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Tuesday 04.12.2016

Ben S. Bernanke: What tools does the Fed have left? Helicopter money

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated." (Milton Friedman, “The Optimum Quantity of Money,” 1969)

"The deflation speech saddled me with the nickname 'Helicopter Ben.' In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a 'helicopter drop' of money. Dave Skidmore, the media relations officer…had advised me to delete the helicopter-drop metaphor…'It’s just not the sort of thing a central banker says,' he told me. I replied, 'Everybody knows Milton Friedman said it.' As it turned out, many Wall Street bond traders had apparently not delved deeply into Milton’s oeuvre.” (Ben Bernanke, The Courage to Act, 2015, p. 64)

In previous posts, I discussed tools that the Fed might use in response to a future slowdown in the U.S. economy. I argued that, even if the scope for conventional interest-rate cuts is limited by already-low rates, the Fed has additional policy tools available, ranging from forward guidance about future rate policies to additional quantitative easing to targeting longer-term rates. Still, so long as people have the option of holding currency, there are limits to how far the Fed or any central bank can depress interest rates. [1] Moreover, the benefits of low rates may erode over time, while the costs are likely to increase. Consequently, at some point monetary policy faces diminishing returns.

When monetary policy alone is inadequate to support economic recovery or to avoid too-low inflation, fiscal policy provides a potentially powerful alternative—especially when interest rates are “stuck” near zero. [2] However, in recent years, legislatures in advanced industrial economies have for the most part been reluctant to use fiscal tools, in many cases because of concerns that government debt is already too high. In this context, Milton Friedman’s idea of money-financed (as opposed to debt-financed) tax cuts—“helicopter money”—has received a flurry of attention, with influential advocates including Adair Turner, Willem Buiter, and Jordi Gali.

Obama, Yellen ‘trade notes’ on risks to economy

Federal Reserve Chairwoman Janet Yellen and President Barack Obama met privately in the Oval Office on Monday to “trade notes” on the health of the U.S. economy.

In a statement, the White House said Obama and Yellen talked about the economic outlook, labor markets, inequality and “potential risks to the economy, both in the U.S. and globally.” White House spokesman Josh Earnest said before the meeting that it would be “an opportunity for them in some ways to trade notes on something they’re both looking at quite carefully.”

U.S. growth in the first quarter is expected to be weak, expanding at a 0.1% rate, according to a reading from the Atlanta Fed. But economists think growth will ratchet up in the second quarter.

Yellen said last week that the economy was on a solid course and would need more interest-rate hikes. Obama and Yellen also discussed government regulation of the nation’s biggest banks, the statement said.

Alcoa cuts jobs as sales fall 15%

Aluminium company Alcoa said on Monday that its sales and profits declined in the first quarter and revealed plans to cut jobs. The New York-based company posted a profit of $11m in the first three months of 2016, down from $255m in the same period in the year prior. Adjusting for one-time items earnings of 7 cents a share, topped estimates for 2 cents.

Sales fell 15 per cent on a year-on-year basis to $4.95bn, compared with analysts’ estimates for sales of $5.2bn, writes Mamta Badkar in New York. Alcoa also said it reduced its workforce by 600 positions in the first quarter and expects to cut another 400 jobs. The company added that it was evaluating an additional headcount reduction of up to 1,000 jobs.

In September, Alcoa said that it was splitting into two, with an upstream business that includes its smelting operations, and its downstream operations, which are focused on the units that make metals products.

A breakdown showed that revenue at Arconic, the name of its future downstream business, fell 2.2 per cent to $3.3bn. The company cited the impact from metal and the foreign exchange fluctuations for the decline in revenue at the division, which is expected to be faster growing.

Gold Finds Its Floor; Rallies To 3-Week High

Italy’s Banking Crisis Is Back—-Government Desperately Seeking Bailout

Italy is rushing to cobble together an industry-led rescue to address mounting concerns over the solidity of a banking sector whose woes pose a risk to the wider eurozone economy.

Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan. Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.

Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession. The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.

Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders. A second vehicle will seek to buy non-performing loans at market prices. “It is a backstop fund,” said one person involved in the talks.

Gold Prices Unlikely To Slow Down, $1,350/oz In 2017: Credit Suisse

Once again these are golden times for gold. The precious metal has regained some of the strength it lost over the last year after having a record high quarter in 2016. Gold prices gained 16% to 17% in the first quarter and are currently at $1,235/ounce. According to analysts at Credit Suisse, the precious metal is going to follow an upward trajectory throughout this year.

Michael Slifirski and Nick Herbert write in their FX and Commodities quarterly review that gold prices will peak at $1,350/ounce in the first quarter of 2017. The report further states that gold is likely to keep rising until the global economy stabilizes against fears of recession. Credit Suisse predicts a pullback in gold prices at the beginning of 2018 as real interest rates turn upwards. The CS analysts state their long term price estimate to be $1,200/ounce, reasoning that at this level, the demand and supply equation will be relatively balanced.

Market bears like Soceiete Generale’s Albert Edwards have already predicted that a recession in the U.S. has become inevitable. With all the doom and gloom, gold is bound to move further up as investors tend to grab “safe haven” assets in a bearish market. Other factors that are helping gold prices is the weaker U.S dollar and Federal Reserve’s decision not to hike rates.

Hedge funds and investment banks have once again become huge buyers of gold. There has been record buying in gold ETFs in the first quarter. The sudden price rally must have hurt the record number of short positions on gold futures that were held until the end of 2015.

Japan Needs Stronger Dollar, China Wants Weaker Dollar

Foreign exchange (FX) is a zero-sum game: if one currency weakens, another must strengthen. Since the value of a currency is relative to other currencies, all currencies can’t weaken together: at least one currency must strengthen as others weaken.

That one strengthening currency has been the U.S. dollar (USD) since mid-2014. The USD has strengthened by 20%, while the Japanese yen and the euro weakened by 20%. Many developing-economy currencies (rand, peso, real, etc.) have fallen off a cliff, suffering 40% to 50% (or even more) declines against the U.S. dollar.

Why does any of this matter? Simply put, the stock market is a monkey on a leash held by central banks–just give the leash a little tug, and the monkey jumps. Bonds are a gorilla–harder to control, but still manageable–but foreign exchange is King Kong, trading $5 trillion a day and impossible to control beyond short-term manipulations.

Currencies set the underlying trend, not just for bonds and stocks, but for entire economies. A weakening currency makes a nation’s exports cheaper in other countries, and the theory is that expanding exports will boost the overall economy–especially if that economy is stagnating or in recession. A weakening currency also makes imports more expensive in the domestic economy, pushing inflation higher–precisely what every central bank in the world desires, on the theory that inflation will make people spend more (since their money is losing value) and reduce the costs of borrowing (which is presumed to stimulate more borrowing and spending).

Junk Defaults to Rise to 4.6% in Next Year

Corporate defaults are set to rise due to deteriorating credit conditions across the globe, both Moody’s Investors Service and Deutsche Bank warned. Moody’s said in its March Default Report that the global default rate on junk bonds should rise to 4.6% in one year, from the current level of 3.8%, and reach 4.3% in the second quarter, surpassing the long-term average of 4.2% for the first time since August 2010.

“Although high yield spreads tightened over the past few weeks, the global default rate is anticipated to keep rising due to deteriorating credit conditions especially in commodity sectors such as oil & gas and metals & mining,” analysts at the ratings agency wrote.

For all Moody’s-rated oil and gas issuers in the U.S., default rates are very likely to remain at 10% over the next 12 months, Moody’s said, while rates should remain at 12.6% for metals and mining. In Europe, default rates are expected to be highest for oil and gas and media issuers.

Thirty-three Moody’s-rated issuers defaulted in the first quarter, 13 of which were from oil and gas and eight of which are metals and mining. In comparison, there were only 22 defaults in the same period of last year and 27% were contributed by commodity sectors. The most recent defaults in these sectors include Foresight Energy, Venoco, Rex Energy, Southcross Holdings, and Cliffs Natural Resources, with each defaulting on more than $500 million in debt.

Fed Official: America No Longer Top Country to Achieve American Dream

Federal Reserve official William Dudley said America is no longer the top country for achieving the American Dream in remarks on economic opportunity and income mobility at a conference in New York on Monday.

“While income mobility in the United States has been relatively unchanged, it remains well below several other nations,” Dudley said. “The probability of moving from the bottom quintile to the top quintile is 7.5 percent in the United States, as compared to 11.7 percent in Denmark and 13.5 percent in Canada—two countries with relatively high levels of intergenerational mobility.”

“So effectively the chance of achieving the American Dream is not the highest for children born in America,” Dudley said. Dudley, who is president of the Federal Reserve Bank of New York, made the comments at a conference hosted by the Association for Neighborhood and Housing Development, where he discussed what is going on at the grassroots level of the economy and shared data on the health of household balance sheets at the state and local levels.

“Broadly, the economy’s potential growth rate depends on effectively investing in and taking advantage of all of the resources in the economy—in particular, we need to achieve the full potential of the human capital of all Americans,” Dudley said. “For the United States to reach its maximum economic potential, all Americans must have the opportunity to reach their potential.” According to Dudley, income mobility is an essential component of the American Dream. He also distinguished the difference between income mobility and income inequality.

Why Bankers Hate It When You Hold Cash

In an extraordinary turn of events, last week we were contacted by our local bankers. Since we were turned down for a mortgage in 1982 (our business finances were thought to be “too shaky”), we have had little truck with them.

We pay cash. They mind their own business. But for the first time we can recall, not just one but three suits came to visit. Personable and intelligent, they were worried when they saw how much cash we were keeping on hand. No kidding. They came to visit to propose ways we could “put it to use.”

“You really should take some of that cash and invest it in municipal bonds” was the motion on the table. “What if the municipalities can’t pay?” we asked. “Don’t worry about that. Historically, the odds of default are extremely remote,” one of them answered. “But what if interest rates turn up? Wouldn’t the default rate go up?” “Well, maybe. But we keep the maturities short and invest only in the most creditworthy municipalities. The risk is very low.”

“Oh… but what if we just need some cash.” “No problem. We’ll give you a line of credit.” “Let me get this straight. You’re proposing to put me into debt so that I can keep my money invested in somebody else’s debt?” “Uh… well… yes… and we’ll charge you less interest than you will earn from the municipal bonds.” “Wait. You can earn a fee for putting my money in bonds… and earn another fee for lending me money… and I still end up ahead?” “Yes. We just try to find ways to help clients with their financial needs.” “Oh.”

Outgoing pharma CEO on hot seat over drug price spikes

American Apparel cutting factory jobs

American Apparel Inc., which reemerged from bankruptcy in February, plans to cut up to 450 jobs at its facilities in Garden Grove, downtown Los Angeles and South Gate, according to its workers’ union.

The clothing maker and retailer laid off more than 80 employees at it’s Garden Grove factory and could cut a total of 150 jobs by next week, reported the Orange County Register.

Up to 450 sewers, auxiliary workers and supervisors will be laid off in total, Nativo Lopez, an adviser with the General Brotherhood of Workers of American Apparel, told the newspaper. Laidoff workers received a severance package based on the number of years employed with the company, according to the union. The union claimed the layoffs come at a time when it’s seeking certification as the exclusive collective bargaining unit at American Apparel with the National Labor Relations Board.

According to Sourcing Journal, a trade publication for the textile industry, CEO Paula Schneider notified employees in a letter that manufacturing at its 800,000-square-foot factory in downtown would be condensed to a single floor. The streamlining effort resulted in the layoff of at least 100 of the factory’s 2,600 workers, according to to the nonprofit Hermandad Mexicana. In addition, a fabric dyeing and finishing facility in Hawthorne was recently closed and less than half of its 75 employees were transferred to Garden Grove.

Jobless voters key to Trump primary win

If you're an unemployed Republican, chances are you're supporting Donald Trump as your party's nominee.

That's the takeaway from a CNBC analysis of county-level primary voting data, which shows Trump has won big in counties with jobless rates higher than the national average. That could bode well for the billionaire frontrunner in New York state's upcoming primary, where 46 of the state's 62 counties have jobless rates above 5.0 percent.

To gauge how well Trump is faring with voters looking for work CNBC looked at GOP primary results in more than 2000 counties in the states that have voted so far. (County-level data was not available for all states that have voted so far.) Of those counties, nearly 1400 had jobless rates above the national average of 5 percent.

Trump was the winner in about three-fourths of the counties with higher-than-average unemployment. Texas Sen. Ted Cruz won about 21 percent of those counties, while Ohio Gov. John Kasich won just 2 percent of them. That support among jobless voters could be pivotal for the GOP nomination as Trump's campaign works to recover from a major loss in Wisconsin, where the statewide jobless rate is 4.6 percent. While Trump carried 43 of the 58 Wisconsin counties with unemployment above the national average, he picked up just 35 percent of the statewide popular vote, behind Cruz's 48 percent share.

Minimum Wage Laws: Do We Need Them?

Bank Bail-Ins Begin as EU Bank “Bailed In” In Austria

Bank bail-ins in the EU are here after Austria’s financial markets regulator FMA imposed a hefty haircut on creditors in an Austrian bank. Creditors in the bank Heta Asset Resolution will receive less than half of their money back according to the country’s financial regulator, the FMA.

Senior bondholders in the so called “bad bank” could expect to receive around €0.46 for each euro which would be paid from the realisation of assets by 2020, according to the FMA statement. It said that this had been calculated using “very conservative” assumptions.

“This package of measures also ensures the equal treatment of creditors. Orderly resolution is more advantageous than insolvency proceedings,” the FMA said.

Bond maturities, however, will be extended to 31 December 2023 as “all currently outstanding legal disputes will realistically only be concluded by the end of 2023”. “Only at that point will it be possible to finally distribute the assets and to liquidate the company,” the regulator said. In November 2015, the largest collection of creditors, which included Pacific Investment Management Co (PIMCO), Commerzbank , FMS Wertmanagement AoeR and a collection of distressed debt investors, proposed to extend bond maturities for 30 years in return for repayment in full.

The war on business during presidential campaign

If there's one thing that candidates as diverse as Bernie Sanders and Donald Trump can agree on, it's that some business practices are destroying American jobs and hurting the middle class.

"I think that the anti-business climate is as toxic as I've ever seen," said Greg Valliere, chief strategist of Horizon Investments. "It's something that has united both parties. How's that for a twist?"

With a decade of stagnant wage growth as corporate profits soar to new heights, Americans are feeling the burn (and the Bern). They're taking out their anger on Big Business, the piñata of choice during the campaign season. Economist Douglas Holtz-Eakin, president of the America Action Forum and former campaign adviser to John McCain, said the candidates -- even President Obama -- are responding to an increasingly angry electorate.

"People are saying, 'I'm not getting a raise,'" he said. "Sanders is saying the system's rigged, and Trump is saying the same thing. If we were getting healthy wage increases, maybe that message wouldn't stick as well."

‘Why aren’t we earning enough to live?’

Janet, a Walmart shop assistant in Louisiana, is so visibly stressed by working in a very understaffed store that a customer tells her she looks as if she’s going have a heart attack. Rochelle, a care worker in Newcastle, is miserable that her hours are so long that she can’t get home to put her children to bed. She also wishes she was better paid so that she didn’t owe £4,000 in catalogue bills, from buying clothes and shoes on credit for her children. Leah, a KFC worker from Richmond, Virginia, works six days a week, but is still behind on her rent and juggles calls from debt-recovery companies. Everyone in Katharine Round’s new documentary, The Divide, is struggling, trying to improve their lives; everyone is feeling the pressure. This is the reality of a low-wage existence in two of the world’s most unequal economies. Based on The Spirit Level, the 2009 bestselling book studying global inequality, the film highlights the toxic effects of divided communities on everyone who lives in them. Even the wealthy are scrabbling to stay happy.

We meet Wall Street psychologist Alden, who wants to get ahead and join the top 1% of earners, and who is working so hard to save up to move his family into a gated community that he gets home too late for story time with his daughters. When he has back surgery, he can’t afford to convalesce, and is in his office the next morning.

When The Spirit Level was published, it quickly attracted global attention to the ideas of its authors Richard Wilkinson and Kate Pickett. It argued that income inequality is the key cause of most modern social ills – violence, obesity, drug abuse, depression, teenage pregnancies, ill health. Ed Miliband quoted the book in a piece for the New Statesman, David Cameron referred to it in his Big Society addresses, Michael Gove said it was a “fantastic analysis”. It was the most talked-about political book of the year, but also a very dense volume that analysed vast international data sets. No one said: “This would make a great movie!”

Apart from Round. “It was a totally mad idea to get a book of graphs and make it into a feature film,” she concedes, acknowledging moments of doubt over the years spent researching and raising money for a documentary based on a book that sweeps through 27 different countries and grapples with huge, abstract concepts of capitalism, globalisation and inequality. She persisted, raising more than £120,000 of the total budget, from a successful crowdfunding exercise.

Wall Street braces for lackluster earnings season

Goldman Sachs officially reaches $5B settlement over toxic mortgage bonds

The previously announced $5 billion settlement between Goldman Sachs and the federal government over claims related to toxic mortgage bonds sold to investors in the run up to the financial crisis is now official, the Department of Justice announced Monday morning.

Goldman Sachs itself first announced the terms of the settlement in January, but noted at the time that the agreement with the government was merely an “agreement in principle” and could change, but the DOJ announced the finalized settlement agreement on Monday, with the terms remaining the same as what Goldman Sachs disclosed earlier this year.

The $5 billion settlement agreement resolves actual and potential civil claims by the Department of Justice; the New York and Illinois Attorneys General; the National Credit Union Administration, acting as conservator for several failed credit unions; and the Federal Home Loan Banks of Chicago and Seattle, relating to the Goldman Sachs’ securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007.

Under the terms of the settlement, Goldman Sachs will pay $2.385 billion civil monetary penalty to the federal government under the Financial Institutions Reform, Recovery and Enforcement Act. Goldman Sachs will also be required to make $875 million in cash payments to resolve claims by other federal entities and state claims. As part of that $875 million, Goldman will pay $575 million to settle claims by the National Credit Union Administration, $37.5 million to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle, $37.5 million to settle claims by the Federal Home Loan Bank of Chicago, $190 million to settle claims by the state of New York, $25 million to settle claims by the state of Illinois and $10 million to settle claims by the state of California.

Housing Bust Lingers for Generation X

The group of Americans known as Generation X has suffered more than any other age cohort from the housing bust, according to an analysis of federal data, suggesting homeownership rates for that group could remain depressed for years to come.

The data show an enormous swing in the fortunes of people born between 1965 and 1984, the group defined by the Harvard Joint Center for Housing Studies as Generation X. Compared with previous generations, Generation X went from the most successful in terms of homeownership rates in 2004 to the least successful by 2015, according to the data, which date to the early 1980s.

The culprit: a historic bull market for housing, fueled in part by easy-to-get mortgages, that encouraged record levels of home buying until the financial system cracked and the housing market collapsed. Earlier generations such as baby boomers, who entered the market before the frenzy of the early 2000s, have fared better.

Generation X “came into the market at precisely the wrong time,” said Rick Sharga, executive vice president at Ten-X.com, an online real-estate brokerage. “We’ve effectively wiped out a group of homeowners who historically would have been on their second or third properties by now.” In 2004, people then-aged 25 to 34, the core of Generation X, had a homeownership rate of 49.5%, the highest for that age group since the U.S. Census Bureau started regularly collecting such data in the early 1980s.

Former McDonald's CEO: $15 Minimum Wage is a Jobs Killer

With California and New York moving toward a $15 an hour minimum wage, former McDonald’s USA CEO Ed Rensi told the FOX Business Network’s Maria Bartiromo that the new rules will destroy small businesses.

“You talk about going from an average wage of $10 up to $15 for a new minimum, you’re talking about a 50% increase in wages. You look at that. Small business is going to get crucified with these rules, the joint employer stuff, the union organizing, these restaurants can’t afford that… it’s inflationary and it’s going to cause prices to go up,” he said.

While New York Governor Andrew Cuomo thinks the increase will “restore fairness and decency” to people’s lives, Rensi says this will be a job killer.

“The franchisees are going to survive. They are going to do what they need to do to survive and that means they are going to raise prices and cut costs which means getting rid of people.”

Tuesday 04.12.2016

NEWS to Disturb the Comfortable...

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