September 30, 2016

This Is How Much Liquidity Deutsche Bank Has At This Moment, And What Happens Next

It is not solvency, or the lack of capital - a vague, synthetic, and usually quite arbitrary concept, determined by regulators - that kills a bank; it is - as Dick Fuld will tell anyone who bothers to listen - the loss of (access to) liquidity: cold, hard, fungible (something Jon Corzine knew all too well when he commingled and was caught) cash, that pushes a bank into its grave, usually quite rapidly: recall that it took Lehman just a few days for its stock to plunge from the high double digits to zero.

It is also liquidity, or rather concerns about it, that sent Deutsche Bank stock crashing to new all time lows earlier today: after all, the investing world already knew for nearly two weeks that its capitalization is insufficient. As we reported earlier this week, it was a report by Citigroup, among many other, that found how badly undercapitalized the German lender is, noting that DB's "leverage ratio, at 3.4%, looks even worse relative to the 4.5% company target by 2018" and calculated that while he only models €2.9bn in litigation charges over 2H16-2017 - far less than the $14 billion settlement figure proposed by the DOJ - and includes a successful disposal of a 70% stake in Postbank at end-2017 for 0.4x book he still only reaches a CET 1 ratio of 11.6% by end-2018, meaning the bank would have a Tier 1 capital €3bn shortfall to the company target of 12.5%, and a leverage ratio of 3.9%, resulting in an €8bn shortfall to the target of 4.5%.

When Citi's note exposing DB's undercapitalization came out, it had precisely zero impact on the price of DB stock. Why? Because as we said above, capitalization - and solvency - tends to be a largely worthless, pro-forma concept. However, when Bloomberg reported today that select funds have withdrawn “some excess cash and positions held at the lender” the stock immediately plunged: the reason is that this had everything to do with not only DB's suddenly crashing liquidity, but the pernicious feedback loop, where once a source of liquidity leaves, the departure tends to spook other such sources, leading to an outward bound liquidity cascade. Again: just ask Lehman (and AIG) for the details.

Which then brings us to the $64 trillion (roughly the same amount as DB's gross notional derivative exposure) question: since DB is suddenly experiencing a sharp "liquidity event", how much liquidity does Deutsche Bank have access to as of this moment, to offset this event? The answer would allow us to calculate how long DB may have in a worst case scenario if we knew the rate of liquidity outflow.

Read the entire article

September 29, 2016

“Negative Growth” of Real Wages is Normal for Much of the Workforce, and Getting Worse – New York Fed

The New York Fed published an eye-opener of an article on its blog, Liberty Street Economics, seemingly about the aging of the US labor force as one of the big economic trends of our times with “implications for the behavior of real wage growth.” Then it explained why “negative growth” – the politically correct jargon for “decline” – in real wages is going to be the new normal for an ever larger part of the labor force.

If you’re wondering why a large portion of American consumers are strung out and breathless and have trouble spending more and cranking up the economy, here’s the New York Fed with an answer. And it’s going to get worse.

The authors looked at the wages of all employed people aged 16 and older in the Current Population Survey (CPS), both monthly data from 1982 through May 2016 and annual data from 1969 through 1981. They then restricted the sample to employed individuals with wages, which boiled it down to 7.6 million statistical observations.

Then they adjusted the wages via the Consumer Price Index to 2014 dollars and divide the sample into 140 different “demographic cohorts” by decade of birth, sex, race, and education. As an illustration of the principles at work, they picked the cohort of white males born in the decade of the 1950s.

That the real median income of men has declined 4% since 1973 is an ugly tidbit that the Census Bureau hammered home in its Income and Poverty report two weeks ago, which I highlighted in this article – That 5.2% Jump in Household Income? Nope, People Aren’t Suddenly Getting Big-Fat Paychecks – and it includes the interactive chart below that shows how the real median wage of women rose 36% from 1973 through 2015, while it fell 4% for men:

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September 28, 2016

Bridgewater Calculates How Much Time Central Banks Have Left

One of the key themes that have emerged in the past year is that, having loaded up their balance sheets with tens of trillions in various assets, central banks are "running out of road." While it is a topic extensively discussed on these pages, going all the way back to 2014, a good summary of the practical limitations on central banks comes from the following series of charts from Deutsche Bank.

The first slide looks at the bond transmission mechanism, namely that central banks have become increasingly aware of the adverse impact of low bond yields on financial sector profitability; another aspect is that European pension liabilities as a % of market cap are at a 10-year high – and above the levels they reached in 2008, when the European market cap was at half the current level. This means that absent an independent rise in inflation expectations, central banks’ attempts to push up nominal bond yields (via less QE or faster hikes) risks leading to higher real bond yields as well; the implication is that equities tend to de-rate when real bond yields rise (i.e. the discount rate increases).

There is a limitation from the standpoint of markets as well: European 12-month forward P/E, at 14.9x, is around 20% above its 10-year average; DB notes that its P/E model suggests that this deviation is fully accounted for by the fact that real bond yields are 180bps below their 10-year average; more troubling is the admission that any removal of monetary accommodation would likely lead to a sharp rise in credit spreads to reflect the deterioration in fundamentals (with default rates now at 5.7%), while equity strategist note that accommodative monetary policy has driven aggregate bond and equity valuations to the highest level since 1800

Read the entire acticle

September 27, 2016

Deutsche Curve Inverts As Bundesbank Dismisses State Support Of "Zombie" Banks

Deutsche Bank Sub CDS closed above 500bps for only the second day in its history (and the longer-term CDS curve inverted once again) as a bad day ended worse with Bundesbank member Andreas Dombret exclaimed "state support of banking sector must end," warning that it only "props up zombie banks." His pronouncements also pushed politicians to make the hard decisions and "tell banks they need structural reform."

As Bloomberg details, “Political support for the banking sector has to end at last,” Bundesbank board member Andreas Dombret says in text of speech in Vienna. “Unfortunately I’m only seeing this to a limited extent.”

“Without courageous realignment, banks won’t be able to permanently survive, except perhaps as zombie banks with the support of public authorities,” he says.

German and Austrian banks have to “adjust their business models so that they match the current environment,” he says.

The whole sector has to shrink, because the “systematic clean-up, inevitable after the bursting of the financial bubble, isn’t finished yet,” he says.

Discussion shouldn’t focus exclusively on “fewer banks, fewer branches,” he says, adding that the sector has to shrink to a sustainable size.

Market participants have to decide how to address overcapacities, Dombret says.

Basel III rules should be finalized by year-end and in the medium term the privileged treatment of sovereign bonds should be abolished.

Capital markets union should be advanced to strengthen capital markets as supplement to the banking system

And the credit market reacted badly with Sub CDS topping 500bps for only the 2nd day ever...

Read the entire article

September 26, 2016

26 Incredible Facts About The Economy That Every American Should Know For The Trump-Clinton Debate

Are you ready for the most anticipated presidential debate in decades?  It is being projected that Monday’s debate between Donald Trump and Hillary Clinton could potentially break the all-time record of 80 million viewers that watched Ronald Reagan and Jimmy Carter debate back in 1980.  Many Americans probably hope to see some personal fireworks between the two nominees, but the two candidates have both expressed a desire to focus on substantive issues.  There will likely be quite a few questions about the economy, and without a doubt this is an area where Trump and Clinton have some very sharp differences.  The mainstream media would have us believe that the U.S. economy is in pretty good shape, and if that was true that would seem to favor Clinton.  But is it actually true?  The following are 26 incredible facts about the economy that every American should know for the Trump-Clinton debate…

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September 23, 2016

Backlash Against Trade Deals: The End of U.S.-Led Economic Globalisation?

There is much angst in the Northern financial media about how the era of globalisation led actively by the United States may well be coming to an end. This is said to be exemplified in the changed political attitudes to mega regional trade deals like the Trans Pacific Partnership Agreement (TPP) that was signed (but has not yet been ratified) by the US and 11 other countries in Latin America, Asia and Oceania; and the Trans-Atlantic Trade and Investment Partnership Agreement (TTIP) still being negotiated by the US and the European Union.

President Obama has been a fervent supporter of both these deals, with the explicit aim of enhancing and securing US power. “We have to make sure America writes the rules of the global economy. We should do it today while our economy is in the position of global strength. …We’ve got to harness it on our terms. If we don’t write the rules for trade around the world – guess what? China will!”, he famously said in a speech to workers in a Nike factory in Oregon, USA in May 2015. But even though he has made the case for the TPP plainly enough, his only chance of pushing even the TPP through is in the “lame duck” session of Congress just before the November Presidential election in the US.

However, the changing political currents in the US are making that ever more unlikely. Hardly anyone who is a candidate in the coming elections, whether for the Presidency, the Senate or the House of Representatives, is willing to stick their necks out to back the deal.

Both Presidential candidates in the US (Donald Trump and Hillary Clinton) have openly come out against the TPP. In Clinton’s case this is a complete reversal of her earlier position when she had referred to the TPP as “the gold standard of trade deals” – and it has clearly been forced upon her by the insurgent movement in the Democratic Party led by Bernie Sanders. She is already being pushed by her rival candidate for not coming out more clearly in terms of a complete rejection of this deal. Given the significant trust deficit that she still has to deal with across a large swathe of US voters, it will be hard if not impossible for her to backtrack on this once again (as her husband did earlier with NAFTA) even if she does achieve the Presidency.

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September 22, 2016

Wall Street Goes "All In" For Hillary Clinton

Wall Street, America’s most despised industry, is putting all of its eggs in the Hillary Clinton basket. I must say, I’m actually pretty shocked at the extent to which the industry’s heavyweights are backing her. There’s really only one explanation - they know she’s a sure thing. 

You don’t go into Wall Street to help the world. You go in to make money, stroke your ego and perhaps one day be lucky enough to be deemed “master of the universe” by some finance humping media outlet like Bloomberg or CNBC. Wall Street oligarchs aren’t rallying around Hillary because they find Trump offensive. The only thing these people find offensive is not making money. They know Hillary, they’ve paid Hillary, and they are 100% confident she will do their bidding. Trump on the other hand is unpredictable and injects into the environment what the current crop on Wall Street hates more than anything else, risk.

The U.S. economy is totally rigged. While in the past, you were expected to take on a great deal of risk to earn an outsized return, most large returns these days have been gamed to such and extent that they amount to riskless schemes through which the U.S. taxpayer funnels money upward to a handful of oligarchs. Hillary will unquestionably keep this system in place. Trump, we just don’t know.

This is why the real players Wall Street want Hillary. They want the riskless pillaging of society to continue uninterrupted. As usual, money talks.

As The Hill reports:

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September 21, 2016

"We Haven't Seen This Since The Great Depression" - Gallup CEO Destroys The "Recovery" Lie

The Invisible American

I've been reading a lot about a "recovering" economy. It was even trumpeted on Page 1 of The New York Times and Financial Times last week.

I don't think it's true.

The percentage of Americans who say they are in the middle or upper-middle class has fallen 10 percentage points, from a 61% average between 2000 and 2008 to 51% today.

Ten percent of 250 million adults in the U.S. is 25 million people whose economic lives have crashed.

What the media is missing is that these 25 million people are invisible in the widely reported 4.9% official U.S. unemployment rate.

Let's say someone has a good middle-class job that pays $65,000 a year. That job goes away in a changing, disrupted world, and his new full-time job pays $14 per hour -- or about $28,000 per year. That devastated American remains counted as "full-time employed" because he still has full-time work -- although with drastically reduced pay and benefits. He has fallen out of the middle class and is invisible in current reporting.

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September 20, 2016

The Bank For International Settlements Warns That A Major Debt Meltdown In China Is Imminent

The pinnacle of the global financial system is warning that conditions are right for a “full-blown banking crisis” in China.  Since the last financial crisis, there has been a credit boom in China that is really unprecedented in world history.  At this point the total value of all outstanding loans in China has hit a grand total of more than 28 trillion dollars.  That is essentially equivalent to the commercial banking systems of the United States and Japan combined.  While it is true that government debt is under control in China, corporate debt is now 171 percent of GDP, and it is only a matter of time before that debt bubble horribly bursts.  The situation in China has already grown so dire that the Bank for International Settlements is sounding the alarm

A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring.

If you are not familiar with the Bank for International Settlements, just think of it as the capstone of the worldwide financial pyramid.  It wields enormous global power, and yet it is accountable to nobody.  The following is a summary of how the Bank for International Settlements works that comes from one of my previous articles entitled “Who Controls The Money? An Unelected, Unaccountable Central Bank Of The World Secretly Does“…

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September 19, 2016

China 'Banking Stress Indicator' Spikes To Record High

China’s credit-to-gross domestic product "gap" has reached 30.1%, the highest for the nation in data stretching back to 1995, according to the Basel-based Bank for International Settlements. As Bloomberg points out, the warning indicator for banking stress rose to a record in China in the first quarter, underscoring risks to the nation and the world from a rapid build-up of Chinese corporate debt.

The gap is the difference between the credit-to-GDP ratio and its long-term trend. As BIS explains:

The build-up of excessive credit features prominently in discussions about financial crises.

While it is difficult to quantify “excessive credit” precisely, the credit-to-GDP gap captures this notion in a simple way.

Importantly from a policy perspective, large gaps have been found to be a reliable early warning indicator (EWI) of banking crises or severe distress.

Readings above 10 percent signal elevated risks of banking strains. A blow-out in the number can signal that credit growth is excessive and a financial bust may be looming.

Read the entire article

September 16, 2016

10 Things That Every American Should Know About Donald Trump’s Plan To Save The U.S. Economy

Can Donald Trump turn the U.S. economy around?  This week Trump unveiled details of his new economic plan, and the mainstream media is having a field day criticizing it.  But the truth is that we simply cannot afford to stay on the same path that Barack Obama, Hillary Clinton and the Democrats have us on right now.  Millions of jobs are being shipped out of the country, the middle class is dying, poverty is exploding, millions of children in America don’t have enough food, and our reckless spending has created the biggest debt bubble in the history of the planet.  Something must be done or else we will continue to steamroll toward economic oblivion.  So is Donald Trump the man for the hour?

If you would like to read his full economic plan, you can find it on his official campaign website.  His plan starts off by pointing out that this has been the weakest “economic recovery” since the Great Depression…

#1 Donald Trump would lower taxes on the middle class
#2 Donald Trump would lower taxes on businesses
#3 Childcare expenses would be exempt from taxation
#4 U.S. manufacturers will be allowed to immediately fully expense new plants and equipment
#5 A temporary freeze on new regulations
#6 All existing regulations would be reviewed and unnecessary regulations would be eliminated
#7 Donald Trump would fundamentally alter our trade relationships with the rest of the globe
#8 Donald Trump’s plan would be a tremendous boost for the U.S. energy industry
#9 Trump would repeal Obamacare

#10 Trump’s plan says nothing about the Federal Reserve

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September 15, 2016

More Jobs Shipped Out Of The Country: Ford Moves All Small Car Production To Mexico

What is going to happen when America finally doesn’t have any manufacturing jobs left at all?  On Wednesday, we learned that Ford Motor Company is shifting all small car production to Mexico.  Of course the primary goal for this move is to save a little bit of money.  This hits me personally, because my grandfather once worked for Ford.  He was loyal to Ford all his life, and he always criticized other members of the family when they bought a vehicle that was not American-made.  When I was young I didn’t understand why making vehicles in America is so important, but I sure do now.  By shipping jobs overseas, we are destroying jobs, we are destroying small businesses and we are destroying our tax base.  If we want to be a wealthy nation, we have got to make things here, and hopefully we can get the American people to start to understand this.

In 1914, Henry Ford decided to start paying his workers $5.00 a day, which was more than double the average wage for auto workers at the time.

One of the reasons why he did this was because he felt that his workers should be able to afford to buy the vehicles that they were making.  This is what he wrote in 1926

“The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.”

These days Ford is going in the complete opposite direction.  Pretty soon, Ford won’t be making any more small vehicles in the United States at all

Ford is shifting all North American small-car production from the U.S. to Mexico, CEO Mark Fields told investors today in Dearborn, even though its plans to invest in Mexico have become a lightning rod for controversy in this year’s presidential election.

“Over the next two to three years, we will have migrated all of our small-car production to Mexico and out of the United States,” Fields said.

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September 14, 2016

"Rampant Fraud" Exposed In Obamacare Exchanges: 100% Of Fictitious Enrollees Obtained Subsidies

A recent "undercover enrollment" investigation conducted by the Government Accountability Office (GAO) found that pretty much anyone can sign up for Obamacare and receive taxpayer funded incentives without having to worry about pesky little details like proving citizenship, identity or income-based needs.  In fact, the study found that every single one of its 15 fictitious Obamacare applications were actually approved for coverage despite intentional application omissions, fictitious identification and citizenship documentation, etc. Moreover, all of the applications were also approved for federal subsidies which totaled $60,000 per year. 

Per the GAO:

Our undercover testing for the 2016 coverage year found that the eligibility determination and enrollment processes of the federal and state marketplaces we reviewed remain vulnerable to fraud, as we previously reported for the 2014 and 2015 coverage years. For each of our 15 fictitious applications, the marketplaces approved coverage, including for 6 fictitious applicants who had previously obtained subsidized coverage but did not file the required federal income-tax returns. Although IRS provides information to marketplaces on whether health-care applicants have filed required returns, the federal Marketplace and our selected state marketplace allowed applicants to instead attest that they had filed returns, saying the IRS information was not sufficiently current. The marketplaces we reviewed also relaxed documentation standards or extended deadlines for filing required documentation. After initial approval, all but one of our fictitious enrollees maintained subsidized coverage, even though we sent fictitious documents, or no documents, to resolve application inconsistencies.

For each of our 15 fictitious applications, the federal or state-based marketplaces approved coverage at time of application—specifically, 14 applications for qualified health plans, and 1 application for Medicaid.  Each of the 14 applications for qualified health plans was also approved for APTC subsidies. These subsidies totaled about $5,000 on a monthly basis, or about $60,000 annually. These 14 qualified-health-plan applications also each obtained CSR subsidies, putting the applicants in a position to further benefit if they used medical services.

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September 13, 2016

Wells Fargo Exec Who Oversaw Fake Accounts Received $125 Million Upon Recent Retirement, Praise from CEO; Senate Hearings Next Week

Sanctimonious Wells Fargo, which was a major perp in foreclosure abuses, has finally managed to go too far. Even normally complacent institutional investors are disturbed how Wells Fargo threw customers illegally under the bus to wring some incremental revenues out of them.

Adding fuel to the fire is the revelation by Fortune that the officer on whose watch this abuse took place, one Carrie Tolstedt who conveniently resigned at the end of July, identified by an alert NC reader the day the scandal broke, made off with a cool $125 million in addition to earlier cash and prizes. From the Fortune story:

When Tolstedt leaves Wells Fargo later this year, on top of the $1.7 million in salary she has received over the past few years, she will be walking away with $124.6 million in stock, options, and restricted Wells Fargo shares. Some of that hasn’t vested yet. But Tolstedt gets to keep all of it because she technically retired. Had she been fired, Tolstedt would have had to forfeit at least $45 million of that exit payday, and possibly more.

That stands in contrast with $185 million in fines paid to the CFPB, the Los Angles City Attorney, and the OCC, and does not include the multi-million amounts she also received in annual pay.

Read the entire article

September 12, 2016

The Impoverishment Of The Masses

Feudal and mercantilist economic systems were characterised by the lower orders of ordinary people being enslaved by, or subjected to, the commands of an elite.

Beyond basic subsistence, serfs and slaves were not enabled to consume other goods, nor were they given the means to do so. Communism was hawked as handing power to the serfs, or workers, united in and by the state. But again, it meant that workers remained serfs, employed and commanded by a state set up in their name. Freedom from the bourgeoisie became subjugation by the state. Only capitalism, founded on free markets and freedom of choice for all, held the promise of freeing the masses from a life of drudgery and servitude.

This was what the industrial revolution in Britain was about, particularly after the Corn Laws were repealed, and also the basis for the opportunities offered in America for refugees from European feudalism and mercantilism. And as the benefits of this freedom became enjoyed by those that were freed, so the abolition of slavery followed. A minimalist enlightened government based on democracy guaranteed property ownership and ensured that individuals’ rights were enforceable. These were the simple conditions of free markets, the conditions where the lowest consumer is the master of the mightiest producer, who endeavours to serve him. These are the conditions that led to a dramatic improvement in living standards for everyone in only a few decades, an improvement that had proved impossible in all the history of feudalism, mercantilism, and communism. It was the unique achievement of Anglo-Saxon laissez-faire.

But empires strike back. Just as communism enslaved the workers in their own name, so democratic states in the name of capitalism find ways to bind their own electors. Freedoms taken for granted by the British and Americans were never fully adopted by more socialistic states, and even the Anglo-Saxons have been slowly compromised to the point where their democratic systems are now breaking down.

Central to the loss of freedom, the road to serfdom as Hayek put it, is the creation of myths. The myth that the state acts on behalf its people, when it always acts to protect itself. The myth that the state knows better what its electors want than the electors themselves. The myth that only the state has the impartiality to right all wrongs. The reality is the exact opposite. The state intervenes to prevent people from deciding the matters that directly concern them. The middle classes have been taxed in the name of redistribution to the poor, and the poor themselves in turn have been relieved of the value of their earnings and savings by monetary debasement, always in the interest of the common good.

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September 9, 2016

Wells Fargo Fires 5,300 For Engaging In Massive Fraud, Creating Over 2 Million Fake Accounts

For years we have wondered why Wells Fargo, America's largest mortgage lender, is also Warren Buffett's favorite bank. Now we know why.

On Thursday, Wells Fargo was fined $185 million, (including a $100 million penalty from the Consumer Financial Protection Bureau, the largest penalty the agency has ever issued) for engaging in pervasive fraud over the years which included opening credit cards secretly without a customer’s consent, creating fake email accounts to sign up customers for online banking services, and forcing customers to accumulate late fees on accounts they never even knew they had. Regulators said such illegal sales practices had been going on since at least 2011.

In all, Wells opened 1.5 million bank accounts and "applied" for 565,000 credit cards that were not authorized by their customers.

Wells Fargo told to CNN that it had fired 5,300 employees related to the shady behavior over the last few years. The firings represent about 1% of its workforce and took place over several years.  The fired workers went to far as to create phony PIN numbers and fake email addresses to enroll customers in online banking services, the CFPB said.

How Wells perpetrated fraud is that its employees moved funds from customers' existing accounts into newly-created accounts without their knowledge or consent, regulators say. The CFPB described this practice as "widespread" and led to customers being charged for insufficient funds or overdraft fees, because the money was not in their original accounts. Additionally, Wells Fargo employees also submitted applications for 565,443 credit card accounts without their knowledge or consent, the CFPB said the analysis found. Many customers who had unauthorized credit cards opened in their names were hit by annual fees, interest charges and other fees.

Read the entire article

September 8, 2016

The Percentage Of Working Age Men That Do Not Have A Job Is Similar To The Great Depression

Why are so many men in their prime working years unemployed?  The Obama administration would have us believe that unemployment is low in this country, but that is not true at all.  In fact, one author quoted by NPR says that “it’s kind of worse than it was in the depression in 1940″.  Most Americans don’t realize this, but more men from ages 25 to 54 are “inactive” right now than was the case during the last recession.  We have millions upon millions of strong young men just sitting around doing nothing.  They aren’t employed and they aren’t considered to be looking for employment either, and so they don’t show up in the official unemployment numbers.  But they don’t have jobs, and nothing the Obama administration does can eliminate that fact.

According to NPR, “nearly 100 percent of men between the ages of 25 and 54 worked” in the 1960s.

In those days, just about any dependable, hard working American man could get hired almost immediately.  The economy was growing and the demand for labor was seemingly insatiable.

But today, one out of every six men in their prime working years does not have a job

In a recent report, President Obama’s Council of Economic Advisers said 83 percent of men in the prime working ages of 25-54 who were not in the labor force had not worked in the previous year. So, essentially, 10 million men are missing from the workforce.

One in six prime-age guys has no job; it’s kind of worse than it was in the depression in 1940,” says Nicholas Eberstadt, an economic and demographic researcher at American Enterprise Institute who wrote the book Men Without Work: America’s Invisible Crisis. He says these men aren’t even counted among the jobless, because they aren’t seeking work.

Read the entire article

September 7, 2016

Goldman Bans Partners From Donating To Trump Campaign To "Minimize Potential Reputational Damage"

In the last days of August, Goldman Sachs surprised its employees with a new rule: the firm's top employees will be barred from donating to certain political campaigns, including that of Trump-Pence.

In a memo sent out on August 29, the firm's global compliance office said that starting on September 1, "all partners across the firm are considered “Restricted Persons” as defined by the firm’s Policy on Personal Political Activities in the US." This means that as of this moment, Goldman's partners are "prohibited from engaging in political activities and/or making campaign contributions to candidates running for state and local offices, as well as sitting state and local officials running for federal office", and specifically donating to the Donald Trump campaign, in order to "minimize potential reputational damage."

The memo conveniently provides the following example of the type of political activity that is barred, among others:

Any federal candidate who is a sitting state or local official (e.g., governor running for president or vice president, such as the Trump/Pence ticket, or mayor running for Congress), including their Political Action Committees (PACs).

As Fortune, which first obtained the memo reported, said that Goldman's new rule was meant to remove any implication of so-called “pay to play.” Four years ago Goldman bank paid $12 million to settle charges that a former Boston-based banker had picked up bond underwriting business in the state while working for and contributing funds to the campaign of a then Massachusetts state treasurer and governor-hopeful, Tim Cahill.

Pay-to-play rules were first introduced by the Securities and Exchange Commission in 2010, after several investment advisors were accused of trying to win business, such as managing public pensions, with improper tactics including political contributions. If a financial advisor were to make a campaign contribution to a public official or candidate, they would be banned from providing advisory services for compensation to the government client for two years under the rules.

Goldman explains that "the policy change is also meant to minimize potential reputational damage caused by any false perception that the firm is attempting to circumvent pay-to-play rules, particularly given partners’ seniority and visibility," adding that “all failures to pre-clear political activities as outlined below are taken seriously and violations may result in disciplinary action."

Read the entire article

September 6, 2016

From An Industrial Economy To A Paper Economy – The Stunning Decline Of Manufacturing In America

Why does it seem like almost everything is made in China these days?  Yesterday I was looking at some pencils that we had laying around the house and I noticed that they had been manufactured in China.  I remarked to my wife that it was such a shame that they don’t make pencils in the United States anymore.  At another point during the day, I turned over my television remote and I noticed that it also had “Made In China” engraved on it.  It is still Labor Day as I write this article, and so I think that it is quite appropriate to write about our transition from an industrial economy to a paper economy today.  Since the year 2000, the United States has lost five million manufacturing jobs even though our population has grown substantially since that time.  Manufacturing in America is in a state of stunning decline, our economic infrastructure is being absolutely gutted, and our formerly great manufacturing cities are in an advanced state of decay.  We consume far more wealth than we produce, and the only way that we are able to do this is by taking on massive amounts of debt.  But is our debt-based paper economy sustainable in the long run?

Back in 1960, 24 percent of all American workers worked in manufacturing.  Today, that number has shriveled all the way down to just 8 percent.  CNN is calling it “the Great Shift”…

In 1960, about one in four American workers had a job in manufacturing. Today fewer than one in 10 are employed in the sector, according to government data.

Call it the Great Shift. Workers transitioned from the fields to the factories. Now they are moving from factories to service counters and health care centers. The fastest growing jobs in America now are nurses, personal care aides, cooks, waiters, retail salespersons and operations managers.

No wonder the middle class is shrinking so rapidly.  There aren’t too many cooks, waiters or retail salespersons that can support a middle class family.

Since the turn of the century, we have lost more than 50,000 manufacturing facilities.  Meanwhile, tens of thousands of gleaming new factories have been erected in places like China.

Does anyone else see something wrong with this picture?

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September 5, 2016

What Else Can Central Banks Do?

During the Great Moderation period from the mid-1980s to 2007, economists grew confident that central banks could stabilise economies by raising and lowering short-term interest rates. A startling development during the Great Recession of 2008-2009 was that policy rates in advanced economies fell to near zero (Blanchard et al. 2016), yet that was not sufficient stimulus to promote strong recoveries. Rates have stayed near zero in many countries, suggesting a liquidity trap: further stimulus is needed, but central banks’ traditional tool of policy rate cuts is not available.

In the:

2016 Geneva Report on the World Economy,

we examine the liquidity trap, or lower bound on interest rates (Ball et al. 2016). We first document the severity of the problem – how it has constrained monetary policy since 2008, and how it is likely to constrain policy in the future – and then discuss how central bank policymakers can respond. Contrary to the common view that central banks are “out of ammunition” when policy rates fall to zero, we believe they can provide stimulus, notably by pushing rates negative and through aggressive forms of quantitative easing (QE). Looking further ahead, policymakers can greatly reduce the danger of the lower bound by a modest increase in their inflation targets.

The Danger of the Lower Bound

There is little doubt that the lower bound on interest rates has constrained monetary policy since 2008. For the US, for example, a pre-crisis Taylor rule dictates a federal funds rate of -5% or -6% in 2009. The actual rate never fell below zero. Based on a simple macroeconomic model, we estimate that US unemployment rates from 2009 through 2015 averaged more than a percentage point higher than they would have if there were no lower bound on interest rates. Unemployment would have been higher still if not for the Federal Reserve’s policy of quantitative easing (discussed below).

A crisis of that magnitude is not necessary for the lower bound to constrain monetary policy, however. Our report emphasises that, going forward, even modest economic downturns are likely to push interest rates to zero. This prospect is the result of two factors. One is the low inflation targets chosen by central banks, typically close to 2%. The second is the apparent fall in the neutral real interest rate over the last two decades, to current estimates of about 1% or even lower. Together, these numbers imply that the steady state nominal interest rate is 2 + 1 = 3%. Starting from this level, a central bank can reduce its policy rate only 300 basis points before hitting zero – not enough stimulus to offset a moderate-size shock to the economy.

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September 2, 2016

Small Business Defaults Rise, Borrowing Drops: "What Scares Us Is The Rise In Delinquencies"

Yesterday, we pointed out something disturbing when we looked at the latest NACM Credit Manager Index report: over the past year it had declined steadily, hitting the lowest print since 2009, or as the National Asscoiation of Credit Managers' economist Chris Kuehl said “Overall, it was fun while it lasted - the trends had been up and now they aren’t" adding that “the best that can be said about the decline is that it was bad and hasn’t gotten much worse.... The sales collapse is consistent with what has been appearing in the Purchasing Managers’ Index and other statistics, so it is unlikely to be an anomaly, not good timing as far as the retail community is concerned.”

Today, we got a validating, and equally concerning, perspective on how small businesses are doing, courtesy of the latest Thomson Reuters/PayNet Small Business Lending Index, which fell to 121.5 in July, the lowest level since January and down from an upwardly revised 139.2 in June. 

But while the headline decline was mildly troubling, the details within the report were worse: according to PayNet, borrowing by U.S. small businesses sank in July, with more firms late on repaying existing loans, trends which according to Reuters "point to softer economic growth ahead."

More troubling is that companies are increasingly struggling to pay back existing debts. Loans more than 30 days past due rose in July to 1.63%, the fourth straight monthly increase and the highest delinquency rate since December 2012, separate data from PayNet showed.

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September 1, 2016

Global Supply Chains Paralyzed After World's 7th Largest Container Shipper Files Bankruptcy, Assets Frozen

After years of relentless decline in the Baltic Dry index...

... today the largest casualty finally emerged on Wednesday when South Korea's Hanjin Shipping, the country's largest shipping firm and the world's seventh-biggest container carrier, filed for court receivership after losing the support of its banks, leaving its assets frozen as ports from China to Spain denied access to its vessels.

For those unfamiliar with the company, here is a brief overview from its website:

Hanjin Shipping is Korea's largest and one of the world’s top ten container carriers that operates some 70 liner and tramper services around the globe transporting over 100 million tons of cargo annually. Its fleet consists of some 150 containerships and bulk carriers.

With 4 regional headquarters in the U.S., Europe, Asia and South East & West Asia, approximately 5,000 global staffs as well as container terminals in world’s major ports contribute to Hanjin Shipping’s world-class logistics network around the world.

As Reuters reports, banks led by state-run Korea Development Bank withdrew backing for the world's seventh-largest container carrier on Tuesday, saying a funding plan by its parent group was inadequate to tackle debt that stood at 5.6 trillion won ($5 billion) at the end of 2015.

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