Monday, August 29, 2016

August 29, 2016

Fed Continues To Pretend Obviously False Thing Is True
In a dramatically over-hyped meeting in Jackson Hole, Wyoming last week, the leaders of the Federal Reserve met for an annual symposium. Naturally, Fed Chair Janet Yellen was the one everyone was focused on, and her talk was decidedly ambiguous--which is what we've come to expect from the Fed in recent years.

Perhaps the most important line in her speech was her note that the Fed could consider purchasing "a broader range of assets". This is an indirect way of saying the Fed could consider buying corporate bonds and potentially stocks, instead of just government bonds to stimulate the economy with quantitative easing (which is money created out of nothing). This program has already been implemented by both the Bank of Japan and European Central Bank, and it's a truly terrible idea. In essence, it amounts to directly transferring wealth from the general public to people invested in the stock and bond market in order to prevent stock market from falling. Thus, not only does such a program explicitly prop up asset bubbles (which most of us frown upon), it also amounts to a wealth redistribution program from the poorest people (those with little or no financial investments) to the rich (who hold many such assets).

Fortunately, the Fed contends that this awful idea is merely something that should be considered and researched for the future, rather than something they are actively contemplating in the present. That said, we should have little doubt that they will attempt to implement this policy when the next recession strikes.

The other notable aspect of Friday's speech is that Yellen stated that the case for a rate hike is "strengthening". And in case the market didn't get the message, Fed Vice Chair Stanley Fischer noted in an interview that Yellen's comments were "consistent with a possible September hike".

Here, the Fed is once again pretending that 1) the economy is strong enough to tolerate a rate hike without chaos and 2) that it's confident enough in this, that it will risk hiking rates a month before the election. Of course it is possible that the Fed drinks its own Kool-aid, but this should be viewed with a heavy dose of skepticism. The behavior of the stock market in the last three months prior to a presidential election has an uncanny correlation with election results--if the stock market is rising, the incumbent party wins; if it's falling, the opposition party wins. This has been true 86% of the time, dating back to 1928.

No doubt, the Federal Reserve is also aware that the shape of the stock market has a significant impact on the presidential election as well. And that's why, despite their repeated protestations to the contrary, they probably are not foolish enough to raise rates in September. Time will tell.

Reason Triumphs A Little in Illinois Pension Debate
Last week, we discussed the precarious situation of the Illinois Teachers' Retirement System (TRS) pension plan, and the ongoing feud about the assumed rate of return.

Basically, the politicians wanted to keep the assumed rate of investment return high because it makes the pension plan look better than it really is. This, in turn, means the state government doesn't need fork over millions of dollars to the pension fund right away in an effort to keep the fund afloat. And because Illinois already has major budgetary issues, this is a very big problem for the politicians.

There's been an update on this story, and incredibly, reality triumphed over political imperatives. That doesn't usually happen.

Specifically, the TRS lowered its assumed rate of return to 7.0% from 7.5%. This is still very unrealistic, but it is slightly less unrealistic. That's still a win.

This development is good news if you're a TRS pensioner because it means the government will have to contribute more money to the plan and your pension payments won't run out quite as soon. If you're an Illinois taxpayer on the other hand, a new round of financial pain is about to start forthwith.

Turkey Invades Syria
The cluster that is the Syrian War got even more complicated last week when Turkish troops invaded Syria to participate in the assault on Jarabalus, in the country's north. ISIS was holding Jarabalus prior to the assault, and apparently, most of the ISIS fighters fled in the face of overwhelming firepower from the Turkey's troops and the rebel groups that they accompanied.

The immediate goal of the assault was about getting rid of ISIS, and that was one of the effects. However, the more important purpose of this attack was that Turkey wanted to prevent the Syrian Kurds from expanding their territory along the northern border. Readers will recall that the US backs the Syrian Kurds and even has special ops troops embedded with some of them; however, Turkey views the Syrian Kurds as a major threat.

Thus, the practical effect of the new Turkish intervention--which expanded to more villages over the weekend--is create even more fault lines in the Syrian conflict. The US and Russia back the Syrian Kurds, and now Turkey is directly confronting them. Turkey is on-board with fighting ISIS, along with Russia, Syria, and the US. Turkey also backs other Islamist rebels that are fighting Assad; the US is broadly on board with this policy, but Russia staunchly opposes it. Any one of these tensions could quickly lead to escalation, and that's why it's alarming that Turkey just added one more.

The only good news is that there's a new round of peace talks this week that hold more promise than most; here's hoping the US is finally willing to give up on regime change so a real ceasefire can be reached.

Read Patrick Cockburn for an in-depth take on the latest developments.

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