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Something funny happened on the way to the bank: In August, commercial and industrial loans outstanding at all banks in the US fell for the first time month-to-month since October 2010, which had marked the end of the collapse of credit during the Financial Crisis.

In October 2008, the absolute peak of the prior credit bubble, there were $1.59 trillion commercial and industrial loans outstanding. As the Great Recession chewed into the economy, C&I loans plunged. Many of them were cleansed from bank balance sheets via charge-offs. But then the Fed decided what the US needed was more debt to fix the problem of too much debt, thus kicking off what would become the greatest credit bubble in US history. By July 2016, C&I loans had surged to $2.064 trillion, 30% above their prior bubble peak.

But in August, something stopped working: C&I loans actually fell 0.3% to $2.058 trillion, according to the Federal Reserve Board of Governors. That translates into an annualized decline of 3.8%, after an uninterrupted six-year spree of often double-digit annualized increases. Note that first month-to-month dip since October 2010:


It’s still too early to tell how significant this dip is. It’s just the first one. It could have occurred because companies borrow less because they need less money as there’s less demand, and expansion is no longer on the table. Or it could have occurred because banks are beginning to tighten their lending standards, with one hand on the money spigot. And all this is occurring while banks write off more nonperforming loans (and thus remove them from the C&I balances) that have resulted from mounting defaults and bankruptcies by their customers.

The ugliest credit stories in terms of bonds, according to Standard & Poor’s Distress Ratio, are the doom-and-gloom categories of “Energy” and “Metals, Mining, and Steel.” Next down the line are two consumer-facing industries: brick-and-mortar retailers and restaurants.

But these metrics by credit ratings agencies are based on companies that are big enough to be rated by the ratings agencies and that are able to borrow in the capital markets by issuing bonds. The 18.9 million small businesses in the US and many of the 182,000 medium size businesses don’t qualify for that special treatment. They can only borrow from banks and other sources. And they’re not included in those metrics.


But when they go bankrupt, they are included in the overall commercial bankruptcy numbers, and those numbers are getting uglier by the month.

In September, US commercial bankruptcy filings soared 38% from a year ago to 3,072, the 11th month in a row of year-over-year increases, according to the American Bankruptcy Institute.

For the first nine months of 2016, commercial bankruptcy filings jumped 28% compared to the same period in 2015, to 28,789. Most of those are not the bankruptcies we hear about in the financial media. Most of them are small businesses that go that painful route – painful for their creditors too – in the shadows of the hoopla on Wall Street.

By comparison, just over 100 oil and gas companies in the US and Canada have gone bankrupt since the beginning of 2015. About a dozen retail chains have filed over the past year, along with about 12 restaurant companies, representing 14 chains.

Commercial bankruptcy filings skyrocketed during the Financial Crisis and peaked in March 2010 at 9,004. Then they fell on a year-over-year basis. In March 2013, the year-over-year decline in filings reached 1,577. Filings continued to fall, but at a slower and slower pace, until November 2015, when for the first time since March 2010, bankruptcy filings rose year-over-year. That was the turning point. Note that there is no “plateauing”:


In September this year, bankruptcies exceed those from a year ago by 855 filings – the 38% jump. March and May saw similar year-over-year increases. So this looks like it’s the beginning of a new and long trend that is not going to fit into the rosy scenario.

Rising bankruptcies are an indicator that the “credit cycle” has ended. The Fed’s policy of easy credit has encouraged businesses to borrow – those that could. But by now, this six-year debt binge has created an ominous debt overhang that is suffocating these businesses as they find themselves, against all promises, mired in an economy that’s nothing like the escape-velocity hype that had emanated from Wall Street, the Fed, and the government.

Restaurants are experiencing a wage of bankruptcies that rivals that of 2009-2010, with “very challenging” sales trends. Read… Restaurant Industry, Leading Indicator of US Economy Sours, Bankruptcies Pile up



Following the seemingly endless procession of short-squeeze-fueling trial balloons last week - fromsettlement rumors to German blue-chip bailouts to Qatari investors - Germany's Bild newspaperconfirms the rumors that sparked weakness on Friday: Deutsche bank CEO John Cryan has failed to reach an agreement with the US Justice Department.

Having soared over 25% off the briefly single-digit price levels thanks to well-chosen rumor headlines of an "imminent settlement", news and facts on Friday started to eat away at that confidence...



And now, as Bloomberg reports, Deutsche Bank's Chief Executive Officer John Cryan failed to reach an agreement with the U.S. Justice Department to resolve a years-long investigation into its mortgage-bond dealings during a meeting in Washington Friday, Germany’s Bild newspaper reported.


The meeting was meant to negotiate the multi-billion-dollar settlement the bank will have to pay to resolve alleged misconduct arising from its dealings in residential-mortgage backed securities that led to the 2008 financial crisis, according to a Bild am Sonntag report.


The German lender is still considering seeking damages against Anshu Jain and Josef Ackermann, who are both former CEOs of the bank, the newspaper reported. Bild said the bank froze part of the millions in bonus payments to Jain and other former top managers.


A Deutsche Bank spokeswoman declined to comment to Bild about the outcome of Cryan’s Friday discussion or about clawing back former executives’ compensation. Mark Abueg, a Justice Department spokesman, declined to comment.

Cryan, a Briton who speaks fluent German, has sought for the last three weeks to reassure investors that Deutsche Bank can weather the formidable obstacles to its financial health. His arsenal of strawmen include: denials of bailouts, blaming speculators, rumors of informal capital raising talks with Wall Street firms, rumors of capital injections from Germany's blue-chip corporations, rumors (denied) of Qatari sovereign wealth fund investments, and the sale of key assets and elimination of thousands of jobs.


So what happens next?

Three things:

1) The "settlement-imminent"-driven 25% short-squeeze in stocks - completely decoupled from credit market's less optimistic perspective - is going to end badly...


2) Deutsche Bank will need to raise more capital and that just became more problematic afterthe bank quietly raised $3bn in a senior unsecured bond issue on Friday at a very wide concession...


Some have wondered why the need to sell new paper at such a wide concession: after all as we reported before, DB has no current liquidity constraints courtesy of substantial ECB generosity, which backstop DB's existing liquidity reserves of just over €200 billion.




... while issuing debt does nothing for the bank's net leverage, and in fact could lead to an erosion of certain credit metrics.


If anything, the push to obtain cash may be seen by some as an indication that management is taking advantage of the recent stock price rebound window to offload securities to investors, which alone could lead to more pressure on the bank.


After all, the question immediately emerges: "does DB know something investors don't?."

3) A "bail-in" is more likely than a 'bailout', and as we detailed earlier, and here's how it can be done... Jonathan Rochford, PM of Australian hedge fund Narrow Road Capital, explains that despite all the recent confidence-building rhetoric and posturing, Deutsche Bank will need a bail-in. In the following analysis he explains how it would (and should) be done.


Following the confirmation that hedge funds have started to reduce their capital and trading with Deutsche Bank its position is now perilous. It is correct to say that Deutsche Bank doesn’t have a liquidity crisis and that even if it did the Bundesbank could provide it with unlimited liquidity. But liquidity alone doesn’t guarantee a bank can continue to operate in the long term, solvency and profitability are essential as well. Deutsche Bank is at best borderline for both solvency and profitability with little prospect of either improving materially in the medium term. Deutsche Bank needs to substantially restructure its business activities and balance sheet, both of those will take time and capital neither of which Deutsche Bank has.


Insufficient Capital


Unlike other global banks Deutsche Bank has failed to adequately lift its capital levels since the collapse of Lehman Brothers eight years ago. It has been allowed to remain undercapitalised due to weak European regulators, which are fighting against global effortsto have all banks increase capital levels. Whilst German and Italian regulators are fighting for lower capital levels and avoiding dealing with their problem banks Switzerland and the US are implementing much higher capital levels, particularly for the largest banks.


On Deutsche Bank’s preferred measure, risk weighted assets, it sits behind most of its peers. That’s after it has gone through a capital optimisation exercise which reduced risk weighted assets without reducing their balance sheet by the same proportion. On the more rigorous leverage ratio shown below, Deutsche Bank is dead last at less than half of its peer group average. When Europe’s most systemically important bank is the most poorly capitalised of its peer group that is a major problem that needs to be corrected as soon as possible.

Source: FDIC


Deutsche Bank’s current equity at book value is €61.9 billion but its market capitalisation is only €15.8 billion. Its total assets are 114.3 times its market capitalisation and its price to book ratio is 25.5%. The only peers with ratios this bad are Italian banks who have dubious solvency and very high levels of non-performing loans. To get from the 2.68% tier one capital ratio shown above to the 5% leverage ratio many consider the minimum acceptable level requires €40.1 billion of new equity.


Not Profitable


There are three primary ways for a bank to increase its capital. Firstly, profits can be retained rather than paid out as dividends. Deutsche Bank hasn’t been meaningfully profitable since 2011. The table below shows the net income after taxes for Deutsche Bank since 2009. The combined total of the last seven and half years is €7.8 billion, an average of €1.04 billion per year. That equates to a return on equity of 1.68% since 2009. Over the last four and a half years the cumulative loss is €3.8 billion with the average return on equity -1.38%.

The CEO has stated that 2016 will be a peak year for restructuring, meaning investors should expect a loss for 2016. The fine being negotiated with the US Department of Justice will have a significant impact this year. Further fines for new scandals, the difficulties of operating in a negative interest rate environment and the potential for another European or global downturn mean there is a material risk of losses continuing in future years. Given sufficient time and capital Deutsche Bank would restructure substantially, ridding itself of unprofitable and low return activities. Unfortunately, it has squandered the opportunities it had over the last eight years and now doesn’t have either the time or capital needed to facilitate the necessary cuts.


Assets Sales Not Sufficient


The second way to raise capital is to sell assets and Deutsche Bank is making a great deal of noise about its asset sale plans. The sales of the UK and Chinese insurance businesses will together raise approximately €4.5 billion. A sale of the asset management business might raise €10 billion. Altogether that’s €14.5 billion which is helpful but not nearly enough. The flipside of asset sales is that future profits are reduced, exacerbating the profitability issues already outlined.


Sufficiently Large Capital Raising Near Impossible


The third way a bank can strengthen its balance sheet is by conducting a capital raising. The problem for Deutsche Bank is that the amount needed is simply too high based on the current metrics. Any investment banker will tell you raising 254% of market capitalisation is extremely optimistic. To achieve that for a business with a history of being marginally profitable is near on impossible.


A Bailout or Bail-in is Needed


Taking into account the lack of capital and the very unlikely prospects for an equity raising or asset sales to be sufficient, Deutsche Bank needs either a bailout or a bail-in. A bailout by the German government is legally possible given the gaps in the regulation that can be exploited. The key question is whether the German government would be willing to do so. In recent years Angela Merkel and her key ministers have consistently denounced the possibility of the Italian government providing a bailout to Italian banks. In recent months they have been adamant they won’t bailout Deutsche Bank.

I’m cynical enough to know that politicians can change their minds extremely quickly when the pressure is on. I acknowledge there is a decent chance that the German government will do that soon. What the rest of this article aims to show is that there is a way to recapitalise Deutsche Bank without taxpayer funds. If there’s a decent solution that doesn’t involve taxpayer funds I think that solution can win out.


Bail-in Mechanics


The recently introduced European regulations lay out a framework for how a bail-in would work. Equity, additional tier 1 securities (Coco’s or hybrids) and subordinated debt can be written off completely if the bank is declared non-viable. Senior debt, particularly that provided by large institutions can also be converted to equity in order to lift reserves. By undertaking a combination of those two processes Deutsche Bank’s undercapitalisation could be quickly rectified.


The table below lays out the liabilities and equity on Deutsche Bank’s balance sheet. Equity, additional tier 1 and subordinated debt securities are broken out. Senior debt has been broken into two categories, the portion which could be expected to be bailed-in and that where it is uncertain. For the purpose of this exercise a conservative approach has been taken, the amount that could be bailed-in is likely much larger.

How Much More Capital is Needed?

In determining how much additional capital is needed a target capital level must be chosen. If a bail-in is executed it needs to be a one-time exercise that removes all concerns about Deutsche Bank’s solvency. Lifting the core equity tier 1 ratio just to the average level of its peers is not enough, it must go much further.


A core equity tier one leverage ratio of 9% would lift Deutsche Bank to the top of the list amongst its global peers. This would provide strong reassurance that another bail-in won’t be needed. It would also provide breathing room to undertake the overdue restructuring of unprofitable and marginal businesses. At a 9% level, another €111.5 billion of tangible equity is required. This would come from the write-off of additional tier 1, subordinated debt and €98.5 billion of senior debt being converted to equity. This implies that 63.1% of the senior debt able to be bailed-in needs to be converted to equity.

For every €100 they are currently owed bailed-in senior debt holders would receive €36.90 in new senior debt as well as material value in new equity. To assist the transition, the regulators and Deutsche Bank should work together to see that those who receive new equity can be offered a transparent and orderly means to sell down those shares. Whilst Deutsche Bank could theoretically just restart trading after the new shares were issued, relisting without an opportunity for new shareholders to sell down to more natural equity owners could be substantially disorderly and may result in much greater losses in value and confidence in banks than would otherwise be the case.


Potential Capital Sell-Down Process


There’s two types of approach that could help facilitate the sale of shares by those who are seeking to exit; a rights issue model and an IPO model. The table below summarises some of the different features of each that could apply in the case of a Deutsche Bank bail-in.


The rights issue model is the most efficient, but it doesn’t allow for Deutsche Bank management to prepare a solid pitch to potential new investors. Management would have only a few days to develop their strategy for making the bank profitable again and limited time to explain that to the many large global investors that may want to buy shares. The IPO model takes longer, but would allow management to put forward a clear plan on what businesses it will exit, what that will cost and the additional profitability that could be generated over time. The downside of the additional time is that it increases the potential for contagion to other banks as investors remain unsure of what recovery they will receive on their new shares for a longer period. Allowing over the counter trading to continue on senior debt would allay some of these concerns.


As a guide to the possible recovery for bailed-in senior debt, other European banks were generally trading at 0.5 to 1.0 times book value in early September. This implies the new equity is worth €89.2 – €178.4 billion. When combined with the new senior debt of €57.5 billion this a total recovery of 94.0% – 151.1% on the old senior debt. If an IPO process was used this would open up the opportunity for the old subordinated debt, additional tier 1 and equity owners to receive some value. If a bookbuild ended up realising more than a 100% recovery for senior debt holders, which is reached if the price to book is 0.55 or above, the additional value could be allocated to the subordinated capital owners via the natural order of priority. This process would largely eliminate arguments that value wasn’t maximised, neutering the possibility of ongoing litigation as has been the case with Fannie Mae and Freddie Mac.


Deutsche Bank’s position is currently marginal as it is woefully undercapitalised and has no clear prospect of becoming meaningfully profitable. As the world’s largest derivative trader and Europe’s most systemically important bank this is untenable. Deutsche Bank is three times larger than Lehman Brothers, making the possibility of an unexpected and uncoordinated failure completely unacceptable. Deutsche Bank needs substantial time and capital to execute a turnaround, neither of which it now has. It does not have the profitability to grow its capital base quickly or to support a capital raising of the size it needs. Deutsche Bank needs either a bail-in or a bailout.

An orderly bail-in process would deliver Deutsche Bank the additional time and capital it needs.In the first instance, the bank should be declared non-viable with all equity, additional tier 1 and subordinated debt written off. By converting 63.1% of long term senior debt to new equity the leverage ratio would increase to an unquestionably strong 9%. Based on recent peer comparisons, bailed-in senior debt holders would receive a recovery of at least 94% of their current position. Using an IPO model, where management develops and presents a new strategy to potential investors over a 2-3 month period, would allow the recipients of newly issued equity an orderly process to sell-down their equity. It also creates the possibility of a substantial recovery for subordinated debt, additional tier 1 and equity investors.

*  *  *

If the Lehman playbook continues to play out as it has done - denials of any problems... blame speculators... unleash short-squeeze on heels of rumors of foreign sovereign wealth fund investments... and finally acceptance - this will not end well...


Perhaps it's time once again to listen to DoubleLine's Jeff Gundlach, whose advice was simple: don't touch it. "I would just stay away. It's un-analyzable," Gundlach said about Deutsche Bank shares and debt. "It's too binary."




The euro is tumbling amid on-going worries over Deutsche Bank.

The currency is down by 0.4% at a 1.1175 against the dollar as of 7:38 a.m. ET.

Hedge funds are reportedlydumping the troubled German lender, and its shares are tanking. 

And European bank stocks are in the red amid fears of a collapse of the bank. Commerzbank Bank, Germany's second largest bank behind Deutsche Bank, is down about 6%.

As for the rest of the world, here's the scoreboard as of 7:48 a.m. ET:

  • Relatedly, traders were earlier buying into the Swiss franc, a safe-haven currency. But it dipped back down on speculation that the Swiss National Bank "was perhaps intervening to cap the currency's strength," reports Reuters. The currency is down by 0.8% at 0.9736 per dollar.
  • The US dollar index is up 0.3% at 95.82 ahead of a bunch of data: Personal income and spending will be released at 8:30 a.m. ET before Chicago PMI and University of Michigan consumer confidence cross the wires at 9:45 a.m. ET and 10 a.m. ET, respectively.
  • The Japanese yen is down 0.2% at 101.19 per dollar after consumer prices in Japan dropped for the sixth straight month. Core consumer prices were down 0.5% year-over-year in August.
  • The British pound is little changed at 1.2976 against the dollar after the UK's economy expanded by 0.7% quarter-over-quarter in the second quarter thanks to strength in the production and service sectors, according to the final figures released by the Office for National Statistics.
  • The Russian ruble is down by 0.2% at 63.1807 per dollar.



Jim Clifton, Chairman and CEO at Gallup, who presides over endless surveys of American consumers and businesses and knows a thing or two about them, has a message for the media and the political establishment that seem to be clueless: this meme about the recovering economy – “It was even trumpeted on Page 1 of The New York Times and Financial Times last week,” he says – “I don’t think it’s true.”

In an article posted on Gallup’s website, he made his case:

The percentage of Americans who say they are in the middle or upper-middle class has fallen 10 percentage points, from a 61% average between 2000 and 2008 to 51% today.

Ten percent of 250 million adults in the U.S. is 25 million people whose economic lives have crashed.

What the media is missing is that these 25 million people are invisible in the widely reported 4.9% official U.S. unemployment rate.

Let’s say someone has a good middle-class job that pays $65,000 a year. That job goes away in a changing, disrupted world, and his new full-time job pays $14 per hour — or about $28,000 per year. That devastated American remains counted as “full-time employed” because he still has full-time work — although with drastically reduced pay and benefits. He has fallen out of the middle class and is invisible in current reporting.

And these “Invisible Americans,” as he calls them, are facing the “disastrous” emotional toll often associated with a sharp loss of household income. It hits “self-esteem and dignity,” and produces an “environment of desperation.” Even many American with good jobs and incomes are just “one degree” away from the misery of those with falling wages, or the underemployed or unemployed.

Clifton names three metrics that “need to be turned around or we’ll lose the whole middle class”:

  1. According to the U.S. Bureau of Labor Statistics, the percentage of the total U.S. adult population that has a full-time job has been hovering around 48% since 2010this is the lowest full-time employment level since 1983.
  2. The number of publicly listed companies trading on U.S. exchanges has been cut almost in half in the past 20 years — from about 7,300 to 3,700. Because firms can’t grow organically — that is, build more business from new and existing customers — they give up and pay high prices to acquire their competitors, thus drastically shrinking the number of U.S. public companies. This seriously contributes to the massive loss of U.S. middle-class jobs.
  3. New business startups are at historical lows. Americans have stopped starting businesses. And the businesses that do start are growing at historically slow rates.

“Free enterprise is in free fall — but it is fixable,” he says. It all depends on small businesses. They need to thrive again. They’re “our best hope” for the economy to pick up some speed. And once they’re thriving again, they can “restore the middle class”:

Gallup finds that small businesses — startups plus “shootups,” those that grow big — are the engine of new economic energy. According to the U.S. Small Business Administration, 65% of all new jobs are created by small businesses, not large ones.

But small businesses as a group are not doing well. Over the past three decades, the US averaged nearly 120,000 more business births than deaths per year. But between 2008 and 2011, according to Census Bureau data, on average 420,000 businesses were born per year, while on average 450,000 died. That the core of the US job creation machine has been faltering is not a sign of a healthy or even a “recovering” economy.

Clifton’s sobering message – that a big part of American households and therefore consumers are still in serious disarray in part due to the problems small businesses are facing – appears to be getting totally lost among the media hype, including the deafening razzmatazz about the 5.2% jump in “household income,” reported last week by the Census Bureau, and widely misconstrued by the media.

This disarray is even worse, once it’s parsed, as the Census Bureau has done, by men and women. Because men’s median income, adjusted for inflation, is now lower than it had been in 1974! Read…  That 5.2% Jump in Household Income? Nope, People Aren’t Suddenly Getting Big-Fat Paychecks



The Fed’s core policies of 2% inflation and 0% interest rates are kicking the economic stuffing out of Flyover AmericaThey are based on the specious academic theory that financial gambling fuels economic growth and that all economic classes prosper from inflation and march in lockstep together as prices and wages ascend on the Fed’s appointed path.

Au contraire! Those propositions are the most economically destructive and wantonly unjust notions ever embraced by an agency of the state. They clobber the middle- and lower-end of the income ladder while showering the top tier of financial asset owners with stupendous windfalls of unearned gain.

So the nation’s rogue central bank is essentially a reverse Robin Hood on steroids. If Donald Trump wants to hit the ball out of the park next Monday evening, therefore, he needs to quickly skip over his dog-eared income tax cut plan and put the wood good and hard to the Fed, Janet Yellen, and our unelected financial rulers.

They are killing wages, off-shoring jobs, trashing savers, subsidizing the banks, gifting Wall Street speculators with endless financial bubbles and rigging the markets to insure that the Democrats win.

In response to that line of attack, Hillary will harrumph and sputter about the sacred “independence” of the Fed; claim that by slashing interest rates the Fed “saved” the American economy; and scold that such reckless talk will unsettle markets.

But none of that will even register with the hurting voters of Flyover America. They know the Fed serves Wall Street and the moneyed classes and that rigged financial markets have done nothing to arrest their shrinking living standards and diminishing job prospects.

Unfortunately, what will register loudly with so-called Reagan democrats and other working people is the chart below. If Trump keeps listening to his semi-geriatric economic advisors, who are stuck in a 1980s time warp, he will spend the night answering Hillary’s irrefutable accusation that the Trump tax plan amounts to a 1.3% cut for the middle class and 16% cut for the top one percent.

No, we are not channeling Paul Krugman or Professor Piketty. In principle, lower income taxes are better than higher taxes and deliberate redistributionism by the state is always doubly bad. But the villain of the piece in 2016 is not the IRS tables; its the central bank’s printing press. So there is no point in taking a political hit to solve the wrong problem.

It was a totally different world in the early 1980s. The Gipper’s promise to slash incomes taxes by 30% across-the- board resonated with “Reagan democrats” because double-digit inflation was causing a rip-roaring bracket creep. Wage and salary workers were getting nailed with unlegislated tax increases, and that weren’t going to take it anymore.

Indeed, without the tax rate cuts, the Federal revenue take would have risen from 19.5% of GDP under Carter’s last budget to 24% of GDP by 1986. By contrast, the Federal income tax is now indexed and has been for 30 years. Tax brackets, the standard deduction and personal exemptions are all shielded from inflation by law.

So when Steven Moore and his Club for Growth high rollers start jawing about income tax cuts, no one in Flyover America hears them. Instead, what they hear is “Hillbama” demagogueing about the wealth inequality that their minions at the Fed have actually caused; and the prospective 12:1distributional benefits from the proposed Trump tax cut that go to the 1%—who could readily do without it in the name of the more urgent tax cuts described below.

Indeed, after three decades of indexing and GOP tax-cutting the ranks of wage and salary workers in Flyover America hardly know from income taxes. In the most recent year, the bottom 75% of tax filers—–and that’s about 104 million citizens—–paid only 14% of the income taxes.

Moreover, a goodly portion of that huge number paid no Federal income tax at all. Overall, these 104 million tax filers posted $2.8 trillion of adjusted gross income (AGI) but paid only $169 billion in Federal income taxes. That’s just 5.9%.

And as the man on late night TV used to say, there’s even more. The bottom50% of tax filers—–the 69.2 million filers who are really getting monkey-hammered by the crooked regime of the Wall Street/Washington ruling elites—- paid only $34 billion in Federal income taxes. That’s an average of $9 per week or 3.2% of the group’s $1.03 trillion of AGI.

So Donald Trump needs to stop visiting the Supply-Siders Nursing Home and get with the current facts of life. To wit, the top 10% of tax filers—–just under 14 million—pay 70% of the income taxes, and will get upwards of 85% of the benefits from the Trump tax cut announced last Thursday.

Here’s the thing. Well more than half of this tiny slice of the electorate will vote for him anyway because they live in Houston, Indianapolis etc. And the rest live in the precincts of the bicoastal elites, where they get their news from the New York Times and will thank him for the extra cash by voting for Hillary, anyway.

By contrast, there are 160 million payroll tax-payers in America. And they are getting hit with the ol’ doubly whammy. That is, due to the Fed’s disastrous 2% inflation targeting policy, the bottom 130 million are losing jobs to China and the off-shore markets and purchasing power to domestic inflation.

At the same time, they are paying through the nose on account of a nearly 16% payroll tax levy. To wit, the average wage earner at $22 per hour gets$3,000 extracted from his/her pay envelope, even as their employer is whacked for another $3,000. On the margin, that $6,000 wedge kills jobs and shrinks real household incomes.

Yet there is a Trumpian solution that makes far more sense under today’s conditions than the tired old supply siders income tax cut for the 10%; and most especially the top 1%—- who pay 14X more in income taxes than the bottom 50%, and who would capture upwards of 45% of the Trump income tax cut.

To wit, eliminate the payroll tax entirely and replace it with a tax on imports and business sales (otherwise known as consumption). That was proposed by Lyin’ Ted in the primaries, and at least that part of it he got right.

Yes, and for political protection from the social security calamity-howlers, he could revive Al Gore’s “lock box” and dedicate every penny to funding social security—especially for the 90% of recipients who actually need it.

That gets us back to the Fed and it’s malefic 2% inflation targeting.

In an open global labor market, high paying jobs in finance, government, entertainment, the professions and business management get off-shored last, but are also the first to inflate at or higher than the general CPI rate.

By contrast, it is lower tier jobs that get off-shored in response to the China Price for goods and the India Price for services. That is, the average nominal hourly wage in the US has nearly tripled since 1987, but all that “inflation” was for naught. Real wages went nowhere even as soaring nominal labor expense caused good jobs to be off-shored in droves.

Average Hourly Earnings - Nominal and Real - Click to enlarge

It should not be surprising, therefore, that there are no more full-time, full-pay breadwinner jobs at $50k per year in the US today than there were when Bill Clinton was packing his bags to shuffle out of the oval office in January 2001.

On the margin, any goods and services jobs that can be off-shored, have been sent abroad. Indeed, in the context of the highest nominal wage rates on the planet, a central bank not enthrall to Keynesian voodoo would actually welcome deflation, not print money until the cows come home trying to stimulate inflation, thereby deliberately making war on wage earners who must compete in the world labor market.

NonFarm Payrolls Less HES Complex Jobs - Click to enlarge

And it’s also not surprising that what has been created in the labor market since the year 2000 are jobs which so far can’t be off-shored. That is to say, bartenders, waitresses, hot-dog vendors, retail floor sales clerks and temp agency gigs which fill the cracks and come and go with the business cycle.

Unfortunately, that category of employment averages just 27 hours per week, $14 per hour, and $20k on a full year basis for holders who are lucky enough to be paid 52 weeks per year by computerized demand-load driven scheduling systems.

Yet, they all count as one job-one-vote on vote on bubble vision during the monthly ritual of Jobs Friday. Needless to say, they know better in Flyover America.

Part Time Economy Jobs - Click to enlarge

Yet that’s not the half of it. The fact is, 2-3% annual inflation is not a lockstep affair. Nominal wage rates for import competing production and services jobs tend to rise slower than the CPI, meaning that the longer and more fully the Fed’s specious goal of 2% inflation is realized, the farther behind real wages become.

In an excellent post today on the fraudulent median household income gain reported by the Census Bureau, Charles Hugh-Smith powerfully illustrated the point that only academics with their heads in the sand could believe that inflation is a benign vehicle of lock-step prosperity. Accordingly, among male wage earners since the 1970s, the top 5% have experienced a 51% gain in real wages—even using the BLS’ sawed-off inflation measuring stick—-compared to a 5% loss for the for the median earner.

And that’s especially true for the overwhelming bulk of main street households where upwards of two-thirds of paychecks go to the four inflationary horseman of medical, housing, food and energy.

When you weight these true cost of living factors at 66% versus the BLS’ 55% weighting, and you use an accurate measure of medical and housing inflation, you end up not with “lowflation” as are monetary central planners so risibly claim. Actually, you end up with more than 3% per year inflation year-in-and-year out since 1987.

Flyover CPI - 1987-2016

Furthermore, when you then deflate the nominal median household income as reported by the Census Bureau by the Flyover CPI, you end up not with the spurious 5.2% gain so loudly ballyhooed by Washington and Wall Street last week. No, what you get is a 16.7% decline in the real median household incomes since the year 2000.

That figure dramatically contrast with the 2.2% decline reported by the Census Bureau last week based on an inflation index (the CPI-U-RS) which seriously undercounts the true cost of living. Either way, however, the very idea that a posse of academic pettifoggers is attempting to spur more inflation should be reason enough for The Donald to go after the Fed with both barrels blasting during next week’s debate.

Real Median Income Deflated Two Ways - Click to enlarge

It is bad enough, of course, that inflation targeting clobbers households in Flyover America as depicted above. What’s worse is that the resulting flood of central bank liquidity never leaves the canyons of Wall Street in today’s world of Peak Debt. Accordingly, the value of financial assets have been massively, systematically and relentlessly inflated.

So doing, the central bankers bring about the ultimate affront to the struggling households of Flyover America. In a word, main street households have precious little discretionary income to salt away in “savings” and none that they can afford to put in harm’s way in the Wall Street casino.

Indeed, the very idea that the policy of the state’s central banking branch is to force savers out of bank accounts and into so-called “risk assets” is beyond the pale. Yet a retiree who has been thrifty enough over a working lifetime to salt away $250,000 in a bank account is earning the equivalent of one Starbucks cappuccino per day in interest under the Fed’s 93 months and counting of ZIRP.

In short, since the onset of Bubble Finance when Greenspan panicked in October 1987 and flooded Wall Street with cash and order to keep the insolvent banking houses of the day afloat the wealth creation process in America has been rigged in exactly the manner that the Donald has implied.

Bottom 90

Putting the wood to the Fed is the right answer for what ails the American economy. Monday night would be a good place for the Donald to line-up with the 90% who have been left behind.

The GOP establishment which he defeated have already done more than enough for the top tier, even as it has helped populate the Fed with the Keynesians and beltway apparatchiks who have brought American capitalism to the brink of ruin.


BY: David Stockman

Mr. Stockman is the former Director of the Office of Management and Budget under President Ronald Reagan.  Check out more of his writings on his Blog HERE



We've written frequently about the legions of "safe space" seeking Millennials moving back in with mom (see "More Young Americans Live With Their Parents Than At Any Time Since The Great Depression").  As the Pew Research Center reported back in May, for the first time ever more 18-34 year olds are living at home with mom than are "married or cohabiting in their own households."  According to Pew research the biggest reason for Millennials moving back home is their inability find jobs to support their independence.  Take, for example, "young" Lisa Jacobs:

Lisa Jacobs holds two bachelor’s degrees, one in photography and one in graphic design. But work has been sporadic, so this year she moved back in with her parents in Somerset, New Jersey.

“My parents have a lovely home, but nobody’s happy to be living at home at 32,” Jacobs said, adding that she needs to make at least $20 an hour to afford an apartment. “There are plenty of places that would pay me $15 an hour. But that’s not getting me any closer to moving out.”

Frankly, we're shocked that someone with TWO uselessamazing bachelor degrees wouldn't be able to find a job in such a robust economy.  But don't strain yourself, young Lisa Jacobs, with a $15 per hour job that is beneath your level of you just move in with mom and wait for your dreams to come true!

For parents who might find themselves in similar situations, the University of Minnesota has developed a very helpful map to assess the risk of your over-educated, entitled, self-indulging offspring moving back home.  Unsurprisingly, parents are most at risk in the states with large, expensive metropolitan cities where recently-educated, residentially-challenged young adults like to return to indulge their "social" desires but can't necessarily afford to live.  The states with the highest percentage of Millennials living at home were New Jersey (43.9%), Connecticut (38.8%), New York (37.4%) Florida (37.2%) and California (36.7%). 

If you're the parent of a Millennial and just want to be left alone might we suggest a nice "fly-over" state like North Dakota where only 15.6% of Millennials are found to be living at home.  Sure it's a little cold but the remote, barren landscapes are amazing Millennial deterrents.

(click on map below to be redirected to interactive version with additional stats)

Millennials At Home



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