Thursday, April 28, 2016

Where has the Federal Reserve's Stimulus Gone?

Anyone who has been awake and paying attention since 2007 realizes that the "printing presses" at the Federal Reserve have been operating full-time in a desperate attempt to stave off both another Great Depression and the next recession.  The Fed's actions have led to this expansion in MZM:

MZM stands for Money Zero Maturity and includes the liquid money supply in the economy, representing all of the M2 money (cash plus savings deposits) minus time deposits (i.e. certificates of deposit) plus all money market funds.  In other words, MZM is a measure that shows us how much money is readily available in the economy for spending and consumption.

Here's what the year-over-year expansion in MZM looks like since 2000:

You can clearly see the expansions in MZM just prior to, during and immediately after a recession as the Fed attempts to stave off economic slowdowns.  What is unusual about the current economic expansion is the length of time that MZM has experienced annual growth above five percent; over the five year period since April 2011, MZM has grown between five and ten percent on an annual basis.  After the recession in 2001, MZM annual growth dropped to less than five percent within two years after that recession.

Let's switch gears for a moment and look at the velocity of MZM.  For those of you who are not aware of the concept of the velocity of money, it is a measure of the rate at which money is exchanged from one transaction to another.  In other words, it measures the rate at which the money in circulation is used for purchasing goods and services or the number of times an average unit of currency is used to purchase goods and services within a given period of time.  The Federal Reserve defines the velocity of money as the ratio of nominal gross domestic product to the supply of money.  The Fed also uses this equation:

                                  MV = PQ

where M stands for money, V stands for the velocity of money, P stands for the general price level and Q stands for the quantity of goods and services produced.  Based on this equation, with money velocity being constant, if the supply of money rises at a faster rate than real economic output, then the price level must rise to make up the difference (i.e. inflation can occur).

This equation can also be manipulated to look like this:

                                   V = PQ/M

In this form, the equation can be used to give us a sense of the economy's strength aka people's willingness to spend money.  Given a constant supply of money or a supply of money that is growing at a rate that is slower than the rate of economic growth, where there are more transactions (i.e. an economic expansion), the velocity of money rises and where there are fewer transactions (i.e. an economic contraction), the velocity of money declines. 

Now that we have all of that behind us, let's look at what has happened to the velocity of MZM going back to the late 1950s:

Despite the Fed's prodding and the so-called economic expansion, in fact, the velocity of money has reached its lowest point since the late 1950s.  Obviously, the Fed's massive money injections (M in the equation) since 2008 have not accomplished even a one-for-one proportional increase in nominal GDP (either P or Q in the equation).

Why did the increase in MZM not cause a proportional increase in either price or quantity of goods and services produced?  Here's at least part of the answer:

Please keep in mind that the banking sector is not required to hold excess reserves and that prior to late 2008, excess reserves stood at essentially zero since there was no incentive to hold excess reserves at the Federal Reserve.  However, thanks to the Fed's newfound wisdom of paying interest on excess reserves (IOER) of 0.25 percent starting in December 2008 and 0.50 percent starting in December 2015, the banking sector would rather leave nearly $2.4 trillion of that "newly minted cash" sitting risk-free at the Fed than taking a risk and lending it to individuals and businesses.  In other words, the Federal Reserve is rewarding banks for doing exactly what they didn't want them to do in the first place.

Another aspect that has negatively impacted the velocity of money is consumer spending which has done this on a year-over-year basis:

Over the post-Great Recession period, annual growth in personal consumption expenditures has been at its lowest level going back to the 1960s.  Despite all of that "money" that has been injected into the economy, consumers simply aren't feeling as secure as they did during the other economic expansions of the past fifty plus years.  Perhaps at least some of this lack of spending is due to the fact that the Fed's ultra-low interest rate policies have meant that there have been negligible returns on low-risk investments like certificates of deposit and Treasuries meaning that people (particularly retirees and those close to retirement) have had to save more as shown on this graph:

Since the end of 2008, savings deposits have increased by $4.2 trillion with year-over-year increases of between 4.7 percent and 18.9 percent.

Thanks to the banking sector and its cash-hoarding habits and consumers that have felt little confidence in their futures, the economy has been spared a very painful bout of inflation.  Despite the fact that things have not gone the way that they should have given the Fed's massive injection of "cash" into the economy, the ultra-low level of the velocity of money has been good for one thing, another in a long line of unintended consequences of questionable monetary policy.

Tuesday, April 26, 2016

Apple - The Guardian of Your Privacy

Recent news on the FBI's $1.3 million plus hack into Apple's flagship product got me wondering how many requests Apple gets from governments around the world for its customers' content.  This is a subject of some concern given the revelations of Edward Snowden back in 2013 and the ongoing inability of the world's government security apparatus to put a dent in terrorist activities.   In its latest transparency report for the period from January 1 to June 30, 2015, Apple reports the following government requests for information on its customer base:

1.) Device requests: The majority of these relate to information about stolen or lost Apple devices and may include customer contact information that was provided to Apple when the device was registered by the owner.  Here is a table showing how many law enforcement device requests Apple received in the first half of 2015 by nation:

The largest number of requests come from Germany at 9659 followed by the United States at 3824, however, Australia is not far behind at 2986.  This is surprising given that Germany has about 25 percent of the population of the United States and Australia has roughly 7 percent of the population of the United States.  It is also interesting to note that Apple complies with only 53 percent of the law enforcement requests that are sourced in Germany compared to 81 percent to those sourced in the United States, the highest level among the nations with a high request total.

2.) Account requests: These requests usually involve information about an account holder's iCloud or  iTunes account, for example, a name and address.  In some cases, Apple is asked to provide the actual content of a customer's iCloud account including emails, documents, photos, contacts and iOS backups.  Obviously, these requests are far more invasive and Apple may provide account access when the request is a search warrant.  Here is a table showing how many account requests Apple received in the first half of 2015 by nation:

The United States alone had 971 law enforcement account requests in the first half of 2015 compared to 696 for the remainder of the world.  Again, Apple provided account information for 81 percent of the requests in the United States, by far the highest level among major requesting nations.  Of the 2727 American accounts that were specified in the requests, Apple released data for 1407 accounts or 51.6 percent of the total and released no data for only 181 accounts.  Apple also objected to only 116 account requests or 4.3 percent of the total for the United States.  

3.) Emergency requests:  These requests are made by governments in cases where Apple believes that an "emergency involving imminent danger of death or serious physical injury to any person requires such a disclosure without delay".  Here is a table showing the number of emergency requests received during the first half of 2015 by nation:

Once again, the United States is in first place with 107 emergency requests followed by the United Kingdom with 98 and Canada with 14.

4.) National Security requests: These requests include all FISA and National Security Letters.  In the first half of 2015, Apple received between 750 and 999 national security orders that affected between 250 and 499 accounts.  By law, Apple is not allowed to be more specific about the exact number of national security requests; the bands of 250 requests are the narrowest range allowed by the federal government.

It is interesting to note that, by a wide margin, Apple is asked to release information by American authorities far more often than other nations, including China which is not exactly known for its shining human rights record.  The requests for the private content of Apple's customers should be of great concern to Apple users around the world; with law enforcement around the world finding itself unable to preempt significant terrorist acts, one has to wonder how important this personal information has been in the fight against terrorism and violent non-terrorist attacks.

American Politics - The Super-Wealthy Man's Playground

We all know that Wall Street is a big donor to America's political theatre, an issue that has particular traction in the case of Hillary Clinton who has availed herself of millions of dollars of personal wealth from speeches given to Wall Street firms.  According to OpenSecrets, SuperPACs, those political action committees that supposedly act independently of the candidates that they support, are heavily funded by one particular part of Wall Street; hedge funds.

According to data from the FEC, March 2016 saw six men donate huge amounts of money to SuperPacs and, coincidentally or not, all six are founders of investment firms that manage either private high-risk funds or hedge funds, many of which require million dollar plus investments from their investors.

Here are the big donors:

1.) James (and Marilyn) Simons:  Mr. Simons donated $3.5 million to the Priorities USA Action SuperPAC which supports Hillary Clinton in the first quarter of 2016 and an additional $1 million to the liberal-leaning House Majority SuperPAC as shown on this table:

Mr. Simons, a mathematician, founded hedge fund Renaissance Technologies and, according to Forbes is worth $15.5 billion which puts him at 50th place in America's most wealthy.

2.) Robert Mercer:  Mr. Mercer has donated a total of $530,000 in the first quarter of 2016 with the bulk of the donation ($500,000) going to the New York Wins SuperPAC.  Here is a table showing the rest of Mr. Mercer's donations in this cycle:

Robert Mercer is the co-CEO of the aforementioned Renaissance Technologies.  According to Forbes, in 2015, he was the eighteenth highest paid hedge fund manager with total compensation of $150 million.  He is politically right-leaning and has been one of Ted Cruz's biggest financial backers, donating $11 million to the pro-Cruz Keep the Promise 1 SuperPAC in 2015. 

3.) Donald Sussman:  In the fourth quarter of 2015, Donald Sussman donated a total of $2.5 million to Priorities USA Action SuperPAC which supports Hillary Clinton, the House Majority SuperPAC, a liberal-leaning SuperPAC and Women Vote!, a liberal-leaning SuperPAC that is the independent expenditure arm of EMILY's List, a PAC that supports pro-choice Democratic female candidates.  Here is a look at all of Mr. Sussman's donations in this cycle:

Mr. Sussman is the chairman of the Board of Trust Asset Management and the founder of Paloma Partners and New China Capital Management.  In the 2012 and 2014 election cycles, he was the seventh largest donor, donating a total of $5,891,540.

4.) Paul Singer:  In the first quarter of 2016 alone, Mr. Singer has donated at total of $4,006,891, the lion's share of which went to Conservative Solutions SuperPAC ($2.5 million) which supported Marco Rubio (oops) and Our Principles SuperPAC ($1.5 million) which opposes Donald Trump.  Here are the rest of his donations in this cycle:

His total donations of $15,463,600 in this cycle puts him in first place among all individual contributors.

Paul Singer heads the hedge fund Elliott Management Corporation and has a net worth of $2.2 billion, putting him in 288th place among America's most wealthy.

5.) George Soros:  Mr. Soros has donated a total of $6 million in the last quarter of 2015 to the pro-Clinton Priorities USA Action SuperPAC.  As shown on this table, his donations to this single SuperPAC have totalled $7 million:

Mr. Soros is the chairman and founder of Soros Fund Management and, according to Forbes, has a net worth of $24.9 billion, putting him in 15th place among America's super-wealthy.

6.) Cliff Asness:  Mr. Asness donated $1 million to the Our Principles SuperPAC which opposes Donald Trump in the first quarter of 2016.  Here is a table showing the rest of his donations in this cycle:

Like Mr. Singer, he donated $1 million to the pro-Rubio Conservative Solutions SuperPAC.

Mr. Asness is the co-founder of AQR Capital Management and was the founder of Goldman Sachs' Global Alpha Fund.  

To give you a sense of the control over American politics that these six gentlemen have, here is a list of the fifteen largest individual donors in the current election cycle:

Five out of six of the donors named in this posting appear in the top fifteen list.  In addition, here is a graphic showing the political contribution trends for the hedge fund industry since 1990:

So far in this cycle, $74.888 million has been donated to both the Democrats and the Republicans by the hedge fund industry, already well above the $52.5 million in 2014 and $48.2 million in 2012.

Obviously, SuperPACS are allowing a single industry to dominate political giving.  While the presidential candidates, particularly Hillary Clinton, may claim that they are not in the pockets of Wall Street, the donations pattern in the 2016 cycle would suggest otherwise.  Donations by America's hedge fund management billionaires would suggest that they will be expecting co-operation from Washington if and when the next financial crisis takes root.