U.S. Stocks Remain in Tight Band Ahead of Jobs Report

U.S. Stocks Remain in Tight Band Ahead of Jobs Report

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U.S. stocks fell slightly in one of their lightest trading days of the year, as the market more or less tread water ahead of Friday’s monthly jobs report.

Stocks, oil and gold all fell as the dollar rose amid the market’s ongoing rehashing and mulling of its own take on what it expects the Fed to do, in September and the rest of the year. Government bond yields were largely unchanged. There wasn’t much data on the calendar – S&P Case-Shiller report on homes, and a consumer confidence report. Wednesday is more promising for Fed tea-leaf readers.

Traders will get three Fed speakers on Wednesday’s docket – Rosengren, Kashkari, and Evans – as well as the ADP jobs report.

The S&P 500 moved only about 0.5% from high to low on Tuesday, a narrow band that extended to 18 the number of consecutive sessions in which the index has moved less than 0.75% during the day. That is the longest such streak among records dating back to 1970.

The big news on Tuesday, though, was the EU antitrust regulator’s decision for force Ireland to collect $14.5 billion in unpaid, unlevied taxes from Apple. The EU’s argument is that a sweetheart deal, which amounted to “illegal tax benefits,” allowed Apple to pay virtually no taxes over the past decade on its European business. It’s the largest sum the regulator’s ever imposed, and of course was denounced by Apple, the U.S., and Ireland.


Data Front: MBA Mortgage Applications (7:00 AM ET), ADP Employment Report (8:15 AM ET), Chicago PMI (9:45 AM ET), Pending Home Sales Index (10:00 AM ET), EIA Petroleum Status Report (10:30 AM ET), Farm Prices (3:00 PM ET).

Fedspeak: Boston Fed’s Eric Rosengren Speaks (3:15 AM ET), Minneapolis Fed’s Neel Kashkari Speaks (8:00 AM ET), Chicago Fed’s Charles Evans Speaks (3:15 PM ET).

Earnings: Bob Evans, Brown-Forman, Chico’s FAS, Korn/Ferry, Navistar, Salesforce.



In the 17 trading days through last Thursday, the S&P 500 moved less than 0.75% between its daily high and low, the most consecutive days within such a narrow trading range in records that go back to 1970.


EU Hits Apple With Irish Tax Bill of $14.5 Billion:  The European Union’s antitrust regulator has demanded that Ireland recoup roughly €13 billion ($14.5 billion) of unpaid taxes over a decade from Apple Inc., a move that could intensify a feud between the EU and the U.S. over the bloc’s tax probes into American companies.

Apple Ruling Stirs Fears of Revenue Loss in U.S.: American politicians have spent years salivating over U.S. companies’ stockpile of untaxed foreign profits, now more than $2 trillion and growing. This week, Europe got to that money pot first.

Dollar at One-Month High as Investors Mull U.S. Rate Path: The dollar improved Tuesday as investors continued to assess the outlook for U.S. interest-rate increases this year. The WSJ Dollar Index, which measures the U.S. currency against 16 others, was up 0.5% at 86.96, a one-month high.

U.S. Stocks Slip as Monetary Policy Remains in Focus: U.S. stocks edged lower Tuesday, as the dollar strengthened on expectations that the Federal Reserve was moving closer to raising interest rates.

ISIS Says Spokesman Killed in Syria: The militant group’s Amaq news agency said Tuesday that Abu Mohammed al-Adnani was “martyred” while surveying the operations to repel the military campaigns against Aleppo, without providing further details.

Google Takes On Uber With New Ride-Share Service: Google is moving onto Uber Technologies Inc.’s turf with its own ride-sharing service in San Francisco that would help commuters carpool at far cheaper rates, according to a person familiar with the matter, jumping into a booming but fiercely competitive market.

Chinese Banks Step Up Bad-Loan Write-Offs: China’s largest banks are writing off huge volumes of soured loans in an effort to clean up their balance sheets, as they look to improve their future profitability despite the country’s economic slowdown.

This Is the Quietest Stock Market in Decades: By some measures, the S&P 500 has been trading in its narrowest range in decades, a sign of just how muted market activity has been.


Approaching Monthend Brings Heavier Flow of Economic Data

Approaching Monthend Brings Heavier Flow of Economic Data

Approaching Monthend Brings Heavier Flow of Economic Data

August 30, 2016

The dollar remains firm on the anticipation of a federal funds rate hike in September, contingent of course upon a decent U.S. monthly jobs report due this Friday. Fed Vice Chair Stanley Fisher elaborated further on previous hawkish remarks, noting that the labor market is nearing full employment conditions. The dollar is 0.4% stronger against the yen and up 0.2% relative to the Australian and New Zealand dollars. The dollar is steady against sterling and has settled back 0.5% versus the loonie, 0.2% against the euro and Swiss franc and 0.1% relative to the yuan.

Share prices overnight climbed 1.6^ in India, 1.0% in Hong Kong, 0.2% in China and 0.5% in New Zealand but edged 0.1% lower in Japan. Stocks in Europe have traded up 1.2% in Italy, 1.0% in Germany, 0.8% in Spain, 0.7% in Greece and France, 0.5% in Switzerland but just 0.1% in the U.K. where mortgage approvals slowed to an 18-month low.

The 10-year British gilt yield shot up eight basis points. The U.K. market had been closed Monday. German bunds are steady, and the 10-year Japanese JGB yield is a basis point softer.

Evidence of scarcer supply lifted West Texas Intermediate crude oil by 0.6% to $47.24 per barrel. Comex gold, which often trades inversely with the dollar, settled back 0.4% to $1,322.50 per troy ounce.

Japan released labor statistics, retail sales and household spending statistics.

  • The jobless rate fell to a new low for the move of 3.0% in July from 3.1% in June and 3.2% in April and May. On-year employment growth accelerated to 1.5%, but the job offers:seekers ratio held steady at 1.37.
  • Total retail sales increased 1.4% on month in July, trimming the on-year decline to just 0.2%. Large-store sales were 0.6% greater than a year earlier.
  • Real household consumer spending jumped 2.5% on month in July, most 16 months, but was 0.5% lower than a year earlier. Real income and real disposable income recorded on-year declines of 1.8% and 0.4%.

Building approvals in New Zealand sank 10.5% in July following a 21.9% leap in June. In contrast, building approvals in Australia jumped 11.3% last month after dropping 4.7% in June, and they were 3.1% greater than their year-earlier level.

Eurostat, the EU’s statistical agency, reported consumer and business sentiment measures for August. Euroland’s economic sentiment index fell 1.0 point to a 5-month low of 103.5. Consumer confidence was unchanged from its flash estimate but 0.6 points worse than July’s level. Industrial confidence printed at -4.4, 1.8 points lower than in July and the weakest reading in at least a year. The business climate index dropped 0.36 points to 0.02, worst in 34 months.

Among six reporting German states, CPI inflation slowed during August in four instances, rose in just Hesse, and stayed unchanged in Saxony.

German import prices edged up just 0.1% in July following month-on-month rises of 0.9% in May and 0.5% in June, but the 12-month rate of decline, 3.8%, was the smallest on-year drop in six months. Non-energy prices rose 0.3% on month but fell 1.9% on year.  Export prices posted a 1.2% 12-month decline.

According to preliminary calculations, Spanish consumer prices dipped 0.1% on year in August and were 0.3% lower on a harmonized basis that standardizes European inflation data.

Greek producer price deflation narrowed to 7.3% in July from 7.8% in June.

Italian retail sales rose 0.2% on month and swung from an on-year drop in May to a 12-month 0.8% rate of increase in June.

The Swiss index of leading economic indicators weakened sharply in August, falling to 99.8 from a 103.5 reading in July.

Austria’s manufacturing purchasing managers index fell 1.3 points in August to a 3-month low of 52.1. Austrian producer prices in July were 2.2% lower than a year earlier.

Polish GDP growth of 0.9% last quarter was unrevised from the initial estimate. On-year GDP growth of 3.1% was a half percentage point better than the first-quarter result.

In the year to July, industrial production and retail sales in Portugal respectively fell 1.6% and rose 4.6%. Consumer sentiment remained weak in August, printing at negative 13.1.

Scheduled U.S. data releases this Tuesday include the Case Shiller house price index, the Conference Board consumer confidence index and weekly Redbook chain store sales. Canada releases producer prices and the quarterly current account.

Tomorrow completes the middle third of 2016, and Friday will mark the end of the unofficial summer trading season in foreign exchange, which runs from the U.S. Memorial Day to the U.S. Labor Day holiday weekends.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

Tags: Euroland economic sentiment, German PPI, Japanese unemployment


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Commodities Technical Analysis, August 29th — September 2nd

Commodities Technical Analysis, August 29th — September 2nd

The technical analysis, that includes the indicators’ data and major pivot points for WTI Oil, Gold, Silver and Copper as traded on spot market as of August 28th, 2016:

Crude Oil


Moving Averages RSI Parabolic SAR CCI
Long Neutral Short Neutral

Crude Oil - Indicators as of Aug 28, 2016

Floor pivot points

3rd Sup 2nd Sup 1st Sup Pivot 1st Res 2nd Res 3rd Res
44.01 45.21 46.24 47.44 48.47 49.67 50.70

Crude Oil - Floor pivot points as of Aug 28, 2016

Woodie’s pivot points

2nd Sup 1st Sup Pivot 1st Res 2nd Res
45.17 46.17 47.40 48.40 49.63

Crude Oil - Woodie's pivot points as of Aug 28, 2016

Camarilla pivot points

4th Sup 3rd Sup 2nd Sup 1st Sup 1st Res 2nd Res 3rd Res 4th Res
46.05 46.67 46.87 47.08 47.48 47.69 47.89 48.51

Crude Oil - Camarilla pivot points as of Aug 28, 2016

Fibonacci retracement levels

0.0% 23.6% 38.2% 50.0% 61.8% 100.0%
46.40 46.93 47.25 47.52 47.78 48.63

Crude Oil - Fibonacci retracement levels as of Aug 28, 2016



Moving Averages RSI Parabolic SAR CCI
Short Neutral Short Short

Gold - Indicators as of Aug 28, 2016

Floor pivot points

3rd Sup 2nd Sup 1st Sup Pivot 1st Res 2nd Res 3rd Res
1284.34 1301.15 1311.03 1327.84 1337.72 1354.53 1364.41

Gold - Floor pivot points as of Aug 28, 2016

Woodie’s pivot points

2nd Sup 1st Sup Pivot 1st Res 2nd Res
1299.42 1307.58 1326.11 1334.27 1352.80

Gold - Woodie's pivot points as of Aug 28, 2016

Camarilla pivot points

4th Sup 3rd Sup 2nd Sup 1st Sup 1st Res 2nd Res 3rd Res 4th Res
1306.24 1313.58 1316.03 1318.47 1323.37 1325.81 1328.26 1335.60

Gold - Camarilla pivot points as of Aug 28, 2016

Fibonacci retracement levels

0.0% 23.6% 38.2% 50.0% 61.8% 100.0%
1317.95 1324.25 1328.15 1331.30 1334.44 1344.64

Gold - Fibonacci retracement levels as of Aug 28, 2016



Moving Averages RSI Parabolic SAR CCI
Short Neutral Short Neutral

Silver - Indicators as of Aug 28, 2016

Floor pivot points

3rd Sup 2nd Sup 1st Sup Pivot 1st Res 2nd Res 3rd Res
17.67 18.05 18.34 18.72 19.01 19.39 19.68

Silver - Floor pivot points as of Aug 28, 2016

Woodie’s pivot points

2nd Sup 1st Sup Pivot 1st Res 2nd Res
18.03 18.29 18.70 18.96 19.37

Silver - Woodie's pivot points as of Aug 28, 2016

Camarilla pivot points

4th Sup 3rd Sup 2nd Sup 1st Sup 1st Res 2nd Res 3rd Res 4th Res
18.25 18.44 18.50 18.56 18.68 18.74 18.80 18.99

Silver - Camarilla pivot points as of Aug 28, 2016

Fibonacci retracement levels

0.0% 23.6% 38.2% 50.0% 61.8% 100.0%
18.44 18.60 18.70 18.78 18.85 19.11

Silver - Fibonacci retracement levels as of Aug 28, 2016



Moving Averages RSI Parabolic SAR CCI
Short Oversold Short Short

Copper - Indicators as of Aug 28, 2016

Floor pivot points

3rd Sup 2nd Sup 1st Sup Pivot 1st Res 2nd Res 3rd Res
194.86 200.44 203.57 209.15 212.28 217.86 220.99

Copper - Floor pivot points as of Aug 28, 2016

Woodie’s pivot points

2nd Sup 1st Sup Pivot 1st Res 2nd Res
199.83 202.35 208.54 211.06 217.25

Copper - Woodie's pivot points as of Aug 28, 2016

Camarilla pivot points

4th Sup 3rd Sup 2nd Sup 1st Sup 1st Res 2nd Res 3rd Res 4th Res
201.91 204.30 205.10 205.90 207.50 208.30 209.10 211.49

Copper - Camarilla pivot points as of Aug 28, 2016

Fibonacci retracement levels

0.0% 23.6% 38.2% 50.0% 61.8% 100.0%
206.02 208.08 209.35 210.38 211.40 214.73

Copper - Fibonacci retracement levels as of Aug 28, 2016

If you have any questions or comments on this commodity technical analysis, please, feel free to reply below.

Pensions, Oy Vey

Pensions, Oy Vey

Years ago it seemed that when you hit 65 you’d retire, receive a gold watch, and proceed to spend your pension money on a rocking chair and pot plants. Ten years later you’d be in a box and, since pot plants are cheap, the cost of keeping you alive wasn’t prohibitive.

Not anymore. Today things are different. My wife belongs to a running club and there are a bunch of octogenarians there who put us both to shame. Nope, today you retire and spend your pension on kickboxing classes and second wives, with no plan of dying anytime soon.

This is really bad news for pension schemes across the developed world. Longevity is a problem when you can’t pay for it.

Your Pension Is Threatened As Life Expectancy Rises

Maybe, just maybe, we could keep Mabel and Bob around for 10 years of re-used tea bags and pot plants, but not 20 years of kickboxing.

A suggestion put forward is that young people will simply have to hand over three times as much in taxes and work in their cubicles until they’re 123 before collapsing from a heart attack, clutching their overfilled catheters. At the very least, we’ll have robots changing their nappies though this doesn’t seem like a credible solution.

The fundamental problem with pensions is that you’re saving for old age diapers, pot plants, and rocking chairs by handing those savings over to entities whose mandates force your capital into asset allocations that no longer make sense. Why, oh why would you buy a European government bond for a negative yield just because the rating agencies still class it AAA and your fund mandate says it’s OK?

For those who still watch TV, I’m told that every night is littered with advertisements for pension companies. Those pension fund companies, sucking in your pot plant money, are actively seeking more suckers so they can move into shinier, taller office buildings in the most expensive sought after part of town where they will hire more executives to help plan more adverts to bring in more money from more suckers.

But we’re not living in 1964 anymore. Technology has evolved and today I sit writing to you from a home office in a place of my choosing. I manage my wealth from this location but in truth I can -and often am – anywhere. I have friends, colleagues, and clients with multi billion dollar family offices who operate in much the same way. No shiny office buildings on the expense column. The shiny office buildings are there but they’re leased to, you guessed it, pension and mutual funds.

Remember: pension funds are the dumb money. Smart investors watch mutual fund flows in order to know where the dumb money is moving to and there is no better place to watch than these guys.

And the government’s even worse. They promise to take our money and return it to us in the future but instead use it to bomb sand on the other side of the world. It’d be better if they just used it to buy a boat and go fishing on weekends. At least then we wouldn’t get the blowback of disastrous foreign policy I recently discussed in the 7-step blueprint to the easiest short in recent history.

New Election Cycle – Same Story

Every new election cycle, no matter where you live (unless perhaps it’s Kabul), your government will promise you greater security at less cost and they’ll promise to protect pensions.

Expecting your government to ring-fence pensions for protection is as silly as thinking your road tax goes on the roads. It doesn’t. It’s spent on a legion of new civil servants so that the government can live up to their other promise of job creation. “Look, we just created a gazillion new jobs right here and look at that increased GDP.” 

Don’t be disheartened though. There is good news. According to a study published in the Journal of Epidemiology & Community Health delaying retirement increases life expectancy. Clearly we just need to keep working.

Our stern faced suits seem to be pushing forward without any credible plan implemented and if history is any guide – and it is – then debt and taxes will be tried first. And this brings me to debt.

Before the crucial demographic tipping point is even directly upon us those stern suits have racked up an unconscionable amount of debt.

According to a Citibank report, the total amount of unfunded government pension liabilities in OECD countries currently stands at $78 trillion.

“If we focus on government pension liabilities for public sector workers and social security, our own analysis of twenty OECD countries indicates an average level of unfunded government pension liabilities of 190% of GDP. For that same cohort of countries, the reported amount of all government debt totals only 109% of GDP.

In US dollar terms, we estimate global retirement underfunding sitting on government balance sheets for these twenty countries to total $78 trillion, compared to reported national debts totaling $44 trillion. Therefore, if the liabilities of social security and public sector worker underfunding are added as a form of ‘contingent debt’, total global government debt may be three times as large as people currently think it is. Whatever the calculation used, the numbers are staggering.”

And by the way, this figure isn’t included in public debt to GDP ratios. You know, those ratios that everyone has been wringing their teeth and gnashing their hands over?

That figure (the debt to GDP for these OECD countries) stands at $44 trillion, nearly half the pension liabilities. To understand the real debt we need to add the two but in truth it’s meaningless. None of it is getting paid back!

What to Do?

Good question and one I’ve spent considerable waking hours pondering.

You could take up smoking and junk food, hastening an early heart attack. Or you could take control of your own finances, save like hell, watch the markets like a hawk, and position yourself for the inevitable.

Many will label me a rich parasitic capitalist for saying this and they can eat sand because the truth is I expect to make a fortune over the coming decade from this folly and I sincerely hope you do too.

– Chris

“Fund flows really come in handy. How you can really document that is to look at the mutual fund flows because you’re tracking the worst investors on the planet.” — David Hay, CIO Evergreen Capital Management

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World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture

World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture

Future of Farming

The future of farming has arrived. It’s vertical, soilless, and run by robots.

Tech Insider reports World’s First Robot-run farm will harvest 30,000 heads of lettuce daily.

The Japanese lettuce production company Spread believes the farmers of the future will be robots.

So much so that Spread is creating the world’s first farm manned entirely by robots. Instead of relying on human farmers, the indoor Vegetable Factory will employ robots that can harvest 30,000 heads of lettuce every day.

Don’t expect a bunch of humanoid robots to roam the halls, however; the robots look more like conveyor belts with arms. They’ll plant seeds, water plants, and trim lettuce heads after harvest in the Kyoto, Japan farm.

The Vegetable Factory follows the growing agricultural trend of vertical farming, where farmers grow crops indoors without natural sunlight. Instead, they rely on LED light and grow crops on racks that stack on top of each other.

In addition to increasing production and reducing waste, indoor vertical farming also eliminates runoff from pesticides and herbicides — chemicals used in traditional outdoor farming that can be harmful to the environment.

The new farm, set to open in 2017, will be an upgrade to Spread’s existing indoor farm, the Kameoka Plant. That farm currently produces about 21,000 heads of lettuce per day with help from a small staff of humans. Spread’s new automation technology will not only produce more lettuce, it will also reduce labor costs by 50%, cut energy use by 30%, and recycle 98% of water needed to grow the crops.

Go Vertical

What starts with lettuce, won’t stay with lettuce. Strawberries, cabbage, tomatoes, beans, eggplant, and many other vegetables can be grown this way.

Potatoes, peanuts, and things that grow in the ground may be off limits. Corn is too tall with acreage requirements too big.

Vertical Farms Half the Size of a Wal-Mart

Also consider Indoor Vertical Farm Half the Size of a Wal-Mart.

Matt Matros reads about the 34,000 bags of spinach Dole just recalled and shudders. A Salmonella contamination never would have happened on his farm.

Matros is CEO of FarmedHere, the largest indoor vertical farm in North America. At 90,000 square feet, the Bedford, Illinois farm is a leader in a growing agriculture movement that grows crops without soil and sunlight. Instead, these crops are grown indoors, where they’re always monitored and kept away from harmful bacteria.

FarmedHere also prioritizes locally sourcing its produce, Matros says. It wants to deliver its herbs and leafy greens to consumers living at most 200 miles away, as part of a larger mission to reduce its carbon footprint.

In Matros’ eyes, the move follows in the footsteps of the fast-casual chain Chipotle, which recently updated its mission to source from farms at most 350 miles away.

With 18 FarmedHere facilities, 75% of the US population would fall within that 200-mile radius, ensuring the produce can reach consumers quickly.

So far, the main crops are basil, mint, lettuce, and kale. Those are the low-hanging fruit that are easy to grow, Matros says.

Without the hassle of Mother Nature’s changing climate, farmers can enjoy year-round growing seasons indoors, using less water, fewer pesticides, and avoid biological invaders that cause diseases like Salmonella, Escherichia coli (E. coli), and Listeria.

The company is anticipating an industry-wide tipping point a couple years down the line in which the winners are the local farmers who can provide nutritious food to nearby residents who need it, taking a big chunk of all long-haul trucks filled with produce off the road for good.

Tipping Point

Instead of digging deeper and deeper wells in the California desert to grow things, water in these farms is 95-98% recycled.

And commenting on labor issues, Matros points to Amazon’s use of factory robots: “We’re going to have that in our next farm, which will be open in about a year.” 

Japan will have similar technology in a similar timeframe.

The tipping point for worker-less agriculture has arrived.

Mike “Mish” Shedlock

Focus to Shift From Fed Watching to Data Combing

Focus to Shift From Fed Watching to Data Combing

Focus to Shift From Fed Watching to Data Combing

August 26, 2016

In the week just ending, financial market participants were consumed with today’s scheduled speech by Janet Yellen at the K.C. Fed-sponsored Jackson Hole central banking symposium. The Fed Chair made some news by reporting progress toward the Fed goal of 2% inflation as well as its jobs growth mandate had occurred, and that the case for a second hike of the federal funds rate target is strengthening. She didn’t signal how soon the increase might occur and put the greatest emphasis in her comments on near-term monetary policy to the expectations that normalization will be a gradual process. Indeed, even if officials move in September, the interval between the first and second increases will have been ten months from an unprecedented low level. Calling that a snail’s pace would be an understatement. Yellen’s comment was comfort food for investors, and markets rallied, but that wasn’t the whole story of today. Remarks about an hour later by Vice Chair Stanley Fisher hinted that two hikes by yearend are possible, sending the dollar up and stocks and bond prices lower. Despite repeated admonitions by Fed officials and private analysts that the broad path of rate normalization, rather than the exact timing of changes, will be most important to the ultimate response of the U.S. economy and financial markets, today’s action underscored just how influential sudden shifts in perceived timing can be.

While the catalysts for such shifts this week came from the comments of officials, next week will be all about the data. A vast quantity of economic indicators are being reported by the United States and other advanced economies. One of the more forward-looking indicators will be the ISM manufacturing purchasing managers index on Thursday. Markit Economics also compiles U.S. PMI data and has released some weaker-than-expected preliminary indications already for the month of August. Its manufacturing PMI fell from a 9-month high of 52.9 in July to 52.1, and the companion services PMI dropped 0.5 points to a 6-month low of 50.9. The composite PMI (both services and manufacturing) was at a 2-month low of 51.5.

These tentative findings do not imply a big improvement in the coming quarter. Over the previous three quarters, U.S. real GDP expanded just 0.9% last fall, 0.8% in the winter, and 1.1% at an annualized rate in the spring. Moreover, growth has not been well-balanced but rather heavily dependent on the consumer. While real consumer spending in 2Q16 grew 4.4%, annualized declines were recorded by residential investment (7.7%), non-residential business investment (2.5% and the third straight quarterly drop), and government spending (1.5%). Net foreign demand augmented GDP growth by a mere 0.1 percentage point, while inventories exerted a sharp 1.26 percentage point drag. It’s highly probable that on-year GDP, which was only 1.2% in 2Q16, will be even lower in 3Q.

That puts a very heavy emphasis on all elements of next Friday’s Labor Department jobs report to justify tightening at the September FOMC meeting. The problem with moving that soon rather than at the penultimate or final scheduled meetings of 2016 that it would keep alive the possibility of two, rather than just one, rate hikes in 2016.

Then there is the election. Every four years, Fed officials say that they will not be influenced by the presidential election, but it would go against human nature this time for the election not to affect their predisposition. If Trump and fellow Republicans win in November, Fed policymakers can kiss good-bye to their independence. No monetary official can feel neutral about that prospect, not just because of losing the chance to make a difference but also because the studies show monetary policy by independent central banks achieving much better results of promoting sustainable growth with price stability than in cases where decisions are made or strongly influenced by elected officials. Because of the looming election, policy is likely to be tightened at the September meeting only if a compelling economic case exists then to do so.

It’s also clear that Fed officials are closely monitoring the dollar and its reaction to what they do. A strengthening dollar could impede both their mandates but eroding the price competitiveness of U.S. exports and import-competing goods and by directly depressing import prices. Whatever action is taken at the September meeting, the on-going inclination to normalize rates a third time will hinge on the dollar not strengthening significantly further.

Copyright 2016, Larry Greenberg. All rights reserved.  No secondary distribution without express permission.


Tags: Fed Policy, the dollar, U.S. economic growth


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Renzi’s Great Gamble

Renzi’s Great Gamble

Renzi’s Great Gamble

By Nick Andrews and Stefano Capacci
August 24, 2016

Prime ministers come and go in Italy – four since the financial crisis – but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble.

If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms. If he loses, Renzi has promised to step down – a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and by extension Italy’s membership of the eurozone itself. As a result, a “No” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long term membership of the eurozone into doubt, plunging the single currency area once again into crisis.

Policy no man’s land

Italy’s fundamental problem is that it is stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

GK Italy DeVal

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house – the Senate and the Chamber of Deputies – wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards, as Italy’s real GDP per capita has slumped to a 20-year low.

GK EZ Comps

Such a below-par economic performance has led to a build-up of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. In turn, this bad loan overhang has eroded the ability of the banking sector to extend new credit to the thousands of small businesses which are the engine of Italy’s economy and which normally power employment growth. The result is stagnation.

To stand any chance of escaping this low growth trap, Italy needs to enact wholesale structural reforms to enhance its competitiveness relative to its eurozone neighbors. Notably, it needs to make the labor market more flexible to encourage job creation, it needs to lower the barriers to entry that protect much of the country’s service sector, it needs to overhaul a judicial system so sclerotic that bankruptcy proceedings can last 10 years or more, and it needs to restructure its fragmented and dysfunctional banking system.

The prescription might be clear, but Italy’s political system makes enacting reform all but impossible. Renzi has already tried to overhaul Italy’s labor market by attempting to dismantle the generous protections that make it difficult and expensive for companies to dismiss staff, and which therefore encourage businesses to hire only temporary workers, heightening economic insecurity among the young.

But Renzi’s attempt ran into bruising opposition from Italy’s powerful and well-subscribed trade unions. The results were a watered-down reform package that entitles existing permanent staff to a near-guarantee of lifetime employment, and a severe dent in Renzi’s popularity from which he is yet to recover. It’s a familiar story in Italy. Entrenched interests, whether represented by local and regional political leaders, unions, protected professions, or established private sector companies, exert enormous influence over the political process. All profit from the status quo, which promises they will continue to benefit from special protections and payouts. And because of the equal balance of power in Italy’s parliament, which means the Senate can block government legislation indefinitely, the consequence is political – and economic – stagnation.

Bloated and wasteful

Renzi’s referendum aims to change that. The prime minister is seeking popular approval for constitutional reforms that promise to cut the size of the upper house from 315 to 100 senators. Under his proposals, senators will no longer be directly elected, but will instead be chosen by regional councils, nominated by the mayors of big cities, or – in the case of five – be appointed by the Italian president. The reform will not only cut the costs of the notoriously bloated and wasteful upper house, where senators have traditionally enjoyed lavish expenses and generous pensions. Most importantly, it will downgrade the political power of the Senate so that it will no longer be able to obstruct government legislation entirely, but only to propose amendments that will be adopted at the discretion of the lower house (although the Senate will retain a say on constitutional ma tters, including the ratification of European Union Treaties). The objective is to increase the executive power of the government, and to tackle entrenched interests with additional measures that allow for new laws to facilitate popular referendums and to promote citizen participation in the political process.

Unlikely alliance

However, powerful forces are arrayed against Renzi, and a “Yes” vote is far from assured. The proposed reforms have attracted opposition not only from establishment voices who benefit from the current arrangements. They have also drawn fire from constitutional lawyers and anti-establishment parties, including the populist 5-Star Movement, which argues the 50% simple majority needed to win the referendum is too low for constitutional changes that promise a concentration of political power unprecedented since the formation of the Italian republic in 1946.

Perhaps more importantly, Renzi’s pledge to resign in the event of a “No” victory has raised the possibility of a protest vote against the prime minister himself – the third unelected head of government in succession – from a broad cohort of the electorate which is thoroughly disillusioned with Italian politics. Increasingly disgruntled, these voters are sick of the corruption and self interest of politicians, and fed up with painfully austere policies that they believe to be dictated from Brussels and Berlin, and which they hold responsible for Italy’s poor economic performance.

The chances of a “Yes” vote in the referendum have not been improved by the slump in Renzi’s personal popularity following last year’s attempt to reform the labor market, and a series of small bank restructurings that saw retail savers “bailed-in” – forced to take losses – under new European Union banking regulations. From 40% after Renzi entered office two years ago with optimistic promises of reform, the approval rating of the prime minister’s PD party has fallen to little better than 30% today, much the same as that of the opposition 5-Star Movement. As a result, with two months to go the referendum is too close to call. Opinion polls indicate the “Yes” and “No” camps are running roughly equal, with a large proportion of voters still undecided.

GK Italian Options

If Renzi loses the referendum, not only will Italy remain in policy limbo, but it is highly likely his subsequent resignation will trigger a parliamentary election. Under new election laws passed last year, if a party fails to win 40% in the first round of voting, the top two parties go through to a second round. The latest opinion polls put Renzi’s governing PD party on 31% and the 5-Star Movement on 29%, with the next two largest parties – Silvio Berlusconi’s Forza Italia and the anti-establishment Northern League – level pegging on around 13%.

In recent years, Renzi’s PD government has represented the best hope for structural reform and economic modernization. But even if the PD party were to win a post-referendum election, there is a risk that, following Renzi’s resignation, the left wing of the party would wrest back control from the reformist center-right faction, damping hopes for further restructuring. Such a swing to the left would hardly be unique to Italy. In the UK, the militant left has captured the leadership of the main opposition Labour Party. In Spain, Podemos has split the left wing vote, and in France the ruling Socialists have come under pressure in the polls from the radical and Euroskeptic Left Party led by Jean-Luc Mélenchon.

GK Italian Polls

At the moment, an election victory for the 5-Star Movement, which identifies as neither left nor right, appears at least as probable as a second round win for the PD. The Movement has already scored significant victories in mayoral elections in Rome and Turin, and enjoys increasing support across the country. Its broad stance is anti-establishment and in favor of direct participatory democracy rather than representative democracy, which it regards – with some justification in Italy – as an invitation to corruption. Beyond that, however, its platform is so vague that it is hard to pinpoint any concrete policies, except its call for a referendum on Italy’s membership of Europe’s single currency.

Leadership vacuum

Perhaps the biggest problem for 5-Star, however, is that it has no clear leader. Its founder and leading voice, Beppe Grillo, was found guilty of involuntary manslaughter in 1980 following a fatal road traffic accident, and so cannot run for public office under Movement rules barring candidates with criminal records. Without Grillo the parliamentary party would be leaderless, meaning 5-Star has no obvious prime ministerial candidate even should it secure a majority in the election.

All this means that the possibility of a “No” vote in Italy’s constitutional referendum come October or November is the biggest clear and present danger to the euro’s survival. Both 5-Star and the Northern League are promising a plebiscite on euro membership should they come to power in a post-referendum election. That does not mean a vote on Italy’s eurozone membership would lead directly to its exit – many likely “No” voters in this year’s constitutional referendum favor continued euro membership. However, a “No” vote come October would effectively be a vote against the structural reforms needed to ensure Italy’s economic growth and prosperity within the eurozone.

In other words, in the event of a “No” vote in October, the only economic choice for Italy would be between continued stagnation, or a return to the old economic model of successive devaluations. The latter course would naturally mean exiting the eurozone anyway. But even if Italy were to take that path, it would hardly be a less painful way to restore the economy to health. Whether inside or outside the single currency, Italy still needs structural reform to ensure future growth. The only potential benefit to leaving the eurozone would be that deep devaluation of a reconstituted lira could help to ease some of the transitional pain (although it is probable the palliative effect would be more than offset by the additional economic and financial damage wreaked by an exit).

Europe in microcosm

Clearly investors should be concerned. Italy is the third biggest economy in the monetary union and one of its core members. Its departure would surely hasten the break-up of the whole euro project. What’s more, the political and economic tensions within Italy ahead of October’s referendum mirror those at work across the eurozone as a whole. In Italy the wealthy north makes up the industrial heartland which drives the economy, while the south is underdeveloped and poor. There is little enthusiasm for structural reforms, and throughout the country populist movements which promise to tear down the self-serving political establishment are rapidly gaining ground.

Italy is the wider eurozone in microcosm. In the EU as a whole, progress towards creating the political and economic institutions that could ensure the success of the single currency project have been comprehensively obstructed by narrow – but deeply entrenched – national interests. This failure to advance, and the economic hardships and sense of disempowerment that have resulted, has fueled the rise of populist political parties from Greece to Finland – parties that are challenging an increasingly distrusted political elite and questioning not just the status quo, but the whole European project. If Renzi wins come October, the eurozone has fresh hope. But if he fails, Italy fails, and very likely the eurozone fails too.


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