The US economy died when middle class jobs were offshored and when the financial system was deregulated.
Jobs offshoring benefitted corporate executives and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.
However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.
The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.
Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One sourcre of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.
The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized. Continue reading
December was one of the worst months on record for foreign dealing with the “dollar.” The latest TIC update further confirms why January was under such persistent and heavy liquidation pressure in almost every corner. There was a record monthly amount of “selling UST’s” in foreign channels, a dearth of private “dollar” activity and, perhaps most important of all, bank liabilities for the last quarter of 2015 shrinking again at a troubling rate.
Just starting with the monthly overall total, the funding disorder is plainly evident in comparison to some of the worst financial months.
The huge “selling” pressure (and it should be pointed out again that “selling” UST’s and dollar-denominated assets in this context might be something other than liquidation; it could very well be an accounting transfer across jurisdictions, such as repo or derivative collateral flows, which leave market prices undisturbed but have enormous funding ramifications) was coming from the “official” sector, meaning foreign central banks and/or governments. As noted above, the one-month decline was by far the largest on record.
This is too Funny…
We have nothing against hedge fund manager John Paulson…after all, we don’t know the man. In fact, he is inter alia known for his philanthropy, having gifted $400 million of his not inconsiderable fortune to Harvard’s School of Engineering and Applied Sciences. But ever since hitting the big time by shorting assorted MBS prior to the 2008 crisis, he has frequently served as an excellent contrary indicator.
John Paulson looking at a recent chart of gold …
Photo credit: Bloomberg
First he bought bank stocks in 2010, announcing that he was betting on a rebound in growth that would ignite the sector. Not long thereafter, bank stocks began to decline sharply, as the euro area debt crisis went into overdrive. Paulson finally admitted that his strategy was a failure and sold the bulk of his exposure to banks in the fall of 2011 – literally within days of the sector taking off sharply.
Bank stocks and John Paulson – click to enlarge.
Gold investors should have realized that this represented a warning sign. Paulson had decided to jinx them in 2010 – 2011 as well. He announced his thesis on investing in gold and gold stocks in 2010 and eventually launched a dedicated fund for the purpose. He even offered a version of it that was denominated in gold, which we thought was actually a great feature. Continue reading
Submitted by Danielle DiMartino Booth – DB Money Strong
Mick Jagger has credited Charles Pierre Baudelaire for inspiring him to write “Sympathy for the Devil”.The French poet wove gorgeous verses around darker subjects that refuted mankind’s inherent kindness; his advocacy of the diabolical was pure allegation. As for the Rolling Stones, the song is a platform from which to present mankind’s atrocities from the devil’s point of view – to allow the devil himself to play devil’s advocate on history’s annals of tragedy. The controversial but undeniably timeless hit bridges from the trial and death of Jesus Christ to the Russian Revolution and World War II. The intense lyrics peak with Jagger demanding to know, “Who killed the Kennedys?”
A recent enlightening listen to this classic among rock classics reminded yours truly of the dangers of confirmation bias, the quest to validate one’s views by rejecting others’. After nearly a decade inside the Federal Reserve, one could only conclude that this contrarian-minded thinker would have been damagingly brainwashed to not bask in the clean light of skepticism.
Nevertheless, the dangers of deriving incomplete conclusions necessitates you play devil’s advocate to yourself from time to time. Caveat lector: this is purely an exercise in introspection. The writer’s full loss of faculties is not the conclusion you should draw at the end of this piece. So, now that we’ve set the stage, knowing said writer’s tongue is firmly in cheek, let’s channel our inner devil’s advocate. Shall we?
Our advocacy may as well start with the stalwart U.S. consumer, who we’ve all learned might take a body blow from time to time, but is never knocked out. The January release of retail sales was all it took to send those who’d temporarily jumped on the bearish bandwagon scurrying for their caves. Forget 2015’s Polar Vortex that made for easy comparables; the 3.4-percent gain over last year was still the best in a year. And December was revised up to boot. Isn’t it plain to see that the $140 billion de factor tax cut at the gas pump (which apparently kicks in with a long lag) and buoyant wages are finding their way into the real economy?
As for the strongest component of retail sales, it’s not only subprime loans that are behind the 6.9-percent growth in car sales over 2015. Super prime auto loan borrowers’ share of the pie is now on par with that of subprime borrowers – each now accounts for a fifth of car loan originations. What’s that, you say? Can’t afford that new set of wheels? Not to worry. Just lease. You’ll be in ample company — some 28 percent of last year’s car sales were made courtesy of leases, an all-time high. For bigger ticket items, anecdotal evidence suggests that while Gulf Stream sales have hit the skids, financing for yachts can still be had for two percent, a song in and of itself. So why not live a little?
And while you’re at it – turn up the heat! Not only are lower heating and gasoline prices paying off in spades for all households, Ford 150 and Ferrari drivers alike. But the other side of the story, that of the damage inflicted by crashing energy prices on all those displaced highly-compensated oil patch workers, is set to finally abate. All we need is for the always-accommodating countries of Iran and Iraq to both agree to play nice in the diplomatic sand box for the greater good of the world economy. Russia has held out an olive branch. Why shouldn’t they as well? Continue reading
Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails——as 84 months of ZIRP and massive QE clearly have—–he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.
Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the “natural” money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the “policy rate” to sub-zero levels in order to achieve the appropriate level of “accommodation” in an economy that refuses to attain “escape velocity”.
But after 86 months it is evident that all of this putative monetary “accommodation” has failed. Falsifying the cost of money and capital can only work if it causes households and businesses to borrow more than they would otherwise; and to then lay credit based spending for consumption and investment goods on top of what can be funded out of current production and income. Another name for that is leveraging private balance sheets and thereby stealing production and income from the future.
With $62 trillion of public and private debt outstanding the US economy has hit a economic barrier called Peak Debt. For all practical purposes, it can be measured as the macroeconomy’s aggregate leverage ratio at 3.5X national income. That represents fully two turns of extra debt on the economy relative to the stable 1.50X ratio that prevailed during periods of war and peace and boom and bust during the century before 1970. Continue reading
You can’t blame the PBOC for trying, as if they were even going to do it, Monday was the day. With the US closed and after the turmoil all over the “dollar” up to last Thursday, the Chinese central bank was left with practically no choice. With Hong Kong shaping up to the mess in the eurodollar, there wasn’t any surprise over the weekend. As I wrote Friday in anticipation (subscription required):
With volume in Hong Kong heavy and losses severe in many places, there isn’t a lot to suggest a durable turnaround in stocks, banking or currencies. The mess of imbalance survives in Hong Kong, meaning that it will likely continue to afflict the mainland only further eroding sentiment all the way around. It will be interesting how the PBOC reacts, as surely they will and must.
And they did, fixing the CNY all the way up to 6.50. It was unusually welcome news to a mainstream view that is more often predicated on “devaluation” as some sort of miracle solution. In other words, even the mainstream is starting to notice the correlation between the CNY’s regular and serious downdrafts and the liquidations that suddenly appear everywhere else in tandem. Even if you have no idea how or why that might be, just blind observation suggests the relationship.
The problem of “how” becomes the issue going forward, and maybe even not too far into the future. While it was somewhat gutsy the size of the move on Monday, today open business across the eurodollar left the CNY fix already pushed lower to 6.518 (middle rate) with a selling rate as low as 6.531 (according China Merchant’s Bank). In short, the one-day window to rush to 6.50 seemingly worked in instilling enough confidence for a short-term rebound (perhaps just aiding the rebound that had started Friday), but already the conditions for its end are apparent across a wide selection of indications – starting with both China and the US internals (subscription required) beyond just the stubborn economic decay.
Submitted by Mark O’Byrne – GoldCore
Gold is holding solidly above $1,200, brushing off news of the freshly released Fed minutes. Iranians cautiously welcome the Saudi-Russian oil production pact, while stating that they support cooperation to achieve higher oil prices, they also have domestic pressure to ramp up export of supply and cash in after years of being locked out of the market. This may possibly weigh down future oil price rises.
Gold in USD -1 Year
Interestingly, one of the biggest gold bears, ABN AMRO group have changed their long-held negative slant on gold and turned bullish — targeting $1,300 for 2016, stating that the global economy continues to weaken with lower oil prices affecting emerging markets, but the U.S. in particular. Analyst Georgette Boel wrote, “Having been long-standing bears we have now turned bullish on precious metal prices,” and “Our new scenario sees a longer period of weaker global growth.”
You can read the full article on Bloomberg here.