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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Is the Fed’s Balance Sheet Headed for the Crapper?

Never underestimate the resourcefulness of a great plumber.

Had it not been for the genius of Thomas Crapper, champion inventor of the water-waste-preventing cistern syphon, Victorians would have been left to make their trek to that malodorous darker place otherwise known as the Out House, or perhaps the crockery pot stashed under the bed for a while longer.

Born in 1836, Crapper was apprenticed to a master plumber at the tender (today) age of 14 and had hung his shingle in Chelsea by his mid-twenties. Such was Crapper’s renown and stellar reputation, that even the Royals themselves were early adopters. The Prince of Wales, later King Edward VII, is the first known to grace the invention with his regal rear. Windsor Castle, Buckingham Palace and Westminster Abbey would be appointed in short order ensuring safe and sanitarily stately relief as the royal “We” traveled from castle to castle.

Of course, it took rude Americans to nick his last name, giving future generations of boisterous boys endless joy at having a humorous potty word to reference the potty. Crapper took great pride in publicly peddling his patented products. Legend has it prim British ladies would faint upon happening upon his Marlborough Road shop, such was the shock at the sight of this and that model of the technological wonder behind huge pane glass windows.

By our very nature, we are nothing if not imperfect, Crapper included. One of his innovative inventions fell flat, or better put, jumped too high. It would seem his spring-loaded loo seat, which leapt upwards as derrieres ascended, automating flushing in the process, was too ill-conceived and thus ill-fated, to be purveyed after all.

No one likes a rude slap on the bottom, bond market investors especially. Perhaps that’s why there’s such irritability among traders who prefer clarity above all, even as bond yields flash danger ahead. Just a guess here but all that angst could reflect concerns about a different sort of plumber, of the central banker ilk.

It’s no secret the plumbers at the Federal Reserve are feverishly at work devising a way to unwind their $4.5 trillion war chest of a balance sheet. Officials claim their carefully devised maneuvers will nary elicit an inkling of a disturbance in the markets they’ve coddled all these years with billions of dollars of purchases, month-in, month-out. But one must wonder, at the timing, at the ostensive optics, if nothing else.

Fed Chair Janet Yellen insists that economic recoveries do not die of old age. But why chance it? Unless, that is, the motivations of shrinkage are less than magnanimous and dare one say, immoral.

Consider the Fed’s Commander in Chief herself. Back in December 2011, then Vice Chair Yellen pushed back against the majority of those on the Federal Open Market Committee (FOMC). The time was ripe for more cowbell. She argued that “a compelling case for further policy accommodation” could be made despite visible green shoots in the labor market and business spending. The consummate dove, she added that while they were at it, why not commit to the Fed sitting on its hands until late 2014 from what was then mid-2013?

Why yes, since you raise the subject, a presidential election was indeed a matter of months away.

Take a step back further in time if you will, to August 2011. Though it is maintained that the subject of politics at FOMC meetings is unseemly, as religion is to cocktail parties, the upcoming election was too front and center to ignore given the subject of debate among committee members.

At the time, the markets were interpreting the Fed’s pledge to keep interest rates tethered to the zero bound for “an extended period” as several meetings. For markets, that period of time was sufficiently brief to begin to price in an impending tightening cycle, an abhorrent assumption to the dovish coalition who had several years, not meetings, in mind.

How best to broadcast the Fed was anything but a commitment-phobe? That’s easy. Do what the Fed did throughout its foray into unconventional policymaking and guarantee results the best way econometricians can, with a numeric commitment, in this case through “mid-2013.”

God love St. Louis Fed President James Bullard for piping up with this following gem: “It will look very political to delay any rate hikes until after the election. I think that will also damage our credibility. I also doubt that we can credibly promise what this committee may or may not do two years from now.”

Score two for St. Louis! Political tinder and who the heck knows where economy will be in two years!

Dallas Fed President Richard Fisher (full disclosure – the man I once simply referred to as ‘boss’) concurred: “The ‘2013’ just looks too politically convenient, and I don’t want to fall back into people being suspicious about the way we conduct our business.”

According to the transcripts, former Fed Governor Daniel Tarullo offered a helping hand with the suggestion that perhaps Fisher would be happier with committing all the way out to 2014. Lovely. And this coming from an individual who sported his Obama bumper sticker for years driving in and out of the parking garage.

For the record, then Chairman Ben Bernanke sided with the doves, defending the move to make binding for a set period the promise to keep rates on the floor. In the end, Bernanke withstood three dissenting votes though not without a fight.

Perhaps what’s most noteworthy is that no fewer than 20 pages of transcripts are devoted to Bernanke’s best efforts to quash the dissents. That’s a problem in and of itself. Healthy dissent should make for a healthy institution. Plus, common sense tells you markets never give back what you give. The time committed was downright irresponsible and all but set the stage for future market temper and taper tantrums.

You may note that the dissenting voices of reason never prevailed, hence the aforementioned $4.5 trillion balance sheet. That’s what makes the doves’ dogged determination to tighten on two fronts so damning. It’s clear that politics got us into this monetary quagmire and that politics will also land us in recession.

To be fair, recessions are inevitabilities down here on Planet Earth where business cycles are permitted to be cyclical. Just the same, for a group of folks who’ve done backbends for years endeavoring to prolong the recovery at all costs, it’s plain odd that they’re even flirting with shrinking the very balance sheet that secures their power base as Type A monetary control freaks.

The good news, for those fearing having to enter monetary rehab, is that it’s going to take a mighty long time to shrink the balance sheet. The fine folks over at Goldman Sachs figure that getting from Point A ($4.5 trillion) to Point B ($2 trillion based on balance sheet contracting just over a tenth the size of the country’s GDP) will take at least five years.

(An aside for you insomniacs out there: Have a look back at Mind the Cap, penned back on December 16, 2015, released hours before the Fed hiked rates for the first time in order to raise the cap on the Reverse Repo Facility (RRP) to $2 trillion. (Mind The Cap via DiMartinobooth.com) Come what may, you can consider Goldman’s estimate of the terminal value of a $2 trillion balance sheet and the size of the RRP to be anything but coincidental.)

In any event, things change. As per Goldman, by 2022, “…changes in Fed leadership, regulation, Treasury issuance policy, or macroeconomic conditions could alter both the near-term path and the intended terminal size of the balance sheet.” Indeed.

It is entertaining to watch market pundits shift in their skivvies trying to assure the masses that a shrinking balance sheet will be welcomed by risky assets. It was downright comical to read that the Fed’s strategically allowing only long-dated Treasuries to expire and not be replaced would prevent the yield curve from inverting, thus staving off recession.

Pardon the interruption, but domestic non-financial sector debt stood at about 140 percent of GDP in 1980. Today, it’s crested 250 percent of GDP and keeps rising. Interest rate sensitivity, especially in commercial real estate, household finance and junk bonds is particularly acute. Oh, and by the way, monetary policy is a global phenomenon. At last check, the European periphery and emerging market corporate bond market were not in the best position to weather a rising rate environment.

The best performance, though, was delivered by Chair Janet Yellen herself. In the spirit of giving credit its due, Business Insider’s Pedro da Costa highlighted this delightful nugget from testimony Yellen presented to Congress in February: “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting the financial markets and pushing the economy into recession.”

Isn’t the rapidly flattening yield curve communicating that ‘removing accommodation’ today is one and the same with ‘pushing the economy into recession’? In Da Costa’s words, this preemptive philosophy is “dubious” and akin to, “a modern-day finance version of bleeding the patient to cure it.” Hope you’ll agree that leeching has no more place in modern medicine than outhouses do in our backyards.

Even as the Fed battles its own public relations nightmare, it would seem policymakers intend to follow through on their threat to tighten on two fronts, though not concurrently. Will President Trump pass the test and stand firm on reinstating leaders at the Fed who will transform it into a less compromised, more apolitical institution? Or will Trump fold, opting to keep the doves in command?

It’s just a hunch, but a less-threatened Fed could just as easily be expected to back down on shrinking the balance sheet. Given where the economy looks headed, newly empowered doves might even be inclined to grow the balance sheet anew. Stranger things or political posturing? You tell me and while you’re at it, ever noticed the word, ‘die’ is embedded in the word, ‘diet’? Let’s just say bulking up is easier done than slimming down.

The Five-Tool Bond Market

The Five-Tool Bond Market, Danielle DiMartino Booth, Money STrongWillie Mays, Duke Snider and Ken Griffey, Jr.

It’s no secret that these bigger than life baseball players are all Hall of Fame legends. But what about Mike Trout of the Los Angeles Angels? Or the Pittsburg Pirates’ Andrew McCutchen or Carlos Gomez of the Texas Rangers? What do all six of these greats have in common?

If you guessed that none of them were pitchers, you would definitely be on to something. If you’ve really been doing your homework in the preseason, you would patiently explain that all six were “complete ballplayers,” with above-average capabilities in hitting, hitting for power, fielding, throwing and running. If you wanted to show off, you could elaborate that each has at least three qualified recorded data points in one season in each of the five areas rendering them “five-tool players.” These are the well-rounded players of field scouts’ dreams.

The idea of this quintessential, albeit exceedingly rare player, harkens to another picture of perfection – the bond market. After peaking above 15 percent in 1981, the yield on the benchmark 10-year U.S. Treasury fell in July of last year to a record low of 1.36 percent. That there is what we call the rally of a lifetime. A major contributor to the mountains of wealth that bonds have generated include the venerable inflation-fighting of one Paul Volcker. The three subsequent boom and bust cycles, largely engineered by Volcker’s successors at the Federal Reserve, each made their own contribution and brought greater and greater degrees of intervention to bear on the market and helped push yields lower and lower. In bondland, that translates to prices soaring higher and higher.

Over the years, the castigators were cast aside time and again. As for the few with steel constitutions, who quickly drew parallels between Japan’s intrusions and those of the Federal Reserve, let’s just say they can retire and rest in peace. They bought 30-year Treasury Strips and buried them, giving new meaning to the beauty of buy and hold. To keep the analogy alive, let’s say that at that juncture, the bond market was a four-tool player.

But then suddenly, last summer, something gave way.

Since July, the conventional wisdom has held that bond yields have finally troughed, bringing a denouement to the 35-year bull run. Of course, those comprising the consensus collided in arriving at their conclusions.

Market technicians, aka the chart-meisters, provide the simplest explanation. In 2016, the 10-year yield sunk below 2015’s low of 1.64 percent and rose above its high of 2.50 percent. Technicians refer to such boomerang behavior in short spaces of time as “outside events” that mark the beginning of the end of a cycle.

The reflationists point to the pronounced uptick in the industrial metals complex as proof positive that inflation has seen its lows of the cycle. Everything from nickel to rebar to copper and back validated the notion that pipeline and margin pressures were building, especially if you had building a pipeline in mind.

And then we have the bullish economist cabal who insist that gross domestic product is set to accelerate into some sublimely sustainable hyper-drive mode. The increase off the lows in interest rates purely reflects the markets being forward-looking mechanisms and sniffing out the bevy of incendiary economic accelerants. In the event you’ve just emerged from a medically induced coma, we’re talking about small business formation, tax cuts galore and repairing every crumbling bridge and filling every pothole from Bangor to Baja. Oh, and by the way, delivered care of our cuddly Congress, in full, tomorrow.

Lastly, there’s the camp with which yours truly would most likely be associated: The Skeptics. As the ridiculous veered into the surreal last year, as nearly a quarter of a trillion in global debt yielded from somewhere south of one percent into deeply negative territory, some of us skeptics began to ask the ye-of-great-faith-in-omnipotent-central-bankers if they grasped the implications of policymakers’ intrusions. Did they really believe Mario Draghi could vacuum up a corporate bond market lock, stock and barrel, and his counterpart Hiroki Kuroda an entire stock market and live to tell? Or was exhaustion overcoming exertion?

At the end of the trading day, all four camps’ arguments are moot. At least, that’s the message the 10-year Treasury is communicating in no uncertain terms. If there is one thing the 10-year can be called upon to deliver, it’s consistency, as in behaving in the same way over time so as to be fair and accurate in anticipating the future. Lest you etymologists, pundits and, dare say, traders in our midst be tripped up, try not to confuse consistency with what you believe to be predictability, as in behaving in an expected manner.

You can carry this much, though not all the way to the bank — the bond market should have corrected long ago if history was any judge. Inflation, heck hyperinflation, should have ignited and burned our currency to the ground by now. But that hasn’t happened, has it? Unlike so many of you who do indeed deliver on the expectations front (yawn), the bond market has consistently surprised those with cocky certitude calling for sea changes.

You’re forgiven if it’s been difficult to incorporate a once-in-a-century outlier factor into your decision-making framework. The entrant of over a billion workers into the global workforce, coupled with the building out of the equivalent of the United States in its glorious industrial age, introduced a deflationary impetus that simply doesn’t exist in any economics textbook in print today. The weighty subsequent suppressant on yields, combined with the artificiality of central banks butting their way into bond pricing, held rates lower than logic or any econometric models dictated, confounding the esteemed doctorate community.

As for the here and now, worry thee not about the chartists, the inflation worrywarts, the optimists and even the skeptics. The decline in the 10-year yield tells you everything you need to know, and probably more than you’d like to acknowledge.

The simple fact is, the current economic recovery has peaked and rolled over. It’s one thing if some subprime auto lender you’ve never heard of is whining about regulators clamping down on premature repossessions. It’s quite another when the data tell you that car inventories are up nearly 10 percent over last year, GM is choking on incentives of its hottest selling pickups and State Farm has just swallowed $7 billion in auto loan underwriting losses (gulp!). Last check these were not hot-money, private-equity-backed fly-by-nighters.

In the event you require yet more proof that the bond scare was just that – scary — Behold! The yield curve flattens! After hitting a wide of 136 hundredths-of-a-percentage-point (basis point) in mid-December – which just so coincided with global bond losses hitting a cool $3 trillion — the difference between the 2-year and 10-year Treasury has narrowed to 112 basis points. Finance 101 tells us that the slimmer the divide between short and long rates, the closer we are to crossing into the netherworld, otherwise known as recession.

This precarious position posits a pondering pause:  Exactly where does the Fed fit into the equation? By the looks of things, the post-election Fed has morphed into its answer to Dirty Harry. Odds of a March rate increase have catapulted to 70 percent in the space of three trading days, a tidy trek for academics more apt to move at the pace of molasses in January. And yet, their tough talk is borderline brash.

Take this from New York Fed President William Dudley three whole days before the onset of the blackout period ahead of next week’s Federal Open Market Committee Meeting begins: “I just think it makes the risks to the outlook a little bit tilted to the upside at this point.” When further queried whether the next rate hike should come, ‘sooner rather than later,’ Dudley replied. “I think that’s fair.”

As benign as his comments may read, make no mistake, they’re fighting words for a Fed that’s given new meaning to skittish for the better part of three decades. It’s as if Fed officials were contenders within reach of that five-tool status save one that last qualifier – hitting for power with a home run distance of 425 feet or more. Recall that Dudley is Vice Chairman of the Federal Open Market Committee. In other words, his conceding to a ‘go’ in March cleared the ball way over the fences.

Rather than delve into any (deeply political so as to throw economy into recession) motivations, let’s look beyond the next recession, inadvertently induced by an overly aggressive Fed, to the next question: How do policymakers wage that next battle?

Since you ask, this is where baseball reenters the equation, in its positively perfect form, in all its five-tool glory. Fighting the next recession is theoretically where the academics shine brightest and hit their collective pleasure threshold. This is where the bond yields steal home. There’s one word for it. Wait for it… “MONETIZATION.” The debt doth disappeareth.

It wasn’t until a recent and very heated public debate, at which a friendly colleague attempted to put your fearless writer in her place (a mistake), that the height of the stakes became apparent. For starters, we both agreed that the overabundance of debt, not just in the United States, but globally, was problematic. Fair enough. The solution to such an intractable problem was thus by its very definition, tricky bordering on tempestuous.

The good news, he insisted, was that in the end, boys would be boys and men would be men. The overly indebted developed-world economies would march off into the great blue yonder and not return until a gentlemen’s agreement has been secured. Pray tell, what form would that take?

In short, not in the neatest of forms. A blanket propaganda campaign would have to be launched educating the clueless public about the virtues of negative interest rates and a cashless society. Upon that sturdy foundation, we could then construct a full-blown monetization of the bloated debt we carry today, one in the same with what we’re told is technically irrelevant because models dictate it can be wished away.

Lest you be led astray, there’s no cathartic Kumbaya that conveniently follows before the credits roll. Milton Friedman was, and remains to this day, spot on in his observation that there is no such thing as a free lunch. My undaunted debater conceded that there would be losers, mainly emerging nations shouldered with boatloads of dollar-denominated debt and developed nations that were naïve enough to not be burdened with excessive debts. But so be it.

In global credit markets that exceed $200 trillion in outstanding securities, dominated by dollar-denominated debt, I deign to accede that the losers have much to lose indeed. Whether they will take their lumps lying down like lambs, however, remains a much wider, open and heated debate than that which played out on a stage in Austin, Texas. My greatest fear is that the war we will eventually face is of the all-too-real variety, precipitated by the greatest income divide since the years that preceded the Great Depression and the Second World War.

Rather than focus on such dire potential outcomes, take comfort in the adage that history doesn’t precisely repeat itself, but rather merely rhymes. Between now and Sunday, April 2nd, baseball’s opening day, relish in the welcome distraction to come. Count your blessings as we count down to the day we hear, “Play Ball!” and spectate with hope for the next five-tool player to make us once again believe.

UpEnding the Fed: The Administration Redemption

Danielle Dimartino Booth, Money Strong, The Administration Redemption“Remember Red, hope is a good thing, maybe the best of things, and no good thing ever dies.” 

Wiser words were never spoken on the big screen than those of The Shawshank Redemption’s main character Andy Dufrense. We are none of us beyond redemption, so we are taught by this banker from Maine, even when we are punished for crimes we did not commit. In briefly researching the movie, one comes to learn that it is based on Stephen King’s 1982 novella Rita Hayworth and Shawshank Redemption. No doubt, Hayworth’s role in the movie stands out in all our minds, which is saying something as the superstar was no longer with us.

Dig deeper and you learn that King’s longer than a short story, but shorter than a novel, was part of a series called, Different Seasons, subtitled Hope Springs Eternal. How reassuring if enigmatic. More perplexing still is this master of the horror genre’s inspiration — Leo Tolstoy’s God Sees the Truth, But Waits. It would seem that Carrie has met Anna Karenina.

Clearly, it’s easier to judge those who write books by their most famous covers. But why not set such preconceived notions aside. You too can bask in King’s gorgeous prose from Shawshank and even Tolstoy’s beautiful words of inspiration: “If you want to be happy, be.” And redemption: “Everyone thinks of changing the world, but no one thinks of changing himself.”

These words resonate so against the backdrop of a country that remains intent on fomenting division, on splitting itself at the seams, bent on self-destruction. Perhaps it will have to come down to one man and his ability to change himself, to draw in more than his avid followers but his doubters as well.

For yours truly, it has thus been curious, nay fascinating that on matters of the Federal Reserve one Donald J. Trump has been silent as a mouse whose paws cannot bang out 140-character rants. Perhaps, just maybe, he is busy doing late night reading on the foundations of this venerable institution. If that’s the case, maybe he came across this little gem that was passed along recently:

“In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”

Maybe that’s why the media has begun to dispense with the labels “hawk” and “dove” and is beginning to replace the aviary with simple human beings who have been there and done that, who have been on the receiving end of Fed policy for their entire careers. Take this from Kate Davidson at the Wall Street Journal:

“After his campaign criticism of the central bank’s low-interest-rate policies, many observers speculated he would seek more “hawkish” candidates who would favor higher borrowing costs. But his choices may be driven less by these issues and more by their practical experience, judging from his early picks for other top economic policy posts in the administration—drawn from investment banking, private equity and business—and the pool of early contenders for the Fed jobs.” 

Meanwhile, the Financial Times’ Gavyn Davies had this to say:

“The last four Fed Chairs have all been clearly on the economist side of the line, and because they have all bought into the Fed’s economic orthodoxy, their actions have been considered somewhat predictable by the markets. A business person or banker might be less predictable, at least initially, and more prone to shake up the Fed’s orthodoxies, for good or ill.”

With deference to Mr. Davies, there can be no ‘for ill’ in shaking up the Fed’s orthodoxies, if you can call them that. Orthodoxy, from the Greek word orthodoxia, implies officials are cleaving to a correct creed. But what if policymaking has devolved from correct to simply accepted?

That would imply a good dose of heterodoxy, also Greek from heterodoxos, was in order, as in a departure from the official position. To be crystal clear, heterodoxy does not equate to heretical, from the Greek hairetikos, (pardon the digression but who gave the Greeks a monopoly on multisyllabic, cool words?). Even so, a bit of heresy would also do the Fed a world of wonders. The literal Greek translation means ‘able to choose.’

A recent study determined the study of economics in academia had itself become incestuous with a great preponderance of students being trained in the same school of thought. This determination was not only disturbing and dangerous, it demands politicians introduce a bit of heresy into our nation’s central bank.

Perhaps President Trump, his administration and all members of Congress should sit down for a tutorial on Heterodox Economics (nope, not making that one up), which refers to schools of economic thought which fall outside of mainstream — read Keynesian – economics, which is predictably referred to as orthodox economics. Maybe, just maybe, it’s high time a variety of schools are incorporated, as in the post-Keynesian, Georgist, social, behavioral and dare say, Austrian approaches.

That last one, the Von Mises-inspired Austrian school of economics is apparently public enemy number one. The FT’s Davies goes on to warn that some candidates up for those open and opening positions on the Fed’s Board of Governors are ‘Austrian’ economists, a school that has apparently influenced Vice President Pence. An “Austrian” candidate would certainly alarm the markets.”

Davies has apparently done his homework. Back in 2010, one Mike Pence was serving in Congress as a representative of Indiana. In response to the Fed’s insistence on launching a second round of asset purchases, which the markets adoringly embraced as QE2, he blasted back that, “Printing money is no substitute for pro-growth fiscal policy.”

Pence’s words certainly ring Austrian, as the school considers malinvestment to be a menace, as well any rational person would. Malinvestment (we can finally score one for the Latins!) is defined as a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses.

And we wonder why we’ve had such a long run of jobless recoveries that happens to coincide with the post-Greenspan era. Why would the markets abhor an Austrian? Clearly, we would not have starved productivity by overbuilding residential real estate in the years prior to the crisis. Nor would companies have gorged on record share buybacks in the years that followed. Agreed, these phenomena juiced returns. But to what end aside from protecting the legacy of the mythological ‘wealth effect’?

As my dear friend Peter Boockvar wrote of the wealth effect in response to the Fed’s meeting minutes from its January meeting: “The concept, invented by Alan Greenspan, and carried on by Mr. Bernanke and Mrs. Yellen, is the unspoken third mandate of the Fed. Well Fed, you certainly got what you wanted in terms of a dramatic rise in asset prices over the past 8 years (just look at the value of equities relative to the underlying US economy) but a wealth effect did not happen if the pace of personal spending in this expansion is any indication. For many, it’s the wages they earn and the savings they keep that drive spending decisions, not the value of their stock portfolios.”

For taxpayers’ money, because they will pay in the end, it would seem we need Peter to fill one of those vacancies on the Fed’s Board. Just sayin’. Would the man who coined the term, ‘monetary constipation’ to describe the, “constant hemming and hawing over a rate hike…even in the face of a world that clearly changed on November 8th  and as we approach the 8th  year of this expansion.”

President Trump, can you hear Peter?? This is not the time to be obtuse. This is the time to bring back the good things in life, beginning with the best – hope. Dig as deep as you can and ask yourself some probing questions. Can you stand up to the orthodoxy that’s robbed the business cycle of its very cyclicality? Are you man enough to populate the Fed with leaders who are so strong there’s no need to audit the out-of-control institution? Pray God, does Mike Pence have your ear? You may be a debt kind of a guy, you’ve said so yourself. But you’re also beholden to no one and have a once-in-a-century opportunity to reshape the world’s most powerful central bank and in doing so safeguard the sanctity of the U.S. dollar.

As Andy Dufrense explained to us all, “I guess it comes down to a simple choice, really. Get busy living or get busy dying.” It’s time we got back to the business of living in this country, every single one of us. Who are we to question if it takes a heretic to get us back to where we need to be?

Bloomberg: Heed the Fed’s Balance Sheet Banter

Heed the Fed's Balance Sheet Banter, DiMartino Booth, Money Strong, Fed Up

Dear friends,

How is it exactly that we’ve journeyed from Uber-Doveville to life on Tightening Row? My answer is, “You tell me.” In the space of one election, Fed officials have metamorphosed from crying for fiscal stimulus to opining that the economy doesn’t really need all that much help after all from fiscal authorities.

The outlook has, in fact, improved so much that the unheard of, the sacrosanct, is now reasonable. Yes, if you have to ask, I speak of the precious balance sheet that was protected as is it were the very Ark itself. It, too, now is fair game to shrink.

If it looks like double tightening and sounds like double tightening, well then, by golly that’s what it is. The economic recovery is now so durable it can not only handle rising interest rates but an absent Fed in the Treasury and mortgage-backed securities in which it’s been ever present since the zero bound was hit back in 2008.

Yes, it is time to pinch yourself or ask if politics is so blatant as to be conspicuous in its very presence. For an explanation of this cryptic concoction, please read an opinion piece published yesterday.

Heed the Fed′s Balance Sheet Banter

https://www.bloomberg.com/view/articles/2017-01-23/heed-the-fed-s-balance-sheet-banter

Best,

Danielle

 

The Federal Reserve and the Destruction of the American Dream

“Government is a just execution of the laws, which were instituted by the people for their people’s preservation: but if the people’s implements, to whom they have trusted the execution of those laws, or any power for their preservation, should convert such execution to their destruction, have they not the right to resume the power they once delegated, and to punish their servants who have abused it?”

—John Wilkes, The North Briton, October 19, 1762

 

No truer words have ever been penned to the betterment of a people struggling to break free of tyranny. Indeed, John Wilkes is considered by some historians to be the primary source of inspiration for revolutionary colonial Americans given his staunch defense of religious liberty, prisoners’ rights and freedom of the press, rights we hold dear to this day.

So idolized was Wilkes, our forefathers named countless towns and babies in his name, quite the honor all things considered. You see, Wilkes was also an infamous pornographer and relished his notoriety, raising self-promotion to an art form. Even Benjamin Franklin was disturbed by the raunchy rake, which is saying something considering Franklin’s own proclivity for dalliances.

But what if the colonials, the “We the People” to be, assigned added value to Wilkes’ brand of self-cultivated ill-repute? What if he rose to such fascinating infamy precisely because he launched vicious attacks on the privileged? What better way to become a champion of the powerless? Ring any bells?

On November 8, 2016, a stunned TV audience bore witness to Wilkes’ legacy playing out across this great land. Millions of voters joined forces to punish their elected servants who had so egregiously abused their power. The establishment was disenfranchised overnight.

Since the election, a not entirely unexpected pivot has taken place. President-elect Donald J. Trump is sure to have recruited cabinet members whose rich resumes no doubt raise the hair on the backs of some of his most radical supporters. We can only hope the promised, the demanded, reforms are not sacrificed on the altar of deal-making. It will come as no surprise to regulars of these missives what the deepest betrayal would be for yours truly. Trump must hold firm on his commitment to return the Federal Reserve to its right place as an apolitical institution. The very future of the American dream depends upon our new president being true to his word.

Reams upon reams have been written on the downfall of the American Dream. Social mobility stunted. Generations of stagnant incomes. The decline in new business formation. Income inequality the likes of which hasn’t persisted since the days preceding the Great Depression. Money in the bank is a theory for most Americans, even those fast approaching retirement. If you do have savings, by the way, you are punished with insulting levels of interest rates.

And just so we’re clear here and inside the trust tree, let’s be honest and acknowledge how and especially where the anger this trap incites will manifest itself — that is, shout-out-loud, hostile and open conflict and on our streets. An exaggeration? If only that were the case.

Two weeks ago, Real Vision aired an interview conducted with me right after the elections were held. Many subjects were covered over the hour. But the one that struck the loudest chord with viewers was the issue of underfunded public pensions, which stands to reason given the headlines of late.

But the reaction from viewers was anything but expected. The bile, the contempt, the malicious back and forth in the comments between public and private sector workers stunned me speechless.

It was the teachers, firefighters and policemen vs. you name the line of work among those in the private sector. No side won in the event you’re holding your breath. And both made great points. Promises made should not be broken. Teaching our children, protecting our citizens from harm – noble, often thankless professions without question. By the same token, why should someone who has worked their entire life swallow a spike in their property taxes to foot the bill? It’s not as if the investments in their 401ks are not on the same vulnerable footing as those in pensions.

The outrage prompted a private conversation with a great friend who also happens to be the most insightful municipal bond strategist out there (a subtle way to say the following comments must remain anonymous).

The first order of business was a correction to my concern that Uncle Sam would be forced to bail out weak pensions in the end: “The federal government is most definitely NOT going to write checks to state and local government! If anything, the current lineup on the Hill wants to move more responsibility to the states (and they have no money anyhow).”

There’s no arguing with the no money part. But indulge the rest of the conversation as here’s where we get down to causality, to culpability.

“I would lay more blame on your friend, the Fed. Remember that public pensions were funded in 2000 and prior to that, earning a seven-to-eight percent return on assets was no sweat. For the last 15 years though, we’ve had nothing but volatility and low interest on fixed income, the place where conservative investors are supposed to go to deal with retirement investment. This has clobbered long-term investors of all shapes and the feedback to the economy is not fully being taken into account (in my opinion).  If you are approaching retirement (read: baby boomers) and know you don’t have enough money in your 401k, you are not likely to run out and buy stuff.”

Few would dispute that Keynes’ Paradox of Thrift is alive and well. The ravages of the Fed’s low interest rate policy have forced an increasing number of Americans to save more to offset what they are not earning on their savings. The resulting decline in aggregate demand goes a long way to explaining the current economic recovery’s refusal to accelerate – even factoring in the third quarter’s 3.2-percent pace, current forecasts calling for 2.3-percent growth in the fourth quarter leave 2016 full year growth just shy of the two-percent mark.

But that’s the point of the Paradox. The millions of baby boomers retiring are going to cash, as they should to provide for this little thing called security. Still, the forced frugality sets an anything but virtuous cycle in motion, glaringly reflected in the economic health of the generations behind the boomers, an alarming number of whom still live with their parents. Bunking up remains altogether too common, which of course reflects mobility, or better said, the lack thereof.

The tie that binds the generations comes down to one word: debt. That’s where the Federal Reserve has inflicted the greatest damage. Set aside for a minute U.S. sovereign and corporate debt. While they’re mammoth challenges for tomorrow’s policymakers, it is household debt that has torn at the fabric of our culture and fueled the fury.

The latest figures from NerdWallet, produced by aggregating Fed and Census Bureau data reveal that the average household carries $132,529 in debt, including mortgages. That’s up from $88,063 in 2002. The cost of living, which the Fed lectures us is running too cold, has risen by 30 percent over the past 13 years, surpassing income growth of 28 percent over the same period.

What makes up the deficit? We read nonstop about student loans helping to bridge the gap. But it’s credit cards that have taken up the slack of late. The average indebted household is sitting on $16,061 in credit card debt, a hair shy of 2008’s high. As for those low interest rates, the average credit-card interest rate is 18.76 percent which translates into $1,292 in annual interest payments.

Add it all up and total household debt is $12.35 trillion. Estimates call for the prior housing boom peak to be surpassed by the end of this year.

Putting a face on these nameless numbers, these ‘indebted households,’ provides much-needed perspective. Imagine you’ve grinded out a living as a building engineer in Western Pennsylvania for over 35 years. Your pension was long ago converted into a fee-laden 401k that’s taken plenty of hits over the years. Meanwhile, the guy who works on the top floor of your building makes multiples of your income, a reality you don’t even resent. Your pride runs too deep to throw a pity party. But that’s not to say you don’t have your limits.

How exactly do you take the latest headlines in the Post-Gazette that at over $60 billion, the shortfall in Pennsylvania’s pension fund makes it the ninth-worst in the country? That state Democrats are battling to raise your already high taxes to cover the funding gap? Do you fall in line with the lemmings, taking your lumps? Do you apply for yet another credit card to cover your own newfound budgetary shortfall? Do you slip further behind, accepting your station and the demise of the American Dream?

Or do you switch sides and vote for the party that’s vowed to tackle pension reform come hell or high water? The outcome of Pennsylvania’s state legislative elections speaks for itself. Democrats lost seats in Harrisburg, Johnston and Erie. Outside Pittsburgh, there are no Democrats west of the Susquehanna leaving Republicans with a 34-16 majority, enough to override the governor’s veto. An override in the House is not in the cards — Republicans hold only 122 of the 203 seats. Still, it’s the largest GOP majority since the 1950s.

Now, back out to the rest of the country. Take a moment to study “The Two Maps of America.” A gracious reader suspecting I might miss the dueling visual wonders was kind enough to forward me the article published in the New York Times on November 16th, days after the election. In the spirit of paying forward good deeds at this time of giving, a link to the article can be found below.

What do these maps convey? Rather than a geographically divided nation, the first map reveals Donald Trump won most of the land mass. A stunning 80 percent of the counties voted Republican, many in traditionally blue states like Michigan, Minnesota and Wisconsin, and yes, Pennsylvania.

Meanwhile, so illustrative is the NYT’s Tim Wallace’s description of the second map, it would be criminal to paraphrase: “Hillary Clinton overwhelmingly won the cities, like Los Angeles, Chicago and New York City, but Mr. Trump won many of the suburbs, isolating the cities in a sea of Republican voters. Mrs. Clinton’s island nation has large atolls and small island chains with liberal cores, like college towns, Native American reservations and areas with black and Hispanic majorities.”

A separate publication recently highlighted the irony of Clinton’s staunch support in the ‘liberal core college towns.” According to the Economist, a college education in America equates to more in lifetime earnings than is the case in every other developed country save Ireland. As for the why: “the use of maths in the workplace is 10 percent greater than the OECD average. The supply is limited, since Americans are not particularly numerate.”

In the event you bristled at the pretense, at the elitist tone, you’re not alone. Our being “innumerate” means we’re incapable of conceptualizing and working with numbers. It means we don’t educate our children, that we’ve given up on the American Dream as evidenced by our de facto indentured servitude. To think, some still wonder how the media and the establishment drove our electorate to revolt.

President-elect Trump, consider this to be an open letter. The time has come to quit placating the masses with subprime this and that to still their spirits. Please fulfill your promises to represent them and their children with integrity, knowing the road ahead will be anything but easy, and that the temptation to allow business as usual to continue at the Fed will be enormous.

Millions upon millions of your supporters voted to do just as John Wilkes urged the oppressed colonials to do on October 19, 1762. They punished the servants who so abused their power by voting them out of office. Serve your country by refusing to squander their hard-fought liberty.

Link HERE:  New York Times, The Two Americas of 2016

Will Public Pensions be Trump’s Biggest Challenge?

Dear friends,

Over the past week, as the Trump rally has marched on, I’ve been on the receiving end of an entirely different sort of unexpected acclaim. It started with an hour-long interview I did with Real Vision’s Grant Williams that is going ‘viral’ (I’m still new to these terms given I was inside the Federal Reserve for so long where social media was banned, and with good reason.)

The subjects covered in the extensive interview, filmed just after the election, include prospects for the Fed under the new administration, what had the Italians so piping mad and most of all, public pensions. It was this last subject that most captured the media’s attention, catching me off guard.

Some subjects such as global debt and public pension shortfalls are so massive that most choose to pretend they don’t exist. An entire cottage industry has sprung up to debunk any concerns about that little $200 trillion global debt issue, even as Libor skips upwards. It’s as if Reinhart & Rogoff’s work on record debt inducing stagnation never existed.

As for public pensions, earlier this week, I observed that Meredith Whitney’s bearish call, as aired on 60 Minutes, marked the beginning of the end of the public’s concerns. So coordinated was the campaign to disprove Whitney’s timeline that her entire body of work ended up vanishing into thin air.

And so we have learned to live with elephants in our rooms. The alternative doomsday scenarios are simply too big to get our heads around. That’s all good and well unless our mothers were right, you remember, that thing about ignoring problems not making them go away.

In the event you don’t follow me on Twitter and LinkedIn, a) congratulations as you live a much less frenzied, information-overloaded, cluttered life, and b) please enjoy the links to a five-minute slice of the Real Vision interview as well as the three articles in which I was featured this week.

Wishing you a joyous and warm holiday weekend.

All best,

Danielle

What’s racier than Vegas? Pensions, says former Fed insider .

A Pensions Time Bomb Spells Disaster for the US Economy — Business Insider

Former Fed Adviser: ‘Some Miracle’ Needed to Defuse $1.3 Billion Pensions Time Bomb — Newsmax

Danielle DiMartino Booth on the Trump Federal Reserve — Investopedia


Click HERE to purchase Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America

U.S. Household Finances – It Only Looks Like the Good Life

U.S. Household Finances It Only Looks Like the Good LifeOf all the recognized generational cohorts dating from the American Revolution, it is the 13th or the Generation X cohort which demographers find hardest to define. Did the stork deliver the first Gen X-ers as early as 1960 or as late as 1965? Was the end date for their births 1976 or 1984? And what of their collective character? At one time they were considered to be disdainful apathetic slackers, but since have become known as confident, hardworking and extremely entrepreneurial.

What is not in question is their unforgettable movie characters whose reasons for being were to make us laugh, not cry. Think Sixteen Candles’ hysterical foreign exchange student, Long Duck Dong and the impossible, too cute to rebuke truant, Ferris Bueller. And who didn’t harbor a soft spot for Pretty in Pink’s Ducky or Chet in Weird Science? It was the 80s, and even outcasts could be transformed into loveable friends on the big screen. You just can’t deny the affection we all felt for every last recipient of Saturday detention as The Breakfast Club credits rolled along to our anthem, “Don’t You Forget About Me?”

But then there was Less than Zero, which more than made up for the rest of the light-hearted lot. The 1987 hit stands as the Eighties’ testament to Film Noir replete with shoulder-pad wardrobed femme fatales, darkly doomed heroes and even nastier anti-heroes. Can anyone argue James Spader as a debt-collecting drug dealer was his least likeable character? Of course, the movie made an icon out of Robert Downey, Jr., whose stoned character gave new meaning to, ‘Don’t Leave Home Without It,’ when he tried to swipe his American Express card to gain entry to the family mansion’s (open) sliding glass door.

The film’s byline, “It Only Looks Like the Good Life,” summed up the Yuppie era to a tee, a time when U.S. households woke to the idea of aspiration, as in aspirational lifestyles. Longing to break free from their parents’ frugal ways, many Baby Boomers embraced the relatively novel world of easily accessible debt with relentless relish.

Of course, it was a different place from which to take a leap of fiscal faith. Both the saving rate and 5-year jumbo CD rate were 7.9 percent when Less than Zero was released in November 1987. Inflation, meanwhile, had finally been tamed and was running at about half the rate people were setting aside in rainy day funds.

You might be thinking, hmmm, wasn’t something else going on about then? Well, yes, of course. It would be daft to ignore the other thing that had just taken place in the weeks before the afore mentioned less than joyful downer of a movie was released, known to market historians simply as Black Monday.

Unlike the movie though, the markets didn’t end in a funeral scene. In fact, October, November and December 1987 proved to be a splendid time to jump into the markets, which investors were in fact encouraged to do by the new sheriff in town, a soft spoken Federal Reserve Chairman the world would come to revere as The Maestro.

In early May, 2000, the Wall Street Journal took the occasion of the Nasdaq finally capitulating to gravity to publish, “How Alan Greenspan Finally Came to Terms with the Market.”

“He became Fed chairman two months before the 1987 crash, and his first major task was to pick up the pieces. He sought a way to predict at the beginning of each day how U.S. stocks would open, a precursor to the futures markets that have since evolved to perform that task. During volatile periods in the late 1980s, a Fed staffer would arrive at the office at 5 a.m., call Europe to find out trading activity and have that day’s forecast on the chairman’s desk by 7:30.”

Bear in mind, the Fed’s mandate was then and remains to maximize employment while minimizing inflation. Becoming an expert on stock market trading patterns isn’t buried anywhere in the fine print of its 1913 charter.

Did it take investors long to catch on to Greenspan’s new and improved mandate? Not hardly. Interest rate moves were not announced back then. Still, investors could plainly see the dramatic decline in yields as the Fed pushed the fed funds rate down by a half a percentage point, to just below seven percent the Tuesday after that fateful Monday in 1987.

As Reuters columnist James Saft wrote on the 25th anniversary of the crash, “The response, like a kid given its first sugary soda, was electric, with a strong rally winning back a small portion of the earlier losses. The Fed kept at it in the coming months, operating quite publicly, and often giving trading desks advance notice, and repeatedly taking overnight interest rates lower.”

With that, the rules of the game changed. Traders began gaming the Fed and profiting from the increased confidence that stock prices were front and center for policymakers.

Of course, households had nothing to complain about as many rode this stock market wave to paper riches. Pray tell, how did they respond to this wealth accumulation? For millions of Yuppies, the answer came down to shopping till they dropped.

Households had piled on upwards of $160 billion in credit card debt as the New Year rang in on 1988. But that was nothing compared to what was to come with the advent of securitization one year later. Care of deregulation, another gift Greenspan bestowed upon the financial markets, lenders began to sell off slices of credit card-backed debt to an investor class that grew hungrier for cash equivalent income as interest rates embarked upon the decline of a lifetime.

The more yields slumped, the stronger the demand for all manner of asset-backed debt. Of course, we all know how this story ends. What began with car loans and credit card balances eventually led to bonds backed by home mortgages and ultimately the subprime crisis.

Households’ response would surely have been a curiosity to those who lived through the Great Depression. But that culture of prudence had long since been written into the history books as a curiosity of its own. What replaced the frugality was in a word, perverse. The more households were worth, the less actual money they had in the bank.

Before all was said and done, credit card debt was pushing $1 trillion and the saving rate had plumbed new lows, as in into negative territory, as home equity was cashed out hand over fist. Americans were spending more than they were taking in at the greatest clip since the Great Depression.

Of course, all of this bad behavior came to a crashing halt with the advent of the other event that merited a ‘Great’ label — the Great Recession of 2009. After peaking north of $1 trillion in December 2008, credit card debt eventually troughed just below $800 billion in April 2012. Until very recently, the growth rate of credit card debt was unremarkable; the total outstanding continuously bumped up against a $900 billion ceiling.

Last year, though, the cycle finally turned and for the better if you ask most economists. According to Standard & Poor’s, at $969 billion, revolving credit is at the highest level since April 2009, before the bottom completely fell out of the economy. This figure, which is once again flirting with a ‘trillion’ handle, is up $54 billion over the last 12 months. This ‘improves’ upon the $12 billion, $34 billion and $46 billion gains over the same 12-month periods ending in 2013, 2014 and 2015 respectively. We are told that increased usage of credit is a sign of confidence, a sure signal that households view the job market’s prospects as healthy looking ahead.

Indeed, consumers’ median household income growth expectations rose to 2.9 percent in August from 2.8 percent in July and 2.75 percent in June according to a report the New York Fed released September 13th. Why then do their expectations for missing a debt payment remain near the highest level in two years? Moreover, why did consumers’ spending growth expectations decline to 3.3 percent in August from 3.8 percent in July and 3.6 percent in June?

According to the NY Fed, the downshift in expectations reflects consumers over the age of 40 and lower income households. That’s intuitive enough if you consider these two cohorts get hit hardest by healthcare and rent inflation, both of which are running at twice the pace of income growth. Perhaps a separate part of the story is rising minimum wages in many parts of the country. Do rising prices for necessities thus connect the dots between rising income and falling spending expectations?

It’s hard to say for sure without conducting a comprehensive survey of every working American. On a more philosophical level, one must stop and ask whether it’s a good thing that car, student and soon-to-be credit card borrowing all surpass $1 trillion?

Surely living within one’s means was once the American way for good reason before low interest rates and lax lending standards encouraged that standard to be stood on its head. Presumably the debate will rage on until the stock market pulls back and/or interest rates rise, or even worse, both.

High income earners dominate consumer spending but can also bring the economy quickly to its knees. A falling stock market could thus trigger a recession given consumption is the only pillar of strength remaining in the current recovery. As for rising interest rates, households, corporations and especially Uncle Sam can hardly afford that prospect to become a reality, especially in the uncontrolled manner they’ve risen since rates bottomed in July with nary a Fed rate hike to catalyze the move.

Falling stock prices and rising interest rates occurring concurrently is thus a central banker’s worst nightmare. Such an impossible scenario unfolding would be a dark ending to a 30-year feature film all about a party that never seems to end, until it does erasing so many facades and leaving the simple reality that it only looked like the good life. Nothing in life is free. And sometimes the payback can be less than zero.

In a Fed Meeting Minute, Everything Can Change

In a Fed Meeting Minute, Everything Can Change

In the blink of an eye. In a heartbeat. In a New York minute. Life can and does change in these thinnest slices of time. And yet for Don Henley’s anthem to the swiftness of change, and just how quickly those sharing our lives’ most precious moments can be lost, he ran against the norm for 6.22 minutes of endless pain and sorrow.

New York Minute, recorded in 1989 for Henley’s best-selling solo album, The End of Innocence, proved to not only have staying power, but to also be “the album’s most unique and interesting track.” The iconic title already in mind, he turned to songwriter Danny Kortchman for help with the lyrics. His stated aim: capture the atmosphere of a late 1980’s New York City, a gritty scene of come-hither lights, drugs and overt excess all fueled and well-greased by the golden glitter of greed.

That the song opens with an obviously lost, maybe even suicidal, Wall Street refugee is telling. Tom Wolfe’s Bonfire of the Vanities, his bestselling novel, was sweeping the globe on its way to becoming what the Guardian dubbed, “the quintessential novel of the 80s.” Chronicling the downfall of a Wall Street “Master of the Universe,” Wolfe’s main character painfully parallels Henley’s lost soul.

Then, even in real life, Masters fell. Nearly 30 years on, in the endless wake of the financial crisis, it’s deeply dissatisfying that the country’s gone to emergency, but nobody’s going to jail. Such is the reality of a Wall Street that’s become too complex to regulate and police.

While cause and effect elude, complexity does help explain why central banking policy struggles to keep up. With the toolbox of nominal interest rates barren, Fed officials have been forced to deploy nuance in its stead. Veiled threats delivered via FedSpeak have nearly exhausted their utility given their schizophrenic nature. The same cannot be said of the Federal Open Market Committee meeting minutes, which, in the markets’ estimation, have risen to command equal stature to that of the FOMC statement.

Perhaps less appreciated is that years ago in the heat of the financial crisis, Janet Yellen herself had already written the lyrics of the tune to which markets today dance. As she said at the December 16, 2008 FOMC meeting, one in the same at which interest rates were banished to the zero bound, “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

Score one for success on that count. Now, when they’re scheduled for release, media outlets place the minutes at the top of the week’s roster. This is from Reuters in its look ahead to this week’s trading: “Minutes to the Fed’s July policy meeting due on Wednesday may come under more scrutiny than normal given the central bank really only has one opportunity left, at its meeting next month, to raise rates before the November presidential election.”

As for the aforementioned FedSpeak on the week’s docket, which includes in alphabetical order, Bullard, Dudley, Kaplan, Lockhart and Williams, Reuters nails it: “Fed officials have given differing and often conflicting signals throughout much of this year on when the next move will come, leaving few with any clear sense of how much of a risk there is of a September rate rise.”

In the markets’ eyes, the minutes clarify, the words confuse. Why is that?

Look no further than Yellen’s original vision – that the minutes provide ‘quantitative information.’ Given the choice, markets will trade off quantitative over qualitative (FedSpeak words) any day.

But wait! They’re both word constructs. Right? Well yes, but one of the inputs is controlled, the other a complete unknown given what some maverick Fed district president might short-circuit and say in a speech. High frequency traders can build algorithms around instances of key words in the minutes. But it’s anyone’s guess when it comes to FedSpeak, no hot money profit potential, no sex appeal.

The Associated Press’ Martin Crutsinger recently had the gumption to call out the Chair. The venue was the press conference that followed this June’s FOMC meeting and refers back to this past April’s minutes’ release. His question was too priceless to paraphrase, you’ll soon concur:

“When the April minutes were released, they caught markets by surprise. In there, they showed – they seemed to show that there was an active discussion of a possible June rate increase, something we hadn’t gotten from the policy statement that was issued right after the meeting. Was that a conscious decision to hold back and tell us in – when the minutes came out, about the June discussion? And if so, could you tell us what surprises we could see in the June minutes?”

Do the words, ‘you could have heard a pin drop,’ come to mind?

Yellen’s answers has to have gone down as one of the most uncomfortable of all time. To watch, that is. She starts out by contradicting her position on the power of the minutes to shape market perceptions with the following:

“So the minutes are always – have to be an accurate discussion of what happened at the meeting. So they’re not changed after the fact in order to correct possible misconceptions. There was a good deal of discussion at that meeting of the possibility of moving in June, and that appeared in the minutes.”

And then began the tap dance to top all tap dances. Apologies in advance for sharing the pain, but you simply have to close your eyes as if you were in the room, or watching on TV, to get from beginning to end, to feel the embarrassing burn.

“I suppose in the April statement, we gave no obvious hint or kind of calendar-based signal that June was a possibility. But I think if you look at the statement, we pointed to slower growth but pointed out that the fundamentals—there was no obvious fundamental reason for growth to have slowed. And we pointed to fundamentals underlying household spending decisions that remained on solid ground, suggesting that maybe this was something transitory that would disappear. We noted that labor market conditions continued to improve in line with our expectations, and we did downgrade somewhat our expressions of concern about the global risk environment. So I do think that there were hints in the April statement that the Committee was changing its views of what it was seeing in a direction. We continue to say that we think, if economic developments evolve in line with our expectations, the gradual and cautious further increases we expect to be appropriate. And I suppose I was somewhat surprised with the market interpretation of it. But the June meeting minutes—the minutes of the April meeting were an accurate summary of what had happened.”

Of course, that’s a bunch of hooey. Aside from the temerity of Esther George, the April statement read like a chorus of doves cooing in perfect harmony, moving mountains to “remain accommodative” until improvement was seen on both the inflation and job market fronts. And no, there was nary a ‘hint’ that “most” participants felt conditions warranted a June rate hike. The minutes clearly rewrote the history of what took place in the room and were designed to shock and awe, which they did in spades.

As is often the case before moving on, context is key. Recall that there are four FOMC meetings and statement releases that are followed by press conferences and that there are four that are followed by the sound of silence. Though you may be tempted to jump to the conclusion that the four quiet meetings should be ignored, stop for a second and ponder the great opportunities they present to crank up the minutes as a powerful monetary policy tool.

Bank of America Merrill Lynch economist Michael Hanson is a true believer in the minutes’ mojo after being sideswiped by the April meeting minutes. He had this to say in previewing the ‘silent’ July FOMC meeting.

“Perhaps the biggest risk to market pricing will come not from this week’s statement, but from the minutes in three weeks’ time,” wrote Hanson of the August 17th release date. “Recall the sharp market reaction when the April minutes revealed significant support on the FOMC for a possible June rate hike. We see an elevated risk of a repeat with the July minutes.”

It wasn’t so long ago that the minutes were used for the opposite reason, to calm markets, that is. At the conclusion of its September 2014 meeting, the FOMC statement contained the dreaded word, “when,” as in, “When the Committee decides to begin to remove policy accommodation…”

Of course the markets gagged. A rate hike? The suggestion of follow through??

But then, as post-crisis fate always has it (and always will), a mitigating factor presented itself. In this case it was Europe not emerging from its crisis. European Central Bank President Mario Draghi was negotiating to buy bundles of junk-rated Greek and Cypriot bank loans, exacerbating tensions between tight-fisted Germans and the ECB.

And so, the Fed reacted by penning the mother of dovish minutes text, reneging on the September statement’s hawkish tone.

This breathless recap from the Wall Street Journal followed:

 “U.S. stocks soared Wednesday to their biggest single-day gain this year, after meeting minutes from the Federal Reserve suggested the central bank would move cautiously on raising rates. The rally was a sharp reversal from a steep Tuesday drop on worries about international economic growth. U.S. benchmarks spent much of the day hovering around the flat line, after another session of European stock declines. But they surged after minutes from the Fed’s latest meeting unexpectedly showed more focus on slowing growth overseas and lessening inflation pressures.”

At a minimum, investors should be wise to Yellen’s silent-meeting victory. The deployment of the minutes as a monetary policymaking weapon represents a classic Mission Accomplished for the Chair. In a Fed meeting minute, everything can change. But does that make it right? Or should we question the tacit manipulation of Fed policy that’s advertised as being transparent but is anything but clear by design. As the “I’ll get mine first” greed of the ‘80’s again rears its ugly head, who do you think is greasing its wheels?