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Time Warner, AT&T shares fall with concerns over deal clearance

Ticker and trading information for telecoms company AT&T are displayed at the post where it is traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 24, 2016. REUTERS/Brendan McDermid

Ticker and trading information for telecoms company AT&T are displayed at the post where it is traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 24, 2016.  REUTERS/Brendan McDermid

Time Warner, AT&T shares fall with concerns over deal clearance

By Jessica Toonkel and Supantha Mukherjee

Wall Street signaled skepticism on Monday that AT&T Inc would secure the government approvals needed to carry out its planned $85.4 billion acquisition of Time Warner Inc, with shares of both companies falling as analysts scrutinized the deal.

Time Warner shares were trading some 20 percent below the implied value of AT&T’s $107.50 per share cash and stock offer, indicating investors doubt that the companies would be able to complete the transaction.

The deal, announced on Saturday, would give AT&T control of cable TV channels HBO and CNN, film studio Warner Bros and other coveted assets and reshape the media landscape.

Dallas-based AT&T said on Saturday it would need approval of the U.S. Department of Justice and the companies were determining which Time Warner U.S. Federal Communications Commission licenses, if any, would need to transfer to AT&T. Any such transfers would require FCC approval.

AT&T Chief Executive Randall Stephenson said on Monday he expects government clearances for the deal because it is a so-called vertical integration that will not eliminate a competitor, a situation that is viewed more favorably by antitrust enforcers.

“While regulators will often times have concerns with vertical integrations, those are always remedied by conditions imposed on the merger, so that’s how we envision this one to play out,” Stephenson told CNBC.

Despite its big media footprint, Time Warner has only one FCC-regulated broadcast station, WPCH-TV in Atlanta. Time Warner could sell the license to try to avoid a formal FCC review, several analysts said.

Any decision to review the deal would be made by regulatory officials at the Department of Justice and the Federal Trade Commission, White House spokesman Josh Earnest told reporters on Monday.

“The president would hope and expect that regulators would carefully consider the potential impact of this deal on consumers,” Earnest added.

Shares of AT&T closed down 1.7 percent at $36.86 and shares of Time Warner fell 3 percent to $86.78.


Wall Street analysts and traders on Monday expressed concerns about the implications of the antitrust and regulatory challenges.

The total value of broken deals is nearly $700 billion so far this year, a fact that has sidelined some investors.

“The regulatory environment has been unbelievable this year and I think everyone is on edge,” said an arbitrage investor considering buying exposure to the deal who did not want to be identified because they were not authorized to speak to the press.

The biggest deals to fall apart in 2016 include Office Depot–Staples, Baker Hughes–Halliburton, Allergan–Pfizer and Norfolk Southern–Canadian Pacific Railways. Many of the deals drew objections from the Department of Justice and U.S. Treasury.

“We are unprepared at this point to assign anything higher than a 50/50 probability of deal approval,” wrote MoffettNathanson Research in a report, downgrading Time Warner to ‘neutral’ but raising its target price by $8 to $100.

The deal’s arbitrage spread of more than 20 percent is wider than five other recent deals that regulators subsequently shot down or were withdrawn, including Comcast Corp’s planned takeover of Time Warner Cable. That deal had a spread of only 5 percent.

The deal, announced just over two weeks before the Nov. 8 U.S. election, was also generating skepticism among both Republicans and Democrats.


Other analysts were unnerved by the massive $170 billion debt balance the combined company may hold after the deal closes and some questioned the rationale for the combination.

Analysts at Cowen & Co said it was a “struggle” to understand why the acquisition made sense.

“If it is simply differentiated content AT&T is interested in we don’t understand why this couldn’t have been solved by some form of partnership,” the firm wrote in a note to downgrade the company’s investment rating to ‘market perform’ from ‘outperform.’

Analysts at Moody’s, which put AT&T on review for a downgrade after the acquisition was announced, said regulators could include conditions that limit the wireless provider’s ability to use Time Warner content as a competitive advantage, ultimately undermining its objective to differentiate its mobile and pay TV platforms with exclusive content.

(Additional reporting by Malathi Nayak, Carl O’Donnell and Roberta Rampton; Editing by Nick Zieminski, Meredith Mazzilli and Bill Rigby)

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Published at Mon, 24 Oct 2016 21:12:09 +0000

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Sunday Night Futures

Photo geralt from Pixabay

Sunday Night Futures

by Bill McBride on 10/23/2016 08:24:00 PM

Schedule for Week of Oct 23, 2016

• At 8:30 AM ET, the Chicago Fed National Activity Index for September. This is a composite index of other data.

From CNBC: Pre-Market Data and Bloomberg futures: S&P futures and DOW futures are up slightly (fair value).

Oil prices were mixed over the last week with WTI futures at $50.67 per barrel and Brent at $51.61 per barrel.  A year ago, WTI was at $44, and Brent was at $47 – so oil prices are UP about 10% to 15% year-over-year.

Here is a graph from for nationwide gasoline prices. Nationally prices are at $2.21 per gallon (close to unchanged from a year ago).  Gasoline prices will be up year-over-year soon.


by Bill McBride on 10/23/2016 08:24:00 PM

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Published at Mon, 24 Oct 2016 00:24:00 +0000

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Vehicle Sales Forecasts: Sales Over 17 Million SAAR Again in October MichaelGaida from Pixabay

Vehicle Sales Forecasts: Sales Over 17 Million SAAR Again in October

by Bill McBride on 10/23/2016 12:41:00 PM

 The automakers will report October vehicle sales on Tuesday, November 1st.
Note:  There were 26 selling days in October 2016, down from 28 in October 2015.

From WardsAuto: Forecast: October Daily Sales to Reach 15-Year High

A WardsAuto forecast calls for October U.S. light-vehicle sales to reach a 17.8 million-unit seasonally adjusted annual rate, making it the seventh month this year to surpass 17 million.

A 17.8 million SAAR is greatly higher than the 17.3 million recorded year-to-date through September, but does not beat the 18.1 million result recorded in the same month last year.
emphasis added

From J.D. Power: New-Vehicle Retail Sales in October Slip; Sixth Monthly Decline of 2016

The SAAR for total sales is projected at 17.7 million units in October 2016, down from 18.1 million units a year ago.

This graph shows light vehicle sales since the BEA started keeping data in 1967.
Vehicle Sales

The dashed line is the September sales rate.

Sales for 2016 – through the first nine months – were up slightly from the comparable period last year.

After increasing significantly for several years following the financial crisis, auto sales are now mostly moving sideways.


by Bill McBride on 10/23/2016 12:41:00 PM

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Published at Sun, 23 Oct 2016 16:41:00 +0000

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Q3 GDP Forecasts

By Peggy_Marco from Pixabay

Q3 GDP Forecasts

by Bill McBride on 10/21/2016 02:03:00 PM

The advance GDP report for Q3 GDP will be released next Friday. The consensus is real GDP increased at a 2.5% Seasonally Adjusted Annual Rate in Q3.

From the Altanta Fed: GDPNow

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.0 percent on October 19, up from 1.9 percent on October 14.
emphasis added

From the NY Fed Nowcasting Report

The FRBNY Staff Nowcast stands at 2.2% for 2016:Q3 and 1.4% for 2016:Q4.

From Merrill Lynch:

We expect the first estimate of 3Q GDP to show growth of 2.5% qoq saar, an improvement from the 1.4% pace in 2Q and 0.8% gain in 1Q. Although consumer spending is expected to slow from the strong 4.3% increase in 2Q, we still expect a solid 2.6% increase in 3Q, owing to strong auto sales.

CR Note: Looks like real GDP growth  was around 2.0% to 2.5% in Q3.


by Bill McBride on 10/21/2016 02:03:00 PM

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Published at Fri, 21 Oct 2016 18:03:00 +0000

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Another Lehman Blunder Coming Up?

By pcdazero from Pixabay

Another Lehman Blunder Coming Up?

Telegraph writer Ambrose Evans-Pritchard says the Fed risks repeating Lehman blunder as US recession storm gathers.

The key problem with Pritchard’s superficial analysis is the Lehman bankruptcy is about the only thing the Fed got right.

Liquidity is suddenly drying up. Early warning indicators from US ‘flow of funds’ data point to an incipent squeeze, the long-feared capitulation after five successive quarters of declining corporate profits.

Yet the Fed is methodically draining money through ‘reverse repos’ regardless. It has set the course for a rise in interest rates in December and seems to be on automatic pilot.

“We are seeing a serious deterioration on a monthly basis,” said Michael Howell from CrossBorder Capital, specialists in global liquidity. The signals lead the economic cycle by six to nine months.

“We think the US is heading for recession by the Spring of 2017. It is absolutely bonkers for the Fed to even think about raising rates right now,” he said.

US Liquidity

The growth rate of nominal GDP – a pure measure of the economy – has been in an unbroken fall since the start of the year, falling from 4.2pc to 2.5pc. It is close to stall speed, flirting with levels that have invariably led to recessions in the post-War era.

“It is a little scary. When nominal GDP slows like that, you can be sure that financial stress will follow. Monetary policy is too tight and the slightest shock will tip the US into recession,” said Lars Christensen, from Markets and Money Advisory.

If allowed to happen, it will be a deeply frightening experience, rocking the global system to its foundations. The Bank for International Settlements estimates that 60pc of the world economy is locked into the US currency system, and that debts denominated in dollars outside US jurisdiction have ballooned to $9.8 trillion.

The world has never before been so leveraged to dollar borrowing costs. BIS data show that debt ratios in both rich countries and emerging markets are roughly 35 percentage points of GDP higher than they were at the onset of the Lehman crisis.

“We are getting closer and closer to a recession, but we are not quite there yet, looking at our forward-indicators,” said Lakshman Achuthan from the Economic Cycle Research Institute in New York.

“I can understand why people are getting worried. We have been seeing a ‘growth-rate’ cyclical downturn for the last two years. The longer this goes on, the less wiggle room there is,” he said.

“We are sure there will be no recession this year or into the first two months of 2017, but beyond that there are worrying signs. The deterioration of our leading labour market index is very clear,” he said.

Albert Edwards from Societe Generale says gross domestic income (GDI) was the most accurate gauge of the economy as the pre-Lehman crisis unfolded, and this measure has been flat for the last two quarters.

Pritchard for Fed Chairman

Pritchard calls Lehman a Fed failure.

Look at the result: Too big to fail is even bigger, toggle bonds and corporate borrowing are running rampant, no imbalances were fixed, QE is insane by any rational measure, and the Fed did nothing to rein in moral hazard risk taking.

The entire world would be much better off had not only Lehman gone under, but the entire banking system gone under.

Instead, bank are bigger than ever, corporate leverage is higher than ever, debt levels are higher than ever, and the global economy is setup for an even bigger collapse.

Hello Ambrose, this is what happens when you take moral hazard stances of bailing out failed corporations.

Ambrose should throw his hat into the ring to replace Janet Yellen when she retires. He would fit right in. At the first sign of any problem he would scream for more liquidity while bailing out failed financial institutions.

Meanwhile, it’s interesting to see the comments by Albert Edwards on GDI. Here are my thoughts: Real GDI, GPDI Recession Indicators Take II.

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Published at Sun, 23 Oct 2016 01:39:50 +0000

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Schedule for Week of Oct 23, 2016 by geralt from pixabay

Schedule for Week of Oct 23, 2016

by Bill McBride on 10/22/2016 08:01:00 AM

The key economic reports this week are the advance estimate of Q3 GDP and September New Home Sales.

Also the Case-Shiller House Price Index for August will be released.

For manufacturing, the October Richmond and Kansas City Fed manufacturing surveys will be released this week.

—– Monday, Oct 24th —–

8:30 AM ET: Chicago Fed National Activity Index for September. This is a composite index of other data.

—– Tuesday, Oct 25th —–

9:00 AM: FHFA House Price Index for August 2016. This was originally a GSE only repeat sales, however there is also an expanded index.  The consensus is for a 0.5% month-to-month increase for this index.
Case-Shiller House Prices Indices

9:00 AM ET: S&P/Case-Shiller House Price Index for August. Although this is the August report, it is really a 3 month average of June, July and August prices.

This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the July 2016 report (the Composite 20 was started in January 2000).

The consensus is for a 5.1% year-over-year increase in the Comp 20 index for August. The Zillow forecast is for the National Index to increase 5.2% year-over-year in August.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for October.

—– Wednesday, Oct 26th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.
New Home Sales

10:00 AM ET: New Home Sales for September from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the August sales rate.

The consensus is for an decrease in sales to 600 thousand Seasonally Adjusted Annual Rate (SAAR) in September from 609 thousand in August.

—– Thursday, Oct 27th —–

8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 255 thousand initial claims, down from 260 thousand the previous week.  Note: I expect some further impact on claims due to Hurricane Matthew.

8:30 AM: Durable Goods Orders for September from the Census Bureau. The consensus is for a 0.2% increase in durable goods orders.

10:00 AM: Pending Home Sales Index for September. The consensus is for a 1.0% increase in the index.

10:00 AM: the Q3 Housing Vacancies and Homeownership from the Census Bureau.

11:00 AM: Kansas City Fed Survey of Manufacturing Activity for October.

—– Friday, Oct 28th —–

8:30 AM ET: Gross Domestic Product, 3rd quarter 2016 (Advance estimate). The consensus is that real GDP increased 2.5% annualized in Q3.

10:00 AM: University of Michigan’s Consumer sentiment index (final for October). The consensus is for a reading of 88.5, up from the preliminary reading 87.9.


by Bill McBride on 10/22/2016 08:01:00 AM

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Published at Sat, 22 Oct 2016 12:01:00 +0000

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Wall Street ends little changed; Microsoft hits record

By efes from Pixabay

Wall Street ends little changed; Microsoft hits record

By Chuck Mikolajczak


The S&P 500 and the Dow were little changed and the Nasdaq advanced on Friday as a record day for Microsoft and earnings from McDonald’s helped offset a fall in energy and healthcare shares.

General Electric (GE.N), often seen as an economic bellwether, weighed on the market as the industrial conglomerate’s posted results that topped expectations but cut its full-year revenue target to send shares down 0.9 percent after it touched an 8-month low of $28.33.

A stronger dollar .DXY, which touched its highest level since early February, also pulled on sentiment as it could dent the earnings of large multinationals.

“The dollar is getting stronger, that is going to have a negative impact energy prices, that is going to have a negative impact on corporate earnings, at least potentially,” said Phil Orlando, chief equity market strategist at Federated Investors, in New York.

The energy index .SPNY was off 0.7 percent, while health .SPXHC declined 0.9 percent. Johnson & Johnson <JNJ.N and Merck (MRK.N), were both down 1.2 percent, and among the biggest drags on the healthcare sector. Schlumberger (SLB.N), the world’s No. 1 oilfield services provider, weighed on the energy index as it lost 3 percent after its quarterly results.

But gains in Microsoft (MSFT.O) and McDonald’s (MCD.N) on the back of their strong quarterly reports helped keep losses in check.

“Earnings, frankly have started out little better than I thought they would, and a little better than the consensus thought they would. You had a couple of good companies like Microsoft, which is skewing things positively,” said Orlando.

Microsoft was up 4.3 percent at a record closing high of $59.69, while McDonald’s was up 3 percent at $113.93.

With 23 percent of S&P 500 companies posting results, earnings are now expected to show growth of 1.1 percent for the third quarter, up from the 0.5 percent decline expected at the start of the month, according to Thomson Reuters data.

The Dow Jones industrial average .DJI fell 16.64 points, or 0.09 percent, to 18,145.71, the S&P 500 .SPX lost 0.18 points, or 0.01 percent, to 2,141.16 and the Nasdaq Composite .IXIC added 15.57 points, or 0.3 percent, to 5,257.40.

For the week, the Dow edged up 0.04, the S&P rose 0.4 percent and the Nasdaq climbed 0.8 percent.

Telecoms .SPLRCL, down 2.3 percent, were lower for a second straight session. AT&T (T.N) lost 3 percent on news the wireless carrier was in advanced talks to buy Time Warner (TWX.N), whose stock surged 7.8 percent.

In other deal news, Reynolds American (RAI.N) jumped 14 percent after British American Tobacco (BATS.L)(BTI.A) offered to buy the 58 percent of the tobacco company it does not already own in a $47 billion takeover.

Advancing issues outnumbered declining ones on the NYSE by a 1.04-to-1 ratio; on Nasdaq, a 1.20-to-1 ratio favored decliners.

The S&P 500 posted 8 new 52-week highs and 3 new lows; the Nasdaq Composite recorded 52 new highs and 38 new lows.

About 5.97 billion shares changed hands in U.S. exchanges, below the 6.4 billion daily average over the last 20 sessions.

(Reporting by Chuck Mikolajczak; Editing by Dan Grebler and Nick Zieminski)

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Published at Fri, 21 Oct 2016 21:49:10 +0000

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“The Structural Factors Behind the Steady Fall in Labor Force Participation Rates of Prime Age Workers”


By UzbekIL from Pixabay


“The Structural Factors Behind the Steady Fall in Labor Force Participation Rates of Prime Age Workers”

by Bill McBride on 10/21/2016 05:38:00 PM

Here is some additional analysis on the labor force participation rate. Dr. Frank Lysy discusses the various reasons for the decline in the labor force participation rate for prime age workers – especially the multi-decade decline for prime working age men: The Structural Factors Behind the Steady Fall in Labor Force Participation Rates of Prime Age Workers. Here is the introduction:

Increasing attention has recently been directed to the decline in labor force participation rates observed for men over the last several decades, and for women since the late 1990s.  The chart above tracks this.  It has indeed been dubbed (for men) a “quiet catastrophe” in a new book by Nicholas Eberstadt titled “Men Without Work”.

The issue has been taken up by those both on the right and on the left.  Even President Obama, in one of the rare “By invitation” pieces that The Economist occasionally publishes, has highlighted the concern in an article under his name in last week’s issue (the issue of October 8).  President Obama treats it as one of “four crucial areas of unfinished business” his successor will need to address.  A chart similar to that above is shown.  President Obama notes that in 1953, just 3% of men between the ages of 25 and 54 were not working, while the figure today is 12% (that is, the labor force participation rate fell from 97% to 88%).  The share of women of the same age group not participating in the formal labor market has similarly been falling since 1999.

While Obama is careful in his wording not to say directly that all of this increase in those not working was due to “involuntary joblessness”, he does note that involuntary joblessness takes a devastating toll on those unable to find jobs.  This is certainly correct. The fundamental question, however, is to what degree do we know whether the rise has been involuntary, and to what degree has it risen due to possibly more benign factors with rational choices being made.

Dr. Lysy discusses the various reasons for the decline (disability, “Mr. Mom”, more prime workers in school, etc.).


by Bill McBride on 10/21/2016 05:38:00 PM

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Published at Fri, 21 Oct 2016 21:38:00 +0000

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Federal Reserve Admits it Never Knew What it was Doing

By AhmadArdity from Pixabay

Federal Reserve Admits it Never Knew What it was Doing

Janet Yellen

The Federal Reserve is, at last, acknowledging at top levels that its economists are completely baffled, its recovery is failing, that the Fed cannot raise interest and may even have to heat up its stimulants … or we may end up with a permanently scarred and stagnant economy.

Federal Reserve bank president expresses deep reservations about Fed’s recovery

Last week, Boston Federal Reserve President Eric Rosengren opened a meeting with Fed Chair Janet Yellen with the following statements:

He said the “nonconformist” behavior of the economy remains a challenge for policymakers trying to determine whether low growth and low inflation are now a permanent state of affairs…. It could mean the country’s economic performance has changed for good. Policymakers are trying to determine “whether firms and households have changed behavior in ways that are likely to be more permanent than transitory, whether slow growth in productivity is transitory or permanent, and whether recent trends in personal saving behavior are likely to persist well into the future,” Rosengren said. The answers will shape whether officials at the Fed and other central banks … will have to keep nontraditional tools in hand and be prepared “to address any emerging risks to the current recovery.” The fact that 10 year Treasury yields remain near or below zero on an inflation-adjusted basis, Rosengren said, “suggests a lack of confidence in U.S. and global growth prospects, and in the ability of policy authorities to offset weak growth.” ~ Newsmax

Really? You figured that out all by yourselves? Good job, guys. Yes, there is a great lack of confidence in your ability to do just about anything. Yes, your plan has created an economy that is destined to remain stagnant until it dies. Yes, the economy is “non-conformist” to regular economic principles because you have engineered a recovery that is entirely based on irregular ways of thinking and have all but eliminated free markets in anything that trades in this world with your infinite ability to create meaningless money to pump into those markets. Therefore, the market of everything follows the Fed, rather than conforming to normal economically based decisions, because the Fed IS the economy now.

And all of this is a “challenge” for you because you haven’t got a clue as to what genie it is you let out of the bottle. And, yes, it does mean the country’s economic performance has changed for good or, at least, until your experiment in alchemy blows up so we can get back to real economics. Until then, the economy is destined to endless life support in order to remain comatose on the operating table.

We’re all glad you’re finally starting to see the shape of things to come. You are worse than the old-world alchemists who tried to make gold out of baser metals. You try to make money out of nothing and then pretend it has value, even as you create near-infinite amounts (trillions of dollars) of it. And, then, you believe the nothing you have puffed up with your hot air can create enduring productivity and wealth throughout the nation.

Clearly, your centrally planned economy is not running quite well as you would like or as you puppets of mastermind Ben Break-the-Banky thought it would, or you wouldn’t be talking about how it is not conforming to the ways you thought it would go after all of your quantitative wheezing and free loans. Once you finish figuring out why your plans aren’t working, if you need any arsenic for yourselves, I’m sure you can find plenty of people who will help you get ahold of some.

Yellen not yellin’ “recovery” any more

Next, the comments of Fed Chair Janet Yellen proved equally enlightening as to how economically unenlightened the Fed actually is:

Federal Reserve Chair Janet Yellen said Friday that the slow recovery from the Great Recession has surprised economists, confounding long-held beliefs about growth and inflation. Her remarks could help explain why the Fed has been reluctant to raise U.S. interest rates. ~ Newsmax

How odd that you would be surprised by this, Janet, given that I started writing this blog years ago because I was certain your recovery would fail and that any real recovery from the disaster that was created by the Federal Reserve, which we call the Great Recession, would take more than a decade to succeed.

You are surprised because your religious beliefs about growth and inflation are completely oblivious to how free-market economies actually function. Because of this false belief system, the Fed and its modern economists completely failed to see the great abyss that was coming in 2007 and 2008. To this day, you completely fail to see that we are still standing in that same abyss. It was your mentor who sat in your chair, Ms. Yellen, who infamously said he didn’t see a recession in sight during the summer of 2008 when he was standing nose-deep in the middle of one.

So, are we surprised your surprised? No. Readers of blogs like this expect you to be surprised. Being surprised by real-world economic reality seems to be the one thing you do well. I’m sure you thought you could nudge interest rates off the bottom in December, 2015, without destroying the stock market that you court and the economy as a whole and were surprised when the market immediately plunged into its worst January in market history. I’m sure you were surprised that things looked so bad by February, 2016, that you had to hold two closed-door emergency meetings with your board of governors right after one of your regular meetings and then follow that with an emergency meeting with the president and vice president, also behind closed doors, in order to try to fix the problems that were suddenly showing up quite starkly.

I suspect you were surprised when you found you could not raise interest rates four times this year as you telegraphed you might do … and then couldn’t raise them three times … and then couldn’t even raise them twice in one year … and now appear to be preparing the way in your comments below for the possibility that you won’t be able to raise them even once this year.

Yellen said sluggish worldwide growth will likely keep global interest rates low, making it harder for central banks to combat the next recession with rate cuts.

Umm. Yeah. There was no surprise in that here. I predicted a year ago that you would raise interest rates in December of 2015 for the first time in years because you were feeling great pressure to prove you could do it that year in order to show your recovery would hold. At the same time, I predicted that it wouldn’t hold and that you would become paralyzed and unable to raise interest rates again after that.

I said that things would start to fall apart so badly in 2016 that even you would be able to figure out that raising rates a second time would certainly finish off your fantasy recovery. (It only exists on the high fumes of low interest that you keep breathing into its lungs in the form of nearly free loans.) Clearly, you don’t call as many top-level, back-to-back emergency meetings as you did in the first part of this year unless something has gone seriously awry.

So, I venture to say that things looked quite dire and that you found a secret way in your closed-door, emergency summits to patch the economy along through the election cycle; but your comments below indicate you don’t think the fix will hold much longer. Your own comments make it clear enough that things have turned out so badly you are now forced by circumstances to prepare the general public and the business world for the possibility that the economy may have to run on near-zero interest for a very long time to come.

As with the aftermath of the Great Recession, Yellen noted that economists have at times been baffled by the economy’s refusal to comply with their expectations.

There it is again. This time from the big horse’s mouth. Admission that the economy is completely refusing to act as you think it should — that it is not responding to your life support. And you are baffled as to why that is. You don’t have a clue, or you’d give the answer to that question at the meeting where you were speaking; but you didn’t.

Unfortunately, you were given the world as your play pen in which to experiment with your shiny new alchemy kit as you try to figure out how the world works. The rest of us are just here to enjoy the explosions and clean up afterwards.

Thus, you were baffled before the Great Recession, and you’ve been baffled ever since. You are as baffled now as Alan Greenspan was baffled when the housing market proved that it actually can slow down and even go in reverse, in spite of ever-greater Fed stimulus to that market, in spite of a nearly religious belief (at the time) that real estate never crashes. Greenspan was an economist who was baffled that diminishing returns exist as an economic law. He tried to fly into the sun, and his wings melted off. Apparently he thought the Fed had overcome gravity.

Readers of blogs like this are not baffled, however, because they understand such basic economic realities as … you cannot fix an economy that is dying under the weight of its own monumental debt by piling up more debt. Seems simple to us, but somehow it is beyond your capacity to fathom such a concept. I’d say the Federal Reserve has peas for brains; but, really, peas can have worms in them, and worms have real brains, regardless of how small, and that’s more than can be said about the creatures that inhabit your little pod of experts. You are a strange anomaly: you are experts who are dumber than the average person in the area of your own expertise. Thus, you have to admit …

The aftermath of the 2007-2009 crisis has “revealed limits in economists’ understanding of the economy,” the Fed chair suggested.

Indeed it has! It has revealed that you do not even understand the very most basic economic principles, such as the law of diminishing returns, the fact that debt is not wealth, the basic premise that you cannot create demand just by expanding supply, or the idea that, if you make it easy for investors to make easy money, they will take the easy path and do no real work.

The Great Recession has revealed that the limits in economists’ understanding are apparently greater than any of us imagined prior to the Great Recession. That event was a real coming out party for you and your buddies. Many of us have no delusions that you understand anything anymore. We’re seriously wondering if you’re capable of tying your own shoes without tying them together and falling on your faces.

Telling us what you learned from the Great Recession gives us some insight into how blind you are:

Tumbling home prices reduced consumers’ willingness to spend more than economists had envisioned.

That was kind of a weird thing for you guys, too, wasn’t it? To find out that, when home prices fall and people are deeply underwater in debt, you can’t entice them to goose the economy with more consumption by offering them additional debt at a lower cost? I guess that was a revelation for you — that you cannot endlessly expand debt in order to keep expanding an economy that is entirely based on debt. Turns out, we’ve hit maximum debt where the average person doesn’t want any more of it at any price, so you’re forced to keep the price of new money down at near-zero.

And a steady decline in the unemployment rate has failed to lift wages and inflation as much as economic models would indicate.

You say your economic models are failing? Who would have seen that coming? You give all the new funny money to banks by the trillions for free to spend as they wish in the marketplace, and they find it is easier to make money by pricing stocks up in endless rounds of speculation just as houses got priced upward in the run-up to the Great Recession. Then it turns out the money continually gets reinvested in stocks and bonds and never on building factories and hiring more workers at higher rates to get better workers because … who needs to work for their money when when it is being created and given away for free by the trillions and when it can be multiplied time and again by just bidding up stocks? Why build factories and hire more skilled workers when money comes that easily and that risk free?

(There were no risks because you telegraphed quite openly under the Bernanke Doctrine of New Fedspeak that you would keep creating the money and giving it away to invest in bonds and stocks for years. That’s why the market went into convulsions whenever you hinted at quitting the money printing in months ahead or raising the cost of new money. But you weren’t even smart enough to realize those convulsions happened because the patient was so entirely dependent on your medicine that mere talk of taking the Meds. away threw the patient into paroxysms of fear.)

So, what we are really in is a money bubble. The money bubble inflates a stock bubble and a bond bubble at the same time. You created a Fed Fantasyland, a Wonderland where stocks went up when business news was bad because bad news meant you’d keep creating and giving out your magic elixir. You created a realm in which bonds and stocks went up and down together, whereas in the real world they used to run opposite of each other, because their rise and fall had nothing to do with the economy and everything to do with the incoming supply of new Fed money. You see, in Fed Fantasia, diminishing corporate earnings were of no concern when evaluating stock prices because no one was betting on the performance of a business but just on the performance of the Fed and on whether companies would use your magic money bubble to buy back shares and drive their own stock prices up. You created a realm of complete economic fantasy, and then you are flabbergasted that things don’t respond as they used to. You are amazing … just not in the ways you think you are.

The rest of us are more like flummoxed that you can’t figure out why things aren’t working, and we’re frustrated because we cannot figure out how to explain these basic concepts down to your level.

Ah, but the days of bubble money are nearing their end because December is almost here when you will have to either prove you were completely unable to raise interest rates by the tiniest fraction for an entire year — after the minuscule fraction that you raised them last December — or go ahead and raise them again to prove you can and, thus, kick over your own rickety recovery.

Have fun with that.

Yellen prepares public for no future interest-rate increases

And that’s why you are now preparing the entire world for the possibility that you may be keeping rates low for a very long time:


Yellen said the sluggish recovery suggests that “it is even more important for policymakers to act quickly and aggressively in response to a recession” and that policymakers might need to provide more stimulus “during recoveries than would be called for under the traditional view.

In December, the Fed raised short short-term U.S. rates from near zero, where it had kept them for seven years. Fed policymakers had been widely expected to raise rates several times this year, but they have not, citing persistent uncertainty about the economic outlook.

Given that the Fed traditionally speaks in minimalist language of hints and whispers, these words are rather bold in their implication that your surprised economists see that the economy’s failure to respond means you will have to mainline your stimulus even beyond the historically extraordinary levels of economic cocaine you have been doling out for free in recent years. The shot of epinephrine didn’t start the patient’s endlessly resuscitated heart this time around, so maybe if you just drop the patient in a vat of the stuff, that will stir some action.

Given your assessment of things to come, I don’t suppose you’ll be raising interest rates in December. Pour the epinephrine-cocaine Kool-Aid down his throat and into his nose and through his veins all you want, but he’s not going to move. (Actually this realization on your part doesn’t completely convince me you won’t be dumb enough to try another interest increase just to prove you really are doctors … because desperate people are unpredictable in their final moments.)

Thus, you and your cronies at the Bank of England have stated that you will likely let inflation grow beyond your 2% target before raising interest to curb inflation so as not to damage the economy:

In a further indication that the Federal Reserve will be inclined to let inflation run hot for a while, Chair Janet Yellen on Friday said it’s useful to consider the benefits of a “high-pressure economy.” Yellen said the post-financial crisis period has pushed policymakers into reconsidering the dynamics of inflation. ~ CNBC

Ah, yes. You’re caught in a bind because you’ve been saying for years that you’d back off on the administration of stimulants once you got the patients heart rate up to a level of 2% inflation and once you got to full employment. Now, you see you are almost at that level and, yet, nowhere near being able to end your stimulus; so you are preparing the world for the idea that maybe we are in exceptional times where 3% inflation for a limited time would be a good idea just to jumpstart things. If that doesn’t work, try 4?

The Federal Reserve sees no recovery in sight

Let me pre-empt you in sharing your next comment, Janet, by stating outright that you are blaming the need to go past 2% inflation by staying at near-zero interest on the past crisis, rather than admitting you’ve been administering all the wrong medicine: (Italics mine.)

(Reuters) – The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.

Though not addressing interest rates or immediate policy concerns directly, Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping and aggressive steps may be needed to rebuild it.

Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”

“One can certainly identify plausible ways in which this might occur,” she said. Looking for policies that would lower unemployment further and boost consumption, even at the risk of higher inflation, could convince businesses to invest, improve confidence, and bring even more workers into the economy.

Sounds to me like you’re preparing everyone for the possibility that the Fed won’t be raising interest anytime in the foreseeable future. You know that inflation and employment have met the Fed’s targets, so you will be out of excuses by December for not raising rates. You fear the Fed’s “recovery” cannot handle even the smallest raise so you are running this idea of a supercharged economy (one where higher inflation than the target is allowed) up the flag pole ahead of your next too meetings to see how it is accepted. If it’s accepted, there will be no rate increase.

You’re hoping the world will pretend the you and your hooded colleagues have discovered wisdom in raising your inflation target now that the Federal Reserve has met its original target since real recovery is crumbling all around you. Things may be giving way slower than I said they would this year, but your comments show desperation, revision of tired doctrines and realization that the landscape is falling apart everywhere.

Let me just offer you and your colleagues in merry old England a piece of advise: the further down Recovery Row you go, the less bang you get for the buck or less pop for the pound. You have not overcome gravity; you have not overcome the Law of Diminishing Returns. So, even drowning the patient in epinephrine is not going to restart his placid heart. At best, you’ll get one dying reflex kick. And the further you go with this, the worse real recovery will have to be when we try to get off the drugs.

So, just stop.

Just stop already.

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David Haggith

David Haggith
The Great Recession Blog

David Haggith

My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

Copyright © 2015-2016 David Haggith

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Published at Thu, 20 Oct 2016 15:11:54 +0000

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Dollar hits seven-month high, global stocks set for weekly rise

Traders react while working on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 15, 2016.  REUTERS/Brendan McDermidTraders react while working on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 15, 2016.  REUTERS/Brendan McDermid

Dollar hits eight-month high, stocks set for weekly rise


By Dion Rabouin | NEW YORK

The dollar rose to its highest since February against a basket of currencies on Friday as investors weighed the likelihood of higher U.S. interest rates, while a measure of world stocks dipped but looked set for its first weekly gain in four weeks.

The euro hit a seven-month low against the dollar after the European Central Bank left its ultra-loose policy unchanged on Thursday but kept the door open to more stimulus in December.

The dollar also was bolstered by comments from New York Federal Reserve President William Dudley earlier this week that the Fed was prepared to raise U.S. overnight interest rates, and by decreasing likelihood of Donald Trump winning the U.S. presidency.

“There have been some Fed comments where they sound like they are ready to move in December, but also partly related is the market view that a hike in December is much more likely if Clinton wins than if Trump wins,” said Steven Englander, global head of foreign exchange strategy at Citigroup in New York.

A Trump victory is seen as more likely to create uncertainty and market volatility, which could delay an interest rate increase.

Traders are now pricing in a 74-percent chance the Fed will raise rates in December, up from 64 percent two weeks ago, according to CME Group’s FedWatch Tool.

China’s offshore yuan fell to its lowest against the dollar in six years, pressuring the currencies and equity shares of emerging market countries that rely on exporting to the world’s second largest economy.

Wall Street moved lower despite Microsoft surging to an all-time high. GE’s shares were off 2.3 percent, weighing the most on the S&P 500, after the conglomerate lowered its full-year revenue growth target and narrowed its profit forecast.

“Although earnings have been coming in mixed, GE’s comments of a sluggish economy is causing investors to take a step back,” said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey.

The Dow Jones industrial average fell 108.37 points, or 0.6 percent, to 18,053.98, the S&P 500 lost 7.43 points, or 0.35 percent, to 2,133.91 and the Nasdaq Composite dropped 2.81 points, or 0.05 percent, to 5,239.02.

World stocks slipped with MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.4 percent and the pan-European STOXX 600 index edging 0.14 percent lower. World stocks, as measured by MSCI’s world index, were still on track for their first week of gains since September.

Longer-dated U.S. Treasury yields fell in step with their European counterparts, pushing both yield curves to their flattest level in a week, in the wake of Draghi’s comments about bond purchases.

“Draghi basically told people they could play in the long end,” said Tom di Galoma, managing director at Seaport Global Holdings in New York.

Oil prices rose modestly but were set for their first weekly loss since mid-September. Brent crude futures rose 0.6 percent while U.S. WTI crude futures added 0.2 percent.

(Reporting by Dion Rabouin; Additional reporting by Richard Leong and Karen Brettell in New York and Alistair Smout in London; Editing by Nick Zieminski)

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Published at Fri, 21 Oct 2016 10:51:14 +0000

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Existing Home Sales increased in September to 5.47 million SAAR

Photo by Merio at Pixabay

Existing Home Sales increased in September to 5.47 million SAAR

by Bill McBride on 10/20/2016 10:12:00 AM

From the NAR: First-time Buyers Steer Existing-Home Sales Higher in September

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, hiked 3.2 percent to a seasonally adjusted annual rate of 5.47 million in September from a downwardly revised 5.30 million in August. After last month’s gain, sales are at their highest pace since June (5.57 million) and are 0.6 percent above a year ago (5.44 million)….

Total housing inventory at the end of September rose 1.5 percent to 2.04 million existing homes available for sale, but is still 6.8 percent lower than a year ago (2.19 million) and has now fallen year-over-year for 16 straight months. Unsold inventory is at a 4.5-month supply at the current sales pace, which is down from 4.6 months in August.

Existing Home SalesClick on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in September (5.47 million SAAR) were 3.2% higher than last month, and were 0.6% above the September 2015 rate.

The second graph shows nationwide inventory for existing homes.
Existing Home InventoryAccording to the NAR, inventory increased to 2.04 million in September from 2.01 million in August.   Headline inventory is not seasonally adjusted, and inventory usually decreases to the seasonal lows in December and January, and peaks in mid-to-late summer.

The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory
Year-over-year InventoryInventory decreased 6.8% year-over-year in September compared to September 2015.

Months of supply was at 4.5 months in September.

This was above consensus expectations. For existing home sales, a key number is inventory – and inventory is still low. I’ll have more later …


by Bill McBride on 10/20/2016 10:12:00 AM

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Published at Thu, 20 Oct 2016 14:12:00 +0000

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Wall St. up on oil, upbeat earnings; Intel limits gains

Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., October 19, 2016.  REUTERS/Lucas JacksonTraders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., October 19, 2016.REUTERS/Lucas Jackson

Wall St. up on oil, upbeat earnings; Intel limits gains


By Yashaswini Swamynathan

Wall Street was on track for its second straight day of gains on Wednesday as oil prices boosted energy stocks and financials got a lift after Morgan Stanley rounded off a strong quarter for big U.S. banks.


However, gains, especially on the Nasdaq, were limited by Intel (INTC.O). The chipmaker tumbled 6 percent, weighing the most on major indexes, after its disappointing revenue forecast. The chip index .SOX dipped 0.54 percent.

U.S. crude prices surged 3 percent to a 15-month high after a report showed an unexpected drop in U.S. crude stockpiles. [O/R]

The energy sector .SPNY jumped 1.74 percent, the most in three weeks, also boosted by a 4.8 percent rise in Halliburton (HAL.N) following its surprise quarterly profit.

Morgan Stanley (MS.N) inched up 0.8 percent after its results. The financial sector .SPSY has gained 1.8 percent in the past four trading days as the banks reported, while the KBW bank index .BKX is up nearly 3 percent.

Now, about 80 percent of the 70 S&P 500 companies that have reported so far have beaten earnings’ expectations, increasing the likelihood of snapping a four-quarter earnings recession.


Analysts now estimate earnings increased 0.5 percent in the third quarter, according to Thomson Reuters I/B/E/S.

“We would see the third quarter as the bottoming out of the earnings recession that we have been experiencing for the last year or so,” said Tracy Maeter, global investment specialist, J.P. Morgan Private Bank in Philadelphia.

At 12:27 p.m. ET (1627 GMT), the Dow Jones Industrial Average .DJI was up 74.79 points, or 0.41 percent, at 18,236.73.


The S&P 500 .SPX was up 6.16 points, or 0.29 percent, at 2,145.76 and the Nasdaq Composite .IXIC was up 2.25 points, or 0.04 percent, at 5,246.08.

Eight of the 11 major S&P sectors were higher. The consumer staples’ .SPLRCS 0.7 percent drop was the steepest.

The Federal Reserve is due to release its Beige Book at about 2:00 p.m. ET, giving anecdotal commentary on the health of the U.S. economy.


The third and final U.S. presidential debate between Donald Trump and Hillary Clinton starts later in the day. The stock market had gained on both days after the previous two debates, which were perceived to be won by Clinton.

“The noise in the marketplace around politics can drive stocks in the short term, but in terms of the underlying influence … that’s going to be driven more by the economy and the profitability of companies,” Maeter said.

Advancing issues outnumbered decliners on the NYSE by 2,178 to 721. On the Nasdaq, 1,637 issues rose and 1,008 fell.

The S&P 500 index showed eight new 52-week highs and two new lows, while the Nasdaq recorded 45 new highs and 44 new lows.

(Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Savio D’Souza)

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Published at Wed, 19 Oct 2016 17:04:25 +0000

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US STOCKS-Wall St set to open slightly higher


Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., October 17, 2016.REUTERS/Lucas Jackson

(Adds details, comments, updates prices)

* Oil prices rise 1.4 pct

* Morgan Stanley up on profit, revenue beat

* Intel drops on disappointing forecast

* Futures up: Dow 41 pts, S&P 4.25 pts, Nasdaq 4.75 pts

By Yashaswini Swamynathan

Oct 19 Wall Street looked set to inch higher at the open on Wednesday, a day after the S&P 500 rallied to its best day of the month amid upbeat quarterly earnings.

While investors assess another flood of corporate earnings reports, they also await the Federal Reserve’s Beige Book at noon, which contains commentary on the health of the U.S. economy, and the third U.S. presidential debate at night.

Oil prices rose 1.4 percent as the dollar eased and data showed Chinese output dropped while U.S. inventories shrunk.

“This morning does seem quiet, but oil prices could be one theme that could drive markets,” said Aaron Clark, portfolio manager at GW&K Investment Management in Boston Massachusetts.

“There are also not a lot of bellwether companies reporting today that would change the narrative that much.”

Strong earnings from marquee companies such as UnitedHealth and Goldman Sachs led Wall Street to rally on Tuesday.

Dow e-minis were up 41 points, or 0.23 percent, with 20,215 contracts changing hands.

S&P 500 e-minis were up 4.25 points, or 0.2 percent, with 132,273 contracts traded.

Nasdaq 100 e-minis were up 4.75 points, or 0.1 percent, on volume of 23,087 contracts.

The Nasdaq could come under pressure from Intel, whose shares dropped 5 percent in premarket trading after the chipmaker gave a disappointing current-quarter revenue forecast.

Morgan Stanley rose 1.4 percent after its quarterly profit and revenue beat consensus estimates, rounding off a strong quarter for big U.S. banks.

Yahoo rose 1.03 percent after reporting overnight that its third quarter profit beat estimates.

Through Tuesday, earnings from S&P 500 companies had largely beaten market expectations, putting them on track to post profit growth for the first time in five quarters. Analysts now expect earnings increased 0.2 percent in the third quarter, according to Thomson Reuters I/B/E/S.

Pipeline operator Kinder Morgan and payments processor American Express will issue results after the close.

The Fed’s Beige Book, due at 2:00 p.m. ET (1800 GMT), will lay out commentary on the health of the economy, and could offer more insight into the path of future interest rate hikes.

Donald Trump and Hillary Clinton face off in the third and final presidential debate. A Clinton presidency would be more positive for the markets because her positions are more well known than those of Trump, according to a Reuters poll. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Savio D’Souza)

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Published at Wed, 19 Oct 2016 12:55:14 +0000

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Wednesday: Housing Starts, Beige Book, 3rd Presidential Debate

By meineresterampe from Pixabay

Wednesday: Housing Starts, Beige Book, 3rd Presidential Debate

by Bill McBride on 10/18/2016 09:04:00 PM

From Tim Duy: Are Yellen and Fischer Really Worlds Apart?

Bottom Line: The key debate within the Fed at the moment centers around the need for preemptive rate hikes. The hawks prefer more preemption, the doves favor less. Federal Reserve Lael Brainard pulled the FOMC to the dovish camp, primarily through her influence at Constitution Ave. Yellen is probably somewhat more sympathetic to Brainard than Fischer, but as I said last week, Fischer has moved substantially in Brainard’s direction. It is really the presidents that are on the hawkish side of the aisle. There just isn’t that much space between Yellen and Fischer at the moment.

• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, Housing Starts for September. Total housing starts decreased to 1.142 million (SAAR) in August. Single family starts decreased to 722 thousand SAAR in August. The consensus for 1.180 million, up from the August rate.

• During the day, The AIA’s Architecture Billings Index for September (a leading indicator for commercial real estate).

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

• At 9:00 PM ET, the Third Presidential Debate, at University of Nevada, Las Vegas, Las Vegas, NV

Read more at Housing Starts, Beige Book, 3rd Presidential Debate

by Bill McBride on 10/18/2016 09:04:00 PM

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Published at Wed, 19 Oct 2016 01:04:00 +0000

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Key Measures Show Inflation close to 2% in September

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Key Measures Show Inflation close to 2% in September

by Bill McBride on 10/18/2016 11:13:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.1% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.3% (3.6% annualized rate) in September. The CPI less food and energy rose 0.1% (1.4% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for September here. Motor fuel was up 94% annualized in September!
Inflation MeasuresClick on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.1%, and the CPI less food and energy also rose 2.2%. Core PCE is for August and increased 1.6% year-over-year.

On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 2.1% annualized, and core CPI was at 1.4% annualized.

Using these measures, inflation has generally been moving up, and most of these measures are at or above the Fed’s target (Core PCE is still below).


by Bill McBride on 10/18/2016 11:13:00 AM

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Published at Tue, 18 Oct 2016 15:13:00 +0000

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Tuesday: CPI, Homebuilder Confidence


Tuesday: CPI, Homebuilder Confidence

by Bill McBride on 10/17/2016 08:57:00 PM

Along with CPI, the BLS will release CPI-W, the Cost-Of-Living Adjustment (COLA) for 2017, the contribution base, and the National Average Wage Index. I expect COLA to be slightly positive, and for a fairly significant increase in the contribution base.

• At 8:30 AM ET, the Consumer Price Index for September from the BLS. The consensus is for 0.3% increase in CPI, and a 0.2% increase in core CPI.

• At 10:00 AM, the October NAHB homebuilder survey. The consensus is for a reading of  63, down from 65 in September.  Any number above 50 indicates that more builders view sales conditions as good than poor.


by Bill McBride on 10/17/2016 08:57:00 PM

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Published at Tue, 18 Oct 2016 00:57:00 +0000

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The Rape of America — The Core Federal Election Issue


The Rape of America — The Core Federal Election Issue

The 2016 US presidential election between leading candidates Republican Donald Trump and Democrat Hillary Clinton has been unusual in that allegations of rape have cropped up during the campaign with Bill Clinton accused of rape, Hillary Clinton accused as an accessory, and Donald Trump accused of groping women without their consent. However, the core issue of the campaign — indeed the reason the Trump campaign exists — is citizen anger at a growing sense that their country itself has been abused at the hands of a financial elite.  And this core campaign issue is lost as the back and forth sexual recriminations between the campaigns deflects attention from a critical issue.1

Something’s Wrong — And It’s Big

But citizens increasingly know something is wrong – and that realization is despite soaring stock markets and bond markets since the Great Financial Crisis of 2008.

The current US administration promotes an unemployment rate of 5% (down from 10% in 2009) as a sign that the economy has recovered from the Great Financial Crisis.

Flying in the face of this promotion is the fact that the number of adults not in the US labor force is 94 million people in September 2016 up from 80 million not in the labor force in October 2008. Excluding 14 million people from the US labor force so that they are not counted as unemployed helps to statistically reduce the unemployment rate.

And 41 million Americans now remain on food stamps up from 28 million in October 2008.

These statistics, and there are many more, show us that despite soaring financial markets fuelled by the Fed’s 0% interest rates, there is no real recovery underway.  Soaring financial markets with moribund labor markets and rising prices for essential goods do not signal a healthy economy. Donald Trump knows it as do US voters.

On September 5, 2016 Trump warned that the Federal Reserve had kept rates artificially low and “It’s an artificial market. It’s a bubble.” warning that the bubble economy that the Federal Reserve has created had resulted in “very scary scenarios”. On September 6 Clinton immediately responded to Trump by saying that “presidents and candidates should not comment on Fed actions”.  It was also revealed on September 6 that Goldman Sachs was banning partners from contributing to Trump’s campaign from September 1 forward.

The Rape of America (and Europe and Canada)

By (correctly) identifying the Fed as the source of economic distortions and the coming crash and impoverishment of the American people, Trump was alarming many in the financial industry by lighting fires of inquiry that cannot be put out. And the trail of evidence leads back not only to the Fed but to Goldman Sachs as well.

The rape of America has been a relatively simple process and involves a few key elements:

1) A debt-based currency system run by the central bank.

With a debt-based currency system and the ability of banks to instantly credit money into creation, the age-old formula of blowing bubbles can be effected by continually lowering interest rates and increasing the amount of currency in circulation thus driving speculation continually higher. This creates Trump’s “artificial markets”.

2) Recognize the inverse relationship between real interest rates and gold prices

Gold has historically limited the ability of central banks to blow bubbles by soaring in price. Former Clinton administration Treasury Secretary Larry Summers in his seminal 1985 paper with Barsky identified that the primary factor driving real gold prices was real interest rates (i.e. nominal interest rates minus the inflation rate). As inflation rises from loose central bank monetary policy, the real price of gold measured in constant dollars also rises and is the principal “tell” of those loose monetary policies. The principal driver of consumer goods inflation is monetary policy — as more money is created, goods prices also become more expensive. Indeed, the US dollar now buys 1% of what it could buy in 1913 when the Fed was created. But as was seen in the late 1970s, when inflation rages gold rages more. Central bankers are then forced to choose between abandonment of their paper money and bonds for real assets or to stop their money printing.

Now, Summers and Barsky were so certain of their observation that they wrote “(t)he negative correlation between real interest rates and the real price of gold that forms the basis for our theory is a dominant feature of actual gold price fluctuations.” [“Gibson’s Paradox and the Gold Standard“, Summers and Barsky, 1985 NBER working paper 1680].  The principal driver of the gold price was real interest rates — as they collapse due to inflation, the price of gold soars. The implication is that if you would like to sustain loose monetary policy for a protracted period, it is necessary to be able to control the price of gold.

And as we will see, the ability to control the bond market was almost lost in the late 1970s as both inflation and the price of gold soared forcing nominal interest rates up to the high teens before gold’s rise was arrested.

3) Convert the world’s principal gold markets from trading gold to trading paper gold thereby short-circuiting price discovery in the global gold and bond markets

The central characteristics of gold are that it is rare and of universally of value — gold has a 4,000 year history as a monetary asset as it cannot be debased or created without limit as fiat paper money can. With the 1987 creation of the London Bullion Market Association (LBMA) by the Bank of England (, gold trading was progressively thereafter converted to paper contract trading through the creation of “unallocated gold contracts” without gold backing and price discovery was thereby thwarted as these contract claims on gold can themselves be created and traded without limit (  By deflecting claims for gold into paper gold contracts, today there are an estimated 400 million to 600 million oz of claims for gold at the LBMA without gold backing and daily gold trading has reached 200+ million oz of gold per day (vs global annual gold mine production of ~ 100 million oz).

Price discovery of gold, and the ability of the price of gold to respond to real interest rates, has thus been greatly arrested — the knock-on and targeted effect was that the bond market was also short-circuited allowing the secular reduction of interest rates (and creation of mountains of debt in our debt-based economies). Central bankers could now defy gravity — for a while.

The following graph using the Bureau of Labor Statistic’s consumer price index (CPI) method of calculating inflation from 1980 held constant shows the 1987 decoupling of the price of gold’s historic inverse relationship with real interest rates with the creation of the LBMA — gold no longer responded by rising in price as real interest rates became negative and central banks were free to blow bubbles. Note also in the graph (where the inverse price of gold is plotted on the right) that in late 1982 the price of gold started to surge driving real interest rates to almost 9% higher than the rate of inflation before money started to return to bonds from gold.

Source: Reginald Howe, 1980 CPI computations by John Williams at

Another issue given Goldman Sachs response of banning Goldman partners from donationing to the Trump campaign is the key role of Goldman Sachs’ subsidiary J. Aron and Co. gold traders in advising central banks to sell and lease gold in the 1990s. Former gold banker and author Ferdinand Lips wrote at pages 123 to 124 in his book Gold Wars — The Battle Against Sound Money From a Swiss Perspective that he came to recognize in 1996 that Goldman’s J.Aron and Co. were the central advisors to central banks behind their gold policy to agressively sell and lease gold into the market — thereby further depressing the price of gold ( Mr. Trump’s reference to a bubble economy driven by central banks and artificially low interest rates leads inexorably back to Goldman Sachs and the LBMA.

4. Now, continually lower interest rates over the next 30 years creating a succession of financial bubbles — when the bubbles pop, bail-out the banks and not borrowers

With gold no longer properly signalling artificially low interest rates by central banks this enabled the creation of a of a fake bubble economy as identified by Trump. When you rig the global price of gold, you rig the global bond market.   Global credit market borrowing now totals $230 billion or 340% of global GDP more than double the historically sustainable level of 150% of GDP.

Central bankers have responded to the succession of bubbles and financial crises of their own creation by bailing-out the banks (lending up to $16 trillion to banks during the Great Financial Crisis) and prescribing lower interest rates and more debt compared to the needed monetary system reform and debt write-down to stabilize our economy. And Alan Greenspan who was appointed to the Fed in 1987 has retired and has been knighted as Sir Alan Greenspan by the UK establishment. A job well done.

The Bubbles are Popping but the Debt Remains

With the creation of the debt bubble and the consequent sequence of financial and economic bubbles, the US economy is now so distorted by Fed policy that even with the zero interest rates the economic output is growing at 1% and is declining. We are at the terminus point of exceptionally loose money started in 1987 by the Bank of England and the Federal Reserve.

With assets stripped from their hands and large numbers of Americans out of work and on food stamps, Mr. Trump’s words have not elicited reasoned discussion.   Not only has Trump been told not to talk like that but the recriminations back and forth of sexual impropriety have stopped discussion of this core campaign issue reflecting American voter concern. And the hackneyed accusation of anti-semitism against Trump further muddies the waters  ( and with hedge fund donations to Trump totalling $19,000 vs 48.5 million for Clinton, we get some sense of the Candidate reflecting the interests of Wall Street. And this mirrors the Obama administration which executive structure was determined by Citibank (

The question now remains whether there will be any further discussion of this key issue broached by Trump and reform forced by the electorate or whether America will proceed with its politicians bickering about sex as the financial, economic and monetary system proceeds over the waterfall.


1. The well documented alleged rape of nursing administrator Juanita Broaddrick in 1978 by former President Bill Clinton and Broaddrick’s subsequent intimidation into silence by Democratic candidate Hillary Clinton has revolted many long-time Democratic supporters (for a catalogue of some of Bill Clinton’s alleged crimes against women see:  And Hillary Clinton’s successful 1975 legal defence leading to the release of a rapist who raped 12 year old Kathy Shelton and audio tapes of Clinton laughing at the process as well as her using a defence that the child had a “tendency to seek out older men and engage in fantasizing.” leaves observers disgusted.   The tape recording of Republican candidate Trump bragging about what women let a star like him do to them as well as the fusillade of accusations by women of unwanted groping and kissing by the Republican further leaves voters shocked — and not thinking. And more allegations are sure to follow in this political season.

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David B. Jensen, P.Eng., LL.B., MBA
Vancouver, BC

David Jensen

David Jensen, P.Eng., LL.B., MBA, is a Professional Engineer with a degree in Engineering from the University of Waterloo in Canada (1987). He worked through 1993 on the F-5 Fighter Overhaul program and the Bombardier Regional Jet programs. Mr. Jensen then graduated with a LL.B. degree in corporate and commercial law from the University of Calgary (1997) and an MBA from Univ. of B.C., majoring in Logistics and Supply Chain Management (1999). Returning first to aviation then, after reading Austrian School Economics, Mr. Jensen transitioned to the mining industry from the aerospace industry in 2004 first through his mining industry consultancy, then as Vice President of Corporate Development for Western Copper Corp., and most recently as President and COO of Skyline Gold. Mr. Jensen currently serves as President and COO of a private mining company and provides strategic, operational, risk assessment, and precious metals consulting services through his consultancy, Jensen Strategic.

Copyright © 2005-2016 David Jensen. All rights reserved.

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Published at Mon, 17 Oct 2016 09:34:59 +0000

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NY Fed: October “General business conditions index slipped five points to -6.8”

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NY Fed: October “General business conditions index slipped five points to -6.8”

by Bill McBride on 10/17/2016 08:33:00 AM

From the NY Fed: Empire State Manufacturing Survey

Business activity continued to decline in New York State, according to firms responding to the October 2016 Empire State Manufacturing Survey. The headline general business conditions index slipped five points to -6.8.

After reaching their lowest levels of the year last month, both labor market indexes rose, but remained negative. The employment index increased ten points to -4.7 and the average workweek index edged up one point to -10.4, indicating that employment counts and hours worked continued to decline.

Indexes for the six-month outlook suggested that respondents were more optimistic about future conditions than in September. The index for future business conditions increased two points to 36.0.

This was below the consensus forecast of 1.0, and suggests manufacturing contracted in the NY region in October.


by Bill McBride on 10/17/2016 08:33:00 AM

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Published at Mon, 17 Oct 2016 12:33:00 +0000

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Wall St. dips as energy, health stocks offset BofA boost

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 14, 2016. REUTERS/Brendan McDermid

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 14, 2016.REUTERS/Brendan McDermid
By Chuck Mikolajczak | NEW YORK

Wall Street ended modestly lower on Monday as energy stocks retreated along with oil prices, while Amazon and Netflix weighed on the consumer discretionary sector.

Federal Reserve Vice Chairman Stanley Fischer warned that economic stability could be threatened by low interest rates and noted the central bank is “very close” to its employment and inflation targets, but said it was “not that simple” for the Fed to raise rates.

The comments from Fischer, a dove who has supported a rate hike, come as other Fed officials have recently said the current state of affairs may be about as good as it gets.

Conflicting statements on the timing of a rate hike from some Fed officials has been adding to uncertainty in markets, which have been grappling with changing dynamics in a tumultuous U.S. presidential election and nervousness regarding third-quarter earnings.

“Fischer’s stature is second only to Janet Yellen so when he speaks, people are going to pay closer attention to what he is saying,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

“To me, it is different slices of the same apple – we’ve got a Fed that desperately wants to raise rates one more time this year and that probably happens in December.”

Energy stocks .SPNY were 0.6 percent lower as U.S. oil prices CLc1 settled down 0.8 percent at $49.94 while Brent crude LCOc1 settled down 0.8 percent at $51.52 a barrel. Oil prices were weighed down by oversupply concerns, although losses were curbed amid a projected drop in American shale output.

The Dow Jones industrial average .DJI fell 51.98 points, or 0.29 percent, to 18,086.4, the S&P 500.SPX lost 6.48 points, or 0.3 percent, to 2,126.5 and the Nasdaq Composite .IXIC dropped 14.34 points, or 0.27 percent, to 5,199.82.

Investors are looking for corporate profits to turn a corner in the third-quarter after a string of declines. With 7 percent of S&P 500 companies having reported through Monday morning, expectations are for a decline of 0.1 percent for the quarter, an improvement from the 0.5 percent decline expected on Oct. 1, according to Thomson Reuters data.

Bank of America Corp (BAC.N) shares edged up 0.3 percent as its profit rose for the first time in three quarters and topped estimates.

Netflix Inc (NFLX.O) fell 1.6 percent ahead of its expected quarterly results, while Inc (AMZN.O) lost 1.2 percent, for its third straight decline, which pulled the consumer discretionary sector .SPLRCD 0.8 percent lower.

After the close, shares of the subscription video service surged about 20 percent in the wake of its results.

Hasbro Inc (HAS.O), was a bright spot among discretionary stocks during the session, surging 7.4 percent after the toymaker’s better-than-expected quarterly report.

Declining issues outnumbered advancing ones on the NYSE by a 1.51-to-1 ratio; on Nasdaq, a 1.48-to-1 ratio favored decliners.

The S&P 500 posted no new 52-week highs and 7 new lows; the Nasdaq Composite recorded 24 new highs and 89 new lows.

About 5.15 billion shares changed hands in U.S. exchanges, below the 6.54 billion daily average over the last 20 sessions.

(Reporting by Chuck Mikolajczak; Editing by Lisa Shumaker and Nick Zieminski)

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Published at Mon, 17 Oct 2016 14:04:34 +0000

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Fed: Industrial Production increased 0.1% in September

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Fed: Industrial Production increased 0.1% in September

by Bill McBride on 10/17/2016 09:22:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production edged up 0.1 percent in September after falling 0.5 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 1.8 percent for its first quarterly increase since the third quarter of 2015. Manufacturing output increased 0.2 percent in September and moved up at an annual rate of 0.9 percent in the third quarter. In September, the index for utilities declined 1.0 percent; mining posted a gain of 0.4 percent, which partially reversed its August decline. At 104.2 percent of its 2012 average, total industrial production in September was 1.0 percent lower than its year-earlier level. Capacity utilization for the industrial sector edged up 0.1 percentage point in September to 75.4 percent, a rate that is 4.6 percentage points below its long-run (1972–2015) average.
emphasis added

Capacity UtilizationClick on graph for larger image.

This graph shows Capacity Utilization. This series is up 8.7 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 75.4% is 4.6% below the average from 1972 to 2015 and below the pre-recession level of 80.8% in December 2007.

Note: y-axis doesn’t start at zero to better show the change.

Industrial ProductionThe second graph shows industrial production since 1967.

Industrial production increased 0.1% in September to 104.1. This is 19.2% above the recession low, and is close to the pre-recession peak.

This was below expectations of a 0.2% increase.


by Bill McBride on 10/17/2016 09:22:00 AM

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Published at Mon, 17 Oct 2016 13:22:00 +0000

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