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Thursday 10.27.2016

Fiscal Stimulus: Just an Excuse to Grow Government

Between 1870 and 1913, the real GDP of the United States — as best they can estimate it — rose from $20 billion to $131 billion (1958$). That gain of 4.3% per annumcompounded over 43 years is the highest real GDP growth on record for a continuous equivalent period of time. But here’s the wonder of it… During that golden age of growth and prosperity, the U.S. had no central bank and not even one episode of fiscal stimulus!

If you allow for population growth from 39 million in 1870 to 97 million by 1913 and look at the U.S. economy on a per capita basis, the gains in those dark days before the invention of “stimulus” were pretty robust.

Real GDP rose from $480 to $1,350 per capita, or at a 2.5% annual rate. That, too, was never again exceeded over a continuous four decade interval. During the most recent 43-year period, for instance, the growth rate of real per capita GDP was only1.6%.And since the eve of the financial crisis at the end of 2007, it has dropped to just 0.3%per annum.

If you aren’t drinking the Wall Street/Washington Cool-Aid that latter figure might cause you to scratch your noggin. Compared to the last 9 years when we have had a tsunami of monetary stimulus, how did we get 8X more per capita growth in real GDP during the 43-year period ending in 1913? After all, the almighty Fed did not even open its doors for business until the fall of 1914.

Thermodynamic Oil Collapse Interview: Why The Global Economy Will Disintegrate Rapidly

The world is heading towards a rapid disintegration of its economic and financial system due to a “Thermodynamic oil collapse.” I spoke with Dr. Louis Arnoux of nGeni, about the details of the thermodynamics of oil depletion and its impact on the global economy.

Unfortunately, the world is completely in the dark about this energy information and its dire implications to global economic trade and finance, in a relatively short period of time. I would like to emphasize that this Thermodynamic Oil Collapse Video is the most important interview I have ever done.

During the interview, Louis Arnoux discusses the dynamics of the “Thermodynamic oil decline” using six slides, including one on his nGeni technology towards the end of the interview. The information in this interview is so important, Louis needed to take the extra time to explain these concepts in detail.

In the beginning of the interview, Louis describes the significance of the first chart showing how the world’s fuel gauge is now “Running On Empty.”

This Could Lead to the Biggest Bubble Ever…

Recently, two of the world’s most influential central bankers sent a critical signal to investors… Bank of England (BoE) governor Mark Carney and Federal Reserve Chair Janet Yellen both revealed their desire to let their respective economies “run hot.” They’re going to allow inflation to go higher than usual as a trade-off for economic growth.

That means the central banks’ long-standing 2% inflation target is effectively being tossed aside. That spells bad news for workers, savers and consumers as rising inflation reduces the purchasing power of their earned and interest income. By design you’re going to be squeezed in a vice grip. But there’s a silver lining…

Central banks use short-term interest rates to control the rate of inflation. In theory, keeping rates low increases demand for credit, helping boost economic activity and, therefore, inflation. And that’s just what Carney and Yellen are trying to do. They would both rather be too slow in raising interest rates than too fast.

Carney says he wants to err on the side of higher growth and inflation to help cushion the impact of Brexit. Yellen claims she’s trying to create a “high-pressure economy” to heal the damage caused by the Great Recession. So what may happen to the major asset classes if this central bank scheme to abandon the 2% inflation target succeeds?

Housing bubble fears have returned

Home prices kept rising in August and September in most major American cities. That's great news for people looking to sell. However, some cracks appear to be forming in the housing market again. It may not be another bubble bursting like nearly 10 years ago, but it still may be a cause for concern.

Two companies that could be considered canaries in a housing coal mine reported weak results and issued disappointing forecasts on Tuesday -- appliance giant Whirlpool (WHR) and paint manufacturer Sherwin-Williams.

Both stocks plunged 11%. (So much for the Cleveland magic lifting Sherwin-Williams, which is based in the 216. The stock tanked on the day the Indians won Game 1 of the World Series and the Cavs received their NBA championship rings.)

Whirlpool CEO Jeff Fettig called the environment "challenging," while chief operating officer Marc Bitzer added that there was "industry softness" in North America. Sherwin-Williams noted in its report that sales of paint to consumers and commercial customers fell from a year ago as well.

Consumer confidence tumbles down in October

Consumers are less confident about the economy in October, citing that, among other things, business conditions are bad, according to the Consumer Confidence Survey conducted by The Conference Board by Nielsen, a provider of information and analytics around what consumers buy and watch.

The index decreased to 98.6, down from September’s post-recession high of 103.5. The Present Situation Index decreased from last month’s 127.9 to 120.6, and the Expectations index decreased from 87.2 last month to 83.9.

In 1985, the index was set to 100, representing the index's benchmark. This value is adjusted monthly based on results of a household survey of consumers' opinions on current conditions and future economic expectations. Opinions on current conditions make up 40% of the index, while expectations of future conditions make up 60%.

“Consumer confidence retreated in October, after back-to-back monthly gains,” said Lynn Franco, The Conference Board director of economic indicators. “Consumers’ assessment of current business and employment conditions softened, while optimism regarding the short-term outlook retreated somewhat.” “However, consumers’ expectations regarding their income prospects in the coming months were relatively unchanged,” Franco said. “Overall, sentiment is that the economy will continue to expand in the near-term, but at a moderate pace.”

The Next 10 Years Will Be Ugly for Your 401(k)

It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. Their average annualized long-term expected return? 6.2 percent. After 1.6 percent was shaved off to allow for a decade of inflation1, the number dropped to 4.6 percent, which was rounded up. Voilà.

So on average we all expect a 5 percent; the report tells us we should start getting used to disappointment. To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model, the report looks at the typical balanced portfolio of 60 percent stocks and 40 percent bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance of 6.6 percent, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.

ObamaCare’s Architect: Higher Premiums Mean the Law “Is Working as Designed”

“You’ve heard it straight from the architect of ObamaCare’s mouth. The substantially higher insurance premiums that Americans will face on the exchanges this year mean ObamaCare ‘is working as designed.’ Jonathan Gruber and the Obama administration really must believe that voters are stupid, as Gruber infamously said on multiple occasions.”

“The fact of the matter is that President Obama promised that insurance premiums would decline under ObamaCare. That was a lie. He promised that Americans could keep the health plans they had and liked. That was a lie.”

“With premiums rising, ObamaCare cooperatives failing, fewer than expected consumers enrolling in costly health plans under the law, and insurers withdrawing their participation in the exchanges, we can only assume that the eventual collapse of ObamaCare is also by design.”

“Of course, Democrats will continue to try to sell us more socialist snake oil by telling voters that single-payer health care is the only answer. But when ObamaCare collapses, how can Democrats possibly expect any American to believe that more government centralization of health care will work?”

Google Fiber halts expansion efforts, announces job cuts

Google Fiber is hitting the pause button on expansion efforts, and the head of the fiber business unit is stepping down. Craig Barratt, senior vice president at Google parent company Alphabet and CEO of Access, announced the changes in a blog post.

To continue to grow and stay ahead of the curve, the company has refined its plans, he said in the post. “In terms of our existing footprint, in the cities where we’ve launched (Google Fiber) or are under construction, our work will continue. For most of our “potential Fiber cities” — those where we’ve been in exploratory discussions — we’re going to pause our operations and offices while we refine our approaches,” he said in the blog. “We’re ever grateful to these cities for their ongoing partnership and patience, and we’re confident we’ll have an opportunity to resume our partnership discussions once we’ve advanced our technologies and solutions.”

The halted expansion efforts and refined plan also will result in layoffs, but Barratt declined to share exact numbers in the blog. Barratt also announced he is stepping down as CEO of Access but will continue to work with the business unit in an advisory role. A successor hasn't been announced.

Google Fiber is currently available in nine metro areas, including Kansas City; Austin, Texas; Atlanta; and Charlotte, N.C. Some of its “potential Fiber cities” included Dallas, Texas; Jacksonville, Fla.; Los Angeles; and Oklahoma City.

Why the president can't fix your finances

Fear of Violence at Polls on Election Day Causes Cancellation of Classes in Schools across Nation

Rigged elections. Vigilante observers. Angry voters. The claims, threats and passions surrounding the presidential race have led communities around the U.S. to move polling places out of schools or cancel classes on Election Day.

The fear is that the ugly rhetoric of the campaign could escalate into confrontations and even violence in school hallways, endangering students. "If anybody can sit there and say they don't think this is a contentious election, then they aren't paying much attention," said Ed Tolan, police chief in this seaside community, which decided to call off classes on Election Day and put additional officers on duty Nov. 8.

School officials already are on edge because of the shootings and threats that have become all too common. They point to the recent firebombing of a Republican Party office in one North Carolina county and the shooting-up of another with a BB gun as the type of trouble they fear on Election Day.

Some of those anxieties have been stoked by Donald Trump's repeated claims that the election is rigged and his appeal to his supporters to stand guard against fraud at the polls. Some are worried about clashes between the self-appointed observers and voters. Parent Alpay Balkir said he is glad children will be home. His 8-year-old son is a student in Falmouth, where the high school doubles as a polling place. "If it's going to be as chaotic as they say it's going to be, it's a good thing. Kids should stay out of it," Balkir said. "I don't know what the environment is going to be like."

Illegal Immigration Spiking Ahead Of US Election As Smugglers Promise "Amnesty" From Hillary

As Obama has learned from his constant threats on new gun regulations, sometimes advertising your intentions for new policies and regulations well in advance of actual implementation simply leads to more of the undesired actions. According to border patrol officials in Southern Texas, that is exactly what is driving a recent spike in illegal immigration as people are rushing to enter the U.S. ahead of the 2016 election.

Agent Chris Cabrera told CBS News that they’ve been seeing a spike in immigrants crossing the U.S.-Mexico border illegally, thanks in part to the election.

“The smugglers are telling them if Hillary [Clinton] gets elected, that there’ll be some sort of amnesty, that they need to get here by a certain date,” Cabrera said. “They’re also being told that if [Donald] Trump gets elected, there’s going to be some magical wall that pops up overnight and once that wall gets up, nobody will ever get in again.”

Cabrera added that they’ve encountered up to 1,000 immigrants along McAllen’s stretch of the border some days. “We’re getting mass spikes of people crossing and turning themselves in,” he said. Of course, Trump has been very clear throughout his campaign that illegal immigration would be big focus during his presidency after repeatedly calling for a wall along the southern U.S. border with Mexico and mass deportation of immigrants here illegally.

CEOs offer mixed picture of future

CEOs, it appears, aren't gung-ho about the U.S. economy's near-term chances of breaking free from its slow-growth malaise. Still, the outlook for the economy, while far from upbeat, isn't dreary, either.

The downbeat sales and profit forecasts from many CEOs in the current profit-reporting season suggest the economy's trajectory in 2016's final quarter and beyond is not that much different than the below-trend growth we've been seeing.

The government is set to give a reading on U.S. economic growth on Friday. The economy averaged about 1% growth in the first half of the year but is seen rebounding to a 3% clip in the third quarter, Barclays says.

Still, many CEOs are managing expectations down, not up, worrying Wall Street. The mixed outlook comes as the earnings growth rate for the Standard & Poor's 500 stock index has turned positive (+2.2%) in the third quarter for the first time in four quarters. "The story is still the same," says Greg Rutherford, CEO of Cavalier Investments. "We're not seeing anything that says, 'wow, earnings are really starting to pick up. In the economy, you don't have anything that's really driving growth."

Verizon Executive: We’re Still Waiting For More Info On Yahoo Breach

Yahoo’s data breach affecting the accounts of half a billion customers will probably have an effect on its pending acquisition by Verizon, and that effect will be a “material” one that will affect how much Verizon pays. A Verizon executive explained at a technology conference today that the company still needs more information about the hack before tying the knot.

“I’ve got an obligation to make sure that we protect our shareholders and our investors, so we’re not going to jump off a cliff blindly,” Marni Walden, Verizon’s president of Product Innovation and New Businesses, told attendees of the WSJDLive conference in California, according to Reuters.

The goal of this acquisition, Walden explained, is to put Yahoo and AOL, internet giants from decades past that still have traffic and a large user base, together into one advertising entity that will be able to compare with the ad-serving behemoths that are Google and Facebook.

The problem with buying a legacy business, though, is that you also buy the good and bad parts of the business’s legacy. In Yahoo’s case, that’s the 2014 theft of crucial information like names, dates of birth, phone numbers, and email addresses, which the company didn’t disclose until September 2016, after Verizon’s purchase offer.

The Goldman Sachs way to fire: bit by bit

The first "plant layoff" notice came in February: 43 people would lose their jobs. The second arrived six weeks later, increasing the cuts to 109 workers. Then a third, in April, for 146 more. And a fourth, in June: 98. Three more notices followed, including 20 dismissals announced last week.

The "plant" in question — Goldman Sachs Group Inc. Like all big companies in New York State, the firm is required to file a "WARN notice" with state authorities when it plans to shed large numbers of employees as part of a plant closing, or "mass layoffs" involving 250 or more. Employers also must inform the state of smaller reductions under certain circumstances, and Goldman Sachs cited a "plant layoff" in each case. Last week's notice brings this year's job-cut tally to 443.

With the run of notices, seven since the start of the year, the bank has signaled its intention to dismiss hundreds of employees in New York without placing a single, headline-grabbing number on the overall reduction, already its largest since 2008. The company's approach differs from competitors, including Morgan Stanley, who have shown a preference for larger, one-time cuts.

"When there's a big number, people right away get that something is happening at that firm — it's a negative," said Jeanne Branthover, a partner at New York-based executive-search firm DHR International. "This is more, 'We're having layoffs and we don't want to explain it.' It's more under the radar screen."

Where Does Gold Go After Hitting A Three-Week High?

After hitting a three-week high overnight, gold prices are modestly lower, dipping below the 200-day moving average and analysts are mixed as to where prices are headed next in this current consolidation phase.

Gold pushed lower Wednesday after the release of U.S. new home sales, which despite missing expectations, were up almost 30% compared to last year. December Comex gold futures last traded at $1,268.20 an ounce, down 0.42% on the day.

In a note to clients Tuesday, commodity analyst at iiTrader, said that for gold to maintain its momentum the price needs to hold above the 200-day moving average, which for the December contract comes in at $1,272.40 an ounce. They noted that a continued close above this level could push prices to their next resistance level at $1,283 an ounce.

Colin Cieszynski, senior market analyst at CMC Markets Canada said in an interview with Kitco News, he is also watching the $1,280 area. He added that close above this would signal an end to the correction -- which saw prices drop 5%. But, he added that there are already signs that the correction could be over.

Will China Trigger the Next Global Recession?

China’s debt growth rate has become the focus of some discussions and, fair enough, from comparing the outright levels, it may seem that China can collapse at any moment. Daniel Fernandez suggested this in his article "Has China Reached Its Debt Limit?" in Mises Wire. In response to the government’s monetary expansion stimulus plan after the 2008 financial crisis, China’s corporate sector did indeed leverage up quickly, followed by an equally fast pace of leveraging in the household sector. However, in order to avoid comparing apples with oranges, we need to take a closer look by putting these numbers into perspective. Using the same data source as used by Fernandez, we find that China’s total debt as a percentage of GDP was 254 percent by the end of 2015. Debt-to-GDP ratio of corporate, government, and household sectors stood at 170 percent, 44 percent, and 40 percent respectively

For government and household sectors, both started from considerably low levels until the last administration kicked in a four-trillion yuan (RMB) stimulus plan in 2009. Government debt-to-GDP ratio, which was kept in the mid 30s in the first decade of this millennium, now stood at 44 percent by the end of 2015. Household’s debt-to-GDP ratio was at 11 percent in 2006 and almost doubled to 19 percent in 2007 and then doubled again to 40 percent by the end of 2015. The leveraging up of households happened exactly as the Chinese society was undergoing rapid urbanization as well as when the government launched its 2009 stimulus.

Apart from the demand for urban housing, Chinese households, with their high savings rate and extra cash in hands, invested in in real estate as a hedge against future inflation. Furthermore, as the stimulus package allowed for easier lending, household debt increased dramatically. However, we must note that although the debt growth rate was high, the absolute debt level of household is still considerably low versus global peers.

The most disturbing trend is found in the corporate sector, with the debt-to-GDP ratio increased from approximately 110 percent prior to 2009 to 170 percent by the end of 2015. First of all, the level of corporate debt (mostly in the form of bank loans) was high to start with, but is by no means out of the norm for a financial system dominated by the banking sector, whose funding source is mostly deposits.

Laurence Kotlikoff-US in Worse Shape Financially Than Russia

Biggest risk to economy: Fed-fueled bubbles could pop

Although the United States economy is in good shape — with essentially full employment and an inflation rate close to 2% — a world of uncertainty makes it worthwhile to consider what could go wrong in the year ahead. After all, if the U.S. economy runs into serious trouble, there will be adverse consequences for Europe, Japan, and many other countries.

Economic problems could of course originate from international political events. Russia has been acting dangerously in Eastern and Central Europe. China’s pursuit of territorial claims in the East and South China Seas, and its policies in East Asia more generally, is fueling regional uncertainty. Events in Italy could precipitate a crisis in the eurozone.

But within the U.S., the greatest risk is a sharp decline in asset prices, which would squeeze households and firms, leading to a collapse of aggregate demand. I am not predicting that this will happen. But conditions are becoming more dangerous as asset prices rise further and further from historic norms.

Equity prices, as measured by the price-earnings ratio of the S&P 500 stocks SPX, -0.17% , are now nearly 60% above their historical average. The price of the 30-year Treasury bond is so high that it implies a yield of about 2.3%; given current inflation expectations, the price should be about twice as high. Commercial real-estate prices have been rising at a 10% annual pace for the past five years.

Chipotle 3Q same-store sales decline 21.9%

Third-quarter same-store sales at Chipotle Mexican Grill Inc. fell 21.9 percent, improving slightly from steeper declines earlier in the year, the company said Tuesday.

The Denver-based fast-casual operator, which suffered several food-borne illness outbreaks in late 2015, said same-store transactions were down 15.2 percent in the third quarter that ended Sept. 30. The same-store sales decline of 21.9 percent included a 0.8 percent revenue deferral related to unredeemed awards from the brand’s Chiptopia loyalty-program.

Same-store sales had declined 23.6 percent in the second quarter that ended June 30, which included a 19.3-percent fall off in transactions, and the same measure dropped nearly 30 percent in the first quarter.

"Our restaurant teams are very excited to see more customers return to their restaurants, and are working hard to reward them with an excellent guest experience,” said Monty Moran, co-CEO of Chipotle, in a statement. “After successfully implementing an industry leading food safety program, and as our marketing efforts are driving more people to our restaurants, it is critical that we are prepared to delight customers on every visit,” Moran said.

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