Wednesday, May 4, 2016

Today's Links

1--Bill Gross: Fed should 'drop the money from helicopters'

"Helicopter money" is an idea made popular by the American economist Milton Friedman in 1969, when he suggested that dropping money out of helicopters for citizens to pick up was a sure way to restart the economy and effectively fight deflation. ...

Such a move would allow governments to focus on infrastructure, health care, and introduce a "universal basic income" for displaced workers amongst other increasing needs.

Overall, Gross said the renewed QE from the Fed would lead to a less independent central bank, and a more permanent mingling of fiscal and monetary policy that has been in effect for over six years now.

"Chair (Janet) Yellen and others will be disheartened by this change in culture," he said.

Gross said interest rates will stay low for longer, asset prices will continue to be artificially high, and at some point monetary policy will create inflation and markets will be at risk. He also said investors should be content with low single-digit returns

2--It’s Not About Bernie: Why We Can’t Let Our Revolution Die in Philadelphia

To endorse Hillary, even with a more progressive platform, would be the opposite of political revolution and would abandon all the vital energy and momentum we have built over this historic past year....

We simply can’t afford to make this mistake. That’s why I have launched a petition calling on Bernie Sanders to run all the way to November as an independent, and to use his campaign as a launch pad for a new political party of the 99%....

The Clintonian era which began under Bill Clinton in the 1990s was marked by the Democratic Party’s open advocacy and implementation of neoliberalism, as a continuation of the “trickle down” ideas of Ronald Reagan and George H.W. Bush. The Clinton administration passed devastating policies like NAFTA, with its brutal effects on workers and the environment; the 1994 crime bill with its dramatic expansion of incarceration; and the destruction of welfare with its inhuman effects on the poor and particularly single mothers. Such laws were part of an overall agenda of attacks on social services and on the interests of the working class and people of color. Bill and Hillary Clinton were political partners in that process, as they are political partners in Hillary’s election campaign today....

As a U.S. Senator, Clinton voted for the Iraq War, the Patriot Act, the Patriot Act re-authorization, for new “free trade” deals (including the 2008 Panama agreement which helped perfect it as a tax haven), for bank deregulation, the Wall Street bailouts (TARP), the 2006 border fence legislation, and the list goes on. As Secretary of State she was perhaps the administration’s most aggressive proponent for interventions in Libya and Syria that fueled the humanitarian crisis in the region. She acted as a global spokesperson for fracking, and in spite of considerable pressure from Sanders has not backed down from this environmentally devastating practice....

FDR originally ran for the presidency on a message of fiscal austerity, and his tune only changed due to the deepening of the economic crisis and the militant movement of labor activists and socialists that erupted on his watch. In fact, he defended his policies to business people as necessary concessions to mass movements, saying: “I’m the best friend American capitalism ever had.”

3--The Hazards of Financial Engineering

Is the entire stock market engaged in unsustainable financial engineering in an effort to satisfy shareholders? Put another way: We know the market is engaged in large-scale financial engineering in the form of a huge ramp-up of leverage. Is it sustainable?

The virtuous circle of cheap financing for takeovers leading to higher valuations leading to cheap financing works only as long as they keep doing deals. Valeant’s market value is down $78 billion from its peak, about the same in today’s money as the total lost by shareholders of Enron...

But yesterday’s financial engineering often becomes widely accepted. In the case of the engineering behind today’s high stock-market valuations, it goes further: Borrowing to buy back shares is widely welcomed.

The biggest 1,500 nonfinancial companies in the U.S. increased their net debt by $409 billion in the year to the end of March, according to Société Générale, using almost all—$388 billion—to buy their own shares, net of newly issued stock. Companies have become far and away the biggest customer for their own shares....

As corporate profitability slows, the obvious worry is that this debt will lead shareholders to disaster. Total corporate debt is close to the proportion of the economy hit during the debt-fueled bubble that ended in the 2008 collapse of Lehman Brothers.

According to David Kostin, a strategist at Goldman Sachs, the debt and equity of the median U.S. nonfinancial company is worth 11 times operating cash flow, higher than in 2007 and higher than at the peak of the dot-com bubble. ...

So not only do companies have a lot of debt, but shareholders love it. What could possibly go wrong?...

The case for concern is that this borrowed money wasn’t invested into productive projects that would boost earnings in the future and so pay off the debt, but instead was used to buy back shares. Corporate investment has picked up recently, but overall buybacks are being funded from borrowing, as Andrew Lapthorne, a strategist at Société Générale, points out.

This creates three risks. First, rising interest rates for corporate debt would have a much bigger impact on profits and shareholders than usual, and could lead to a wave of defaults, as the energy sector showed.

Second, more caution in the bond market, perhaps caused by recession, could make it hard for companies to roll over debt; again, the energy sector has been a painful demonstration of what happens to highly indebted companies when they lose access to credit.

Third, if companies themselves become more cautious, it could remove the biggest buyer of stocks from the market. Share buybacks have helped support prices and earnings per share even as profits have fallen back to mid-2012 levels.

If companies stop borrowing to finance buybacks, another generation of shareholders will discover the downside of financial engineering.

4--Anticipating another bailout? Fed’s Dudley Says Giving More Firms Access to Discount Window ‘Worth Exploring’ (getting around Dodd Frank)

Federal Reserve Bank of New York President William Dudley said the powers the central bank can use to step in and aid a faltering financial institution are still flawed, more than seven years after the crisis, and that allowing more firms access to the discount window “might be worth exploring.”...

One area he expects the group to focus on heavily, he added, is how those procedures would work in the event a failing firm had several units operating across international borders. In that case, the expectations of the domestic and host countries would need to be properly understood, he said....

(Blanket bailout provision for all?)

Now that the rules have made all major securities firms in the U.S. part of bank holding companies subject to routine capital and safety checks, Mr. Dudley said providing these firms with access to the discount window could be a worthwhile addition. Currently, the Fed’s discount window is only available to depository institutions, and the law hampers the ability of a bank to pass along discount window funding to its securities unit.

“To me, this is a more reasonable proposition now than it was prior to the crisis, when the major dealers weren’t subject to those safeguards,” he said.

5--Whistleblowing Is Not Just Leaking — It’s an Act of Political Resistance

6--Over Half of Americans Now Believe the Voting System Is Rigged

7--Markit and ISM add to the gloom

The report summarized it this way:

The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity. The survey indicates that factory output is dropping at an annualized rate of approximately 3%, and factory headcounts are being culled at a rate of around 10,000 per month.

Rather than reviving after a disappointingly weak first quarter, the data flow therefore appears to be worsening in the second quarter, raising question marks over whether GDP growth will improve on the near-stalling seen in the first three months of the year.”


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