Eyes on Fed, BOJ, Europe's bank stress test
FRANKFURT | By Balazs Koranyi
Central banks from Washington to Tokyo take center stage next week, although policymakers are likely to remain cautious as they wait for the dust to settle from Britain's shock vote to leave the EU.
As they wait for political reassurances and greater clarity over the likely impact of the move, central banks have mostly avoided action since Britain's June 23 referendum, calming jittery markets with verbal assurances but leaving the burden on governments to chart a path.
Indeed, the U.S. Federal Reserve is all but certain to keep interest rates on hold on Wednesday, acknowledging improved economic prospects but offering few hints about its next move, keen to avoid repeating its past mistake of stoking rate hike expectations.
The next move is still seen as an increase in rates. But even as concerns over Brexit ease the U.S. election is drawing closer, likely pushing back action towards the end of the year and possibly limiting the Fed to a single hike in 2016, a far cry from its early-year estimate for four moves.
"As the outlook up to mid-September will presumably not be clear enough by then, the next rate hike is more likely to happen in December in our opinion, followed by two further steps in the coming year," Commerzbank said in a note. "Consequently, we predict a somewhat stronger dollar and slightly higher yields in the medium term."
Analysts polled by Reuters also see the next move in the fourth quarter while futures imply a move closer to mid-2017.
Still, the U.S. economy remains on a solid footing with preliminary second-quarter figures due on Friday expected to show the annual growth rate accelerating to a healthy 2.6 percent from 1.1 percent three months earlier.
Economic data have surprised on the upside and financial conditions have also eased recently, suggesting that the U.S. is entering the third quarter on a strong note with solid growth momentum.
For the Bank of Japan, struggling with low inflation, next Friday's rate decision will be a close call with markets simmering with speculation that it will have to ease policy.
It is likely to cut its inflation forecasts but only slightly, which may allow the bank to justify standing pat for the time being.
Prime Minister Shinzo Abe, fresh off a big election win, is also working on a stimulus package with a headline figure of at least 20 trillion yen ($189 billion), potentially taking some pressure off the BOJ, which was criticized earlier this year for cutting rates into negative territory.
Still, it is uncertain whether the bank can avoid delaying the time frame for meeting its 2 percent inflation target, suggesting that its rate decision will be a close call.
"Concerns about Brexit fallout on the real economy and financial markets have driven investors to bet on BOJ easing this month," Naomi Muguruma, senior market economist, Mitsubishi UFJ Morgan Stanley Securities said.
"Therefore if the BOJ stands pat this month, that would disappoint the markets, prompting a fall in stock prices and a rise in the yen," Muguruma added.
For now, analysts expect the bank to expand its asset purchases and cut its key rate to -0.2 percent from -0.1 percent.
In Europe, the week's top event will be Friday's release of banking stress test results, with all eyes focused on Italian lenders, seen as the weakest link due to their low profitability and the 360 billion euros ($397 billion) worth of non-performing loans on their books, a legacy of Europe's debt crisis.
Though the test is not a pass-or-fail exercise, the data could give fresh impetus to agreeing on a solution with Italy and the European Commission seemingly deadlocked, disagreeing over state support.
European Central Bank president Mario Draghi hinted on Thursday at the possibility of setting up a public backstop to help Italian banks sell down some of their bad loans that have hampered their ability to lend.
Second-quarter euro zone and British GDP figures will also make for interesting reading, although the number will be seen as less relevant in the wake of the Brexit decision.
America Needs A Good, Old-Fashioned Economic Depression
ZeroHedge.com Jul 22, 2016 10:00 PM
Submitted by Jay Kawatsky via The National Interest,
Artificial measures to stave off a downturn will only make it much worse.
Describing what he called the “crack-up boom”, Ludwig von Mises, the great Austrian economist, said:
The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation – which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system.
Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances. (emphasis added)
Although it would be the wiser policy, there is no evidence that the world’s central bankers have the wisdom, either individually or collectively, to select the second alternative. More specifically, they lack “the courage to act” (as Ben Bernanke’s recent, self-congratulatory memoir was so ironically titled); they and their political, big finance and big business cronies are afraid to swallow the “d-pill”, the economic medicine named “depression”.
A good, old-fashioned, pre-1929 depression (like the short-lived, eleven-month depression in 1920-1921, before the days of “modern” central banking and “enlightened” Keynesian intervention “cures”) is the only tonic that can clear out the mal-investment built up since the beginning of the fiat money era. That era began in August of 1971. That is when Richard Nixon, informed that U.S. gold reserves were precipitously declining as a result of President Johnson’s March 1968 action to reduce the gold reserve ratio from 25 percent to zero, “temporarily” suspended the convertibility of the U.S. Dollar into gold. That “temporary” measure has been in effect for forty-five years.
Finally freed from the constraints of what they could not print (i.e., gold), central bankers and their cronies in government, finance and big business were given a license to debase all formerly hard currencies. (Such currencies were “hard”, as they were linked, via the Bretton Woods arrangement, to the dollar, which was backed by gold.) And debase they did: they replaced real investment capital (i.e. actual savings) with cheap, invented credit; they replaced market-derived price (of money) discovery, i.e., market-derived interest rates, with central-bank-proclaimed interest rates.
The actions of central bankers to suppress real price discovery (i.e., market-derived interest rates) now has led to nearly $12 trillion of sovereign debt having been issued with interest rates below zero (“NIRP”, or “negative interest rate policy”). That means that more than one third of all sovereign debt worldwide now carries negative interest rates.
That nearly $12 trillion total includes $3.2 trillion of short-term sovereign debt and $8.5 trillion of long-term sovereign debt. The total NIRP debt is up $1.3 trillion from the end of May. Even more astounding is that the total amount of negative-yielding debt with maturities of seven years or longer has ballooned to $2.6 trillion. That is nearly double just since April of this year. In fact, all of the debt issued by the Swiss government - every borrowed franc, even Swiss fifty-year bonds - now carries a negative yield. All of the debt issued by the Japanese government (JGBs) with maturities up to twenty years now carries a negative yield.
Imagine lending money to anyone, even the Swiss government, for fifty years, ultimately getting back less than you loaned … and paying for the privilege! What such an investor has to believe, in order to make such a loan, is that inflation over the next fifty years will be substantially negative (i.e., a great, and long-lasting deflation), with the result that the purchasing power of the Swissie will increase substantially over the next fifty years. But every major currency on the planet, including the US dollar, the British pound, the Japanese yen and the Euro/DM, has lost purchasing power over the last forty-five years (since the end of Bretton Woods).
Without some form of scarce commodity backing (e.g., precious metals) for currencies, why would anyone, particularly sovereign bond investors, believe that currency units, which can be conjured at will from thin air (not a scarce commodity) by desperate governments, will be worth more, not less, over the next fifty years? But believe it they do, proving that, at least with respect to high finance (better named low-IQ finance?), you can fool all of the people (the investment public) all of the time.
NIRP simply never could exist in a real-money world, where credit, like all commodities, is scarce and must be rationed by the market. But European Central Bank chief Mario Draghi, with the implicit and explicit assent of all the world’s central bankers and the urging of their cronies in government, finance and big business who get “first crack” at the conjured money, has reiterated over and over that there would be “no limits” to what he and the ECB might do with respect to printing money and further reducing interest rates. (No wonder the workaday citizens of Great Britain voted overwhelmingly for Leave.)
ZIRP and NIRP certainly have well served the central banks and their crony political, finance and big business elite masters (the top 1 percent of the top 1 percent). Money printed by central banks ex nihilo (out of nothing) has poured into the world’s stock markets, fueling stock buybacks that enrich big-business management via soaring stock-options values. Money printed by central banks has fueled an auto-loan bubble, with total auto debt now more than $1 trillion. Money printed by central banks has fueled the rapid increase in student debt that either will enslave American youth, preventing most from participating in the “American Dream” of home ownership and a reasonable retirement, or turn them into rabid supporters of socialist politicians (e.g., Bernie Sanders) who promise to absolve them of their unpayable debts.
But the central bankers’ ability to defy economic gravity may, at long last, be coming to an end. Even the radical Keynesian, Richard Koo has recognized the outrage of NIRP, which he recently described as “an act of desperation born out of despair over the inability of quantitative easing and inflation targeting to produce the desired results… the failure of monetary easing symbolizes crisis in macroeconomics."
The failure of ZIRP, QE and now NIRP is easy to see from recent corporate earnings reports and associated PE multiples: As of close of trading on Friday, July 1, 2016, the S&P 500 was trading at 24.3 times earnings over the last twelve months, close to an historical record high PE multiple. Generally (meaning before fiat money), elevated PE multiples were notched during times of increasing earnings. But for the first fiscal quarter of 2016 (FQE 3/31), S&P 500 earnings per share were only $87. That is 18 percent less than the $106-per-share earnings peak reported for the third quarter (FQE 9/30) of 2014. If money printing and central-bank-dictated interest rates were the saviors of the real economy, and if the United States were actually experiencing a real economic recovery, corporate earnings would be increasing, not declining precipitously.
Interestingly, the first quarter 2016’s $87 per share earnings were eerily equivalent to the $85 earnings per share for the last twelve months just preceding the 2008 crash. And the S&P 500 multiple was only 18.4 at that time. So stocks have a long way to fall from their elevated current levels, levels only reached as a result of share buybacks (artificially increasing earnings per outstanding share and increasing per share prices), which buybacks were (and continue to be) fueled by relentless near-ZIRP maintained by the U.S. Federal Reserve, as well as so-called “carry-trade” borrowings in currencies with NIRP (such as the Japanese yen).
The failure of ZIRP, QE and now NIRP also is easy to see from recent corporate sales reports: According to the most recently updated Inventories to Sales Ratio compiled by the Federal Reserve Bank of St. Louis, the inventory to sales ratio is hovering at 1.35, just below the highest recorded (1.41 in January of 2009) in over twenty years. That ratio exploded higher (meaning unsold goods are piling up) every quarter since the end of the second quarter of 2014. If money printing and central bank-dictated interest rates were the saviors of the real economy, and if the United States were actually experiencing a real economic recovery, inventories would not be languishing unsold on the shelves of suppliers and merchants. Workers with higher pay checks would be consuming them.
Which brings us to perhaps the easiest way to understand the failure of ZIRP, QE and now NIRP: the labor market. Contrary to the claims of the Obama administration’s Bureau of Labor Statistics’ headline unemployment numbers (which counts job slots, so that a part-time gig is the equivalent of a forty-hour-per-week career job paying over $50,000 per year), there is not more work being done in America. There actually is less, as former full time jobs (with benefits) have been, and continue to be, replaced with more part-time, lower paying jobs (without benefits). Indeed, as former OMB chief David Stockman has instructed, the number of what can be called “breadwinner jobs”, which are jobs that can support a family of four, is now almost one million below the number of such jobs in the year 2000. If money printing and central bank-dictated interest rates were the saviors of the real economy, and if the United States were actually experiencing a real economic recovery, there would be more “breadwinner jobs” now than in 2000, when the population was considerably lower.
The crack-up boom, fueled by fiat money, QE, ZIRP and now NIRP, is coming. It will hit on a global scale, and “rock the casbah” (and all points north, south, east and west thereof). It will make the Great Depression look like a picnic party in the park. Why will it be worse? Consider just two simple facts: first, supply chains are much longer and considerably more intricate than eighty-five years ago. As they fail (due to bankruptcies and business failures of those in the chain), basic necessities will not get to those in need of them. Second, compared to eighty-five years ago, the world has billions more mouths to feed, and many fewer people, including millions fewer farmers, who actually know how to produce the basic necessities.
Yes, central bankers can print currency units, but not food, energy or other commodities necessary for sustaining life. As basic commodities become more scarce or are priced out of the reach of average folks, wars, riots, rebellions, diseases and repressive governments will result. All of this human suffering will be the progeny of ZIRP, QE and NIRP, which in turn are the progeny of the replacement of the gold standard by the Ph.D standard.
Inside the High-Profile Downfall of a $8 Billion Hedge Fund
Simone Foxman SimoneFoxman Bloommberg.com
Katia Porzecanski KatiaPorzo
Katherine Burton burtonkathy
July 20, 2016 — 5:00 AM EDT
Long before Jacob Gottlieb was forced to unwind his Visium Asset Management last month amid insider trading allegations, red flags were emerging at the once $8 billion hedge fund.
In its early days, Visium employed Gottlieb’s younger brother as compliance chief, a potential conflict of interest. The founder at one point owned shares in a company that his hedge fund invested in. And in early 2013, Visium funneled money from its main healthcare fund to its struggling credit team just before their bond fund shut down.
Interviews with a dozen investors and former employees portray a company that was built on the cheap, with tight limits on compensation, and compliance that was at times lacking. Gottlieb, who had ambitions to build a firm rivaling the biggest hedge funds, all but shuttered Visium last month when the federal government accused three traders of securities fraud. While neither the company nor its founder were accused of wrongdoing, the allegations raise questions about oversight, said Tamar Frankel, a professor at Boston University School of Law.
“Investment advisers can’t say, ‘I didn’t see. I didn’t hear,”’ said Frankel, who specializes in fiduciary law. “As far as management is concerned, it’s their duty to know.”
Visium and Gottlieb declined to comment for this story, said Jonathan Gasthalter, a spokesman for the firm. When Visium first revealed in March it was being probed over the valuation of securities and trading in certain securities, the firm said it was cooperating and expected “only the highest ethical conduct from all our employees.”
Mismarking BondsFederal prosecutors on June 15 accused Sanjay Valvani, the star money manager who ran part of Visium’s flagship healthcare fund, with trading on confidential information from a former Food and Drug Administration official, going back as early as 2005. Five days after pleading not guilty, Valvani took his own life.
Separately, Chris Plaford, who ran credit investments, pleaded guilty to mismarking bonds using sham quotes from brokers, and trading on inside information. He’s cooperating with the government. Stefan Lumiere, Gottlieb’s brother-in-law, was also charged with mispricing assets. He pleaded not guilty.
For an examination of insider trading and hedge funds, see QuickTake
The accusations effectively ended Gottlieb’s big plans for the firm he founded in 2005, and which is now in the process of returning client capital. The firm said yesterday it’s cutting 33 employees in New York, starting in October.
The Brooklyn-born manager told Institutional Investor four years ago that he was committed to running a "very high quality, high integrity firm" that would compete with large multi-strategy hedge funds, a step beyond the health-care fund that was Visium’s first offering. Clients bought into the expansion, and assets ballooned from $4 billion in 2013 to $8 billion this year.
Family AffairInitially, Visium was more of a family affair, with Gottlieb’s relatives pitching in. His father, an accountant, had an office at the firm’s New York headquarters until 2010 and occasionally helped on financial matters in an unofficial capacity, according to people with knowledge of the arrangement who asked not to be identified without authorization to discuss the firm’s internal affairs.
Lumiere was hired in 2007, two years after his sister Alexandra became engaged to Gottlieb.
As recently as 2009, Gottlieb’s brother Mark was the head of compliance. His title appears as chief compliance officer in filings made to the Securities and Exchange Commission in every year between 2006 and 2009. He previously spent about two years as an analyst at UBS Group AG and a similar tenure at Balyasny Asset Management, where he worked with his brother. In between, he briefly held roles in business development at two tech start-ups. Mark Gottlieb remains a Visium partner and its chief administrative officer.
“Putting a relative in that role creates a potential conflict of interest and makes it more difficult for that person to be objective,” Brad Balter, head of Balter Capital Management, which invests clients’ money in hedge funds, said of the compliance post. “It’s indicative of a cultural problem.” Balter hasn’t invested with Visium.
Compliance MeasuresMark Gottlieb, who hasn’t been accused of any wrongdoing, declined to comment through Gasthalter.
In its complaint against Plaford, the SEC said Visium’s policies and procedures failed to prevent his misuse of material non-public information. At least between 2011 and 2013, the company had no measures to monitor employees’ communications with outside consultants and put the onus on employees to alert the legal department or compliance chief if they may had come into possession of inside information, the SEC said.
The SEC also said in its complaint against Valvani that no one at Visium monitored his relationship with the consultant or “at a minimum, questioned the lawful nature of the information” he obtained.
Compliance departments have bulked up in recent years as a wave of scandals forced hedge funds to look harder for misbehavior by traders. Point72 Asset Management in 2014 hired former federal prosecutor Vincent Tortorella as chief compliance and surveillance officer. He created a new surveillance unit. The firm is the successor to Cohen’s hedge fund, SAC Capital Advisors, which pleaded guilty to securities fraud.
Illiquid AssetsThe cases against Plaford and Lumiere allege that mismarking securities was a regular practice at the company’s credit fund. From July 2011 to January 2013, the two men overrode an independent administrator’s valuations in their favor 284 times, according to the SEC’s complaint.
Lumiere’s attorney Eric Creizman said the SEC’s allegation is false.
During that time, Visium may have been using its main fund to prop up the credit strategy, people with knowledge of the matter said.
Starting in late 2012, the firm reclassified some of the fund’s investments as illiquid and put them in a separate vehicle to sell them. Around that time, Visium’s main healthcare fund more than doubled its allocation to fixed income. While Visium told clients the shift was opportunistic, the people familiar with the matter said in interviews they believed the move was intended to buttress credit assets at a time when investors were redeeming from the team’s fund. By April, Visium announced the fund’s liquidation.
Increasing investments in a failing strategy raises questions about whether Visium acted in investors’ interests, said Boston University’s Frankel.
Double StandardWhen news of the government’s probe first surfaced, Gottlieb emphasized his firm’s code of ethics. The company prohibited personal trading of stocks and bonds, for employees as well as their spouses and minor children, according to the June 2012 compliance manual and code of ethics. But in January 2014, a regulatory filing showed that Gottlieb directly owned 25,703 shares of Intercept Pharmaceuticals Inc., a company in which Visium also had a 5.2 percent stake.
Gottlieb had owned stock in Intercept since it was a private company, according to one person familiar with the matter. But employees interviewed for this article said they were angry at what they saw as a double standard, and at least one investor complained that Gottlieb owned stock in a company in which the fund also invested.
Visium staffers who worked there at the time recall another peculiar event in January 2015: Morgan Stanley abruptly rescinded Gottlieb’s invitation to attend the industry’s pre-eminent matchmaking confab, its annual conference at The Breakers hotel in Palm Beach, Florida.
Morgan Stanley told its employees it would no longer introduce potential clients to the hedge fund, the people said. The reason for the snub was never revealed and Morgan Stanley isn’t commenting. The bank’s asset management unit remained an investor in Visium’s main fund and Gottlieb spoke at the conference this year.
Lower PayFormer and current employees say Gottlieb was frugal to a fault. For most of its history, Visium money managers were paid an annual bonus of 8 percent to 10 percent of the profits they generated from investments, these people said. While rivals paid 15 percent to 20 percent, the firm told clients leaner payouts kept investor fees low.
Gottlieb drove a hard bargain in his private life, too. A dispute over a prenuptial agreement held up his marriage to Alexandra Lumiere, Stefan’s sister, for more than a year and a half, through the birth of their first child and until she became pregnant with the second, according to New York court documents. On 12 occasions, court documents show, Gottlieb made an offer, Lumiere agreed, and Gottlieb countered -- with something less.
The final agreement, which Lumiere signed against her lawyer’s advice, provided her with an apartment until her kids turn 18, and $300,000 plus interest for each year of their marriage, which fell apart in 2012. Court papers showed Gottlieb’s net worth at $188 million as of 2013.
Even now, Gottlieb is watching the purse strings. In announcing the liquidation of the Balanced Fund, Gottlieb told investors he would hold back 3 percent to 5 percent of assets in part to pay potential legal costs from the government cases.
Suzi Ring & Matt Robinson
Bloomberg.com Updated May 10, 2016 10:22 AM UTC
It seems obvious on first glance: Insider trading is cheating and ought to be a crime. Ivan Boesky and hedge fund billionaire Raj Rajaratnam famously went to jail for doing it and George Soros paid a big fine. Actually, though, it’s not obvious at all. In the U.S., where prosecutors have vigorously pursued insider trading cases, there’s no law defining it. Courts are split about where to draw the line between legal and illegal use of private information in pursuit of profit. Some scholars think it shouldn’t be illegal at all, reasoning that outlawing it restricts information flow in markets. There’s also a huge variance in penalties, with a maximum two years’ jail time in France versus 20 in the U.S. and South Korea.
The U.S. Supreme Court will consider a California case that could resolve what sort of benefit a defendant must receive to make insider trading a crime. In 2014, a federal appeals court decision had narrowed the definition and made it harder to prosecute. It was a confusing coda to one of the biggest insider-trading events in U.S. history, when the hedge fund SAC Capital Advisors pleaded guilty and paid a record $1.8 billion fine after a fund manager squeezed tips from doctors involved in a clinical drug trial to net $275 million. In all, federal prosecutors in New York dismissed or lost on appeal 14 of 91 convictions from August 2009 to December 2015. They had convicted Rajaratnam after wiretaps showed that his firm used insiders to trade ahead of public announcements about earnings, forecasts and mergers. The U.K. convicted a high-profile ex-Moore Capital trader, while billionaire Paul Singer’s Elliott Management was assessed $22 million in civil penalties in France. In 2015, a French court blocked a trial of Airbus executives who sold shares when they knew about costly production delays. Meanwhile, hedge funds are snooping on their own employees, using keystroke-reading software to spot rogue traders.
Source: BloombergThe BackgroundThere’s no U.S. law specifically barring insider trading. It became a crime through judicial interpretation of a 1934 law aimed at cleaning up markets after the 1929 stock market crash. Not until the 1980s did prosecutions really take off. One of the most famous cases made household names of financiers Michael Milken, Dennis Levine, Martin Siegel, and Boesky. He’s thought to be at least part of the inspiration for the character Gordon Gekko in the 1987 film “Wall Street.” Insider trading rules are murky and complex. What’s clear in the U.S. is that traders can’t use information they obtain by paying tipsters to pass along secrets. Less clear is what happens if a trader doesn’t pay, or doesn’t know whether a tipster received some benefit. In the U.K., insider trading became illegal in 1980, but only 14 convictions were secured in the next 26 years. Spurred by the financial crisis, the U.K. markets regulator produced 30 convictions from 2009 to May 2016. Legislation against insider trading wasn’t enacted in Germany, India and China until the 1990s. Japan tightened insider trading laws in 2013 after scandals embroiled prominent firms including Nomura Holdings. The country made it a crime to give out inside information even if nobody trades on it.
The ArgumentThere are two schools of thought about the uses of insider trading. One holds that it allows information to be incorporated into stock prices quickly, making them more accurate. By that reasoning, insider trading helps investors and criminalizing it hurts them. The contrary view is that access to non-public information allows a select few to make big bucks while other investors are kept in the dark, damaging the integrity of markets. To complicate the issue, corporate employees — the real insiders — are allowed to trade their own stock so long as the information they’re trading on is generally available. That’s hard to define and regulate. Insider trading can be difficult to prove and prosecute but it generates headlines that regulators have come to depend on as a deterrent to market abuse. Does it work? That’s up for debate.
Trump 'Close Friend' Unleashes Economic Reality Check: America Is "Lost In The Black Hole Of Entitlement"
ZeroHedge Jul 20, 2016 5:18 AM
On Monday, Thomas Barrack, a globe-trotting billionaire real-estate investor in Los Angeles who describes Trump as a "close friend," published a 12-page treatise on the economy. As Bloomberg reports, it doesn't mention Trump, but it's a kind of defense of Trump's critique of international trade.
The paper is in no way an official statement from the Trump campaign; it reflects only Barrack's personal views. But Trump, a real-estate developer and reality-TV star with no experience in public service, relies on friends and family for advice more than many politicians do. Barrack is scheduled to speak at the Republican convention in Cleveland this week where Trump will be officially named the party's nominee.
He contends the Western economic institutions -- the system of free trade agreements, the central banks -- were once effective but are now antiquated, contributing to growing inequality and resentment. He faults the U.S. for negotiating trade agreements like the Trans-Pacific Partnership to further national-security objectives while, in his estimation, ignoring the economic impact of lost jobs at home. He calls for the North American Free Trade Agreement to be renegotiated in unspecified ways. He says the current round of unconventional monetary policy is doing more harm than good, and that the U.S. government's debt is unsustainable.
"Opaque global monetary policies combined with unfocused, poorly negotiated international trade agreements are undermining the entire project of globalization as proponents of these policies face a growing backlash among voters," he writes.
Citizens everywhere are unhappy with their governments and angry with their leaders. They are no longer interested in a political rhetoric that they do not understand and that has no value in their lives. Monetary policy, trade policy technological disruption and the array of issues that make up globalization are simply a parade of unintelligible horribles to the average working class citizen.
Until recent times, central bank activities were mostly technical, marginal, and unreported. Today central bankers utilize exotic new tools such as Quantitative Easing (“QE”) and massive asset purchases to manipulate markets to conform to macroeconomic mandates and political leaders' preferences. The driving force behind US economic policy is no longer the Secretary of the Treasury or Chairman of the President's Council of Economic Advisors; it is the new breed of central banker on steroids. Foreign exchange, QE, asset purchases and the printing of money unanchored to any external standard, and other technical monetary tools are today’s “super trade weapons.”
In the early stages of the financial crisis, central banks acted quickly, decisively and effectively to provide liquidity and help avert another Great Depression. These actions reinvigorated the payments and settlements system, established a floor on value and forced banks to restructure. Yet instead of curtailing emergency policies as economies recovered, central banks have all but monopolized the economy policies of many nations. As a result, investment has stalled and savings rates are pressing historic lows. Middle- and lower-income workers see no benefits from these policies, while the holders of capital, just as with globalization, enjoy burgeoning investment portfolios and bank accounts. At this point, central bank actions seem mainly to impact asset prices while only marginally influencing the true drivers of the economy, such as real investment, productivity expansion and job growth. We have reached the point where central banks – which are a lot better at emergency responses than steering long-term policy – have become the problem, not the solution.
The dramatic swelling of Wall Street asset prices has not been accompanied by a revival of the real economy or rising middle class incomes. Unconventional monetary policy is not a reliable force for robust growth in a time of economic stagnation. Instead, it encourages riskier investment, compounding the rising wealth effects from expanding equity markets and real estate prices, which primarily benefit the affluent.
Policies like QE also favor net borrowers over net savers, again benefitting debt-burdened governments and corporations that have the ability to borrow, while middle-class workers with limited borrowing capacity stagnate. This is the primary reason why corporate profit margins and equity markets are at historic highs, while real wage growth remains historically low. Employment data show a resentful workforce feeling despair and doomed to irrelevance in a technologically advanced global marketplace, even as investors enjoy the bull run of the century.
In today’s globalized economy, elected leaders who decide fiscal policy, on which long-term economic growth is predicated, make little sustained effort to reform outdated personal or business tax policies or exercise spending restraints needed to reduce government debt. Monetary policy, for which elected leaders disclaim responsibility, leaving it to unelected central bankers, is king. Central banks are frantically seeking market share through currency devaluations, desperately hoping that lower nominal exchange rates will boost exports and reduce imports – part of a zero-sum rush-to-the-bottom.
As the central bankers continue down their road without a GPS, no one knows what the effects will be: financial bubbles, a debt bust, an equity bust, a disorderly exit from the sale of trillions of dollars sitting on central bank balance sheets, emerging market capital outflows or increased inequality and disenchantment. Financial engineering by itself cannot achieve the kind of sustainable, inclusive growth that will extend economic benefits to America’s hard-pressed middle class. Opaque global monetary policies combined with unfocused, poorly negotiated international trade agreements are undermining the entire project of globalization as proponents of these policies face a growing backlash among voters.
The world is moving at warp speed, as are all the things within it. In order to keep up, we too need to move and adapt or be lost in the black hole of entrenchment and entitlement. Many decades ago, Winston Churchill wrote a series of essays predicting the ever more dizzying pace of change in the modern world. It could not and must not be stopped, but he worried that mankind might have so much more, yet be unhappier than before. "Their hearts will ache, their lives will be barren, if they have not a vision above material things," he wrote. We need to be reminded about the "simple questions which man has asked since the earliest dawn of reason," about the meaning, purpose, and ends of mankind – in other words, the same kind of questions that led America's Founders to declare the self-evident truth that all human beings are created equal. As we question the status quo and chip away at the corrosion that attends old thoughts, ideas, and institutions, we must not fail to keep in mind the difference between material things that are always changing and the abiding truths that have made America great.
Full Article: http://www.zerohedge.com/news/2016-07-19/trump-close-friend-unleashes-economic-reality-check-america-lost-black-hole-entitlem
Middle-Class Venezuelans Liquidate Savings to Stockpile Food
By hannah dreier, associated press July 18
Tebie Gonzalez and Ramiro Ramirez still have their sleek apartment, a fridge covered with souvenir magnets from vacations abroad, and closets full of name brand clothes. But they feel hunger drawing near.
So when the Venezuelan government opened the long-closed border with Colombia this weekend, the couple decided to drain what remained of the savings they put away before the country spun into economic crisis and stock up on food. They left their two young sons with relatives and joined more than 100,000 other Venezuelans trudging across what Colombian officials are calling a "humanitarian corridor" to buy as many basic goods as possible.
"This is money we had been saving for an emergency, and this is an emergency," Ramirez said. "It's scary to spend it, but we're finding less food each day and we need to prepare for what's coming."
Gonzalez, 36, earns several times the minimum wage with her job as a sales manager for a chain of furniture stores in the western mountain town of San Cristobal. But lately, her salary is no match for Venezuela's 700 percent inflation. Ramirez's auto parts shop went bust after President Nicolas Maduro closed the border with Colombia a year ago, citing uncontrolled smuggling, and cut off the region's best avenue for imported goods.
The couple stopped eating out this year, abandoned plans to buy a house and put a "for sale" sign on their second car. There is no more sugar for coffee, no more butter for bread and no more infant formula for their 1-year-old son.
When Ramirez, 37, went to get a late night snack on Friday, he found nothing in the refrigerator.
So Sunday, the couple donned their nicest clothes and hid fat wads of bills in their bags. Before heading to the border, they surveyed the stocks in their renovated granite kitchen: An inch of vegetable oil at the bottom of a plastic jug. A single package of flour. Some leftover cooked rice. No coffee.
Then they set off in a 2011 Jeep SUV onto bandit-plagued highways, the lights of hillside shantytowns glinting in the blue darkness like stars.
At the crossing, scowling soldiers with automatic weapons patrolled a line that wrapped around more than a dozen blocks. The couple considered turning back. But within minutes, people started shouting that immigration officials were waving everyone through, and the line broke into a stampede.
Gonzalez and Ramirez ran with thousands of others toward a bridge barely wide enough for two cars to pass. Soon, it was packed as tightly as a rush-hour subway train. Some people cradled newborns, others toted dogs as they headed to a new life in Colombia. Most carried suitcases and backpacks to fill with groceries.
The couple held hands to stop the crowd from pushing them apart. Two hours passed. People sang the national anthem. Gonzalez's feet ached in Tommy Hilfiger wedge heels. People who couldn't stand the claustrophobia and heat doubled back to try to swim across the river, but soldiers stopped them.
At last, the Colombian flags came into view. Soon, the bridge opened out onto a road lined with officials waving, cheering, even doling out cake.
No one checked ID cards. Beyond the reception line, folk music played and kiosks sold products that have become treasures in Venezuela: rice, toothpaste, detergent, and sacks of sugar.
Gonzalez was crying behind her oversized aviator glasses.
"I thought the crossing would be easier. It made me feel so humiliated, like I was an animal; a refugee," she said.
"But look how different things are on this side. It's like Disneyland," responded Ramirez. Not only was the town filled with prized groceries, but everything was much cheaper than on Venezuelan black market, now the only alternative for people who don't have time to spend in the hours-long lines for scarce goods that have become the most salient feature of the oil country's economic crisis.
They changed their Venezuelan money into Colombian currency at a mall, where Gonzalez luxuriated in the clean, air-conditioned space as she window-shopped for watches and handbags.
As she browsed past the shoes, a TV report flashed on the store television: It was an aerial shot of the bridge she had crossed over, crammed with people. "Humanitarian crisis," the headline said.
"Oh no," Gonzalez whispered.
Other shoppers were indignant.
"That isn't Venezuela. That isn't us," said a woman who was looking at sneakers.
Gonzalez crossed herself and left. It was time to go food shopping and get home.
The variety at the mall supermarket felt unreal after so many months of scrounging in near-empty stores.
The couple debated over the best baby toothpaste. Gonzalez ran her hand over seven varieties of shampoo. She examined each option in an aisle of pasta.
But while things were cheaper than in shortage-hit Venezuela, they were pricier than they had expected.
They decided to skip the flour and sugar, instead choosing seven packages of the cheapest pasta. They went for cloudy off-brand cooking oil instead of the more expensive canola. Every price was checked and rechecked as the couple spent three hours deciding how to allocate their emergency fund.
"It's more expensive than we had hoped, but what matters is that it's available at all," Ramirez said.
Other Venezuelans in the store — teachers, small business owners and office workers — pored over prices and reluctantly put things back.
In the end, the couple bought enough food to fill two suitcases and a duffel bag, then slipped into the stream of exhausted shoppers filing back to Venezuela. Colombian officials said Monday there would be no more one-day border openings.
Colombian soldiers shook hands with the departing Venezuelans and wished them well. But the kindness didn't lift the shoppers' spirits the same way it had when they entered Colombia hours earlier.