Overleveraged America has no Plan B

WASHINGTON – Is America once again at the edge of some catastrophic event that will cause economic misery? Not by a long shot, most would argue. The economy, although a bit slower in the second quarter of 2019, is till chugging along, with a respectable 2.1 GDP growth. Unemployment at 3.7% is still at its historic lows, while jobs creation (about 165,000 a month this year) is quite substantial. So, where is the problem? The problem is too much debt.

Too much debt

It is well known that credit is the fuel of capitalism. And this is why a modern, well functioning financial sector is so critical for growth. Savvy bankers and venture capitalist most of the time will allocate capital to deserving established or new enterprises. This properly targeted new credit (or investments) will foster the growth of healthy companies or new ventures, often creating more innovation, new jobs, and eventually broader prosperity.

Corporate debt

And yet, if we look at the $ 9 trillion of US corporate debt, much of this massive burden is not about new investments. Some of it at least is about cheap capital used to buy back stocks, in order to prop their value. Which is to say that at least some of the impressive stock market buoyancy is an optic illusion. It is made possible by historically low interest rates that allow corporation to obtain cheap credit used not for investment in technology and expansion, but for financial manipulation.

Consumers are overleveraged

And what about US consumers? Their financial health and optimism about their economic and financial circumstances are absolutely critical, since private consumption in America, at 70% of GDP, is by far the most significant factor affecting economic growth.  

Well, here
is another mixed bag. As noted above, the economy is growing, new jobs keep
being added, and unemployment is extremely low. Still, things are not great for
the American middle class. Millions of relatively young people carry an
extraordinarily high student debt load. Combined with car loans, other consumer
debt and child care expenses for those who have children we have a picture of
individuals or families that can barely survive, even on relatively good income
(above $ 100,000 or more for a couple).

Millions of new young professionals simply cannot afford to buy a house because the existing debt they have to pay off prevents them from saving enough for a down payment, let alone adding monthly mortgage payments to the long list of existing obligations.

More federal debt

The Federal Government is playing a negative role in all this. Democrats and Republicans who these days agree on almost nothing, very quietly just passed a new spending bill that increases defense and other discretionary spending, without even a word on the need to seriously consider reforming the major entitlement programs (Social Security, Medicare and Medicaid are the big ones) that slowly but surely increase –every year—federal spending. The net result of this political accord is more federal spending, higher deficits and more debt, at a faster clip than forecasted even a year ago.

Debt, debt everywhere

So, here is
the picture. Corporations are high into debt. The American consumers,
especially the younger workers, even those with above average income, carry an
enormous debt burden that is made tolerable only by extremely low interest
rates. The Federal Government, both parties having forgotten any concerns about
fiscal responsibility, is piling up new debt at a fast clip –while a growing economy
is at full employment.

To top it
all off, the US Federal Reserve just cut interest rates, this way signaling that
the happy era of ultra-cheap credit will continue, who knows for how long.

All is well?

At the
moment, none of this concerns anybody. If asked, policy-makers will tell you
that things have rarely been so good for the US economy. On the surface this is
true. But we have to pray that nothing will happen.

If for some
reason we have a re-ignition of inflation that may force the Federal Reserve to
raise interest rates and therefore increase the cost of borrowing throughout
the economy, this whole thing may collapse.

Cascading effects

consumers can no longer pay existing debts and buy new things at the same time,
there will be a contraction in spending that will immediately reverberate
throughout the economy. Lower demand means lowers sales, and therefore job cuts.

Think of
the millions who can barely make it today, while having a good or at least
decent job. Imagine their predicament if they lose that job! They will default
on all their loans. Their cars will be repossessed. As a consequence, much of
their consumer loans and credit card debt will have to be written off, with
considerable losses for the banks that extended it. And this means a major

Doomsday scenario

Look, may be none of this will ever happen, and this doomsday scenario will remain fiction. Still, I am truly concerned when America –the largest economy on earth– has essentially no margin, no cushion. All the key players: corporations, consumers, the Federal Government and the Federal Reserve are overextended.

when a recession hits, the Federal Government increases spending in an attempt
to inject liquidity and stabilize the jobs market.

But today
Washington is about to go back to $ 1 trillion deficits, justifiable only when
America was trying to emerge from the devastating financial crisis of 2008. It
will be hard to increase federal spending when deficits are already so high.

Again, let’s
pray that nothing bad will happen. But prayer is hardly the most sophisticated
contingency plan for a $ 20 trillion plus overleveraged economy.

Wanted: Credible Centrist Political Leaders

WASHINGTON – Recently, a Democratic party elected leader of national renown argued in a public forum that in order to regain lost momentum and credibility with the American voters the Democrats have to redefine themselves as the party of economic growth and inclusiveness.

Common sense messages

At a national event focused on the future of U.S. small businesses, a Republican national leader claimed that America’s greatness rests on its foundations as an opportunity society in which people can advance because of a rules based system that recognizes and rewards merit.

John Hickenlooper, the Governor of Colorado, a successful state chief executive, stated that through collaboration between Republican and Democrats we can find workable compromises on the future of the US health care system, and other national priorities.

Well, what do I make of all this? Very simple. These statements made by credible centrists in both parties raise the hope that it may be possible, even in this incredibly poisoned political climate, to rally millions of Americans, hopefully a majority, around the basic ideas of an optimistic country in which policy-makers promote economic growth, while upward mobility is based on genuine merit; and nobody is excluded or kept from advancing because of social class, gender, race, or anything else. In fact, the opposite –equal opportunity for all- is embraced by all.

And this must include quality education, the best foundation of future success in life, available to everyone; while bridges are built across every divide, and doors are wide open to all who are willing to make an effort.

It is an old idea

This idea of America as a level playing field and fair rules used to be a shared vision embraced by most. Indeed, it was the belief that America offered genuine opportunity that attracted millions of immigrants who wanted to create in America a better life for themselves. It is about time to re-propose this vision in a manner that can be shared by today’s Americans –Democrats and Republicans.

Indeed, who could object to public policies that promote economic growth, social advancement based on merit, while all citizens have genuine access to quality education, careers and consequently a good seat at the table?

Lost hope 

Of course, the last few years have told us an entirely different story. It is a story of lost hope, deep disappointment, and resentment. A story of popular distrust in the honesty and abilities of most elected leaders. A story of exaggerated promises not kept.

This has created an emotional anti-government rebellion on the right, (“Washington is a rotten place”), and the triumph of policy agendas on the left which advocate economic and social re-balancing achieved through redistribution by taking (ill-gotten gains) from the few ultra rich and giving to the rest of society. All this will be wisely designed and orchestrated by government, through taxation and subsidies.

Despondent America 

The outcome of all this is not pretty. The unexpected outcome of the November 2016 presidential elections is evidence of the widespread feeling of deep despair. Indeed, according to millions who voted for Donald Trump, “the system” failed –period. Its failure is so deep that it is not worth salvaging. In fact, it should be dismantled. In fact, millions of Americans voted for Trump mostly because he is not a professional politician. Therefore he is untarnished by Washington’s rot and well equipped to “clean the stables”,”drain the swamp” and all by himself –with his power and superior intelligence– transform America.

Paradoxically, notwithstanding continuous economic growth and much lower unemployment since the end of the Great Recession in 2010, rightly or wrongly millions of Americans who used to be part of a self-confident middle class now are and feel poorer, left behind and alienated. At the same time, millions of young people feel hopeless facing a world of diminished opportunities, while laboring under the crushing weight of absurdly large student debts.

There is a way out

That said, I sense that there is a way out of this. Difficult, yes; but not impossible. Yes, America needs house cleaning. It needs fresh faces not tainted by the old ways of doing business.

The unimaginative political elites still populating Washington, DC have survived by over promising everything to everybody, while pretending to pay for all the goodies they offered to various (of course deserving) constituencies, knowing full well that the only way to finance all this public largess (unaffordable entitlements) was and is to borrow more and more, this way getting the country deeper and deeper into debt.

Sadly, the Washington elites have no real economic growth strategy, while their policies aimed at buying votes through entitlements funded by public money and more and more borrowing are driving America towards the abyss of insolvency.

Credible people who will tell the truth 

Most Americans have common sense. However, they need credible new leaders who will tell the unvarnished truth about the dangers of systemic and growing fiscal imbalances, (i..e we have to agree on a sensible plan to reform all major federal entitlement programs, by far our biggest fiscal problem), while pointing the only way to get out of this ditch: economic policies (think tax reform and smart deregulation affecting business activities) that will promote a more robust economic growth in a genuinely open and inclusive society. An inclusive society in which elected leaders are committed to destroying all artificial barriers to entry, while opening new avenues of opportunity to all.

(President Donald Trump, a new leader who is not carrying the baggage of the distrusted establishment politicians, could lead the way in shaping a new American political conversation. As his presidency is just getting started, it is impossible to say whether he will engage in this effort or not. We should all hope that he will. This would benefit the country and him).


Well, in the end all this “back to basics” idea founded on the values of openness, fairness and merit sounds too lofty, in fact unrealistic. Yes, this is an appeal to an admittedly mythologized idea of an America “where anything is possible as long as you work hard and play by the rules” which (truth be told) never fully existed in the way many refer to it.

And then there is the huge problem of yanking benefits away from millions (deserving or undeserving, it does not matter) who got used to getting them. “Come on…get real. Nobody gets elected by promising less, let alone by promising to cut existing benefits. And we in Washington just do not know how to deliver stronger economic growth. We only know how to  distribute subsidies”.

The way ahead

And yet, if we do not want to see America follow Europe on the path leading to historic decline, it is imperative to make real progress on these two related fronts:

1) restore fiscal sanity by reforming all the major entitlement programs

2) genuinely and forcefully promote economic growth and real opportunity for all

The alternative is political chaos, the de-legitimization of our institutions, and rapid economic decline.

Some elected leaders of both parties know this. I just hope that their common sense message will be heard, understood and embraced.

Living In A False Data World

WASHINGTON – We are used to hear that we live in a “data driven” world. Thanks to ICT and the computing power explosion, it is possible to gather, streamline and organize millions, in fact billions of bits of information. All this intelligently organized and sifted data provides precious information that will influence, in fact will determine investments, marketing strategies, purchases, and even the pitch of political campaigns.

Reliable data

Fine, all well and good. But this “data revolution” assumes that we do have reliable data; and it also assumes that we have a good sense of “what all this means”, once we have carefully looked at all the available information.

And here I see serious problems. At one level, we may engage in self-deception by giving excessive weight (or not enough weight) to some data. And, on a different level, what if the data is false, or heavily manipulated? In both cases we are in trouble.

Data in context 

Let’s talk about exaggerating the importance of some data. For example, take unemployment. The US Government is proud to tell us that at around 5% the unemployment rate is back to “normal’. True. Except that this unemployment statistic, while correct, is rarely placed in context.

Unemployment is definitely way down, and this is good news. However, the percentage of the US population that is actually working compared to the entire working age population is well below what it used to be 10 or 15 years ago. Indeed, labor participation reached 67.3% in 2000. And now in 2016 it is at down to 63%. Which really means fewer people employed. In other words, the often cited unemployment data omits the fact that millions of Americans simply dropped out of the work force, and therefore are no longer counted. Therefore, if we look at how many Americans are actually working compared to the overall working age population the picture is not so good.

Likewise, when employment statistics are presented, we usually get an aggregate number or percentage. The conventional wisdom is that if unemployment is down this must be good news. This means that the economy is growing, and therefore there is demand for more labor. What can be wrong with this? Well, nothing wrong really.

From a different angle 

However, if we look just a bit under the surface, we see that among the millions of new jobs that have been added in the last few years very few are related to productive activities (manufacturing, mining, energy) that produce new wealth. We have millions who found work in the hospitality industry, or who are on the lower echelons of the health care industry, along with many janitors and landscaping workers. Most of these are low pay, often part-time, marginal jobs.

Therefore, if you focus only on the overall unemployment figures and conclude that all is well, because a healthy labor market is a powerful indicator of a healthy economy, you are engaging in self-deception.

Over valued stock market 

On a different level, a buoyant stock market used to be considered a sign of a healthy economy. But these days it is no longer so. US share prices are dangerously inflated for reasons that have nothing to do with any misinterpretation of the real economy and market forces.

They are inflated because the US Federal Reserve continues to keep real interest rates at historically low levels. This unusual ZIRP policy created a bias against any form of saving. Since they get zero per cent keeping their money in the bank, people seeking some return on their money are induced to invest in the stock market. And since millions started buying stocks for lack of any alternatives, this has inflated stock values.

So, at this time the stock market data is not a helpful indicator of anything regarding the real economy because valuations are grossly inflated. High valuations are disconnected from economic performance. Of course, there have been bubbles before and we can expect more in the future. But this is a gigantic bubble created by the Federal Reserve and its monetary policies. The shares valuations data does not capture any of this.

False data 

And now let’s get to the bigger problem: false data. When the Greek debt crisis emerged back in 2009 it became obvious that the truth about the impending fiscal disaster had not emerged up to that point in part thanks to the complicity of the national statistics agency, (Hellenic Statistical Authority, ELSTAT). At the behest of the Greek government, the agency was happily producing false data, with the obvious intention of hiding the truth about the huge fiscal hole for as long as possible.

More recently, right after Mauricio Macri was elected President of Argentina, one of his first moves was to get new staff in the national statistics agency, (INDEC). His goal is to recreate credibility for economic data published by his new government. It is clear that the previous administration published false (or distorted) data in order to convey the message that the tottering economy was in fact doing well under their stewardship.

Just a few bad apples? 

Well, these are some of the cases we know about. But are these just a few exceptions? Are all other governments around the world complying with high ethical and professional standards when it comes to reporting economic statistics? I would not be so sure. For example, a major country in Africa, beyond inflating GDP growth statistics, cuts the actual number of its very large population in order to show a higher per capita GDP, this way trying to show a sign of economic progress that is not really there.

And then we have impeachment procedures against Dilma Rousseff, the President of Brazil, accused of manipulating public accounts in order to show a healthier fiscal situation. And what about India’s GDP numbers? Most experts argue that they are inflated, even though it is not clear by how much. In other words, India is also under suspicion of “cooking the books” in order to create a brighter economic picture.

China’s GDP numbers 

And, finally, the real monster: China’s GDP growth figures. Nobody believes the official Chinese data anymore. No, China does not grow at almost 7% a year. The question is: how big a lie is this? Is the real GDP growth 6%, or is it 3%? We simply do not know. There are many theories but no hard facts, simply because nobody trusts the official Chinese data.

Now, think about all this for a moment. China is the second largest economy in the world. And yet most experts and analysts routinely argue that the official numbers are fake. But why would China do this? It is quite simple. In China positive economic statistics are necessary tools to strengthen the regime’s political legitimacy. Inflated growth numbers tell everybody a good story: the Communist Party leadership is doing a splendid job.

What about everybody else? 

Once again, are we talking about just a few cases of rogue governments that do not play by the rules? Or is this fraudulent manipulation of sensitive economic data far more extensive?

I would say that the likelihood of data manipulation increases with the degree of authoritarianism. A government not held accountable by any one is not interested in enforcing high standards of truth and transparency. You can bet that it will say whatever it can to make itself look good. As there are not so many accountable democratic governments around the world, we can safely conclude that much of what is published and is then used by analysts as “data” is at least inaccurate, in some instances totally false.

Bad consequences

And data manipulation has really bad consequences. Unless a company enjoys the benefits of political favors, it is hard to make major economic decisions when you literally “do not know what’s going on” in any country that is in the habit of manipulating important economic data. Likewise, it is hard to attract serious foreign investors when you cannot reassure them that the country is ruled according to proper transparency standards.

Data driven world, with many lies 

So, here is the thing. We live in a very strange and paradoxical world. The IT experts tell you that they routinely capture millions of pieces of information on consumers, their preferences, their habits and buying patterns. And all this data drives decisions and investments by large corporations.

At the same time, we see how statistics, even when correct, are routinely manipulated in order to fit a preordained (and often dishonest) narrative. If you want to make the case that the US economy is doing fine, you can point to hard data: 5% unemployment, 2% GDP growth, historically high stock market valuations, low inflation.

But if you want to paint a darker picture, you will point to other hard data. 2% GDP growth is 1/3 below the historic 3% norm. On the basis of other real data, you will say that most of the new jobs are part-time gigs that at best provide survival wages, without creating any chance of upward mobility. You will argue that there are millions of part-time workers who would rather have full-time jobs but cannot get them. And you will also say that, based on hard data, (real corporate earnings for instance), the US stock market is over valued, thanks to Fed policies.

No reliable data without accountable governments 

Once again, regarding the wider world, you can rest assured that every non democratic regime in which leaders are not held accountable –and there many of them– economic numbers are either false or heavily manipulated, so that they can be used by the leaders to support a self-serving political narrative.

Yes, this is a data driven world. And data analysts can indeed perform wonders, provided however that they have real data to work with. And this is not the case. At least not in large parts of the world.

In the end, there is no chance to have true data driven decision-making processes without true democracy, real accountability and transparency.

In the final analysis, good governance is the precondition for getting good data.

Hillary Clinton Will Ban Fracking -Less Energy For America

WASHINGTON – When it comes to America’s energy needs and viable alternatives to fossil fuels, it looks as if Democrats running for the White House live on another planet. Front runner Hillary Clinton recently declared that, as President, she would place so many restrictions on extracting oil and natural gas from shale formations using hydraulic fracturing, or fracking, that this will amount to a complete ban. Her opponent Bernie Sanders declared that he is totally against fracking.

The benefits of fracking 

Indeed. And yet fracking has been one of the few pieces of real economic good news of the last decade. Thanks to fracking America doubled its oil production. This means importing less crude oil, and keeping billions of dollars at home, every day. And fracking used to produce natural gas means abundant supply and lower electricity prices.

But no, this is not good news. The Democrats are telling us that this energy revolution that increased supply and lowered prices is actually bad, because of the environmental impact of fracking. Well, this allegation, even though endlessly repeated by the green movement, is almost entirely baseless.

Fracking is safe 

Of course there have been incidents of pollution deriving from poorly constructed wells and other sub standard practices. But there is no evidence of any systemic risk. If energy companies follow best practices and established industry standards, and most of them do, fracking is safe. And, by the way, this industry is regulated, and heavily monitored.

Environmental protection agencies at the state level keep an eye on it. At the federal level the Environmental Protection Agency, EPA –certainly no friend of oil and gas companies– reviewed the entire US fracking industry and could not come up with anything bad to say about it. Again, while the Obama EPA is certainly not in the pocket of the energy lobby, it could not come up with any justifications to restrict fracking, let alone banning it.

Renewable energy will become more important… 

If we look at the broader world context, it is clear that fossil fuels, (and natural gas in particular), will continue to dominate as essential energy sources. It is true that the most recent energy outlook produced by the energy company BP clearly indicates that the renewable energy sector is rapidly growing. It is gaining a bigger share of total energy consumption. But it starts from a very low base. Therefore, even if it continues its impressive growth, it will take years before it will be able to displace fossil fuels.

…But oil and gas cannot be replaced

In the meantime, oil and gas will continue to dominate. In particular, natural gas share of total energy consumption will grow significantly. And –guess what– most of the new natural gas produced in the USA comes from fracking shale formations.

The very tangible economic benefits coming from new natural gas extracted via fracking are stable or lower electric rates, (natural gas is used mostly for electric power generation), and huge advantages for US petro-chemical industries that use natural gas as feed stock. Cheaper natural gas means lower costs, and therefore more competitive prices for finished products.

Therefore, all sane people know that until we shall have truly cost-effective alternatives to oil and gas the fracking revolution is and will continue to be a major asset for the US economy. It allowed America to become once again a major energy producer, with clear advantages for industry, US global competitiveness, and huge savings for millions of consumers in terms of lower energy bills.


So, why do Clinton and Sanders make such outlandish statements about banning or restricting fracking? Very simple. This is just politics. They both want to appeal to the Democratic Party far left where the greens and the pure environmentalists are strongly positioned. In order to get their precious votes, they need to assuage these ideologues with ritualistic anti hydrocarbon policy statements.

This makes no sense 

And yet, if you think of it, all this is absolutely crazy. In the real world, for would be presidents of the USA –one of the largest oil and gas producers on this planet — to state that they will ban a significant component of the production of this vital source of energy should be dismissed as totally preposterous.

But no, nothing happens. Both Clinton and Sanders declared that they will ban fracking. And no one says anything. I wonder how will Democrats in North Dakota, Pennsylvania, Ohio, and Texas –all of them major energy producers– react to this nonsense.

US Economy and Public Finances Deteriorating – Candidates Talk About Something Else

WASHINGTON – While we wait with trepidation for the outcome of the Iowa caucuses that will finally begin to shape the race for the Democratic and Republican nominations, none of the candidates really care to discuss in any detail the actual conditions of America, both its economy and public finances.

On shaky ground 

Let’s make this simple. The US economy is on shaky ground. A lot of the rather modest (2%) economic growth that we had since the end of the 2008 recession is due to free money doled out by the Federal Reserve for an absurdly long time.

Energy bust 

And now, some of that growth is gone, for good. Thanks to Saudi Arabia and its all out oil production policy that depressed prices, the massive energy boom that America enjoyed until 2014 is over, killed by oil at $ 30 a barrel. More than 100,000 high paying jobs have vanished in about a year. More losses to come as more US energy companies go bankrupt, or have to retrench.

Easy credit 

And what about the good news, like higher consumer spending? Well, the stunningly large 2015 car sales were financed almost entirely via easy credit extended to practically anybody walking into any dealership. (Some analysts talk openly about “sub-prime auto loans”). With these kinds of credit tricks it is easy to jack up GDP figures. The problem is that you cannot keep doing this for ever. When consumers who do not earn that much (their incomes have been stagnating for decades) have used up all their credit, then what? Is it just a coincidence that Wal-Mart is planning to close a large number of stores?

True, we have had significant employment growth. But most new jobs are low paying, and many of them are only part-time. Where will the new economic growth come from? From massive new consumption driven by store clerks and janitors who make $ 20,000 a year?

High dollar hurts exports

US exports have been hit and will be hit by a deteriorating global economy (this means less demand) and by a high dollar that makes Made in the USA products more expensive. For the moment, manufacturing output is relatively steady. However, thanks to automation, this sector will not create many new jobs.

Jittery markets 

Are we headed towards a recession? Probably not any time soon. Still, with modest growth and declining corporate earnings, we are barely treading water. It would only take a bit of bad news (look at the Wall Street jitters anytime something strange comes out of China) to wipe out many of the newly created restaurant and hospitality jobs.

Of course, compared to weak Europe or Japan, let alone disaster zones Brazil or Russia, the US is doing much better. But this is not a robust, resilient economy built on the production of valuable goods that give America a strong competitive edge. Sure, we still have many IT giants. But there is only one Silicon Valley in America.

Fiscal picture getting worse 

Sadly, we have to add to this a slowly deteriorating fiscal picture. With due credit to President Obama, it is true that after years of gigantic federal deficits that added massively to the national debt, more recently US public finances have improved –a great deal. the US Federal deficit is now down to less than 3% of GDP for 2015.

However, this will not last. A combination of increased discretionary spending and the higher costs of all key entitlement programs due to an aging population will cause an increase of the Federal budget deficit beginning in 2016. According to the Congressional Budget Office, a non partisan, research and analysis public body, the US Federal deficit will go from $ 439 billion in 2015 (2.5% of GDP) up to $ 544 in 2016, (2.9% of GDP).

The rising cost of entitlements 

And any fair estimate of the increased costs of Social Security, Medicare and Medicaid –the largest Federal entitlement programs — indicates that year after year the deficit outlook will get progressively worse.

Entitlements will soon absorb 15% of GDP (now it is 13.1%). Higher deficits mean higher cost of debt service and the reduction of discretionary spending, including defense.

Obamacare does not pay for itself 

And there is more. The just released numbers on Obamacare enrollment do not look good. The new people who signed up for medical insurance are mostly old and sick. The young and fit did not enroll in sufficient numbers. And this means higher costs for the system. Since most of the new, needy “patients” receive Federal subsidies to pay for their brand new medical insurance, soon enough Obamacare’s extra costs will add to the deficit.

Not a catastrophe

For the time being these numbers, while worrisome, do not look catastrophic. And in fact they are not. But they indicate a bad trend of higher costs and higher deficits, notwithstanding higher tax revenue. And here why this is happening.  As new births keep declining, while more and more Americans get older and live longer, the cost of well-meaning social programs designed in another era, (Social Security was designed in the 1930s), at a time in which retirees were expected to collect benefits only for a few years before they died, will keep growing.

Candidates do not talk about any of this 

Given the above, it is obvious that entitlements reform should be on top of any serious candidate’s list of policy priorities. But it is not. Sure, some of them have presented fiscal reform plans. But they are mostly attention grabbing tax cuts ideas. They fear that any serious talk of real reform amounting to benefits cuts for millions of Americans would amount to political suicide.

So, here is the thing. This elections year should be an opportunity to focus on the real issues affecting America: a fragile economy and deteriorating public finances due to entitlement programs no longer in line with current and future demographic trends.

No serious talk about policy 

But no, the candidates do not talk about any of this. This year we have had a mixture of political theater, lunatic plans to redistribute wealth, populism and empty grandstanding. Between the crazy ideas pushed by socialist Bernie Sanders and Trump’s bravado, mixed with his endless recitations of his good poll numbers, there is no room for seriously talking about anything.

A bizarre President or a weak one 

As I said, Thank God America is not in a serious crisis. But we see a once vigorous society that is slowly deteriorating, while those who want to run the Republic peddle fantasies to people who just want to be duped. My hope is that this unusual political season that started as vaudeville will finally get serious. But I would not count on it.

Sadly, we will end up either with a bizarre president (Trump, Cruz or Sanders), or with a weak one (Clinton) who will do nothing to change course.


Fed Unclear On Future Rate Increases

WASHINGTON – At last, the US Federal Reserve decided to put an end to the abnormally long period of zero interest rates, or ZIRP. On December 16 Fed Chairman Yellen announced a 1/4 percentage point increase.

More rate increases ahead 

In addition, the Fed indicated its intent to continue to “gradually” increase interest rates in 2016 and 2017. In so doing, the Fed signals its intention to bring monetary policy back to “normal”. The emergency mode that goes back to the 2008 recession is officially over.

The argument supporting a rate hike is that the US economy is growing at a steady pace, while unemployment at 5% is back to a physiological level.

Do they really mean it? 

However, after reading the modulated Fed statement and after listening to the careful words of Fed Chair Yellen during her press conference, we can also get a very different impression. The Fed did something now. But it is not at all clear that it will carry on with additional rate hikes at a steady pace next year, even though it says it wants to.

In fact, it may very well do nothing next year.

We want inflation 

Here is the thing. The Fed declared that additional rate hikes that will bring monetary policies back to “normal” are in large part contingent on the rate of inflation going back to 2%. Right now it is much lower, at 0.4%. Which is to say that if inflation fails to climb to the desired 2% level, the Fed may have to reconsider the pace and the extent of any additional interest rate hikes.

That said, it is quite plain that in a deflationary global economy, with collapsing commodities and energy prices, the chances of higher inflation in the US in 2016 are very slim. Therefore we can conclude that the Fed, while declaring a policy objective, also created an easy way out.

This is what we will do, or may be not 

In simple terms, the Fed announcement can be read this way: “Yes, it was about time for all of us in the Federal Open Market Committee, FOMC, to stop this ZIRP insanity. And so we did. We raised rates, even if just a little bit, to prove that we are serious about this. And, of course we would like to raise rates some more in 2016 and  2017. However, we really need inflation at or close to 2% to do this. If this does not happen next year we may have to reconsider any rates hike timetable”.

Got that? Let me say it again, just in case: “We would like to raise rates, but we may not, after all. It all depends on the rate of inflation. If inflation is too low we may pause or raise rates even more slowly than we announced today. Is our intent clear?”

The markets can choose to interpret this statement of intentions this way:

We have raised rates today. But this is only for show. And we have created a nice way out of additional interest rate hikes. Off the record, we all know that there is no way that inflation will go back to 2% in 2016. And we just told you that low inflation will give us an excuse to dilute or postpone any future action on rates”

Markets are fine with this 

Theoretically, any Fed policy move signaling a return to higher interest rates should have spooked the stock market. It is an open secret on Wall Street that stocks are overvalued because ZIRP, the zero per cent interest policy pursued by the Fed for so many years, made stock investing a lot more attractive. Bank deposits and other traditional forms of prudent investment yield nothing.

But the stock market reacted calmly. In fact, right after the Fed announcement, the Dow Jones moved higher.

How so? In my opinion, the markets concluded that the Fed does not intend to seriously tighten any time soon. May be later, but not in the immediate future.

Translation: the Wall Street party goes on.

A different signal would have elicited different market reactions

It would have been a completely different story had Yellen declared that this 0.25% increase is just the opening salvo, the first in a long series of staggered rate hikes that will take place —no matter what. This would have signaled a real policy shift.

Right now there is half a signal. “We would like to, but we are not sure that we will, because low inflation may not allow us to go forward”.

End ZIRP just as the economy peaked 

Well, why this muddled message? Very simple. The Fed is in a bind. At some point it had to end this ZIRP anomaly. But the Fed also knows that the US economy, while expanding at a modest 2% annual rate, is not doing so great. Capital expenditures are down. Movement of goods in and out of US ports is down. Major US exporters like Caterpillar are doing poorly because of lack of demand.

A global slow down 

Besides, the global economy is very anemic. Europe is not growing much. Japan is in bad shape. China is slowing down. Major commodities exporters, from Brazil to Chile and Australia, are in real trouble. All commodity prices have collapsed. Besides, oil is now at less than $ 40 a barrel, with negative consequences on a large part of the US economy that supports the energy sector.

And finally, all other major central banks, from the European Central Bank to the Bank of Japan, are moving exactly in the opposite direction. While the US begins tightening, they keep on relaxing their own monetary policies, this way devaluing their currencies. Higher rates in America will translate into an even higher US dollar. And this will hurt all US exporters.

This is not a scenario that indicates higher growth ahead for America, therefore providing the rationale to go back to “normal” monetary policies. In fact the global slowdown may even cause a recession in the US in 2016.

Given all this, why did the Fed decide to act now on rates?

A political rate hike

The December 16 rate hike is mostly symbolic. It is about  institutional credibility, and therefore mostly about politics, and not about setting a new monetary policy.

The fact is that a Fed rate increase has been openly discussed, anticipated, hinted and almost announced so many times that the FOMC decided that it had to do “something” before the end of 2015. But it did so in a clever way, leaving for itself plenty of wiggle room regarding future moves.

However, because of this deliberate ambiguity, it is hard to read any precise guidance regarding future monetary policies.

Will the stock market bubble continue? 

Eternal Wall Street bulls and plenty of speculators will probably conclude that the Fed moved today only for public relations reasons.

Most probably, it will increase rates in 2016 only a little bit, and may be not at all. Therefore investing in vastly overvalued stocks is still relatively safe. The small 0.25% rate hike, by itself, changes nothing.

In other words, to the extent that investors believe that the stock market is alive and well, even after today’s hike and announcements of likely future tightening, we are a long way from getting back to normal.

And this is bad news. At some point, with or without decisive Fed action on rates, the Wall Street party will end. When that happens, speculators and unsuspecting retail investors will be burnt very badly.

A word of advice: Pull out now, before the whole thing collapses.

Will The Fed Raise Interest Rates? May Be Not

WASHINGTON – Until a couple of days ago, most economists bet that the US Federal Reserve would finally begin to raise interest rates at its December 2015 meeting, this way ending the anomaly of the longest era of zero interest in modern history.

Promising picture

The general picture looked propitious for such a move. The US economy just added 271,000 jobs in October, many more than expected. Wages are going up a bit. Unemployment is down. Overall, it seemed that the new data indicated that a strong economy would fuel more inflation. And this new trend would justify raising interest rates.

What will happen to stocks? 

And what about the consequences? Well, here it gets tricky. This Fed move on interests would signal to stock investors that the ground may begin to shift. Higher rates mean that in a short while, (depending on how fast the Fed moves to bring interest rates from zero back to a historic norm of about 4%), other investment instruments like savings accounts or bonds will become once again more attractive.

In short, if it is indeed true that this unprecedented era of zero interest created a stock market bubble because it forced people to move away from other forms of investments, then we can expect that its end may bring about a stock market decline, or worse.

Right now, people have an extra incentive to invest in stocks because –thanks to zero interest rates decreed by the Fed– it is the only game in town. You cannot make any money by placing your funds in savings accounts. When interest rates go up again, people will have choices.

Fed watching 

Because of all this, these days markets move up or down mostly on the basis of what analysts believe the Fed will or will not do, and how soon. This happens because stocks are sensitive to interest rates moves, and also because there is no action on any other economic policy front that may trigger market reactions.

Paralysis in Washington 

Washington is paralyzed by political dissent. Therefore, no chance of anything happening there that would influence economic policies and therefore economic and investment decisions. No serious public spending reform plan on the agenda, no changes to major entitlements, and no tax reforms that would modify economic incentives.

In other words, nothing is coming from Washington that would signal markets that soon it will be easier to go into business, create new companies, invest in them and profit from them.

Will the Fed move?

So, we are left with Fed watching. As noted above, looking at the positive signs from the US economy that were streaming in in the last few days, it looked as if the Fed would finally have the margin to move.

Indeed, on the surface, the US is doing fine. The stock market is buoyant. Lots of new jobs added in October. More Americans are employed. Higher interest rates, phased in a little bit at a time, would not smother this fairly solid economy.

Outlook not so good anymore 

Well, this was only a few days ago. But now things do not look so good anymore. For example, let’s take a look at commodities. By any measure the sector, a close proxy of industrial activities, looks awful. The Bloomberg Commodity Index is now down to its lowest level since the 2008 financial crisis. The price of copper, widely used in all sorts of industries, is now down to a six-year low. Most commodity prices are back to where they were before China engaged in its gigantic domestic investment program that drove up the cost of everything. As a minimum, this serious decline means that most industrial economies, and not just China, are slowing down.

Commodities down, world trade down 

And it gets worse. Because of sharply lower demand for their products, many emerging markets that produce and export commodities are either in a recession or close to it, (think of Brazil and South Africa). Besides, despite the official statistics pointing to lower but still significant growth, China is exporting and importing less of everything. This affects all its trading partners, from Australia to South Korea.

And there are more bad signs. Maersk, the Denmark based leading maritime shipping company, recently announced that it canceled several orders for new vessels. In other words, a giant player that manages a large chunk of world trade does not believe that current and projected global traffic volumes justify buying more container ships. (Incidentally, recent data about the movement of goods in and out of major US ports also indicate a sustained decline).

More Americans are working, but few good jobs

Back in the US, while more people have jobs, most of the recent additions are in leisure and hospitality, health care, and other services. Most of these jobs are low paying. In many cases they are not full-time. In other words, there are no new jobs in critical wealth creating sectors such as oil and gas, mining and manufacturing.

Sure, more American are employed, and this is good news. But their jobs depend on government spending (health care), and on the spending of other Americans employed in wealth producing sectors.

So, here is the thing. While we have more bartenders and waiters, we have had zero growth or declines in manufacturing, oil and gas, and mining. This is not a sign of a robust economy, going forward.

If the global economy slows down significantly, many US exporters will be hurt. Some, like Caterpillar, are already doing poorly. And this is because fewer foreign customers are engaged in new construction projects. Hence no need to buy more earth moving equipment from Caterpillar.

Other Central Banks not about to raise rates 

Last but least, you have to consider what the other monetary authorities are doing. The Bank of England just decided not to raise rates. The European Central Bank is engaged in Quantitative Easing and plans to have more of it, largely on account of disappointing growth within the Eurozone, (only 0.3% in the last quarter). The Japanese economy is (once again) sputtering.  Finally, China is trying to stimulate its economy by easing credit and lowering the amount of reserves banks need to keep. Therefore you can expect more, not less, monetary easing in the rest of the world.

So, here is the global picture. The US may be doing almost OK –for now. But the rest of the developed and developing world is slowing down. For this reason all other central banks will keep interest rates at zero or close to zero.

If the US acts on its own 

In this context, if the US will raise rates all by itself, as a minimum we can expect a massive flood of foreign capital seeking higher rewards into America. This would drive the US dollar further up, significantly hurting US exporters, including all major manufacturing companies. And remember that the newly added US jobs in leisure and hospitality largely depend on other gainfully employed people having the discretionary income to spend on restaurants and holidays.

Stampede out of stocks? 

And it gets worse. Everybody agrees that the US stock market is overvalued on account of zero interest rates that drove people away from other forms of investments. What we do not know is how overvalued.

Assuming even a modest Fed move on interest rates in December, we cannot expect rational, measured reactions. Foreign investors, fearing that the Fed might get aggressive, may flee from higher risk countries. The dollar shoots up. US exporters are hurt, badly. Their stocks sink, dragging down their vendors and suppliers. Other vulnerable stocks follow. Can this become a rout that drags down “everything”? Yes, this can happen.

Is the US economy rather weak, after all? 

Therefore, the odds are now against the Fed raising rates. But, wait a minute. If the Fed does not raise rates, then it signals to Wall Street that the US economy, contrary to its earlier analyses, is not that strong. If even a modest Fed move on interest rates might upset the whole thing, this means that the economy has no strong foundations.

For this reasons, some investors are likely to sell stocks anyway, finally realizing that they are holding stuff of dubious, most likely artificially inflated value.

Preserve your capital, stay out of over valued assets 

Either way, we lose. If investors were wise, they would give up the notion of making any money in stocks, given this weird environment characterized by a slow-moving US, a weak global economy, and expensive assets.

US stock are over valued. Therefore it is not smart to keep buying them. Of course, if you go into cash, you make no money, we know that. Still, better to make zero profit than losing your capital. As I said, if investors were wise…

David Stockman: We Are Losing Manufacturing Jobs

WASHINGTON – In his Contra Corner blog David Stockman (Budget Director under Ronald Reagan) has been warning us that we live in Fed-induced economic fantasy, possibly a hallucination, in which soft numbers pass for indications of solid growth.

Back to where we were

The ugly truth is that, notwithstanding the unprecedented length of the Fed-mandated zero per cent interest policy, America is barely back to where it was  before the 2008 recession. As for jobs growth, it is real. However, we should carefully look at the economic reality behind these numbers. What kind of jobs are we creating?

Jobs losses in manufacturing, gains in health care

Indeed, the just released August figures provide a warning. The mildly good headline is that we have added new jobs, (+ 173,000). However, this is a bit less than what was expected, and this is a bit disappointing.

If we break this number down, the real story is that the smaller than expected jobs growth is due to a net decline in the sectors that actually have an impact on the real economy: manufacturing and mining, (-17,000 jobs). This has been compensated by significant employment growth in services, such as health care.


Which is to say that America is stagnating where it matters: in the true wealth-creating sectors of the economy, while we add jobs in (low pay) services sectors that depend largely on public financing, notably health care. The fact is that nursing assistants, while valuable, do not generate any new wealth, factory workers do. The soft August jobs numbers do not fully reveal this disturbing reality.

Now, the loss of some manufacturing jobs is not so terrible. Because of technological progress and automation, (robots), factories can keep their output while employing fewer people. But, below a certain level, these losses spell decline.

The end game

And if we combine the two trends –loss of jobs in industry and employment gains in low added value services– we begin to see the end game: a feeble economy that no longer generates any real wealth.

How Stockman sees it

This is how Stockman himself presents the issue in his Contra Corner blog. The figures and the graph below, copied from his recent entry, are truly alarming.

“Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition of 1.5 million waiters and bartenders”.

US Media Tell Us That America Is Doing Well

WASHINGTON – Despite evidence to the contrary, most media tell us that all is well with the US economy. The subtext is that the worst post-recession recovery in history is now the accepted “New Normal”. Therefore what we used to call disappointing mediocrity is in fact good. Likewise, low growth rates are impressive. Overall, as a buoyant stock market indicates, we are clearly headed higher. 

Slow growth is the norm 

Here are the facts. The stock market levels are artificial. Everybody knows that current high valuations are largely the effect of zero interest rates mandated by the US Fed that have “forced” investors to buy stocks, as there are no viable alternatives left. Therefore, since all investors are buying stocks, we have inflated Wall Street valuations.

Regarding macro economic data, in the second quarter of 2015 the US economy grew by 2.3%. This is by no means terrible. But it is bad compared to a post war 3% average. Sure enough, we are growing, but at a rate that is about 30% less than what used to be considered the norm.

So, which is which? Are we saying that the post war average was an aberration? Are we saying that growth around 2% is just about right, the best that we can do?

Cheerful headlines 

Well, if you look at the headlines announcing just released second quarter GDP figures, the implicit message is that US mediocre performance is actually quite good.

Reuters: “Consumer spending bolsters US second quarter growth”, The Washington Post: “US economy expands at 2.3% in second quarter, picks up speed”. USA TODAY: “Economy bounces back”.

Look, let’s be clear, these are not lies. They are however embellishments. It is true that the US economy has done better in the second quarter of 2015. But then you have to point out that the ultra-anemic 0.6% growth we had in the first quarter was really bad.

Under performance 

Whichever way you look at this, the media have become cheerleaders of an economy that by any measure is under performing. Average growth is lower than the post war average. The number of Americans with a job as a percentage of the working age population is lower. Unemployment is finally almost back to historical average; but only if we agree to count as employed millions of people who have part-time jobs, while they would like to have full-time employment, and if we agree to exclude from the ranks of the unemployed millions who have dropped out and so are no longer counted.

Once again, this is not a “glass half full or half empty” debate. This is about recognizing what consistently mediocre data, year after year, tell us. America is slowly but clearly sliding into what I would call “European mediocrity”.

2.3% growth in the second quarter, coming after 0.6% growth in the first gives you less that 1.5% for the first half of 2015. It takes heroic optimism to label these disappointing numbers as an indication that the overall economy is “picking up speed”.

Denial is the worst problem

Here is the thing. We have actually two problems. Number one: for a variety of reasons we have lost our past economic vigor. Number two: our elites –the experts whom we rely upon– tell us that all told we are still doing pretty well. Nothing to worry about.

And I suggest that this is the worst problem. We are slowly going down, and we are told by the experts that we are alright, in fact we are trending up.

FT: Europe Undergoing High Tech Transformation – Really?

WASHINGTON – If you look at mainstream media, the news is that slowly but surely “Europe is back”. With a degree of optimism bordering on lunacy, we are told by many analysts and commentators that Europe’s economies are doing so much better, these days.

Europe is back

Yes, we are talking about a Eurozone growth rate for this year that may go beyond 1%. Can you imagine? More than 1% growth? Unheard of.

Well, this is Europe’s “New Normal”. A new normal in which debt to GDP ratios are now close to 100% in most countries, while in Italy the national debt climbs to 125% of GDP and in resurrected and officially “saved” Greece it is close to 180%. This is the new normal of structurally high unemployment (above 10%) with peaks around 25% in Spain and Greece. Not to mention catastrophic youth unemployment (about 30% or higher) in most of Southern Europe.

And yet, notwithstanding this rather dismal picture, the news is that things are essentially back to normal or getting back to normal.

Deluge of cash into high-tech startups?

Case in point an FT front page title encouraging readers to get to the story on page 9 says: “A deluge of cash – Venture capital is pouring into Europe’s tech start-ups”. “Deluge of cash”? Now here is a story. If the authoritative FT writes a special report on an explosion of venture capital supporting new high-tech enterprises in Europe, there must be something really important going on.

Well, no, there isn’t. And it is clear that there is no revolution when you read the article. It is true that now there is a lot more venture capital supporting European tech ventures. In the digital sector there has been an increase from $ 4bn a year in 2010 to $ 7.7 bn in 2014. This is indeed almost double.

Modest funding

However, compared to the $ 160bn invested in the US, of which $ 70 bn have been invested just in Silicon Valley, this is nothing. And yet the EU economy is just as large as America’s, (about $ 18 trillion).

The difference is that there is very little innovation in Europe. The long FT survey describes only a couple of major success stories. And some experts and practitioners quoted in the long article expressed strong skepticism about Europe’s chances to become a real high-tech hub.

And yet, while the actual news is not that good, the FT editors thought that it would be OK to dress up a not so interesting story about Europe’s so-so high-tech companies with a teaser that announces a “Deluge of cash”. As a minimum this is a distortion.

Lamentable record in innovation

The WSJ is more realistic. In a piece titled “Post Bailout Risks Loom for Eurozone Investors” (July 23, 2015), we read that: “Europe’s lamentable record in innovation and startups means a lack of fast-growing new companies with big investment plans”. Got that? Lamentable record in innovation and startups”. No mention here of any “Deluge of cash”.

Look, economic affairs reporting is not an exact science. But both papers cannot be right on the truly significant issue of innovation in Europe. The macro statistics about growth, public debt and unemployment support the WSJ: Europe’s  economies are stagnating.

Wishful thinking

Unless we want to cling to our hopes and say that the FT is right because it is anticipatory. Its reporters have identified below the horizon transformative trends in Europe that others have yet to grasp.

Look, it would be great if this were true. It would be great to witness a European economic renaissance. But it is not there.

And preposterous headlines that announce the massive capitalization of high-tech revolutions, when there is little evidence of anything truly significant underway, are very unhelpful.