April 28, 2017

Core Eurozone Inflation Surges To 4 Year High As CPI Nears ECB Target

Mario Draghi's job just became a little more difficult, because one day after the head of the ECB surprised markets with a more dovish statement than expected stressing risks for European inflation, on Friday morning Eurostat reported that Euro zone inflation rose by more than expected to the European Central Bank's target and core inflation increased to its highest level in four years.

Inflation in the 19 countries sharing the euro was 1.9 percent year-on-year, Eurostat estimated, up from 1.5 percent in March and just short of the four-year high of 2.0 percent recorded in February. The print was also above the 1.8% consensus estimate, even though German inflation data released on Thursday which also came in hotter than expected had prepared markets for a potential stronger figure for the bloc.

The April print (released before the month is even over) was also just shy of the ECB's medium-term target for inflation of 2 percent.

Overall inflation was higher primarily because of a 7.5% rise in energy prices and of 2.2% for unprocessed food. Prices for food, alcohol and tobacco went up by 1.5% in April, slightly lower than the 1.8% figure for March. In the services sector, the largest in the euro zone economy, prices rose by 1.8 percent in April, compared with 1.0 percent in March.

Core inflation, excluding volatile prices of energy and unprocessed food and which the European Central Bank monitors even more closely, jumped to 1.2% year-on-year in April from 0.8% in March, above market expectations of 1.0 percent. The core level was at its highest level since September 2013.

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April 27, 2017

Have We Just Reached Peak Stock Market Absurdity?

Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market?  Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing.  This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever.  But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.

Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics.  Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.

Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…

Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.

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April 26, 2017

Feudalism And The "Algorithmic Economy"

For the sake of this essay, feudal economic models imply the idea that a very tiny segment of the society is fantastically rich while the bulk of society works hard, has few choices about the work they do, and tend to be poorly compensated for their efforts.

the dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants (villeins or serfs) were obliged to live on their lord’s land and give him homage, labor, and a share of the produce, notionally in exchange for military protection.

Welcome to the Algorithmic Economy, a future which uses machines to determine how effective you can be and how little they can pay you in the process.

There are no unions in this economy. There are no bosses to complain to. There are no people you can ask for redress. Because in this economy, the people doing the labor are considered the least important part of the machine and it’s best if they never communicate with someone living if it can be helped.

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April 25, 2017

The IMF Is Not Done Destroying Greece Yet

Austerity is over, proclaimed the IMF this week. And no doubt attributed that to the ‘successful’ period of ‘five years of belt tightening’ a.k.a. ‘gradual fiscal consolidation’ it has, along with its econo-religious ilk, imposed on many of the world’s people. Only, it’s not true of course. Austerity is not over. You can ask many of those same people about that. It’s certainly not true in Greece.

IMF Says Austerity Is Over

Austerity is over as governments across the rich world increased spending last year and plan to keep their wallets open for the foreseeable future. After five years of belt tightening, the IMF says the era of spending cuts that followed the financial crisis is now at an end. “Advanced economies eased their fiscal stance by one-fifth of 1pc of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation,” said the IMF in its fiscal monitor.

In Greece, the government did not increase spending in 2016. Nor is the country’s era of spending cuts at an end. So did the IMF ‘forget’ about Greece? Or does it not count it as part of the rich world? Greece is a member of the EU, and the EU is absolutely part of the rich world, so that can’t be it. Something Freudian, wishful thinking perhaps?

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April 24, 2017

11 Facts That Prove That The U.S. Economy In 2017 Is In Far Worse Shape Than It Was In 2016

There is much debate about where the U.S. economy is ultimately heading, but what everybody should be able to agree on is that economic conditions are significantly worse this year than they were last year.  It is being projected that U.S. economic growth for the first quarter will be close to zero, thousands of retail stores are closing, factory output is falling, and restaurants and automakers have both fallen on very hard times.  As economic activity has slowed down, commercial and consumer bankruptcies are both rising at rates that we have not seen since the last financial crisis.  Everywhere you look there are echoes of 2008, and yet most people still seem to be in denial about what is happening.  The following are 11 facts that prove that the U.S. economy in 2017 is in far worse shape than it was in 2016…

#1 It is being projected that there will be more than 8,000 retail store closings in the United States in 2017, and that will far surpass the former peak of 6,163 store closings that we witnessed in 2008.

#2 The number of retailers that have filed for bankruptcy so far in 2017 has already surpassed the total for the entire year of 2016.

#3 So far in 2017, an astounding 49 million square feet of retail space has closed down in the United States.  At this pace, approximately 147 million square feet will be shut down by the end of the year, and that would absolutely shatter the all-time record of 115 million square feet that was shut down in 2001.

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April 21, 2017

The Amazon.com Effect: Retailers Say They’re Not Selling, but Consumers Report They Are Buying

One of the issues I keep reading about recently is the (alleged) divergence between “soft” and “hard” data.  For example, consumer sentiment as measured by the University of Michigan (and the Conference Board, and Gallup) has been making new highs since the Presidential election last November (according to Gallup, mainly fueled by a massive gain in optimism among Republicans). while “hard data,” chiefly industrial production but also including consumer spending, has failed to follow suit.

One problem with this thesis has been that manufacturing as measured by the industrial production index, turned up for five months in a row.  It turned down in March, and one good measure of how intellectually honest the commentator is, is whether they have been using a consistent measure for industrial production:

Production as a whole only fell in January and February because of utility production (warm winter in the eastern half of the US).  In March, production only rose because utility production rebounded sharply (March was actually colder than February in much of the East).

So a Doomer who was all over the decline in industrial production for the last two months should be touting its advance in March.  If the Doomer backs out utilities this month, take a look to see if they did the same thing last month — almost certainly not.
Another problem with the soft/nard data dichotomy is that online retail appears to have reached a tipping point where it is causing big damage to brick-and-mortar retailers, who are laying off thousands of employees and even shutting down completely.

I am concerned that the official real retail sales numbers might not be adequately picking up online retail:

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April 20, 2017

Banks Plan To Cut Oil Lending Even More This Year

Oil lending could go down even more

Even though the price of oil has nearly doubled from its lows printed at the beginning of last year, it seems that for many oil and gas companies, the downturn continues to weigh on operations.

According to the most recent issue of the Haynes and Boone, Borrowing Base Redeterminations Survey, conducted last quarter, around 24% of exploration and production borrowers expect to see a decrease in their borrowing base redeterminations for spring 2017. Even though the number of responses indicating a reduction in borrowing capacity has decreased dramatically since last year (down from 41% in the fall of 2016) it is notable that many sector stakeholders believe further adjustments are ahead despite the changes that have taken place over the past 12 months.

Banks Plan To Cut Oil Lending Further

163 Borrowing Base surveys were completed for the spring 2017 issue with respondents spread across the lending, producer, services and other oil and related industries. Far more borrowers believe borrowing bases will be cut this year than lenders with 27% of borrowers predicting a cut and 20% of lenders holding the same opinion.

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April 19, 2017

Goldman Pours Cold Water On Trump's Fiscal Stimulus Plan

Goldman Sachs' Chief US Political Economist Alec Phillips writes that tax reform faces a risk of failure, but tax cuts remain likely... in 2018 and investors need to stay realistic about the impact of fiscal stimulus.

President Trump’s campaign proposals initially raised expectations of several forms of fiscal stimulus, driving investor optimism on both infrastructure spending and various elements of tax reform. However, we expect only tax cuts to have a meaningful effect on growth over the next couple of years. Three risks are behind this view: tax reform failure, fiscal constraints, and delayed enactment.

Debates, delays, distractions

First, tax reform faces a real risk of failure. If Republicans pursue revenue-neutral tax reform, they are likely to encounter the same challenges they encountered in passing their health legislation. Inclusion of controversial proposals like the border-adjusted tax (BAT) or even the repeal of corporate interest expense deductibility, for example, could sink the effort. Views on these issues do not follow traditional party lines, which could easily lead to some Republican opposition (we have already seen significant opposition to the BAT, for example). With few if any Democratic lawmakers likely to vote for the tax bill, Republicans would need nearly unanimous support from their own party. Thus, while revenue-neutral tax reform might be preferable from a policy perspective, imposing this restriction would lower the odds of enactment by next year.

In light of the challenges tax reform faces, we believe that President Trump, who did not emphasize revenue-neutrality during the campaign, is likely to eventually endorse more limited reforms that result in a net tax cut. However, the size of such a cut would be limited by fiscal constraints; centrist Republican lawmakers seem especially likely to balk at large tax cuts that would eventually require deep spending cuts to maintain fiscal sustainability. Dynamic scoring and other budget accounting strategies might provide several hundred billion dollars’ worth of room for a tax cut in 10-year budget projections, but alone would allow for only a very modest cut. Our current expectation is a tax cut of $1.75tn over ten years, taking effect in 2018.

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April 18, 2017

US Restaurant Industry Suffers Worst Collapse Since 2009

What tentative hope had emerged for a rebound for the U.S. restaurant industry at the start of the year, was doused last month when in its February Restaurant Industry Snapshot, TDn2K found that "Restaurant Sales and Traffic Tumble in February" and reported that same-store sales fell -3.7% in February, with traffic declining -5.0% . It did however leave a possibility that things may turn around as a result of the prompt disbursement of withheld tax refunds in the month, which it suggested may have adversely affected sales and traffic.

Alas, that did not happen, and restaurant struggles continued in March as sales and traffic again declined year-over-year: same-store sales were down 1.1% while traffic dropped 3.4%. March results were disappointing for an industry desperately trying to reverse performance trends; with sales now negative in 11 out of the last 12 months, the longest stretch since the financial crisis. There was a modest improvement sequentially, however, and while still negative, sales improved by 2.5% points compared to February as traffic rose marginally by 1.6%.

Explaining the sequential "improvement", Victor Fernandez, executive director of insights and knowledge for TDn2K, said “March sales were expected to be somewhat better than February due in part to the catch-up of tax refunds that were initially delayed in February. In addition, the industry likely benefited from the shift in the Easter holiday, which fell in March in 2016. For the largest segments (quick service and casual dining), this holiday represents a potential loss of sales."

However, it was not enough: “The fact that sales were still negative in March given these tailwinds highlights the challenge chains have faced since the recession. Factors like restaurant oversupply and additional competition for dining occasions continue to take their toll on chain traffic.”

As TDn2K further adds, with a same-store sales decline of 1.6%, the first quarter of 2017 was the fifth consecutive quarter of negative results. The last time the industry experienced a similar period was in 2009 and the first half of 2010, as the economy began recovery following the recession. Only this time the move is in the opposite direction. 

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April 17, 2017

World's Biggest Aluminum Producer Faces Default, Warns Of "Dramatic Social Unrest" Without A Beijing Bailout

Step aside China Huishan Dairy Holdings - China's largest dairy producer which cratered last month after a negative Muddy Waters research report brought attention to a company we knew for one year was collateralizing its cows to fund stock buybacks - and make way for what may be the next Chinese megafraud.

While China Hongqiao Group may be best known for being the world's largest aluminum producer, it has in recent months featured just as prominently among short-seller reports who have accused the company of being a fraud. As the WSJ's Scott Patterson writes, questions about China Hongqiao’s finances first emerged in November, when an anonymous short seller wrote on a website called Hongqiao Exposed that the company’s profits are “too good to be true.” China Hongqiao in the March 31 statement called the report “untrue and unfounded.”

A subsequent 46-page report on Feb. 28 by Emerson Analytics, a trading firm focused on Chinese stock-market fraud, disclosed more allegations of fraud involving the Chinese commodity giant.

Emerson accused China Hongqiao of “abnormally high” profits generated by underreporting production costs and disclosing electricity expenses—one of the biggest costs for aluminum producers—as much as 40% below their true cost. Emerson said it investigated Chinese electricity costs, spoke to former China Hongqiao employees and compared the company’s costs and profits with other comparable companies.

Additionally, China Hongqiao has been more profitable than some Chinese competitors. For instance, China Hongqiao earned an average operating profit margin of 27% in the past five years, compared with minus-1.7% for state-owned Aluminum Corp. of China , known as Chalco, and 5.9% for Alcoa, according to FactSet. “People were always skeptical about how they managed to be more profitable than their peers,” said Sandra Chow, a credit analyst at CreditSights.

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April 14, 2017

Big US Banks Make Laughable Excuses for Preserving Failed Universal Bank Model

In today’s lead story at the Financial Times, Big US banks defy calls that they should be broken up, American megabanks make clear that they don’t think much of the financial savvy of investors or the business press. In quarterly earning calls, bank analysts were pressing executives on the news reports that former Goldman exec, now director of the National Economic Council Gary Cohn told senators last week told a group of senators that he was in favor of Glass-Steagall break-up-the-banks style legislation.

Our comments:

Wake me up when this gets serious. Cohn made it clear that he supported a breakup bill. While Trump has also said he wanted to revive Glass-Steagall, he didn’t say that very often on the campaign trail and there are many things he did say often and pretty consistently, like questioning why the US is carrying so much of the cost of NATO, he’s either reversed himself or is now backing a weak-tea version that his base regards as a sellout, such as Trump’s promises about NAFTA. Plus any Glass-Steagall type bill gets passed only over rabid anti-regulation House Financial Services committee chairman Jeb Hensarling’s dead body.

Don’t buy Jamie Dimon’s Brooklyn Bridge. Big complicated banks are not good for investors, no matter how much banks put their hands on their hearts and try to convince you otherwise. Here was the argument, per the pink paper:

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April 13, 2017

Tech Stocks Experience Their Longest Losing Streak In 5 Years As Panic Begins To Grip The Market

S&P 500 tech stocks have now fallen for 9 days in a row.  The last time tech stocks declined for so many days in a row was in 2012, and that was the only other time in history when we have seen such a long losing streak.  As I have stated before, the post-election “Trump rally” is officially done, and the market is starting to roll over as investors begin to realize that all of the buying momentum has completely evaporated.  Tech stocks tend to be particularly volatile, and so the fact that they are starting to lead the way down should definitely be alarming to many in the investing community.

Of course it isn’t just tech stocks that are falling.  The Dow was down another 59 points on Wednesday, and the S&P 500 has closed beneath its 50 day moving average for the very first time since the election.  For those that have been waiting for a key technical signal before getting out of the market, there is one for you.

The price of gold was up again, and that is definitely not surprising in this geopolitical environment.  The closer we get to war the higher gold and silver prices will go, and if we actually get into a major conflict we will see them blast into the stratosphere.

Another key indicator that I am watching very closely is the VIX.  On Wednesday it shot up above 16 for the very first time since the day after Trump’s election victory, and many believe that it could soon go much higher.  The following is an excerpt from a CNBC report

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April 12, 2017

IMF Blames Fall of Middle Class on Globalization and Technology

This sort of orthodoxy-reinforing narrative is deeply frustrating, particularly since the research side of the IMF, unlike the program side, often does very good work.

One of the big problem of reports like this is they never consider the question that income distribution is a function of political and social arrangements, and in particular, the rights of capital versus labor. It is hardly an accident that labor stopped sharing in the benefits of productivity gains in the mid 1970s, well before globalization and technology would have played much of a role. The big culprit was loss of labor bargaining power, which become official policy due to Volcker committing the Fed to creating more labor slack to keep inflation as close to his preferred target of zero as possible, and the Reagan/Thatcher “free market” fetish.

Now in fairness, some of the problems with a report like this are the difficulty of unpacking critical issues. For instance, as we’ve discussed regularly, the amount of offshoring of jobs that took place was considerably more than was justified by profit concerns. Direct factory labor is a small percentage of wholesale product cost; savings there are offset by greater managerial, finance, and transport costs, plus higher risks. In others words, offshoring and outsourcing are often, if not mainly, a transfer from low level workers to management rather than a bona-fide plus to the business. So while it is narrowly correct to say that globalization has been a big driver of middle class losses, analyses like that are misleading because they focus on proximate causes, not ultimate causes.

This report also misses another increasingly recognized driver of inequality, which is the lack of anti-trust enforcement which in turns leads to monopoly and oligopoly rent extraction. And it ignores a huge transfer from ordinary citizens to the capital-owning classes via subsidies. The banking industry is a huge example, where as we’ve written repeatedly, its operations are purely extractive (the cost of periodic crises greatly exceeds the value of the enterprises) and it enjoys such large subsidies that it should not be regarded as private enterprise. Banks should be regulated as utilities.

Similarly, an op ed in Links today describes the magnitude of subsidies extracted by WalMart: roughly $50 per American household per year. That is equivalent to 1/4 of its 2014 pre-tax profits, and an even higher percentage of its US pretax profits.

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April 11, 2017

Rent Control Makes For Good Politics And Bad Economics

One needn’t read very much about public policy before coming across some statement to the effect that “bad economics makes good politics.” This statement is clearly untrue when good politics is defined as furthering mutually beneficial arrangements, as good economics is central to that task. But the statement is often true when good politics is defined as attracting 50%-plus-one votes on some issue or candidate, which is a much different standard, leaving plenty of room for government-imposed harms to be imposed on citizens.

Few issues reflect this divergence between “good” politics and bad economics more clearly than rent control. One of the most universally accepted propositions among economists is that rent control produces a host of adverse social consequences with its large involuntary redistribution of wealth and suppression of market prices as communicators of information and incentives. Despite that, it has been adopted as policy in many places and times — and now is a good time to revisit these issues, as efforts are currently underway in several states (including California, Oregon, Washington, and Illinois) to repeal existing statewide restrictions on rent control.

How Rent Control Destroys Value 

Rent control takes a large portion of the value of residential properties from landlords. It does so by removing owners’ rights to accept offers willingly made by potential renters. And the value of the rights involved are large. For example, after Toronto imposed rent control in 1975, affected building values fell by 40% over five years, and a decade ago, such losses were estimated at $120 million annually in Santa Monica. A law like rent control, which can take half or more of each apartment’s value from the landlord, harms them just as much taking away half of their apart­ments, even though the latter is recognized as theft. Those stripped property values are given to current tenants, whose resulting bonanzas are shown by the fact that those under strict rent control almost never leave.

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April 10, 2017

The Debt Crisis Of 2017: Once Their Vacation Ends, Congress Will Have 4 Days To Avoid A Government Shutdown On April 29

April 2017 could turn out to be one of the most important months in U.S. history that we have seen in a very long time.  On April 6th, Donald Trump attacked Syria on the 100th anniversary of the day that the U.S. officially entered World War I, and now at the end of this month we could be facing an unprecedented political crisis in Washington.  On Friday, members of Congress left town for their two week “Easter vacation”, and they won’t resume work until April 25th.  What this means is that Congress will have precisely four days when they get back to pass a bill to fund government operations or there will be a government shutdown starting on April 29th.

Up to this point, there has been very little urgency by either party to move a spending bill forward.  It is almost as if everyone is already resigned to the fact that a government shutdown will happen.  The Democrats will greatly benefit from a government shutdown because they can just blame the entire mess on the Republicans.  But for the GOP, this is essentially the equivalent of political malpractice.

To me, there is simply no way that Congress is going to be able to agree on a bill that funds the entire government in just four days.  And it turns out that this upcoming deadline comes exactly on the 100th day of Trump’s presidency

The U.S. government is poised to shut down on Day 100 of Donald Trump’s presidency, unless Congress can pass a new spending bill or a continuing resolution before the current one expires on April 28.

Since Congress is currently on a two-week recess, there will be a sense of urgency to get a new bill passed once they reconvene on April 25. Leaders in both chambers would have four days to craft a new proposal that each side can agree on and get it on the president’s desk for Trump to sign.

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April 7, 2017

Amazon Discovers the High Cost of Being Poor

Sometimes financial services industry mouthpieces inadvertently give the game away. When this happens – and a tame bank-friendly publication runs a story which aims to fulfil their role as boosters and palliatives for what outside their bubbles is an industry which is beyond redemption – the results are often amusing. If they try to brush the problems big finance causes to media darlings like Amazon under the rug, they look even more ridiculous when their attempts at finessing them away draws even more attention back to the underlying issue.

Once such example comes from big finance’s Mrs. Malaprop, the American Banker. To save weary readers from having to parse the whole article, in this piece American Banker made even by their standards a risible effort to re-tread Amazon’s press release in which Amazon announced to an eager public how it was going to “help” customers give founder Jeff Bezos (who in my mind is living proof of what happens when you cross breed a unicorn and a bunny boiler) even more money.

To cut American Banker’s long story short — by which I am sure I am performing a community service — Amazon now offers customers a means of crediting their Amazon account with funds which they deposit at a range of partner bricks-and-mortar retail outlets. There are some shenanigans with a smartphone app, bar codes, optional Apple Pay or Android Pay snooping, trips to the store to pay in cash and so forth which you can read about in American Banker’s explanation but — to cut to the chase — the new service means that if you have cash, you can get that cash into your Amazon account without needing to have access to a credit or debit card.

The unintentionally amusing aspect of this rah-rah’ing from Amazon and American Banker is that it accidentally highlights a significant issue for so-called New Economy players such as Amazon. The problem for non-traditional retailers and service providers who lack physical premises is that it is very difficult for them to be able to handle customers who either don’t want to pay by credit or debit card or, more intractably, don’t have a debit or credit card in the first place.

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April 6, 2017

Euro Saves Germany, Slaughters the PIGS, & Feeds the BLICS

The change in nations Core populations (25-54yr/olds) have driven economic activity for the later half of the 20th century, first upward and now downward.  The Core is the working population, the family forming population, the child bearing population, the first home buying, and the credit happy primary consumer.  Even a small increase (or contraction) in their quantity drives economic activity magnitudes beyond what the numbers would indicate.

To highlight the linkage of Core populations to economic activity, the chart below shows the European 25-54yr/old population vs. the best indicator of economic activity, total energy consumption (data available starting from 1980).  The implications are pretty straightforward.  European economic activity (& resultant energy consumption) will contract for decades, at a minimum, with the declining Core population.  The pie is shrinking and now it's simply a fight for who gets bigger slices.

Given this, consider Germany was well aware of it's post WWII collapsing birth rate and the impact of this on economic growth as this shrinking population of young made it's way into the Core.  Consider Germany's Core population peaked in 1995 and it's domestic consumer base has been shrinking since, now down over 3.3 million potential consumers (about a 9% Core decline...remember a depression is a 10% decline in economic activity, which a 9% and growing decline in German consumers would have almost surely induced).

GERMANY

The chart below shows Germany's Core population from 1950-->2040...but understand this is no guestimate through 2040.  This is simply taking the existing 0-24yr/old population (plus anticipated immigration) and sliding them into the Core through 2040.  Germany's Core population is set to fall by over 30% or 10+ million by 2040 (far more than the 7 million Germans of all ages who died in WWII).

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April 5, 2017

"We Have A Serious Problem": For Jamie Dimon, This Is The Most Troubling Chart About The US Economy

As discussed earlier, Jamie Dimon's annual letter this year was a departure from his usual optimistic sermons about the state of nation, dedicating an entire section in the 45 page letter to  describe that "something is wrong" with the US. And of all the items mentions, the following aspect of the US economy is what was most troubling to the JPM CEO. Not surprisingly, it deals with two of the biggest threats facing the US currently: demographics and labor, and shows the at least in one key economic metric, the US is now the worst among the entire universe of developed countries.

This is what Dimon said:

Labor force participation in the United States has gone from 66% to 63% between 2008 and today. Some of the reasons for this decline are understandable and aren’t too worrisome – for example, an aging  population. But if you examine the data more closely and focus just on labor force participation for one key segment; i.e., men ages 25-54, you’ll see that we have a serious problem. The chart below shows that in America, the participation rate for that cohort has gone from 96% in 1968 to a little over 88% today. This is way below labor force participation in almost every other developed nation. 

Labor force participation in the United States has gone from 66% to 63% between 2008 and today. Some of the reasons for this decline are understandable and aren’t too worrisome – for example, an aging  population. But if you examine the data more closely and focus just on labor force participation for one key segment; i.e., men ages 25-54, you’ll see that we have a serious problem. The chart below shows that in America, the participation rate for that cohort has gone from 96% in 1968 to a little over 88% today. This is way below labor force participation in almost every other developed nation.

If the work participation rate for this group went back to just 93% – the current average for the other developed nations – approximately 10 million more people would be working in the United States. Some other highly disturbing facts include: Fifty-seven percent of these non-working males are on disability, and fully 71% of today’s youth (ages 17–24) are ineligible for the military due to a lack of proper education (basic reading or writing skills) or health issues (often obesity or diabetes).

Incidentally, Dimon's key concern was initially flagged here back in 2013 and most recently, last summer. For the remainder of the US economic problems listed by Dimon, please refer to the original article.

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April 4, 2017

The Next Subprime Crisis Is Here: 12 Signs That A Day Of Reckoning Has Arrived For The U.S. Auto Industry

In 2008, subprime mortgages almost single-handedly took down the entire financial system, and now a new subprime crisis is here.  In recent years, the auto industry has been able to boost sales by aggressively pushing people into auto loans that they cannot afford.  In particular, auto loans made to consumers with subprime credit have been accounting for an increasingly larger percentage of the market.  Unfortunately, when you make loans to people that should not be getting them, eventually a lot of those loans are going to start to go bad, and that is precisely what is happening now.  Meanwhile, automakers and dealers are starting to panic as sales have begun to fall and used car prices have started to crash. If you work in the auto industry, you might remember how horrible the last recession was, and this new downturn could eventually turn out to be even worse.  The following are 12 signs that a day of reckoning has arrived for the U.S. auto industry…

#1 Seven out of the eight largest automakers in the United States fell short of their sales projections in March.

#2 Overall, U.S. auto sales so far in 2017 have been described as a “disaster” despite record spending on consumer incentives by automakers.

#3 Dealer inventories are now at the highest level that we have seen since the last financial crisis.  Why this is so troubling is because there are a whole lot of unsold vehicles just sitting there doing nothing, and this is becoming a major financial problem for many dealers.

#4 It now takes an average of 74 days before a dealer is able to sell a new vehicle.  This number is also the highest that it has been since the last financial crisis.

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April 3, 2017

What Is America Going To Look Like When Stocks, Home Prices And Even Used Cars All Crash By At Least 50 Percent?

Have you ever thought about what comes after the bubble?  In 2008 we got a short preview of what life will be like, but most Americans seem to have come to the conclusion that the last financial crisis was just a minor bump in the road toward endless economic prosperity.  But of course the truth is that the ridiculously high debt-fueled standard of living that we are enjoying now is not sustainable, and after this bubble bursts it will be an extremely painful adjustment for our society.

Since the last financial crisis, the U.S. national debt has nearly doubled, corporate debt has doubled, stock valuations have reached exceedingly ridiculous extremes, the student loan debt bubble has surpassed a trillion dollars, we are facing the largest unfunded pension crisis in U.S. history, and in many parts of the country (particularly the west coast) we are facing a housing bubble that is even worse than the one that burst in 2007 and 2008.

And even with all of these bubbles, U.S. GDP growth has been absolutely anemic.  Even if you believe the grossly manipulated numbers that the federal government puts out, the U.S. economy grew at a “miserably low” rate of just 1.6 percent in 2016…

In terms of GDP, the fourth quarter was revised up slightly, but there were adjustments for prior quarters, and overall GDP growth for the year 2016 remained at a miserably low 1.6%. We’ve come to call this the “stall speed.” It’s difficult for the US economy to stay aloft at this slow speed. As Q4 gutted any hopes for a strong finish, GDP growth in 2016 matched the worst year since the Great Recession.

And corporate profits, despite a stock market that has been surging for years, are even worse. A lot worse. They’ve declined for years. In fact, they declined for years during the prior two stock market bubbles, the dotcom bubble and the pre-Financial-Crisis bubble. Both ended in crashes.

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March 31, 2017

The Ticking Time Bomb That Will Wipe Out Virtually Every Pension Fund In America

Are millions of Americans about to see the big, juicy pensions that they were counting on to fund their golden years go up in flames in the biggest financial disaster in U.S. history? When Bloomberg published an editorial entitled “Pension Crisis Too Big for Markets to Ignore“, it simply confirmed what a lot of people already knew to be true.  Pension funds all over America are woefully underfunded, and they have been pouring mind boggling amounts of money into very risky investments such as Internet stocks and commercial mortgages.  Just like with subprime mortgages in 2008, this is a crisis that everyone can see coming well in advance, and yet nothing is being done about it.

On a day to day basis, Americans generally don’t think very much about pensions.  Most of those that have been promised pensions simply have faith that they will be there when they need them.

Unfortunately, the truth is that pension plans all over the country are severely underfunded, and this has already resulted in local fiascos such as the one that we just witnessed in Dallas.

But what happened in Dallas is just the very small tip of a very large iceberg.  According to Bloomberg, unfunded pension obligations on a national basis “have risen to $1.9 trillion from $292 billion since 2007″…

As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.

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March 30, 2017

You Know It's A Global Debt Bubble When...

With analysts noting that markets are "taking the Fed's tightening policy in their stride," demand for emerging-markets debt is so strong that Bloomberg reports one of Asia's poorest nations is mulling a debut dollar-bond sale... Papua New Guinea.

The southwest Pacific nation plans to raise $500 million in five-year bonds, central bank governor Loi Martin Bakani said Tuesday at the Credit Suisse Asian Investment Conference in Hong Kong. The country would join Mongolia among sub-investment grade issuers in 2017. Sales of high-yield bonds total almost $15 billion so far this year, according to data compiled by Bloomberg.

“There is strong appetite for frontier issues -- and markets have taken the Federal Reserve tightening policy in their stride,” Stuart Culverhouse, chief economist at Exotix Partners LLP in London, said by phone. Issuers in the single-B tier -- the second-highest in the junk rating scale -- have found yields “are not prohibitively high for their financing needs,” he said.

Papua New Guinea aims to woo buyers from Asia, Europe and the U.S. for its bond sale in the second half of the year. This isn’t the country’s first attempt, after it hired banks in 2013 for an issue of dollar-denominated securities that didn’t pan out, despite the same confidence from bankers...

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March 29, 2017

EURUSD, Bond Yields Tumble After ECB Walks Back Policy Shift: "Wary Of Upsetting Investors"

The Euro and European bond yields tumbled this morning after Reuters reported 'sources' saying the ECB is wary of fresh policy change (i.e. the expected quasi-tightening) before the June meeting, because it is worried about bond yield spikes.

Via Reuters:

European Central Bank policymakers are wary of making any new change to their policy message in April after small tweaks this month upset investors and raised the specter of a surge in borrowing costs for the bloc's indebted periphery.

One ECB source said the bank has been overinterpreted by markets at its March 9 meeting.

Taken aback when markets started to price in an interest rate hike early next year, policymakers are keen to reassure investors that their easy-money policy is far from ending, suggesting reluctance change message before June, six sources in and close to the Governing Council indicated.

While the current level of bond yields remains acceptable, a further increase would be problematic, particularly in places like Italy, Spain and Portugal, where debt payments are a major cost item and rising yields would curb spending and thwart growth.

With the euro zone economy on its best run in almost a decade and conservative policymakers# keen to start winding down stimulus, the ECB gave a small nod to improvement with a tweak of its guidance in early March, axing a reference to being ready to act with all available instruments.

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March 28, 2017

Leaving The EU's Customs Union Is The Only Logical Step For A Truly "Global Britain"

As UK Prime Minister Theresa May prepares to trigger the Article 50 EU exit mechanism on Wednesday, Open Europe has published a new report, entitled, ‘Nothing to declare: A plan for UK-EU trade outside the Customs Union.’

The study concludes that leaving the EU’s Customs Union is the only logical step for the UK to pursue an independent trade policy and achieve a truly ‘Global Britain’ outside the EU. Open Europe assesses different models of collaboration outside a customs union, and argues that the UK and the EU should aim for full cooperation on the practicalities and administration of customs as part of a comprehensive UK-EU free trade deal.

A dozen key points on customs

The UK should leave the EU’s Customs Union (EUCU). The UK Government has stated its intention to leave key parts of EUCU (the Common External Tariff and the Common Commercial Policy). Open Europe’s assessment is that leaving these and EUCU overall is correct. Brexit means the UK must be able to shape its own trade policy. It can only do so outside of EUCU.

The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds. The UK should leave EUCU entirely to maximise opportunities. Prime Minister Theresa May has suggested that she is open to being an “associate member” of EUCU or remaining a signatory to elements of it. Open Europe believes that, while it is sensible to keep an open mind, no ‘half-in’ option is better than being fully out. Nonetheless, the UK should consider retaining membership of some relevant conventions.

It is in both the UK’s and EU’s interest quickly to secure full cooperation on the practicalities and administration of customs as part of a comprehensive Free Trade Agreement (FTA). Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs facilitation agreement. The EU already has agreements on customs facilitation with non-members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the continuation of tariff-free UK-EU trade and minimise customs delays.

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March 27, 2017

Your Pension Will Be At The Center Of America's Next Financial Crisis

I’m not a fan of the “greed is good” mentality of Wall Street investment firms. But the next financial crisis that rocks America won’t be driven by bankers behaving badly. It will in fact be driven by pension funds that cannot pay out what they promised to retirees. According to one pension advocacy organization, nearly 1 million working and retired Americans are covered by pension plans at the risk of collapse.

The looming pension crisis is not limited by geography or economic focus. These including former public employees, such as members of South Carolina’s government pension plan, which covers roughly 550,000 people — one out of nine state residents — and is a staggering $24.1 billion in the red. These include former blue collar workers such as roughly 100,000 coal miners who face serious cuts in pension payments and health coverage thanks to a nearly $6 billion shortfall in the plan for the United Mine Workers of America. And when the bill comes due, we will all be in very big trouble.

It’s bad enough to consider the philosophical fallout here, with reneging on the promise of a pension and thus causing even more distrust of bankers and retirement planners. But I’m speaking about a cold, numbers-based perspective that causes a drag on many parts of the American economy. Consider the following.

According to a Bureau of Labor Statistics report from 2015, the average household income of someone older than age 75 is $34,097 and their average expenses exceed that slightly, at $34,382. It is not an exaggeration, then, to say that even a modest reduction in retirement income makes the typical budget of a 75-year-old unsustainable — even when the average budget is far from luxurious at current levels. This inflexibility is a hard financial reality of someone who is no longer able to work and is reliant on means other than labor to make ends meet.

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March 24, 2017

Ford Warns "Used Car Prices Will Drop For Years"

Earlier this morning we noted Ford's "CFO Let's Chat" meeting with analysts before which Ford announced weak 1Q adj. EPS guidance of 30c-35c, coming in well below analyst estimates of 47c, which they blamed on higher costs, lower volume & unfavorable exchange rates. 

With the call now concluded, here are a couple of the key takeaways:

First, the bad...

Volumes will start to fall off this year, next year
Used car prices will drop for several years
European profit will fall this year
China sales down sharply in 1Q
India more difficult than expected
All options on table including traditional restructuring

...and the good-ish...

Favorable market factors offsetting higher commodity prices
Inventory levels “in very good shape”
Sedans play diminishing role in U.S. business; SUVs, trucks make up 73% of U.S. business
Not seeing anything to suggest economy will “tip over”

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March 23, 2017

China 'Shadow Banks' Crushed As Liquidity Costs Hit Record High

During the so-called Chinese Banking Liquidity Crisis of 2013, the relative cost of funds for non-bank institutions spiked to 100bps. So, the fact that the 'shadow banking' liquidity premium has exploded to almost 250 points - by far a record - in the last few days should indicate just how stressed Chinese money markets are.

While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks, according to data compiled by Bloomberg.

The premium is reflected in the gap between China’s seven-day repurchase rate fixing and the weighted average rate, which, by Bloomberg notes, widened to as much as 2.47 percentage points on Wednesday after some small lenders were said to miss payments in the interbank market. Non-bank borrowers tend to have a greater influence on the fixing, while large banks have more sway over the weighted average.

"It’s more expensive and difficult for non-bank financial institutions to get funding in the market," said Becky Liu, Hong Kong-based head of China macro strategy at Standard Chartered Plc. “Bigger lenders who have access to regulatory funding are not lending much of the money out.”

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March 22, 2017

Have We Reached A Turning Point For Stocks? Tuesday Was The Worst Day For The Stock Market In 6 Months

The post-election stock market rally is officially over.  After hovering near record highs for the past couple of weeks, U.S. stocks had their worst day in six months on Tuesday.  For quite some time it has been clear that the momentum of the post-election rally had been exhausted, and a pullback of this nature was widely anticipated.  But even though stocks fell by more than 1 percent during a single trading session for the first time since last September, it is going to take a whole lot more than that to bring stock prices back into balance.  In fact, stocks are so overvalued at this point that it would take a total decline of about 40 to 50 percent before key stock valuation measures return to their long-term averages.

So we are still in a giant stock market bubble.  All Tuesday did was shave about one percent off of that bubble.

Let’s review some of the numbers from the carnage that we witnessed…

-The Dow was down 237.85 points (1.14 percent)

-The S&P 500 was down 1.2 percent on the day

-The Nasdaq was down 1.8 percent at the closing bell

-Financial stocks were down more than 2.5 percent

-Overall, it was the worst day for banking stocks since the Brexit vote

-Bank of America is now down more than 10 percent since Trump’s speech to Congress

-The Russell 2000 (small-cap stocks) dropped about 2 percent

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March 21, 2017

US "Too Big To Fail" Banks Top $1 Trillion - What Happens Next?

For the first time ever, the market cap of America's "Big Four" banks topped $1 trillion having surged 30% since Donald Trump was elected president. While to some this is cause for celebration, we note that the last time a nation's "big four" banks topped $1 trillion in market cap did not end well...

As Bloomberg notes, the four biggest U.S. banks were worth the most on record versus China's "Big Four" this month, as JPMorgan, Wells Fargo, Bank of America, and Citigroup were worth over $250 billion more than Industrial & Commercial Bank, China Construction Bank, Bank of China, and Agricultural Bank of China combined.

The four Chinese banks, the world's most profitable, were worth about the same as the U.S. foursome as recently as June.

However, as the chart above shows, while the American quartet's combined market value closed above $1 trillion for the first time last month, China achieved that goals in June 2015... and it did not end well.

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March 20, 2017

EU Taxpayers Brace As Deepening Banking Crisis Means Euro-TARP Looms

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution

Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.

The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.

On a country-by-country basis, things look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:

Ireland: 15.8%
Italy: 16.6%
Portugal: 19.2%
Slovenia: 19.7%
Greece: 46.6%
Cyprus: 49%

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March 17, 2017

"This Is Not The Reaction The Fed Wanted": Goldman Warns Yellen Has Lost Control Of The Market

With stocks soaring briskly around the globe following Yellen's "dovish" hike, and futures set for a sharply higher open with the Nasdaq approaching 6,000, something surprising caught our attention: in a note by Goldman's Jan Hatzius, the chief economist warns that the market is overinterpreting the Fed's statement, and Yellen's presser, and cautions that it was not meant to be the "dovish surprise" the market took it to be.

Specifically, he says that while the FOMC delivered the expected 25bp hike, with only minor changes to its projections. "surprisingly, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices."

Even more surprisng is that according to Goldman, its financial conditions index, "eased sharply, by the equivalent of almost one full cut in the federal funds rate."

In other words, the Fed's 0.25% rate hike had the same effect as a 0.25% race cut!

The implication from the market's reaction is that at current levels, financial conditions are poised to make a substantial positive contribution to growth in 2017, from a starting point of essentially full employment, inflation close to the target, and a sub-1% funds rate; which in light of concerns about an economic overheating due to Trump's fiscal policies is precisely the opposite of what Yellen wants. Hatzius warns that "the FOMC will lean against this, and will deliver more monetary tightening than discounted in the bond market."

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March 16, 2017

12 Reasons Why The Federal Reserve May Have Just Made The Biggest Economic Mistake Since The Last Financial Crisis

Has the Federal Reserve gone completely insane?  On Wednesday, the Fed raised interest rates for the second time in three months, and it signaled that more rate hikes are coming in the months ahead.  When the Federal Reserve lowers interest rates, it becomes less expensive to borrow money and that tends to stimulate more economic activity.  But when the Federal Reserve raises rates , that makes it more expensive to borrow money and that tends to slow down economic activity.  So why in the world is the Fed raising rates when the U.S. economy is already showing signs of slowing down dramatically?  The following are 12 reasons why the Federal Reserve may have just made the biggest economic mistake since the last financial crisis…

#1 Just hours before the Fed announced this rate hike, the Federal Reserve Bank of Atlanta’s projection for U.S. GDP growth in the first quarter fell to just 0.9 percent.  If that projection turns out to be accurate, this will be the weakest quarter of economic growth during which rates were hiked in 37 years.

#2 The flow of credit is more critical to our economy than ever before, and higher rates will mean higher interest payments on adjustable rate mortgages, auto loans and credit card debt.  Needless to say, this is going to slow the economy down substantially

The Federal Reserve decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.

Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike, says Greg McBride, chief analyst at Bankrate.com. He says it’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016.

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March 15, 2017

New Oil Price War Looms As The OPEC Deal Falls Short

Last November, OPEC orchestrated an impressive feat: corralling all (or nearly all) of its members to sign on to relatively aggressive production cut deal, and then actually convincing everyone to follow through on those reductions beginning in January. OPEC’s estimated 94 percent compliance rate defied the cartel’s own history of cheating and mistrust, and OPEC has taken around 1 million barrels of oil production per day off the market.

They were initially rewarded for this. Oil prices rallied more than 20 percent in the month after the deal was announced and investors and analysts have been mostly bullish on crude prices ever since. But the cuts were not all that they seemed to be for two reasons: OPEC cut from record highs and countries exempted from the deal ramped up oil production in the fourth quarter of 2016, offsetting much of the reductions.

Member countries (excluding Indonesia, which is no longer a member) produced about 32.5 million barrels per day (mb/d) in August. That was the last month before the September Algiers accord, which was basically an agreement to agree to cuts at a later date.

By January, after nearly 90 percent of the 1.2 mb/d of cuts were implemented – or reductions of about 1.1 mb/d – the group still produced a relatively high 32.14 mb/d.

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March 14, 2017

How The Federal Reserve Is Setting Up Trump For A Recession, A Housing Crisis And A Stock Market Crash

Most Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump.  Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed.  For an extended analysis of this point, please see this article.  In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.

On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes

Economists generally believe the central bank’s median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But there’s some risk that gets pushed to four as inflation nears the Fed’s annual 2% target and business confidence keeps juicing markets in anticipation of President Trump’s plan to cut taxes and regulations.

During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy.  In a recent article, Gail Tverberg explained how this works…

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March 13, 2017

$21,714 For Every Man, Woman And Child In The World – This Global Debt Bomb Is Ready To Explode

According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars.  Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number.  If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.

So if you have a family of four, your family’s share of the global debt load would be $86,856.

Very few families could write a check for that amount today, and we also must remember that we live in some of the wealthiest areas on the globe.  Considering the fact that more than 3 billion people around the world live on two dollars a day or less, the truth is that about half the planet would not be capable of contributing toward the repayment of our 152 trillion dollar debt at all.  So they should probably be excluded from these calculations entirely, and that would mean that your family’s share of the debt would ultimately be far, far higher.

Of course global debt repayment will never actually be apportioned by family.  The reason why I am sharing this example is to show you that it is literally impossible for all of this debt to ever be repaid.

We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.

Bill Gross, one of the most highly respected financial minds on the entire planet, recently observed that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.

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March 10, 2017

"It Can Only Disappoint" - What Wall Street Expects From Friday's Payrolls Report

Following Wednesday's blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow's nonfarm payroll report, the last major economic data point before the Fed's March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street's forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing - think less than 100K - report will derail the Fed from hiking for the second time in three meetings.

Here are some of the more notable forecasts for tomorrow's number::

Westpac 170K
Bank of America 185K
BNP 185K
Barclays 200K
Deutsche Bank 200K
Goldman Sachs 215K
Nomura 235K
Morgan Stanley 250K

Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:

Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)
Unemployment Rate Exp. 4.70% (Prey. 4.80%, Dec. 4.70%)
Average Hourly Earnings M/M Exp. 0.30% (Prey. 0.10%, Dec. 0.20%)

Consensus calls for an increase of 193K jobs in February, with the unemployment rate falling to 4.7% from 4.8%. Much of the focus could be on average hourly earnings for signs of inflationary pressure. Last month, average hourly earnings disappointed with Y/Y wage growth slowing to 2.5% from 2.9%. This month, average hourly earnings are expected to pick up to 2.7% Y/Y with monthly growth of 0.3%.

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