The Spellman Report - Page 3 of 15 - The Spellman Report, Where the Economy and Markets Meet

It’s a Whole New Ballgame: The Fed Has Been Stymied: (Part 1)

To prevent a reoccurrence of the 2008 financial meltdown, the banks of the G-20 countries must now operate under new rules that encourages substantially higher cash holdings. This changes both the banking systems outcomes as well as our learned reflexes about the Federal Reserve’s ability to generate economic stimulus. Basically, this accounts for the muted response to the Federal Reserve’s efforts to restore economic growth and inflation. Get used to it.

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The House of Cards: EU Edition

Negative interest rates pursued by central banks of distressed economies are more of a problem than a solution. They bleed investment income from financial institutions already facing asset write-offs. Currently, this is the quandary of Italy and its banks facing bankruptcy. Though a bailout is the norm for depositors of democratic socialist governments, Italy will be hard pressed to do so given budgetary and EU constraints. In this case, exit from the EU becomes an alternative.

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The Mad Genius of the Zero-Forever Bond

That the developed world’s governments are accumulating outsized debt shouldn’t be news to anyone. Unless there are some tricks up the government’s sleeves — and they are tricksters — there will be defaults. And here is the trick: force regulated financial institutions to buy and hold zero-rate perpetuity government bonds that pay neither interest nor principal. It’s the equivalent of repudiation without default at the expense of private wealth. We are well on the way to that.

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Bond Refugees Flee to Stock Lands

Tension is building among stock investors. Stock prices have levitated while the most fundamental determinant of stock price support— an uplift in corporate earnings — has gone soft. But on the other side of the ledger is the resolve of central banks to support asset prices. Will market logic or central bank buying prevail in these crosscurrents of stock price levitation?

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Negative Interest Rate Neverland

In the wonky world of central banking, the Rx for reviving an economy comes down to reducing the cost of credit so that borrowers are tempted to borrow and spend. These notions, taught in central banking academies called graduate schools, are well-learned but not applied wisely. Negative interest rates put lenders on the road to extinction with profound consequences.

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A Grand, Simultaneous Financial Bust: Asian Contagion II

In the early days of open global capital markets, capital was attracted from the developed economies to the low-wage emerging markets with the promise of building a manufacturing base to export to the developed world. This capital surge was short-lived as capital plunged in at a faster rate than the new facilities could be up and flow revenues. It all came to a screeching halt when capital sought to repatriate. This was knowns as Asian Contagion. The year was 1997. The recent commodity, currency and stock market plunge are all related and known as Asian Contagion II, with the differences only in the details.

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Tell Spellman It’s an Art, Not a Science

At the moment, the question of whether or not the Fed should be raising interest rates has become a much ballyhooed event for which every investor, financial writer, and taxi cab driver has an opinion. It’s supposedly based on the best estimates of what money variables need to be in order to align aggregate spending with the upper supply side level that won’t trip off too much inflation. While the Fed would like to be scientific about it, the dramatic effects of globalism places the decision more in the realm of art than science and the Fed is not comfortable with art.

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The US Growth Machine is Red Taped to Death

We can chastise the Federal Reserve for being unable to get itself to move off of a zero interest rate (because doing so has harmful side effects), but the Fed has no other way to influence the economic growth machine. Only Congress and a President do, and the Fed would be doing us a service to state so publicly.

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The Next Leg of Globalism

In 1993, there was a great debate carried live on national TV between then-Vice President Al Gore and Dallas entrepreneur Ross Perot. The issue was the pros and cons of going global. Equally unusual in terms of today’s political alignment was the right-leaning Perot (as the Donald Trump of his time) arguing against globalism. His position was that the lower wages abroad would result in a “giant sucking sound” of jobs lost to lower-wage countries. Well two decades later, there is no doubt who got it right.

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Country Debt Enablers and the Greek Conundrum

For a country with little penchant to tax and a greater penchant to spend, financing its fiscal deficit is an ongoing chore. When it comes to financing its deficits, governments have tricks up their collective sleeves – not available to the private sector. What makes it easy to finance a deeply indebted country is that its debt is placed — not sold and doesn’t meet a market test. Hence yields are not a deterrent to further indebtedness.

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