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Monday 03.13.2017

Traders: Fed Reserve Will Increase Interest Rates at Least Three Times in 2017

Federal Reserve chair Janet Yellen is eyeing at least three benchmark interest rate increases this year, the Financial Times reports.

A quarter point increase is probable Wednesday following the Federal Open Market Committee meeting, with a robust February jobs report cited as one of the reasons to move forward – 235,000 jobs were added while unemployment slipped to 4.7 percent. Goldman Sachs analysts predict another increase to take place in June.

Yellen has been slow to raise rates, with only two increases happening since she took over in 2014. In January, she said it was time to do so again.

"The U.S. economy has exhibited remarkable resilience in the face of adverse shocks in recent years, and economic developments since mid-2016 have reinforced the Committee's confidence that the economy is on track to achieve our statutory goals," Yellen said during a speech in Chicago in mid-January. "Job gains have remained quite solid, and the unemployment rate, at 4.8 percent in January, is now in line with the median of FOMC participants' estimates of its longer-run normal level. On the whole, the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat. The Committee currently assesses that the risks to the outlook are roughly balanced.”

U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis

U.S. subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments, according to S&P Global Ratings.

Losses for the loans, annualized, were 9.1 percent in January from 8.5 percent in December and 7.9 percent in the first month of last year, S&P data released on Thursday show, based on car loans bundled into bonds. The rate is the worst since January 2010 and is largely driven by worsening recoveries after borrowers default, S&P said.

Those losses are rising in part because when lenders repossess cars from defaulted borrowers and sell them, they are getting back less money. A flood of used cars has hit the market after manufacturers offered generous lease terms. Recoveries on subprime loans fell to 34.8 percent in January, the worst since early 2010, S&P data show.

With losses increasing, investors in bonds backed by car loans are demanding higher returns, as reflected by yields, on their securities. That increases borrowing costs for finance companies, with those that depend on asset-backed securities the most getting hit hardest.

Japan Begins QE Tapering: BOJ Hints It May Purchase 18% Less Bonds Than Planned

With the Fed expected to further tighten financial conditions following its now guaranteed March 15 rate hike, and the ECB recently announcing the tapering of its QE program from €80 to €60 billion monthly having run into a substantial scarcity of eligible collateral, the third big central bank - the BOJ - appears to have also quietly commenced its own monteary tightening because, as Bloomberg calculates looking at the BOJ's latest bond-purchase plan, the central bank is on track to miss an annual target, by a substantial margin, prompting investor concerns that the BOJ has commenced its own "stealth tapering."

While in recent weeks cross-asset traders had been focusing on the details and breakdown of the BOJ's "rinban" operation, or outright buying of Japan’s debt equivalent to the NY Fed's POMO, for hints about tighter monetary conditions and how the BOJ plans to maintain "yield curve control", a far less subtle tightening hint from the BOJ emerged in the central bank's plan released Feb. 28, which suggests a net 66 trillion yen ($572 billion) of purchases if the March pace were to be sustained over the following 11 months. As Bloomberg notes, that’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year.

Some more details: the central bank forecast purchases of 8.9 trillion yen in bonds in March, based on the midpoint of ranges supplied in the operation plan. Maintaining that pace for 12 months will see it accumulate about 107 trillion yen of debt. At the same time, 41 trillion yen of existing holdings will mature, leaving it with a net increase of 66 trillion yen, well below the stated goal of 80 trillion yen.

And in another potential major shift to the status quo, one which would imply a sharp steepening in the JGB yield curve, the March plan indicates the BOJ may acquire 1.5 trillion yen of bonds due in more than 10 years, down 32 percent from the level in January 2016 when it introduced its negative rate policy. Other parts of the curve are also changed: for one-to-five-year notes, the projection is for an 8.6 percent decline, whereas the central bank will be buying roughly the same amount of five-to-10-year notes.

We Are Dangerously Close to a Recession

Restaurant Recession Meets February Debacle

Restaurants should have done well in February. The economy created 235,000 jobs, according to the Bureau of Labor Statistics. The big gain was ascribed to the weather – the warmest February in 100 years. Weather-sensitive industries, such as construction, went on a hiring binge. The exuberance should have led to activity at restaurants. Compared to Februaries when people stayed home because polar vortices marauded much of the nation, this time, the weather invited them to head out.

But no. Folks stuck in the real economy and not benefiting from the surge in stocks, or those who’re paying with their last dime for the surge in housing costs, they’re cutting back on restaurant meals.

Same-store restaurant sales in February dropped 3.7% and foot traffic dropped 5.0% from a year ago, according to TDn2K’s Restaurant Industry Snapshot. This comes after a January report, from which emanated for the first time in a while some sort of gloomy optimism, titled with delicious irony: “Flat Sales, Welcome Change for Restaurant Industry in January.” It went like this: “While same-store sales growth was flat (zero percent) in January, it represented a welcome break from the ten consecutive months of negative sales growth experienced by the industry.”

That gloomy optimism has now too fallen by the wayside, and it was “not a turning point in declining industry performance,” the report now specified. Over the last three months – with the gloomily optimistic January in the middle of it – same-store sales fell 2.7% and foot traffic 4.7%.

Pence: ‘Obamacare Nightmare Is About to End’

Vice President Mike Pence promised Americans that “the Obamacare nightmare is about to end” during a speech Saturday in Kentucky as he sought to sell the House Republican leadership’s controversial Affordable Care Act replacement proposal.

Although the Kentuckians gathered at Louisville’s Harshaw Trane proved to be an enthusiastic audience, Pence had no easy task in front of him as he attempted to quell misgivings about the Republican Obamacare replacement plan. While Democrats are loath to witness former President Obama’s signature health care overhaul face uprooting, many of Congress’ most conservative Republicans are outraged and frustrated with the bill, saying that it does not fulfill the party’s promise of a complete repeal. Pence, however, insisted that President Donald Trump was honoring his campaign promise.

“Most importantly of all, the top priority the president gave us: to work with members of Congress and make sure that the Obamacare nightmare is about to end,” Pence said. “Obamacare has failed the people of Kentucky, Obamacare has failed the people of America, and Obamacare must go!”

Although Pence fully endorsed the Republican bill and reaffirmed both his commitment and the president’s commitment to ending the “Obamacare nightmare,” most of the vice president’s speech was focused on reiterating Obamacare’s failures and touting its necessary disintegration instead of addressing Republicans’ specific concerns about the bill.

World Bank scraps order for Venezuela to pay US$1.4b to Exxon

A World Bank panel has overturned part of a ruling ordering Venezuela to pay US$1.4 billion to ExxonMobil in compensation for nationalising a company project 10 years ago.

In an 85-page ruling, the Washington-based International Centre For Settlement of Investment Disputes (ICSID) agreed with Venezuela's argument appealing the amount of compensation to the US oil giant, and overturned that part of its 2014 decision.

The ICSID ruling was dated Thursday, but released on Friday. ExxonMobil originally had sought US$12 billion in compensation over the loss of what it said it had already invested and what it expected to reap from the Cerro Negro project, which was nationalised in 2007.

In October 2015, the three-member ICSID arbitration panel rejected ExxonMobil's arguments that Venezuela's action represented an illegal expropriation, but awarded the company payment as "just compensation" under an international investment treaty.

Catherine Austin Fitts-Don’t Blame Trump for Ending the Bond Bull Market

Oil prices hit three-month low as U.S. rig count climbs

Oil prices dropped to their lowest in three months on Monday despite OPEC efforts to curb crude output, dragged down as U.S. drillers kept adding rigs.

Brent crude (LCOc1) had by 0011 GMT (8:11 p.m. ET) fallen 42 cents, or 0.82 percent, to its lowest since Nov. 30 at $50.95 per barrel. It closed the previous session down 1.6 percent at $51.37 a barrel.

U.S. West Texas Intermediate crude (WTI) (CLc1) declined 50 cents, or 1.03 percent, to $47.99 a barrel, its weakest since Nov.29. U.S. drillers added oil rigs for an eighth consecutive week, Baker Hughes said on Friday, as energy companies increased spending to take advantage of a recovery in crude prices since the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut output late last year.

OPEC and other major oil producers including Russia reached a landmark agreement last year to cut production by almost 1.8 million barrels per day (bpd) during the first half of 2017.

Why Millennials Should Look for Blue Collar Jobs

On Friday, The Bureau of Labor revealed that the U.S. economy added 235,000 jobs in February. Despite the positive jobs report, a study by the Job Application Center Opens a New Window. found that millennials are still having a hard time finding work straight out of college.

Levo Founder & CEO Caroline Ghosn stated that millennials get a bad reputation because they are the first ‘digital native generation.’

“So we are the first generation to never have known what it’s like to not have the Internet, so we have these digital behaviors that are unprecedented. And we have these expectations around things being very fast and often when that translates into the workforce, we have a little bit of a generational clash,” she told the FOX Business Network’s Liz Claman.

Ghosn said that millennials are staying away from blue collar jobs because of the media’s focus on how ‘interesting and futuristic’ the technology industry is.

We may soon know why the Fed changed its tune

By now, everyone knows the Fed wants to hike interest rates Wednesday, but what is not known is what central bank officials think about future rate increases this year.

Friday's strong jobs report was the whipped topping on a parfait of strong indicators for the Fed. In the coming week, February retail sales and the consumer price index will both be important, but the Fed already has above-trend job growth of roughly 235,000 in both January and February, and hourly wage gains of a respectable 2.8 percent.

The Fed is expected to raise the fed funds target range by a quarter point, which would put it between 75 basis points and 1 percent. That move would directly impact short-term borrowing costs, but the Fed's rate moves are like a domino effect and will send even longer-term rates higher. Those rates affect everything from car loans to mortgages, and commercial loans.

When the central bank unfurls it's new forecasts Wednesday, the market will be looking to see if there's an adjustment in its collective interest rate outlook, which now points to three quarter-point rate hikes this year. The market has looked skeptically at these forecasts since the Fed began 2016 with forecasts pointing to four hikes, and ended the year with just one rate rise in December.

Outdoor retailer Gander Mountain files bankruptcy, closing 32 stores

Outdoor retailer Gander Mountain filed for bankruptcy protection Friday and announced the closure of 32 stores nationwide as the company prepares for a quick sale by mid May, the company announced.

The privately held, Minnesota-based retailer said the Chapter 11 protection will also for the sale "on an expedited basis while protecting the interests of our customers, employees and other stakeholders." The company said it is in active discussions with several parties and anticipates closing a sale by May 15.

"Like many retailers, Gander Mountain experienced challenging traffic patterns and shifts in consumer demand resulting from increased direct-to-customer sales by key vendors and accelerated growth of e-commerce," the company said.

"Despite aggressive actions to improve the efficiency of the company's retail operations and support functions, the underlying financial impact from underperforming stores and unproductive, excess inventory hampered efforts to create a sustainable path forward."

Report: Funding may be cut from TSA, FEMA to pay for wall

Markets Have Finally Woken Up

I’ve been warning my readers since last December that the Fed was on track to raise interest rates on March 15. I was almost alone in that view. Market indicators were giving only a 25% chance of a rate hike. Wall Street analysts were paying lip service to the idea that the Fed might raise rates twice before the end of the year but said the process might begin in June, not March.

Wall Street expectations and market indicators did not catch up with Fed reality until last week, when expectations moved from 30% to 90% in four trading days before converging on 100%.

So expectations of a Fed rate hike March 15 are now near 100% based on surveys of economists and fed funds futures contracts. Markets are looking at things like business cycle indicators, but that’s not what the Fed is watching these days. The Fed is desperate to raise rates before the next recession (so they can cut them again) and will take every opportunity to do so.

But as I’ve said before, the Fed is getting ready to raise into weakness. It may soon have to reverse course. My view is that the Fed will raise rates 0.25% every other meeting (March, June, September and December) until 2019 unless one of three events happens — a stock market crash, job losses or deflation.

The Big Short Gets Its Day in Court

Almost a decade after the financial crisis of 2008, the individuals and institutions responsible for the subprime mortgage crisis that created the worst financial disaster since the Great Depression have paid almost no price for it.

Some fines were paid by banks to the government, a handful of bankers ended up in prison, but few investors were able to recover the money lost by the banks and their investment companies. Now, as Senator Al Franken has noted, Trump has filled his administration with billionaires who played roles in nearly wrecking the world’s economy.

On Monday, a trial begins before Justice Saliann Scarpulla in the Manhattan Supreme Court, to see if one bank, JPMorgan Chase, can be held accountable for the loss one victim suffered. The victim is Ambac Assurance UK, a subsidiary of New York-based Ambac Financial Group; Ambac is a guarantor, meaning the company pays principal and interest on securities if the issuer of the securities defaults. In May 2006, Ballantyne Re, a financial holding company created by Scottish Re, entered into an agreement with JPMorgan Investment Management (JPMIM), a division of JPMorgan Chase, to invest $1.65 billion. The investment, subject to an agreement that spelled out investing guidelines, was guaranteed by Ambac.

The contract required JPMIM to pursue “reasonable income while providing a high level of safety of capital.” It also required JPMIM to adhere to a law called the Delaware Insurance Code, which stipulates that an insurance company is not allowed to invest more than 50 percent of its assets in mortgage-backed securities. But, right away, according to court documents, JPMIM invested almost the entire $1.65 billion—about 90 percent—in mortgage-backed securities.

Sears just hinted at another round of store closings

Sears hasn't completed its latest round of store closings, but it looks as if the company is already planning for more.

In a prerecorded conference call to discuss quarterly earnings on Thursday, Sears' chief financial officer, Jason Hollar, said the company was looking for ways to generate "liquidity" — in other words, cash — and he specifically highlighted the company's real estate.

"We have a valuable real-estate portfolio, which at the end of the fourth quarter comprised 1,050 leases with significant optionality, as well as 380 owned stores, many in prominent locations," Hollar said. "We will continue to assess opportunities to right-size our store footprint and inventory levels aligned to our ongoing transformation to an asset-light integrated retail model."

By highlighting the leases with optionality, Hollar seems to be suggesting that Sears can find ways to either partially or entirely get out of those leases before they expire. The owned stores can be sold for cash. Sears is under pressure from years of plunging sales, and investors have been supportive of the company's decision to close its unprofitable stores. The company's shares surged 14% on Friday.

Keiser Report: Rise of the Machines

Record Number of Americans Renouncing Citizenship

Record numbers of Americans are saying goodbye to the US and our next guest, international tax planning expert Mark Nestmann of the Nestmann Group, thinks this is just the beginning. In a recent FS Insider podcast, Nestmann explains why he thinks this trend will continue, including a wide-ranging discussion on tax havens, foreign investment into the U.S., and the end of cash.

“I think it’s the tip of the iceberg, Nestmann said. “People might be scratching their heads and thinking, ‘my gosh – why in the world would someone take such a radical step as giving up their U.S. citizenship and passport?”

While the election of Trump may play a role for some in the years ahead, in most cases Americans are renouncing their citizenship because they already live abroad and, among the millions of those that do, complying with U.S. tax laws and filing requirements has become an absolute nightmare in recent years.

Why? First off, the U.S. is the only nation other than Eritrea to tax income of non-resident citizens, leading many expatriates to renounce their homeland rather than pay a large portion of their income to a nation that no longer provides government services to them. In addition, foreign banks and other financial institutions abroad shy away from managing accounts of non-resident Americans for fear of violating the Foreign Account Tax Compliance Act, more commonly known as FATCA laws.

20,800 Walmart workers in Arizona get a cash bonus — and a raise

More than 11,500 Walmart associates in metro Phoenix and more than 9,300 others statewide got cash bonuses based on store performance in the fourth quarter of 2016, the company said in a news release Friday.

The bonus money was included in workers' paychecks Thursday, and they also received an annual pay raise, the company said. Individual bonuses are based on multiple factors, including the associate’s position and time in that position. If the money had been parceled out equally, each person would have received less than $200.

More than 850,000 Walmart associates nationwide divided a $157 million bonus pool; $3.8 million went to Arizona employees, the company said. “These bonuses are Walmart’s way of saying ‘thank you’ to our associates for their hard work and the fantastic job they do for our customers all year long,” Paula Ginnett, Walmart vice president and regional general manager in Arizona, said in a statement.

“In stores across the country, our associates are leading many of the innovations that are transforming our business, and we know that when our associates succeed, so does Walmart.”

Are Central Banks Losing Control?

Eight years after the crisis of 2008-09, central banks are still injecting $200 billion a month into the global financial system to keep it from imploding. If you want a central banker to choke on his croissant, read him this quote from socio-historian Immanuel Wallerstein: “Countries (have lost the ability) to control what happens to them in the ongoing life of the modern world-system.”

Stated another way, Wallerstein is asking: what do central banks no longer control? The quote is from Wallerstein’s recent meditation on China: China is Confident: How Realistic?

The question is how realistic is this self-assessment of China? There are two premises embedded in China’s self-confidence, whose validity need to be investigated. The first is that countries, or rather the governments of states, can actually control what is happening to them in the world-economy. The second is that countries can effectively contain popular discontent, whether by suppression or by limited concessions to demands.

If this was ever even partially true in the modern world-system, these assertions have become very dubious in the structural crisis of the world capitalist system in which we find ourselves today.

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