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Friday 06.17.2016

Rising rents, healthcare costs support U.S. underlying inflation

U.S. consumer prices moderated in May, but sustained increases in housing and healthcare costs kept underlying inflation supported, which could still allow a cautious Federal Reserve to raise interest rates this year.

While another report on Thursday showed an increase in the number of Americans applying for unemployment benefits last week, the trend remained consistent with a healthy labor market. The data came a day after the Fed lowered its assessment of the jobs market and suggested a slower path to interest rate hikes.

"The economy is generating enough heat to produce some inflation, even if the Fed has worries about the long-term trend for economic growth being too weak to lift interest rates much higher for now," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Labor Department said its Consumer Price Index increased 0.2 percent last month, slowing from April's 0.4 percent gain, as gasoline prices rose modestly and the cost of food fell. In the 12 months through May, the CPI increased 1.0 percent after advancing 1.1 percent in April. Stripping out the volatile food and energy components, the so-called core CPI increased 0.2 percent after a similar gain in April. That took the year-on-year core CPI rise to 2.2 percent from 2.1 percent in April.

The Fed Just Sparked Gold's Next Leg Higher

It’s the least shocking news you’ll hear all week: the Fed has decided to keep rates unchanged! We were treated to the usual mumbo jumbo at yesterday’s presser. Household spending is up. But job gains have been soft. Auntie Janet even said next week’s Brexit vote was one of the reasons the Fed decided to back off…

To be clear, no one was expecting a rate hike this month. Fed fund futures gave 2% odds of a hike yesterday before the announcement. Anyone shocked that the Fed held steady needs his head examined.

But that didn’t stop the markets from pitching a temper tantrum… Stocks fell off a cliff with about a half an hour to go in yesterday’s session. The S&P 500 finished lower for the fifth day in a row.

It was a different story for gold and other precious metals. Gold futures have steadily advanced since yesterday afternoon. As of early this morning, an ounce of the yellow metal is trading at $1,308. That’s a two-year high. Gold’s run higher this month has caught many investors with their pants down. I told you yesterday that no one’s paying attention to gold anymore.

Janet Yellen: Helicopter money is an option in extreme situations

If the U.S. economy turns south in a big way, helicopters could be dropping cash over your neighborhood -- courtesy of the Federal Reserve.

That's at least the concept of helicopter money -- an unusual idea aimed at reviving economic growth, espoused by famed economist Milton Friedman. Fed Chair Janet Yellen has generally stayed away from endorsing this form of economic stimulus in the past. But on Wednesday, Yellen wouldn't rule it out as a possible option in an extreme circumstance.

"It is something that one might legitimately consider," Yellen said Wednesday. It was her most explicit comment as Fed Chair on the subject. Helicopter money was first introduced in 1969 as a concept by Friedman. Here's the idea: the Fed would essentially write a huge check to the U.S. Treasury office, which would then send tax rebates (translation: cash) to millions of Americans.

The hope is that Americans spend the money, which drives up economic growth and inflation -- two things the Fed could use more of right now to justify rate hikes. Instead, growth and inflation are anemic and were key factors why Yellen and other Fed officials decided not to raise interest rates at the central bank's June meeting. Yellen's predecessor, Ben Bernanke, too has endorsed the idea as a last resort option. "Helicopter money could prove a valuable tool," Bernanke wrote in a blog post in April.

Keiser Report: America at War with Itself

Jo Cox’s husband issues statement against ‘hate’ after shooting death

There was a strong social-media reaction to the messages made by the husband of a slain lawmaker on Thursday. Police said Jo Cox, a British minister of parliament and 41-year-old mother of two, was pronounced dead at 1:48 p.m. U.K. time and that they had arrested a 52-year-old man in connection with the attack.

Cox’s husband, Brendan, tweeted an image of his wife in London with no caption. He also issued the following statement: “Today is the beginning of a new chapter in our lives. More difficult, more painful, less joyful, less full of love. I and Jo’s friends and family are going to work every moment of our lives to love and nurture our kids and to fight against the hate that killed Jo.

“Jo believed in a better world and she fought for it every day of her life with an energy, and a zest for life that would exhaust most people.

“She would have wanted two things above all else to happen now, one that our precious children are bathed in love and two, that we all unite to fight against the hatred that killed her. Hate doesn’t have a creed, race or religion, it is poisonous. Jo would have no regrets about her life, she lived every day of it to the full.”

A Cashless Society -- Based On Gold

A gold standard system can take on a great many practical manifestations. Before 1800, in most places it meant gold and silver coins exclusively. In the 1950s, it meant paper money whose value was linked to gold, even as owning gold itself had been illegal since 1933. Some time in the future, it might mean various forms of “e-money,” where neither coins nor banknotes are used.

In all of these cases, the core concept is that the value of the medium of exchange is linked to gold. Gold is the standard of value. It has a multi-century track record of success in this role. This is not much different than the eurozone today, where, instead of gold, the euro is the standard of value. Sometimes this means using the euro itself – which is a little similar, you might say, to using gold coins. For more than two dozen countries, it means a currency linked to the euro – a “euro standard system.”

These countries do not have any domestic monetary policy. They trust that the management of the euro will be beneficial. They get to participate in a trade network among other euro users, free of the problems of floating exchange rates.

In a gold standard system also, countries have no domestic monetary policy. They trust that gold will serve its role as a stable measure of value, as it has for centuries. They get to participate in a trade network among other gold standard countries, free of the problems of floating exchange rates. I think that gold will still be the Monetary Polaris long after all that remains of the euro is a page on Wikipedia.

Smith & Wesson's gun sales boosted profits by 50% on last year

Surging gun sales following a wave of mass killings helped boost profits at gun manufacturer Smith & Wesson to $293.8m, a 50% increase on last year, the company announced on Thursday.

Firearms accounted for $657.6m of sales – an increase of 23.8% from last year. Accessories – including holsters, magazines, cases and brand apparel – accounted for $65.3m. Overall sales reached $722.9m – an increase of 31% from the year before, the company announced.

Smith & Wesson’s sales have risen over 200% since president Barack Obama was elected. Gun sales have soared after a spate of mass killings that have sparked fears among buyers of tighter gun control laws. There is anecdotal evidence that the same pattern has followed the murder of 49 people at a gay club in Orlando last weekend.

In May there were a record 1.87m background checks for new arms licenses, the thirteenth consecutive month of back-to-back record breakers. Background checks do not necessarily translate into sales, as not all checks result in a sale and multiple firearms can be bought with a single background check. Yet manufacturers often rely on background checks to measure demand and overall health of the market.

Study: Americans Will Spent 9 Billion Hours on Taxes in 2016

The Tax Foundation examined the amount of hours and money it takes for Americans to compute and file taxes, from single adults all the way up to large businesses. The group calculated the cost of tax compliance this year will be $409 billion.

The more the 8.9 billion hours spent is, according to the report, "equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. The majority of the 8.9 billion hours will be spent complying with U.S. business (2.8 billion hours) and individual income (2.6 billion hours) tax returns."

The report talks about the sheer size of the U.S. tax code. In 1955 it consisted of 409,000 words. It is now at 2.4 million words. There are also 7.7 million words of tax regulations and 60,000 pages of tax-related case law.

"Time is precious, and Americans should not be forced to waste it complying with IRS tax forms," the report reads.

Feds Spend $564,231 on Farmers’ Markets for Refugees

The U.S. Department of Agriculture is spending over $500,000 to start farmers markets for refugees on food stamps.

The International Rescue Committee (IRC) enrolls 10,000 refugees in the United States every year onto the Supplemental Nutrition Assistance Program, commonly known as food stamps. The group received the funding to provide “culturally-appropriate” corner stores and food markets.

“The IRC will expand and deepen the impact of its successful Fresh Fund incentive program over the next four years in seven refugee-rich neighborhoods across Salt Lake City, Phoenix, Baltimore, and Charlottesville,” according to the grant, part of a $16.8 million effort announced by the agency last week to get food stamp enrollees to eat more vegetables.

The agency said refugees and immigrants in the United States are simultaneously at risk for “under-nutrition and obesity, and are highly dependent on SNAP to meet nutritional needs.” The funding will create one co-op farmers market, seven “farm stands,” and 10 corner stores for refugees in Utah, Arizona, Maryland, and Virginia. The stores and markets will use a “culturally-appropriate products list” of 40 fruits and vegetables in an attempt to get newly arrived refugees to eat healthy food.

House blocks ban on warrantless surveillance of Americans

Privacy rights advocates in the House lost a battle Thursday to ban warrantless surveillance of Americans' electronic communications and prevent the government from forcing tech companies to build "backdoors" into encrypted smartphones and other devices.

The House voted to defeat legislation by Reps. Thomas Massie, R-Ky., and Zoe Lofgren, D-Calif., after opponents argued that it would make it tougher for the FBI to stop terrorists such as the gunman who committed the mass shootings in Orlando on Sunday.

The measure failed by a vote of 198-222 when supporters tried to attach it to a sweeping $576 billion defense spending bill for 2017. It was a huge turnaround on the issue from last year, when an identical amendment was approved in the House by a vote of 255-174 as part of the 2016 defense spending bill. That bill never became law because it stalled in the Senate.

This time around, the massacre in Orlando changed the tone of the debate, giving security hawks the upper hand over privacy advocates. The bill's supporters ranged from the liberal American Civil Liberties Union to conservative FreedomWorks. Currently, under a law known as Section 702 of the FISA Amendments Act, Americans' private data and communications — including emails, photos, and text messages — are swept up by intelligence agencies as part of the information they collect on foreigners overseas who are suspected of terrorist ties.

Obamacare health-care premiums going up

America’s Dying Shopping Malls Have Billions in Debt Coming Due

Suburban Detroit’s Lakeside Mall, with mid-range stores such as Sears, Bath & Body Works and Kay Jewelers, is one of the hundreds of retail centers across the U.S. being buffeted by the rise of e-commerce. After a $144 million loan on the property came due this month, owner General Growth Properties Inc. didn’t make the payment.

The default by the second-biggest U.S. mall owner may be a harbinger of trouble nationwide as a wave of debt from the last decade’s borrowing binge comes due for shopping centers. About $47.5 billion of loans backed by retail properties are set to mature over the next 18 months, data from Bank of America Merrill Lynch show. That’s coinciding with a tighter market for commercial-mortgage backed securities, where many such properties are financed.

For some mall owners, negotiating loan extensions or refinancing may be difficult. Lenders are tightening their purse strings as unease surrounding the future of shopping centers grows, with bleak earnings forecasts from retailers including Macy’s Inc. and Nordstrom Inc., and bankruptcy filings by chains such as Aeropostale Inc. and Sports Authority Inc. Older malls in small cities and towns are being hit hardest, squeezed by competition from both the Internet and newer, glitzier malls that draw wealthy shoppers.

“For many years, people thought the retail business in the U.S. was a bit overbuilt,” said Tad Philipp, an analyst at Moody’s Investors Service. “The advent of online shopping is kind of accelerating the separation of winners and losers.” Landlords that can’t refinance debt may either walk away from the property or negotiate for an extension of the due date. It can be hard to save a failing mall, leading to high losses for lenders on soured loans, Philipp said.

The Economy Is Not a Car and Fiscal Stimulus Is Not a Gas Pedal

Ten days before President Barack Obama took office in 2009, his economic team released an analysis of a proposal to use fiscal policy to stimulate the economy to reduce unemployment. The analysis claimed that the stimulus would create 3.675 million jobs, and that as a result the unemployment rate, which otherwise might rise to nine per cent, would instead remain below eight per cent.

Such calculations appeared to be scientific and precise. However, as it turned out, fiscal stimulus was enacted in 2009, and yet the unemployment rate hit 10 per cent, which was higher than the level that the economists had predicted it would reach without the stimulus. In fact, throughout Obama’s first term, the unemployment rate was higher than the economists projected under the “no-stimulus” scenario.

The economists were necessarily wrong about one or both of their claims. If they were correct in forecasting that without the stimulus unemployment would top out at nine per cent, then their analysis that the stimulus would generate less unemployment was incorrect, because the opposite happened. Conversely, if the stimulus reduced unemployment below what it otherwise would have been, then it was their baseline forecast of unemployment that was erroneous.

To make judgments about the efficacy of fiscal stimulus in reducing unemployment, we would like to know with reasonable certainty how the 2009 stimulus worked. However, the only scientific way of doing so would be to re-create economic conditions exactly as they were early in 2009, hold everything else constant, and allow the economy to proceed without enacting any fiscal stimulus.

Fed lacks a vision on economy, 'overly data-dependent'

Federal Reserve policymakers "don't have a vision" for where the U.S. economy is going, Allianz Chief Economic Adviser Mohamed El-Erian said Thursday, a day after central bankers decided not to increase interest rates.

"The collateral damage and unintended consequences of this prolonged experiment with very low interest rates [and] very big balance sheets are starting to have a meaningful [negative] effect on the economy," El-Erian told CNBC's "Squawk Box."

Without a clear idea for the future of growth, the Fed has become "overly data-dependent," El-Erian said, arguing that such an approach has been sending "conflicting signals over time." The former co-CEO of Pimco said investors are left wondering whether the Fed is "being totally inconsistent or the Fed [is] being a slave of the markets."

The Fed raised rates in December for the first time in more than nine years. At the time, central bankers projected four more rate hikes in 2016. But the new year market turmoil scaled back those expectations.

Jobless claims climb to 277,000 as California filings surge

Initial U.S. jobless claims rose by 13,000 to 277,000 in mid-June, but the increase is likely tied to seasonal quirks that could unwind in the next few weeks. Broadly, layoffs nationwide remain low.

The number of new applications for benefits during the week stretching from June 5 to June 11 was little changed in most states except for California and Pennsylvania, the government reported Thursday.

Unadjusted claim soared by 55% to 54,805 in the Golden State, an unusually large increase. A similarly outsized gain occurred in Pennsylvania. In some states, certain school employees such as bus drivers or cafeteria can file for benefits when the school year ends. Some workers who could have filed claims at the end of May, what’s more, may have waited because of the Memorial Day holiday to apply in the following week.

Whatever the case, new claims remained below the key 300,000 mark for the 67th straight week, the longest streak since 1973. Even though hiring has slowed, job openings in the U.S. remain near at a record high and many companies complain they can’t find enough skilled workers. That’s forced some firms to raise wages.

Prince Gets Taxed for Dying

The passing of pop icon Prince in April left millions of Americans heartbroken. Regarded as one of the greatest musical geniuses of his generation, Prince’s legacy will live on in his music, fans, and loved ones. Unfortunately, his estate might not have the same fate. That’s because the federal government, along with the state of Minnesota, still has one of the most outdated and immoral taxes on the books – the death tax.

The death tax is a tax on the net worth of all property after an individual passes away. The current federal tax rate sits at 40%, which is on top of all taxes an individual has paid on their earnings over their lifetime. If that wasn’t enough, the state of Minnesota has its own death tax coming in at a rate of 16%. With Prince’s estate estimated to be worth at least $300 million, he will owe approximately $168 million – or 56% – of his assets to federal and state government just because he passed away.

Supporters of the death tax will say this current situation proves the tax is a good idea. After all, these high taxes will be an equalizing force between millionaires like Prince and the middle class. What supporters fail to understand, however, is the disastrous impact this very policy meant clearly to redistribute wealth actually has on the same middle class they are trying to help.

Small businesses and family farms feel the death tax especially hard because the tax encompasses both liquid and non-liquid assets, which is money in the bank versus assets such as land. Smaller companies tend to have much of their worth tied up in expensive equipment and factories and don’t have the cash to pay the expensive tax bill when an owner passes away. Families inheriting these smaller companies are forced to sell assets or fire employees in order to pay the tax. This is especially harmful for family farmers in Prince’s home state of Minnesota. Often times farms that have been in families for generations are forced to sell their land all to pay the high tax bill.

Chinese Debt Called “Fatal” By Chinese Think Tank

China’s attempts to keep its economic engine revving at high speed, with the country’s total private and public debt now ballooning to a 249% debt to GDP ratio, could be “fatal,” a Chinese economist told reporters. Not only is debt growing, but the addiction to cheap money is hard to break.

China’s borrowing to end 2015 touched new highs at 168.48 trillion yuan, or $25.6 trillion, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS) was quoted as saying. The exact debt in China has not been universally agreed upon. The total debt – which includes government, corporate and household borrowing – was less than some non-government estimates and underneath the US, which was reported at 331% debt to GDP.

While debt can build growth in the near term, such stimulative measures are not likely to result in sustainable economic growth but more like a sugar high. The problem with sugar highs is the result in crashes. “The gravity of China’s non-financial corporate debt is that if problems occur with it, China’s financial system will have problems immediately,” Li was quoted as saying in the Guardian.

Local governments have been going on a significant debt spree, and this is creating “systemic risks” to the economy. Chinese banks, closely linked to the government, could lead to a seismic default and require an intervention. “It’s a fatal issue in China. Because of such a link, it is probably more urgent for China than other countries to resolve the debt problem,” Li said.

Gold above $1300, DiMartino on Fed policy as Brexit looms

FHFA watchdog blasts lax oversight of rising Fannie Mae headquarters construction costs

The Federal Housing Finance Agency has been lax in its duties as the overseer of Fannie Mae, and needs to do far more to address the dramatically rising cost of Fannie Mae’s new Washington, D.C. headquarters, the FHFA’s watchdog said in a new report.

According to a new report from the Federal Housing Finance Agency Office of Inspector General, the projected cost of Fannie Mae’s new Washington headquarters, which would consolidate several office locations in the D.C. area into one main location, has risen 53.35% from $164.32 per square foot to $252.81 per square foot since Jan. 26, 2015.

And while that cost has been on the rise, the FHFA hasn’t exercised the proper oversight over Fannie Mae and its relocation process, the FHFA-OIG said in its report. According to the FHFA-OIG report, its review of Fannie Mae’s relocation stemmed from an “anonymous hotline complaint” that accused Fannie Mae of engaging in “excessive spending” in the construction of its new headquarters.

The FHFA-OIG conducted a review of the entire relocation process, from the initial decision to either relocate or renovate Fannie Mae’s current office location all the way through selecting a new location and through the beginning stages of construction, which began last month. And according to the FHFA-OIG, the results of that review were less than positive.

Fed's warning: Economic hurdles to persist

The Federal Reserve made a stark concession this week: The economy is likely to grow at a listless pace for the foreseeable future.

While the Fed left its key interest rate unchanged and signaled it could raise it twice this year, policymakers raised eyebrows by predicting markedly slower hikes in coming years amid persistent headwinds to economic growth. Those hurdles include meager productivity gains, an aging labor force, low household formation and the weak global economy, Fed Chair Janet Yellen said at a news conference following the Fed meeting.

Fed policymakers have cited these economic speed bumps before, but had voiced optimism that several were temporary legacies of the Great Recession. This week, however, the Fed said it anticipates its benchmark rate will be just 2.4% at the end of 2018, down from its March forecast of 3%. And it cut its forecast of the longer run rate -- to 3% from 3.3%. The Fed keeps rates low to stimulate borrowing and economic activity.

“What you saw was the Fed capitulating,” says economist Diane Swonk of DS Economics. The drags on growth have “gone on long enough that they’re now concerned.” Surprisingly, the Fed lowered its growth forecast only marginally, to 2% a year for 2016 through 2018 and in the longer run, just below the average pace in the seven-year recovery. But that apparently is only because the Fed expects its slower rate increases to largely offset the economic headwinds, says Dean Maki, chief economist of Point72 Asset Management.

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