The Federal Reserve on Wednesday raised a key U.S. interest rate for the first time in a year and signaled a more aggressive approach in 2017, when incoming president Donald Trump plans a full-throttle strategy to jack up the American economy
In a widely expected move, the central bank raised its key short-term rate to a range of 0.5%-0.75% from 0.25% to 0.5%. The vote was unanimous.
At the same time, the Fed’s so-called “dot plot” showed the central bank has now penciled in three rate hikes in 2017 instead of two under its prior forecast.
Although Chairwoman Janet Yellen called the shift “very tiny,” she acknowledged some Fed officials took President-elect Trump’s economic plan into account when making their forecast. Still, she suggested that higher inflation and a lower unemployment rate than the Fed had expected were bigger factors in the change.
What’s more, she stressed the Fed would take a wait-and-see approach for now since the outlines of Trump’s plans are hazy.
“I wouldn’t want to speculate until I were more certain of the details and how they would affect the likely course of the economy,” she said.
U.S. stocks SPX, -0.81% rose briefly after the Fed decision before turning sharply lower to end the day. Still, stocks have rallied to record highs since Trump’s surprise victory and interest rates have also risen. Yellen noted that Wall Street is expecting fiscal policy to be more stimulative in 2017.
Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the central bank to raise rates more aggressively.
Others think the Fed may be able to accommodate some stimulus without reacting sharply.
Fed officials did not give many hints in their latest forecast for the economy. They still expect GDP growth to average 2% over the next three years. And they predict the unemployment rate will stay close to 4.6% rate seen in November.
Yellen implied the Fed doesn’t expect the labor market to show much more improvement, however, and that more stimulus from Washington probably isn’t necessary.
“I would say the labor market looks a lot like the way it did before the recession,” Yellen said.
It shouldn’t be any surprise to anyone with a slim understanding of economics that driving up costs for businesses means bad news for customers and employees alike. In terms of driving up wages by force, there were only two results that could follow. Either that business was going to have to lay off employees in order to afford their work force, or find a way to circumvent having employees in the first place.
In the case of the major fast food chain McDonald’s, they took the latter path and rolled out a shiny new line of self-service machines that allow you to order your food without the need for employees at a register. This happened after many cities forced the businesses in their cities to raise the minimum wage to $15 as a result of a nationwide protest called “Fight for $15.”
Many had predicted this coming, including former CEO of McDonald’s USA Ed Rensi. Rensi wrote a guest post at Forbes on Tuesday that essentially had one message.
“I told you so.”
It brings me no joy to write these words. The push for a $15 starter wage has negatively impacted the career prospects of employees who were just getting started in the workforce while extinguishing the businesses that employed them. I wish it were not so. But it’s important to document these consequences, lest policymakers elsewhere decide that the $15 movement is worth embracing.
While McDonald’s certainly had trouble in cities featuring the raised wage, it was a minor bump in the road that they could afford to spend their way out of. Sadly, not every business has the capital this massive chain does, and businesses and workers will both suffer for it.
Of course, not all businesses have the capital necessary to shift from full-service to self-service. And that brings me to my next correct prediction–that a $15 minimum wage would force many small businesses to lay off staff, seek less-costly locations, or close altogether.
Tragically, these stories—in California in particular–are too numerous to cite in detail here. They include a bookstore in Roseville, a pub in Fresno, restaurants and bakeries in San Francisco, a coffee shop in Berkeley, grocery stores in Oakland, a grill in Santa Clara, and apparel manufacturers through the state. In September of this year, nearly one-quarter of restaurant closures in the Bay Area cited labor costs as one of the reasons for shutting down operations. And just this past week, a California-based communications firm announced it was moving 75 call center jobs from San Diego to El Paso, citing the state’s rising minimum as the “deciding factor.” (Dozens of additional stories can be found at the website FacesOf15.com.)
These machines have been looming on the horizon since 2013, but now with the success of the protests, we’re beginning to see the fruits of their non-labor. Hopefully, people will abandon their quest through forced higher wages via the government as their community suffers under the financial burden.
One month ago, when we last looked at the Fed's update of Treasuries held in custody, we noted something troubling: the number had dropped sharply, declining by over $22 billion in one week, one of the the biggest weekly declines since January 2015, pushing the total amount of custodial paper to $2.805 trillion, the lowest since 2012. One month later, we refresh this chart and find that in last week's update, foreign central banks continued their relentless liquidation of US paper held in the Fed's custody account, which tumbled by another $14 billion over the course of a week, pushing the total amount of custodial paper to $2.788 trillion, a new post-2012 low.
Today, to corroborate the disturbing weekly slide in the Fed's custody data, we also got the latest monthly Treasury International Capital data for the month of September, which showed that the troubling trend presented one month ago, has accelerated to an unprecedented degree.
Recall that a month ago, we reported that in the latest 12 months we have observed a not so stealthy, actually make that a massive $343 billion in Treasury selling by foreign central banks in the period July 2015- August 2016, something unprecedented in size.
Fast forward to today when in the latest monthly update for the month of September, we find that what until a month ago was "merely" a record $346.4 billion in offshore central bank sales in the LTM period ending August 31 has - one month later - risen to a new all time high $374.7 billion, or well over a third of a trillion in Treasuries sold in the past 12 months.
Among the biggest sellers - on a market-price basis - not surprisingly was China, which in August "sold" $28 billion in US paper (the actual underlying number while different, as this particular series is adjusted for Mark to Market variations, will be similar), bringing its total to $1.157 trillion, the lowest amount of US paper held by Beijing since 2012.
It wasn't just China: Saudi Arabia also continued to sell its TSY holdings, and in August its stated holdings (which again have to be adjusted for MTM), dropped from $93Bn to $89Bn, the lowest since the summer of 2014. This was the 8th consecutive month of Treasury sales by the Kingdom, which held $124 billion in TSYs in January, and has since sold nearly 30% of its US paper holdings.
As we pointed out one month ago, what is becoming increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a very troubling pace, something which in light of the action in the past week appears to have been a prudent move.
In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia, it is to provide the funds needed to offset the collapse of the petrodollar, and to backstop the country's soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.
So who are they selling to? The answer, at least until last month, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, "private investors" both foreign and domestic are soaking up hundreds of billions in central bank holdings. As we said last month when we observed this great rotation in Treasuries out of official holders into private hands, "we wonder if they would [keep buying] knowing who is selling to them." Well, this month it changed, and after private investors had been happily snapping up bonds for 4 straight months, in September "other foreign investors" sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record!
Meanwhile, while just three months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are surging on concerns that not only will the BOJ, the Fed, and maybe even the ECB will soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it.
While it is unclear under what conditions foreign buyers may come back, one thing is very clear: as of this moments the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will have no choice but to forget about hiking rates and focus on QE4 instead.
What this means for the Average American
Foreign governments (i.e. central banks) are dumping the Treasury Notes they bought from us. A Treasury Note is what gets issued when the US Government BORROWS money. Whoever gives the US the money gets a Note in return. That note promises to pay X amount back over X amount of time.
Foreign governments are now selling US Debt before the notes mature. The question is "Why?"
Well, if the US is going to war with one or more of these countries, then the countries would not want to be holding US Debt Instruments which the US could refuse to pay over a war! Or, if these countries feel that the US will be UNABLE to repay, they may want to cut their losses and get out while they can.
But the most-likely scenario is that these countries are trying to wreck the US economy, and bring us to our knees.
In order to payoff the Notes early, the cash has to come from somewhere. If all else fails, the Federal Reserve will order the Treasury to PRINT IT.
By printing the cash, it serves to DEVALUE all the rest of the cash which is already in circulation. Lessening the value of the US dollar makes EVERYTHING more expensive for Americans. As things get more expensive, people hold back. The economy stalls. And that begins a vicious circle.
The less our cash is worth, the more we have to continue printing to pay off the Notes early, so the more expensive things continue to become, so the less people are able to buy, so the economy gets slower and slower and slower, until it STOPS. Everybody is broke.
THAT is apparently what China and Saudi Arabia are trying to achieve.
The other foreign banks see what these two countries are doing, so they're getting scared and they're dumping Treasuries too. Which makes the cycle worse.
This is a financial attack being perpetrated upon us by China and Saudi Arabia.
They've been conducting this attack slowly for months, but they've sped things up now. They are trying to "break" us.
Maybe we might have to "break" them back . . . . but not with currency. . .
Monte Paschi's long anticipated, if largely undesired bail-in is finally a fact. The bank has failed and is now seizing investor money under "Bail-in" rules, to stay afloat.
Ever since the bank failed the ECB's latest stress test this summer, when it was advised that it needs to raise billions in capital, only to see the process fizzle with virtually no willing sources of new cash emerging due to the opaque labyrinth of the bank's bilions on NPLs, Italy's third largest, most insolvent, bank has been hoping to avoid a debt conversion, out of fears it may spook retail bondholders across the capital structure, and in other Italian banks, who may perceive the move even if touted as "voluntary" as a creditor bail-in. Which it technically is.
Earlier today, the bank's board bet on Monday to set the terms for a bond-to-equity conversion that is part of the lender's capital boosting plans. As part of its sweeping restructuring, Monte Paschi was planning to lay off a tenth of its staff, shut branches and sell assets to win investor backing for a 5 billion euros ($5.4 billion) cash call, its third recapitalisation in as many years. The key part, however, due to the lack of new investor interest was the previously leaked voluntary conversion of its subordinated debt, whose successful execution would limit the amount of new funds needed.
Retail investors are estimated to hold some 2 billion euros of Monte dei Paschi's senior subordinated debt. As Reuters reported last month, small investors could be excluded from the conversion, as involving them makes it necessary to publish a prospectus, delaying the offer's launch. However, it now appears that everyone will be "voluntarily" equitized.
"The (conversion) operation will kick off after the shareholder meeting... and there will obviously be a premium offered to market price," A Reuters source added. The conversion plan will also include the Fresh hybrid instrument used to partly finance the costly acquisition of rival Antonveneta in 2007.
Senior debt is not included in the plan.
The bank - assisted by JP Morgan and Mediobanca - is due to hold an extraordinary shareholder meeting on Nov. 24 to approve the turnaround plan that also includes the sale of some 28 billion euros in bad loans at below book value. To underpin the cash call, management at the 544-year old lender has been on road shows to drum up support from potential anchor investors.
Qatar's sovereign wealth fund had allegedly expressed a preliminary interest, however that has not been confirmed. "Next week the road show will continue with a video call with U.S. and Asian investors," the source said. On Sunday, Il Sole 24 Ore said the bank was reaching out to Asian investors, especially Singapore wealth fund Temesek.
So while we wait to learn if Monte Paschi will be successful in raising the critical outside cash, here is what Monte Paschi's bail-in, pardon debt conversion will look like, according to sources including Ansa, Bloomberg and Reuters:
- Monte Paschi approves voluntary debt-to-equity swap offer
- Offer to target subordinated bonds for total outstanding amount of 4.289 billion euros; will offer between 20-100 percent of nominal value in bond swap offer
- Holders of ~€4.5 billion of subordinated bonds will be able to convert them to shares
- Bank is also considering possibility of launching conversion into equity of 1 billion euros of Fresh 2008 bonds
- Senior bonds not included in the voluntary conversion plan
- The bank is also considering conversion plan for EU1b of hybrid bonds
- The conversion price is seen at 85% of nominal value for riskier Tier 1 bonds, according to Ansa sources.
- The Conversion price is seen at 100% of nominal value for less risky Tier 2 bonds
- Monte Paschi will acquire €700m of MPS Capital Trust II securities, also Tier 1, at 20%
- It will also acquire seven series of BMPS subordinated debt at 100%
- Offer open to investors classified as “qualified investors” only for Upper Tier 2 securities
In the aftermath of this announcement, keep an eye not so much on the Monte Paschi's stock price, which may jump on the news that the bank will soon have a lower debt load (even if it means diluting the equity) as deposit activity - and especially outflows - at this and other Italian banks.
To report ILLEGAL ALIENS casting Ballots, or Thugs Intimidating Voters at Polling Places, or people voting multiple times, here are the phone numbers for each state:
California 916 657-2166
New Hampshire 603-271-3242
New Jersey 609-292-3760
New Mexico 505-827-3600
New York 518-473-5086
North Carolina 919-733-7173
North Dakota 701-328-4146
Rhode Island 401-222-2345
South Carolina 803-734-9060
South Dakota 605-773-3537
Washington DC 202-727-2525
West Virginia 304-558-6000
Janet Reno, former US attorney general under President Bill Clinton, died Monday morning following a long battle with Parkinson's disease, her sister Maggy Hurchalla said. She was 78.