You are currently browsing the tag archive for the ‘Fed’ tag.

Warning: The Next Crash is Taking Shape

 By Shlomo Maital

     In the children’s fable, a boy cried “Wolf! Wolf!” in jest – until, when there really was a wolf, nobody came to help. Economists seem to be like that boy. We are always crying “wolf!”.   Problem is, sometimes, not always, the wolf does come.

     Writing in the New York Times, Ruchir Sharma, chief global strategist of Morgan Stanley Investment Management (a Wall Street insider for sure) sounds a thousand warning bells. When an insider cries Wolf!, we should listen.

       Here is why.

      “Central banks adopted zero to negative interest rates and provided huge amounts of cash” after the 2008 crisis. Result: “global financial assets are worth over $250 trillion, up from $12 trillion in 1980, or more than 3 times global GDP.” …”The ocean of money in financial markets is so large, it’s possible that ripples on its surface could trigger the next big downturn.”

       Suppose, just suppose, as North Korea and the US square off, global financial markets fall by 10%. That implies paper losses of $25 trillion, or half again as large as the United States’ annual GDP. That could trigger widespread panic.

         Why have asset prices risen so dramatically? Because when you get to borrow free money, you are tempted to do something, anything, with it —   even when returns are low. At long last, central banks are beginning to worry about what they’ve done – create a new bubble. As Sharma notes, “asset prices from stocks to real estate have never been this expensive simultaneously.” Clue that it’s a bubble? Of course.

         Since WWII, there have been 88 recessions – and 62 of them followed a stock or housing bubble or both. So a financial crash will inevitably bring an economic crisis.

       Does anyone else agree that the wolf is on the way?   Philip Inman, The Guardian, does. He notes that the US Federal Reserve is now starting to sell its $4 trillion in bonds, bought in order to pump money into the system. In other words – soak up some of the mountain of money it created. This will require the US Treasury to raise more in tax, Inman notes. Why? If the Treasury can’t sell bonds, it has to raise taxes.  But baby boomers everywhere, those who have grown wealthy, simply refuse to pay the taxes needed to keep their governments afloat. And the Trump administration is hell-bent on lowering taxes, not raising them.   The baby boomers are “offloading the problem to younger lower-income groups, who now must borrow excessively just to make ends meet”.  

     It’s a recipe for big trouble, which now includes a war between the generations – when once, we old fellows used to try to make things better for the younger kids, and now we seem to be working hard to make them worse. And I haven’t even mentioned climate change.  

     “There is growing evidence of a slide into outright deflation even ahead of the next recession…”, notes a financial analyst, Albert Edwards. He thinks the US will soon slide into recession. And Trump is about to appoint five new Fed governors, all of whom want less regulation and less government.  

       I know a fairly wealthy investor, highly savvy, who is pulling his investments out of the US and putting them into Europe, of all places. Problem is, in a global crisis, there is no safe haven.

       These are dangerous times.   Everyone should set aside a bit extra for rainy days, and prepare at least mentally for a new global crisis.

 

Advertisements

“Drowning in Debt”

By Shlomo Maital

debt drown

   A new report from McKinsey Global Research, “Global Debt: Challenges and Opportunities”, sounds the alarm, from a rather unlikely source – a consulting company that makes its living on optimism and activism.

   Here is what McKinsey says, worth heeding!

   ”The world is deep in a flood tide of debt. Do we care and what do we do about it?

….More than 8 years since the 2008 global financial crisis started the world seems to be drowning in debt. Global economic growth remains anemic..some economists attribute it to the high level of debt (govt., businesses, households have been devoting significant resources to debt servicing instead of productive activities).   …Global debt has been growing faster than the economy… as of mid 2015 it stood at 294 % of global gross domestic product, up 25 percee end of 2007 and 48 percentage points since the end of 2000. In many countries debt has increased to levels not normally seen during peacetime in advanced economies.”

     The world has painted itself into a corner.   Advanced economies desperately need major investments in infrastructure and human capital. Instead they are either a) slashing public spending, to try to control the high level of debt, or b) recycling huge debts, borrowing new money just to pay off old money, because slow growth has put the brakes on tax revenues and increased deficits.

       I see little sign of creative thinking to solve the problem.   Central Bankers recently meet at Jackson’s Hole, Wyoming, took off their ties and formal dress…. And heard Janet Yellen, head of the US Fed, speak about how she plans, maybe, perhaps, to raise interest rates a bit this year. In Europe the central bank continues to push negative interest rates, after everyone knows for sure that you cannot get out of the painted corner solely by adding to the already huge mountain of money.

     Does anyone have a creative idea? Our central bankers are completely out to lunch… literally.

 Story-Driven Policy: Worth a Try!

By Shlomo  Maital

Kevin and Nicholas

Nicholas Kristof and friend Kevin Green, Yamhill

  The latest buzzword in professional and academic circles is “evidence-based”.  As an adjective, it modifies ‘psychology’,  ‘medical care’,  ‘policy’… everything.  Everything has to be evidence based. That usually implies a large data base mined for correlations.   Problem with that is,  G-d is in the details.  Truth is in the details.  By using data, especially Big Data, we miss the stories about the “little” people… forgotten people who struggle daily with illness, poverty, crime, drugs and other afflictions.  The Talmud says, If you save a single soul, it is as if you saved the whole world.  The point, of course, is to treat every single person with huge respect and massive importance.

    Today’s New York Times has two seemingly-unrelated stories that make this point perfectly.

    In his Op-Ed piece,  Nicholas Kristof mourns  the death of his school chum Kevin Green. They grew up together in Yamhill, Oregon, and ran cross-country together.  Kevin lost a good job, went on welfare, got divorced, became obese, lived on food stamps, got diabetes, and died at age 54.  Tea Party Republicans say he “had it easy because he got government benefits without doing anything”.  Kristof notes that Kevin collected cans and bottles by the roadside, to make $20 a day for subsistence.  Easy?  Want to trade places?  Did Republican wealth “trickle down” to Kevin and help him get a good job?  Not a chance.

    In Binyamin Applebaum’s piece on Washington, “Three stories illustrate Fed’s power and its limits”,  he covers Janet Yellen (Fed Chair) and her first speech.  Instead of an academic bore, quoting data, citing equations and analysis,   Yellen, who is brilliant, told the stories of three Chicago residents struggling to recover from the recession. She used their stories to explain why she will be very very slow and cautious in ending the Fed’s low-interest policy, despite Republican pressure to do so.   I wonder if she chose Chicago, because that is where President Obama lived and worked.

     All three ‘heroes’ in Yellen’s speech are struggling, but gaining ground.  Jermain Brownlee, 40, got a job building bus seats, though he makes less than he once did in construction.  Dorine Poole lost her job, then got a new one as a full-time office manager.  She makes $20,000 a year,  far less than the $32,000 she once made before the recession, as a claims processor.  Vicki Lara, 62,  lost her job in the recession and a year later, is serving food samples in a supermarket two days a week, six hours a day.  She wishes she could work more hours.  She owed $1,200 when she lost her job, and that debt has now ballooned to $3,700, with interest.  If she worked more, the companies to whom she owes money would simply garnish her wages.  So she had to decline a full-time job.   She told the NYT,  “When I walk home to catch the bus, I see five homeless people freezing in this weather…I wish I made enough money to help them.”

     Lots of people do make enough money to help them. But if you believe it’s their own fault, why bother?  Surely, they LOVE being homeless, outside, in the freezing cold.  Who wouldn’t? 

     I would like to see story-based policy.  If you want to cut welfare as a policy,  tell me a story about a real person and real events, to back up what you claim.    When I was a professor, I wrote papers based on data.  I always felt that the REAL story was in the story itself. But when I told stories, my papers were rejected, often with biting comments – because in Academe, “story” is a swear word.  Single cases, it is claimed, prove nothing.

    Wrong.  They prove everything.  They help us understand real people, real events, real problems.  When the U.S. Congress is populated by elected representatives, half of whom are millionaires, how in the world can they understand people like kevin, Vicki, Jerome or Dorine?    They can’t.      

Smoking Gun – How the FED Pampered Goldman Sachs

By Shlomo  Maital

Goldman Sachs

  Carmen Sigarra is a veteran lawyer, who worked for the Federal Reserve, overseeing banking operations, specifically Goldman Sachs.  She was fired and is now suing the Fed.

   During her stay at the Fed, she recorded nearly 50 hours of sessions in which Fed examiners checked Goldman Sachs transactions.  She has now released these tapes, and they will be the subject of an upcoming episode of This American Life, on PBS (American public radio).   Don’t miss it!

   What emerges is a picture of lax regulators, overly delicate with how they treat Wall St. Big Money, especially Goldman Sachs.   It demonstrates the culpability of the Fed in the 2008 financial collapse and crisis.  Blame the Fed is the title of an article I published in Barron’s,  and these tapes confirm it.  Blame Goldman Sachs too – they are not blameless.

   Specifically, one transaction that illustrates the whole picture was this:  the embattled Spanish bank Santander was being pressed by European regulators to boost  its capital –  that is, to have more liquid cash on hand, in case its assets declined in value.  To avoid doing this, Santander needed to get some assets off its books.  So it asked Goldman Sachs to babysit them – keep the assets on Goldman’s books.  For a hefty fee, of course.  Goldman agreed… it’s legal, (but shady, said the Fed examiner.  Legal, but shady.  That is the mantra of many people on Wall St.).

   Goldman attached a clause:  The transaction was subject to Fed approval. So the Fed could have killed this ‘shady’ transaction. But of course they didn’t.  And it went ahead. And so did many many many other similar, much worse transactions.

    What do we learn?   Wall St. has immense power.  The alleged independence of the regulators, the Fed,  is a fiction.  This is why another financial collapse, totally different in nature, could well occur. 

 

What is Helping the Dollar Defy Gravity?

By Shlomo  Maital   

        dollar               

  What in the world is helping the U.S. dollar defy gravity, keeping it from falling relative to other currencies?  The U.S. economy’s recovery is weak, job creation is awful, President Obama is incompetent, the Congress is deadlocked, and America is turning inward, or returning to its traditional isolationism. Moreover, the Fed continues to print dollars (by buying $85 m. worth of Treasury bonds monthly). There is an enormous overhang of printed dollars out there.

   China has lots its appetite for buying dollars.  According to Floyd Norris (New York Times, Feb. 22-23/2014),  China bought a net $48.5 b. worth of U.S.Treasury bonds last year.  This is $20 b. less than in 2012.  China now holds $1.27 trillion in Treasury bonds; together with Japan, this amounts to 42 per cent of the total $5.8 trillion in Treasuries held by all foreigners. 

    There is a great science fiction plot here.  What if those foreign Treasury holders decided to spite the U.S. by dumping their dollar holdings?  The dollar would crash, stock markets all over would drop, and an enormous crisis would result.  Why would anyone do this?  Well, America has plenty of ill-wishers out there.  The fact is, the fate of the dollar, and the U.S. economy, is now in the hands of Chinese, Japanese and others, who hold vast amounts of U.S. assets. 

    By great good fortune, just as China is easing off its dollar purchases to support the dollar,   Japan, under Abe and his “Abe-nomics”, has stepped up its buying.  Japan bought a huge $71.3 b. in Treasuries in 2013, up from $53 b. in 2012.  Japan is now the single largest purchaser of dollar assets.  Of course, Japan does this to weaken the yen and help its exports.  So far, it isn’t working too well.

    It is significant that the American public, including the banks, slashed their holdings of U.S. treasuries.  Clearly everyone knows that interest rates aren’t going down, they’re going up, which means Treasuries are going down, which means we should be selling them.  Apparently, foreigners are more bullish about the dollar than Americans are.   Not a good sign. 

     Right next to Norris’ column is an account of Fed discussions during the 2008 crisis.  It is very disturbing.  It shows how clueless the Fed Open Market committee was, especially after the Lehman bankruptcy, and how the Fed continued to worry about inflation, when the pressing problem was in fact deflation.   It seems that not only are there no competent political leaders left in power, there are no competent economic and financial leaders either. 

       

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2019
M T W T F S S
« May    
 12
3456789
10111213141516
17181920212223
24252627282930

Pages

Archives

Advertisements