It Is All About Control

I hear and read the daily screeching about universal healthcare and free college and endless items to which people believe they are entitled.

Entitled is the correct word here and this is why: be it healthcare or housing or education or anything else there is nothing preventing these folks from forming voluntary associations in order to collectively accomplish these goals among themselves without the use of government what so ever.
There is nothing stopping these people from forming organizations to collectively cover healthcare cost or education cost or housing cost. There is nothing stopping these people from sitting down and writing a check themselves.
However that is not what they want to occur and not what they will do. What they want to have happen is to have government pass laws and create regulations to control the lives of others. If this was not the case they would have formed these voluntary organizations in order to accomplish these goals by now – but they have not.
Hence the only logical conclusion to draw is that it has nothing to do with healthcare or housing or education – it has everything to do with controlling your neighbor and helping yourself to your neighbors stuff.
It is all about control – not helping other humans. If you believe otherwise, no matter how sincerely believe that, you are being conned.
It is all about control.

Low Official Unemployment Rate And Wage Stagnation

Quite a few people make some very bad assumptions in regard to how the economy works. The reason for these bad assumptions is usually due to people assuming the economy works in a similar manner as it did ten or twenty or thirty years ago when that is no longer true. The main cause for that no longer being true is massive intervention via central banks and governments. Eight and a half years ago the global economy entered into emergency mode in order to prevent the global credit markets from locking up – the global economy still operates in emergency mode.

As such the relationships within the economy no longer function in the manner that many people believe they do. Great example of this is the announcement this morning that the unemployment rate is 4.4% – yet wages are stagnant. Why is that?

Jeffrey P. Snider provides an excellent technical analysis of the reasons for wage stagnation at Alhambra Investment Partners. 

“That is why economists and policymakers like Janet Yellen can only hint at what full employment is supposed to bring, rather than being able to point directly at the evidence for it. Instead, all the related data in terms of productivity suggests very little difference now as last year or the year before; again, no matter how low the unemployment rate falls.”



Guaranty Bank Of Milwaukee Fails

This evening Guaranty Bank of Milwaukee (d/b/a BestBank in Georgia & Michigan) was closed by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Guaranty Bank had 119 branches in 5 states. The 12 brick-and-mortar locations in Illinois, Minnesota, and Wisconsin will reopen as branches of First-Citizens Bank & Trust Company during their normal business hours. The 107 branches in retail outlets, such as grocery and general merchandise stores, will not be reopening.

Guaranty Bank is the second large (One billion plus in deposits and assets) bank failure in a week with New Orleans-based First NBC Bank having failed on April 28th. Guaranty Bank is expected to cost the FDIC about $150 million in clean up cost.

Two data points do not make a trend, but it had been two years since a bank the size of either one of these two banks had failed in the United States and now two banks have failed on consecutive Fridays. Five banks have failed this year. Puerto Rico moved to bankruptcy just this week as well.

Pay attention!

Interesting Times

This note was dropped to me last night:


“Keith, I noticed something a few months ago that could possibly be concerning. Now it’s become worrying. Our company represents 11 manufacturers of eye surgery devices, equipment and specialized prescriptions .. i.e. the “ophthalmic” industry. We sell and distribute in the southwest United States (NV, UT, AZ, NM and southern CA). Sales in ALL 11 of our lines were down the last quarter of FY 2016. 1st quarter of FY 2017 … same … sales down. We are now going into the 2nd month of the 2nd quarter of 2017. We just had the worst month since December 2011. At first I thought it was just a few of the lines and things would turn around. Then it became obvious it was all 11 lines. Then I thought it might be something occurring in our sales force (6 to 8 people). Just found out that all 11 mfrs sales are down NATIONWIDE. Next we are finding out our competitors’ lines are also down. The whole industry seems to grinding down. Other specialty industries (orthopedic, cosmetic, and other elective surgery fields) also down … across the board. This is a high probability of a sign of a serious national economic slowdown, IMHO.”
I share his opinion.
Auto sales were way down in April – and not just for a few manufacturers but pretty much across the board. Unsold inventories of automobiles have built up to their highest quantity in ten years and the auto manufacturers are offering deeper and deeper discounts and more and more incentives in order to make the sales they are making.
The Atlanta Fed pegged first quarter GDP growth at 0.5%.
Oh by the way – Puerto Rico filed for bankruptcy.
Anecdotally many people I know are reporting a noticeable slowdown in business. Recession is in the air. In China odd economic things are going on but no one quite knows what – China is so opaque that even the Chinese government does not know whats going on. Kyle Bass says that “All hell is going to break loose soon” in China – so we will see.
In Canada, Home Capital Group lost 75% of their deposits in a week and in order to remain solvent obtained a fairly shady $2 billion line of credit – and last night it was reported than the had already consumed a billion dollars worth of that credit and were desperately in search of more credit. Rumors earlier in the week that they had been backstopped by the Canadian government may or may not turn out to be true.
Meanwhile in Italy Alitalia filed bankruptcy and is symbolic of the entire country. The only thing keeping the Italian banking system solvent are endless bailouts and liquidity injections from Germany, Holland and Luxembourg and the motivation for keeping the Italians solvent is to not provide anymore incentive than what already exists for more countries to leave the EU.
All in all keep your eyes open – the United States and global economies are walking a tightrope right now and it would not take much of a breeze to knock them off.

Socialism For Rich People

“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.” – James Grant, Grant’s Interest Rate Observer

When the deregulation of the banking industry took place under the Clinton administration, it was not completely deregulated; the principle part which was not deregulated was the piece leaving the taxpayers on the hook to absorb bank failures.

When the credit markets came near to collapse in the fall of 2008, the Federal government had a basic decision to make: try to save the banks and credit markets, or let them fail. A major part of the calculation to try to save the banks was that if the banks failed then the taxpayers would be responsible for trillions of dollars in insured deposits. To put it bluntly, the Federal government did not have the necessary trillions of dollars on hand that would have been required by law.

Consequently the decision was made to re-inflate the real estate markets that the CDS devices were dependent on in order to save the derivative markets and from there save the credit markets. This was accomplished by the zero interest rate policy, liquidity injections, the Federal Reserve buying distressed assets from banks and corporations, and a host of other activities. Along the way the Federal Reserve also took an activist role in re-inflating the stock markets. There are even unsubstantiated rumors that the Federal Reserve directly purchased stock shares in order to elevate the equity markets.

In doing all of this, the Federal government and Federal Reserve implicitly and explicitly communicated that they would not allow these markets to fail or suffer a sharp decline that might adversely affect confidence in the markets. The unintended side effect of this policy has been that the real estate and equity markets have become risk free, since investors do not believe the Feds will allow them to suffer a loss. As such, the economy is now like socialism for rich people: the Feds have promised to socialize the losses among the American citizens but allow the profits to be kept by the entity that is investing in these markets.

Money that should have been allocated to new products, new services, and new jobs has been redirected into stocks and real estate.

The Federal Reserve and Federal government by and large are populated by intelligent people. They understand that they cannot continue this forever without very adverse effects on the economy. In fact, we see those very adverse effects already in the lack of full time private sector employment, wage stagnation, ever increasing debt of all types, and bubbles in real estate and equities. The Feds know that if they continue these policies, these negative consequences will only grow. The trick is how to escape the consequences without doing the very thing they set out to avoid: crashing the world credit markets.

The Feds have created an extraordinarily distorted market with at least tens and perhaps hundreds of trillions of dollars in misallocated capital. For example, when the crisis first hit in September of 2008, the worldwide notional value of derivatives was about $240trillion. The current worldwide notional value of derivatives is about $550trillion. With the Feds placating the credit markets, the amount of money invested in these instruments is more than double what it was when the crisis hit. The cure may have alleviated the pain the patient was feeling but ultimately it made the illness much worse than it otherwise would have been.

On top of all of this, the taxpayers are still on the hook if the banks fail.