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Tuesday 01.03.2017

The Consequences of Helicopter Money

The Federal Open Market Committee, FOMC, of the Federal Reserve voted on Dec. 14 to raise interest rates 0.25%, as we expected. The vote was unanimous including doves such as Fed governor Lael Brainard.

While the rate hike was fully expected by markets, what was not expected was that the Fed struck a hawkish stance on future rate increases. Prior to the December FOMC meeting, the forecast was for two rate hikes before the end of 2017. On Dec. 14, the Fed signaled its intention to increase interest rates three more times in 2017.

The Fed based this more hawkish view on the fact that labor market conditions continue to improve, and slow but steady progress is being made in meeting the Fed’s inflation targets. As long as labor conditions are satisfactory, and inflation is not too high, the Fed will raise rates at a tempo of 1% per year, more or less, until a “neutral” fed funds rate of about 3.25% is achieved.

The Fed is engaged in this tightening cycle not because the economy is running “hot” (it’s not), but because they are desperate to raise rates enough to cut them again in a future recession. The Fed is behind the curve in this process. The Fed should have raised rates to about 3.25% over the course of 2009 to 2013. But, the Fed missed this entire interest rate cycle, instead engaging in fruitless experiments in quantitative easing or QE.

In a social experiment, Finland starts giving a $587 monthly income to 2,000 citizens

Finland has become the first country in Europe to pay its unemployed citizens a basic monthly income, amounting to 560 euros, or $587, in a unique social experiment it hopes will cut government red tape, reduce poverty and boost employment.

Olli Kangas from the Finnish government agency KELA, which is responsible for the country's social benefits, said Monday that the two-year trial with the 2,000 randomly picked citizens who receive unemployment benefits kicked off Monday.

Those chosen will receive 560 euros every month, with no reporting requirements on how they spend it. The amount will be deducted from any benefits they already receive. The average private sector income in Finland is 3,500 euros per month, according to official data.

Kangas said the scheme's idea is to abolish the “disincentive problem” among the unemployed. The trial aims to discourage people's fears “of losing out on something,” he said, adding that the selected people would continue to receive the 560 euros even after receiving a job. A jobless person may currently refuse a low-income or short-term job in the fear of having his financial benefits reduced drastically under Finland's generous but complex social security system.

Do Central Bankers Know a Bubble When They See One?

Between 2000 and 2008, two of the largest financial bubbles in history — in technology stocks and housing, respectively — suffered spectacular collapses. Opinions vary, but some market commentators believe at the peak of the tech bubble, total stock market capitalization exceeded 180% of US GDP. To put this in perspective, the tech stock bubble was over twice the size of the 1920s stock bubble!1 As large as the bubble in tech stocks was, it was child’s play compared to the housing bubble. When the US housing bubble collapsed, the credit losses were so large the entire worldwide banking system was considered to be in mortal danger.

One of the primary justifications behind the 1913 founding of the Fed was to prevent financial crises. Logic then dictates if a major motivation behind forming a central bank is the prevention of a financial crisis, then a financial crisis that breaks out under the nose of a central bank must be due — at least in part — to mistakes of that bank. The Fed’s mistakes and its subsequent leading role in causing the housing bubble will be seen by reviewing speeches given by Alan Greenspan and Ben Bernanke that praised the housing bubble era Fed. In addition, a review of statements made in the wake of the tech bubble’s collapse will reveal senior Fed officials taking positions diametrically opposed to positions Alan Greenspan claimed formed the basis for the Fed’s policy toward bubbles, namely, allowing bubbles to burst and dealing with the consequences later.

From its March 2000 peak to its October 2002 bottom the NASDAQ declined 80%. Throughout the 1990s no one cheered on the “new economy” more than the “maestro,” Alan Greenspan. After the bubble collapsed, Greenspan recognized a need to explain his and the Fed’s actions while the tech bubble grew. In August 2002 Greenspan gave a speech at the Fed’s conference in Jackson Hole. In this speech, which Jim Grant called “self-exculpating revisionism,”2 Greenspan offered this rationale for the Fed’s actions during the late 1990s:

The struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policymakers. … We at the Federal Reserve considered a number of issues related to asset bubbles — that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact — that is, when it’s bursting confirmed its existence.

Millions of Americans ringing in 2017 with a pay raise

China's new rules on yuan transfers are not capital controls: Xinhua

China's new rules on overseas currency transfers are not capital controls, the official Xinhua news agency reported, even as some banks told customers that purchases of foreign currency for property, securities and life insurance were not allowed.

Capital outflows have been a growing concern for the government in the past year as it attempted to put the economy back on track and keep the currency stable without exhausting its foreign exchange reserves, which tumbled to $3.052 trillion in November, the lowest in almost six years.

Starting in July 2017, banks and other financial institutions in China will have to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,201), compared with 200,000 yuan previously, the central bank said on Friday. Banks will also need to report any overseas transfers by individuals of $10,000 or more.

The responsibility of reporting such transactions will be assumed by financial institutions, and there will also be no extra documentation or official approval procedures required for companies or individuals, Xinhua reported late on Sunday, citing Ma Jun, chief economist of the People's Bank of China (PBOC).

Oil prices rise as markets eye OPEC, non-OPEC production cuts

Oil prices rose in the first trading hours of 2017, buoyed by hopes that a deal between OPEC and non-OPEC members to cut production, which kicked in on Sunday, will be effective in draining the global supply glut.

International Brent crude oil prices (LCOc1) were trading up 31 cents, or 0.55 percent, at $57.13 a barrel at 0203 GMT on Tuesday - close to last year's high of $57.89 per barrel, hit on Dec. 12. Oil markets were closed on Monday after the New Year's holiday. U.S. benchmark West Texas Intermediate (WTI) (CLc1) crude oil prices were up 32 cents, or 0.6 percent, at $54.04, not far from last year's high of $54.51 reached on Dec. 12.

Jan. 1 marked the official start of the deal agreed by the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC member countries such as Russia in November last year to reduce output by almost 1.8 million barrels per day. Market watchers said January will serve as an indicator for whether the agreement will stick.

"Markets will be looking for anecdotal evidence for production cuts," said Ric Spooner, chief market analyst at Sydney's CMC Markets. "The most likely scenario is OPEC and non-OPEC member countries will be committed to the deal, especially in early stages."

Puerto Rico's new gov seeks statehood to help end crisis

Puerto Rico's new governor was sworn in Monday, promising an immediate push for statehood in a territory facing a deep economic crisis.

Gov. Ricardo Rossello, 37, proposed several measures aimed at alleviating the crisis shortly after he was sworn in at midnight. Among them is a proposal to hold a referendum that would ask voters whether they prefer statehood or independence. Many have argued that Puerto Rico's political status has contributed to its decade-long crisis that has prompted more than 200,000 people to flee to the U.S. mainland in recent years.

"The United States cannot pretend to be a model of democracy for the world while it discriminates against 3.5 million of its citizens in Puerto Rico, depriving them of their right to political, social and economic equality under the U.S. flag," Rossello said in his inaugural speech, delivered in Spanish. "There is no way to overcome Puerto Rico's crisis given its colonial condition."

The crowd rose to its feet and cheered as Rossello announced that he would fly to Washington, D.C., Monday to back a bill to admit Puerto Rico as the 51st state. He also said he would soon hold elections to choose two senators and five representatives to Congress and send them to Washington to demand statehood, a strategy used by Tennessee to join the union in the 18th century. The U.S. government has final say on whether Puerto Rico can become a state.

Japanese white-collar workers are already being replaced by artificial intelligence

Most of the attention around automation focuses on how factory robots and self-driving cars may fundamentally change our workforce, potentially eliminating millions of jobs. But AI that can handle knowledge-based, white-collar work are also becoming increasingly competent.

One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with “IBM Watson Explorer,” starting by January 2017.

The AI will scan hospital records and other documents to determine insurance payouts, according to a company press release, factoring injuries, patient medical histories, and procedures administered. Automation of these research and data gathering tasks will help the remaining human workers process the final payout faster, the release says.

Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on the investment in less than two years.

Charged a Fee for Getting Arrested, Whether Guilty or Not

Corey Statham had $46 in his pockets when he was arrested in Ramsey County, Minn., and charged with disorderly conduct. He was released two days later, and the charges were dismissed.

But the county kept $25 of Mr. Statham’s money as a “booking fee.” It returned the remaining $21 on a debit card subject to an array of fees. In the end, it cost Mr. Statham $7.25 to withdraw what was left of his money.

The Supreme Court will soon consider whether to hear Mr. Statham’s challenge to Ramsey County’s fund-raising efforts, which are part of a national trend to extract fees and fines from people who find themselves enmeshed in the criminal justice system.

Kentucky bills people held in its jails for the costs of incarcerating them, even if all charges are later dismissed. In Colorado, five towns raise more than 30 percent of their revenue from traffic tickets and fines. In Ferguson, Mo., “city officials have consistently set maximizing revenue as the priority for Ferguson’s law enforcement activity,” a Justice Department report found last year.

Venezuela Government Said to Sell $5 Billion of New Dollar Bonds

Venezuela’s central government has issued new dollar debt for the first time in more than five years, selling $5 billion of the notes to state bank Banco de Venezuela SA and the central bank, according to a senior government official.

The bond, which was issued Dec. 29, matures in 2036 and has a coupon of 6.5 percent, according to data complied by Bloomberg. The government official, who wasn’t authorized to discuss the issuance publicly, didn’t provide additional details.

Cash-strapped Venezuela has been forced over the past several years to reduce imports of essential items including food and medicine to stay current on its foreign debt obligations. In October, state oil company Petroleos de Venezuela SA completed a swap in which creditors holding $2.8 billion of bonds agreed to extend maturities after weeks of tense negotiations that included dire warnings from Caracas of a possible financial collapse.

The few details known about the new bond issuance -- the first such sale since October 2011 -- suggest it might be linked to Chinese lending, according to Francisco Rodriguez, the chief economist at Torino Capital in New York.

Gold edges up despite firm dollar

Gold began the new year quietly, edging up slightly on Tuesday, despite pressure from a strong dollar. Spot gold rose 0.2 percent to $1,154.26 per ounce at 0109 GMT. Bullion gained more than 8 percent in 2016, snapping three years of declines. U.S. gold futures rose 0.3 percent at $1,155.4

The most active COMEX gold futures contract finished 2016 up 7.1 percent as compared to the end of 2015 after strong gains on economic uncertainty earlier in the year were pared by heavy selling as the U.S. dollar rallied following the U.S. presidential election.

The dollar index - which measures the greenback against six major rivals - climbed over half a percent. The U.S. dollar held on to broad gains on Tuesday, resuming its ascent after last week's brief wobble as the prospect of rising U.S. interest rates this year kept sentiment bullish on the long-run.

Asian stocks began 2017 on a flat note on Tuesday, uninspired by a surge in European markets to their highest in more than a year, while the dollar resumed its climb after last week's stumble.

French workers can ignore work emails

Sanctuary Cities Freed 2,000 Migrants in FY 2016

More than 2,000 illegal immigrants have been freed from sanctuary cities’ police departments in fiscal year 2016 instead of being handed over to federal immigration officials.

In a year-end report from the Department of Homeland Security, nearly 279 sanctuary cities were detailed responsible for the release of illegal immigrants back onto the streets as the municipalities continue to refuse adherence to federal immigration law, according to the Washington Times.

Federal immigration officials reported that they are on track to surpass the 2016 record of freed illegal immigrants in the first two months of FY2017. The report also mentions how border agents are seeing a surge of migration most recently, while only 114,000 illegal immigrants were actually captured by the Immigration and Customs Enforcement (ICE) agency last year.

As the Washington Times notes, those caught by ICE represent a mere one percent of the over 11 million illegal immigrants who are documented to be living in the country. “More than 90 percent of those ICE apprehended had criminal convictions, had gang ties, were deemed national security risks, were new illegal arrivals or were defying active orders of deportation,” the Washington Times noted.

At $125,000 Per Dose, Will This Be the Most Expensive Drug in the World?

The Food and Drug Administration has approved the first drug to treat patients with spinal muscular atrophy, a disease that, in its most severe form, kills infants before they turn 2. “This is a life-changing event, and this will change the course of this disease,” Dr. Mary K. Schroth, a lung specialist in Madison, Wisconsin, who treats children who have the disease, said of the approval, which was made last week. Schroth has worked as a paid consultant to Biogen, which is selling the drug.

The drug, called Spinraza, by some estimates will be among the most expensive drugs in the world. Biogen, which is licensing Spinraza from Ionis Pharmaceuticals, said one dose will have a list price of $125,000. That means the drug will cost $625,000-$750,000 to cover the five or six doses needed in the first year, and about $375,000 annually after that, to cover the necessary three doses a year. Patients will presumably take Spinraza for the rest of their lives.

The pricing could put the drug in the cross hairs of lawmakers and critics of high drug prices, and perhaps discourage insurers from covering it. Geoffrey C. Porges, an analyst for Leerink Partners, said the price could lead some insurers to balk or to limit the drug to patients who are the most severely affected, such as infants, even though the FDA has approved Spinraza for all patients with the condition.

The price of the drug would be comparable to some other drugs that treat rare diseases. A spokeswoman for Biogen said the company set the price after considering several factors, including the cost to the health care system and the clinical value it brought to patients. Ligia Del Bianco, the spokeswoman, said Biogen had set up a program to help families navigate insurance approvals and other logistics, and will provide financial assistance.

How the US Could Win a Trade War With China

Donald Trump talks tough on China and has appointed trade hawks Wilbur Ross and Peter Navarro to key positions in his administration. He has threatened to slap a blanket tariff on Chinese goods and talked directly to Taiwan’s President, previously regarded as a major diplomatic offense.

According to “Road to Ruin” author James Rickards, this is Trump’s way of opening the negotiations with China to reach a mutually beneficial trade relationship.

“[He] is saying to China: ‘Here is where we are going to start, what have you got for us? Are you willing to be more flexible on foreign direct investment, are you willing to treat U.S. companies in China more fairly, are you willing to stop the theft of intellectual property?’ If China makes concessions on these points he can say ‘fine, now my tariff is [lower].’ It’s the art of the deal; people don’t understand that about Trump,” Rickards told the BBC.

However, in any deal, the other party also has some negotiating chips on the table and China, for example, can hurt American companies exporting to China or American companies operating in China.

Harder To Replace ObamaCare Than Repeal It?

What led Fed to bump up rate-hike forecast?

The Federal Reserve tossed some cold water on the recent market rally a few weeks ago when it not only raised interest rates as expected but forecast three rate hikes in 2017 instead of the two moves anticipated. Fed meeting minutes out this week are likely to shine more light on what Fed policymakers were thinking. The week’s economic news also spotlights the final jobs report of the year and measures of manufacturing and service-sector activity.

Manufacturers have endured a rough couple of years as a result of the oil downturn and sluggish exports – a byproduct of a strong dollar and weak global economy. But oil prices rebounded partly in 2016, prompting crude producers to reopen shuttered wells and order more steel pipes. And the dollar had stabilized until a recent upturn. Also, inventories are depleted after businesses reined in stockpiling in 2016, leaving them poised to ramp up orders, says Stuart Hoffman, chief economist of PNC Financial Services Group.

Yet the greenback has strengthened again, raising concerns about exports in coming months. And automakers appear set to trim production early in 2017 to offset high output recently, Hoffman says. Economists surveyed by Action Economics estimate ISM’s manufacturing index, out Tuesday, will signal a slightly faster but still moderate expansion in December.

On Wednesday, the Fed releases minutes of its December 13-14 meeting, which featured its first rate hike in a year. Fed Chair Janet Yellen told reporters that President-elect Donald Trump’s proposal to beef up infrastructure spending and cut taxes “may have been a factor” in policymakers’ median forecast of three rate increases next year, up from two in their previous estimate.

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