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Thursday 04.06.2017

Half of US working families are living paycheck to paycheck

More than seven years after the Great Recession officially ended, there is yet more depressing research that indicates at least half of Americans are vulnerable to financial disaster.

Some 50 percent of people are woefully unprepared for a financial emergency, new research finds. Nearly 1 in 5 Americans (19 percent) have nothing set aside to cover an unexpected emergency, while nearly 1 in 3 Americans (31 percent) don’t have at least $500 set aside to cover an unexpected emergency expense, according to a survey released Tuesday by HomeServe USA, a home repair service. A separate survey released Monday by insurance company MetLife found that 49 percent of employees are “concerned, anxious or fearful about their current financial well-being.”

One explanation: Americans are crippled under the same amount of debt as they had during the recession. The New York Federal Reserve on Monday predicted that total household debt will reach its previous peak of $12.68 trillion in 2017. The last time it reached that level was in the third quarter of 2008, during the depths of the Great Recession. Indeed, it’s already close: Total household debt in the fourth quarter of 2016 was $12.58 trillion. Fewer borrowers have housing-related debt in 2017 and, instead, have taken on auto and student loans.

One illness can push people to the brink of financial ruin. Wanda Battle, a registered nurse for four decades, was recently hit with a $100,000 medical bill. She has visited her local emergency room on more than one occasion due to severe migraines and mini-strokes. Battle, who is based near Nashville, Tenn., managed to reduce her latest hospital bill to $32,000 based on her relatively low income, but still faces $650 monthly payments for a previous $22,000 medical bill. “There were times I couldn’t work,” she told MarketWatch. “I have not held a job that is continuous.”

Former Fed advisor says the central bank shouldn't comment on equities

Federal Reserve officials commented on the stock market in March, as minutes from the Federal Open Market Committee meeting revealed the central bank is working to reduce its $4.5 trillion in bonds on its balance sheet this year.

Danielle DiMartino Booth, a former Dallas Fed advisor and president of Money Strong, said on CNBC's Power Lunch on Monday, "It always makes me uncomfortable," when the central bank comments on U.S. equities.

In the summary of the March meeting, Fed members "commented that the recent increase in equity prices might in part reflect investors' anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy, which might not materialize. They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives."

"I don't think it's necessarily the purview of central bankers to comment on this," DiMartino Booth said. She said the Fed's comments on the market shows "they are also verbally concerned about financial instability," and may consider it when the Fed makes fiscal policy decisions, in addition to labor and inflation mandates.

Auto Subprime Trend Worsens, UBS and Morgan Stanley Warn

The trend in auto subprime loan area is worsening, two nearly identical reports from UBS and Morgan Stanley say. Defaults from undesirables are mounting as the loan standards have been loosened to 2008 housing crisis levels, an issue that has been documented in ValueWalk on several occasions. That trend has populist roots and is gaining strength and momentum signals point to potential downside deviation in the offing.

For all the talk of low unemployment and a great economy that is working for all Americans, one only needs to look at the root cause of rising delinquency rates in subprime auto loans to understand the problem. UBS Strategists Matthew Mish and Stephen Caprio point to a growing problem throughout the developed world: “consumer income inequality.” This coupled with “aggressive” lending standards being pushed by non-bank lenders, an issue raised in part by the New York Federal Reserve.

UBS says that “central bank reflation efforts,” mostly conducted through unconventional stimulus,” have been more successful at fueling wealth creation for a subset of the consumer.” The “subset” UBS refers to is the most affluent, an active topic of discussion. UBS notes that benchmarking an economy based only on the stock market has been “less effective in stimulating broader income growth,” particularly as the majority in the US don’t have the significant stock market or asset ownership exposure of the top 1% of society. Central bank stimulus has primarily benefited those with ownership of assets.

The market is shifting from a wealthy baby boom generation – benchmarked by their high quality borrowing standards – to a less credit worthy borrower, and it is here “the default risk lies.” The borrower and those the smaller organizations originating the loans have been accused of submitting false documentation or no documentation in order to borrow.

Did the Fed put an end to the Trump market rally?

New Wells Fargo CEO pens open letter thanking customers for their loyalty

It probably goes without saying that it’s been a rough few months for Wells Fargo. It all started with the shocking revelation of fake account scandal at the bank, which involved more than 5,000 of the bank’s former employees opening more than 2 million fake accounts to get sales bonuses.

The scandal led to a $185 million fine from the Consumer Financial Protection Bureau, the OCC, and the city and county of Los Angeles, and the shockwaves of that scandal are still reverberating.

Recently, the bank announced that its Community Reinvestment Act rating is being downgraded by the Office of the Comptroller of the Currency, due in part to the fake accounts.

The bank also announced recently that it reached a $110 million settlement in a class action lawsuit brought on behalf of the bank’s customers who had a fake account opened in their name. The scandal also led to the bank’s CEO stepping down, and the bank revoking millions of dollars in bonuses for its executives. And the fallout from the fake accounts is likely far from over.

The Fed wants to start shrinking its $4.5 trillion balance sheet later this year

Most members of the Federal Open Market Committee believe it should start shrinking the Federal Reserve's $4.5 trillion balance sheet later this year, according to minutes from their mid-March meeting.

The Fed amassed assets by buying Treasurys and other mortgage-related securities during the financial crisis to keep interest rates low.

Combined with increasing the fed funds rate, reducing the balance sheet would contribute towards normalizing monetary policy.

"The fact that we're all hanging on to every utterance by the Fed is just an indication that they are also trying to get back to a place of normalcy after seven to eight years of emergency policy," said Karissa McDonough, the chief fixed income strategist at People’s United Wealth Management.

Nearly 30% of Arizona's part-time workers want a full-time job but can't find one

Arizona has one of the highest rates of underemployed workers in the nation — a situation that can keep people in poverty, lacking benefits and facing other financial problems, according to a new Federal Reserve report.

In Arizona, 29 percent of part-time workers said they'd prefer full-time employment but haven't been able to find it, according to the report released Tuesday by researcher Leilani Barnett of the Federal Reserve Bank of San Francisco.

Nationally, 21 percent of part-time workers were in that status involuntarily, according to the study, citing 2014 data. Only Nevada and California had higher rates of involuntary part-time workers, at 33 percent and 30 percent.

Women overall are more likely to work part time compared with men, but African-American and Latina women are far more likely to do so involuntarily because of an inability to find full-time employment, the report said.

Gold Finds Strong Support from Negative Real Rates

In case you haven’t already noticed, inflation has been steadily creeping up since July. In February, the most recent month of available data, consumer prices advanced at their fastest pace in five years, hitting 2.7 percent year-over-year. March data won’t be released until next week, but I expect prices to proceed on this upward trend, buttressed by rising mortgages and costs associated with health care and energy.

One of the consequences of strong inflation is that real rates—what you get when you subtract the current consumer price index (CPI) from the nominal rate—have turned negative. And when this happens, gold has typically been a beneficiary. This is the Fear Trade in action.

Gold shares an inverse relationship with the real 10-year Treasury yield, which is influenced by consumer prices. When inflation is soft and the yield goes up, gold contracts. But when inflation is strong, as it is now, it can push the Treasury yield into subzero territory, prompting many investors to move into other so-called safe haven assets, including gold.

I expect consumer prices to continue rising, especially if President Donald Trump gets his way regarding immigration and trade. Slowing the stream of cheap labor from Mexico and other Latin American countries, coupled with raising new tariffs at the border, should have the effect of making consumer goods and services more expensive. Although it might sting your pocketbook, faster inflation could be constructive for gold investors.

Bebe will close 21 stores as it works to overhaul its business

Amid speculation that Bebe Stores will shutter all of its shops to become an online-only retailer, the specialty women's apparel chain says it has committed to closing 21 locations. That represents some 12 percent of its outlets.

In a filing with the Securities and Exchange commission on Wednesday, Bebe said it will incur an impairment charge of approximately $2 million from the closures. It will pay a termination fee of roughly $7.4 million.

The company, which is in the process of exploring strategic alternatives for its business, will continue that work with its remaining stores, it said in the filing.

A spokeswoman for Bebe did not immediately respond to CNBC's request for additional information. Speculation has been swirling that Bebe could be one of the next retailers to join a growing list of companies that have filed for Chapter 11 bankruptcy protection this year. That includes Payless ShoeSource, which said Tuesday that it would shutter some 400 stores as it tries to reorganize.

Feds Paid $6 Million While Facing Misconduct Investigations

Department of the Interior (DOI) officials were paid $6 million while on extended administrative leave – often while under investigation for misconduct – without documented approval, a government watchdog reported Wednesday.

The $6 million went to 242 DOI employees on administrative leave for at least 45 days between January 2013 and July 2016, the agency’s Inspector General (IG) reported.

“DOI did not sufficiently document decisions made regarding the use of extended administrative leave, resulting in inefficient management and oversight,” the report said.

“If DOI management does not appropriately maintain documentation … DOI cannot demonstrate that it has properly managed its use of extended administrative leave or that it has not wasted taxpayers dollars by paying employees not to work.”

Bezos is selling $1 billion of Amazon stock a year to fund rocket venture

Amazon.com founder Jeff Bezos said on Wednesday he is selling about $1 billion worth of the internet retailer's stock annually to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year.

Blue Origin had hoped to begin test flights with company pilots and engineers in 2017, but that probably will not happen until next year, Bezos told reporters at the annual U.S. Space Symposium in Colorado Springs.

“My business model right now … for Blue Origin is I sell about $1 billion of Amazon stock a year and I use it to invest in Blue Origin," said Bezos, the chief executive of Amazon.com Inc (AMZN.O) and also the owner of The Washington Post newspaper.

Ultimately, the plan is for Blue Origin to become a profitable, self-sustaining enterprise, with a long-term goal to cut the cost of space flight so that millions of people can live and work off Earth, Bezos said. Bezos is Amazon's largest shareholder, with 80.9 million shares, according to Thomson Reuters data. At Wednesday's closing share price of $909.28, Bezos would have to sell 1,099,771 shares to meet his pledge of selling $1 billion worth of Amazon stock. Bezos' total Amazon holdings, representing a 16.95 percent stake in the company, are worth $73.54 billion at Wednesday's closing price.

Pinal County, Arizona gives no sanctuary from federal law

Are Student Loans the Next Financial Bubble?

Over the past 15 years, Congress enacted a bevy of laws in an attempt to reform financial and disclosure legislation. From Sarbanes-Oxley to Dodd-Frank, the goals of such legislation include increased transparency, a boost in consumer protection and, of course, shirking the onset of another financial crisis.

But the outcome is far from perfect – as evidenced by Wells Fargo’s ongoing scandals and the rise of unregulated shadow banking. With a new presidential administration keen to eliminate reforms that seek to rein in the excesses of the financial industry, watch for new economic risks to emerge in the next few years.

One of those risks is America’s mounting student debt, which is well over $1.4 trillion. According to MarketWatch, this figure rises at a rate of $2,726 a second.

In the wake of the global financial crisis of 2008, some commentators suggested forgiving some student debt as an attempt to relieve young workers and revitalize the middle class. But do not expect anything approaching that idea over the next four years. And now one student loan company, which has been sued in the past for its dubious business practices, has found itself in court again. As Bloomberg reported, in response to a lawsuit from federal regulators, Navient Corp. made it clear that its overarching goal is getting borrowers to “cough up cash” for creditors like its biggest client, the U.S. Department of Education.

Debt Ceiling Shutdown: What Would Happen if the US Government Shut Down For Good?

It’s that time of year again where the US government acts like it will “shut down” and argues about nonsensical things to try to make people believe they are somehow necessary.

In 2015, Congress suspended the ceiling, which let the government borrow as much as it wanted through March 15, 2017. On that date, the total national debt was $19.846 trillion, and the government can’t exceed that limit without approval from Congress.

In the meantime, the government uses all kinds of accounting tricks to shuffle the chairs around on the Titanic and all manner of vultures will be fighting over who gets the bounty of stolen funds extorted from Americans.

This type of thing has been going on for nearly a century. The very first “debt ceiling” was put in place exactly 100 years ago, in 1917, and nearly every year since then a group of parasites working for stolen money (taxes) gets together in a place called the opposite of progress, Congress, to act like they would ever shut down the very thing that employs them. It’s an exercise in stupidity, but it does lead to the question, what would happen if the US federal government shut down for good?

Republicans continue to debate over health care reform

Thousands fail background checks for Uber, Lyft

Massachusetts officials say more than 10 percent of drivers for ride-hailing companies Uber and Lyft have failed a required background check.

More than 62,000 drivers passed, including some who drive for both companies. About 8,200 failed the checks, which are required under a 2016 state law officials have called the most stringent in the country.

Of those who were denied, the figures released Wednesday show the largest number were turned away because their license had been suspended, they had been licensed to drive for less than three years, or they had multiple serious driving offenses. More than 300 applicants had felony convictions and 51 were registered sex offenders.

Uber issued a statement faulting the background process as too strict. “Thousands of people in Massachusetts have lost access to economic opportunities as a result of a screening that includes an unfair and unjust indefinite lookback period,” the statement read. “We have an opportunity to repair the current system in the rules process so that people who deserve to work are not denied the opportunity.”

Walmart's latest move confirms the death of the American middle class as we know it

Walmart is getting into aspirational retail — and it says a lot about the American economy. In recent months, Walmart has purchased a number of trendy, online retailers, including hip fashion brand ModCloth, outdoor gear retailer Moosejaw, and shoe store ShoeBuy.

These brands' wares are very different from the apparel stereotypically sold by Walmart, which is better known for its low prices than fashion innovation. ModCloth's dresses typically cost from around $60 to $150; Walmart's dresses are usually priced between $10 and $25.

"The acquisitions of ShoeBuy and Moosejaw, in addition to Hayneedle, gave us immediate expertise and capabilities in new, more upscale categories of merchandise," Walmart CEO Doug McMillon said in a call with analysts in February.

The addition of more "upscale" merchandise demonstrates the changes that the discount retailer has been forced to make as the number of potential middle-class customers plummet. Between 2000 and 2014, middle-class populations decreased in 95% of the 229 metropolitan areas reviewed in a Pew Research Center study.

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