Flashback from 2000: Fed raises interest rates

Fed lifts key rates again
March 21, 2000: 3:10 p.m. ET
Fed funds rate, discount rate raised a quarter point each to slow growth 
NEW YORK (CNNfn) - The Federal Reserve Tuesday lifted short-term interest rates by another quarter point -- the fifth increase in less than eight months -- in an effort to slow the seemingly unstoppable U.S. economy and ensure prices for goods and services remain in check.
    It also put another warning shot over Wall Street's bow that it likely will raise rates again in the face of what it sees as a risk for an outbreak of inflation.

Source: http://money.cnn.com/2000/03/21/economy/fomc/

17 year business cycle

In a previous post, I theorized that there might be an 11 year cycle.  Now I am thinking about a 17 year cycle.  The Dow hit a high of 11,722 on 1/14/2000, and this cycle hit a high of 21,115 on 3/1/2017.   

Previous cycles had turning points in 1932 (the depths of the great depression), 1949, 1966, and 1983.  There wasn't a recession in 1966, but it reached a high of 981 on 1/5/1966.  The first time the Dow broke 1,100 was on 2/24/1983, so the stock market went sideways for 17 years from 1966 to 1983 before beginning a great boom from 1983 to 2000.

The 17 year cycle is about double Martin Armstrong's pi cycles of 8.6 years.

If the 17 year cycle is correct (and it probably isn't), then we can the Fed to raise rates 3 more times this business cycle, a recession starting in March 2018, and a stock market crash in September 2018.

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Armstrong sees a cycle of 3,141 days, so two cycles have 6,282 days.  If you start with 1/14/2000 and add 6,282 days, you get to 3/26/17.  The actual high in 2017 was on 3/1/2017, 25 days early.  That's pretty close.

A recession began in March 2001 (call it March 1 for our purposes).  6,282 days from then is May 12, 2018, or really on May 1, 2018.

Other parallels between the year 2000 and the year 2017 is the feeling of something totally new.  In 2000, it was a new millenium.  It 2017, it was the election of Trump.

On May 16, 2000 the Fed raised interest rates to 6.5%.  They have never been that high since.  6,282 days from then is about July 27, 2017.  The next time the Fed meets is in June.  So I am predicting that they will raise rates at that meeting to 1.00% and that will be the last time they raise rates.

All's Fair at the Fair

Luxembourg is the next London

There were plenty of reasons for financial outfits of all kinds to settle in the City of London. But now that Brexit will likely throw a monkey wrench into unfettered access to the European Union for these firms, they need to head to the continent. And tax haven Luxembourg appears to be a big beneficiary in a post-Brexit world.
--http://wolfstreet.com/2017/03/13/brexit-financial-firms-move-from-london-to-luxembourg/

Is Trump planning on defaulting?

On March 15, the debt limit will be reimposed.  The Treasury only has $34 billion cash on hand.  The government will receive a lot of tax revenues in April and is slowing down paying the tax credits.  Still, it may be out of cash by the end of May.  (I previously speculated September 1).  The exact day doesn't really matter, but it will probably be sometime between June 1 and Sept 30.

Trump may be able to negotiate a deal by then. When Obama had the same type of crisis in 2011, 2013, and 2015, he and Jack Lew stared down the Republicans and insisted that the Treasury was unable to prioritize payments and if it missed a single accounts payable deadline it would be in default.  McConnell caved and this lead to a deal which will soon expire.

I think Trump is more devious than that.  I think he will order that payments be prioritized so that payments for interest, Social Security, and the military, and other programs he likes will be paid, and programs he doesn't like, such as the EPA, won't.  He will force a downsizing of the federal government whether anyone likes it or not.  All hell will break loose, and this will end up in the Supreme Court.

Ironically, this will cause the stock market to boom, for the simple reason that cash has to go somewhere, and the government issuing bonds soaks up some of the cash.

The outcome?  Who knows.  But it could include riots in the streets and the national guard.

Two questions: will this cause a recession?   I don't think so, at least not in the short run.  The government is usually seen as a counterweight to recessionary forces, but it can also damper the "animal spirits".  Unemployment is at a 30 or 40 year low, and the only signs of a recession are reduced government revenues and in retailers.

And is this good for the long-term fiscal stability of the country?  Ironically yes.  The biggest threat to the long-term stability is the debt, or more specifically the interest on the debt.  Anything that stops the debt from growing is good.  So bring it on.

I don't think very many people are aware of the constitutional crisis that will occur this summer.  Well David Stockman has been yelling, but not many people are listening.

So, when the blockbuster hit comes out this summer, grab some popcorn and watch the world explode.

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Read this: https://dailyreckoning.com/fiscal-horror-show-playing-soon-washington/

I believe it is likely that the debt ceiling will not be raised at least at first when it is hit. By hit I mean after the Treasury plays it's usual bag of tricks to delay hitting the ceiling, if they do. Rather I believe that the White House will instruct the Treasury to simply pay only some bills and thus not 'shut down' the government. After all tax receipts are enough to pay around 90% of all expenditures.

Thus the power of the purse will go to the White House. Don't like EPA, stop paying their salaries. Don't like some program that sends money to Chicago to do something or other, don't send it. Of course they will pay the interest and principal on Treasury paper so there will not be a default on the debt which after all what default means. The question of if not spending money that has been appropriated, by our Byzantine and irrational congressional appropriations process, is default can be left to the courts. Even then why would the administration or the GOP abide by a Supreme Court decision they don't like. Who is going to make them?

An additional thing is that with no Treasury borrowing to suck up investment money it will have to flow into stocks. Something playing our already with a reduced Treasury borrrowing schedule as it burns through the huge $350bn plus cash balance it had when Trump was sworn in, $250bn left to go. (which is one reason stocks are marching higher so relentlessly. Because the Treasury is not in the market as much as it would otherwise be) With zero Treasury issuance it will be almost impossible for stocks not to rise. It will just be like $80bn a month in QE. Well except that the 3% of the money flowing into the real people real jobs economy will stop flowing. Can you say recession?

According to Bannon recession is a small price to pay for a revolution.

I wish someone would start asking the White House, the GOP leadership and the Treasury about this because I firmly believe it is planned already. If so then what we have seen the first two months of the administration is just a warm up to a constitutional and political crisis second to none since the Civil War.

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More on the same topic:

The Treasury will likely be out of cash shortly after Memorial Day. ... Trump is going to find it quite challenging to find the votes to raise the debt ceiling.  After everything that has happened, very few Democrats are willing to help Trump with anything, and many Republicans are absolutely against raising the debt ceiling without major spending cut concessions.  So we shall see what happens.  If the debt ceiling is not raised, it will almost certainly mean that a major political crisis and a severe economic downturn are imminent.

--http://theeconomiccollapseblog.com/archives/21714-for-every-man-woman-and-child-in-the-world-this-global-debt-bomb-is-ready-to-explode

Recession Watch: Government Receipts

Source: http://davidstockmanscontracorner.com/chart-of-the-day-recessioin-warning-us-treasury-receipts-down-yy-for-3rd-straight-month/

Housing in Japan

Houses in Japan rapidly depreciate like consumer durable goods – cars, fridges, golf clubs, etc. After 15 years, a home typically loses all value and is demolished on average just 30 years after being built. And so, despite a shrinking population, house building remains steady. 87% of Japan’s home sales are new homes (compared with only 11-34% in Western countries). This puts the total number of new houses built in Japan on par with the US, despite having only a third of the population. This begs the question: why don’t the Japanese value their old homes?
--http://www.archdaily.com/450212/why-japan-is-crazy-about-housing/

Alan Beaulieu: 2019 Mild Recession, 2030 Great Depression

I've never heard of Alan Beaulieu before but this makes sense.

Alan Beaulieu: Still on Track for 2019 Recession, 2030 Depression

The economy seems to be on an 11-year business cycle.  The last recession started in Dec. 2007.

Radioactive wild boars are taking over the Fukushima exclusion zone

When the exclusion zone was set up - with the surrounding towns population evacuated to a safe distance - hundreds of the wild boars, which have been known to attack people when enraged, descended from surrounding hills and forests into the deserted streets.  Now they roam the empty streets and overgrown garden's of Japan's deserted seaside town of Namie, foraging for food However, the people of Namie are scheduled to return to the town at the end of the month, which means the bloody-toothed interlopers have to be cleared. "It is not really clear now which is the master of the town, people or wild boars," said Tamotsu Baba, mayor of the town.  --http://www.mirror.co.uk/news/world-news/first-photos-radioactive-wild-boars-9996080

See also The Biggest Threat to the Planet.

Is this the peak?

Exhibit 1 - Dow Jones
The Dow Jones closed yesterday (Feb 27) at 20,837.44, and is down 25.50 today to close at 20,812.24.  It could go higher tomorrow, but it seems like it is running out of steam.

Exhibit 2 - Commercial and Industrial Loans
Commercial and industrial loans have plateaued.  They have been flat at about $2.1 trillion for 4 months now.  "The timing of a turning point may not be perfectly aligned with the beginning of a recession, but it’s close.And turning points become clear only after CI loans are in a real downdraft. Before then, we just have our suspicions. For now, we have four months of stagnation, a first since the trough of the Financial Crisis, and a sign that companies have become more reluctant to borrow from banks."

Exhibit 3 - NYSE Margin Debt
This hit an all-time high in January 2017 of $513,278 million.  I've written about this before.  It could be a danger signal or it could be nothing.

Exhibit 4 - Initial Jobless Claims
The 4-week moving average is at 241,000, which is at the lowest level in 47 years (since 1970).  It appears to be at a low.  And once it hits a low, it doesn't stick around, it starts going up quickly.

This recovery could still go on longer.  But I think the March 15 date will panic the market.  We will see.  Some point will be the high and yesterday might be it.

Disclaimer:  My track record on this is horrible.  The last time I though a crisis was imminent was Sept. 30, 2016, and before that on September 11, 2015, and I could find more.  I am not saying a crisis is imminent now.  I am just saying that this may be a peak, and there may be a recession within 6 to 18 months.

Update:  The housing bubble is starting to pop worldwide.

Update 2:  The Dow closed on March 1, 2017 at 21,115.55.  Let's see where it is on March 16.

After March 15 Everything Will Grind To A Halt

“I think what people are missing is this date, March 15th 2017. That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015. That holiday expires. The debt ceiling will freeze in at $20 trillion. It will then be law. It will be a hard stop. The Treasury will have roughly $200 billion in cash. We are burning cash at a $75 billion a month rate. By summer, they will be out of cash. Then we will be in the mother of all debt ceiling crises. Everything will grind to a halt. I think we will have a government shutdown. There will not be Obama Care repeal and replace. There will be no tax cut. There will be no infrastructure stimulus. There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.” 
http://www.zerohedge.com/news/2017-02-26/stockman-after-march-15-everything-will-grind-halt

Comment:  I fully agree, which is why I posted it, but the "drop dead" date will be about September 1, not March 15.  The "drop dead" date is when the Treasury exhausts the extraordinary measures, and they can go a few months with all the tricks.

The system can't continue past 2037

This isn't recent news but noteworthy nonetheless.  This is a quote from Paul Ryan on April 6, 2011.

“We’re on a debt crisis path. We are on a path where the government goes from 20 percent of GDP, to 40 percent then 60 percent of GDP. We’re on a path where our debt goes from about 68 percent of GDP to 800 percent of GDP over the three-generation window,” Ryan said.

“I asked CBO to run the model going out and they told me that their computer simulation crashes in 2037 because CBO can’t conceive of any way in which the economy can continue past the year 2037 because of debt burdens,” said Ryan.

So, this quote is almost 6 years old, and I think the long-term outlook has improved since then.  Still, there is a Y2K38 bug that will occur on January 19, 2038, which seems like a "bad omen".

I'm trying to be proactive and positive here.  How can the system continue as is after 2037?

Budget and Economic Outlook: 2017 to 2027

https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52370-outlookonecolumn.pdf

The CBO recently released their latest 10 year budget outlook. I'm looking for their worst-case scenario and when they think it might occur. Here it is:

 Beyond the 10-year period, if current laws remained in place, the pressures that contributed to rising deficits during the baseline period would accelerate and push debt up even more sharply. Three decades from now, for instance, debt held by the public is projected to be nearly twice as high, relative to GDP, as it is this year—and a higher percentage than any previously recorded. Such high and rising debt would have serious negative consequences for the budget and the nation:

• Federal spending on interest payments would increase substantially as a result of increases in interest rates, such as those projected to occur over the next few years.
• Because federal borrowing reduces total saving in the economy over time, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.
• Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.
• The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.

This is my interpretation of what is being said here.  In 3 decades from now, that is, in 2047, a fiscal crisis is likely to occur unless major changes are made.

When do they expect the trillion dollar deficits to re-occur?  In 2023, when the budget deficit is conveniently predicted to be exactly $1.000 trillion.

The Debt Limit is back

The debt limit is suspended until March 15, 2017, at which time it will be both reset to include all debt issued while it was suspended, and frozen at that level until it is raised or re-suspended.  The Treasury should have enough cash to operate until at least August.

Usually it just gets suspended again without much of a fight.  This time, however, the Republicans, being in the majority, could get tough, and the Democrats would love to trip Trump up.

The main question I have is will it reach $20 trillion before March 15?

See also: http://www.marketwatch.com/story/raising-the-debt-ceiling-is-now-trumps-problem-2017-02-01

2016 Financial Report of the US Government

Link:  https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/16frusg/01112017FR_(Final).pdf

Although this isn't GAAP, its the closest we have.

The executive summary is that the US Government lost $1,047 billion in FY 2016 and its net financial position (assets minus liabilities) was a negative $19,292 billion.

How much interest was paid in FY 2016?  It's hard to find in the report, because you have to use the right search words, which are: "Interest on Treasury Securities Held by the Public".  The total was $273 billion.

So, no worries.  The debt will never have to be paid back, and the only real cost is the interest, which is totally manageable.

Global Helicopter Money

There is $150 billion per month being created out of thin air by the BOJ and  the ECB that indirectly makes its way to the US to buy Treasury bonds.  This keeps the yield of T-bonds about 1% lower than it otherwise would.  If this flow of money stops, then the US would immediately fall into a recession:

"I would venture a guess that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession."
--http://www.zerohedge.com/news/2017-02-06/gross-without-qe-ecb-and-boj-us-economy-would-sink-recession

Thanks Japan and Europe, for subsidizing our economy.  Thankfully, this situation will continue forever!

There is no need to worry about deficits because we can always issue more bonds.  And they will be purchased with money created out of thin air.  It's alchemy!  We have discovered a way to create unlimited wealth.  Step 1, have the government spend it on whatever they want.  Step 2, issue bonds to cover the deficit.  Step 3, the BOJ will create more money to buy the bonds.  The only problem is that the government does not spend enough,  We need moar!

Steampunk in San Francisco

Nikola Tesla’s alternating current may have “won” the War of Currents at the end of the 19th Century, but the defeated incumbent—direct-current distribution, aggressively championed by Thomas Edison—endured. As historian of technology Thomas P. Hughes observed in his influential essay on the evolution of large technological systems, the War of Currents ended “not with victor and vanquished, but with the invention of devices making possible the interconnection of the two systems.” Remnants of DC power distribution kept performing their assigned tasks for decades as the AC grid thickened around them.

In fact, a few live on to this day. One of the best examples is in San Francisco, where 250-volt DC power still flows through underground and overhead cables across the city. These DC lines peacefully coexist with their AC counterparts; you can see this mix of currents straddling utility poles in the city’s South of Market district. DC’s perseverance in that neighborhood seems fitting, for it was just a few blocks away that the tiny California Electric Light Co.—a forebear to California’s dominant Pacific Gas and Electric (PG&E)—became the first power company in the United States, and possibly the world, to supply electricity to multiple customers from a central generating station. It was in September 1879—a full three years before Edison turned on his famous Pearl Street generating station in New York City—that California Electric began burning coal, raising steam, and driving dynamos in a wooden shack at the corner of Fourth and Market streets to feed current to its customers’ electric lights.

DC-driven winding-drum elevators—the leading design until the 1930s—use a DC motor in the basement that winds and unwinds the elevator’s steel cable on a steel drum, thus lifting and lowering the car from pulleys atop the elevator shaft. DC drive was the only way to go at the time for a speedy elevator, because only DC could deliver variable-speed operation for smooth starts and stops. The DC motors were also energy efficient, capable of something that has only recently become possible with modern elevator designs: regenerating power when the elevator descends.

--http://spectrum.ieee.org/energy/the-smarter-grid/san-franciscos-secret-dc-grid

The Debt now seems under control

As of yesterday, January 31, 2017 the national debt was at $19.937 trillion.  One year earlier, it was $19.012 trillion.  So it increased less than a trillion over that period, breaking a streak of 10 months in a row where the debt increased at least 1 trillion from the previous year.  I consider this very good news.  The new President Trump deserves at least a little credit for this I think.

The $20 trillion mark still hasn't been breached, but this should occur later in February, which usually runs a large deficit.

California should be split into 4 states

I know this has been mentioned before but this is my proposal.  California should be divided into 4 states, 2 for counties south of the "line" and 2 for counties north of it.  I will call them by the name of their largest city.

1. Los Angeles aka "West California"  (Los Angeles County, Ventura, Santa Barbara, San Luis Obispo, Kern).
2. San Diego aka "South California" (San Diego County, Orange County, Riverside, San Bernadino, Imperial).
3. San Francisco aka "San Francisco Bay" (San Francisco County, Monterrey, San Benito, Santa Cruz, Santa Clara, San Mateo,  Alameda, Contra Costa, Marin).
4. Sacramento aka "Central California" (Sacramento County, Napa, Solano, Sonoma, Yolo, San Joaquin, Stanislaus, Merced, Fresno, Kings, and all the remaining counties).

The boundaries aren't fixed and of course the people in border counties could vote on which state they would want to join (e.g. Kern County, Sonoma County).

This is very similar to the earlier proposal to split California into 6 states.  The main difference is that my state of Sacramento would be split into 3 states, with Central California (including Kern county), North California (Sonoma, Solano, Napa, Sacramento, and west), and the state of Jefferson.

This would give the states more political power, with 8 Senators total vs 2 Senators now.

See also http://www.nationalreview.com/article/444384/california-secession-bad-idea-division-two-states-better-idea

Happy New Year!

The national debt on 12/30/2016 was $19.977 trillion.  Almost $20 trillion.
One year earlier, on 12/31/2015, in was $18.922 trillion.  So it was more than $1 trillion higher.

This marks the 10th consecutive month (the first was March 31, 2016) in which the national debt was at least $1 trillion higher than the same point one year prior.

I still don't understand why the national debt doesn't matter.  We are either going to pay it back or we are not.  It seems like we are not.  Which means that we will default someday, in a hyperinflationary depression.  My last calculation for this doomsday event was 2039, and I will leave it there until the next recession, when I expect the deficit to spiral out of control again.

For all my doom and gloom, I don't expect a recession to hit this year.  I expect it to be in 2018.  So let's have a great year and see if Trump can fix this leaky boat before it sinks.

I don't expect to post very often this year, unless something really strikes my fancy.