Tuesday, February 23, 2016

Swedes Are Saving More Than Ever As Negative Interest Rates Fail

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/us-markets/swedes-are-saving-more-than-ever-as-negative-interest-rates-fail?post=85446&uid=4798

Swedes are saving more than ever in their newly created (voluntary) cashless environment. That was not supposed to be how it works. They should be saving less and spending more because the banks are charging them interest. That is the goal of negative interest rates, to force people to spend more so that inflation will bump off zero.

But here is the flaw in that reasoning. The fees the banks charge retail customers are like a tax. They make the Swedes feel poorer in their accounts, not richer. So the Swedes do what I predicted. They save more to make up for the shortfall. They still don't want to hide money under the mattress, risking the loss of all of it to theft!

The illogical reasoning that people will spend more when you take their money away from them must have been created by people who have plenty of spare money. No one else would entertain this absurd reasoning except for economists and bankers!

A tax is a tax, no matter if it comes from the government or if it is imposed by the banks. Bankers better be very afraid that people will simply not want to spend money when they are being taxed more. Savings have exploded in the USA, even while main street has suffered. You can see that by the chart:

Now, it is possible that once negative rates become large, like over 5 percent, that people will look for alternative means of storing value. They will seek out gold, or perhaps antiques, or art, or coins or most likely, bond funds. But knowing that the populace is getting steadily poorer will not, in my opinion, make for a stronger business climate. And if people sense a weak business climate they save money.

So, making the populace poorer will not make them spend. People spend less when they feel poorer, not more. I cannot understand how this is lost on New Keynesians like Krugman and Roubini and others. The slide toward negative interest rates is an untested and dangerous model.

But even JP Morgan is calling for a deep venture into negative rates well below zero. The economists at JP Morgan say that banks will not hoard cash, even if it makes economic sense to do so. Negative .5 percent is the real zero lower bound according to the bank of England. But JP Morgan says that the Fed could go as low as -1.3 percent here in the US, that Britain could drop down to -2.5 percent, and that the euro zone could drop as low as -4.5 percent with Japan dropping to -3.45 percent.

Of course, those negative rates may have to be passed on to retail accounts, in which case rates could go lower than even JP Morgan recommends.

Jim Edwards of Business Insider has pointed out that Swedes have more than doubled the amount they have deposited into banks this year over last year. As Jim has noted, Statistics Sweden has pointed out:

Households continued to save in bank accounts and deposits minus withdrawals amounted to SEK 24 billion. Net deposits during the first three quarters of the year were SEK 100 billion. This can be compared to SEK 42 billion during the corresponding period last year.
Jim is puzzled by the behavior, but I am not at all. Sweden is a cold weather nation. People make good wages and seek convenience. Also, they must be confident they can overcome the tax, with, you guessed it, more savings!

Jim points out that as other assets grow for Swedes, they are actually feeling richer. It will be interesting to see what happens when the housing bubble crashes. Will Swedes then feel poor and save even more or will they hide their money under the mattress, forcing the powers that be to abolish cash?

I don't see the later happening at all. People are at work all day, and they don't want a lot of cash left in unsafe places. Greedy banks are better for savers than no banks. And, of course, when rates go negative far enough, depositors could be permanently trapped, as banks banish cash altogether.

As for Americans, well, many of us pay bills online. We don't want to spend the time or money to drive to the stores to pay the bills. Much of the US has cold winters, when the price of going out could be too high. Until negative rates become simply abusive, we may tolerate some fees.

But it could be the accumulation of fees and taxes that set Americans against negative rates. If gasoline prices rage upwards and utility prices rage upwards, and other prices go out of control, how much patience with Americans have with the negative rate regime? It is one thing to voluntarily take a small interest fee for convenience. It is quite another to be forced into it.

Massive bank fees with forced savings due to cashlessness may cause a serious revolt of some kind. That is the experiment in human nature that we think could be played out not so long in the future. How Americans react to the totalitarianism of forced savings could be a game breaker.

Sunday, February 21, 2016

If Super Bowl 50 Was Fixed It Wasn't Done by Cam Newton

 I first published this post to my personal blog on Talkmarkets: http://www.talkmarkets.com/contributor/gary-anderson/blog/news/if-super-bowl-50-was-fixed-it-wasnt-done-by-cam-newton?post=85311&uid=4798

Was Super Bowl 50 fixed? Certainly it was not fixed by Cam Newton. He was as disappointed in the outcome as anybody on the field. His body language was not of one who wanted to lose the Super Bowl. Certainly, all participants in a game of this magnitude, with the amount of betting done both legally and illegally, have their behavior questioned after a questionable outcome.

While I question Snopes when it comes to the website's assessment of causes of certain conspiratorial political events, it is helpful here in dispelling any rumors that Cam Newton and his family were arrested for fixing the Super Bowl. They were not arrested for fixing the Super Bowl! We have to look to others to see if there was a pattern of questionable behavior.

Certainly, we know that sporting events can be fixed. The Big Fix: The Hunt for the Match-Fixers Bringing Down Soccer is a book written by Brett Forrest, which explores soccer's betting scandals that have reached the highest levels of the game.

The easiest way to throw a game is to get to the officials. Now, let me say I have no proof whatsoever that any official in Super Bowl 50 threw the game. Bad officiating, or my opinion of what is bad officiating, is certainly not proof of conspiracy. There has to be independent confirmation of money changing hands, which is how most sports scandals are solved. My opinion is, that at the very least, the game was poorly officiated.

It turns out that a Carolina player, Josh Norman, mentioned that the Panthers were playing two teams.  My personal opinion is that he was speaking of the first team being the Denver Broncos and the second team being the referees.

As I observed the game, there were 5 calls during Super Bowl 50 that could have been bad calls against the Carolina Panthers. These calls or non calls were all drive stoppers.

1. The catch by Jerrico Cotchery was assessed not to be a catch in the replay booth. It was ruled dropped on the field, but that was, in the opinion of the unofficial replay official in the booth with Jim Nance, a catch. Yet the official replay booth upheld the call that it was dropped.

2. A catch to keep a drive alive in the second half, was dropped in the middle of the field, as it appeared a Denver Bronco defensive player was draped all over the receiver. No call of pass interference was made. Another Panther drive was stopped.

3. A flag was picked up as the Panthers were driving toward the goal line in the second half. Cam Newton smiled in disbelief at the officials and shook his head at that reversed call. This was a very suspicious situation for me, because Cam Newton appeared to be quite put off at the officials.

4. The Panthers were punting. An obvious offside call was missed as a Broncos player clearly was on the other side of the line of scrimmage when the ball was snapped. NFL refs rarely miss offside calls.

5. Cam Newton's fumble of a forward pass towards the end of the game received no scrutiny. The fact he didn't dive for the ball received scrutiny, but that was likely self preservation. Certainly, Tom Brady's forward pass that the Oakland Raiders thought was a fumble, back in the snow bowl, was played over and over in slow motion and showed a minute movement forward in Brady's arm. No such scrutiny was applied to the Cam Newton pass.

Of course, people are still talking about playoff mistakes, like Des Bryant's catch that was ruled not a catch, back when the Cowboys played the Packers.

For the integrity of the game, which is losing certainty, clearly investigations must take place about these matters, and not just by the NFL security people. The FBI and other law enforcement agencies need to step up to the plate. There is more money made illegally from betting than legally in the Super Bowl.

The truth is, Super Bowl 50 was an exceptionally boring football game, because of the officiating stopping all the Panther drives, regardless of whether it was a fixed game or not. These officials are supposed to be the best in the game. They didn't perform as the best in the game, in my opinion.

But it is for others to take a look at the behaviors of the participants to determine of bad calls were really foul plays. Sponsors of the game are going to pull back, and damage the game and sports in general if they sense that they are supporting a massive fraud.

Add this to the issue of concussions in the sport of football, and the way the league ignored the issue for so many years, and pretty soon Americans will call for a replacement celebration to be representative of American culture, not football. Because the game is a violent game at times, it needs to be squeaky clean in all other aspects of the business and players must be protected as to their health and reputations.

And officials of sporting events should be paid a lot more money than they are currently being paid. Their salaries are simply too small when considering the temptations to engage in illegal behavior. A rookie NFL official makes $78,000 per year. While that is a nice living for many, it is simply not a deterrent to crime, in my opinion. Salaries of officials becomes a bad joke, in my opinion, and the joke could be played on the integrity of the game.

Then add to all this issues about deflated footballs, headset tampering, substance abuse, and you get people saying cheating is simply a part of the game. The moral aspect of the game, for many fans, simply does not exist and they don't even seem to care. And it just isn't about football, it is about all sports. If sports is a teaching tool for sportsmanship, it is failing miserably. It boils down to an issue of trust in our institutions.

Thursday, February 18, 2016

Retirees Should Not Listen to This Investopedia Financial Advice

This article was first published by me on Talkmarkets:  http://www.talkmarkets.com/content/us-markets/retirees-should-not-listen-to-this-investopedia-financial-advice?post=85122&uid=4798

Retirees should not listen to Investopedia's recent financial advice. It is contained in the article: Retirees: 7 Lessons from 2008 If There Is Another Crisis. They should, at least, think for themselves and consider the opposite view. I am not an investment counselor or attorney, so I am not giving advice, merely trying to get older people to reconsider the bullish advice.

I find Investopedia to be quite helpful on many issues, as it has brief, clear cut definitions of terms and concepts used in the financial world, as well as great articles on finance.  

The Investopedia article in question was written by Tim Parker in February, 2016.  So, this was posted after the decline of oil and food prices has been in full swing. China is bleeding money trying to prop up the Yuan, and Europe and Japan are suffering negative interest rates.

Yet, Investopedia is being quite bullish with the Parker article. The article speaks to some various strategies, not all suspect for the older crowd. For example, the concepts of hedging, not being in stocks only, keeping calm, and diversity are all good concepts. If anything, the author is hedging his bullish comments.

But other advice given, such as sitting still, preparing to buy, and not hoarding cash, are not consistent with turbulent times and retirees. Return of capital is paramount in turbulent times. Tim Parker does not really acknowledge that. His advice would likely be helpful to young people, who have time to turn around mistakes in investing. Older folks have no such time.

I could not find any information that contributors do or do not speak for Investopedia. I would assume that front page articles are vetted by editors. Again, this is not a criticism of the website in total, just about the concerns I have about the advice given in this particular article.

Of course, Investopedia often gives good advice, to the investment community. They say beware of new Alt-A liar loans. That is a great piece of advice, as doing the same thing over and over again with the same disastrous results as what happened prior to the Great Recession is the definition of insanity.

Now, getting back to retired individuals, there are various ways to hoard cash in times of trouble. One could hoard it in a bank account. So far that seems to be a pretty safe bet, especially in FDIC insured accounts, as banks do not pass along negative interest rate costs to consumers. And the Fed has not yet saddled the banks with negative interest rates to pass on.

But that could change, and maybe sooner than we think. If it does, and the Fed introduces negative rates to retail accounts, very conservative bond funds and total return could be an option for those seeking appreciation of principle as negative penalties are applied to the account. That makes more sense than letting the money sit in a bank account while interest is charged.

The powers that be are not significantly worried about a small excursion into negative interest rates for banks themselves, because it costs more to store cash than it would to pay the Fed a small fee to keep digital money at the Fed. But retirees, if you see negative rates extended to your retail bank accounts, seek shelter in government bonds and total return, where the prices can appreciate, and positive interest rates may be found in longer maturities.

This change to the negative may be a few years away, but retirees in any era need to have a plan to maximize their return on capital. Seeking return of capital are the funds BRASX and the bond fund TLT.

Wednesday, February 17, 2016

Negative Interest Rates and Why Banks Want Fannie and Freddie

Here are some cutting edge discussions about negative interest rates (NIRP) that are worth your attention. Some of the discussions speak to profound insights gained, and others speak to tweaks needed to fully embrace the negative rate regimes. Others discuss the success or failure of such regimes. Why banks may want to replace Fannie and Freddie so badly is discussed.

Bookmark this page as a reference to these ongoing discussions.

This article was published by me on Talkmarkets:  http://www.talkmarkets.com/content/us-markets/negative-interest-rates-and-why-banks-want-fannie-and-freddie?post=85041&uid=4798

The assumption of those seeking negative rates is that they will serve as a stimulant to economic growth and a stimulant to mild inflation that would stimulate growth. So far there is little evidence that these measures are working, but the experimentation is far from over. Here then are some of the cutting edge discussions, including some chilling realizations:

Tyler Durden on Talkmarkets shows how demand for bonds is picking up even as the ECB and BOJ go negative. The question then becomes how low the central banks will go in pursuit of stimulus using NIRP. Declining bond yields, of course, means demand for bonds is picking up.

The Econometer Panel has said don't worry about negative interest rates coming to the USA (except for Kelly Cunningham who says otherwise), but hedge those comments with an implied application of them in any serious downturn. The Fed is watching how negative interest rates work in Japan and in the ECB before taking any action.

Jeff Cox at CNBC says that the Fed could reverse payment on interest on reserves (IOER) and force the banks to pay the Fed or lend the money out into the economy. Reversing payment on reserves is a market monetarist position, however, that economic school usually does not seek negative rates.

Stephen Williamson has written extensively about negative interest rates with many fascinating articles from his blog. In particular, he has posted an interesting article showing that in figure 3, the Riksbank was talking up negative rates as a solution to the lack of inflation in the Swedish economy. It turns out that figure 3 was from 2 years ago, and Williams points out the talk failed and that the Swedes are still talking up inflation with no victories at all for the negative rate regime. Similar failures exist in the ECB and in Japan.

I wrote about Summers and Roubini and others accepting the concept of negative interest rates, and even some accepting cashlessness. Most of these guys are New Keynesians (NK), but Summers may embrace certain market monetarist positions.

J.P. Konig discusses the technical difficulties of plunging into negative interest rates. He says that monetary policy for the Fed is very ineffective with negative rates, since negative interest rates on IOR would mean the banks would have to pay the Fed for all those reserves. And because other institutions other than banks, including the GSE's would not have to pay negative rates to the Fed because they don't get IOR now anyway, the Fed Funds Rate would not follow the IOR rate down. Konig speaks of Nick Rowe introducing the concept of the sticky ceiling to the Fed Funds Rate.

In my view, as an observer and not an economist, it would be a good thing that the Fed Funds Rate not go negative if IOER (interest on excess reserves) was reversed to the negative. After all, what interbank lending that there is should not be negative.

But now, thanks to Konig, we may know why the banks want to replace Fannie and Freddie.
In a negative interest rate environment, the GSE's could eat the lunch of the big banks as they will have to pay no interest and will have a competitive advantage. After all, the GSE's are capable of originating loans, not just guaranteeing them. They could offer lower interest rates than the banks if they were excluded from paying negative interest on reserves.

Of course, the big banks want the mortgage guarantee business as well, because it is profitable and would establish a favorable conflict of interest, and I wrote about why that would be a bad idea here at Talkmarkets. 

So, how do market monetarists weigh in on negative interest rates. First of all, they do not believe interest rates should be the main determining factor in monetary policy. They reject the NK's on that issue. They prefer nominal income targeting instead.

However, some market monetarists, like Woolsey, believe in experimenting with negative interest rates on the retail level:
 Some market monetarists like Bill Woolsey have suggested that "The Fed could impose a fee on bank reserves, leaving banks to impose a negative interest rate on their customers’ deposits. That might simply serve to fill up sock-drawers as people took the money out of their accounts. But eventually, instead of hoarding currency, they would spend and invest it, bidding up prices and, with luck, boosting production."[7]
But what if people decide to hoard more currency to make up for the losses on their deposits? Based on the Tyler Durden article at the beginning of this post, that could very well happen. Or, people could just pile into bonds, avoiding the negative tax on their deposits anyway, as bond prices going up would offset rate declines. That would not happen in a regular retail bank account.

And we know that there is a massive demand for bonds already, and negative rates could increase that demand to maddening levels.

We can see that consumer prices are flagging, especially for energy and food. Deflationary pressures are creeping in. Of course, the alternative, high food and energy cost, was a tax on American consumers.  However, banks bet risk on in oil and in food, markets they could control.


World deflationary pressures are worse than in the US at this point. But, while the Riksbank laments inflation below two percent, so does the Fed. 

World population growth has slowed, from 1.24 percent 10 years ago to 1.18 percent today. That is potentially deflationary. The rate of population growth is in serious decline according to that UN pdf. link.

Many government employees experienced no cost of living increase (COLA) this year, and social security recipients were denied a cost of living increase as well. That is quite deflationary and is also evidence of deflation in the economy.

Boomers are getting older and more cautious, and millennials are cautious as well. Keeping rates positive is like swimming upstream. Hopefully the currents will not be stronger than the efforts to push rates up. But since rates are predisposed to be lower, as I wrote here, it is almost insincere of the Fed to be speaking of and seeking significant rate increases.

With the Fed, it has become a question of trust. This we do know, the Federal Reserve is not the friend of main street. Even Konig hints at this when he addresses the issue of bank arbitrage through the use of GSE funds in the positive rate environment we cling to (Konig link above). And the author of this Fed article advocates paying interest on reserves to the GSE's to level the playing field, since depository institutions (big banks) receive that interest.

Of course, in the negative rate regime that is relentlessly coming, that would give the GSE's a massive disadvantage. Yes, this is all about trust, or the lack of it, and whether the Fed is thinking two steps ahead while telling us about the one step ahead.

The ECB was at least honest with regard to the negative consequences of negative interest rates:
A negative deposit rate can, however, also have adverse consequences. For a start, it imposes a cost on banks with excess reserves and could therefore reduce their profitability. Note, however, that this applies to any reduction of the deposit rate and not just to those that make the rate negative. For sure, lower bank profitability could hamper economic recovery, especially in times when banks have to deleverage owning to stricter regulation and enhanced market scrutiny...

...In order to avoid the cost of excess reserves, banks may also, decide to borrow less from the ECB. This would reduce excess liquidity in the banking system and put upward pressure on interest rates in the interbank and bond market, which could counteract the reduction of policy rates. But this is not what we have seen so far. 
 Indeed, as of now, the market monetarist wish for the US Fed, to charge interest on excess reserves, rather than pay it out, would likely not push interest rates in the interbank lending market up as hoped.
Therefore, if the banks need negative rates in the future, and maybe even cashlessness, it is possible that that banks will get their way even if it seriously harms main street. That was the case in the Great Recession and could be the case going forward although we hope real American patriots will prevail.

Tuesday, February 16, 2016

Wednesday, February 10, 2016

Preserve Capital-Relentless Slide Toward Deflation and Negative Nominal Rates

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/us-markets/preserve-capital-relentless-slide-toward-deflation-and-negative-nominal-rates?post=84564&uid=4798

I have talked a lot about demand for bonds, especially long bonds as collateral in derivatives markets. This demand has driven down yields and raised prices, so much so that Larry Summers fears a shortage of bonds, making the bond prices even more outrageous in a never ending bid for higher prices.

I have written about how the economy cannot boom, but only experience slow growth, in this regime of perma-low interest rates, with the Fed even predisposed to keep rates low. I wrote here about the four ways I see that the Fed is so predisposed:

So, we need to look at the ways in which the Fed has set things up to predispose it to keep rates low.
1. Grumpy's friend says the Fed can't afford to pay the treasury interest if rates are significantly raised. That is almost a hostage situation.
2. The banks have bet on low rates, taking the floating low side of the swaps bet when they issue loans.
3. The Fed pays interest on the excess reserves in order to restrain lending.
4. Long bonds are in massive demand as collateral, the new gold, and there are shortages, even with BRICS nations selling into a deep market.
So, rates are predisposed to stay low barring some unforeseen circumstance.
[Tracking the behavior of TIPS, which had their day but still have reasons for some demand, can help with understanding bond investing in these low interest rate environment. For those simply seeking capital preservation, there is a recommendation at the end of this article]

I shared solutions to the above Fed propensity, from Dr. Werner, to solve the problem of the conundrum of the long bond low yields in times of recovery, resulting in very slow recovery for main street as banks don't lend to consumers or each other. But number 3 will be difficult to implement as is discussed below:

1. Banks should not lend in non GDP transactions at all. No speculation of that sort should be allowed.
2. Central banks should bail out troubled banks by taking the bad loans off the books and nursing them to maturity or until there is a market for the assets.
3. Governments should stop the issuance of government bonds. Governments should borrow from banks in their own nations, instead.
4. Fiscal stimulation should come through bank borrowing, not the issuance of bonds.
America is potentially vulnerable to negative nominal rates just like the rest of the world, because the US is reliant on foreign holdings of the dollar to keep it strong and in reserve status. If the dollar is to remain the reserve currency, people will need to want to hold dollars and US bonds will continue to exist in high demand.

And one of the main reasons they would want to hold dollars is because they know America has never defaulted on its bonds. They need that safety. The bonds are not only gold as collateral in derivatives markets, but they are like gold in the backing of the base currency which was once known as the high powered money, not the same as the larger money supply. The discussion below should clarify how little power high powered money, base money, has become these days.

Gold bugs believe that gold is better than treasuries at backing the US dollar, but that treasuries do indeed at least back base money. But they could live and die before their view of gold versus treasuries is verified! And there isn't enough gold to back the currency anyway. Going to a gold standard for base money or especially for all money, would limit dollars and make trade with other nations impossible.

The Fed takes protection of the financial system seriously in certain situations. In 2009 the Fed protected bonds and banks as I wrote in a comment section on a blog making the point that the real economy is an afterthought and that the derivatives markets were all that mattered:

Back in those days, there were no clearing houses for derivatives, with trillions of dollars of long bonds being used as collateral as is being done today. While I don't believe bonds should be used as collateral in that way, as they back the dollar too, bond demand was likely lower, and the Fed bought them and the MBSs as well.
By 2009, the crash had occurred in the real economy. Banks would not lend. If anything, bank lending got tighter because of Fed actions. The banks should have been divided into bad bank, good bank. What the Fed did was all about the saving the banks and bond demand and had nothing to do with the real economy.
The Fed crushed the interbank lending market, with excess reserves and newly given power to pay interest on those reserves (IOR) to the big banks. The Fed even pays interest on the base money reserves, the required reserves, to the banks. This is new as well, from 2008, during the crisis.  The Fed pays interest on mandated reserves (IOR) and interest on excess reserves (abbreviated as IOR or IOER).  That certainly weakens the power of high powered money, the base money, for increasing the money supply!

Bonds will always back Fed base money. But bonds do not have to always be used as collateral for derivatives trades. Land could work for that. Fiat money from bank loans could work for that. Commodities could work.

The march toward negative is proving to be the main flaw in the otherwise almost foolproof system designed to protect the banks and treasury bond demand (engineered at least in part by Alan Greenspan). The propensity toward a deflationary scenario seems relentless, in Europe, in Japan and even spoken of by the Fed.

Dr Werners' plan to end the long bond may not work, but a return to a normal economy would be welcome news. Wouldn't it be nice if we had government banks that bypassed the issuance of bonds by the treasury. These banks would offer loans to our government, at positive interest rates. Bonds could be issued for special programs, like for infrastructure as was done with war bonds in World War 2. 

And regular treasuries would still back the base money. They would carry higher interest rates, reflecting diminished demand, and return the economy to more normal times. The 1 percent would be forced to pay taxes, so that the deficits would not be so large. But the bonds would not be in demand as collateral, so that would take some of the pressure off demand for them.

That way, when the Fed raises interest rates on the short end, there would be half a chance for long bond rates to go up so banks would lend into the real economy and profit. They certainly are not doing much of that now. We have a little inflation in the US, but in Europe, inflation is negative, meaning real interest rates are going up. Economists want to stimulate with negative nominal rates (real rates + inflation) to offset the rise in real rates.

Real rates can be negative, but as long as the nominal rate is positive, you won't have people pulling their money out of banks. But making nominal rates negative does bring in the problem of cash. 

We are clearly entering a worldwide deflationary cycle, with the slowing of China and US slow growth and the drop for the Baltic Dry Index. If the experiments of the Japanese and Scandinavian nations fail to stimulate, through their negative rates, it will certainly be back to the drawing board. And eliminating cash is not the answer, with too many unknowns being the result.

For me, there are more questions than answers regarding this march toward negativity. In a deflationary scenario, the banking system wants to reward recklessness and punish frugality. But they brought on the frugality along with globalization and lower wages that resulted. 

There is nothing wrong with frugality. Only, if everyone is frugal at the same time there are deflationary pressures and slow growth. The Japanese, and US millennials and boomers, and Europeans are frugal. Banker abuse and globalization caused this frugality in most cases. Easy money followed by credit tightening (which is different than money tightening by the Fed) is not good banker PR!

Preservation of capital is the only way for older people to navigate the slow growth/deflationary waters. Stocks and volatile bonds are not the place to be. Safe bonds or bond funds and capital preservation funds are the place to be unless growth can be rekindled .

Unless something changes, gold and stocks are still speculative in this environment. The article titled 
 Negative Real Interest Rates: The Conundrum for Investment and Spending Policies
was written years ago, but is great for explaining the bond markets and investor risk.  Negative real rates force money managers to take risk, likely too much risk.

And for individual older investors, this risk is unacceptable. BRASX looks like a reasonable place for older people to park their money.

Sunday, February 7, 2016

The Federal Reserve Financed WW2 But Cannot Finance America Now

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/us-markets/the-federal-reserve-financed-ww2-but-cannot-finance-america-now?post=84143&uid=4798

World War 2 was financed by the Federal Reserve Bank. The Great Depression came to an end through a dreadful war that was likely brought on by the central bankers' failure to finance economies in the Great Depression and prior to it:

 When the United States entered the war, the Board of Governors issued a statement indicating that the Federal Reserve System was “. . . prepared to use its powers to assure at all times an ample supply of funds for financing the war effort” (Board of Governors 1943, 2). Financing the war was the focus of the Federal Reserve’s wartime mission. This mission differed from the mission of the System before and after the war...
...Plans for financing the war were devised by the Treasury and the Federal Reserve. These organizations met frequently to determine how to finance the war and organize machinery for marketing United States government securities.
 The plan called for financing the war to the greatest extent possible through taxation and domestic borrowing.2 Paying for the war through levies on current incomes would minimize inflationary pressures, promote economic expansion during the war, and promote economic stability when peace returned.
 To direct the savings of American citizens into the war effort, the Treasury and Federal Reserve marketed a range of securities that would fit the needs of all classes of investors, from small savers who wished to invest for the duration of the war to large corporations with temporarily idle funds. To distribute these securities, the twelve Federal Reserve Banks organized Victory Fund committees and established plans to market war bonds in cooperation with commercial banks, businesses, and volunteers.

This article proves that the Federal Reserve played a heroic part in the war effort with the efforts it made to market the war bonds. Unfortunately, that heroic aspect of the Fed has disappeared entirely. It is now looked upon as a failed institution that helped some with the establishment of QE, but ravaged the middle class in favor of the richest by doing so. Asset increases, much of which was based upon mispriced risk, made money for American business but also hurt the middle class. Mispriced risk for assets caused booms and busts as the Bank of America stated.

Congress could permit the Fed to finance key drivers of the economy, like good roads and bridges. In a backdoor sort of operation, the Fed was used by congress to finance the last highway bill, as explained by Ellen Brown on Talkmarkets.

Some critics have said that the Congress overstepped but it is a complicated argument that really is not convincing. Even if the Fed claws back the funds, the highway bill is funded and the congress has set precedence for the Federal Reserve.

When looking at all the Fed did during World War 2, this is a very minor tweak of Fed policy. There are, of course, Build America bonds. But they are issued by state and local governments and are not backed by the full faith and credit of the United States. The Fed could pedal special treasury bonds that build America. But it doesn't.

Yet many are ready to pounce on the Fed for being the lender of first resort, even in the limited way Ellen Brown explained in her article. Libertarians do not want the Fed to be out front in any plan to rebuild America.

Libertarian anarcho-capitalist Doug Casey makes the case that low interest rates cause a misallocation of capital, which allows financial engineering. But in my opinion that is less a function of low interest rates than it is a function of stupid business leaders.

Casey makes a good case, however, that across the board stock buybacks is a massive misallocation of easy money. He shows earnings per share have been stagnant since 2013.

But I doubt the answer of most libertarians would be to let the Fed be the engineering lender into real projects for US growth, although I am sure Casey would prefer real growth to the economy rather than the fake growth we have now.

I am not saying that companies buying back stock is not a financially wise decision. It could be, depending on the business. But when they all do it at the same time it becomes a bit of a fraud, making the stock market look stronger than it really is. Earnings would tumble without stock buybacks. And the market would have cratered without the illusion of wealth creation.

Is the Fed happy enough with that illusion of wealth creation? We certainly hope not.

There may be a silver lining in current efforts by the Fed, in raising the Fed Funds Rate, however. Many view it as a tightening, but if it were more robust it could be looked at as growing the money supply. 

In a recent article entitled A Scary Monetary Conundrum Arises from the Great Recession, I pointed out that the Fed and market monetarists seemed to have reached a conundrum. The Fed interfered with interbank lending, and it had a slight bounce before diving. It now is all about the Fed Interbank.

So, one wonders if raising the Fed Funds Rate would give interbank lending a bounce. The Fed has said raising the Federal Funds Rate puts a floor under the rates. It seems to be worth a try, in order to break the conundrum, make the market monetarists happy, or at least as happy as economists can be, and get the Fed to input more stimulus into the banking system. The Fed has clearly failed to do so.

Clearly, with excess reserves making interbank lending less necessary, all that is left is for the Fed to fund infrastructure, maybe buy non financial assets like Japan does, and do more QE, but there is a shortage of long bonds in the economy and short bonds at the Fed to do repo.

The Fed is letting the world economy, and the US economy down. Everyone knows it. We cannot settle for negative interest rates and a cashless society. The Fed can do better, so can the treasury, and so can the comatose, zombie-like congress who is afraid of its own shadow (sorry for the mixed metaphor. Real zombies fear nothing), when it comes to getting our economy going again.

The Fed and the government need to work together to bring prosperity, because if they keep taking down small and medium businesses during downturns,  who borrow and fail, pretty soon it won't be worth it for job creators to borrow and fail anymore.

There isn't physical world war, but there is an economic war going on against main street and small and medium business. And that war is being driven by Fed policy, even if it doesn't want to carry on that unpopular fight.

Friday, February 5, 2016

A Scary Monetary Conundrum Arises from the Great Recession

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/financial/a-scary-monetary-conundrum-arises-from-the-great-recession?post=83841&uid=4798

There is a real and frightening conundrum that has arisen from the Great Recession.  It is the IOR Conundrum. What are we to make of payment of interest on excess reserves (IOR), held for the banks by the Fed. In a nutshell, the Fed says a floor must be created under the Fed Funds rate, which is a form of interbank stimulus, and IOR does that, while the Market Monetarists say that the Fed made the recession much worse by paying the IOR. So, which is it?

Many don't realize that the Fed says they gave interest on banks' reserves in order to put a floor under the Fed Funds Rate. The Fed is worried that banks would loan money between each other at lower rates than the Funds rate, perhaps leading to negative rates. Of course, the Funds rate has hovered under 1 percent, so you wonder what bank would actually do that. But here is what the Fed says:

 Essentially, paying interest on reserves allows the Fed to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves.
We all want to be free from the horrible Scandinavian problem of negative rates. We all know by now, I hope, that this has become a serious reality show over there in Denmark, Sweden and Norway, with the biggest Norwegian bank recently calling for a ban on all cash. We certainly don't want to try their little experiment in cashlessness.

But the conundrum continues with the Market Monetarists showing pretty clearly that the Great Recession got worse because banks not only did not lend below Fed Funds rate, but they simply didn't lend at all except to big business. The MMers view interest on reserves as a monetary policy tightening.

The Fed disagrees:

A steep rise in excess reserves cannot be interpreted as evidence that the central bank's actions have been ineffective at promoting the flow of credit to firms and households.
Clearly, the link above to the New York Fed is interesting, showing that the excess reserves caused banks to be more willing to lend between each other but not at lower than the funds rate. 

More from the New York Fed:

In fact, the central bank paid interest on reserves to prevent the increase of reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions.

So, some say, tightening in the current uncertain period, through continued IOR and through raising short rates, is effectively driving long interest rates downward. Of course they are inclined to be low due to massive demand for the bonds,and I think that carries more weight than manipulation of the Fed Funds Rate.

An explanation for the conundrum by the New York Fed is that the Fed is trying to loosen up interbank lending without the banks pushing rates down. But the MMers argue that the effect is a tightening on main street as well. Certainly, even the New York Fed admits:

It is important to keep in mind that the excess reserves in our example were not created with the goal of lowering interest rates or increasing bank lending significantly relative to pre-crisis levels.
So, not increasing bank lending significantly is of course what drives the Market Monetarists crazy. They don't fear some of this money (excess reserves) getting out into the economy, since inflation is so low these days. They want a little more inflation, to get the economy started again. Whether their way is the wisest way remains to be seen. Slow growth is the new normal of the Fed, clearly, by word and deed.

Perhaps this IOR Conundrum is the end of monetary policy. It is more like a stalemate in chess. Nobody seems to be winning, least of all the economy. Perhaps it is necessary to look for other ways to stimulate the economy, as fragile as it clearly is.

Another conundrum closely linked to this one is that we would be better off with higher interest rates and lower interest rates at the same time. Higher rates would motivate banks to lend as they would see a real profit from doing so. Lower rates would stave off perception of money tightening in the US, which is real money tightening in the world that borrowed cheap dollars.

Higher rates are preferred for our economy, but it is like we are separated from them by a great chasm, and no one can leap over that chasm. According to Market Monetarists, higher rates mean higher asset prices unless there is a savings glut which pushes asset prices up as rates fall. Since Higher rates cause banks to lend, forcing greater demand for assets. That helps the world economy, but not Americans so much.

Since the Fed cannot buy non financial assets like REITS like the Bank of Japan (BOJ) can, raising interest rates becomes the only tool to try to jack up asset prices as a stimulus, other than QE.

With regard to the IOR Conundrum, maybe someone should pass a law that says banks cannot lend to each other below the Fed Funds Rate, and get on with the business of loosening the money supply before emerging markets hit bottom in an ever more frequent deflationary and recessionary reality. As of now, the Fed does reverse repo operations to force banks to offer loans above the Fed Funds Rate.

Otherwise, the Fed could tighten the money supply but loosen lending by the TBTF banks, by cutting back on interest on reserves. Seriously introduce that rule that banks cannot lend below the Federal Funds Rate. Reverse repos can't go on forever, but the floor is still needed on interest rates. After all there are way more excess reserves than there are treasury bills to soak up those reserves. So why not force the banks to lend no lower than at the Fed Funds Rate?

No lending coupled with monetary tightening seems like a recipe for trouble. For the market monetarists, it is more about stable money than inflation or deflation. But, that debate is for the economists to figure out.

Finally, regarding the creation of bubbles, monetary policy is not key, but in my observation, since I saw it happen in Nevada, easy terms for loans with adjustable rates for the average buyer was key. That was clearly what caused the housing bubble in the last decade. There was an absence of underwriting coupled with securitization (caused by the Fed mispricing the risk of mortgage backed bonds), so banks did not have to keep the loans.

Once banks could no longer securitize, as the repo market broke due to suspect MBSs, the machine of securitization was prevented from working. Banks had to keep their loans and IOR came into the picture. The IOR Conundrum was put in place.

Monday, February 1, 2016

NGDP Targeting Good Observation Tool, Gold and Speculation

This article was first published by me on Talkmarkets:  www.talkmarkets.com/content/us-markets/ngdp-targeting-good-observation-tool-gold-and-speculation?post=83477&uid=4798

Is targeting Nominal GDP (NGDP), which is promoted by market monetarists, a fair way to expand the money supply and level out the business cycle? I have already admitted that watching the path of NGDP is a great tool and leading indicator signaling boom or bust. The concept of NGDP futures is interesting, but fraught with danger. 

 CC BY-SA 2.5
Image taken by Clark Anderson/Aquaimages

I am mostly concerned with fairness, regarding NGDP Targeting. I asked this question on a couple of econoblogs:

...Oh, by the way, the big banks did a form of NGDP targeting in rich neighborhoods. They permitted those that defaulted to live there free, so the prices would not crash in those neighborhoods. So, even in crash cities like Reno and Las Vegas, there were people living over 5 years in houses where the mortgage was not being paid.
Of course, the average Joe was not afforded such a break. The banks didn’t care that the prices dropped in his neighborhood because they had big clients ready with credit lines to go in and pay cash at rock bottom prices on thousands of homes. So, they got the houses they wanted back through foreclosure and credit to their wealthy clients.
So, the question is, based on what the big banks did in the above statement, can NGDP targeting possibly be fair?
Looking at the example in the quote above, the banks did not really increase the money supply. It was not actual NGDP targeting. Letting people stay in the houses without paying made it look like the money supply was stable, and that prices were stable.

But this question is important in the light of our failure to establish a rise in interest rates throughout the world. NGDP targeting would most likely be better than the negative rates and cashless society that Sweden is facing. But otherwise, it could cause big problems.

I had one answer granted to me by the NGDP pros, as to fairness, that those working for higher, sticky wages could be hurt, but that the negative effects of NGDP Targeting are unknown. I don't know if that is a definitive answer. But unknown is just what Wall Street needs, right? Not!

Scott Sumner did not go into detail, but he said, concerning the fairness of NGDP Targeting: "Chris, No, it’s not fair..."

What does NGDP Targeting hope to achieve? It hopes to level out the cycles of boom and bust. It hopes to slow a deepening of recessions while jump starting economies hurt by deep recessions quicker. It hopes to head off recessions using NGDP as a leading indicator.

But, clearly, NGDP Targeting will feature asset purchases and a futures market. The BOJ purchases REITS. So, some assets may benefit while others won't. There could be an inherent unfairness to that process.

The Fed would target NGDP at a certain level. The Fed would then raise or lower inflation to level out nominal GDP, which is real growth plus inflation. Personally, I think the Market Monetarists are deceived into thinking that the Fed would do the right thing, limit booms and busts, and the world would live happily ever after.

From Wikipedia, we see that:

Market monetarists contend that by not paying attention to nominal income, the Federal Reserve has actually destabilized the US economy; nominal GDP fell 11% below trend during the 2008 recession, and has remained there since.

But if the Fed has a secret agenda these market monetarists will be disappointed. The Fed will want to wash out weak hands (debt laden business and high wage workers), and may want to give friends a head start toward prosperity in the recovery. The Fed feels a need, in other words, from time to time, to blow bubbles and create busts.

NGDP Targeting would interfere with these secret Fed agendas. NGDP could end up being manipulated by the dreadful need to blow bubbles and create busts.

Scott Sumner wants an NGDP futures market, which supposedly would be a free market indicator of NGDP. But we know how markets are manipulated. Why wouldn't an NGDP market be manipulated by big players if the cocoa market could be cornered by one man?

This from the above Wikipedia link is the goal of the futures market:
The (central) bank would offer to buy and sell NGDP futures contracts at a price that would change at the same rate as the NGDP target.
How subject to manipulation would those contracts be, even if the Fed did adopt the policy of implementing the futures market? The NGDP Futures market lives in the head of Scott Sumner at this point, and it is unclear if it could be manipulated.
So, ultimately, NGDP Targeting would not help gold, which thrives on boom and bust but could be subject to being cornered as well. Of course, NGDP Targeting could help gold if the central banks push it up as an asset. That seems low on the priority, compared to REITS and practical commodities.

So, it appears that NGDP Targeting would be neutral regarding gold,unless the financial community lost faith in the ability of the market monetarists to get the targeting right. And that is a complex process that is more difficult to implement than inflation targeting, which is what the Fed does now, of course.

Perhaps another effort besides NGDP Targeting, the effort to get the Fed to fund projects, will actually create more business in America. There are two views regarding this funding, which showed up in the highway bill. Ellen Brown gave that funding for roads, a favorable report, saying that Fed involvement would expand the economy, but that more needs to be done. And Jeffrey Rogers Hummel has said that congress is robbing the Fed.

Hummel also says that the Fed will get the money back and it was just a way for Republicans to fund something without raising taxes. But even if this is true, at least the Fed is in the business of infrastructure repair. It can't hurt the economy. Good infrastructure increases the efficiency of the economy.

The Fed would not directly increase the money supply by funding roads, but economic activity would increase, and that could expand the money supply, as road workers get loans for houses and cars.

Perhaps more of this stimulation will be coming in the future from some plan instituted by the Fed. Certainly we should throw the book at the liquidity trap, and not give up like the New Keynesians, as they have practically bowed down to the inevitability of negative interest rates and even cashless societies.

The NK's have given up on Europe. And they want to lower interest rates this very minute in the USA, so Wall Street can continue feeding the stock market.

Some think NGDP Targeting could already be here as it has been added to the Fed tools. It has possibly proven itself to be inherently unfair, as QE was extended time and again since 2009. It did increase the wealth divide, but there was a little trickle down in low paying job creation.

Perhaps, buying gold or other commodities would have been far better than buying bonds, which created a shortage of long bonds in the derivatives world. But that would have been unfair as well.

We should follow Sumner's progress on the futures market implementation to see if it could improve the overall economy.

Teslas Are Not Cars. Crash Test Reveals the Truth

John Thomas Blog | Crash Testing The Tesla | Talkmarkets

If your Tesla gets banged up, few can fix it and it costs thousands of dollars for those who can, for a fender bender. Tesla is a one piece aluminum joke. And the joke appears to be played on the buyers of the car.

I told everyone this car was a bad joke because of the owner's desires to:

1. End manual driving,

2. Blast an atomic bomb on Mars to warm it up (and old Israeli student idea), and

3. Go live on Mars to escape nuclear destruction.

Please do not support Elon Musk, the delusional owner of Tesla or trust him with the future of technology in the United States.

...News flash: These things are not cars. They are more like giant computers, with an 18-inch screen and a 1,200-pound battery. None of the components looked anything like car parts. Only the wheels belied any connection with transportation.
 It took two months to finish the repairs. Since Tesla would only sign off on the car when it was perfect, it was sent back to the factory in Fremont three times for additional realignment and recalibration.
The final bill came to $32,000. The good news is that my lithium ion battery was fine, which would have cost an extra $30,000 to replace.

Understand that Tesla is a fraud, a hoax, in my opinion. It certainly is not crash friendly. It was given the highest rating by Consumer Reports as the best car ever made. If a fender bender cannot be fixed for less than $30,000 dollars as the article relates, then it can't be the best car ever made. It could be a car that leads one to financial distress and serious inconvenience because you don't get a new Tesla to drive as a loaner car. Cheap Bas****s.

If anyone owns Tesla Stock, $TSLA, they should consider this man's story before taking any action. I am not an attorney nor a stock counselor. I just think people need to understand what is really going on with Tesla.

More on Elon Musk's delusions in addition to the belief that he built a good car:

Escape to Mars Before Nuclear War

Blasting Mars with Nukes

Eliminating Manual Driving