Rate-Cuts Aren't Going To Be Insurance; They Are The Alarm Bells

Jerome Powell, Chair of the Fed 

See https://www.zerohedge.com/news/2019-06-26/libor-now-inverted-rate-cuts-arent-going-be-insurance-they-are-alarm-bells

Last week, for the first time since February 2008, the LIBOR curve inverted. It’s another sign of imminent rate cuts. I am somewhat reluctant to point out how it was on August 9, 2007, when this same thing happened for the first time last time around. Authorities are being pulled kicking and screaming in a direction they absolutely don’t want to go.

I've said this before.  I think the Fed should ignore all the signals and hold steady.  It could cause stocks to drop, but they are too high anyways.  An interest rate of 2.35% isn't that high.  If the Fed caves in to the bond vigilantes, then it will only encourage them, and they will want more rate cuts.  Don't feed the trolls!

If the Fed cuts rates on July 31, then it will cause a recession about 3 months later.  There is no need to cut, even though everyone in the world thinks there is 100% chance of a rate cut on July 31,  and a 92% of at least two rate cuts by December.

Don't do it.  Jerome Porter, you are our only hope.  Save us from the financial terrorists who want to destroy our economy.  Don't push the button, don't cut rates.  If you do, the destruction it causes will all be your fault. 

Update:
An "insurance rate cut" in July could not only prove a policy mistake, but further erode Powell's credibility and the Fed's.

How the Boomers Ruined Everything

https://www.theatlantic.com/ideas/archive/2019/06/boomers-are-blame-aging-america/592336/

The Baby Boomers ruined America. That sounds like a hyperbolic claim, but it’s one way to state what I found as I tried to solve a riddle. American society is going through a strange set of shifts: Even as cultural values are in rapid flux, political institutions seem frozen in time.

Baby Boomers are living longer even as the workers who pay for their pensions are dying from an epidemic of drug overdose, suicide, car accidents, and violence. But, of course, while this sudden increase in working-age death rates is a new concern, the long-run fiscal crunch has been obvious for decades. For virtually the entire period of Boomer political dominance, it has been obvious that long-term obligations needed to be fixed. And yet, the problem has not been fixed. Younger Americans will suffer the consequences.

The rise and fall of Astroworld

This very cool theme park was closed in 2005 and demolished in 2006, supposedly because the land was so valuable.  However, the land sits empty today and is used only for overflow parking on rare occasions.

The Law of War

The Law of War is fascinating reading.  Source: http://ogc.osd.mil/images/law_war_manual_december_16.pdf

Excerpt:
3.5.1 General Distinction Between Jus in Bello and Jus ad Bellum. As a general matter, jus in bello and jus ad bellum address different legal issues and should not be conflated.

Conflating jus in bello and jus ad bellum risks misunderstanding and misapplying these concepts. For example, in jus ad bellum, proportionality refers to the principle that the overall goal of the State in resorting to war should not be outweighed by the harm that the war is expected to produce. However, the principle of proportionality in jus in bello generally refers to the obligations to take feasible precautions in planning and conducting attacks and to refrain from attacks in which the expected loss of civilian life, injury to civilians, and damage to civilian objects incidental to the attack would be excessive.  Therefore, although a jus ad bellum proportionality analysis might consider the harm suffered by enemy military forces in the fighting, a jus in bello proportionality analysis would not.

Note: Jus ad bellum deals with the question as to whether the war was justly started (i.e. for self-defense).  Jus in bello asks whether the war is being justly fought (i.e. avoiding civilian causalties where possible).

Deficit Hits Record for Month of May with $208 billion

See: https://www.zerohedge.com/news/2019-06-12/us-government-spending-soars-all-time-high-deficit-hits-record-month-may

The deficit has never been higher in May.  It is up from $147 billion in May 2018.  (In May 2009, it was about $190 billion).  "the budget deficit for the first eight months of the fiscal year shot up to $738.6 billion, a whopping 38.8% higher than the $532 billion reported for the same period last year, largely the result of soaring government spending". 

The deficit for FY 2019 is supposed to be $897 billion, but at this rate it will easily pass $1 trillion.

Should the US adopt Guatemala?

Specifically, my question is, should Guatemala become a commonwealth (or protectorate) of the United States, making it have a status similar to Puerto Rico and the Northern Mariana Islands.  Puerto Rico participates in the Olympics, and they have U.S. citizenship but don't pay income taxes.  The only restriction is that a commonwealth doesn't conduct its own foreign affairs.

The reason for proposing this is twofold: first, the enormous number of illegal immigrants in the US from Guatemala, and second, the historical interference of the US in Guatemala which prevented it from developing its own democracy.  See CIA activities in Guatemala,  1954 Guatemalan coup d'etat, and Guatemalan Revolution.

It sounds crazy, but Guatemalans are clearly voting with their feet.  Let's make Guatemala part of the U.S. empire.

Rate cut by September

	Rate	3 month	6 month	1 year	2 year	3 year
Jun 21, 2019	2.35%	5.875	5.875	5.875	5.875	5.875
Sep 21, 2019	2.10%		5.25	5.25	5.25	5.25
Dec 21, 2019	1.85%			4.625	4.625	4.625
Mar 21, 2020	1.85%			4.625	4.625	4.625
Jun 21, 2020	1.60%				4	4
Sep 21, 2020	1.60%				4	4
Dec 21, 2020	1.60%				4	4
Mar 21, 2021	1.85%				4.625	4.625
Jun 21, 2021	1.85%					4.625
Sep 21, 2021	1.85%					4.625
Dec 21, 2021	1.85%					4.625
Mar 21, 2022	1.85%					4.625
Total interest paid		5.875	11.125	20.375	37	55.5
Num quarters		1	2	4	8	12
Total Annualized Return		2.37%	2.24%	2.04%	1.83%	1.82%
Actual as of 6/5		2.35%	2.25%	2.04%	1.83%	1.81%

The bond market is now predicting rate cuts in September, December and June 2020.  Previously (just 2 days ago), it was predicting rate cuts in December, March 2020 and June 2020.

So expect something drastic between now and September that would force the Fed to react, maybe a stock market crash or maybe a jump in the unemployment rate. And the recession should start in December 2019.

Secession: Treason or Right?

Interesting article at: https://fl.lawstudentland.com/post/45684364518/secession-treason-or-state-right , that is worth a read:

The initial union between the entities now making up the United States was the British Empire.  Within this empire, however, a new union was founded.  Abraham Lincoln claimed that this union was founded in 1774 with the Articles of Association,[1] and indeed these articles created an association amongst twelve of the thirteen colonies, but this association itself was expressly a temporary measure to last until the dispute with Great Britain had been resolved.[2]  Lincoln then claimed that this union was “matured and continued by the Declaration of Independence.[3]” 

...

The Conundrum of the 14th Amendment

Were the former Confederate states welcomed back into the American family after the Civil War?  In President Andrew Johnson's view, they were:

At the end of May 1865, President Andrew Johnson announced his plans for Reconstruction, which reflected both his staunch Unionism and his firm belief in states’ rights. In Johnson’s view, the southern states had never given up their right to govern themselves, and the federal government had no right to determine voting requirements or other questions at the state level.  Apart from being required to uphold the abolition of slavery (in compliance with the 13th Amendment to the Constitution), swear loyalty to the Union and pay off war debt, southern state governments were given free reign to rebuild themselves.
https://www.history.com/topics/american-civil-war/reconstruction

So, in this view, I will call it the Johnsonian view, the only real requirement was that the states ratify the 13th Amendment, which abolished slavery, but which did not make the former slaves citizens and didn't give them any rights.  Johnson encouraged the southern states to form governments, which however were not recognized by Congress.  The 13th Amendment was ratified by the southern states of: Virginia, Louisiana, Tennessee, Arkansas, South Carolina, Alabama, North Carolina, and Georgia.  Only 27 states were needed to ratify because Nebraska did not become a state until 1866. Florida ratified it a few days it was officially approved. The southern states that refused to ratify the 13th Amendment were: Texas, Kentucky and Mississippi.  But it didn't matter because it was already part of the Constitution.

However, Congress, controlled by the Republicans, passed the Reconstruction Acts, which imposed military governments on the South and it also passed a law on March 2, 1867, requiring that a former Confederate state must ratify the Fourteenth Amendment before "said State shall be declared entitled to representation in Congress".  I will call this the Radical Republican view.

So we are looking at the seven recalcitrant states (Arkansas, Florida, North Carolina, South Carolina, Louisiana, Alabama and Georgia).  Were they accepted back into the family because they ratified the 13th Amendment?  Or were they rejected and deserved to be ruled by the military?

The conundrum was that the 14th Amendment was essentially coerced on these seven states and it wasn't their voluntary act.  Maybe you could say that these seven states weren't really part of the union, and along with the other 3 (Texas, Virginia, and Mississippi), they were conquered territory to be ruled by the military.

If you subtract out the 10, then there were only 27 states (including Nebraska).  Three-fourths of 27 is 21.  But the 14th Amendment had been rejected by Oregon, New Jersey, Ohio, Kentucky, California, Delaware, and Maryland.  So only 20 of the 27 states voted for it (including Nebraska).  That isn't enough to pass.

Now obviously after the reconstructed southern states were reconstructed enough and ratified it, there were enough states to get to the 3/4 mark.  But it does appear that the 14th amendment was never properly ratified.  

The conundrum is, if the state was welcomed back as part of the family, then respect its vote.  If the state wasn't welcomed back, then exclude its vote.  Either way, there weren't enough votes to pass the 14th Amendment until sometime in the 1870s.  The Supreme Court has never ruled on this.  Interesting.

Was the 14th Amendment never properly ratified?

I've just read a crazy claim that the 14th Amendment was never ratified.  To pass a constitutional amendment requires 3/4 of the states.  There were 37 states in 1866 when the amendment was proposed.  So 28 states had to approve it.  If 10 or more rejected it, then the 28 number wasn't reached.

The amendment was proposed on June 16, 1866.

New Jersey passed it on September 11, 1866 then rescinded it on February 20, 1868.

Oregon passed it on September 19, 1866 then rescinded it on October 16, 1868.

Ohio passed it on January 11, 1867 then rescinded it on January 13, 1868.

North Carolina rejected it on December 14, 1866 then approved it on July 4, 1868.

Louisiana rejected it on February 6, 1867 then approved it on July 9, 1868.

South Carolina rejected it on December 20, 1866 then approved it on July 9, 1868. 

Georgia rejected it on November 9, 1866 then approved it on July 21, 1868.

Virginia rejected it on January 9, 1867 then approved it on October 8, 1869.

Texas rejected it on October 27, 1866.

Delaware rejected it on February 8, 1867.

Maryland rejected it on March 23, 1867.

Kentucky rejected it on January 8, 1867.

Florida rejected it on December 6, 1866.

Alabama rejected it on December 7, 1866 and then approved it on July 13, 1868.

Arkansas rejected it on December 17, 1866 then approved it on April 6, 1868.

Mississippi initially ignored it and didn't ratify it until January 17, 1870.

California initially ignored it and didn't ratify it until May 6, 1959.

Just looking at the initial rejections and also counting those that didn't approve it by the end of 1867 and ignoring those who approved it and then rescinded, these states rejected or ignored it: Alabama, Arkansas, California, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Texas, Virginia.  That is 14.  

So only 23 states initially approved it.  Those states are:

Connecticut

New Hampshire

Tennessee

New Jersey

Oregon

Vermont 

New York

Ohio

Illinois

West Virginia

Michigan

Minnesota

Kansas

Maine

Nevada

Indiana

Missouri

Pennsylvania

Rhode Island

Wisconsin

Massachusetts

Nebraska

Iowa

So they were 5 states short.

Hmm, I think we are on to something suspicious here.   Of course there is more to the story.  To be continued...

===============
Part 2:  
In early 1868, Ohio and New Jersey rescinded their ratifications.  Their reasoning was that the 14th Amendment guaranteed black people rights but discriminated against former Confederates.  There was a question as to whether they could rescind, but assume that they did.  Now the 14th Amendment only had 21 states supporting it.

But then the reversals starting rolling in. 
Arkansas in April 1868.
Florida in June 1868.
And in July 1868, North Carolina, South Carolina, Louisiana, Alabama and Georgia all changed their minds and ratified it. 

So the magic number of 28 was reached on July 21, 1868.

But why did the 7 states change their minds?

Holy Cow

	Rate	3 month	6 month	1 year	2 year	3 year
Jun 21, 2019	2.35%	5.875	5.875	5.875	5.875	5.875
Sep 21, 2019	2.35%		5.875	5.875	5.875	5.875
Dec 21, 2019	2.10%			5.25	5.25	5.25
Mar 21, 2020	1.85%			4.625	4.625	4.625
Jun 21, 2020	1.60%				4	4
Sep 21, 2020	1.60%				4	4
Dec 21, 2020	1.60%				4	4
Mar 21, 2021	1.60%				4	4
Jun 21, 2021	1.60%					4
Sep 21, 2021	1.60%					4
Dec 21, 2021	1.85%					4.625
Mar 21, 2022	1.85%					4.625
Total interest paid		5.875	11.75	21.625	37.625	54.875
Num quarters		1	2	4	8	12
Total Annualized Return		2.37%	2.36%	2.16%	1.86%	1.80%
Actual as of 6/3		2.35%	2.31%	2.11%	1.82%	1.79%

The bond market is now predicting 3 interest rate cuts, in December, March 2020 and June 2020.  And that they won't rise at all until December 2021.   The first rate drop somehow either is a leading indicator of a recession or causes it, with a lag time of about 3 months.  Last time, the Fed cut rates in September 2007 and the recession started in December 2007.

So we a looking at a stock market crash in October, a rate cut in December, and the recession starting in March 2020 and lasting through September 2021.   This will obviously reduce GDP growth, tax revenue will decline and the deficit will soar.  Will we see a $2 trillion deficit in FY 2021?

================
Update:
The Countdown to FOMC site is predicting a 29% chance of a rate cut in June (this month), and a 75% of a rate cut by July (next month). By September, the odds increase to 92%.  By December, there is a 98.4% chance of a cut. 

I'm obviously missing something.  I don't get why the Fed would cut at all, unless there is a stock market crash.