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“It’s Not The Economy; It’s The Central Banks, Stupid!”

"It’s Not The Economy; It’s The Central Banks, Stupid!"

Authored by Bill Blain via MorningPorridge.com,

“Who’s more foolish: the fool…

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"It's Not The Economy; It's The Central Banks, Stupid!"

Authored by Bill Blain via MorningPorridge.com,

“Who’s more foolish: the fool or the fool who follows him?

Central Banks have one real job: avoid inflation! It’s here, and the consequences will be devasting as conventional rate-hiking wisdom is used to fight a wholly exogenous supply side shock. There may be alternatives, but “credibility” is everything to Central Banks.

May the Fourth be with you! It’s Star Wars Day!

Which is kind of apt as the global economy feels like it’s about to do a Death Star impression: exploding in a fireball of incandescent fury… all because someone skimped on the design of a monetary policy exhaust vent… You know the rest…

Central Banks – Its all about Central Banks

It’s all about central banks this week. Today the Fed is set to raise rates by a “massive” 50 bp and announce plans to cut its balance sheet. Tomorrow the Bank of England might go full hog and also hike 50 bp (taking its benchmark rate to 1.25%, the highest since 2009) and announce its Quantitative Tightening Plans. (Forget the ECB for the time being…)

Lies ahead does pain and misery… said Yoda. It will get worse. If you think 1% UK rates will even scrape the sides of 8% plus inflation.. think again.

Central Banks have only one real job. (Forget all the gibberish about full employment or other such distractions.) They exist to protect economies from the ravages of Galloping Inflation.

Inflation is a dread economic disease that consumes empires, destroys nations, and turns sound economies to dust. Yet today, central bankers are hoping they can thread economies through the eye of a rising inflation storm, and inflate away the debt consequences of the last 14 years of monetary experimentation. (Simple bond market rule: inflation makes repaying long dated bonds simple.)

It’s going to be a rough ride. There are estimates energy, food and commodities supply instabilities will trigger double-digit inflation by Q3 – which could still accelerate sharply as supply distortions magnify. The likelihood is the global economy slips into recession.

Every 50 or so years, inflation returns. That seems to be an irrefutable rule of economic growth. As economies rise and fall in the boom and bust cycles we were once so familiar with, imbalances generate endogenous frictions sufficient to ignite inflation – price rises triggering wage demands, for instance.  Conventional wisdom says there is only one cure – stop the economy overheating by raising rates. It’s a blunt and imperfect tool, but inflation is not a laughing matter…. It needs to be addressed… robustly, say monetarist paladins.

While my city contemporaries are scaring their younger staff with tales of 14% interest rates and 19% mortgages, you can feel the whole economy shudder as folk contemplate the implications of higher rates on the value of their pensions and homes. The smarter ones are more worried about job security than at any time during the pandemic. I am terrified what it may mean for my family. I fear our economies lack the resilience we had back then.

Anyone with a modicum of understanding knows the crisis is coming. A monetary unravelling is about to occur that going to cost jobs, livelihoods and leave nations perhaps as economically damaged as Ukraine. It feels unavoidable. When it happens, the social consequences will be enormous – and I am seriously concerned about the ability of our “modern” economies like the UK to absorb the coming pressures.

Ken Rogoff, ex-IMF economist, is on the wires saying the Fed needs to hike up to 5% to avoid a perfect storm of recessions. (Anyone still using “perfect storm” should probably be shot for the crime of lazy metaphors.) Smarter minds than I say the risks have been allowed to build up by central banks who have been too timid to address inflation and implement appropriate policies – despite seeing this crisis approach.

That’s kind of unfair. Central Bankers are not bad people. They did what they could over the past 13 years – trying to stabilise the post Global Financial Crisis economy through a raft of unconventional monetary experimentation, policy choices the likes of which we’d never seen before. NIRP, ZIRP and QE (Negative Real Interest Rates, Zero Real Interest Rates and Quantitative Easing, since you were wondering) were all employed to stabilise the post GFC economy. Without them.. we’d have probably seen a wave of sovereign defaults, deep recession and increased banking failures causing industrial crisis. But there were consequences.

During the pandemic, Central Banks played their part with emergency rate cuts and a host of other emergency measures in conjunction with governments; from bounce back loans to furlough programmes. They saved the global economy from a Covid meltdown.

But monetary and fiscal interventions since 2008 have had massive consequences and created intense market distortions. They created the financial asset bubbles (that are now deflating) and have distorted the efficient allocation of capital by financial markets. By inflating the value of financial assets they made the rich richer, and the poor relatively poorer. The result has been widening income inequality.

We’ve always known that at some stage the distortions of monetary policy would need to be addressed and purged – but… is this really the time to try?

Conventional economists – the ones in positions of power in Central Banks and editing national newspapers – are prescribing a course of economic purgatives to address inflation though conventional higher rates. Such conventional policy will drive a wave of business failures, a bankruptcy quake, a redundancy shock, and financial retrenchment. It will be described by politicians as tough medicine, but we will be told it will mitigate inflation and unravel the systemic instabilities that have multiplied in the system as a result of post 2009 experimental monetary policy. It will be look profoundly unfair as the poorest in society will suffer most.

It will all be a bit: “To save the global economy, we had to destroy it..”

A few brave souls and economic free-thinkers have noted that current inflationary pressures have precious little to do with normal endogenous economic demand factors. The current tsunami of monetary inflation has everything to do with the current round of 3-Sigma exogenous supply shocks – soaring energy and food inflation triggered by the War in Ukraine, and supply chain breakdowns in the wake of Covid.

If the global economy could address previous exogenous shock like Covid with constructive monetary policy, why not this exogenous inflation shock? I read a great line from David Janny, a financial advisor at Morgan Stanley, whose stuff I try to read: “The Fed can’t print commodities but they can certainly could expedite a recession.”

Trying to treat an anaemic global economy on the verge of collapse though a course of bleeding, leeches and austerity fiscal programmes looks a recipe for social disaster. It hasn’t worked before. The consequences will be economic pain for millions of homeowners as mortgages soar, consumption plumets, unemployment trebles, while inflating away national debt. It’s a painful trade off.

So why are central banks going to do it? As I said above, they hope they can navigate this inflation storm, and use it to inflate away debt. It’s no secret national debt has ballooned since the GFC. UK Govt debt has risen from £1 trillion in 2010 to £2.3 trillion today.

Yet, the Bank of England currently holds £847 billion of Gilts – UK government debt. If they sell them into the market, that would create the expectation of a shocking and massive supply glut that will have one consequence – pushing up the yield on gilts to astronomical levels. It will mean the UK has to pay much, much more on any future gilt borrowing, severely curtailing the ability of the Government to fund its way through any further exogenous shocks – like war – through Gilt issuance.

So, let me once again propose a solution.

Every time the UK Treasury raises debt it does so by instructing the Debt Management Office to sell new Gilts. The DMO contacts the markets and sells them the new Gilts in the morning. Let’s say it’s a £10 bln issue. The £10 bln immediately appears on the balance sheet of the UK Treasury as a liability. In the afternoon, the same banks that bought the Gilts in the morning, sell them to The Bank of England (at a small mark-up, of course), where the new Gilts show up as an £10 bln asset on the Bank’s balance sheet.

Lightbulb moment: A liability on the Treasury balance sheet and an asset on the Bank’s balance sheet…. That is an accounting issue. It is easily solved. It does mean £10 bln new cash has been added to the economy. (That’s effectively exactly the same as what happens when you borrow £100 from a high street bank – it doesn’t have £100, it “magically” creates it…)

Since the current inflation shock is exogenous it doesn’t really matter that £10 bln has been added to the broad money in circulation. It would if the inflation shock was endogenous. Monetarist economists will be swearing at me at this point – they will not agree.

Why don’t the Treasury and the Bank simply write off the £847 bln of Gilts the Bank holds – via the simple expedient of the Treasury buying the Gilts back in return for a Zonk – a single penny sized coin bearing the Queen’s head and face value of £847 bln. It could be displayed in the Bank’s rather fine museum. It may have a notional value of £847 bln, but be worthless and priceless at the same time.

The UK’s national debt will then fall to a perfectly manageable level, allowing the country to combat this exogenous financial shock with supportive and appropriate policies.

But, of course it won’t happen. That’s because Central Banks care most about their credibility. No Central Bank would dare take such a radical step if it might cost credibility, on the basis that if a national central bank loses credibility, then the currency will collapse, triggering a further inflationary tidal wave and a loss of national prestige..

But.. I bet the Fed, the ECB and BOJ are all thinking about it..

Tyler Durden Wed, 05/04/2022 - 08:48

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Stock Market Today: Dow Jones, S&P 500 Edge Higher; Trip.com Stock Surges From China Covid Easing

Markets opened in the green today as they rebound from Monday’s losses.
The post Stock Market Today: Dow Jones, S&P 500 Edge Higher; Trip.com Stock…

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Stock Market Today Mid-Morning Updates

On Tuesday, the Dow Jones Industrial Average is up by 270 points as it followed modest losses on Wall Street. Investors are still weighing the risks of red-hot inflation as rates continue to rise. Aside from the U.S., European Central Bank Leader Christine Lagarde downplayed recession concerns in the eurozone, already being destabilized by Russia’s war on Ukraine. She also says that her team is ready to raise rates at a faster pace if needed, in order to combat inflation.

Shares of Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and Goldman Sachs (NYSE: GS) raised their dividends after passing their annual stress tests. For instance, Goldman Sachs is boosting its dividend payout by 25% to $2.50 per share. On the other hand, shares of Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) are up today after China announced that it will be easing Covid-19 quarantine rules for international arrivals.

Among the Dow Jones leaders, shares of Apple (NASDAQ: AAPL) are up by 0.13% today while Microsoft (NASDAQ: MSFT) is down by 0.79%. Meanwhile, Disney (NYSE: DIS) and Nike (NYSE: NKE) are trading mixed on Tuesday. Among the Dow financial leaders, Visa (NYSE: V) is up by 0.17% while JPMorgan Chase (NYSE: JPM) is also up by 1.67%

Shares of EV leader Tesla (NASDAQ: TSLA) are up by 0.83% on Tuesday. Rival EV companies like Rivian (NASDAQ: RIVN) are down by 0.17%. Lucid Group (NASDAQ: LCID) is down by 1.09% today as well. However, Chinese EV leaders like Nio (NYSE: NIO) and Xpeng Motors (NYSE: XPEV) are trading mixed today. 

Dow Jones Today: U.S. Treasury Yields Inches Higher; House Price Increases Slows Down In April 

Following the stock market opening on Tuesday, the S&P 500, Dow, and Nasdaq are trading higher at 0.68%, 0.89%, and 0.31% respectively. Among exchange-traded funds, the Nasdaq 100 tracker Invesco QQQ Trust (NASDAQ: QQQ) is up by 0.28% while the SPDR S&P 500 ETF (NYSEARCA: SPY) is also up by 0.67%. 

The benchmark 10-year U.S. Treasury yield currently hovers around 3.22% as the market continues to push against a bear market. Oil prices rallied for the third day today as major producers like Saudi Arabia looked unlikely to be able to boost output significantly. This comes as the West agreed to explore ways to cap the price of Russian oil. Brent crude, for instance, currently trades at around $116 per barrel.

Home prices increased slower than before in April and could be a potential sign of a cooling in prices. Diving in, prices rose by 20.4% nationally in April compared with a year earlier. This is according to the S&P CoreLogic Case-Shiller Index. For comparison, home prices increased by 20.6% year-over-year in March. Cities like Tampa, Miami, and Phoenix continue to lead the pack with the strongest price gains. Tampa home prices, for instance, are up by a whopping 35.8% year-over-year.

[Read More] Top Stock Market News For Today June 28, 2022 

Trip.com Stock Gains Following Better-Than-Expected Quarterly Performance On Travel Rebound; China Covid Easing

Trip.com Group (NASDAQ: TCOM) seems to be among the top gainers in the stock market now. Evidently, TCOM stock is now up by over 14% at the opening bell today. Overall, this likely stems from the company’s latest financial update. Getting straight into it, Trip.com reported a quarterly loss per share of $0.01. Furthermore, the company’s total quarterly revenue is $649 million. For reference, consensus figures on Wall Street are a loss per share of $0.08 on revenue of $575.04 million. With these commendable results, investors looking to bet on the return of travel would be considering TCOM stock.

According to Trip.com, the company has recovering travel demand in global markets to thank for its latest quarterly performance. In particular, Trip.com highlights a bump in activity from consumers across its Europe and Asia Pacific user bases. This, the company believes, is a result of easing travel restrictions amidst countries in these regions. Moreover, Trip.com also notes that staycation-related travel in China is another notable contributor to growth for the quarter. Accordingly, its local hotel bookings are now up by 20% year-over-year.

On the whole, travel firms like Trip.com continue to thrive as consumers book their vacations. For its latest quarter, the company’s air-ticket bookings on global platforms are now up by a whopping 270% year-over-year. As mentioned earlier, this is mainly led by a rebound in demand from its European and Asian Pacific operations. Looking forward, CEO Jane sun notes that Trip.com will “remain adaptive to embrace the changing environment and be flexible with our strategies to swiftly seize growth opportunities.” With all this in mind, I could understand if TCOM stock is turning some heads in the stock market today.

TCOM stock
Source: TradingView

[Read More] Best Oil Stocks To Buy Right Now? 5 For Your Late June 2022 Watchlist 

Occidental Petroleum On The Rise Following Latest Berkshire Hathaway Stake Increase

Meanwhile, the likes of Occidental Petroleum (NYSE: OXY) seem to be gaining attention in the stock market now. For the most part, this is likely a result of the latest regulatory filing from Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A). Namely, Berkshire disclosed a purchase of an additional 794,000 shares of Occidental. This adds up to a $44 million transaction, bringing its total stake to about 16.4%. In total, Berkshire currently holds about 153.5 million shares of OXY stock, worth $9 billion.

All in all, Buffett’s focus on Occidental would likely draw attention to the energy firm’s shares. This is apparent as OXY stock is currently gaining by over 6% in the stock market now. According to Berkshire’s filings since March, the company’s average purchase price per share of OXY stock is $53. Following this investment, Berkshire would be bolstering its position as Occidental’s largest stakeholder. In second place on this front is investment firm Vanguard with an almost 11% stake. As a result of all this, it would not surprise me to see OXY stock making the rounds in the stock market now.

OXY stock
Source: TradingView

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The post Stock Market Today: Dow Jones, S&P 500 Edge Higher; Trip.com Stock Surges From China Covid Easing appeared first on Stock Market News, Quotes, Charts and Financial Information | StockMarket.com.

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Economics

Soaring Inflation And Crashing Rates Are Sparking Trucking’s “Great Purge”

Soaring Inflation And Crashing Rates Are Sparking Trucking’s "Great Purge"

By Craig Fuller, CEO at FreightWaves

The last trucking market…

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Soaring Inflation And Crashing Rates Are Sparking Trucking's "Great Purge"

By Craig Fuller, CEO at FreightWaves

The last trucking market crash was in 2019. The current market could end up worse for small truckload fleets.

The freight market crash in 2019 was caused by two factors – a freight slowdown due to tariffs on Chinese imports and a surge of new fleets flooding the market, even as rates continued to fall. 

Until 2019, we had never seen that many new fleets enter the market, especially during a market downturn. During 2019 an average of 7,200 fleets entered the market per month compared to an average of 5,200 fleets per month during 2008-18. 

The 2019 drop in freight volumes wasn’t significant. At their deepest trough, tender volumes registered a 4.6% drop in year-over-year load requests, and that lasted for just a few short months (May-July).

Trucking is a commodity and anyone that has been around commodity markets understands that it doesn’t necessarily take a dramatic move on one side of the market to change the balance of supply/demand and cause significant price swings. 

In 2019, the trucking market already had too much capacity relative to demand. The year-over-year decline was only in the mid-single digits. But, it was enough to push rates below carriers’ operating costs.

Removing the cost of diesel from the spot rate, here is what the market looked like in 2019 (van per mile): 

  • Low: $1.51

  • Average: $1.59

  • High $1.75

We are nearing 2019’s rock-bottom, inflation-adjusted spot rates

Trucking companies have much higher operating costs now than they did in 2019, even when removing fuel from the number. Every fleet’s operating cost will be different, but using data from TCA, ACT, and FreightWaves’ own analysis, we can draw some conclusions about the cost increases that a fleet would experience in 2022 compared to 2019. 

Assuming a fleet averages 6,500 miles per truck per month and purchased a four-year-old used truck in 2019 at $50,000, plus sales tax, financed for five years at 5% interest, the monthly payment would cost around $0.15/mile. With used truck prices surging during the pandemic, a four-year-old used truck last fall would run $77,000. If the vehicle was financed with similar terms, the per mile cost would be around $0.23/mile.   

A driver employee with experience working for a top-paying fleet can expect to make around $0.62/mile. In 2019, the same driver would have made around $0.47/mile. 

Higher variable operating costs include insurance (+$.02/mile), maintenance (+$.06/mile), equipment (+$.08/mile) and driver wages (+$.15/mile).

All in, variable costs have increased at least $0.31/mile more for fleet operators in 2022 compared to 2019. These numbers are likely understated, as they don’t include increases related to back-office operations and support staff, which can vary widely among fleets. 

Adjusting the 2019 numbers, the rates per mile total: 

  • $1.82 (low) 

  • $1.90 (average)

  • $2.16 (high)

The current spot rate (net fuel) is $1.95/mile. On a variable cost-adjusted basis, the trucking spot rates have matched 2019 since May 2022 – $2.16/mile, dropping $0.21/mile. It’s likely to get worse. The month of May typically has among the highest rates we’ll see all year, with July and August being some of the weakest months. 

It is conceivable that spot rates will drop below the inflation-adjusted 2019 low of $1.82 per mile in July, since there doesn’t seem to be any near-term market catalysts to drive additional demand. 

U.S.- bound container volumes, which have been driving a substantial amount of the freight surge in the U.S. trucking market since 2020, are seeing a significant drop, as reported by Henry Byers, FreightWaves’ senior global trade analyst.  

There are also the economic challenges that are apparent in the economy, including record-low consumer confidence, declining construction and industrial activity, surging inflation, and a Federal Reserve that is determined to slow the economy down to tame inflation, even if it means putting the economy into a recession. 

All of this means that the freight market will likely encounter additional headwinds and there are more reasons to believe that trucking spot rates have further to fall.

Capacity matters

Of course, trucking is a two-sided market. Demand is only one part of the equation; capacity also matters. 

Capacity is really just a function of how much dispatchable capacity is in the market. Like 2019, the trucking industry has seen a record number of new entrants enter the trucking market to take advantage of what were strong market conditions and record high spot rates created because of government stimulus over the past two years. The number of new entrants into the trucking industry nearly doubled the 2019 monthly record average. Since 2020, the monthly average of new fleets entering trucking has increased to 13,370 per month, up from 7,200. In April, the number hit 23,479. 

This large number of new entrants means that the trucking industry has many companies that are brand new, have higher cost structures (because they joined when the freight market was peaking) and that have never experienced a downturn. 

This massive surge of dispatchable capacity was built for a market that had much more freight activity. If the economy contracts further, it could spell disaster for many of the most vulnerable operators.

The summer doldrums

Even if the economy doesn’t contract, July and August are always slower than June. It is the time of the year when supply chains take a break and get ready for the retail surges that typically begin after Labor Day. 

The retail surge is a really important part of the freight calendar and often offers some of the highest spot rate opportunities. In the first half of the year construction, auto, beverages, and fresh produce drive the surges in trucking. 

In the second half of the year, surges are caused by retailers scrambling to get inventories placed for the holiday shopping season. That may not happen this year, with many retailers’ inventories overstocked. Since their warehouses and distribution centers are full, they are reluctant to add additional inventory to their supply chain and will focus their efforts on liquidating what they currently have in stock.

Trucking spot rates will not increase significantly until the Great Purge is over

As long as the market has excess capacity, freight rates will remain depressed. It will take a substantial purge of capacity before spot market carriers can expect relief. 

FreightWaves editorial director Rachel Premack covered this topic last week in her article titled “the Great Purge.”

The unfortunate reality of trucking is that the market is often “feast or famine” and with so many new mouths to feed, the famine this year could be much worse than was experienced in 2019. 

Tyler Durden Tue, 06/28/2022 - 10:20

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Economics

CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment

CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment
PR Newswire
NEW YORK, June 28, 2022

NEW YORK, June 28, 2022 /PRNewswire/ — Today, CED released the fourth and final installment of its unique 2022 series that ana…

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CED Releases Report on Using Census Bureau Data to Boost Child Care & Employment

PR Newswire

NEW YORK, June 28, 2022 /PRNewswire/ -- Today, CED released the fourth and final installment of its unique 2022 series that analyzes the role of paid child care in the economy—including its impact on labor force participation. The new report serves not only as a road map for researchers to build on CED's findings. The report is also useful to policymakers as they consider key questions related to the use of paid child care—especially for women—and its connection to the workforce and economic growth.

Specifically, the new report details how researchers can effectively leverage the underlying data from the Census Bureau's Current Population Survey (CPS), which CED used as the basis for its report series about paid child care. As detailed in the primer, the CPS is a monthly survey of US households jointly sponsored by the Census Bureau and the Bureau of Labor Statistics. As part of its Annual Social and Economic Supplement (ASEC), the survey includes questions about the use of paid child care since 2001 and about such expenditures since 2010.

"Our work uncovered several groundbreaking insights, including that boosting women's labor force participation by one percent—which more paid child care could help achieve—would generate nearly $73 billion of additional income for women," said Dr. Lori Esposito Murray, President of CED. "CED's series examines data more extensively and over a long a time period than any previous work. This fourth and latest report provides a foundation for the research community to discover additional insights, which will help inform public policies that generate more prosperity for the nation's families and the economy more broadly."

The report, The Economic Role of Paid Child Care in the U.S., Part 4: Child Care Data in the Current Population Survey, a Primer, covers five key aspects of the CPS data:

  • The design of the CPS and its Annual Social and Economic Supplement;
  • What specific data the survey captures;
  • The sources from which that data comes;
  • Best practices for using the data; and
  • Likely technical issues which come with the data and how to handle them

The series is the first deep analysis of paid child care usage mined from the CPS data. Findings highlighted from the first three installments in the series include:

  • A high price tag: In 2020, the average income of families using paid child care was $149,926.
  • COVID-19's impact on participation: From 2019 to 2020, children in paid child care dropped by nearly 20 percent.
  • The primary drivers of paid child care usage are labor force attachment, household income, and educational attainment.
  • Despite declining labor force attachment across all genders, men participate in the labor force at a higher rate than women.
  • Paid child care usage is directly impacted by maternal labor force participation trends.
  • A one percent increase in the labor force participation of women ages 18-54 would produce multiple economic benefits, including an additional income of approximately $73 billion.
  • Short-term changes in paid child care correspond with three key factors: labor force participation, actual hiring of mothers, and increased income.
  • Long-term changes in paid child care correspond with three different key factors: maternal labor force, real income, and the overall total of the male and female labor force.

The prior three reports as part of this series focus on 1) the link between paid child care and income; 2) the link between child care access and mothers' workforce participation; and 3) the economic benefits of increasing women's participation in the labor force. More information on the series, which was produced with funding from the W.K. Kellogg Foundation, can be found here.

About CED

The Committee for Economic Development (CED) is the public policy center of The Conference Board. The nonprofit, nonpartisan, business-led organization delivers well-researched analysis and reasoned solutions in the nation's interest. CED Trustees are chief executive officers and key executives of leading US companies who bring their unique experience to address today's pressing policy issues. Collectively they represent 30+ industries, over a trillion dollars in revenue, and over 4 million employees. www.ced.org 

About The Conference Board

The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

 

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SOURCE Committee for Economic Development of The Conference Board (CED)

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