It’s official: the Federal Reserve is insolvent12/16/2018
By Simon Black (ronpaullibertyreport.com)
In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.
It wasn’t the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:
Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.
Those certificates could then be transferred to other people… and the government would make payments to whoever held the certificate at the time.
In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.
This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.
When a government’s fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.
It’s not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.
Just like the price of Apple shares, the prices of government bonds rise and fall all the time.
One of the most important factors affecting bond prices is interest rates: when interest rates rise, bond prices fall. And when rates fall, bond prices rise.
And this law of bond prices and interest rates moving opposite to one another is as inviolable as the Laws of Gravity.
Back in the 12th century when Venice started issuing the first government bonds, interest rates were shockingly high by modern standards, fluctuating between 12% and 20%. In France and England rates would sometimes rise beyond even 80% during the Middle Ages.
Needless to say, it didn’t take long for banks to get in on the action; they realized very quickly that by controlling government debt, they effectively controlled the government.
The dominance of the banks over the government cannot be overstated.
Miriam Beard’s book History of the Businessman, for example, describes medieval politicians in the Italian city-state of Genoa as having to pledge loyalty to the banks before they were allowed to take office.
Thus began the deep, long-standing relationship between banks and the government:
Banks buy government debt– helping to finance spending packages that keep them in power.
And the government bails out the banks when they get into trouble.
You scratch my back, I scratch yours.
All along the way, of course, they both use other people’s money. YOUR money. Governments bail out the banks with taxpayer funds. Banks fund the government with their depositors’ hard-earned savings.
Of course, it’s so absurd now that they’ve simply resorted to creating money out of thin air to benefit the both of them… which is precisely what central banks do.
A decade ago during the 2008 global financial crisis, central banks around the world created trillions of dollars, euros, yen, etc. worth of currency and effectively gave it all away to their respective governments and commercial banks.
In the Land of the Free, the US Federal Reserve conjured $4 trillion out of nothing and “loaned” most of it to the federal government at record low interest rates.
But here’s the weird part: if you remember that inviolable law of bond prices– when interest rates go up, bond prices fall.
And that’s exactly what’s been happening.
The Fed bought trillions of dollars worth of government bonds at a time when interest rates were at historic lows.
Then, starting about two years ago, the Fed began slowly raising interest rates.
But each time the Fed raised rates, the value of the government bonds that they had purchased would fall.
This seems insane, right? By raising rates, the Fed was creating massive losses for itself.
I’ve written frequently that, as the Fed continues raising interest rates, it will eventually engineer its insolvency.
Well, that’s now happened.
Yesterday the Fed released its latest quarterly financial statements, showing that the value of their bonds is now $66.5 billion LESS than what they paid.
And that $66.5 billion unrealized loss is far greater than Fed’s razor-thin $39 billion in capital.
This means that, on a mark-to-market basis, the largest and most systemically important financial institution in the world is objectively insolvent.
(It’s also noteworthy that the Fed’s financial statements show a NET LOSS of $2.4 billion for the first nine months of 2018.)
This is all truly remarkable… and highlights how utterly absurd the financial system is.
Our society has awarded an unelected committee the ability to conjure trillions of dollars out of thin air and render itself insolvent to support the ongoing, mutual back-scratching of governments and banks, all at your expense.
But what’s even more remarkable, though, is how little anyone has noticed.
You’d think the front page on every financial newspaper would be “FED INSOLVENT.”
But it’s not. No one seems to notice that the Fed is insolvent. Or, for that matter, that most Western governments are insolvent.
It’s crazy. It’s as if it doesn’t matter that the government of the largest economy in the world loses a trillion dollars a year, has $22 trillion in debt, $30+ trillion in unfunded pension liabilities, or suffers a debt-to-GDP ratio in excess of 100%.
Or that the central bank of the largest economy in the world is insolvent on a mark-to-market basis according to its own financial statements.
There seems to be an expectation that none of this matters and it will continue to be rainbows and buttercups forever and ever until the end of time despite some of the most compelling evidence to the contrary.
It’s difficult to imagine a consequence-free future with data like this.
Peaks, corrections, crises, etc. are often preceded by similar dismissive, willful ignorance and irrational optimism.
It would be foolish to presume that this time is any different.
This Is The Worst December For Stocks Since The Great Depression
ZeroHedge.com Tue, 12/18/2018 - 08:00
Authored by Michael Snyder via The Economic Collapse blog,
U.S. stocks have not fallen this dramatically during the month of December since the Great Depression of the 1930s.
On Monday, the Dow Jones Industrial Average lost another 507 points, and it is now down more than 1,000 points from Thursday’s close. This fresh downturn has pushed the Dow and the S&P 500 very firmly into correction territory, and the Russell 2000 is now officially in bear market territory. The ferocity of this stock market crash is stunning many of the experts, and many investors are beginning to panic. Back in early October, the Dow hit an all-time high of 26,951.81, but on Monday it closed at just 23,592.98. That means that the Dow has now plunged more than 3,300 points from the peak of the market, and many believe that this stock crash is just getting started.
But CNBC has the numbers to back up that claim…
Two benchmark U.S. stock indexes are careening toward a historically bad December.
Both the Dow Jones Industrial Average and the S&P 500 are on pace for their worst December performance since 1931, when stocks were battered during the Great Depression. The Dow and S&P 500 are down 7.8 percent and 7.6 percent this month, respectively.
And we still have two weeks remaining in December. If things continue to unravel, we could potentially be talking about a truly historic month for Wall Street.
But we certainly don’t need things to get any worse, because the damage that has already been done has been immense. The following numbers come from Zero Hedge…
When asked about this market downturn by CNBC, one equity strategist actually used the “R” word…
“The sell-off comes from the risk-off sentiment. Small caps are riskier than large caps, and there are some concerns about the end of a cycle in the U.S. and that we are entering a recession,” said Tobias Levkovich, chief U.S. equity strategist at Citi.
How bad could things ultimately get if there is some sort of “Lehman Brothers moment” that sets off a full-blown state of panic?
Trillions upon trillions of dollars of paper wealth has disappeared, and needless to say, hedge funds are starting to go down like dominoes. Earlier today, a New York Post article used phrases such as “losing their shirts” and “financial wipeout”…
The stars of the biggest hedge funds are losing their shirts as analysts fear a major financial wipeout is imminent. You are witnessing a massive culling of the hedge fund industry as hundreds of funds are liquidated and thousands more get sizable redemptions. Many of these funds own the same companies—the outcasts from the indexed world, the cheap, the unloved; the same stocks that many other hedge fund managers own. With the hedge fund industry going in reverse, there is suddenly no natural buyer for what must be sold. As a result, you are seeing waves of forced sell orders and few buyers (which for those so inclined, is creating good bargains all around).
Those of you that have been waiting for the stock market to implode can finally stop waiting.
It is here, and it is really, really bad.
Meanwhile, a new survey contains more evidence that average Americans are becoming increasingly pessimistic about the U.S. economy. In fact, the numbers in the survey were “essentially reversed” from earlier this year…
Overall, 28 percent of Americans said the economy will get better in the next year, while 33 percent predict it will get worse, according to the survey, which was released Sunday. Those numbers were essentially reversed from January, when 35 percent said the economy would get better and 20 percent said it would get worse.
Well, Ron Paul told CNBC that “it could be worse than 1929″…
Paul said Thursday on CNBC‘s “Futures Now that “Once this volatility shows that we’re not going to resume the bull market, then people are going to rush for the exits.” Paul added that “it could be worse than 1929.” He was referencing the fateful day in October of 1929 when the stock market crashed, and the United States was flung into the Great Depression that lasted ten years. During that year, a worldwide depression was ignited because of the U.S.’s market crash. The stock market began hemorrhaging and after falling almost 90 percent, sent the U.S. economy crashing a burning.
Will it ultimately be that bad?
Only time will tell, but right now things certainly do not look good, and I have a feeling that they are about to get a whole lot worse.
CEO Panic: Almost Half Say U.S. Could Be in a Recession by End of December
America’s elites are in a recession panic.
Breitbart.com A survey of 134 American chief executive officers was conducted during last week’s Yale CEO Summit in New York, according to the New York Times. Nearly half said that the economy could enter a recession by the end of the month.
That is a stunning level of negativity given that all data show the U.S. economy is still expanding. Even the Empire State Manufacturing Survey, which came in disappointingly weak on Monday, still shows that manufacturing in New York is expanding, just at a slower pace.
The Atlanta Fed’s GDP Now, a real-time estimate of GDP based on the latest economic figures, sees fourth-quarter GDP growing at a 3 percent rate. The New York Fed’s Nowcast sees it growing at a 2.4 percent rate. Those are down from the third quarter, when the economy expanded at a 3.5 percent rate, but still far from anything suggesting a recession is about to strike.
Keep in mind that a recession is defined as two consecutive quarters of negative growth. Given that there are only about two weeks left in the fourth quarter, it is all-but-impossible that we will subsequently learn that the economy had already been contracting. Economic figures get revised up and down but this would require revisions of enormous proportions. Even if the Fed shocked the market this week by hiking rates up a full percentage point–rather than the one-quarter of a point expected–the hike would slow the economy next quarter or the quarter after that. It wouldn’t retroactively repeal the growth of October and November.
A separate survey of CEOs released Monday also showed confidence in the economy has fallen sharply. According to the CEO Group:
In our most recent monthly poll of 236 U.S. CEOs, scaled on a rating of 1-10, the downward trend in CEO confidence in conditions one year from now accelerated sharply, ending the year at with a rating of 6.4 out of 10. That’s a month-over-month drop of 7% versus November, 16% since the start of the year and 13% year-over-year.
CEO confidence in current business conditions also declined again in December, down 7% month-over-month to 7.2 out of 10. That level is 3% lower than the same time last year and 8% below its February peak.
So what has CEOs so glum? It is likely the stock market. CEOs of big public companies are judged by the performance of their stocks and often their compensation depends on investor gains. With the stocks of many companies deeply in negative territory for the year, and the major indexes barely hanging on to tiny gains, it may feel like we already are in a recession if you are a CEO.
The c-suites are a pretty grim place right now. In addition to the panicked CEOs, the chief financial officers are also convinced doom looms just around the corner. A recent survey found nearly half think we’ll be in a recession by end of next year and 80 percent think we’ll have entered one by the end of 2020.
Fed Report Says Millennials Are Poorer Than Other Generations...But Fed Policies Made It Happen
Tue, 12/11/2018 - 20:45
Authored Ryan McMaken via The Mises Institute,
One of the challenges in looking at income and wealth data is getting a sense of how different demographic groups are affected.
It's relatively easy to find median income and wealth data over time for the entire population, for example. But then problems of interpretation immediately present themselves. For example, if the data is household data, what are we to make of things if the household compositions has changed over time?
And what if the demographics of the individuals within the households themselves have changed? For example, if a larger proportion of all households are now younger households, perhaps that could have an effect on the income and wealth data overall. After all, younger heads of household tend to have lower incomes and less wealth than older heads of households.
This problem of measuring workers and incomes over time has been the challenge that presents itself to anyone trying to figure out if so-called millennials are richer or poorer — as a group — than other age cohorts.
To do this, researches must find some way to estimate wealth and incomes for different age cohorts at similar ages or at similar points in their careers. Otherwise, characteristics we think we are attributing specifically to Millennials may really be characteristics that are just common to people of a certain age.
Last week, the Board of Governors of the Federal reserve released a new report that attempts to address the issue of whether or not Millennials really are worse off at the same point that other age cohorts have been at similar ages.
This will no doubt be the first of many that attempt to answer this question. At this early stage, however, we can say that the data leans toward concluding that yes, Millennials are, in fact, less wealthy, and are lower-income than previous cohorts.
Some conclusions in the report include:
Moreover, according to the report, "millennials also have significantly less credit card loans and miscellaneous other debt."
The problem we encounter here, though, is that the debt the Millennials do have is not connected to assets. For example, fewer Millennials have mortgages, which, given lower homeownership rates, suggests Millennials have less home equity as part of their net worth totals:
In 2004, 28 percent of Generation X members had a mortgage, well above the 19 percent share of millennials that had one in 2017. ... That said, the median mortgage balance for millennial mortgage borrowers in 2017 was somewhat higher than for Generation X mortgage borrowers in 2004 ($105,000 versus $94,000), reflecting, in part, the net in crease in real house prices during the same period.
Instead, debt seems to be more connected to student loans and to auto debt. For example:
For auto loans, contrary to the stories in the popular press th at millennials have a more subdued demand for cars than members of earlier generations, the Equifax/CCP data show that 40 percent of millennials had an auto loan in 2017, compared with 36 percent of Generation X members in 2004. The mean outstanding balances on auto loans in the two cohorts are similar at about $5,200.
And, as many suspected, student debt is higher for Millennials:
One loan category for which millennials in 2017 had a notably higher average balance than Generation X members in 2004 was student loans. While only 20 percent of Generation X members had a student loan balance in 2004, more than 33 percent of millennials had one in 2017. Moreover, the median balance among student loan borrowers was substantially higher for millennials in 2017 than for Generation X members in 2004 (over $18,000 versus $13,000). ... Accordingly, the average student loan balance for millennials in 2017 was more than double the average loan balance for Gene ration X members in 2004. The rise of student loan borrowing among young consumers reflects, in part, the rising real cost of higher education, the increase in college enrollment due to the Great Recession, and the increasingly limited capacity of parental contribution.
Thus, it's not surprising when the report concludes that Millennials have a lower net worth than other age cohorts at the same stage:
Turning to net worth, which puts together the asset and debt comparisons described above, we find that millennials in 2016 have substantially lower real net worth than earlier cohorts when they were young. In 2016, the average real net worth of millennial households was about $92,000, around 20 percent less than baby boomer households in 1989 and nearly 40 percent less than Generation X households in 2001.
The median total assets held by millennials in 2016 is significantly lower than baby boomers in 1989 and only half as big as Generation X members in 2001.
Overall, the report paints a picture of younger workers who have fewer assets, lower incomes, and more student debt.
A common response in the media has been to blame Millennials for buying "too much avocado toast," or for having too many other luxury tastes that render them incapable of building wealth. That may be true of the minority of Millennials who spend much of their lives on Instagram, but the Fed report itself concludes that the consumption patterns of Millennials are not significantly different from those of other groups when incomes and other factors are taken into account.
In other words, Millennials are not any more profligate than the Baby Boomers or Gen Xers who came before them.
The Role of Modern Monetary Policy
The report does not attempt to answer questions as to why Millennials might be unable to build wealth as quickly as those who came before. But there is something different about today's younger workers: they mostly started their careers in the post-Great Recession world and have thus lived their working lives in the shadow of what Brendan Brown calls the Great Monetary Experiment.
First of all, these workers had to deal with the fall-out of the Great Recession itself which was widespread unemployment for a period of years. This meant slower income growth in the first several years of employment, which can have a long-term effect on wealth accumulation. Economists and other observers have been pointing this out since at least 2011, when it became clear that job markets and incomes were not going to just bounce back as many assumed they would at the time. Indeed, it has only been in the past few years that most measures of incomes and wages have returned to the levels we saw back in 2007.
And Millennials appear to have been hit especially hard by this, as noted in this report from the St. Louis fed. All of this, of course, happened on the Fed's watch, and was just the latest example of how the myth of Fed-engineered economic stability has always been a myth.
So, we have a group of workers who start out their careers in a bad labor market, brought on by more than 20 years of money-pumping by Volcker (later in his term), Greenspan, and Bernanke.
But once those Millennials were able to get jobs, they then were faced with a world that was particularly hostile to saving, home purchases, and investment for lower-income workers.
Our current situation is marked by endless monetary activism marked of near-zero interest rates and asset inflation which rewards those who already own assets, and have the means to access higher-risk investment instruments that offer higher yields.
Meanwhile, banking regulations have been re-jiggered by federal politicians and regulators to favor established firms and the already-wealthy. This was explored in some detail recently by banking-industry researcher Karen Petrou who concluded that thanks to post-2007 federal regulations, "it’s basically impossible for banks to make mortgage loans to anyone but wealthy customers."
Meanwhile, basic methods of saving, like savings accounts, offer interest rates that don't even keep up with inflation.
Combine this with rapidly climbing home prices, and we have a formula for an economic system where being an ordinary worker — who needs to build wealth from scratch — is facing low yields, less accessible debt, high housing prices, and lower incomes.
This, not surprisingly, has led to greater inequality, and its likely that as we look at growing inequality statistics, part of what we're seeing is a growing gap between younger workers and older ones — a growing gap that was not as wide before.
In this environment, doing what the Baby Boomers did, or doing what the Gen Xers did, just isn't going to work very well. It may very well be that the only way for Millennials to get ahead in the current economy will need to either inherit wealth or engage in "extreme frugality" in which the Millennials will need to adopt a drastically lower standard of living compared to their elders.
This was not nearly as essential for previous generations. Of course, for those Millennials who do decide to go the route of extreme frugality, they'll then be attacked for ruining the economy by "not spending enough." The smart ones won't care.
"I Thought This Deal Was Absurd, But Pensions Are Piling In..."
ZeroHedge.com Fri, 12/07/2018 - 17:05
Authored by Simon Black via SovereignMan.com,
We have been talking about the pension crisis for years now. It’s without a doubt one of the biggest, financial disasters.
These pools of capital, responsible for paying out retirement benefits, are terribly underfunded. So anyone depending on a pension in their retirement years should seriously consider a Plan B – and sooner rather than later.
We aren’t alone in sounding the alarm on pensions.
The World Economic Forum reported that in 2015, worldwide pensions were underfunded by $70 TRILLION. That is larger than the top 20 economies in the world, combined. In the US alone, federal, state, and local government pensions are $7 trillion short on the funding they need to pay what they have promised.
And none of this includes Social Security’s almost $50 trillion of unfunded obligations.
Even the private sector isn’t in great shape. US corporate pensions are a combined $553 billion in the hole. And one quarter of those funds are expected to go broke within a decade.
Most pensions require about an 8% annual return to break even (and make all the payments they’ve promised)… historically, these funds could achieve decent returns with a mix of conservative, fixed-income investments. But after a decade of ultra-low interest rates, achieving an 8% return in bonds would be a dream.
So these pensions are forced to take on more and more risk just to break even (oh, and deal with corrupt government officials)…They’re essentially taking the teachers’ and firemen’s retirement money and betting it on black… hoping to dig themselves out of the enormous hole they’re in.
That means buying more stocks (at what may be the top of the market)… and investing in global real estate (another hugely inflated asset)… Remember, pension funds are supposed to be some of the most conservative investors on the planet. Millions of people rely on them to make prudent investments to provide them with a decent income in retirement, not to make large, risky bets hoping for outsized returns.
But pensions are desperate. And they’re swinging for the fences just to make ends meet.
Pensions have nearly doubled their allocation to real estate since 2006 (investing an extra $120 billion into the sector)
But a certain type of real estate investment called “opportunistic investments” has grown sixfold over the same period. “Opportunistic investments” is just a fancy term for being a real estate developer. In other words, pension funds are basically building spec properties now.
At least with a normal real estate investment, the funds can buy an asset and earn a reliable income stream. But now they’re buying speculative land, developing it (often taking on debt to do so) and hoping to flip it to someone at a higher price somewhere down the line.
This is wrong for so many reasons.
Remember that outrageous real estate deal I was offered back in July?
A big bank was raising $500 million to buy a building in midtown Manhattan… then they wanted to spend another $1,000 per square foot on renovations.
I immediately passed. Why would I buy a building in one of the most expensive cities in the world, at a market high… then spend a fortune (and several years) renovating the property… then pray we don’t have a market downturn so I can sell the property to a higher bidder.
Well, now we know who likely took the $500 million allocation – pension funds.
Calstrs, one of the largest pension funds in the US, has allocated $5.7 billion to opportunistic real estate. And they think they’re going to make 13% to 30% on these investments (compared to 6% to 9% with traditional real estate).
What could possibly go wrong here?
Ten years into a raging bull market, pension funds aren’t just buying expensive real estate… They are buying expensive real estate and taking on debt to develop it. And they are hoping that years from now when the property is finished, the market will still be in a position to buy what they have built at a higher price.
Everything needs to go right for pensions to make money on these investments. But I see a lot more that can go wrong.
I was able to pass on this deal. But the millions of Americans depending on a pension for retirement don’t have that luxury… they’re at the mercy of the pension managers to make decisions for them.
And they are not making sound decisions today.
Are We In A Recession Already?
ZeroHedge.com Fri, 12/07/2018 - 17:45
Authored by Charles Hugh Smith via OfTwoMinds blog,
The value of declaring the entire nation in or out of recession is limited.
Recessions are typically only visible to statisticians long after the fact, but they are often visible in real time on the ground: business volume drops, people stop buying houses and vehicles, restaurants that were jammed are suddenly sepulchral and so on.
There are well-known canaries in the coal mine in terms of indicators. These include building permits, architectural bookings, air travel, and auto and home sales. Home sales are already dropping in most areas, and vehicle sales are softening. Airlines and tourism may continue on for awhile as people have already booked their travel, but the slowdown in other spending can be remarkably abrupt.
All nations are mosaics of local economies, and large nations like the U.S. are mosaics of local and regional economies, some of which (California, Texas, New York) are the equivalent of entire nations in and of themselves.As a result, there can be areas where the Great Recession of 2008-09 never really ended, and other areas that have experienced unprecedented building booms (for example, the San Francisco Bay Area where I live part-time.)
Changes in sentiment are reflected in different sectors of the economy: people become hesitant about big purchases first (autos, houses) and then start deciding to save more by spending less (Christmas shopping, eating out, vacations, etc.)
Given the structural asymmetries of our economy (a few winners, most people lucky to be losing ground slowly), each economic class also responds differently. The lower 60% of households don't have the disposable income of the top 10%, so "cutting back" for them might be buying fewer fast-food meals per week.
The top 10% have the majority of the nation's disposable income, just as they own two-thirds of the wealth. If the sources of their income tanks (tech bubble pops, etc.), then signs of recession in this class will be a decline in high-cost consumption: luxury store sales, fancy restaurants, etc.
In other words, different classes, sectors and regions of the economy can be recession while others are still doing fine.
As a result, the value of declaring the entire nation in or out of recession is limited. While national conditions such as mortgage rates and Treasury yields are consequential, the recessionary effects will likely be as asymmetric as the economy: the effects will vary considerably depending on how each sector, class and region are doing.
To summarize: the top 10% may never experience a recession that guts the bottom 90%, who depend on wages rather than earnings from capital.