SIFIs Archives - The Automatic Earth

U.S. President Donald Trump said he was pushing ahead with hefty tariffs on $50 billion of Chinese imports on Friday, and the smoldering trade war between the world’s two largest economies showed signs of igniting as Beijing immediately vowed to respond in kind. Trump laid out a list of more than 800 strategically important imports from China that would be subject to a 25 percent tariff starting on July 6, including cars, the latest hardline stance on trade by a U.S. president who has already been wrangling with allies.

China’s Commerce Ministry said it would respond with tariffs “of the same scale and strength” and that any previous trade deals with Trump were “invalid.” The official Xinhua news agency said China would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood. China’s retaliation list was increased more than six-fold from a version released in April, but the value was kept at $50 billion, as some high-value items such as commercial aircraft were deleted.

Soybeans R Us.

• Why The U.S.-China Trade Deficit Is So Huge (MW)

President Donald Trump will let tariffs on Chinese goods worth up to $50 billion take effect after talks between the two countries failed to appease White House demands on reducing huge U.S. trade deficits. The U.S. has run large deficits with China for years and in some cases no longer produces certain goods such as consumer electronics that are popular with Americans. It won’t be easy, and it might even be impossible, to reduce the gap much any time soon. In 2017, the U.S. posted a $375.6 billion deficit in goods with China.

Most glaring is the huge deficit in computers and electronics, but the U.S. is a net importer from China in most market segments except for agriculture. The U.S. is excluding Chinese-made cellphones and televisions from its tariffs. China has been a big buyer of American-grown soybeans and other crops. Planes made by Boeing also are a product in demand in China. What happens next? Trump has vowed to increase tariffs if China retaliates, but the Chinese promised to return the favor. A trade dispute between the two largest economies in the world could result in lasting damage to the global economy if it metastasizes.

What happens when there is no price discovery.

• Wall Street Builds Immunity To Trade War Rhetoric (R.)

Fears of tariffs and a potential global trade war have jostled U.S. stocks over the past few months, but there is a sense among investors that the market is taking the drum beat of rhetoric and statements more in stride. In the latest salvo, U.S. President Donald Trump announced hefty tariffs on $50 billion of Chinese imports on Friday, and Beijing threatened to respond in kind. But even as the developments threatened to ignite a trade war between the world’s two largest economies, the equity market largely shrugged it off. The benchmark S&P 500 index ended down only 0.1 percent on Friday.

That paled compared to losses earlier in the year that were sparked by fears of a U.S.-China trade war that would be detrimental to economic growth. “The market has gotten reasonably comfortably numb to this tariff stuff,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “They are becoming more accustomed to this being a first foray and negotiating tool.” The U.S. Customs and Border Protection is to begin collecting tariffs on an initial tranche of 818 Chinese product categories on July 6. “It’s kind of the cry-wolf syndrome,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “I think people fear the tariffs and the uncertainty about it, but think, ‘OK, this is just another negotiating point.’”

“..a de facto heist that has enabled the most dominant banks and central bankers to run the world”.

• Nomi Prins: The Central Banking Heist Has Put The World At Risk (UH)

Over the last decade, she tells me when we meet in London, “under the guise of QE, central bankers have massively overstepped their traditional mandates, directing the flow of epic sums of fabricated money, without any checks or balances, towards the private banking sector”. Since QE began, in the aftermath of the financial crisis, “the US Federal Reserve has produced a massive $4.5 trillion of conjured money, out of a worldwide QE total of around $21 trillion”, says Prins. The combination of ultra-low interest rates and vast monetary expansion, she explains, has caused “speculation to rage … much as a global casino would be abuzz if everyone gambled using everyone else’s money”.

Much of this new spending power, though, has remained “inside the system”, with banks shoring up their balance sheets. “So lending to ordinary firms and households has barely grown as a result of QE,” says Prins, “nor have wages or prosperity for most of the world’s population”. Instead, “the banks have gone on an asset-buying spree”, she explains, getting into her stride, “with the vast flow of QE cash from central banks to private banks ensuring endless opportunities for market manipulation and asset bubbles – driven by government support”. Prins describes “the power grab we’ve seen by the US Federal Reserve, the European Central Bank, the Bank of Japan and other central banks”.

Using QE, she argues, “these illusionists have altered the nature of the financial system and orchestrated a de facto heist that has enabled the most dominant banks and central bankers to run the world”.

They run the world and they’re still failing. Follow the money.

• Some Of The ‘Most Systemically Important Banks’ In The World Are Tumbling (ZH)

Since the Federal Reserve hiked rates, “big” US banks have dramatically underperformed “small” US banks, continuing a trend that has been going on since February… But it’s broader than that; this “big” bank blow-up is global. The stock prices of 16 of the most ‘Systemically Important Financial Institutions’ (SIFIs) in the world are now in bear market territory (down by 20% or more from their recent highs in dollar terms); and as the FT reports, this has caused Ian Hartnett, chief investment strategist at London-based Absolute Strategy Research, to issue his first “Black Swan” alert since 2009.

Of the 39 SIFIs, these are the 16 in bear market territory: Deutsche Bank, Nordea, ICBC, UniCredit, Crédit Agricole, ING, Santander, Société Générale, BNP Paribas, UBS, Agricultural Bank of China, AXA, Mitsubishi UFJ Financial Group, Bank of China, Credit Suisse and Prudential Financial. At some point, says Hartnett, central bankers will have to respond to bearish signals from almost half the global SIFIs, rather than continuing to tighten monetary policy: “The clue is in the name,” he said. “If these banks are supposed to be systemically important then policymakers ought to be watching them to see what is happening.” “The synchronised dips were a sign of global financial stress.”

“..there has been $2 trillion in mergers in 2018, and its only June.”

• Merger Mania (Lebowitz)

We have written numerous articles describing how cheap money and poorly designed executive compensation packages encourage corporate actions that may not be in the best interest of longer-term shareholders or the economy. The bottom line in the series of articles is that corporations, in particular shareholders and executives, are willing to forego longer term investment for future growth opportunities in exchange for the personal benefits of short-term share price appreciation. Buybacks and mergers, both of which are fueled by the Federal Reserve’s ultra-low interest rate policy have made these actions much easier to accomplish.

On the other hand, corporate apologists argue that buybacks are simply a return of capital to shareholders, just like dividends. There is nothing more to them. Instead of elaborating about the longer term ill-effects associated with buybacks or the true short-term motivations behind many mergers, the powerful simplicity of the following two graphs stands on their own. The first graph, courtesy Meritocracy, shows how mergers tend to run in cycles. Like clockwork, merger activity tends to peak before recessions. Not surprisingly, the peaks tend to occur after the Federal Reserve (Fed) has initiated a rate hike cycle. The graph only goes through 2015, but consider there has been $2 trillion in mergers in 2018, and its only June.

The following graph shows how corporate borrowing has accelerated over the last eight years on the back of lower interest rates. Currently, corporate debt to GDP stands at levels that accompanied the prior three recessions. There is a pattern here among corporate activities which seems similar to that which we see in investors. At the point in time when investors should be getting cautious and defensive as markets become stretched, they carelessly reach for more return. Based on the charts above, corporate executives do the same thing. The difference is that when an investor is careless, his or her net worth is at risk. A corporate executive on the other hand, loses nothing and simply walks away and frequently with a golden parachute.

The statement does have substance.

• The Key Word In The Trump-Kim Show (Escobar)

The Singapore joint statement is not a deal; it’s a statement. The absolutely key item is number 3: “Reaffirming the April 27, 2018, Panmunjom Declaration, the DPRK commits to work toward the complete denuclearization of the Korean Peninsula.” This means that the US and North Korea will work towards denuclearization not only in what concerns the DPRK but the whole Korean Peninsula. Much more than “…the DPRK commits to work toward the complete denuclearization of the Korean Peninsula”, the keywords are in fact “reaffirming the April 27, 2018, Panmunjom Declaration…” Even before Singapore, everyone knew the DPRK would not “de-nuke” (Trump terminology) for nothing, especially when promised just some vague US “guarantees”.

Predictably, both US neocon and humanitarian imperialist factions are unanimous in their fury, blasting the absence of “meat” in the joint statement. In fact there’s plenty of meat. Singapore reaffirms the Panmunjom Declaration, which is a deal between North Korea and South Korea. By signing the Singapore joint statement, Washington has been put on notice of the Panmunjom Declaration. In law, when you take notice of a fact, you can’t ignore it later. The DPRK’s commitment to denuclearize in the Singapore statement is a reaffirmation of its commitment to denuclearize in the Panmunjom Declaration, with all of the conditions attached to it. And Trump acknowledged that by signing the Singapore statement.

The Panmunjom Declaration stresses that: “South and North Korea confirmed the common goal of realizing, through complete denuclearization, a nuclear-free Korean Peninsula. South and North Korea shared the view that the measures being initiated by North Korea are very meaningful and crucial for the denuclearization of the Korean peninsula and agreed to carry out their respective roles and responsibilities in this regard. South and North Korea agreed to actively seek the support and cooperation of the international community for the denuclearization of the Korean Peninsula.”

The risk is real.

• Merkel’s Position As German Leader Under Threat Over Immigration Split (CNBC)

A split over immigration between Angela Merkel’s Christian Democratic Union (CDU) and its sister Christian Social Union (CSU) party is threatening to end her 12-year spell as Germany’s leader. Germany’s grand coalition government was formed in March after five months of political deadlock since an election the previous September. It resulted in Merkel’s fourth term as German chancellor. That vote saw a big upswing in support for the right-wing Alternative for Germany (AfD) party, who campaigned against Merkel’s open-door policy to refugees and migrants arriving from the Middle East and Africa.

Now the CSU, fearful of losing further support from its conservative base, is threatening to withdraw from the country’s grand coalition unless Merkel hardens her immigration stance. “My sources in Berlin say the situation is on a knife-edge right now, some are even giving it an 80 percent probability that Merkel will step down in the next two weeks,” said Nina Schick, director at political consultancy Rasmussen Global, in a telephone call to CNBC Friday. Schick, however, warned that writing Merkel off has long been a dangerous game. “The fundamental rule in German politics since 2006 is don’t underestimate Merkel,” she added.

CUT IT OUT! Bunch of crazies.

• US Government Says 2,000 Child Separations At Mexico Border In 6 Weeks (R.)

The government said on Friday that 1,995 children were separated from 1,940 adults at the U.S.-Mexico border between April 19 and May 31, as the Trump administration implements stricter border enforcement policies. The number represents a dramatic uptick from the nearly 1,800 family separations that Reuters reported had happened from October 2016 through February of this year. The official tally of separations is now nearly 4,000 children, not including March and the beginning of April 2018. In May, U.S. Attorney General Jeff Sessions announced a ‘zero tolerance’ policy in which all those apprehended entering the United States illegally would be criminally charged, which generally leads to children being separated from their parents.

The families were all separated so the parents could be criminally prosecuted, said a spokesman for the Department of Homeland Security, who declined to be named, on a call with reporters. “Advocates want us to ignore the law and give people with families a free pass,” said the official. “We no longer exempt entire classes of people.” The Department of Homeland Security did not immediately respond to a request to provide a breakdown of the age of children separated from their parents and held in custody, but the official said they do not separate babies from adults.

I said: CUT IT OUT!

• French Police Cut Soles Off Migrant Children’s Shoes – Oxfam (G.)

French border police have been accused of detaining migrant children as young as 12 in cells without food or water, cutting the soles off their shoes and stealing sim cards from their mobile phones, before illegally sending them back to Italy. A report released on Friday by the charity Oxfam also cites the case of a “very young” Eritrean girl, who was forced to walk back to the Italian border town of Ventimiglia along a road with no pavement while carrying her 40-day-old baby. The allegations, which come from testimony gathered by Oxfam workers and partner organisations, come two months after French border police were accused of falsifying the birth dates of unaccompanied migrant children in an attempt to pass them off as adults and send them back to Italy.

“We don’t have evidence of violent physical abuse, but many [children] have recounted being pushed and shoved or shouted at in a language they don’t understand,” Giulia Capitani, the report’s author, told the Guardian. “And in other ways the border police intimidate them – for example, cutting the soles off their shoes is a way of saying, ‘Don’t try to come back’.” Daniela Zitarosa, from the Italian humanitarian agency Intersos, said: “Police [officers] yell at them, laugh at them and tell them, ‘You will never cross here’. “Some children have their mobile phone seized and sim card removed. They lose their data and phonebook. They cannot even call their parents afterwards.”

France’s role is not pretty. Macron’s criticism of Italy unveils it.

• In ‘Calais of Italy’ Tension Soars Over Migrant Crisis (AFP)

Emmanuel Macron is not a welcome guest in the Italian border town of Ventimiglia, a flashpoint in Europe’s migration crisis. Residents are furious at the French president for charging Rome with “cynicism and irresponsibility” this week after it turned away a rescue boat carrying more than 600 asylum-seekers. “It’s bad what happened to the Aquarius (ship) but how dare Macron criticise Italy!” vented retired teacher Fulvia Semeria who volunteers for the Secours Catholique charity, a key aid group for migrants. “It’s unacceptable from a country that does nothing for migrants and even rejects them,” she said, calling his remarks “insulting and totally unfair”.

The pretty northern town at the gates of the French Riviera has received tens of thousands of asylum seekers pushed back by France since the eruption of Europe’s worst migration crisis three years ago. This is in addition to scores of desperate African refugees landing on its shores after undertaking the perilous journey across the Mediterranean. The influx has seen Ventimiglia dubbed the “Calais of Italy”, in reference to the French coastal town notorious for its sprawling migrant camps. [..] At least 16 migrants have died trying to cross from France into Italy since September 2016, falling off mountains, being hit by cars or electrocuted while hiding under train carriages.

Pretty crazy. All over a name change.

• Greek Police Hunt Golden Dawn Lawmaker Faced with Charges of Treason (GR)

A Golden Dawn lawmaker is on the run after Greece’s authorities issued an arrest warrant following his call in the parliament on Friday for the arrest of the country’s prime minister and president over the provisional ‘Macedonia’ name deal. According to reports, Konstantinos Barbarousis, who could face charges of high treason, escaped a police blockade late on Friday in the western region of Aetoloakarnania where he sought refuge. A huge police operation is under way to locate him and bring him to justice. Judicial authorities do not need Parliament’s approval to lift an MP’s immunity in the case of treason-related charges.

Speaking in Parliament, Barbarousis accused the government of “not legislating in the nation’s interests but in its own.” He called for a coup d’etat and asked on the Greek armed forces to “abide by their oath” and arrest Prime Minister Alexis Tsipras, Defense Minister Panos Kammenos and President Prokopis Pavlopoulos. His outburst led to his expulsion form the extremist party, as the speaker of the house barred any members of Golden Dawn speaking during the debate on a no-confidence motion against the government tabled after the Greece, FYROM agreement.

Debt Rattle Jun 8 2014: The ECB Negative Rate Is A Dud

Jun 082014

June 8, 2014 Posted by Raúl Ilargi Meijer at 10:11 am Finance Tagged with: Draghi, ECB, Negative rate, SIFIs 3 Responses »

Office of War Information Watching D Day news line on New York Times building June 6, 1944

Much ado about nothing. That about sums up the real story behind the heated headlines on the “historic” decision by the ECB to lower its deposit rate into negative territory, from 0% to -0.1%. Because without any actual deposits, the move is empty, meaningless, showmanship, sleight of hand. There was a time when it made sense for banks to park reserves at the central bank, but that time is long gone, since banks don’t have to be afraid of each other’s hidden debts anymore. Not because those debts have disappeared , but because governments and central banks are now on the hook for them.

First, in November 2011, the Financial Stability Board published its initial official list of SIFIs or “Systemically Important Financial Institutions”, another way of saying Too Big To Fail. Being on the list may come with a few requirements, reserve ratios etc., but much more importantly it cemented the coup by the banking world in the wake of the financial crisis. Other than those few requirements, they could now act with impunity: any losses would be covered first by the people of the countries the banks had their headquarters in, but in the case of Europe also by other EU citizens.

What risks remained in the system, such as smaller banks and peripheral bonds, were taken away on July 26 2012 by Mario Draghi’s infamous “whatever it takes” speech. From there on in it’s been smooth sailing. For the banks that is, not for the various economies. To wit: yields on PIIGS bonds are now about on par with US Treasuries, even as Spanish, Italian and Greek unemployment numbers have stayed absurdly high for years now. That’s the kind of distortion you can only get through the promise of unlimited spending from central banks.

I picked up the graph below from Dutch business channel RTLZ and adapted it a little. It needs precious few further comments. From the $800 billion in deposits in early 2012, perhaps $10 billion or so is left. Chump change. The negative deposit rate has neither meaning nor impact. The Systemically Important Financial Institutions are in full control of the game. And that cannot bode well for the man and woman in the street.

• Banks Are Digging Into China Metal-Backed Loans (WSJ)

As many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans, according to people with knowledge of the matter. The banks, including Citigroup and Standard Chartered, provided loans to trading firms that were backed by metals such as copper and aluminum stored at one of China’s biggest ports, the people said. The trading firms hold the deed to the metal, which can be used to secure financing, but the metal stays in a warehouse. Banks fear a private Chinese company may have used the metal as collateral to get multiple loans, potentially defrauding the lenders and trading firms. Two of the people with knowledge of the matter estimated the value of the loans and collateral at several hundred million dollars.

The banks are frustrated because they haven’t been able to get access to the collateral, the people said. The metals are stored at Qingdao Port, which administers the warehouses. An executive at one of the banks said the title documents from the warehouses may have been photocopied and used to secure the loans. Police in Qingdao, a city of nearly nine million people in eastern Shandong province, are scrutinizing paperwork between a domestic company and the port, according to another person familiar with the matter. In one suspected instance, five receipts involving one stockpile were found, even as the port claimed to have only issued one, this person said. [..]

The potential fraud raises questions about the integrity of commodities warehouses in China, one of the world’s largest users of commodities, and how trading is financed. There has been concern among policy makers that commodities in China are being used to get financing for cash-strapped companies. As credit tightens and the nation’s economy slows, some investors worry that the commodities will be dumped onto the market as banks seize collateral, potentially knocking down prices. There is also concern that demand in China will collapse because so much of the metal had been stockpiled in warehouses.

Maybe the courts can do what regulators won’t. But that’s still a big maybe.

• US Exchanges Face Class Action Suit Over High-Frequency Trading (Guardian)

The American lawyer who orchestrated a successful class action suit against the tobacco industry 20 years ago has turned his sights on the stock exchanges caught up in the controversy over high-frequency trading. HFT is the process by which professional traders are able to put orders in to the stock market more quickly than the majority of investors. Putting in these earlier bets on the market, it is alleged, allows professionals to make quick profits at the expense of savers and investors in pension funds. The practice is being tested in a class action suit filed in a New York court last month by a number of US legal firms including Michael Lewis, the lawyer who led a class action suit brought by the state of Mississippi in 1994. The team of lawyers he assembled at that time led to $368.5 billion being paid out by 13 tobacco companies to cover the cost of treating illnesses related to smoking in almost 40 US states.

In an interview in Weekend magazine, Lewis – who is not related to the author of the same name whose book Flash Boys exposed high-frequency trading to the public – describes his court action as “a small skirmish against the larger backdrop of the vast accumulation of wealth and political power”. The case in the Southern District of New York is filed against 13 stock exchanges and subsidiaries on behalf of Harold Lanier “individually, and on behalf of all others similarly situated”. “This is a case about broken promises,” the 40-page document begins. It is signed by eight legal firms. In the interview, Lewis says that the information being provided by exchanges “was not timely or accurate, and wasn’t fairly distributed”, and alleges that they were in breach of contract. “The illusory market – the market that the investor sees when he looks at his monitor – is anywhere from 1,500 to 900 milliseconds old. That doesn’t sound like much, because the blink of an eye is 300 milliseconds. But that’s a long, long time in the world of HFT.”

Interesting way to look at the numbers.

• BLS Employment Surveys Diverge (Alhambra)

It’s payroll day again, which means we get to watch the straight-line march of the Establishment Survey “confirm” whatever the observer wishes to infer because a straight line is both uninteresting and mostly not useful. This happens, of course, regardless of what other parts of the survey or other surveys show. The most prominent disagreement continues to be with the Household Survey, diverging conspicuously in October 2012. We can also add the labor force, which flattened out also in October 2012, as well as one other data point. The headline numbers were all exactly in line with previous months, which should stand out as something askew more than act in confirmation. The economy certainly doesn’t move in a straight line so it stands to reason there should be more than a little lumpiness to payroll changes even including adjustments. Ever since the start of 2013, the Establishment Survey has become more of a straight line than at any time in its history.

Going back a few months before, it was there that the Household Survey began to “undercount” employment, at least by comparison. While the mainstream position places far greater faith (which is what it is) in the more quoted Establishment Survey, the other parts of the payroll report disagree – and some vehemently. As I have shown in previous months, prior divergences between the two surveys were typically small and never endured for very long. The last 20 months have been highly unusual to say the least. However, the somewhat healthy increases in the official labor force flattened out right around that same month. In fact, the labor force in October 2012 was 155.5 million, and is estimated to be 155.6 million in today’s release. Measuring from January 2013, when the Establishment Survey’s straight line grew straighter, the labor force is actually 86k fewer in number.

This is highly irregular as well except during periods of open contraction. It is not just the labor force that shows this trend, either, as I noted earlier this week household formation has dropped significantly in the past year or so. Adding that data point to the mix reinforces this interpretation, particularly as the change in trend dates once again to about October 2012. This is beyond random coincidence and mere population characteristics. How can it be related to population when the Household Survey, an alternate measure of employment, picked up the same exact inflection at the same exact time? The only way to tie these factors together and maintain logical consistency is to look to the macro economy as something other than what the mainstream indication is being used for. Putting household formation together with the unadjusted Establishment Survey shows this divergence perhaps even clearer.

As forests disappear, so do languages. Let’s all switch to Mandarin, shall we?

• Loss Of Biodiversity Linked To Loss Of Human Diversity (Guardian)

New Guinea has around 1,000 languages, but as the politics change and deforestation accelerates, the natural barriers that once allowed so many languages to develop there in isolation are broken down. This is part of a process that has seen languages decline as biodiversity decreases. Researchers have established a correlation between changes in local environments – including the extinction of species – and the disappearance of languages spoken by communities who had inhabited them. “The forests are being cut down. Many languages are being lost. Migrants come and people leave to find work in the lowlands and cities. The Indonesian government stops us speaking our languages in schools,” says Wenda.

According to a report by researchers Jonathan Loh at the Zoological Society of London and David Harmon at the George Wright Society, the steep declines in both languages and nature mirror each other. One in four of the world’s 7,000 languages are now threatened with extinction, and linguistic diversity is declining as fast as biodiversity – about 30% since 1970, they say. While around 21% of all mammals, 13% of birds, 15% of reptiles and 30% of amphibians are threatened, around 400 languages are thought to have become extinct in the same time. New Guinea, the second-largest island in the world, is not just the world’s most linguistically diverse place, it is also one of the most biologically abundant, with tree-climbing kangaroos, birds of paradise, carnivorous mice, giant pigeons, rats bigger than domestic cats and more orchid species than any other place on the planet.

A timely warning. Complacency is never a good driver.

• A Hawk Stirs as Weber’s UBS Sees U.S. Inflation Set to Take Off (Bloomberg)

Leave it to Axel Weber to sound the inflation alarm while most of the world is focused on the threat of deflation. A stalwart advocate of tight money at the European Central Bank, where he helped to set interest rates from 2004 to 2011, Weber says U.S. price gains and the subsequent response of the Federal Reserve will outpace investor expectations. “I see more potential ahead for nervousness in the market,” Weber, chairman of UBS since 2012, told a London conference of the Institute of International Finance yesterday. “The whole driver is going to be the inflation rate by the end of the year in the U.S.” The boss’s concerns are shared inside Switzerland’s largest bank.

In a May 27 study, New York-based economist Maury Harris and colleagues outlined what they called a non-consensus view that the personal consumption expenditures price index excluding fuel and food will reach 2% by the end of this year. It rose 1.4% in April. The Fed’s benchmark rate will jump to 1.25% by the end of next year and 3.25 by the end of 2016, UBS predicts. By contrast, the median estimate of economists in a May survey was for a 0.75% rate by the end of next year. The UBS analysis points to tightening labor and rental markets, a less-disinflationary impact from imports and price gains at the factory gate. Such an environment sets the stage for a surge in bond yields by the end of the year, forcing the Fed to retreat from its low-interest rate commitment, in UBS’s view.

The 10-year Treasury yield will rise to 3.25% in December from 2.57% today and touch 4% by the end of 2015, it says. That would surprise many, with the median forecast of analysts in another Bloomberg poll suggesting the yield will be 3.14 percent in the fourth quarter of this year. A year since emerging markets were roiled by the fear the U.S. central bank was readying to withdraw stimulus, Weber now says investors worldwide must brace themselves anew for international fallout from the Fed. “Every U.S. tightening cycle has been associated with repercussions in the global economy,” he said. “I don’t have the hope it will be different this time around.”

The US government may be facing a credibility problem.

• The Two Key Numbers That Shadow The Jobs Numbers (WaPo)

The monthly jobs report is comprised of two numbers, calculated using two different methods. In May, the economy added an estimated 217,000 jobs and the unemployment rate stayed at 6.3%. But looking at those two numbers outside of the context of two other numbers means you’re not seeing the full picture.

Jobs numbers and population Earlier, we noted that the economy hit a post-recession milestone: The number of people employed in the United States has finally passed the level of January 2008, the previous peak. (There are a number of footnotes that could be applied to “number of people employed,” but we’re going to skip those for now.) Thanks to those 217,000 more jobs, there are about 98,000 more people employed than in that month. But you can’t look at those job gains without looking at another number: population. Below is a graph of the number of people employed in the economy relative to January 2008 (“JOBS”) with another set of data, the noninstitutional population of the country relative to the same month (“POPULATION”).That’s the shadow. And it shows that job additions since 2010 have essentially kept pace with the growth of the number of people in that same time period.

Unemployment rate and participation Likewise, you can’t just look at the unemployment rate by itself. The unemployment rate is a simple fraction: the number of people employed divided by the number of people in the workforce. If a million people are in the workforce and 800,000 are employed, 80% of them are employed and the unemployment rate is 20%. Simple enough. But the size of the workforce fluctuates. People retire, people graduate from college, people go on disability, people just give up on finding work. So if the workforce suddenly drops to 900,000 in our previous example, eight out of nine people are working, instead of eight out of 10. The unemployment rate goes from 20% to 11% in a snap, with no one getting a job. The government counts the percentage of people participating in the workforce, too. And it tracks neatly with the unemployment rate, as you can see in the graph below, which shows the change in percentage rate since January 2008. Participation is the unemployment rate’s shadow.

” … go easy on the hallelujahs”

• Most US Workers “Running Up The Down Escalator” (AP)

The U.S. economy has finally regained the jobs lost to the Great Recession. But go easy on the hallelujahs. The comeback is far from complete. Friday’s report from the government revealed an economy healing yet marked by deep and lasting scars. The downturn that began 6Ω years ago accelerated wrenching changes that have left many Americans feeling worse off than they did the last time the economy had roughly the same number of jobs it does now. Employers added 217,000 workers in May, more than enough to surpass the 138.4 million jobs that existed when the recession began in December 2007. But even as the unemployment rate has slipped to 6.3% from 10% at the depth of the recession, the economy still lacks its former firepower.

To many economists, the job figures are both proof of the sustained recovery and evidence of a painful transformation in how Americans earn a living. “The labor market recovery has been disappointing,” said Stuart Hoffman, chief economist at PNC Financial Services. “Even with the new peak, there is still a great deal of slack.” There are still 1.49 million construction jobs missing. Factories have 1.65 million fewer workers. Many of these jobs have been permanently replaced by new technologies: robots, software and advanced equipment that speeds productivity and requires less manpower, said Patrick O’Keefe, director of economic research for the advisory and consulting firm CohnReznick. “When heavy things need to be moved, we now have machines to do it,” O’Keefe said. “It is unlikely in the manufacturing sector that we recover much of the losses.”

Government payrolls have shrunk, taking middle class pay with them. Local school districts have 255,400 fewer employees. The U.S. Postal Service has shed 194,700 employees. And during the economic recovery, more people have left the job market than entered it. Just 58.9% of working-age Americans have jobs, down from 62.7% at the start of the recession. Some of that decline comes from an aging country in which more people are retiring. But the share of working adults among the overall population is “still bouncing around at the bottom where it was during the worst of the recession” evidence that meaningful wage gains across the economy are unlikely, O’Keefe said.

The recovery hasn’t kept up with the expanding U.S. population. Researchers at the liberal Economic Policy Institute estimate that 7 million more jobs would have been needed to keep up with population growth. The pain has been concentrated largely among lower- and middle-income workers, according to an analysis by the institute. For the bottom 30% of earners, wages, when adjusted for inflation, have fallen over the past 14 years. For the next 40% of earners, pay basically flatlined. Most U.S. workers are “running up the down escalator,” said Larry Mishel, the institute’s president.

if nobody believes the unemployment numbers anymore, why keep publishing them?

• What’s The Real Unemployment Rate? (CNBC)

The U.S. Labor Department said Friday that the unemployment rate was 6.3% in May—but does that rate tell the real story? A number of economists look past the “main” unemployment rate to a different figure the Bureau of Labor Statistics calls “U-6,” which it defines as “total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a% of all civilian labor force plus all marginally attached workers.” In other words, the unemployed, the underemployed and the discouraged—a rate that still remains high. The U-6 rate fell slightly in May to 12.2%. While it is down 160 basis points over the last year, the trend has been somewhat more volatile than in the main unemployment rate, which steadily declined. Over the last 18 months, the U-6 rate has changed by at least four-tenths of a point from month to month five times.

• The Fed Won’t Let the Economy Heal (Mises Inst.)

Most commentators are of the view that the massive monetary pumping of the Fed during 2008 prevented a major economic disaster. The yearly rate of growth of the Fed’s balance sheet jumped from 3.9% in January 2008 to 150.9% by December of that year. The federal funds rate target was lowered from 3% in January 2008 to 0.25% by December of that year. According to popular thinking, the Fed’s actions have bought time to allow the US economy to heal — much like keeping a coma patient on life support. Consequently, popular thinkers are harshly criticizing commentators that advocate allowing economic recession to take its course. Contrary to popular thinking, economic recessions or economic busts are not about the end of the world but about the removal of various non-productive activities, also labeled as bubble activities brought about by previous loose monetary policies of the central bank.

Observe that by means of loose monetary policy wealth is diverted from wealth generators to non-wealth generating activities. The stronger the pace of monetary pumping the stronger is the divergence of wealth. (Bubble activities, which don’t generate wealth, cannot exist without this divergence.) Obviously then the longer the divergence of wealth takes place the weaker wealth generators become. Note that once the ability of wealth generators to generate wealth comes under pressure the so-called economy follows suit. After all it is the increase in wealth that supports overall economic activity. It is increases in wealth that fund increases in productive and non-productive activities. So how then can aggressive monetary pumping by the Fed during 2008 have allowed the economy to buy time and to heal?

We suggest that the massive monetary pumping of 2008 has bought time for non-productive bubble activities. However, as we have seen, such activities undermine wealth generators thereby weakening the economy as a whole. If loose monetary policy is enforced over a prolonged period of time it runs the risk of severely weakening the process of wealth generation. A situation can then emerge where the pool of wealth becomes stagnant or starts to decline. Once this happens the economy plunges into a severe slump since there is now less funding available to support both productive and non-productive activities. In such a case, what is required to heal the economy is the fast removal of bubble activities. This will leave a larger amount of necessary funding in the hands of wealth generators thereby strengthening the process of wealth generation — the key for economic recovery.

It’s clear whose side Draghi is on.

• Draghi Faces Off With Regulators Over $2 Trillion In Tricky Debt (Bloomberg)

Mario Draghi is on a collision course with regulators as he seeks to revive Europe’s asset-backed debt market to boost lending to businesses. The European Central Bank president said yesterday regulators are holding back the market he wants to use to spur economic growth. Policy makers are frustrated by the Basel Committee on Banking Supervision’s demands that investors increase the capital they hold to absorb losses on the debt. “We are working on the ABS, but you know that there are also other actors,” Draghi said at a press conference in Frankfurt. “There has to be a revisitation of the regulation that had been introduced in the past few years about ABS to eliminate some of the undue discriminations.”

Europe’s $2 trillion ABS market contracted 32% since 2009 as regulators cracked down on the debt they blamed for deepening the financial crisis. The securities package individual loans such as mortgages, auto credit or credit-card debt and sell them on to investors, allowing banks to share the risk of default and encouraging them to offer more credit. Regulators have been wary of the securities as the complicated structure of some products can obscure the true riskiness of the underlying assets. That happened with securities backed by the U.S. sub-prime mortgage market, which imploded in 2007. Lenders from London-based Barclays Plc to Deutsche Bank AG in Frankfurt say the rules are becoming so onerous they may shun some of the debt, prompting the ECB to join with the Bank of England to seek to ensure the market isn’t unnecessarily impaired.

The ECB is promoting bonds backed by loans to small- and medium-sized enterprises in a bid to increase funding to the businesses that employ about 70% of the European Union’s private-sector workers. Draghi said the plan to revive the market includes buying “simple and transparent” notes that are backed by non-financial private sector debt. That may prove to be a challenge, according to New York-based Citigroup Inc., because there are only about 13 billion euros ($18 billion) of public bonds outstanding. “They may well succeed in reviving the market, but only in encouraging exactly the sort of credit-intensive growth and associated bubbles in asset prices which got us into trouble in the first place,” Citigroup analysts led by Matt King said in a note to clients yesterday before Draghi spoke.

• Draghi’s Big Fat Monetary Zero (Detlev Schlichter)

Before the ECB’s latest move, eurozone banks could get regular funds from the ECB at 0.25%, emergency funds at 0.7%, and they could deposit money at the ECB at 0%. After the ECB’s move, they can borrow regular funds at 0.15%, emergency funds at 0.40%, and they now get charged 0.1% for anything they keep at the ECB. What will the impact of all of this be? Pretty much nothing, I believe. It is sometimes stated that the –0.1% on deposits at the ECB is a fine for “parking” cash at the ECB and that it will encourage banks to do other things with the money. I think that this description is inaccurate. It gives the impression that banks could lend this money to corporations and households. But banks cannot do this.

Deposits at the central bank are bank reserves. They cannot be transferred and cannot be lent to non-banks because non-banks do not have an account at the central bank. Banks can lend these balances to other banks but the banking sector in aggregate cannot get rid of them. This means that at the new negative deposit rate the banking industry will pay about €220 million to the ECB every year and they can do precious little about it (but not to worry, this is small change in the big scheme of things). How can this potentially be stimulating? Individual banks that sit on large reserves may try and reduce their balances at the ECB by creating extra loans. When banks extend new loans they also create extra deposits (new money). Some of these deposits may flow to other banks, which means reserves also flow to other banks, that is, the balances at the ECB of the first bank (the credit and money creating bank) shrink. (Again, this does not lower balances at the ECB in aggregate.)

How many new and risky loans to small and medium sized companies banks will create to avoid the 0.1% “fine” at the ECB I do not know. My guess is it won’t be many. The extra money injections from September onwards seem equally ridiculous to me. Banks are not lending because of some shortage of reserves or lack of interbank liquidity but out of concern for their own balance sheets and the risks inherent in extending new loans to their shaky debtors. There also appears to be limited demand for loans.

By caving in to its critics rather than vigorously defending its previously passive but reasonable policy position, the ECB nurtures the foolish belief that various monetary shenanigans could play a meaningful role in improving the European economy. These policies will not solve anything but wet the appetite for more monetary interventions down the road. The advocates of “easy money” will not be appeased for long. For these people money is always too tight, interest rates are always too high and budget deficits always too small. There is always too little “stimulus”. Paul Krugman is a case in point.

• Draghi’s Horrible Threat: “Are We Finished? The Answer is No” ! (Stockman)

Taken at face value yesterday’s action by the ECB amounted to a monetary farce. How could any adult believe that a benchmark rate cut of 10 bps from an already microscopic level of 25 bps would move the needle in an economic zone that is already groaning under of the weight of $60 trillion in public and private credit market debt? Similarly, what exactly is the point of negative rates on excess bank funds deposited at the ECB when there will never be any takers? After all, Euro banks do have alternative parking lots for idle cash. Likewise, how does inventing a grand new acronym called TLTRO hide the fact that its essentially a free toaster program for clever loan book managers? As instructed by this swell new ECB writ, they will presently shuffle some funds out of mortgages, sovereign debt or other speculative purposes yet to be defined and into approved “productive” loans.

And then they will pass “go”, collect some cheap TLTRO funding from the ECB and collect their own performance bonus for all the bother. All of this silly kidstuff, in fact, is the work of Keynesian desperados in Frankfurt who embrace two propositions that are unequivocally and provably wrong. Namely, that the Euro area economy is floundering due to a tiny decline in non-financial credit and that “low-flation” is the great roadblock that prevents the wheels of credit and commerce from turning at a more satisfactory pace.

In truth, the Euro zone has had an explosion of bank credit growth to the private non-financial sector. Outstanding bank loans grew at a 7.5% CAGR during the 10-years ending at the eve of the financial crisis in early 2008. During those halcyon days there was obviously nothing wrong with the bank credit machinery—especially given the fact the euro zone money GDP grew during the same decade at only a 4.4% CAGR. Expressed in absolute dollar terms, the gain borders on a borrowing frenzy. During that decade, non-financial debt outstanding in the euro zone grew by the equivalent of $7 trillion—which is to say, by an amount equal to the entire loan book of the US banking system on the eve of the crisis.