The Disturbing Rise Of Modern Monetary Theory (MMT)
by Zero Hedge - January 21st, 2019 8:20 pm
Courtesy of ZeroHedge. View original post here.
Authored by Mark Jeftovic via Guerilla-Capitalism.com,
Lately, we’ve suddenly been hearing a lot about Modern Monetary Theory (“MMT”) in the mainstream media. It could be that with the election of Alexandra Ocasio-Cortez to congress, MMT’s star will rise with hers as she is reportedly an adherent and possibly views MMT as a means to fund her Green New Deal.
As we see below, MMT has been around for some time, having come out of the Chartalism school in the first half of the 1900’s and was made into MMT in the early 90’s by Warren Mosler, apparently after a “long steam” with Donny Rumsfeld, who then referred him to Art Laffer (creator of the Laffer Curve). MMT mostly flew under the radar until around the time of the Global Financial Crisis and is now clearly spiking into public awareness.
To the casual onlooker, MMT may sound a lot like standard-issue Keynesianism, the idea that the Government can and should run deficits to smooth out the business cycle.
The big difference is this: Keynesians believe that the deficits should be run to stimulate our way out of a recession or financial crisis, after which there will be some kind of return to normalcy, when deficits will matter again .
To MMT-ers there is no return to normalcy, this is the The New Normal. Deficits don’t matter, the Government can’t go broke because they can issue money in any amount required. We’ll look at how they rationalize this below, but suffice it to say now that Keynesians and MMT-ers are not synonymous and even Paul Krugman has had his criticisms of it:
it would be quite likely that the money-financed deficit would lead to hyperinflation.
The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with
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What Happens When The Fed Stops Hiking
by Zero Hedge - January 21st, 2019 7:55 pm
Courtesy of ZeroHedge. View original post here.
As we explained last weekend, it’s not the Fed tightening – and curve flattening – that is the recession catalyst: it is when the Fed begins cutting rates, sending the yield curve sharply higher, that one should be worried as all three prior recessions followed within 3 months of the first rate cut after a hiking cycle:
This is a critical distinction at a time when the Fed is contemplating not only ending its rate hike cycle – and thus curve flattening impulse – but potentially cutting rates, at least if it agrees with the market, so soon as late 2019, which in turn would prompt a sharp spike in the yield curve and, as we argued in our post explaining why the Fed is trapped, catalyze the next recession.
To be sure, nothing is set in stone, and as Goldman strategist Ian Wright writes, much focus remains on the state of US growth, the ongoing US-China trader war, the US government shutdown, and Brexit, each of which could tip the Fed’s hand. And yet, amid this uncertain backdrop, recent weeks have been good for risky assets. Oil has risen sharply, with GSCI Energy now up 16% on the year. Credit has also rallied – especially on a risk-adjusted basis – and undone almost all of its December spread widening, in both IG and HY, and USD and EUR markets. Last but not least, the S&P 500 is up 14% since the Steve Mnuchin called the Plunge Protection team on December 24 (and since the government shutdown).
Sarcasm aside, the recent risk was largely the result of Powell’s abrupt dovish reversal and has been supported by the abatement of concerns about central banks hiking rates. In the past month, markets have priced both the Fed and ECB more dovishly in the coming year, with no hikes priced for the Fed in 2019 and a first ECB hike priced only in 2020 (notably, 10-year yields have risen amid the recent risk-on, as the correlation between stocks and bonds which recently shocked market watchers when it inverted, appears to be normalizing somewhat).
Meanwhile, as the Goldman strategist writes, even as the bank’s economists’ view remains that the Fed will hike again in June, followed by December, the bank’s clients have asked “if…
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“We Come Not To Praise Indexing, But To…”
by Zero Hedge - January 21st, 2019 7:30 pm
Courtesy of ZeroHedge. View original post here.
Jack Bogle’s passing is a timely reason to spend a moment considering the growth of index-based investing, an approach he spent much of his professional life promoting with great success. Like many of you, we have watched indexing go from curiosity (in the 1980s) to limited acceptance (the 1990s) to widespread adoption (now). In terms of his impact on capital markets, Mr. Bogle has few peers in this or any century.
As far as what we can add to a discussion of index-based investing, we have three points to share with you today:
#1. Indexing’s rise – especially in US equity markets – over the past 20 years was not just a function of its low cost structure or notional simplicity.Rather, long run returns declined precipitously over the period. This left asset owners scrambling for ways to maintain equity exposure without paying active manager fees.
Some data to back this up:
- Over the 20 years from 1980 to 1999, the S&P 500 compounded at an annual rate of 17.7%. If you had invested $100 at the start of this period, you would have come out the other end with $2,600.
Now, if you paid an active manager 1-2%/year to invest in US equities over this period and they kept pace with the S&P, your returns would have been 5-11% lower than simply buying the index.
- Over the 20 years from 1999 to 2018, the S&P only compounded at an annual rate of 5.6%. Instead of seeing $2,600 from a starting $100 investment (as with the prior point), at the end of 2018 you would only have $296.
Paying an active manager 1-2%/year over the last 2 decades would have cut your returns by 18 – 36%. A good deal more than 5-11%, in other words.
The upshot here is that indexing didn’t damage the active management business (as critics often claim) as much as structurally lower US equity returns pushed asset owners to lower cost solutions like index funds. Mr. Bogle and other indexers caughtthis wave beautifully, but they did not create it.
#2. While the rise of “passive” indexing has caused increasing concern that it makes societal asset allocation less efficient, other “active” approaches to capital investment have grown dramatically as well. Consider:
- McKinsey estimates the
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Feds Prepare To Bail Out “Vast Majority” Of 90,000 Sears Pensions
by Zero Hedge - January 21st, 2019 7:05 pm
Courtesy of ZeroHedge. View original post here.
The Pension Benefit Guaranty Corp (PBGC) said in a Friday press release that it believes Sears Holdings Corp’s “continuation of the plans is no longer possible” following the Company’s October bankruptcy, after it was revealed in a Friday filing that Chairman Eddie Lampert’s $5.2 billion rescue package does not include pension plans.
PBGC, a government agency, covers individuals’ pensions in the event a pension plan shuts down without sufficient funding to meet its obligations. The Sears pension system, meanwhile, is underfunded to the tune of approximately $1.4 billion, which the agency could attempt to recover through the bankruptcy, according to MSN.
It should be noted that the PBGC is not supported by general tax revenues, rather, funding comes from four sources; insurance premiums paid by sponsors of defined benefit pension plans; assets held within the pension that PBGC takes control of; recoveries of unfunded pension liabilities from the bankruptcy estates of plan sponsors, and investment income. Sears entered into a five-year protection plan with the PBGC in 2016.
Ron Olbrysh, chairman of the National Association of Retired Sears Employees, said the guarantee means retirees aren’t worried about losing pensions, but they do have concerns about other benefits.
“The pensions are secure through Sears or through the Pension Benefit Guaranty Corp.,” he said. “The big impact if Sears does liquidate is that retirees will lose life insurance.“
The PBGC said it expects its guarantee will cover the “vast majority” of pension benefits earned under Sears’ plans. Retirees who have questions about what the takeover would mean for their pensions can visit www.pbgc.gov/Sears-QA. -MSN
Until Sears agrees to terminate the pensions or the court orders them to do so, the Hoffman Estates-based retail giant will remain responsible for the plans, which the agency is looking to assume control of as of January 31.
Lampert – then the company’s CEO, wrote in a September blog post that the company’s pension obligations had become a major sticking point.
In addition to the very difficult retail environment, Sears has also been significantly impacted by its long-term pension obligations. In the last five years, we contributed almost $2 billion, and since 2005 we have contributed over $4.5 billion, to fund our Pension Plans.
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The reality is that, while we strongly believe in our vision and our strategy for
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Demographic Catastrophe: China’s Birth Rate Falls To Historic Low
by Zero Hedge - January 21st, 2019 6:15 pm
Courtesy of ZeroHedge. View original post here.
Over the weekend, China’s statistics bureau announced a significant dip in the country’s birth rate with the number of babies born in China last year falling by 2 million to the lowest annual rate since the country was founded in 1949, despite Beijing’s recent attempts to encourage couples to have more children.
In 2016, China partially ended its one-child policy to allow couples to have two children, but as we warned repeatedly since then, the policy has done done little to spur population growth as rising living costs weigh on couples considering a child.
In numbers (via DW):
- The birth rate in 2018 dropped to 10.94 per thousand, down from 12.43 the previous year.
- The number of babies born in 2018 dropped by 2 million compared to the previous year to 15.23 million.
- The birth rate is the lowest since 1949.
- China’s population is nearly 1.4 billion.
Commenting on China’s demographic collapse, Wang Feng, a sociology professor at the University of California, Irving, said: “Decades of social and economic transformations have prepared an entirely new generation in China, for whom marriage and childbearing no longer have the importance they once did for their parents’ generation.”
Cited by DW, Beijing officer worker Mina Cai said: “Many of us grew up as only children and we’re a little selfish about putting our own satisfaction above having kids.”
Independent Chinese demographer He Yahu echoed these concerns when he said: “The low birth rate has led to a seriously ageing population. On one hand, families are getting smaller, reducing support for the elderly; on the other hand, the elderly population to workforce is growing, which increases the burden on the working population.”
As we reported at the time, China surprised the world three years ago when it announced the end of its one-child policy, which limited many families from having more than one child. The policy was criticized for giving rise to forced abortions and sterilizations, for encouraging couples to try to have boys rather than girls and for catalyzing China’s sharp decline in births.
China’s new civil code is set to be unveiled in 2020, with all mentions of “family planning” removed from the text, according to media reports. Observers suggest it could mean Beijing will be lifting limitations on family sizes introduced in…
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GMO Warns “…Own As Little US Equity As Your Career Risk Allows”
by Zero Hedge - January 21st, 2019 5:50 pm
Courtesy of ZeroHedge. View original post here.
Authored by Martin Tarlie via GMO,
Key Points
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A new model suggests that from early 2017 through much of 2018, the U.S. stock market was a bubble.
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Driven by negative changes in sentiment, the bubble started to deflate in the fourth quarter of 2018, in spite of strong fundamentals.
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Our advice, consistent with our portfolio positions established in Q1 2018 – as usual, we were early – is to own as little U.S. equity as your career risk allows.
Introduction
In the fourth quarter of 2018, the S&P 500 fell almost 14%. This large price drop occurred in spite of a strong fundamental backdrop. Earnings per share (EPS) for 2018, much of it already locked in, is expected to be about $140, a 28% increase over 2017. And expectations for 2019 are for EPS of about $156, a 12% annual increase. With fundamentals so good, what explains the recent price action?
A new model – the Bubble Model – explains this dichotomy between price action and fundamentals by suggesting that a bubble in the U.S. stock market started inflating in early 2017, and continued to inflate through the third quarter of 2018. In the fourth quarter, however, indications were that the bubble had started to deflate.
And when bubbles deflate, they generally do so with a volatility bang. In this new model, bubbles are prone to form when times are good and expected to get even better. Good times today and even better times ahead are reflected in high valuations and solid fundamentals that continue to improve. Improving fundamentals lead to positive changes in sentiment, and these positive changes in sentiment fuel the bubble.
However, sentiment cannot increase forever. When change in sentiment – not level – inevitably turns negative as hopes of even better times ahead are dashed, there is nothing left to fuel the bubble…
While there are indications that the bubble started to deflate in the fourth quarter of 2018, and the magnitude of both price action and the change in the quantitative measure of euphoria that defines the Bubble Model suggest that the odds are now tilted in favor of the view that this is the beginning of the end of the bubble, we would be well-advised to remember Yogi Berra’s counsel that…
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There Will Be Blood: The Future Of Asset Management
by Zero Hedge - January 21st, 2019 5:00 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Three Body Capital,
TL;DR
The rise of passive and ETF investing is turning up the heat on active managers. Change is coming to our industry, and those that fail to adapt will fade into obscurity.
The old business was highly intermediated and lucrative, while the tokenised future is likely to be far less commercially attractive and unable to support the behemoths in their current form.
Despite the doom and gloom, we believe active management can generate compelling returns for investors and survive the impending upheaval that looks set to turn our entire industry upside down.
The elephant in the room
Asset management in its current form still looks much like it did back in the 80s, or even earlier. Asset managers aggregate investor funds and deploy capital in search of investment returns, seeking to identify mispricing in the market. The ascent of passive and ETF investing has turned the table on active managers, especially in terms of fees. Here at Three Body Capital, we’re still in this line of business because we believe it can generate compelling returns for investors. And we believe it will survive the impending upheaval that looks set to disrupt our entire industry.
While other industries have experienced profound structural disruption, financial services have stayed largely the same. Asset managers still employ complex fund/manager structures (e.g. Cayman domicile with a Delaware feeder, Malta, BVI, Bermuda, Jersey etc), with a large chunk of active management fees effectively diverted to the likes of fund administrators, custodians, exchanges, brokers and service providers fulfilling a range of regulatory and administrative functions.
The hurdles to entry into the asset management industry are high, which is why large managers get bigger and small upstart managers struggle to gain traction. Case in point: BNY Mellon, one of the largest custodian banks and asset managers in the world, has about US$1.8tn of assets under management and US$35.4tn of assets under custody. Asset management is profitable at around 28% pre-tax margin, but its custodial/services business generates almost 35% pre-tax margin, represents almost 55% of its US$13bn of non-interest income, and 44% of US$17bn of total revenues.
Custody, clearing, settlement and other issuer services are big business. Add to that expansive regulation and the need for more compliance and supervisory oversight in the years since the crisis of…
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11 Dead After 2 Ships Catch Fire In Kerch Strait, One “Struck By A Blast”
by Zero Hedge - January 21st, 2019 2:05 pm
Courtesy of ZeroHedge. View original post here.
At least 11 sailors have died after two ships caught fire while moving through the Kerch Strait separating Crimea from mainland Russia – the location of the latest escalation in tensions between Russia and Ukraine in November - after one of them was apparently rocked by an explosion the Russian Maritime Agency said. One vessel was "allegedly struck by a blast" RT reported, which caused the fire that then spilled over to another ship, an official with the Russian Maritime and River Transport Agency said.
Clouds of black smoke could be seen billowing over a vessel engulfed by a blaze on YouTube footage, which shows the scene of the incident. Another ship can be seen floating nearby.
The fire reportedly broke out as the two ships were transferring fuel from one to the other. According to RT, approximately three dozen sailors managed to escape the burning ships by jumping into the sea but at least 11 people died in the incident and 12 have so far been rescued from the sea.
The crews of the affected ships included Turkish and Indian nationals, the emergency services said, adding that there were no Russian sailors. Turkey confirmed that 16 of its citizens were aboard the affected vessels.
Emergency services said that between eight and ten ships have been sent to the rescue and are picking up the sailors. The explosion might have been caused by a safety rules violation during the fuel transfer, according to some reports.
One of the ships was a liquefied natural gas carrier and another one was a tanker; both vessels were flying Tanzanian flags.
According to the director of the Crimean Sea Ports, the maritime traffic through the strait was not affected by the incident and navigation across Kerch remains open.
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Martin Luther King Jr., union man
by ilene - January 21st, 2019 2:02 pm
Martin Luther King Jr., union man
Dr. Martin Luther King Jr. on the picket line at the Scripto plant in Atlanta, Ga., December, 1964. AP
Courtesy of Peter Cole, Western Illinois University
If Martin Luther King Jr. still lived, he’d probably tell people to join unions.
King understood racial equality was inextricably linked to economics. He asked, “What good does it do to be able to eat at a lunch counter if you can’t buy a hamburger?”
Those disadvantages have persisted. Today, for instance, the wealth of the average white family is more than 20 times that of a black one.
King’s solution was unionism.
The union newspaper reported that King appealed in his Sept. 21, 1967 address to Local 10 ‘for unity between the labor movement and the Negro freedom movement.’ The Dispatcher archives, ILWU
Convergence of needs
In 1961, King spoke before the AFL-CIO, the nation’s largest and most powerful labor organization, to explain why he felt unions were essential to civil rights progress.
“Negroes are almost entirely a working people,” he said. “Our needs are identical with labor’s needs – decent wages, fair working conditions, livable housing, old age security, health and welfare measures, conditions in which families can grow, have education for their children and respect in the community.”
My new book, “Dockworker Power: Race and Activism in Durban and the San Francisco Bay Area,” chronicles King’s relationship with a labor union that was, perhaps, the most racially progressive in the country. That was Local 10 of the International Longshoremen’s and Warehousemen’s Union, or ILWU.
ILWU Local 10 represented workers who loaded and unloaded cargo from ships throughout San Francisco Bay’s waterfront. Its members’ commitment to racial equality may be as surprising as it is unknown.
In 1967, the year before his murder, King visited ILWU Local 10 to see what interracial unionism looked like. King met with these unionists at their hall in a then-thriving, portside neighborhood – now a gentrified tourist area best known for Fisherman’s Wharf,…
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The Top Global Risks In 2019
by Zero Hedge - January 21st, 2019 1:40 pm
Courtesy of ZeroHedge. View original post here.
Authored by Nick Routley via VisualCapitalist.com,
The suits are pressed and the jets are gassed up, as global political and business leaders prepare to converge in Davos for the World Economic Forum.
To prep the wide variety of world leaders attending the summit, the organization has just published its most recent edition of the Global Risks Report. The highly anticipated annual presentation puts the world’s most pressing issues into focus, giving a sense of what is top-of-mind for global decision-makers.
Below are the top five risks highlighted in this year’s report.
THE WORLD’S EVOLVING RISK LANDSCAPE
The report looks at two specific ways of evaluating global risks:
- The likelihood of an event occurring
- The impact or severity of an event, should it occur
And over recent years, it’s clear that the composition of these top threats has evolved.
In 2009, the world was still reeling from the global financial crisis, so economic concerns were naturally at the forefront of discussions.
Today, the most likely scenarios to play out in the near future involve extreme weather events and natural disasters. Also trending upward are cyber-security threats and concerns over the security of personal data.
RISK PERCEPTION
Each year, the Global Risks Perception Survey looks at which risks are viewed by global decision-makers as increasing in the coming year.
Some clear themes emerge from the responses:
A Breakdown in Geopolitical Cooperation
From trade wars to the dissolution of weapons treaties, cooperation between countries is on the decline. Leaders are concerned that this divergent geopolitical climate may continue to inhibit collective progress on important global challenges.
Technological Instabilities
As the influence of technology creeps into more aspects of everyday life, cyber-attacks and lax cybersecurity protocols are becoming more of a concern. In one dramatic example information theft, multiple breaches of India’s government ID database reportedly left the information of over 1 billion registered citizens exposed. Technology is influencing society in other ways too, such as…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site
