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Reinharts Rant: Jay Powell's Policy Path Will Get Trump Re-Elected
In a Dudley-esque op-ed, establishment economists Carmen and Vincent Reinhart reflect on Jerome Powell's Dilemma.
There is a reason that the US Federal Reserve chair often has a haunted look. Probably to his deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that President Donald Trump will be reelected next year.
Once a year, the leadership of both the European Central Bank and the United States Federal Reserve go to the mountains for policy enlightenment. The ECB conducts a forum every June in Sintra, a town in the foothills of the eponymous Portuguese mountain range. And the Fed convenes in late August in Jackson Hole, Wyoming, for the Kansas City branch’s economic symposium. In retrospect, this year’s remarks from on high by ECB President Mario Draghi and Fed Chair Jerome Powell provide insight into the global outlook and the two banks’ recent policy actions, which have been coincident, but not coordinated.
In Jackson Hole, Powell named the challenge to the global economic outlook, not personally (US President Donald Trump), but operationally: heightened trade uncertainty, he said, presented a new drag on aggregate demand. Back in 2018, most Fed officials believed that 3% annual real GDP growth was unsustainable, because resource utilization was already taut. That assessment led the Fed to hike the policy interest rate by a quarter point four times.
That episode demonstrates the pitfalls of real-time policymaking. One year later, the Bureau of Economic Analysis trimmed almost half a percentage point from GDP growth for 2018, and the Bureau of Labor Statistics revised downward its estimate of monthly employment gains. Among the mechanisms by which an increase in interest rates slows aggregate demand is the foreign-exchange market. When the Fed is set on tightening as other central banks hug the effective lower bound of their nominal policy rates, the dollar’s value rises. Essentially, dollar appreciation is a channel through which policymakers “donate” domestic economic strength to US trading partners that now have weaker, more attractive currencies. With the ECB’s policy rate distinctly negative and its asset-purchase program running out of steam, Draghi especially appreciated the gift of easier European financial conditions last year.
Of course, the transfer of domestic economic strength by an independent agency, the Fed, displeased the chief executive, and withering criticism ensued. But it was not Trump’s carping about dollar appreciation that led the Fed to change course. Rather, Trump’s trade policies elevated uncertainty about investment and growth. Investment in long-term capital is always risky for a business. When doubt about such an investment emerges before concrete is poured, less concrete will be poured.
By early 2019, the Fed viewed this new economic headwind as obviating the need to continue raising the federal funds rate. As the year unfolded and the trade winds intensified, Fed officials switched course and began to ease policy.
Some economic mechanisms, however, are asymmetric. When the Fed tightens its policy, other central banks do not always follow, preferring to allow their currencies to depreciate. In contrast, when the Fed eases its policy, far fewer international partners are willing to let their currencies appreciate so that the dollar can depreciate. No one volunteers because everyone fears upward exchange-rate pressure. An earlier generation of central bankers would have relied on direct intervention in the currency market to pursue the same goal. But while this is still done in emerging-market economies, the use of reserves by an advanced economy would draw its peers’ opprobrium. Instead, they achieve the same end by changing policy interest rates to deflect appreciation and welcome modest depreciation.
As a consequence, when the Fed pivoted, all other major central banks followed. Draghi pushed the ECB in that direction in Sintra and followed through with further easing on September 12. This similarly drew Trump’s ire, as he viewed the move as directed toward the exchange rate. He is right, indirectly. A weaker euro is the intermediate result Draghi seeks in order to support a flagging economy and move inflation up to the ECB’s target of near, but below, 2%.
The ECB’s response, of course, means less dollar depreciation, weakening the stimulus effect of the Fed’s move. And the consolation that by easing policy, the Fed single-handedly induced worldwide monetary accommodation does not get much credit from the White House. Trump would prefer that Powell were faster than his counterparts in the race to the interest-rate bottom. Powell’s problem is that the US economy apparently does not require such stimulus. Job gains remain robust, and wages are ticking up. Global trade may be in recession, but the US economy is not as dependent as its trading partners on global trade.
Probably to Powell’s deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that Trump will be reelected next year. That instruction is not contained in the Federal Reserve Act, of course, but the Fed is supposed to deliver maximum employment and stable prices. Its mandate of sustainable economic growth thus requires Powell to attempt to offset the effects of policy uncertainty under Trump.
Fed officials are not thinking of intentionally letting the economy stumble between now and the 2020 election. Thus, if Powell succeeds, Trump will not bear the cost of his words and actions. This will invite more of the same.
There is a reason that Powell often has a haunted look, and not just at Jackson Hole.Tyler Durden Thu, 09/19/2019 - 21:05 Tags Business Finance
The Strategy That Added $16 Billion To Bill Gates' Net Worth This Year
Decades after founding Microsoft, Bill Gates is still creating immense wealth for himself.
He added $16 billion to his net worth this year, bringing his total net worth to $106 billion, according to Bloomberg. He's second only to Jeff Bezos on the Bloomberg Billionaires Index, even after donating $35 billion to charity.
Gates said in an interview:
“We’re not, you know, in some defensive posture where we’re mostly in cash, or anything like that. The strategy that’s been used on the investments is to be over 60% in equities.”
And with Microsoft just announcing a new $40 billion buyback scheme, the fact that it is the most valuable company in the world is not hurting Gates...
As of Monday, Gates had about $60 billion of his assets in equities. This is far higher than the average family office in North America, which held about 32% of its assets in equities in 2018.
Gates' family office, Cascade Investment, is overseen by Michael Larson and has enabled Gates to build the world's largest private foundation without making any impact on his fortune. Of course, his fortune could be at risk if politicians call for higher taxes.
Gates said about a potential wealth tax:
“I doubt, you know, the U.S. will do a wealth tax but I wouldn’t be against it. The closest thing we have to it is the estate tax. And I’ve been a huge proponent that that should go back to the level of 55% that it was a few decades ago.”
In his interview, Gates also pleaded for higher income taxes and more financial transparency: “I’m for way more financial transparency. I don’t like that you can have trusts where nobody knows who owns it.”
Gates also doesn't believe his stellar returns are likely to continue:
“There’s reasons to think absolute returns for the next decade will be less than they have been for the last several decades.”
Gates' comments come as inequality continues to be a key political issue heading into the 2020 election. America's richest 0.1% currently control more wealth than at any time since 1929. On Tuesday, Gates' foundation released its annual "Goalkeepers" report, which monitors and aids the progress of the UN in achieving its Sustainable Development Goals. The report noted that the goals are being hindered by persistent inequality.
The report says:
“There is no silver bullet that will make geography, gender and other random factors stop mattering. But guaranteeing that every single child has access to good health and education systems is a very good start in that direction.”
If its inequality he truly seeks to address, maybe someone should put Gates on the phone with Jerome Powell.Tyler Durden Thu, 09/19/2019 - 20:45
China Just Got Handed The Oil Deal Of A Lifetime
China and Russia are sewing up whatever oil and gas fields and accompanying infrastructure that they can in Iran and Iraq, as Iraq tries to markedly up the pace of development on the fields it shares with Iran. Iraq only wants the U.S. for the Common Seawater Supply Project (CSSP) because ExxonMobil is the only firm that can do it properly and within a reasonable timeframe. ExxonMobil’s participation, though, is far from guaranteed.
Of all the key shared fields - Azadegan (Iran side)/Majnoon (Iraq side), Azar/Badra, Yadavaran/Sinbad, and Dehloran/Abu Ghurab, Naft Shahr/Khorramshahr – the first of these has been a priority for Iran since it was severely flooded in March. It is this field that was the focus of the announcement last week that two major new drilling contracts have been signed: one with China’s Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million and the other with the Iraq Drilling Company to drill 43 wells at a cost of US$255 million.
According to senior oil and gas industry sources spoken to by OilPrice.com last week, it is China that will do all of the work and finance all of the drilling, with the headline ‘Iraq Drilling Company’ being on the contract simply to assuage the followers of Moqtada al-Sadr, the de facto leader of Iraq, and his Sairoon (‘Marching Towards Reform’) power bloc whose public message at the last election was that Iraq should not be beholden to any other country. OilPrice.com understands that al-Sadr privately has approved the project, otherwise, of course, it would not be going ahead.
Located around 60 kilometres to the north-east of the main southern export terminal of Basra, the supergiant Majnoon oilfield is one of the world’s largest, holding an estimated 38 billion barrels of oil in place. Rather literally, the field’s name means ‘insane’ in Arabic, derived from its possessing an ‘insanely’ large amount of oil. Discovered in 1975 by Brazil’s Braspetro (now part of Petrobras), it has been subject to a microcosm of the troubles that have affected the Iraq oil industry as a whole, with two U.S.-led wars, the war against Iran, and ongoing domestic security issues leading to the cancellation of various deals with international oil companies (IOCs) over the past 40 years. A major ongoing problem for development remains the substantial quantity of unexploded ordinance in and around the site that dates back to the 1980-1988 Iran Iraq War.
Having been awarded the licence for the field on 11 December, 2009, it took Shell Iraq Petroleum Development (SIPD) and its partner Petronas nearly 18 months to clear 28 square km of land of explosives, prior to constructing and opening the first well, and then restarting production on 20 September 2013. The Shell subsidiary had to develop a new approach for removing mines, involving the use of heavily-armoured bulldozers and loaders. During the site’s construction phase, over 12,000 items were cleared and destroyed using this technique.
Additionally, in order to circumvent the dangerous conditions, the super-major had to transport an initial 48,000 tonnes of steel via the Shatt al-Arab waterway, which had previously been closed to commercial transport for 31 years. Given these logistical constraints and the longer-than-expected delay in generating any revenue from the project – already fixed under the terms of the technical service contract (TSC) terms at a relatively tight per barrel fee of US$1.39 per barrel for the developers – there was much talk that the consortium at the time (SIPD 45%, Petronas 35% and Iraq’s Missan Oil 20%) was in the process of renegotiating key parameters of the concession.
As it transpired, given the Iraqi view that the enormous reserves in situ and the low costs of recovery would more than offset any other considerations, negotiations were unsuccessful. The consortium moved quickly to boost output from the 46,000 barrels per day (bpd) level being produced when it took over in 2009. Within a very short timeframe from production re-commencing, the consortium managed to boost output to the 175,000 bpd first commercial production target (the threshold for cost-recovery payments for Shell), and by the end of the first quarter of 2014, the field had an average output of 210,000 bpd. As it stands, the field is now producing only marginally more, at 240,000 bpd.
Longer term, the original production target figures for the Shell-led consortium still stand: the first production target of 175,000 bpd (already reached), and the plateau production for the site of 1.8 million bpd. The Iraq Ministry of Oil’s own latest target is for 450,000 bpd by the end of 2021. All things remaining equal, the International Energy Agency (IEA) maintains its projection for 700,000-1 million bpd at some point in the 2030s.
As it has transpired, the floods in March handed China ‘a deal of a lifetime’, according to Iraq oil industry sources. It is widely posited that much of the structural damage to the Majnoon area was caused by the erosion of subsoil across over one million hectares of forest and brush land in both sides of the region – Azadegan and Majnoon - by Iran’s Islamic Revolutionary Guard Corps (IRGC) as a result of extensive building programmes. Because of the geology of the region, Majnoon fared worse than its neighbouring Azadegan. Crucially, though, China is currently the lead operator of the North Azadegan field, and is in prime position in South Azadegan as well, so it is in a position to address the potential flooding problem across the entire region, covering both Iran and Iraq sides, and including widespread berm building and maintenance, and directing of water flows.
Partly because of this, China has been negotiating a deal with Iraq for one of its oil and gas entities (China National Offshore Oil Corporation is the one on the table currently) that involves a 25-year contract. However, the contract would officially start two years after the signing date, so allowing CNOOC to recoup more profits on average per year and less upfront investment, according to a senior Iraq source. The per barrel payments to China will be the higher of either the mean average of the 18 month spot price for crude oil produced, or the past six months’ mean average price.
It also involves at least a 10% discount to China for at least five years on the value of the oil it recovers. China, for its part will make good on the structural damage to the site and will increase output to at least 500,000 bpd by the end of May 2021.
“With the terms of the deal on the table, China would make between eight and nine billion dollars profit every year from Majnoon alone,” concluded the Iraq source.Tyler Durden Thu, 09/19/2019 - 20:25 Tags Business Finance
Amazon Ordering 100,000 Custom Electric Delivery Vans From Rivian
Amazon announced on Thursday that it would be implementing a newly formed climate change pledge for its business where it aims to achieve net zero carbon emissions by 2040, a decade ahead of the Paris Climate Agreement.
As part of that endeavor, the e-commerce giant announced that it would be ordering 100,000 custom electric delivery vehicles from startup Rivian, based in Chicago.
The order is set to be for a previously unrevealed commercial vehicle that will be designed and built at Rivian's Illinois factory, according to the Chicago Tribune. The custom electric vehicles are going to be made exclusively for Amazon and will not be sold to any other customers.
The vans will share a number of elements with Rivian's truck and SUV lines, including battery, powertrain and electrical network. The van's body, design, application software and suspension will be custom made for Amazon.
Rivian spokeswoman Amy Mast said:
“This has been in the works for some time. The idea that you can marry consumer applications to these more commercial applications ... is just really exciting.”
She continued, speaking about the vans:
“[The vans] are all developed specifically for Amazon’s last mile delivery operations, so that they fit seamlessly into Amazon’s existing logistics network.”
Rivian is targeting 10,000 electric vehicles on the road for Amazon by late 2022. It then hopes to ramp up to the full 100,000 order by 2030. The first of the new electric vans are expected to begin delivering orders in 2021.
The order is the latest milestone for Rivian, who announced a $350 million equity investment from Cox Automotive last week. This came after the 10 year old company closed on a $500 million investment from Ford in April of this year. Amazon led a $700 million investment round in the company several months prior, in February.
Our fleet is Electrifying! Thrilled to announce the order of 100,000 electric delivery vehicles – the largest order of electric delivery vehicles ever. Look out for the new vans starting in 2021. pic.twitter.com/y5qYpuy2WP— Dave Clark (@davehclark) September 19, 2019 https://platform.twitter.com/widgets.js
Amazon CEO Jeff Bezos said in a statement: “If a company with as much physical infrastructure as Amazon which delivers more than 10 billion items a year — can meet the Paris Agreement 10 years early, then any company can.”
Amazon is projecting reducing carbon emissions by 4 million metric tons per year by 2030, when the full fleet is scheduled to hit the road.
Rivian's flagship truck and SUV are slated to hit the road by late 2020. The company unveiled prototypes of the two models last year and says the high end model of its pickup, the R1T, will be able to go from 0 to 60 in about 3 seconds and travel 400 miles on a single charge.
Not bad, huh Elon?Tyler Durden Thu, 09/19/2019 - 20:05 Tags Environment Business Finance Technology Internet
Smart Faucets And Toilets Use Alexa To Listen To Your Conversations
It is hard to imagine a more intrusive home surveillance device than a faucet or toilet that listens to everyone's conversations, but that is just what Delta Faucet and Kohler have done.
Delta Faucet's "Voice IQ" takes advantage of where lots of people like to congregate and turns it into an Alexa eavesdropping center.
"Designed with the understanding that 20 percent of all WiFi-enabled homes are equipped with a connected home device, VoiceIQ Technology pairs with existing devices to dispense the exact amount of water needed, all with a simple voice command."
Delta lets Alexa decide how much water everyone gets.
"VoiceIQ Technology allows users to easily warm water and turn it on and off with voice activation, lending a hand in an active kitchen space. Consumers can command the faucet to dispense a metered amount of water in various quantities for precise measurement. Additionally, consumers can customize commands to make everyday tasks easier, like filling a coffee pot, a child’s sippy cup, or a dog bowl."(To learn more about Voice IQ click here.)
What they are really saying is Amazon will now monitor your home and individual water usage.
How is that for Orwellian?
Install Alexa in your kitchen at you own peril:
So despite what Delta's promotional video says, 'the kitchen is not a great place for some hands-free help.'
I mean who in their right mind thinks that Alexa's "hands free help" does not include moderators listening to your conversations while entertaining?
Delta is also offering Alexa's "hands free help" to homeowners with older kitchens.
"VoiceIQ Technology will be available summer 2019 as a pre-assembled feature on select Delta Trinsic® pull-down models with Touch2O Technology. For an added level of convenience, a retrofittable module for VoiceIQ Technology will be available to upgrade existing kitchen faucets with Delta Touch2O Technology manufactured after January 1, 2018."
No thanks, I'm good. I do not want to turn my faucet into an Amazon eavesdropping device.
I mean, what's next a voice-activated toilet?Kohler creates a voice-activated toilet
Leave is to Kohler to destroy what most people consider their most private part of life: the bathroom.
Earlier this year, Kohler unveiled their voice-activated toilet, called the "Numi 2.0" intelligent toilet.
"Numi 2.0 will come equipped with embedded Amazon Alexa for easy voice control to active toilet features as well as Alexa commands such as checking weather, traffic, accessing news, etc."
Is this really what America wants: a toilet that listens to you while you sit on the throne?
According to the Numi Intelligent video, Alexa monitors how often you go the bathroom and how much water you use.
Kohler is so sure that homeowners will want Alexa to listen to their most intimate moments that they created an app for the whole family.
"Use the Kohler Konnect app to program personalized presets for different users, and you can use voice to access the preset/profile. There is probably a difference between you, your spouse, and your children when it comes to your interaction with Numi 2.0; this lets you easily personalize your experience."
Alexa knows the difference between you and your children's voices. How is that for creepy?
In what messed up world do we live in? Where it is OK, to let a private company monitor when you go to the bathroom?
Delta Faucet and Kohler have joined the ranks of ignominious companies like Amazon and Google who have turned our private lives into a for-profit family surveillance model.Tyler Durden Thu, 09/19/2019 - 19:45 Tags Technology Internet
The award-nominated artist held up the provocative mask on stage at the of the Prime Minister Boris Johnson aloft as he took to the stage and addressed the crowd in London.
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