Kentucky senator explains controversial proposed legislation that would subject Federal Reserve‘s monetary policy powers to outside scrutiny as it gets new life under a new administration – and may stand its best chance at becoming law.
SHANGHAI — Keith Bradsher Chinese officials cheered on the country’s stock market when it reached heady new highs, offering hope that it could become a new source of money to fix China’s economic problems. Then, last year, the market crashed.
“China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further.”
Now another fast-growing part of China’s vast and increasingly complicated financial market is showing signs of distress: its $9 trillion bond market.
Prices for government and corporate bonds have tumbled over the past week, a sell-off that continued on Tuesday. The situation has spooked investors, prompting the government to temporarily restrain some trading and to make emergency loans to struggling financial institutions.
“The adjustment has not yet finished. It will continue and normalize until money is put where the government can see it.”
— Miao Zuoxing, a partner at the FXM Brothers Fund
The price drops have resulted in higher borrowing costs at a time when more Chinese companies need the money to cope with slowing economic growth. Yields reached new highs again on Tuesday.
In part, China is reacting to financial shifts across the globe. With the Federal Reserve raising short-term interest rates and many expecting the presidency of Donald J. Trump to lead to heavier government spending, investors worldwide are selling bonds.
“Due to recent, relatively large market fluctuations, our company decided to cancel the issue of the current bond, and will reissue it at a chosen time.”
— Jiangsu Sumec Group
But China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further.
“The adjustment has not yet finished,” said Miao Zuoxing, a partner at the FXM Brothers Fund, a Shanghai-based investment fund that trades stocks, bonds and futures. “It will continue and normalize until money is put where the government can see it.”
At least 40 companies have said they would postpone or cancel bond offerings rather than risk being forced to pay high interest rates to sell the bonds — or being unable to sell them at all. Among them was the Jiangsu Sumec Group Corporation, an industrial trading house that exports items as varied as gardening tools and auto parts; the company said on Thursday that it would not go through with the sale of $130 million in short-term bonds.
“Due to recent, relatively large market fluctuations, our company decided to cancel the issue of the current bond,” Jiangsu Sumec Group said in a statement, “and will reissue it at a chosen time.”
China has particular reason to worry. As the world’s second-largest economy, after the United States, it relies on a rickety financial system that is mired in debt and susceptible to hidden stresses. Higher overseas interest rates could also prompt more Chinese investors to move their money out of the country, either to chase higher returns elsewhere or to avoid what some see as China’s growing problems.
Read the rest of this entry »
Mr. Grant confronts the subjectivity of economic measurement head-on in his book in an enlightening discussion of whether the 1921 depression was, in fact, a depression at all.
The Forgotten Depression: 1921 — The Crash That Cured Itself, by James Grant, Simon & Schuster, 2014.
Joseph Calandro Jr. writes: To better understand the current economic environment, financial analyst, historian, journalist, and value investor James Grant, who is informed by both Austrian economics and the value investing theory of the late Benjamin Graham, analyzes the Depression of 1920–1921 in his latest work, The Forgotten Depression: 1921 — The Crash That Cured Itself.
Grant understands that despite the pseudo-natural science veneer of mainstream economics the fact remains that economic value is inherently subjective and thus economic measurement is also subjective. Mr. Grant confronts the subjectivity of economic measurement head-on in his book in an enlightening discussion of whether the 1921 depression was, in fact, a depression at all.
Was It a Depression?
Grant concludes it was a depression, but mainstream economist Christine Romer, for example, concludes it was not a depression. As Grant observes, Ms. “Romer, a former chairman of the Council of Economic Advisors, presented her research, titled ‘World War I and the Postwar Depression,’ in a 1988 essay in the Journal of Monetary Economics. The case she made for discarding one set of GNP estimates for another is highly technical. But the lay reader may be struck by the fact that neither the GNP data she rejected, nor the ones she preferred, were compiled in the moment. Rather, each set was constructed some 30 to 40 years after the events it was intended to document” (p. 68).
In contrast, Mr. Grant surveys economic activity as it existed prior to and during 1920–21 and as it was evaluated during those times. Therefore, five pages into chapter 5 of his book, which is titled “A Depression in Fact,” we read that:
A 1920 recession turned into a 1921 depression, according to [Wesley Clair] Mitchell, whose judgment, as a historian, business-cycle theorist and contemporary observer, is probably as reliable as anyone’s. This was no mere American dislocation but a global depression ensnaring nearly all the former Allied Powers (the defeated Central Powers suffered a slump of their own in 1919). “Though the boom of 1919, the crisis of 1920 and the depression of 1921 followed the patterns of earlier cycles,” wrote Mitchell, “we have seen how much this cycle was influenced by economic conditions resulting from the war and its sudden ending. … If American business men were betrayed by postwar demands into unwise courses, so were all business men in all countries similarly situated.”
So depression it was … (p. 71)
- War finance (the currency debasement and credit expansion associated with funding war) has long been associated with economic distortion including World War I, which preceded “The Forgotten Depression.” Such distortions unfortunately continue to the present day.
- Scandal is also associated with booms and busts; for example, the boom preceding “The Forgotten Depression” had Charles Ponzi while the boom preceding “The Great Recession” had Bernie Madoff.
- The booms preceding both financial disruptions also saw governmental banking regulators not doing a very good job of regulating the banks under their supervision.
- Citibank famously fell under significant distress in both events.
- Both eras had former professors of Princeton University in high-ranking governmental positions: Woodrow Wilson was president of the United States at the beginning of “The Forgotten Depression” while Ben Bernanke was chairman of the Fed during “The Great Recession.”
- On the practitioner-side, value investor Benjamin Graham profited handsomely from the distressed investments that he made during “The Forgotten Depression” while his best known student, Warren Buffett, profited from the distressed investments that he made during “The Great Recession.”
The Crash That Cured Itself
Despite similarities, there are noteworthy differences between these two financial events. Foremost among the differences is the reason why “The Forgotten Depression” has, in fact, been forgotten: the government did nothing to stop it. Not only were interest rates not lowered and public money not spent, but interest rates were actually raised and debt paid down. The context behind these actions is fascinating and superbly told and analyzed by Mr. Grant. Read the rest of this entry »
Loose Money Party Peaks, Hangover Anticipation Looms.
“Central banks get most of the credit for the calm and upward-moving market over the summer, but I don’t think we can depend on that going forward.”
— Jeff Layman, chief investment officer at BKD Wealth Advisors
Markets in Europe and Asia retreated Monday amid signs the world’s central banks will be less accommodative than previously expected.
“Bourses in Asia closed with steep declines, with shares in Hong Kong off around 3.3%, Shanghai down 1.9%, Japan down 1.7% and Australia down 2.2%.”
“Central banks get most of the credit for the calm and upward-moving market over the summer, but I don’t think we can depend on that going forward,” said Jeff Layman, chief investment officer at BKD Wealth Advisors.
The Stoxx Europe 600 shed 1.9% early in the session, while futures pointed to a 0.6% opening loss for the S&P 500 after its biggest daily drop since the U.K.’s EU referendum.
Bourses in Asia closed with steep declines, with shares in Hong Kong off around 3.3%, Shanghai down 1.9%, Japan down 1.7% and Australia down 2.2%.
Stocks and long-dated government bonds sold off on Friday after comments from Federal Reserve Bank of Boston President Eric Rosengren heightened expectations for an interest rate rise later this year. Read the rest of this entry »
The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor’s.
Higher interest rates are about to hit companies – just when many are ill prepared to handle them.
The Federal Reserve this month took interest rates up for the first time in nearly a decade – ending the days of free money. It might take a few years for higher rates to hit companies – as they look to refinance debt. But the troubling part is many companies aren’t in great shape to eat the higher costs.
The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor’s. The biggest culprit for the jump in these so-called “weakest links” is the oil and gas sector, which accounts for 34 of them. But financial companies are close behind, representing 33 of the weakest links, says S&P….(read more)
APPL is still on track to log its worst performance in six years.
“Some of the bloom is off the rose. I think that’s a little bit unfair. We still think it’s a great story, we still think its going to have a good six months, but some of the excitement and momentum traders have backed off, probably in part because of a risk-off general attitude in the markets.”
However, the stock is still on track to log its worst performance in six years.
In 2008, Apple shares fell more than 50 percent. Since then, the stock has consistently risen 5 percent or more.
“We tend to see a little bit of a trail down in Apple going into earnings, we tend to see people be worried. And then we see the shares strengthen after the earnings are reported.”
Max Wolff, chief economist at Manhattan Venture Partners, said the stock’s lackluster performance this year is likely due to concern about the completion of the Apple car, sales of the new Apple watch and more risk-averse investors.
“Some of the bloom is off the rose,” Wolff said Friday on CNBC’s “Trading Nation.” “I think that’s a little bit unfair. We still think it’s a great story, we still think its going to have a good six months, but some of the excitement and momentum traders have backed off, probably in part because of a risk-off general attitude in the markets.”
However, Wolff said Apple’s third-quarter earnings report, which is scheduled for Oct. 27, could bring some of that excitement back. Read the rest of this entry »
“A new Wall Street Journal poll finds that three out of four Americans think the next generation will be worse off than this generation. So long American Dream.”
Editor’s note: Larry Kudlow is economics editor of National Review. Stephen Moore, a frequent contributor to National Review, is chief economist at the Heritage Foundation.
John F. Kennedy campaigned for president in 1960 by belittling Dwight Eisenhower’s three recessions and declaring, “We can do bettah.” He was right. In the 1960s, after the Kennedy tax cuts were implemented, prosperity returned, the economy grew by almost 4 percent annually, unemployment sank to record lows, and a gold-linked dollar held down inflation.
“It would be hard to conceive of a worse set of policy prescriptions than the ones Larry Summers and his Keynesian collaborators have conjured up.”
But today many leading economists are throwing up their arms in frustration and assuring us that 2 percent growth is really the best we can do.
Barack Obama’s former chief economist Larry Summers began this chant of “secular stagnation.” It’s a pessimistic message, and it’s now being echoed by Federal Reserve vice chair Stanley Fischer. He agrees with Summers that slow growth in “labor supply, capital investment, and productivity” is the new normal that’s “holding down growth.” Summers also believes that negative real interest rates aren’t negative enough. If Fisher and Fed chair Janet Yellen agree, central bank policy rates will never normalize in our lifetime.
“These measures have flat-lined the economy. It’s as simple as that.”
Unfortunately, Americans seem to be buying into this dreary assessment. A new Wall Street Journal poll finds that three out of four Americans think the next generation will be worse off than this generation. So long American Dream.
But secular stagnation is all wrong. It’s a cover up for mistaken economic policies that began in the Bush years and intensified during the Obama administration. Read the rest of this entry »
CNBC‘s Kate Gibson reports: U.S. stocks were battered on Monday, with benchmark indexes falling through key support levels after a gauge of factory activity disappointed, heightening concern about the economy before Friday’s monthly jobs report.
Stocks had wavered ahead of the report that had U.S. manufacturing expanding at a substantially slower pace in January, driving overall factory activity to an eight-month low.
“A report like this scares people ahead of the payroll number on Friday,” said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds, who added the report’s soft new orders component was of particular concern.
Niraj Chokshi writes: The income gap in America has been widening for decades and the modest three-year recovery did little to change that, according to new Census data.
The new data suggest that despite modest recoveries in many states, the middle class has been shrinking while households have been added in the lowest and highest income brackets. In many states and nationally, the highest income brackets saw more growth than the lowest, but households in the middle brackets continued to decline. The state-by-state data compare incomes from a pair of three-year periods: 2007 through 2009, a span that included the Great Recession, and 2010 through 2012, a period that included the ongoing and modest recovery.
For years, the wealthiest 1 percent have amassed income more quickly than the rest. From 1979 through 2007, for example, the top 1 percent of households saw income grow by 275 percent, according to a nonpartisan Congressional Budget Office study. Compare that to the bottom fifth of households, which saw income gains of only 18 percent over that time. Recent Nobel Prize winner for economics Robert Shiller, who is known for creating a closely tracked home-price index, last month called income inequality “the most important problem that we are facing now today.” And just last week, President Obama’s nominee to lead the Federal Reserve, Janet Yellen, called income inequality “an extremely difficult and to my mind very worrisome problem.”
But it’s easier than acting like responsible adults
I saw this article yesterday, and thought it looked suspicious. Rather than go blind with despair over the NYT’s familiar habit going into battle facing the wrong way, I hoped Kevin Williamson might be scanning skies above Gotham, see the Bat signal, and make an appearance. My wish is granted:
Kevin D. Williamson writes: The New York Times has published a very interesting article forwarding a number of familiar arguments that the Federal Reserve should try to increase inflation in order to encourage economic growth. Without going too deeply into the fallacies behind the idea that higher inflation is a means to strong and sustained economic growth, it is worthwhile to examine the wishful thinking and euphemisms that inform the Times’s account.
Item 1: “Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.”
Let’s take a look at these claims in order. Read the rest of this entry »
J.T. Young writes: Five years in, Obama’s presidency appears more divisive than decisive. There is a high irony in this outcome for a candidate elected on promises of unity and change. Yet the increasingly obvious pattern is that Obama is unwilling to make a tough decision and as a result, he not only alienates a growing number of voters, but an increasing number of his supporters.
Obama’s presidential campaign was explicit in its commitment to an administration both unifying and bold. “Hope,” “Change we can believe in,” and “Yes we can!” promised a muscular agenda America could rally around. And America did.
Obama won with the largest popular vote percentage (52.9%) of any Democrat since LBJ in 1964. The day after his inauguration (1/20/09), Rasmussen polling showed he had a 65%-30% approval to disapproval rating.
However, that favorable view has faded fast. Unlike other two term presidents, whose popular vote percentages increased in reelection, Obama’s fell, winning with only 51% of the popular vote and by just over half his 2008 margin (3.8% to 7.3%).
Still in only his second term’s first year, his disapproval rating routinely exceeds his approval rating. His signature policy achievement fares worse. Obamacare’s disapproval margin is in double-digits in virtually every poll. And Obama’s lowest job performance ratings come on Americans’ biggest concern: the economy. Read the rest of this entry »
Seth Lipsky writes: One of the most amazing stories right now is the failure of either President Obama or Congress to address the monetary crisis. This is the crisis Joe Six-Pack feels when he fills his car with gas or fetches up at the supermarket checkout — or when he has a hard time finding a job.
Even as our money doesn’t seem to go as far as it used to just a few years ago, Federal Reserve Chairman Ben Bernanke keeps insisting that inflation is low. Yet the hottest story about Obama’s naming of a new Fed chief has been what a New York Times dispatch called the decision’s “gender undertones.” Read the rest of this entry »