Friday, October 31, 2014

Today's links

"The Fed courts a real danger of becoming, if it has not already become, the motor of a thoroughly corporatist political economy model for the United States, if not for the entire world." Walker Todd, former Fed staffer

1--Japan goes "all in", Reuters

U.S. stock index futures rallied on Friday after the Bank of Japan significantly ramped up its stimulus program just days after the U.S. Federal Reserve wound down its own package of economic incentives.

* The BOJ's board voted 5-4 to accelerate purchases of Japanese government bonds, increasing its holdings at an annual pace of 80 trillion yen ($723.4 billion), while tripling its purchases of exchange-traded funds and real-estate investment trusts.
* At the same time, Japan's $1.2 trillion Government Pension Investment Fund announced new allocations for its portfolio, including raising its holdings of domestic and foreign stock holdings to 25 percent each from 12 percent

2--Markets soar on uber-QE, zero hedge  (Nikkei Futures Halted Limit Up (+1100) As USDJPY Tops 112) trading halted on gov free money surge

You know the world's financial markets have become farce when the broad Nikkei 225 stock market of Japan rises 1000 points in 7 hours... The meme that stock 'markets' move on fundamentals not central bank liquidity is officially dead. Let that sink in for a moment...

Chart: Bloomberg

3---Consumer Spending Tumbles At Fastest Rate Since October 2009, zero hedge

Goodbye GDP hopes... Consumer Spending tumbled 0.2% against expectations of growing 0.1%, dropping at the fastest pace since October 2009. This is the biggest miss since Jan 2014 - in the middle of the PolarVortex... did it snow in October

4---Why that Economy of Ours Feels so Crummy , wolf street

Whether or not that annualized quarterly rate of 3.5% was a mirage – year over year, the economy grew by just 2.3%.
A growth rate barely above 2% is exactly where the US economy has been for the last five years! Nothing has changed. For a recovery by US standards, it’s a very crummy growth rate, and far from the escape velocity that Wall Street hype artists have predicted for years in their justification for the ceaselessly skyrocketing stock market.

But it gets worse. The population in the US has been growing too. And the economic pie has to be divvied up among more people. So the pie has to grow faster than the population or else, on an individual basis, that growing overall economy, gets cut into smaller slices of the pie....

Before the financial crisis, real per-capita GDP peaked in Q4 2007. Then it fell 5.5% to bottom out in Q2 2009. Since then, it has been working its way back up. In 2013, it surpassed its pre-crisis peak. Now, it is up a measly 2.3% from where it was nearly seven years ago! And it remains far below the long-term trend (red line):
On this per-capita basis, the economy grew only 1.7% from Q3 last year. That’s less than half the annualized quarterly rate that has been bandied about all day.

5---Number of billionaires doubles since financial crisis, cnbc

The super-rich club has become less exclusive, with the amount of billionaires doubling since the financial crisis, according to a report from global charity Oxfam.
There were 1,645 billionaires globally as of March 2014, according to Forbes data cited in the Oxfam report, up from 793 in March 2009.
Oxfam honed in on this figure to highlight the growing gap between the world's rich and poor. Hundreds of millions of people live in abject poverty without healthcare or education, while the super-rich continue to amass levels of wealth they may never be able to spend

6---Japan plans to prop up markets with pension funds, Bloomberg

Japan’s Government Pension Investment Fund said it will put half its holdings in local and foreign stocks, double previous levels, and invest in alternative assets. The Bank of Japan raised its annual target for monetary expansion to 80 trillion yen ($724 billion) from as much as 70 trillion yen. The Topix index soared the most in a year, leading a rally in equities around the world.

7---Fed Needs to Stop Asset Acquisitions for a Generation or So, naked capitalism

As of mid-2014, the Fed had expanded its balance sheet by $3.483 trillion since August 2007 (375 percent), with nearly all of the increase occurring since the onset of the crisis in September 2008. However, nominal GDP expanded by only $2.850 trillion over the same period (19.3 percent). In other words, only 81.8 cents of new GDP were created for every dollar of Fed-Treasury money printing, an exercise of remarkable inefficiency considering that, for the eleven years before the crisis, 1997-2007, about $13.88 of new GDP were created for every new dollar of money printing. Money printing is an inefficient way of creating GDP, after the crisis, but it has proved to be an efficient way of creating asset price bubbles

if you make interest rates low enough, people will save less and spend more, and businesses will borrow and invest more because money is on sale.
In fact, what has happened is that many of those people who swapped bonds for cash went out and bought other financial assets, goosing stock prices, lowering yields on risky debt, and sending money sloshing into emerging economies. There appears to have been a modest amount of economic lift from that due to wealth effect among the rich. But big companies for the most part didn’t invest.

They borrowed cheaply and are holding wads of cash that they can use to keep propping up their stock prices. Similarly, banks haven’t done much small business lending, in part because institutionally many have exited that business, and smaller enterprises themselves haven’t been too keen to borrow because in most regions and sectors, the recovery isn’t all that robust....

In 2007, the year before the crisis, a Fed balance sheet of “only” $929 billion sufficed to promote strong growth in a $14.5 trillion economy (nominal GDP). The Fed’s balance sheet was only 6.3 percent of the entire economy. After countless interventions in the economy and a never-ending series of Quantitative Easings (econospeak for money-printing) since then, the Fed’s balance sheet is nearly five times larger, but the economy is only 19.3 percent larger. The Fed’s balance sheet is now 25.5 percent of GDP.

One supposes that it takes a lot more money to make the world go around these days, but the economic outcome is far smaller than one would have expected given the amount of monetary input. If the Fed has an econometric model showing how much GDP growth it expects from each new dollar of monetary input, it should disclose that model to Congress now, and if the outcomes are suboptimal or as demonstratively inefficient as I think they are, then Congress should make the Fed stop using that model to drive FOMC policy choices, if the Fed refuses to do so voluntarily.

The Fed courts a real danger of becoming, if it has not already become, the motor of a thoroughly corporatist political economy model for the United States, if not for the entire world. A central bank balance sheet equal to 25 to 50 percent of GDP was considered a hallmark of corporatism in developing economies that the World Bank was trying to reform in the post-1980 years....
“The Fed appears to have recognized that QE was largely a failed experiment …”
QE was a huge success for the owners of the Fed … trillions in liquidity, tens of billions in bank subsidies. There was no question that the Fed knew exactly how QE would work. Everyone has fallen for the myth that the Fed is just another stumbling, bumbling Federal Agency when in fact their corporate charter is bankster charter.


  1. Yves Smith Post author
    I have written repeatedly that the banks do not own the Fed. This sort of inaccurate statement allows critics to be dismissed. The OCC and Treasury are every bit as bank friendly by virtue of mere cognitive capture.

  2. The shares that member banks own are nonvoting preferred shares, with dividends of 6% of par value. All the critical decisions relative to the regional Fed banks, like the selection of presidents, are made by the Board of Governors, who are nominated by the President and approved by the Senate. The boards of the regional Feds are meme advisory boards, to have tea and cookies with the staff of that Fed and advise them of local economic conditions. They are a holdover from the days when there was no economic data to speak of.
    The Fed is a bizarre public-private hybrid. It is most assuredly NOT owned by banks
8---Buybacks Can Juice Per-Share Profit, Pad Executive Pay, WSJ
Share Repurchases, Running at Fastest Clip Since Recession, Likely to Accelerate Through Year-End

Buying earnings growth cuts both ways.

In the most recent quarter, one in four companies in the S&P 500 index is expected to have juiced its earnings per share by 4% or more by snapping up its own stock, according to S&P Dow Jones Indices. That is up from one in five at the beginning of the year.

Corporations have long bought their own shares as a way of returning excess cash to shareholders. Reducing the number of shares outstanding gives the remaining investors a larger stake in the company. Buybacks also are often a sign of a company’s confidence in its future.

The other side of the blade: Some shareholders and analysts are questioning why companies aren’t instead plowing more money back into their business, and they say that buybacks may serve the interests of top management more than those of average shareholders. ....

While the economy has crawled back to life, many businesses remain reluctant to buy new equipment, build factories or hire workers. They blame the uneven recovery that has left many Americans behind and foreign markets that are stumbling.
Repurchases, meanwhile, can boost a company’s curb appeal. Illinois Tool Works used buybacks to post an EPS surge of 33%, nearly twice the latest quarter’s bottom-line profit growth. Bed Bath & Beyond Inc. ’s stock purchases turned a 10% drop from a year earlier in overall profit into a penny improvement in EPS. The housewares retailer didn’t provide comment....

“If you’re cash rich, and you have no better place to put it,” she said. “We’re such a cash cow. The last thing we’re going to do is sit on cash. That is value-destroying to our shareholders.”...

Still, investors should expect a year-end spending spree. While about 8% of a year’s buybacks historically take place October, the peak is in November, with 14% of repurchases, and another 10% come in December, according to David Kostin, senior U.S. equity strategist at Goldman Sachs Group Inc.

9--MH17-Chief Investigator Investigates Possibility of Air-to-Air Missile, Seeks Cooperation From Russia Mish

10--Subprime redux; Auto finance probe, zero hedge

subpoenas received from the DOJ include a broad request for documentation and other information in connection with its investigations of potential fraud and other potential legal violations related to mortgage-backed securities, as well as the origination and/or underwriting of mortgage loans.

In addition, we recently received a document request from the SEC in connection with its investigation related to subprime automotive finance and related securitization activities.
And this comes on the heels of GM Financial's admission of Subprime Auto Loan Probes (via Bloomberg)
Investigations of the subprime auto finance business are spreading as General Motors Co. (GM) said its lending arm received additional subpoenas seeking details of its underwriting practices.

GM Financial, which specializes in loans to people with spotty credit, said in a regulatory filing yesterday that attorneys general of states it didn’t identify and other government offices are demanding documents related to its business of making car loans and pooling them into bonds that are sold to investors. The Detroit-based lender, along with Santander Consumer USA Holdings Inc., disclosed a similar probe by the U.S. Department of Justice in August.

The scrutiny is intensifying at the same time more borrowers are falling behind on their payments and sales of securities backed by the loans increase. Auto-finance firms that lend to people with bad credit lowered their standards amid increased competition as new entrants flooded the business to capitalize on cheap funding, according to Moody’s Investors Service

11--The Bank of Japan’s expansion of record stimulus today may see it buy every new bond the government issues, zh

The BOJ could end up owning half of the JGB market by as early as in 2018, according to Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. 

12---Falling yen signals trouble in China and US, zh

Edwards' bottom line: "If a clear break in the yen downwards against both the dollar and euro is occurring, not only will this spell trouble for the beleaguered Chinese economy and exacerbate deflation in the west, but it will also break the spell of German economic dominance."

13---Killing people is still good for the economy.; Economic Lessons Not Learned, NYT

In economic growth data released on Thursday, government spending saved the day – or the quarter, to be more precise. Economists had expected growth of 3 percent for July through September. The initial reading came in at 3.5 percent, a chunk of which was from a big increase in outlays for defense. Without that defense spending, growth would have been 2.8 percent, all else being equal, and instead of celebrating outperformance, there would be hand wringing over slowing growth.....

For all its quarterly ups and downs, overall growth in the past several years has slogged along at roughly 2 percent to 2.5 percent, too slow to foster broad prosperity. This year, so far, is no exception. It would take an improbably strong finish to 2014 to propel the economy out of that range.
If anything, the economy is showing less momentum as the year comes to a close. Economic growth contracted in the first quarter (-2.1 percent), bounced back in the second (4.6 percent) and then backed off again in the third, to 3.5 percent. Consumer spending was lackluster last quarter, and with wage growth weak, there is no reason to expect a surge. The drop in oil prices will allow some consumers to free up cash for holiday shopping, in the same way that mild summer weather allowed for less spending on electricity and more on summer fun. But that’s catching a break, not getting ahead.
In a healthy economy, most Americans would be getting ahead. By that simple yet comprehensive measure, the economy has not been healthy for a very long time. That means, in turn, that government has a rightful economic role to play, in the near term, through spending that makes up for the slack in consumption and investment. But that’s not happening, and so neither is broad prosperity

14---Inflation? Deflation Is New Risk, NYT

what has the Fed accomplished?
It has helped the economy, although not nearly to the extent that might have been hoped. Inflation, far from accelerating as some conservative economists forecast, has been running consistently below the Fed’s 2 percent target. The Fed’s preferred measure, the index of personal consumption expenditures, is up 1.5 percent over the last 12 months, both overall and excluding volatile food and energy prices. It has been more than two years since either measure was up as much as 2 percent....

The much discussed ratio of national debt to gross domestic product also suffers. Consider the 18 nations in the eurozone. Collectively, their national debts rose by 7.8 percent in 2012 and 2013, forcing up the debt-to-G.D.P. ratio by 5.2 percentage points. From 2004 to 2006, their debts rose nearly as rapidly, by 7.4 percent. But the debt-to-G.D.P. ratio actually fell by a percentage point. At the time, European economies were growing and inflation was also pushing up the nominal gross domestic product figures. Now there is little if any growth or inflation, and the result is to worsen the debt picture....

But the bond market is not so confident. The market inflation forecast can be estimated by calculating the inflation rate at which a purchase of a normal Treasury security would be no better or worse than the purchase of an inflation-protected Treasury security of the same maturity. At the end of last year, the 10-year inflation forecast was 2.2 percent; now it is 1.7 percent. The one-year forecast then was 1.5 percent; now it is a forecast of deflation, negative 0.75 percent..

15---Afghan opium poppy cultivation hits all-time high, Guardian

Farmers grew 209,000 hectares of opium poppy despite US spending $7.6bn on counter-narcotics efforts since 2001

16---Rolling the dice on pensions, WSJ

Japan’s $1.2 trillion public pension fund said Friday it plans to take more aggressive bets by slashing how much money it puts in domestic bonds and ramping up its investments in stocks.
The dramatic portfolio shift at the Government Pension Investment Fund is aimed at boosting the retirement incomes of the fund’s 67 million participants, but it runs counter to moves by other global pension funds to scale back holdings in risky assets. The move is part of Prime Minister Shinzo Abe ’s efforts to make Japan stocks more attractive and speed up the nation’s economic recovery

Under the new allocation guidelines, Japanese stocks and foreign stocks will each take up 25% of the fund’s holdings, up from 12% each previously. The fund intends to put 35% of its money in domestic bonds, down from 60%, while the ratio for overseas bonds will rise to 15% from 11%.
Global fund managers have been paying close attention to how the pension fund changes its strategy because of the potential for hundreds of billions of dollars to flow into markets inside and outside of the country. Even a one-percentage-point change to its portfolio could mean a shift of more than 1 trillion yen ($9 billion

17---Fannie, Freddie to take on more credit risk, HW

Proposals to lower the minimum down-payment on Fannie Mae and Freddie Mac-backed mortgages at the same time as reducing banks’ exposure to put-back risk may help accelerate the modest loosening in mortgage credit conditions that is in train.
But, notes Capital Economics in a client note, the changes will mean Fannie Mae and Freddie Mac take on substantially more credit risk, which will do nothing for the long- term aim of reducing their role in the provision of mortgage credit. ?

18---GDP not what it's cracked up to be, Dean Baker

 if we can look all the way back to the beginning of 2014 we see that the average growth for the first three quarters so far this year is just 2.0 percent, the same as the average for the prior three years. And, just to remind folks, we had a really bad recession back in 2008-2009. This has left us at a level of output way below the economy's potential. To make up the ground lost the economy has to be growing faster than its 2.2-2.4 percent potential growth rate. At the 2.0 percent growth rate we have seen so far in 2014, we are making up none of the lost ground...

The second point that should have featured prominently in all discussion of the GDP report is that the major drivers of growth in the quarter, net exports and military spending, will almost certainly not be adding to growth in the same way in future quarters and will most likely be in part reversed. In other words, the strong growth in these components is reason for believing future growth will be weaker, not stronger.
Net exports added 1.32 percentage points to growth in the quarter, while military spending added 0.66 percentage points. If the contribution of these sectors to growth had been zero, GDP growth would have been 1.5 percent rather than 3.5 percent.
In short, Mr. Arithmetic thinks the celebrations of third quarter GDP were premature. The economy is likely still on the slow growth path of the last three years. We'll see whether or not he is right when the fourth quarter data are released in January...

Since the U.S. economy and Chinese economy are now roughly equal in size, even if China's growth slows to 5 percent it will still be providing far more of a boost to the world economy than any plausible growth rate for the U.S. With the Chinese economy growing much larger than the U.S. economy over the next decade, the days of the U.S. economy as the primary engine of world growth are history.
The other point is that the piece wrongly touts the prospect of improved consumer confidence leading to a surge in consumer spending. The implication is that consumer spending has been depressed. That is not true. The saving rate out of disposable income was 5.5 percent in the third quarter. This is higher than the 2.5 percent rate at the peak of the housing bubble, but well below the 8.0 percent average for pre-bubble years. In other words, there is little reason to expect consumption spending to rise much relative to income, even if consumers are more confident.

19--​1,000 per month: US airstrikes fail to stem tide of foreign fighters, RT

20--TBTF war games results no known, RT

With their limitless resources, we can be sure central bankers at the BIS have thoroughly computer modeled and gamed out the bursting of history’s biggest ever debt bubble. The decisions these wizards of money make on that day could determine whether millions of us live or die.
That’s why we need to know exactly what was being gamed at the Federal Deposit Insurance Commission in Washington on Monday 13th October, because if past events are anything to go by the banksters will simply use the opportunity to bounce both politicians and public further into wage slavery and debt. Osborne's promise to share the results of that 'economic war game' has come to nothing as yet.

21--Can an economy in which the majority of households are "just getting by" experience robust growth, i.e. "recovery"?  zero hedge

Other stories reflect an enduring interest in the questions, what is a living wage?and what is a middle-class income? These questions express the anxiety that naturally arises from the sense that we're sliding downhill in terms of our purchasing power--a reality that is confirmed by this chart:

22--Yen Declines to 7-Year Low on BOJ Monetary Easing , Bloomberg

23---Dollar Hits 6-Year High Against Yen, wsjBank of Japan Easing Sends Yen Plummeting Against Most Currencies

24--The American dream is dead, polling report

Americans are more pessimistic about the future, Polling Report
According to a CNN/ORC Poll May 29-June 1, 2014:
"Do you agree or disagree? The American dream has become impossible for most people to achieve."
Agree: 59%
Disagree: 40%
Unsure: 1%
According to a NBC News/Wall Street Journal Poll conducted by the polling organizations of Peter Hart (D) and Bill McInturff (R). April 23-27, 2014
"Do you agree or disagree with the following statement? Because of the widening gap between the incomes of the wealthy and everyone else, America is no longer a country where everyone, regardless of their background, has an opportunity to get ahead and move up to a better standard of living."
Agree: 54%
Disagree: 43%
Mixed: 2%
Unsure: 1%
Also, according to a CBS News Poll. Jan. 17-21, 2014. N=1,018 adults nationwide.
"Looking to the future, do you think most children in this country will grow up to be better off or worse off than their parents?"
Better off: 34%
Worse off: 63%
Same: 2%
Unsure: 1%

25---American Household Credit Card Debt Statistics: 2014, nerdwallet

Current as of September 2014

U.S. household consumer debt profile:
  • Average credit card debt: $15,607
  • Average mortgage debt: $153,500
  • Average student loan debt: $32,656
In total, American consumers owe:
  • $11.63 trillion in debt
    • An increase of 3.8% from last year
  • $880.5 billion in credit card debt
  • $8.07 trillion in mortgages
  • $1,120.3 billion in student loans
    • An increase of 11.5% from last year

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