Fed Statement Today: Between a Rock and a Hard Currency

By Pam Martens: January 28, 2015

Jeffrey Gundlach, DoubleLine CEO,  Tells CNBC's Bob Pisani What He Think the Fed's Really Up To With Its Interest Rate Talk

Jeffrey Gundlach, DoubleLine CEO, Tells CNBC’s Bob Pisani What He Thinks the Fed Is Really Up To With Its Interest Rate Talk

The Federal Open Market Committee (FOMC) of the Federal Reserve will release its monetary policy statement at 2 p.m. today against a backdrop of extraordinary global events since its last statement on December 17. Since that time, deflationary forces have picked up steam in the 19-member Eurozone forcing the European Central Bank to announce a large scale quantitative easing program to buy up government bonds in the hope that the added liquidity will spike spending and inflation.

A political earthquake has also been unleashed by the Coalition of the Radical Left, known colloquially as Syriza, seating their candidate, Alexis Tsipras, as Prime Minister in Greece. The win came on a platform to end austerity and renegotiate the terms of the Greek bailout. This is causing spasms in stock and bond markets in Europe over concerns it could lead to Greece’s exit from the Euro or cause other debt-laden Eurozone members to ask for similar concessions.

Here at home, tremors have been picking up pace since the December FOMC meeting. Large corporations have been announcing big job cuts: American Express, 4000; Coca Cola, 1600 to 1800; IBM, at least 2000 with rumors suggesting the number is far higher; Schlumberger, 9000; Baker Hughes 7000; U.S. Steel 750.

Part of the downsizing problem is the global economic slowdown but another serious headwind for U.S. based multinational corporations is the strong U.S. dollar which has gained about 20 percent against other major currencies over the past eight months. A strong dollar hurts U.S. based multinationals’ earnings and can erode market share by making their products and services less competitively priced for consumers in foreign countries who are making their purchases in weaker currencies. U.S. companies which have already blamed the strong dollar for crimping earnings include Procter & Gamble, Pfizer, DuPont and Goodyear.

U.S. multinationals know they have the Fed to thank for the dollar’s strength. The Fed’s persistent chatter that it plans to raise interest rates later this year on the premise of improved economic conditions here at home has put a prop under the dollar and led much of the world to believe that the U.S. is back to its goldilocks economy – not too hot and not too cold. Neither Wall Street On Parade nor DoubleLine CEO Jeffrey Gundlach is buying that spin.

As we have previously noted, back on December 16, 2008, the FOMC correctly interpreted “declines in the prices of energy and other commodities” as a harbinger of “weaker prospects for economic activity.” Today, a 60 percent drop in oil prices in the span of seven months and sharp plunges in a broad range of other industrial commodities have incredibly failed to wake the Fed from its apparent stupor on what’s actually going on in the world. Unless, of course, the Fed is simply trying to reload its gun, as we suggested in October.

Yesterday, Jeffrey Gundlach added some weighty arguments to the above thesis in an interview with CNBC’s Bob Pisani during an investment conference in Hollywood, Florida. Gundlach had this to say:

Gundlach: “I think it’s obvious that the world is dealing with a deflationary situation. If you look at breakevens and TIPS versus the nominal market, across the globe, really. If you look at yield curves which flattened, across the globe, during 2014.  And you look at PriceStats, the internet-based transaction of prices daily, it’s at zero year over year. If you look at the dollar strengthening, that’s deflationary. If you look at commodity prices collapsing, really to multi-year lows, you wonder what they’re [the Fed] thinking about raising interest rates.

“They say something contradictory. This is part of the gibberish. They say their mandate is stable prices but they define stable as rising two percent per year. Which, last time I checked, was not the definition of stable. But, anyway, their goal is two percent a year – you haven’t been at two percent a year in like forever – and it’s going the other way.

“So what is the logic for raising short term interest rates? I think the logic is that they don’t like having no tools. So that when and if the economy rolls over, if you’re at zero at that time, you’re in a very bad situation.”

Evidence Grows Showing Wall Street as a Negative Economic Force

By Pam Martens and Russ Martens: January 27, 2015

Gallup Study on Negative Business Growth in U.S.Earlier this month, Jim Clifton, Chairman and CEO of Gallup, published a stunning indictment of Wall Street as a job creating engine. Clifton reported that the U.S. now ranks 12th among developed nations in business startups with countries such as Hungary and Italy having higher startup rates. Of equal concern writes Clifton, “American business deaths now outnumber business births.”

Clifton has a theory on why America’s crisis in creating new businesses is a well-kept secret. He writes:

“My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion.”

A key function of Wall Street is to bring promising new companies to market to ensure that the U.S. remains competitive in new industries and good jobs and innovation. This process is called Initial Public Offerings or IPOs. But the nation was put on notice as far back as 2001 that Wall Street was more snake oil salesman than the locomotive for new business launches. The largest investment banks were calling the startups they were peddling to the public on the Nasdaq stock market “dogs” and “crap” behind closed doors while lauding their virtues in publicly released “research” announcements.

Writing in the New York Times in 2001, Ron Chernow precisely analyzed how the Nasdaq stock market, Wall Street’s primary market for tech startups, had served the country. Chernow wrote:

“Concern has centered on the misery of small investors maimed in the tech wreckage. But what happened to all the money they squandered in the I.P.O.’s? Think of the stock market in recent years as a lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market has functioned as a vast, erratic mechanism for misallocating capital across America.”

At the time Chernow wrote those words, $4 trillion had been erased from the markets. At Nasdaq’s peak, set on March 10, 2000, it was at 5,048.62. Yesterday, the Nasdaq closed at 4,771.76. Our job creation engine has sputtered and backfired for a decade and a half without intervention from Congress or the White House. Wall Street investment banks are still allowed to write research reports on the same companies they are bringing to market despite the $4 trillion lesson that this is a flawed, corrupt system.

Just seven years after the Nasdaq crash, Wall Street collapsed the entire U.S. financial system and the nation’s economy. We are now entering the second leg of that economic collapse as deflation takes root in major industrialized nations around the globe, supply gluts proliferate on weak demand, and oil and industrial commodity prices collapse.

Wall Street brought us to the brink in 2008 through a corrupt system whose only function was to enrich its players at the nation’s expense. These are a few of the milestones in that journey:

  • Wall Street had insider knowledge that subprime loans were going to take down the housing market because Wall Street incentivized their employees to approve loans to people who were lying about their income and could not afford the mortgage payment;
  • After Wall Street created the bad mortgage loans, they sold loans they knew to be likely to default to Fannie Mae and Freddie Mac, having good reason to believe those firms would fail as a result;
  • Wall Street created Collateralized Debt Obligations (CDOs) because it could bury its exorbitant fees inside their complexities and bundle up all of its bad loans and sell them off to unwary pension funds and institutional investors;
  • The rating agencies entrusted with the critical role of providing honest ratings of these CDOs were corrupted by being paid for the ratings by the Wall Street firms. This pay to play system remains in place;
  • Wall Street had insider knowledge that many of these CDOs were ticking time bombs. To profit from this knowledge, Wall Street firms bought Credit Default Swaps on the CDOs, a form of insurance that would pay off when the CDO defaulted or rise in value as the credit worthiness of the CDO declined.  AIG sold this insurance through its AIG Financial Products division. When AIG failed, the U.S. government paid 100 cents on the dollar to Wall Street firms for the Credit Default Swaps they had purchased from AIG;
  • Wall Street looked around for other suckers to fleece – public school districts, towns, counties, cities and states. It knew that it was only a matter of time before its massive issuance of mortgages to people who could not afford them would blow up the housing market and create a long-term downturn, bringing rates to record lows, so it sold tens of billions of dollars of interest rate swaps to these public entities. The public entities would receive a variable rate tied to Libor; Wall Street would receive a higher, fixed rate.  Wall Street then proceeded to engage in a conspiracy to rig the Libor interest rate to its advantage.  Typically, the public entity ended up receiving a fraction of one percent in interest, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer. To get out of the deals, public entities have been forced to pay Wall Street tens of billions of dollars in termination fees, further fleecing the public purse.

Wall Street’s overarching function today is that of an institutionalized wealth transfer mechanism, propped up by compromised regulators and a dysfunctional Congress. As the PBS program Frontline reported in 2013, if your work career spans 50 years and you receive the historic return of 7 percent on stocks in your 401(k) plan, the 2 percent typical fee charged by Wall Street mutual funds will gobble up almost two-thirds of your account.

The Frontline program was called “The Retirement Gamble.” Wall Street On Parade checked the math and found this was not a gamble but a certainty: “under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam.”

All of these examples cited above are part and parcel of why the United States has the fourth most unequal income distribution in the developed world. That income inequality, according to the Organisation for Economic Co-Operation and Development (OECD) is dampening growth prospects. The OECD found in a study released in September of 2014 that “countries where income inequality is decreasing grow faster than those with rising inequality.” The study noted that in Italy, the U.K. and the United States, “the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened.”

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Radical Left Wins in Greece, Leaving the Koch Brothers in a Cold Sweat

By Pam Martens and Russ Martens: January 26, 2015

Alexis Tsipras, the New Prime Minister in Greece

Alexis Tsipras, the New Prime Minister in Greece

Just imagine what would happen in the United States, land of the billionaire Koch brothers’ well-heeled minions and their obsessive hysteria against the government helping those in need, if a political party called the Coalition of the Radical Left (Syriza is the Greek shorthand) took over the country in a landslide victory.

Even though it happened in Greece yesterday, not the United States, it is sure to provide plenty of fodder for the Kochs to incite fear in their ranks and ramp up campaign spending by billionaires heading into the 2016 U.S. election. Just this past Saturday, Charles Koch was warning his Ayn Rand-worshiping followers at their annual confab in Palm Springs, California that “Americans have taken an important step in slowing down the march toward collectivism.” In excerpts of his speech leaked to the media, Koch said his vision is one of a “society that maximizes peace, civility and well-being.”

Riverside County Sheriff Officers Guard the Entrance to a Rancho Mirage, California Luxury Resort Where the Koch Brothers Held their January 2011 Political Strategy Confab. Photo Courtesy of Michael Cline, ClineFoto.com

Riverside County Sheriff Officers Guard the Entrance to a Rancho Mirage, California Luxury Resort Where the Koch Brothers Held their January 2011 Political Strategy Confab. Photo Courtesy of Michael Cline, ClineFoto.com

The Koch brothers appear incapable of comprehending that their own ultra “well-being” and that of fellow billionaires is a wealth-stripping device that is impoverishing the rest of the country. As we previously reported, the Koch brothers’ combined wealth grew by $33 billion in a recent three-year span at a time when the U.S. Department of Education was reporting 1,065,794 homeless schoolchildren in the U.S., the highest number on record. Americans living in poverty according to the U.S. Census Bureau is 45.3 million while median income is 8 percent lower than in 2007 and only slightly above the level of 1995. Clearly, the billionaire approach to “well-being” isn’t working for the population at large.

The man who led Syriza to victory in Greece is Alexis Tsipras, a 40-year old veteran political activist. He has called what is happening in Greece a “silent humanitarian crisis” and, indeed, it is. As a result of the austerity program imposed by the terms of its bailout, Greece’s GDP has plunged 25 percent, unemployment is running at 26 percent, and almost a third of its population of 11 million is living below the poverty line.

Tsipras attracted even conservative voters by promising to renegotiate the punishing terms of the Greek bailout which many Greeks feel has stripped the country of its dignity and hope. Tsipras has promised a €2 billion program of social spending to include free electricity and food for several hundred thousand impoverished and hungry households, free medical care for the uninsured, boosting the minimum wage and rehiring public sector workers who were purged as part of the austerity program.

Those responsible for the crippling austerity are called the “troika” in Greece – the European Commission, European Central Bank and International Monetary Fund. After exit polls showed a strong win for his party, Tsipras told his supporters that “Greece is leaving behind the destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain.”

It is the charisma and popularity of Tsipras that has many on both sides of the Atlantic worried about a spreading leftist movement – underpinned by the harsh realities of unprecedented wealth inequality. A report released last week by Oxfam found that the richest one percent of people in the world own 48 percent of the wealth, while the richest 20 percent own all the wealth except for 5.5 percent which must be spread across the remaining 80 percent of the people in the world.

The web site of Syriza maps out its wide-ranging goals:

“SYRIZA insists strongly on its position that it will abolish the memoranda signed with the Troika of lenders when it assumes office and will re-negotiate the loans. At the same time it will promote a programme of social and economical reconstruction, aiming at development that promotes human needs and well-being and respects nature.

“Regarding foreign policy, SYRIZA fights for a multidimensional, pro-peace foreign policy for Greece, with no involvement in wars or military plans, a policy of independence and friendly peaceful cooperation with all countries, especially our neighbours.

“Together with the European Left Party, of which it is a very active member, SYRIZA is fighting for the re-foundation of Europe away from artificial divisions and cold-war alliance such as NATO. As for the E.U., SYRIZA denounces the dominant extreme neoliberal and euro-atlantic policies and believes that they must and can be transformed radically in the direction of a democratic, social, peaceful, ecological and feminist Europe, open to a socialist and democratic future. This is why SYRIZA is in favour of cooperation and coordinated action of left forces and social movements on a pan-European scale.  However, it does not hold euro-centric views and rejects the idea of an insulate ‘fortress Europe’.”

U.S. stocks, majority-owned by the wealthy elite around the world, sold off sharply at the opening of the markets this morning.

Seven Central Banks Take Anti-Deflationary Actions in Past Week

By Pam Martens and Russ Martens: January 22, 2015

Mario Draghi Speaking at the Press Conference on QE, January 22, 2015

Mario Draghi Speaking at the Press Conference on QE, January 22, 2015

The big story this week has not been news coming out of the widely covered World Economic Forum in Davos or the much anticipated bond-buying program in Europe known as QE. The big story is the sheer number of central banks moving into panic mode in the span of a week.

We may be forced to change the name of our web site to “Central Banks On Parade.” Since last Thursday, seven separate central banks have taken action to guard against deflationary forces now moving like an out of control wildfire around the globe. Central bank moves in Switzerland, Canada, Denmark and Peru came as a surprise to markets and may have had a secondary agenda of drawing some blood from speculators.

The most heavily anticipated announcement came today from Mario Draghi, President of the European Central Bank. At 2:30 p.m. Central European Time today, Draghi announced that the central bank will expand its current program of purchasing asset-backed securities and covered bonds by including the purchase of sovereign debt from its Eurozone members. The program will run from this March until September of 2016 with 60 billion euros in bonds being purchased each month. 

Yesterday, Canada’s central bank, the Bank of Canada, shocked markets by announcing it is lowering its target overnight rate by one-quarter of one percentage point to 3/4 percent. The central bank said the move comes in response to “the recent sharp drop in oil prices.” In a statement released at the time of the announcement, the bank stated:

“Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth. Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015…The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016.”

The Danish National Bank cut its deposit rate deeper into negative territory on Monday as speculators pour into the currency (Krone) in the belief that Denmark will have to abandon its peg to the Euro, following the same move by Switzerland last Thursday. Central banks can spend billions of dollars attempting to maintain such pegs. If the costs become too exorbitant as speculators pile in, the peg is at risk of abandonment. Monday’s action cut the deposit rate by 15 basis points to minus 0.2.

The Bank of Japan also announced this week that it will extend by a year two loan programs geared toward encouraging banks to broaden lending. One of the programs was increased by 3 trillion yen for a total of 10 trillion yen while eligibility was widened. The BOJ also announced that it will maintain its program of increasing its monetary base at an annual pace of $674 billion. The moves coincided with an announcement that the BOJ is cutting its core inflation forecast from 1.7 percent to 1 percent.

Centrals banks in Turkey and Peru also cut rates in the past seven days. On Tuesday of this week, Turkey’s Monetary Policy Committee cut its benchmark one-week repo rate to 7.75 percent from 8.25 while last week the Central Reserve Bank of Peru cut its reference rate by 25 basis points to 3.25 percent from 3.50, citing weak economic growth and the impact of lower oil prices.

The central bank move that has cost speculators most dearly was last Thursday’s decision by Switzerland’s central bank, the Swiss National Bank, to remove the 1.2 cap on the Swiss Franc’s peg to the Euro and allow the currency to float freely. The action came with no hint of warning and stunned currency markets. Global banks have admitted to losses of at least $400 million with billions more in losses coming at hedge funds and foreign currency brokers.

Why the Energy Selloff Is So Dangerous to the U.S. Economy

By Pam Martens and Russ Martens: January 21, 2015

Television pundits and business writers who are relentlessly pounding the table on how cheaper home heating oil and gas at the pump is going to provide a consumer windfall and ramp up economic activity have a simplistic view of how things work.

Oil-related companies in the U.S. now account for between 35 to 40 percent of all capital spending. Announcements of sharp cutbacks in capital spending and job reductions by these companies create big ripples, forcing related companies to trim their own budgets, revenue assumptions, and payrolls accordingly.

The announcements coming out of the oil patch are picking up steam and it’s not a pretty picture. Last week Schlumberger said it would eliminate 9,000 jobs, approximately 7 percent of its workforce, and trim capital spending by about $1 billion. Yesterday, Baker Hughes, the oilfield services company, announced 7,000 in job cuts, roughly 11 percent of its workforce, and expects the cuts to all come in the first quarter. Baker Hughes also announced a 20 percent reduction in capital spending. This morning, the BBC is reporting that BHP Billiton will cut 40 percent of its U.S. shale operations, reducing its number of rigs from 26 to 16 by the end of June.

When Big Oil cuts capital spending, we’re not talking about millions of dollars or even hundreds of millions of dollars; we’re talking billions. Last month, ConocoPhillips announced it had set its capital budget for 2015 at $13.5 billion, a reduction of 20 percent. Smaller players are also announcing serious cutbacks. Yesterday Bonanza Creek Energy said it would cut its capital spending by 36 to 38 percent.

Other big industrial companies in the U.S. are also impacted by the sharp slump in oil, which has shaved almost 60 percent off the price of crude in just six months. As the oil majors scale back, it reduces the need for steel pipes. U.S. Steel has announced that it will lay off approximately 750 workers at two of its pipe plants.

On January 15, the Federal Reserve Bank of Kansas City released a dire survey of what’s ahead in its “Fourth Quarter Energy Survey.” The survey found: “The future capital spending index fell sharply, from 40 to -59, as contacts expected oil prices to keep falling. Access to credit also weakened compared to the third quarter and a year ago.  Credit availability was expected to tighten further in the first half of 2015.” About half of the survey respondents said they were planning to cut spending by more than 20 percent while about one quarter of respondents expect cuts of 10 to 20 percent.

The impact of all of this retrenchment is not going unnoticed by sophisticated stock investors, as reflected in the major U.S. stock indices. On days when there is a notable plunge in the price of crude, the markets are following in lockstep during intraday trading. Yes, the broader stock averages continued to set new highs during the early months of the crude oil price decline in 2014 but that was likely due to the happy talk coming out of the Fed. It is also useful to recall that the Dow Jones Industrial Average traveled from 12,000 to 13,000 between March and May 2008 before entering a plunge that would take it into the 6500 range by March 2009.

Both the Federal Open Market Committee (FOMC) and Fed Chair Janet Yellen have assessed the plunge in oil prices as not of long duration. The December 17, 2014 statement from the FOMC and Yellen in her press conference the same day, characterized the collapse in energy prices as “transitory.” The FOMC statement said: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

If oil were the only industrial commodity collapsing in price, the Fed’s view might be more credible. Iron ore slumped 47 percent in 2014; copper has slumped to prices last seen during the height of the financial crisis in 2009. Other industrial commodities are also in decline.

A slowdown in both U.S. and global economic activity is also consistent with global interest rates on sovereign debt hitting historic lows as deflation takes root in a growing number of our trading partners. Despite the persistent chatter from the Fed that it plans to hike rates at some point this year, the yield on the U.S. 10-year Treasury note, a closely watched indicator of future economic activity, has been falling instead of rising. The 10-year Treasury has moved from a yield of 3 percent in January of last year to a yield of 1.79 percent this morning.

All of these indicators point to a global economy with far too much supply and too little demand from cash-strapped consumers. These are conditions completely consistent with a report out this week from Oxfam, which found the following:

“In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years.”

Crude Oil (WTI) Trading Versus the Dow Jones Industrial Average, December 1, 2014 Through January 12, 2015

Crude Oil (WTI) Trading Versus the Dow Jones Industrial Average, December 1, 2014 Through January 12, 2015