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Friday 12.16.2016

Trump, the Fed and Systemic Risk

The most decisive factor in the implementation of the Trump economic plan is the reaction of the Federal Reserve. While a Fed rate hike in December was basically a certainty, the path of rates in 2017 following the December hike will be dispositive with regard to the success or failure of Trump’s plans.

The Fed can choose to be highly accommodative in the face of Trump’s larger deficits. In effect, the Fed will not anticipate inflation, but will wait until it actually emerges. Actual inflation is still well below the Fed’s target inflation rate of 2%. Since the Fed is targeting average inflation of 2%, it could allow inflation to run above 2% for a while, which would be consistent with 2% average inflation, given today’s lower level.

The Fed also seeks negative real rates as a kind of stimulus measure. Negative real rates exist when the rate of inflation is higher than the nominal interest rate. This condition can exist at any level of nominal rates. For example, inflation of 3% with nominal rates of 2.5% produces a negative real rate of 0.5%.

Likewise, inflation of 4% with nominal rates of 3.5% produces the same negative real rate of 0.5%. No doubt the Fed does not want inflation of 3.5%. However, they can achieve negative real rates at any level by using financial repression to put a lid on nominal interest rates. This is done by forcing banks to buy Treasury notes even if the Fed’s balance sheet is stretched. It amounts to a kind of “shadow QE” using the bank balance sheets to park bonds instead of the Fed’s balance sheet.

Greenspan: US Has Grown 'Scarcely at All' in Last 5 Years

Former Federal Reserve Chairman Alan Greenspan warned that U.S. economic growth has essentially stalled in the last half-decade under President Barack Obama.

“A necessary condition for economic growth is that output per hour grows at a rate probably close to 2 percent. We're now under 0.5 percent, meaning we're essentially for the last five years have been growing scarcely at all,” he told Bloomberg TV.

“”If you don't get output per hour growth, you will not get the type of GDP growth which the people who are talking about it, ‘we can now grow our way out of it,’ unless you change the fact that we've got this 9 percent average annual increase in entitlements, which is eating into the domestic savings of the economy, which in turn is a critical issue, which is required to get capital investment going and capital investment is the key element in productivity growth,” he said.

"So it's this entitlement issue, which nobody wants to discuss. The Democrats don't want to discuss it, the Republicans who actually have been spending more and faster rate than the Democrats in the last half century, nobody wants to touch it. It's the third rail of Americana politics,” he said.

Americans’ Debt Total: $12.35 Trillion

Including mortgages, the average American household carries $132,529 in debt. That total comprises $16,000 in credit card debt, $28,500 in auto loans and $49,000 in student loan debt.

A major reason for the increase is that cost of living has outpaced income growth over the past 13 years. Household income has risen 28% since 2003, but medical costs have jumped 57% and food and beverage costs have risen 36%. Overall, the cost of living is up 30% in the 13-year period.

The data were reported earlier this week by researchers at NerdWallet in its annual survey of household debt. Their conclusion: [I]ncreasing debt loads aren’t just a case of lifestyle creep. The rapid growth in medical and housing costs is dwarfing income growth, making it challenging for many families to make ends meet without leaning on credit cards and loans.

Since 2002, household income adjusted for inflation has risen by 10 percentage points, a far cry from the 38 point spread in 2008. Education cost increases have dropped to the point where income outpaces the cost increases by two percentage points. Student loan debt rose 186% in the decade since 2003, but increased by just 6.32% between 2015 and 2016.

Obamacare premium to increase by $10B

Toyota files layoff notice in Kentucky

Toyota's move to consolidate its operations in Texas is kicking into high gear. In a layoff notice sent this week to Kentucky officials, Toyota Motor Engineering & Manufacturing said it would shutter its northern Kentucky headquarters by the end of 2017.

Toyota, which is moving its facilities in Erlanger, Ky., to the Dallas suburb of Plano, said the move will affect 648 workers. The layoffs are expected to begin Jan. 3 and continue through the end of 2018, according to the company.

Erlanger has been home to the Japanese automaker's North American engineering and manufacturing headquarters since 1996. Toyota, in its decision to move to Texas, studied how it could make its North American operations more efficient and it decided to consolidate work being done in California, Kentucky and New York.

The Georgetown, Ky., plant is its largest in North America. "Although Toyota's Erlanger-based headquarters will eventually move, we know that a continued strong presence in Kentucky is central to Toyota's ongoing success," Toyota North American CEO James Lentz said in a letter to then Gov. Steve Beshear in 2014. "We want to make clear that Toyota's roots will remain deep in this state, and we plan to maintain a strong presence in Kentucky for decades to come."

China: Our relationship with the US is 'too big to fail'

When Donald Trump becomes U.S. president next month, one issue above all others could force his new administration to work closely with China and underscore why he and Beijing need each other — North Korea.

A nuclear armed North Korea, developing missiles that could hit the U.S. west coast, is clearly bad news for Washington but also Pyongyang's sometimes-reluctant ally Beijing, which fears one day those missiles could be aimed at them.

"There is enormous space for the two countries to cooperate on North Korea. The two must cooperate here. If they don't, then there will be no resolution to the North Korean nuclear issue," said Ruan Zongze, a former Chinese diplomat now with the China Institute of International Studies, a think-tank affiliated with the Foreign Ministry.

"It's no good the United States saying China has to do more. Both have common interests they need to pursue, and both can do more," he added. North Korea is a tricky proposition even at the best of times for China, and simply easing up on U.N. sanctions as a way to express displeasure at Trump's foreign policies could backfire badly for China, said one China-based Asian diplomat.

After Raising Rates Once During The Obama Years, The Fed Promises Constant Rate Hikes During The Trump Era

Now that Donald Trump has won the election, the Federal Reserve has decided now would be a great time to start raising interest rates and slowing down the economy. Over the past several decades, the U.S. economy has always slowed down whenever interest rates have been raised significantly, and on Wednesday the Federal Open Market Committee unanimously voted to raise rates by a quarter point. Stocks immediately started falling, and by the end of the session it was their worst day since October 11th.

The funny thing is that the Federal Reserve could have been raising rates all throughout 2016, but they held off because they didn’t want to hurt Hillary Clinton’s chances of winning the election. And during Barack Obama’s eight years, there has only been one rate increase the entire time up until this point.

But now that Donald Trump is headed for the White House, the Federal Reserve has decided that now would be a wonderful time to raise interest rates. In addition to the rate hike on Wednesday, the Fed also announced that it is anticipating that rates will be raised three more times each year through the end of 2019…

Fed policymakers are also forecasting three rate increases in 2017, up from two in September, and maintained their projection of three hikes each in 2018 and 2019, according to median estimates. They predict the fed funds rate will be 1.4% at the end of 2017, 2.1% at the end of 2018 and 2.9% at the end of 2019, up from forecasts of 1.1%, 1.9% and 2.6%, respectively, in September. Its long-run rate is expected to be 3%, up slightly from 2.9% previously. The Fed reiterated rate increases will be “gradual.”

Rising rents lift US inflation; labor market tightens

Rising rents lifted underlying U.S. inflation in November, pointing to a steady build-up of price pressures in the economy that could support more interest rate increases from the Federal Reserve next year.

The prospects of further monetary policy tightening in 2017 were also bolstered by other data on Thursday showing a drop in the number of Americans filing for unemployment aid last week.

The Fed raised interest rates on Wednesday for the second time since the 2007-2009 financial crisis and forecast three rate hikes in 2017. In addition to rising oil prices and a tight job market, inflation is likely to get a boost from U.S. President-elect Donald Trump's proposed expansionary fiscal policy agenda.

"Inflation is moving in the right direction, all the conditions for stronger inflation are in place. I don't think the Fed is behind the curve. We expect the next rate increase in March," said Ryan Sweet, senior economist at Moody's Analytics in Westchester, Pennsylvania. The Labor Department said its Consumer Price Index excluding volatile food and energy costs rose 0.2 percent last month after edging up 0.1 percent in October. Rents accounted for most of the increase in the so-called core CPI last month.

Venezuela cash crisis worsens as new bills fail to arrive

New money was supposed to arrive Thursday so that Venezuelans could swap their old cash for new bills and coins. On Sunday, Venezuela's President, Nicolas Maduro, said in a radio address that he would give people 72 hours to exchange their 100 bolivar notes for coins of the same face value. The announcement came just a week after the country said it will replace the 100 bolivar note with six other bills, worth between 500 and 20,000 bolivars, starting December 15.

The government-set deadline is here. But the new bills haven't arrived at many banks and ATMs even as Venezuelans are standing in endless lines waiting to exchange or deposit their cash. The pandemonium epitomizes the deep economic chaos Venezuela currently faces. The currency has crashed and inflation has skyrocketed. Venezuelans now need to carry stacks of cash just to buy food and medicine, which are already in short supply.

"Nobody has the new bills...Nobody," says Alejandro, a 24-year old who lives in Maracaibo, Venezuela. Alejandro, who requested CNN not use his full name, said the shops he visited Thursday didn't have the new cash. "With the 100 bolivar bill, nobody can pay for anything."

Some Venezuelans reported on social media Thursday that ATM's from the state-run Banco de Venezuela were still dispensing 100 bolivar notes. Central bank President Nelson Merentes said the bills will arrive in the country and be distributed in a "progressive manner" to banks, a spokesperson told CNNMoney, without providing more specific details on timing.

Illegal migration hits new high in November as families surge across border

More than 15,000 illegal immigrants traveling as families were nabbed at the U.S.-Mexico border in November — a massive increase that marks the worst November on record, and the second-worst overall, according to new statistics released Thursday by Homeland Security.

The number of children traveling without parents also ticked up, topping 7,000 for the month, but it’s the surge of families that’s straining the Border Patrol and testing the Obama administration’s resolve. Combined, the children and families fleeing Central America for the U.S. have reshaped the challenges of the illegal migration problem, sending the overall level of illegal immigration back to levels that haven’t been seen in years. November’s 47,214 illegal immigrants caught is 44 percent than the level in 2015, and is the worst November in years.

Obama officials blame conditions in Central America, saying poverty and violence in El Salvador, Honduras and Guatemala are forcing people to make the trip north. But the Border Patrol’s chief told Congress that U.S. policy is inviting the surge because migrants, coached by the smugglers they’re paying, have learned to gain the system.

The worst month for children and families is June 2014, which was the peak of the previous surge. But migration is cyclical, and the fact that this year had the worst November on record suggests fiscal year 2017, which began in October, is poised to set new records for families.

More than 10% of homeowners still under water

The U.S. housing market has recovered. The median home price is now about where it was at the time of the housing market crash.

But like politics, all real estate is local. Not every housing market has recovered at the same pace and there's still plenty of pain left over from the popping of the housing bubble.

Real estate marketplace Zillow reports about 5.3 million homeowners were under water – meaning they owed more on mortgages than the homes are worth – in the third quarter of the year. That amounts to about 11% of homeowners with mortgages.

While that is discouraging for those homeowners who have not been able to sell or refinance for the last decade, it's a marked improvement from the height of the housing crash. In 2012, an estimated 15.7 million homeowners were under water. Rising home prices helped some get their heads back above the surface, but not all. Many are no longer under water because they eventually lost their homes to foreclosure.

Jamie Dimon: Trump's Cabinet Picks Are 'Very Qualified'

IRS Employees Spent $1.4 Million of Taxpayer Money on Lavish Travel and Hotels

IRS employees spent $1.4 million in taxpayer funds on lavish travel and hotels, according to a new report from the Senate Finance Committee.

Sens. Orrin Hatch (R., Utah) and Ron Wyden (D., Ore.), the committee’s chairman and ranking member, respectively, wrote in May 2016 to the IRS and other federal agencies to evaluate their travel policies and practices, asking what the costs of those activities were and whether or not the agencies have done anything to reduce costs.

The Finance Committee found that the IRS had 27 employees who traveled 125 business days at a cost of more than $1.4 million in fiscal year 2015. The average cost of each trip totaled $52,800 and lasted an average of 207 days.

One employee racked up $72,544 in hotel costs, spending $43,726 at the Ritz Carlton in Arlington, Virginia, alone. Another employee spent nearly half a year living in the Grand Hyatt in Washington, D.C., which cost taxpayers $38,799.

Gold Could Shine In 2017 As Inflation Catalysts Kick Into Gear

Inflation can be understood as the destruction of a currency’s purchasing power. To combat this, investors, central banks and families have historically stored a portion of their wealth in gold. I call this the "fear trade."

The fear trade continues to be a rational strategy. Since President-elect Donald Trump’s surprise win a month ago, the Turkish lira has plunged against the strengthening U.S. dollar, prompting President Recep Erdogan to urge businesses, citizens and institutions to convert all foreign exchange into either the lira or gold. Most obliged out of patriotism, including the Borsa Istanbul, Turkey’s stock exchange, and the move has helped support the currency from falling further.

Venezuela, meanwhile, has dire inflationary problems of its own. Out-of-control socialism has led to an extreme case of “demand-pull inflation,” economists’ term for when demand far outpaces supply. Indeed, the South American country’s food and medicine crisis has only worsened since Hugo Chavez’s autocratic regime and the collapse in oil prices. The bolivar is now so worthless; many shopkeepers don’t even bother counting it, as Bloomberg reports. Instead, they literally weigh bricks of bolivar notes on scales.

“I feel like Pablo Escobar,” one Venezuelan bakery owner joked, referring to the notorious Colombian drug lord, as he surveyed his trash bags brimming with worthless paper money. Because hyperinflation has destroyed the bolivar, the ailing South American country sold as much as 25 percent of its gold reserves in the first half of 2016 just to make its debt payments. Venezuela’s official holdings now stand at a record low of $7.5 billion.

Yahoo! hack affects one BILLION user accounts

Mark Spitznagel: "The Big, Fat, Ugly Stock Bubble" Is Now The Greatest Risk For Trump

The “big, fat, ugly bubble” in the stock market that President-elect Donald J. Trump so astutely identified during his campaign now becomes one of the greatest potential liabilities of his presidency.

If that bubble bursts soon, the pain will correctly be understood to be the result of monetary manipulations during the Obama years. But if it persists and the United States economy manages to further postpone its long-overdue recession (following an expansion that was barely that), Mr. Trump’s ostensibly “free-market” policies will unfairly bear the blame when the markets finally do return to reality — perhaps a year or two down the road.

The postelection Trump rally in the stock market is evidence of euphoric optimism about the fiscal stimulus, reduced regulations and lower taxes that are hoped for. And yet we mustn’t forget where we are today, with distorted pricing in virtually all markets and extremely levered public and private balance sheets, all driven by monetary interventionism on a scale never seen before: By most measures, the stock market is as expensive as it has been for a century, save only the giddy late 1990s.

We must also remember what got us to this spot: namely, extreme, collectivist interventionism by the heavy hand of the state. Perhaps never before have we had such a clear case of a controlled experiment in the effects of economic (and especially monetary) interventionism. Problem is, the election of Mr. Trump is adding noise to this otherwise transparent experiment, and is extremely risky for supporters of his policies because he is poised to take office near such a peak in economic distortion.

Retailers Are Giving More Discounts This Holiday Season, Even If They Don’t Want To

It’s the season to be merry again, but only for customers, because they know retailers will be offering big discounts. As for retailers, no amount of strategy can sway people away from discount coupons.

Ever since the recession hit the West, brands have been forced to offer tempting deals to boost sales. While they hoped to limit the trend only for that period of temporary hardship, discounts have now become a holiday tradition.

Since the period between Thanksgiving Day and New Year accounts for almost a fifth of annual sales for these retailers, they are swimming in deep right now. Only last year, popular retail brands like Macy’s, Kohl’s and Nordstrom dealt a huge blow. While they had stocked up inventories to the brim, poor sales caused a large surplus of products, hurting the company.

Also, retailers have realized that no dearth of stocks means having to offer greater discount on items. Hence, this year, they have cut back on inventory numbers to a great extent. This has only worked for Ulta Salon Cosmetics & Fragrance Inc. and Gap Inc.’s Athleta. Other retailers continue to bear the brunt of offering discounts.

Venezuela Hunger Crisis 2016: Starving Children Abandoned Amid Food Shortages, Economic Collapse

Venezuelan families are giving their children away in a last ditch effort to save them as severe food shortages mount. As the region’s economic recession deepens, families lack basic foods and goods necessary for survival. Parents are turning to friends and neighbors to take care of their children, or in some cases, abandoning them altogether.

“It’s better she has another family than go into prostitution, drugs or die of hunger,” Zulay Pulgar, a mother who asked a neighbor to care for her 6-year-old daughter, told Reuters. Pulgar said buying one meal of chicken to feed her family would decimate half of her household’s monthly income. Breakfast was often just bread and coffee, she said, with lunch and dinner consisting only of rice.

“The primary motivation now is lack of food,” Maria Salas, director of the service center Carirubana, told Reuters. A survey released by children’s rights group Cecodap found two-thirds of households with children in Caracas did not have enough food.

Whether due to a lack of money or a lack of available goods, more and more parents in Venezuela are unable to feed themselves and their children. In August, Reuters reported an increase in the number of sterilization surgeries as women sought to avoid having more children. Under Venezuelan law, it is difficult to obtain contraceptives and abortion is banned except in cases of threat to a woman’s life.

Banks move quickly to raise prime lending rates

Not too long after the Federal Open Market Committee finally elected to increase the federal funds rate, banks started to announce they are increasing their prime lending rates. In a statement released Wednesday by the Federal Reserve, the FOMC voted unanimously to raise the target range for the federal funds rate from 0.5% to 0.75%, effective Dec. 15, 2016.

Quickly thereafter, banks followed suite with a swarm of announcements that they were adjusting business to the change. The last time banks raised their prime lending rates was when the Fed chose to raise rates in the December 2015 meeting.

Here are only a handful of the bank announcements. Fifth Third Bancorp announced that it is increasing its prime lending rate from 3.5% to 3.75%, effective immediately. The rate was last changed on Dec. 16, 2015, when Fifth Third increased its prime rate from 3.25% to 3.5%.

Similarly, BB&T Corporation stated it is increasing its prime lending rate to 3.75% from 3.5%, effective immediately. Effective Dec. 15, 2016, M&T Bank will increase its prime lending rate from 3.5% to 3.75%.

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