Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Category Archives: Economics

The Hubris of Keynesianism is Driving the Fed’s Interest Rate Hikes

This article was published by The McAlvany Intelligence Advisor on Wednesday, June 13, 2018: 

The core underlying principle of Keynesianism is that the massive $21 trillion American economy can be “managed” by “experts” sporting fancy degrees from prestigious colleges and universities. The fact that they take themselves seriously, as does most of the media, reminds one of the story The Emperor’s New Clothes. Everyone in the crowd believed until the little girl exclaimed, “The Emperor has no clothes!”

That time has not yet arrived for the Fed. Amy Scott, writing in Marketplace, continued to believe the emperor is clothed:

The Federal Open Market Committee begins its two-day meeting today to talk interest rates. The Fed is expected to raise its target rate by a quarter of a point for the second time this year [tomorrow]. And with unemployment reaching a new low last month and inflation creeping up, analysts expect officials to keep raising rates throughout the year.

 

If short-term yields keep rising, that could lead to what’s called an inverted yield curve, when short-term term rates are higher than long-term borrowing costs.

First, Scott is conflating inflation with price increases. Second, she is likely referring to the latest CPI numbers and not the Fed’s preferred measure of price increases, the PCE index.

Inflation has already occurred.

Keep reading…

Is the Fed Risking a Recession by Raising Interest Rates?

This article appeared online at TheNewAmerican.com on Tuesday, June 12, 2018:

With the Board of Governors of the Federal Reserve likely to raise overnight bank lending rates by one quarter of one percent on Wednesday — its second increase in that rate this year and the sixth in the last 18 months — observers are increasingly concerned that those increases may throttle Trump’s roaring economy just as it’s beginning to hit its stride.

Some are dusting off the hoary maxim that “just when the party is getting started, the Fed takes the punch bowl away.” Others are expressing concerns about something called an “inverted yield curve” — a phenomenon which has preceded each of the last seven recessions.

Amy Scott, writing in Marketplace, summed up the challenge facing the board:

The Federal Open Market Committee begins its two-day meeting today to talk interest rates. The Fed is expected to raise its target rate by a quarter of a point for the second time this year [tomorrow]. And with unemployment reaching a new low last month and inflation creeping up, analysts expect officials to keep raising rates throughout the year.

 

If short-term yields keep rising, that could lead to what’s called an inverted yield curve, when short-term term rates are higher than long-term borrowing costs.

First, Scott is conflating inflation with price increases. Second, she is likely referring to the latest CPI numbers and not the Fed’s preferred measure of price increases, the PCE index.

Inflation has already occurred. The Fed created billions of digital dollars when it bailed out the big banks following the real estate collapse in 2007-2008. In fact, its balance sheet is so massive — over $4 trillion — that it is slowly beginning to sell off some of those reserves.

Price increases are the result of the previous inflation. Those price increases have been held in check largely because banks have been, until recently, unable or unwilling to lend out their residual capital. They have been content to keep their excess reserves encamped with the Fed, which has been paying them a low but predictable and risk-free rate of return.

The CPI accelerated in May to the fastest pace in more than six years, according to a Labor Department report released on Tuesday, rising 0.2 percent from April and 2.8 percent from a year ago. This is serving, according to many commentators, as justification for the Fed’s continual raising of short term rates. But a closer look at the Fed’s preferred measure of inflation, called the “annual core PCE” price index [personal consumption expenditures, excluding food and fuel], reveals year-over-year price increases of 1.8 percent.

But with the Fed determined to head off what it perceives as incipient inflation (which it caused), it is likely to continue to raise overnight rates steadily. Its belief is that the massive U.S. economy can be managed by its board of “experts” more effectively than can individual consumers voting with their dollars. That is the hubris of Keynesianism which is the Fed’s core operating manual.

What some are concerned about is that, in its determination to “get ahead of inflation,” it may tip the economy into recession in the process. Enter concerns about the “inverted yield curve” — a phenomenon when short term interest rates paid on U.S. Treasury bills rise above the rates paid on longer-term bills and notes. Right now the “spread” — the difference between two-year rates and 10-year rates — is 45 basis points (a basis point is one one-hundredth of a percent), down from 125 basis points just a year ago, and the lowest seen in years. As Justin Lahart, writing in The Wall Street Journal, noted: “This is a longstanding signal that a recession is coming.”

But is it? There have been false positives, as Goldman Sachs economist Jan Hatzius pointed out. An inverted yield curve “isn’t the cause of recessions so much as the result of the Fed trying to keep the economy from overheating.” In other words, recessions are more the result of the Fed’s meddling than the natural business cycle operating without outside interference.

The Cleveland Fed is approaching the matter much more calmly. Its internal calculation of the chances of a recession occurring in the next 12 months is a scant 13.4 percent, down from 13.8 percent last month. That’s less than once chance in seven.

Investors and informed citizens are wise to continue to monitor the behaviors and decisions of the Fed’s Board of Governors. But they should not be concerned about a recession starting anytime soon. The next raise of overnight rates scheduled for Wednesday will likely have little measurable impact on the roaring Trump economy.

High-income Earners Leaving High-tax States

This article appeared online at TheNewAmerican.com on Thursday, June 7, 2018:

Realtors in Nevada, just across the border from California, are feeling the positive effects of Trump’s new tax reform. Real estate developer David Hutchinson is offering building lots for sale at Clear Creek Tahoe and told Robyn Friedman of The Wall Street Journal:

Most of our lot sales are to buyers from California, the vast majority of whom intend to make them a permanent residence.

 

If you’re a wealthy tech executive from the Bay Area who can live wherever you want and you have a $3 million [annual] income, you would have $399,000 a year in savings [by moving] here.

 

That’s a lot of money to spend on real estate.

That’s also a lot of money that California isn’t going to see. Arthur Laffer and Stephen Moore, also writing in the Journal, did the math:

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Economic Forecasting Makes Weather Forecasting Look Good

This article was published by The McAlvany Intelligence Advisor on Wednesday, June 6, 2018: 

Predictions about the future are fraught with danger. Add in predictions about when they will happen and an economic forecaster moves from estimates and guesses to hope and wistfulness.

Take, for example, the latest from an outfit called the National Association for Business Economics, or NABE. It claims to be the largest international association of applied economists, strategists, academics, and policy-makers, and boasts a membership of 3,000 of these seers and forecasters. Their quarterly report is available only to members, which is unfortunate, as one would like to know just how they came up with their latest prediction:

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More Good News for the U.S. Economy: Job Openings Set New Record

This article appeared online at TheNewAmerican.com on Tuesday, June 5, 2018: 

Last month the Department of Labor reported that there were 6.55 million job openings in March, about equal to those unemployed but looking for work. On Tuesday the DOL revised its numbers for March upwards to 6.63 million, while reporting that in April job openings jumped to 6.7 million, a new record. As Steve Goldstein wrote for MarketWatch.com:

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Robust Jobs Report Erases Concerns About a Slowdown

This article appeared online at TheNewAmerican.com on Friday, June 1, 2018: 

Any concerns about a nascent slowdown in the American economy were firmly erased by Friday’s report from the Bureau of Labor Statistics. Beating forecasters’ predictions of 200,000 new jobs being added to the booming economy in May, the real number according to the BLS was a heartening 223,000. The agency also reported that the unemployment rate, as a result, dropped further, to 3.8 percent — a level not seen in decades.

Commentators were ebullient. Nelson Schwartz, writing in the New York Times, said, “The American economy roared into overdrive last month … underscor[ing] other recent signs of strength, like robust personal income and spending data reported earlier this week.”

Thomas Simons, senior money market economist at investment firm Jeffries LLC, said there were “no holes to poke here [in the report].… These numbers are phenomenal.” Paul Ashworth, chief U.S. economist for Capital Economics, echoed the sentiments expressed by this writer on Thursday:

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Changing the Metaphor: Repatriated Capital is More Like an Afterburner, not a Turbocharger, for the Economy

This article was published by The McAlvany Intelligence Advisor on Friday, June 1, 2018: 

Ever since Trump’s tax reform instituted a tax holiday for the estimated $2.6 trillion being held overseas by American companies, this writer has referred to its impact once it is “repatriated” as a turbocharger on an IC engine. With no apologies to the EV crowd, a better metaphor, now that the economy is responding to those tax cuts for American taxpayers, is one of a jet engine: that repatriated capital is looking and more like an afterburner on an engine that is already at maximum thrust. 

Ben Leubsdorf, writing for The Wall Street Journal, first noticed the effect. He wrote that corporate profits jumped by nearly eight percent in the first quarter of 2018, and then noted that there was a substantial pickup in capex as well: “Fixed nonresidential investment, a measure of capital expenditures, rose at a 9.2% annual rate in the first quarter, including a large upward revision for investment in intellectual property products such as software.” 

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U.S. Economy Continuing to Fire on All Cylinders

This article appeared online at TheNewAmerican.com on Thursday, May 31, 2018: 

Polls, surveys, and other economic and financial indicators just released confirm that the U.S. economy continues to generate goods and services at a torrid pace. Following a report by the government that the gross domestic product (GDP) came in slightly under forecast for the first quarter of 2018 at 2.2 percent annual growth, the New York Federal Reserve’s Nowcast is at three percent for the second quarter, while the St. Louis Fed’s Eco News index is predicting 3.6 percent growth and the Atlanta Fed’s Nowcast comes in at four percent.

Following ADP’s jobs report on Wednesday that the economy added 178,000 new jobs in April, forecasters are predicting that the jobs report from the Bureau of Labor Statistics (BLS) on Friday should come in close to 200,000.

Consumers are enjoying their tax cuts by spending

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Latest Drop in Oil Prices Puts OPEC in a Bind

This article appeared online at TheNewAmerican.com on Wednesday, May 30, 2018:

Within minutes of comments made by Saudi Arabia’s oil minister on Friday, crude oil prices for present and future delivery dropped like a stone. By the end of trading on Tuesday, crude oil had lost more than six percent of its value, ending just above $65 a barrel, down from over $70.

What spooked the markets were these comments from energy minister Khalid Al-Falih, made during a panel discussion on energy on Friday:

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More Taxpayers Fleeing Illinois Than Any Other State

This article appeared online at TheNewAmerican.com on Wednesday, May 23, 2018:

Thanks to the mass exodus of citizens from the Land of Lincoln, Illinois has dropped from the fifth most-populous state in the union to sixth. According to Chicago’s WGN TV, it’s due largely to the state taxing them out of their homes.

Over the last two years, more than 70,000 people have left Illinois for warmer and more tax-friendly climes such as Texas, Florida, and even South Dakota and Wyoming. In fact, Chicago is the only city in the United States that has consistently lost citizens over the last five years. The so-called “U-Haul index” — a measure of the difference in rates charged for outgoing rental trucks versus incoming trucks — rates Illinois as number one for outbound moving vans.

They are no doubt getting out while the getting is good.

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Booming Economy Dimming Democrats’ “Blue Wave” Hopes in November

This article appeared online at TheNewAmerican.com on Wednesday, May 23, 2018: 

America’s recovery from both the Great Recession and the oppression of the Obama years has shown up not only in the numbers but in attitudes, both economic and political. And with that improvement, talk of the “blue wave” taking over the House of Representatives by the Democrats in November has virtually disappeared.

The numbers are remarkable, as The New American and other real news outlets have repeatedly reported. Job growth, unemployment, and even poverty levels have all benefited from the release of pressure from the central government under the Trump administration. Job openings are the highest since 2000, unemployment is at 3.9 percent and falling, and real (inflation-adjusted) wages are improving. According to Sentier Research, “Median household income in April of this year was higher than for any other month since January 2000 [and] 12.9 percent above the post-recession low point [in] June 2011.”

A report from the Census Bureau on income and poverty levels already showed great improvement during the last two years of the Obama administration, as shown below, but Obama reigned over the slowest economic recovery since the Great Depression. Trump has simply supercharged the economy during his time in office.

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Mauldin Reveals the Trigger for the Next Recession

This article was published by The McAlvany Intelligence Advisor on Wednesday, May 23, 2018: 

John Mauldin, the New York Times best-selling author and publisher of his Thoughts from the Frontline, reminded his readers of the story of Casey Jones:

For those who don’t know the story or haven’t heard the songs, Casey Jones was a talented young railroad engineer in the late 1800s. On April 30, 1900, Casey Jones was going at top speed when his train tragically overtook a stopped train that wasn’t supposed to be there.

 

Traveling at 75 miles per hour, Jones ordered his young fireman to jump, pulled the brakes hard, and blew the train whistle, warning his passengers and the other train. Later investigations found he had slowed it to 35 mph before impact. Everyone on both trains survived… except Casey Jones.

 

His heroic death made Jones a folk hero to this day. Many songs told the story and even the Grateful Dead and AC/DC paid tribute decades later. (Trivia: He actually tuned his train whistle with six different tubes to make a unique whippoorwill sound. So, when people heard his train whistle, they knew it was Casey Jones.)

His point?

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U.S. Fiscal Outlook “Not Good,” Says Goldman Sachs’ Chief Economist

This article appeared online at TheNewAmerican.com on Tuesday, May 22, 2018: 

In his newsletter to Goldman Sachs’ clients published on Monday, Jan Hatzius, the investment banking firm’s chief economist, wrote, “An expanding deficit and debt level is likely to put upward pressure on interest rates. While we do not believe that the U.S. faces a risk to its ability to borrow or to repay, the rising debt level could nevertheless have [serious] consequences.”

Borrowing from the Congressional Budget Office’s analysis following the passage of the tax reform act, the two-year budget deal in February, and the massive “omnibus” spending bill in March, Hatzius projected that annual deficits will shortly exceed a trillion dollars a year, pushing the national debt close to $30 trillion in less than 10 years. He warned:

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Latest CBS Poll: Americans Happy With Economy

This article appeared online at TheNewAmerican.com on Monday, May 21, 2018:  

Nearly two out of three Americans polled by CBS rate the economy as either “very good” or “somewhat good,” while only nine percent rate the economy as “very bad.” The poll, CBS News Nation Tracker, which was released on Sunday, showed that respondents think the president is largely responsible for it: When asked, “How much do you think Donald Trump’s policies are responsible for the current state of the economy?” more than two out of three said “a great deal” or “somewhat” responsible.

The poll contained additional good news for Republicans heading into the November midterm elections: Seven out of 10 GOP voters told CBS that they prefer a candidate that the president supports.

These results are consistent with those from CNN earlier this month that showed that

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Kellogg’s Just the Latest to Exit Venezuela

This article appeared online at TheNewAmerican.com on Wednesday, May 16, 2018: 

When workers at the Kellogg’s cereal plant in Maracay, Venezuela showed up for work on Tuesday, they discovered that the plant was closed. A note taped to the fence simply indicated that the company had ended operations: “The current economic and social deterioration in the country has now prompted the company to discontinue operations.”

That left an estimated 400 workers without work, or a paycheck. But that gave the Marxist dictator Nicolás Maduro an opportunity to point the finger at Kellogg’s: “Why are they doing it today? Because we are four days away from elections and they think it will spook the people.… Imperialists! Oligarchs! Nobody can scare our people!”

Kellogg Company had been making cereal in Venezuela since 1961, and at one point was the largest foreign presence in South America after Mexico. But on Tuesday,

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Just How Strong Is the U.S. Economy? $3 Gas Won’t Even Slow It Down.

This article was published by The McAlvany Intelligence Advisor on Wednesday, May 16, 2018:  

The mainstream media has spent an inordinate amount of time, ink, and airtime over the rising cost of gas, blaming most of it on the president’s termination of the “horrible” Iranian nuclear deal. They grieve over the impact that termination will have on everything from bombs in the Middle East to the price of gas in Tuscaloosa. (For the record, it’s $2.51 a gallon, according to GasBuddy – see Sources below.)

Some states are higher, including California ($3.68), Hawaii ($3.63), Washington ($3.35), and Oregon ($3.23). Some states are lower, including Mississippi ($2.56), Arkansas ($2.57), South Carolina ($2.58), and Louisiana ($2.58).

But none of them seem to be dampening the spirits of the American consumer, who is planning his Memorial Day holiday and his summer vacation. Mark Jenkins, a spokesman for AAA, doesn’t expect higher prices at the pump to change many Americans’ plans to travel this summer:

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More Than 40 Million Americans to Travel on Memorial Day Despite Higher Gas Prices

This article appeared online at TheNewAmerican.com on Tuesday, May 15, 2018: 

Mark Jenkins, a spokesman for AAA, doesn’t expect higher prices at the pump to change many Americans’ plans to travel this summer:

 Gas prices are [at] their highest in years, yet that doesn’t seem to be slowing motorists down. The latest round of figures from the EIA [U.S. Energy Information Administration] shows that gasoline demand is significantly higher than this time last year.

 

A strong economy is helping to fuel motorists along, as we approach the most traveled Memorial Day in more than a dozen years.

Jenkins estimates that more than 41.5 million Americans will travel at least 50 miles or more over the Memorial Day weekend — from Thursday, May 24 to Monday, May 28 — the highest number since 2005 when 44 million hit the road or the air. This is five-percent higher than last Memorial Day, and an increase for the fourth straight year, said Jenkins.

Gas prices, according to GasBuddy, which tracks prices at 135,000 gas stations across the country, are closing in on $3 a gallon,

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Merrill Lynch Sees “Risk” of $100 Oil in 2019, Thanks to Iran Sanctions

This article appeared online at TheNewAmerican.com on Friday, May 11, 2018: 

Francisco Blanch, a commodity expert at Bank of America’s Merrill Lynch, wrote Wednesday that his team of prognosticators “see a risk of $100 a barrel of oil next year,” adding that it could happen sooner: “We are concerned that these market dynamics could unfold over a shorter time-frame.”

Those “market dynamics” no doubt cause forecasters such as Blanch many sleepless nights, trying to sort them all out in time to write about them for his clients. First, of course, is President Trump’s cancelling of the Obama-era nuclear deal and promising not only to reapply the previous sanctions (which took one million barrels of oil off the world market every day) but to ramp them up.

Next is global economic growth, which is estimated to increase world demand for oil and its derivatives by at least 1.5 million bpd next year. Then there’s Venezuela, under the control of Marxist Nicolas Maduro, who has decimated his country’s oil production, with further reductions of 500,000 barrels a day likely next year.

Despite higher gas prices in the United States, the average increase in cost of a family’s summer vacation is estimated to be around $200, not likely to impact most Americans’ plans.

Next are the bottlenecks in the Permian Basin, where production has outstripped pipeline capacity, at least for the moment.

One market dynamic that might lead to less oil being used is

Keep reading…

Citigroup: U.S. Will Be World’s Largest Oil Exporter by Next Year

This article appeared online at TheNewAmerican.com on Wednesday, May 9, 2018: 

Citigroup announced last week that exports of crude and finished oil products from the United States would overtake Saudi Arabia’s by next year. Last week, the U.S. exported 8.3 million barrels per day (bpd) of crude and finished petroleum products. While Saudi Arabia exported 9.3 million bpd of crude and refined products in January, the kingdom plans to cut crude exports to under seven million bpd in May.

With the coming sanctions against Iran thanks to the president’s termination of the Iranian “nuclear deal” on Tuesday, up to another million bpd of crude could be removed from global supply, tilting further the advantage to U.S. producers.

Those sanctions set up the U.S. oil industry to continue to fill the vacuum just as quickly as it can find skilled roughnecks to put up idled rigs and complete wells that were drilled just waiting for an opportunity such as this. Those DUCs — drilled but uncompleted — wells number above 4,000 and are being brought online as quickly as possible. Labor and material bottlenecks are being resolved, and with oil in the high 60s and lifting costs in the low 30s, the boom in U.S. production will continue to set records. All at OPEC’s expense.

OPEC’s problems are largely self-inflicted.

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Despite Increasing Use of Robots, the U.S. Economy Boasts Highest Job Openings in History

This article was published by The McAlvany Intelligence Advisor on Wednesday, May 9, 2018: 

Old myths die slowly, including the one that goes: “Robots are taking over the world, leaving millions unemployed!” Doomsayers are likely to refer to an article (from three years ago) that implicitly warned of exactly that. From Intelligent Machines in July, 2015:

Keep reading…

Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.