SOCCER MONSTERS — The Lamborghini in the Carpool Lane

Writing on a weekly basis requires no small amount of inspiration from all corners of this life that I walk. This week’s newsletter, a stark take on the very real economic implications of both demographics and inequality, two subjects I marry for the first time, was inspired by two different events that took place this past weekend and one from long ago.

At dinner on Saturday night, I found myself captivated by a dear friend’s recounting of a run-in he’d had with a client. To keep things appropriately anonymous, let’s just say my friend has been in the business of catering to the wealthiest of the wealthy for many years. And to be clear, he has done so with supreme aplomb and integrity, much to his clients’ approval.

But something has changed over the past few years, he shared. It would seem his clients have lost their capacity for restraint, their etiquette moorings. Some, not all, of course, of the uber-wealthy have decided that their wealth empowers them to occupy a different sphere, to breathe rarified air, and to mock, well, the rest of us, including those who cater to their every whim, including my friend in his professional capacity. Profanity is discharged as any other weapon and petulance has become the norm.

How sad that it’s come to this. Those were the last words that crossed my mind as I laid my head on my pillow late Saturday night.

But then, tomorrow is another day. At least that’s what I’d hoped.

On Sunday, I indulged myself the best way I know how, by tucking into Peggy Noonan’s weekend column. Her writing is as good as it gets. The unflinching light she casts on subjects we must read about leaves me in awe week and week out. And then there was America Needs More Gentlemen. With a sad rush, I was transported back to Saturday night.

Noonan writes of what we’ve all begun to wake to in this era of social media that’s not only helped rob our youth of their innocence, which we carry on about endlessly, but our men of their decorum and self-control. Read the column if you have not already and partake of Noonan’s observations which will make you long for what’s been lost along the way. But be graced here by the best of what we can be.

As Noonan wrote splendidly, “A gentleman is good to women because he has his own dignity and sees theirs. He takes opportunities to show them respect. He is not pushy, manipulative, belittling. He stands with them not because they are weak but because they deserve friendship.” Even better, she notes that there are plenty of definitions of gentlemen to be found on the internet. So plenty of young men out there want to know, which is a great place to begin to find our way back.

The long-ago episode, those who have read Fed Up will know, was a lunch, a celebratory birthday lunch with the man I once advised, Richard Fisher. At the time, riots were burning in Athens’ streets. As the coffee was being cleared, I asked Richard what his greatest fears were for our country’s future. His answer has been with me ever since — that those riots so far away would take place one day on our own streets, that social unrest was coming home to roost if something didn’t give.

Entitled and crude, a vile combination if there ever was one. And yet, in so many ways, on so many levels, that’s what it’s come to as the divide between the have’s and have not’s widens and our nation’s Boomers age in a graceless age. We will recover our collective dignity if we know what’s best for our country. Our economy and more importantly, our very souls depend on it.

With that, I will leave you with this week’s installment, SOCCER MONSTERS: The Lamborghini in the Carpool Lane.

With hopes that you hold the door open or have it held open for you, and wishing you well,

Danielle

PS. The following Bloomberg column made me laugh as I hadn’t in years, at least on the subject of central banking. A Twitter follower was kind enough to send it to me and I can’t help myself. I simply must pay the joviality forward. So please enjoy, Your Psychiatrist Will See You Now, Mr. Central Banker.

It will act as a lovely offset to this week’s sobering newsletter.

 

 

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DiMartino Booth, Federal Reserve, Jay Powell

POWELL ON POWELL — A Deep Dive into 2012’s FOMC Transcripts

It’s official…for a second time around. At least that’s what the CNBC headline said: Fed Chair Nominee Jerome Powell Wins Approval (Again) of Senate Banking Committee. It would seem the esteemed Committee is challenged by expiration dates, which could give one pause as it pertains to dairy products and such. Though the members voted on December 5th to approve Powell’s nomination, it would seem the expiry date came and went on December 31st.

For the record, Senator Elizabeth Warren was the only committee member to vote against Powell’s nomination…again. The full Senate now has all of 16 days to confirm Powell before Janet Yellen’s term ends on February 3rd.

At the risk of stating the obvious, time could be of the essence. While it’s true that the ink has yet to dry on the acclamatory, congratulatory and laudatory approbations of the Yellen mini-era, we might not want to risk even one day without a warm body chairing the Federal Reserve Board.

According to one veteran hedge fund manager, today resembles neither 1987 or 1999. What does this say of what’s to come, of the markets’ fate? One thing is for certain. If Jay Powell is confirmed, he’s going to find out.

To say that a den of cynics lays in wait, hoping for Powell’s failure is kind. Consider the very first Twitter reply to the posting of a Business Insider article about the world’s nine wealthiest men having a combined net worth that exceeds that of the poorest four billion.

I tweeted out the following: “I’ll repeat this until I’m blue in the face. Inequality will morph from a socioeconomic to a macroeconomic issue and boomerang back with a vengeance. And I’m a proud card-carrying capitalist if there ever was one.”

The first reply: “End the Fed and all other Central Banks.”

The public, it would seem, is taking no prisoners. The gig is up that trillions upon trillions of dollars of quantitative easing have accomplished one thing – they’ve made the rich richer. Let’s be clear, that’s a gross oversimplification. But the Pavlovian and vitriolic reaction to any mention of inequality nevertheless induces howls from the masses who lay the blame for the yawning gap that’s opened up between the proverbial have’s and have not’s squarely at central bankers’ doorsteps.

Meanwhile, despite my own fears that the cryptocurrency craze could infect the FANG stocks if Bitcoin did something like halve, all seems to be fine in the major indices. In fact, as Bleakley Advisory Group’s Peter Boockvar points out, if we manage another three days without a 5% correction in the S&P 500, history will have been made, as in the longest winning streak of all time. Is it any wonder the Goldman Sachs Financial Conditions Index is at the lowest since 2000?

And yet, the long end of the yield curve seems incapable of responding with anything more than a Heisman to the insistent laundry list of reasons long-maturity Treasury yields should be rising – climbing deficits leading to greater supply, razor-thin risk premiums, producer prices bubbling over. At last check, the 10-year yield registered 2.56% to the 2-year’s 2.04%. Correct me if I’m wrong, but that 52-basis-point differential is within a hair of the flattest curve we’ve seen for the better part of a decade.

Add them up – a grassroots campaign calling for your failure, risky assets gone wild, a bond market that’s double-daring you to hike into building inflationary pressures, oh, and, just for good measure – no historic precedent. How would you like to be Jay Powell?

The good news is that Powell understands every single aspect of what’s to come. His CV suggested as much, but it wasn’t until I dove into the freshly-released 2012 FOMC transcripts that I was sure. Especially after reading his words, I reiterate my contention that Powell is no clone of any of his predecessors. With that, I invite you to enjoy the fruits of my painstaking parsing of the transcripts in this week’s newsletter, POWELL ON POWELL: A Deep Dive into 2012’s FOMC Transcripts.

A personal aside. I was able to catch up with my best friends from New York over the long weekend in beautiful La Jolla. It had been over three years. Let’s just say that was too long a stretch. Sometimes Facetime just doesn’t cut it. Do yourself a favor before the new year sweeps you away, and schedule a time to catch up face-to-face. You’ll thank me for it.

Hoping you too enjoyed your long weekend and wishing you well,

Danielle

 

 

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ATLAS STUMBLES Inequality and Macroeconomics at a Crossroads, DiMartino Booth, Federal Reserve, Money Strong

Atlas Stumbles — Inequality and Macroeconomics at a Crossroads

“If you don’t know, the thing to do is not to get scared, but to learn.” 

“Man’s mind is his basic tool of survival. Life is given to him, survival is not.” 

“I like to deal with somebody who has no illusions about getting favors.”

Red-blooded Americans read these lines and, if in polite company, resist the urge to beat their chests. These mantras say all that need be said of the virtues of honesty, integrity, productivity, grit, independence, pride and liberty itself. Accurately attribute the quotes to Ayn Rand’s Atlas Shrugged, however, and some pause for a moment of reticence, gently reminded of the need to be politically correct.

The need to be ‘PC’ was not even in accepted vernacular back in 1957, when Rand’s book was being vilified by critics. The tome was labeled a testament to hatred and cruelty, a soulless slaying of the welfare state. As fate would have it, a rich rebuttal in the form of a letter to the editor of the New York Times would make history: “‘Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

That the vehement defense was penned by one Alan Greenspan might go down as one of the most malevolent mockeries writ from an era in central banking heralded by the Rand acolyte himself. It rings as impolite in its bluntness, but it was Greenspan who most bastardized Rand’s basic premise, that innovators and producers build model economies.

Every tragedy has a beginning. At the outset of this particular saga was the moral hazard born of Greenspan’s fascination with the stock market. He was literally in awe of those Rand would have characterized as perfect producers, Wall Street’s Masters of the Universe who consumed what they killed. It’s one thing to admire, but quite another to allow yourself to be intimidated when you are tasked with regulating the world in which the Masters reside.

And yet, in the weeks and months that followed the crash of 1987, the newly minted Federal Reserve Chairman directed the New York Fed to leak to bond trading desks the Fed’s plans to inject liquidity into the system. By sanctioning the front running of the Fed, Greenspan had effectively invited the Wall Street’s foxes into the hen house to feast on preordained profits.

Stop and think for a moment about the regime change this heralded, the alteration thrust upon the principle of risk-taking, of markets’ duty-bound and noble tradition of price discovery. Greenspan flipped the very law of nature on its head for those who had been schooled to live and die off the consequences of their trades, come what may. To be shielded from the ramifications of their actions denunciated everything Wall Street did and should represent.

And yet, here we are, 30 years later. Thanks to the bounteous harvest of moral hazard sown by Greenspan’s original sin, far too many of Wall Street’s innovative producers have devolved into the looters Rand so decried in her tribute to capitalism. Rather than create anything of lasting value, today’s Wall Street leeches what it can from the bottomless, fetid supply of the moral hazard manufactured by central bankers.

If only it just ended there it would be bad enough. But politicians long ago opted to tie their fates and fortunes to the same poisoned central bank dealer. As far as they’re concerned, the monies that keep them in office need be fungible and nothing else.

And so, the Stygian tale turns, sustained by trillions upon trillions of dollars of debilitating debt taken on along the way. The central banks print money. The investment banks pocket fees. The tab swells. Add it all up and global credit sums to $220 trillion today, up from $150 trillion at the onset of the financial crisis. Narrow your focus to the four largest developed markets, those most active on the money-printing stage, and you find that $34 trillion of debt has amassed since then. Call the chart below simple if you will, but sometimes one line says more than enough.

Sum of Central Bank Balance Sheets and
Cumulative Budget Deficits for the United States,
Eurozone, the United Kingdom and Japan ($Trillions)

CENTRAL BANK ASSETS

In the words of the Deutsche Bank analysts who created the graph: “Another way of looking at this is the extra amount of stimulus over and above living within our means (no money printed, no deficits) seen since the Great Financial Crisis. In the end, $34 trillion of stimulus and Quantitative Easing has delivered very low growth, subdued inflation and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?”

In all actuality, the very same Deutsche analysts answered their own question in the same report that produced that daunting chart above, of debt built to nowhere, akin to that pork-financed bridge, also to nowhere, so pilloried in the media years ago. The fallout will be anger — unprecedented, immeasurable levels of unrequited anger among the masses that know all too well that the economy’s designated producers have become looters, robbing them of a passageway out of the hell on earth they’ve come to know as subsistence care of entrepreneurship and innovation succumbing to slow, sad deaths.

Populism itself is coming home to roost and it will present itself as the macroeconomic challenge of the ages.

No doubt, ‘populism’ is a subjective force, all but impossible to quantify. Thankfully, that didn’t stop the Deutsche analysts from giving it a go. To wit, they weighed populist votes and population size in seven large countries over the last century, specifically those of France, Italy, Spain, the United Kingdom, Japan, Germany and the presidential elections within the United States. Qualifiers included parties that espouse communism, nationalist policies tied to immigration and militarism and leaders with dominating, charismatic personalities rather than well-defined policy positions. In Europe, anti-NATO and Euro-skeptic tendencies were also captured while in the United States, anti-corporate progressives that defied the establishment made the cut.

It’s noteworthy that these general themes, in one form or another, have withstood the test of time, answering the question as to whether we can’t all just get along. (Apparently not.)

Discount what you will. Net out what you like. No matter how you slice it, prior to the last decade, populism is off the charts. No period in modern history compares to what we’re witnessing today save the epoch set off by the stock market crash of 1929 that culminated with World War II, with, by the way, the Great Depression sandwiched in between.

Populism Index Against the Backdrop of
Developed Market Financial Crises

Populism index

Hats off to the team at Deutsche for resisting hyperbole in the face of the immutable message delivered in the graph: “While the consequence of the recent rise in populism hasn’t yet destabilized financial markets, the level of uncertainty will surely remain high while such parties remain realistic power brokers in major national elections. (Populism’s) rise surely increases the risk to the current world order and could set off a financial crisis at some point soon.”

It’s that last point that finally brings this week’s subtitle into context. The gravity of populism’s root cause, inequality, is no longer purely political tinder. It’s all about the economy.

The good news is the beginnings of an epiphany is dawning on the have’s. Mega hedge fund magnate Ray Dalio in particular, a man whose net worth crests $17 billion, has voiced concern. In a recent interview, Dalio said that he thought inequality was the most daunting challenge on the horizon, one on par with the period from 1935-1940.

“If you carve out that lower 40 percent, not only has there been no income growth, but death rates are rising because of opiate use, suicide and because they’re losing jobs,” Dalio said. “This is the biggest issue of our time – the biggest economic issue, the biggest political issue and the biggest social issue.”

Dalio is right. And though he’s gone as far as saying the Fed is poised to commit a policy error akin to 1937, he’s not vociferous enough in his criticism of Fed policy for engineering the fine mess in which the country finds itself.

Thankfully, I’m not alone in my indictment of the Fed. In the words of an economist worthy of the deepest respect, Judy Shelton, Janet Yellen’s concern for the plight of the forgotten masses is, “rich.” I recently caught up with Shelton and she had this to say, in a clear rebuttal of the fawning accolades being showered on Yellen as her time at the Fed comes to a blessed end: “While it’s nice that Janet Yellen cares about the issue, I think she should have been more forthcoming in acknowledging the Fed’s own role.”

Shelton’s eloquence shines through in Beware a Magnanimous Fed, an opinion piece she wrote three years ago in reaction to the following naïve statement made by Yellen:  “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” Shelton’s reply follows.

“The problem with Yellen’s public display of benevolent concern over income and wealth inequality is that it implies she means to do something about it. This is worrisome because she views the Fed as a force for good rather than as a distorting government interloper into private-sector credit markets whose clumsy efforts skew financial rewards to savvy corporate strategists and sophisticated investors.

If Yellen wants to restore the free-market values rooted in our nation’s history, she needs to pay heed to the telling correlation between wealth inequality — at its highest level in the past 100 years, higher than for much of American history before then — and the creation of the Federal Reserve in 1913. It’s unbecoming to preach the virtues of equality of opportunity when Americans see only too well who most benefits from monetary favoritism and who is most punished by the inequality of access to vital financial capital.”

It’s doubtful Ayn Rand herself could have said it better. Shelton’s refutation of Yellen’s premise is all the more prescient given the results of the presidential election. The masses may not be able to identify zero interest rate policy and quantitative easing as culprits by name. But their actions speak volumes to their shared revelation that the enemy has been identified and it is indeed within.

As for any aspirations to attain the American Dream, they’ve long since been crushed by repeated iterations of subprime debt illusions ending in tears. Call the two dichotomous headlines from the November 15th issue of the Wall Street Journal Exhibits A & B: Household Debt Hits a New High and More Americans Feel Like a Million Dollars.

If you haven’t yet got the picture, it might be time for a courtesy call to your friendly neighborhood ophthalmologist. As for what lies ahead, populism appears to be taking a nasty turn for the worse. And though the problem is clearly as close to home as it can be, our shared national dilemma is anything but local.

Look no further than my paternal family’s homeland. Radical no longer suffices for the long-repressed Italians seeking relief at the polls. The far right, it would appear, is now rearing its hateful, ugly head. Be on the lookout for more of these headlines as oppression spreads in the way only nasty infestations can.

On a more practical level, it strikes me as untoward to bandy about investment ideas while pondering such heavy prospects. If you’ll indulge me some grace, it’s safe to say defense contractors will have no challenge keeping the lights on in the years to come.

In the end, our collective deliverance can only come from strong leadership that refuses to balk at the grave challenges that lie ahead. To call one last time on Rand’s sagacity, “Evil is impotent and has no power but that which we let it extort from us.”

 

DANIELLE DiMartino Booth, Commercial Real Estate, Federal Reserve, Restaurants

Congestion Indigestion – The Future of the Restaurant Industry in America

Oh how Mrs. Howe’s heart burned. Literally.

And so, her dutiful hubby descended to his basement where he concocted a remedy of calcium carbonate and sugar for his bride, much to her relief. And much to Jim Howe’s financial delight, his made-at-home remedy caught on like wildfire, extinguishing heartburn, neutralizing acidity and digesting indigestion far and wide. Could it be that the excesses of the Gilded Era were just what the pharmacist ordered in 1928? Or perhaps it was the hangover that set in the following year?

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Destination Reformation — The Dawn of a New Era in Central Banking

Combine contraband coffee, paralytic guilt and a gift for translating Greek and you too can change the world. Such was the case with a young, deeply devout Catholic by the name of Martin Luther in the year 1516.

A decade after he traded academia for the priesthood, Luther found himself disturbed by the quid pro quo nature of Catholicism. Sin expunged via penance in increasingly pecuniary form struck Luther as graceless at best. A field trip to Rome only served to dial up his unease as the ornateness on vivid display communicated dishonesty and even vice. That this epiphany coincided with the first trickles of coffee into Germany was fitting given what was to come.

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THREEofTHREE, Danielle DiMartino booth, Money Strong

Pricing in Perfection: Three out of Three?

We know two out of three ain’t bad. Does that render three out of three perfection itself? The history of the number three certainly suggests that to be the case. Little did we know that three is the first number bequeathed ‘all-encompassing’ status.

True Triads come in many familiar forms including the Father, Son and Holy Spirit; the beginning, middle and the end; the heaven, earth and waters; the body, soul and spirit; and last but certainly not least — life, liberty and happiness.

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@dimartinobooth, Danielle DiMartino Booth, Fed Up: An Insider's Guide to why the Federal Reserve is Bad for America, Money Strong LLC, economy, federal reserve, William Safire

Channeling Safire: “If it’s broke, fix it.”

Bert Lance must have left office thinking his legacy was in the soup.

Instead, the wise words of one of the country’s shortest-serving Directors of the Office of Management and Budget would go on to first merit inclusion in Random House’s Dictionary of Popular Proverbs and Sayings and then today, Google status. The expression, “If it ain’t broke, don’t fix it,” achieved such acceptance, conservative legend William Safire would go on to crown Lance’s idiom, “a source of inspiration to all anti-activists.”

For Safire, a gifted word spinner if there ever was one, his acknowledgement of pith perfected in no way implied admiration of the source. Indeed, Safire’s crowning glory as a New Yok Times columnist arrived with his 1978 Pulitzer Prize for “Carter’s Broken Lance.” …

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“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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The Currency Wars two years on: Shanghai Accord, Danielle DiMartino Booth, Money Strong

The Currency Wars Two Years On: The Shanghai Discord

“Nothing unimportant ever happens at the Plaza.”

So legend has it of one of the finest structures to emerge from foreclosure in the aftermath of a three-year depression that ravaged the U.S. economy through 1885. ‘Important’ no doubt describes what took place one century later, on September 22, 1985, with the signing of the Plaza Accord, so named for the grand hotel that stands proudly to this day at the intersection of Fifth Avenue and Central Park South.

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ECONOMICS101, Danielle DiMartino Booth, Federal Reserve

Economics 101: Divining a New Mouse Trap

If only we had more rhabdic force to go around.

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

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