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Wednesday 08.31.2016

Japan’s debt-to-GDP could hit 1,908% by 2100: Analyst

The power of compounding once described as being the eighth wonder of the world by Albert Einstein, is well known for being an investor’s best friend. If you manage to compound your wealth at a steady rate of say around 10% per annum for the next three or four decades, you’ll do pretty well for yourself, and you should be able to retire comfortably — barring any unforeseen shocks.

Unfortunately, the power of compounding works both ways. If you or your business is unlucky enough to be in debt, without a careful debt reduction plan, debts and interest on debts can soon spiral out of control. This is exactly the situation Japan could find itself in if the country does not get its financial house in order according to analysts at Source, the multi-asset research platform.

To the outside observer, it may look as if Japan’s debt position has already spiralled out of control. The country’s gross government debt to GDP ratio climbed from 67% in 1985 to 248% in 2015 while the net debt ratio rose from 26% to 128%. However, there are a few unique features that have enabled Japan to run this kind of deficit without the country collapsing in default.

Japan is self-financing. The country has run a current-account surplus in every year since 1981, and the country as a whole saves more than it invests. Gross National savings are currently around 25% of GDP. Japan is an international creditor, not a debtor, with a net international investment position of 68% of GDP by 2015. Switzerland is the only country in a better position with a net international investment position of 92% of GDP for 2015. In comparison, Spain, Australia and the US are indebted to the rest of the world with ratios of -88%, -57% and -41% respectively. As a result, it’s difficult for the rest of the world to force a financial crisis on Japan; the country is in control of its own economic destiny…or it is for the time being.

Abercrombie Closing up to 60 Stores After Posting Wider Loss

Abercrombie & Fitch Co. reported a wider loss for its second quarter on Tuesday and said it's closing up to 60 stores in the United States as both U.S. and international sales fell. The teen-focused retailer also offered a downbeat outlook for a key sales measure, as business continues to be hurt by a decline in tourists to its flagships in key cities. The closures will represent about 8 percent of its store count in the domestic market. Abercrombie's shares tumbled more than 20 percent in midday trading.

Abercrombie, once a top destination for teens, has struggled to adjust as its customers increasingly shop on their phones and other mobile devices, and shift more to fast-fashion chains like H&M. The retailer is changing its marketing to play down its sexy image, and last year got rid of provocative pictures on its shopping bags and bare-chested male models greeting customers at the door. It also gave employees more freedom to dress how they wish, ditching its "look policy" that banned eyeliner and certain hairstyles among other rules.

Indications had been that moves to make over its merchandise were gaining speed. But the latest results underscore that the decline in visitor spending in U.S. is overshadowing efforts that the company is making to spruce up its business. "As we look to the rest of the year, we now expect flagship and tourist locations will continue to weigh on the business," Executive Chairman Arthur Martinez said in a statement.

Martinez said the company expects to see "traction" from its investments in marketing and new products. But Abercrombie also says it now expects revenue at stores open at least a year to remain "challenging" through the second half of the year because of lower tourist spending.

Fed's Fischer says US job market 'very close' to full strength

The U.S. job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing, Fed Vice Chairman Stanley Fischer said on Tuesday.

In an interview with Bloomberg TV, Fischer did not comment on the timing of the next Fed rate hike but said "we choose the pace on basis of data," and that U.S. "employment is very close to full employment." Fed Chair Janet Yellen said on Friday she thought the case had grown stronger in recent months for an interest rate increase, remarks that Fischer later that day said were consistent with a view that the U.S. central bank might raise rates at its next policy meeting in September.

Asked about the dollar on Tuesday, Fischer said the currency's strength affected U.S. inflation and company profits but improvements in the labor market showed the economy had withstood this headwind. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical.

Prices for Fed funds futures on Tuesday suggested they expect about a 20 percent chance of a hike next month and just over even odds for such a move in December. The Fed also has a policy meeting scheduled for early November.

US consumers expect economy will keep improving

US consumer confidence reached its highest point in nearly a year in August as economic conditions continue to improve. The level indicates that Americans expect the economy to remain strong through the second half of the year.

According to the Conference Board, which tracks consumer sentiment, the index reading for August was 101.1, up from 96.7 in July. The index has not reached such a high point since September 2015. "Consumers' assessment of both current business and labour market conditions was considerably more favourable than last month," Lynn Franco, the Conference Board's head of economic indicators.

"Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months."

Increases in consumer confidence typically indicate more people are willing to spend money. As more than two-thirds of the US economy is generated by consumer spending, the increase signals likely economic growth.

Gold May Be Worth Much More Than You Think - Deutsche Bank

Why the Stock Market Could Be Headed for a 1987-like Crash

There are some eery similarities. Don’t tell stock market investors, but we’re in the middle of the longest earnings recession since 2008. That’s according to data from FactSet, which shows that the second quarter of 2016 was the fifth straight in which overall earnings fell. What’s worse, estimates show that they will decline for a sixth straight quarter before finally posting a 5.6% gain in the fourth quarter of this year.

But Jim Bianco, president of Bianco Research argues that even this forecast might be overly optimistic. In a research note to clients Monday, he pointed to data that shows that companies have been consistently cutting their estimates for future earnings as the close of the quarter in question nears.

Big picture, all the lines are headed down. But also focus in on the gray line on the far right. As you can see, back in April, expectations for fourth-quarter earnings growth were nearly twice what they are today. If the trend of earnings growth estimates being revised down continues, there’s a decent chance that earnings growth at the end of the year will be close to nonexistent.

None of this, however, is apparent from how stock market indexes have been moving lately, which unlike the charts above have been going up and to the right. “Since 1947, every time profits fell this much, or for this long, a recession was either underway or about to begin,” writes Bianco. “The only exception was the middle of 1986 to early 1987.” If you remember, there was a pretty important event that happened in 1987: A massive stock market crash that sapped close to 30% of the S&P 500’s value in just five days.

Four Horses Of The U.S. Debt Apocalypse

Crises are based on compound bets (or debts) gone awry. As with lightning, though, crises don’t usually strike the same place twice, not consecutively, anyway. Over the past two decades, we’ve seen the emerging-market collapse in the late 1990s, the Enron-led crime spree in 2001–02 and the housing-spawned financial crisis of 2008. Since that last crisis, the Fed’s cheap money policy has helped big banks and corporate customers, but most regular people have not fully recovered.

Regardless of whether the Fed raises rates or keeps recklessly bating business media about the possibility, these connected debt pockets can crush the economy again. Here, I’ll lay out how they can push us over the edge. Understanding these connected debt bubbles means that you can not only survive the looming implosion but also come out ahead.

One: Student Loans — The student loan debt bomb is exploding, with few remedies to address it. Student loans aren’t dischargeable in bankruptcy, meaning there’s no way to get rid of them for a clean, Donald Trumpesque slate. The financial industry lobbied to make sure of this when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed.

Because of that law, private banks piled into the lending business (although they have since backtracked). This, in turn, stoked college tuition, which necessitated more student debt. Current numbers are epic. Americans owe about $1.3 trillion in student loan debt across 43 million borrowers. This a HUGE increase from $260 billion in 2004. The average class of 2016 graduate has $37,172 in student loan debt, up 6% from 2015 and 12% from 2014. The student loan delinquency rate has reached a peak of 11.6% and is rising. The impact of this condition is vast — felt in fewer students purchasing homes, starting businesses, investing and consuming. All of this hurts the future economy. And the overhang hinders more people as they go through life. The share of student debt for people over 60 has skyrocketed from $8 billion to $43 billion, with 5% deducting loan payments from Social Security checks.

Case Shiller Lags and Understates the Housing Bubble

Here’s how the Case Shiller Index (CSI) press release spun the data on the state of the US single family housing market today:

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.1% annual gain in June, unchanged from last month. The 10-City Composite posted a 4.3% annual increase, down from 4.4% the previous month.The 20-City Composite reported a year-over-year gain of 5.1%, down from 5.3% in May.

The problem is that Case Shiller’s methodology causes price suppression and severe lag. That gives the impression that the US housing market isn’t in a bubble. It’s a misimpression, considering that market prices on average are actually above the 2006 bubble peak. If 2006 was the top of the most extreme bubble in US history, what does that make today’s higher prices?

Case Shiller uses only public record data. The current release, which purports to be June data, is really data culled from government records for recorded sales. The closings were purportedly in June, but the contracts were entered at least a month before, and in most cases 2 months to 3 months prior. So the current CSI release doesn’t represent the current market.

Average Household Debt: $132,000 - Not Counting Mortgage

A new study out last week reported that the average US household has over $132,000 in outstanding debt – not counting their home mortgage. If we add the home mortgage, the average debt level soars to over $263,000. Both numbers are huge, but are still below the peak debt levels just before the Great Recession in 2008. I will give you the details below.

I will argue today that these huge household debt levels are one of the reasons that this economic recovery is so weak, with GDP growth averaging less than 1% in the first half of this year. I will also explain why the continued huge household debt level is not just because US consumers spend beyond their means. It’s an interesting dilemma.

But before we get to that, I will opine on the latest Fed discussions on when to raise short-term interest rates, especially in light of Janet Yellen’s latest policy speech last Friday in Jackson Hole, Wyoming. The big question is whether the Fed will hike rates at its next policy meeting on September 20-21. This will be a big focus of market attention between now and then.

Chair Yellen made her much-anticipated policy speech last Friday at the annual Jackson Hole gathering of monetary leaders from around the world. Some expected her to deliver a “hawkish” speech in favor of raising the Fed Funds rate sooner rather than later. Others expected a continuation of her cautious “data-dependent” stance on the next rate hike. As it turned out, both interest rate bulls and bears found something to hang onto in Ms. Yellen’s carefully scripted (as always) speech. She started out by making a case for raising the Fed Funds rate soon based on what she cited as encouraging signs regarding the economy, largely based on the continuing improvement in the labor market.

Six Years After Obamacare, 11 Percent Remain Uninsured

Six years after President Obama signed the Affordable Care Act, or Obamacare, into law, nearly 11 percent of Americans remain without health insurance.

According to a new Gallup poll, 10.8 Americans are still living without health insurance in 2016, more than half a decade after the president’s health-insurance-for-all program was passed and two years after the law’s individual mandate went into effect. Gallup notes the vast majority of the still-uninsured are minorities, young adults and low-income Americans.

The U.S. Census Bureau states that in 2010, the percentage of people without health insurance was 16.3 percent. The percentage of people without health insurance in 2008 – two years before Obamacare was passed – was about 14.8 percent. Additionally, 15.5 percent of respondents to the poll said that they had lacked the ability to pay for their health insurance or necessary medications at some point in 2016, a drop of only three percent since Gallup asked the same question in 2010. The polling group notes:

Even though fewer Americans are struggling to afford healthcare, other Gallup trends suggest that the Affordable Care Act may not be meeting its goal of reducing healthcare costs... Gallup also previously reported that since the individual mandate took effect, there has been a rise in the percentage of U.S. adults paying for all or some of their health insurance premiums who say that their premiums have gone up "a lot" over the past year.

US Banks Should Prepare For Tough Times Heading Into 2017

The start of 2016 was not the best of times for the financial sector. Global markets tumbled as a result of mounting concerns regarding emerging economies and other macroeconomic slurves. In the midst of the storm, the U.S. banking sector saw trouble of its own on various fronts.

There is no doubt that markets hate uncertainty. With the troubles at the start of the year, fears of a potential recession jeopardized investor sentiment. The collapse of large financial institutions during the 2008-09 meltdown left a deep scar on investor psyche. Fast forward to 2016, they still remain wary of looming economic and geopolitical instability.

However, beginning the year on a jittery note with weak Chinese data was not the only ingredient. The run-up to the referendum that subsequently decided Britain’s fate regarding the EU, added to the mix of concerns. Complementing these macro issues was the Federal Reserve’s decision to stand pat on the interest rate situation in all its meetings so far this year.

While the general belief depicts the Federal Reserve’s stance as a positive and in the best interests of the economy, banks could continue to remain on the losing end of the spectrum. Low interest rates have weighed heavily on the sector, pulling down net interest income and net interest margins. The narrow spread between short- and long-term rates tends to squeeze margins.

Gold Bars Near 5-Week Dollar Low as Fed's 'Full Employment' Rate-Rise Hints Meet 'Falling Inflation'

Gold bars traded in London's wholesale market recovered from their fourth dip below $1320 per ounce in 4 days on Tuesday, returning from the UK's summer Bank Holiday near 5-week lows as betting rose that the US Fed will raise its key interest rate at this month's FOMC meeting despite an expected slowdown in US jobs creation.

Wall Street consensus says Friday's official estimate of non-farm payrolls will show a rise of 180,000 for August, well down on July's surprise 255,000 jump. The Federal Reserve then meets to announce its policy on 21 September. "Gold remains range-bound within a descending triangle over the past month," said a note from traders at gold refiner and bar manufacturers MKS Pamp.

"With investors pricing in a greater likelihood of a Fed rate increase before year end, pressure is likely to continue to weigh. Next focus for traders will be on...Friday's employment data to gain more insight."

"Every figure will be scrutinized and every Fed speaker will be closely followed," agrees a trading note from futures and wholesale gold-bar brokerage Marex Spectron's London office. "Forget normal fundamentals, forget technicals, forget most things that all of us are used to watching for clues. Just watch the data out of the US and all the headlines that go with it." "While giving a nod to improving economic conditions," said Japanese conglomerate Mitsubishi's analyst Jonathan Butler in a note last week, "the Fed [must] emphasize the data dependency of any rate decision, and how dampened inflation expectations will warrant further patience before raising rates.

The true state of the economy

The 10 States That Contribute Most to the $1 Trillion Pension Disaster

While a handful of states including West Virginia, New York and Indiana have made important strides in reducing major shortfalls in their employee pension plans, many others are just treading water or losing ground, according to a new study by the Pew Charitable Trust.

A year after the organization sounded a dire warning about a widening gap between assets and obligations, the picture has improved just slightly. State-run retirement systems reported shortfalls totaling $934 billion in fiscal 2014, the latest figures available, which was a slight improvement over the $969 billion deficit from the previous year.

Many states were fortunate in making smart investments that helped chip away at the shortfall, but those good times are over. Now, unless state governments undertake concerted policies to raise revenues or somehow reduce their obligations — other than through budgetary gimmicks — the gap will expand to well over $1 trillion in subsequent years, according to the authors of the report.

When combined with the shortfalls in local government pension systems, the total state and local pension debt likely exceeded $1.5 trillion in fiscal 2015 – an historically high level of debt as a percentage of the overall U.S. economy. “The gap between the pension benefits that state governments have promised workers and the funding to pay for them remains significant,” the report stated. “Many states have enacted reforms in recent years to help shrink that divide, but they also have benefited from strong investment returns.”

Why Corporate America’s Stock Buyback Binge May Be Coming to an End

Wall Street pros love talk about how regular investors are terrible market timers and thus should just buy and hold for the long haul. Small investors tend to panic sell at the lows and greedily buy at the highs.

But this stimulus-fueled bull market has proven that the pros are no better. Hedge funds and active mutual funds are badly lagging their performance benchmarks as "alpha" — risk-adjusted outperformance — disappears and stocks across the market increasingly rise and fall together. And now, with stocks near record highs amid very quiet trading — with volatility near historic lows — regular investors are aggressively cashing out.

Is Main Street onto something? Or have they made a blunder? And who is buying stocks if they're not? As a reminder, many Street titans like Carl Icahn and George Soros have also recently become very bearish on stocks. Much of the recent buying out of the June market lows has come from a combination of short covering and purchases in the equity futures market. So the only people that are really "bulled up" here are likely central banks like the Swiss National Bank, the Bank of Israel and the Bank of Japan, all of which are actively buying equities.

According to Jason Goepfert of SentimenTrader, domestic mutual funds have lost more than $26 billion in assets over the last four weeks, the largest outflow since 2011. Oddly, this runs counter to many measures showing investor sentiment is dangerously bubbly. But it's a hard data point that cannot be easily dismissed. To be fair, this reflects a change of opinion at the margins, since investors are still holding nearly the largest allocation to stocks as a percentage of total financial assets in 50 years. And equity assets compared to safe money market assets, while down from recent highs, is above levels seen at the 2000 and 2007 market peaks.

Ex-drug executive Martin Shkreli scores $2.7 million payday

Martin Shkreli, the controversial ex-drug executive now facing federal criminal charges, nearly doubled his investment in KaloBios, the drug company he briefly controlled and ran last fall.

Shkreli started buying shares of KaloBios last November when it was a penny stock, about a month before he was arrested. At the time, the company was in bad shape, winding down operations and liquidating its assets.

Shkreli paid $2.8 million for a controlling stake in the company, according to an SEC filing. He bought an additional block of shares for which he did not have to disclose his purchase price. Given that the stock was trading at well below a dollar a share, he probably paid less than $250,000 for the remaining stake.

The company announced on Monday that Shkreli sold his total stake in the company a private transaction. He received $3.10 a share, according to a filing, which comes to a total of $5.9 million. That means he made a $2.9 million profit on his initial investment of about $3 million. Shkreli could not be reached for comment.

Coddled Banking Class

How does the minimum wage affect your health?

A new working paper published by the National Bureau of Economic Research says minimum wage increases may harm the health of some workers, especially unemployed male workers. The paper claims to be the first to research how minimum wage hikes affect the self-reported health of workers in the United States.

"We find little evidence that minimum wage increases lead to improvements in overall worker health," the paper's authors write. "In fact, we find some evidence that minimum wage increases may decrease some aspects of health."

The paper also found that minimum wage hikes put both male and female employees out of work. Minimum wage hikes are especially harmful to unemployed males. "Unemployed men experience the largest health losses following minimum wage increases," the paper says. They experience worse physical health that isn't completely offset by an improvement in mental health.

Males who remained employed after a minimum wage hike were more likely to say their health was "fair or poor." It's not all bad news, however. They also reported a reduction in the number of days they experienced "mental strain." The paper found no evidence female workers were any more or less healthy because of a minimum wage hike.

Why is the EU demanding Apple pay $14.5 billion in Irish taxes?

A European Union commission has done a record-breaking audit on Apple Inc., ordering the tech giant to pay Ireland 13 billion euros ($14.5 billion) in back taxes in a controversial ruling.

The government of Ireland denies any wrongdoing, but this is the latest in a series of revelations that suggest the nation's business-friendly tax policies could lend themselves too easily to tax evasion, a reputation Jason Walsh described for The Christian Science Monitor in 2013:

"Ireland has a reputation as business-friendly jurisdiction and makes much of its educated and English-speaking workforce, but the since the 2007 crisis has gained an unwelcome reputation as an offshore tax haven without the warm climate. Ireland's corporation tax rate of 12.5 percent is the second-lowest headline in Europe, with only Bulgaria and Cyprus's 10 percent rate lower. Taken on an average basis, Ireland remains at the lower-end of so-called "implicit" tax rates, a measurement of the actual taxes paid.

“U.S. companies are the grandmasters of tax avoidance,” Edward Kleinbard, professor at the University of Southern California and former chief of staff to the congressional Joint Committee on Taxation, told The New York Times. “Nevertheless, because of the nature of U.S. politics, [the Apple case] will be framed by the U.S. as Europe overreaching and discriminating against ‘our team.’ ”

Goldman Sachs is at it Again

More than 75,000 people have signed their names to a petition protesting against the appointment of former European Union leader José Manuel Barroso to the investment bank Goldman Sachs. The outrage demonstrates what I have warned about — the peak in public confidence in government and banks is now in place. Goldman Sachs has gone too far. This move is being called “irresponsible” and “morally reprehensible.” This is all about buying influence. NO former politician is worth their weight in peanuts, no less money. Before he joined the commission, Barroso also served as Portugal’s Prime Minister from 2002-2004.

This all began in 1981 when PHIBRO, the company that made the money from the commodity rally into 1980, took over Wall Street by buying the biggest bond house, Salomon Brothers. By 1991, the first scandal erupted as the commodity boys took over Wall Street and brought their manipulations to the world of finance.

Goldman Sachs took over J.Aaron, a commodity house from which Lyod Blankfein began, a few months later. It was 31.4 years from that first step to the demise that required the biggest bailout in history to save their ass. When Salomon Brothers was being shut down for manipulating the Treasury bond market, Goldman Sachs realized that they too could be on the ropes.

Goldman Sachs bought the Clintons and stuffed in Robert Rubin as the 70th Treasury Secretary from January 11, 1995 – July 2, 1999, just long enough to get Glass-Steagall repealed, and then Rubin left with the ability to sell all his stock tax-free. Next came Hank Paulson who became the 74th US Secretary of Treasury under George Bush from July 10, 2006 – January 20, 2009. Paulson made sure that Bear Stearns and Lehman Brothers collapsed to reduce the competition for Goldman Sachs.

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