Consumer Checkpoint Higher-income pullback

"The highest 40% of the households by income account for over 60% of overall consumer spending (Exhibit 7)."

Link here.

Visualizing the Assets and Liabilities of U.S. Banks

This infographic visualizes all of the deposits, loans, and other assets and liabilities that make up the collective balance sheet of U.S banks using data from the Federal Reserve.

Link here.

Adams - Fragmentary Notes for “A Dissertation on the Canon and the Feudal Law”, May – August 1765

"Property monopolized or in the Possession of a few is a Curse to Mankind. We should preserve not an Absolute Equality.—this is unnecessary, but preserve all from extreme Poverty, and all others from extravagant Riches."

~John Adams

Link here.

How the US financial system works

The Federal balance sheet (spending and deficits) and lower corporate tax rates are used to create money and direct it to corporations to jack up stock prices.

QE lowers interests rates which increases stock valuations (discounted cash flow) and lowers returns on bonds, a competing asset class.

QE also provides a way for banks and companies to issue dodgy debt and then have it end up on the Fed's balance sheet during downturns, where losses don't matter.

The military/intelligence/homeland security industrial complex has become a ongoing bipartisan Federal stimulus program; spending beyond defense needs to boost the economy and jobs.

The "funnelling" effect of directing money to corporations and the wealthy has become very effective, as evidenced by the multi-year decrease in money velocity and increase in the GINI ratio.

The Cost-of-Thriving Index: Reevaluating the Prosperity of the American Family

As an alternative to inflation adjustment, this paper proposes the development of a “Cost-of-Thriving Index” (COTI) that tracks the cost of a basket of major items that a family of four would likely seek to buy. A comparison over time between the cost of that basket and a median weekly wage indicates whether economic trends are easing or compounding the challenge of making ends meet.

In 1985,[2] the COTI stood at 30—it would require 30 weeks of the median weekly wage to afford a three-bedroom house at the 40th percentile of a local market’s prices, a family health-insurance premium, a semester of public college, and the operation of a vehicle. By 2018, the COTI had increased to 53—a full-time job was insufficient to afford these items, let alone the others that a household needs.

Link here.

The Long Now, Pt. 4 – Snip! (or Ben Hunt nails it)

"This is a picture of the billionaire CEO of a government-supported too-big-to-fail megabank, telling his 60 Minutes interviewer that he has no control over his compensation, as that’s determined by the CEO’s board of directors. Interestingly enough, this is also a picture of the billionaire Chairman of that board.

And it’s not just the billionaire CEO bank manager. It’s his centimillionaire lieutenant bank managers. It’s the dozens of decamillionaire sub-lieutenant bank managers. All of them made generationally rich from stock-based compensation in a company where the government guarantees their success. None of them entrepreneurs. None of them risk-takers with their own skin in the game. All of them … lifer managers of a too-big-to-fail bank.

But, hey, the stock is up! They’ve done a good job! What’s the problem, Ben?

That’s exactly the problem. The problem is that we have redefined capitalism to mean “the stock is up”. We have redefined capitalism to NOT mean Smith’s invisible hand or Schumpeter’s creative destruction or productivity-enhancing and risk-taking investments in the real economy. We have redefined capitalism to ONLY mean financial asset price inflation in the here and now. By any means necessary. So that’s what we get. From the Fed, from the White House, from corporate management … that’s what we get in the Long Now … an endless series of policies and decisions in service to capitalism-as-financialization, where capital markets are maintained as a political utility."

Link here.

Top 1.0% of earners see wages up 157.8% since 1979

"Over the last four decades since 1979, the top 1.0% saw their wages grow by 157.8% and those in the top 0.1% had wages grow more than twice as fast, up 340.7%. In contrast those in the bottom 90% had annual wages grow by 23.9% from 1979 to 2018. This disparity in wage growth reflects a sharp long-term rise in the share of total wages earned by those in the top 1.0% and 0.1%."

Link here.

The Conservative Case for Antitrust

Fewer competitors leads to less competition and more collusion. There is nothing new under the sun. Even in the 18th century, Adam Smith wrote in The Wealth of Nations that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” A little later John Stuart Mill echoed the sentiment, “Where competitors are so few, they always end by agreeing not to compete.”

Capitalism without competition is not capitalism.

Competition creates clear price signals in markets, driving supply and demand. It promotes efficiency. Competition creates more choices, more innovation, economic development and growth, and a stronger democracy by dispersing economic power. It promotes individual initiative and freedom. Competition matters because it prevents unjust inequality, rather than the transfer of wealth from consumer or supplier to the monopolist. If there is no competition, consumers and workers have less freedom to choose.

Capitalism is a game where competitors play by rules that everyone agrees. Today, the state, as referee, has not enforced rules that would increase competition, and through regulatory capture has created rules that limits competition. All too often today, monopolies exist through lobbying, regulation and the helping hand of government.

Link here.

Why Regulators Went Soft on Monopolies

The process of getting mergers approved appalls the mind. Firms hire Washington, D.C. K Street law firms and engage highly paid economists to argue that mergers will promote efficiencies and lower prices. The top economists in the field move back and forth from consulting firms such as Compass Lexecon or Charles River Associates to run the DOJ and the FTC. The economists create models arguing that mergers will lower prices. But once mergers are approved, prices mysteriously go up.

This naturally influences the work of well compensated pro-merger economists. Financial models rely on questionable assumptions of demand, costs, and the way firms will behave in the future. Numerous studies show that these assumptions turn out to be incorrect, and merger simulations do not accurately predict actual post-merger prices. In layman’s terms, “garbage in = garbage out.” Merging firms pay well, and economists are happy to perform on demand.

Since the early 1980s, economists have become wealthy moving in and out of government promoting mergers. Each time, they land at a cushy law firm or research firm that trades on their inside connections in government, and they return to government.

Link here.

Fed Blinks as Housing, CLOs Slump

Ben Bernanke noted in 2010 that “higher equity prices will boost consumer wealth and help increase confidence, which can spur spending.” The Fed's fixation with perception rather than data is illustrated by the way in which former Fed Chairs Bernanke and Yellen deliberate chose to inflate the value of financial and real assets to "stimulate" the economy. The WSJ’s Nick Timiraos reported last week:

“Former Fed Chairman Ben Bernanke often argued that it was the maturity and risk-profile of the Fed’s holdings, not the overall size of its reserves or securities portfolio, that determined how much it stimulated markets and the economy.”

The Fed’s dual mandate from Congress includes full employment and price stability. But to look at recent policy suggests members of the FOMC cannot read federal statute or do simple sums. Causing asset prices to soar by double digit rates is not price stability – it is inflation, plain and simple. Please, Chairman Bernanke, do show us where it says in the Federal Reserve Act that the FOMC is allowed to employ asset price inflation as a policy choice.

In the Orwellian newspeak of the Federal Reserve System, inflating the value of stocks, bonds and real estate to absurd levels is a form of economic “stimulus.” Never mind that this vast act of asset price inflation did not help the majority of Americans. Indeed, the biggest impact of the Bernanke/Yellen asset inflation seems to be preventing a whole generation of younger Americans from buying a new home.

Link here.

Exclusive poll: Americans want economic reform in 2020

Most Americans think the economic system is skewed toward the wealthy and the government should do more to fix it — and they're ready to vote for a candidate who agrees, according to a new Axios/SurveyMonkey survey.

Why it matters: The economy is usually the top priority for voters heading into a presidential election, and Democrats in particular — but also a strong majority of independents — are looking for big changes. By wide margins, they think unfairness in the economic system is a bigger problem than overregulation of the free market.

The big picture: Democrats and young adults are increasingly favorable to socialism.

As Axios' Felix Salmon noted, 18–24-year-olds in the survey view socialism (61% positive) more favorably than capitalism (58%), the only age group to do so. Older respondents tend to be far more wary of socialism.

Democrats are far more favorable toward socialism than independents and Republicans, as other surveys have found. 64% of Democrats in this survey say they have positive views of socialism, while 83% of Republicans and 61% of independents have negative views.

Men are much more bullish about capitalism (71% positive) than women (51%). Women, meanwhile, are slightly more favorable toward socialism (41% positive, vs. 36% for men).

Link here.

Financial Times’s Martin Wolf on finance as “a jungle inhabited by wild beasts”

The purchasers of promises will know that the sellers normally know much more than they do about their prospects. The name for this is “asymmetric information.” They will also know that those who have no intention of keeping their word will always make more attractive promises than those who do. This is “adverse selection.” They will know that even those who are inclined to be honest may be tempted… not to keep their promises. The source of this is “moral hazard.” The answer to adverse selection and moral hazard… is to collect more information. But this too has a drawback: “free-riding”… [T]hose who have made no investment in collecting [information] can benefit from the costly efforts of those who have… That will, in turn, reduce the incentive to invest in such information, thereby making markets subject to the vagaries of “rational ignorance.” If the ignorant follow those they deem to be better informed, there will be “herding.” Finally, where uncertainty is pervasive and inescapable — who, for example, knows the chances of nuclear terrorism or the economic impact of the internet? — the herds are likely both to blow and ultimately to burst “bubbles.”

Link here.

Breaking the ‘Medici Vicious Circle’ – monopolization trends in advanced economies

On the product markets side, since 1997, more than 75 percent of the U.S. sectors experienced an increase in concentration levels as measured by the Herfindahl-Hirschman Index rising more than 50 percent on average across the U.S. economy. In line with the stock markets concentration evidence mentioned earlier, the size of the average publicly listed company in the U.S. as measured by market capitalization, went from $1.2 billion to $3.7 billion in constant dollars.

Three factors drive the above figures.

One: Entrepreneurship is on a decline. The rate of new company formations has fallen from 15 percent in 1975 to 14 percent in the 1980s, to 11 percent in 1995. In 2015, the rate was just above 8 percent. The quality of the new company formations, as measured by life expectancy of the firms and tangible returns on investment, have also deteriorated.

Two: Firms are getting larger not through organic growth in revenues, but through M&As. Over 1997-2017, average annual volumes of global M&A activities amounted to roughly one half of the entire nominal global GDP growth. At the end of May, global M&A deal flow was running double on the same period of 2017 to reach a total of $1.5 trillion of announced deals. U.S.-only deals account for about 37 percent of the global total in M&A transactions – a share that is more than 2.5 times greater than the relative share of the U.S. economy in global GDP on PPP-adjusted terms.

Three: The demise of the medium-sized firms. In the 1980s, only 20 percent of mid-cap companies had negative earnings per share. By 2015, that number stood at 50 percent.

Link here.

The Myth of Home Ownership and Why Home Ownership is Not Always a Good Thing

CONCLUSION

"The cultural attachment to home ownership significantly influences public policy discussions about housing. In pursuing the home ownership dream, consumers routinely ignore the financial risks associated with making this large, long-term investment in real property. Though home ownership is touted and subsidized because it helps increase jobs, boosts the demand for goods and services, and helps build prosperity, no one wants to admit that U.S. businesses need potential or existing homeowners to go deeply into debt in order to maintain high corporate earnings for U.S. companies.

Though inconsistent with the home ownership myth, the time has come for consumers to start ignoring the immediate, likely short-term, end result of achieving the status of homeowner. To force consumers to consider the long-term risks on investing in a house, home ownership subsidies should encourage renters and potential homeowners to focus on the likely long-term benefits of the investment itself. This should cause homeowners to decide whether it is in their best interest to devote limited investment funds to purchasing a house and also to consider the economic consequences of a failed investment; that is, the inability to use those funds to make other investments, and potentially losing the home to foreclosure."

Fucking brilliant!

Link here.

Democrats Must Reclaim the Center … by Moving Hard Left

This precarious balancing act helps explain why policies that would clearly benefit the majoritarian center are so often rejected as ideologically “far left;” for a centrism that seeks to balance the interests of capital is a centrism that seeks to balance the interests of the very wealthiest Americans against those of everybody else. It’s this sort of “one dollar, one vote” logic that led to Citizens United—a logic that threatens to subvert American democracy itself. For a system that justifies the wealthiest 2 percent purchasing the same political influence as the other 98 percent, isn’t really a democracy at all. I’m not saying that self-described “centrist” Democrats are any more greedy or corrupt than their progressive colleagues, but if they’re honest with themselves, they should recognize how much they have internalized this orthodox ideological bias. Indeed, this is what they mean by “pragmatic centrism”: an economic policy agenda that necessarily balances the interests of business (the few) versus the interests of labor (the many), in an attempt to best serve the interests of all. Yet as pragmatic as such an approach might at first appear, when viewed from a majoritarian perspective, the ideological center consistently fails to hold.

Link here.

Bank Stocks Rebound as Home Prices Start to Weaken

With all of the different government programs put into place since the 2008 financial crisis to manipulate the credit markets and artificially boost home ownership, the fact of a bubble in home prices is no great surprise. Add to that the limitations on bank lending for new residential home construction and you have the perfect formula for killing the American dream of home ownership of American families.

We believe that the year 2018 may be remembered as marking the peak in both bank equity valuations and residential home prices. Residential loan default rates are unlikely to rise very quickly given the shortage of moderately priced homes, but as we note in The IRA Bank Book, bank net interest margins are likely to be as flat as the yield curve by year-end. And the embedded credit risk in the financial system will continue to build with each passing day and largely due to the conflicting policy decisions emanating from Washington.

Link here.

Impact of the Trump Fiscal Stimulus on US Economic Growth

Together, the sweeping tax cuts enacted in the United States at the end of 2017 and the spending package enacted in February of this year are expected to add $276 billion in fiscal stimulus to the US economy this year, or 1.4 percent of GDP. But the actual impact on US economic growth may turn out to be lower than meets the eye. As we explain in this blog, the impact of fiscal stimulus on economic activity and output varies with the business cycle. Existing projections of the impact of the Trump stimulus measures—the "multiplier" effects—miss (or ignore) the fact that the US economy is operating at nearly full potential. Based on the current state of the US economy, we predict that the Trump fiscal stimulus will yield an extra boost to GDP of 0.5 percent by 2020, instead of 2.1 percent if this dimension is not taken into account.

Link here.

CFR World Economic Update Past Event — May 11, 2018

No shit.

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MALLABY: All right, let me just persist on this one point and link it up to what Karen was asking about and Greg’s answer.

So, you know, it feels like there’s a similarity between how the economy is poised now and the dilemma for the Fed with how things were, let’s say, in 2005 or 1999. So in those cases you had inflation that was fine. You had pretty much, you know, full employment, and if there was a source of instability in 1999, it was that tech stocks were going nuts, and in 2005, the real estate thing was already beginning to pump up.

So an inflation-targeting Fed looks at this and say, our job is to target inflation, inflation seems under control. We can tighten very, very gradually. And looking back, in both cases, there was a bubble, it blew up, and the bubble blowing up caused trouble.

So why, in the face of a sudden surge of fiscal stimulus, would you not have a sudden surge of commensurate monetary tightening given that you’ve got this risk that you’ve lived through twice before, which is that if you simply target inflation—the price of eggs may be very stable, but the price of nest eggs is going nuts. Why not run policy a little tighter—which is perfectly justifiable given the credit stimulus—I mean, the fiscal stimulus—and take some of that financial sector risk off the table?

REINHART: Because it is a remarkably risk-averse entity concerned about the reaction to a marked change in its policy. If the Fed—

MALLABY: What’s the worst that could happen? Are you—we talking about the market reaction or are we talking about political reaction first of all?

REINHART: Oh, I don’t think it’s political reaction.

MALLABY: OK, so it’s the market—

REINHART: I think it’s the market reaction, that we saw the 10-year flirting with 3 percent as a risk even for emerging market economies. Think back to the taper tantrum—this is an institution scarred by that, that if there is a deep irony that before the taper tantrum they were frank in criticizing the 2004 to 2006 policy realignment as too gradual and too telegraphed. It not just made the yield curve steeper than it would be otherwise, strengthening the carry trade and adjustable rate mortgage finance. It also made them safe because it was so clear what the Fed was going to do.

MALLABY: Right, right.

REINHART: After the taper tantrum, what are they doing? They are more gradual, they’re more contractual even as they continue to say all decisions are data-dependent and made meeting by meeting.

MALLABY: So you’re suggesting that the Fed is colored by the effect of its policy on emerging markets.

REINHART: Markets—financial markets generally.

Link here.

Comparison of asset bubbles

The end of the liquidity supernova