The Wall Street Examiner » Wall Street Examiner Exclusives http://wallstreetexaminer.com Get the facts. Thu, 31 Jul 2014 18:11:10 +0000 en-US hourly 1 Are Wages Really Rising or Has Wall Street Knee Jerk Media Missed The Story Again? http://wallstreetexaminer.com/2014/07/are-wages-really-rising-or-has-wall-street-knee-jerk-media-missed-the-story-again/ http://wallstreetexaminer.com/2014/07/are-wages-really-rising-or-has-wall-street-knee-jerk-media-missed-the-story-again/#comments Thu, 31 Jul 2014 18:06:26 +0000 http://wallstreetexaminer.com/?p=203677 The Wall Street-Washington, self congratulatory media echo chamber press release repeaters got all excited this morning about a bump in the seasonally adjusted headline number for the BLS employment cost index. That number rose by 0.7% on a quarter to quarter basis. The Wall Street economist crowd’s consensus guess was for an increase of 0.4%.

Seasonally adjusted numbers are fictional and subject to repeated after the fact revisions, so there’s really no way to know whether they accurately represent reality or not. The only way to do that is to do a little technical analysis on the actual, not seasonally adjusted data. That’s much easier than trying to analyze a number which does not exist in the real world and which will be changed several times as subsequent data becomes available.

The year over year gain in actual employment costs for all civilian workers was, are you ready for this–2%! That, indeed, is the highest it has been since 2011, when it spent the 2nd through 4th quarters rising at rates of 2-2.25%. Last year it never got above 1.9%. It’s a breakout! Or maybe not quite. This number is still within the same range of growth rates that it has been since the second quarter of 2010.

The gain, such as it was, was driven by gains of more than 2% in 6 major employment sectors. On the other hand, 4 broad sectors rose by less than 2%, and they can’t seem to get out of their own way. 3 of them have been wallowing below 2% since early 2011 and all 4 have been since early 2012.  Here’s a breakdown of the actual, not seasonally adjusted annual rate of gain by major sector.

Employment Cost Increases By Sector

Employment Cost Increases By Sector

Here’s how it looks on a graph.

Employment Costs By Sector- Click to enlarge

Employment Costs By Sector- Click to enlarge

Before you get all outraged about government workers leading the increases, note that they got screwed in 2011 and 2012, falling below private sector workers for more than a year. The current surge looks like catch-up for that time when they were not getting raises. At about 16% of the workforce the government sector may be big enough that had it not been for this apparently compensatory increase, the total aggregate number for all employees may not have made it to a new 2 year high.

Another notable factor is that the 5 sectors that rose less than 1.75% comprise more than half of all US workers. The majority of US workers are experiencing compensation increases that do not even keep up with CPI, which we know, in addition, to be understated. The standard of living of most Americans continues to decline. Just as a house divided against itself cannot stand, neither can an economy where nearly half of its actors are losing purchasing power. It steadily becomes a house more divided. It’s bad economically and bad for society.

Among the stronger sectors, Construction AND Extraction showed a gain of 2.1%. The problem there is that all of the gain is due to Extraction. Extraction means mining, and oil and gas production. Extraction is booming, while construction–not so much. In June, the BLS reported a year to year to year increase of 4.64% in average weekly earnings for mining and oil and gas extraction workers. But construction workers got virtually nothing, showing a gain of 0.24%. According to BLS data, there are approximately 850,000 employees in mining and oil and gas extraction. There are more than 6 million construction employees. How the BLS averaged those two together to come up with a 2.1% overall increase is beyond my ability to comprehend. I am the simple one.

So when you break these numbers down, recognizing the catching up of government workers which is probably temporary, and the likely overweighting of gains in mining and oil and gas extraction, that leaves just 4 sectors barely above a 2% increase.

One is Transport workers. They account for less than 3% of the US workforce. Their year to year increase is still below the peak levels of the past two years. The current uptick does not yet indicate that they’ve turned the corner.

Likewise those in another sector gaining more than 2%, Sales, saw an increase that remains well below the peaks of the past 2 years. Finally, managers and professionals and office and administrative workers have been flatlining at a 2% rate of increase for 2 years. There’s no breakout there either.

Looking at the 4 weaker sectors comprising the majority of US workers, the idea of a turn there is ludicrous.

Overall, private sector workers and those in education are not keeping pace with inflation, and the recent gains for non-education government workers could prove transitory. Considering the trends of the actual data in all of these major sectors, there’s no breakout here. The corner has not been turned. Overall employee compensation is probably still rising at a rate of less than 2%. That’s insufficient to keep up with inflation. It’s insufficient to prevent the majority of Americans from continuing to lose purchasing power. Eventually these trends will slow the US economy to a stall, followed by contraction.  Recent data suggests that the time until that happens is growing short. It may only be a few months, perhaps coinciding with the end of the QE intravenous drip into the patient’s veins.

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Beware! Jobless Claims Fall By 30,000, Continuing 10 Month String of Record Lows http://wallstreetexaminer.com/2014/07/beware-jobless-claims/ http://wallstreetexaminer.com/2014/07/beware-jobless-claims/#comments Thu, 31 Jul 2014 14:02:17 +0000 http://wallstreetexaminer.com/?p=203628 With yesterday’s 4% GDP print it’s becoming clear that the observation I had reported for several months that the US economy is overheated in key areas is starting to creep into mainstream consciousness.

When you pay attention to actual data, it’s easy to see the facts of what is happening on the ground well before mainstream economists and the Washington-Wall Street self congratulatory echo chamber of mainstream media press release repeaters. The clueless herd religiously follows the dumbed down seasonally adjusted headline numbers rather than actual data. Is it any wonder that they usually have no idea what’s actually happening in the US economy?

Today’s report on initial jobless claims continues the pattern of extreme readings that we’ve had our eyes on for 10 months. It set another record low for this week of the year, continuing a string of record lows that began in September of last year.

Another report released this morning suggested rising wage pressures, although that is probably skewed by the narrow segments of the labor market where skills are in short supply. Those wages are rising faster, but in the bulk of the economy where specialized skills are not required, wages are likely to remain stagnant because there’s still a massive pool of low skilled labor looking for work. As companies continue to cut workers, the oversupply of labor persists, lowering the market value of labor. These conditions are symptomatic of just how distorted the US economy is, thanks to the Fed’s QE and ZIRP, which reward speculation and financial manipulation at the expense of savings and real investment.

Today, the headline, seasonally adjusted (not actual) number for initial unemployment claims for the week ended July 26 was 302,000. That was 8,000 less than the consensus guess of Wall Street economists. The actual numbers, which the Wall Street captured media ignores, again show claims below the levels reached at the top of the housing/credit bubble in 2006. Since September 2013 when the number of claims first fell to a record low, the data has suggested that the central bank driven financial engineering/credit bubble has reached a dangerous juncture.

Initial Claims and Stock Prices- Click to enlarge

Initial Claims and Stock Prices- Click to enlarge

The actual number for this week is also below the number reached just before the top of the internet/tech bubble in 1999. That’s both in relative terms as a percentage of the workforce, and in absolute numbers. As a percentage of the workforce it’s less than the late July 2000 reading as well.

The headline number is seasonally adjusted (SA), therefore fictional. It may or may not give an accurate impression of reality, depending on the week.

Until the last several weeks, mainstream media press release repeaters, thanks to their focus on the SA imaginary numbers, have given little indication that by historical standards the numbers represented a danger sign. That has now changed. Ten months after the fact, the headline writers have  finally recognized the record levels, but the Wall Street Washington self congratulatory media echo chamber has presented that as positive, rather than the danger sign that it is.

The media repeaters are also incorrectly reporting that the numbers rose last week. In fact they fell, as they always do in the 4th week of July, but they fell less than usual. In the distorted world of mainstream economic press release repeaters, that’s an increase.

Here are the actual numbers.

According to the Department of Labor, “The advance number of actual initial claims under state programs, unadjusted, totaled 257,210 in the week ending July 26, a decrease of 29,839 (or -10.4 percent) from the previous week. The seasonal factors had expected a decrease of 49,885 (or -17.4 percent) from the previous week. There were 281,692 initial claims in the comparable week in 2013. ”

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

Actual initial unemployment claims were 8.7% lower than the same week a year ago. The normal range of the annual rate of change the past 3.5 years has mostly fluctuated between -5% and -15%. The current number is a continuation of the bubble trend.

The actual week to week change last week was a decrease of nearly 30,000. Decreases are normal for this week of July. The current number is not as strong as the average change for this week of a decline of 61,000. The comparable week last year saw a drop of 59,000. It will be a few weeks before we learn if this slippage is a sign that the worm is turning, or just a one week wonder.

New claims were 1,840 per million workers in June nonfarm payrolls. This compares with 1,965 per million in this week of 2007, which was when the housing bubble was on the verge of collapse, and 1,909 per million in the comparable week of 2006, right at the top of the bubble. In September 2013, this figure set a record low. In each ensuing week the numbers have remained at or near record levels. The current number is also less than the number hit during the same week of 2000 just before the tech bubble collapsed.

Initial Claims Per Million Workers- Click to enlarge

Initial Claims Per Million Workers- Click to enlarge

With record readings having persisted for 10 months, let’s just say that the actual numbers have given us fair warning that the Fed sponsored financial engineering bubble may not have much longer before it too begins to deflate. The numbers persisted at extreme levels at the tops of the last two bubbles for a year before the collapses got rolling. The foundations were already beginning to crumble by the time the first anniversary of record readings rolled around. We’re almost at that stage today.

Last week I asked what the Fed will do when overheated sectors of the US economy begin to cool. We’re likely to find out over the course of the next 12 months.

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Watch Not What Yellen Says, Watch What She Does http://wallstreetexaminer.com/2014/07/watch-not-what-yellen-says-watch-what-she-does/ http://wallstreetexaminer.com/2014/07/watch-not-what-yellen-says-watch-what-she-does/#comments Wed, 30 Jul 2014 15:58:45 +0000 http://wallstreetexaminer.com/?p=203521 Lee Adler discusses liquidity trends and translates Janet Yellen’s remarks in the wake of the last FOMC meeting in mid June 2014.

This video was originally posted for subscribers of Radio Free Wall Street on June 20, 2014. To see current videos in real time subscribe here.

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Oh Yeah, About That Con Con Con http://wallstreetexaminer.com/2014/07/oh-yeah-about-that-con-con-con/ http://wallstreetexaminer.com/2014/07/oh-yeah-about-that-con-con-con/#comments Tue, 29 Jul 2014 17:06:30 +0000 http://wallstreetexaminer.com/?p=203443 As usual, the Conference Board and all the major media press release repeaters put a positive spin on the highest reading of Consumer Confidence (aka the Con Con Con) since October 2007. None of the media echo chamber reports pointed out that October 2007 was the beginning of the worst bear market in US stocks since 1973-74. So I thought it important that the issue be given a little perspective (as I did recently with the Thompson Rhoiders Michigan Con Index).

First things first, the Con Con Con is an amalgamation of the results of two survey questions presented to “consumers” (aka real people). One question asks people how they view the current status of the economy, which is useful because most people are capable of seeing the present reasonably accurately. The other question is what they think conditions will be in 6 months, as if anybody knows the answer to that. While real people may be far better at answering that question than Wall Street and academic economists and media echo chamber pundits… I mean really… Ask a stupid question get a stupid answer. So then the Con Con Con takes the useful index of Present Conditions and combines it with a completely stupid index of what people think the future holds, and thereby creates a stupid and useless composite index.

Given that, let’s just focus on the one measure that might be meaningful, the Present Conditions index. The chart created by Briefing.com, with a little technical analysis and annotations added by yours truly, gives us that which is missing in the media echo chamber reporting… perspective. The graph speaks for itself. The long term trend is down. Note that the index is based on the average reading in 1985 being 100. The peak reading of around 185 was reached at the end of the tech bubble. Another peak around 140 was reached at the top of the housing bubble, when virtually everybody had a home equity ATM. The current reading remains below the 1985 average at about half the peak level.

Perspective on the Con Con Com - Click to enlarge

Perspective on the Con Con Com – Click to enlarge

The trend reflects the decline in standard of living that an increasing number of Americans have been experiencing for the past 15 years. After a 5 1/2 year rally in stocks and consumer attitudes, those attitudes are almost all the way back to the average 1985 level. Whoop de doo.

Aside from the fact that a house divided against itself cannot stand, and neither can an economy carried by a few people doing exceptionally well at the top of the wealth spectrum, the chart also shows that the current Con Con Con Present Conditions reading has reached the top of the long term trend channel. From the standpoint of technical analysis, this is a good reason to be cautious now, especially considering how far the stock market bubble and housing price bubble have progressed.

The Fed has driven these bubbles with QE and ZIRP. Pressured by its critics, both from without and within, the Fed has recently gotten cold feet, so it is slowly shutting down the money pump that has been inflating these asset bubbles, and allowed consumer attitudes to rebound back to the long term downtrend over the past 5 years.  Sentiment has now reached a level where a rollover in the present conditions reading at any time in the next few months could be an indication that the next great bear market is beginning, just as it signaled and coincided with the onset of the last two great bear markets. If this index does roll over from a third lower peak, an even greater decline in the US median standard of living could be forthcoming.

Conversely, a breakout in consumer attitudes could lead to the mother of all bubbles, bigger than the tech bubble of the late 90s and bigger than the housing bubble of the last decade. But can the markets continue their rampage without the Fed pumping cash into them?

The answer is yes and no. The facts behind that get a little technical. The Fed is not the only big central bank in the world, and all of the big 3 pump cash into the same pipelines.  I sort through those issues in my weekly analysis of central bank behavior as it impacts markets.

So, ladies and gentlemen, place your bets. Is this as good as it gets, or the threshold of a brave new world? This indicator should give us an indication one way or the other over the remainder of 2014.

Central bank behavior is the key to shading your bets correctly. The Wall Street Examiner Professional Edition lays out the facts for you.

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Housing Prices Did NOT Decline In May as Case Shiller Reported and Are Still Running Hot http://wallstreetexaminer.com/2014/07/housing-prices/ http://wallstreetexaminer.com/2014/07/housing-prices/#comments Tue, 29 Jul 2014 14:19:19 +0000 http://wallstreetexaminer.com/?p=203422 I won’t go into the specifics of the worst housing indicator in the world, released today and dutifully spewed by the world’s mainstream financial infomercial outlets. If you want to pick through that type of garbage, go read the Wall Street Journal or Bloomberg or watch CNBC. You can get the irrelevant and misleading data on US housing prices there.

Presented as a public service, here’s a review of a several housing price indicators which are timely and are not smoothed and lagged to the point of silliness as the Case Shiller Index is. They show that as of right now, the US housing price bubble continues to inflate, in spite of weak demand.

First let’s look at a couple of real time or near real time indicators of the housing trend, DepartmentofNumbers.com’s real time listing prices for late July, and Redfin’s real time contract prices from June. Before you complain that listing prices aren’t sale prices, the fact is that since this data has been published in 2006, the subsequently released lagging data on actual sale prices has shown that the trend of listing prices has been absolutely accurate in showing the direction of US housing prices in real time. Naturally, they are higher than sale prices, but they trend in the same direction and turn at the same points in time. The lagged data reported by various organizations differ in only one material respect. They’re lagged. Listings data is real time. It accurately shows what the market is doing right now, which is starting the usual seasonal second half pullback that begins every year in late summer, while continuing the powerful uptrend track it has been on.

US Home Sale Prices - Click to enlarge

US Home Sale Prices – Click to enlarge

The DepartmentofNumbers.com’s data represents real time listing prices collected from 54 of the largest markets in the US. Redfin collects all contract prices in real time in the 19 large markets it serves. Their sample is skewed by the fact that Redfin serves only large, active, desirable markets, and therefore it overstates price increases relative to the nation as a whole, but again, its direction has proven to be accurate. If the prices of 19 large, active markets are bubbling, that’s certainly sufficient to be a systemic problem even if the rest of the nation is increasing at a slower rate. The markets which Redfin serves are the leaders.

As of July 28, the median asking prices of houses for sale in 54 large US markets was 8.9% higher than a year ago. That’s modestly slower than a peak year to year gain of 11.4% in March, and slightly slower than the May level of +10.8%. The Case Shiller data released today, July 29, showed a similar year to year increase for “May.” It was actually the 3 month average contract price with a time midpoint of March. We had those figures in real time in March. They’re not news now. Do we care where the 3 month moving average of the Dow or the S&P was in March? It’s absurd to view US housing prices in that way. Yet the media continues to report this garbage as if it matters.

Making matters worse is that the month to month decline in prices that Case Shiller is showing for “May” due to its ridiculous methodology is simply not correct. Prices rose from April to May. Redfin showed a 2.9% month to month increase in May contract prices. DepartmentofNumbers.com showed a 2.6% increase in May listing prices. The National Association of Realtors showed a 5.2% increase in sale prices for all houses sold by Realtors in the US which closed in May. CoreLogic, which recently acquired the Case Shiller Index from S&P, even reported that its own housing price measure rose 1.4% in May based on closed sales and that contract prices rose 0.8% that month.

Any way you slice it, US housing prices did not decline in May. We may not know the actual rate of increase for the aggregate US market because different measures measure different slices of the market, but it’s pretty clear that the market remained red hot in May and it was still hot in June. There are indications that markets have cooled slightly in recent weeks, but they’re still plenty hot, even with the year to year decline in contract volume reported by the NAR. Thanks to the Fed’s subsidy of mortgage rates via ZIRP and QE, the US housing price bubble marches on, in spite of the weak demand.

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Pay No Attention To The Woman Behind The Curtain http://wallstreetexaminer.com/2014/07/pay-no-attention-to-the-woman-behind-the-curtain/ http://wallstreetexaminer.com/2014/07/pay-no-attention-to-the-woman-behind-the-curtain/#comments Sun, 27 Jul 2014 21:36:02 +0000 http://radiofreewallstreet.fm/?p=3691 Read more →

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This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Lee Adler explains why we don’t need a crystal ball to front run the Fed. No ball gazing or front running is required to see the top. Subscribers may click here to open or right click to download this video and play in your media player. Or click here for a lower resolution video.

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Lee Adler Explains Why The Top Is Almost Here http://wallstreetexaminer.com/2014/07/next-posting/ http://wallstreetexaminer.com/2014/07/next-posting/#comments Sat, 26 Jul 2014 12:22:59 +0000 http://radiofreewallstreet.fm/?p=3678

Lindsay Williams interviewed Lee Adler on Thursday, July 24. The next Radio Free Wall Street posting for subscribers will be on Sunday, July 27, 2014. See you then.

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What Will Fed Do When The Overheated Sectors Carrying US Economy Start Cooling? http://wallstreetexaminer.com/2014/07/what-will-fed-do-when-the-overheated-sectors-carrying-us-economy-start-cooling/ http://wallstreetexaminer.com/2014/07/what-will-fed-do-when-the-overheated-sectors-carrying-us-economy-start-cooling/#comments Thu, 24 Jul 2014 16:41:14 +0000 http://wallstreetexaminer.com/?p=203119 While some sectors of the US economy remain buried at or near depression levels and others are just so so, others are red hot. They are at record levels reaching or exceeding the levels hit at the tops of the housing bubble in 2006, and at the top of the internet bubble. For data that shows that, we need look no further than today’s release of initial jobless claims. They hit another record low for the latest reported week of July.

If the hot sectors of the US economy are driving the tepid growth in the overall economic picture, what happens if those hot sectors that are carrying the economy are stretched to their natural limits? How long can they continue to run at overheated levels? In the past, overheated sectors, or overheated economies or markets, would persist at those levels for a year or so before succumbing to the forces of correction. Once the correction set in, the unwinding of the excesses would impact many other sectors of the markets and the economy. The popping of the housing bubble and its aftermath are fresh in our memory.  We know how badly things can go.

The difference between now and then is that then interest rates were still at historically normal levels and central bankers had not yet pulled out their magic tools, now colloquially know as Quantitative Easing or QE. It’s essentially money printing at a massive scale. Mainstream economists and journalists, who never saw the bubble in the first place, now claim that QE gets credit for reversing the economic collapse that followed the bubble. Of course we will never know if that’s true, or if the US economy would have rebounded on its own as it had done in every economic panic that preceded the creation of the Fed in 1913. Mainstream pundits seem to forget about that fact, instead prefering to give credit to the great and powerful Oz–Ben Bernanke.

So here we are in 2014 with asset bubbles in stocks and fixed income securities, housing bubbles in most of the developed world as well as many US locales, and evidence of economic overextension in some of the economic data. The problem today is that as the natural forces of correction of the excesses take hold, the Fed’s only tool is QE, since interest rates are already at zero (ZIRP- Zero Interest Rate Policy).

The Fed is currently in the process of reducing QE to near zero. That will be reached by the end of the year. The Fed may be reluctant to re-institute QE very soon thereafter. It would look like panic and would send the message that the US economy is entirely dependent on the drug of eternal money printing. It would also run the risk of triggering commodity booms again as speculators scramble for money substitutes. Sharply rising input prices would be the last thing the US economy could tolerate. Being cognizant of that, the Fed is gradually turning off the monetary spigot.

Today, the headline, seasonally adjusted (not actual) number for initial unemployment claims for the week ended July 19 was 315,000. That was 7,000 more than the consensus guess of Wall Street economists. The actual numbers, which the Wall Street captured media ignores, again show claims below the levels reached at the top of the housing/credit bubble in 2006, a condition which has now persisted for 10 months. Since September 2013 when the number of claims first fell to a record low, the numbers have suggested that the central bank driven financial engineering/credit bubble has reached a dangerous juncture.

Initial Claims and Stock Prices- Click to enlarge

Initial Claims and Stock Prices- Click to enlarge

Make no mistake, this is a world record extreme. The actual number for this week is also below the number reached at the top of the internet/tech bubble in 2000. That’s both in relative terms as a percentage of the workforce, and in absolute numbers.

The headline number is seasonally adjusted (SA), therefore fictional. It may or may not give an accurate impression of reality, depending on the week. The manner in which the mainstream media reports the SA number gives little indication that by historical standards the numbers represent a danger sign.

No one is ringing alarm bells. Some have read the warnings I’ve posted here in previous months and ridiculed them. Bulls view this condition as a sign that the economy has reached “escape velocity.” Bears suggest that this is” as good as it gets.” I think it’s even more ominous.

According to the Department of Labor, “The advance number of actual initial claims under state programs, unadjusted, totaled 292,344 in the week ending July 19, a decrease of 78,215 (or -21.1 percent) from the previous week. The seasonal factors had expected a decrease of 58,477 (or -15.8 percent) from the previous week. There were 340,457 initial claims in the comparable week in 2013. ”

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

Actual initial unemployment claims were 14% lower than the same week a year ago. The normal range of the annual rate of change the past 3.5 years has mostly fluctuated between -5% and -15%. The current number is a continuation of the bubble trend.

The actual week to week change last week was a decrease of 78,000. Decreases are normal for this week of July. The current number is stronger than the average change for this week of a decline of 64,000. The comparable week last year saw a drop of 71,000.

New claims were 2,092 per million workers in June nonfarm payrolls. This compares with 2,144 per million in this week of 2007 and 2,120 per million in the comparable week of 2006, at the very top of the housing bubble. In September 2013, this figure set a record low. In each ensuing week the numbers have remained at or near record levels. The current number is also less than the number hit during the same week of 2000 at the top of the tech bubble.

Initial Claims Per Million Workers- Click to enlarge

Initial Claims Per Million Workers- Click to enlarge

A soft economy with high unemployment, but where hardly any workers are laid off each week suggests that employers are holding on to the workers they have with the skill sets they need because they cannot find those skills in the enormous pool of unemployed workers. The labor market of those with needed skills is tight. The recent surge in job openings shown by Janet Yellen’s favorite measure, the JOLTS Survey (Job Openings and Labor Turnover), supports that view.

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How The US Government Deliberately and Systematically Understates Inflation http://wallstreetexaminer.com/2014/07/us-government-deliberately-systematically-understates-inflation/ http://wallstreetexaminer.com/2014/07/us-government-deliberately-systematically-understates-inflation/#comments Wed, 23 Jul 2014 15:07:02 +0000 http://wallstreetexaminer.com/?p=201721 The US Government has been deliberately and systematically understating inflation since 1983. This video shows how the BLS does it.

This is a segment from the June 27 Radio Free Wall Street video for subscribers. The remainder of the program discusses why July could be rocky for stocks, and why real time data Federal tax revenues suggest that the financial engineering bubble should be near its peak. Subscribe to all of these cutting edge commentaries.

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Why ECBs Negative Interest On Reserves Is a Con Game That Can’t Work http://wallstreetexaminer.com/2014/07/why-ecbs-new-policy-is-a-con-game-that-wont-work/ http://wallstreetexaminer.com/2014/07/why-ecbs-new-policy-is-a-con-game-that-wont-work/#comments Sun, 20 Jul 2014 00:17:32 +0000 http://radiofreewallstreet.fm/?p=3517 This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

In this video, posted for Radio Free Wall Street subscribers on June 13, 2014,  Lee Adler shows why the ECBs new policy is a ridiculous con that won’t work to solve Europe’s economic problems. He reviewed the data (as of June 13, 2014) that suggests US stocks were still likely to make more new highs.

Transcript below

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Transcript

On June 6, the ECB announced that it would begin to charge interest at the rate of 10 basis points on deposits held at the central bank. The institution of the negative deposit rate has resulted in the universal misconception that this is supposed to spur banks to lend more to business by discouraging them from holding deposits at the central bank, as if this were somehow even possible, which it is not.

Deposits are created when the loans are made. That applies not only to central banks, but banks in general. Banks do not need central bank money to create loans. Banks can create loans, and money—deposits—out of thin air, subject to reserve requirements, which today are effectively zero. Loans create deposits. Deposits create reserves.

What happens when a central bank lends money to banks? It creates a deposit in the bank’s account at the central bank. On the one hand the loan becomes an asset of the central bank. On the other hand, the deposit that is created becomes a liability of the central bank. The two amounts are equal.

The immutable law of accounting, on any balance sheet, is that assets equal liabilities plus capital. In the case of the central bank, capital is essentially a fixed amount, therefore any increase in assets will result in an equal increase in liabilities when the central bank makes a loan to a bank. Conversely, when a bank repays a loan, the deposit is extinguished and money disappears.

A portion of the banking system’s balance sheet is therefore the mirror image of the central bank’s balance sheet. The banking system’s cash assets acquired as a result of loans made by the central bank can not be “withdrawn” from the central bank to make loans, nor do they need to be. The only way the banking system could withdraw those deposits would be to literally ask for truckloads of paper cash to be delivered to their own vaults. Needless to say, that’s not likely to happen, short of bank runs by depositors demanding cash from them.

The amounts of money on deposit at the ECB are immutable. They can be shifted from one liability category to another, such as from accounts known as “Current Accounts” to Deposit facility or Fixed Term Deposits. The first two will now charge 10 basis points to the holder. The Fixed Term Deposits which the ECB offers regularly still pay a nominal interest rate. So there will be increased demand for those as banks try to reduce their costs. But other than withdrawing paper cash, the banks can only reduce their deposits at the ECB one way. That’s to pay back the loans that created the deposits.

With the ECB now charging interest on deposits, lo and behold this week, that’s exactly what happened. The balance sheet shrank by €25 billion in the week ended June 6. That’s exactly the opposite of the ECB’s intent, but entirely predictable. [Note: Since then, through July 10 the ECB's balance sheet has shrunken by an additional €167 billion.

The ECB knew that that could happen, so simultaneously with charging 10 basis points interest on deposits it also reduced the interest rate on its weekly main refinancing operations (MRO) by 10 basis points. This results in an absolute wash in the banking system’s cost of funds over time as the new MROs at the lower rate replace outstanding MROs at the higher rate. [Note: The deposit became effective immediately on all existing deposits. The reduced loan cost applies only to new loans.]

The banking systems’ cost on funds obtained from the ECB equal the interest cost of the borrowed funds less any interest paid on the deposits created or plus any interest charged on deposits. The old loan interest rain was 25 basis points, and the resulting deposit at the central bank paid zero. The net cost to the banking system was 25 basis points. If the loan cost is reduced to 15 basis points and the deposit rate is increased to 10 basis points, the cost to the banking system is calculated

Interest on loan .15 + deposit cost -.10 = .25.

In other words, the cost of the funds equals the 15 basis points in interest on the loan plus the 10 basis points charge on the deposits for a total cost of funds of .25 basis points.

There’s no difference in the cost of the loans before and after. There’s no incentive to do anything, and in fact even if the cost were ten times as much it could not encourage banks to make more loans. Banks can create loans at will. They do not need central bank money to create loans. The issue is not the lack of willingness or ability of the banking system to make loans. The issue is the lack of qualified demand.

There are times when banks go insane and make loans to unqualified borrowers. We’ve just been through one of those periods. Chastened by the resulting collapse, most banks, in the interest of self preservation, have only been interested in making loans to qualified borrowers. What’s lacking today is qualified borrowers. Effective loan demand is weak, and there’s nothing the ECB can do about that.

The Fed knows that, so instead of voluntary lending programs, it resorts to outright securities purchases to inject funds into the system. While the ECB’s balance sheet keeps shrinking, the Fed, by forcing Primary Dealers to sell securities to it keeps growing its balance sheet and keeps forcing cash into the system. Since economic loan demand is far less than the amount of cash the Fed is forcing into the system, its actions only causes

The ECB can’t do that because it does not have a captive dealer system to force funds into the system. It also does not purchase government securities except on a limited and tortured basis to get around its own rules. To counter that problem it is now making plans to purchase asset backed securities. The ostensible purpose of that is to stimulate bank lending to businesses. But that can’t work without qualified borrowers for the banks to lend to. What it will do is further stimulate the worldwide asset bubble as the ECB buys more ABS than the banks can replace with new lending.

It would appear that the ECB is either stupid or insane if it believes these measures will work. But the ECB is neither stupid nor insane. These new policies are just a bluff, a con, an attempt to get the market to believe some kind of fantasy in the vain, stupid, and foolish hope that that will somehow stimulate the European economy. My guess is that it won’t work.

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ADDITIONAL NOTES

Charging interest on those deposits will not stimulate lending. There’s so much ignorance and misinformation being promulgated in the media and the blogging community about the ECB’s new program, it is stunning. Absolutely stunning. Apparently no journalists or bloggers understand the simplest basics of double entry accounting and the fact that there are two different balance sheets involved in central bank actions.

For each central bank action there is a debit and a credit on the books of the central bank, and a debit and a credit on the books of the banks. When a central bank lends to banks, that creates a cash asset on the banks’ ledger. Those assets are held as deposits at the central bank (or they can ask for and get vault cash- but they don’t because there’s insufficient demand for paper cash). Central banks can’t direct what banks do with the cash assets created on the banks’ balance sheet when the central bank makes a loan to them. The fact of whether it is paying interest on the deposits so created, or charging interest on them has zero impact on total money supply. There’s no sterilization.

Furthermore, unlike the Fed’s purchases from Primary Dealers, the ECB’s programs are voluntary. It cannot force banks to borrow money. OK, with the LTRO it “strongly encouraged” all banks to borrow the funds, look what happened when the involuntary holding period ended. Those funds were repaid lickety split. Some of the unneeded funds were clearly used to fund a US Treasury carry trade. As soon as the banks were allowed to begin repaying the LTRO after the mandatory one year holding period, look what happened. The Fed has had a voluntary lending program forever. It’s called the Discount Window. Nobody uses it.

ECB Balance Sheet and US Treasuries- Click to enlarge

ECB Balance Sheet and US Treasuries- Click to enlarge

Any strictly voluntary lending programs that are restricted to a specific purpose where there’s no profit incentive and no qualified borrowers for the banks to actually lend to, won’t be used.

The interest that the ECB will now charge on deposits is a direct offset to the reduced cost on the loans it has outstanding to the banks. It’s a wash transaction. Will the banks voluntarily increase lending because of that? Obviously not. Furthermore, you need qualified borrowers. You cannot force banks to lend money they know or strongly believe can’t be repaid.

It’s all a con, a shell game. And the nonsense about it in the media is truly frightening.

Banks do not need central bank cash to create loans. A loan creates its own cash and own reserve at the bank. With all the excess cash already on their books, the only constraints on lending is demand from qualified borrowers and bank capital. If capital/asset ratios are adequate banks can lend. Whether they will or not depends on qualified loan demand.

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