9/11, Danielle DiMartino Booth, Money Strong, Fed Up

Angels Manning Heaven’s Trading Floors

Dear friends,

Time heals, or so they say. Indeed, one more year has come and gone making today the 16-year anniversary of the most horrific day in modern U.S. history when life as we know it was forever altered, when innocence died. This year, we not only have the distance of 365 more days past to help fade memories and heal wounds, we have a multitude of distractions, both natural and man-made.

The onus was thus on me to make an extra special effort to honor all those Angels looking down on us as we go about our day to day lives. To do so, I watched Man on Wire with my nine-year old, my youngest, just he and I. I can tell you I will forever cherish spending those 94 minutes with him as we were swept away by something so much larger than anything we could have imagined, in a good way.

The Oscar-winning 2008 documentary follows Phillippe Petit’s fulfillment of his greatest dream, walking a high wire between the Twin Towers. The brazen illegality of the caper led to the 1974 feat being coined, “the artistic crime of the century.” To those of us for whom the majesty of the World Trade Center never failed to awe, Petit’s film will always stand as a magnificent monument to the fallen. If you haven’t seen it, perhaps today is the right day to do so.

Thursday, August 30, 2001 was the last day I stood and stared up at those beautiful beasts of buildings. I prefer to carry that image with me. Or that of my youth, when I would make day trips from Connecticut into the city with my grandparents. Or 1994, the first time I as a future New Yorker laid eyes on the Towers as a determined young woman with ambitions that matched the skyscrapers’ height. Anything but how they looked 16 years ago today, the day they collapsed, taking down so many Angels with them.

Many of you will have read today’s special installment in years past. This is the third year I am publishing my personal retrospective. If it is the case, that you’ve read it before, I ask that you take a moment to reread it and then pay it forward. As a proud People, we must make every effort, today at 8:46 am, 9:03, 9:37, 9:59, 10:07, and 10:28, and every minute of every day to #NeverForget.

With that, I give you what little I can, in all the humility I can muster. I give you Angels Manning Heaven’s Trading Floors.

 

Never forgetting and always wishing you well,

 

Danielle

 

Angels Manning Heaven’s Trading Floors

He could have passed for Yul Brynner’s twin if it wasn’t for those eyes. He was 57 years old, 6’2” tall, tan and handsome with a shining bald head. But his eyes, those elfish eyes dared those around him to partake of anything but his infectious happiness. It was those eyes I will never forget.

It was Labor Day weekend, 2001. One of my best friend’s college buddies from UCLA was in town and his uncle had a boat. So we had the good fortune to be invited to take a cruise around Shelter Island on that long holiday weekend 16 years ago. I was 30 years old at the time and I can tell you there was no “boat” about this Yul Brynner look-a-like’s 130-foot yacht. The crystal champagne flutes, the hot tub on the deck, the full crew – none of these accoutrements faintly resembled the boats I’d been on as a middle class girl spending summers off Connecticut’s stretch of Long Island Sound. The thing is, our friend’s uncle was none other than Herman Sandler, the renowned investment banker and co-founder of Sandler O’Neill.

I wasn’t sure what to expect of Sandler and I had no idea that this chance meeting would make a soon to happen unspeakable act that much more real. Would Sandler exude that same pomposity so common among the Ivy League investment bankers who had underwritten the Internet Revolution? In a word, hardly. Sandler personified self-made man. After introducing me to his family, of whom he was immensely proud, he graciously offered me something to eat or drink. And then, he told me a story about a man who knew the value of never straying the course. It haunts me to this day.

It was a good old-fashioned American Dream story about a man and some friends who started an investment bank to banks and built their firm to the top of the world. Literally. The secret to his success, which he enjoyed from his place in the clouds, on the 104th floor of the south tower of the World Trade Center was simply hard work, he said. He prided himself, relaying to me in what I could tell was a tale he’d repeated time and again, not only on making it to the top of the tallest building in the city, but on beating the youngest and hungriest to the office in the mornings and turning off the lights at night. Never forget where you come from. Never take for granted what you have.

In 2001, I had been on Wall Street for five years and was enjoying my own success and experiencing firsthand what money could buy. Given the choices my world offered, most would not have chosen night school. But I was determined to fulfill a lifelong dream and attend Columbia where I was to earn my master’s in journalism to complement my MBA in finance from the University of Texas. I guess I was not like most others. I wanted something tangible to open the next door in my career, which I knew would involve both the markets and writing. I called it my retirement plan.

Throughout this Wall Street by day, student by night chapter of my life, the minute the stock market closed at 3 pm, I would rush to the west side subway lines to trek north to Columbia’s campus. Just before Labor Day that year, I had turned in a class project, exploring the world of the famous Cornell Burn Center at New York-Presbyterian Hospital. During my time on the project, the unit was quiet save a few occupants, which apparently was not the norm. So those brave nurses had to paint a picture for me of what it was like when the floor was bustling with victims of fire-related disasters. Many of the stories of pain and suffering were so horrific I remember being grateful for the relative calm and saying a little prayer the unit would stay that way.

I returned to work on Tuesday, September 4, after that long weekend that proved to be fateful, with a new perspective on life and work, inspired by Sandler’s humility. Little did I know we were all living on precious borrowed time. It was impossible to conceive that one short week later, Sandler’s inspirational tale and those nurses’ surreal stories would collide in a very real nightmare.

It’s the Pearl Harbor of my generation. Most Americans can tell you where they were on the morning of September 11, 2001. I had walked part of the way to work that day, so picture perfect was the blue of the blue sky. I was in my office at 277 Park Avenue in midtown watching CNBC’s Mark Haines on my left screen and pre-market activity on my right screen. As was most often the case, it was muted as live calls on economic data and company news came over the real life squawk box on my desk. My two assistants were seated outside my office going through their pre-market routine, fortified as was usually the case with oatmeal, yogurt and coffee. In retrospect, the mundaneness of the morning’s details are bittersweet.

It was almost 9 am and out of the corner of my eye, I noticed that a live picture of the World Trade Center had popped up on CNBC. Haines reported, as did many initially, that a small commuter plane had hit the north tower of the World Trade Center. As distracting as the image was, I tried to go back to my own morning routine, preparing for the stock market open in what had ceased to be one-way (up) trading after the Nasdaq peaked in March 2000.

And then, at 9:02 am, time stood still. A scream pierced the floor as one of my assistants watched a second plane, a second enormous plane, fly straight into what appeared to be Morgan Stanley’s office floors in the south tower, where her father was at work. As things turned out, it didn’t matter where the plane had hit for the employees of Morgan Stanley that morning. They had Rick Rescorla, the firm’s Cornish-born director of security and a Vietnam veteran who had been preparing for this day for years. He knew the Twin Towers were an ideal target for terrorists. Thanks to his efforts and years of constant drilling – every three months, which some thought overzealous — all but 13 of Morgan Stanley’s 2,687 employees and 215 office visitors survived that day. With the evacuation complete, Rescorla heroically reentered the buildings to continue his rescue efforts and in doing so, paid the ultimate price.

Ironically, as was the case with Morgan Stanley’s Rescorla, some at Sandler O’Neill had lived through the first attack on the World Trade Center. When the young firm had outgrown its previous office space, it chose the south tower as its new home, moving in the same week it was bombed on Friday, Feb. 26, 1993. Many who struggled their way down over 100 flights in crowded stairwells, through seas of discarded women’s shoes, learned the lesson that they would have been just as well staying put. It was that very hesitation, borne of that lesson, that cost many of the firm’s employees their lives.

In the 16 minutes between the time the first and second planes struck the towers, the Port Authority had announced over the south tower’s intercom system that the issues were isolated to the north tower and to stay put. That didn’t mean the scenes across the way at the north tower were any less horrifying as rather than suffocate or burn to death, some leapt to their deaths before the very eyes of those across the way in the south tower. Amid this mayhem, Jennifer Gorsuch, a Sandler employee, emerged from the ladies room just in time to hear Sandler shout, “Holy shit!” Gorsach rushed to find a friend and fellow Sandler employee who had survived the 1993 ordeal and knew of an escape route. Together, the two set off down an open stairwell.

Sandler, though, going off his 1993 experience, told one investment banker who did survive 9/11 that the safest place to be was in the office. He added, though, that anyone who wanted to leave was welcome to do so. Of the 83 employees in the office that morning, 17 chose to leave right away. The bond traders and most of those on the equity desk chose to remain. Only three other Sandler employees would make it out alive. The rest, including Sandler himself, were never aware that one, and only one, open staircase offered them safe passage; the building’s intercom system had been knocked out at the time of the second plane’s impact.

From the little we know, many that day above the crash site tried to get to the roof. Though it would not have made a difference in the end, it is nevertheless deeply disturbing that the door to the roof was found to have been locked. The towers were exempt from a city code that required roof access to remain unlocked. The Port Authority and Fire Department had agreed that the safest evacuation route was down, not up. Plus, enforcing the exemption delivered a loud and clear message to vandals, media-mongering pranksters and those contemplating suicide.

For me, the sweetest sorrow came down to the nobility of those brash, boisterous traders. Many that day, at Sandler O’Neill and Keefe, Bruyette & Woods and Cantor Fitzgerald, among others, were among the 1,500 who could have possibly escaped but chose to do right by their firms’ clients. You see, once it was understood that the attacks were an act of terror, the markets began to flash angry red, promising to crash at the open, handing certain victory to the evil, soulless weaklings who took aim at the economic heart of this great country. It is the traders who chose to man their stations I mourn to this day, those I have always called, with utter reverence, the real Masters of the Universe

The helplessness I felt when the buildings fell was matched only by my horror at the silence that followed. At some point between 9 am and 10 am that morning, I found myself praying the deafening fire engine and ambulance sirens tearing down Park Avenue would just stop blaring. The cacophony had filled the 102 minutes that followed the initial plane striking the north tower at 8:46 am. But then the buildings did fall. Although the second to be struck by a plane, the south tower was the first to fall at 9:59 am. In the 29 minutes that followed, we all prayed the north tower would escape the fate of its sister to the south. But it was not to be. The unthinkable, the impossible happened, not once, but twice. And then it was quiet, quiet for days and months and now, 16 years.

Of course, there were miraculously 12,000 who walked away, mainly those who had evacuated the floors beneath the impact zones in both buildings. No doubt, the survivors paved a pathway of hope to help the country heal. But the dearth of rescues was nevertheless heartbreaking as we collectively sat vigil praying man and dog would pull a survivor from the pile. Hence the devastation wrought by the silence. It was unfathomable to contrast those who had braved the fires and lost, and the mere 22 survivors admitted to the no longer nearly vacant Cornell Burn Center of my Columbia class project experience. As if to punctuate the pain, four hospital EMS employees had been lost along with 408 other rescue workers that dark day.

Normalcy was suspended in the days and hellish nights that followed. We financial markets survivors, weighed down by guilt as we were, were told to do what those in those towers had done so bravely. We stayed on call in the event Dick Grasso and the other powers that be were able to open the markets for trading. We were prepared to be the calm in the stormy market seas that were sure to follow the initial open.

Unlike the markets, Columbia resumed classes on Wednesday, September 12th. The moment I stepped out of my cab on 125th Street that evening, the memories of the sounds of 9/11 were lost in the overwhelmingly toxic smells of its aftermath. Buffered as I was, at home in the middle of the island on Fifth Avenue, I had only experienced the tragedy’s aftermath from the nonstop playback news images of the towers that were, and then ceased to be. But Columbia, with its proximity to the Hudson, is an inescapable spot to take in what the winds carry. That evening it was the sad novelty of the smell of burning computers, steel and God knows what else, something I hope to never know again.

On Friday, September 14th, I was set free to travel north to Connecticut to the loving arms of my family who were worried so. They tried to bolster my spirits, what with my 31st birthday set to arrive on Monday. But I was in no place to find the will to celebrate. I was short the markets, poised to profit the minute trading opened on Monday morning and beating myself up as a traitor to my country for being so. The moment I was able to do so on the morning of September 17th, I closed out my position. And I manned my station.

That night, most of my friends dragged me out to my favorite Italian restaurant. But one of us was absent from the table. My dear friend, whose UCLA friend had introduced us to Herman Sandler, found herself in the right place at the right time to begin to help the healing process. At the time, she was working at Bank of America in midtown. The very day the towers fell, the bank had offered Sandler O’Neill survivors temporary office space in the same midtown office at which my friend worked. Jimmy Dunne, who found himself running Sandler O’Neill in the flash of an eye, gratefully accepted. Dunne had been out of the office on 9/11 trying to qualify for the U.S. Mid-Amateur Classic; he survived by chance and chance alone. So devastated was my friend that she chose to stay late every night, on her own time, to help Dunne write condolence letters to the families of the 66 Sandler employees who had lost their lives. She would eventually end up working at Sandler.

On my birthday, six days after 9/11, my friends insisted that robbing us all of joy, the very ability to celebrate life’s little occasions, would represent yet another feather in the caps of the cowards who attacked our fearless traders, our Masters of the Universe who were now all, and would be forever, on heavens’ trading floors. We raised our glasses to them that September evening and I remember thinking I hope Smith & Wollensky delivers in the celestial realm.

But I don’t digress. I never do on 9/11. I never shy away from remembering the worst day of my life. To do so would be an unforgivable dishonor to the 2,759 victims who gave their lives on that painfully beautifully September morning. And so, I never will.

DiMartino Booth

“Okay, Houston, we’ve had an opportunity here.”

Who doesn’t know that past perfect verbs are passé? Especially where drama is concerned.

Hence the thrice-taken artistic license in recanting the fateful conversation that took place April 13, 1970. An onboard explosion had just rocked those manning the Apollo 13 mission to the moon. In the pitch-blacked-out module, some 200,000 miles from home, the astronauts radioed mission control. You know what happened next – ‘Houston, we have a problem.’ Except it didn’t.

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Sasquatch Syndrome

Commercial Real Estate: Sasquatch Syndrome

Things were tough for Moscovians back in the Ice Age day.

The Trans-Siberian Railroad was still about 20,000 years from construction completion. And dinner in the form of wooly mammoths had this nasty habit of migrating east, as in so far east, it landed in what would one day be the United States’ Pacific Northwest. Passage was arguably simplified via the Bering Land Bridge, which hypothetically connected the two continents.

Folklore has it that the mammoths were not alone, but were accompanied by the Gigantopithecus. In that Gigantopithecus fossils have yet to be found outside Asia, stalwart believers maintain that a small population managed to flourish in their new home.

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DiMartino Booth, Fed Up, Will Corporate Bonds Cross Over?

Will Corporate Bonds Cross Over?

It started out kinda ‘Crazy,’ in 1961 to be exact. A 20-something-year-old bass player by the name of Willie Nelson had written a song which he generously offered up to country singer Billy Walker. Walker, however, perceived the lilting lyrics to be a bit too feminine, so he passed. The late Patsy Cline would be forever grateful to Willie for ‘Crazy,’ which she sultrily sang to stardom, and in doing so, founded a movement.

We’re familiar with what followed, from the hobo portrayed as ‘King of the Road’ to the petulant moment, ‘The day my momma socked it to the Harper Valley PTA.” Even the most vacuous pop music acolytes couldn’t help but to let Olivia Newton John know they loved her. Did they ever let her know! And who didn’t want to emulate Glenn Campbell? Even those 1975 disco divas velvet-roping at Studio 54 dreamed of landing the perfect Rhinestone Cowboy.

Year in and year out, Crossover Country hits made traitors of pop purists. Even Willie finally got his mainstream due, with 1982’s No. 5 pop chart hit, “Always on my Mind.” It wasn’t until 1983, when Dolly Parton & Kenny Rogers met on “Islands in the Stream,” taking the hit all the way to No. 1 on the charts, that crossover crossed back over to strictly Country terrain.

And now there is Sam Hunt. Never heard of him? Chances are you can recite a line or two from ‘Body Like a Back Road,’ Hunt’s Crossover Country megahit that recently landed at No. 6 on the Billboard 100. Even if you choose to be obtuse about what the song is about, you can’t help but roll the windows down and sing about “Doin’ 15 in a 30.”

That is, unless you’ve recently hit our country’s byways and all but screamed at that infuriating Sunday driver who only adheres to half the law, that is, doesn’t comprehend Slower Traffic Keep Right (!)

Unbeknownst to unassuming corporate bond holders, they too will soon be forced into the slow lane. For the moment, the vast majority fancy themselves that equally exasperating driver who won’t get out of the fast lane, determined to bully their way to their damned destination. As for the perils of tailgating, they’re for the other guy, the less agile driver with rubbery reflexes.

That’s all good and well and has been for many years. Bond market fender benders are nearly nonexistent. The question is: Will central bankers worldwide turn placid parkways into highways to hell as they ‘remove accommodation,’ to borrow from their gently genteel jargon? That’s certainly one way to interpret Federal Reserve Chair Janet Yellen’s latest promise to shrink the balance sheet ‘appreciably.’

Care for a translation? How easily does “Aggressive Quantitative Tightening” roll off the tongue? Perhaps you’ve just bitten yours instead.

Enter the International Monetary Fund (IMF), The Institute of International Finance (IIF), The Bank of International Settlements (BIS), and by the way, the Emerging Markets complex including and especially China.

As a former central banker, it is with embarrassing ease yours truly can bandy about fantastic figures. No surprise that nary an eyebrow was raised at the latest figures out of the IIF that aggregate global debt is closing in on $220 trillion, as touched on last week. Consider that to be the broad backdrop.

Now, narrow in on the IMF’s concerns that financial stability could be rocked by a rumble in US corporate debt markets. Using firms’ capacity to service their debts from current earnings as a simple and elegant yard stick, the report warned that one in ten firms are failing outright.

The last two years of levering up have exacted rapid damage: earnings have fallen to less than six times interest expense, this during an era of unprecedented low interest rates. And as record non-financial debt as a percentage of GDP quickly approaches 50 percent, the share of income required to service this mountain is at a seven-year high. Should financial conditions tighten (the report was published in April prior to the Fed’s June rate hike), one-in-five firms are likely to default, which rises to 22 percent if rates continue to rise.

A separate signal of distress flickers into focus when one considers the sectors most at risk. Add up energy, real estate and utilities and you get to about half of the at-risk debt. And we wonder why Boston Fed President Eric Rosengren is perturbed about commercial real estate (CRE) and the risks it poses to the banking system.

A few bullets on CRE:

  • Smaller banks with less than $50 billion in assets hold $1.2 trillion of the $3.8 trillion in outstanding CRE debt. Larger banks are relatively less exposed, with $767 billion. This begs the question why the Fed chose this year to not stress test the smaller banks?
  • Bank holdings of CRE have risen nine percent over the last year; multifamily is up 12 percent.
  • Despite skyrocketing rents, multifamily prices have risen so much faster that “cap” rates (net operating income divided by the property price) have sunk to a 16-year low.

Why deviate to a CRE chit-chat in the middle of a corporate bond discussion? In so many words, financing is financing. Whether it’s the capital markets the Fed has kept wide open or banks, companies need access to sources of leverage, especially in times of need and extra especially in times of illiquidity. Stressed smaller banks in particular will be inhibited in their ability to extend lifelines to smaller companies in the coming years.

Speaking of illiquidity but not of small banks, over the past seven years, assets on the biggest banks’ balance sheets have fallen from $5 trillion to $3 trillion. Zero in on corporate bond inventories and you find that dealer holdings have collapsed by 75 percent since the onset of the financial crisis.

Who’s taken up the slack? Whom, pray tell, do you, Joe Q Bond Fund Manager, ping when you need to offload a few billion in bonds? Let’s just say the nontraditional entrants who provide bond market liquidity during the next rout won’t be nearly as polite when it comes to maintaining market stability and pricing. They might even behave a bit like vultures. The more you need to sell, the lower the price.

For this neat noose secured round our necks, we have the regulators to thank. Will bond investors sing along to the greatest hit that has yet to be released by those Rocking Regulatory trio of Dodd, Frank & Basel? Tossing tomatoes onto the stage will more likely be the case.

In the event you’ve begun to sweat, you might want to reach for more than a Kleenex. In a normal world, the bulk of the risk inherent in owning bonds was credit-related. But years of distortive low-interest rate policy have flipped bonds’ risk/return dynamic on its head. Using Barclays US-dollar Aggregate Corporate Bond Index, ‘duration’ now accounts for 90 percent of the risk of holdings bonds, with the balance related to credit; that’s up from 37 percent in 2013. Think of duration as your bonds’ sensitivity to interest rate risk. Kind of gives a whole new meaning to no sudden moves.

Thank heavens for geographic diversification? Ah, you must refer to those essential emerging markets (EM) bond holdings, a must have for any discerning investor. No doubt, they’re the ‘it’ girl. Dollar-denominated EM debt sales were already up 160 percent through May over 2016 to $160 billion, marking the fastest annual start to the year since 1999.

Let’s just say the Bank of International Settlements (BIS) isn’t quite so enthusiastic. The BIS is often referred to as the central bank to central banks. In its estimation, there is a total of $3 trillion in dollar-denominated EM credit worldwide. The BIS’ chief economist Claudio Borio warned in the BIS’ recently released annual report that, “dollar funding remains a potential pressure point in the international monetary and financial system.”

The IMF concurred, warning that in a tightening environment, “the weak tail of emerging economy firms” would be highly vulnerable. The report added that, “A sustained reversal of capital inflows would put pressure on countries with high external financing and/or low reserve adequacy.”

At least China’s got that going for it, as in $3 trillion in foreign reserves. The problem is that only a trillion is considered to be truly liquid, while another trillion is earmarked to build that expanse of infrastructure connecting China to the western world once and for all. After all, you don’t become dominant by being isolationists. Oops, well you get the point.

The BIS estimates that Chinese corporate debt is 169 percent of its GDP. Would you believe that eye-watering and disconcerting figure is realistically on the light side? My good friend Leland Miller sagely suggests one apply the apropos grain of salt to what Chinese statisticians generously refer to as ‘GDP.’ So round down the denominator, way down. Add in the fact the corporations might not be fessing up to what their liabilities really are (who wants to be Debbie Downer?) and or never repay it so why report it? So round up the numerator, way up.

And, you guessed it, who in the world can say with any authority how buried in debt Chinese corporations are? So there’s that lovely black box to ponder.

The takeaway is that ‘bonds’ just ain’t what they used to be. Don’t be comforted by your broker telling you they help you diversify or that they carry bullet proof credit ratings. Sit him or her down instead and warn of the real risks of swollen durations, of bonds of all stripes slipping into rusty junkyards, of our portfolios’ safest holdings crossing over, and not in the good way those country hits do for us pop enthusiasts.

Do yourself a favor. Have a listen to Body like a Back Road. It’s easy enough to find in your car, on that mean machine at the gym, or wherever you prefer to slow down and have a listen. You’ll be grateful you did as summer drags on, closing your eyes and imagining the luxury of going 15 in a 30. It beats the heck out of what your bonds are apt to do when inclement weather hits, which will feel more like going 100 in a 50 on bald tires. And who wants to listen to that?

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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The Demographic Divide: A Police State of Mind

The Demographic Divide: A Police State of Mind

Fake news is so old.

How else did, “I am prepared to veto any bill that has as its purpose a federal bailout of New York City to prevent a default,” become, “DROP DEAD” way back in October, 1975? Oh, those hellbent headline writers. Whatever will they think of next? Besides, the Daily News headline worked wonders, if infuriating die hard New Yorkers was the objective.

The insult so unhinged one William Martin Joel that he soon found himself saying goodbye to Hollywood and headed back to his native New York by way of a Greyhound bus on the Hudson River Line. Had the songwriter and singer we’ve all come to know and love as Billy Joel not been on that bus, he’d have never been inspired to pen the classic New York State of Mind, an anthem to the City only Sinatra himself can claim to have bested in his time.

So thank you, President Ford for refusing to treat the “insidious disease.” At least that’s how he characterized New York’s profligate spending ways. Without the media’s dramatization of Ford’s ire, the world would have been robbed of some of the most poetic lyrics ever written. And, by the way, a feasible blueprint for the years to come as some budget-strapped cities run their tills dry.

In the unique case of New York City in the late 1970s, federal assistance accompanied fiscal reforms. The details of the détente should thus be de rigueur study materials for the judicial and legislative arms of so many at-risk municipalities nationwide.

At the risk of feigning any pretense of legal expertise, municipal bankruptcies come down to the limitations of the federal government’s power to provide relief to ‘units of states,’ whether they be cities, counties, taxing authorities, municipal utilities or school districts.

Though a variety of other state-led interventions have been successfully deployed, many of us are most familiar with voluntary Chapter 9 bankruptcy filings, permitted by half the states and employing the powers of the judiciary in conjunction with creditor workouts. Jefferson County, Alabama and Stockton, California may ring mental bells. But it is 2013’s record $18 billion Detroit, Michigan Ch. 9 filing that reset precedent on how engaged the bankruptcy courts can be.

Suffice it to say, default via the court system is a lengthy process and most lucrative for the lawyers retained. In relative terms, New York City’s effective default occurred in a New York Minute. After the banks cut off New York City in the spring of 1975, the State created an emergency financial control board and a borrowing entity to provide immediate relief to the city. Rather than “default,” the city declared a “moratorium” on $1.6 billion in obligations, a hotly debated designation. A thorny rose it nevertheless was.

In December 1975, with the financial management wrested out of the city’s control, Congress passed and Ford signed into law legislation allowing the Treasury to extend loans to the city to keep it up and running. Future New York state and city revenues were promised to repay the loans and spending reforms that had been intractable were implemented by force.

Looking back at the 40th anniversary of the extraordinary federal-led intervention, American Enterprise Institute’s Alex Pollock applauded Ford’s staunch stance: “That’s what happens when you run out of money and the music stops. Intensely needed reforms of the city’s spending and financial controls actually did follow.”

Why raise the specter of federal assistance if it’s patently apparent other means can be deployed in today’s modern municipal era? The crush of retiring Baby Boomers will keep Uncle Sam up at night for years as he struggles to keep federal entitlements solvent. Why even consider federal involvement in municipal pensions that are at least backed by some semblance of assets? The answer comes down to demographics.

Forty years ago, Baby Boomer were entering their prime earning years. Opportunity in the land of America was expanding at a rapid clip. The level of education was rising among those entering the workforce vis-à-vis their older counterparts at the same time women were growing the overall workforce (just under half of women worked then; today it’s 70 percent). In the simplest terms, the size of the pie was growing.

Today, roughly 10,000 Boomers exit the workforce every day, which should present an opportunity in and of itself for Millennials to backfill the depleting workforce. Census data tell a different story. In 2016, median personal income for workers aged 24 to 34 was $35,000. In modern dollar terms, that same age cohort was earning $37,000 in 1975.

It’s difficult to square lower earnings with the educational makeup of the labor force. In 1975, 23 percent of young workers had earned a bachelor’s degree. Forty years on, 37 percent have achieved the same. Shouldn’t that improvement have lifted per capita earnings?

It comes down to comparative advantage. Back then, it was easy enough for a younger, better-educated worker to displace an older, less-educated and therefore less-qualified older worker. Today’s workforce is largely educated and intent on working longer; it’s stickier and less tractable. At the same time, the double governors of technological innovation and globalization have reduced the aggregate demand for warm bodies.

At the risk of getting buried in the weeds, there are more workers exiting the workforce than there are those joining it. Those making way for the exits are otherwise known as ‘retirees.’ It is at this critical juncture that municipal finance re-enters the picture.

As has been written on these pages, over the past few years, public pensions have been reducing the stated returns they anticipate their portfolios generating on investments. These reduced expectations necessarily trigger the need for higher contributions on the part of state and local governments.

That’s exactly what took place last year. The Census’ 2016 Annual Survey of Public Pensions found that state and local government contributions rose by 6.5 percent to $191.6 billion from 2015’s $179.7 billion. By contrast, earnings on investments, which include both realized and unrealized gains, tumbled 67.9 percent to $49.9 billion from $155.5 billion in 2015.

Meanwhile, the number of pensioners collecting checks marched upwards to 10.3 million people, up 3.3 percent over 2015. The benefits they received last year rose even more, by 5.4 percent to $282.9 billion from $268.5 billion in 2015. And finally, total pension assets fell 1.6 percent to $3.7 trillion from $3.8 trillion the prior year.

In the event you sense you’ve been felled by death by numbers, back out to the big picture. Paid benefits exceeded contributions to the tune of $40 billion in 2016 against the relentless backdrop of an increasing number of Boomers retiring (in 2014, there were 9.9 million receiving benefits).

Microcosm this demographic dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment returns but paid out $8.511 billion to retirees.

Chicago Mayor Rahm Emanuel recently proposed raising new city employees’ contribution to help fill the gulf of underfunding but Illinois’ Governor quickly vetoed the measure declaring Emanuel was, “trying to fix a drought with a drop of rain.”

Projections suggest that one of the two funds will be cash flow negative by 2023; the other will run short by 2025. If all else remains the same, a big IF with risky asset prices trading at frothy high valuations, property taxes would need to be doubled to cover the coming shortfalls.

Many Cook County taxpayers are forsaking a wait-and-see approach. Chicago was the only large city in America to lose population last year, its resident count dropped at nearly double the rate of 2015.

As convenient as it might seem to excoriate the Windy City, there are plenty of other major cities deep in hock. According to a Moody’s report, though Chicago does indeed top the list, Dallas is the second-most underfunded city followed by Phoenix, two magnets for nomads in search of lower costs of living. Rounding out the top ten list are Houston, Los Angeles, Jacksonville, Detroit, Columbus, Austin and Philadelphia.

In other words, running and hiding in lower tax haven hamlets will be even more challenging in coming years. According to a Milliman report, 2015 marked the first time retirees outnumbered active employees in the nation’s 100 largest public pensions; there were 12.6 million retirees covered by the toils of 12.5 million workers.

Look back no further than 2012 to appreciate how the trend has accelerated; in that year retirees numbered 10.5 million vs. 12.3 million active employees. Absent a surge in state and local payrolls, further fiscal deterioration is poised to persist.

To take the case of the case of the country’s largest pension, the California Public Employees’ Retirement System, in 20 years’ time, retirees supported by the plan will be roughly double the number of active workers. CalPERS won’t be alone in this predicament.

Again, it comes down to the demographic divide that’s opened up since President Ford was in office. In the 1970s, the typical public pension’s active employees outnumbered retirees by a factor of four-to-five times; today that ratio is 1.5-to-1 and continues to fall as Boomers retire in droves and Millennials fail to fill the yawning gap.

After a grisly year that ended with a tally of 4,000 homicides, Chicago has begun to coordinate with federal authorities to control a crime wave driven by gangs’ unencumbered access to firearms. The last thing the city can withstand is further cuts to public service funding. By the same token, taxpayers have already begun to vote with their feet as rising taxes and foundering pensions promise to beget more tax hikes to come.

It’s plain that the last thing any of us want to see is a Police State of any kind. But the growing risk is that the next recession and deflating asset prices could well alter the rules of engagement between federal and state authorities on more levels than any of us care to envision.

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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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Central Banks’ Ode to Investors: Super Size Me!, Danielle DiMartino Booth, dimartinobooth, Money Strong LLC, Fed Up

Ode to Investors: Super Size Me!

How do you take your plaque?

C’mon, we all have our victual vices that risk turning the gourmet in us gourmand. Those naughty nibbles that do so tempt us. Is it a bacon, cheese, well…anything? Maybe a slice of pie – pizza or otherwise? Or do you take yours scattered, smothered and covered? As in how you order your late-night hashbrowns at Waffle House – scattered on the grill, smothered with onions and covered with melted cheese. That last order is sure to do the trick if clogging your arteries is your aim. Too exhausted to trek inside? Hit the drive through. It’s the American way.

Enter Morgan Spurlock. In 2003, he had grown so alarmed with the ease with which we can go from medium to jumbo (in girth) he conducted a filmed experiment. For 30 days, Spurlock consumed his three squares at McDonald’s, a neat average of 5,000 calories a day, twice what’s recommended for a man to maintain his body weight. Fourteen months later, Spurlock managed to shed the 24 pounds he’d packed on.

Released in 2004, Super Size Me garnered the nomination for Best Documentary Feature.

And since then? A freshly released paper finds that more than 30 percent of Americans were obese in 2015 compared with 19 percent in 1997. Of those who were overweight or obese, about 49 percent said they were trying to lose weight, compared to 55 percent in 1994.

One must ask, where’s that “Can Do!” spirit? Why acquiesce given the known benefits of restraint? Perhaps we’d be just as well off asking that same question of the world’s central bankers who seem to have also thrown in the towel on discipline, opting to Super Size their collective balance sheet, the known hazards be damned.

At the opposite end of the over-indulge-me spectrum sits one Harvey Rosenblum, a central banker and my former mentor who sought to push his own discipline to the limits throughout his 40 years on the inside, to take a stand against the vast majority of his peers. Consider the paper, co-authored with yours truly, released in October 2008 — Fed Intervention: Managing Moral Hazard in Financial Crises.

In the event your memory banks have been fully withdrawn to a zero balance, October 2008 is the month that followed the magnificent dual implosions of Lehman Brothers and AIG.

To speak of insurers and quote from our paper: “Moral hazard, a term first used by the insurance industry, captures the unfortunate paradox of efforts to mitigate the adverse consequences of risk: They may encourage the very behaviors they’re intended to prevent. For example, individuals insured against automobile theft may be less vigilant about locking their cars because losses due to carelessness are partly borne by the insurance company.”

As it pertains to central banking, we had this to say: “Lessening the consequences of risky financial behavior encourages greater carelessness about risk down the road as investors come to count on benign intervention. By intervening in a financial crisis, the Fed doesn’t allow markets to play their natural role of judge, jury and executioner. This raises the specter of setting a dangerous precedent that could prompt private-sector entities to take additional risk, assuming the Fed will cushion the impact of reckless decision-making.”

What a redeeming difference eight years can make?

If you’ve read Fed Up, you’ll recognize these words, which open Chapter One: “Never in the field of monetary policy was so much gained by so few at the expense of so many.” Every chapter of the book begins with a quote, most of them ill-fated words straight out the mouths of Greenspan, Bernanke and Yellen, chief architects of the sad paradox that’s benefitted “so few.” Those prescient words were written in November 2015 by Bank of America ML’s Chief Investment Strategist Michael Hartnett, before Brexit was on the tips of any of our tongues, before the anger of the “many” erupted at voting booths.

Chapter One goes on to recount the Federal Reserve’s December 2008 decision to lower interest rates to zero. According to the Bernanke Doctrine, the Fed’s purchasing securities, quantitative easing (QE) could not commence until interest rates had hit their lower bound. To suggest the chairman’s blueprint was arbitrary requires a vivid imagination. Few appreciate the Doctrine was conceived in August 2007 in Jackson Hole, in the tight company of his chief architects. But one can breathe a sigh of relief his models did not necessitate negative interest rates.

We know it’s been over two years since the Federal Reserve stopped growing its balance sheet to its current $4.5 trillion size. And yet, investors are anything but alarmed, comforted in their knowledge that Liberty Street stretches round the globe. There are plenty of corners on which moral hazard dealers can ply their wares, luring animal spirits out of their lairs. QE is global, it’s fungible and it feels so good.

As Hartnett reminds us in his latest dispatch, global QE is, “the only flow that matters.” Add up the furious flowage and you arrive at a cool $1 trillion central banks have bought thus far this year (note: it’s April). That works out to a $3.6-trillion annualized rate, the most in the decade that encompasses the years that made the financial crisis “Great.”

“The ongoing Liquidity Supernova is the best explanation why global stocks and bonds are both annualizing double-digit gains year-to-date despite Trump, Le Pen, China, macro…”

As so many sailors fated to crash onto the rocky shores of Sirenuse, investors have complied with central bankers’ biddings. And why shouldn’t they?

As Bernanke himself wrote in defense of QE in a 2010 op-ed, “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will support further economic expansion.”

What a relief! This won’t end as tragically as the Greeks would deem fit. It’s the wealth effect, a different myth altogether, protected by virtue herself.

Investors are excelling at obedience in such rude form they’ve plowed fresh monies into emerging market debt funds for 12 weeks running. As for stocks, forget the fact that it’s a handful (actually two hands) of stocks that are responsible for half the S&P 500’s gains. Passive is hot, red hot. According to those at Bernstein toiling away at tallying, within nine months more than half of managed US equities will be managed passively.

As if to celebrate this milestone, Hartnett reports that an ETF ETF has completed its launch sequence. What better way to mark a decade that’s seen $2.9 trillion flow into passive funds and $1.3 trillion redeemed from active managers? In the event you too need a definition, an ETF ETF is comprised of stocks of the companies that have driven the growth of the Exchange Traded Funds industry. But of course.

In the event you’re unnerved by the abundance of blind abandon in our midst, it helps to recall the beauty of moral hazard. Central bankers know what they’re doing in encouraging moral hazard and they’ve got your back. If they can’t prevent, they can at least mitigate the future economic damage they’re manufacturing.

As Bernanke said in a 2010 interview, “if the stock market continues higher it will do more to stimulate the economy than any other measure.” If that was true then, isn’t it even truer today? More has to be more. Why diet when it’s so much more satisfying to indulge to our heart (attack’s) abandon?

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