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Thursday 06.02.2016

Fed's Beige Book sees 'mostly modest' US economic growth

Most of the regions in the US economy were growing only modestly during the April-May period, with lackluster consumer spending, according to the Federal Reserve's Beige Book survey Wednesday.

But the report noted that the outlook in a number of areas was "generally optimistic", and labor markets were tighter, a likely positive sign for future wage increases for workers. The anecdotal survey of economic activity across the Fed's 12 regions will help the Fed assess the strength of growth around the country as it weighs tightening monetary policy at its next meeting in two weeks.

For that, the newest Beige Book echoed recent hard data showing a pickup in growth from the sluggish first quarter during the April-to-mid-May period. But the picture was mixed from region to region: Activity was stronger in San Francisco while it slowed in Chicago and Kansas City.

In most areas consumer spending rose modestly, though it appeared to fall in New York. Construction and the real-estate business were broadly better, but tourism remained a mixed bag across regions.

The U.S. dollar is stronger than it's been in 13 years. That's bad.

You may have heard that the U.S. dollar is quite strong again. That sounds good, right? "Strong" is generally a positive adjective, after all. Well, not so fast. Because if the dollar is strong, something else must be weak. So whether a "strong" dollar is a good thing or not depends on some context.

A "strong" versus "weak" dollar is all about how much the dollar is worth compared to other currencies, as measured on international currency exchange markets. If someone on those exchanges was willing to give you two Canadian dollars for every one U.S. dollar you had, then the U.S. dollar would be considered quite "strong" compared to the Canadian dollar. Now in reality, the highest the exchange rate has ever gotten is about 1.1 Canadian dollars for every U.S. dollar, and the lowest it's gotten is 0.6 Canadian dollars for every U.S. dollar. So generally, when people say the U.S. dollar is "strong" compared to the Canadian dollar, they're speaking in historical context: They mean the U.S. dollar is approaching that 1.1 ceiling.

We don't just compare the U.S. dollar to Canada, of course. We stack it up next to a bundle of six major international currencies. And the last time the dollar was this strong against those half dozen currencies was way back in 2003.

So why is the dollar doing so well? The main reason is the U.S. economy is doing better — not necessarily better compared to its own historical performance, but better compared to everyone else these days. And when the economy is doing (at least relatively) well, that makes it an attractive investment opportunity: Putting money into U.S. ventures and business is more likely to earn you a better return. But to invest in the U.S. economy you need U.S. dollars. So demand for U.S. dollars goes up relative to other currencies, and the U.S. dollar gets stronger. But there's another wrinkle that suggests a strong dollar may be bad.

Why OPEC May Die of Self-Inflicted Wounds

Fiscal And Monetary Stimulus Has Failed – What Next?

In 2009 a small group of analysts dared to question whether emergency stimulus measures were the beginning of the “Japanisation” of Europe and the US. Ultra-low interest rates, large budget deficits and then quantitative easing were all meant to be temporary. Seven years later, only the most optimistic could see these measures being put away soon.

In 2014 Larry Summers called the current malaise “secular stagnation”. The secular part implies that the change is not cyclical but has become entrenched. The stagnation part means that there is little or no growth. This year the mainstream business news (i.e. Bloomberg not just Zero Hedge) has started regularly publishing articles questioning whether orthodox economic policy has any answers left. Orthodox economists and central bankers are openly saying that monetary policy has reached its limits and the answers must be found elsewhere.

Whilst there might be a consensus that monetary policy isn’t working, there isn’t a consensus on whether fiscal policy is the solution. At one end of the spectrum, Paul Krugman argues that bigger government deficits are the answer. At the other end there’s a growing group who think that orthodox economics continues to ignore debt and hence hasn’t correctly diagnosed the problem. If the diagnosis is wrong the remedy is almost certainly wrong as well.

Much of orthodox economics doesn’t mention debt or include it in its models. Whilst it’s been a while since I finished an undergraduate economics degree I can’t recall coming across debt research in those studies. It’s not that economists never study debt, it’s that the work by Irving Fisher (1930’s) and Hyman Minsky (1950’s-1980’s) gets ignored. There’s never been a Nobel prize awarded for work on debt so far, perhaps Reinhardt and Rogoff might get that honour if sovereign debt defaults spike.

Banking expert warns of potential for ‘really bad’ cyberattack

Cyberattacks on banks need to be looked at with the same kind of urgency as physical threats, because there is the potential for things to get really bad, banking and cybersecurity expert Ben Lawsky said Wednesday.

"We live in a world where each day we are surprised by something new when it comes to the sophistication and the capabilities of hackers," he said in an interview with CNBC's "Power Lunch."

"You have groups of hackers around the world who are innovating all day long. All they do is try and figure out ways to disrupt our system. It could be really bad."

The banking world was stunned earlier this year when $81 million was siphoned out of the Bank of Bangladesh's account at the New York Federal Reserve Bank. The thieves hacked into the global messaging network Swift to access the funds. U.S. lawmakers are now investigating the NY Fed's handling of the situation.

Economy Remains Top Priority for Next President

Americans mention the economy more than any other concern when asked what single issue the next president should focus on when he or she takes office next January. They also frequently mention immigration, healthcare, defense and national security, and education as top priorities.

These latest data are from Gallup's May 18-22 election benchmark survey. Americans' responses to this open-ended question are similar to those measured in January, showing that the issues on which the public wants the next president to focus haven't changed after five additional months of intense campaigning and issue discussion in the string of debates held during that time.

The next president, if intent on following the will of the people, will clearly need to keep a sustained focus on economic issues. Not only do Americans spontaneously mention the economy more often than any other issue, but they also name several other economically related priorities, including the federal deficit, wages and the decline of the middle class, jobs/unemployment, taxes and poverty.

The next president will at the same time face the challenge of responding to other public concerns, including the perennial challenge of keeping the nation safe and secure, immigration, healthcare and education.

Why Americans Don’t Trust Government

Larry Summers had an interesting piece in the Washington Post last week about why Americans don’t trust the government. He first links to an op-ed he wrote about the scandalous cost overruns and delays that occurred in maintenance and repairs for the the Anderson Memorial Bridge over the Charles River. Then he writes:

At another level, though, our story may illustrate phenomena that go way beyond infrastructure. I’m a progressive, but it seems plausible to wonder if government can build a nation abroad, fight social decay, run schools, mandate the design of cars, run health insurance exchanges, or set proper sexual harassment policies on college campuses, if it can’t even fix a 232-foot bridge competently. Waiting in traffic over the Anderson Bridge, I’ve empathized with the two-thirds of Americans who distrust government.

That’s a very good question to ponder. He then says that for the American people to start trusting the government to do the big stuff, it needs to show that it can do the little things:

Faith in government’s ability to do big things depends on its success in executing on routine responsibilities. That’s kind of right. When you find out that the government spends $1 million to study monkeys running in hamster balls on a treadmill or $706,800 to conduct a so-called “shrimp fight club,” you have good reasons to doubt that it will be able to pull off a federal health-care exchange. But then again, there are also plenty of major government failures and failed promises to convince us to never trust government and politicians ever again (“if you like your plan, you can keep it,” Operation Fast and Furious, the war in Iraq, the failure of the war on drugs, Benghazi, the Veteran Affairs scandal, the worst recovery since World War II, just to name a few).

There Goes the Fed's Credibility

Back in January 2012, the Federal Reserve promised to keep its preferred measure of inflation close to 2 percent over the longer run. More than three years later, that promise remains unfulfilled, casting doubt on the central bank's willingness to deliver.

The latest reading for the measure, known as the price index for personal consumption expenditures, showed annual inflation running at only 1.1 percent in April. Excluding volatile food and energy prices, the inflation rate was 1.6 percent. Here's a chart showing how both have fallen well short of 2 percent for more than three years:

Some would say that central banks are out of ammunition, that the Fed has thrown everything it has at the problem of sub-target inflation and failed to make progress. Actually, though, the Fed has been deliberately tightening monetary policy over the past three years. Just last week, Chair Janet Yellen made a point of saying that the Fed intends to keep raising interest rates in the coming months.

To understand the Fed's motivations, consider this: Would it have started pulling back on stimulus in May 2013 if its short-term interest-rate target had been at 5 percent instead of near zero, and if it hadn’t been holding trillions of dollars in bonds? I strongly suspect that the Fed would instead have added stimulus by lowering interest rates. If so, then the Fed's current course is driven not by state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered "normal."

Good for Donald, These Clowns Need to Be “Rattled”

President Obama says that the feckless world leaders who attended last week’s G-7 meeting in Japan are “rattled” by Donald Trump. Bully for The Donald! These clowns need to be rattled — right to their very bones. And we might as well start with our own snake oil salesman in chief.

It seems that Obama can’t stop taking bows for the awesome recovery he claims to have presided over and the 14 million new jobs he claims to have created. Yet those claims are as exaggerated as anything that Trump has ever let fly. Let’s look at facts:

At the February 2008 peak, prior to the crisis, the U.S. Bureau of Labor Statistics (BLS) reported 138.5 million nonfarm payroll jobs in existence. Compare that with 143.9 million in April 2016. The net gain: Only 5.4 million nonfarm jobs. This means one thing: Nearly 9 million, or 61%, of the 14 million “new” jobs Obama has been crowing about are not new at all.

These other 9 million jobs are actually what are called “born again” jobs. They consist of lower-paying and lesser-quality jobs than the ones eliminated during the crash and so-called Great Recession. For instance, there has been a loss of 2.3 million goods-producing jobs in manufacturing, mining/energy and construction. Those jobs paid an average of $58,000 per year. Now, they’ve been swapped out for 1.9 million jobs in leisure and hospitality that pay less than $20,000 per year.

Virgin Islands debt bomb, emerging markets to the wall

It’s not just Brexit — Greece, Spain, France are also on the brink

The hedge funds will have prepped their positions. The investment banks will have ordered in pizza and extra coffee ready for a long night of dealing. Exit polls will have been commissioned, and currency traders will be ready to buy or sell sterling GBPEUR, -0.9915% as soon as they start getting a clear idea of whether Britain has voted to stay in or get out of the European Union on June 23.

But hold on. In fact, it is not just the risk of Brexit that the markets need to be worrying about. In truth, the real drama is going to come over a long and difficult weekend, leading up to potentially wild day in European assets on Monday, June 27.

Why? Over that weekend, Spanish voters will go back to the polls in another attempt to settle on a government, which may well see the far-left Podemos group make big gains. Greece will be struggling to find the money to pay back its latest debts. And if the strikes in France escalate, the country may be close to running out of its strategic fuel reserves — and approaching a total meltdown.

Brexit, Spexit, Grexit, and Frexit could all collide. The result? A car crash for the European markets. Brexit remains the most pressing worry for investors, and rightly so. With three weeks until the vote, the polls remain very close. The latest sample for the Daily Telegraph showed a five-point lead for “Remain,” and most have showed the two camps within five to 10 points of each other.

Uber Turns to Saudi Arabia for $3.5 Billion Cash Infusion

In its quest to build a global empire, Uber has turned to the Middle East for its biggest infusion of cash from a single investor.

Uber said on Wednesday that it had raised $3.5 billion from Saudi Arabia’s Public Investment Fund, the kingdom’s main investment fund. The money was part of the ride-hailing giant’s most recent financing round and continued to value the company at $62.5 billion. The investment does not cash out any of Uber’s existing investors.

As part of the investment, a managing director at the Public Investment Fund, Yasir Al Rumayyan, will take a seat on Uber’s board, joining Uber’s chief executive, Travis Kalanick, and other directors, including Arianna Huffington.

“We appreciate the vote of confidence in our business as we continue to expand our global presence,” Mr. Kalanick said in a statement. “Our experience in Saudi Arabia is a great example of how Uber can benefit riders, drivers and cities and we look forward to partnering to support their economic and social reforms.”

Japanese sales tax increase delayed until 2019 to avoid recession risk

Japan’s Prime Minister Shinzo Abe has confirmed that he will delay a scheduled sales tax increase by two-and-a-half years from April 2017 to 2019.

He said that is because putting up VAT “might damage domestic demand”. It is the second time Abe has delayed the increase in the sales tax to 10 percent from eight percent.

The decision is a climbdown by the prime minister and his policy of ‘Abenomics’ in the face of continued weakness in Japan’s deflation-plagued economy. He wants to avoid a repeat of what happened two years ago when Japan was tipped back into recession by a VAT increase.

The problem is the tax money is needed to pay down the country’s massive government debt and fund the ballooning social welfare costs of a fast-ageing population. The corporate profits that Abe had been counting on to fuel gains in wages have failed to materialise.

Hyper-Bubble In Stocks, Dollar & Government Debt

Uh-Oh … Are Americans Raiding Their Piggy Banks?

Consumer spending increased 1% from March to April, the biggest increase in more than six years, according to a Reuters report on new Commerce Department data. In very basic economic terms, a jump in consumer spending can be a good thing: It can show that people are confident they’ll make ends meet without having to squirrel away their paychecks, like some people might do if they’re worried about losing their jobs.

Before you get too excited about Americans’ recent urge to splurge, there’s another statistic you should know about, and this one’s a little bit of a downer. At the same time consumer spending increased, Americans’ savings decreased, from $809.4 billion in March to $751.1 billion in April. That’s a $58.3 billion drop. That indicates Americans aren’t spending more because they’re earning more; rather, they’re spending more by choosing to save less or even tapping their savings to make purchases. (Personal income increased 0.4%, and disposable income increased 0.5%, while spending increased 1%.)

Put another way: The average personal savings rate dropped from 5.9% in March to 5.4% in April. There are a lot of opinions on how much people should save, but probably the most common rule of thumb says to put away 10% of what you earn. If that’s what people are working toward, they lost a little momentum last month.

But these data are complicated. There are advantages to both saving and spending. Perhaps some of the people who diverted savings money to spending money last month did it so they could purchase something they’ve needed for a while, like a new car or a more energy-efficient appliance that could end up helping them save money.

Defined Benefit Pensions Are a Foolish Dream

Pensions are good. Pensions are worth preserving until something better comes along. But pensions that make impossible promises and cultivate lies are not the pensions we should hope for.

If you are fortunate enough to have a pension these days (and you’re probably not), it is one of two types. Defined contribution plans are pensions where you put in a fixed amount of money each month, which is invested and perhaps supplemented by your employer, and after you retire, you get a payout based on how much money is there. The final pool of money that you have at the time of your retirement depends upon how much was put in and how much it grew as it was invested.

Defined benefit plans are pensions with one key difference: when you retire, you are guaranteed a payout of a certain amount. In other words, it is the responsibility of the pension plan to ensure that by the time you reach retirement age, they have invested the money well enough to make it grow enough to be able to make the payments they have promised to you.

Defined benefit plans are considered the gold standard of pensions, and are perceived as the most desirable by workers. They are also a mirage. We should end them.

Slow economic growth tugs on oil prices

Crude oil prices turned lower in early Wednesday trading amid expectations of a status quo policy from OPEC and prospects of a global economy stuck in low gear.

Members of the Organization of Petroleum Exporting Countries meet Thursday for the first time since a proposal to freeze production at January levels collapsed after Iran said it would only consider its output once it regained a market position lost to economic sanctions.

De facto OPEC leader Saudi Arabia may be looking to market forces to sway the price of crude oil and the supply levels contributed from major producers. Lower crude oil prices have sidelined some production from the United States, though total OPEC production for April, the last full month for which data are available, is about a half percent higher than the average during the first quarter of the year.

Oil prices have held steady in the upper $40 range for several sessions as low production balances against higher demand for energy products from major economies. Angel Gurria, the secretary-general for the Organization Economic Cooperation and Development, said Wednesday from Paris the global economy is stalled.

The winners have taken all: Middle class incomes are plummeting — with no relief in sight

Poor Americans are becoming increasingly disposable in our winner-take-all society, as often noted in the passionate writings of Henry Giroux. After 35 years of wealth redistribution to the super-rich, inequality has forced much of the middle class down to near-poverty levels, worsened by the fact that they are also blamed for their own misfortunes.

The evidence for this disposability keeps accumulating: income and wealth—and health—are all declining for middle-class America. Meanwhile, those at the top could not be less concerned. As wealth at the top grows, the super-rich feel they have little need for the rest of society.

Here are some truly stark realities about how extreme inequality continues to worsen to the point where vast numbers of Americans are in dire straits in terms of income, savings and even health, and may have little reason to hope things will get better.

According to Pew Research, in 1970 $3 of every $10 in income went to upper-income households. Now $5 of every $10 goes to them. The Social Security Administration reports that over half of Americans make less than $30,000 per year. That’s less than an appropriate average living wage of $16.87 per hour, as calculated by Alliance for a Just Society.

Is Gold A Hedge? The Legendary Jim Grant Says No

Most For-Profit Students Wind Up Worse Off Than If They Had Never Enrolled in the First Place

The for-profit college industry appears to be facing its moment of reckoning. The closing of Corinthian Colleges in April of last year, once a big player in the industry, left thousands of students in debt and without degrees. In the months since, the Department of Education has forgiven more than $27 million in debt for nearly 3,500 students—many of them former Corinthian students—on the grounds that they were deceived. The Department of Education has also set up an initiative to take action against for-profit colleges engaged in deceptive marketing and recruitment practices.

According to statistics from the National Center for Education Statistics, for-profit-college enrollment surged between 2000 and 2010. The initial boom has been attributed to the growing number of students—particularly non-traditional students seeking college credentials—as well as the availability of federal student aid and the low cost, on the business side, of providing degrees through a website.

The bust that followed—between 2010 and 2014, enrollment decreased by 26 percent—can fairly be chalked up to the hard-to-ignore failings of these institutions: There are countless stories of debt, default, and the empty promises of a better financial future. And worse, for-profit schools are failing the students who can least afford it—students who attend for-profit colleges are disproportionately older, female, and black, with 51 percent of students coming from low-income families.

The for-profit college boom is one that Vauhini Vara at The New Yorker calls a “sorry legacy,” born from the misguided belief that everyone should go to college. What that belief didn’t account for are the people who either obtain degrees that aren’t worth much in the labor market or those who drop out. For those who don’t complete their degrees at for-profit colleges—and over 60 percent of the students who attend for-profit colleges don’t—the financial consequences are dire.

New Construction Spending Falls Nearly 2% in April

The U.S. Census Bureau reported Wednesday morning that construction spending in April dipped by 1.8% to an estimated seasonally adjusted annual rate of about $1.134 trillion from the upwardly revised estimate of nearly $1.14 trillion in March. Compared with April 2015, total spending is up 4.5%.

For the first four months of 2016, new construction spending rose 8.7% to an estimated total of $334.8 billion, compared with the 2015 total of $307.9 billion.

The consensus estimate by economists surveyed by Bloomberg News called for a rise of 0.6% in construction spending for April. For the month of April private residential construction slipped 1.5% month over month to $439.7 billion. Private nonresidential construction also fell 1.5% month over month, and total private construction spending on a seasonally adjusted annual basis fell 1.5% to $843.15 billion, compared with a revised March total of $855.91 billion.

In the private sector, single family residential construction was 8% higher than it was a year ago and multifamily construction was up 21.4% from April 2015. Private, nonresidential construction was up 3.4% year over year.

Thursday 06.02.2016

NEWS to Disturb the Comfortable...

We don't tell you what to think,

but we give you something to think about.