December 4: Daily Contrarian Reads

The Scalp-Taking of Gen. Flynn

Russia-gate enthusiasts are thrilled over the guilty plea of President Trump’s former National Security Adviser Michael Flynn for lying to the FBI about pre-inauguration conversations with the Russian ambassador, but the case should alarm true civil libertarians. What is arguably most disturbing about this case is that then-National Security Adviser Flynn was pushed into a perjury trap by Obama administration holdovers at the Justice Department who concocted an unorthodox legal rationale for subjecting Flynn to an FBI interrogation four days after he took office, testing Flynn’s recollection of the conversations while the FBI agents had transcripts of the calls intercepted by the National Security Agency.

CEO's Aren't Lying---Bulk Of The Corporate Rate Cut Will Go To Shareholders, Not Growth

Major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class. The president has held fast to his pledge even as top executives’ comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.

 Banks and The Fed's Duration Trap

While it is clear that some smart people at the FRBNY understand the duration dilemma, it is not clear that the Fed staff in Washington and particularly the members of the Board of Governors get the joke.  Unless you believe that the FOMC is intentionally pursuing a flat yield curve as a matter of policy, it seems reasonable to assume that the folks in Washington do not understand that reducing the size of the System portfolio is a necessary condition for normalizing the price of credit.

The Perverse Reason Why The Fed Pays Banks Billions NOT To Lend

The Fed's current operating system, in contrast, is a type of "floor" system — what I have elsewhere referred to as a "leaky" floor system. In a floor system, the IOR rate (which is also, in the Fed's case, the interest rate on excess reserves) is an above-market rate, the purpose of which is to encourage banks to retain excess reserves. Once satiated with reserves, banks have no reason to borrow overnight for the sake of keeping liquid, so the overnight interbank market shuts down. The IOR rate itself, rather than open-market operations, thus becomes the central bank's chief means of implementing monetary policy, with a higher IOR rate serving to tighten, and a lower one serving to loosen, policy.

We Give Up! Government Spending And Deficits Soar Pretty Much Everywhere On The Planet

A recurring pattern of the past few decades involves governments promising to limit their borrowing, only to discover that hardly anyone cares. So target dates slip, bonds are issued, and the debts keep rising. This time around the timing is especially notable, since eight years of global growth ought to be producing tax revenues sufficient to at least moderate the tide of red ink. But apparently not.

The Source of the Next Crisis---The Massive VIX Short

Yet the frenetic pace of VIX shorting has intensified to a level that frightens me. There is now $1.2 billion of market cap of the inverse VIX ETF XIV, with another $1.3 billion of SVXY (another inverse ETF). This is insanity. Robert Whaley never expected his little VIX product to be the epi-centre of a multibillion-dollar casino. To me, this just reeks of the old Warren Buffett quote — “what the wise do in the beginning, the fool does in the end.”

The GOP Tax Cut Isn't Supply Side---It's A Fiscal Scam

There are times when the politicization of economic arguments becomes dangerous. This is one of those times. The US simply can’t afford the current tax cuts making their way through Congress. According to the nonpartisan Congressional Budget Office, the cuts will result in a cumulative deficit of about $1.4 trillion over the next decade. The problem arises because America’s chronic saving shortfall has now moved into the danger zone, making it much more difficult to fund multi-year deficits today than was the case when cutting taxes in the past.

The Bull Market In Idiocy

For now, however, several things are abundantly clear.  Everyone – including you – is getting rich from bitcoin.  So, too, everyone’s getting rich from FANG – Facebook, Amazon, Netflix, and Google – stocks.  Likewise, everyone’s getting rich shorting the CBOE Volatility Index (VIX). What to make of it? Without question, there’s a bull market in idiocy.  And when there’s a bull market in idiocy, idiots get rich.

The Real Storm/Fire Disaster Impact On Households Is Yet To Come

The full effects of Hurricanes Harvey and Irma are rapidly showing up in the data. In September, according to Black Knight, the number of mortgages either past due or in foreclosure rose by 214,000, or 9 percent, compared with August. At 5.1 percent, the combined rate is far off the previous month’s 4.7 percent and the most recent low of 4.5 percent recorded in March 2007.

A Hit Too Far---Whipping Post Politics

To me, the job on Keilor was a hit too far. I hope others out there with their frontal cortexes intact felt themselves crossing a threshold into a strange new un-American society where the merest allegation can instantly send anyone to perdition.

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