TRUMP vs. JOHN LEWIS -- FIRST IN PLAYBOOK: BUTTIGIEG’s D.N.C. platform -- TRUMP talks Russia, China with WSJ -- SESSIONS’ Democrat problem -- SPOTTED AT SEAN SPICER's party -- B’DAY: Susan Glasser
Good Saturday morning. Six days until President Donald Trump.A NOTE TO TRUMP TOWER -- REP. JOHN LEWIS (D-GA.) told NBC’s Chuck Todd that he didn’t believe Donald Trump is a legitimate president. It’s the kind of criticism that we hadn’t heard from many high-level Democrats, so it’s significant. Earlier this month he said he wouldn’t attend the inaugural. Most Republicans would probably advise Trump to let this fight go. There are some people in Washington who command respect from both sides of the aisle. Lewis is one of those people. He’s a civil rights icon who has spent nights in jail fighting for equality. He has spent 30 years serving in the House. Republicans and Democrats flock to be associated with him. In other words, if you hit back at Lewis, you won’t get a ton of backup from Republicans -- at least the ones who matter. That doesn’t mean he is immune to criticism. It just means you won’t get a lot of support if you go there.-- HERE’S HOW SOME REPUBLICANS HANDLED IT: Sen. Roy Blunt (R-Mo.) in Trump Tower after meeting with Donald Trump: “I think it’s interesting that people that were so concerned before Mr. Trump won about whether the election results would be accepted no longer are nearly as interested in that. But John Lewis is a great man, he’s a friend of mine. He has to make his own decisions. The idea of constantly looking for ways to delegitimize the results of an election no matter how unhappy you are about it isn’t the best example we set. The best example we set is understanding that there’s a Democratic process that you go through, there is a unique process in our country where states still matter, and Mr. Trump won that election handily.” Sen. Ben Sasse (R-Neb.) on Twitter (@BenSasse): “To John Lewis, one of my heroes: Please come to the Inauguration. It isn’t about a man. It is a celebration of peaceful transfer of power.”-- HOW DONALD TRUMP HANDLED IT: @realDonaldTrump at 7:50 a.m.: “Congressman John Lewis should spend more time on fixing and helping his district, which is in horrible shape and falling apart (not to......mention crime infested) rather than falsely complaining about the election results. All talk, talk, talk - no action or results. Sad!”WELL … Say what you want about Lewis, but “all talk, talk, talk -- no action or results” isn’t the way most people would describe a guy who bled and was jailed in the struggle for civil rights. Also, his district isn’t really falling apart. He has represented the tony Buckhead section of Atlanta for years -- he now splits it with another lawmaker -- and he represents Emory University and some of the city’s most rapidly gentrifying neighborhoods.FOR PEOTUS -- JOHN BRESNAHAN has a list of Democrats skipping the inauguration: Democratic Reps. Barbara Lee (Calif.), Lewis, Katherine Clark (Mass.), Lacy Clay (Mo.), Raul Grijalva (Ariz.), Luis Gutierrez (Ill.), Jose Serrano (N.Y.), Nydia Velazquez (N.Y.), Kurt Schrader (Ore.), Earl Blumenauer (Ore.) and Jared Huffman (Calif.).NOTE: Most of these people represent super-liberal urban areas like Chicago, the Bronx, the East Bay in California. Not much political pressure for these folks to show up to witness the transfer of power.FWIW -- TRUMP will be in Washington at least part of the day Monday, which is Martin Luther King, Jr. Day, per a pool report.TRANSFER OF POWER ALERT -- The Obama White House and incoming Trump administration had a “transition exercise yesterday.” “The exercise provided a high-level perspective on a series of challenges that the next administration may face and introduced the key authorities, policies, capabilities, and structures that are currently in place to respond to major domestic incidents.” List of participants http://politi.co/2jIXNHqTRUMP TALKS -- “Trump Open to Shift on Russia Sanctions, ‘One China’ Policy: President-elect signals he would use any available leverage to realign U.S. relationship with its two biggest rivals,” by WSJ’s Peter Nicholas, Paul Beckett and Jerry Seib: “President-elect Donald Trump suggested he would be open to lifting sanctions on Russia and wasn’t committed to a longstanding agreement with China over Taiwan -- two signs that he would use any available leverage to realign the U.S.’s relationship with its two biggest global strategic rivals. In an hourlong interview, Mr. Trump said that, ‘at least for a period of time,’ he would keep intact sanctions against Russia imposed by the Obama administration in late December in response to Moscow’s alleged cyberattacks to influence November’s election. But he suggested he might do away with those penalties if Russia proved helpful in battling terrorists and reaching other goals important to the U.S. ‘If you get along and if Russia is really helping us, why would anybody have sanctions if somebody’s doing some really great things?’ he said. He also said he wouldn’t commit to America’s agreement with China that Taiwan wasn’t to be recognized diplomatically, a policy known as ‘One China,’ until he saw what he considered progress from Beijing in its currency and trade practices.” http://on.wsj.com/2jJ0LfiBATTLE FOR THE FUTURE OF THE DEMOCRATIC PARTY -- FIRST IN PLAYBOOK -- PETE BUTTIGIEG, the mayor of South Bend, Indiana, who is mounting a campaign for chairman of the Democratic National Committee, released a comprehensive platform, which is going to members of the DNC this morning. (The party is gathered in Phoenix for the “DNC Future Forum.”) Buttigieg is promising to visit all states and territories in his first year as chairman. Also, nodding to some of the uproar in 2016, he is vowing “fairness and neutrality.” He says he’ll create an “independent presidential primary debate commission,” because Democrats “can’t afford another debate over debates, or anything else that threatens confidence in the fairness and neutrality of the Presidential primary debate process.” The platform http://bit.ly/2jinCl7-- Fox News analyst [Jehmu Greene] jumps into DNC chair race,” by Daniel Strauss: http://politi.co/2ir695ESCOOP ... SESSIONS’ DEMOCRAT PROBLEM -- “Red-state Democrats turn against Sessions for AG,” by Seung Min Kim: “Red-state Senate Democrats, under political pressure to back Jeff Sessions for attorney general, are rebelling against his nomination to be the nation’s top law enforcement official by citing his opposition to a 2013 domestic violence law that overwhelmingly passed Congress four years ago. Sessions’ issues with the law, the Violence Against Women Act, may be an insurmountable hurdle for a trio of moderate Democratic senators – Heidi Heitkamp of North Dakota, Claire McCaskill of Missouri and Jon Tester of Montana – whom pro-Sessions forces have targeted so one of Donald Trump’s most high-profile Cabinet picks can head to the Justice Department with some bipartisan cover.” http://politi.co/2jjnMs9DEPT. OF CONGRESSIONAL RELATIONS -- “How Cruz and Trump learned to like each other,” by Eliana Johnson: “Ted Cruz met with Donald Trump exactly one week after Election Day. As it turned out, Cruz’s tete-a-tete with the president-elect he had spurned from the stage of the Republican National Convention just months before wasn’t the most consequential meeting he would have that day. After his talk with Trump, the Texas senator and his chief of staff, David Polyansky, then sat down with his chief strategist, Stephen Bannon, who sounded him out about his interest in filling the Supreme Court vacancy created by the late Antonin Scalia. Cruz — widely considered one of the best Supreme Court litigators of his generation — swatted down the idea, according to four people to whom he has relayed the conversation.“Handing Cruz a lifetime appointment to the high court would have been a political masterstroke. It would have simultaneously eliminated Trump’s chief adversary within the Republican Party and elated conservatives. That may not happen, but the conversations Cruz had that day with Trump and several of his aides touched off a congenial and cooperative relationship between the onetime rivals. Though Cruz may have been one of Trump’s most vocal critics during the campaign, as Inauguration Day nears, he has become perhaps the president-elect’s most important — and most unexpected — ally in the Senate.” http://politi.co/2jPTn5OEYEBROW-RAISER -- “Trump adviser had five calls with Russian envoy on day of sanctions: sources,” by Reuters’ Jonathan Landay and Arshad Mohammed: “Michael Flynn, President-elect Donald Trump’s choice for national security adviser, held five phone calls with Russia's ambassador to Washington on the day the United States retaliated for Moscow's interference in the U.S. presidential election ... The calls occurred between the time the Russian embassy was told about U.S. sanctions and the announcement by Russian President Vladimir Putin that he had decided against reprisals ... The calls raised fresh questions among some U.S. officials about contacts between Trump’s advisers and Russian officials.” http://reut.rs/2jaZDlo--“Intelligence Committee will investigate possible Russia-Trump links: The Senate panel could use subpoenas to secure testimony from Obama officials and the Trump team,” by Elana Schor: “Senate Intelligence Chairman Richard Burr (R-N.C.) said late Friday that his committee will investigate possible contacts between Donald Trump’s campaign and Russia, reversing himself one day after telling reporters that the issue would be outside of his panel’s ongoing probe into Moscow’s election-disruption efforts.” http://politi.co/2jPMZeHDATA DU JOUR -- “Trump’s Cabinet So Far Is More White and Male Than Any First Cabinet Since Reagan’s,” by NYT’s Jasmine C. Lee: “If Mr. Trump’s nominees are confirmed, women and nonwhites will hold five of 21 cabinet or cabinet-level positions. ... Those five members will also be in some of the lowest-ranking positions. None of them are in the so-called inner cabinet, the four positions in place since George Washington’s presidency: the attorney general and the secretaries of state, Treasury and defense (formerly called the secretary of war).” http://nyti.ms/2jaZuP5OBAMA to LESTER HOLT -- “My spirit is unchanged”: http://nbcnews.to/2jjqQEAJOSH KUSHNER PROFILE – “Brother of Jared Kushner Is Thrust Into the Spotlight,” by NYT’s Katie Benner: “While the brothers are known by friends and colleagues as ambitious workaholics with ties to power brokers on both coasts, in many ways their paths have diverged. Jared Kushner has emerged as an increasingly public figure since becoming the face of the family’s real estate firm, Kushner Companies, and buying the publisher Observer Media. ... But Joshua Kushner has maintained a lower profile. While he has dated the model Karlie Kloss for four years, he is rarely seen out with her. He does not party or drink. Unlike most venture capitalists, Mr. Kushner also does not blog, and he posts to Twitter infrequently. ... At Harvard, Mr. Kushner roomed with Alexander Blankfein, the son of the chief executive of Goldman Sachs, Lloyd Blankfein.” http://nyti.ms/2inMjNeLEON PANETTA was interviewed by David Westin on Bloomberg Technology: “We have never had a situation where a president-elect tweets out questions about the integrity of this kind of intelligence information. That’s unheard of and very frankly I think it’s damaging to the credibility of that information, it’s damaging to the morale of the people who do that work in the intelligence agencies and I think it invites our enemies to take advantage of it. I hope that he can move away from that and try and deal with whatever concerns he has in the confines of the Oval Office.” http://bloom.bg/2jieEnOINAUGURATION WEEK unofficially kicked off last night with a party honoring Sean Spicer at the American Trucking Association. SPOTTED: California Rep. Darrell Issa, Frank Coleman, Juleanna Glover, Kristen Fedewa, Sue Hensley, Rebecca Spicer, Vanessa Morrone, Mike Ambrosini, Kevin Cirilli, Katherine Faulders, Jeff Solsby, Major Garrett, Craig Gordon, David Jackson, Ron and Sara Bonjean, Craig Purser, Kate Bennett, Hunter Schwartz, Benny Johnson, Sam Feist, Jeff Mason, Will Kinzel, Dena Battle, Dana Harris, Emily Miller, Shannon Flaherty McGahn, Brian Walsh and Zeke Miller.SPEAKING OF INAUGURATION -- “Democrats plot their D.C. departures for Trump inauguration,” by Daniel Lippman: “Many prominent Democrats and Republicans who opposed Donald Trump are fleeing Washington for the inauguration, heading far from the capital to plot anti-Trump strategy or simply avoid the pain of witnessing inauguration celebrations … [DNC interim chair] Donna Brazile ... is spending Martin Luther King Jr. Day with students of St. Anselm College in Manchester, New Hampshire, before jetting off to Paris for a conference. … Robert Raben ... is heading to the Sundance film festival in Park City, Utah. ... Doug Thornell is heading to his favorite city of New Orleans to celebrate the 40th birthday party of some close friends. ... Adrienne Elrod, the Clinton campaign’s former director of strategic communications ... said some of her campaign friends are going to places like Europe or the beach to avoid seeing Trump get inaugurated.” With cameos by Neera Tanden, Stephanie Cutter, Hilary Rosen, Ron Klain, Jack Quinn, Katie Packer, Tony Fratto: http://politi.co/2jihUzQ GREAT READ -- ANNIE KARNI on “The Man Who Became Donald Trump”: “The code name for the operation was ‘Royal Water,’ English for the Latin-named ‘Aqua Regia’ acid, which is powerful enough to dissolve gold. That was how the small group of Hillary Clinton aides clued in to the top-secret identity of the man who played Donald Trump in debate preparations referred to him and his small team. And for Philippe Reines—the colorful and famously combative longtime Clinton confidant who stepped into the role of Trump opposite his old boss in tense and testing mock sessions—it was the name of the project that drove him deep into Trump’s mind for three of the most bizarre months of his life.” http://politi.co/2irghv7THE INAUGURATION – “Donald Trump Declines to Issue Inaugural License Plates. Sad!” by WSJ’s Reid J. Epstein: “On Jan. 20, Mr. Trump will become America’s first president since Herbert Hoover to decline to produce special license plates for the vehicles in his inauguration parade, a change that has unnerved collectors who have spent decades trying to acquire a complete set. The 45th president is instead expected to travel from the Capitol to the White House in an armored Cadillac limousine with the same District of Columbia plates in use now.” With a Ryan Williams cameo http://on.wsj.com/2inP1lYOBAMACARE WATCH -- “Republicans move to spend billions on Obamacare — before they kill it,” by Jen Haberkorn: “On their way to killing Obamacare, Republicans are leaning toward funding up to $9 billion in health care subsidies this year to keep the program afloat -- even though they sued the Obama administration to stop those exact payments. The move is the most significant sign yet that the GOP is serious about propping up Obamacare temporarily to provide a smooth transition to a yet-to-be disclosed Republican replacement. The irony is deep: Republicans have never voluntarily funded an Obamacare program. This particular subsidy, which covers out-of-pocket health care costs for low-income participants, has been a GOP target since 2014 when House Republicans went to court to argue the White House funded it unconstitutionally. Republicans were exultant last May when the D.C. District Court ruled in their favor, even though the payments were allowed to continue pending an appeal.” http://politi.co/2ivYJkQFIRST LOOK -- “Ramping up efforts to mobilize opposition to Donald Trump’s nominees, NextGen Climate today launched a new ad campaign that highlights EPA administrator nominee Scott Pruitt’s extremely close ties to the oil industry and history of attacking clean air laws as attorney general of Oklahoma. The ad [is called] ‘Polluter Protection Agency.’” The ad https://youtu.be/TEwVVW46zzk --The Progressive Change Campaign Committee on Friday rolled out 30 Wisconsin Democratic political leaders who endorse Rep. Keith Ellison for DNC Chair. Audio of announcement http://bit.ly/2jIznxRROBERT DRAPER on the cover of tomorrow’s N.Y. Times Travel section, “Where I Live: Washington, D.C.: Finding refuge from Washington’s quotidian intrigues -- and how to get close to the political spectacle”: “The wealthy New Yorker, who earned a grand total of 4.1 percent of the District of Columbia electorate’s vote, has proclaimed that he will ‘drain the swamp.’ Washington has heard this pledge before: by House minority leader Nancy Pelosi in 2006, by President Ronald Reagan in 1982, and in the early 19th century by developers whose failed efforts to literally empty out the marshes of the new capital city would compel Lincoln and other presidents to spend their summers and autumns in the less boggy climes of the Soldiers’ Home. Suffice it to say that draining at no time eventuated. ... Indeed, by early accounts, Washington is poised to become even swampier under the new regime. ‘I’m already picking up tons of new clients,’ a lobbyist friend recently told me, his eyes alight at the prospect of unprecedented deal-cutting.” http://nyti.ms/2jiiD3QWEST COAST WATCH -- “California’s bullet train is hurtling toward a multibillion-dollar overrun, a confidential federal report warns,” by LA Times’ Ralph Vartabedian: “California’s bullet train could cost taxpayers 50% more than estimated — as much as $3.6 billion more. And that’s just for the first 118 miles through the Central Valley, which was supposed to be the easiest part of the route between Los Angeles and San Francisco. A confidential Federal Railroad Administration risk analysis, obtained by The Times, projects that building bridges, viaducts, trenches and track from Merced to Shafter, just north of Bakersfield, could cost $9.5 billion to $10 billion, compared with the original budget of $6.4 billion.” http://lat.ms/2jPKHMDHILL FIGHT OF THE WEEK -- “Capitol officials rule Ferguson painting will be removed,” by Kyle Cheney: “The architect of the U.S. Capitol has determined that a controversial painting hung by a Missouri congressman [Rep. Lacy Clay] violates standards adopted by House officials and will be removed on Tuesday. The decision is likely to inflame a tense dynamic that has pitted members of the Congressional Black Caucus against GOP lawmakers, who have been clamoring to remove the painting by a high school student from the district that includes Ferguson, which highlighted the racial tension that erupted between police and citizens after the death of Michael Brown.” http://politi.co/2jPThLx-- @brespolitico: “The controversy over this painting is quite possibly the dumbest issue ever. Seriously, can’t believe adults have bothered with this”VALLEY TALK – NICK BILTON in Vanity Fair, “Will Mark Zuckerberg Be Our Next President?”: “Increasingly, a number of influential people in Silicon Valley seem to think that Mark Zuckerberg will likely run for president of the United States one day. And some people, including myself, believe that he could indeed win. ‘He wants to be emperor’ is a phrase that has become common among people who have known him over the years.” http://bit.ly/2jjepZmMEDIAWATCH -- “Fox News’ Martha MacCallum Rises to ‘First 100 Days’ Challenge in Primetime,” by Variety’s Cynthia Littleton: “MacCallum ... wants it to be a vehicle for holding Trump and his administration accountable for the promises he made to voters during the bruising campaign against Democratic rival Hillary Clinton. Fox News, like other news organizations, is under pressure to show that it will demonstrate its journalistic independence in covering Trump and his new administration as it seeks to up-end the status quo.” http://bit.ly/2iT6CPb-- “CNN poaches Hunter Schwarz and Kate Bennett from Independent Journal Review,” by Kelsey Sutton: “[T]hey will launch a new newsletter and work as reporters for CNN Politics’ White House team.” http://politi.co/2jrt3vf-- TV TOMORROW – For the 9 p.m. ET show on Sunday, “President Obama sat for two lengthy interviews with the History Channel, and producers interviewed dozens of current and former staff, Hill leaders, opponents and journalists for this 2-hour special on the President’s legacy. John Legend provides the narration for the documentary. In addition to the president, Valerie Jarrett, COS Denis McDonough, former AG Eric Holder, VP Biden, SecState Kerry, Ben Rhodes, Senate Majority Leader Mitch McConnell, former House Majority Leader Eric Cantor, LA Times’ Christi Parsons, The Atlantic's Jeffrey Goldberg, former DPC Director Melody Barnes, Obama confidants Marty Nesbitt and Michael Strautmanis and many more open up. ‘The 44th President In His Own Words’ was executive produced by former Obama aides Joshua and Michelle DuBois along with Texas Crew Productions and Russ McCarroll for History. They’ve also created a new 9-part oral history on the Obama Years from the interviews.” http://bit.ly/2ji8rbyVIDEO DU JOUR -- “President Obama delivered his final weekly address thanking the American people for making him a better President and a better man.” 4-min. Video http://bit.ly/2jJ0A3gCLICKERS -- “The nation’s cartoonists on the week in politics,”edited by Matt Wuerker -- 10 keepers http://politi.co/2jsE3sq--DELAWARE GOV. JACK MARKELL’s farewell video http://bit.ly/2irp1kNGREAT WEEKEND READS, curated by Daniel Lippman: --“Lunch with the FT: Roger Stone”: “What’s it like to be Donald Trump’s streetfighter? On a hectic summer’s day in Manhattan, over ‘the best devilled eggs in the world’, Edward Luce finds out.” http://bit.ly/2iQX7zQ --“The Lost Footage of Marilyn Monroe,” by Helene Stapinskijian in the NYT: “That film image of Ms. Monroe’s skirt rising high in a gust of air? It’s a reshoot of a discarded and more risqué scene seldom seen until now.” http://nyti.ms/2ilHKDj--“Killing Animals at the Zoo,” by Ian Parker in The New Yorker: “At Danish zoos, surplus animals are euthanized—and dissected before the public.” http://bit.ly/2ioYSmY --“How ‘Sherlock of the library’ cracked the case of Shakespeare’s identity,” by Robert McCrum in The Guardian: Wolfe “delivers the coup de grace to the wild-eyed army of conspiracy theorists who contest the authenticity, even the existence, of the playwright known to contemporaries as Master Will Shakespeare”. http://bit.ly/2jgUsTf (h/t TheBrowser.com) --“Considering the Novel in the Age of Obama,” by Christian Lorentzen in Vulture: per ALDaily.com’s description: “What literary categories define the Obama age? Christian Lorentzen unpacks autofiction, the new meritocracy novel, the retro novel, and the trauma novel.” http://bit.ly/2jNycRL --“The Mysterious Disappearance of Keith Davis,” by Sarah Tory in Hakai Magazine: “The unsettling disappearance of a fisheries observer sparks questions about safety on the high seas and the fate of the fish stocks observers attempt to monitor.” http://bit.ly/2iQX5YT --“She loved him, and he died in the Holocaust. Now her son is bringing his music back to life,” by Malcolm Gay in Boston Globe: “A tale of young love drove a son on an eye-opening journey. And in the process, a musical legacy that was all but lost has been found, and a life revealed.” http://bit.ly/2jNokHI (h/t Longreads.com) --“Syria and the Left,” by Yusef Khalil and Yasser Munif in Jacobin Magazine: “Behind the humanitarian disaster of the Syrian civil war is a political crisis the Left urgently needs to understand.” http://bit.ly/2itrONI --“Murder on Union Hill Road,” by Kathleen Hale in Hazlitt Magazine: “In April 2016, eight family members were slain in their homes in Ohio. Nine months later, the killer or killers are still on the loose, and the town has all but forgotten the crimes.” http://bit.ly/2jFEyPf (h/t Longform.org) --“The Mysterious Death of a Muslim Marine Recruit,” by Alex French in Esquire: “Raheel Siddiqui was a young Muslim who dreamed of becoming a Marine. At twenty, he started basic training at Parris Island, where barking drill sergeants transform callow recruits into elite killing machines. Less than two weeks after he arrived, Siddiqui suffered a mysterious and fatal fall. The Marine Corps says he committed suicide, but some think more sinister forces led to his death.” http://bit.ly/2ilxydX--“A.J. Daulerio Is Ready to Tell His (Whole) Gawker Story,” by Maximillian Potter in Esquire: “Not all that long ago, as the editor in chief of Gawker.com, Daulerio was among the most influential and feared figures in media. Now the forty-two-year-old is unemployed, his bank has frozen his life savings of $1,500, and a $1,200-per-month one-bedroom is all he can afford.” http://bit.ly/2ilFnQV --“The Crimes of SEAL Team 6,” by Matthew Cole in The Intercept: “[H]idden behind the heroic narratives is a darker, more troubling story of ‘revenge ops,’ unjustified killings, mutilations, and other atrocities — a pattern of criminal violence that emerged soon after the Afghan war began and was tolerated and covered up by the command’s leadership.” http://bit.ly/2jh01kD --“The Tumultuous Life and Lonely Death of Marion Barry’s Only Son,” by Harry Jaffe in Washingtonian: “He had access to the highest heights of Washington society. It wasn’t enough.” http://bit.ly/2j94R1f --“Living in Andy Cohen’s America,” by Taffy Brodesser-Akner in tomorrow’s N.Y. Times Magazine: “No one understands our new era of reality-TV populism better than the man who turned ‘The Real Housewives’ into an empire.” http://nyti.ms/2iQPpG1PRESIDENT’S (FINAL) WEEK AHEAD -- “On Monday, the President will welcome the Chicago Cubs to the White House to honor the team and their 2016 World Series victory. Later in the afternoon, the President will participate in a service project for Martin Luther King Jr. Day. On Tuesday, the President will attend meetings at the White House. On Wednesday, the President will hold his final press conference. On Thursday, the President will attend meetings at the White House.“On Friday morning, the President and First Lady will welcome President-elect Trump and Melania Trump to the White House for tea. The President and First lady will then attend the Inauguration of President-elect Trump at the U.S. Capitol. They will then proceed to Joint Base Andrews via helicopter where the President will deliver remarks to a group of staff gathered there to bid farewell, before departing JBA on their last flight aboard the presidential aircraft.” SPOTTED: Callista and Newt Gingrich for a late night cocktail at the St. Regis’ King Cole Bar in NYC ... Chris Matthews leaving Le Diplomate on 14th Street Friday night. ... Susan Rice at Mission last night celebrating several of her former aides leaving admin. … Sen. Cory Booker on this morning’s 9 a.m. New York-bound Acela (He’s a quiet car kind of guy).SPOTTED at a book party hosted by Robert Draper and Kirsten Powers for “Reclaiming Hope: Lessons Learned in the Obama White House About the Future of Faith in America,” by Robert Wear: Jon Ward, Eugene Scott, Julia Ioffe, Isaac Dovere, David Brooks, Anne Snyder, Stephanie Summers, Michael Cromartie, Andrew Sullivan, Kathy Wills Wright, Julie Rodgers, Amanda Hite, Ryan Nobles, Rev. Diana Butler Bass, Tommy Hinson and Laura Waters Hinson, Elizabeth Dias, Melinda Henneberger, John Cotton Richmond, David Patterson, Webster Younce and Melissa Wear. $19.21 on Amazon http://amzn.to/2iTaY8FOBAMA ADMINISTRATION DEPARTURE LOUNGE – Jon Romano emails friends and colleagues: “[Friday was] my last day at the U.S. Department of Transportation. ... Starting next week, I will be joining Rhode Island Governor Gina Raimondo as [s]enior [adviser]. And Jenn will be working with the Swearer Center for Public Service at Brown University to launch a new semester in DC program that will inspire, educate, and train the next generation of leaders.”TRANSITIONS – Friday was Rachael Dean’s last day in Sen. McCain’s office and Julie Tarallo is assuming the role of communications director. ... John Martin has been promoted from senior advisor to legislative director for Sen. Tom Cotton. ... Trevor Foughty next week is starting a new job as the director of government relations and communications for Indiana University; he served as campaign manager for Sen. Todd Young (R-Ind.).BIRTHWEEK (was Wednesday): The Washington Institute’s Gina Vailes BIRTHDAYS: Susan Glasser (hat tip: Theo) ... Maureen Dowd ... Shepard Smith is 52 ... CBS stalwart Bill Plante … LCV President Gene Karpinski is 65 … Eric Alterman is 57 … Doug Michelman ... Erin Haber celebrating at The Wizarding World of Harry Potter (h/t Alix, Bonnie) ... Toby Harnden of The Sunday Times of London and a Telegraph alum, who studied modern history at Oxford, is 51 ... Brennan Moss … Rep. Michael McCaul (R-Tex.) is 55 ... Frank Raines, former chairman and CEO of Fannie Mae, is 68 … Jack Torry, DC bureau chief for Columbus Dispatch … Michael Block, a White House and CFPB alum … NPR alum Andrea Seabrook, DC bureau chief of Marketplace and founder of DecodeDC … Margaret Chadbourn ... WaPo’s Molly Gannon … Politico alum Marcella Bombardieri, now senior policy analyst at CAP ... David Vyorst … Alexandra Shapiro, a DNC, McAuliffe and DCCC alum ... Mary Kusler, senior director for NEA’s Center for Advocacy (h/t Sean Johnson) ... Ian Chung of T. Rowe Price ... Nina Totenberg, award-winning legal affairs correspondent for NPR since 1975, focusing primarily on the Supreme Court, is 73 ... Michael L. Tuchin, AIPAC board member, founding member and co-managing partner of LA-based law firm Klee, Tuchin, Bogdanoff & Stern LLP, is 52 (h/ts Jewish Insider) ...… Ben Koltun, senior analyst at Hamilton Place Strategies ... Christina Daigneault, founder and CEO at Orchard Strategies ... NPR senior editor Jen Liberto ... William Harrison Johnson, director of political and public affairs at Institute of Scrap Recycling Industries … Teddy Eynon, partner at Fox Rothschild ... former N.C. Gov. Bev Perdue is 7-0 ... Duncan Currie … Andy Gussert … Megan Milligan … Ruby Macklem … Mary Jane Cobb (h/ts Teresa Vilmain) … Ellen Wulfhorst, chief correspondent of the Americas at the Thomson Reuters Foundation … Colin Milligan ... Jack Herzog, son of John and Laura … John Ellsworth, Gold Star Father and chairman of Military Families United ... Regina Schofield, a Bush 43 DOJ alum now director of corporate engagement and education outreach at Battelle ... Google alum Jeffrey Webb, now an MBA student at Berkeley Haas ... Patty Link … Charlotte Hudek … Laura Pena … Marc Schloss … David Green … Faye Dunaway is 76 ... movie writer-director Steven Soderbergh is 54 ... LL Cool J is 49 (h/ts AP)THE SHOWS, by @MattMackowiak, filing from Austin:--NBC’s “Meet the Press”: Sen. Dianne Feinstein (D-Calif.) … incoming W.H. C.O.S. Reince Priebus … Georgia Rep. John Lewis (taped). Panel: Helene Cooper, Jeffrey Goldberg, Rich Lowry and Danielle Pletka.--ABC’s “This Week”: Reince Priebus … Sen. Bernie Sanders (I-Vt.) … Rep. Jason Chaffetz (R-Utah). Ethics panel: CREW chair and Norman Eisen and CREW vice chair Richard Painter. Political panel: Cornell Belcher, Sara Fagen, Jonathan Karl, Bill Kristol and Katrina vanden Heuvel.--“Fox News Sunday”: VP-elect Mike Pence … John Brennan. Panel: Jerry Seib, Lisa Boothe, Jane Harman and Bob Woodward … “Power Player of the Week” with Presidential Inauguration Committee chairman Tom Barrack.--CBS’s “Face the Nation”: Mike Pence … Sen. Joe Manchin (D-W.Va.) … Newt Gingrich … David Ignatius. Panel: Ben Domenech, Ruth Marcus, John Heilemann and Ed O’Keefe.--Fox News’ “Sunday Morning Futures” (10 a.m.): Sen. Ron Johnson (R-Wis.) … John Ashcroft … Rudy Giuliani … Jason Chaffetz. Panel: Ed Rollins, Mary Kissel and Hank Sheinkopf.--Fox News’ “MediaBuzz” (SUN 11 a.m.): Sean Spicer … Erin McPike … Kelly Riddell … Juan Williams … Trish Regan … Sharyl Atkisson … Martha MacCallum.--CNN’s “Inside Politics” with John King (SUN 8 a.m.): Panel: Julie Pace, Mary Katharine Ham and Lisa Lerer.--CNN’s “State of the Union” (9 a.m.): Denis McDonough … Sen. Rand Paul (R-Ky.). Panel: Nina Turner, Rick Santorum, Marc Morial and Sarah Isgur Flores.--CNN’s “Reliable Sources”: (SUN 11 a.m. ET): Ben Smith. Panel: Jeffrey Goldberg, Margaret Sullivan and Mollie Hemingway … David Zurawik. --Univision’s “Al Punto” (SUN 10 a.m. ET / 10 a.m. PT): Panel: Jose Fuentes and Alfonso Aguilar … Puerto Rico Resident Commissioner Jenniffer González … Kevin de Léon … Dick Durbin … Zoe Saldana … Martin Scorsese. ---C-SPAN: “The Communicators” (SAT 6:30 p.m. ET): Rep. Darrell Issa (R-Calif.) and Suzan Delbene, questioned by Politico’s Ashley Gold … “Newsmakers” (SUN 10 a.m. ET): Rep. Steny Hoyer (D-Md.), questioned by The Washington Post’s Kelsey Snell and AP’s Erica Werner … “Q&A” (SUN 8 p.m. and 11 p.m. ET): Committee for a Responsible Budget president Maya MacGuineas --Washington Times’ “Mack on Politics” weekly politics podcast with Matt Mackowiak (download on iTunes or listen at MackOnPolitics.com): Garry Kasparov … John Schindler.
Steve Mnuchin, Trump's Treasury Pick, Investment Could Benefit From Fannie And Freddie Restoration
Wiki Commons Should Fannie Mae and Freddie Mac be removed from government control, Steve Mnuchin — President-elect Donald Trump’s pick for Treasury Secretary — could benefit as an investor. The Goldman Sachs veteran outlined a proposal to privatize the two mortgage behemoths following his nomination, a move that could greatly benefit a [...]
By Michael Burge For the first time in almost a year, mortgage rates are above 4%. While still low by historic standards -- the annual average rate on a 30-year mortgage in 1981 was 16.63%, according to Freddie Mac -- most observers expect rates to keep climbing in 2017. The increase, which is likely to be slow and steady for most of the year, will be driven by fiscal stimulus resulting from President Donald Trump's policies, higher official rates as the Federal Reserve boosts the cost of borrowing in the face of faster economic growth, and rising bond market yields, experts say. Market rates spiked after Trump won the election, surprising many observers and forcing a rethink of expectations for the economy and markets. Then, the Fed raised rates Dec. 14, a widely expected move that reflected improved economic conditions and prospects for stronger growth next year. The 0.25 percentage point hike was the first increase in short-term interest rates in almost a year, and only the second time within the past 10 years. How high will mortgage rates go? The good news is, economists, analysts and housing experts don't expect an extreme spike in mortgage rates over the next year. Danielle Hale, managing director of housing research at the National Association of Realtors, predicts rates won't rise too dramatically because expected potential gross domestic product growth in the future is still lower than what we've seen since the end of World War II. "Most economists expect right around 2, maybe a little higher than 2% growth," Hale says, "whereas typically through most of that postwar period the average was 3%. The new normal is underperformance relative to the old normal. That should help keep rates lower than in the past. But I don't think they'll stay quite as low as they are now." Rates are predicted to climb steadily this year, with three more bumps from the Fed as the economy keeps growing. Hale says that NAR expects to see rates averaging 4.6% for the fourth quarter of 2017. "But that means by the end of the year they could be as high as 4.7 or 4.8%, somewhere in that 4.5-to-5% range by the end of the year," Hale says. Here are four things that could happen under a Trump presidency that could keep rates heading in that direction. 1. Fiscal stimulus Tax cuts and government spending are two Trump proposals that could lead to bigger deficits and a bigger debt load. This fiscal stimulus, paired with the stable employment we're already seeing, could mean stronger economic growth, which could lead to higher mortgage rates. "If rates were to rise rapidly," Hale says, "that probably indicates that inflation is coming in higher than expected, and that probably means that the Federal Reserve will act to move short-term rates higher even faster. That would spur long-term rates to move up a little bit faster." "That could be OK if incomes are also rising, to help offset some of that increase," she says. "But I don't think that's an ideal scenario. An ideal scenario would be continued moderate economic expansion, and rates that are stable to slightly higher." 2. Privatizing government-sponsored enterprises The odds of reforming government-sponsored enterprises like Fannie Mae and Freddie Mac to bring them out of government ownership have risen post-election, says Moody's Analytics chief economist, Mark Zandi. He gives such reform a 50% chance. "It will be tough to get reform through Congress," he says. "If there is reform, it will probably result in higher rates." Jordan Levine, an economist with the California Association of Realtors, says it's safe to say that privatizing Fannie and Freddie will increase rates because right now, with government ownership, the implicit guarantee that Uncle Sam stands behind the mortgage bonds they issue reduces the cost of capital for the private sector. "I can say with a pretty good level of confidence that it [privatizing Fannie and Freddie] will increase the cost of borrowing because there's going to be more risk from those pools being borne by the private sector," Levine says, "and they're going to want to be compensated for that additional risk that they're bearing." 3. Deregulation The Trump administration could ease up on tighter lending standards that have been the norm since the financial crisis. That would entail either minor changes to Dodd-Frank, a piece of legislation passed in response to the Great Recession, or a complete dismantling of it. Zandi thinks it's unlikely the Consumer Financial Protection Bureau, which was created by the Dodd-Frank act, will be completely dismantled. Doing away with Dodd-Frank altogether is even more unlikely, according to Zandi. "Killing Dodd-Frank would mean getting rid of higher capital standards that the banks face." Experts like Zandi and Levine say deregulation has less impact on mortgage rates than it does on the number of people who have access to credit. 4. Change at the Fed Federal Reserve Chair Janet Yellen's term ends in January 2018, giving Trump the opportunity to make a new appointment. But according to Zandi, a new Fed chair isn't that important to mortgage rates. "For most borrowers, what matters is the 30-year fixed-rate mortgage," he says. "That's tied to long-term rates, and the Fed has less control over that." Hale says there's a consensus at the Fed on the best way to approach making monetary policy, and she doesn't expect a new chair to cause drastic change. "By the end of [Yellen's] term, the Fed should be well on its way to a more normal monetary policy," Hale says. "A new chair could come in and change that, but it's not very likely." What should you do about rising rates? "Higher rates could have more of an effect than people think on the housing market," Zandi says. Over the last 30 years, when people bought a home, they could get a mortgage rate that was lower than their existing mortgage, which helped increase home sales, he says. "Going forward, it's going to be the reverse," he says. "Mortgage rates are going to be higher on the home they want to buy relative to their current mortgage. That will make it less attractive for them to buy and sell. That probably means that housing activity will be less buoyant than it has been," Zandi says. Levine, of the California Association of Realtors, suggests those who are thinking seriously about buying a home consider making a move sooner rather than later, if possible. "If you're thinking about getting into the market, it's a good time to lock in rates before they go up higher," Levine says. "If you're thinking about selling 12 months from now, you might consider going a little bit early so that you can get locked in to a low rate on your new home." If you're on the fence about refinancing, it wouldn't hurt to make a decision faster. If you have a floating rate mortgage, consider refinancing into a fixed-rate loan. You don't want your ARM set much higher, unless you can financially handle an increase over the next year. If you have a home equity line of credit, which tends to come with adjustable rates, think about refinancing into a home equity loan with a fixed rate. And if you want to buy a home and can afford it, Zandi recommends you make sure you have a good credit score, that you're managing your current debts well, and that you have enough money for a down payment. He says these factors are key to being able to apply for a mortgage and getting a reasonably good rate, regardless of where rates are heading. "That's what's in your control, that's what you need to focus on," Zandi says. Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: [email protected] -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
In September 2008, Fannie Mae and Freddie Mac were placed in a Federal Governmental conservatorship. The crisis-induced rise in mortgage defaults had eroded their capital, and made it impossible for them to continue operations without support from the US Treasury. The conservatorship also eroded the agencies' political support. Their continuing existence is an embarrassment to the liberals in Congress responsible for the agencies heavy involvement in sub-prime mortgages, which was a major cause of their downfall. Conservatives opposed to government intrusions in the market as a matter of principle, who were never more than ambivalent toward the agencies, now relish the opportunity to get rid of them altogether. Yet despite the loss of virtually all of their political support, we are now into the ninth year of conservatorship and the agencies are still with us. The reason is an entirely plausible concern that terminating them would depress the mortgage market and new housing construction. While the prevailing political sentiment is hostile to the agencies continued existence, it is also fearful of the consequences of their demise. The result has been a policy paralysis. But the paralysis won't last forever, at some point it will give way to a plan to phase out the agencies by progressively narrowing the segment of the market that they can serve. William M. Isaac and Richard M. Kovacevich in a recent Wall Street Journal article proposed a 7-year phase out. The phase-out approach assumes that within the specified time frame, the private system will evolve to fill the gap. In my view, that will not happen without a well-developed Federal plan to make it happen. Without such a plan, our existing system of private financial institutions will not create a viable private secondary mortgage market that would replace Fannie and Freddie. The private market that was the vehicle used to fund sub-prime mortgages employed a house-of-cards structure that completely collapsed during the financial crisis. Unlike the mortgage securities issued in Denmark, which are full faith liabilities of the institutions issuing them, the US securities were no one's liability. Each security carried its own "credit enhancement" as a back-up to cover potential losses, and if losses exceeded the back-up, the security would default. Redundant credit enhancement on other securities, even if they had the same issuer, was not available to support the security with a deficiency. That market collapsed, and good riddance. As a point of comparison, not a single mortgage security issued by Danish mortgage banks defaulted during the crisis - or any other time! Existing private institutions in the US are not going to develop full-liability mortgage-backed securities, even if all legal roadblocks were removed. Commercial banks have never been interested, and even less so now following the heavy losses they have sustained from being held legally liable for misdeeds committed prior to the crisis. Home mortgages are now viewed as carrying high political risk. The existing mortgage banks in the US are loan originators and don't have the capital to become security issuers. The one industry for which mortgage security issuance might have made sense because of its focus on home mortgages was the savings and loans, but that industry is long gone. What is needed is a new industry of mortgage banks that fund themselves with mortgage-backed securities, similar to those in Denmark. They could be regulated by the Federal Housing Finance Agency, which currently regulates Fannie and Freddie. Depository institutions would be encouraged to charter mortgage bank affiliates, and existing mortgage banking companies would be encouraged to convert. But it will take time for a new industry to evolve, and in the meantime, Fannie and Freddie should be moved out of conservatorship purgatory. Over the years the agencies have accumulated enormous intellectual capital that is embedded in well-honed secondary market systems and processes, some of which could be used by an emerging mortgage banking industry. The agencies also could be involved in helping new mortgage banks raise capital. Phasing out the agencies would destroy much or all of their intellectual capital - for no good purpose other than achieving a political catharsis. The wiser plan is to establish the legal foundations for a new mortgage banking industry, and retain the agencies until the new structure makes them redundant. For more information on mortgage or to shop for a mortgage in a fair, unbiased environment, vist my website The Mortgage Professor -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
Me, at MoneyWatch: Here's what really caused the housing crisis: One story of the housing crisis goes like this: Government programs that helped low-income households purchase houses led to widespread defaults on the subprime loans they held, sparking the entire...
Donald Trump's pledge to drain the swamp in Washington has already turned out to be a cruel hoax on the working class voters who believed it, as his transition quickly leaned on insider lobbyists and his administration is filling with the corporate elites and Goldman Sachs bankers he attacked during the campaign. But you might think that at least Democratic Party-affiliated lobbyists would suffer some in a city where lobby firms even color-code their rosters, red for Republicans and blue for Democrats, because lobbying is often based on revolving door partisan appeals, and the Democrats are completely out of power. But homo lobbius is a resilient species, and top Democratic lobbyists are pursuing their survival strategies. For example, Democratic mega-lobbyist Tony Podesta (disclosure: my wonderful landlord in the early nineties) is publicly fawning over the Trump family, informing the Boston Globe that daughter Ivanka Trump "is a great businesswoman. She is a really interesting person..." and telling the New York Times that "[i]t will be great" to have Ivanka's family living in his Kalorama neighborhood. But long-time Democratic power lawyer-lobbyist Jamie Gorelick has gone a step further: It emerged over the weekend that she has been hired to represent Ivanka's husband, Jared Kushner, as he addresses the legal ethics issues related to him joining Donald Trump's administration. Kushner, a real estate executive with no government experience, has just been named to serve in the White House job as senior adviser to Trump. Kushner, according to the Times, "has been described by numerous transition staff members as the first among equals in Mr. Trump's high command." Some experts on legal ethics and Democrats in Congress have argued that Trump appointing Kushner might violate a federal law barring the hiring of family members, including sons-in-law, for federal jobs, a law enacted after President John F. Kennedy installed his brother Robert as attorney general. Gorelick has been making the rounds, speaking on a Trump transition conference call with reporters, insisting that the White House is not a federal agency within the coverage of this anti-nepotism law and explaining how Kushner will divest and restructure assets to avoid conflicts of interest. Gorelick, a partner at the law firm Wilmer Hale, would seem an odd choice to directly serve the family of Donald Trump. After all, Trump is the man who told Hillary Clinton during a debate last fall that if he were elected, "you'd be in jail." And Gorelick, she has long been on the Clinton team, at least we thought. Gorelick served in Bill Clinton's administration as deputy attorney general, the number two official at the Justice Department, and she was mentioned as a candidate to be Hillary Clinton's attorney general. Gorelick has donated more than $171,200 to federal candidates or committees since 1997, mostly to Democrats, with $11,000 of those contributions going to Hillary Clinton's Senate and presidential campaigns. In 2015, Gorelick represented the Clinton Foundation, on whose board of directors Hillary Clinton served from 2013 to 2015, in its successful defense against a lawsuit brought by conservative activist Larry Klayman. Gorelick also led efforts to criticize FBI Director James Comey's "October surprise" letter to Congress regarding newly-discovered emails on a computer linked to one of Hillary Clinton's aides. But to those who have followed Gorelick's career over the years, her assisting the Trumps in pushing the ethical envelope is no surprise. She is a symbol of revolving door Washington, where well-educated, highly-capable people trade on government experience and connections to help special interests get their way over everyone else. After leaving the Clinton administration, Gorelick served as vice chair of Fannie Mae, the giant mortgage lender, from 1998 to 2003, and received some $25.6 million in compensation, including bonuses. In 2006, DC-based Fannie Mae was fined $400 million for accounting manipulation tied to executives' bonuses that occurred from 1998 to 2004; Gorelick was not charged with any wrongdoing. Fannie Mae's increasingly risky business strategy in the 2000s eventually required a huge taxpayer bailout. At WilmerHale, Gorelick has represented a wide range of major corporate clients. Federal disclosure forms show she has lobbied for Google, JPMorgan Chase, Lazard Freres and others. She represented BP, pressing to limit government efforts to hold the energy giant responsible for the massive Gulf of Mexico oil spill. Gorelick also lobbied from 2009 to 2010 on behalf of student loan giant Sallie Mae as part of an intense effort by that company and big banks to block the Obama administration's effort to reform the student loan system by eliminating nonsensical, wasteful loan subsidies to private lenders. The Obama administration ultimately prevailed over Gorelick and the other special interest lobbyists, and the reform has saved billions for students and taxpayers. Later, Gorelick represented another special interest--one caught engaging in abuses against military service members. In 2016, Gorelick successfully pressed the Pentagon on behalf of the country's biggest for-profit college, the University of Phoenix, to lift a suspension barring the school from recruiting on military bases -- despite the school having been caught red-handed engaging in recruiting violations, and despite its dismal record serving troops and other students. The University of Phoenix has been getting as much as $3.8 billion annually from taxpayers, but its toxic mix of high prices and low spending on instruction has left many students with overwhelming debt. In recent years, the University of Phoenix has been under investigation for fraud and other misconduct by the US Department of Education, Department of Defense, Federal Trade Commission, Consumer Financial Protection Bureau, Securities and Exchange Commission and attorneys general of California, Delaware, Florida and Massachusetts. And now, Trump. Elite Washingtonians will argue that Gorelick is simply providing wise legal counsel to the Trump family, helping to ensure that they comply with the law. But in addition to the fact that her arguments aggressively press against at least the spirit, if not the letter, of the ethics laws, there is the question of whether Gorelick should be lending her skills and Democratic credentials to the Trump cause. Because for many people, Democrats, Republicans, and independents, this is not a normal presidency. In case you missed it, Trump has a disturbing record of bigotry, misogyny and sexual abuse, dishonesty, predatory business practices, association with organized crime figures, and misuse of charitable entities. He also has advocated for torture, bombing civilians, and other reckless acts that no conscientious military officer could carry out. Since the November election, he has appointed to top administration jobs people with disturbing records of bigotry. While tweeting complaints about the media, "Saturday Night Live," Meryl Streep, and the cast of "Hamilton," he has failed to assertively disavow hateful acts perpetrated by his supporters. He has brushed off the pointed conclusions of U.S. intelligence agencies that the Russian government engaged in extensive operations to influence the outcome of the U.S. election in his favor. And he has assumed a passive-aggressive stance regarding his obligations under the law to separate his government power from his private interests, repeatedly discussing his overseas investments in calls with foreign leaders, and always insisting that while he will announce plans to behave ethically, he has no obligation to do so. Trump promised to put Hillary Clinton in jail. And now Hillary Clinton's lawyer, Bill Clinton's deputy attorney general, is getting paid to vouch for the the Trump family's ethics and help them assume full powers in the White House. Anything is possible in Washington. If you have enough money to buy people. This article also appears on Republic Report. -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
By Hal Bundrick, CFP Donald Trump, the real estate tycoon, will be our nation's 45th president. That's good news for the housing industry, right? Well, there's a lot to consider. Here's how the Trump presidency may impact housing and homeownership in 2017. A 'responsibly aggressive' marketplace A unified call for less government regulation is coming from the Trump camp as well as Republicans in Congress. On the deregulation radar: the Consumer Financial Protection Bureau and other elements of Dodd-Frank, the Wall Street reform act that President Obama signed into law in 2010. "Since the elections, there has been much discussion of how expected changes under a Trump administration are likely to reduce the [CFPB's] impact, particularly in the enforcement arena," says Rob Chrisman, a senior advisor for the Stratmor Group, a mortgage industry consultancy. "Dodd-Frank will not be eliminated. It will be refined -- which is a good thing." Jeff Taylor is managing partner of Digital Risk, a mortgage processing company. He also says trimming Dodd-Frank would be a good thing for potential homeowners. "If Dodd-Frank is streamlined, I think you could have banks be more responsibly aggressive in the marketplace, as far as making mortgages," he says. "And I think that will open up more product for first-time homebuyers ... in the next couple of years." Taylor says less stringent regulations on lenders might lower the costs of compliance and allow more small community banks to compete with big banks, "boosting bank profits -- all of which are likely to increase credit availability." However, critics like Noah Smith, former assistant professor of finance at Stony Brook University, worry that deregulation will dial banking risk back up and, perhaps more importantly, put taxpayers back on the hook to bail out the bad actors. Just as during the housing crisis of 10 years ago, it would be another "race to the bottom," Smith wrote in a Bloomberg analysis. But a reduction in federal regulations won't transform the housing industry, Chrisman says. "Trump may mean less federal enforcement, but the states will remain aggressive. Politicians in California, Illinois and New York, primarily Democratic states, have already mentioned a stepped-up regulatory atmosphere," he says. Getting Fannie and Freddie 'out of government ownership' Another item on the Republican agenda is to reduce the government footprint in the mortgage industry. That means moving Fannie Mae and Freddie Mac into the private sector. The two government-sponsored companies back a majority of mortgages and were bailed out with taxpayer dollars during the housing crash. Fannie and Freddie buy home loans from lenders and then package and sell those loans in large bundles of bonds. The quarterly profits that Fannie and Freddie earn are now funneled to the U.S. Treasury, which has been paid back $60 billion more than it provided in bailout funding to the companies. Investors in Fannie and Freddie want to see that money move back into the private sector. In November, Trump's Treasury secretary nominee, Steven Mnuchin, told Fox Business Network, "We gotta get Fannie and Freddie out of government ownership." "I think there are models that could work," Taylor says regarding Fannie and Freddie privatization. "What I don't think you could see is a model [where] the U.S. government doesn't stand 100% explicitly behind the bonds that Fannie and Freddie issue." He says removing that federal guarantee would reduce the global demand for the mortgage-backed securities that the two quasi-government agencies issue. Those bonds are instrumental in freeing up capital for lenders to make more loans. Homebuilders and a Trump economy A lack of skilled labor has been one of the biggest constraints to the housing industry for the past couple of years, and Taylor worries that the Trump administration may not help matters in that regard. "Mr. Trump's plan to spend money on infrastructure projects around the country could result in more laborers taking those jobs and leaving homebuilders short-handed," Taylor says. "Also, his immigration stance is likely to keep immigrants out of the country and out of the workforce -- a blow to homebuilders who rely on immigrants for many construction jobs." Labor shortages also contribute to rising wages for construction workers, which in turn keep new home prices high, he adds. However, Robert Dietz, chief economist for the National Association of Home Builders, says he expects the Trump administration to take action on some labor rules that could benefit the homebuilding industry. That will almost certainly include the Obama overtime rule "that would've affected a lot of construction site managers," Dietz says. That rule, blocked by a federal judge on Nov. 22, aimed to double the maximum income a worker could earn and still be eligible for mandatory overtime pay. The new limit of $47,500 would have given 4.2 million more Americans the opportunity to earn overtime, according to the Obama administration. Dietz also is looking for a Trump administration to help lower building costs. "Just under 25% of the cost of a newly built home is due to regulatory burdens," he says. "I think it's reasonable that the new administration can address a lot of them." How Trump might affect home affordability Mortgage rates have soared since Trump won the election. That's part of a good news/bad news scenario. "One could argue that the Trump victory has driven up interest rates due to the fear of future inflation, given his tax and infrastructure build proposals," Chrisman says. "This increase in rates certainly negatively impacts homeownership for first-time buyers. Increasing interest rates, however, often signal a strengthening economy, and if that is the case, more first-time borrowers will qualify." Taylor also says home affordability could suffer but offers another factor in the equation. "On the positive side, [higher mortgage rates] could also slow price appreciation, which would help buyers. The housing market has lacked first-time buyers and move-up buyers. Slower price appreciation could benefit move-up buyers who have regained value in their home and want to move up before prices rise again," he says. "I'll tell you, if I'm looking to buy a house for the first time or to sell my house and move into a different house, I really am looking at this next year as probably a moving year because rates still in the 4s are very, very attractive," Taylor adds. Will Trump eliminate the mortgage interest deduction? And then there's the most sacred cow of all: the mortgage interest deduction. It is frequently mentioned as an important factor in the "buy or rent?" conversation. The Trump administration and Republicans have floated the idea of putting a cap on the amount of allowed interest that you could deduct from your tax bill. The thing is, an analysis by the Tax Policy Center of the Urban Institute and Brookings Institution says only about one-fifth of households actually use the deduction. And of those that do, most are way above middle-class taxpayers. "The Tax Policy Center finds that in 2017, Trump's cap would affect only about 160,000 singles, a tiny fraction of the 89 million single taxpayers, and about 230,000 couples out of 59 million joint filers," Howard Gleckman, senior fellow with the Tax Policy Center, writes on Forbes.com. "The vast majority of the taxpayers who would face the cap are high-income." Homeownership rates under a Trump presidency Chrisman is looking for little change in the rate of homeownership in the coming years. From a percentage perspective, homeownership in the U.S. reached its peak during the Clinton/Bush presidential terms, he says. But that's when banks relaxed underwriting guidelines to such an extent that "people who shouldn't have been buying houses were." The housing crash changed everything. Underwriting, loan documentation and appraisal requirements have strengthened since then. "Marginal borrowers are not borrowing money, and investors feel more secure with investing in mortgage-backed securities," Chrisman says. He says that America's need for housing is just as great as ever and that Trump's policies won't move the dial on homeownership rates one way or the other. "Internal population growth hasn't stopped, nor has immigration. Nor has the desire for a new generation to want a home for their children," he says. "I think that from what we know so far, the Trump presidency will have little or no direct impact on homeownership rates." A positive outlook for the New Year All in all, the experts we spoke with are optimistic about 2017. Lenders are using better technology to streamline the mortgage process, and the housing market is "healthy" and "robust," in their words. "Builders are excited," Dietz says. He says reductions in regulatory costs could help homebuilders provide housing to the tightest segment of the market, the entry-level buyer. "If we do get an administration that's taking a look at various kinds of regulatory policies -- where they've grown too large or too expensive -- that will certainly be a help [to] the supply side of the market. And I think that's good news, not just for builders, but it's good news for renters and prospective homebuyers because adding supply is the way that you address housing affordability issues." Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @halmbundrick. -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
Treasury Secretary Lew's Exit Memo: Eight Years of Progress at Treasury and a Look to the Future of American Financial Prosperity
WASHINGTON –U.S. Treasury Secretary Jacob J. Lew has authored a departure memorandum that recounts the progress and work of the U.S. Department of the Treasury over the last eight years. The memo then outlines Secretary Lew’s visions and goals for the future of the Treasury Department. The Secretary closes his departure memorandum with personal reflections on the importance of bipartisan cooperation, his optimism about America’s future, and his hope that future policymakers will take careful stock of the successes of this Administration as they consider the next steps forward. Please see the memo attached. Treasury Exit Memo.pdf The full text of the memo is below: Department of the Treasury Exit Memo Secretary Jacob J. Lew Cabinet Exit Memo │January 5, 2017 Introduction The Department of the Treasury (Treasury) is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. This role encompasses a broad range of activities, such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions. Treasury’s mission was challenged like few times before in our nation’s history during the 2008 financial crisis. As few of us can forget, signs of trouble first emerged in the housing market, which set off a cascade of shocks in 2007 and 2008, including the collapse of Bear Stearns and Lehman Brothers, the freezing of credit markets, and the loss of trillions of dollars of wealth held by Americans in their homes, other assets, and businesses. By the time President Obama took office, the United States was in the midst of the worst recession since the Great Depression. The economy was shrinking at its fastest rate in 50 years and shedding more than 800,000 private-sector jobs per month. Unemployment peaked at 10 percent in 2009, a level not seen in over 25 years. The auto industry, an embodiment of American ingenuity and economic strength, was teetering on the edge of collapse; the deficit had hit a post-World War II high; and homes in neighborhoods across the United States faced foreclosure. Though the financial crisis was perhaps the most pressing challenge the country faced in 2008, it was far from the only one. Health care spending was on an unsustainable path, and millions of Americans lived in fear of facing a significant medical problem without insurance. Middle-class and working family incomes had stagnated for much of the previous three decades. Wealth disparities had grown to levels not seen since the 1920s. And after two major wars in the Middle East and strained relationships in many parts of the world, the standing of the United States around the world was in need of significant repair. We have come a long way as a country since 2008. In the following pages, I will recount the Administration’s record of progress, with a specific focus on the role Treasury has played. I will also articulate a vision for the future, and recommend steps to be taken in the coming years to make progress towards that vision. Finally, I will end with some personal reflections. Eight Years of Progress Economic Recovery Over the eight years since President Obama took office amidst the worst financial crisis of our lifetimes, we have seen a sustained economic recovery and a significant decline in the federal budget deficit. We have cut the unemployment rate in half. Our economy is more than 10 percent larger than its pre-recession peak. U.S. businesses have added a total of 15.6 million jobs since private-sector job growth turned positive in early 2010. Household incomes are rising, with 2015 seeing the fastest one-year growth since the Census Bureau began reporting on household income in 1967. And our financial system is more stable, safe, and resilient, providing the critical underpinnings for broad-based, inclusive, long-term growth. There are many factors that explain why the United States was able to bounce back so strongly from the recession. First and foremost, I credit the resilience of the American people. In addition, our policy response to the crisis was immediate and robust. Led by my predecessor, Treasury Secretary Tim Geithner, policymakers put in place a wide-ranging strategy to restore economic growth, unlock credit, and return private capital to the financial system, thereby providing broad and vital support to the economy. In February 2009, just 28 days after taking office, President Obama signed the American Recovery and Reinvestment Act, which provided powerful fiscal stimulus that resulted in a less severe recession and stronger recovery than we otherwise would have seen. Investments made through our Troubled Asset Relief Program (TARP) provided stability to our financial system, and the Automotive Industry Financing Program helped prevent the collapse of the U.S. auto industry. TARP also included housing initiatives that helped millions of struggling homeowners avoid foreclosure and lower their monthly payments. These efforts bolstered the housing market and strengthened consumer finances more broadly. And funds expended under TARP have been repaid in full, at a profit to taxpayers: in total, TARP invested $412 billion in financial institutions, large and small, during the financial crisis, and as of October 2016, these investments have returned $442 billion total cash back to taxpayers. Critically, we also acted quickly to reform our financial system, working with Congress to enact the most far-reaching and comprehensive set of financial reforms since the Great Depression: the Dodd-Frank Wall Street Reform and Consumer Protection Act. Wall Street Reform transformed the way the financial system operates, and Treasury and the financial regulators have continued to work together since its passage to implement important reforms such as the Volcker Rule, risk retention, and resolution planning for large, complex financial institutions. Because of these efforts, our system today is more stable, more transparent, and more consumer-focused. Wall Street Reform also created the Financial Stability Oversight Council, a body that looks across the entire financial system to identify future threats to financial stability, and the Consumer Financial Protection Bureau, a watchdog agency that is working hard to protect Americans from unfair, deceptive, or abusive financial practices. The progress we have made on implementing reform has resulted in a safer, stronger, and more stable American financial system—one better positioned to support growth rather than work against it, more likely for consumers to get fair treatment in their interactions with financial institutions, and less prone to major failures of financial firms that can harm Americans on Main Street. This progress must be sustained through continued follow-through, to avoid allowing a return to the recklessness and abuse that predated the worst global financial crisis of the last 80 years. A More Inclusive Economy Beyond working to bring our economy back from the brink and to spur growth, we also undertook efforts to ensure that more citizens have a fair shot at sharing in our nation’s prosperity. One of the Administration’s most significant achievements was the 2010 passage of the Affordable Care Act (ACA), which extended health insurance to millions of Americans who had not previously had it, allowed young adults to stay on the health plans of their parents, barred insurance companies from denying coverage to people with preexisting conditions, and strengthened Medicare’s solvency. Once the legislation was signed into law, Treasury implemented the law’s many new tax provisions. Beyond the ACA, the Administration made a number of other key changes to the tax code that has made our tax system significantly fairer and more equitable. Through programs like the Community Development Financial Institution Fund and myRA, and through extensive stakeholder engagement, Treasury has worked to promote access to the financial system for underserved and vulnerable populations. We also successfully worked with Congress to pass bipartisan legislation to enable Puerto Rico to undergo a financial restructuring. With continued commitment from policymakers in both the Commonwealth and the United States, this legislation will begin to put Puerto Rico on a fiscally sustainable path so that the 3.5 million Americans living there are not denied essential services and economic opportunity. Leading in the Global Economy As we put into place the financial regulatory framework to prevent future crises in the United States, we also led the international response to the crisis. We worked through the G-20 to help mobilize $5 trillion in fiscal stimulus, expand the resources of the international financial institutions by $1 trillion, and establish new institutions like the Financial Stability Board to prevent future crises. Our approach elevated the G-20 as the premier platform for international economic cooperation and put in place a demonstrated mechanism for international response. Following the financial crisis, many countries turned to policies of fiscal austerity, and Treasury vigorously advocated for a more balanced use of policy levers. Over the next several years, Treasury engaged closely with our partners and through the G-20 and other multilateral bodies to emphasize the need for short-term growth and longer-term structural reforms to put the global economy on stronger footing. Through our sustained engagement, we achieved a number of commitments from the G-20, including moving away from austerity-only fiscal policy and avoiding competitive currency devaluation. We have used the G-20 to advance a global growth agenda, and the U.S.-China Strategic & Economic Dialogue to foster increased bilateral economic coordination and engagement with China. Our sustained engagement with China has allowed us to exert positive pressure on Chinese exchange rate policy—whereas China once intervened in foreign exchange markets to drive down the value of its currency, in the past year, we have seen China intervene to prevent a rapid depreciation in the renminbi, which would have had negative consequences for the Chinese and global economies. Treasury also worked to solidify U.S. leadership by modernizing the international economic architecture to ensure that it would remain relevant in a changing world. In particular, securing the passage of International Monetary Fund (IMF) quota reform sustained U.S. leadership on the global stage. Our leadership in the IMF in turn enabled us to work through it to promote policies that supported U.S. economic and security objectives, such as economic stability in Ukraine and Greece. Promoting a Safer World Treasury has also continued to use its unique financial capabilities to address a variety of national security and foreign policy threats posed by terrorists, criminals and other bad actors. To address the changing threat posed by terrorism, including the threat posed by ISIL, we have worked with our international partners to deny terrorist financiers, fundraisers, and facilitators access to the international financial system with financial measures and targeted actions. Treasury’s sanctions against Iran played a critical role in forcing Iran to the table to negotiate a deal that cuts off the country’s pathways to a nuclear weapon. To hold Russia accountable for its aggression in eastern Ukraine and its occupation and attempted annexation of Crimea, we imposed sanctions that led to tighter financial conditions, weaker confidence, and lower investment in Russia. We also secured new domestic and multilateral sanctions measures against North Korea in the face of Pyongyang’s continued provocative behavior with regard to nuclear weapons and weapons of mass destruction. All the while, we have worked to craft a cohesive vision for the use of sanctions, in which sanctions are informed by financial intelligence, strategically designed, and implemented with our public and private partners to focus pressure on bad actors and create clear incentives to end malign behavior, while limiting collateral impact. In the face of emerging cyber threats, we have also made significant progress in coordinating cybersecurity efforts among financial regulators and the private sector, both domestically and internationally, to improve the financial sector’s resilience and to establish best practices for industry and government. A Vision for the Future Looking across the next five years, 10 years, and beyond, I see four major goals that mirror the progress above. Treasury should focus on: (i) continuing to promote more inclusive growth; (ii) moving from recovery to long-term fiscal health, (iii) remaining a leader in the global economy; and (iv) adjusting to the new threats in our world. Each of these goals brings with it major challenges that we must collectively overcome in order to reach them. Continuing to Promote Inclusive Growth Through the work of this Administration, the U.S. economy is growing again. But working families have not shared fully in the benefits of economic growth over the past decade, and there is evidence that our society has undergone structural changes that have fundamentally altered the basic social compact. It is crucial that the next Administration builds on the work already done to ensure that our prosperity is broadly shared. There are many aspects to inclusive growth, including: investing in infrastructure to create good middle-class jobs and lay the foundation for future growth, giving workers a stronger voice, enacting progressive tax policies, making quality education more available and affordable, and investing in retraining programs for those who have lost their jobs. One component most directly within Treasury’s purview is increasing access to the financial system; currently, many low-income and minority families are effectively locked out, operating without a credit card or banking history. Finding creative ways to increase access to the financial system—such as fostering new technologies—will help individuals and families transfer money and make payments safely and affordably. Financial inclusion allows people to manage life’s unexpected financial shocks, build long-term financial security, and take advantage of economic opportunities, like starting a business. Our inclusive growth agenda should not, however, be limited to domestic issues: more than 2.6 billion people live in poverty around the world, and more than two billion people rely solely on cash transactions. Moving underserved populations from a cash economy to formal banking not only increases their economic opportunity but also strengthens our ability to combat illicit and dangerous finance. Moving from Recovery to Long Term Fiscal Health The actions of this Administration, and the economic recovery those actions helped support, have sharply reduced deficits since 2009. However, both the Administration and the Congressional Budget Office project that, absent any changes in policy, the deficit will rise steadily over the next decade and beyond. Thus, while the actions of this Administration have put the country on a solid fiscal footing today, we must also focus on the long-term fiscal health of our nation. In recent years, the Administration has proposed a combination of smart investments and policy reforms that would keep the deficit under three percent of GDP for the next 10 years and nearly eliminate the fiscal gap over the next 25 years. Tax reform to curb inefficient tax breaks for the wealthy, close loopholes, and reform the taxation of capital income and financial institutions would make the tax system fairer and lower the deficit. Comprehensive immigration reform would boost labor force participation, productivity, and ultimately growth, directly addressing key fiscal challenges. Continued focus on health policy to further improve health care quality and control cost growth remains critical. This policy vision shows that investments in growth and opportunity are fully compatible with putting the nation’s finances on a strong and sustainable path. It also shows that responsible deficit reduction can be achieved without endangering vital support to poor Americans or undermining commitments to seniors and workers. Under President Obama’s leadership, there has been substantial economic and fiscal progress, showing what is possible when strategic investment to grow the economy is paired with smart reforms that address the true drivers of long-term fiscal challenges. While there is some scope for additional borrowing to finance smart investments in the next few years, ever-increasing borrowing is not sustainable as a long-run strategy, particularly when used to finance spending that does not generate higher growth or improvements for the middle class and in the case of deficit-increasing tax cuts, which deepen income and wealth disparities that are already a serious concern. Instead, the long-term fiscal health of the nation depends on smart investments in the middle class, tax reforms that close loopholes for the wealthy and ensure that everyone plays by the same set of rules, comprehensive immigration reform, and health reforms that build on our progress to date without sacrificing coverage or quality. Remaining a Leader in the Global Economy The United States must continue its long history of international economic leadership. Such leadership benefits American workers and families and enables the United States to project its values abroad to achieve its larger foreign policy objectives. Of course, the world has changed since the creation of our international financial architecture after World War II, and we must change with it. Perhaps somewhat counterintuitively, our influence internationally will increase if we share the benefits, as well as the responsibilities, of managing the global economic and financial system with emerging economies, such as China. Our influence, however, cannot be sustained if we either back away or insist on protecting the status quo. But we face a host of challenges. Our relationship with China is one of the most important in the world. While we have made much progress over the past eight years, the degree to which China is willing to takes the steps necessary to follow through on commitments to reorient its economy toward more sustainable growth, open up to foreign businesses, and be a partner in global governance, remains to be seen. As we saw from the example of Chinese exchange rate policy, engagement between the United States and China is an important means of maintaining pressure for China to implement policies that are necessary for China’s own medium and long-term economic health and to create a level playing field for the world economy. The UK’s decision to leave the European Union sent shockwaves through Europe and the world, and we must closely monitor the situation and continue to argue for the benefits of continued integration post-Brexit. Japan’s economy faces the ongoing challenges of an aging population and high public debt hampering the government’s ability to foster growth. We must also keep a watchful eye on emerging economies and the unique challenges they face. In particular, in recent years, we have made progress in our relations with Latin America, particularly with Mexico and Argentina, and we should build on that progress. Adjusting to the New Threats in Our World With the rise of state-sponsored and lone wolf terrorism, rogue nations, and international strongmen, we must address the reality that we live in a dangerous world. Making it safer means using every tool available—including the financial tools available to Treasury—to defeat and degrade terrorist organizations like ISIL. We must continue to leverage our ability to impose crippling sanctions on states and individuals to change behavior. We must seek to eliminate the proliferation of nuclear weapons. Cyber attacks on our financial system represent a real threat to our economic and national security, and maintaining vigilant and coordinated efforts to keep pace with and respond to these threats has been and will remain a crucial piece of Treasury’s work. And we must recognize global climate change for the economic and existential threat that it is and band together with the rest of the world to avert catastrophe. How to Make Our Vision a Reality How do we accomplish the goals laid out above? To be sure, there are a host of paths policymakers might take to do so, but I believe the following steps, which range from specific policy prescriptions to more general advice, are the most immediate. Infrastructure Spending Moving forward, we must redouble our efforts to make investments in our country’s transportation infrastructure, which help create middle-class jobs in the short term and drive broad-based economic growth in the long term. Indeed, by fixing our aging roads, bridges, and ports, we will help lay a foundation for widely shared economic expansion. The President’s business tax reform framework, discussed in more detail below, would generate substantial one-time revenues to fund new infrastructure investments. Paying for these investments by taxing overseas business profits would both be fiscally responsible and would help fix the perception that our tax system is not a level playing field. Continuing to come up with fresh, new ways to deploy capital will help the country achieve these goals. Effective partnerships between government and the private sector can play an important role in developing innovative solutions that efficiently leverage resources. And taking advantage of historically low interest rates to fund high-return public investments is simply smart fiscal policy. This Administration has long advocated for the creation of a national infrastructure bank, which would provide critical financing and technical support to foster public-private partnerships in U.S. infrastructure and establish a predictable source of long-term financing that would allow U.S. infrastructure to be consistently improved. Business Tax Reform Over the last eight years, Congress and the Administration have taken important steps to make the tax code fairer, support working families, and roll back unnecessary and unaffordable tax cuts for high-income families. In addition, using its administrative tools, the Administration has made substantial progress over the past eight years in combatting abusive tax practices. However, our business tax system remains in need of reform. As I have emphasized repeatedly throughout my time as Treasury Secretary, only Congress can enact business tax reform, which is necessary to remove incentives for businesses to relocate overseas, raise one-time revenues to promote infrastructure spending, and simplify tax compliance for smaller businesses. President Obama’s proposed plan for business tax reform sets out a framework for modernizing our business tax system. Among other elements, it would prevent companies from using excessive leverage in the United States to reduce their tax burden, impose a minimum tax abroad to help fight the global race to the bottom, impose a one-time tax on unrepatriated foreign profits, and reform the taxation of financial and insurance industry products. It also would close loopholes and special credits and deductions to lower rates without shifting the tax burden to individuals. Enacting such a plan would enhance our competitiveness and create an environment in which business rather than tax considerations drive decision-making. The President’s framework is also fiscally responsible, ensuring that business tax reform does not add to deficits over the long-term. I am hopeful that this framework will help to equip the new Congress to take responsible action on business tax reform. Housing Finance Reform Fixing our housing finance system remains the major unfinished work of post-financial crisis reform. Though the housing market has made significant strides thanks to efforts on the part of the Administration to help struggling homeowners, stabilize the housing finance system, and restore broader economic growth, many homeowners and neighborhoods continue to struggle. Fannie Mae and Freddie Mac remain in conservatorship and continue to rely on taxpayer support. Only legislation can comprehensively address the ongoing shortcomings of the housing finance system. A starting point for such legislation should be the principles President Obama laid out in 2013, which stressed a clearly-defined role for the government to promote broad access to consumer-friendly mortgages in good times and bad. While private capital should bear the majority of the risks in mortgage lending, reform also must provide more American households with greater and more sustainable access to affordable homes to rent or own. Global Economic Integration Global economic integration, including high-standards trade, leads to better economic outcomes than isolation and protectionism. High-standard trade agreements such as the Trans-Pacific Partnership can expand U.S. economic growth, open markets for American exports, and strengthen labor and environmental safeguards so that American workers can compete on a level playing field. But economic uncertainty, both domestically and abroad, threatens this framework. Whether driven by trade, technological advances, or the changing structure of the markets for labor and capital, these anxieties are real and deeply felt. In order to continue to enjoy the benefits of an integrated world, we need to focus on policies that address the real issues of inequality, such as slowing wage growth and increasing disparities in pay, to ensure that the benefits of trade are broadly felt. Strengthening the rules, alone, is not enough. To preserve this important engine of economic growth and international integration the United States and other advanced economies must also design and implement policies—including fiscal and tax policies—that advance the cause of inclusive, sustainable, and broad-based growth. Not all countries have the fiscal space sufficient to meet these needs, but after years of urging by the United States, policies of austerity are one-by-one giving way to policies designed to grow demand and improve incomes. The United States must continue to be an active voice in the global discussion of these issues. The United States must also maintain its leadership in the international financial architecture and ensure that the U.S.-led international financial system is adapting to best preserve U.S. interest in a changing world. This includes continued governance reforms of the IMF and multilateral development banks to reflect a changing world. Clear global rules create opportunities and incentives for innovation, invest, and work, which are critical to the United States and drive economic progress in other regions of the world. Continued Engagement with Challenging Partners Just as global economic integration has fueled economic growth, that integration—and our economic strength—provides us with additional tools to advance our priorities on the international stage. We should continue to use these tools judiciously to maintain pressure on those countries that take aggressive and destabilizing actions, such as Russia and North Korea, and provide sanctions relief when the targeted malign behavior changes, as with Iran and Burma. And, as we chart new courses with other countries, such as Cuba, we should be mindful of how we can use our economic tools to create the conditions for a changed relationship. We must always take care to avoid the overuse of sanctions, particularly our most unilateral tools like secondary sanctions that extend to non-U.S. persons. If we overuse these powerful tools, we risk lessening their impact when they are most needed and ultimately threaten our central role in the global financial system. Looking Forward with Optimism We have learned the hard way that deadlock does not produce good results—government shutdowns and near default on our debt cost the United States both economically and in standing around the world. It did not work in the 1990s, and it did not work over these past eight years. What has worked is finding opportunities in the sometimes quiet periods when bipartisan cooperation can lead to honorable compromise. In recent years, we have seen that targeted budget agreements could pave the way for more orderly and economically beneficial outcomes. We have seen that, on issues like creating a path forward for Puerto Rico and multi-year funding for our surface transportation programs, bipartisan compromise is still possible. But there is much more that requires this kind of progress. Treasury plays a critical role in finding areas where bipartisan solutions are possible. In a period when many thought little could be accomplished legislatively, we reached agreement on IMF Quota Reform, an approach to deal with Puerto Rico, and a permanent extension of expansions to the earned income tax credit and child tax credits that will reduce the extent or severity of poverty for millions of families with children. We have also used our existing authorities to limit corporate tax inversions, shed greater light on beneficial ownership to limit tax avoidance, realize tax parity for same-sex spouses, and opened relations with Cuba. And we have used our sanctions authorities to bring Iran to the negotiating table and limit the resources available to terrorist regimes and groups. I am proud of the record we have built over the past eight years. But during calmer economic times, policy makers are often tempted to roll back regulations, weaken reforms, and reduce oversight. I hope that future policymakers will take careful stock of the successes of this Administration as they consider the next steps forward. I remain an optimist about America’s future and wish the next team entrusted with responsibility for governing much success as it tackles the many challenges that remain and the new challenges that will present themselves over the coming years. Margaret Mulkerrin is the Press Assistant at the U.S. Department of Treasury. ###
Регуляторы США считают, что Deutsche Bank во время мирового финансового кризиса, занижал оценки рисков по ценным бумагам, которые были в итоге проданы американским компаниям Fannie Mae и Freddie Mac
What happened to the S&P 500 since the last time we looked at it over two weeks ago? The short answer to that question is "nothing much unexpected", at least if your eyes are drawn to that red box we first drew at the end of the first week of December 2016.... As they have fairly steadily since 25 November 2016, investors exited 2016 with their forward-looking focus apparently fixed to the distant future quarter of 2017-Q2, which coincides with investor expectations for when the Federal Reserve's Open Market Committee will next hike short term interest rates in the U.S. But the longer and perhaps more amazing story is that for us to have been right over the last two weeks, the S&P 500 has had do something a bit extraordinary and unusual. The S&P 500 has now tied a record with 9 consecutive days trading within the range set 10 days ago.... This is just the 2nd time in the history of the index that it has traded for 9 straight days without moving beyond the range set 10 days ago. Before you go thinking that we're unusually good at prognostication, let's take a moment to consider the limitations of the forecasting abilities of our standard dividend futures-based model. The following chart shows the potential alternative trajectories that the S&P 500 would have been likely to take in 2016 based only on the information we had available before the market even opened for the year back on 4 January 2016. In this chart, we had identified three periods of time where we already knew in advance that our model's projections would be less accurate because of the echo of the volatility of stock prices during certain periods in 2015, which affects our model because it incorporates historic stock prices as the base reference points for making its future projections. In addition, at the beginning of 2016, we had no visibility into the expectations for dividends that would be paid out in any future quarter beyond 2016-Q4. Contrast what you see in that chart with the final results for 2016, in which we've showed the actual trajectory of the S&P 500 against the backdrop of the alternative trajectories we projected, which we updated weekly throughout the year as our model incorporated new information. The first thing that stands out to us is just how much the projected future changed throughout the course of 2016. For example, if you look just at the alternative trajectory we showed for the expectations that would apply for whenever investors would collectively focus their attention upon 2016-Q4, you'll see that projected stock prices rose above the levels that our model had indicated at the beginning of 2016. You can also see the impact of new information when it became relevant, such as in late May-early June 2016, when investors suddenly shifted their forward-looking focus from the third quarter of 2016 to the first quarter of 2017. And then there was the disruptive noise event of the unexpected outcome of the Brexit referendum in the United Kingdom, which caused volatility to spike in the S&P 500 in late June 2016, which would subsequently affect our model's forecasting ability in July 2016 because of the echo of volatility it first generated at its one-month anniversary - an echo that didn't exist before the Brexit vote! These kinds of limitations are why we more closely focus on just the current quarter when projecting future stock prices, as the expectations of the future tend to be much more stable in the shorter term under normal circumstances, where the primary contributor of non random-walk volatility in stock prices may be simply attributed to shifts in how far forward investors are collectively focusing their attention at any given point of time. Once you get more than one quarter out, the future for stock prices is more likely to change by more than anyone can reasonably foresee, which is why forecasting where the S&P 500 will be more than three months from the present is such a fool's errand. Speaking of which, we'll look forward to the end of 2017-Q1 sometime later this week. Until then, as we're closing out 2016, let's sample the headlines for what potential market-moving news there was that stood out to us during the last two weeks of December 2016.... Monday, 19 December 2016 Wall Street extends rally but Germany truck deaths reduce gains Tuesday, 20 December 2016 Wall Street hits record highs, dollar rises to 14-year peak Wednesday, 21 December 2016 Oil prices fall on U.S. inventory build; Libya output ramps up Wall Street loses ground after Trump rally A volatile calm - the paradox of 2016 financial markets Thursday, 22 December 2016 A volatile calm - the paradox of 2016 financial markets This is probably the story of the S&P 500 in 2016. Despite periods of notable volatility, which from our perspective, were little more than the kind of Lévy flights that occur as investors shift their forward-looking attention from focusing upon a particular period of time in the future to instead focus on other periods of time in the future, the overall volatility of stock prices was considerably less than what we saw in 2015. Oil prices up in quiet session as year-end approaches Retailers weigh on Wall Street, Dow 20,000 slips away Friday, 23 December 2016 U.S. crude settles at 17-month high after small, pre-holiday gain Wall St. rises, Dow racks up seventh straight weekly gain Tuesday, 27 December 2016 Oil rallies in thin trade, adds to year's gains Wall St. edges up in low volume, boosted by tech shares Wednesday, 28 December 2016 Largest drop in two months as Wall St. rally loses steam Thursday, 29 December 2016 Oil dips after an unexpected U.S. crude inventory build Bank stocks weigh on shares; Dow backs further from 20,000 Fed buys $3.2 billion of mortgage bonds, sells none Did you know that the Fed never stopped its QE 3.0 program of buying up Mortgage-Backed Securities to lower mortgage rates to stimulate the U.S. housing market? If you looked at the Fed's total holdings of U.S. government-issued debt, you would likely miss it, since the Fed has been effectively exchanging the "agency" debt that both Fannie Mae and Freddie Mac borrowed and have been paying back to the Fed with new mortgage-backed securities debt issued by the two U.S. government-controlled enterprises. Friday, 30 December 2016 Dollar, stocks log yearly gains, oil the biggest winner Wall St. ends solid 2016 on dour note The takeaway from the two stories together: 2016 was an up year, but 31 December 2016 was a down day for the S&P 500! As he is wont to do, Barry Ritholtz has succinctly summarized the positive and negative news for the markets and the economy for the weeks ending 23 December 2016 and 30 December 2016.
Fannie Mae reported today that the Single-Family Serious Delinquency rate increased to 1.23% in November, up from 1.21% in October. The serious delinquency rate is down from 1.58% in November 2015.These are mortgage loans that are "three monthly payments or more past due or in foreclosure". The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.Click on graph for larger imageAlthough the rate is generally declining, the "normal" serious delinquency rate is under 1%. The Fannie Mae serious delinquency rate has fallen 0.35 percentage points over the last year, and at that rate of improvement, the serious delinquency rate will not be below 1% for about 8 more months.Note: Freddie Mac reported earlier.
Freddie Mac reported that the Single-Family serious delinquency rate in November was at 1.03%, unchanged from 1.03% in October. Freddie's rate is down from 1.36% in November 2015.Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Click on graph for larger imageAlthough the rate is generally declining, the "normal" serious delinquency rate is under 1%. The Freddie Mac serious delinquency rate has fallen 0.33 percentage points over the last year, and at that rate of improvement, the serious delinquency rate could be below 1% in December or January.Note: Fannie Mae will probably report tomorrow.
Submitted by Dave Collum via PeakProsperity, A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. Background: The Author “The easiest thing to do on earth is not write.” ~William Goldman, novelist I never would have believed it—not in a million years—but it happened: the Cubs won the World Series, and The Donald is our new president. Every December, I write a Year in Review1 that’s first posted on Chris Martenson’s & Adam Taggart’s website Peak Prosperity2 and later at Zero Hedge.3 What started as a few thoughts posted to a handful of wingnuts on Doug Noland’s Prudent Bear message board has mutated into a detailed account of the year’s events. Why write this beast? For me, it puts the seemingly disconnected events that pass through my consciousness, soon to be lost forever, into a more organized and durable form. Somebody said I should write a book. I just did. In a nutshell, this is a story of human follies and bizarre events. There are always plenty of those. Let others tell the feel-good stories. Figure 1. Malcolm McDowell as Alex in A Clockwork Orange. I try to identify themes that evolve. This year’s theme was obviously defined by the election, which posed a real problem. I struggled to detect the signals through the noise. Many of my favorite analysts from whom I extract wisdom and pinch cool ideas spent the year trying to convince the world that one or more of the presidential candidates was an unspeakable wretch. I was groping for a metaphor to capture our shared experiences, rummaging through Quentin Tarantino scripts and Hieronymus Bosch landscapes for inspiration. “Rise of the Deplorables” was tempting. Then it clicked. The term “clockwork orange” is a Cockney phrase indicating a bizarre incident that appears normal on the surface. The phrase was commandeered as the title of a 1971 dystopian film in which Malcolm McDowell’s character Alex is brainwashed by being forced to watch the most grisly and horrifying of spectacles (Figure 1). For us, it was the 2016 presidential election, which created a global mind-purging brain enema. The horror! The horror! (Oops. Wrong movie.) I knew in January that by mid-November we would be unified by our collective distrust of the Leader of the Free World, who would be surrounded by a dozen chalk outlines corresponding to political corpses that nobody wished to resurrect. I have done my best to not marinate you—too much—in tales of sociopathic felons or stumpy-fingered, combed-over letches. I do, however, eventually enter the Swamp. By way of introduction, my lack of credentials—I am an organic chemist—has not precluded cameos in the Wall Street Journal,4 the Guardian,5 Russia Today,6,7,8 a plethora of podcasts,1 and even a couple investment conference talks. Casting any pretense of humble bragging aside, let’s just post this year’s elevator résumé and a few endorsements to talk my book. “We live in a world where some of the best commentary on the global financial markets comes from a frustrated chemistry professor.” ~Catherine Austin Fitts, former Assistant Secretary of Housing, former Dillon, Reed & Co., and current president of Solari9 One of the high-water marks was sharing the spotlight with Mark Cuban in a Wall Street Journal article by Ben Eisen on nouveau gold buggery:10 “Dave Collum . . . has been adding to his holdings of physical gold this month, citing, among his concerns, negative interest rates and the growing refugee crisis in Europe. ‘I’m getting apocalyptic,’ he said.” ~Ben Eisen, Wall Street Journal Podcasts in 2016 included Wall St. for Main St.,11 Macro Tourist Hour (BTFD.TV),12 The Kunstlercast,13 Five Good Questions,14 FXStreet,15 and, of course, Peak Prosperity.16 Dorsey Kindler, of a small-town newspaper, the Intelligencer (Doylestown, PA), interviewed me about college in an article titled, “The New McCarthyism” and, in an ironic twist, was soon thereafter fired and his content purged.1 An interview for the Cornell Review, a right-wing student newspaper considered a “rag” by the liberal elite, probed college life and the new activism.17 A cross-posting at Zero Hedge got the Review’s click counts soaring.18 Finally, I chatted on local radio about real estate, the bond market, Hillary, and other rapidly depreciating assets.19 “If you reflect on Prof. Collum’s annual [review], you will realize how far removed from the real world and markets you are. This is a huge deficiency that all of you must work on correcting.” ~Professor Steve Hanke, economist at Johns Hopkins University, in a letter to his students Contents Footnotes appear as superscripts with hyperlinks in the Links section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts via the linked contents as follows: Part 1 Background: The Author Contents Sources On Conspiracy Theorizing Investing U.S. Economy Broken Markets Cash on the Sidelines Pharma Phuckups Gold Energy Real Estate Debt Pensions Inflation/Deflation The Bond Caldera ZIRP and NIRP War on Cash Banks and Bankers The Fed European Central Bankers Europe Brexit Refugee Crisis References Part 1 Part 2 Putin and Russia South America China Japan Middle East Government Folly Panamania Human Achievement Human Folly Civil Liberties Campus Politics Elections Rigged Primaries: RNC Division Rigged Primaries: DNC Division Bernie Hillary Clinton Trump Media Conclusion Books Acknowledgments References Part 2 For historical reasons, the review begins with a survey of my perennial efforts to fight the Fed. I am a fan of the Austrian business cycle theory and remain hunkered down in a cash-rich and hard-asset-laden Bunker of Doom (portfolio). The bulk of the review, however, is really not about bulls versus bears but rather human folly. The links are as comprehensive as time allows. Some are flagged as “must see,” which is true only for the most compulsive readers. The quote porn is voluminous: I like capturing people’s thoughts in their own voices while they do the intellectual heavy lifting. I try to avoid themes covered amply in previous reviews. Some topics resolve themselves. Actually, none ever do, but they do get boring after a while. Others reappear with little warning. Owing largely to central banking largesse, the system is so displaced from equilibrium that something simply has to give, but I say that every year. We seem to remain on the cusp of a recession and the third, and hopefully final, leg of a secular bear market that began in 2000. Overt interventions have kept the walking dead walking. The bulls call the bears Chicken Littles and remind us what didn’t happen. One of my favorite gurus reminds us of a subtle linguistic distinction: “Didn’t is not the same as hasn’t.” ~Grant Williams, RealVision and Vulpes Investment Management I finish with synopses of books I’ve read this year. They are not all great, but my limited bandwidth demands selectivity . They are all nonfiction (to varying degrees). I don’t have time to waste on 50 Shades of Garbage. Sources “As for the national press corps—the Fourth Estate—it has been compromised, its credibility crippled, as some of the greatest of the press institutions have nakedly shilled for the regime candidate, while others have been exposed as propagandists or corrupt collaborators posturing as objective reporters.” ~Pat Buchanan, syndicated columnist and senior advisor to presidents With some notable exceptions, the mainstream media has degenerated into a steaming heap of detritus that is so bad now that it gets its own section. A congenital infobesity has morphed into late-stage disinfobesity. Enter social media—the fever swamp—to fill the void. As we shall see, however, all is not well there either. I sift and pan, looking for shiny nuggets of content that reach the high standards of a rant. Shout-outs to bloggers would have to include Michael Krieger, Charles Hugh Smith, Peter Boockvar, Bill Fleckenstein, Doug Noland, Jesse Felder, Tony Greer, Mike Lebowitz, Mish Shedlock, Charles Hugh Smith, and Grant Williams. News consolidators and new-era media include Contra Corner,20 Real Vision,21 Heatstreet,22 and Automatic Earth.23 A carefully honed Twitter feed is a window to the world and the road to perdition. My actions speak to my enthusiasm for Chris Martenson and Adam Taggart at Peak Prosperity.24 However, if you gave me one lens through which to view the world, I would have to choose Zero Hedge (or maybe LadySonya.com). “You really should be keeping a journal because you are living through momentous times.” ~Chris Martenson, Peak Prosperity On Conspiracy Theorizing “I stopped believing in coincidences this year.” ~Scott Adams, creator of Dilbert Every year I shout out to conspiracy theorists around the world. I am not talking about abductions by almond-eyed aliens with weaponized anal probes (which really hurt, I hasten to add) but rather the simple notion that sociopathic men and women of wealth and power conspire. Folks who could get through 2016 without realizing this are imbeciles. I am talking totally blithering idiots. Markets are rigged. Government stats are cooked. Interest rates are set by fiat. Polls are skewed. E-mails are destroyed. Cover-ups abound. Everybody has an agenda. Watch this d-bag at one of the neocon think tanks—somehow so stupid as to not realize he’s being recorded—talk about how false-flag operations are commonplace.25 Meanwhile, the media conspires to convince us to the contrary. The folks who really piss me off, however, are the glib intellectuals—Nassim Taleb calls them “intellectuals yet idiots” (IYIs)—who suggest that conspiracy theorists are total ret*rds.26 (Saved by the asterisk, which baffles the sh*t outta me why that works.) Does it seem odd that the world’s most prominent detractor of conspiracy loons, Harvardian Cass Sunstein,27 is married to neocon Samantha Power,28 one of the great conspirers? It does to me, but I am susceptible to such dietrologie. “Popular opinions, on subjects not palpable to sense, are often true, but seldom or never the whole truth.” ~John Stuart Mill Many will try to shut down open discussions of ideas displaced from the norm by using the word “conspiracy” pejoratively. Their desire for the world to be normal is an oddly child-like cognitive dissonance. In that event, lean over and whisper in their ears, “Keep your cognitive dissonance to yourself, dickweed” while gently nudging them in the groin with your knee. Now, let’s pop a few Tic Tacs, grab a clowder, and get on with the plot, but first . . . *Trigger Warning* If this review is already too raw for your sensibilities, please stop reading. Nobody is making you squander your time on a socially marginal tome of questionable merit. Better yet, seek professional help. Investing “If you pay well above the historical mean for assets, you will get returns well below the historical mean.” ~Paraphrased John Hussman Read that over and over until you understand it. Changes in my 2016 portfolio were more abrupt than those from other years but still incremental. I resumed purchasing physical gold in 2015 after a decade-long hiatus. In 2016, I bought aggressively in January (the equivalent of half an annual salary) and continued incremental buying throughout the year (another half salary). My total tonnage (OK, poundage) increased by an additional 5% of my assets. My cash position shrunk by about 5% accordingly but remains my largest holding. I am in no rush to alter the cash position. For a dozen years, I have been splitting my retirement contributions into equal portions cash and natural gas equities. The latter keeps failing to attain an approximate percentage goal of 25–30% of my assets owing to market forces. My approximate positions are as follows: Precious metals etc.: 27% Energy: 12% Cash equivalent (short term): 53% Standard equities: 8% The S&P, despite a late year rally incorrectly attributed to the Trump victory, appears to be running on fumes or, as the big guns say, is topping. The smart guys (hedge fund managers) continue to underperform, which means the dumb money must be overachieving (blind nuts finding squirrels). This is never a good sign. “We should all own cash, because it is the most hated asset.” ~Jim Rogers, Rogers Holdings and Beeland Interests “The great financial success stories are people who had cash to buy at the bottom.” ~Russell Napier, author of Anatomy of the Great Bear (2007) “Cash combined with courage in a time of crisis is priceless.” ~Warren Buffett, Berkshire Hathaway Figure 2. Performances of GLD, SLV, XAU, XLE, XNG, and S&P. After a few years of underperformance resulting from the oil and gold drubbing, large gains in the gold equities (60%), gold (6%), silver (15%), generalized energy equities (10%), and natural gas equities (48%) shown in Figure 2 were attenuated by the huge cash position to produce a net overall gain in net worth of 9%. This compares to the S&P 500 (+10% thanks to a hellacious late year rally) and Berkshire Hathaway (25%, wow). (Before you start brain shaming me, that same cash buffer precluded serious percentage losses during the hard-asset beatings in the preceding years.) The most disappointing feature of the year was in the category of personal savings. I have managed net savings every year, including those that included paying for college educations. This year, however, began poorly when my gold dealer got robbed and lost my gold. My losses paled in comparison to his; he committed suicide. I discovered maintenance needs on my house that got really outta control, and a boomerang adult child ended up costing me a bit. All told, I forked over 50% of my annual salary to these unforseeables, which turned overall savings negative (–20% of my salary) and eroded a still-decent annual gain in net worth. Oh well, at least I have my health. Just kidding. I have a 4 centimeter aortic aneurysm, am pissing sand, and have mutated into Halfsquatch owing to congenital lymphedema (Figure 3). (I live-Tweeted a cystoscopy—likely a first for social media.) I have to keep moving here to finish before I pass my expiration date. Figure 3. Sand and Stump. In a longer-term view, large gains in total net worth (>300%) since January 1, 2000 are still fine. I remain a nervous secular precious metal bull and confident equity secular bear. I intend to put the cash to work when Tobin’s Q, price-to-GDP, price-to-book, and Shiller PE regress to and through the mean. When this will occur is anybody’s guess, especially with central bankers determined to make me pay for “fighting the Fed.” I will start buying after a 40% correction brings the S&P to fair value, keep buying as it drops below fair value, and wish I had saved my money by the secular bottom. We return to all this in Broken Markets. Here’s what my dad taught me: you need cash at the bottom to buy up cheap assets. Few will have cash because you have to go to cash at the top, and precious few have the capacity to shake recency bias and exit positions that have performed well. Just like a toaster, your sell order has only two settings: too soon and too late. My far greater concern is that bear markets are as much about time as they are about inflation-adjusted price. The Fed is determined to burn the clock. Nobody wins if we imitate Japan’s 25-year lost decade. “Time takes everybody out. It’s undefeated.” ~Rocky Balboa U.S. Economy “The word ‘maximum employment’ has this connotation that everything is good in the labor market, but everything is not great in the labor market.” ~Loretta Mester, president of the Cleveland Federal Reserve Unemployment is at 4.9%—what’s not to like? Economists have even claimed the “labor market is getting tight.” I scoff. The labor participation rate shows that 38% of working-age adults are not working (Figure 4). Apparently, 33% of working-age adults are neither employed nor unemployed. Hmmm . . . even that’s a little optimistic given that only 50% of adults are employed full-time. The millennials are getting whacked by the boomers who refuse to die (sorry, retire). Figure 4. Unemployment (left; official stats in red; Shadowstats in blue) and labor force participation rate (right). The wealth for middle-class households has dropped 30% since 2000;29 One in five kids lives in poverty,30 46 million folks are on food stamps;31 20% of the families have nobody employed32 (despite the 4.9% number); and almost 50% of all 25-year-olds are living with mom and dad unable to translate that self-exploration major into a job.33 Half of all American workers make less than $30,000 a year.34 The once-industrial-juggernaut Rochester of Kodak/Xerox fame has more than 30% of residents living in poverty and another 30% living with government assistance.35 Very Detroit-like but without the Aleppo motif. You can see it in the micro if you drill down. Deindustrialization has been occurring steadily since the late 90s.36 The mining industry lost more this year than it made in the last eight years.37 Sales of industrial-strength trucks have been “dropping precipitously.”38 Sales in general are looking very ’09-ish. Factory orders and freight shipping (Cass Freight Index) have been dropping for two years.39 Catherine Mann of the OECD says that “In terms of actual trade growth, it is extremely grim.” The CEO of Caterpillar finally cashed in his chips after 45 contiguous months of dropping sales.40 Commercial bankruptcies are up 38% year over year,41 whereas 62% of Americans have less than $1,000 in savings.42 It seems unlikely the consumer will be buying bulldozers and 18 wheelers in the near future. “This turns out to be the deepest and most protracted growth shortfall on record for the modern-day global economy.” ~Stephen Roach, Yale professor and former chairman and chief economist at Morgan Stanley The economy is in the weakest post-recession recovery in half a century despite protestations to the contrary by Team Obama.43 The 2%-ish growth rate since ‘09 feels like a recession, especially given specious inflation adjustments to get 2%. There isn’t a wave of job cuts yet, but some signs are worrisome. Cisco Systems laid off 20% of its workforce.44 GE cut 6,500 jobs.45 Despite gains in non-GAAP earnings, GE’s GAAP earnings—the non-fabricated earnings—plunged.46 Intel dumped 11% of its workforce but faked a win by dropping its assumed tax rate by 7%.47 This tactic smacks of the same old financial engineering, but maybe it is headed for nonprofit status. One bright spot: the $15 billion vibrator industry is set to grow to $50 billion,48 satisfying consumers in a manufacturing–service industry combo. Speaking of stimulus, what the hell went awry? The Feds drilled the rates to zero (creating a ginormous bond bubble; vide infra) to encourage consumers to do the one thing they cannot afford to do—consume. Global central bankers have cut rates every 3 days since 2008 according to Grant Williams.49 The central bankers dumped tens of trillions of dollars—trillions with a “t” that comes right before gazillions with a “g”—into the global economy. The answer is simple and foreshadowed above: once you blow up a credit bubble, you cannot force consumers to spend. Have ya heard people talking about pulling equity out of their houses lately? Didn’t think so. That numbnut idea proferred by the incoherent Alan Greenspan left consumers with the same houses and twice the debt while poverty-stricken old age looms large. “If a consumer buys a boat today with money made available through a low-interest loan, that’s a boat he won’t buy next year.” ~Howard Marks, Oaktree Capital and Three Comma Club (billionaire) “The decline of the middle class is causing even more economic damage than we realized.” ~Larry Summers, speaking for himself with the royal “we” How could the economists have been so wrong? I have a remarkably simple theory: their models are wrong. They suffer so badly from Friedrich Hayek’s “fatal conceit” that they have become functional nitwits. That’s the best I’ve got. One could argue we have a secular economic problem. As a nation, we exploited cheap labor overseas through immigration during the 16th–20th centuries. The immigrants worked like dogs, got paid squat, and saved so furiously that it became a lot more than squat. Thomas Sowell explains this brilliantly in his writings.50 For the last few decades, however, we exploited cheap overseas labor by exporting jobs. They too worked like dogs, got paid squat, and saved furiously. But that wealth is not here; it’s over there (pointing east). Will new and improved trade policies solve our (U.S.) problems? I don’t think so. As long as there are folks overseas willing to work harder for less, we have some correcting left to do. With that said, I am a free-trade guy and particularly like the trade agreement painstakingly crafted by Mish Shedlock: “Effective immediately, all tariffs and subsidies, on all goods and services, are removed.” ~Mish Shedlock (@MishGEA), blogger How about some more Keynesianism? Former economist Paul Krugman, whose op-eds read like episodes of Drunk History, would say we simply haven’t done enough. (Paul: you have done more than enough.) Modern-day Keynesianism has mutated way past Maynard’s original idea into an unrecognizable metaphysical glob of thinking that boils down to the notion that government knows how to spend better than the private sector does. Is this the same government that included Anthony Weiner, Rick Santorum, and Barbara Boxer? Here is Keynesianism I could live with. Government should spend as little as possible, but there are legitimate roles to be played. Imagine if governments at all levels would simply act like financially interested parties—as a collective, not as slovenly greedy, bribery-prone individuals—and buy necessary goods and services when they are cheap and stop buying when the private sector has bid them up. We would get maximum bang for the tax buck. It would also quite naturally achieve the much ballyhooed counter-cyclicality. But, alas, the moment they start talking “stimulus,” the pay-to-play crowd turns it into a fiasco. As my dad once said, “Never ask government to do anything they don’t have to do, because they will do a terrible job.” Words from the wise. Broken Markets “I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention.” ~Axel Weber, former head of the Bundesbank “My thesis now is that central banks believe they can prop up asset prices through a downturn in the business cycle.” [email protected] Whomever @TheEuchre is, I think that is a provocative alternative theory of Fed motivation. Moving along, we seemed to be on the cusp of a recession last year with a number of valuation indicators pointing to a +40% correction simply to regress to the mean. In the absence of such a correction (check) and the absence of explosive growth (check), we are still looking over the precipice (check). Luminaries like Stanley Druckenmiller, George Soros, Sam Zell, and Bill Gross are calling for a zombie apocalypse at some unknowable future date. Paul Tudor Jones appears to be wrapping up in a way that smacks of Julian Robertson’s Tiger Management hedge fund liquidation in ’99. Harvard’s Martin Feldstein says asset prices are “dramatically out of line.” Credit Suisse sees analogies to the tech bubble, whereas Ned Davis Research suggests, “on a revenue basis, U.S. stocks are as expensive as they have ever been.” Chart guru Doug Short created a simple model that averages four common equity valuation techniques (Figure 5). Based on his analysis, the market is 76% overvalued compared with the average dating back to 1900. (Note: a 76% overvaluation is regressed to the mean by a 43% correction, which will be as pleasant as baptizing a cat.) Figure 5. Doug Short composite valuation model. At these valuations, a few shanks at the start of the year were scary, but soon the markets entered the tightest 40-day trading range (2.27%) in more than 100 years—the Horse Latitudes.51 There were a few goofy IPO crack-ups but they stayed subclinical. Even flash crashes raised only a few eyebrows. Knee-slappers elsewhere included a crash of the British pound in the forex markets in under a minute owing to Brexiteers52 (vide infra) and a 6.7% crash in China in less than a minute.53 The misnamed Trump rally—misnamed because it began three days before the election—left some serious skid marks, elevating the market 8% in only a few weeks. This was a short squeeze in conjunction with . . . I don’t really know. It is suggested that central banks and programmed investing have pushed a wall of money at the markets. This credit-based splooge corresponds to debts to be paid back later, but who cares? Over 10,000 mutual funds and exchange-traded funds (ETFs) are feeding off only 2,800 issues on the NYSE. There are now almost twice as many hedge funds as there are Taco Bells54 (which won’t be growing under a Trump presidency). I get a little confused as reported outflows in both equity funds and money market funds argue the contrary. (Even these claims are confusing given that buyers necessarily match sellers; vide infra.) “[I]t’s monetary policy we demonstrate is driving everything. And yet here too, there are worrying signs of what may become a breakdown.” ~Matt King, Citigroup Stock buybacks—in many cases leveraged stock buybacks—continue to levitate the markets. For those not paying attention, companies borrow money to buy back shares to prop up share prices, which serves the dual role of maximizing year-end bonuses and wards off balance sheet crises. Now my head hurts. Baker Hughes announced a $1.5 billion share buyback and $1 billion of debt issue. In the first half of 2016, S&P 500 companies “returned” 112% of their earnings through buybacks and dividends.55 Returned? There is some evidence that buybacks may be subsiding. When they stop buying shares at all-time highs—“buying high”—and their investment unwinds while crushing corporate debt persists, companies will be doing “dilutive share issuance” at fire sale prices—“selling low.” For now, corporate balance sheets hold the dumb money. “The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins and growing indebtedness.” ~Stanley Druckenmiller, former head of Duquesne Capital and rock star There are instances of generic idiocy emblematic of deep problems. Eighty-five percent of traders on Wall Street have less than 15 years of experience. Synthetic securitizations are returning.56 Are buyers being paid for the risk? Some have suggested that retail investors should stay away from these (and Fukushima). A managed futures fund was launched by a 17-year-old kid who may not have made it to third base yet.57 A 28-year-old Ukrainian hacker got caught making over $30 million on insider information.58 If he were a bank, he’d have been fined $100K. The “head” of the collapsed Visium Asset Management hedge fund killed himself by slicing his own neck.59 Right. Platinum Partners appears to have been running a Ponzi scheme.60 Vegan food start-up Hampton Creek used $90 million in “seed” money to buy its own products (probably seeds) to generate fake “organic growth.”61 Nintendo spiked on the release of Pokémon, which caused hoards of idiots to chase digital critters to stupid places.62 Even though Nintendo fessed up that their bottom line would not be improved by the craze, some of the gains have stuck as investors keep chasing those digital share prices to stupid places. “Markets don’t have a purpose any more—they just reflect whatever central planners want them to. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable.” ~Mark Spitznagel, Universa Investments Cash on the Sidelines “Preliminary attempts to clean it up fail as they only transfer the mess elsewhere.” ~Wikipedia on the bathtub ring in The Cat in the Hat In 2011, I used that quote in a different context, but it is a great articulation of the Law of Conservation of Mass.63 There are a lot of memes in the investing community—pithy phrases and ideas for which tangible support is weak or nonexistent. One is the merits of “cash on the sidelines” and its kissing cousin, money “flowing” in and out of asset classes. In the late ‘90s, I tried to ascertain how much cash was generated in sell-offs and soon realized the answer was zero. Others such as Lance Roberts,64 John Hussman,65 Cliff Asness,66 and Mish Shedlock67 have dismembered putty-headed thinking underlying cash on the sidelines. However, there are pockets of holdouts (mostly on CNBC) who subscribe to the flow model. You can hear Maria saying it: “There is so much cash on the sidelines waiting to go into equities.” I am going to take one last crack at it with the aid of some graphical wizardry and grotesque oversimplification. “So if money is coming into the market, where is it going to find a home?…What’s going to get it into the market?” ~CNBC Fast Money Here is the problem with the meme in a nutshell: If I buy, somebody must sell. It’s the Law of Conservation of Cash. If I grab a stack of Tubmans ($20 bills) and buy NFLX, the former owner of NFLX now has the Tubmans, and I have the overpriced shares. Do that all day long, and the cash on the sidelines doesn’t change; it moves around like the bathtub ring. Mutual funds insert middlemen to skim cash, but still no money is destroyed or created. Breathless claims that money is flowing in or out of mutual funds sounds important, but where in this model is cash created or destroyed? The percentage of cash, however, is a huge issue. Let’s look at this graphically and restrict it to a simple binary model (Figure 6). Imagine there is $100 trillion in cash globally and $100 trillion of market cap in equities. Of course different investors have different allocations, but investors have collectively decided that they wish to own 50% cash and 50% equities (labeled 50:50). Figure 6. Equity-to-cash allocations in a non-inflationary world. In a non-inflationary banking system, the cash is static. Along comes legendary wise man John Bogle declaring equities reward risk taking, we should weight our portfolios 60:40, and the world agrees. Investors will bid up equities to higher valuations until, collectively, equities reach the 60:40 proportion for a satisfying 50% gain exclusively through expansion of the numerator. Legendary raging bull Laszlo Birinyi, guided by recency bias, convinces the world stocks are great investments and suggests 80:20 as the right allocation. Investors collectively agree, and they bid shares higher, which completes an overall 300% equity gain from the conservative days of 50:50 allocations. Now we’re rocking! We are just beginning to pull stupidity forward. Jeremy Siegel, self-appointed guru and demagogue, says you simply can’t lose, so you should be 90% stocks, and the world listens because this particular baitfish-smart analyst stays at Holiday Inns and is from Yale! The market has now lost all moorings, pushing the overall gains to 800%! Of course, now cash is trash and investors strive to be 100% in equities. Equity investors now “reach out and touch the face of God” because the prices are heading for infinity. Alas, The Bear appears before that can happen—it always does. It doesn’t have to be an axle-breaking speed bump. The proximate trigger is not important. Spooked investors drop their allocations back to 60:40 and, in the depths of despair, back to 50:50. You will then scoop up cheap equities with inverted baggies from disembowled, toe-tagged investors who need cash. We gave the gains all back . . . or did we? During this round trip, society collectively learned to make goods and provide services much more efficiently. The same amount of effort—the same amount of cash—corresponds to a much higher standard of living. This is good deflation, the kind that James Grant describes because he reads the dusty archives from bygone eras. Most economists nowadays endorse low inflation that roughly matches productivity growth, which causes both the cash and the market cap (equities) to drift gently upward in a feel-good money illusion.68 Don’t we need inflation for growth? Only if you believe the industrial revolution of the nineteenth and early twentieth century was disappointing. For the first half of the twentieth century, the DOW rose 1.3% nominally per annum. However, the modern banking system is most definitely inflationary. Money is created by increased leverage of all kinds—sovereign debt, consumer debt, quantitative easing (QE), and helicopter money all grow the money supply. They grow the denominator (cash) in Figure 6, which is inflation. The overarching model guiding the Fed’s policies seems to be that increasing the denominator will nonlinearly increase the numerator. As inflation lifts equities, animal spirits take hold (the Wealth Effect) and lift them even more. We will go through the four stages of bullishness: Bogle-Birinyi-Siegel-God. The gains will be illusory because real wealth is manufactured, farmed, mined, and maybe programmed. Central bankers will always do something; sitting on their hands (or thumbs) is unnatural. When the markets de-lever, however, cash leaves the system. Business and investing models demanding inflation begin to break. This is bad deflation. It is harsh, abrupt, and dreaded by central bankers, because it is largely their doing. Pharma Phuckups “If you think health care is expensive now, wait until you see what it costs when it’s free.” ~P. J. O’Rourke, conservative columnist There seemed to be an epidemic of flatliners in the pharmaceutical industry requiring quarantine (its own section). The big one was Theranos, a company based on miraculously effective lab tests that turned out not to really work.69 The company was quietly outsourcing to labs whose tests did work. When the scam was revealed, the wunderkind CEO, Elizabeth Holmes, watched her Forbes-estimated net worth drop from $4.5 billion in 2015 to “$0” in 2016.70 The corporate digital exam would be familiar to her distant relative John Holmes. Mylan suffered an optics problem when the disappearance of a key competitor allowed it to take a cue from pharma scoundrel Martin Shkreli71 and jack up its EpiPen price 500%,72 which smacked of price gouging. Mylan was protected by government intervention when Teva was denied rights to make a competing product.73 Such mischief in the generic drug market is real. The feds also mandated stocking EpiPens in all schools.73 A million bucks of lobbying money well spent.74 An ode to my new EpiPen It used to cost one, now it’s ten Our merchants of greed Are cheeky indeed These grifters are at it again [email protected] Valeant Pharmaceuticals also reported big losses following big gains. Criminal investigations into Valeant took it 90% off its recent highs (a “tenth bagger”).75 Meanwhile, drug giant Eli Lilly’s share price Felt the Bern in the fall when Bernie Sanders tweeted concerns about the price of insulin rising 700% in 20 years.76 The big-cap drug scoundrels have also been accused of fabricating an ADHD epidemic and causing a global prescription drug addiction. A drum beat to restrain pain meds is getting very loud. Chronic pain patients watch with angst. “Recovery is living long enough to die of something else.” ~Dr. Howard Wetsman (@addictiondocMD), chief medical officer, Townsend Addiction Treatment Centers Oh, those bastards, right? Well, maybe not. I’m gonna take a crack at defending the industry. Mylan has been dead money for 20 years—zero percent return ex-dividends and ex-inflation. The same is true for Merck, Pfizer, Eli Lilly . . . I could go on. Former antimicrobial juggernauts Eli Lilly and Bristol-Myers Squibb are exiting the antibiotic market because they can’t pay the utility bills with the proceeds. You should worry. “Drug corporations’ greed is unbelievable. Ariad has raised the price of a leukemia drug to almost $199,000 a year,” ~Bernie Sanders Tweet, dropping the shares 20% on the day Where are all the revenues going? Really expensive research and development. Better meds make the world a better place. The life expectancies of AIDS patients with treatment are now three years below those of their uninfected peers. Wow. New-era cancer cures are off-the-charts effective. Pharma creates wealth in the purest sense and employs millions of people. On my consulting gigs, I can see researchers diligently trying to cure major diseases. Operationally, however, big-cap pharmas have been not-for-profit organizations for investors for several decades. When you see the prices get jacked up, don’t mindlessly assume it’s to line the pockets of management or investors. It is claimed rather convincingly that the per-unit cost of health care has not risen, but the volume has soared. My stump/bladder sand /aneurysm mentioned above burned through a lot of health care. Why is health care so cheap elsewhere? My son broke his foot while in Vietnam weeks ago. X-rays, an MRI, surgery with titanium pins, and casting: $1,000. Three days in the hospital: $30 per day. Being invited to stay with the surgeon’s family for two weeks to convalesce: priceless. For a total of about $1,600, my son flew to Vietnam, got excellent surgery, and flew home. That is the essence of the rapidly growing medical tourism industry. How is that possible? The doctor in Vietnam is not wealthy and probably demands few material goods. Torte reform is not needed because caveat emptor reigns. There might even be some Gates Foundation money thrown in. Most important, the profoundly expensive research and development was all done in developed countries and paid for by large revenue streams. “It’s the craziest thing in the world.” ~Bill Clinton on Obamacare Gold “I am leaving the gold equity ‘buying opportunity of a lifetime’ . . . to others; my shrunken stash of equities is it for now. Maybe I just called the bottom.” ~David Collum, 2015 Year in Review Nailed it! That was the bottom. I expect some checks in the mail from nouveau riche gold bugs who got 60% on their XAU-tracking investments. Despite weakness of late, the case for gold is now in place: European and Chinese banking risks, negative interest rates, a war on cash, and omnipresent risks of a hot war in the borderlands of the Middle East and Europe. Estimates suggest 0.3% of investors’ assets are in gold.77 Traditional portfolio theory recommends 5%, offering a better than 15-fold relative performance en route. (Recall that discussion of “flow” from above.) Let’s check in on what some of the wingnuts on the fringe of society are chortling about now: “The world’s central bankers are completely focused on debasing their currencies. If investor’s confidence in central bankers’ judgment continues to weaken, the effect on gold could be very powerful.” ~Paul Singer, Elliott Management Corp Gillian Tett: “Do you think that gold is currently a good investment? Greenspan: “Yes. Economists are good at equivocating, and, in this case, I did not equivocate.” “I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future.” ~Mervyn King, former head of the Bank of England “I am not selling gold.” ~Jeff Gundlach, DoubleLine and the new “Bond King” “The case for gold is not as a hedge against monetary disorder, because we have monetary disorder, but rather an investment in monetary disorder.” ~James Grant, Founder of Grant’s Interest Rate Observer “Everyone should be in gold.” ~Jose Canseco, expert on performance enhancement James Grant also went on to say that “gold is like a monetary tonsil,” leading some to speculate that his son, Charley (WSJ), slipped him a pot brownie. Let’s see if we can get the goofs too. We’ll begin by blowing out a few ideas I do not subscribe to. I keep hearing from smart guys that gold is in short supply in the Comex or Shanghai gold exchange, you name it. These stories almost never play out. I am also a huge fan of Rickards and Maloney, but the saying “gold is money” and the notion that its price is actually the movement of the value of the dollar don’t work for me: prices of everything I buy follow the dollar, not gold, on the currency timescales. On long timescales, their assertion may be correct. Someday their assertion may even be correct on short timescales, but that isn’t right now. What a year: I got as many electoral delegates as the bottom ten republican candidates combined, ate python, and own as much gold as the Central Bank of Canada. Per the Bank of Canada, it finished selling off all of its gold,78 probably to ensure that the U.S. didn’t attack. You think I jest? A WikiLeaked e-mail by Sid Blumenthal to Hillary Clinton revealed that France whacked Libya to make sure North Africa distanced itself from a gold dinar currency.79,80 Germany supposedly has half of its requested gold repatriated from the U.S. and France,81 which could be bullish or bearish on the half-full/half-empty logic. Venezuela repatriated 100 tons of gold a few years ago and was squeezed to sell it all back in the heat of a currency crisis.82 The Dutch depatriated their gold this year after repatriating it not long ago.83 The reasons are unclear. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, assured us Russia will continue to buy gold (Figure 7), presumably as a defense against interventions from inside the beltway. Of course, the Fed is silent on the “metal whose name shall never be spoken.” Figure 7. Russian gold reserves. In a shockingly quiet year given how much gold moved to the upside before the post-election monkey hammering, we probably should finish with some generic goofiness. On a few occasions, gold took the beatings that are familiar—huge futures dumps in the illiquid wee hours of the morning when no price-sensitive investor would ever consider selling. It dropped $30 in seconds late on the day before Thanksgiving when nobody was paying much attention. Another hammering came from a $2.25 billion sale84 and another $1.5 billion sale,85 both of which occurred in under 1 minute. Nanex concluded that the algo “gold spoofer” was at play,86 but the 2016 poundings were transitory and toothless compared with their brethren in 2011–2015. Trouble in the ETF market was revealed when BlackRock was overwhelmed by GLD buying.87 It was forced to create more shares in February than it had in a decade. I retain previously stated convictions that GLD is a scam—fractional-reserve gold banking. Deutsche Bank was overwhelmed by requests for physical gold.88 It tried to shake the hook by demanding that such a request must be made at a participating bank.89 Deutsche Bank, the location of the request, is not a participating bank? I imagine it doesn’t have the gold, consistent with its troubles outlined below. A Swedish precious metal vault got its payment mechanism terminated without explanation.90 We can’t close without talking about gold’s kissing cousin—silver. The silver market gets its share of muggings and sustained bashings, at times spanning several weeks. The silver sellers didn’t get full traction either, however, bringing silver off a 50% gain but leaving it up 15% year to date. Silver market treachery got some attention. The London Silver Fix—truth in advertising—at times deviated markedly from the spot price,91 causing consternation among those attempting to fix the price. Deutsche Bank agreed to settle litigation over allegations it illegally conspired with Scotiabank and HSBC Holdings to fix silver prices at the expense of investors.92 A class action suit against Scotiabank suggested that the conspiracy spanned 15 years.93 JPM was cleared of silver manipulation in three lawsuits—all dismissed with prejudice, an altogether different form of “fix.”94 The only remaining question is why they are stockpiling huge stashes of physical silver.95 I’m as sanguine as ever holding large precious metal positions. Gold bugs are reminded, however, of what a big victory will feel like: “Our winnings will come . . . from the people who wake up one morning to find their savings have been devalued or bailed-in. . . . [I]t’s going to come from the pension funds of teachers and firefighters. The irony is that when gold finally pays off, it will not be a cause for celebration.” ~Brent Johnson, Santiago Capital Energy “Why Oil Prices Are About to Collapse” ~Headline from The Oil Drum in January, 2016 You could almost hear the bell ringing on that one. The price of oil promptly went on a 50% rip to the upside. Generally, however, energy was boring (to me) this year, but I keep investing in it. Of course, lower energy prices were hailed as great tax breaks for the consumer, ignoring those who say the economy drives commodity prices not vice versa. Like every other market, however, has been totally financialized. The supply/demand market got replaced with a casino-based futures market, and we know that casinos are trouble. Then there’s that whole petrodollar thingie wherein our alliances in the Middle East keep the dollar at reserve currency status and allow us to sell debt. It also seems to be the proximate cause for bombing vast numbers of Arab countries, but I’m ahead of myself. A few corporation-specific problems gurgled to the surface. Chesapeake Energy got indicted for energy market manipulation, prompting the CEO to off himself in a one-car accident.96 He probably never realized it was a self-driving car (wink). Petrobras canned 11,700 workers.97 Norway’s sovereign wealth fund started tapping principle because Statoil got crushed.98 Statoil says it will pay a dividend . . . by issuing new shares.99 Maybe it should hire more petroleum engineers and fewer financial engineers. The world’s biggest developer (SunEdison) of the world’s most expensive energy (clean energy) had accrued $12 billion in debt after a two-year asset-buying binge. Liquidation revealed a complex web of Ponzi financing.100 Here’s a funny little nugget for intellectually molesting people at cocktail parties: Edward Longshanks outlawed the burning of coal in 1306 because of pollution. Apparently, Hillary was not the first to try to put a few coal miners out of jobs. Coal is truly hated, and the industry is getting annihilated by the switch to natural gas, which is getting annihilated by fracking-based oversupply.101 The mega-miner Arch Coal got oxidized in the energy rout, ironically leaving little residue.102 It’s probably time to invest in coal miners once the market’s beta corrects. (That’s code for a market-wide sell-off.) All of my ideas are contingent on a prefacing market drop in the throes of a recession. One will come like night follows day, and then the merits of cash will be unambiguous. Energy companies getting whacked wouldn’t be so bad if it weren’t for the debt. Life insurers have huge energy-based junk bond exposure.103 Of course, the banks will allow them to hang on to greater risk by not calling in their chits rather than face reality. Zero Hedge reported that the Dallas Fed was telling banks not to push bankruptcy on energy companies.104 Denial by the Dallas Fed confirmed the story.105 (Thou doth protest too much.) Wells Fargo is committed to $72 billion if oil companies draw down their lines of credit,106 and that is just the beginning of its problems (vide infra). Wells Fargo, Bank of America, and JPM all have spiking numbers of bad energy-sector loans.107 I keep investing in energy, providing my own little Wall of Money to elevate the markets. In 20 years, I’ll know if it’s a smart move. A subset of this plan includes Russia, Iran, coal, and even uranium. Y’all can keep the new-fangled green energy; it’s too political for my tastes. “Fossil fuels have saved more lives than any progressive cause in the history of the universe.” ~Greg Gutfeld, Fox News Real Estate “7:00 PM Sinkhole forms in San Francisco 7:01 PM Thirty-five people on wait list to rent sinkhole” ~Daniel Lin (@DLin71) “House prices can’t be in a bubble because they are only 10% greater than the 2006 peak.” ~Seattle Realtor Thank God the real estate bust is over. That got outta hand fast, but we’ve learned our lesson (sigh.) Of course, it’s not over, and we learned nothing durably. Stupidity doesn’t just rhyme; it repeats. I must confess that I’m unsure how they cleaned up the ’09 bust. Where did the massive inventory go? Some did the full cycle (ashes to ashes). I suspect that many former foreclosures are rentals (Figure 8). Although single-family rentals are a lousy business and represent a dangerous shadow inventory, soaring rental rates may actually make them profitable in the medium term. The authorities also didn’t really clean up the financial mess. Fannie Mae and Freddie Mac—the two toxic government sponsored enterprises (GSEs) that nearly destroyed us in ’09—are being considered for bailouts again.108 What? Didn’t we drive wooden stakes through their hearts? No. They got placed in the government protection program under the pseudonym Karen Anne Quinlan living on Maiden Lane. Figure 8. Renter-occupied versus owned houses. Some bubbles didn’t even burst in ’09. Vancouver real estate went bonkers with the influx of Chinese money. The cost of a single-family home in Vancouver surged a record 39% to $1.2 million by midsummer. Mansions were being bought and abandoned (Figure 9). Shacks (tear downs) were selling for millions. Thomas Davidoff, erudite professor at the University of British Columbia, noted, “These prices are getting pretty freaking nuts.” Figure 9. Abandoned $17.5 mansion,109 $7.2 million mansion for sale,110 and $2.4 million starter home in Vancouver. People were getting rich buying Vancouver houses, but I’ve seen this plot before and know the ending. With everybody on the same side of the boat (boot), it would soon be listing starboard. Is that a blow-off top in Figure 10? Not really. The authorities aggressively scuttled it with a 15% housing tax111 to “cool off the market” (real estate’s version of the ice bucket challenge.) Sales dropped 96% year over year while prices dropped 20% in the blink of an eye.112 Where’d the buyers go? Toronto!113 I suspect Vancouver will retrace a decade (or more) of gains. Figure 10. Vancouver real estate prices 1977–2016. Blue is “detached” in so many ways. Legendary real estate analyst Mark Hanson sees a few frothy domestic markets, too (Figure 11).114 Bloomberg reports that $0 down, 30-year, adjustable-rate, jumbo mortgages are being given to youngsters in Silicon Valley, all backed by stock options.115 The San Francisco Federal Credit Union calls the program POPPY, or Proud Ownership Purchase Program for You because, as Zero Hedge notes, “Steaming Pile of Shit” lacks panache.116 Alan Cohen, former Ithacan and current Florida county planner, told me the Florida real estate bubble was back and bloated. A $95 million tear down in Palm Beach was the sound of a bell ringing.117 Prices of luxury condo sales in Miami have been cut in half.118 A busting golf course bubble is causing problems in Florida and other sand states because the courses are embedded in neighborhoods.119 Smacks of time-share-like legal problems. Some may also recall that a Florida real estate bust prefaced the ’29 collapse.120 Even in New York City the market is softening, as is its bedroom community, Greenwich, CT.117 And $100 million condos are showing evidence of being overpriced.118 Whocouldanode. Aspen witnessed the largest drop—a double-black diamond “freefall”—in years.119 You want some entertainment? Check out this critique of the architectural wizardry behind the ever-popular MacMansion.120 Figure 11. Domestic real estate markets. According to Christie’s International Real Estate, $100 million homes were piling up by mid-year.121 It appears that the UK market (especially London) may finally be softening or, as they say at Bloomberg, “tanking.”122 The largest property fund had to stop redemptions.123 Ironically, they’ll have to sell assets, which I’m sure won’t help the market as the virtuous cycle turns vicious. Prime properties have also dropped in Paris, Singapore, Moscow, and Dubai.124 Some say the global high-end market has completely stalled.125 Australia seems to remain in a bubble.126 You know the picnic is over for the commercial markets when the seven-story office building in Figure 12 gets stale on the market.127 The real estate bears have taken notice. (That was inexcusable.) Debt “Every cycle in human history has ultimately come to an end. Credit-enhanced cycles come to worse ends than the normal kind.” ~Tad Rivelle, chief investment officer of fixed income at TCW Group Federal debt has climbed 8% annually since 2000,128 but who cares because we have the reserve currency, can print the garbage at will, and are assured by the highest authorities that inflation is good and high inflation is even better. Meanwhile, friend and market maven Grant Williams has created a masterpiece of analysis of our debt problems.129 In the absence of a deflationary collapse, debt is reconciled to the downside at a geologic pace; it almost never happens. (Supposedly the Brits did it in the mid-nineteenth century.130) The problem is exacerbated by an inherently inflationary banking system that requires monotonically rising debt to survive. Where do you think the interest paid on savings comes from (when there is interest, that is)? Despite the current calm—possibly the eye of the storm—there are newsworthy events in the world of debt. The consumer is stretched by having no savings and gobs of debt—huge net debt (Figure 13). An estimated 35% of Americans have debt that is more than 180 days past due.131 They are now buying used cars with 125% loans,132 presumably to cover the negative equity from their previous loan and help pay for repairs. The used car market is priced poorly owing to the overdeveloped credit machine created to sell the trade-ins from rentals. Figure 13. Consumer debt (credit). One of the most oppressive of all debts, high-interest credit card debt, now exceeds $16,000 per household.133 The $2500 per annum interest payments are a death spiral for the average consumer earning less than $30,000 per year. The collective tab is nearing $1 trillion.134 Larry Summers blames the high debt-to-income ratio for the stagnant consumer.135 He may be missing the superimposed realization that they have no pension either (vide infra). “There’s a huge difference between having the money to buy something and being able to afford something.” [email protected] Non-dischargeable student loans continue to climb, now exceeding $1.3 trillion (Figure 14). Can anybody picture the millennials paying this off? A comprehensive White House report lays out the stark details.136 Student debt has grown linearly since ’09—suspiciously linearly. In fact, I don’t trust linearities like that: “A 45-degree angle in finance means one thing—fraud.” ~Harry Markopoulos, Madoff whistleblower I suspect that the federal government is using student loans as a monetary policy tool to methodically jam money into the system not unlike its bond-buying spree in which Andy Husar was instructed to buy $8 billion a day, every day, without fail. Curiously, the White House (metonymically speaking) thinks “student debt helps, not harms, the U.S. economy.” That idea reflects the IQ expected of a house. Figure 14. Just student loans or monetary policy? There are rumors of arrests of student debtors—Operation Anaconda.137 It sounds like Dickensian debtors’ prisons if true. I think it more likely that we are slowly heading toward some form of debt jubilee. It will be highly politicized and unfairly distributed. Hints of one come in the form of disability relief for almost 400,000 students who are said to be disabled but unable to prove it.138 If, however, ADHD or a damaged frontal cortex that allows one to spend $200,000 on an unmarketable education is a disability, 400,000 is an underestimate. Hillary publically promised to give free tuition to students while privately getting caught on a hot mic referring to the millennials’ hopes of free education as “delusional.”139 This point is now moot. “Even with borrowing costs at or near their lowest ever, companies are increasingly unable to pay their debts.” ~Mark Gilbert (@ScouseView), Bloomberg Corporate debt continues to give me fits as companies blow up their balance sheets to buy back shares and pay dividends. This is not self-extinguishing debt. You hear about corporate cash on balance sheets from the media. That cash is stored in metaphorical crocks, because the story is bogus. The top 1% of companies has 50% of the net cash on the balance sheets. (Kinda sounds like the wealth disparity pitch all over again, eh?) Apple, Microsoft, Google, Cisco, and Oracle account for 30% of it. The journalists squealing about “cash to be put to work” often fail to look at the net cash (cash minus debt). Total debt on the balance sheets doubled from $2.5 trillion in 2007 to over $5 trillion by early 2016 (Figure 15). That’s 7% per annum according to the 72 rule (interest rate x doubling time ? 72). Meanwhile the cash on the balance sheet rose by a paltry $600 billion. I get lost in the big numbers, but that is a $2 trillion rise in net debt. They’ve got to keep growing it, however, to buy back shares if they wish to prevent their share prices from collapsing. Figure 15. Corporate debt. Isn’t debt a zero-sum game? We owe it to ourselves? In a sense, yes. But when all this debt comes due, we will discover that our shiftless counterparty (us) doesn’t have any money. All that money you think you’ve saved is owed to the millions of people comprising “ourselves.” How much do we owe ourselves? Unfunded liabilities come to a total of $2 million per viable taxpayer ($200 trillion total). You know what you are owed, but do you know how much you owe to the rest of us? Got gold? Pensions “It’s existential. . . . You can pull different levers, but the decline in rates is an existential problem for the entire pension system.” ~Alasdair Macdonald, Willis Towers Watson, an actuarial consultancy Everybody passes pickles over the social security trust fund when, in fact, it doesn’t exist and never did. It is a mathematical certainty that we will default on our obligations, but it will occur in some way invisible to most people, probably via cost of living adjustments that fail to track inflation, means testing, and just printing money. I signed my wife up for social security early (62) on a bet that they would renege somehow. She didn’t earn much; I did. What started as a small payment turned miniscule. Here is her statement: Really? $411 per month was whittled down to $63 per month? The part I cut off was the final clause that said, “Don’t spend it all in one place, bitch.” The risk is in the substrata of the pension system in which bankruptcy and insolvency are smash-mouth realities. I didn’t mention state debt in the previous section because much of it is hiding as unfunded obligations to pensioners. Paying state and municipal employees with pension promises was such an easy way to compensate people without raising the money. Enter reality: public pensions are now $3 trillion in the hole.140 How long would it take to make up $3 trillion? Noooo problem! Simply pay off a million dollars a day for 8,200 years (assuming 0% interest.) Some examples are in order. Oregon’s public employee retirement system has a $21 billion unfunded liability (6 years of payouts), and it’s growing as returns of 2% somehow fall short of assumed returns of 7.7%.141 Those assumed 7–8% returns have never been accurate over the long term when adjusted for inflation, fees, and taxes. Connecticut, Kentucky, and Hawaii have similar problems.142 Illinois is the gold standard of insolvency. The Illinois Teachers Retirement System is only 40% funded and currently assumes annual returns of 7.5%.143 How did this happen? For starters, the employees are the best compensated in the Union, including free health care for life.144 Wrap your brain around that: they work for 20–30 years and get free health care for up to 50–60 more years? Meanwhile, state labor unions are asking for raises out of “fairness.” As you drill down, you find bloodbaths pretty much everywhere in municipalities. Chicago’s pensions in aggregate are 20–30% funded depending on whom you ask.145 Pending legislation, however, will allow the insolvent state of Illinois to bail out the insolvent city of Chicago.146 Isn’t there something you can do? Even if we get serious about savings among, say, the boomers, many are way past their fail-safe points. You can hear the barn door slam. At least those with defined benefit pensions are safe because they are protected by contractual obligations. Legal schmegal: there is no god-damned money! Pension cuts are just beginning but could accelerate. The Teamsters’ Central States Pension Fund is looking to cut 400,000 pensions by 55% or go flat broke—zero dollars—by 2026.147 Recent rulings preventing pension cuts are, in my opinion, the courts simply stating that it is illegal to avoid bankruptcy through selective nonpayments. Bankruptcy is about distributing remaining assets in a fair and equitable way to all creditors when there is not enough to go around. There is evidence of an old-school-style run on pensions: workers are retiring in serious numbers to remove their assets from faltering pension programs. I hear rumors of University of Illinois faculty moving to other institutions—five to Georgia Tech alone—to remove their pensions at full value from the Illinois system while it’s still possible. Dallas police and firefighters are leaving the job to grab their full pensions from a dwindling stash.148 It turns out there was also a bit of a Ponzi scheme going on, which caused the mayor to propose a 130% increase in property tax.149 I don’t see a reelection in your future, Mr. Mayor. As seasoned public servants, they might be able to move to Austin or Houston. There is now evidence the withdrawals in Dallas are being shut down.150 I could even imagine claw backs of the rolled-out funds. At the personal level, self-directed defined contribution plans paint a clockwork orange big time. Gundlach says the 40–50 crowd is “broke.” Well he exaggerated: the average American household has $2,500 saved, and the average couple consisting of two 45-year-olds has $5,000.151 Technically speaking, they are not broke, but they are totally screwed. Across all working-age families, more than 50% have no savings whatsoever,152 which is one way to render low returns moot. The 55- to 60-year-olds are positioned closer to the pearly gates but have median retirement nest eggs of $17,000.153 Assuming a couple eats six cans of dog food per day (2 × 3) and they have no other bills, the couple will run out of money in 11 years (which, on the bright side, will seem like eternity). The top 10% have less than $300K.154 The numbers could be skewed to the optimistic side: 20% of all eligible 401(k) participants have loans outstanding against their 401(k) accounts.155 This practice is so egregious that some companies are offering alternative payday loans to their employees, albeit with elevated interest rates, of course.156 I remember reading about company towns in West Virginia coal country paying their employees in company scrip. The practice was outlawed. Of course, I’ve just described a potpourri of anecdotes in the U.S. Maybe it’s better in other countries. Right off our coast we have the tropical paradise of Puerto Rico, which is so up to its ass in debt that creditors essentially own the island.157 “The ECB’s record low interest rates are causing ‘extraordinary problems’ for German banks and pensioners and risk undermining voters’ support for European integration.” ~Wolfgang Schäuble, German financial minister What about Europe? There’s where it gets fugly. The markets in pretty much everything that is bought and sold are at nosebleed valuations. There is little or no room left for gains through changes in valuation. Interest rates on bonds are miniscule, even negative (vide infra.) You won’t make anything on those bonds, but you could lose enormous principle when—not if—interest rates normalize after a 40-year downward march. There is some evidence that the reversal has now started. Equity markets also have a mean regression in their future despite what the proponents of the mathematically sophisticated Greater Fool Theory espouse. If the markets correct—they always do—you can adjust all those numbers I just cited by an arithmetically simple factor of 0.5. Could an industrial revolution save us? The most stupendous industrial revolution in history—the U.S. juggernaut in the twentieth century—returned an inflation-adjusted 4–5% including dividends using the Dow index as a proxy. Unfortunately, I do not believe those returns are corrected for management fees and taxes. I’m thinking 3% is optimistic. I’m thinking Illinois and the rest of the world are still toast. Inflation/Deflation “US deflation is largely a myth, like the Loch Ness monster or North Dakota.” [email protected], undefeated Twitter Snark Champion “The debasement of coinage . . . is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way. ~Copernicus The central bankers and macroeconomists all want inflation. There are media pundits who buy into this metaphysical notion that inflation is good (no offense to the metaphysicists). Dispelling the notion that this quest for inflation is just hyperbole calls for some quotes to capture pundit sentiment: “I think there is a loss of confidence in the ability of central banks in the long run to regenerate inflation.” ~Ken Rogoff, Harvard professor “Deflation . . . is bad news because it makes people less willing to borrow and spend—anticipating lower prices, consumers will put off spending—and could also lead to a fall in wages.” ~IMF economist, still waiting to buy an iPhone and flat-screen TV “All the G7 countries are suffering from a dearth of inflation.” ~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve “I think they’re heading intentionally for a higher rate of inflation so that once they’ve gotten to, say, an inflation rate of 3 percent, 3.5 percent, that’s when they can jack up short-term rates.” ~Martin Feldstein, Harvard professor and former president of the National Bureau of Economic Research “Why You Should Hate Low Inflation” ~Time magazine headline “Welcome news for America’s renters could be unhelpful for the Federal Reserve. . . . Any cooling in the most pronounced driver of inflation means the Fed will have to wait even longer to reach their 2 percent price target.” ~Bloomberg “Inflation is not at our stated target, not near our stated target, and hasn’t been so in quite some time.” ~Daniel Tarullo, governor of the Federal Open Market Committee “[T]he ECB needs to signal that it is serious about pursuing its inflation mandate, including via a stepped-up pace of monthly QE purchases.” ~Robin Brooks, Goldman’s chief FX strategist “The elusive quest for higher inflation” ~Yasser Abdih, senior economist at the IMF They may believe that by generating small positive inflation levels that seem to accompany strong economic growth, they will somehow create that growth. More likely, they fear no inflation in an inherently inflationary credit-based banking system. If central bankers furiously debase their currencies with an inflationary tailwind and deflation appears nonetheless, then somebody screwed up (them). I buy this latter thesis. Of course, the measure of inflation has been debated ad nauseam in the context of stats rendered dubious by hedonic adjustments, substitutions, unvarnished fraud, and adjustments based on reading goat entrails. I discussed these frauds years ago.158 Inflation is certainly not 2% but some number much higher if one is measuring what Joe Six-pack is shelling out to exist.159 (Anticipating squeals about MIT’s Billion Price Project, I discussed it in last year’s review: I think it’s bogus.) “The grim reality is that real inflation is 7+% per year, and this reality must be hidden behind bogus official calculations of inflation, as this reality would collapse the entire status quo.” ~Charles Hugh Smith, Of Two Minds blog The fear of deflation is fear of asset deflation. With huge leverage in the system, a collapse in asset prices becomes insolvency and cardiac arrest. The problem is that the Fed’s inflation policies are the root cause of the deflationary risk. To me, the existential risk is hyperinflation, which is in full bloom in Venezuela160 and germinating in Nigeria.161 Closer to home (for Americans), rents have been soaring—13.2% per year in Boston since 2010, for example.162 Health plans are rising double digits per year, looking to jump more than 15% next year.163 College tuition is on a headline-making inflationary trajectory of 6% per annum above the rate of the admittedly dubious inflation rate. “The unproductive buildup of debt caused the Great Depression of the 1930s and the Great Recession of 2008.” ~Chetan Ahya, Morgan Stanley “If businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%.” ~Richard Koo, Nomura The Bond Caldera “The bond market’s 7.5% 40-year historical return is just that—history.” ~Bill Gross, Janus Sounds a little ominous. He also notes that “global yields are the lowest in 500 years of recorded history.” Alas, there are other bond doomsters. Paul Singer says “the bond market is broken . . . the biggest bubble in the world . . . never-before seen asymmetry between potential further reward and risk.” Former punk rocker and newly crowned Bond King Jeff Gundlach now moves the markets with his pronouncements. Jeff wails that the current market for 10-year treasuries is the worst opportunity in its long history. He calls it “mass psychosis . . . not guided by the markets.” With a little math wizardry that only a bond king could muster, Jeff says, “a 1% increase in the rates would result in up to $2.4 trillion of losses.”164 I’m not sure investors hiding in the safe haven of bonds are quite ready for those losses. They’re betting that rates will never rise 1%. As I type, that is proving to be wrong—possibly dead wrong. At some point, this party has (had) to end. In 2014, James Grant of the legendary Interest Rate Observer described three bond bulls in America during the past 150 years—“1865–1900, 1920–1946, and 1981 to the present.” The first two did indeed end, and probably unexpectedly given how long they lasted and investors’ willingness to extrapolate to infinity. The third will end too. The bond market is like the Atlantic conveyor that must keep moving currents around the Atlantic Ocean.165 When the conveyor sputters, we get an ice age. When the bond market sputters, we will get the credit market analogue of an ice age. What’s different this time—a dangerous choice of words—is that the highly financialized markets are not only huge but also highly correlated. The correlation reaches way beyond the conventional debt markets into the shadow debt markets and the $1 quadrillion derivatives market—a quadrillion dollars of the most screwed-up, leveraged investments based on blind faith and confidence the world has ever witnessed. No problemo, say the optimists. We will “net” those puppies. Netting is when you round up investments on each side of the bet and simply cancel them out (like from either side of an equal sign.)166 Ya gotta wonder which genius is going to net $1 quadrillion dollars of derivatives in the midst of a raging inferno. It didn’t work in ’09, and it won’t work the next time, especially in a market so large Avogadro might wince. “They have to normalize interest rates over a period of two, three, four years, or the domestic and global economy won’t function.” ~Bill Gross How crazy has the bond market become? The French sold 50-year bonds.167 Ireland sold its first so-called century bond less than three years after it exited an international bailout program.168 Spanish 10-year interest rates are below those of the U.S., prompting James Grant to suggest “a return to the glory of Rome.” The Eurowankers (European bankers) are monetizing debt by buying corporate bonds to jam money into (1) a system that doesn’t need any more, and (2) the pockets of cronies who always demand more. Shockingly, the cronies front-ran the purchase program by buying existing corporate debt169 and creating new types of corporate debt, all for a tidy profit . . . for now. Taking a cue from the U.S. postal service, Japan is offering “forever bonds”: you get interest—a low 1% interest at that—but you never get paid back your principle.170 The idea that inflation will never rear its ugly head seems presumptuous, even preposterous. It would be safer loaning money to your adult children, who will never pay you back either. You know to the penny your return on that investment. “Bonds are still offering positive yields.” ~CNBC headline Alas, as is often the case, CNBC isn’t even right on what would be a truism in any other era. I could go on talking about ridiculously low yields, but now we get “the rest of the story.” ZIRP and NIRP “It seemed like a good idea at the time: Cut interest rates below zero to revive growth.” ~Bloomberg On April 1, 2006, an article appeared endorsing zero-coupon perpetual bonds.171 You give somebody your money, and they pay you no interest and you don’t get your money back. Irate readers forced this hooligan to “politely point out to them the date of publication” (April 1st). Did you know the word gullible is not in the dictionary? Unbeknownst to the author, the article wasn’t satire; it was foreshadowing. There is no endeavor in which men and women of enormous intellectual power have shown total disregard for higher-order reasoning than monetary policy. We are talking “early onset” something. I am not an economist, but my pinhead meter is pegging the needle. Let’s hop right over ZIRP (zero interest rate policy) because it is so 2014 and head right into NIRP (negative interest rate policy). NIRP is where you pay people to lend them money. (Check the date: it’s December, not April.) You heard that right: you give them money, and they give you back less. “The arrogant, suspender-snapping, twenty-something financial geniuses are yapping in my face. . . . I still can’t fathom ‘negative’ interest rates. It seems the ultimate insanity to say a short sale of a sovereign bond becomes a ‘risk-free’ trade.” ~Mr. Skin, anonymous guru who writes for Bill Fleckenstein Capitalism progressed for 5,000 years without interest rates ever stumbling on the negative sign (which, by the way, was invented by the Arabs more than a millennium ago). You can no longer simply say that bonds are at multi-century highs; it is mathematically impossible to bid rates on normal bonds into negative territory. It takes a special kind of monetary fascism to create negative rates. Japan is at the vanguard. Eight days after Hiruhiko Kuroda, head of the Bank of Japan (BoJ), announced he was not considering negative interest rates, he jammed rates negative.172 That was like a knuckleball from the famous pitcher Hiroki Kuroda. Nearly 80% of Japanese and German government bonds are now offering negative yields (whatever “yield” now means).173 Fifty-year Swiss debt has gone negative.174 Early this year, negative yielding global sovereign debt surpassed $10 trillion “for the first time.”175 Really? For the first time? Sovereign debt first dipped below zero only two years ago. An estimated $16 trillion (30%) of sovereign debt is now under the auspices of NIRP (Figure 17).176 Over a half-trillion dollars of corporate debt is also at negative rates.177 Reaching for yield in corporate debt markets always seemed risky, but that’s nuts. By now it could be $1 trillion. I’ve lost track. NIRP has infected the consumer debt market: Denmark and Belgium are offering negative interest rate mortgages.178 (I just soiled my thong.) By the way, you folks with big credit card debt will likely have to wait for relief; your rates are pegged above 20%. Maybe you’ll get some helicopter money. Figure 17. Negative yielding debt with a subliminal flare. These Masters of the Universe, economists and bankers extraordinaire, and their enthusiastic supporters of modern-day monetary theory certainly didn’t leap into the NIRP abyss casually. Let’s listen to the justification in their own voices. While reading, rank their comments as (1) pragmatic resignation, (2) dubious, or (3) delusional rants of the clinically insane: “If current conditions in the advanced economies remain entrenched a decade from now, helicopter drops, debt monetization, and taxation of cash may turn out to be the new QE, CE, FG, ZIRP, and NIRP. Desperate times call for desperate measures.” ~Nouriel Roubini, professor at New York University “Well, let’s face it. They can do whatever they want now.” ~Ken Rogoff, dismissing the risk of government taxation by NIRP “The degree of negative rates introduced by ECB is bigger than Japan. Technically there definitely is room for a further cut.” ~Haruhiko Kuroda, head of the Bank of Japan “It appears to us there is a lot of room for central banks to probe how low rates can go. While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.” ~Malcolm Barr, David Mackie, and Bruce Kasman, economists at JPM “Negative Rates Are Better at QE Than Actual QE” ~Wall Street Journal headline “Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time and the idea is the lower the interest rate the better it is for investors.” ~Stanley Fischer, vice chairman of the Federal Reserve, based on two years of data on NIRP “The prospect of being charged, say, 6% a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time . . . ensuring that the public understands the central bank’s goals and supports its methods of achieving them.” ~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve, bankersplaining Jedi mind tricks So these paternalistic libertarians are doing it for the children. What’s the problem? Let’s start with savings. There is no income left in fixed income. All those unresilient consumers are getting zip on what money they have. The low rates are designed to get them to spend their paltry savings. Peachy. A USA Today headline read, “How to break Americans of shortsighted saving habits.” Let’s start by giving them a return on their savings, for Pete’s sake. Giving them negative returns, however, in a twisted way is forcing them to save like their parents. Maybe I’ve misunderstood the headline. Maybe it’s excoriating the public for their growing addiction to saving, causing the wholly ludicrous and intellectually impoverished Paradox of Thrift.179 This naturally leads back to the inflation/deflation debate. The inflation that the Fed desires comes, at least in part, from inherently inflationary fractional reserve banking in which interest rates demand net dollars to increase. Negative rates, by contrast, are inherently deflationary. Every year the banking system has less. This doesn’t seem that hard to grasp. “Negative interest rates are ridiculous, particularly in a fight against deflation. They ARE deflation. . . . You are necessitating savings.” ~Jeff Gundlach, DoubleLine Low and negative rates are destroying pension management, insurance, and even banking industries. When your business model is to take in money, make decent returns, pay out a little less, and skim off the difference, then negative, zero, or even low interest rates are deadly. The model fails. This doesn’t seem hard to grasp either. “All pension plans everywhere in the world are being destroyed. Trust funds, insurance companies, endowments—they are all being destroyed.” ~Jim Rogers on NIRP and central bank policies Finally, low interest rates actually hurt the economy by keeping the weak alive, preventing the much needed creative destruction. Unviable companies on the life support of loose credit cannibalize serious businesses measurably, sometimes even fatally. You must cull the herd of the sick and weak. “Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.” ~Bill Gross The big credibility problem is that I’m just a chemist “identifying” as a pundit going toe-to-toe with some serious paid-to-play central bankers and their groupies. To rectify that, let’s listen to some critics of NIRP with gravitas in their own words: “Maybe Italian banks are telling us that central bankers and their negative interest rate policies are actually destroying the Japanese and European banking system. . . . Even if they put [short-term rates] back to zero, imagine the carnage, at least in the short-term bond markets.” ~Peter Boockvar, chief strategist of the Lindsey Group “The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters, and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.” ~Lord Jacob Rothschild, overpaid blogger “Negative interest rates are the dumbest idea ever. It’s horrible. Look at how badly it’s been working.” ~Jeff Gundlach, DoubleLine “Under a negative rate scenario, the only participant receiving more cash over time is the government. The private sector slowly collapses as we are seeing in Japan and Europe in real time.” ~Michael Green, Ice Farm Capital “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC? . . . The Bank of England is doing things today that it has never done in its history, which is 300 plus years. . . . In finance, mostly nothing is ever new. . . . However, with respect to interest rates and monetary policy, we are truly breaking new ground.” ~The James Grant Anthology “What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity. . . . What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking. They are sitting on a powder keg.” ~Pater Tenebrarum, independent market analyst “I think what they’ve done, particularly the unconventional stuff—and there has been so much of it—has led many people into looking upon all of this as experimental policies smacking of panic.” ~William White, senior advisor at the Organisation for Economic Co-operation and Development “Negative and low interest rates around the world are crushing savers, and those policies are going to become the biggest crisis globally. We have become too dependent on central bankers.” ~Larry Fink, chairman and CEO of BlackRock “Negative interest rates in Japan is blowing my mind.” ~Jose Canseco, designated pundit What’s the end game? My best guess is that the system blows up and a lot of bankers find themselves seriously upside down . . . like Mussolini. The silent bank run is already happening. In a free market, NIRP is precluded by cash and hard assets. NIRP in Japan caused a run on safes for hoarding cash.180 A headline announced, “German Savers Lose Faith in Banks, Stash Cash at Home.”181 I was told by a high-level source that one of the world’s largest insurers was renting vaults to store physical currencies. Commerzbank was considering hoarding billions to avoid European Central Bank (ECB) charges.182 Mark Gilbert of Bloomberg notes that storing $100 million as stacks of bills would basically take a vault the size of a large closet.183 See the theme? The financial intermediaries are storing hard cash. Alas, our central banker overlords won’t stand for it. War on Cash “There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.” ~Mario Draghi You ever notice the War on Anything never works? Whether it be drugs, terror, poverty, Christmas, hunger, you name it, it becomes an interminable, profoundly costly adventure. Now we have the War on Cash. OK, millennials, listen up. You might like paying for everything with your Swiss Army phones. There are rumors you can even swipe G-strings on pole dancers with your phones, which means you’ve totally lost the plotline. If we go to cashless, you won’t have the scratch needed to buy a cell phone before long. These globalists wish to remove your right to an important civil liberty—to hold and spend wealth outside the view of the government and beyond the control of the banks. “A global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against ‘big money’ and for the interests of ordinary citizens.” ~Larry Summers, Harvard professor and former secretary of the treasury The global elite want to eliminate cash so that they can inflict monetary policy without restraint. As Rogoff says, cash gums up the system. When the former secretary of the treasury, Larry Summers, starts supporting the elimination of cash because it will “combat criminal activity . . . for the interests of ordinary citizens” you should sit up and pay attention. He says we “are essentially on a fairly dangerous battlefield with very little ammunition.” He is not talking about the War on Crime but rather efforts to fight the market forces attempting to curb the global banking cartel. Ex-Fedhead Kocherlakota tried to get coy using reverse psychology on free marketeers by arguing that “governments issuing cash . . . is hardly a free market.” As the story goes, the libertarians should support a cashless society by letting currencies compete in the marketplace.184 Very clever, Yankee dog! Of course, he forgot to mention that the government would then shut competitors down like they did to Bernard von NotHaus, who got his assets seized and went to prison for offering such competition. Satoshi Nakamoto, Bitcoin founder, is on the lam.185 Your arguments are specious, NK. “In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy. Unfortunately, the existence of cash gums up the works.” ~Ken Rogoff Ken Rogoff carried the standard in the War on Cash this year by hawking his new book, The Curse of Cash. He tirelessly tried to make the case for a cashless, bank-rich society, arguing that “paper currency facilitates racketeering, extortion, drug and human trafficking, the corruption of public officials not to mention terrorism.” He argues that “cash is not used in ordinary retail transactions.” Really? What do stores put in the cash registers, coupons (which are going digital)? To say he supports the termination of cash is not quite fair: he endorses using only low denominations such as $10 bills, which buy you a pack of cigarettes (maybe). Don’t spend it all in one place. On noticing that hundreds of commenters in a Wall Street Journal editorial186 showered him with suggestions on how to render him testicle free, I suggested in a brief e-mail that people are clearly stating that the idiosyncrasies of cash are a small price to pay for personal freedom. He, in turn, suggested I read his book. Not likely. There was pushback, however. Jim Grant used his sharp wit to get Ken halfway to eunuch status.187 When the globalists left Davos,188 the War on Cash seemed to accelerate almost overnight: Deutsche Bank CEO John Cryan predicted that cash won’t exist in 10 years. Norway’s biggest bank, DNB, called for an end to cash. Bloomberg published an article titled “Bring On the Cashless Future.” A Financial Times op-ed titled “The Benefits of Scrapping Cash” advocated the elimination of physical money. Harvardian and ex-Harvard president Peter Sands wrote a paper titled “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes” in which he waxed on about fighting wars—wars on crime, drugs, and terror. Mario Draghi, head of the ECB, phased out the €500 note—30% of the physical euro notes in circulation: “We want to make changes. But rest assured that we are determined not to make seigniorage a comfort for criminals.” The New York Times called for the termination of high-denomination notes. Again, all of this was within a month of the shrimpfest at Davos. You and your banking buddies are the criminals and seem quite uncomfortable with cash. If you really care about crime, shut down HSBC: With physical cash curtailed, JPM estimates the ECB could ultimately bring interest rates as low as negative 4.5%.189 (Two decimal point precision: nice.) Phasing out the $100 bill would eliminate 78% of all U.S. currency in circulation.189 Hasbro announced that the game Monopoly will replace cash with special bank cards (special drawing rights?) in which players buy and sell with handheld devices. More recently, Prime Minister Narendra Modi of India withdrew all high-denomination bills essentially overnight.190 The results were predictable for a society in which cash really is king: the system shut down. Nearly instantaneously, India’s trucking industry—millions of trucks—were parked on the roadside: out of cash means out of gas.191 As I type, the chaos continues. There are, thankfully, influential supporters of cash. Bundesbank board member Carl-Ludwig Thiele warned that the attempt to abolish and criminalize cash is out of line with freedom.192 Bundesbank president Jens Weidmann said it would be “disastrous” if people started to believe cash would be abolished: “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch.”193 Austrian economist Frank Shostak, by no means influential because Austrians are considered to be insane, reminds us that “abolishing cash to permit the central banks to lower interest rates into deeper negative territory will lead to the destruction of the market economy and promote massive economic impoverishment.”194 Maximum mirth came when Jason Cummins, chief U.S. economist and head of research at hedge fund Brevan Howard, stood up at a meeting littered with devout globalists and denounced the War on Cash and quest for inflation as stemming from the “Frankenstein lab of monetary policy.”195 Jason went on a rant: “You are not going to have independent central bankers in the next 10 years if you keep on this path. The economy has rolled over and died in an environment when financial conditions have never been easier. . . . People aren’t consuming, businesses aren’t investing, they aren’t buying houses even with a 3.5% mortgage rate. . . . The maestro culture created by Greenspan has been one of the worst features of central banking. . . . My biggest worry is that the public will conclude that . . . capitalism is just socialism for the rich.” Oops. Too late, dude. Arguments about the insecurity of cash seem specious when you look at how the digital world has fared lately. The thriving sovereign state of Bangladesh was raided for a cool $100 million by a series of unauthorized withdrawals using the global SWIFT check-clearing system.196 One could imagine that third-world safeguards against such a heist might be lax, but the hackers removed the booty from the New York Federal Reserve. A Fed spokesperson offered the official response: “Sorry. Our bad.” Apparently, the Fed has been hacked more than 50 times since 2015. Gottfried Leibbrandt, the CEO of SWIFT, has expressed grave concern about the threat hackers pose to the banking system.197 Ya think? On a more micro scale, six of my colleagues got their paychecks phished. They were tricked into signing into their financial home page. With the passwords in hand, the Nigerian princes rerouted their direct-deposited paychecks. Food stamp computers went down for over a week in June.198 An Ecuadorean bank got clipped for $12 million, blaming Wells Fargo for not plugging a leak.199 It’s probably in the Clinton Foundation. The risks of cash in society seem to pale in comparison with the risks of digits in the banking system. The termination of cash is all some dystopian futuristic abstraction that won’t come to pass, right? No. Brits are complaining that they are being stopped from withdrawing amounts ranging from £5,000 to £10,000: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”200 The phrase, “give me my goddamned money before I jump the counter and beat the crap out of you” comes to mind. Better yet, say it’s for Zika medication and start coughing. The €500 note did indeed get abolished.201 Angela Merkel put caps on bank withdrawals. 202 I heard from a friend that Wells Fargo was obstinate about a large money transfer. (We return to Wells Fargo’s disasters in the banking section.) Some restaurants are refusing cash.203 What does “all debts public and private” mean? Nightmare scenarios in a cashless society include: (1) negative interest rates of any magnitude; (2) civil asset forfeiture (but I repeat myself); (3) bank bail-ins; (4) getting booted from or locked out of the system—by mistake or otherwise; (5) sovereigns getting booted from the SWIFT check-clearing system (just ask Pootin); (6) outlawing gold (again); and (6) hackers! We could see a black market based on S&H Green Stamps. Banks and Bankers “The unpalatable truth is that the banking model is broken. The days of generating gobs of cash from “socially useless” financial engineering . . . are over.” ~Mark Gilbert, Bloomberg “It’s the big banks that continue to prefer being highly leveraged. And too many policymakers are deferring to them. Like it or not, that means we are in line for another stomach-turning round on the global economy’s wild ride.” ~Simon Johnson, MIT professor and former IMF chief economist The banking system was not fixed in ‘09. The putrid wound was stitched up without disinfectant by a cabal of bankers and regulators, all agreeing that the system had to retain its current form. The assets of the 10 largest banks—greater than $20 trillion—grew 13% per year in the last 10 years. This is not my idea of mitigating systemic risk. Now we are near the top of an aging business cycle where bad loans start unwinding and bad ideas begin to die. Gangrene is beginning to show. Collateralized debt is picking up because the uncollateralized refuse starts piling up like during a NYC garbage strike.204 Collateralized loan obligations—the dreaded CLOs—are starting to liquidate.205 Banks are rebuilding teams for debt restructurings.206 As noted above, the Dallas Fed is attempting to extend and pretend energy loans.207 Does this kind of crackpottery ever work? Citigroup failed—as in big fat F-like failed—its stress tests.208 Those were the Kaplan practice tests. Many banks will fail when the real stress test arrives. Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, thinks we will unwind banks in an orderly process.209 Of course he does, and of course I don’t. “I don’t trust Deutsche Bank. I don’t trust what they’re saying.” ~David Stockman, former Reagan economic advisor and former Blackstone group partner Although huge problems could be triggered by a default almost anywhere in the system—an internal hedge fund or even an unusual presidential election—the disaster will be global. The first raging inferno is most likely to burn in Europe and will undoubtedly include Deutsche Bank (DB). DB was the most putrid of the ’09 wounds; it never really healed. In 2014, it was forced to raise additional capital by selling stock at a 30% discount. But why?210 This year DB sold $1.5 billion in debt at junk rates (admittedly a paltry 4.25% in this era).211 German Finance Minist
По данным Федерального агентства по финансированию жилья (FHFA) индекс цен на дома в США, покупка которых осуществлялась с участием контролируемых государством ипотечных агентств Fannie Mae и Freddie Mac, в октябре повысился в месячном исчислении на 0.4% при ожидавшихся 0.5% и после повышения на 0.6% сентябре.
По данным Федерального агентства по финансированию жилья (FHFA) индекс цен на дома в США, покупка которых осуществлялась с участием контролируемых государством ипотечных агентств Fannie Mae и Freddie Mac, в октябре повысился в месячном исчислении на 0.4% при ожидавшихся 0.5% и после повышения на 0.6% сентябре.
Submitted by Ryan McMaken via The Mises Institute, Anonymous leakers at the CIA continue to make claims about Russia and the 2016 election. In response to demands to provide evidence, the CIA has declined to offer any, refusing to meet with Congressional intelligence committees, and refusing to issue any documents offering evidence. Instead, the CIA, communicating via leaks, simply says the equivalent of "trust us." Not troubled by the lack of evidence, many in the media and in the Democratic party have been repeating unsubstantiated CIA claims as fact. Of course, as I've noted before, the history of CIA intelligence is largely a history of missing the forest for the trees. Sometimes, the failures have been spectacular. One of the questions that immediately arises in the media in situations like these, however, is "has the CIA been politicized?" When used in this way, the term "politicized" means that the CIA is involved in helping or hurting specific political factions (e,g., specific ideological groups, pressure groups, or presidential administrations) in order to strengthen the CIA's financial or political standing. All Government Agencies Are Politicized The use of the term, however, rather naïvely implies that it is possible for a government agency to not be politicized. A non-political government agency, it is assumed, acts without regard to how its actions and claims affect its political standing among powerful interests in Washington. Such an agency has never existed. Indeed, when a government agency relies on taxpayer funding, Congressional lawmaking, and White House politics to sustain itself, it is absurd to expect that agency to somehow remain not "politicized." That is, it's a logical impossibility to think it possible to set up a government agency that relies on government policymakers to sustain it, and then think the agency in question will not attempt to influence or curry favor with those policymakers. This idea might seem plausible to school children in junior-high-school civics classes, but not to anyone who lives in the real world. In fact, if we wish to ascertain whether or not an institution or organization is "politicized" we can simply ask ourselves a few questions: Does the organization depend on a legal monopoly to accomplish its mission? That is, does the organization benefit from a government prohibition on other organizations — especially private-sector ones — doing the same thing? Does the organization depend on taxpayer funding for a substantial amount of its budget? Was the organization created by government legislation? Are senior officials appointed by government policymakers (i.e., the President)? Does the organization engage in what would be illegal activities were it not for protective government legislation? If the answer to any of these questions is "yes" then you are probably dealing with a politicized organization. If the answer to all of these questions is "yes" — as is the case with the CIA — then you're definitely dealing with a very politicized organization. (Other "non-political" organizations that fall well within this criteria as well include so-called "private" organizations such as the Federal Reserve System and Fannie Mae.) So, it has always been foolish to ask ourselves if the CIA is "politicized" since the answer is obviously "yes" for anyone who is paying attention. Nevertheless, the myth that the CIA and agencies like it can be non-political continues to endure, although in many cases, the charge has produced numerous helpful historical analysis of just how politicized the CIA has been in practice. Recent Narratives on CIA Politicization Stories of CIA politicization take at least two forms: One type consists of anti-CIA writers attempting to illustrate how the CIA acts to manipulate political actors to achieve its own political ends. The other type consists of pro-CIA writers attempting to cast the CIA as an innocent victim of manipulation by senior Washington officials. Of course, it doesn't matter whether the provenance of CIA politicking comes from within the agency or outside it. In both cases, the fact remains that the Agency is a tool for political actors to deceive, manipulate, and attack political enemies. With CIA leaks apparently attempting to call the integrity of the 2016 election into question, the CIA is once again being accused of politicization. Consequently, articles in the Washington Times, the Daily Caller, and The Intercept all question the CIA's motivation and present numerous examples of the Agency's history of deception. The current controversy is hardly the first time the Agency has been accused of being political, and during the build up to the Iraq invasion in 2003, for example, the CIA worked with the Bush Administration to essentially manufacture "intelligence." In his book Failure of Intelligence, Melvin Allan Goodman writes: Three years after the invasion of Iraq, a senior CIA analyst, Paul Pillar, documented the efforts of the Bush administration to politicize the intelligence of the CIA on Iraqi WMD and so-called links between Iraq and al Qaeda. Pillar accused the Bush administration of using policy to drive intelligence production, which was the same argument offered by the chief of British intelligence in the Downing Street memorandum prior to the war, and aggressively using intelligence to win public support for the decision to go to war....Pillar does not explain why no senior CIA official protested, let alone resigned in the wake of the president's misuse of intelligence on Iraq's so-called efforts to obtain uranium ore in Africa. Pillar falsely claimed "for the most part, the intelligence community's own substantive judgments do not appear to have been compromised," when it was clear that the CIA wa wrong on every conclusion and had to politicize the intelligence to be so egregiously wrong." Since then, CIA officials have attempted to rehabilitate the agency by claiming the agency was the hapless victim of the Administration. But, as Goodman notes, we heard no protests from the Agency when such protests would have actually mattered, and the fact is the Agency was easily used for political ends. Whether or not some agents wanted to participate in assisting the Bush administration with trumping up evidence against Iraq remains irrelevant. The fact remains the CIA did it. Moreover, according to documents compiled by John Prados at the George Washington University, "The U.S. intelligence community buckled sooner in 2002 than previously reported" and that "Under the circumstances, it is difficult to avoid the impression that the CIA and other intelligence agencies defended themselves against the dangers of attack from the Bush administration through a process of self-censorship. That is the very essence of politicization in intelligence." In other words, to protect its own budgets and privileges, the CIA reacted quickly to shape its intelligence to meet the political goals of others. Journalist Robert Parry has also attempted to go the CIA-as-victim route in his own writings. In an article written before the Iraq War debacle, Parry looks at how the Agency was used by both Reagan and Clinton, and claims that what is arguably of the CIA's biggest analytical errors — repeatedly overstating the economic strength of the Soviet Union — was the result of pressure applied to the Agency by the Reagan administration. (Parry may be mistaken here, as the CIA was wrong about the Soviet economy long before the Reagan Administration.) While attempting to defend the CIA, however, Parry is merely providing a list of the many ways in which the CIA serves to manufacture false information that are useful for political officials. In this essay for the Center for International Policy, Goodman further lists many examples of politicization and concludes "Throughout the CIA’s 60-year history, there have been many efforts to slant analytical conclusions, skew estimates, and repress evidence that challenged a particular policy or point of view. As a result, the agency must recognize the impact of politicization and introduce barriers to protect analysts from political pressures. Unfortunately, the CIA has largely ignored the problem." It is difficult to ascertain whether past intelligence failures were due to pressure form the administration or whether they originated from within the Agency itself. Nevertheless, the intelligence failures are numerous, including: The CIA was wrong about Iraqi weapons of mass destruction. The CIA failed to anticipate the Iranian 1978-79 revolution. The CIA consistently failed to understand the state of the Soviet economy The CIA painted a rosy picture of the potential success of the Bay of Pigs invasion. The CIA was clueless about India's nuclear testing in the late 1990s. The fact that politicization occurs might help explain some of these failures, but simply claiming "politicization" doesn't erase the legacy of failure, and it hardly serves as an argument in favor of allowing the CIA to continue to command huge budgets and essentially function unsupervised. Regardless of fanciful claims of non-political professionalism, it is undeniable that, as an agency of the US government, the CIA is a political institution. The only type of organization that is not politicized is a private-sector organization under a relatively laissez-faire regime. Heavily regulated private industries and all government agencies are politicized by nature because they depend heavily on active assistance from political actors to sustain themselves. It should be assumed that politicized organizations seek to influence policymakers, and thus all the actions and claims of these organization should be treated with skepticism and a recognition that these organizations benefit from further taxation and expanded government powers inflicted on ordinary taxpayers and other productive members of society outside the privileged circles of Washington, DC.
Профицит бюджета США в декабре стал рекордным на фоне более высоких налогов на заработную плату, выплат со стороны Fannie Mae и Freddie Mac, а также снижения уровня безработицы. Доходы превысили расходы в прошлом месяце на $53,2 млрд по сравнению с дефицитом на уровне $1,19 млрд в декабре 2012 г., свидетельствуют данные Минфина США. Экономисты, опрошенные Bloomberg, ожидали показатель на уровне $44 млрд. В 2013 г. безработица в стране сократилась на 1,2 процентного пункта до 6,7%, и это самое сильное падение в годовом выражении с 1983 г. Укрепление экономики и увеличение налоговых поступлений позволили сократить дефицит страны в прошлом финансовом году, закончившемся 30 сентября, более чем наполовину: до $680,3 млрд по сравнению с рекордным показателем в $1,42 трлн в 2009 г. "Мы продолжаем видеть улучшение экономических условий, которое в настоящее время отражено в сокращении бюджетного дефицита", - отметил экономист Wells Fargo Securities LLC Майкл Браун. Доходность 10-летних казначейских облигаций снизилась до 2,83%, приблизившись к самому низкому уровню за месяц. Доходы бюджета составили $283,2 млрд в прошлом месяце по сравнению с $269,5 млрд в декабре 2012 г. Расходы составил $230 млрд по сравнению с $270,7 млрд в прошлом году. В течение первых трех месяцев текущего финансового года дефицит составил $176,3 млрд, тогда как с октября по декабрь 2012 г. показатель составлял $293,3 млрд. Платежи в казну от Fannie Mae и Freddie Mac выросли за год примерно на $34 млрд.
Мы совсем как то эту тему забросили, а зря. Все же на этот рынок много завязано. О каких суммах идет речь? Объем ипотечных кредитов (для жилой недвижимости, коммерческой, сельскохозяйственной) составляет 13.1 трлн долл на конец 2012 года. Из этих 13.1 трлн более 9.4 трлн записано на домохозяйства. Под эти кредиты выпускали тоннами всякого MBS’осного шлака, процесс полностью остановился в 2008 году. Сейчас совокупный объем MBS составляет 7.54 трлн, т.е. почти 58% всех ипотечных кредитов было секьюритизировано. На пике зверства было под 70%. Из 7.54 трлн около 80% эмитировано Government-sponsored enterprises (GSE) всякие там fannie mae и freddie mac, остальное остальное на частные структуры. Причем стоит обратить внимание на то, что в 2009 году более 4.4 трлн дефолтных бумаг (!) было изъято из частных структур в пользу государственных. Не будь этого, то все рухнуло. Программа TARP, кредитование ФРС и QE здесь не учитываются.Как это было...Чтобы оценить тенденции и масштабы, то лучше всего на графике.Как видно, процесс сокращения ипотечных кредитов продолжается. Низкие процентные ставки не помогают, кредиты не берут. А выкуп MBS не помогает тем более, т.к. сам процесс выкупа не имеет ни малейшего отношения к способностям и желаниям заемщиков получать кредит. Все, к чему имеет отношение ФРС - это стимуляция дальнейшей активности бангстеров по секьюритизации ипотечных кредитов, но если нет роста кредитов, то и чисто теоретически не может быть никакого роста активности в MBS. Поэтому проблема не в предложении кредитов, т.е не в банках, а в спросе (заемщиках). Нет спроса на кредиты, а банки бы рады опять шарманку запустить.Максимум, что может получиться из этой безумной затеи ФРС - так это провоцирование отрыва башни у бангстеров . С тем, чтобы условия получения займов были столь простыми, что получить займ мог бы любой, кто имеет в активах хотя бы один чупа чупс и половину недопитой банки коки. Возврат к тому, от чего пришли. Ничего этих людей не исправит.Кто держит весь этот мусор?Разумеется больше всех у ФРС – 1 трлн на конец 2012 и 1.15 трлн в настоящий момент. Ни одна структура единолично столько не держит. Это 15% рынка на 2012, к концу 2013 будет держать все 20% рынка. Тем самым это означает, что ценообразование на этом рынке под полным контролем ФРС и дилеров. Проще говоря, вторичного рынка больше не существует.Почти 4.5 трлн у финансовых структур (1.6 трлн коммерческие банки, 350 млрд ипотечные трасты, 347 млрд страховые фонды, 223 млрд пенсионные фонды, 170 млрд у брокеров и так далее).Частный сектор (домохозяйства и корпорации) сократили вложения почти в ноль. Причем домохозяйства по каким то загадочным причинам начали скупать MBS тогда, когда они наиболее активно падали в цене. На тот момент (2007-2008) они были самым крупным покупателем на рынке, нарастив всего за 1.5 года объем MBS на 500 млрд до 1.02 трлн, а потом в период с 2009 по 2010 все продали, когда ФРС запустил QE1Я раньше вам говорил, но повторю. Эта операция была похожа на хорошо спланированный инсайд. Группа лиц инсайдеров и аффилированных лиц с ФРС примерно в конце 2007-середине 2008 знала, что будет неизбежный выкуп MBS со стороны ФРС для поддержания рынка и примерно тогда готовился план по банкротству Лемана. Учитывая, что бумаги продавались с дисконтом, то предположительно через частные счета и некоммерческие организации был проведен выкуп на 300-400 млрд бумаг, которые по рыночной цене не стоили и половину от номинала. А потом продавали по номиналу ФРС, заработав сотни процентов чистой прибыли. Также поступали и дилеры, но в отличие от юридических лиц, физиков и НКО никто проверять не будет, т.к. об этом никто даже не догадывается. Т.е. более, чем вероятно, что на инсайде смогли отмыть через мошеннические схемы более 150 млрд чистой прибыли.Основные выводы1. Роста кредитования нет.2. Эмиссии MBS нет, т.к. нет роста кредитования.3. Рынок MBS под полным контролем ФРС и дилеров. Еще никогда в истории одна структура не держала такую долю рынка. 15% на 2012 и 20% на конец 2013. Вторичного рынка больше не существует в свободном формате. Цены регулируются ФРС.4. ФРС частная лавочка бангстеров и инсайдеров, которая действует прежде всего в интересах бангстеров и инсайдеров.5. По множеству косвенных и прямых признаков, инсайд о вероятном запуске QE1 был еще в начале 2008 года. Много подозрительных теневых операций по переброски средств в НКО. Откуда у НКО пол триллиона баксов, которые выкупали это говно в момент острой паники и краха. По моим оценка отмыли не менее 150 млрд чистой прибыли.6. Когда MBS в объеме не увеличиваются, а ФРС выкупает под 40 млрд в месяц + когда ФРС монетизирует гос.долг США, то избыточная ликвидность абсорбируется на рынке акций. Реципиентом являются дилеры – те, кто работает с ФРС и получает ликвидность от ФРС. НЕ нужно питать иллюзий, что рост фондового рынка чем то фундаментально обоснован. Очередная гнусная операция по перекачки ликвидности и поддержанию рентабельности фин.сектора в условиях, когда активность клиентов спала на рекордно низкий уровень. Не будет QE = не будет роста рынка.7. Единственной хорошей новостью является то, что этот бардак выходит на финишную прямую. Когда они сосредоточили в руках почти всю возможную власть и активы, то прорыв этого чуда-юда неизбежен. Учитывая то, насколько все ухудшилось за последний год, то ждать осталось не так и долго. Еще никогда контроль над активыми не был столь тотальным и всеобъемлющим.Более детальная таблица держателей MBS
Небольшая предыстория, чтобы понять, откуда растут ноги у монетарного безумия. Это важно понимать в условиях, когда система на полном ходу несется под откос. Все началось задолго до того, как общественностью принято считать началом острой фазы кризиса. Первые серьезные проблемы появились в еще 2007 году, а не осенью 2008.Но сначала, что такое MBS? Объясню предельно кратко. Это структурированная облигация с определенным номиналом и процентными платежами, покупаемая инвесторами по образу и подобию обычных облигаций с небольшими отличиями. Кто является эмитентом? Либо квазигосударственные структуры (Ginnie Mae, Fannie Mae, Freddie Mac), либо инвестиционные фонды. На какой основе происходит эмиссия?Ипотечные кредиты населения объединяются в пул residential mortgage-backed security (RMBS)Коммерческие ипотечные кредиты объединяются в пул commercial mortgage-backed security (CMBS).Нарисовал схематично в общих чертах принцип работыДалее происходит секьюритизация кредитов и градация по качеству кредитов с присвоением соответствующего рейтинга. Самый высокий рейтинг соответствует якобы самым надежным кредитам и по ним наименьшие ставки. Соответственно наоборот с наименее надежными –сабпрайм кредитами.После этого происходит эмиссия MBS и продажа инвесторам. Не буду заостряться на ценообразовании, т.к. это весьма обширная тема, а скажу суть. Процентные ставки по MBS всегда ниже, чем процентные ставки по кредитам, образующих MBS. Так, например, если пул кредитов на 1 млрд долларов со средневзвешенной ставкой в 6%, то облигация будет точно ниже 6% годовых. Если инвесторы не готовы покупать по 6%, а просят 7%, то эмиссия облигации теряет всякий смысл.Отсюда вытекает две фундаментальные уязвимости.Первое. В отличие от стандартных облигаций, MBS крайне серьезно завязаны на денежном потоке, который образуется процентными платежами по кредитам, поэтому процентные ставки по MBS не могут быть выше процентных ставок по кредитам.Второе. В действительности, инвесторы не могут претендовать ни на какие залоги, поэтому формально облигация не имеет реального обеспечения, т.к. если происходит дефолт заемщиков и реализация их недвижимости на рынке, то это в самом лучшем случае может компенсировать лишь часть пула. Допустим, в пуле кредитов 10% оказались дефолтными и лишь 7% удалось реализовать, да еще с дисконтом в 20% из-за падение цен на недвижимость. Эмитент облигации в таких условиях не может в полной мере выполнить своих обязательств и инвесторы несут убытки, либо при исполнении обязательств эмитент понесет убытки пропорционально количеству дефолтных заемщиков.Но это в лучшем случае.В реальности процедура взыскания усложнена, т.к. из-за иерархической секьюритизации сложно доказать, кто фактически является собственников кредита. Вспомните, Foreclosure-gate в 2010 году, когда банки не могли доказать принадлежность кредита, что усложняло процедуру взыскания.Это потоки денег между контрагентами.Т.е. схема такая. Заемщик идет в банк за кредитом, получает деньги и покупает недвижимость. Коммерческий банк продает пул кредитов инвестфондам, как правило, с небольшим дисконтом, и инвестбанк получает пул кредитов и процентные платежи по нему от коммерческого банка. Далее инвестбанк структурирует кредиты, производит градацию по качеству и выпускает MBS. Инвесторы платят инвестбанку деньги за MBS, а от банка-эмитента получают процентные платежи и деньги при полном или частичном погашении облигации.Собственно, мотивация инвестбанков в покупке пула ипотечных кредитов заключается в том, чтобы заработать деньги на разнице между процентной ставкой по эмитированной облигации и процентными ставками по ипотечным кредитам.Коммерческие банки заинтересованы в перераспределении ответственности и снятию рисков невозврата.Инвесторы заинтересованы в получении доходов от MBS. Раньше деньги по MBS исправно платились,Все были заинтересованы в расширении этого рынка, но …Коллапс ипотечного пузыря с 2007 года вызвал обесценение mortgage-backed security и инвесторы стали просить премию за ипотечные пулы. Иными словами, эмиссия этого чуда-юда проходила по существенно более высоким ставкам.Все крупнейшие банки были достаточно сильно представлены в MBS, как со стороны инвесторов, так и со стороны эмитентов.Теперь рассмотрим этот процесс внимательно со стороны эмитента MBS. В активах у них ипотечные пулы, в пассивах обязательства по MBS.Начинается дефолт заемщиков (сужается денежный поток по выплате кредитов), падает цена не недвижимость, которая является залогом в пуле кредитов. Целые кластеры обесцениваются, но инвестбанк вынужден выполнять свои обязательства перед инвесторами.Допустим, к погашению подходит 10 млрд MBS. Раньше на каждые 10 млрд погашений, банки могли размещать по 30-50 млрд нового выпуска, тем самым происходил, как процесс рефинансирования, так и процесс расширения. А что случилось в 2007-2008?Эмиссия упала в ноль. Погашать надо, а рефинансировать не получается. Все, конец. Без ФРС теперь никуда.Во-первых: инвесторы начали просить премию и более высокие процентные ставки, тем самым многие выпуски теряли смысл при отсутствии рентабельности.Во-вторых: инвесторы значительно сократили свои вложения в этот рынок из-за опасения дефолтов после коллапса ипотечного пузыря и смены настроений. Т.е. раньше рефинансировали легко 10 млрд, а теперь максимум готовы купить 2-3 млрд.Так вот, банку нужно погасить 10 млрд, а купить в новой эмиссии готовы лишь на 2 млрд. Образуется дефицит ликвидности на 8 млрд. Что делать? Фондироваться на межбанке, просить деньги у ФРС, либо реализовывать свои активы на рынке.Фондироваться на межбанке не получалось, т.к. в начале был дефицит ликвидности, когда у других банков были теже самые проблемы и им тоже нужны были деньги. А потом возник кризис доверия, когда банки не могли открывать кредитные линии по причине, что не были уверены в платежеспособности контрагента.Реализовывать активы на рынке приходилось с дисконтном в десятки процентов, т.к. одновременно на продажу ринулись все, тем самым активы посыпались. В 4 квартале 2007 году произошли первые многомиллиардные списание у крупных банков. Собственно тогда стало окончательно понятно, что система пошла в разнос.Оставалось звонить ФРС.Звонки в ФРС стали происходит в аварийном режиме на постоянной основе с матерными выкриками : «Бен, что за ебанистика творится на рынке? Мы не может остановить падение MBS, у нас нет денег на поддержание штанов, мы банкроты»Разработка экстренных программ началась в 4 квартале 2007 года, запуск первых состоялся в декабре. Одна из первых программ – это Term Auction Facility (TAF) – временные аукционы для поддержания ликвидности в финансовой системе. Эта программа предоставляет банкам кредиты на 28 или 84 дня на тот случай, если кредитование через дисконтное окно ФРС по каким либо причинам не доступно, либо не востребовано банками.И понеслась.Март 2008. ЗапускTerm Securities Lending Facility (TSLF) программа, призванная увеличить показатели ликвидности непосредственно для первичных дилеров. Кредиты сроком на 1 месяц, обеспеченные залогами. Старт был в марте 2008, окончание действия 1 февраля 2010. Процентная ставка определяется по рыночной стоимости казначейских одномесячных векселей.Primary Dealer Credit Facility (PDCF) Это овернайт кредиты исключительно для первичных дилеров с целью стабилизации рынка РЕПО и устранения кассовых разрывов при отсутствии возможности фондироваться на необходимую сумму из других источников. Теоретически овернайт кредиты могут пролонгироваться бесконечно в формате действий данной программы. Ставка фиксированная и определяется ФРБ Нью Йорка. Лимиты программы формально безграничны, но фактически определяются уровнем залогов у первичных дилеров.Но ничего из того не помогло, исправить ситуацию не получилось. Обесценение MBS происходило дальше.Банки убивало то, что эмиссия MBS сжалось почти в ноль, а погашать MBS надо был в огромных количествах. Следовательно, дефицит ликвидности стал просто запредельным. Плюс сжатия денежного потока + падение цен на недвижимость и самого залога.В середине 2008 стало окончательно понятно, что должен быть крупный покупатель на рынке MBS, чтобы стабилизировать обесценение. Вариантов не оставалось – это только ФРС.Сейчас в 2013 это кажется странным, но тогда монетарное блядство и разврат были далеко не так запущены, как сейчас. Опыта QE не было. Было просто дикостью, что ФРС будет скупать активы на открытом рынке, ни одному в голову такое прийти не могло. В середине 2008 они придумали гениальный план, суть которого заключалась в следующем, что раз просто так начать QE не получится, то необходимо устроить панику и условия тотального страха, чтобы законодательно оправдать помощь. Повторюсь, в 2008 году банкиры были очень запуганными, это сейчас они обнаглели в конец и делают, что хотят. Тогда еще были рамки приличия. Как устроить панику? Обанкротить банк? Какой банк? Достаточно крупный, чтобы вызвать глобальную панику, но недостаточно крупный, чтобы привести к параличу банковской системы.Выбор был невелик: Goldman Sachs, Morgan Stanley, Merrill Lynch и … Lehman Brothers. Не будем заостряться, почему это был Lehman Brothers, но так получилось, что козлом отпущения должен был стать именно он.Существует миф, что якобы виной кризиса стал Lehman Brothers. Это не так. В оправдание этого банка скажу, что вся банковская система была на тот момент банкротом, т.к. экспозиция по структурированным продуктам была запредельная, и этот рынок был парализован. Сказать, что финансовый кризис спровоцировал LB – это расписаться под собственной профнепригодностью.Lehman Brothers – это не более, чем предлог для начала экстренных спасительны мер, это был инструмент для спасения всей банковской системы, т.к. необходимо было начать программы TARP и выкуп MBS. Банкротство Lehman Brothers шло в полном соответствии с планом Казначейства и ФРС по спасению банковской системы. Банкротство Lehman Brothers было спланированным и подготавливалось с весны 2008, когда стало понятно, что без выкупа не обойтись. Если бы не начали выкуп, то через несколько дней навернулся бы другие инвестбанки, там были дичайшие кассовые разрывы.Ниже задолженность банков перед ФРС по кредитам. Отмечу, что Citi и Bank of America в тот момент были в более плачевном положении, чем Lehman Brothers.На графике черной линией консодированная задолженность Леман перед ФРС по кредитным линиям.Видно, что она на уровне других банков, а пиковая задолженность в пару раз меньше, чем у конкурентов, что как бы намекает на то, что дела у других банков мягко говоря шли еще хуже.Потом Генри Полсон говорил, что они обанкротили Леман по причине, что не хотели тратить деньги налогоплательщиков? Брехня и вранье.Через пару дней они начали заливать в систему триллионы, что видно нижеЗдесь я провел клиринг всех операций кредитования и посчитал кумулятивную экспозицию по всем программам.Расшифровка программ. Про три программы расcказал выше. Остальные:Commercial Paper Funding Facility (CPFF) – программа обеспечивает поддержку ликвидности для американских эмитентов корпоративных облигаций через прямой выкуп трехмесячных облигаций (обеспеченных и необеспеченных активами) по специально созданным лимитам. Операции проводились до полного погашения обязательств. Ставки кредитования для необеспеченных бумаг OIS + 300 базисных пункта, а для обеспеченных OIS + 100 базисных пунктаTerm Securities Lending Facility (TSLF) – программа, призванная увеличить показатели ликвидности непосредственно для первичных дилеров. Кредиты сроком на 1 месяц, обеспеченные залогами.Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) – это программа экстренного кредитования фондов денежного рынка под залог коммерческих бумаг, обеспеченных активами. Процентная ставка фиксированная и устанавливается ФРБ Нью Йорка на день выдачи (Primary Credit rate). Лимит кредитования устанавливается в зависимости от предоставленных залогов. Срок кредитования от нескольких дней до нескольких месяцев.На графике не отражены своп линии и Maiden Lane for Bear Stearns, American International Group – целый ряд программ поддержки для Bear Stearns и AIG. В совокупности на пике без учета своп линии впрыск ликвидности доходил до 1.25 трлн долларов.В принципе, надо понимать, что для ФРС не было никакой проблемой спасти Леман. Речь шла о разрыве в 15 млрд баксов. Они не дали 15, чтобы потом влить 1.5 трлн. Чувствуйте разницу? Дело в том, что он вполне мог спасти по образу и подобию Bear Stearns, когда дал гарантии по части обязательств банка. Но на Леман закрыли лимиты тогда, как банки, так и ФРС. Программы кредитования проходили достаточно мутно. т.к. в залог формально давали активы, а по факту мусор, т.к. оценить стоимость было сложно и тупо оценивали все по номиналу.Так вот, откуда объем в 1.25 трлн у QE1? Почему не 600 млрд или 1 трлн? 1.25 трлн = пику кредитования. Т.е. QE1 замещал кредит на чистый впрыск ликвидности. Те. Банки погашали кредиты и одновременно получали деньги через QE1.Почему выкуп MBS, а не трежерис? Понятно из статьи.QE2? Что это? Экспериментальная программа, чтобы проверить обратную реакцию системы. Чистый вандализм и произвол. Они хотели проверить, приведет ли программа к негативным последствиям на валютном и долговом рынке? Не привела, все осталось в порядке и запустили QE3 в уже безлимитном форматеПрограмма QE3. Основная цель – монетизация гос.долга и обеспечение рентабельности бангстеров в условиях, когда реальный сектор высушен, когда невозможно генерировать прибыль. К заявленному спасению экономики программа не имеет никакого отношения. Это очередное прикрытие банкиров.Посмотрите, насколько херовые результаты по доходам инвестбанков.Конъюнктура такая, что делать деньги стало практически невозможно. Разумеется, опять приходит на помощь ФРС уже с QE3 ))Вероятно, QE3 - это последнее, что сделает ФРС. Система в критическом состоянии находится. Обратные связи полностью деградировали. Сейчас производят интервенции на рынке акций в аварийном режиме, но не знаю, поможет ли? Думаю, что нет. По совокупности факторов, мировая экономика находится в более худшем состоянии, чем в 2009 году. Основная беда, что все идет в холостую, в пустоту. Рентабельность приращенного гос.долга близка к нулю
Федеральная резервная система может увеличить объемы и расширить список активов, выкупаемых в рамках проведения третей программы количественного смягчения. Об этом заявил президент Федерального резервного банка Сан-Франциско Джон Уильямс.Такие действия возможны в ответ на слабую реакцию экономики США на текущий формат стимулирования экономики."В отличие от наших прошлых программ по выкупу активов у этой нет заранее определенной даты завершения. Вместо этого она напрямую привязана к тому, что происходит с экономикой. Мы можем даже расширить наши покупки, с тем чтобы включить в них другие активы", - заявил Уильямс.Уильямс также отметил, что хоть и согласно мандату ФРС список бумаг, который может быть на балансе регулятора, ограничен, однако все еще есть возможность выкупа казначейских облигаций всех сроков обращения, долговых обязательств ипотечных агентств Freddie Mac и Fannie Mae.Помимо этого, Уильямс также ожидает продления сроков программы "Твист". "Я ожидаю, что мы продолжим эту программу в 2013 году, и я также думаю, что существуют сильные предпосылки для увеличения объемов или продолжения выкупа других активов в 2013 году, включая Treasuries с более длительными сроками обращения", - отметил Уильямс.По прогнозам представителя регулятора, ФРС удастся добиться снижения безработицы до 7,25% уже в 2014 г., поэтому программа выкупа активов будет завершена до конца 2014 г.