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Tuesday 08.16.2016

Fed's Williams urges new policies to combat low interest rates

Central bankers and governments must come up with new policies to buffer their economies against persistently low interest rates that threaten to make future recessions deeper and more difficult to avoid, a top Federal Reserve official said on Monday.

Setting higher inflation targets, tying monetary policy directly to economic output, instituting government spending programs that automatically kick in during economic downturns, and boosting investment in education and research are all policies that should be considered, San Francisco Fed President John Williams said.

Without such changes, Williams warned, policymakers will find themselves hamstrung. "There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low," Williams said in the latest issue of his regional Fed bank's Economic Letter.

Williams' push for broad policy change well beyond the writ of the central bank is not unprecedented -- Fed Chair Ben Bernanke used to regularly admonish lawmakers to get their fiscal house in order.

The Banking Crisis That Can Never Be Contained...

When President Obama signed the Dodd-Frank Wall Street “reforms” into law in 2010, he promised they would “bring the shadowy deals that caused this [financial] crisis into the light of day.” We were “sold” that Dodd-Frank would end Wall Street insiders’ reckless risk-taking that cratered the global economy in 2008. But most of all, it would end taxpayer bailouts of banks.

Sycophantic media pushed their Obama love to all-time highs on the news. And Americans connected to the Matrix… the ones asleep in a deep coma… well, they breathed a sigh of relief into their ventilators. Paternal government patted the lemmings on the head and tucked them in bed with a smooch on the forehead. Everything was fine again.

All it took for happy days to return was a thick stack of regulations from D.C. hacks and the general populace rolled back over into a state of oblivion. But the problem was never fixed. In fact, it’s gotten a whole lot worse…

The root cause of the financial crisis was reckless lending and excessive risk-taking by the world’s largest banks. But after the Lehman Brothers collapse, the untold trillions in risky derivatives trades these banks had on their books caused the fire to burn beyond control. Nobody knew how much exposure to derivatives other banks had. A huge bank could implode at any time. So nobody wanted to lend or trade with each other. The global financial system ground to a halt. And it took billions upon billions of taxpayer money to rescue the system. They told us that Dodd-Frank would prevent this from ever happening again…

Dollar Extends Drop as Faltering Economy Pares Rate-Boost Wagers

The dollar extended last week’s slide as investors became less confident about a 2016 interest-rate increase before the release of the minutes of the Federal Reserve’s July meeting.

The chance of the Fed raising rates before year-end has fallen as stagnant retail-sales data on Aug. 12 cast doubt about the strength of the U.S. recovery. The odds, as measured by futures data tracked by Bloomberg, had started to climb after a better-than-forecast jobs report the previous week, supporting the dollar.

“The market really has not moved to price in any more chance of Fed tightening,” Daniel Katzive, head of foreign-exchange strategy for North America at BNP Paribas SA, said by phone. “That’s sapped the dollar of any momentum.”

Still, he expects the currency to be supported by hawkish signals from the U.S. central bank. The Fed is due Aug. 17 to publish the minutes of its July 26-27 meeting, when it upgraded its assessment of the U.S. economy while signaling it’ll take a gradual approach toward tightening policy. A gauge of the greenback slumped almost 5 percent this year in the absence of signs that Fed policy is set to further diverge from that of the Bank of Japan and European Central Bank, which are boosting monetary stimulus as they seek to spur flagging growth.

Bank of England to Manage Its Own Digital Currency

According to financial news website The Deal Room, testing has begun on the Bank of England issued cryptocurrency RSCoin. Using what they term as a hybrid model, it aims to combine the advantages of distributed ledger platforms with the traditional centralized management of the fiat money system to create a unique digital currency. This new cryptocurrency can be used by the central bank to quickly adapt to changing economic conditions and as a change mechanism within global trade. The centralized ledger entirely under the Bank of England control is unlike any other digital currency and how this progresses could have a dramatic effect on the industry.

One central bank that has been vocal about digital currencies over the last couple of years has been the Bank of England. Earlier in 2016 it suggested that a central bank issued digital currency could be of benefit to both the local economy and users, and according to financial news website The Deal Room, that has become something real as testing of the currency is now ongoing.

Dubbed RSCoin, the cryptocurrency will be controlled directly by the Bank of England, and seeks to combine the benefits of blockchain and the distributed ledger model with the centrally managed fiat monetary system. The aim of this is to provide the Bank of England with a new tool they can use to strengthen the country’s economy and effect global trade.

RSCoin itself has been developed by researchers at University College of London, and although it retains the traits of cryptocurrency, counterfeit resistant and tamper-proof, the ledger will be centralized and held within the Bank of England itself. Access to the ledger will be determined by the bank and is expected to include commercial banking partners and similar financial institutions. The developers refer to RSCoin as a hybrid currency system rather than a digital currency as we have seen before.

FDIC Slams Biggest US Banks, Says Capital Reserves “Inadequate”

On Friday morning, a gentleman named Thomas Hoenig wrote some rather unflattering comments about the US banking system in a little known publication called the Wall Street Journal. In his remarks, Hoenig stated that “while the largest U.S. banks have increased capital since the [2008] crisis, their capital is still lower than the industry average and inadequate for bank resiliency.” Think about what means. A bank’s “capital” is essentially its rainy day reserve fund.

If there’s a giant mess in the financial system and asset prices collapse (as they did in 2008), a bank with plentiful capital will be able to withstand the crisis. Banks with inadequate capital will fail.

Hoenig is suggesting that many of the largest banks in the US fall in the latter category. More importantly, Hoenig slammed the ridiculous accounting methods that banks use to report their financial condition, something he said “too easily allows banks to conceal risk.” So Hoenig is telling us that banks have insufficient capital to be resilient in a crisis and can too easily hide their risks. Crazy.

So who exactly is this whack job Thomas Hoenig? What sort of social deviant would possibly question the sanctity and soundness of the US banking system? Hoenig is the vice chairman of the FDIC, as well as former president of the Kansas City Federal Reserve Bank. So, he’s not a whack-job. He’s the ultimate banking insider. I’ve been writing about this for years, detailing how most Western banks have, at a minimum, questionable levels of capital, and they play all sorts of accounting tricks to mask their financial condition. But as I often say, don’t take my word for it. Listen to the banks themselves.

Why a Coal Miner Pension Bailout Could Open the Door to a $600 Billion Pension Bailout for All Private Unions

Congress is looking to pass legislation that would use taxpayer dollars to bail out the overpromised, underfunded pension plan of the United Mine Workers of America (UMWA). Such an unprecedented move would send the message that Congress will stand behind sending trillions of dollars in overpromised, underfunded public and private pension obligations across the country. The federal government already provides a backstop for failed union and other private pension plans by insuring them through the Pension Benefit Guaranty Corporation (PBGC). Congress should avoid bailing out select pension plans at all costs and should instead reform the PBGC so that it can meet its obligations without a taxpayer bailout.

The UMWA pension plan is massively underfunded. It has promised $5.6 billion more in pension benefits than it will be able to pay. Although the UMWA pension plan is among the worst-funded pension plans, it represents only one of more than 1,300 multiemployer (union) pension plans across the U.S. Almost all of these plans have made promises they cannot keep.

According to the PBGC, a whopping 96 percent of all multiemployer plans have funding ratios of less than 60 percent—meaning they have less than 60 percent of the funds necessary to pay promised benefits. In total, multiemployer plans have promised over $600 billion more than they are estimated to be able to pay.

If Congress passes legislation to bail out the UMWA pension plan with nearly a half a billion dollars a year, what will stop it from passing legislation to bail out the other 1,200 plans that have more than $600 billion in unfunded promises? If Congress forces taxpayers to bail out private union plans, why not also private non-union plans that have $760 billion in unfunded liabilities, and public plans that have as much as $4 trillion to $5 trillion in unfunded liabilities?

Men not at work: Why so many men ages of 25 to 54 are not working

Milwaukee sheriff: Riots caused by 'welfare state'

The claim that racially motivated police officers are routinely targeting young black men across America was at the center of two nights of rioting in Milwaukee that followed the fatal shooting of a 23-year-old man by a city officer.

Once again, although the investigation is ongoing, the prevailing narrative on the street doesn’t appear to match the facts. Based on video from the body camera of the officer – who is black – 23-year-old Sylville Smith ran from police after a traffic stop and was shot only after he raised his gun at the officer after being told to drop it.

Milwaukee Country Sheriff David Clarke, an African-American, believes there is a serious social problem at the heart of the unrest and the incidents with police nationwide. But he thinks racism is not the chief cause. In an interview on Fox News’s “America’s Newsroom” with Martha MacCallum, Clarke said the police shooting Saturday was simply an “igniter.”

“Here is what causes riots,” he said. “We have inescapable poverty in the city of Milwaukee. Milwaukee is sixth poorest city in America. You have massive black unemployment, I think at 32 percent. You have a failing K-12 public education system. It’s one of the worst in the nation. You have questionable lifestyle choices. Some of this is self-inflicted. All the kids with no fathers around, father, absent homes. When fathers are not around to shape behavior of young men, they often times grow up to be unmanageable misfits.”

San Francisco Adds $2 Billion in New Development ‘Fees’ for ‘Affordable Housing’

According to the San Francisco Business Times, “San Francisco is seeking over $2 billion in fees from developers over 25 years as it plans to upzone the Central South of Market area to accommodate around 7,800 new affordable and market-rate housing units and 40,000 new jobs.”

The Times further notes that “[t]he draft Central SoMa plan unveiled on Thursday, which spans 260 acres bounded by Market, 2nd, Townsend and 6th Streets, is expected to usher in development there, and city planners want money from developers to help pay for community benefits like new sidewalks, open space and above all, affordable housing.”

However, as California Political Review’s Stephen Frank points out, the burden of those billions will ultimately rest with the end consumer and anyone who buys or rents something “from a tenant in this project, you will have the $2 billion as part of the purchase price.”

The Business Times notes: “Residential projects would have to provide between 16 percent to 18 percent affordable housing on-site, or between 28 percent to 33 percent affordable housing off-site,” which will be “below-market-rate” and will reportedly “require millions in subsidies to pay for construction costs and lower rents.”

The U.S. Dollar Hasn’t Been Linked to Gold for 45 Years. Here’s Why

It was 45 years ago, on Aug. 15, 1971, when President Richard Nixon announced that the decades-old monetary system that had controlled the U.S. dollar—and thus the world’s currency values—for more than three decades just wasn’t working anymore. To most Americans the news, known as the “Nixon shock,” wasn’t actually shocking. War in Vietnam had drained America’s resources, world currency speculation was rampant and 1970 saw the biggest deficit thus far in U.S. history.

“In the past seven years, there has been an average of one international monetary crisis every year,” Nixon said in his speech outlining his new economic policy. “Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them. In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy—and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.”

That action? To “suspend temporarily the convertibility of the dollar into gold.” When Nixon announced what was coming, TIME explained why the move was on its way:

"Washington cut the dollar’s tie to gold by serving notice that it will no longer cash in foreign-held dollars for gold bullion held at Fort Knox. Ever since 1944, when the present monetary system was devised at Bretton Woods, N.H., the dollar has had a special and internationally unique relationship to gold. Technically, gold is the asset by which nations pay their debts to one another. But practically, under the rules of the 118-nation International Monetary Fund, which evolved from the Bretton Woods conference, dollars are actually the medium of exchange through which nations settle those debts. The system was made possible by a promise from the U.S. Treasury to redeem dollars for gold at $35 an ounce. Because of that promise, IMF member nations had been assured that whenever they wanted gold in exchange for the dollars that they held as payment of debts, all they had to do was ask the Treasury Department in Washington".

Japan showing signs of strain

CEOs at big US companies make 276 times as much as the average worker

Inequality continues to be a big problem in the US, and one statistic that reflects this is the enormous disparity between pay for CEOs and workers at large companies.

According to a report published earlier this summer by Lawrence Mishel and Jessica Schieder of the Economic Policy Institute, CEOs of the 350 largest companies in the US by sales earn an average of about 276 times what the average worker at their company makes.

The EPI researchers noted that this was down from 302 times the average worker's pay in 2014, largely because CEOs tend to receive a large amount of their compensation in the form of stock and options; 2015 saw a pretty flat stock market.

Still, Mishel and Schieder observed that this ratio was "light years beyond the 20-to-1 ratio in 1965." They also noted that while CEO compensation grew by about 940% from 1978 to 2015 after adjusting for inflation, the typical worker's pay grew just 10% over that time.

Morgan Stanley: ‘’The Oil Rally Might End On Wednesday’’

Following his bearish note last week, Morgan Stanley's oil analyst Adam Longson is out with a new report, in which he accurately explains that the recent oil-price jump is driven by traders covering bearish bets, even as market fundamentals are seen remaining weak in coming months.

According to Longson, a “sizeable” amount of Sept. WTI put positions at $40, $45 recently came into or near the money, leading to spike in hedging by traders to cover their exposure. However, the good news for oil bears is that the effect of this action will fade once option expires Aug. 17. As we have pointed out previously, the recent comments from OPEC, and IEA helped reverse bearishness and also unleash the recent short squeeze which led to the biggest weekly jump in oil in 4 months.

He then notes that he “would not be surprised to see tank top fears return in 1Q17” as he sees rising U.S. crude inventories in coming months. He list other bearish factors for oil, which include modest implied draw in global oil stockpiles in 3Q, as well as a lack of meaningful cuts to refinery run rates. A record OPEC production, albeit seasonal, with potentially higher Libyan exports and Iraqi output growth into 2017 add to bearish indicators.

He notes that the draw in U.S. gasoline inventory seen deceptive as higher net exports - lower imports and more overseas shipments - could be “masking the problem.” He concludes that if global product markets remain oversupplied, ability to export on larger scale may be limited and run cuts unavoidable.

A Stock Market Crash Is Coming, These Ominous Technical Signs Reveal

Seekers of enlightenment often focus on living in the present rather than thinking about the past or future. The Chinese word "tao," pronounced "dao," signifies the "way" or "path" to enlightenment. It seems to imply that enlightenment is about the journey rather than the destination.

This monthly bar chart of the Dow Jones Industrial Average has moved to a crucial crossroad after a very long journey. While it is too early to declare that this index has put in its final high, there are some alarming comparisons to the last two major peaks, and a jaw-dropping comparison to one of them. Let's leave our biases aside for a few moments and consider the enlightenment that an objective perspective might bring: the Tao of the Dow.

Let's begin by observing the corresponding pairs of pink and red ovals that appear in the price pane at the top and the stochastics pane at the bottom. These highlight the rare occurrences of what we call bearish divergence sell signals. These happen when their are two peaks in the stock's price with the second peak being higher than the first. At the same time, the second peak in the corresponding pair of stochastics readings is lower than the first (with the stochastics remaining above the 90% threshold that indicates stocks are extremely overbought).

In 1999 and 2000 there was such a signal, with the two peaks occurring about five months apart. In the ensuing two and a half years, the Dow fell 38%. Then in 2007 there was another occurrence, with the peaks three months apart. In the next 1.4 years, the Dow fell 55%.

Retailers Predict Bankruptcy if Back-to-School Sales Fizzle

To the surprise of many, for many retailers, the back-to-school selling season has become the second most significant sales volume push, second only to the end of year holiday sales season. The predictions of a number of significant retailers and industry experts point to a dismal 2016 back-to-school sales season which will, in turn, lead to additional retail bankruptcies.

The New York Post recently reported that "teen retailer Claire's Stores needs a big sales lift from back-to-school or the business will likely go bankrupt." Claire's Stores, which has more than 3,000 retail outlets, announced that its overwhelming debt of $2.4 billion combined with a same store sales decline of 5 percent for the 10 weeks ending July 10 points to a possible bankruptcy filing.

In the last nine months, the retail environment has been plagued with an unusually large number of high-profile retail bankruptcies, led by Sports Authority which was not only unable to reorganize successfully and stay in business but also was unable to sell virtually any of its existing stores as going concern locations. This along with other retail failures in the industry, including teen retailer Aeropostale, creates the need for landlords, suppliers, taxing authorities, employees and even consumers to understand the need for protection from substantial or even catastrophic losses.

The back-to-school sales situation points to several unique factors which have created a confluence of negative impact on the financial health of retailers. During the most recent financial crisis, when interest rates dropped to close to zero, many retailers large and small took the opportunity to refinance existing debt at a lower rate and, in many instances, increasing the outstanding indebtedness. These loans carry an interest and principal reduction burden which erodes profits to the extent they exist. Furthermore, many of these loans are expected to mature within the next 12 to 18 months, putting additional pressure on the retailers and their lenders.

Hotel operator hit by data breach

A hotel operator responsible for several high-profile hotels across the U.S. says it discovered a breach of its payment processing systems that may impact hotels in several states and The District of Columbia.

The breach occurred in systems run by MICROS Systems, which was purchased by Oracle in 2014.

Oracle security engineers found malware in some systems run by MICROS and identified the affected systems and blocked malicious processes and unauthorized network connections, the company said in an undated letter and FAQ sent to customers, which it provided to USA TODAY on Monday.

In the letter, Oracle assured customers that “payment card data is encrypted both at rest and in transit in the MICROS hosted environment.” Whether that meant actual customer financial data was accessed by the hackers in unknown. Krebs, who has deep sources in the Russian criminal underground, reported that the breach was tied to Russia's Carbanak Gang, which stole over $1 billion from banks worldwide in 2015.

Watch this shopping technology track your every move

John Oliver explains the terrifying, predatory, Wall Street-feeding descent of used-car dealers

Americans love their cars, "but America's auto obsession isn't just a hobby," John Oliver said on Sunday's Last Week Tonight. Some 86 percent of U.S. workers use cars to get to work, "and if you don't have a car, holding down a job can be a tremendous challenge." But cars, of course, are expensive, which brought Oliver to the theme of his latest seriocomic explainer: auto lending. Nearly a quarter of car loans are now of the subprime variety, he said, "and if the phrase 'a boom in subprime loans' is making your eye twitch with flashbacks to the mortgage crisis, just wait, we will get there."

First, Oliver dove into the world of "buy-here, pay-here lenders," or dealers that provide their own loans — and charge an average interest rate of 19 percent. "It's just one of the many ways in which, when you are poor, everything can be more expensive," he said. About a third of buyers default within seven months, and when the dealer repossess your car, they don't have to refund your down payment, and they can even go after you for more money.

"So you can easily end up with no car and thousands of dollars in debt," Oliver said, while the dealer just sells your car again — sometimes several times. Buy-here, pay-here is losing market share, he added, but mostly to subprime lenders.

That's when Oliver touched on how the subprime lending market for cars is eerily similar to the speculative mortgage-bundling bubble that crashed the global economy a few years back. The buy-here, pay-here industry has taken note, and taken action. "The news that used-car dealers are predatory is clearly not new, but it seems these days market pressures are forcing them to be more aggressive and take more risks," Oliver said.

California may ditch Daylight Saving Time

It's not quite Camelot, but in California, voters get to decide just about everything through the state's initiative process. Soon they may even decide when the sun rises and sets. A state legislative committee has cleared a measure that would ask voters to decide whether to scrap Daylight Saving Time, and the bill now goes to the full Senate, where it is expected to pass handily. It has already passed the General Assembly.

It may sound odd that a state usually seen as progressive, forward-looking and so forth would want to turn the clock back, but the fact is that much of the state is desert and the rest is pretty sunny too. A lot of Californians would like for the cool, cool of the evening to arrive a bit sooner during the hot months when daylight time is now in effect.

“Daylight Saving Time is an institution that has been in place largely without question for more than half a century,” said the measure's sponsor, Assemblyman Kansen Chu (D-San Jose), in a statement. “I think we owe it to the general public to be given the opportunity to decide for themselves whether or not it ought to be continued.”

California switched to daylight time in 1949, with voters' approval. It was promoted as a way to use less energy since it would get dark later during the summer months. But in today's world, those savings don't materialize, since most of us are inside with the lights, air conditioner, and humongous flat screens running full bore.

13 Major Retailers Closing 100 Or More Stores...So Far

It won’t be a very merry Christmas for thousands of employees of at least these 13 major retailers. Why, the retailers have all announced they’re closing at least 100 or more of their stores.

The stores won’t all close at once, and some won’t close for a year or more. In some cases, mergers, such as Office Depot and Office Max, have lead to excess stores. Sports Authority finally threw in the towel and is closing all of their stores.

24/7 Wall St writes: “As U.S. employment continues to improve in the years after the recession, Americans are more likely to have disposable income to spend on clothes and goods. Retail sales in the United States rose for the third straight month through January. Unfortunately for many brick-and-mortar retailers, an increasingly large share of Americans are shopping online, and sales at electronics and appliance stores and department stores fell by roughly 5% each compared to the same time last year. American brick-and-mortar retailers have had to make significant adjustments, and often this involves closing down stores. Major retailers such as Walgreens, Sports Authority, and even Walmart plan on closing at least 100 stores in the next year or so.

Time.com/Money calls it the Amazon Effect. It’s the age of Amazon, and brick-and-mortar retailers are feeling the pinch. Amazon’s dominance—bolstered by mostly lower prices, more options and increased convenience for shoppers–has caused stores across the mall to take a hit. Teen-apparel retailer Aéropostale filed for bankruptcy in May. Later that month, JC Penney announced that it would cut payroll and freeze overtime for its employees. The bad news isn’t only recent: In 2015, Penney announced it would close 40 locations, while fellow mall giant Sears has shuttered more than 200 locations over the past two years.

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