirement System (CalPERS): “We will be conducting quite elaborate choreography, looking at asset allocation, our liabilities and the risk tolerance of our board in conjunction with our expected rates of return for our various candidate portfolios.”

Oh, but for the days of antiquated notions such as matching assets to liabilities. But that’s so 80s. Today, a given public pension’s portfolio is anything but dominated by the Treasury bonds once held to satisfy its future liabilities. Rather, half of a typical portfolio’s assets are invested in stocks, a quarter in bonds and cash, and the balance in ‘alternative investments,’ including private equity, hedge funds, real estate and commodities. (Yes, we are still on the subject of matching current and future retiree paychecks to appropriate investments.)

To CalPERS credit, this ‘elaborate’ mix turned in stellar performance in its most recent fiscal year ended June 30. The $323 billion fund generated a net 11.2 percent return buoyed by a 19.7 percent return on its stocks. Returns of 14 percent on its private equity holdings and 7.6 percent on real estate rounded out the outperformance.

Eliopoulos stressed that, “as pleased as we are with this one-year return, our focus is always on the long-term. We invest for decades, not years.”

As pointed out in Barron’s, it’s been touch and go for the past few decades. CalPERS returned 4.4 percent compared to the S&P 500’s 7.1 percent, and over the past 20 years, 6.6 percent vs. the market’s 7.1 percent. Neither achieved return, it should be pointed out, exceeds the fund’s currently assumed rate of return of 7.5 percent or the assumed rate to which it will be lowered, seven percent, by the end of 2019.

The ultralow interest rate environment engineered by the Federal Reserve and unattained return goals leave CalPERS 68 percent funded. That puts it just about in line with Wilshire Consulting’s most recent calculations, which found the average aggregate funding ratio for state pension plans to be 69 percent.

So very few pensions are where they need to be. And fewer still will ever get there. Pension managers are deluding themselves into believing creativity in asset allocation holds the key to greatness in the after-working-life.

Afraid to say the miracle of alternative investments cannot make up for the average four-percent differential required to make pensions whole – just this year. How so on the math? A blended portfolio of cash, investment-grade and junk bonds today earns 3.5-percent; this compares to pensions’ average assumed rate of return of 7.5 percent. Of course, this gap has been widening for years care of dim-witted central bankers who excel at calculus but can’t manage simple math.

How unfair is it to leave out portfolios’ spice girls of equities and alternatives? Hate to turn down the party music, but starting points do matter. So do fees (hold that thought).

There’s nothing to say pensions won’t eke out another exceptional year of stock gains. The Fed could well be tantalizing investors with chatter of QE4 if the economic data continue to soften. But there’s no silver lining in that potential outcome. Remember that rocky cliff over which current reckless allocations can drive returns? Let’s just say the cliff gets taller, and the fall longer, for every year into which this aged-bull-market rally stretches.

As for those alternatives, for better or for worse, commodities are passé. Meanwhile, pensions have been abandoning hedge funds for years as passive investing takes victim active managers who dare value an asset and invest accordingly. And real estate is on fire. As in, valuations have never been this steep in the history of mankind. You can draw your own conclusions on that front.

That leaves us with private equity, that darling of asset classes and the issue of those pesky steep fees. According to the Pew Charitable Trusts, states bled $10 billion in fees and investment-related costs in 2014, the latest year for which data are available. Not only is this lovely line item funds’ largest expense; fees are up by about a third over the past decade, which conveniently coincides with the greater adoption of alternatives. Gotta love being a taxpayer!

But surely pensioners are privileged to have access to these tony private equity funds? Over the long haul, PE always outperforms those stodgy asset classes every Tom, Dick and Harry can buy online. So what if they’re illiquid. Right?

It’s hard to imagine the shivers sent down the spines of many pension fund managers when they heard the news that EnerVest Ltd, a $2 billion PE fund, had lost all its value. “Though private-equity investments regularly flop,” the Wall Street Journal reported, “industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.”

Well at least the oil bust is long over. Ill-fated, ill-timed, ill-valued energy investments are to blame for EnerVest’s demise. And surely that’s a comfort. It positively proves the fund’s evisceration is an isolated idiosyncratic incident.

Those other Wall Street Journal (WSJ) headlines don’t mean a thing. Why worry that, “Shale Produces Oil, So Why Doesn’t It Produce Cash, Too?” To wit, over the past decade, eight of the most established shale players have generated a respectable $414 billion in revenue but nary a penny in free cash flow. In fact, this eightsome has had negative cash flow of $68 billion.

Still think EnerVest will be a one-off event? Try this other WSJ headline from early July: “Wall Street Cash Pumps Up Oil Production Even As Prices Sag,” an article that went on to cite one analyst’s observation of, “insufficient discrimination on the part of sources of capital.”

Why, the question must be posed, bother discriminating when you’re sitting on $1.5 trillion in dry powder? Wait, are we still talking about energy? Well, no. That’s the point.

Go back to that last WSJ article for a moment, to what the reporters wrote: “Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means.”

Set aside the fact that the analogy strikes closely to that of a drug dealer. Now nix the word, ‘production’ and fill in the blank with whatever your heart desires. THAT is the power of $1.5 trillion in private equity dry powder in all the forms it has the capacity to assume.

Again, starting points matter. That is, unless you are a deep-pocketed price agnostic buyer, one that collects fees for assets under management, regardless of how well the investment decisions fare. Being valuation-insensitive, however, also means you can incinerate your investors, especially pensions, and still walk away all the richer for it.

To its credit, Pew expressed particular concern with respect to desperate pensions playing the game of returns catch-up, as in those that have most recently plowed headlong into alternatives. No surprise, they happen to be one in the same with those sporting the weakest 10-year returns.

Ever heard someone tell you to not put all of your eggs in one basket? This rule of thumb applies in spades to pensions, or at least it should. While alternatives may provide a degree of diversification, Pew reports that that the use of alternatives among the nation’s 73 largest state-sponsored pension funds ranges from zero to over 50 percent.

Arizona tops the far end of that range, with 56 percent of its assets in alternatives. Missouri and Pennsylvania are not far behind with over 50 percent in this ‘basket,’ and Illinois, Michigan, Ohio, South Carolina and Utah stand out as having close to 40 percent in alternatives. Click for link to PEWTrusts.org report.

In the weeks to come, many pensions will excel in the back-slapping department, reporting double-digit returns for the fiscal year ended June 30th. Please keep your salt shaker handy.

For the third time, starting points matter. In late June, Moody’s ran some figures and scenarios to quantify where pensions are today, and where they’re headed. In 2016, total net pension liabilities (NPLs) surpassed $4 trillion. Looking ahead, Moody’s expects reported NPLs to fall one percent by 2019 in an upside scenario, but rise 59 percent in a downside scenario.

Perhaps the fine folks at Moody’s have contemplated what happens when, not if, pensions’ liquid equity and bond holdings lose 20 percent. Maybe they’ve even taken their scenarios one step further and envisioned the return implications for all of these elegant alternatives when a liquidity freeze takes hold amid plummeting valuations.

What’s a pension to do? Fraught managers are apt to throw more of your money at alternatives as tax revenues rise to compensate for what pensions cannot make up in returns. Know this: the more that $1.5-trillion store of dry powder grows, the more it devolves into that much napalm in the morning. The conflagration that spreads will not be containable, and you won’t be able to tear your eyes from it. As the tragic Pollock said of his paintings, and we will one day say of pensions, they have no beginnings or endings, they have lives of their own.

In Case You Missed It — July 10, 2017

Dear friends,

It is my hope that you received an email that looked like what I’ve pasted below. While it doesn’t resemble the communique you normally receive from me, I assure you I am the sender. Please login as directed and you will transition yourself onto new platform.

 

On 07/6/2017, you successfully activated your trial subscription to Money Strong written by Danielle Dimartino Booth. During your trial subscription, you will receive an email containing a link to the most recent issue of Money Strong published every Wednesday. You may also view recently archived issues of Money Strong at the subscriber website (Subscribers Home).

To access Money Strong, you may login via the link in our notification email or via the login button on our website. On the login screen, please enter the below username and password below for access. To avoid errors in the login process we recommend typing in your email address and then copying and pasting the password from this email:

E-mail Address (Username): _______________________

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In the meantime, we’ve got one more payroll report under our belt. The headlines made a splash with job growth appreciably stronger than expected as a surge of sidelined laborers rejoined the workforce. Wages remain soft, which is intuitive given the type of jobs created – home health care workers led the month’s gains, a demographic sign of the times we are in.

For more on the outlook for baby boomers’ retirements, please have a look at my latest Bloomberg column, which focuses on the implications of boomers’ increasing exposure to passive and so-called ‘alternative investments.’ Below the Blomberg piece are three of my earlier missives on the implications of the tremendous build in private equity dry powder and pensions’ prospects. Hard to believe I started writing on this subject two years ago.

 

Private Equity and Passive Investors Are on a Collision Course

Bloomberg View — Danielle DiMartino Booth, July 6, 2017

Money Strong Archive Pull

The Smell of Dry Powder in the Morning 

What if Charlie Munger is Right?

The Smell of Dryer Powder in the Morning

In other In Case You Missed It

The Lance Roberts Show — July, 6, 2017

FED Players Receive Special Treatment

FX Street — EUR/USD and Fed: Levels, Ranges, Targets

As many of you hit the road back home, wishing you well,

 

Danielle

SaveSave

ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — June 23, 2017

Dear friends,

It may be summer, but things are hopping hot. Welcome but unexpected gifts have crossed my screen in recent days – Fed Up book reviews, feature interviews, speech recaps. Knowing you know that I’m judicious with the number of emails I send, I provide for you below links to what you might have missed knowing there’s a risk your inbox won’t be checked until Monday.

In that vein, why not unplug? I hear it’s the ultimate liberator. Why not dig your toes in the sand and forget life for a while? In the event you prefer a bit of light mental intake, please enjoy:

THE WRITTEN WORD:

The Fed Needs to Acknowledge Slowing Economy – Too much debt is putting a strain on car sales, retail and commercial real estate.
June 23, 2017 – Danielle DiMartino Booth via Bloomberg Prophets

FED UP… An Insider’s Take On Why The Federal  Reserve Is Bad For America 
June 22, 2017 – Richard Bowen  of RichardBowen.com

Danielle DiMartino Booth is Spreading Financial Literacy by Speaking the Truth Few on Wall Street Would Dare
June 14, 2017 –  Elaine Rau of Ladybossblogger.com 

Cassandra of the Crash: An Interview With Former Dallas Fed Researcher Danielle DiMartino Booth
July 2017 issue Digital Edition, Reason.com

11 Takeaways from Danielle Dimartino Booth 
June 09, 2017 – Cole Henson, Architect, GFF of TREC Wire via Recouncil.com

THE SMALL SCREEN:

What Would America Look Like if…The Glenn Beck Program 
June 21, 2017 –   Danielle DiMartino-Booth Joins  Glenn

Larry Berman: Why the Federal Reserve is bad for America
Jun 19, 2017 –  BNN.com

Fed Trying to Cripple Trump Economy  
June 21, 2017 – Greg Hunter’s USAWatchdog

Hoping you enjoy the beach for me, and wishing you well,

Danielle

Danielle DiMartino Booth, Money Strong, Woman on Fire, Fed Up

Woman on Fire

There is a delicious liberation in having nothing to lose.

That profound realization quickly comes into focus for those who can bear the brutality that one man is capable of unleashing in Man on Fire.

Set in Mexico City, the casting and filming of the 2004 film are flawless. Though the supporting cast is critical to the film’s eventual success, its two main characters are key to the crossing of the film into the realm of sublime. Denzel Washington as “John Creasy,” a former CIA operative and Recon Marine officer turned mercenary, portrays to perfection a man whose heart had long since turned to stone. The on-air chemistry between Creasy and his nine-year old charge, “Lupita,” elevated the movie to greatness. A young Dakota Fanning nearly stole the show.

As shocked as he was to learn he still had the capacity to love, Creasy was all the more moved to hatred when told the girl, whose kidnappers had nearly killed him, had been murdered. With that his soul followed his heart into darkness.

Creasy avenged an evil as only a man with nothing to lose can. “Revenge is a meal best served cold,” he observed. And serve up vengeance Creasy did, to the powerfully protected “La Hermandad,” the corrupt brotherhood of police officers responsible for unspeakable crimes against the innocents.

Whether it was serendipity or fate that drew me to immerse myself in this film as I reflected upon the two years that have passed since I left the Federal Reserve will remain an unknown. Regardless, the resonance made its mark as I digest the latest headlines, warning that the new guard at the Federal Reserve will be much the same as the old, if not replicated down to the very same cast of characters.

Many readers who’ve journeyed with me these past two years have asked whether this spirit-sapping news will cause me to lay down my arms, to give the mission of reforming the Fed up to a higher being.

The answer is simple. Why come this far just to give up? I had no agenda, nothing to lose, the day I set foot inside the Fed. And I had nothing to lose the day I walked out its doors, determined to shine a light on an institution that is not so mysterious, as it is myopic, to the detriment of its own charges, We the People.

It is for the little guy that I will go on fighting the good fight. It is for the abandoned masses I will continue to make a stand against central banking’s answer to La Hermandad.

Did you miss the news, you might be asking? Have nominees to fill those three vacancies at the Federal Reserve Board been named? Has Janet Yellen been re-nominated to continue chairing the Fed? Well, no.

But Gary Cohn has told us we need not concern ourselves with change at the world’s most powerful central bank. As was reiterated in a deliberately timed and placed story in the Wall Street Journal last Wednesday, the very day the Fed met and raised interest rates,

“The Fed will do what they need to do, and we respect the powers of the Fed.”

Note two things: Cohn first spoke these words in an interview aired in March on Fox News. That his words were reprinted two months later under a front-page headline that read, “Search for Fed Chief Begins, Led by Goldman Veteran” was no coincidence. Consider the story’s emphasis on Cohn’s, “appreciation for the power of the Fed during his long career on Wall Street and for the institution’s relative freedom during his current stint in Washington,” to be the icing on the cake.

In the event you sense some sort of conspiracy at hand, stop it. It’s not sinister. It’s strategic. It’s how the establishment becomes entrenched. It’s how wrong becomes the accepted right.

Speaking of wrongs, a recent Economist story, cleverly titled, “How to be wrong,” offered a rude reminder to all of us who’d prefer to think we’re above fallibility. Two years on, and 127 missives later, I’d be remiss to park myself in the deity department. Rather, let me count the ways I have been wrong…

For starters, risky asset prices have gone from being rich to richer. As much as I’d like to brag on a different outcome, one that would have hit the reset button long ago, the stock market hasn’t fallen out of bed, bonds of all ilk remain buoyant and real estate roars on.

Rather than claim post-traumatic stress disorder resulting from too many years on the inside, take the words of Bernard Baruch, who once said, “The main purpose of the stock market is to make fools of as many men as possible.” Today, our upside-down existence dictates we flip his reasoning on its head. To that end, “The main purpose of a stock market in the modern age of central banking is to make fools of as many skeptics as possible.”

Did someone mention carnage in the junk bond market? Mea culpa again. Crude prices being closer to $30-something than $50-something looked to herald unprecedented losses in high yield bonds. What do we have instead, thanks to the bottomless pockets of those who ply in dry powder? That would be the leanest domestic energy industry on Planet Earth, which takes us one step closer to energy independence, an unequivocal best-case scenario result.

As for all those share buybacks I contended were the stock market’s sole prop, guess what? In the year through March 2017, the percentage of Standard & Poor’s 500 companies that have reduced their share count by four percent or more has halved to 14 percent from a high of 28 percent. Firms are being run as cost-effectively as ever and throwing off cash flow as never before.

Have faith the baring of these revelations that run contrary to my grave predictions has not been an enjoyable exercise. Nor was it supposed to be. But integrity demands it of the lowliest of us. Consider the alternative to fessing foibles, to acquiescing to necessary and yes, exhilarating, exercises in humility.

Perhaps you’ve noticed the belligerence of the bulls of late? How they all seemed to have lost any manners they should have gleaned from their upbringings in catty concert?

According to the Economist, “groupthink is highest when people within groups face a shared fate.” Well that explains a lot. “Even as the facts on a particular issue converge in one direction, parties can still become increasingly polarized around starkly different belief sets. That, in turn can make it harder still for a member of one party to derive any benefit from breaking ranks (emphasis mine).”

As little breaking bad as there is among the bullish herd, there’s even less among economists. For their sake, it’s a good thing Citigroup waves investors off viewing its proprietary Economic Surprise Index in isolation. The gauge, which tracks the pace at which economic indicators are beating estimates, has hit its lowest level in six years. You remember the summer of 2011, don’t you, when Uncle Sam was about to get slapped with a ratings downgrade? That said, once economists ratchet back their growth projections, this self-correcting index will pop back into positive territory.

As the New York Fed’s Bill Dudley himself has foreseen, it’s a matter of perspective and relativity. In his estimation, the overall outlook today is “pretty good.” As for what’s to come, forget the message in that old bond market. Things are apt to be smoking hot before we know it, hence the need to keep tightening.

“If we were not to withdraw accommodation,” Dudley said twisting his words as only economists can, “the risk would be that the economy would crash to a very, very low unemployment rate and generate inflation.” Follow? “Then the risk would be that we would have to slam on the brakes and the next stop would be recession.” Got it? The Fed is tightening so they don’t have to tighten. Right.

Dudley is right on one count. We could well see an overshoot on the unemployment rate. By the same token, the Fed wrote the rules on which economic indicators lead, and which lag. The caboose, if you will, is the unemployment rate.

What’s driving the train? What will lead the economy in its next direction? Hmmm. While earnings growth is all good and well, sales can’t seem to pick themselves off the floor and we’re talking the full spectrum, from the smallest to the biggest businesses. What else? There is that crude oil thing that’s looking less ‘transitory’ by the day and promises to bleed into inflation for months to com. As for the cars that have literally driven the current recovery? Maybe it’s best we not bring up the subject and leave it at that. You know how ugly it’s become in that space.

And finally, there’s this little thing called the commercial real estate market, which is taking daily body blows as valuations overheat in the face of a blindsiding barrage of supply emanating from retail, and soon to be restaurants.

Yep, that about sums it up if you’re into looking ahead as opposed to making monetary policy using only what you see in the rearview mirror to guide you.

To be fair, there are two voices of reason on the Fed. The Boston Fed’s Eric Rosengren has risen in stature as he refuses to back down on the potential for commercial real estate to spread to the macroeconomy.

And then there’s Vice Chair Stanley Fischer who just this week warned that house prices in a multitude of spots around the globe are a wee bit too high, “perhaps as a result of extended periods of low interest rates.” Imagine that. On the other hand, a $664,000 price tag for a parking spot in Hong Kong does seem a bit off (the Richter Scale).

If only, the lament goes, policymakers had a reliable inflation metric that correctly captured that darned asset price inflation! So we have whined for years and years…until now.

I wish I could take credit. Alas, the acclaim goes to a fishing buddy of mine who saw fit to put his mind to the grindstone for the cause of us wee souls who’ve been exhausted by “brilliant” central bankers who’ve yet to exemplify the capacity to come up with a new inflation mouse trap that incorporates real estate and asset price inflation. To think they defer to each other deferentially as “Doctor.”

For the time being, credit will have to sit with Brent Donnelly, or plain old Mister Donnelly if you insist on being formal, for taking a stab at reading reality.

Gourmand snobs in the audience will likely demand the details. To wit, Donnelly started with year-on-year figures for consumer prices (as per CPI), home prices and the Nasdaq. He then adjusted for volatility using the CPI as the baseline: he divided the CPI by itself; home prices by 1.64 and the Nasdaq by 11 (as it’s 11 times more volatile than the CPI). Is it me, or is it so far, so painfully intuitive?

The new and seriously improved metric goes by the ingenious acronym of the CAPI – the US Consumer and Asset Price Inflation. Maestro, can we please get a “Ta-Da?!” (Didn’t some central banker once go by that nickname? I digress…)

At the risk of Donnelly being drawn and quartered, I regret not being able to share the data and the glorious chart it produces that depicts this comprehensive metric all the way back to 1998, before the Original Sin of (inflation) omission was committed by Alan Greenspan.

Take my word for it, central bankers worth their weight in salt (gold is so passé!) would easily gather from a first blush glance that the line of demarcation between tamed inflation (the real and inclusive CAPI deal) and inflation run wild is seven percent…if they actually had to exist in a world that captured inflation in the aggregate.

In continuing on the theme of the data humbling any preconceived conclusions, in the here and now, the CAPI has just crossed up and over the seven-percent line. Inflation, measured wholly and holistically, is in true Goldilocks fashion, neither too hot nor too cold. The current equilibrium compares ever so favorably to early 2000, when the CAPI was double its current level, and 2007, when the index hit 10 percent.

Hate to break it to you, folks. Wherever “there” is, we haven’t arrived at “Destination No Looking Back.”

Bubbles, especially those that chip away at our intellect, wearing us down with their endless build-ups and messy aftermaths, are cruel, mean bitches that refuse to slink silently into any night. We may have a tornado in commercial real estate. We most certainly have a volcano building to eruption in the bond market. But we don’t have whatever it is that happens when a tornado meets a volcano in the risky asset marketplace that determines the fate of our financial livelihood.

And so, the Fed will once again appear to rise above the fray of so many naysayers, sloughing off worrywarts as Cassandras. The bulls will have their heroes and heroines to indemnify their vitriol. And the new administration will bask in the glory of being on the right side of the trade for the time being.

I refer back to the conclusion of the Economist’s lesson in fessing up to one’s ineptitudes to find a pathway to intellectual salvation, in the beauty of life’s eventually being allowed to be life: “It is rarely in the interests of those in the right to pretend they are never wrong.”

Should you choose to dwell in the land of central bank denialists, you too can dismiss the fifth largest state in our country being a stone’s throw from a junk bond rating. But first, ask yourself if an avalanche of states and municipalities will follow in Illinois’ wake when the markets correct despite the Fed’s delusions as to an otherwise out-worldly outcome?

Insist if you will that the Fed’s second mandate of maximum employment has not bastardized its originally intended role of safeguarding the value of the dollar in our wallets and stepping in as lender of last resort in times of extreme duress when the private sector is on its knees. Has the dual employment mandate not invited Mission Creep of the most nefarious sort?

Ignore if you must the flattest yield curve since the dark days of 2007 that preceded the financial crisis we crowned, “Great” for less than ignoble reasons; that flattening fast figment of our collective imagination is just that, a phantom in plain sight.

As for me, there’s a good chance I’m still Fed Up. There’s a high probability I’m more Fed Up than ever on behalf of you and you and you, that Twitter follower who recently remarked with deserved cynicism that “economic expansion” was defined as the rich getting more and the rest getting less.

More often than not, we forget the etymological wonders proffered by the Greeks. For shame. It is to those very ancient Greeks we are forever indebted for words such as “evangelize,” the literal translation of which is “to share the good news.”

There will indeed be good news to share and spread widely one day when the people take back what it rightfully theirs, their right to financial freedom. Until that splendid time arrives, have faith that I will carry the torch for one and all.

As for those who refuse to stop lying to us, the little people, the central bankers who continue to shush us, insisting they know better on all our behalf, be they ware, I remain steadfast to my committed cause. I still have no agenda, nothing to lose. I am now, more than ever, a Woman on Fire.

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UK ELECTION, DiMartinoBooth

The U.K. Election: An Outsider Looking In

Talk about making hay if the sun shines through and through.

In 1696, William III introduced the ‘window tax.’ It was crystal clear that this dark tax was viewed with great disfavor being as it was based on the number of windows in a given home. Think of it as a first-generation progressive tax, which suited the extravagant era’s buildout of country estates. The more windows in a home, the wealthier the ostentatious occupants were, to say nothing of cheerier and healthier (did Vitamin D supplements exist back then?). So why not pony up more in taxes to help your sovereign offset the scourge of coin clipping?

Coin what?

Back in the day, coins were minted in pure precious metals. This prompted petty pilfers to shave, file and clip the edges off those coveted coins. Combine enduring effort with a red-hot melting pot and voila, fraudulent fortunes followed. The pinchers’ progeny were no doubt among the pioneers committing counterfeit currency capers.

These days we embrace the despicable denigration of our currencies. We go so far as to lavish the loftiest positions in the modern world on those whose most lauded accomplishments have been earned in laureates, not the legal authority to levy, well, anything.

‘Tis true, central bankers have assumed more power than our politicians. The question is where this will lead us all against the backdrop of a world where inequality has boiled over into illegality and depravity for our fellow man.

As all market watchers are aware, the British general elections are to be held Thursday. Intriguingly, some three million newly-registered voters will cast their calls for the first time. This should be a worrying factoid for Theresa May; the UK’s youngest voters were largely opposed to exiting the European Union last June.

The arguably inconsistent and unreliable polls will have certainly given Prime Minister Theresa May pause. One June 4th, May’s Conservative party looked to secure 354 seats, above and beyond the 326 needed for a Parliamentary majority. By Tuesday, other polls showed her party’s prospects had dwindled to 305 seats.

Intuition suggests Saturday night’s horrific terrorist attacks on London Bridge (pictured front and center in this week’s image) and a nearby neighborhood would have solidified Conservative’s lead. But the polls counterintuitively indicate a move in the opposite direction. Though impossible to predict, the least hyperbolic within the political analyst arena give the Conservatives better than even odds of winning a majority, or at the very least forming a coalition that accomplishes the next best thing.

It’s notable that May’s lead did not initially narrow based solely on events that were out of her control, as in three terrorist attacks in three months. Rather, it was her vow to make pensioners’ benefits progressive (just took a huge amount of license in simplifying her proposal) — as in those who have more can expect to collect less from the state – was met with about as much derision as William III’s window tax.

While it’s never wise to judge from the outside, some of the wisest and most patriotic suggestions floated in the United States have been from wealthy retirees who’ve suggested they need not collect Social Security to help balance the nation’s books. Moreover, May was magnanimous in her aim; she intends to use the saved state expenditures to funnel funds into raising productivity by closing the skills gap that has crippled the economy (sound familiar?)

Somehow the liberal media managed to paint May as a pariah (is it yours truly, or are the parallels multiplying?)

In one of May’s latest interviews, she reiterated her focus on what she hopes is to come: “It’s about young people’s future, it’s about ensuring we take the opportunities that will be opened up to us when we leave the EU to be a really global nation bringing more jobs, more investment into the UK. I want to see proper technical education for the first time for young people for whom that’s right.”

Connecting warm bodies with much-needed skills sets to UK’s corporate sector could well do the economy some good. Let’s hope she has wise economic counsel to help her execute her plan if the Conservatives prevail at the polls.

Luckily, one of Britain’s savviest economists is free to pursue his next career gig. Of course, the reference is to Andy Haldane, the Bank of England’s chief economist, whose term technically ended May 31st (he will remain at his post until his replacement is secured.)

How to sum up Haldane? A central banker who gets it right half the time is about as close to genius as you can ever hope for in the field given the de facto requirement that Keynesian Kool-Aid be drank before the threshold is crossed into the inner sanctum sanctorum. That applies whether you refer to the Bank of England, the Reserve Bank of Australia, the European Central Bank, the Bank of Japan or especially the Federal Reserve (though hawks may just get their chance to storm the temple – stay tuned on that count).

Of punk UK productivity, for one, Haldane has this to say in a recent speech: It wasn’t low interest rates that kept middling companies in business since the crisis hit, but rather delusions of operational grandeur. Haldane prodded the UK government to provide global benchmarks to UK firms so they could better appreciate their standing among their international peers.

“As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance,” Haldane said. “Applying those marginal gains to the population of UK companies could significantly improve UK living standards.”

Sounds like May and Haldane are on the same page, though it goes without saying that low interest rates assisted in keeping ‘zombie’ companies alive in addition to an abject denial of mediocrity.

Most importantly for May, if she’s in the market for an economic advisor, Haldane is not beholden to the modern-day economics profession. Haldane likened economists’ failure to foresee the financial crisis to a, “Michael Fish moment.” Fish, for you non-Anglophiles, dismissed the chances that a massive hurricane would hit southern England in 1987. You know how this story ends. The Great Storm did indeed hit and how, wreaking mass destruction and casualties.

After describing his profession as being in, “some degree of crisis,” Haldane went on to suggest that his peers abandon their, “narrow and fragile” models in favor of a broader analysis that incorporated the perspectives of other disciplines. Hear, hear!

To be fair, Haldane went on to say that Brexit would crash the UK economy but with a lag, hence the above-referenced only ‘gets it right half the time’ bit.

If providence is propitious, May is also channeling the ghost of Margaret Thatcher, who made all manner of enemies going against the conventional wisdom of her day, especially as it pertained to the economy. No doubt it will take radical ideas to cure what ails the UK economy today.

In what can only be described as twisted irony, Mark Carney’s Bank of England (BoE) was recently taken to task for the pay raises recently ‘awarded’ to his employees which failed to keep pace with inflation. At around one percent, the most recent annual BoE employee pay raise is a pittance of the current 2.7 percent inflation rate. The average British worker bested that, with average wages increasing by 2.4 percent, which still fails to keep pace with the rising cost of living.

And yet, as is the case with his European and American counterparts, Carney is more likely to get caught out gnashing his teeth about inflation being too low, despite it clearly being too high for the average working man and woman.

The fact is Carney’s in a mighty tight corner with inflation running too hot, wages running too cold and a corporate sector petrified at the potentially poisonous ramifications of Brexit. For the moment, exports are a relative outperformer with a big boost from the weaker pound. It’s the ‘what’s next’ that matters most though — the impossible tradeoff between raising interest rates and the higher real wages that would follow, or lower for longer and the boost to short-term growth prospects too offset any Brexit fallout.

And that’s just for starters when it comes to threading needles on Threadneedle Street. As has been the case in Australia and Canada, residential real estate prices have run wild since quantitative easing unleashed animal spirits in the aftermath of the financial crisis. As a result, British households’ debt loads vis-à-vis the size of the economy have made a full round trip to record highs. But here’s the wrinkle:  mortgages in the UK tend to be of the variable rate variety, In other words, Carney has to tread more lightly than his counterpart Janet Yellen if he’s inclined to tighten.

And so they straddle the Atlantic, both weighed by impossible choices, rendered more intractable yet by their own misguided foregone follies that insisted more was more, lower was better. What good has that done? To add to their intellectual egos’ injuries, both Carney and Yellen have to contend with political leaders who’ve neither the appetite nor the intent to compromise, much less kowtow, to their theoretical end games.

Looking back, it’s hard to believe the window tax withstood its own political backlash for over 150 years. But believe you me, the tax was not abolished until 1851. By then, so despised was the levy, it had assumed a new name — Daylight Robbery. Is it so hard to see that the current crop of central bankers has also managed to destroy the vista, to suck the oxygen out of the world economy as closed up homes did back then, albeit with much more sophisticated means? We can only hope our elected leaders don’t have to wait another 150 years to see the light.

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Danielle DiMartino Booth, Central Bankers, Money Strong LLC, Federal Reserve, Debt, Trojan Horse, Fed Up,

Beware of Central Bankers Bearing Gifts

Ulysses’s reputation preceded him.

   ‘O unhappy citizens, what madness?

Do you think the enemy’s sailed away? Or do you think

any Greek gift’s free of treachery? Is that Ulysses’s reputation?

Either there are Greeks in hiding, concealed by the wood,

or it’s been built as a machine to use against our walls,

or spy on our homes, or fall on the city from above,

or it hides some other trick: Trojans, don’t trust this horse.

Whatever it is, I’m afraid of Greeks even those bearing gifts.’

Virgil, The Aeneid Book II

So warned Laocoön to no avail, and that was with Cassandra’s corroboration. As reward for his prescient prudence, the Trojan priest and his twin sons were crushed to death by two sea serpents. It would seem the Greeks had no intention of relinquishing hold of ancient Anatolia, a critical continental crossroad where Europe and Asia’s borders meet, a natural target for conquering civilizations.

Thankfully, history has made history of menacing machinations crafted with the aim of undermining the opposition. If only… History is rife with exceptions starting with most politicians on Planet Earth and more recently, central bankers.

In what can only be characterized as Mission Creep raised to the power of infinity, the Federal Reserve’s last Federal Open Market Committee Minutes warned that “equity prices are quite high relative to standard valuation measures.”

Let’s see. Where does the stock market fit into Congress’ statutory requirements that the Fed’s objectives be: “maximum employment, stable prices and moderate long-term interest rates”? You neither, huh?

The Minutes also indicated that, “equity price indexes increased over the intermeeting period.” Is it the slightest bit alarming that monetary policymakers are nodding to a phenomena that’s been in place since March 2009 as having just occurred to them? Are we pondering pure coincidence or is this exactly what it appears to be — political pandering?

This from CNBC:  FOMC Minutes have unleashed the word “valuation’ as it pertains to equities six times since Alan Greenspan, a self-described obsessive observer of the stock market, first uttered the words, “irrational exuberance.” In every instance, stocks were hit over the next 12 months.

Could it be that Janet Yellen, who in 2008 said the Minutes should be used, “to provide quantitative information on our expectations” knew exactly what she was doing, that she planted the word ‘valuation’ to send the President a pointed message with nothing less than perfect precision?

You may be thinking our new leader has more than enough on his agenda to be worried about a threat to the stock market from the likes of academics he not so long ago publicly derided. If Trump cares about staying in the good graces of those who put him in office, he will fight the temptation to pivot on the Fed. He’s been in office long enough to have made a move to begin filling the three open seats on the Federal Reserve Board.

More to the point, in the event Trump hasn’t been apprised, the Fed has the economy by the short hairs. And, yes, it was, is, and will be about the economy, at least among those who voted him into office, many of whom remain angry and anxious, but not stupid.

They are still waiting for an advocate who sees through the average data right through to the galling truth that absent executive pay, incomes remain in decline. They pine for a leader who can like debt all he wants to get deals done, but doesn’t force it down the economy’s throat to generate economic growth of the most fleeting nature. They may not be able to identify the enemy within by name but they have every right to expect their President does, that he has the gumption to stand up to the Fed and deliver his People from the shackles of indentured servitude.

It might even be a good thing, for working Americans who’ve long sensed the economy has abandoned them, that Trump has a beef with the media and two savvy guys from Goldman Sachs helping steer the economy. Together they should be able to glean the facts from the data the Fed insists are so much “good news.”

Consider, if you will, a fresh report on the state of consumer finance released by the New York Fed. At $12.73 trillion, household debt sits at a record high. We’re told to look the other way, that it’s a nominal figure and more importantly that debt as a percentage of gross domestic product (GDP) is nowhere near where it was back in the bad old days of 2007.

‘Tis true that household debt is no longer 95 percent of GDP which was the case when it peaked in the fourth quarter of 2007. Before resuming its climb to its current 80-percent level, it got as low as 78 percent of GDP.  But let’s hold off on the austerity bubbly for the moment. Since record keeping began in 1952, when the record low of 23 percent was recorded, debt-to-GDP has averaged 56 percent.

As for the red herring that households have tightened their belts, while that is the case for a minority, the bulk of deleveraging that’s taken place has been the result of the past decade’s 10 million and counting foreclosures. (For those of you still keeping count, some 91,000 individuals had ‘foreclosure’ added to their credit reports in the first three months of this year, an uptick from 2016’s fourth quarter.)

The deleveraging, by the way, ended years ago. Aggregate household debt is 14 percent above the low it hit in the second quarter of 2013. And we’re not talking about mortgages here.

Drawing hard conclusions is a bit of a stretch as it really depends on your perspective. You make the call. How secured by anything of value is the type of debt households have taken on since mortgage lending standards tightened like a vise on would-be homebuyers? Credit card debt is an easy enough call. But what about that car loan? Checked your trade-in value lately? (Not recommended if you’ve had a bad day.) As for that festering $1.3 trillion mountain of student debt? Did someone say ‘perspective’?

The bottom line is we still have too much debt and precious little to show for it.

In return, we get this from the NY Fed’s President Bill Dudley: “Homeownership represents an important means of wealth accumulation, with housing equity being the principal form of wealth for most households.” (Isn’t that a good thing?)

He goes on to observe that, “Changes in the way we finance higher education, with an increased reliance on student debt, may have important implications for the housing market and the distribution of wealth.” (You think?)

And finally, out of the other side of his mouth, he has this gem of a recommendation to kick start the economy: “Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers and would provide a boost to economic growth.” (Wait, wasn’t all that home equity borrowing what pushed debt up to its record highs and drove the economy into the Great Financial Crisis?)

It’s critical to note that Corporate America is also drowning in record levels of debt – nonfinancial corporate debt within a hair of $6 trillion. And though it was nary mentioned in the campaign by either party, at $20 trillion, Uncle Sam himself is up to his eyeballs in hock.

Hopefully you can see Trump’s once in a century chance to reshape the warped thinking inside the Fed. He has the tremendous power to redirect the meme by draining the debt swamp that makes our government beholden to foreign lenders, our corporations less competitive on the global stage and our households seething at their inhibited upward mobility. Talk about Making America Great Again, for ALL Americans.

Without a doubt, this will be one of Trump’s toughest tests, and yes, the Fed can easily take down the stock market in retaliation; they could even follow through on threats to shrink the balance sheet. It would be as if someone flipped a switch and we veered from Quantitative Pleasing to Quantitative Plaguing.

And what politician in their right mind wants plague visited upon their economy on their watch? Ask any of Trump’s predecessors and they’ll shoot you straight. Passing legislation with ultra-easy monetary policy and fluffy stock prices on your side sure as heck beats the alternative.

But in the end, it just buys time, not Greatness.

Artificially low interest rates might be as alluring as that Trojan Horse was to the people of Troy. But let’s put their experience to better use and not dismiss Laocoön’s words as the tragic Trojans did. Let us all Beware of Central Bankers Bearing Gifts.

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The Running of the Bulls’ Mouths

What has the power to turn a right of way into a rite of passage?

Might it be that the mighty hand of time plays a role? Any buffed historian worth their weight in tapas will tell you the most glorious bull run of all time is grounded not in pageantry, but rather pragmatism and perseverance. Nestled on northern Spain’s Basque seashore bordering France, the heat of summer brings with it the promise that Pamplona will once again host its famed San Fermin Festival, so named for its patron saint.

History has it that Middle Age cattle herders and butchers would venture out into the night to guide bulls from their barges to bovine barricades. And while legend suggests the tradition dates back to the 13th century, from whence the mid-night marches morphed into the festivities that today are called the Running of the Bulls, its true beginning remains an unknown. The locals claim October 1776 marked the transformation to today’s annual adrenaline-rushed race through the cobblestone streets. But who establishes anything in unpredictable October? And 1776? In any event, the festival has since been moved to reliable July and aside from a few deaths (15 in all since 1924, when record keeping began) the running continues to run smoothly.

The same can be said of the modern-day bull run the world both celebrates and derides, trading day in and trading day out – it runs like silk on steroids. But unlike the practical birth of its Pamplonan predecessor, there was an overabundance of pomp associated with the grave circumstances that marked the advent of the current stock market run born in March 2009 from the beneficence of commandeered central bankers.

Being as it is, the second-longest artificially-turbo-charged bull market in modern market history, the rally has garnered more than its fair share of detractors. These wall-of-worry scalers suffer from a post-traumatic-stress-disorder that only the twin architects Greenspan and Bernanke could conceive. They simply refuse to be thrice burned. And who with a straight face can blame them? And yet these stalwart prudes have nevertheless been engulfed in the flames of shame of the roaring rally that’s left them behind. In some cases, once again.

Have these unrequited bears lost money in the process? It is said, even insisted, that is the case. But all they’ve really done is lost face, not money. The bears have sat bitterly idle while their full-bull counterparts have racked up massive paper gains. As sure as salt finds an open wound, some of their professional peers will even be nimble enough to monetize their handsome profits and go off, as it were, into the wild blue yonder, or at least the Hamptons, which is a lot closer.

But history also dictates that most of today’s bulls will be fried to a crisp and lose it all. Such is the nature of the beast. Why else would he be called bestial?

In the meantime, the bulls have become belligerent, boastful and bloodthirsty. Naysayers in their pathway are as good as ripe for the picking to the bone as so many hyenas on the hunt would be innately inclined. If only there was some assurance that comeuppance was forthcoming!

Yes, stock market valuations are richer than at any other time since 2000 (in the case of you-name-the-bond and commercial real estate, well, no precedent exists). But let’s focus here. Yes, the yield curve is flattening. Yes, share buybacks have peaked and rolled over. Yes, unchecked leverage lurks in the shadows. Yes, the critically compromised Federal Reserve is threatening to unleash balance sheet Beelzebub. Yes, it is even the case that the real economy has peaked for the current cycle, in both the United States and China, for those inclined to see through bubblevision’s delusional depictions. No, as much as you’d like to believe, absent war, oil prices will not stage some robust rebound that rescues the junk market. And finally, yes, you are not imagining that the political and geopolitical backdrop have never been as tenuous as they are today, to be polite in shared company. At least in our lifetimes. And so justice commeth?

Afraid to be the bearer of good news, but NO, stocks are NOT poised to crash, at least not imminently.

The confluence of factors converging to bring stocks down are precisely what will keep them levitating for longer than any logical person could surmise. And God help the poor soul who endeavors to maintain a bet against stocks without withstanding magnificent losses. You may as well be shuffling razor blades blindfolded in the dark.

For all of you who’ve grown accustomed to analytics at this juncture, hit that ‘x’ at the top right of your screen. Stop reading now. This one comes from anecdotes, history’s brutal lessons and the gut.

Lesson number one is melt-ups have little to do with reason and everything to do with emotion. Where to start on measuring today’s mania?

If it was kosher to passively invest in a pre-Trumpian world, it’s downright patriotic to do so today. Bet against a future led by someone with no axes to grind, no special interests to whom to kowtow and a businessman at that? You call yourself an American? Buy the index! Long-term index                                                                                                                                                                                                                              investing always pays in the end.

As for the feckless Fed, futures are betting less than even odds of a rate hike after we see June 14th come and go. So rates are not at zero. But conditions are anything but tight and the market is telling us they’re as bad as they’ll get for the current cycle, within a quarter-of-a-percentage-point, that is.

Lest we forget the other inevitable that’s priced into the markets, DC is poised to stand and deliver. While that may or may not be the case, Congress-folks cannot recuse themselves from the lens of laudable lawmaking until a year from now when they hit the campaign trail for the midterm elections. And if nothing of note is passed? Oh you naïve nabobs, what’s at play is our playing along, nodding our heads in agreement that the smoke-in-mirrors routine amounts to anything more than a token tax repatriation that funds share buybacks (oh, the novelty of it all!)

But surely there’s that outlier of outliers to fall back on, that of the sadistic seed of demonic dictatorial despots? While abundant in their presence, you may note that absent the nefariousness of a nuclear nature, the markets could give a damn. Don’t expect that to change any time soon.

Not to get technical, but the technicals are poised to be the cherry on the bulls’ sundae. Bets are piling up that certain stocks are poised to fall. Those savvy souls placing their money where their mouth is include none other than the Big Short’s Steve Eisman, who almost lost it all, but lived to make it big betting against toxic subprime mortgages back in the day.

In the here and now, at least in his most recent CNBC interview, Eisman talked up his decidedly two-way book, one in which he’s long Amazon and short Simon Properties. Smart guy. Malls bad. E-commerce good. The only problem is, he won’t be alone in being long for long.

Crowded trades that are banking on a stock’s decline, especially when they begin to multiply as the macroeconomic backdrop deteriorates, oftentimes have a way of backfiring in splendid fashion. They’re called short covering rallies and can be a hairy to maneuver, to say nothing of escape, unscathed. As sound as the logic may be, extrapolating the idiosyncratic to the whole has made many an idiot investor.

How to put the mechanics succinctly? The slightest hint of not-awful news on a stock, or even the space it’s in, can trigger a mad dash to exit a negative bet. One investor covering their potential loss by buying a stock back necessarily propels that given stock upwards, which works in a vacuum. Except that shorting is akin to a plague in how quickly the contagion can spread. More often than not, others are forced to follow suit to contain their damage.

Recall that owning a stock, or being ‘long’ has finite downside. The flip side is that betting a stock will decline carries the potential for infinite theoretical losses, a truth to which many bloodied veterans who’ve lived to tell can attest.

More than any one factor, though, the one that is the least satisfying, the most vexing, for bears to bear, is that of gravity, or better said, the lack thereof. Though a challenge to quantify, upward trending markets are inclined to keep pushing into the stratosphere in search of weightlessness. Like a tantrum-pitching toddler whose headache has long since settled in, this tendency’s impetus to infuriate bears knows no bounds.

It will all come down to a race against time, a test of reality’s resolve to refute recession. But that’s the very nature of mindless melt-ups. They are what make bubbles unfathomable. The siren song of foregone fortunes is the very elixir that lures little investors into the lurch, lengthening the rally’s legs for one last leg-up.

If there is one saving grace, it is the gracelessness with which the bulls have begun to comport themselves, though comportment might be a bit generous in this application. Perhaps it’s better said that nasty is as nasty does. Reading the schadenfreude-fueled vicious barbs being spewed at the ‘loser-bears’ leaves one with some sense of the delayed justice to come.

To think these forked-tongue keyboard abusers embrace their mothers at holidays with the same claws that scratch out the multitude of inappropriate rants in public spaces. One is tempted to ask if someone can please get these bullish haters a puppy already. For the here and now, like it or not, the odds are the bullish cabal will keep running the Street, continuing to disappoint violently-disposed voyeurs by staying one step out of reach of those honed-sharp horns.

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