Money And Change

Rickards Warns: 2018 Will Be The Year Of Living Dangerously
Thu, 01/11/2018 - 19:30

Authored by Jim Rickards via The Daily Reckoning,

I’m calling 2018 “The Year of Living Dangerously.”

That description might seem odd to lot of observers. Major U.S. stock indexes keep hitting new all-time highs. 2017 went down as the first calendar year in which the Dow Jones industrial average was up for all 12 months.

Even in strong bull market years there are usually one or two down months as stocks take a breather on the way higher. Not last year. There’s been no rest for the bull; it’s up, up and away.
Inflation is tame, even too tame for the Fed’s liking. The unemployment rate is at a 17-year low. U.S. growth was over 3% in the second and third quarters of 2017, much closer to long-term trend growth than the tepid 2% growth we’ve seen since the end of the last recession in June 2009.

The U.S. is not alone. For the first time since 2007, we’re seeing strong synchronized growth in the U.S., Europe, China, Japan (the “big four”) as well as other developed and emerging markets.
Growth breeds growth as consumers in one country create demand for goods and services provided by another. This is what economists mean by “self-sustaining” growth instead of force-fed growth from easy money and government spending.

Technology rules the day. The pace of innovation is unprecedented in world history. Our daily needs are being fulfilled better, faster and cheaper by the likes of Amazon, Google, Netflix and Apple. We can share the good news on Facebook.

Best of all, the U.S. Congress and White House got around to cutting our taxes in late December!
In short, all’s right with the world.
Or not.

To understand why 2018 may unfold catastrophically, we can begin with a simple metaphor. Imagine a magnificent mansion built with the finest materials and craftsmanship and furnished with the most expensive couches and carpets and decorated with fine art.
Now imagine this mansion is built on quicksand. It will have a brief shining moment and then sink slowly before finally collapsing under its own weight.

That’s a metaphor. How about hard analysis?

Here it is:
Start with debt. Much of the good news described above was achieved not with real productivity but with mountains of debt including central bank liabilities.
In a recent article, Yale scholar Stephen Roach points out that between 2008 and 2017 the combined balance sheets of the central banks of the U.S., Japan and the eurozone expanded by $8.3 trillion, while nominal GDP in those same economies expanded $2.1 trillion.

What happens when you print $8.3 trillion in money and only get $2.1 trillion of growth? What happened to the extra $6.2 trillion of printed money?
The answer is that it went into assets. Stocks, bonds, emerging-market debt and real estate have all been pumped up by central bank money printing.
What makes 2018 different from the prior 10 years? The answer is that this is the year the central banks stop printing and take away the punch bowl.

The Fed is already destroying money (they do this by not rolling over maturing bonds). By the end of 2018, the annual pace of money destruction will be $600 billion. The European Central Bank and Bank of Japan are not yet at the point of reducing money supply, but they have stopped expanding it and plan to reduce money supply later this year.

In economics, everything happens at the margin. When something is expanding and then stops expanding, the marginal impact is the same as shrinking.Apart from money supply, all of the major central banks are planning rate hikes, and some, such as those in the U.S. and U.K., are actually implementing them.

Reducing money supply and raising interest rates might be the right policy if price inflation were out of control. But prices are actually falling. The “inflation” is not in consumer prices; it’s in asset prices. The impact of money supply reduction and higher rates will be falling asset prices in stocks, bonds and real estate — the asset bubble in reverse. The problem with asset prices is that they do not move in a smooth, linear way. Asset prices are prone to bubbles on the upside and panics on the downside. Small moves can cascade out of control (the technical name for this is “hypersynchronous”) and lead to a global liquidity crisis worse than 2008.

This will not be a soft landing.

The central banks — especially the U.S. Fed, first under Ben Bernanke and later under Janet Yellen — repeated Alan Greenspan’s blunder from 2005–06.

Greenspan left rates too low for too long and got a monstrous bubble in residential real estate that led the financial world to the brink of total collapse in 2008.

Bernanke and Yellen also left rates too low for too long. They should have started rate and balance sheet normalization in 2010 at the early stages of the current expansion when the economy could have borne it (albeit without Dow 25,000). They didn’t.

Bernanke and Yellen did not get a residential real estate bubble. Instead, they got an “everything bubble.” In the fullness of time, this will be viewed as the greatest blunder in the history of central banking.

Not only that, but Greenspan left Bernanke some dry powder in 2007 because the Fed’s balance sheet was only $800 billion. The Fed had policy space to respond to the panic of 2008 with rate cuts and QE1.

Today the Fed’s balance sheet is $4 trillion. If a panic started tomorrow, the Fed’s capacity to cut rates is only 1.25% and its capacity to expand the balance sheet is nil, because the Fed would be pushing the outer limits of an invisible confidence boundary.

This conundrum of how central banks unwind easy money without causing a recession (or worse) is just one small part of a risky mosaic. I’ll be writing about the other pieces of the puzzle in future commentaries.

Here’s a sneak preview:

• Student loan debt is over $1.4 trillion, and default rates are over 20%. Most of these defaults have not yet hit the federal budget deficit. They will soon. Resulting bad credit ratings are standing in the way of jobs and household formation for an entire generation of millennials.

• The new U.S. tax bill is the greatest hoax since Orson Welles’ 1938 radio broadcast, “War of the Worlds,” about an invasion of Earth by Mars. Orson Welles caused a panic in the New Jersey/New York listening area, with people fleeing their homes and jamming the roads. The tax bill damage will be less visible but far more damaging.
  

Biggest winners: corporations and billionaires. Biggest loser: the U.S. economy. I’ll have a lot more to say about this in the weeks ahead. What is certain is the tax bill will add $2 trillion or more to the deficit, something the U.S. can ill afford.

• A catastrophic wave of emerging-market defaults is coming, with enormous spillover effects likely in developed economies. This will be worse than the Latin American defaults of the 1980s and the Asian-Russia defaults of the late 1990s. It will emerge from Turkey and Venezuela but won’t stop there

• A war is coming between the U.S. and North Korea, probably by this summer. The best case is that the U.S. wins but at a very high cost in lives and money. The worst case is World War III when China, Russia and Japan are drawn in due to the inevitable unforeseen consequences of war.
  

There’s more to come over the weeks ahead. For now, think of 2018 as the year of living dangerously.

Sears is closing over 100 more stores

• Sears told its employees Thursday that it will be shuttering over 100 more stores.
• That consists of 64 Kmart stores and 39 Sears stores, all of which are expected to close between early March and April of this year.
• Liquidation sales will begin as early as Jan. 12.

Lauren Thomas  CNBC.com
 
Sears Holdings, parent company of Sears and Kmart stores, told its employees Thursday that it will be closing more than 100 additional stores this year.That consists of 64 Kmart stores and 39 Sears stores, all of which are expected to shut between early March and April.

"We will continue to close some unprofitable stores as we transform our business model so that our physical store footprint and our digital capabilities match the needs and preferences of our members," the company said in a statement.

Sears wouldn't say how many of its employees would be impacted by the closings but did say the majority of the jobs are part-time positions, and eligible associates will receive severance.
Liquidation sales will begin as early as Jan. 12 at the closing stores, Sears said. (See below for a complete list of the locations being shut.)

About this time last year, Seritage Growth Properties, the real estate investment trust that Sears CEO Eddie Lampert spun off from the retailer, said in an SEC filing that the department store chain had exercised its right to terminate the leases on 19 unprofitable stores. This marked the second time Sears chose to shutter a chunk of the stores it sold off to Seritage in 2015.

Since then, Sears has announced handfuls of additional closures and most recently unveiled plans to pay $407 million toward its pension plan in order to unlock and allow for the sale of 140 properties, though the company didn't define when those sales will take place.

At the end of November, Sears reported a narrower net loss for its fiscal third quarter than it did a year ago, as the company pushes to return to profitability against a backdrop of vendor disputes and loans coming due.

Meantime, the department store chain has been testing smaller store formats across the U.S., and in some cases moving to occupy a pint-sized portion of a bigger box, as mall operators redevelop their properties.

On a recent call with analysts and investors, Sears CFO Rob Riecker said the retailer would be building on those new concepts in the coming months, "delivering specialized integrated retail experiences" to customers. Sears also recently started selling two of its brands, Kenmore and DieHard, on Amazon.com.

Earlier Thursday morning, Macy's also revealed the locations of 11 stores that it will be closing in 2018 (nearing in on its previously announced plans to close 100 locations, beginning last year). The company has shuttered more than 120 locations since 2015, hoping that by whittling down its real estate portfolio it can focus on its best assets.

With growing competition from online players and with more brands choosing to sell through their own platforms, department stores including Sears, Macy's, J.C. Penney and Kohl's have been forced to rethink their strategies: what inventory they will carry and how they will get it to shoppers.
Sears shares have tumbled more than 60 percent over the past 12 months. The stock was falling close to 4.5 percent Thursday afternoon.

"Everything Is Overvalued": Public Pensions Face Dangerous Dilemma In 2018
ZeroHedge.com      Tue, 01/02/2018 - 23:25

Being a pension investor these days has absolutely nothing to do with "investing" in the traditional sense of the word and everything to do with gaming discount rates to make their insolvent ponzi schemes look more stable than they actually are.  Here was our recent take on CalPERS' decision to hike their equity allocation to 50%:

CalPERS' decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

Overnight the Wall Street Journal poses an interesting question: what happens when real world fundamentals don't line up with pension boards' artificial goal seeking exercises on discount rates?  The answer, of course, is that pensions, and therefore taxpayers, are forced to take on more and more risk as they stretch for returns...

Retirement systems that manage money for firefighters, police officers, teachers and other public workers aren’t pulling back on costly bets at a time when markets are rising around the world.
Some public pension funds are adding to traditional allocations of stocks and bonds while both are expensive. 

Others are loading up on more private-equity or real-estate holdings that are less liquid and sometimes carry high fees.

Indeed, as one of the people interviewed by the WSJ puts it best, how much risk to take is a question facing all investors as they enter 2018. And the punchline"Of course, when going all-in on the various asset bubbles around the world inevitably fails, taxpayers, as always, will be forced to pick up the pieces: the question is whether or not the public pension ponzi will be too big to bail.

11 Outrageous Ways Federal Government Wasted $473 Billion in Taxpayer Money

by Penny Starr31 Dec 2017  Breitbart.com
 
The federal government wastes or ineffectively uses billions of taxpayer dollars every year. In late November, Sen. James Lankford (R-OK) released the annual waste report: “Federal Fumbles: 100 Ways the Government Dropped the Ball.”

The report provides examples of waste and mismanagement that took place over eleven months, including newly documented past waste and ongoing wasteful practices.The total wasted dollars dug up for the report: $473 billion. Lankford wrote in the introductory remarks in the report:
Included in ‘Federal Fumbles’ is just a sampling of instances where federal agencies or departments have wasted or inefficiently used billions of your dollars. The program and grant funding discussed in this book has already been allocated or spent and cannot be recovered. But highlighting it here provides lessons for agencies and hopefully encourages Congress to utilize its oversight and legislative authority to prevent future waste and misuse of federal tax dollars.
Lankford said the report should be utilized by members of Congress to curtail the waste and make sure federal agencies “are doing the right thing, the right way.”

“Americans rightly expect great things from their leaders in Washington,” Lankford said. “I offer this book as a guide for elected officials of both parties to identify areas of improvement so we may come together to do the work our constituents expect and our country deserves.”
“There are certain things we wanted to be able to put into perspective with this,” Lankford said at the time the report was released. “This is the to-do list for next year.”

The report is based on government oversight agencies, including inspectors general for each federal agency and the Government Office of Accountability (GOA).

Unused Vehicles: $1.6 Billion  — The Departments of Defense, Homeland Security, Agriculture, Justice, Interior and other agencies purchased an estimated 64,500 passenger vehicles, with $25,600 as the average cost for one vehicle. A GOA review of three agencies revealed there is no way to confirm if any of the vehicles were used.
Trolley Expansion: $1.04 Billion — Last year the Department of Transportation awarded a $1.04 billion grant to extend a trolley line in San Diego, California, by 10.9 miles. The report noted that a billion dollars could pay for hundreds of miles of four-lane highways across the country.
Lost Military Equipment: $1 Billion — The Office of Inspector General at the Department of Defense reported that the agency could not account for more than $1 billion in military equipment, including weapons and military vehicles. Congress appropriated the money for fiscal years 2015 and 2016 to supply equipment to security forces in Iraq.
Chimpanzee Habitat: $52 Million — Over the past 17 years the National Institutes of Health (NIH) has spent more than $52 million to support the Chimpanzee Biomedical Research Resource, despite the fact that the 139 chimpanzees housed through the program are no longer used for biomedical research.
Unused Software: $12 Million — The Internal Revenue Service spent $12 million in 2014 to purchase a two-year subscription to a cloud-based email software to replace its old system. The IG for the Treasury Department said because the software lacked compatibility and other requirements, it was never used.
Fish Research: $2.6 million — Since 2003 the National Science Foundation (NSF) has paid $2.6 million to study the stickleback fish in various habitats, including one to determine how it adapted to murky water in Iceland.
Language Studies: $1,109,792 Million — NSF awarded grants totaling more than $1.1 million dollars to study languages, including the Seenku language from the West African country of Burkina Faso, the four languages of New Guinea and the languages spoken in Nepal’s Manang district.
Mexican Plant Study: $210,968 — The NSF funded a five-year study on native plants from Mexico to determine their role in the indigenous plant trade market.
Higher Ed Aid: $138,000 — The Department of Energy (DOE) helps employees pay for educational courses to improve job skills. DOE paid one engineer $138,000 to take courses unrelated to his job, and he subsequently quit.
Chinese Culture Tour: $100,000 — In 2016 the National Endowments for the Arts (NEA) awarded $100,000 to pay for Chinese troupes to perform in communities across the United States.
Shakespeare Adaptation: $30,000 — An NEA grant was awarded to pay for the production of Doggie Hamlet. Included in the cast were humans, sheep, and dogs but no lines from Hamlet were used in the production.

Note: I think we'' find even more waste that we probably more that we don't know about!