"It Will Be A Disaster": Puerto Rico To Run Out Of Cash On October 31

While Puerto Rico is way beyond a simple solvency crisis, having already filed for bankruptcy earlier this summer - and courtesy of Donald Trump there is now debate whether or not the island"s $74 billion in debt will be forgiven outright - it is now also on the verge of a full-blown liquidity collapse. According to Treasury Secretary Raul Maldonado, Puerto Rico faces a government shutdown on Oct. 31, at which point it will run out of cash, resulting in a halt to its hurricane recovery, unless of course the US doesn’t provide billions in emergency funds.

Indeed, while the muni bond market freaked out today after Trump said on Tuesday night that Puerto Rico"s debt may need to be "wiped out", focusing attention on the commonwealth’s staggering $74 billion debt, Puerto Rico faces a more immediate crisis in the wake of the storm: it is about to run short of money for fuel, salaries of recovery workers and food aid.

Meanwhile, only 8.6% of customers have electricity, mobile-phone service is sharply curtailed and many mountainous rural areas remain inaccessible.

According to Bloomberg, the U.S. commonwealth’s bankrupt government is burning through the $1.6 billion it had on hand before Hurricane Maria devastated the island. Furthermore, with widespread damage to telecommunications systems and the electricity grid, the Treasurer said he be unable to begin collecting sales tax for at least another month.

“I don’t have any collections, and we are spending a lot of money providing direct assistance for the emergency,” he said in an interview in San Juan. “Without the assistance from Congress, Puerto Rico’s government will not be able to operate next month.”

“You have conservatively over 100,000 homes that are destroyed here,” Governor Ricardo Rossello said an interview Wednesday.

“Essentially you’re looking at zero revenue for the next couple of months,” he said. “While you have zero revenue, you still have expenditures, plus emergency expenditures. That means the money is going to run out very quickly."

Hence the need for Uncle Sam to step in: Maldonado said he has requested between $6 billion and $8 billion in aid from Congress to keep the government running for “a few months.”

And unless Congress does step in, Puerto Rico will go dark in just under a month. Literally.

The treasurer said he has set aside funds to make payroll and pension payments in October. But if Congress fails to act, he said the island is facing a "total shutdown” on Nov. 1 that would curtail essential services and the distribution of aid.

The good news for Puerto Rico is that, at least at first glance, Congress is willing to cooperate:

Senate Majority Leader Mitch McConnell said in a press statement that the Senate stands ready to help. House Speaker Paul Ryan’s office didn’t respond to a request to discuss the Oct. 31 run-dry date. Nancy Pelosi, the Democratic House minority leader, said earlier Wednesday that the Treasury Department should extend a loan to help Puerto Rico in the short term.

That said, Congressional enthusiasm may be dampened once the broke island comes asking for tens of billions more for its long-term recovery efforts.

Destroyed PR homes sit surrounded by debris from Hurricane Maria

Also on Wednesday, the Trump administration was finalizing a $29 billion disaster-aid request covering a series of major storms in the U.S. But Puerto Rico’s control board, created by the law that allowed the commonwealth to enter bankruptcy, has said Maria may have caused as much as $95 billion in damages, more than the island’s annual gross domestic product.

Meanwhile, perhaps sensing that Congressional, and Trumpian generosity, may soon reach its limits, Puerto Rico control board, which has broad oversight over the island’s finances, requested for immediate aid Tuesday. "In a letter the panel sent congressional leaders, the officials asked the federal government to make low-interest loans available to ease the impending liquidity crisis."

And, in a deja vu moments from Hank Paulson"s request for a blank check from Congress ahead of the TARP bailout of US banks, Puerto Rico did its best imitation of requesting the "greatest amount of federal aid", or else:

“Failure to provide the greatest amount of federal aid and the emergency liquidity program will be potentially ruinous," chairman Jose Carrion wrote. "We must do all that we can to help Puerto Rico avert a tragedy of historic proportions."

The panel also asked that the federal government waive cost-sharing limits, disaster spending caps and grants for long-term relief. Then, for his final Hank Paulson rendition, Maldonado said that If Congress doesn’t act, “it will be a disaster.”

Dear Fed, It's Not "Really Hard To Spot Bubbles"

Authored by Wolf Richter via WolfStreet.com, 

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

The S&P CoreLogic Case-Shiller National Home Price Index for March was released today. It jumped 7.7% year-over-year, far outpacing growth in household incomes. This has been the case for years. In fact, real household incomes are almost back where they were in 2006 (/sarc). So what could go wrong?

At 198.26, the index surpassed the peak of Housing Bubble 1 in May 2006 by 11% (data via FRED, St. Louis Fed):

Since everyone called it a housing bubble after it had imploded, even Kashkari, today’s phase in the wondrous market is Housing Bubble 2, no?

The other day, Zillow reported that the national median home value in April rose 7.3% year-over-year to $198,000. It too beat the peak of Housing Bubble 1 ($196,600) set in April 2007. “It only took a decade,” Zillow said.

The National Association of Realtors reported that the median price in April hit $246,100, which is 6.8% above the peak of Housing Bubble 1 ($230,400 in June 2006).

The Case-Shiller Index appears to have more stature at the Fed than Zillow or the NAR. So we’ll use it here in our visual aids for the Fed.

It is based on a rolling-three month average; hence, today’s release was for January, February, and March data. So it’s always behind. Instead of median prices, it uses “home price sales pairs,” for example, a house sold in 2011 and then again in 2017. Its algorithms adjust this price movement over the years and numerous other factors into a data point that becomes part of the index. The index was set at 100 for January 2000. So an index of 200 means prices have doubled in the past 17 years.

Housing is local. Therefore housing bubbles are local. But if enough of them come together at the same time, the housing bubble takes on national proportions. This is the phase, as the above chart shows, that the US has now reached: In some metros, prices are still below the peak; in other metros, prices are setting new records. Overall, prices have surpassed those of Housing Bubble 1.

So dear Fed Governors, please have a look at some of the beautiful housing bubbles around the country. As you’ll see, they’re really not “hard to spot.”

This is the Boston metro, where the current home price index is now 9% above the peak of Housing Bubble 1 (Nov 2005):

Prices in the Seattle metro have surged even more, pushing the index 13% above the peak of Housing Bubble 1 (Jul 2007):

And here’s Denver’s house price bubble, where prices have soared a breath-taking 38% since the prior peak (Aug 2006):

I know that folks in the Dallas-Fort Worth metro felt left out during Housing Bubble 1. I heard many complaints about that at the time. They also missed out on much of the house price crash.

But they sure know how to make up for things. Home prices have now surged by 37% since the last peak in June 2007:

The Atlanta metro isn’t quite back to the peak of Housing Bubble 1, but it’s near-perfect V-shaped bubble recovery will soon hit it:

For the Portland house price bubble, the index is now 14% above the prior peak:

The Case-Shiller Index for San Francisco, which covers the five-county Bay Area, is now 7.7% higher than at the peak of Housing Bubble 1. However, in the city (and county) of San Francisco, the median home price has soared 47% above the prior peak (Nov. 2007). This is the chart for the five-county Bay Area house price bubble-crash-bubble:

The city of San Francisco is also the first city in this lineup where the median home price is now heading south on a year-over-year basis. During Housing Bust 1, the City was late to react. This time, it seems to be ahead of the pack.

And the Case-Shiller index for the condo price bubble in New York City has soared 17% above the prior peak (Feb. 2006), with prices nearly tripling since 2000:

The local housing bubbles across the US blew up with spectacular consequences, all in their own time frames. Plenty of local home price bubbles are now coming together to form a national home price bubble. So it’s really not hard to spot them, Mr. Kashkari.

Sure, there has been some inflation – 17% since 2006, based on the Fed’s favorite core PCE measure. Home prices in some of the cities have already reached a new peak even after inflation. And besides, it’s not a housing bubble until it reaches the inflation-adjusted point where the prior one took down the financial system? Is that the point when Housing Bubble 2 begins, instead of ends? If so, what would Housing Bust 2 look like? A vision too ugly to behold.

What’s hard to predict is the moment when housing bubbles begin to deflate. With monetary policies still in easing mode, with the federal government subsidizing the housing market in numerous ways, and with homes having become a securitized asset class for global speculators, house price bubbles can inflate – as we have seen – far more than a rational human mind might think possible. But we do know that they will deflate.

In San Francisco, the signs and numbers are already lining up. Read…  Will these 2 Forces Crush San Francisco’s Housing Bubble?

Has Middle Class America Been Fleeced?

Authored by Hunter Lewis via The Mises Institute,

Noah Smith, writing in Bloomberg, says that middle class America has indeed been fleeced by our national economic policies. We agree. But which policies have been responsible?

Smith mentions and immediately dismisses trade, immigration, economic regulation, and welfare policies.

The real villain in his view is an alleged turn toward managing the economy on free market lines: “Your prosperity was taken by the very people who promised to ensure and enhance it. The decades from 1980 through 2008 were the age of neoliberalism -- the ideology of the free market.”

This is a story that we hear more and more. Neoliberals, the favorite new epithet on the left for free market exponents, have ruled the roost for decades ( note how the Obama administration is simply ignored in the preceding quote), and have left the poor and middle class far worse off than they were.

The truth is that the Bush-Clinton-Bush-Obama era had much in common, and it was not free market principles. It was an era of unrestrained crony capitalism, in which special interests formed stronger and stronger alliances with government in order to secure economic monopolies and other privileges.

It was also, not coincidentally, an era of repeated boom and bust, as the Federal Reserve and other central banks created immense amounts of new money to keep the crony capitalist game going. The Fed did not create all the new money to help the poor and the middle class. They did it primarily to support the government debt machine, which they worried was on the verge of collapse in 2008. The result is that government debt has now doubled in the few years since then.

Can Noah Smith, an intelligent writer and economics professor, really believe that free market principles prevailed in recent decades? The only possible excuse for this is that crony capitalists tend to hide their actions behind free market slogans. This is genuinely confusing.

Today, for example, we are told by most commentators that we have a choice between “free trade” and “protectionism,” and the free trade position is represented by people like Hillary Clinton and Hank Paulson, the Bush Treasury Secretary during the last Crash who rescued his old firm, Goldman Sachs, and coincidentally the value of his shares in that firm, and who more recently supported Hillary for president. To describe these people as supporters of “ free trade” is a joke. They are supporters of “ crony trade” in which so-called free trade agreements are actually written by special interests in order to escape the pressures of a genuinely free market.

And does Smith really believe that giving government even more control over the economy will achieve anything other than making crony capitalism worse?

Oh well, at least Smith did not equate what he called “neoliberalism” with fascism, as many on the left are now doing in books and articles. That makes a lot of sense, does it not? Proponents of more liberty in economics and other areas of our lives are somehow like Hitler or Mussolini?

Lewis nails the dismal science but we leave it to econfinjunkie"s comments to sum up the farce...

If anyone needed one more reason to hold Noah Smith and mainstream economics in contempt, read that article.

It is so much easier for those in the mainstream to be ignorant and publish crap like that than for, say, an Austrian economist to do the same. How can anyone with an advanced degree in economics say that our society is based on free market principles? It makes you wonder what they teach after high school.

Starting in intro classes all the way to PhD coursework, didn"t anyone ever think to point out to the future Dr. Smith and his classmates that "oh, by the way, all these principles of free markets we"re talking about, they"re the ideal; they don"t apply to our own economy since we don"t have a free market/society, because we have a central bank, minimum wages, millions of pages of regulations, bank bailouts, and on and on"?

There can be a conversation about whether all these things are justified, but to say that our economy reflects a free market is to put your ignorance on full display for all to see.

What Form Will The Great Confiscation Take - And How Can We Prepare?

Submitted by John Rubino via DollarCollapse.com,

For what seems like decades, people have been warning that the next time some over-leveraged corner of the financial system implodes, bank and brokerage accounts will be either confiscated by desperate governments or lost during the resulting chaos.

Here, from 2012, is a representative warning from gold mining eminence grise Jim Sinclair:

My Dear Extended Family,

In bankruptcy of your bank, broker or fund, you can find your assets in the majority of cases are backing the liabilities of the entity in front of yourselves. This is why you must act to protect yourself.

No one in this financial world is going to do it for you, and few will have the courage to recommend you escape Street Name. You can wake up one day and find out that your investments are gone.

The insurance programs will function as long as the incidents of bankruptcy are isolated events.

In a systemic collapse the insurance funds are not capitalized to meet the potential obligations. The guarantor you are relying on will have to be bailed out.

For securities there are only three ways to hold them:

1. Street name.
2. Direct registration.
3. Certificate form.

Anyone advising you to stay with the Street Name option is a babbling idiot not interested at all in your welfare.

In street name the inferred ownership is the broker or bank, not you. In Direct Registrationand Certificate form, the distinct ownership is you.

In 99.9% of the cases of retirement accounts the answer is you are in Street Name.

How are your securities held? Do you even know? I dare you to ask!

Do you know what your broker’s capital ratio is? Find out as that number is the order of magnitude at which your broker is gambling on with primarily your money. I dare you to ask.

This time around those investors that are too lazy to consider protecting themselves will be demolished.

How would you like your gold shares at $3500 gold, outperforming gold, and one morning you wake up to having nothing anymore? You now are behind the back burner in a bankruptcy situation with any fiduciary.

The system and their minions will do everything to keep you trapped in Street Name. Articles will be published trying to put you back to sleep on this issue.

Wake up, please.

The fact that this mass confiscation hasn’t yet happened doesn’t mean it won’t, says Jim Rickards, whose previous bestsellers Currency Wars and The Death of Money were already pretty apocalyptic. He believes that a coordinated closure/restructuring/confiscation of the banking/brokerage industry is imminent. Here’s an excerpt from a recent column:

In that interim period between the crisis and the time the IMF can react, central banks will be paralyzed. They’re likely going to lock down the system.

When I say lock down, they’ll start with money market funds. I can’t think of a greater misnomer than the money market funds. People think that money market funds are money. They’re not money; they’re mutual funds regulated by the SEC. People think they can just call up their broker, sell to the money market fund and the money’s in my bank the next day.

That will not be true in this crisis because everyone will be doing the same thing. That is what happened in 2008 when Ben Bernanke and Hank Paulson went to the White House and said to the President that the system’s melting down and he must act.

That was such a shock then, that when it happens again they’re not going to give you your money. They’re going to lock it down. The problem is that when it is spreading you can’t just lock down part of the system.

If you lock down money market funds, people are just going to take their money out of the banks. Then you’re going to have to close the banks. Then people are going to sell their stocks, then you’re going to have to close the stock market. Every time you shut one path to liquidity, people are going to turn to another path.

It happened in part in 1914, 1931, 1933 and to gold in 1971. There’s no precedent for a total freeze but we’re getting closer to that point.

The question is, how do you protect yourself against that? There’s only so much you can do.

I don’t recommend running down and pulling all your money out of the bank. I would not have more than the insured amount, which in the U.S. is $250,000. You can spread it between your selected banks so that each is backed and insured up to the limit.

Rickard’s solution is right out of the stacker playbook:

In the world described, the dollar price of gold will approach the $10,000-level if not much higher. But when all of this begins to play out, you’re not going to be able to get gold.

Because of this, gold and silver need to be in physical form, in safe storage, and a non-bank. Putting it in a safety deposit box in a bank is troublesome because by the time you want it the most, that will be when the banks are going to be closed.

Charles Hugh Smith offers some other possible responses:

So what’s difficult to expropriate? It’s impossible to expropriate one’s skills, experience and social capital. These are intangible forms of capital and so they cannot be confiscated like gold, currency, land, etc.

Land and homes are difficult to expropriate for two reasons: private property is the backbone of capitalism and democracy, and the state confiscating private property would very likely spark a political insurrection that would diminish or threaten the power and wealth of the privileged Elites.

Secondly, it’s very costly for the state to maintain the productive output of real property it has confiscated. Guards must be posted, sabotage repaired, and the immense difficulties of coercing a rebellious populace to continue working what they once owned for the benefit of the state and its privileged Elites must be solved and paid for.

The state can expropriate farms, orchards and workshops for back taxes (or some similar extra-legal methodology), but how do you force people to work these properties productively?

As a general rule, whatever the super-wealthy own will be protected from expropriation. Private real property is the foundation of the Elites’ wealth, and while the land of debt-serfs may well be confiscated for back taxes (the wealthy will buy exemptions from rising taxes), those who own land and buildings free and clear constitute a political force to be reckoned with.

The state will also have difficulty confiscating assets that are outside its reach.This explains the popularity of owning assets in other nations, and the debate over cryptocurrencies: will states be able to confiscate all cryptocurrencies at will, or is that technically unfeasible?

The main takeaway is this: your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Land and real property you own free and clear (no debt) is likely to remain in your possession, as long as you can pay soaring taxes/junk fees during the crisis phase. Your financial assets held in centrally controlled institutions will not make it through unscathed; they are simply too easy for central authorities to expropriate.

It’s easy, as the world’s zombie economies just keep shuffling along, to start assuming that the current system will endure forever. That would be wrong, and almost certainly the above warnings will someday seem prescient. All the more reason to forget about timing, and keep buying real assets.

Gary Cohn's Parting Gift From Goldman: An Accelerated $124 Million

Leaving Goldman Sachs to work for the government has always been a lucrative career move: eight years ago, it allowed former Treasury Secretary Hank Paulson to sell $500 million in Goldman stock tax free, and now its the turn of Gary Cohn, Goldman"s former COO and president, who is leaving to join Trump"s cabinet, who is departing with an "accelerated" gift.

According to Bloomberg, Goldman Sachs lifted restrictions or accelerated delivery on about $123.7 million in stock and cash awards previously awarded to Gary Cohn, 56, who left last month to become President Donald Trump’s top economic adviser. Cohn was given $20 million in pay for 2016, including $18.15 million in variable compensation and a $1.85 million salary, the New York-based bank said in a regulatory filing Tuesday.

That wasn"t all: also on Monday, the bank handed over 96,572 restricted shares that were outstanding from earlier stock awards scheduled to be delivered over time. It also lifted selling restrictions on 99,909 shares that Cohn had already earned but was unable to sell. Combined, they were worth $45.9 million based on Tuesday’s closing price of $233.68 a share. About $12.8 million in additional restricted stock was included in his 2016 compensation. Cohn didn’t receive all of the restricted stock because Goldman Sachs withheld an unspecified portion of it for taxes, according to the filing.

That"s not all:

He also got $47 million to settle outstanding awards he received each year since 2011 under the bank’s long-term incentive program. He also received an $18 million cash payment in exchange for outstanding performance shares, according to the filing.

Cohn left Goldman Sachs last month after agreeing to join the Trump administration as head of the National Economic Council. He started at Goldman Sachs in 1990, becoming co-president in 2006, and then sole president. He was long seen as the heir apparent to Chief Executive Officer Lloyd Blankfein.

And since Cohn will likely vacate the post within a year or two, it means that the former COO gets to liquidate his stock holdings at a price near all time highs, without having to wait for it to vest like any other mere mortal Goldmanites. It is still unclear if he will have to pay any tax on the proceeds.

Trump Said To Consider Jamie Dimon For Treasury Secretary

One week ago, when the prospect of a Trump presidency was "calculated" as being anywhere between 0% and 20% by so-called experts, we reported that Trump"s campaign finance chair, Goldman Sachs partner and Soros Fund management alum, Steven Mnuchin, was being positioned for something much larger as Donald Trump reportedly told his aides today that he wants Mnuchin to serve as his Treasury Secretary.

Now, according to CNBC, Trump has decided to expand beyond just Goldman alumni, and is allegedly considering JPMorgan CEO Jamie Dimon as the next US Treasury Secretary.

BREAKING: Trump advisers considering $JPM CEO Dimon for Treasury post - sources https://t.co/Unij5oIyNe pic.twitter.com/TezAC3aOn0

— CNBC (@CNBC) November 10, 2016

Needless to say, we can only hope that this is an attempt to scare clicks by CNBC instead of the actual truth, because if Trump hopes that he can "drain a swamp" by hiring the swamp puppet master, he - and millions of his supporters - will be very disappointed.

As for Dimon, or Mnuchin, they will be delighted: as a reminder, as Hank Paulson demonstrated so well, the only reason why bankers become Treasury Secretaries, is to be allowed to sell all their corporate stock upon moving to public office, tax free.

That said, as CNBC also adds, Dimon passed on the opportunity: "In the wake of Donald Trump"s upset victory, advisors have floated the idea of naming Jamie Dimon as treasury secretary, according to two people familiar with the matter, but one of them added that the JPMorgan chief has said he would not be interested in the role."