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Tuesday 08.23.2016

Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic Shock"

In a Fed Staff working paper released over the weekend titled "Gauging the Ability of the FOMC to Respond to Future Recessions" and penned by deputy director of the division of research and statistics at the Fed, the author concludes that "simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances."

So far so good, however, there are some notable problems with the paper's assumptions, as Citi head of G10 FX, Steven Englander, observes.

He writes that the paper’s basic framework is to take the standard US economic model used by the Fed, give it a negative shock big enough to push the unemployment rate up by 5 percentage points (big but not unprecedented over the last 50 years) and deploying the Fed’s policy rate, QE and forward guidance tools to see if they are adequate to get the economy back on track. Negative rates and helicopter money are not used.

The two simulations assume: 1. The economy is in equilibrium initially with inflation at 2%, r* at 1%, so equilibrium nominal fed funds is 3%. 2. The economy is in equilibrium initially with inflation at 2%, r* at zero (secular stagnation) and equilibrium nominal fed funds at 2%

Peter Schiff On Bigger Government Policies, Bigger Economic Failures

Economics is far simpler than most in academics or government would have you believe. To make accurate predictions all you really need is an honest appreciation of the self-interest that is at the heart of free market transactions and an ability to understand how regulations that attempt to “correct” these realities don’t work. This is certainly the case with the completely predictable slow-motion train wrecks that are the signature U.S. domestic policy experiments of the last eight years: Obamacare and Federal Reserve stimulus. From the start, I issued countless commentaries on why both would fail spectacularly. The jury has started to come back on Obamacare, and the results are a disaster. And while the verdict on the Fed’s policies has yet to arrive in similarly stark terms, I believe that its failure is just as certain.

As I explained in my July 30, 2012, commentary “Justice Roberts is Right: The Plan Won’t Work,” the central flaw (among many others) in Obamacare is that it incentivizes younger, healthier people to drop out of insurance coverage while encouraging older, sicker people to sign up. The result would be a pool of insurance participants that would guarantee losses for those providing coverage. That’s exactly what we are seeing.

After only four years of operation, there is now wholesale defection by insurance companies to abandon the Obamacare marketplace because they are hemorrhaging money faster than just about anyone predicted. To believe that any other outcome was possible would have been the equivalent of believing in the Tooth Fairy.

According to the Wall Street Journal, the four biggest U.S. health insurance companies, Anthem, Aetna, UnitedHealth and Humana are losing hundreds of millions of dollars on their Obamacare plans. And since these companies can’t be compelled to operate a business that loses money, all four have significantly scaled back their offerings. UnitedHealth has already exited 31 of the 34 states where it sells ACA policies. Humana is now offering coverage in just 156 counties of the 1,351 counties in which it was active a year ago. The latest shoe to drop came this week when Aetna said it would stop selling Obamacare plans in 11 of the 15 states where it is currently active.

Chicago Public Schools seeks $1.55 billion credit line

The cash-strapped Chicago public school system will rely on a $1.55 billion line of credit in fiscal 2017 to boost cash flow, up from $1.065 billion in fiscal 2016, according to a briefing document released by the district on Monday.

The bigger credit line will be on the agenda for the Chicago Board of Education's Wednesday meeting, along with a $5.4 billion operating budget, a $250 million property tax hike earmarked for teacher pensions and authorization to issue up to $945 million of general obligation bonds for capital projects.

The nation's third-largest public school district said it needs access to $485 million more in short-term funding as it ends the practice of restructuring outstanding bonds to push off debt payments and because its receipt of property taxes will be a few weeks later next year.

Chicago Public Schools (CPS) said it was working to finalize deals with lenders. Interest costs for the credit lines are budgeted at $34 million in fiscal 2017. The district tapped a bank line of credit in June to complete a $676 million fiscal 2016 contribution to its teachers' pension fund.

Gold Prices Conflicted by 'Thin Markets And Fed Blabber'

Italexit Would Make Brexit Look Like a Picnic

Europe has seemingly coped well with its recent Brexit shock, but now looms the prospect that Italy might be heading for the Eurozone’s door. This should be of great concern to European and global economic policymakers. While it is possible to think of a Europe without the United Kingdom, it is difficult to conceive that the Euro in anything like its present form could possibly survive the departure of Italy, the Eurozone’s third largest member country. It is also difficult to imagine that the Euro’s unraveling would not be a globally systemic economic event.

The prospect that Italy could be on the way out of the Euro within a year or two is far from fanciful. After all, Italy’s economic performance within the Euro has been nothing short of dismal. Eight years after the 2008-2009 Great Economic Recession, the Italian economy is still some 6 percent below its pre-2008 peak and its unemployment rate remains stuck at above 11 percent. Equally concerning is the International Monetary Fund’s projection that a sclerotic Italian economy will only regain its 2008 output level in 2025.

The political fallout from years of highly disappointing Italian economic performance is soon to be tested at the polls. At a yet-to-be-specified date in November, Italy is scheduled to hold a referendum on constitutional reform, mainly involving a proposed streamlining of its two-chamber parliament. With Prime Minister Matteo Renzi committed to resigning should he lose the referendum, the opposition has converted this referendum into a vote of no- confidence on the government.

A prolonged period of political uncertainty is the last thing that a sclerotic Italian economy now needs. Its banking system is burdened with non-performing loans that amount to around 18 percent of its outstanding loans, and its public sector debt has risen to 135 percent of GDP.

Deutsche Bank: Increasing Fed Concern Over Market Stability

With the US Federal Reserve apparently concerned that they might be forced to react too quickly if the economy starts “getting overly frothy,” a Deutsche Bank report looks at increasingly hawkish comments by Fed speakers and thinks Fed Chair Janet Yellen is not likely to stoke fear in Jackson Hole.

Dominic Konstam and his Deutsche Bank team writing the August 19 US Fixed Income Weekly report note “misgivings on the Fed.” “Some Fed officials appear to be making another attempt at jaw boning market expectations for Fed hikes a little higher – at least into the September meeting,” they write, pointing to New York Federal Reserve Bank President William Dudley and San Francisco Fed President John Williams. Last week ValueWalk reported on an expected increase in Fed hawkish comments.

The report, written before Fed Vice Chair Stanley Fischer noted the US central bank is close to hitting its job and inflation targets, is expected to be in contrast to a more muted Fed Chair Janet Yellen in Jackson Hole. The Deutsche Bank analysts think Yellen will generally hold her tongue at the event that is not her favorite for policy pronouncements.

“It will be important for the current market equilibrium that she doesn’t stoke any smoldering ash” in her comments, the report said. “On that basis we are still inclined to fade Fed hike expectations and favor lower nominal yields led by much lower real yields.” The report said the increasing grumblings that point to a September rate hike are potentially misguided and that “normalizing” rates might not happen next month.

Why Are There Still So Many Bank Branches Everywhere? Because You Keep Going

If you live in a certain kind of urban area, you see it all the time: those new mixed-use buildings go up, and on the ground floor of practically every single one there’s a bank branch or two. And if you thought to yourself, “Why are there so freaking many bank branches opening in an era when all the young folk living in those buildings bank by phone?” you’re not alone. But it turns out there’s an easy reason that bank branches keep proliferating: customers are using ’em.

As Reuters points out, the banks don’t exactly like operating them. They cost money — lots of it. A bank branch office costs between $2 and $4 million to get up and running, and another $200,000-$400,000 annually to operate. And sure, per year for a single location is just a tiny drop in the bucket for a bank, but multiply that out and it adds up fast.

Bank of America, for example, says on its website that it currently has about 4,700 “retail financial centers” in the U.S. Using Reuters’ cost estimate, that’s between $940 million and $1.88 billion in operations — a noticeable cost even for them. And that’s after closing roughly a quarter of their branches since 2009.

Investors, of course, want to see costs trimmed anywhere they can be. But this apparently isn’t one of those places. “Our customers still want to visit us,” a Wells Fargo exec told Reuters. “They’re still coming to our stores and our ATMs at pretty consistent rates.” That’s not to say banks aren’t trying to get smarter about where they operate those locations. Chase bank, for example, has shut down about 5% of its locations — 265 total — since 2013, Reuters says, but executives say that doesn’t mean they should just fold them all.

Newspaper Chain With 125 Dailies Offers Employee Buyouts

One of the country's largest newspaper chains is offering buyouts to its employees and said most of those workers would have their last day in mid-September.

GateHouse Media, which is based here and publishes 125 daily newspapers and more than 600 weekly and business papers in 35 states, made the announcement last week in a memo to employees.

"The action supports ongoing efforts across our organization to reduce costs," Chief Executive Kirk Davis said in Tuesday memo. "While we continue to make progress toward our goal of being revenue positive by 2018 and year-to-date our revenue performance has improved and outperformed our industry peers, we continue to see revenue declines and must align our expenses accordingly."

In December, GateHouse sold the Las Vegas Review-Journal, which it owned for nine months, to casino magnate and major Republican donor Sheldon Adelson for $140 million.

U.S. Economy Can't Outgrow Future Natural Disasters, Study Finds

The recent flooding in Louisiana serves as a stark reminder of the many natural disasters that the U.S. has suffered through in recent years. With all the wanton destruction our communities continue to face, it’s natural to wonder how funding for relief efforts can manage to keep up.

Researchers at the Potsdam Institute for Climate Impact Research (PIK) say that, unfortunately, maybe they can’t. Their recent study shows that U.S. economic growth will eventually be unable to keep up with the damages caused by ever-growing hurricanes and tropical storms.

“So far, historical losses due to tropical cyclones have been found to increase less than linearly with a nation’s gross domestic product (GDP). However, if you analyze losses with respect to per capita income and population growth separately, this reveals a different picture,” says Tobias Geiger.

“Our analysis for the United States shows that high income does not protect against hurricane losses. As the number and intensity of tropical cyclones is projected to increase under unchecked global warming, by the end of the century average hurricane losses with respect to national GDP could triple.”

Study says 1 in 6 cars sold in 2020 must be electric to meet fuel-economy rules

Several nations have enacted strict fuel economy standards but, for the most part, they have not required automakers to sell electric cars. In the U.S., only the state of California has a zero-emission vehicle mandate that puts such a requirement on carmakers.

Yet even without mandates, automakers may soon be forced to sell large numbers of electric cars just to meet fuel-economy rules. That's the conclusion of a study published in June by the World Energy Council (WEC), which argues that automakers will need quite a lot of electric cars indeed.

Among the major the points in the full study (pdf) is a prediction that 16 percent of cars sold in 2020 will have to be electric in order to meet emissions standards. The study compares emissions-reductions targets for the U.S., China, and the Europe Union—the world's three largest car markets, with anticipated fuel-economy improvements that can be achieved with internal-combustion engines alone.

By the WEC's estimation, larger volumes of electric-car sales will be needed to plug an "EV Gap" between fuel-economy targets and the improvements that can be realistically expected from internal-combustion engines. The size of that gap varies for each of the three markets studied. In the U.S., it translates to 0.9 million cars, or 11 percent of estimated 2020 new-car sales.

The Volcker Rule explained

The Only Thing That Can Save Your Retirement…

Let’s be honest, if you’re planning to retire in the near future, you’re royally screwed… The Fed has eliminated interest income through zero interest rates. The days of getting 5% interest on your hard-earned savings are a dead-end dream. Artificially inflated stocks are at all-time highs by way of this insane interest-rate policy. And with stocks at these elevated levels, it’s hard to imagine much more than 2%–3% returns over the next decade.

Social Security? Come on. With a funding gap estimated at $13.4 trillion? Like it or not, your Social Security benefits will be cut big time… or you’ll be working well into your 80s. Or both. No doubt you’re getting squeezed on all sides. And that’s just the tip of the iceberg. There’s another punch to the gut coming. I hate to be the bearer of bad news, but the retirement crisis is about to get a whole lot worse.

The government has a nasty secret it’s keeping from you: It owes its retirees a ton of money it can’t possibly pay them. And you’re on the hook for it. Credit-rating agency Moody’s recently reported that federal, state and local governments are $7 trillion short in pension payment funding. That’s 40% of the entire U.S. gross national product. Uh-oh. And that’s just public sector pensions…

Moody’s also found that private multiemployer pension plans are massively underfunded by another $337 billion. And the situation isn’t going to improve. That’s because we’re getting hit with a demographic time bomb… As baby boomers retire in record numbers, we’re seeing fewer U.S. workers for each retiree. Right now, we have three workers for each retiree. Within a decade it will be down to two. More retired dependents with fewer supporting workers means slower economic growth and higher debt obligations.

This Is What Happens When Robots Take Over Banking

When Business Insider asked experts what they thought would change the financial industry in the next decade, nearly all said automation. But while some saw humans being replaced, others thought that the tech will make humans better.

This is what we learned after surveying chief technology officers, chief innovation officers, startup founders, and venture capitalists.

We are heading toward a world where "ubiquitous mobile computing, an exponential growth in data, and continuous advances in machine learning and artificial intelligence will transform finance into an always-on, algorithmically driven industry," according to Sean Park, the founder, chairman, and CIO at venture-capital firm Anthemis Group.

Adding to this trend, he said, is the coming of age of the "Snapchat generation," the millennials — and the generation ahead, which some call "Generation Z" — that have grown up using technology in an automated world.

Jim Cramer: Paying People More Is Walmart's Most Important Strategy

We can think of a dozen different variables about why Walmart can report a terrific quarter like it just did. The leadership team, especially CEO Doug McMillon, is much stronger and centralized. The online business is now very much a part of the operation, integrated in a way that makes the Jet.com deal highly accretive vs. building a similar engine.

The closing of underperforming stores, including 102 Walmart Express stores, shows that the company is no longer going to layer on winning stores on top of losers. It’s going to just cut them off, even though, in some cases, they haven’t even been opened that long. Talk about being decisive. But I think those are all losing the forest through the trees.

The single most important initiative that McMillon did was to pay people more. That’s right, better pay. Higher benefits. Substantially better than many other companies. That’s causing a monster chain reaction that’s keeping good employees rather than losing them, say, to Target, or to a fast food company or any other national chain that could cherry-pick Walmart’s best.

It’s all part of that plan announced last year to boost wages by $2.7 billion over several years time, to get the wages above the national average – an amazing thing for this gigantic company. Why is this so important? Because the biggest cost to a place like Walmart is training. If you are constantly training new people because the good ones leave, you very well could be spending away all of your gross margins.

Virginia Democratic governor and longtime Clinton pal gives 13,000 felons the right to vote in November

A defiant Virginia Democratic Gov. Terry McAuliffe announced Monday that he again restored the voting rights of about 13,000 felons who have served their sentences, after his previous attempt was thwarted by Republican lawmakers and the state Supreme Court.

Virginia's highest court ruled in July that governors cannot restore rights en masse, but must consider each offender on a case-by-case basis. That ruling invalidated a sweeping executive order issued by McAuliffe in April that had given back the voting rights of more than 200,000 felons who completed their sentences.

His office complied with the state Supreme Court's directive, at least technically: A computerized 'autopen' signed each of the 13,000 letters. McAuliffe, a former Democratic National Committee chairman and elite fundraiser, also chaired Bill Clinton's 1996 re-election campaign and then took the same job with Hillary Clinton's failed 2008 presidential bid.

He drew howls when his initial order was seen as an attempt to create a new class of Democratic voters just in time to help Hillary Clinton in November. The governor blasted the court Monday for ignoring the 'the clear text of the Constitution' and accused Republicans of trying to suppress voters' voices.

Merkel Tells Renzi He Can’t Bend Euro Rules to Boost Growth

German Chancellor Angela Merkel lauded Italian Premier Matteo Renzi’s economic policy as “courageous,” while signaling that European Union budget rules can’t be bent to help Italy boost growth.

Merkel’s comments alongside Renzi and French President Francois Hollande hinted at one of the divisions between the leaders of the euro area’s three biggest economies as they met on Monday to plan the European Union’s way forward after Britons voted to leave the bloc. Italy’s economy stagnated in the second quarter, pushing off budget forecasts, and Renzi is pressing for greater flexibility by the European Commission.

“The stability pact has a lot of flexibility, which we have to apply in a smart way,” Merkel told reporters aboard the Italian aircraft carrier Giuseppe Garibaldi, where the leaders discussed topics from refugees, border controls and terrorism to jobs and investment. “Europe isn’t the most competitive place in the world in all sectors yet.”

Renzi signaled he’ll push ahead with his reforms even as his public standing slips. “Italy’s deficit is at the lowest level of the last ten years,” Renzi said. The government “will go ahead with structural reforms and deficit reduction for the good of our children and grandchildren,” he said.

Self-Driving Cars Don't Care About Your Moral Dilemmas

As self-driving cars move from fiction to reality, a philosophical problem has become the focus of fierce debate among technologists across the world. But to the people actually making self driving cars, it’s kind of boring.

The “trolley problem” is the name for a philosophical thought experiment created as an introduction to the moral distinction between action and inaction. The classic example is a runaway mine cart, hurtling down tracks towards a group of five oblivious people. With no time to warn them, your only option is to pull a switch and divert the cart on to a different track, which only has one person standing on it. You will save five lives, but at the cost of actively killing one person. What do you do?

All kinds of tweaks and changes can be made to the basic problem, to examine different aspects of moral feeling. What if, rather than pulling a switch, you stop the mine cart by pushing one particularly large person in its way? What if the five people are all over the age of 80 and the one person is under 20? What if the five people are in fact five hundred kittens?

What if rather than a mine cart, you were in a runaway self-driving car? What if, rather than making the decision in the heat of the moment, you were a programmer who had to put your choices into code? And what if, rather than picking between the lives of five people and one person on different roads, you had to pick between the life of the car’s sole occupant, and the lives of five pedestrians?

Americans Who Haven't Bounced Back After The Great Recession Probably Won't

Venezuelan President To Expand Welfare Health Program Amid Economic Crisis

Venezuelan President Nicolas Maduro has vowed to expand a welfare healthcare program to all of the South American country's states by early 2017. The Misión Barrio Adentro, or Into the Neighborhood Mission, was created by late former President Hugo Chavez in 2003. The program seeks to provide publicly funded healthcare, including dental care, to impoverished Venezuelan communities.

The program, credited for decreasing infant mortality rates, was initially praised by the World Health Organization and UNICEF but the program has waned in recent years as many of the thousands of clinics built under the program became abandoned and the medical personnel who operated within them -- mostly Cuban medics -- left.

In a speech at the Venezuelan presidential palace, Maduro said the government still has the capacity to improve the program -- despite the crippling economic crisis the country faces. "We have made great progress in caring for children, youths and the population in general, but we could still do more, because we have resources to do so," Maduro said Saturday. "This program should be implemented as a prioritized policy to guarantee better quality of life for all Venezuelans."

Maduro said he rejects the call to return Venezuela's healthcare system to a privately run institution.

Boeing Internal Forecast Sees 535 Jetliner Sales In 2016, Below Target

Boeing Co aims to sell 535 jetliners this year, Aviation Week reported on Monday, citing an internal company forecast, well below the plane maker's official forecast of 740 to 745 aircraft.

If correct, the reduced tally would mirror a slowdown in aircraft sales at Boeing and rival Airbus . Widebody plane sales are under particular pressure. Still, asked about the internal forecast which has not been made public, Boeing said it remained committed to its target of selling about as many planes as it delivers this year, or about "740 to 745."

"We have a host of internal forecasts," Boeing spokesman Doug Alder said. "As a general rule, we do not comment on internal numbers." New aircraft sales have slowed as airlines rein in capacity amid weak global growth, and as low oil prices prompt some carriers to fly older planes longer, rather than upgrading to new fuel-efficient models. Also, many airlines already ordered new planes over the past few years, which has cooled demand.

Alder noted Chief Executive Officer Dennis Muilenburg's recent comment that 737 sales could allow Boeing to achieve its goal, even if widebody sales remain slow. "This year's order cycle is more favorable on the narrow bodies," Muilenburg said on a July 27 conference call. "We expect the predominance of that orders flow this year to be in the narrow-bodies arena."

In Germany VW Cuts 28,000 Workers' Hours Over Supply Woes

Embattled auto giant Volkswagen AG (IW1000/7) said on Monday it would halt production at six plants in Germany for several days as a legal dispute with two key suppliers deepened.

Around 27,700 workers would have their work hours slashed by the end of August, in a new headache for the group which is struggling to move past an emissions cheating scandal that is costing billions.

VW had been forced to take the drastic measures at the factories that produce some of its most popular models including Passat sedans and Golf compacts after the two suppliers of gearbox parts and seat covers halted deliveries.

"Although the state court in Brunswick issued temporary injunctions requiring the suppliers to resume deliveries, they so far haven't fulfilled this obligation," the VW statement read. Instead, the components' manufacturers are appealing the court decision. VW said it would resume talks with the suppliers on Monday. While the group "wishes to achieve a result through negotiations," it may also pursue legal means, a spokesman said.

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