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Posts Tagged ‘Fed’

Federal Reserve is Getting Nervous

Posted by Steve Markowitz on January 27, 2016

President Barack Obama often touts his administration’s achievements relating to the economy. Often the President uses the decreasing unemployment figure and the strength of the equities’ markets as proof statements.  Both are red herrings.

The unemployment figures are ginned-up by the government to back a chosen narrative.  In recent years of this rate has been reduced mainly by Americans dropping out of the workforce and therefore not counted as unemployed.  In addition, Americans have been forced to take less than full-time work.

As stock prices have shown in recent weeks, what goes up will come down.  The Dow Jones Industrial Average is down this year by 1,800 points or approximately 10%.  This significant drop has occurred even though the Federal Reserve has maintained historically low interest rates for nearly 8 years.

The Federal Reserve today released a statement indicating that it too was concerned with the direction of the economy.  In a statement released today, the Fed said: “The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”  This typical Fed gibberish that in simple English means the economy is shaky.

The Federal Reserve’s near zero interest rate policies created an economy that is out of balance.  Cheap interest rates have not fueled real economic growth, but instead created financial bubbles, as exemplified by equity valuations.  This has placed the Fed in a quandary.  If the economy weakens, the Federal Reserve will either have to allow the forces of supply and demand to correct the imbalances; i.e. a significant recession, or use even more radical easy money policies to keep the party going.  Realistically, the only ammo left in the Fed’s arsenal is negative interest rates.  The implications of banks requiring payments from depositors for savings deposits are hard to imagine.


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Federal Government to Require Transgender Shelters

Posted by Steve Markowitz on November 20, 2015

BathroomJust when you thought that the Feds could not outdo themselves with ridiculous ideas, they come up with one that leaves many stunned.  According to the Washington Free Beacon, the Department of Housing and Urban Development (HUD) will be requiring special shelters to accommodate transgender people that would include sleeping and bathing facilities of their choosing.

This is another example of the Federal government creating classifications of people.  Ten years ago most Americans never heard of the term “transgender”.  Now, the Federal government is making laws to protect them.  There is nothing in the Constitution that gives the government the power to take such actions.  It would be bad enough if the government’s intent came from compassion, but it is likely more to do with money and power.  HUD’s annual budget is $6.5 billion.  By creating subgroups of disadvantaged Americans it gives itself more power and larger future budgets.  The only way to put a stop to this lunacy is by forcing the government to operate within a balanced budget.

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Unemployment Number Drops While Economy Weakens

Posted by Steve Markowitz on November 17, 2015

The US Bureau of Labor Statistics last week released the monthly unemployment figures that indicated over 270,000 new jobs being created with the unemployment rate dropping to 5%.  The Obama Administration touted these figures as positive indicators of economic strength.  A look under the covers shows show something different.

While the official unemployment rate has dropped significantly since President Obama’s first election, these numbers are at best suspect.  First, they do not take into account the quality of the jobs created; i.e. pay scales. In addition, the figures ignore the many Americans who are underemployed and no longer count because they are no longer searching for a job.

Tony Sagami recently published an article titled The Poisonous Cocktail of Main Street Woes and Federal Reserve Liftoff that shares some sobering statistics putting the true economic situation in perspective.  This includes:

·       401(k) plans are a tax efficient means for workers to put money away for retirement.  Withdrawing funds from these accounts prior to the age of 59.5 leads to a 10% penalty and additional income tax.  Irrespective of this 30 million workers have prematurely taken money out of the plans with 20% of account holders borrowing against their 401(k)s.

·       A record 36% of women between the ages of 18 and 34 continue to live with their parents.  In addition homeownership is at its lowest level in three decades even though mortgage rates are at historic lows.

·       During October, foreclosures on homes jumped by 12% with final stage foreclosures increasing 31%.

At best the numbers Sagami presents demonstrate the weakness of the recovery since 2008.  They likely indicate systemic problems within the economy caused my inept governmental and central-bank policies, as well as the inefficiencies brought to the economy via access governmental regulations.

The low interest rate policies pursued by the Federal Reserve since the 2008 meltdown have failed to create a robust economy.  These policies have not only weakened long-term economic growth, but also increased the disparity between wealthy and average Americans.  However, the Fed is now in a conundrum.  While it should be increasing interest rates, and there are predictions it will do so in December, the economic withdrawal caused by that action could lead to further economic weakening.

Posted in economy, Unemployment | Tagged: , , , , , | 1 Comment »

Posted by Steve Markowitz on October 21, 2015

Macro-Economic Consequences of Excessive Debt

During the past three and half decades the United States and other countries have been on a debt binge.  At an increasing rate the Country has used debt not to finance needed infrastructure or future growth, but instead to increase the lifestyle and wealth of the current generation, most notably Baby Boomers.  Examples include the United States running significant deficits to fund its social programs and crony capitalism.

DebtIn the private sector, individuals and corporations now use a similar philosophy for debt.  Instead of using debt in the traditional role of financing growth, companies use it to increase distribution to executives, employees and shareholders.  Similarly, individuals who in previous generations used debt mainly to fund the purchase homes, vehicles and other big-ticket necessities, now use it to purchase any product that offers instant gratification.  Debt is also used, with governmental support, to fund higher education that no longer offers income growth.  The significant increase in worldwide debt is depicted in the chart.

Although politically incorrect to state in today’s world, excessive debt has consequences.  On the consumer side it often leads to bankruptcies and loss of assets.  A more insidious problem occurs when debt is sovereign, the consequences that we are now seeing in the lethargic economic growth that is occurred since the end of the recession nearly 6 years ago.

Dr. Lacy H. Hunt, Ph.D has published a lengthy report on issues created by excessive debt in the Hoisington Quarterly Review and Outlook – 3Q2015.  This report advises investors to stay in long-term government bonds given the likelihood of long-term \ continued low interest rates.  The report also includes reasons why the debt has been, and will continue to be, a drag on economic growth.  Hunt’s conclusions include:

  • Future business activity will reflect two economic realities: 1) the over-indebted state of the U.S. economy and the world; and 2) the inability of the Federal Reserve to initiate policies to promote growth in this environment.” Translation – The Fed’s easy money policies have not and will not fix the economic problems brought on by excessive debt.
  • S. government debt now stands at 103% of GDP. If private debt is included, the ratio climbs to about 370% of GDP.  Scholarly studies indicate that real per capita GDP growth should slow by about one-quarter to one-third from the long-run trend when the total debt-to-GDP ratio rises into the range between 250% and 275%.  Since surpassing this level in the late 1990s, real per capita GDP has grown just 1% per annum, much less than the 1.9% pace from 1790 to 1999.”  Translation – Excessive debt has led to lower economic growth.
  • These results indicate that the relationship between debt and economic growth is non-linear, or progressively negative, as debt advances to higher levels, a pattern confirmed by academic research (Chart 2). The latest information further supports this relationship.  The current expansion began in 2009, and since then real per capita GDP growth has been 1.3%, less than half the 2.7% average growth in all expansions from 1790 to 1999.”  Translation – This recovery is different and historically weak and seems related to the growing debt.
  • The Bank of International Settlements released a report last month stating that total public and private debt relative to GDP for the entire global economy stands at 265%, up from 219% at the peak of the prior credit cycle. Additionally, the global rate of growth is decelerating significantly while debt levels are continuing to rise, indicating an increasing debt drag. Researcher Chris Martenson calculated that since 2008 total public and private debt rose by $60 trillion while GDP gained only $12 trillion.”  Translation – While the huge deficit spending by governments have not led to proportional economic improvement.
  • Despite the unprecedented increase in the Federal Reserve’s balance sheet, growth in M2 over the first nine months of this year fell below its average rate of growth over the past 115 years, a time when the growth in the monetary base was stable and quite modest (Chart 3).” ….  “The drop in velocity to a six decade low is consistent with a misallocation of capital and an increase in debt used for either unproductive or counterproductive purposes.”  Translation – While the Fed has increased its balance sheet significantly, it has not led to a real increase in the money supply, a requirement for economic growth.
  • The current zero interest rate policy has rendered mass distortions in the allocation of capital and mispricing of risk assets. Such repressed interest rates have contributed to more excess capacity that, in turn, has reduced inflation.  The ZIRP policy allows low quality borrowers access to debt markets, creating untenable balance sheet exposure when economic activity slows”  Translation – The fed’s policies are leading to imbalances in the markets that will ultimate have to rebalance, which always involves pain.
  • An extended period of negative interest rates would lead to many adverse unintended consequences just as with QE and ZIRP. The initial and knockoff effects of negative interest rates would impair bank earnings.  Income to households and small businesses that hold the vast majority of their assets with these institutions would also be reduced.  As time passed a substantial disintermediation of funds from the depository institutions and the money market mutual funds into currency would arise.  The insurance companies would also be severely challenged, although not as quickly.  Liabilities of pension funds would soar, causing them to be vastly underfunded.”  Translation – The coming consequences of the Fed’s policies will not be pretty.

Lacy concludes by saying: “History, economic studies and practicality of politics suggest this is just another red herring trying to solve over-indebtedness with more debt.”  In normal times the obviousness of this conclusion would be laughed at.   But these are not normal times for the world’s economies.

Hoisington Quarterly Review and Outlook – 3Q2015

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Federal Reserve Indicates Willingness to Employ Negative Rates

Posted by Steve Markowitz on October 12, 2015

For months the Federal Reserve (Fed) has been “threatening” to increase interest rates from the historic lows.  To date the Fed has come up with a myriad of excuses in delaying any increase.  Given the bubbles created in certain parts of the market including worldwide equities, it is likely that the Fed fears that a rate increase would pop the bubbles leading to significant economic dislocations.

In a world where macroeconomic rules have been turned on their heels, the Fed has floated a trial balloon that is diametrically opposed to their purported goal of increasing rates.  As reported by MarketWatch.com, some in the Fed have indicated a willingness to go to negative interest rates during the next economic crisis; i.e. recession.  In a nutshell, those that put cash in the bank would lose a small percentage of that cash each year, instead of obtaining interest, the historical norm.

New York Fed president William Dudley said in an interview last week: “Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate.”  He went on to state: “We see now in the past few years that it has been made to work in some European countries,” and “so I would think that in a future episode that the Fed would consider it.”

It is likely that Dudley’s comments were not a slip of the tongue, but instead a trial balloon to see how markets would react to a radical economic move.  While there has been some softening of the US dollar and increases in commodity prices such as gold, the response has been muted, exactly what the Fed hope for.  This helps demonstrate how far off of economic reality we have come.

Interest RatesTo help put things in perspective, the Federal Reserve refused to implement negative interest rates during the 2009 meltdown, the worst economic calamity since the Great Depression, for fear of the consequences.  The fact that they would consider such action today helps demonstrate just how fragile the Fed views the economy.

The central banks have used historically low interest rates since the 2009 meltdown, as indicated in the attached chart.  Pushing rates to negative returns is a continuation of this policy, although now breaking a psychological barrier, whose goal is to stimulate the economy through increased consumption.  This low interest rate policy has been a failure, which is being confirmed by the Fed’s willingness to go even further.  Why should we expect this additional step would be more successful?

A negative interest rate policy will have unintended economic consequences.  However, there are consequences that are rather easy to foresee:

  • Lower savings for individual Americans will make them even more vulnerable to the consequences of recession.
  • Inflicting economic pain on retirees and others on fixed incomes.
  • Cajoling investors into more risky investments in search of returns.
  • Significantly damaging those dependent on money markets.
  • Decreasing return assumptions for pension plans that will force managers into more risky investments and require additional injection of funds to keep the plans solvent.

New York Fed Chairman Dudley would be willing to pursue the radical negative interest rate policy based on the fact that some European countries have implemented it without major consequences.  However, Dudley ignores the fact that the US dollar is the world’s reserve currency and therefore has broader implications.

We are now approaching the eighth year since the economic meltdown.  We were told that the Fed’s low interest rate policies will repair the damage.  We also have been told by our government that all sorts of stimulus programs and deficit spending would repair the economy.  Both failed, which has resulted in the Federal Reserve announcing the possibility of still more radical programs.  A more prudent approach would be a realistic review of the implemented policies and determine why they failed before implementing more of the same.  But this small piece of logic is either lost on the Fed or they feel that they have no alternative.  Neither offers confidence in the Fed’s ability to navigate these complex issues.


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Public Pension Funds Crisis Looming

Posted by Steve Markowitz on September 10, 2015

Defined benefit pension plans are a thing of the past for most private companies.  Those plans guarantee payments to retired employees based on years of service.  While a wonderful concept that was viable when American industry had little competition following World War II, these plans became untenable as worldwide competition increased.  As a result, most American businesses that offer pension plans have moved to 401(k) &plans whose funding requirements are more flexible and can be kept in line with a company’s economic realities.

In defined benefit pension plans, the real costs are hidden within complex actuarial tables that require assumptions on long-term returns.  Should the assumptions be overly optimistic, which they often are, what may look like a financially healthy company quickly become insolvent.

While most of the private sector has addressed its pension responsibilities, the public sector still offers many governmental employees defined benefit pension plans.  This has created a dangerous economic model for many municipal and state governments, which is being exasperated by decreasing returns for pension plan investments.

Timothy W. Martin’s recent article in the Wall Street Journal highlights the growing problem of public-sector pension plans.  The problem is being brought to a head as long-term plan assumptions by necessity are being decreased due to the long term economic downturn and low interest rates available on fixed income investments.

Historically, annual pension return assumptions have been set at 8%.  This assumption was used to calculate the rate of growth of pension fund investments.  This rate of return has not obtainable for some years.  However, the 8% return rate assumption was maintained by pension fund managers as a way of masking problems within their funds.  As a result, states and municipalities were able to underfund their plans and push liabilities off to a future time.  That time is rapidly approaching.

Martin points out that:

  • Over 60% of state retirement systems have cut their assumptions in the past seven years with the average now being just under 7.7%. This Blog proffers the view that even this lower assumption is overly optimistic.  In fact, it has been reported that for the first half of this year the average annual return for pension funds was less than 4%.
  • Last week one of the nation’s largest public pension funds, the New York State Common Retirement Fund, cut its return rate a half a point to 7%. Similarly, the San Diego County Employees Retirement Association cut its assumption quarter point to 7.5%.  The Oregon Public Employees Retirement System and Texas Municipal Retirement System have also lowered their forecasted return rate by a quarter point.
  • America’s largest public retirement fund, The California Public Employees’ Retirement System, is considering dropping its current return assumption rate from 8%.

While lowering the return assumptions by state and local governments is ultimately a positive step, forcing governments to adequately fund their pension obligations, there is significant pain associated with this action.  Increased taxpayer dollars will be required to fund the pension plans.   This will decrease funds available to support governmental services.  For example, Martin reports that Boulder, CO has eliminated 100 positions and cut services in order to add $1.7 million to its pension fund.

States and municipalities have increased their funding of pension programs by over $120 billion in the past 10 years.  That would pay for a lot of government services!


Pension problems for state and municipal governments will grow significantly since even the new lower assumptions are overly optimistic.  In the 1960s, for example, return assumptions were less than 4%.  Should pension fund returns approach those levels, the result would be catastrophic.  As Martin points out, every 1% decrease in a fund’s returns leads to a 12% increase in the pension’s liabilities.

While the looming public pension crisis was created by state and municipal governments using unrealistically high return assumptions and offering benefits that they could not afford, the problem has been exasperated by the low interest rate policies of the Federal Reserve that further depresses fund returns.  This is one example of the significant consequences of the Fed’s interventionist policy that has distorted expenses for some, cajoled investors into higher risk investments as they seek returns, and created bubbles including overpriced equity valuations. These problems are just now beginning to percolate.  When they boil over, books will be written on the fallacy of the Federal Reserve’s low interest rate policies.

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Fed’s Policies Have Created Stock Market Bubble

Posted by Steve Markowitz on September 3, 2015

The last few weeks have come with increasing turmoil in equities markets.  One day last week the Dow dipped nearly 600 points, only to recover nearly 450 the next.  The market’s gyrations are occurring after their values had been relatively flat for the past year.  This is problematic since prior to the flattening, increasing equities’ valuations masked broader weaknesses in the economy.  For example, increasing equity values offset some losses inflicted on parts of the economy due to the low interest rates that decreased returns on fixed income investments.

The signs are clear; the equity bubble is at risk.  Many blame the volatility on problems with the Chinese economy.  However, as this Blog has proffered previously, Federal Reserve and US governmental policies are the culprits. Read the rest of this entry »

Posted in Bubbles | Tagged: , , , , , , | 1 Comment »

Meaningless Unemployment Rate Drops to 5.4%

Posted by Steve Markowitz on May 12, 2015

Last week the US Department of Labor released April’s unemployment figures that indicated the US economy added 223,000 jobs, decreasing the unemployment rate a notch to 5.4%.  This would be good news if the Labor Department’s figures realistically represented the US employment situation.  Unfortunately, it does not.

The Labor Department’s unemployment figures only include Americans who indicate they are searching for employment.  Those that have dropped out of the workforce, for example due to an inability to find work, are not counted as unemployed.  This ludicrous accounting practice shows a low unemployment rate while at the same time the more meaningful labor market participation rate remains at multi-decade lows, according to the New York Times.

It is telling that while the Labor Department releases optimistic, yet unrealistic employment figures, the Federal Reserve leaves the benchmark interest rates at historic lows.  The Fed’s action indicates the irrelevance of the Labor Department’s figures.

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Subprime Loans are Back Again

Posted by Steve Markowitz on March 21, 2015

It was just six years ago that the world was at the brink of economic Armageddon.  The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640.  The cheap mortgages to those with limited assets helped create a huge bubble in the housing market.  When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.

Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure.  This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers.  In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans.  Without the bailouts they would have encountered substantial financial losses.

There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market.  Without suffering losses investors have had short memories and in fact they are back bailoutsat it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.

Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans.  Today, subprime loans are not in the housing market, but in consumer goods.  The Journal published the following:

  • Subprime loans are at the highest level since before the 2008 financial meltdown.
  • Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
  • During the fourth quarter of 2014, total US household debt increased by over $300 billion.

The Federal Reserve’s low interest rate policies are pushing investors to greater risk as they seek returns.  This, coupled with the availability of cheap capital has offered incentives for nontraditional lenders to enter the credit markets.  For example some venture backed funds are fueling the growth of subprime lending, such as Lending Tree, Inc., an online auto loan marketplace.  These lenders are not regulated and are likely to use leverage and other financial games to pursue even more subprime lending, a repeat of the actions behind the 2008 financial crisis.

Subprime lending is fueling economic unsustainable growth.  For example US auto sales topped 16.5 million in 2014, a nearly 6% increase from the previous year and up nearly 60% from 2009.  When the inevitable slowdown occurs, an increasing number of subprime borrowers will be unable to repay their loans, a repeat of what led to the 2008.

History has demonstrated that booms and busts, and yes bubbles, are at normal part of economic cycles.  However, major macroeconomic bubbles have generally been a once in a generation occurrence that is self-correcting and serves as a reminder to that generation of the pitfalls of imprudent economic behavior.  The collapse of 2008 was different with many investors being bailed out and equity markets returning to their highs within a relatively short period of time.  This has shortened capitalists’ memory who are now once again making imprudent loans in search of returns.  This will lead to another significant downturn in the relatively near future, a probability that investors are ignoring in the belief that when it occurs the government will again come to the rescue.  However, this time the government and the Federal Reserve are themselves deep in deep.  It remains to be seen how this huge sovereign debt will affect the outcome.

Posted in Bailouts, Bubbles | Tagged: , , , , , | 1 Comment »

Fed’s Yellen Primes Pump, Feeds Bubbles

Posted by Steve Markowitz on February 24, 2015

YellenFederal Reserve Chairperson, Janet Yellen, today announced that Fed will continue its low interest rate policy for some time into the future. Many had expected Yellen to indicate that with the improving economy, the Fed would begin a slow rise in interest rates. Yellen’s commitment of more gin in the punch bowl had an immediate effect with the Dow Jones Industrial Average, S&P 500, and the UK’s flagship FTSE 100 all hitting record highs.

Generally, rising stock markets are positive signs if the rise is based on appropriate economic fundamentals.   The lengthy drive-up of equity values are instead being driven by the Fed’s low interest rates and Quantitative Easing. This is problematic at various levels. First, should there be an economic slowdown, as there inevitably will, the Fed would have no ammo left to juice up the economy. In addition, when interest rates eventually rise, overvalued equities will show a rapid decline in value causing significant economic pain.

Perhaps the most problematic aspect of the Federal Reserve’s low interest rate policies is who benefits from them. While some on mainstream benefit as equity values rise, especially in 401(k) plans, the greatest benefit goes to the highest income brackets, the people who have the most to invest. This has led to the large increase in the income disparity in the United States. The Fed’s continuation of its policies will further increase the disparity.

Finally, the Fed’s low interest rate policies have cajoled investors into higher risk investments in search of yield. This places further upward pressure on equity values as the bubble builds and guarantees that the next downturn will be exasperated by these interventionist policies.

For many months government publish statistics has shown a significantly improving economy. In addition, by the classical definition, the recession ended years ago. These two items seem in conflict with Janet Yellen’s announcement today that the economy is still fragile. Either the government’s published figures or Yellen’s comments of earlier today relating to the economy need to be questioned.

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