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Monday 08.29.2016

Why The Fed Will Never Reduce Its $4.5 Trillion Balance Sheet Again

Back in early April, one of the foremost experts on the practical applications of QE (there are many more "experts" on the discredited theoretical framework of QE, most of whom are career economists), Credit Suisse's Zoltan Pozsar wrote a note titled "What Excess Reserves", in which the former NY Fed analyst made a very clear case for why the Fed's balance sheet will never shrink again (particularly in the context of the broken Fed Funds market). Some of the note's highlights:

Instead of asking when the Fed will shrink its balance sheet, it’s about time the market gets used to the idea that we are witnessing a structural shift in the amount of reserves the U.S. banks will be required to hold, where reserves replace bonds as the primary source of banks’ liquidity. And that this shift will underwrite demand for a large Fed balance sheet.

Back in April, ge also laid out the role of the Fed's massively expanded balance sheet in the context of the prime money fund shrinkage as a result of the October 14 money market reform deadline:

We are witnessing a structural shift in the amount of reserves held by foreign banks as well. Gone are the days when foreign banks settled their Eurodollar transactions with deposits held at correspondent money center banks in New York. Under the new rules, interbank deposits do not count as HQLA, and foreign banks are increasingly settling Eurodollar transactions with reserve balances at the Fed. Foreign banks’ demand for reserves as HQLA to back Eurodollar deposits and as ultimate means of settlement for Eurodollar transactions will underwrite the need for a large Fed balance sheet as well. Prime money fund reform is a very important yet grossly under-appreciated aspect of this, one with geo-strategic relevance for the United States.

Central Bankers Spurn Call for Radical Approach at Jackson Hole

Central bankers aren’t retreating from the fight against low inflation, although they’re wary of launching a fresh assault on any daring new fronts.

Faced with disappointing growth after years of ultra-low interest rates, Federal Reserve Chair Janet Yellen and her peers who met this weekend in Jackson Hole, Wyoming, re-affirmed their belief in power of monetary policy to stop economies from slipping into deflation. They were less keen on academic proposals that included the abolition of cash, raising their inflation targets, or keeping permanently large balance sheets.

Yellen, in her keynote address at the Kansas City Fed’s annual mountain retreat, said that additional tools remain “subjects for research” and were not being actively considered. Policy makers from Europe and Japan echoed her caution, while reaffirming that they stand ready to boost stimulus if fiscal action proves insufficient to spur growth and inflation.

Central bankers in advanced economies are struggling with low inflation, low productivity and weak levels of investment. For now, however, they’re being cautious in what they’re signaling about the future and are keeping more activist options at arm’s length.

Maker Of EpiPens Says It Gives Thousands To Schools For Free – And May Get Huge Tax Breaks In The Process

Mylan has not lowered its price of EpiPen two-packs after a firestorm of criticism. What it has done is tout all it says it's doing to make the drug more affordable, like offering to subsidize patients' co-pays.

And Mylan says it's donated 700,000 packs of EpiPens to schools in the past four years. It calls the program (fittingly enough) EpiPen4Schools, and it provides four free EpiPens to each participating school, and additional packs at a discount.

This is not pure altruism. Those donations have far-reaching benefits for the company, from tax breaks to marketing and branding.

That donation is almost surely tax deductible for Mylan. And it could be very lucrative if the company is able to take advantage of a little known extra tax break. Mylan may be able to deduct not just the cost of the EpiPens it gives to schools, but also 50% of the difference between its cost and the sticker price.

Gold & Debt: The 1929 Great Depression vs The Next Great Collapse

The situation Americans face in the future will be nothing like anything they have experienced in the past. While we have seen old footage and heard stories about the Great Depression (starting in 1929), we have no idea how bad things really were during the 1930’s.

At that time, approximately 25% of the American population were farmers. Thus, when things really got bad, folks in the cities could move out and stay with their families or relatives on the country farm. This is not an option for most Americans today as only 2% of the population are farmers and ranchers .

After WWII, Americans left the farms in large numbers for the allure of the great life in the cities and suburbs. For decades, living in the city or suburb offered Americans a much easier way of life as the United States had plenty of cheap energy and resources to tap into. Matter-a-fact, after the 1930’s Great Depression, U.S. oil production continued to increase for nearly 40 years:

Even though U.S. oil production declined some years (1930-1970), overall growth steadily increased in a linear fashion. However, the recent surge in U.S. oil production (2007-2015), mainly due to the ramp up of expensive shale oil, moved up exponentially and will likely decline in the same fashion. This will have a profoundly negative impact on the U.S. economy and financial system.

Banks in Safe Harbors

Consumers Less Optimistic About Economy in August

After what seemed like a positive start at the beginning of August, Consumer Sentiment decreased slightly from July, according to the University of Michigan. The Index of Consumer Sentiment dropped to 89.8, down 0.2% from July’s index of 90. It is also down 2.3% from last year’s 91.9.

“Less favorable personal financial prospects were largely offset by a slight improvement in the outlook for the overall economy,” said Richard Curtin, Surveys of Consumers chief economist.

“Most of the weakness in personal finances was among younger households who cited higher expenses than anticipated as well as slightly smaller expected income gains,” Curtin said.

Near the beginning of August, many consumers began shifting from concerns about Brexit to concerns about the upcoming elections. “Although consumers increasingly expect a Clinton victory, consumers remained nearly equally split on which candidate would actually improve overall economic conditions or their own personal finances,” Curtin said.

They Are After Your Cash

If the IRS has its way, cash will be a thing of the past. In its place, every transaction will be digital, every purchase will leave a footprint. And it will tell your story – where you go and what you buy while you are there.

A cashless society means your bank – and the US government – controls every penny you own and every purchase you make. They can freeze your account at will, leaving you destitute with just a few taps on a keyboard.

As Ron Paul said, “The cashless society is the IRS’ dream: total knowledge of, and control over, the finances of every single American.”

Now you may ask, why? Simple answer, because cash is anonymous and almost impossible to track — so Uncle Sam cannot control it. The move towards a cashless, controlled state has been in motion for decades. If you travel by air, you have experienced this first hand. “Cashless cabins” are the rule on nearly all airlines. Every glass of wine, extra cushion or headset must be purchased on credit. Every transaction is tracked, every purchase made subject to interest being tacked on to the principle.

U.S. May Add Speed-Capping Device to Trucks and Buses to Forcibly Slow Them Down

The U.S. is seeking to forcibly limit how fast trucks, buses and other large vehicles can travel on the nation's highways. A new proposal (pdf) Friday would impose a nationwide limit by electronically capping speeds with a device on newly made U.S. vehicles that weigh more than 26,000 pounds. Regulators are considering a cap of 60, 65 or 68 mph, though that could change. Whatever the speed limit, drivers would be physically prevented from exceeding it. The proposal, which comes from the National Highway Traffic Safety Administration and Federal Motor Carrier Safety Administration, does not force older heavy vehicles to add the speed-limiting technology, but the regulators are still considering it.

he government said capping speeds for new large vehicles will reduce the 1,115 fatal crashes involving heavy trucks that occur each year and save $1 billion in fuel costs. While the news is being welcomed by some safety advocates and non-professional drivers, many truckers said that such changes could lead to dangerous scenarios where they are traveling at much lower speeds than everyone else.

The rule has been ensnared in a regulatory maze in the decade since the nonprofit group Roadsafe America issued its first petition in 2006. The group was founded by Atlanta financial adviser Steve Owings and his wife Susan, whose son Cullum was killed by a speeding tractor-trailer during a trip back to school in Virginia after Thanksgiving in 2002. The nonprofit was later joined by the American Trucking Associations, the nation's largest trucking industry group.

Owings said he will continue to push NHTSA to force older heavy vehicles to limit their speeds. "We are dismayed and outraged to learn the proposed rule will be for newly manufactured trucks and will not apply to the millions of trucks with which we continue to share the roads today," he said. NHTSA said retrofitting vehicles made after 1990 with the speed-limiting technology could be too costly, and it is still seeking comments and additional information. NHTSA said it could cost anywhere from $100 to $2,000 per vehicle, depending on when the vehicle was made. Changes to some engines could also be required, increasing the costs, NHTSA said. Heavy vehicles made before 1990 don't have the capacity to add the technology.

Jim Rickards: “There Will Be A War On Gold”

Amazon Tests 30-Hour Work Week

The Washington Post reports that Amazon is launching technical teams whose workers will only clock in for 30 hours a week. While plenty of employees at Amazon are part-time, the novelty here is that the teams are entirely made up of workers on a reduced schedule, including managers. The teams’ members will receive the same benefits as full-time employees, and 75% of a 40-hour workers’ pay.

The stated goal of the program is “to create a work environment that is tailored to a reduced schedule and still fosters success and career growth.” The initiative was accompanied by an event last week titled Reinventing the Work-Life Ratio for Tech Talent.

That reference to work-life balance highlights the possibility that that the testing of a lower-intensity schedule comes partly in answer to a damaging 2015 New York Times investigation into Amazon’s work culture. That report depicted the company as a challenging, even merciless place to work.

But this is about more than just one company’s culture. The idea of a work week of 30 hours or less also speaks to several large-scale issues around technology and employment. More and more voices are arguing that automation is lowering overall labor demand in the economy, a trend that will only increase. A 30 hour work week is seen by some as a way to more evenly distribute the shrinking pool of labor among workers, and reduce the potential of automation to increase income inequality.

Australian Gold Output Hits 15-Year High

Despite something of a consensus among analysts that global gold mine output may have peaked and is beginning to turn down, it appears that the World’s second largest national gold producer, Australia, is bucking the trend. According to gold mining-focused Melbourne consultancy, Surbiton Associates, which monitors what is going on down under very closely, in the year to end June 2016, the nation’s gold production actually hit a 15-year high. Most Australian mining companies have June year ends which is why the annual figures quoted are to the end of that month.

According to Surbiton, gold output for the period totalled 292 tonnes, or near 9.4 million ounces, for 2015/16, some five tonnes or two percent more than in the previous financial year. Production for the June 2016 quarter was 74 tonnes, about two tonnes or three percent greater than for the March 2016 quarter.

“The whole 2015/16 year’s gold output would be worth over A$16 billion at the current gold price of around A$1,730 per ounce,” said Dr Sandra Close, a Surbiton director. “Gold is one of our major exports, it alone accounts for some 5-6 percent of Australia’s total exports.”

One of the main reasons for the nation’s strong gold mine performance is because the Australian dollar remained weaker through much of 2015/16 while the US dollar gold price rose substantially in the second half. This led to a much higher Australian dollar gold price, which provided a welcome boost for local producers, whose costs are predominantly in Australian dollars. “With better gold prices many producers are now taking the opportunity to increase output, increase revenue and strengthen their financial position,” Dr Close said. “Notably, in the June quarter, although the amount of ore treated was little changed, overall the grade of ore processed was higher.”

‘Free’ College Mainly Means a Faster Hamster Wheel

“Free” college — free learning — sounds so wonderful, of course people want it. Indeed, like flying unicorns or losing weight without diet or exercise, it sounds too good to be true. And it is — dangerously so.

Nothing in life is free. Someone has to produce “free” education, and unless the professors will teach for no money, administrators will volunteer their time and contractors will build college buildings pro bono, the direct cost of education will be substantial. Of course, were all these people to render their services for free, the costs to them would be astronomical. So they don’t.

This is why the monetary cost of Hillary Clinton’s “free” college plan is expected to be staggering. Campaign aides have estimated that enabling about 80 percent of Americans to attend public college tuition-free would cost federal taxpayers about $500 billion over 10 years. And the plan would almost certainly involve states greatly expanding their funding. If it ended up requiring, say, a dollar-for-dollar match with federal funds, that’s $1 trillion over 10 years. Some “free”!

But the real cost of free public college would be much deeper, and less obvious, than just the beastly bill. Calls for making college cheaper are typically accompanied by the proclamation that higher education is crucial to a financially secure future. And it is, but that’s largely because we have to run faster and faster just to keep from falling off the credential hamster wheel. Instead of a degree signifying that the holder has obtained highly sought after skills or creative thinking abilities, decades of heavily subsidized college have translated into ‘not having a degree’ suggesting you are seriously flawed. A degree is crucial not, to a significant extent, because the workforce requires more sophistication, but because a college credential has become so commonplace.

Charles Ortel-Bill and Hillary, Bonnie and Clyde of Charity Fraud

More People Buying More Expensive Smartphones, But More Financing Them

For years, flip phones, stick phones and lower-end smartphones — not iPhones and other top-of-the-line models — were Gary Fuentes' bestsellers. His family's La Fiesta Wireless prepaid-phone shop in El Monte, Calif., tried selling pricey models like the Samsung Galaxy S3, which came out in 2012 and retailed for more than $400, but the shop's working-class customers weren't interested.

"We would probably stock no more than five or 10 of the expensive phones," he said. "Customers were focused more on the $100 phones, the $150 phones." The highest-end smartphones haven't gotten cheaper — if anything they are more expensive — but Fuentes is now seeing many more customers willing to shell out for the latest iPhones and Samsung's flagship Galaxy S7. They're just not doing so all at once.

A growing number of prepaid phone users are financing their phones, choosing rent-to-own plans that enable them to pay over several months or a year. That's relatively new in the prepaid market, where customers have generally bought phones outright and where inexpensive phones still dominate.

Big-name phone carriers such as Verizon and AT&T will sell customers a phone and let them pay for it over a few years, usually without any interest or markup over the retail price. Such deals, though, are available only to customers with decent credit who sign up for a standard monthly service plan. But these new payment plans, aimed at customers with bad credit or no credit, come at a cost. Spreading out payments can mean paying more than $1,500 over the course of a year for an iPhone 6 Plus that retails for $750.

What The Federal Reserve Really Is

Investors and analysts throw around the term “Fed” without much reflection on what the Federal Reserve actually is and is not. It’s important to understand the Fed’s structure as a prelude to understanding its policy process. Knowing how the central bank is organized and who’s in charge can position you to preserve wealth and even profit from the coming Fed-induced turmoil.

The Federal Reserve is not a single central bank, but a system of twelve regional reserve banks under the supervision of a board of governors in Washington DC. This central body is called The Board of Governors of the Federal Reserve System. It has a chairperson, currently Janet Yellen, and a vice chairperson, currently Stanley Fischer.

In addition, there are five other governors for a total of seven people on the board. Right now, there are two vacancies (and no pending nominees to fill the vacancies), so the entire board consists of five individuals: Yellen, Fischer, Lael Brainard, Daniel Tarullo, and Jerome Powell.

The chair, vice chair, and governors are nominated by the president of the United States subject to Senate confirmation. Governors serve fourteen-year terms (although many resign from the board before those terms expire). The chair and vice chair have four-year terms, and concurrently serve fourteen-year terms as governors. It’s unusual for a chair to remain as a governor if not reappointed for a new term as chair, but it has happened.

Casual Dining Fights For Survival

Dining out isn’t actually dining out. Not anymore. Think about it. Over the years, consumers have increasingly gone to restaurants to get food that they can eat at home, or at their desk, or in their car on the way to work.

“The old notion of sitting down for dinner at six and be there for an hour at the restaurant is disappearing in the minds of a lot of consumers,” said Victor Fernandez, executive director of insights and knowledge for TDn2K, which publishes the Black Box Intelligence monthly same-store sales index.

So imagine operating a restaurant chain that depends on consumers sitting down and spending some time over lunch or dinner, and you have the fundamental problem afflicting the casual-dining restaurant business. The segment has struggled to generate traffic growth for more than a decade now. And this year, it’s been hit by a broad decline in industry sales.

Casual-dining chains have done almost everything to get customers back in their restaurants. They’ve discounted, and they’ve gone away from discounts. They’ve added technology, changed menus, remodeled locations and improved service. But with traffic declines going back a decade, it’s safe to wonder whether mass-market casual dining can truly be saved.

Pizza Drone Delivery Service To Launch In New Zealand

Pizza drone delivery to customers’ homes is set to begin later this year in New Zealand following a successful demonstration in Auckland last week. At the demonstration, carried out under Civil Aviation Rules Part 101 , Domino’s Pizza Enterprises and drone delivery company Flirtey, showed how the commercial pizza drone delivery service works.

Observers at the event, which was also attended by the Civil Aviation Authority and Minister of Transport Simon Bridges, saw how the drone undertook an autonomous flight to successfully deliver a hot Domino’s pizza.

Matt Sweeny, CEO of Flirtey, a U.S.-based startup specializing in drone delivery services, says: “Launching the first commercial drone delivery service in the world is a landmark achievement for Flirtey and Domino’s, soon you will be able to order a Flirtey to deliver your pizza on-demand.”

The demonstration marks the final step in the approval process for the drone. The next step will be when the two companies launch drone flights to deliver hot pizzas to customers’ homes from a select New Zealand outlet later this year.

Ashley Furniture Lays Off 840 Workers

A furniture manufacturer is cutting hundreds of jobs in Southern California as it shifts production to plants in North Carolina, Mississippi and Wisconsin.

The San Bernardino County Sun reported Saturday that about 840 workers at an Ashley Furniture HomeStore factory and warehouse in Colton were laid off Friday. The company says the majority of production at the site east of Los Angeles is going to other U.S. plants to create more efficiency.

It says closing the Colton plants Oct. 25 will help keep the company competitive. Employees told the newspaper they were notified at a brief meeting that their jobs were being eliminated.

The company said it gave employees 60 days' notice and complied with federal regulations governing layoffs.

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