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Friday 09.09.2016

KKR: Fed to keep rate below 1% through at least 2020

The Fed will be staying lower for longer — a lot longer, in fact, if a forecast from a major private equity player is accurate.

With the market wondering whether the U.S. central bank will hike rates at its Sept. 20-21 meeting, private equity giant KKR believes those anticipating that the Fed will resume its tightening cycle anytime soon are misreading statements from Chair Janet Yellen and others.

In fact, KKR said the Fed is on a long-term dovish cycle unlikely to change for years. The firm specifically cites remarks that Yellen made at the Jackson Hole, Wyoming, summit in late August, when she said the "neutral" funds rate, or the level that maintains an economic equilibrium, is lower than the Fed and the market had thought and "could stay low for a prolonged time."

"Not surprisingly, given all these types of remarks as well as sluggish growth, the fed funds rate is now below 1 percent and we think it ... could trend below 1 percent until at least 2020," Henry H. McVey, KKR's head of global macro and asset allocation, said in a report for clients.

5,300 Wells Fargo employees fired over 2 million phony accounts

Everyone hates paying bank fees. But imagine paying fees on a ghost account you didn't even sign up for. That's exactly what happened to Wells Fargo customers nationwide. On Thursday, federal regulators said Wells Fargo employees secretly created millions of unauthorized bank and credit card accounts -- without their customers knowing it -- since 2011.

The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money.

"Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses," Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.

Wells Fargo confirmed to CNNMoney that it had fired 5,300 employees related to the shady behavior over the last few years. Employees went to far as to create phony PIN numbers and fake email addresses to enroll customers in online banking services, the CFPB said.

Does Helicopter Money And The Size Of Central Bank Balance Sheets Matter?

Monetary policy accommodation has consequences, a Barclays report points out, as fiscal stimulus and contritely named helicopter money may point to the next reluctant leg in governments trying to jump start generally well-performing regional economies. But is there a point when too much debt overwhelms? Or don’t central bank balance sheets matter?

There is a decided trend divergence among central bank balance sheets. As the Bank of Japan and European Central Bank balance sheets sprint to over 80% of their regional Gross Domestic Product – with projections having them hit 100% as 2018 approaches – the U.S. Federal Reserve, currently near 65%, is projected to slowly fall.

There has been an active discussion among market professionals and certain market focused economic PhDs that a “limit” to government debt exists. This red line in the sand is mostly considered the point at which market forces, having witnessed the abandonment of free market principles and traditional supply and demand value economics, withdraw support from the market, leaving the central bankers as the primary bid and ask in a centrally planned market.

There were limits put in place on central bank asset purchases for a reason. Having an “artificial bid,” as Bill Gross and several market participants call it, predominate a market is unhealthy. The central bank central planners were not allowed to exceed a 33% market asset ownership threshold, which keeps free market forces alive. It isn’t much discussed in the mainstream, but this is a key point of defense for free market advocates. With an eye to central banks not entirely overwhelming market forces, the limit is in place to keep a competition buffer in place. There is a problem, however. The magic people don’t like to face market forces. As the ECB is approaching the limits of what it can purchase, talk of breaking the previously set rules predominate. As 2017 comes to a close, those limits could be breached.

Dell Plans Big Job Cuts As EMC Deal Closes

Dell Technologies, which completed the acquisition of data storage company EMC Corp on Wednesday, will cut 2,000-3,000 jobs, Bloomberg reported. Most of the job cuts will be in the United States, Bloomberg reported on Thursday, citing people familiar with the matter.

The layoffs will be mainly in supply chain, marketing and general and administrative divisions, Bloomberg said, adding that the combined company has 140,000 employees.

“As is common with deals of this size, there will be some overlaps we will need to manage and where some employee reduction will occur,” Dell spokesman Dave Farmer said. He, however, declined to comment specifically on the report.

Dell, which was taken private by founder Michael Dell along with private equity firm Silver Lake Management in 2013, agreed to buy EMC for $67 billion in October last year.

Consumer credit rises more than expected in July

US consumer credit balances rose by $17.71 billion in July, according to the Federal Reserve.

Economists had estimated that credit balances increased to $16 billion, according to Bloomberg. Outstanding revolving credit, which includes credit-card purchases, rose at a 3.4% annual rate to $969 billion.

Non-revolving credit — the type in which accounts close once all payments have been made — rose at a 6.7% annual rate to $2.7 trillion.

The increases in credit balances were reflected in data on consumer spending released late in August by the Commerce Department. Personal spending rose 0.3% in July, and spending in the prior month was revised higher, suggesting that consumers could continue to be a crucial boost to overall economic growth in the third quarter.

Hanjin Bankruptcy: a Harbinger for the Global Economy?

South Korea's Hanjin Shipping was the world’s seventh-largest container shipping company, moving (until last week) 100 million tons of cargo on its 200 cargo ships from manufacturers to retailers across the globe. Last week, following years of losses as the global economy has slowed, Hanjin declared bankruptcy. That move stranded 90 of those ships as off-loading companies refused to unload them over concerns that they wouldn’t be paid.

Even an offer of $90 million from what’s left of Hanjin (including $36 million from the personal assets of its chairman) fell far short of the necessary $543 million estimated to unload all of its ships that are now circling ports around the world.

Concerns are mounting that the delay in offloading (retailers are scurrying to make other arrangements to get access to their goods in time for the holiday season) will impact Black Friday shopping and well into the Christmas season. Samsung, for example, has an estimated $40 million worth of refrigerators and other appliances, along with Galaxy smartphones and other “visual” products, waiting to be unloaded.

The offloading is being complicated by creditors seizing some of those ships as collateral for loans they’ve made to Hanjin over the years. What’s surprising is that Hanjin’s bankruptcy has caught the national media by surprise. The Wall Street Journal published a major article on Hanjin’s difficulties on Wednesday, managing to say nothing about Hanjin being the first example of what is likely to be a series of similar bankruptcies occurring all across the international supply chain.

Why the Blockchain Is Perfect for Government Services

Government services are one of the most obvious and immediate application areas for the blockchain. Several governments around the world are already working on a variety of initiatives. Let me illustrate via some examples, what cities, municipalities and governments around the world are currently doing and planning with the blockchain in the first half of 2016.

In Delaware, the state where a majority of new companies in North America will likely incorporate, Governor Jack Markell announced two recent blockchain initiatives, under the banner “Delaware is open for blockchain business”. The first was about moving state archival records to an open distributed ledger. The second allows any private company that incorporates in that state to keep track of all the equity issued and the different shareholder rights on the blockchain.

In Singapore, the government has turned to blockchain to prevent traders from defrauding banks. This was driven by an incident where Standard Chartered lost nearly $200 million from a fraud in China’s Qingdao port two years ago. Fraudulent companies used duplicate invoices for the same goods to get hundreds of millions of dollars from banks, so the Singapore government developed a system with the local banks focused on preventing invoice fraud by having the blockchain create a unique cryptographic hash (a unique fingerprint) of every invoice. The banks share then, this unique key, rather than the raw data. If another bank tries to register an invoice with the same details, the system will be alerted.

Estonia came up with the idea of establishing an e-residency program, where anyone in the world could apply to become an e-resident of Estonia, and they get a digital ID card with a cryptographic key to securely sign digital documents, eliminating the need for ink signatures on official paperwork. An e-resident can also open bank accounts using Estonia’s e-banking system, set up an Estonian company using the country’s online system, and use their e-services. With the blockchain, Estonia is bringing worldwide residents to them virtually, and increasing their government revenues accordingly.

Goldman bars Trump donations, Gilder on “The Scandal of Money”

Will Deutsche Bank Collapse the Global Market?

The past year has seen its fair share of worries. From the China slowdown to the Brexit, successive waves of overseas fear have rolled onto our shores since 2015, yet none of them were the Tsunamis the bears had predicted.

The latest foreign fear concerns the possibility of a global credit crisis led from the collapse of a major international bank. A simplified summary of this scenario goes something like this: Deutsche Bank is on the brink of bankruptcy, and its insolvency could spark a systemic European banking crash. The crash in its turn could send shockwaves throughout the global financial system, resulting in widespread economic turmoil on par with the previous worldwide crisis.

Commentators who favor this outlook tend to illustrate their dire predictions with a graph of Deutsche Bank’s stock performance since last year. It certainly adds a spark of credence to their argument based solely on the depth of the stock’s plunge.

One commentator has gone so far as to assert that “if Deutsche Bank goes under it will be Lehman times five!” Other observers have expressed a similar concern, albeit in fewer alarmist terms. The International Monetary Fund (IMF) labeled Deutsche Bank as the riskiest financial institution. The argument goes that since Deutsche Bank is linked with other publicly traded banks and insurance companies, it has the potential to be the source of another worldwide financial contagion should the bank collapse.

Federal Reserve asks Congress to limit Wall Street merchant banking

The Federal Reserve Board recommended that Congress pare back Wall Street's ability to own physical commodities and engage in other aspects of merchant banking because of possible risks to the financial system, according to a report issued on Thursday.

U.S. lawmakers should repeal permission granted in 1999 for Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) to conduct activities like storing and transporting physical commodities that other banks cannot do, the Fed said jointly with two other regulators.

Fed Governor Daniel Tarullo had already expressed misgivings about the commodities exemption, so the Fed's position was somewhat expected. The Fed's opposition, however, to merchant banking, was something of a surprise.

Merchant banks take direct ownership shares in non-financial businesses. The report was required under Dodd Frank, the Wall Street reform law, which required the Fed, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency to report to Congress on the types of banking activities that might pose risks to the financial system. Existing rules allowing commodity investments raise "safety and soundness concerns as well as competitive issues," the Fed said.

Illinois pension funds more than $100 billion in the hole

Got a spare $8,600? That’s how much you and every other man, woman and child in Illinois would have to pay to immediately to fully fund the state’s pension system out of pocket. That’s based on numbers from the Commission on Government Forecasting and Accountability.

Don’t panic: Billing more than 12 million Illinoisans for nearly $9,000 apiece is not one of the proposed solutions to the pension crisis — but it illustrates how far in the hole the funds are and what an $111 billion unfunded liability means to regular people. Does a $111 billion shortfall sound bad? It’s worse than you think.

“Illinois’ pension system is among the worst-funded in the country,” said Abhijeet Bhattacharya, an economics instructor at Illinois Valley Community College. “The unfunded pension liability is causing the downgrade of Illinois’ credit. It is important for Illinois to restore the business community’s confidence. Far too much revenue goes to meet pension costs.”

And the revenue sucked up by pensions is going to grow. The unfunded liability is not what the pension funds are owed right now. Rather, the liability is how much the state expects to owe in the future — and which the state won’t be able to pay. Illinois state pensions are structured as defined benefit plans; that means the payout amount is set for the lifetime of the pensioner. It differs from 401k plans in that while a pension plan will make investments, the payout is the same no matter how the investments perform.

Gold Will Keep Climbing as Long as Yellen Keeps Experimenting

$9 trillion and counting: How central banks are still flooding the world with money

The money printing presses are spinning fast. The world's four most powerful central banks have pumped more than $9 trillion into the global economy since the financial crisis in a bid to boost growth, inflation and employment. That's a huge number, equivalent to the value of all the goods and services the U.S. produces in six months.

"If you brought a group of economists from 2008 to the present day and told them that central banks had bought $9 trillion in assets and were still looking for ways to boost inflation, I don't think they would believe you," said Michael Pearce, global economist at Capital Economics.

Central banks started creating new money in vast quantities as the world went into recession. The plan was simple: Injecting more money into the system would encourage commercial banks to lend, which would in turn lead to more business and household spending.

In normal times, it is enough for central banks to cut interest rates to prompt lending. But record low interest rates, and in some cases, negative interest rates weren't doing enough. So they turned to stronger medicine and experimented with buying bonds to flood markets with new money. Experts are divided over whether it works.

Gallup: 51% of Americans Disapprove of Obamacare; Record 29% Say It Has Hurt Them

"Do you generally approve or disapprove of the 2010 Affordable Care Act, signed into law by President Obama that restructured the U.S. healthcare system?"

In response to that question posed by Gallup on Aug. 30-31, 51 percent of those polled said they disapprove of the Affordable Care Act, and 44 percent said they disapprove. Gallup noted those numbers are similar to the responses measured last November.

Gallup also found that 29 percent of Americans say Obamacare has hurt them and their family, up from 26 percent in May. That 29 percent is the highest Gallup has measured so far.

Meanwhile, the percentage who say Obamacare has helped their family dropped from 22 percent to 18 percent. The bulk of Americans, 51 percent, continue to say the law has "had no effect."

Millionaire Busted For Taking Food Stamps, Welfare

An Ohio man with ties to Iranian royalty was busted for accepting thousands of dollars in food stamps and welfare, despite being a millionaire with a Swiss bank account.

Police raided the expansive estate of Ali Pascal Mahvi last week to investigate potential theft, Medicaid and welfare fraud. “It’s outrageous to see a situation where somebody is living in a house almost worth a million dollars, a horse barn, driving luxury cars, have millions of dollars in overseas bank accounts and here they are accepting this type of assistance,” James R. Flaiz, Geauga County prosecutor, told Ohio NBC affiliate WKYC.

Investigators say Mahvi and his family own an 8,000 square foot home worth about $800,000, complete with horse stables and a four-car garage where detectives found a BMW and Lexus.

The family pays a $4,600 mortgage each month, a $567 cell phone bill, $200 in restaurant meals and $350 for cable TV. The Mahvi’s claimed zero income on their Medicaid applications though, and received $300 per month for the past two years in food stamps. They borrowed $25,000 from friends, WKYC reports.

Don’t Blame A ‘Skills Gap’ For Lack Of Hiring In Manufacturing

U.S. factories are hiring again. Or they’re trying to, anyway. Manufacturers posted 379,000 job openings in July, the Bureau of Labor Statistics reported Wednesday. That’s up more than 280 percent — close to quadruple — since the recession ended more than seven years ago.

When it comes to actually filling those jobs, though, the rebound has been far more gradual. Hiring is up just 36 percent since the end of the recession and has been pretty much flat over the past year. Tens of thousands of manufacturing jobs are going unfilled.

What’s behind that gap? The Wall Street Journal last week offered a simple explanation: Companies can’t find enough skilled workers. Manufacturing jobs have become more technical, but workers haven’t kept up. That’s left companies with a glut of low-skilled workers and a shortage of applicants who can really do the job.

This “skills mismatch” theory is a favorite of corporate executives and the think tanks they fund. But it is based on scant evidence. Individual companies may be struggling to fill specific jobs, but the data shows little sign of an industrywide shortage of skilled workers. In fact, it’s not clear that companies are really trying hard to fill many of these jobs at all.

Fed Hasn’t Had Credibility Since Greenspan

Janet – You Gonna Have Some ‘Splainin To Do!

For those who might not get the intended pun in the above title, it’s a play on words Ricky Ricardo (Desi Arnaz) would use when demanding his wife Lucy (Lucille Ball) as to explain whatever mischief or crisis she suddenly found herself in on the “I Love Lucy” show. I think it fits the bill today as to describe just what type of “mischief” or “crisis” the now Chair of the Fed., Janet Yellen may now find herself painted into. The only issue that’s not laughable for the comparison is the fact that Lucy’s escapades were fictional. Ms. Yellen’s are going to be on public display in an all too real reality – although it might be quite the spectacle rivaling anything on current reality television.

As I’m typing this it has been less than 48 hours since presidential candidate Donald Trump gave a speech in Philadelphia calling for a vast expansion of the military. Already there are arguments across the media about “how to pay” for such an expansion. As usual the main stream outlets are throwing “cold water” all over such an idea. After all, it’s easy to say “We can’t afford it!” Easy to say yes, but the problem is – the same outlets have praised how easily we could afford, and “can do more!” to cure the ills of this current economic malaise via The Federal Reserve and its toolbox of monetary magic.

Now let me say this directly, and as forcefully as I can so that there is no misinterpretation of what I’m stating here: I am not endorsing one candidate or another. I’m not saying I agree or disagree with either’s positions or proposals. That is for you to decide. What I am stating is a factual based retort that has ramifications for all of us because regardless of who wins, the facts are the facts, and it will be from the next victor of the “bully pulpit” that the current Fed. Chair will need to explain why she can – or – why she can’t do “X” when it was they themselves who are the ones that showed the world how money ex nihlo truly works.

As of today the Fed. has swollen its balance sheet to some $4,500,000,000,000.00 That’s 4.5 TRILLION (give or take a few Billion, but what’s a few Billion among friends, right?)

Could the Fed wipe out all of America's student debt?

Green Party nominee Jill Stein has been trying to make a mark on the 2016 presidential race by calling for the cancelation of all student debt. And she says the Federal Reserve could do it with a wave of its magic monetary wand.

Stein compared her plan to quantitative easing, where the Fed bought financial instruments built on housing debt off the big banks as a way of injecting more cash into the financial system: "It's simply a debt that was bought up by the U.S. government, and then essentially zeroed out, canceled," she said. "So that's exactly what we are calling for here."

This horribly mangles the mechanics of monetary policy. Critics rightly pounced on Stein. But the question still begs: Could the Fed buy up and then wipe out all of America's student debt?

The Federal Reserve is weird. It's basically a bank for the banks, with the power to create money out of thin air, in order to backstop our economy's financial system and prevent destructive collapses. (Like it did in 2008.) The main way it exercises those powers and obligations is by buying and selling financial instruments. Most of the time, that's U.S. government debt — i.e. U.S. Treasury bonds. But the Fed can also get creative and buy other stuff, like mortgage-backed securities. (Like it did with quantitative easing.) Crucially, though, the Fed didn't "forgive" that debt. That's where Stein's narrative really goes off the rails: The people who owed the mortgages were still legally obligated to pay down their debts. All that changed was who owned that debt.

Drones Will Deliver Chipotle Burritos to Virginia Tech Students

Dreams of having a burrito fall from the sky during a prolonged study session just got real for students at Virginia Tech. Thanks to a partnership between Alphabet X and Chipotle, the school will begin testing a burrito drone delivery service later this month.

“I see package delivery as one of the biggest challenges to unmanned aircraft delivery,” Mark Blanks, the director of the Virginia Tech Mid-Atlantic Partnership, tells Inverse.

The Pilot Wing deliveries will be delivered in a closed, FAA-approved site with a Chipotle truck on site. This comes after the White House announced in August they would give Pilot Wing special permission to test drone delivery in regulated zones. Unfortunately, this means the delivery service will only be tested by select student and staff volunteers, not available to Hokies at-large.

Virginia Tech was named one of six national drone test sites by the Federal Aviation Administration in 2012. While the project has experimented with medicine delivery in the past, this is the first time they will attempt to deliver spicy fresh food. Neither Pilot Wing nor Blanks could speak to why Virginia Tech was chosen for the testing. A spokesperson for Pilot Wing was unable to clarify why Chipotle was chosen for the project but stated that the company will not profit from the orders.

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