Chinese Purchase Large Mexican Radio Station Near US Border

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The Chinese government has purchased a large radio station just south of California with the intent of pushing propaganda. According to the Washington Free Beacon, the US government is looking into the potential US issues with the sale. Having a broad reach into southern California, the station will be broadcasting pro-Beijing propaganda. Pushing over 77,000 watts, the station will have an incredibly far reach.

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Phoenix TV has been identified by U.S. intelligence agencies as a major overseas outlet used to spread propaganda and promote the policies of the communist government in Beijing. The Hong Kong television station also has close ties to China’s intelligence service and military.

While under investigation by the FCC, don’t expect any action to block this measure. Although located in Mexico most of its broadcast area is in the US, giving a certain level of jurisdiction but taking into consideration the level of influence the Chinese have with many sitting US Democrat politicians, including the recently exposed staffers for Senator Dianne Feinstein, the Chinese will get what they want.The Chinese have rapidly expanded their influence into South and Central America, and this is one more piece of a larger, more ominous picture.

Why would China be placing propaganda transmitters right off our border? It doesn’t take much to figure it out. They have designs on the US’ west coast. If you’ve slacked off on training, just remember others out there haven’t. The threats are real and that day is coming.

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Source: American Partisan

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Crisis Level: California’s Housing Affordability Plummets To 10-Year Low

California’s housing affordability crisis is progressively getting worse. It has now plummeted to its lowest level in 10-years, and less than one in five households can afford to purchase a median-priced single-family home in the Bay Area, according to new data released by the California Association of Realtors (CAR).

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CAR released its second-quarter Housing Affordability Index report (HAI), based on the percentage of all households that can afford to purchase a median-priced, single-family home in the state. CAR also reports affordability indices for regions and counties within the state. The index is regarded as the most fundamental benchmark of housing well-being for home buyers.

The percentage of home buyers who could afford to buy a median-priced, existing single-family home in the state declined from 31 percent in the first quarter to 26 in the second quarter; in the previous year, the index was at 29 percent, according to CAR’s HAI.

The second quarter marked the 21st consecutive quarter that CAR’s HAI printed below 40 percent; the index topped at 56 percent in the first quarter of 2012.

The report showed that prospective home buyers would need to have minimum annual income of $126,500 to prequalify for the purchase of a $596,730 statewide median-priced, existing single-family home in the second quarter. Assuming a 20 percent down payment and an effective composite interest rate of 4.70 percent, the monthly payments of a 30-year fixed-rate loan would be around $3,160.

The California counties that recorded 10-year lows in housing affordability were Alameda, Merced, Orange, Riverside, Sacramento, San Bernardino, San Diego, San Mateo, Santa Clara, Santa Cruz, and Sonoma.

Here are the areas where housing affordability is at crisis levels: Santa Cruz (12 percent), San Francisco, San Mateo, and Mono (all at 14 percent), and Alameda and Santa Clara (both at 16 percent).

According to CAR’s index, the most affordable counties in California during the second quarter were Lassen (64 percent), Kern (53 percent), Madera (52 percent), Tehama (51 percent) and Kings (50 percent).

Housing Affordability Peaked At 1Q 2012 

https://www.zerohedge.com/sites/default/files/inline-images/Screen-Shot-2018-08-11-at-11.53.25-AM.png?itok=k_MGtfJD

Housing Affordability — Traditional Index 

https://www.zerohedge.com/sites/default/files/inline-images/Screen-Shot-2018-08-11-at-11.53.57-AM.png?itok=INvzZGS_

Affordability Peak vs. Current 

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In a separate, but relevant report from CAR, data shows California’s real estate market could have already peaked.

California Home Sales Declined for the 1 st Time in 4 Months

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Sales Lost Momentum as Mortgage Rates Continued to Climb

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California is one of the largest housing markets in the nation, as it has been a forward leading indicator for the rest of the country. Amid a housing shortage, which has blossomed into a housing affordability crisis, sales this summer have started to tumble, even as more inventory comes online. The supply of homes for sale increased annually in June for the first time in three years, according to the National Association of Realtors, which has depressed sales for the third straight month.

And now it seems, California’s real estate market could be in the beginning stages of a correction to fair value, after nearly a decade of speculation forced much of the median-priced single-family homes out of reach of the middle class – contributing to the housing affordability index at a 10-year low.

Source: ZeroHedge

 

Are Bonds Sending A Signal?

Michael Lebowitz previously penned an article entitled “Face Off” discussing the message from the bond market as it relates to the stock market and the economy. To wit:

“There is a healthy debate between those who work in fixed-income markets and those in the equity markets about who is better at assessing markets. The skepticism of bond guys and gals seems to help them identify turning points. The optimism of equity pros lends to catching the full run of a rally. As an ex-bond trader, I have a hunch but refuse to risk offending our equity-oriented clients by disclosing it. In all seriousness, both professions require similar skill sets to determine an asset’s fair value with the appropriate acknowledgment of inherent risks. More often than not, bond traders and stock traders are on the same page with regard to the economic outlook. However, when they disagree, it is important to take notice.”

This is an interesting point given that despite the ending parade of calls for substantially higher interest rates, due to rising inflationary pressures and stronger economic growth, yields have stubbornly remained below 3% on the 10-year Treasury.

In this past weekend’s newsletter, we discussed the current “bullish optimism” prevailing in the market and that “all-time” highs are now within reach for investors.

“Currently, the “bulls” remain clearly in charge of the market…for now. While it seems as if much of the “tariff talk” has been priced into stocks, what likely hasn’t as of yet is rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.

While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line)which keeps Pathway #1 intact. It also suggests that next weekwill likely see a test of the January highs.

https://www.zerohedge.com/sites/default/files/inline-images/SP500-Chart3-080318%20%281%29.png?itok=aOPYMJ1K

“With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall. “

One would suspect with the amount of optimism toward the equity side of the ledger, and with the Federal Reserve on firm footing for further rate increases at a time where the U.S. Government is about to issue a record amount of new debt, interest rates, in theory, should be rising.

But they aren’t.

As Mike noted previously:

“Given our opinions on the severe economic headwinds facing economic growth and steep equity valuations, we believe this divergence poses a potential warning for equity holders. Accordingly, we thought it appropriate to provide a few graphs to demonstrate the ‘smarter’ guys are not on board the growth and reflation train.”

In today’s missive, we will focus on the “price” and “yield” of the 10-year Treasury from a strictly “technical”perspective with respect to the signal the bond market may be sending with respect to the stock market. Given that “credit” is the “lifeblood” of the Government, corporate and consumer markets, it should not be surprising the bond market tends to tell the economic story over time.

We can prove this in the following chart of interest rates versus the economic composite of GDP, inflation, and wages.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-GDP-Composite-080618.png?itok=lcRcPHyd

Despite hopes of surging economic growth, the economic composite has remained in an elongated nominal range between 40 and 60 since 2011. This stagnation has never occurred in history and is a function of the massive interventions by the Government and the Federal Reserve to support economic growth. However, now those supports are being removed as the Federal Reserve lifts short-term borrowing costs and reduces liquidity support through their balance sheet reinvestments.

As I said, credit is the “lifeblood” of the economy. Think about all the ways that higher rates impact economic activity in the economy:

1) Rising interest rates raise the debt servicing requirements which reduces future productive investment.

2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments.

3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations. 

4) The “stocks are cheap based on low interest rates” argument is being removed.

5) The massive derivatives and credit markets are at risk. Much of the recovery to date has been based on suppressing interest rates to spur growth.

6) As rates increase so does the variable rate interest payments on credit cards. 

7) Rising defaults on debt service will negatively impact banks.

8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage.

9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.

10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.

I could go on, but you get the idea.

So, with the Fed hiking rates, surging bankruptcies for older Americans who are under-saved and over-indebted, stumbling home sales, inflationary prices rising from surging energy costs, what is the 10-year Treasury telling us now.

Short-Term

On a very short-term basis, the 10-year Treasury yield has started a potential-topping process. Given that “yield” is the inverse of the “price” of bonds, the “buy” and “sell” signals are also reversed. As shown below, the 10-year yield appears to be forming the “right shoulder” of a “head and shoulder” topping formation and is currently on a short-term “buy” signal. Such would suggest lower yields over the next couple of months.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Weekly-080618.png?itok=astGcYCm

The two signals above aren’t a rarity. The chart below expands this view back to 1970. There have only been a few times historically that yields have been this overbought and trading at 3 to 4 standard deviations above their one-year average.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Weekly-Crisis-080618.png?itok=8OuknfhB

The outcome for investors was never ideal.

Longer-Term

Even using monthly closing data, which smooths out volatility to a greater degree, the same message appears. The chart below goes back to 1994. Each time yields have been this overbought (remember since yield is the inverse of price, this means bonds are very oversold) it is has signaled an issue with both the economy and the markets.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Monthly-SP500-080618-Crashes.png?itok=8bs9_JzH

Again, we see the same issue going back historically. Also, notice that yields are currently not only extremely overbought, they are also at the top of the long-term downtrend that started back in 1980.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Monthly-SP500-080618.png?itok=gJpuxCHG

Even Longer Term

Okay, let’s smooth this even more by using quarterly data closes. again, the picture doesn’t change.

https://www.zerohedge.com/sites/default/files/inline-images/Rates-Quarterly-SP500-080618-Crashes.png?itok=32JtcmDe

As I noted yesterday, the economic cycle is extremely advanced and both stocks and bonds are slaves to the full market cycle.

https://www.zerohedge.com/sites/default/files/inline-images/Historical-Recoveries-Declines-080518.png?itok=qWOsFTAd

“The “full market cycle” will complete itself in due time to the detriment of those who fail to heed history, valuations, and psychology.”

Of course, during the late stage of any market advance, there is always the argument which suggests “this time is different.” Mike made an excellent point in this regard previously:

“Given the divergences shown between bond and equity markets, logic says somebody’s wrong. Another possibility is that neither market is sending completely accurate signals about the future state of the economy and inflation. It is clear that bond traders do not buy into this latest growth narrative. Conversely, equity investors are buying the growth and reflation narrative lock, stock and barrel. To be blunt, with global central banks buying both bonds and stocks, the integrity of the playing field as well as normally reliable barometers of market conditions, are compromised.

This divergence between bond and equity traders could prove meaningless, or it may be a prescient warning for one or both of these markets. Either way, investors should be aware of the divergence as such a wide gap in economic opinions is unusual and may portend increased volatility in one or both markets.”

While anything is certainly possible, historical probabilities suggest that not only is “this time NOT different,” it will likely end the same way it always has for investors who fail to heed to bond markets warnings.

Source: ZeroHedge

“Their Wealth Has Vanished”: Baby Boomers File For Bankruptcy In Droves

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An alarming number of older Americans are being forced into bankruptcy, as the rate of people 65 and older who have filed has never been higher – at three times what it was in 1991, while the rate of bankruptcies among Americans age 65 and older has more than doubled, according to a new study by the The Bankruptcy Project. 

Older Americans are increasingly likely to file consumer bankruptcy, and their representation among those in bankruptcy has never been higher. Using data from the Consumer Bankruptcy Project, we find more than a two-fold increase in the rate at which older Americans (age 65 and over) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system. The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect. 

The median senior filing bankruptcy enters the system $17,390 in debt, vs. an average net worth of $250,000 for their non-bankrupt peers. 

According to the study, a three-decade shift of financial risk from government and employers to individuals is at fault, as aging Americans are dealing with longer waits for full Social Security benefits, 401(k) plans replacing employer-provided pensions and more out-of-pocket spending on items such as health care.

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“When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” the study says, “and older Americans turn to what little is left of the social safety net — bankruptcy court.”

“You can manage O.K. until there is a little stumble,” said Deborah Thorne, an associate professor of sociology at the University of Idaho and an author of the study. “It doesn’t even take a big thing.”

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The data gathered by the researchers is stark. From February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74; in 1991, there were 1.2.

Not only are more older people seeking relief through bankruptcy, but they also represent a widening slice of all filers: 12.2 percent of filers are now 65 or older, up from 2.1 percent in 1991.

The jump is so pronounced, the study says, that the aging of the baby boom generation cannot explain it.

Although the actual number of older people filing for bankruptcy was relatively small — about 100,000 a year during the period in question — the researchers said it signaled that there were many more people in financial distress. –NYT

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“The people who show up in bankruptcy are always the tip of the iceberg,” said Robert M. Lawless, an author of the study and a law professor at the University of Illinois.

In the Bankruptcy Project’s latest study – posted online Sunday and submitted to an academic journal for peer review, studies personal bankruptcy cases and questionnaires submitted by 895 BK filers aged 19 through 92. 

The questionnaire asked filers what led them to seek bankruptcy protection. Much like the broader population, people 65 and older usually cited multiple factors. About three in five said unmanageable medical expenses played a role. A little more than two-thirds cited a drop in income. Nearly three-quarters put some blame on hounding by debt collectors.

The study does not delve into those underlying factors, but separate data provides some insight. The median household led by someone 65 or older had liquid savings of $60,600 in 2016, according to the Employee Benefit Research Institute, whereas the bottom 25 percent of households had saved at most $3,260. –NYT

Meanwhile, by 2013 the average Medicare beneficiary’s out-of-pocket health care expenses ate up around 41% of the average Social Security payment, according to the Kaiser Family Foundation. 

Moreover, more people are entering their senior years in debt. For many, that means a mortgage – roughly 41% of senior debt in 2016, which is nearly double the 21% rate from 1989, according to the Urban Institute. 

Perhaps not surprisingly, the lowest-income households led by individuals 55 or older carry the highest debt loads relative to their income. More than 13 percent of such households face debt payments that equal more than 40 percent of their income, nearly double the percentage of such families in 1991, the employee benefit institute found. –NYT

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What isn’t helping is that many older parents report that helping their children contributed to their bankruptcies. Seattle bankruptcy attorney Marc Stern says he’s seen parents co-sign loans for $10,000 or $20,000 for their kids, only to find themselves on the hook when their offspring couldn’t service the debt. 

“When you are living on $2,000 a month and that includes Social Security — and you have rent and savings are minuscule — it is extremely difficult to recover from something like that,” he said.

Others parents had had co-signed their children’s student loans. “I never saw parents with student loans 20 or 30 years ago,” Mr. Stern said.

It is not uncommon to see student loans of $100,000,” he added. “Then, you see parents who have guaranteed some of these loans. They are no longer working, and they have these student loans that are difficult if not impossible to pay or discharge in bankruptcy, and these are the kids’ loans.”

CEO of Elder Law of Michigan, Keith Morris, said that bankruptcy was a hot topic among callers to a legal hotline he established for older adults. 

“They worked all of their lives, and did what they were supposed to do,” he said, “and through circumstances like a late-life divorce or a death of a spouse or having to raise grandkids, have put them in a situation where they are not able to make the bills.”

Source: ZeroHedge

Facebook Asking Major US Banks To Share User Data

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Facebook has asked several large US banks to share detailed financial information about their customers, including checking account balances and card transactions, as part of a new push to offer new services to its users, according to the Wall Street Journal

Facebook increasingly wants to be a platform where people buy and sell goods and services, besides connecting with friends. The company over the past year asked JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and U.S. Bancorp to discuss potential offerings it could host for bank customers on Facebook Messenger, said people familiar with the matter.WSJ

Facebook’s new feature would show people their checking account balances, as well as offer fraud alerts, according to the WSJ‘s sources, while the banks are apparently waffling over data privacy concerns.

The negotiations come as the social media giant has fallen under several investigations over data harvesting, including its ties to political analytics firm Cambridge Analytica, which was able to gain access to the data of as many as 87 million Facebook users without their consent. 

One large bank withdrew from talks due to privacy concerns, according to the Journal, however Facebook swears that they’re simply trying to enhance the user experience and won’t use any banking data for ad-targeting. 

Facebook has told banks that the additional customer information could be used to offer services that might entice users to spend more time on Messenger, a person familiar with the discussions said. The company is trying to deepen user engagement: Investors shaved more than $120 billion from its market value in one day last month after it said its growth is starting to slow.

Facebook said it wouldn’t use the bank data for ad-targeting purposes or share it with third parties. –WSJ

We don’t use purchase data from banks or credit card companies for ads,” said spokeswoman Elisabeth Diana. “We also don’t have special relationships, partnerships, or contracts with banks or credit card companies to use their customers’ purchase data for ads.” 

While banks have been under increasing pressure to build relationships with large online platforms and their billions of product-consuming users, they have struggled to gain traction in mobile payments while trying to reach more customers online. That said, they have been hesitant to hand over too much information to third-party platforms such as Facebook – preferring instead to keep customers on their own apps and websites. 

As part of the proposed deals, Facebook asked banks for information about where its users are shopping with their debit and credit cards outside of purchases they make using Facebook Messenger, the people said. Messenger has some 1.3 billion monthly active users, Chief Operating Officer Sheryl Sandberg said on the company’s second-quarter earnings call last month. -WSJ

Both Google and Amazon have also asked banks to join their online platforms with data-sharing agreements that would provide basic banking services on applications such as Alexa and Google Assistant, according to people familiar with the conversations.

“Like many online companies, we routinely talk to financial institutions about how we can improve people’s commerce experiences, like enabling better customer service,” said Diana. “An essential part of these efforts is keeping people’s information safe and secure.”

Facebook has beefed up privacy measures since the data harvesting scandal broke – rolling out new features such as “clear history,” allowing users to prevent the platform from collecting their browsing details off-Facebook. It’s also making greater efforts to alert users to their privacy settings. 

That said, bank executives are still concerned over the scope of information being sought by Facebook – and are willing to maintain their distance over privacy issues even if it means not being included on certain platforms that their customers use. 

JPMorgan isn’t “sharing our customers’ off-platform transaction data with these platforms, and have had to say no to some things as a result,” said spokeswoman Trish Wexler.

Banks view mobile commerce as one of their biggest opportunities, but are still running behind technology firms like PayPal Holdings Inc. and Square Inc. Customers have moved slowly too; many Americans still prefer using their cards, along with cash and checks. –WSJ

In order to crack into the world of online payments and compete with PayPal’s Venmo, several large banks have connected their smartphone apps for quick money-transfers through the Zelle network. While usage has risen, many banks still aren’t on the platform. Meanwhile, Facebook has been trying to turn their Messenger app into a hub for customer service and commerce – “in keeping with a broader trend among mobile messaging services,” reports the Journal

American Express already lets Facebook users contact their customer service department, while PayPal struck a deal with the social media giant to allow users to send money through Messenger. Furthermore, Mastercard cardholders can buy products from certain merchants via Messenger using the card company’s Masterpass digital wallet – while the company says Facebook can’t see card information. 

The initial reaction is positive in Facebook shares – up over 2.5% – but in context of the earnings collapse, Zuck has a long way to go.

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Source: ZeroHedge

Their Plan: Pay All Future Obligations By Impoverishing Everyone

The only way to pay all these future obligations is by creating new money.

I’ve been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.

The funny thing about the loss of a currency’s purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations–pensions, healthcare, entitlements, interest on debt, etc.–lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.

1. As I have explained many times, the only possible output of the way we create and distribute “money” (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the “cheap” money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.

The net result is whatever actual “growth” has occurred (removing the illusory growth that accounts for much of the GDP “growth” this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).

2. Much of the “growth” that’s supposed to fund public and private obligations is fictitious. Please read Michael Hudson’s brief comments for a taste of how this works: The “Next” Financial Crisis and Public Banking as the Response.

The mainstream financial media swallows the bogus “growth” story without question because that story is the linchpin of the entire status quo: if it’s revealed as inaccurate, i.e. statistical sleight of hand, the whole idea that “growth” can effortlessly fund all future obligations goes up in flames.

Combine that “growth” has been grossly over-estimated with an increasing concentration of wealth and income in the top .1% of 1%, and the only possible conclusion is there’s less available to pay fast-rising obligations out of what’s left to the bottom 99.9%.

3. We’ve been paying our obligations with debt for the past decade. Look at the chart below of the debt to GDP ratio–it has skyrocketed as GDP has inched higher while debt has exploded. (Remove the fictitious “growth” in GDP and the picture worsens significantly.)

https://www.zerohedge.com/sites/default/files/inline-images/debt-gdp2.png?itok=ngrFbGtM

Look at the chart of federal debt and explain how the steepening trajectory of debt is sustainable in a stagnating real economy with stagnating wages for the bottom 95% of the populace.

https://www.zerohedge.com/sites/default/files/inline-images/US-debt1-17.png?itok=pjxq533w

4. Recall that the federal, state and local governments pay interest on all the money they borrow to fund deficit spending, i.e. every dollar spent above and beyond tax revenues. All that interest is an increasing obligation that must be paid in the future. Borrowing more to pay interest increases the interest payments due in the future–a classic self-reinforcing runaway feedback loop.

5. Politicians get re-elected by increasing entitlements and obligations without regard to how they will be funded. “Growth” will effortlessly take care of everything–that’s the centerpiece assumption of all conventional economics, free-market, Keynesian and socialist alike.

6. The core constituencies of politicians are government employees and contractors, as these interest groups are funded by the government, which is nominally managed by elected officials and their appointees. Nobody’s more generous (or demanding) than those feeding directly at the government trough. (By “contractors” I mean the vast array of Corporate America cartels that feed off government spending: defense, Big Pharma, Higher Education, etc.)

7. The obligations that have been promised are expanding at a nearly exponential rate, as healthcare costs continue to soar and the number of government pensioners is rising rapidly. This chart illustrates the basic dynamic: the tax revenues required to fund these obligations are far outstripping the income and wealth of the bottom 95% of the populace.

https://www.zerohedge.com/sites/default/files/inline-images/taxpayers-pensions.png?itok=Pxot12Tl

Consider this chart of real GDP per capita. Real GDP is adjusted to remove inflation from the picture, so this is supposed to be “real growth.” How many people are demonstrably 19% better off than they were in 2000?

https://www.zerohedge.com/sites/default/files/inline-images/GDP-per-capita10-17.png?itok=oy1jbuA5

Not many, judging by the decline in family financial wealth since 2001:

https://www.zerohedge.com/sites/default/files/inline-images/assets-family1017a.png?itok=q2ptNEML

Income increases flow disproportionately to the top .1%. Adjusted for real-world inflation, the bottom 95% have actually lost ground:

https://www.zerohedge.com/sites/default/files/inline-images/inequality-NYT8-17a%20%281%29_1.png?itok=nBmjhhR7

Here’s the uncomfortable reality: the means to pay all these future obligations— the real-world economy, and the wealth and income of the vast majority of the populace– are far too modest to fund the fast-expanding obligations,which include interest due on the ever-increasing mountain of public and private debt.

The current “everything” asset bubbles have temporarily boosted the wealth and income of corporations and the wealthy, but all bubbles eventually pop as the marginal elements that are propping up the expansion weaken and implode.

Once the asset bubbles pop, the illusion that “taxing the rich” will pay for all the obligations pops along with the bubble. And as I’ve noted many times, those at the top of the wealth-power pyramid wield political power, so they have the means and the motive to limit their tax burden to roughly 20% or less–(sometimes much less, as in zero.)

That 20% is an interesting threshold, as once federal tax burdens rise above 20%, the higher taxes trigger a recession which then crushes tax revenues.This makes sense– if I pay an extra $2,000 annually in higher junk fees and taxes, that’s $2,000 less I have to invest or spend.

Put these dynamics together and you get one outcome: the federal government cannot possibly pay all its obligations out of tax revenues nor can it raise taxes high enough to do so without gutting tax revenues via a recession.

The only way to pay all these future obligation is by creating new money, which in a stagnant, dysfunctional economy can only reduce the purchasing power of the currency, in effect robbing every holder of the currency of wealth and income.

https://www.zerohedge.com/sites/default/files/inline-images/bolivar-USD6-18_0.png?itok=FFAm1Hn9

Here’s the end-game, folks: Venezuela. The nostrum has it that “the government can’t go broke because it can always print more money.” True, but as the wretched populace of Venezuela has discovered, there is a consequence of that money-creation to meet obligations: the destruction of the currency, and thus the wealth and income of everyone forced to use that currency.

Source: by Charles Hugh Smith | ZeroHedge

The Fed Accelerates its QE Unwind

Mopping up liquidity.

The Fed’s QE Unwind – “balance sheet normalization,” as it calls this – is accelerating toward cruising speed. The first 12 months of the QE unwind, which started in October 2017, are the ramp-up period – just like there was the “Taper” during the final 12 months of QE. The plan calls for shedding up to $420 billion in securities in 2018 and up to $600 billion a year in each of the following years until the balance sheet is sufficiently “normalized” – or until something big breaks.

Treasuries

In July, the QE Unwind accelerated sharply. According to the plan, the Fed was supposed to shed up to $24 billion in Treasury Securities in July, up from $18 billion a month in the prior three months. And? The Fed released its weekly balance sheet Thursday afternoon. Over the four weeks ending August 1, the balance of Treasury securities fell by $23.5 billion to $2,337 billion, the lowest since April 16, 2014. Since the beginning of the QE-Unwind, the Fed has shed $129 billion in Treasuries.

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-Treasuries.png

The step-pattern in the chart above is a result of how the Fed sheds Treasury securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries only mature mid-month or at the end of the month. Hence the stair-steps.

In mid-July, no Treasuries matured. But on July 31, $28.4 billion matured. The Fed replaced about $4 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Walls Street (its “primary dealers”) with which the Fed normally does business. Those $4 billion in securities, to use the jargon, were “rolled over.” But it did not replace about $24 billion of maturing Treasuries. They “rolled off.”

Mortgage-Backed Securities

Under QE, the Fed also bought mortgage-backed securities, which were issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Holders of residential MBS receive principal payments as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off.  So, to keep the MBS balance from declining on the Fed’s balance sheet after QE ended, the New York Fed’s Open Market Operations (OMO) kept buying MBS.

Settlement of those trades occurs two to three months later. Since the Fed books the trades at settlement, there’s a lag of two to three months between the date of the trade and when the trade appears on the Fed’s balance sheet [here’s my detailed explanation]. This is why it took a few months before the QE unwind in MBS showed up distinctively on the balance sheet.

The current changes of MBS on the balance sheet reflect trades from about two months ago. At the time, the cap for shedding MBS was $12 billion a month. And? Over the past four weeks, the balance of MBS fell by $11.8 billion, to $1,710 billion as of August 1, the lowest since October 8, 2014. In total, $61 billion in MBS have been shed since the beginning of the QE unwind:

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-MBS.png

Total Assets on the Balance Sheet

QE only involved Treasuries and MBS. And so the QE unwind only involves Treasuries and MBS. Since the beginning of the QE Unwind, Treasuries dropped by $129 billion and MBS by $61 billion, for a combined decline of $190 billion.

But the balance sheet of the Fed also reflects the Fed’s other functions and activities. And the decline in the overall balance sheet is not going to reflect exactly the amounts shed in Treasuries and MBS.

Total assets on the Fed’s balance sheet for the four weeks ending August 1 dropped by $34.1 billion. This brought the drop since October, when the QE unwind began, to $205 billion. At $4,256 billion, total assets are now at the lowest level since April 9, 2014, during the middle of the “taper.” It took the Fed about six years to pile on these securities, and now it’s going to take years to shed them:

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-overall.png

So the pace of the QE Unwind has accelerated in July, as planned. The Fed has not blinked during the sell-offs in the market, and it’s not going to. It is targeting “elevated” asset prices and financial conditions. Asset prices remain elevated and financial conditions remain ultra-loose. Markets have essentially brushed off the Fed so far. And that only acts as an encouragement for the Fed to proceed.

The FOMC, in its August 1 statement, mentioned “strong” five times in describing various aspects of the economy and the labor market – the most hawkish statement in a long time. Rate hikes will continue, and the pace might pick up. And the QE unwind will accelerate to final cruising speed and proceed as planned. The Fed stopped flip-flopping in the fall of 2016 and hasn’t looked back since.

When the economy eventually slows down enough to where the Fed feels like it needs to act, it will cut rates, but it will let the QE unwind proceed on automatic pilot toward “normalization,” whatever that will mean. That’s the stated plan. And the Fed will stick to it – unless something big breaks, such as credit freezing up again in the credit-dependent US economy, at which point all bets are off.

Source: by Wolf Richter | Wolf Street