Author Archives: Bone Fish

College (As We Knew It) Is Broken In America

The system of higher education in the United States is being rebuilt from the foundation and we’ve only just started to see the impact of this dramatic transformation.

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  • The way students and parents pay for college is changing
  • The methods and the places students learn are changing (and have been for a while)
  • Our culture is changing to finally accept that “traditional” 4-year college isn’t the answer for everyone

(Alex Mitchell) But before we talk about all of the changes that are happening in higher education right now, let’s talk about why college is, to put it simply, broken in the United States.

College is Broken.

It’s impossible to miss the many ways college is broken today. And I’m not just talking about the high profile bribery scandal that broke several weeks ago.

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While parents paying hundreds of thousands to millions of dollars to guarantee college admission through a “side door” is concerning, it pales in comparison to these other indicators of college broken-ness.

1. Student Loans Are Crippling Tens of Millions

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44.2 Million Americans currently are carrying close to $1.5 Trillion in student loan debt (this is ~20% of the US adult population).

Even more astonishing, over 11% of these loans are delinquent (90+ days without payment or in default).

This delinquency rate is >5x the credit card delinquency rate!

Student loans have become such a burden that companies have been started to offer student loan repayment as a fringe benefit: Goodly.

Shout out to Goodly for helping the many already in debt, but we need to stop the problem at the source too!

Sources: Federal ReserveBloomberg

2. Tuition Increases Are Relentless

From 1988 to 2008, tuition increased on average by 3.5% per year. From 2008 to 2018, tuition continued to increase at a still-suffocating 3% per year.

In 1998, tuition at a private 4-year college was 77% of the average male income in the United States.

By 2016, this had increased to 116%.

On the public college side, the increase is even more dramatic. In 1998, the costs averaged 29% of the average male income in the United States,increasing to 52% in 2016.

Incomes simply have not kept pace with tuition increases.

Source: ProCon.org

3. Incentives Are Distorted Between Colleges and Students

Students continue to attend college and continue to take on these significant loans because they believe they are making a good investment. College graduates earn substantially more than High School graduates over the course of their career, right? Correct, but…

The fundamental problem is that if the college they attend turns out to be a bad investment, as a growing number of private 4-year colleges do, only the student pays this penalty (and they pay a BIG, often lifelong, one).

The college already got paid by either the government or the student loan company and there is simply no penalty for their lack of performance in student education and career placement (save for some very limited publicly funded university penalties).

There are also no meaningful incentives from the government to provide education in areas where jobs are in the highest demand.

The only true incentive these colleges have is one that is too distant for many: The ability to continue to recruit new students who will pay their ever-increasing tuition rates.

How College is Changing Right Now

Where And How You Learn

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  • MOOCs: Massive Open Online Courses aren’t new, but the depth of courses they offer continues to increase dramatically. Between EdX, Coursera, Khan Academy, and Udacity you can learn almost anything from anywhere for free.
  • Code Schools (v2!): Code Schools have already gone through one wave of evolution with ineffective programs and schools failing, new models for sustainable funding and profitability emerging and consolidation accelerating.
  • Technical Trade Schools: Technical school used to mean learning a trade like Carpentry or studying as an Electrician’s apprentice. This concept has been reinvigorated with companies like NextGenT that offer many technical certificate programs in high demand fields like cybersecurity.

How You Pay

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  • ISAs: Income Share Agreements. Instead of paying tuition up front, a student agrees to pay a percentage of their future income to the school or lender. There is usually an income “floor” that the student must be above in order for the income share to take effect after graduation. There is also usually a repayment “ceiling” (so the former student doesn’t end up paying an obscene amount if they get a high-salary position immediately out of school). Companies like Vemo Education have started to bring this payment model to significant numbers of both code schools and traditional 4-year colleges.
  • Get Paid to Learn: Several companies are taking the idea of the ISA a step further. In addition to paying nothing upfront, these companies are actually paying you a salary to learn. They are betting on high demand career fields like software development and data science and trying to make it as easy as possible for top candidates to join their schools. Several “get paid to learn” companies include Lambda SchoolModern Labor, and CareerKarma.

Cultural Changes and Pressures

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  • Reducing the 4 Year College “Pressure”: It’s taken a long time, and particularly affluent parts of our country are still pretty resistant, but code schools and alternative higher education options have begun to gain acceptance as a better option for meaningful percentages of high school graduates.

Thank you for reading. If you’re enjoying this post so far, I think you would enjoy my new book, Disrupt Yourself. For a limited time, I’m offering a free pre-release chapter.

Claim yours now here: I want a free chapter of Disrupt Yourself!

Prediction: College in 10 Years…

  • Mid-tier private colleges cease to exist
  • Code schools will (continue to) consolidate dramatically
  • All colleges remaining offer ISAs and many offer “get paid to learn” options
  • Community College still exists as the low cost higher education option and may even grow in influence and size
  • A small set of top code schools achieve “Ivy League” status and diversify to offer robust curriculum for developers, data scientists, designers, product managers and more (essentially the tech company talent stack)
  • Student loan debt collapses in value as defaults skyrocket

Prediction: College in 20 Years…

  • Ivy League and top research universities are only “old guard” that remain
  • Community college is free everywhere in the USA as a guaranteed, robust, public secondary education (in many states this is the case already)
  • All colleges that remain offer both ISAs and “you get paid to learn” options
  • Code schools look like colleges and colleges look like code schools to the point where they are hard to differentiate

College is Changing and It’s a Good Thing

College is broken today.

But fortunately, many startups, companies, and public figures are starting to pay attention and build the next generation of higher education.

It’s going to be disruptive, it’s going to be scary (at times), but with the right minds focused on this huge problem, our country will build a secondary education system that has:

  • Free options that are robust (Community College)
  • Stronger alignment with high-demand careers
  • True incentive alignment between students and education providers
  • Little to no debt for students (!)

Source: ZeroHedge

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Confidence In Higher Education Plummets

Confidence in higher education in the United States has dropped significantly since 2015, according to polling company Gallup, which notes that it’s the worst-performing institution they measure

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The crisis in confidence coincides with a similar decline in the public’s view that higher education is affordable and available to those who need it, according to the report – suggesting that affordability and access are linked to the faith people have in the institution of higher learning.

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The waning confidence in higher education isn’t limited to the general public either; academics have begun to lose faith as well

Concerns about the future of higher education also exist within academia. College and university trustees and board members — many of whom are intimately familiar with higher ed’s services, operations and impact — remain concerned about the industry’s future, despite being more confident in their own institution’s future. The AGB 2018 Trustee Index, a recent study conducted by the Association of Governing Boards and Gallup, finds that three in four trustees (74%) are concerned or very concerned about the future of higher education in the U.S. Their concerns remain focused largely on one main challenge: affordability. –Gallup

What do college and university trustees point to as the top issues causing the drop in public confidence? Negative media reports about student debt (72%) and news reports on the cost of tuition (64%). To that end, more than half of trustees (58%) say their top concern about the future of higher education is the cost.

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When it comes to affordability, the National Center for Education Statistics estimates that the total cost of tuition, fees and living expenses rose 28% between 2005/2006 – 2015/2016 in the United States after account for inflation, while enrollment across all higher education sectors dropped by 1.4% in 2018, which Gallup says is consistent with recent trends. 

Many colleges, universities and even states are attempting to address affordability concerns and related enrollment decreases by freezing or reducing tuition costs. For the seventh year in a row, Purdue University has frozen its tuition rates. Western Governors University has bucked the enrollment trend in higher education for a variety of reasons, including because of its commitment to keep costs contained. In the past five years, WGU has increased the cost of annual tuition by only $600, while total enrollment has more than doubled, to over 100,000 students. –Gallup

The solution? 

Restoring confidence in higher education – and boosting enrollment – can be accomplished by restoring affordability while improving the quality of higher education, according to the report. 

A 2015 Gallup report revealed a clear relationship between student debt levels and graduates’ perceptions that their degree was ‘worth it.’ Graduates drowning in student loan debt were obviously less likely to consider their education a worthwhile investment. 

However, and fortunately for higher education, a high-quality experience in school blunted the negative effect of student debt on graduates’ beliefs that their undergraduate experience was worthwhile, proving that the significant investment can be worth it for some grads. The AGB 2018 Trustee Index also shows that trustees have been asked to make changes to the academic programs offered at their institution to better respond to 21st-century needs. Half of trustees say senior administrators have asked them to increase or introduce STEM programs, and about one-third say they have been asked to increase or introduce applied or experiential learning programs. –Gallup

While the American public largely still believes that higher education is the way to achieve a better life through higher-paying jobs, institutions must figure out how to provide a quality education without saddling grads with debt that takes decades to pay off. 

Source: ZeroHedge

The Biggest Home Price Drops Are In These 10 Cities

As the US housing market deteriorates, the shift to a buyer’s market accelerates, says Knock, a home trade-in online service. The 2Q19 National Knock Deals Report predicts that U.S. markets will have the highest percentage of homes that sell at discount versus the list price, in many years.

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Knock projects that 75% of current listings will sell below their list price within the current quarter. While this is slightly lower than the 1Q19 forecast of 77%, it reflects a significant y/y increase (7% y/y) as the housing market starts to turn.

“The Q1 Forecast, which may have seemed to be a big jump over 2018, was actually much closer to the reality of home sales in Q1 2019 than home sales at the same time last year, or even at the end of 2018,” said Jamie Glenn, Co-Founder and COO at Knock. “It’s clear that we’re at an inflection point in the shift to more of a buyer’s market, and the Q2 Forecast provides insights into where and how buyers can capitalize on that.”

Six out of the ten cities on the list were located in Southern markets. Knock said the increase of Southern markets is a 40% increase over the last quarter.

Providence, RI; Cleveland, OH; New York, NY; and Chicago, IL were the other four markets that made the list.

The report noted that the four markets in Florida ( Miami, Tampa, Jacksonville, and Orlando) were hit the hardest by price reductions.

In Miami, the report says about 88% of single-family home sales in 1Q19 sold below original list prices. Average days on the market of Miami homes sold in 1Q19 were 82, which plays a significant role in discounting.

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“This seems like an interesting telltale that the market is shifting in favor of buyers,” Knock Chief Executive Officer Sean Black told Bloomberg in a phone interview. “Florida is a popular secondary home destination so it tends to drop faster in a downward market because it’s losing buyers, both domestically and internationally. Everybody needs a primary home. Not everybody needs a second home.”

Back in September, we outlined that “existing home sales have peaked, reflecting declining affordability, greater price reductions, and deteriorating housing sentiment.”

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Greater price reductions, more inventory, and more days on the market is a recipe for a significant downward impulse in home prices across the country.

So if you haven’t called your realtor – maybe now is the time before the market goes bust.

Source: ZeroHedge

Armed Realtors Face Off With Menacing Attacker (VIDEOS)

Two Ohio realtors with concealed carry permits came up against an armed man inside one of their empty properties who said he was going to attack them. The real estate agents, Kyle Morrical and his father Phil Morrical III, encountered Derek Miller inside a vacant house in Hamilton that had been reportedly broken into the day before.

“He told us he had a gun and a knife. He was either going to shoot us or stab us and he punched me in my face,” Kyle told Local 12.

That’s when Kyle pulled his gun and the father-and-son pair held the attacker down while a neighbor called the police. Miller was taken into custody and charged with assault, menacing and trespassing.

The Morrical’s, who showed off a collection of compact semi-autos by Glock, Ruger, and S&W to local media, said they go to the range at least once a month to practice.

“I hoped I would never have to use it because it’s one of those things that you hope you never have to use, but you have it just in case,” Kyle said.

According to the National Association of Realtors, their group’s 2018 safety report found that 43 percent of members choose to carry self-defense weapons. The group represents some 1.3 million members.

The National Rifle Association profiled a group of real estate agents in Ohio in 2015 who chose to get their concealed handgun license following the murder of two realtors on the job.

Source: by Chris Eger | Guns.com

Will “Inflated” FICO Scores Be The Catalyst For The Next Meltdown

Consumer credit scores have been artificially inflated during the past decade and are covering up a very real danger lurking behind hundreds of billions of dollars in debt. And when Goldman Sachs is the one ringing the alarm bell, you know the issue may actually be serious.

Joined by Moody’s Analytics and supported by “research” from the Federal Reserve, the steady rise of credit scores during our last decade of “economic expansion” has led to a dangerous concept called “grade inflation”, according to Bloomberg

Grade inflation is the idea that debtors are actually riskier than their scores indicate, due to metrics not accounting for the “robust” economy, which may negatively affect the perception of borrowers’ ability to pay back bills on time. This means that when a recession finally happens, there could be a larger than expected fallout for both lenders and investors. 

There are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.

On the surface, this disappearance of subprime borrowers is good news. But is there more than meets the eye to the American consumer’s FICO score renaissance?

Cris deRitis, deputy chief economist at Moody’s Analytics said: “Borrowers with low credit scores in 2019 pose a much higher relative risk. Because loss rates today are low and competition for high-score borrowers is fierce, lenders may be tempted to lower their credit standards without appreciating that the 660 credit-score borrower today may be relatively worse than a 660-score borrower in 2009.”

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The problem is most acute for smaller firms that tend to lend more to people with poor credit histories. Many of these firms rely on FICO scores and are unable to account for other metrics, like debt-to-income levels and macroeconomic data. Among the most exposed outstanding debts are car loans, consumer retail credit and personal loans that are doled out online. These types of debt total about $400 billion – and about $100 billion of that sum has been bundled into securities that have been sold to ravenous yield chasers “investors”. 

Meanwhile, cracks are already starting to show on the surface: there has been a rising number of missed payments by borrowers with the highest risk, despite the past decade of “growth”. And now that the economy is starting to show weakness, these delinquencies could accelerate and lead to larger than expected losses. 

Goldman Sachs analyst Marty Young said in an interview: “Every credit model that just relies on credit score now – and there’s a lot of them – is possibly understating the risk. There are a whole bunch of other variables, including the business cycle, that need to be taken into account.”

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FICO credit scores are used by more than 90% of U.S. lenders to determine whether a borrower is an acceptable risk. Most scores range from 300 to 850, with a higher score purporting to show that someone is more likely to pay back their debts. Some big banks and lenders have recognized the problem and have included other factors in their underwriting decisions. 

“Borrowers’ scores may have migrated up, but inherently their individual risk, and their attitude towards credit and ability to pay their bills, has stayed the same. You might have thought 700 was a good score, but now it’s just average,” deRitis continued.

Ethan Dornhelm, vice president of scores and predictive analytics at FICO magically doesn’t seem to notice score inflation and blames the issue on underwriters: “The relationship between FICO score and delinquency levels can and does shift over time. We recognize there’s a lot more context you can obtain beyond a consumer’s credit file. We do not think that score inflation is the issue, but the risk layering on underwriting factors outside of credit scores, such as DTI, loan terms, and even trends in macroeconomic cycles, for example.”

Goldman’s Young attributes the rise in missed auto loan payments to the change in scores. The Federal Reserve Bank of New York said the number of auto loans at least 90 days late topped 7 million at the end of last year.

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Michelle Russell-Dowe, who invests in consumer asset-backed securities at Schroder Investment Management, said: “Some deep-subprime auto lenders may be deeply reliant on credit scores, although there’s a pretty wide range within the auto industry of how lenders use scores and other metrics. For marketplace lending, regardless of the statistics you collect on borrowers, there is something adversely selective about somebody looking for loans online.”

Marketplace and peer to peer lending has also been showing signs of stress. Missed payments and writedowns increased last year, according to NY data and analytic firm PeerIQ. “We don’t see the purported improvement in underwriting just yet,” PeerIQ wrote in a recent report.

And the pressure isn’t just showing up in auto loans and marketplace lending. Private label credit cards, those issued by stores, instead of big banks, saw the highest number of missed payments in seven years last year.

“As an investor it’s incumbent on you to do that deep credit work, which means you have to know as much as possible about how things should pay off or default. If you don’t think you’re being paid for the risk, you have no business investing in it,” Russell-Dowe concluded, stating what should be – but isn’t – the obvious.

Source: ZeroHedge

Globalist Utopia: Negative Rates Are Coming, Whether You Like It Or Not

There is nothing that a human mind can’t conceive. It can shoot for the stars or dive in the ocean which twinkles in the shadows of stars and ascend back with sparkling mind bearing uncanny ambition, only to float contended.  

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Today, we live in fear of losing wealth, we worry what economic consequences would do to our cash, we look through a microscope and scrutinize every word, every policy, every regulation or find something to put above ‘every’ and list out the glaring negatives with a slight trace of approval. If only one could notice the lens of the microscope, would then one could tell reel and real apart.

Such is the case of negative interest rates. It is dealt differently by different flock of loaded individuals, generally in ways which would not only prevent losses but essentially gain cash. This flock stands on one side of the transaction contemplating means to win regardless of the loss that still deliberating other doomed flock endures. Well, this is how the world works. It is a Bernoulli trial. But there exists a splash of humble wit folks floating beneath the starry sky delighted by the victory of each one and beaten down none.

Theory? Without thinking too much, negative rates indicate that the economy is unable to generate sufficient income to service its debt. Almost always, all roads leads us back to debt sustainability levels. In order for an economic system to reduce debt, it requires growth or inflation or currency devaluation. For an economic system to exercise one of the two (growth not included), capital transfer is to be facilitated. This capital movement in negative rates environment is from the savers to the borrowers. Your invested value, the money you gave to borrowers would have a value lower than the face value. Barbaric! Savers should be the winners not the borrowers!

So each flock as per their liking would act in a way that makes them the gaining side. In real world scenario, one flock could be investors who when yields falls even deeper into negative territory scoop a profit through capital gain. Flock of foreign investors may try to earn through currency appreciation. Another flock would focus on real rates even though they are negative as that would preserve their capital under deflationary conditions when nominal yields would decrease their capital. Who would want that!

Investopedia gave an example, “In 2014, the European Central Bank (ECB) instituted a negative interest rate that only applied to bank deposits intended to prevent the Eurozone from falling into a deflationary spiral.”

Let’s recall a real practical example. The case of Switzerland.

Paul Meggyesi of JP Morgan said, “The defacto negative interest rate regime lasted until October 1973. The negative interest rate was re-introduced in November 1973 at 3% per quarter and then increased to 10% per quarter in February 1978. All though this period capital inflows were being sustained by the global monetary turmoil/inflation that characterized the first years of floating exchange rates, not to mention the SNB’s singular focus on promoting monetary and price stability through money supply targeting. Ultimately the SNB abandoned these purely technical attempts to curb capital inflows and embraced a much more effective policy of currency debasement, namely it abandoned money supply targeting in favor of an explicit exchange rate target that required huge amounts of unsterilized intervention, money supply expansion and ultimately inflation. (Suffice to say this policy lasted only until 1982, when the Swiss realized that inflation was too high a price to pay for a weak currency).”

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He continued “Negative interest rates will only deter capital inflows if they are sufficiently large to offset the capital gain an investor expects to earn through capital appreciation. CHF rose by 8% in nominal and real terms in 1972-1973. Appreciation in 1973 – 1978 was 62% in nominal and 29% in real terms.”

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In fact, during global financial crisis many central banks reduced their policy interest rates to zero. A decade later, today, still many countries are recovering and have kept interest rates low. Severe recessions in the past have required 3 – 6 percent point cuts in interest rates to revive the economy. If any crisis were to happen today, only a few countries could respond to the monetary policy. For countries with already prevailing low or negative interest rates, this would be a catastrophe.

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Today, around $10 trillion of bonds are trading at negative yields mainly in Europe and Japan as per Bloomberg.

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Poisons have antidotes, and sometimes one need to gulp down the poison to witness the mystique surrounding the life and glide with accidental possibilities, the possibilities which one wouldn’t seek if they remain wary of novel minted cure. 

Here enters a splash of humble wit folks! They want a win – win. So these folks came up with an idea, an idea with legal and operational complication but they have swamped themselves with research to find ways to not stumble in future and yes they do have a long way to go but we have a start. These folks are our very adored IMF Staff.!

They are exploring an option that would help central banks make ‘deeply negative interest rates’ feasible option.

Excerpt from their article ‘Cashing In: How to make Negative Interest Rates Work’:

“In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. When cash is available, however, cutting rates significantly into negative territory becomes impossible.”

“…Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.”

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“… in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money).

E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

At the same time, shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

Negative rates are coming whether we like it or not. There is only so much growth we can get in steady state among rising debt levels. The only hurdle to implementing negative rates is currency in circulation and that’s why more and more countries are trying to outlaw cash. Interesting and profitable times ahead for those who understand the brave new world.

Source: ZeroHedge

Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”

Source: Confounded Interest

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This week in politicks…