It’s different this time — or is it? The US Federal Reserve, the Bank of England and the European Central Bank have become gargantuan, out-of-control, rogue hedge funds. Global central banks have magicked up hundreds of trillions of dollars in debt and guarantees. Worldwide stock-market valuations are stratospheric — buoyed by share buybacks, funded by record corporate debt and enabled by reckless central bank zero-interest-rate policies. The European Central Bank’s purchase of massive amounts of corporate debt is pouring petrol on this blaze.
Can government investment in infrastructure fuel the sort of dynamism that propels an economy forward? Today, that’s virtually an unquestioned truth. Infrastructure spending is constantly cited as the way forward for a stagnating euro zone; in the U.S., both candidates for president promised billions of it. When Donald J. Trump takes office on Jan. 20, that’s the one aspect of his economic agenda that, it appears, Democrats will be able to get behind.Yet caution is warranted. Some in the West have perhaps forgotten two aspects of public investment in infrastructure. First, it takes ages to have real effects. And second, it creates interest groups that warp public spending for decades thereafter.
In the middle of a major domestic crisis over the U.S. charge that Russia had interfered with the U.S. election, the Department of Homeland Security (DHS) triggered a brief national media hysteria by creating and spreading a bogus story of Russian hacking into U.S. power infrastructure. DHS had initiated the now-discredited tale of a hacked computer at the Burlington, Vermont Electricity Department by sending the utility’s managers misleading and alarming information, then leaked a story they certainly knew to be false and continued to put out a misleading line to the media. Even more shocking, however, DHS had previously circulated a similar bogus story of Russian hacking of a Springfield, Illinois water pump in November 2011. The story of how DHS twice circulated false stories of Russian efforts to sabotage U.S. “critical infrastructure” is a cautionary tale of how senior leaders in a bureaucracy-on-the-make take advantage of every major political development to advance its own interests, with scant regard for the truth.
It has only been two weeks since Christmas, and already we are witnessing a stunning bloodbath of store closings. Macy’s shocked the retail industry by announcing that they will be closing about 100 stores. The downward spiral of Sears hit another landmark when it was announced that another 150 Sears and Kmart stores would be shutting down. And we have just learned that The Limited is immediately closing all stores nationwide. If the U.S. economy is doing just fine, then why are we experiencing such a retail apocalypse? All over America, vast shopping malls that were once buzzing with eager consumers now resemble mausoleums. We have never seen anything quite like this in our entire history, and nobody is quite sure what is going to happen next.
It seems so strange, twenty-seven years after the fall of the Berlin Wall, to be living through a new Cold War with (as it happens, capitalist) Russia. The Russian president is attacked by the U.S. political class and media as they never attacked Soviet leaders; he is personally vilified as a corrupt, venal dictator, who arrests or assassinates political opponents and dissident journalists, and is hell-bent on the restoration of the USSR…..(The latter claim rests largely on Vladimir Putin’s comment that the dissolution of the Soviet Union was a “catastrophe” and “tragedy” — which in many respects it was. The press chooses to ignore his comment that “Anyone who does not miss the Soviet Union has no heart, while anyone who wants to restore it has no brain.”
The unfortunate truth is that real demand (at least in the organic sense we are familiar with) no longer exists. When the Fed’s balance sheet is still hovering around $4.4 trillion and M1 money stock is still going parabolic you can safely assume that the financial gurus in the Marriner Eccles building have an agenda. That agenda entails keeping a heavy coat of lipstick on this pig to avoid any unsightly appearances of actual markets. The U.S. housing market is looking more and more like a paranoid schizophrenic with each passing month. After blowing up spectacularly in 2008 (taking most of the world economy along with it), we now have a housing market that has been reflated to new nominal highs. By most appearances things are back to normal, unless you really start to look beneath the headline statistics. Once you peel back the curtain you find a bi-polar housing market riddled with distortions and dislocations, all of which were facilitated by the Fed’s monetary shell game.
With interest rates so low, many retirees have been turning to junk bonds to generate income. They better know what they are doing….. Historically, junk has offered an average of 5.8 percentage points more than Treasurys, though the spread has ranged from 21 points to 2.4 points. (A bigger spread means investors are getting larger interest payments to compensate them for the risk of default.) Defaults among junk-bond issuers seem to have a pronounced cycle, occurring at very low rates for years and then spiking at 10% or more such as in 2001 and 2009. Defaults cause junk-bond prices to plummet and yield spreads to widen as frightened investors dump their holdings.
The European Central Bank should start unwinding its ultra-loose monetary policy this year, German Finance Minister Wolfgang Schaeuble said in an interview to be published on Friday, adding that it would not be easy. “The European Central Bank will have the tough task of getting out of the ultra-expansionary monetary policy,” Schaeuble told the Sueddeutsche Zeitung newspaper. “It would presumably be right if the ECB dared to exit this year”.
US equity markets are already factoring in Trump’s promised reforms, while bond markets are pricing in higher inflation.There’s just one thing: Trump hasn’t done anything yet. We’re still weeks away from his inauguration, and details of his economic plans remain scarce. Investors seem to take potential positives for economic growth (lower taxes, deregulation, and fiscal stimulus) at face value, but ignore the potential negatives (soaring deficits, tariffs, and trade wars).
The company is doing just that. It announced in the last week that it’s closing 150 Sears and Kmart stores, or roughly 10% of its store base, in early 2017. Sears has arranged a deal to sell its iconic Craftsman brand to Stanley Black & Decker for about $900 million, which includes a cash payment of $525 million in the near term and another $250 million in three years, as well as ongoing payments of a percentage of Craftsman sales……The company is doing just that. It announced in the last week that it’s closing 150 Sears and Kmart stores, or roughly 10% of its store base, in early 2017. Sears has arranged a deal to sell its iconic Craftsman brand to Stanley Black & Decker for about $900 million, which includes a cash payment of $525 million in the near term and another $250 million in three years, as well as ongoing payments of a percentage of Craftsman sales.