If the Fed hikes rates for the 3rd time since Dec-15, growth will come off and pop by 50!

Today on February 15th, in 1710, King Louis XV was born in the Palace of Versailles. In 1945, the Allied forces conducted their last day of an aerial bombing campaign on Dresden, Germany, destroying  over 1,600 acres (6.5 square kilometers) of the city center. And in 2005, ex-Lebanese Prime Minister and self-made billionaire Rafic Hariri was assassinated with explosives.

If we take a look back at previous cycles of Federal Reserve interest rate announcements, we can definitely see a pattern of three-too-many, as far as rate hikes in new cycles are concerned!

Analyze this. Three rate hike announcements in a new cycle, and the economy cannot recover to its extent levels of GDP growth in the contemporary cycle, and the next quarter GDP growth rates drops by half, or by 50%!

Source: Bloomberg

Source: Bloomberg

(1) In the era of the pre-1990s, an increase in Federal Funds Target (FFT) rate from 6.5% to 7.25% in three stages left the U.S. economy reeling: Q-Q SAAR (Seasonally Adjusted Annualized Rate) GDP growth never recovered from a contemporary high of 6.8% in Q4-1987 until the 7.20% growth in Q2-1996, going through the 1990 recession and two hike-cut cycles of the FFT (Next quarter growth rate: 2.3%).

(2) Between January and September of 1994, three rate hikes from 3.0% to 4.75% meant that Q-Q SAAR GDP growth rate of 5.6% in Q2-1994 slowed to 1.4% in Q1 and Q2-1995 (Next quarter growth rate: 2.4%).

(3) Three instances of rate hikes from May to December in ’04, from 1.0% to 2.25% left the GDP’s existential Q-Q SAAR growth rate in the range of 4.3-4.9% of Q1-2005 to Q1-2006 (Next quarter growth rate: 2.1%/1.2%) spiraling down towards the great recession of 2008, only to recover to this level in Q4 of 2011!

The interest rate is often criticized as a blunt tool. But what else can the regulators do? The Fed is helpless, right? Well, if they are truly apolitical, they’d have an argument. And that’s where I lose them, because the Fed is extremely political.

As a recent case in point, Chair Janet Yellen admitted in her press conference post the Dec-16 rate hike, that

“Some of the participants… did incorporate some assumption of a change in fiscal policy into their projections.”

In a statement prior to the elections, she had explicitly stated that committee members will take into account only what is reality, leaving politics aside. She also sounded disingenuous about Trump’s fiscal stimulus plan being “unproductive” and unnecessary, the economy being at full employment, given that she acknowledged the adverse demographic participation and rise in debt, and the Trump fiscal plan isn’t clear yet.

Last week, talk show host Alex Jones revealed that behind the scenes, the Trump administration is actively trying to lobby the Fed to not raise rates. Given her rather hawkish Congressional testimony on Tuesday (“Every meeting is live,” shrink the Fed balance sheet in an “orderly and predictable way,” waiting too long to tighten “Unwise”), it seems that she may not have been fully convinced.

Thanks to Ben Garrison, this is a perfect description of things. The dangers are undeniable!

Source: Ben Garrison

Source: Ben Garrison

All these developments have an upshot. Under the Trump administration, the Fed will very likely lose its so-called independence and be turned into a bureaucracy. The bullish bear would like to see a Salerno-style advance (budget restraint – see link below), but instead we will get an adverse audit of the Fed, the power to regulate money & banking returned to the U.S. Congress (or a branch thereof), and a collectivist, socialist, technocratic approach to money management (Taylor rule/ NGDP targeting??!) versus the current secretive, derisory approach.

Recommended reading:

Federal Reserve bankers mocked unemployed Americans behind closed doors >> The Intercept (Jan, 2017)
“It was a surprise to us” – Yellen reveals how Trump’s fiscal stimulus may have doomed the stock rally >> Zero Hedge (Dec, 2016)
How to rein in the Fed, right away >> Joseph T. Salerno, Tom Woods (Apr, 2015)


In just 2 months, Toshiba stock price tanks, pops by 50!

Today, February the 14th, St. Valentine was beheaded in 278 A.D. In 1900, South Africa was invaded by 20,000 British troops during the second Boer war. And in 1919, President Wilson presented the draft covenant for the League of Nations.

Source: Bloomberg, thebullishbearblogger

Source: Bloomberg, thebullishbearblogger

In Japan, Toshiba’s stock price plummeted by 50% from ¥454 on 13th Dec, 2016 to ¥227 on 14th Feb, 2017 after it was apparent that the Company was seeking an extension to its result declaration date and could possibly announce bankruptcy.

Toshiba’s management of Westinghouse Electric Co., the US nuclear power business acquisition from a decade ago, is the source of the problems. Westinghouse faces spiraling cost overruns at nuclear plant projects in the United States, and Toshiba has repeatedly failed in its efforts to offload a portion of its shares in the subsidiary.

Source: Bloomberg

Source: Bloomberg

A write off worth several billions of dollars is expected. According to Reuters (See the link in the recommended reading section below), the final charge, to be detailed alongside quarterly earnings, will be ¥700 billion ($6.2 billion). This would wipe out the company’s shareholder equity. All this will spur trouble for the creditor banks. According to BNP Paribas analyst Toyoki Sameshima, the top four Japanese banks (Mizuho, SMFG, SMTH, MUFG) have already supported increased lending to Toshiba, their loans to Toshiba accounting for 41.5% of its total borrowing. Below is a break up of the loans to Toshiba by these banks:

Source: Companies, BNP Paribas

Source: Companies, BNP Paribas

Earlier, on January 27, 2017, Toshiba announced plans to spin off its semiconductor memory business. Management suggested the possibility of a future IPO, which could yield a value of around ¥1.5-2 trillion.

The sheer size and legacy of Toshiba may mean it is too big to fail (TBTF) at the moment. A bailout from the big Japanese banks is on the cards by way of debt-to-equity swaps (DES), underwriting of common/preferred stock, and subordinated loans. The stock market prices and analyst views are instructive: Over half the analysts do not think that the stock is worth selling at this stage.

Source: Bloomberg

Source: Bloomberg

But what Toshiba urgently needs is to strengthen governance of overseas subsidiary Westinghouse. Arguably, the biggest reason that the stock exchange regulators postponed judgement on a designation change from TE1 was that subsidiary Toshiba EI Control Systems reported inflated sales.

Recommended readings:

Toshiba prepares to unveil nuclear hole, other perils threaten >> Reuters (Feb, 2017)
Toshiba’s nuclear reactor mess winds back to a Louisiana swamp >> Bloomberg (Feb, 2017)

Mongolian currency weakens to 2,480, pops by 50!

Today, February the 13th, is notable for many famous events. Today in in 1633, Italian philosopher, astronomer and mathematician Galileo Galilei arrived in Rome to face charges of heresy for advocating the Copernican theory, which held that the Earth revolved around the Sun. In 1689, the British Parliament adopted the Bill of Rights. And in 1923, born was Charles “Chuck” Yeager, the first man to break the sound barrier.

For many months now, Mongolia has been facing a payments crisis. Today marked a day that its currency, the Mongolian tögrög (MNT-USD pair), weakened to lose over 50% of the gains since January 2017 low of 2,497. It has also lost 50% since Oct, 2013.

Source: Bloomberg, thebullishbearblogger

Source: Bloomberg, thebullishbearblogger

Being a country whose economic activity is dominated by mining (Mining made up 25% of GDP in 2015, and Copper, gold, iron ore and other metals made up 67% of exports that year, while coal and crude oil made up 23%), its growth barometers correlate remarkably well with commodity prices.

Here’s a graph of Mongolia’s GDP against the commodity prices, via FT.com:

Source: IMF, World Bank, Asian Development Bank, Financial Times

Source: IMF, World Bank, Asian Development Bank, Financial Times

And here’s data from Bloomberg showing how Mongolian M2 money supply growth varies closely with the commodity basket proxy, played here by the Rogers Commodity Index:

Source: Bloomberg, thebullishbearblogger

Source: Bloomberg, thebullishbearblogger

But bureaucracy and corrupt governance has played a key role in the country’s weak macroeconomic financial situation. Mongolia needed an IMF rescue in 2008-09, yet government and government-affiliated entities raised billions of dollars through foreign-currency bond issuance and international loans, especially starting from 2011.

Source: Bank of Mongolia, Financial Times

Source: Bank of Mongolia, Financial Times

Hence, Mongolia has once again had to open its doors to the International Monetary Fund, promising “6-8% growth” for “at least 10 years.” Mongolian Finance Minister Choijilsuren Battogtokh said his government and the IMF will likely agree on the basic conditions by Feb 15th, 2017. Such conditions typically include fiscal and monetary austerity measures and structural reforms.

Should the Mongols welcome this step? Past record seems to hardly suggest so. The IMF has a notorious reputation for riot plan (In Joseph Stiglitz’ own words), subverting the will of democratic nations (Threatened Germany with abandonment of the troika in the wake of the Greek crisis) and serving the establishment (Justified policy inconsistencies by unequivocally favoring the United States over Russia during Ukraine’s $3 billion debt default towards the latter). It is also headed by a convicted fraudster, Christine Lagarde, who was excused any punishment because of her “strong international reputation,” which was bizarrely tarnished irreparably by the judgment itself.


In order to make Mongolia great and free from debt again, it needs the Iceland doctrine: shed the debt, jail the corrupt, and then back its currency with commodities and restore the soundness in its banking system!

Recommended podcast:
London analyst issues dire warning: Trump could trigger a great depression >> Silver Doctors (Feb, 2017)

Recommended readings
Battered Mongolia faces make-or-break moment >> Nikkei Asian Review, Financial Times (Feb, 2017)
IMF’s four steps to damnation >> The Guardian (Apr, 2001)
The IMF confesses it immolated Greece on behalf of the Eurogroup >> Yanis Varoufakis (Jul, 2016)

Greek 10-year bond yields pop by 50!

Today, February 9th, is an historic day. Today in 1916, conscription began in Great Britain as the Military Service Act became effective. Today in 1918, Ukraine signed a peace treaty with the Central Powers – a deal to provide food to Prussia (Germany) in exchange for military defense from the belligerent Bolshevik forces of Russia. And today in 1922, the U.S. Congress under Harding establishes the World War Foreign Debt Commission.

But today turned out to be yet another rather grim day for Greece.

Greece 10-year bond yields have begun spiking again

Source: Bloomberg

The Greek 10-year generic bond yields have officially popped up by over 50 basis points (or 0.50%), or by 82 basis points, to be precise, over the last fortnight. The 2-year bond yields surged 64 basis points just today to touch 10%, while the current 10-year bond yield level of 7.816% at 7.34 AM EST is just 50 basis points below October-end levels, from whence the Greek bonds began a bull, (now turning into bull-you-know-what) now reversing at a fast clip over failed negotiations with the European Union creditors.

Here on the blog version of pop-by-50 (A podcast version coming soon), we will dissect the reason behind the latest rounds of failed talks and try to find a way out for Greece in the free market, Misesean spirit.

Greece debt % GDP

Source: UK Telegraph, Eurostat, Haver Analytics

  • Greece is due to pay €7 bn in July ’17, which will not materialize unless bailout cash is injected. Individual financiers at the IMF are increasingly unwilling to fund endless bailouts for the Eurozone’s most troubled country, passing more of the burden onto the EU. The kick in the nutz came from German Finance Minister Wolfgang Schauble, who told the German broadcaster ARD, that in order to cut its debt, Greece would have to leave EU
  • The US ambassador to EU of the new Trump administration, Ted Malloch, suggested on Feb 8th that Greece could very well exit the European Union. “This time I would have to say that the odds are higher that Greece itself will break out of the Euro.”
  • ESM: Europe has made clear commitments to support Greece with additional debt relief after the European Stability Mechanism program, under the condition that this is necessary and that Greece has implemented all the agreed program reforms
  • Earlier in the week, IMF had suggested that the Greek debt crisis was truly in a spiral and needed urgent relief – “Significant debt relief.” Nov-16 unemployment of 23%, growth of 0.8% Q-Q annualized in Q3-16, but this may not be enough. Greece’s debt is projected to fall from 179% of GDP a year ago to 160% of GDP by 2030, “but become explosive thereafter.”
  • Proof that IMF is de facto world central bank: (1) Jeroen Dijsselbloem (Dutch FM, one of four presidents of the Eurogroup) warned that the Netherlands will only support Greek bailouts if the IMF is involved.
    Source: VoxEurop.eu

    Source: VoxEurop.eu

    (2) There are four presidents of the Euro raj! (3) IMF’s Managing Director Christine Lagarde called on Greece to beef up its ability to collect and report economic data, to give the government, investors and other nations a clearer idea of the country’s performance (4) IMF wants Greece to implement more economic reforms, mostly in the form of austerity

  • What’s next? Eurozone fat-cat bureaucrats (Finance ministers) are due to meet on February 20th to discuss the crisis!!
  • Frank Hollenbeck’s Misesean solution in 2015: (1) Exit the Euro zone, (2) implement true austerity (The “15th and 16th month” salaries alone for these employees in 2011 cost taxpayers €9 bn), (3) implement true free-market banking reform (including charges-based warehousing bank, and a 100% equity-financed loan bank), (4) let circulate the Euro and other fiat currencies, though institute the Drachma as government-sponsored currency, (5) Link the Drachma to Gold to institute real financial discipline in banking

Recommended readings:

Five Steps to Fixing Greece’s Debt Problem >> Mises.org (Apr, 2015)

Greece’s Biggest Problem Is Its Anti-Capitalist Culture >> Mises Daily (Aug, 2015)

An “Austrian” Economist’s Advice for Greece and the EU >> Richard Ebeling (Jul, 2015)