Here We Go Again

We are back to the insanity of 2008/9 multiplied by 500% for what was essentially a global shutdown orchestrated by the elites, ie; those at most fear of loosing their lives, billionaires, politicians and the like, while around 6 billion people are left loosing their businesses, livelihoods and putting about 20% of these right back into poverty, reversing the well orchestrated false lifting of the bulk of them out of poverty over the last 30 years... My thoughts are below:

I have been thinking of the last 2 years where our "front line" emergency response people around the country were steadily being supplied Naloxone to keep overdose cases alive and rubber gloves to prevent any skin exposure to the chemicals they ingested that if improperly handled could kill a first responder... Yea, 75,000+ OD's a year by 2018 with a small decrease in 2019 mostly to the emergency response being able to jolt people back in the world of the living... Very little mention of the 70.000 alcohol related deaths ever made the press or the 35,000 gun related deaths 60% self inflicted, ie; suicide.  Oh, then there is the health epidemic where millions suffer digestive issues, diabetes, hypertension etc. directly related to the guinea pig effect of Americans being subjected to the worst quality food on the planet.  The "drug" industry has exploded in riches providing "solutions" to these "diseases".  Hell I get back to the US and see Narcolepsy ads on TV!  Narcolepsy!

Anyway, what is going on now with all that?  We are all chasing a virus that fortunately for most is mildly deadly.  We have shut down the global economy on a dime as the billionaires, global elite and politically powerful run scared and pull all the stops to keep from getting it, putting the livelihood of billions of people at risk.  I just read that it is likely roughly 500,000,000 people will fall back into poverty immediately, yea 1/2 billion people drop to impoverished to save the 1%... We are in dire straights but not from the virus.  We are in dire straits because the US was the only developed nation on the planet that tried for less then 2 years to normalize the Fed balance sheet and bring interest rates back to market levels in a global overly leveraged universe.  But they failed miserably.  By September 2019 the "swaps" market froze.  Underlying interest rates spiked more then during the financial crises and the Fed reversed course on a dime and cut rates rapidly and pumped $500,000,000 into the "financial system" to effectively bail out hedge funds that had been playing a game with increasing leverage to scrape a few pennies out of a system that had to low interest rates for to long and when things went the other way they got caught flat footed and had to be bailed out.  This all happened behind the scenes and almost nobody knows about it.  All they know is from that point forward all the money printing went directly to the stock market which reached all time highs by February.  Stock buyback's by corporations reached nearly $ 1 trillion a year for the last 3 years (following years of records preceding) further pumping up stock prices to enrich the CEO's and "investors" in these companies debt.  Any company could sell debt there was so much money chasing any yield above the Central Bank manipulated low rates that went on for far to long.  Investment was sluggish, regular wages stagnant and we were told there was no inflation.  All the inflation was in asset prices and for average wage earners, "health care", "education" and "rents", which by government accounts are under appreciated.

Why am I mentioning this?  Well because the debt accumulated to buy back that stock and the "off balance sheet" debt accumulated by the Private Equity / Hedge Fund Industry gambling in that same debt dwarfs that which existed in 2008 before the last financial crises and was looming over our economy BEFORE this current crises.  What has been the reaction?  US gov creates over $2 Trillion in additional taxpayer debt (10% increase in total debt in one bill) to further bail out a heavily leveraged corporate world.  Yea the couple hundred billion doled out in checks to citizens takes front and center in the mass media which is desperate to convince Americans "this time is different".

NOTE: Just like the heavy media campaign to glorify the military after 911, glorify entrepreneurs after 2009 and now glorify health care workers after this latest crises, each time no one is held to account, not the military and it's near $10 trillion in pointless wars against people in mud huts since 911, not questioning or convicting any financial firm for the 2009 crises and not one mass media person questioning why in a "developed nation" where more people go into bankruptcy over medical bills and nowhere does any human civilization spend more on medical care then the US with no positive metrics to show for it but wealthy "health care" intermediaries, billionaire CEO's and executives, wealthy on the backs of the American Citizenry.
Yet the Government has to step in to quell a crises!, the same government that claims any interference in the desperately broken health care system is some kind of a socialist... where we have laws on our books that even stop the government from bargaining for medicine and supplies in that they in the end pay for at huge markeup with taxpayer money (debt).

But in reality the Fed is also increasing it's balance sheet by $2.3 trillion immediately on as part of it's 10x leverage of $440 billion handed to them to "replace the banking system" as the banks have all but ceased ALL LENDING outside of the new government programs and they will expand to over $4 trillion over the next 9 months to "re capitalize" already over-levered corporations... Really?  Who is on the hook for all this money printing?  Taxpayers.  Who created the crises?  Billionaires and Elites.  Who gets ultimately crushed, billions of people, including billions who "social distancing" is a joke cause they live on top of each other already! 

You have to watch the short video in this link:

https://www.cnbc.com/2020/04/09/chamath-palihapitiya-us-needs-to-let-hedge-funds-billionaires-fail.html?__source=twitter%7Cmain

It's the part where the answer to the CNBC anchor's question is "yes' when answering whether airlines should be allowed to fail.  Think about what he says... Who is getting bailed out here AGAIN.  This whole thing is as bad.  Capitalism has built an entire set of rules and ways to deal with the natural loss of value during a crises.  Those who hold the debt, those who old the equity, they loose.  That is called risk.  It is how things operate.  As of now, the Fed has jumped in, buying corporate debt directly and through ETF's etc.  They are basically funding credit markets, mortgage markets, off balance sheet debt markets and businesses that have no revenue and who have used all their reserves and taken on incredible amounts of debt to enrich those debt and equity holders over the last decade, since the last crises.  They paid each other back to the tune of trillions, further enriching themselves and stratifying the global income / wealth divide to levels never seen before in human history.  And WE ARE BAILING THEM OUT AGAIN!

Depression? Mental Illness? The US is the most medicated, unhealthy, over levered and overly financialized nation on the planet (well China and Japan and Europe all are competing for who can be the most in debt).  We were already on the edge.  This virus has become nothing more then an excuse to "reset" the debt, extend it further out to the future and to print money to buy votes.  I am so incensed by this whole thing I don't know what to do... I can't believe what I see happening every day to prop up an already failed economic system.. I went back to college to learn more and perhaps gain a voice.  I learned more, but what I learned is they were still teaching late 19th and early 20th century theory that has long become obsolete as the economic system has become several degrees separated from any theory emulating at that time.  We have no models any more.  We most definitely have no model for what to do to rescue an economy that stops on a dime, let alone a simple thing like letting interest rates rise.  Now we have stopped on a dime and we are throwing 20-30% of the population of a "developed" nation into immediate unemployment (look what can happen in less fortunate nations).  Where there is NO cash flow to pay all that debt, none. What are the effects 6 months from now, 1 year from now? The money has to be printed, to re-capitalize.  Just like in 2008, bailouts to re-capitalize all the cash that was taken out of the system, evaporated overnight?  One could do some simple math and see how about $3 trillion was removed from the financial system from 1999-2008 after the deregulation of the banking sector.  It went directly into the hands of the players in the gambling game of financial markets.  It was the largest transfer of wealth since the tech bubble of 1998 and that the largest transfer of wealth since the bond bubble in 1988 and you can trace that back to the international debt crises brewed from the oil shock in 1973 forward.  Where we are now is no-mans land.  God help us.

If you think what I write here is in the right direction, write your congress person / senator and tell them, "All the capitalist system to work as it was designed and stop bankrupting our future.  The money printing  experiment of the last 10 years proves irrevocably, it does not work.

Participants Will Emerge... as Fed Withdraws From Mortgage Securities?

I love to read quotes by Fed Officials... Here is one I just read here on Bloomberg:

“Our capital markets are deep enough that I’m not as worried about the ability to be able to fund those mortgages,” he told an audience Tuesday at a commercial real estate conference in New York. “Price will change, and I think market participants will step up as the price changes.”

So Mr. Rosengren, why has it taken 8 years for you to think markets are deep enough to not be worried about the ability to fund mortgages?  And what rate / price change will be necessary for them to do so?  And when do you think this will be possible?

The thing is, you and your comrades over at the Fed should have allowed this adjustment to start happening 5 or 6 years ago.  Instead you have artificially propped up mortgages, holding unrealistically low rates for far to long now, so long in fact that you have allowed the creation of bubble housing prices in at least a dozen, maybe as many as 20 markets in the US.  These are not irrelevant markets, they are huge metropolitan areas where prices have already surpassed the bubble peaks of just a decade ago.  This time, YOU are the MBS market!  YOU have allowed / created the bubble and NOW you state you are confidant the "market" will pick up the slack at "adjusted prices"...

Well Mr. Rosengren, what is that price?  My guess is the highest quality mortgages in non-bubble market cities would need to yield north of 6.5% in TODAY'S interest rate environment to bring back private investors with bubble markets. Less then true AAA mortgages will need to be north of 8% for the same.

Now, lets fast forward to 2019 when YOU bubble creating Fed officials have managed to back interest rates to "normal", say long bond 6%+ and short end 2%+ where do you think mortgages need to be then to bring in participants, cause my dear Mr. Rosengren they will not be in the market before then.  How many people will have serious mortgage servicing issues then, with average auto loans at $38,000+ with 7 year terms, average college debts $100k with lifetime payoff terms, and an increasing number of mortgages going under water as the bubble you created starts to correct as interest rates jack up?  How many folks will purchase those $1 million dollar houses at 7% or 8%?

You are in a catch 22 sir.  I suggest you go very slowly and steadily now as you suggest and push congress to stop sitting on the sidelines about Fannie / Freddie and find a way to provide serious liquidity to the mortgage industry as you wonderful Fed officials start to retreat from the market.

OH, but maybe I am wrong... Maybe those "bubble" prices are actually reflecting the global loss of purchasing power of all "major currencies" as the money printing machines across the globe find the wealthiest people parking it in hard assets because bricks and mortar will not vanish like the purchasing power of soon to be highly irrelevant fiat currencies. The most reckless policies in human history, from the ponzi-scheme government debts, over extended private citizens to the reckless money printing of central banks all come crashing down...

FOMC Bargain With the Devil, Themselves

I just finished reading the FOMC notes released today.  I find them more humorous and frightening each time they are released.  It seems the folks who are setting monitory policy are some of the best mathematicians in the world of Economics but have the common sense of a doorknob.

This paragraph stands out:

Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest--or r*--including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth. A couple of participants noted that a lower estimated value for r* over the near term implied that monetary policy was providing less accommodation than previously thought. 

Followed by this:

Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, it would rise gradually to the Committee's 2 percent objective over the medium term.

In fact reading this statement was like riding on a merry-go-round.  Their policies, essentially manipulating interest rates at near zero levels (along with ECB and JCB) with the thought that "cheap money" is the key to growing an economy irrespective of the multitude of other factors at play, are the most profound in the history of monitory policy.  They have held rates so low for so long they are starting to think there a new normal.  They are forcing rates down on one hand, then saying that "lower productivity growth, demographic shifts, and an excess of saving around the world" are influencing the natural rate of interest.  Help me out here.  Lets create a massive stimulative / accommodative monitory policy by doing everything possible as a Central Bank to keep interest rates low. Then after we do this for a while we will decide that the natural rate of interest has declined... And because inflation has not popped out of nowhere, we will continue doing the same thing, even though we are saying out of the other side of our mouths that there are structural, demographic and other factors affecting the natural rate of interest not recognizing those same structural, demographic and other factors are ALSO affecting the rate of inflation!!!

It's totally fricken obvious "that monetary policy was ill equipped to address structural factors such as the decline in productivity growth".  Yet they keep doing the same thing.

They say:

The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 

Do these folks even understand the dynamics of what their policies have done to distort the economy?  Do they understand that low investment accompanied by expanding debt by a corporate America that is just taking advantage of historically low interest rates to buy back stock is a function of their policies?  Do they not understand that holding interest rated near zero for so long has created an environment where firms that produce have no need to raise prices when technology has rapidly made producing everything cheaper, that production overcapacity in this world of negative or anemic population growth in the entire developed world means they simply can't sell more, yet their cost of production continues to drop as they borrow money for nothing and continue to consolidate the production of just about everything meaning they need fewer employees and that they can actually afford to keep people they don't really need cause they are making so much money selling stuff, without raising prices, productivity is being affected everywhere?  Do the central banks not see that if they would just run down their balance sheets as securities mature and allow the market to start pricing debt again that their may still be some chance of normalization of rates without them having so terribly distorted the market that any change becomes grossly destabilizing?  Do they understand there are an entire generation of people who have nearly a decade in the workforce who have only seen zero interest rates and would not know what to do if they were in a real interest rate environment?  Do they understand what happens when the expectations of mortgage rates are 3.5-4% for so long that everyone completely
re-balances their entire living budgets on this distortion?  Is it possible the average car price of some $35k with a 7 year payment cycle is only possible because of the total expectation that mortgage rates are stuck at this level for eternity?  Do they see that inflation will not return while the price of money is zero?  Do they not see their own actions are what is driving the "new normal r*"?

Lets look at an example in rough terms.  Energy producers are facing difficult times.  For decades they had one business model, growth in demand, thus growth in investment and output along with prices.  Now they are faced with a dilemma; shrinking demand.  Households are getting more energy efficient.  From appliances, to heating and cooling systems, to light bulbs and electronics are all getting more energy efficient.  Building codes demand more energy efficiency and breakthroughs in fossil fuel recovery has dropped prices in their cost of inputs.  They are seeing lower demand, lower costs of input and very low cost of borrowing, all deflationary.  Does the Fed expect that cheap money means people will consume more energy?  Does the Fed think that cheaper money will drive up fossil fuel costs?  (Almost contrary, cheap money allowed 1/2 a trillion dollars to flow into the sector to employ technology that gets even more out of the ground, creating a surplus, driving down prices, hello!) Does the Fed think cheaper money means people will consume more energy?  Does the fed think cheaper money means all the gains in energy efficiency in every category is going to make energy efficiency reverse? (Well, for autos, the answer is YES as idiots go out and buy massive energy consuming trucks that cost upwards of $50k cause money is flowing like water and gas is cheap again, but otherwise, NO.)  So do the energy producers lay off thousands of workers and shrink their energy production and distribution?  NO. They have to maintain their networks cause there is demand, it's just lower.  Does this mean lower productivity, YES unless they do lay off workers, invest in cheaper delivery technologies and figure out how to operate in a "new normal".  Is there investment in energy production?  Yes.  Renewables. Does this investment replace the loss in investment in legacy energy? At times, maybe, other times not, end result, "anemic" growth in investment in the entire sector as a whole.  Will cheap money and low rates change these fundamental realities?  No. But the Fed fails to see this example can be applied across the spectrum of industries now.  Efficiency, technology, consolidation, weak demand driven by fundamentals and demographics etc. the overcapacity is simple to see.  Getting us back to normal interest rate environment should be a priority cause they are creating other distortions that are, over time, going to be very difficult to break from.

Another example I use is Ketchup.  I make Ketchup.  I have made Ketchup for years.  I bred my own tomatoes for efficiency so they are perfect for mechanical harvesting, have less water etc. Now I make Ketchup more and more efficiently.  The packaging I use fluctuates in price based on energy prices, but the producers have also become more efficient and I can rely on steady prices.  The distribution I have over the years includes just about every outlet possible, though I still compete for restaurant chains etc., the bottom line is my product's growth rate depends on the long run on the population growth rate, unless I can get people to start using Ketchup to run their cars or something, there is no way I can sell more.  Now, I have to show my shareholders I am growing my profits and revenues so I buy my competitors, I shrink my selling sizes at the same price, I find creative ways sell my product for more money etc. But is cheap money going to make me invest more to make my Ketchup even cheaper?  No. I have plenty of capacity at a profitable level and growth is anemic so I may revamp every few years and buy out another competitor, if any are left without me becoming a monopoly, but for now, all cheap money allows is for me to borrow money to buy back my stock, boosting my per share earnings and pay dividends, hence stock incentives for executives o now take a vast amount of the earnings further creating disparities in income levels, and happy investors who see my per share profits increasing.  But are my earnings increasing cause I am selling more or growing my business? NO.  I could go on with this scenario and show how I now buy the mustard guys, then the mayo guys then the salad dressing guys etc till the entire economy for my products is one huge oligopoly... Oh, yea, cheap money allows this kind of consolidation on the cheap, but does it hire more people?  No, it results in consolidation, loss of jobs and stagnation in investment cause growth is dependent on demand and demand for my product depends on demographics, plain and simple...

Face it, the Fed is blind. They are going around circles.  They don't understand business, just numbers. They have no common sense, just charts and theories.  They would not know how to operate dress shop or manufacturer of anything, but could give you models that assume things will be just fine if you just follow the numbers... They have no inkling that the biggest companies by market capitalization in the US now make nothing at all, just buy servers and programmers and if they represent a product, it is made elsewhere, where it's cheaper and this is called "free trade" and companies seeing the globe as their production base and customer base just like the Econ 101 textbooks teach us.  So why are they following their current policies till now? Clueless for sure.
  

The Office Supply Oligopoly is Reeling

Today's earnings announcement from one of the two major players in the "bricks and mortar" office supply retailers, Office Depot, was another telling story of the state of retail in America. Fewer and fewer players are offering more and more shelf space to fewer and fewer suppliers, resulting in lower selection, quality and higher prices to consumers over the last 20 years.  FINALLY this is catching up to the retailers and is sending their businesses into a free fall.  Anyone with 1/2 a brain knows to buy office supplies on line from Non-Brick and Mortar companies that gouge and rip off any flesh and blood buyer that walks into one of their stores.

The announcement read on Seeking Alpha states Office Depot will close 400 stores after it's merger with the other oligopoly player Office Max in November 2013. Staples, the 3rd oligopolist, announced just about a month ago the closing of over 200 stores. 

There is no mistake in why these companies are reeling from their business models.  They are totally flawed.  The model has been replicated in retail across the US for a couple decades:  Open big box stores with a large selection of supplies in every category.  Start with low prices that drives out all the "mom & pop" business that dominated the industry since the beginning of time.  Then start weeding out your suppliers, shrinking the selection of products in each category, while slowly raising prices.  Eventually each product category is down to one supplier and maybe your store brand.  Then keep raising prices.  Meanwhile, the producers of all of the products you used to sell start to also go out of business.  Thousands more manufacturing jobs disappear as the major retailers squeeze out the supply chain till it virtually disappears for all but the select few suppliers.  Now the retailer "is" the supply chain and those who produce products sell directly into that supply chain and are forced to continuesly lower their prices (forcing more and more production "off shore") to increase the profit margin of the retailer.  The also start to lower the quality of their own products to meet this spiraling need for higher profits every quarter to their investors as well.  If they don't play this game they will get swallowed up or merge or go out of business all together.  In the end it is just the end consumer who looses every time.

Enter the Internet and the migration of some of the more tech savvy "mom & pop" businesses.  They find those suppliers left producing and selling products to the non-oligopoly retailers and start selling  online at steep discounts to the brick and mortar retailers.  This phenomena starts to seriously eat into the business of the oligopolist.  Business, the bread and butter of the office supply industry, are not stupid. They go to alternative suppliers. The brick and mortar business start to market more to retail buyers, trying to sell consumer electronics, back to school supplies and other non-core products to consumers who are not as knowledgeable about pricing, are less frequent buyers and easier to rip off.  Eventually even this approach fails as consumers catch up to the game.  Stores close.

The above scenario has happened in many retail industries in the US.  One has to wonder what is on the minds of the Fed and other "economist" when they say there has been no inflation for so long and they are hell bent on increasing this supposedly non existent inflation.  Obviously they have no understanding of the retail dynamics that have been going on in the US for years. The fact that so many of the products Americans buy are sold by so few sellers and those sellers have been diligently shrinking their suppliers, resulting in prices that have done nothing but rise for the last two decades to the retail consumer seems to escape them.

Case in point: I went to buy one gallon of deck sealer a week ago for my deck.  I went to Sherwin Ripoff, I mean Williams.  This is another brick and mortar retailer to both consumer and contractor businesses that had to merge with Duron to stay in business, creating yet another strong oligopoly player in the paint business.   The result: One gallon of deck sealer is $47!  Yes $47 for a GALLON of deck sealer!!  This is INSANE!  I could start replacing the wooden deck boards for the cost of just two gallons of sealer to protect the wood!  Why is this so?  How is it possible?  (The Fed would say there is no inflation because the quality of the deck sealer has increased so much it is now WORTH $47! Ha!) Simple, from the chemical manufactures to the retailers there has been such consolidation that there are no other product options available.  What better then a heavy, expensive to ship item like paint to create an oligopoly industry in.  I could literally buy raw ingredients and make the gallon of deck sealer for less than $47 if I really wanted to. 

I refused to buy the Sherwin Ripoff sealer.  Instead I went to one of the other oligopoly sellers of paint products, Home Depot (the other being Lowes) where the retailer has followed the same pattern explained above and only allows ONE brand of deck sealer on their entire shelf space, Bear.  What is the result?  I got a gallon for ONLY $33.  Yea, deck sealer is worth about $8-$10 Max.  But we as a retail buyer are paying $33-$50 for the product.  Sure the profit margins are rising across the board for the few companies still manufacturing and selling the products but for how long before the entire game implodes? 

Who pays the most for this consolidation?  Well simply put, I can still swing the $33.  But to the rest of the world where $33 can be a day to a week's wages, no way.  The cost of buying nearly EVERYTHING has gone further and further out of reach of the rest of the world.  Yet you will hear hot shot economists bragging that the number of people living on less than $1 a day has declined to like a billion people.   Big F&%#@ing deal!  One needs $3 a day to even think about living in today's world without completely starving yet economist are still using a 25 year old metric to measure poverty.  Where are the central bankers and economist who actually see how the world works, not just plug in numbers in the latest modeling software and call it a day?