Elites Are Waiting to Spring Their Trap

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“Dog whistles,” Jim Rickards calls them.

Through these signals, in frequencies beyond the normal hearing… elites communicate with each other.

The messages themselves are not in fact silent — they are audible to anyone with open ears.

But open ears are not necessarily knowing ears…

Only the intended audience can penetrate their true meaning.

That audience is their fellow elites and policymakers.

Today we tune our hearing to the proper pitch, decode the latest canine whistle… and tease out the implications.

What sedition, what treason, might elites have in store for the next crisis?

Answer in a moment.

But first to the thundering cacophony of the stock market…

The Dow Jones sold off today, down 220 points.

The S&P lost 25; the Nasdaq, 87.

Trump has apparently declined to meet Chinese President Xi Jinping before the trade war truce expires March 1.

European officials also cut their growth forecast this year. The Bank of England further warns the British economy is facing its weakest growth in a decade.

But to return to the central question…

What might policy elites unleash upon us next time?  

Come now to this article, published by the Federal Reserve Bank of San Francisco, dated Feb. 4…

Its author is a certain Vasco Cúrdia of the bank’s Economic Research Department.

It bears the title:

“How Much Could Negative Rates Have Helped the Recovery?”

The answer, says this fellow, is plenty:

The Federal Reserve dropped the federal funds rate to near zero during the Great Recession to bolster the U.S. economy. Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential. It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.

In a walnut shell…

To recover from the financial crisis, the banks should have railroaded you out of your savings.

That is, your bank should not have paid you interest on your savings — however slim.

It rather should have charged you for the burden of holding your savings.

The object is to turn your savings into a potato so hot you cannot hold them for an instant.

You must heave them into productive investment in the hope of positive return… which coaxes the economic engine to life.

Or you must spend them on goods and services, yielding the same healthful effect.

This is the way out of crisis… as the theory runs.

Thus the saver is a public menace.

How low does this Cúrdia fellow think rates should have sunk?

Model estimates suggest that reducing the effective lower bound for the federal funds rate to -0.75% would have reduced economic slack by as much as one-half at the trough of the recession and sped up the ensuing recovery. While the boost to the economy would have been negligible after 2014, inflation would have been higher throughout the recovery by about half a percentage point on average.

He goes on in the same dreadful line.

The implication is clear:

If negative rates were the solution in 2009… they must surely be in the tool bag next time.

The concept of negative rates are not new to longtime Daily Reckoning readers.

They have been adopted in Europe and Japan.

The Federal Reserve has held off to date.

But here we have a cry for negative interest rates originating within the Federal Reserve itself.

It is not the first — incidentally.

A 2017 paper from the St. Louis outpost delivered its own blast for negative interest rates.

These reports are public. They are yours for the asking.

But it is primarily eggheaded fellows within the policy establishments that read and circulate them.

In this fashion ideas gain currency in official circles — especially bad ideas.

Is the latest report clearing the way for negative rates when the next crisis drops?

The current expansion started in June 2009.

Should it extend through summer, it will be the longest on record… the expansion of all expansions.

That is, it already runs on time that is borrowed. And they know it well.

In event of recession the Federal Reserve would begin slashing rates again.

The fed funds rate presently rests at 2.50%. But evidence suggests it must cut 3–4% to haul the economy up.

But if it can only cut 2.50% before reaching zero… it comes upon a brick wall.

To pull the business off next time, the Federal Reserve would have to ram on through.

Will it?

If additional rounds of quantitative easing wouldn’t work the trick… why not?

But have negative rates lived up to billing?

Last year Deutsche Bank released “a report card for unconventional monetary policy.”

Unconventional monetary policy is of course negative interest rates, zero interest rates, quantitative easing — all tools in the central banker’s deepening kit.

Deutsche Bank examined their impact on several metrics of economic performance globally.

The telling results, as summarized by analyst Daniel Lacalle:

1. In eight of the 12 cases analyzed, the impact on the economy was negative.

2. In three cases, it was completely neutral.

3. It only worked in the case of the so-called QE1 in the U.S. and fundamentally because the starting base was very low and the U.S. became a major oil and gas producer.

For emphasis:

In 11 of 12 instances… “unconventional monetary policy” proved either negative or neutral.

Torsten Slok, chief international economist at Deutsche Bank:

How do you evaluate if QE and negative interest rates are working?… The issue is if QE and negative rates have been supporting the economy…

The conclusion is that U.S. QE1 had an impact but in all other cases the impact of QE and negative interest rates has been insignificant. And in eight out of 12 cases, the economic impact has been negative.

These elites regard us drudges as pawns upon the chessboard.

They believe they can push us around at their bidding… and we will fall in blindly behind their plots.

But the living and breathing human being is not a pawn upon the chessboard.

He is rather a joker within the card deck.

He is unpredictable… willful… resourceful.

He will not yield so willingly to the planner’s schemes.

As Jim Rickards notes, negative interest rates have actually induced their targets to save more:

The reality is the opposite of what the elite academics project. The reason savers are saving in the first place is to achieve some future goal… Savers don’t save less; they save more in order to make up the difference and still meet their goals.

But that does not mean planners will throw up the sponge… and quit.

They will instead double, triple, quadruple, quintuple their assaults until we are all broken, all loaded onto one single boat.

And so the immemorial virtue of saving will remain under ceaseless battering.

If we could only get today’s planners to sit down before this timeless proposition:

Saving is both a private and public good, a universal blessing.

Details tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

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Three Concerns Hanging Over the Davos Elite

This post Three Concerns Hanging Over the Davos Elite appeared first on Daily Reckoning.

This week, the global elite descended private jets to their version of winter ski-camp – the lifestyles of the rich and powerful version.  The World Economic Forum’s (WEF) five-day annual networking extravaganza kicked off in the upscale ski resort town of Davos, Switzerland.

Every year, the powers-that-be join the WEF, select a theme, uniting some 3000 participants ranging from public office holders to private company executives to the few organizations that truly do help fix the world that they mess up.  This year’s theme is “Globalization 4.0”, or the digital revolution. The idea being, the potential tech take-over of jobs, and what wealthier countries are doing to lesser developed ones in the process.

While the topic might be focused on the future, the present is just as troubling, if not more so, than the future.   Such is the disconnect between real people and corporations.  That’s what the estimated 600,000 Swiss Franc membership to be a part of the WEF constellation gets you as a CEO at the Davos table.

Government leaders like German Chancellor Angela Merkel, Brazil’s president, Jair Bolsonaro and Chinese Vice President, Wang Qishan are in attendance this week. Business leaders like Microsoft co-founder Bill Gates and JPMorgan Chase CEO, Jamie Dimon will also take part in the festivities.

Yet, even though the various leaders will likely promote their achievements, what’s lurking behind the pristine snowcapped Alps, is a dark foreboding of a less secure world. Nearly every major forecast from around the world is projecting an economic slowdown. As one Bloomberg article reports, “companies are the most bearish since 2016 as economic data falls short of expectations and political risks mount amid an international trade war, U.S. government shutdown and Brexit.”

The list of non-attendees includes U.S. President Donald Trump, UK Prime Minister Theresa May and French President, Emmanuel Macron. They are too busy dealing with complex political problems in their own government institutions and domestic home fronts to make the trek.

Below is a breakdown of the three flashpoints that the Davos crowd should be watching in 2019:

Economic Growth Will Slow

Signs of slowing global economic growth are increasing. We’re seeing that in both smaller emerging market countries and larger, more complex ones. Weaker-than-anticipated data from the U.S., China, Japan and Europe are stoking worries about the worldwide outlook for 2019.

Many mainstream outlets are beginning to understand the turmoil ahead. Goldman Sachs, my old firm, is predicting an economic slowdown in the U.S. And the International Monetary Fund (IMF) has revised downward its 2019 U.S. growth prediction to 2.5% from 2.7% from 2018. It believes that the U.S. will be negatively impacted by the economic slowdowns of American trade partners and that the 2020 slowdown could be even “sharper” as a result.

The IMF also points to pressure from ongoing trade tensions between the U.S. and China and growing dysfunction between the U.S. and other major trading partners, such as Europe.

Because the world’s economies have become increasingly interdependent, problems in one economy can have widespread consequences. We learned this once before: the collapse of U.S.-based investment bank, Lehman Brothers, triggered a greater international banking crisis in 2008. That sort of connectivity has only grown. The reality is that we may now face even greater threats than forecast so far, which could lead to another financial or credit crisis.

It is likely that China could be ground zero for a global economic slowdown. Recent data out of China indicates that much global GDP and trade activity that should normally be in the first quarter (Q1) of 2019 was pulled forward into Q4 2018 to “beat” the tariff increase.

It’s likely that the same phenomenon could happen in the U.S. If this trend does snowball, you should expect to see rapidly deteriorating economic numbers arriving in the months ahead.

Debt Burdens Will Worsen

No matter how you slice it, public, corporate and individual debt levels around the world are at historical extremes. Household debt figures from the New York Federal Reserve noted that U.S. household debt (which includes mortgage debt, auto debt and credit card debt) was hovering at around $13.5 trillion. That debt has risen for 17 straight quarters.

What is different this time is that current levels are higher than just before the 2008 financial crisis hit.

In addition, global debt reached $247 trillion in the first quarter of 2018. By mid-year, the global debt-to-GDP ratio had exceeded 318%. That means every dollar of growth cost more than three dollars of debt to produce.

After a decade of low interest rates, courtesy of the Fed and other central banks, the total value of non-financial global debt, both public and private, rose by 60% to hit a record high of $182 trillion.

In addition, the quality of that debt has continued to deteriorate. That sets the scene for a riskier environment. Over on Wall Street they are already disguising debt by stuffing smaller riskier, or “leveraged” loans into more complex securities. It’s the same disastrous formula that was applied in the 2008 subprime crisis.

Now, landmark institutions like Moody’s Investors Service and S&P Global are finally sounding the alarm on these leveraged loans and the Collateralized Loan Obligations (CLOs) that Wall Street is creating from them.

CLO issuance in the U.S. has risen by more than 60% since 2016. Unfortunately, it should come as no surprise that Wall Street is now proposing even looser standards on these risky securities. The idea is that the biggest banks on Wall Street can actively repackage risky leveraged loans into dodgy securities while the music is still playing.

If rates do rise, or economic growth deteriorates, so will these loans and the CLOs that contain them, potentially causing a new credit crisis this year. If the music stops, (or investors no longer want to buy the CLOs that Wall Street is selling) look out below.

Corporate Earnings Will Be Lower

With earnings season now underway, we can expect a lot of gaming of results in contrast to earlier reports and projections. What I learned from my time on Wall Street is that this is a standard dance that happens between financial analysts and corporations.

What you should know is that companies will always want to maximize share prices. There are several ways to do that. One way is for companies to buy their own shares, which we saw happen in record numbers recently. This process was aided by the savings from the Trump corporate tax cuts, as well as the artificial stimulus that was provided by the Fed through its easy money strategy.

Another way is to reduce earnings expectations, or fake out the markets. That way, even if earnings do fall, they look better than forecast, which gives shares a pop in response. However, that pop can be followed by a fall because of the lower earnings.

The third way is to simply do well as a business. In a slowing economic environment, however, that becomes harder to do. Plus, it’s even more difficult in today’s environment of geopolitical uncertainty, as a multitude of key elections take place around the world in the coming months.

These three concerns were central in conversation in Davos. Expect global markets to be alert to the comments coming from the Swiss mountain town. Severe dips and further volatility could be ahead if any gloomy rhetoric streams from the Davos gathering.

How Will the Fed React?

Ready to help, is the answer. This month, yet another top Federal Reserve official noted that economic growth could be slowing down. That would mean the Fed should, as Powell indicated, switch from its prior fixed plan of “gradually” raising interest rates to a more “ad-hoc approach.”

Indeed, Federal Reserve Bank of New York President John Williams, used Chairman Powell’s new buzz phrase, “data dependence,” to indicate that the Fed would be watching the economy more. While he didn’t say it explicitly, it has become largely clear that the markets are determining Fed policy.

Based on my own analysis, along with high-level meetings in DC, I see growing reasons to believe the Fed will back off its hawkish policy stance. As we continue to sound the alarm, there are now a myriad of reasons including trade wars, slowing global economic conditions and market volatility.

Traders are now assigning only a 15% chance of another rate hike by June. Just three months ago, those odds were 45%.

Watch for even more market volatility with upward movements coming from increasingly dovish statements released by the Fed and other central banks. Expect added downward outcomes from state of the global economy along with geo-political pressures.


Nomi Prins

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