Hoisington Quarterly Review and Outlook, Q1 2017

By Lacy Hunt and Van Hoisington

Fed Tightening Cycles – Past and Present

The Federal Reserve has initiated the fifteenth tightening cycle since 1945 (Chart 1).

Conspicuously, in 80% of the prior fourteen episodes, recessions followed, with outright business contractions being avoided in just three cases. What is notable today is that the economy is in the 93rd month of this expansion, a length of time that is well beyond periods in prior expansions where soft landings occurred (1968, 1984 and 1995). This is relevant because the pent-up demand from the prior downturn has been exhausted; thus, the economy is extremely vulnerable to a shock, which could lead to recession. Regardless of whether there was an associated recession, the last ten cycles of tightening all triggered financial crises. In conjunction with the non-monetary determinants of economic activity (referred to as initial conditions), monetary restraint served to expose over-leveraged parties and, in turn, financial crises ensued.

Four important considerations exist today that were not present in past cycles and that may magnify the current restraining actions of the Federal Reserve:

  1. The Fed has initiated a tightening cycle at a time when significant differences exist in the initial conditions compared to the initial conditions in prior cycles. Additionally, the Fed is tightening into a deteriorating economy with last year’s growth in nominal GDP worse than in any of the prior fourteen cases.
  2. Business and government balance sheets are burdened with record amounts of debt. This means that small changes in interest rates may have an outsized impact on investment and spending decisions.
  3. Previous Federal Reserve experiments, primarily the periods of quantitative easings, have led to an unprecedented balance sheet (an action of “grand design”) to which the economy has grown accustomed. The resulting reduction in that balance sheet (reduction in the monetary base) may have a more profound impact on growth than anticipated.
  4. The monetary base reduction and the impact of the changing regulatory landscape, both in the U.S. and globally, has meant a significant increase in the amount of liquid reserves that banks are required to hold. Liquidity may have already been sharply restrained by the lowering of the monetary base, despite its massive $3.8 trillion size. This is evident as the monetary and credit aggregates are following the expected deteriorating pattern resulting from monetary restraint, suggesting recessionary conditions may lie ahead.

Poor Initial Conditions

To judge the success or failure of monetary or any other type of policy action, one must analyze in terms of the economic conditions under which the measures are being implemented. In other words, different starting points produce different results. Viewed from this perspective, the Fed’s current tightening is highly risk-prone for the economy.

Several factors that influence the economy (other than monetary policy) are far more problematic than those that existed in any of the prior tightening cycles. For instance, the U.S. is experiencing the weakest population growth since the 1930s and the lowest fertility rate since the records began. There has been a slowdown in the growth rate of household formation, and the U.S. has a rapidly aging society.

Economic growth. For the full calendar year 2016, nominal GDP rose just 3.0%, the weakest reported since 2009. Last year’s growth rate was even less than the cyclical lows associated with the recessions of 1990-91 and 2000-01. Rather unusually, at the March FOMC meeting, the Fed did not change its 2017 economic growth projections even though the broader first quarter indicators were even softer than last year, and their prior forecasts were made before they hiked the funds rate in December. Indeed, all of the key monetary variables that are heavily influenced by Fed policy operations deteriorated in the first quarter. Despite the lowest annual economic growth rate of this expansion and the second straight year of declining growth, no fiscal stimulus is expected for 2017. Monetary restraint implemented in late 2015 and 2016 has been followed by further restraint in 2017. How can the U.S. economy surge ahead this year with this additional restraint?

Debt. Total domestic nonfinancial debt, excluding off balance sheet liabilities such as leases and unfunded pension liabilities, surged to a record 254.8% of GDP in 2016, 5.6% greater than in 2009 when Lehman Brothers failed (Chart 2). Total debt, which includes domestic nonfinancial, foreign and bank debt, amounted to 372.5% of GDP in 2016, compared with 251.9% of GDP in 2006, the final year of previous tightening cycle, which, in turn, was greater than in any earlier time from 1870 through 2006.

The situation in the business sector deserves particular scrutiny. Business debt surged to a record 72.6% of GDP in 2016, for the first time eclipsing the prior peak of 70.2% reached in 2009. With the business sector so levered, not much room for miscalculation exists. As such, the risk is clearly present that the Fed’s restraint will chase out one or more heavily leveraged players, just as was the case in all the previous tightening cycles since the 1960s. Academic studies reflect that economic growth slows with over-indebtedness. Thus a powerful negative headwind is reinforcing the present monetary tightening.
The Fed Encounters Problems of Grand Design

Two macroeconomic textbooks (one written by Andrew B. Able (Wharton Professor) and Ben S. Bernanke (former Fed Chairman) and the other by N. Gregory Mankiw (Harvard Professor) both discuss over several chapters the transmission mechanism of monetary policy operations to the broader economy. Although they differ in some technical aspects, they both describe a very similar process as to how Fed restraint impacts economic conditions. Their independently taught process exactly describes what is unfolding in the reserve aggregates, short-term interest rates, bank loan volumes and the monetary aggregates today. However, the established process may more severely impact the economy because these actions are being taken in the aftermath of three unprecedented rounds of quantitative easing that have led to a massively enlarged Fed balance sheet (an action of “grand design”) coupled with the legislative adoption of the Dodd-Frank Law.

The late American sociologist, Robert K. Merton (1910-2003), who originated the concept of “unintended consequences”, identified the problems that arise when policy implements theories of grand design. Merton believed that middle range theories are superior to larger theories of grand design because larger theory outcomes are too distant for policy makers to realize how actions and reactions will change from the middle range theories under which they have typically operated. Merton argued that when dealing with broader, more abstract and untested theories, no effective way exists to test their success in advance.

We believe these are problems the Fed is already facing as their actions have changed the monetary landscape from previous periods of monetary restraint. The Fed (and the entire economy) is now caught in a new format that never existed, and thus is without the ability to anticipate the outcomes to policy because there is no historical reference point. We suspect that the results of the Fed’s tighter policies will be exacerbated by its own balance sheet and by the larger cash and liquidity requirements mandated by the Dodd-Frank Law. Not only must the textbooks be rewritten because of these legal and structural changes, but the Fed may also have to change the way it thinks about monetary policy’s transmission mechanism.
Contractions in the Monetary Base

To raise the policy rate, i.e., the federal funds rate, it is the theoretical norm for the Fed to act on the reserve aggregates, the most prominent of which is the monetary base and its subcomponents – total reserves and excess reserves. Able/Bernanke and Mankiw detail how changes in both influence economic conditions. The base, which is derived from a consolidated financial balance sheet of the Fed and Treasury, has an asset and liability side. On the latter, the base equals currency and total reserves. While the Fed does not have total command of the reserve aggregates in the short run, effective control is achieved over time.

The base is the key variable. If no fractional reserve-banking system existed, the liability side of the monetary base would be totally comprised of currency in circulation. In such an environment the central bank would have no power to change economic activity. On the other extreme, under a fractional reserve banking system where no one is allowed to hold any currency at all, the liability side of the monetary base would equal total reserves of the banking system. Changes in the Fed’s portfolio of assets would result in dollar for dollar changes in bank reserves. This still might not greatly change the central bank’s economic power. Whether depository institutions would put all of the total reserves to use in creating money and credit would still depend on a whole host of other considerations, including interest rates, the capital of the banks, the balance sheet of the potential nonbank borrowers and numerous other factors.

Historically, the higher funds rate was reached by a slower but still positive growth rate in the monetary base. This caused the upward- sloping credit supply curve to shift inward, thus hitting the downward sloping credit demand curve at a higher interest rate level. In graphic terms, the price of credit, which is the vertical component of a supply and demand diagram, is the policy rate, and the horizontal component is the volume demand for credit. The shift in the supply curve reduces the depository institutions capability to make loans while the higher interest rate also serves to reduce the demand for credit. The textbook writers do not add to the complexity of interest rate changes when, like now, the economy is heavily indebted. A small increase in interest rates leads to a large and quick increase in interest expense. But, current conditions differ from the textbook cases due to two powerful considerations.

First, in the initial quarter of 2017, the year-over-year change in the monetary base was -4.8%. This comes after sharp contractions in each of the previous four quarters, the largest such decreases since the end of World War II (Chart 3). Some argue that this unprecedented weakness in the monetary base is not relevant since the depository institutions still hold $2.1 trillion of excess reserves (defined as the difference between total reserves and required reserves). The textbook writers emphasize that excess reserves are the key to money and credit expansion. But, the multiple expansion of bank reserves so diligently explained in the textbooks was written for a regulatory environment that no longer exists, which is the second different condition.

Beginning in 2015, large banks as well as banks with substantial foreign exposure are required to have a 100% or greater “liquidity coverage ratio” (LCR). This means the banks must hold an amount of highly liquid assets (such as reserve balances at the Federal Reserve Banks and Treasury securities) equal to or greater than the difference between their cash outflows and inflows over a 30-day stress period. Thus, excess reserves are irrelevant to the money creation process if the reserve balances are needed to achieve a 100% LCR. In line with the decline in excess reserves, there has been a dramatic reduction in bank liquidity, which has fallen nearly 17% (Chart 4). This reduction brings bank liquidity much closer to its LCR, altering bank management practices. Based upon an examination of all the monetary indicators closely linked to the policy rate and the reserve aggregates, the probability exists that the Fed, with three small increases in the fed eral funds rate, has now turned the money / credit creation process negative.

The Monetary and Credit Aggregates Respond

Since the Fed raised the federal funds rate in December 2015, the growth rates of the monetary and credit aggregates have slowed. In addition, banks have pursued tightening credit standards. As such, these developments are indicative of the changed ground rules.

In the past six months, the M2 money stock grew at a 5.9% annual rate, down from a 2016 increase of 6.8%, which is near the average increase in M2 since 1900. Thus, in a very short span, M2 has fallen from a trend rate of growth onto a slower path. The additional rate increase in March suggests that M2’s growth rate will moderate further over the remainder of the year. U.S. Treasury balances at the Federal Reserve Banks fell sharply in the first quarter due to extraordinary measures used to avoid hitting the debt ceiling. Dropping Treasury balances, all other things being equal, would boost M2. Thus a normalization of Treasury balances, assuming a debt ceiling resolution, will tend to slow M2 growth further.

Growth in the credit aggregates has slumped even more dramatically than M2, thus confirming and reinforcing the significance of the weakness in money. Growth in total commercial bank loans and leases slowed from an 8.0% rise in the first quarter of 2016 to 5.0% in the fourth quarter of last year. Although the figures for the first quarter are not yet complete and subject to revision, bank loans were essentially unchanged. Commercial and industrial loans, however, actually fell in the first quarter, a substantial turnaround from the 10.8% rate of increase in the first quarter of 2016. Residential real estate loans also fell in the first quarter, compared with a 4.0% rate of rise in the first quarter of 2016. Consumer loan growth remained positive in the first quarter, but the rate of increase was sharply cut.

The most notable credit aggregate – total bank loans and leases plus nonfinancial commercial paper – has turned increasingly weak. In March this broad credit measure was just 4% higher than a year earlier and one half the peak growth rate registered in this current economic expansion that began in 2009 (Chart 5). As seen in Chart 5, the year-over-year changes in this aggregate indicate this is a very cyclically sensitive economic indicator. The year-over-year growth peaked prior to, or in the early stages of, all the recessions since 1969. Moreover, the latest growth rate is slower than at the entry point of the past seven recessions. In the last three months, no growth was registered in total loans and nonfinancial commercial paper. Historically, the three-month growth has not been this weak until the economy is already in recession.

Traditionally, money and credit slowdowns have resulted in tighter bank lending standards, and this is currently the case. In the first quarter survey of senior bank lending officers, almost 10% of the banks were tightening standards for both credit card and other consumer type loans. This was almost identical to the percentage when the economy entered the 2000 and 2008 recessions. Standards for commercial real estate loans have also been raised and in the first quarter were just below the levels when the economy entered the last two recessions.

In summary, monetary restraint is taking hold in all the different ways of measuring the Fed’s actions in a late stage expansion where historically the final result was either a recession, a financial crisis or both.
Repeated Results

A century of Federal Reserve tightening cycles has left an indelible mark on the U.S. business cycle. Looking at the period from 1915 through the present, the Fed has typically tightened too much and/or for too long. From this long history, a well-established pattern is identifiable. The economic growth rate along with inflation receded. A financial crisis was more likely than not. With different lags, which were influenced by the initial conditions, bond yields dropped along with falling inflationary expectations (Chart 6). The cyclical trough in Treasury bond yields typically occurred several years after the end of the economic contraction. This long empirical record, as well as economic theory, indicates that the current Fed tightening cycle will not end any differently.

Looking Ahead

Our economic view for 2017 remains unchanged. We continue to anticipate no more than 2% growth in nominal GDP for the full calendar year. This is in line with the recent trends in M2 growth coupled with an anticipated decline in M2 velocity of 3.6% (M2*V=GDP). The risks, however, are to the downside. M2 was probably boosted by what will eventually be a transitory drop in Treasury balances at the Fed. Although not the main determinant, a rise in short-term rates would negatively influence velocity. The downturn in nominal GDP growth suggests that a rise in inflation to above 2% will be rejected and that by year end the inflation rate will be considerably slower. In such an economic environment long-term Treasury yields should continue to work irregularly lower over the balance of the year.

Our view on bond yields does not change if the Fed further boosts the federal funds rate this year. Any additional increases will place further downward pressure on the reserve, monetary and credit aggregates as well as tighten bank lending standards. Such actions will not allow the economy to regain the economic momentum that was lost in 2016 and in the early part of this year. Thus, the secular low in bond yields remains in the future, not the past.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

What Will Break the Gold and Silver Manipulation?

By: Gijsbert Groenewegen

Silver short positions at 23 highs! And the dumping of futures by the commercials is losing its luster

In the heels of gold and silver continuing to consolidate gains, the war in the gold and silver markets continues as the commercials (Fed, BIS, bullion banks) shorts in the silver market just hit a new all-time record! As we know the silver futures short positions are at record levels in order to depress the silver price at all costs. The silver market is less deep than the gold market, and therefore easier to manage. This way it is less difficult for the authorities, by suppressing the silver prices, to demotivate investors to invest in the precious metals. The monetary authorities don't want the silver price to break the $18.50/oz. and $21/oz. resistance levels for fear of much higher silver prices. They don't want the lit to come off of the pressure cooker.

We can clearly see the tug of war going on in silver on the point and figure chart here below.

Silver Point and Figure Chart

And for gold the authorities don't want gold break the $1,300 level, which could open the way to the important $1,400 level and subsequently give us $2,000. We can see on the chart here below why the $1,400 level in gold is so important.

Gold PM Price Fix since 2007

In recent days we have seen the strongest price manipulation going on in gold when the bullion banks dumped 22,000 gold futures contracts on Tuesday April 18 just before the London fix, which resulted in a $8, fall of the gold price in order to rise subsequently $15!!! In my point of view this is a clear sign of the increasing demand for gold from investors wanting to hedge themselves against the geopolitical risks, peak markets and an imminent weakening of the US dollar whilst the Fed and bullion banks seemingly are losing their control in depressing the gold and silver prices. The number of strong hands, investors that believe in the long-term prospects for gold and silver and are holding on to their positions, are clearly increasing and will give the commercials a huge headache. This dumping was respectively repeated on April 19 when an additional 20,000 futures contracts were sold. Both dumps had a notional value of between $2.5-$3bn (20,000 x 100 x 1290= $2.58bn). See below the chart of the net short position of the gold futures held by the commercials (Fed+ BIS + bullion banks)

Commercials have been adding to their gold short positions, but not nearly as aggressively as they have been in the silver market (see chart below).
Gold Hedgers Position

Commercial Silver Shorts Hit All-Time Record (10-year chart)

Silver Hedgers Position 10-Year Chart

The net short position of the commercials now almost amounts to 125,000 contracts equal to 125,000 x 5,000 = 625m oz. of silver or 71% of the 2016 annual silver production of 880m oz. Below is a look at a longer-term 23-year chart of commercial shorts in the silver market, which puts even better in perspective how extreme the current short positions are!! We all know what happens when short positions need to be covered!

23-Year Commercial Silver Chart Shows Record Short Positions

Silver Hedgers Position 23-Year Chart

Pushing gold and silver prices to bargain levels is frustrating the suppressing efforts of the commercials and triggering ever so more purchasing

In my point of view at these low and bargain price levels the bullion banks undermine their own goals of depressing the gold and silver prices "in order to make the dollar look better than justified on the basis of its fundamentals". Remember when the time is up it is up and the fundamentals will rule and no attempted manipulation will succeed because there will be no doubt in anybody's mind which path to choose. Price will meet time.

Quite similar as with gold despite the increasing short positions the silver price reverses its sell-offs the whole time indicating that people find silver a real bargain hence the funds of money flowing into silver. What the Fed, BIS and bullion banks don't seem to understand, or do they, is that considering the peak markets and deteriorating fundamentals gold and silver look very attractive, especially at these low levels. And of course the most important inverse correlator for gold and silver the US dollar has run its course. As described in my last article

I think that the real fundamentals of the US economy are as such that there is no room for further hikes if anything the Fed will most likely have to cut interest rates. And thus the reasoning for so many investors to hold long positions in the US dollar will be over hence why gold and silver become more attractive because of their inverse correlation, after all they are expressed in US Dollars.

Anyway these fundamentals put a support under the gold and silver prices and thus the lower the commercials push prices the more purchases they automatically trigger. Why? Because as mentioned gold and silver are the bargain of the century as will be proven by history. Why do you think the Russians and Chinese are accumulating as fast and as much as possible without causing higher prices? Because gold and silver are real money, remember gold and silver nobody's obligation (nobody's counter-party obligation). It is like getting a Christmas present from the US. The Russians and Chinese must be laughing all the way to the bank, the best bargain they ever got from the US.

They are selling their treasuries because they know that the levels of US debt and US dollar are not sustainable despite all the QEs and thus swap the treasuries for gold. And the Fed, BIS and bullion banks in their almighty wisdom think they can keep the inevitable debasement of the US dollar at bay and gold and silver depressed. Or do they know they don't they have any choice?

The HFT algos, also used by the Fed, BIS and bullion banks, are not programmed to deal with unexpected high sigma events. It is these events that will ultimately break the manipulation of gold and silver

This is a tug of war that is coming to an end. The monetary authorities have so far been able to control the gold and silver prices using algorithm trading. In a world where HFT represents 80%-90% of daily trading volume the "counter-parties" need to use the same tools to be effective. In fact everything is being driven by these momentum programs and for human intervention is no place anymore. Who needs research if computer determine the decision to buy or sell. Though for the exception that confirms the rule, we know that when we have unexpected events ("emotional" or extraordinary events such as Brexit or Trumps election or other geopolitical events) algorithm trading doesn't work these algorithms are not programmed to trade unexpected events or high standard deviations. Algos are purely based on mathematical patterns that interpret facts and models and can't trade on discretionary unexpected events. Extraordinary events are those when the standard deviation, a deviation from a normal range or the mean, would be in excess of 4 to 5. I will explain. If a data distribution is normal then about 68% of the data values are within one standard deviation or divergence from the mean about 95% are within two standard deviations and about 99.7% lie within three standard deviations.

Standard Deviations

Statistical theory holds that 68% of all observations in a normal distribution lie within one standard deviation of the average of that sample. Events that lie on the fringes of this distribution are defined by a number of sigmas (standard deviations), which denote the increasing improbability of this outcome being realized. So if something, an event or fact, is statistically within the realm of normal expectations it will be within SD 1 or 2.

A good example out of real life to illustrate the concept of standard deviation is the following. The average height for adult men in the United States is about 70 inches (177.8 cm), with a standard deviation of around 3 inches (7.62 cm). This means that most men (about 68%, assuming a normal distribution) have a height within 3 inches (7.62 cm) of the mean (67-73 inches (170.18-185.42 cm)) - one standard deviation - and almost all men (about 95%) have a height within 6 inches (15.24 cm) of the mean (64-76 inches (162.56-193.04 cm)) - two standard deviations. If the standard deviation were zero, then all men would be exactly 70 inches (177.8 cm) tall. If the standard deviation were 20 inches (50.8 cm), then men would have much more variable heights, with a typical range of about 50-90 inches (127-228.6 cm). Three standard deviations account for 99.7% of the sample population being studied, assuming the distribution is normal (bell-shaped). And one uses the same methodology for determining trading patterns of equities, bonds, interest rates, currency movements etc. etc.

Though as mentioned it's the unpredictable and unexpected events that can hardly be modeled using the fact-based algos, as we have seen with Brexit. Following the Brexit vote the British Pound suffered an 18-standard-deviation devaluation! In other words believed to be impossible to happen within the normal business practices.

Soros/Black Wednesday, Lehman and Brexit

And in my point of view it will be these kind of moments, the unexpected not foreseen events, whereby the HFT algorithms can't function and will be obsolete (similar to having no market makers in the pit to provide price quotes), that the gold and silver prices will need in order to finally break free from their relentless manipulation.

5 minute suspension rule on the Comex doesn't apply to the OTC market allowing the bullion banks to re-adjust their positions

And although the commercials will have hedged the short positions they hold on the exchange traded Comex by opposite positions on the non-standardized and opaque OTC market they are most likely to double turn (replace one short position with two long positions) in order not to incur huge losses and in turn make significant profits from going long. Though the question will be who will be so stupid to take the short side when this happens. Another point of interest I should emphasize here is that when the comex suspends trading for 5 minutes the commercials can use that time to also get their positions readjusted in the OTC market. The OTC market doesn't suspend trading because it is not an exchange traded market but an unregulated bilateral market without any standardized rules. When the prices are too much in flux it is difficult to agree prices on a bilateral trade hence why when the prices on the comex are suspended parties will be granted time to agree their OTC trades. See the 5-minute Comex rule here below.

Nymex/Comex Rule Regarding Special Price Fluctuation Limits for Certain NYMEX and COMEX Metals Futures and Options Contracts

"The Exchanges will monitor the price movements of lead-month primary futures contracts in real-time on a daily basis. Price movements in lead-month primary futures contracts will result in triggering events. Triggering events result in monitoring periods, possible temporary trading halts followed by the re-opening of trading, and price fluctuation limit expansions.

If the lead-month primary futures contract is bid or offered via CME Globex at the upper or lower first special price fluctuation limit, the Exchanges will consider such an occurrence a triggering event that will begin a five-minute monitoring period in the lead-month contract."

The force majeure will propel gold and silver prices much much higher because of the criminal imbalance between paper contracts and physical backing

In other words the commercials will be able to save their skin despite their sanctioned unlawful behavior though the lit will be off the gold and silver prices. With hundreds of gold and silver contracts "backed" by only one physical ounce of gold and silver the Comex will have to call for a force majeure and settle nominally in US dollars. At this moment the Comex will have failed and the commercials will lose their price setting monopoly.  Paper futures without 100% backing of physical gold or silver will be a phenomenon of the past. Gold could straight away go to $2,000/oz. and silver to $125/oz. especially when counterparty risk is showing its ugly head and the dollar is losing its value.

People ask me why I believe that gold and silver could make such leaps higher. Well if you have 200 paper gold futures outstanding for only one physical ounce of silver or gold in registered inventories and suddenly nobody trusts the dollar anymore and wants that one physical ounce the real laws of supply and demand kick in and will leap prices much much higher.

Conclusion: Insure your wealth against the fake valuations!

I think anyway that investors would do well to shift their focus more and more from the flakey intangible assets to the tangible assets such gold and silver, agricultural land and non contaminated fresh water. Next to that investing in the stock and bond markets is already for a long time not based on fundamentals. Everything is fake; the valuations of stocks, bonds and currencies are completely distorted by QEs, ZIRP and NIRP, actions of the Plunge Protection Team and the HFTs with their algos. So explain to me how an investor can invest on the basis of real fundamentals and is not taken for a ride as we are witnessing for example with the GDX and GDXJ. We live in a fake society whereby fake is ruling our reality!

Anyway why buy insurance for your house, your car, and your life but not for your wealth?

Why not put 10%-15% of your wealth in physical gold and silver and the gold and silver mining companies if you want to hedge your investments in your house and investments. If everything goes well all your assets will do well whilst if things turn sour gold and silver could give that nice leveraged hedge if you have the physical. When it happens people will wake up and realize that physical gold and silver are money the only real money the only reality and that everything with paper is just paper, worth hardly anything, fake!

Bankers Use Trump Rally to Cash Out

Executives, directors at nearly 100 community banks and regional players netted $1 billion in stock sales since election

By Rachel Louise Ensignand Tom McGinty

U.S. Bank CEO Richard Davis, who retired from that role earlier this month, sold $73 million of stock in November and January, netting $28 million after exercise costs. Photo: Elizabeth Flores/Associated Press

Investors rushed into regional and community bank stocks after the U.S. election, encouraged by higher interest rates and potential regulatory relief. Top executives and directors at banks used the rally for a different reason: to cash out.

Insiders at publicly traded commercial banks with a market value greater than $1 billion, but excluding the largest national banks, sold about $1.4 billion in their company stock between the election and the end of March, up 65% from the 10-plus months in 2016 before the election, according to an analysis by The Wall Street Journal.

The sales netted executives and directors at banks like PNC Financial Services Group Inc. PNC -0.80%▲ and U.S. Bancorp USB -0.38%▲ $1 billion when taking into account the cost of exercising options.

The moves are in line with the behavior of insiders at the biggest U.S. banks, which was the subject of a Wall Street Journal article in January.

Executives at some of the country’s largest banks sold about $163.5 million worth of stock since the presidential election, more than in that same period in any year since before the financial crisis, according to an updated Wall Street Journal review of securities filings.

At the nearly 100 community banks and regional players included in the Journal’s latest review, net gains from selling since the election totaled about $7.2 million per day—nearly four times the 2016 pace before the election.

For years, bank stocks lagged behind the broader stock-market rally as low interest rates and a regulatory overhang from the financial crisis weighed on results. Last year started with the KBW Nasdaq Bank index falling as much as 23% by mid-February due to recession fears. During that time, insiders did very little selling, netting just $13 million on share sales in the first two months of 2016.

After Donald Trump’s surprise election win, potential tax and regulatory relief from the new administration gave bank investors a rosier view. Interest rates also started to rise, which helps bank profits.

While bank stocks have flagged a bit in recent months, the KBW index still rose by more than 22% between the election and the end of March, the period of increased insider selling.

Alex Lieblong, a director at Arkansas-based Home BancShares Inc., netted about $25 million in sales of the bank’s stock after the election, compared with about $1 million before the election in 2016. The 66-year-old investor said his estate planners told him that he needed “a little diversification here in case you get hit by the proverbial bus.”

Bank insiders still have vast holdings in their companies. Executives often are given shares through stock or options grants as part of compensation. Sometimes, they purchase shares on the open market or through their retirement plans. In 2016 before the election, 255 insiders at these lenders bought $42 million worth of stock. After the election through the end of March, the purchases amounted to $5 million from 55 insiders.

Private-equity investors with board seats also sold. Four of them accounted for more than $310 million of the sales, or about 22% of the total, since the election. These same investors sold $46 million in 2016 before the election.

While it is relatively unusual for private-equity investors to have stakes in banks due to regulatory restrictions, some got involved during or shortly after the crisis.

Oaktree Capital Management LP and Thomas H. Lee Partners LP, for instance, in 2011 invested more than $350 million in Puerto Rico-based First BanCorp as a part of a capital raise. The two private-equity investors, which declined to comment, sold about $257 million worth of First BanCorp stock in December and February. The stock is up 62% in the last 12 months through Wednesday.

Another recent seller: U.S. Bank CEO Richard Davis, who retired from that role earlier this month. In November and January, he sold $73 million of stock, netting $28 million after exercise costs. The bank said the moves were an exercise of options from 2008 and declined to comment further on Mr. Davis’s behalf.

PNC CEO William Demchak, meanwhile, sold $40 million, netting $21 million.

Both Messrs. Demchak and Davis remain significant shareholders in their banks. The stocks have both hit record highs in 2017 after steadily recovering since the financial crisis.

Given “the rise in PNC’s stock price during this time frame, I viewed it as an opportune time to exercise” stock options that were set to expire in the next two years, Mr. Demchak noted.

End-of-life care

A better way to care for the dying

How the medical profession is starting to move beyond fighting death to easing it

A STROLL from Todoroki station, at the kink of a path lined with cherry trees, lies a small wooden temple. A baby Buddha sits on the sill. The residents of the Tokyo suburb ask the infant for pin pin korori. It is a wish for two things. The first is a long, spry life. The second is a quick and painless death.

Just part of this wish is likely to be granted. The paradox of modern medicine is that people are living longer, and yet doing so with more disease. Death is rarely either quick or painless. Often it is traumatic. As the end nears, people tend to have goals that matter more than eking out every last second. But too few are asked what matters most to them. In the rich world most people die in a hospital or nursing home, often after pointless, aggressive treatment. Many die alone, confused and in pain.
The distress is largely unnecessary. Fortunately medicine is beginning to take a more thoughtful approach to people with terminal illness. Reformers are overhauling how end-of-life care is delivered and improving communication between doctors and patients. The changes mean that patients will experience less pain and suffering. And they will have more control over their lives, right up until the end.

Many aspects of death changed during the 20th century. One was when it happens. The average lifespan increased by more over the past four generations than over the previous 8,000. In 1900 global life expectancy at birth was about 32 years, little more than at the dawn of agriculture. It is now 71.8 years. In large part that is a result of lower infant and child mortality; a century ago about a third of children died before their fifth birthday. But it is also because adults live longer. Today a 50-year-old Englishman can expect to live for another 33 years, 13 more than in 1900.

The chance of an adult dying was once largely unrelated to age; infections were indiscriminate. Michel de Montaigne, a French essayist who died in 1592, wrote that death in old age was “rare, singular and extraordinary”. Now, says Katherine Sleeman of King’s College London, death mostly comes by stealth. She estimates that in Britain only a fifth of deaths are sudden, for example in a car crash. Another fifth follow a swift decline, as with some cancer patients, who stay fairly active until their final few weeks. But three-fifths come after years of relapse and recovery. They involve a “slow, progressive deterioration of function”, Dr Sleeman says.

People in rich countries can spend eight to ten years seriously ill at the end of life. Chronic illness is rising in poorer countries, too. In 2015 it accounted for more than three-quarters of premature mortality in China, according to the Global Burden of Disease, a survey. In 1990 the share was just a half. The World Health Organisation (WHO) predicts that rates of cancer and heart disease in Sub-Saharan Africa will more than double by 2030.

A side-effect of progress, however, has been what Atul Gawande, a surgeon and author, calls “the experiment of making mortality a medical experience”. A century ago most deaths were at home. Now, according to a survey of 45 rich countries by the WHO, fewer than a third are. Death also used to be egalitarian, says Haider Warraich of Duke University Medical Centre and the author of “Modern Death”. Income did not much affect when or where people died. Today poor people in rich countries are more likely than their better-off compatriots to die in hospital.

No dying fall
Many deaths are preceded by a surge of treatment, often pointless. A survey of doctors in Japan found that 90% expected that patients with tubes inserted into their windpipes would never recover. Yet a fifth of patients who die in the country’s hospitals have been intubated. An eighth of Americans with terminal cancer receive chemotherapy in their final fortnight, despite it offering no benefit at such a late stage. Nearly a third of elderly Americans undergo surgery during their final year; 8% do so in their last week.

The way health care is funded encourages over-treatment. Hospitals are paid for doing things to people, not for preventing pain. And not only patients, but those who love them, suffer. Many people who may need intubation or artificial ventilation are not in a condition to indicate consent. An American study found that in about half of cases involving decisions about the withdrawal of treatment there is conflict between family and doctors. A third of relatives of patients in intensive-care units (ICUs) report symptoms of post-traumatic stress disorder.

Many people will want to “rage, rage against the dying of the light”, as the poet Dylan Thomas put it.

Others will have particular events they want to attend: a grandchild’s graduation, say. But the medical crescendo often occurs by default, not as a result of personal choice based on a clearly understood prognosis.

The huge gap between what people want from end-of-life care and what they are likely to get is visible in a survey conducted by The Economist in partnership with the Kaiser Family Foundation, an American health-care think-tank. Representative samples of people in four large countries with differing demographics, religious traditions and levels of development (America, Brazil, Italy and Japan) were asked a set of questions about dying and end-of-life care. Most had lost close friends or family in the previous five years.

In all four countries the majority of people said they hoped to die at home (see chart 1). But fewer said they expected to do so—and even fewer said that their deceased loved ones had.

Apart from in Brazil, only small shares said that extending life as long as possible was more important than dying without pain, discomfort and stress. Other research suggests that wish, too, is increasingly unlikely to be granted. One study found that between 1998 and 2010 the shares of Americans experiencing confusion, depression and pain in their final year all increased.

What healthy people think they will want when they are mortally ill may well change when that moment comes. “Life becomes mighty precious when there is not a lot left,” says Diane Meier, a geriatrician at Mount Sinai Hospital in New York. It is common, for example, to hate the idea of a feeding tube but grudgingly accept one when the alternative is death.

Words I never thought to speak
Yet the gap between what people hope for and what they get cannot be explained away so easily.

Dying people’s wishes are often unknown or ignored. Among those involved in making decisions about a loved one’s end-of-life care, more than a third in Italy, Japan and Brazil said they did not know what their friend or family member wanted. Either they never asked, or only thought to do so too late. A Japanese woman who cared for her mother, an Alzheimer’s patient, says she regrets that “once the door closed there was no way of knowing what she wanted.”

And sometimes, even when relatives know a loved one’s wishes, they cannot make sure they are granted. Between 12% and 24% of those who had lost someone close to them said that the patient’s wishes had not been carried out. Between 25% and 38% said that friends or family had experienced needless pain. Across the whole survey most people rated the quality of end-of-life care as “fair” or “poor”.

End-of-life care can resemble a “conspiracy of silence”, says Robert Fine of Baylor Scott & White Health, a Texan health-care provider. In our survey majorities in all four countries said that death is a subject which is generally avoided. An obvious reason is that death is feared. “In every calm and reasonable person there is a hidden second person scared witless about death,” says the narrator of a Philip Roth novel. One school of psychology—“terror management theory”—holds that fear of death is the source of everything distinctively human, from phobias to religion.

But death was once what Philippe Ariès, a French historian, called a “public ceremony”, where friends and family gathered. Now, changing family structures mean the elderly and dying are more isolated from younger people, who are therefore less likely to witness death up close, or to find a suitable moment to talk about its approach. Just 10% of Europeans aged over 80 live with their families; half live alone. By 2020, 40% of Americans are expected to die alone in nursing homes.

In Japan, where survey respondents were most likely to say that not being a financial burden was a primary consideration, daughters are abandoning their traditional caring role. That has given rise to institutions such as the House of Hope, a hospice in east Tokyo that looks after people who are too poor for hospital care and too alone to die at home. A decade ago Hisako Yanagida, 88, lost her husband, with whom she had sung in a traditional Japanese troupe. Now her sight is going but she can still make out the faded pictures of the two of them on her wall. She tries not to think about death: “There is no point.”

But the chief responsibility for the failures of end-of-life care lies with medicine. The relationship between doctors and seriously ill patients is one of “mutual suspicion”, says Naoki Ikegami of St Luke’s International University, in Tokyo. A decade ago it was common for Japanese doctors to withhold cancer diagnoses. Today they are more honest, but still insensitive. One Japanese woman recalls her oncologist saying that if her chemotherapy made her bald, it would not be a big deal.
And doctors commonly overestimate how long the terminally ill will live, making it more likely that they will duck frank conversations, or recommend drastic treatments that have little chance of success. One international review of prognoses of patients who die within two months suggests that seriously ill people live on average little more than half as long as their doctors suggested they would.

Another study found that, for patients who died within four weeks of receiving a prognosis, doctors had predicted the date to within a week in just a quarter of cases. Mostly, they had erred on the side of optimism.

Doctors often neglect palliative care, which involves giving opioids for pain, treating breathlessness and counselling patients. (The name comes from the Latin palliare, as in “to cloak” pain.) A typical question is “What is important to you now?” It does not seek to cure. As a result, “it is seen as what you do when you give up on a patient,” sighs Dr Ikegami. It receives just 0.2% of the funding for cancer research in Britain and 1% in America.

Breaking the taboo
What studies there have been show the cost of this neglect. Since 2009 several randomised controlled trials have looked at what happens when patients with advanced cancer are given palliative care alongside standard treatment, such as chemotherapy. In each, the group receiving palliative care had lower rates of depression; and in all but one study, patients in that group were less likely to report pain.

Remarkably, in three trials the patients receiving palliative care lived longer, even though the quantity of conventional treatment they opted to receive was lower. (The other two trials showed no difference.) In one study their median survival was a year, compared with nine months for the group receiving only ordinary treatment. A review in 2016 of cases where palliative care was used instead of standard treatment found that even when it was the only care given, it did not seem to shorten life.

The reason for the results is unclear, and the research has mostly been on cancer patients. Those receiving palliative care spend less time in hospital, so may contract fewer infections. But some researchers think that the explanation is psychological: that through counselling they reduce depression, which is linked to earlier death. “A conversation can be more powerful than technology,” says Dr Sleeman.

At St Luke’s hospital in Tokyo, Yuki Asano supports the argument. Ever the executive, the 76-year-old slides his business card across the tray of his bed. The former boss of a brewery company (and 7th dan in kendo, a Japanese martial art) is riddled with cancer. He stopped chemotherapy last year.

The care at one of Japan’s few dedicated palliative centres has helped him feel ready for death. “I achieved everything I wanted in life,” he says. “Now I am waiting for the awards ceremony.”

But few of the 56m or so people who die each year receive good end-of-life care. A report published in 2015 by the Economist Intelligence Unit, our sister company, assessed the “quality of death” in 80 countries. Only Austria and America, the EIU found, had the capacity to ensure that at least half the patients for whom palliative care was suitable received it.

Many countries promise public access to palliative care but do not pay for it. Spain has passed two laws to ensure palliative care is available but in reality, just a quarter of patients can get it.

Though the hospice movement, dedicated to providing high-quality care to dying patients, started in Britain in the 1960s, only about a fifth of the country’s hospitals provide access to palliative care every day of the week.

The way health-care providers are funded often sidelines palliative care. In Japan hospital doctors receive no payment from insurers for talking to patients about end-of-life options. In America hospitals suck up a big share of spending, even though the seriously ill are often better treated elsewhere. Nine in ten emergency visits are because of escalations in symptoms, such as breathlessness; most of these patients could be treated better, faster and more cheaply at home.

Medicare, the public-health scheme for the elderly, does not generally cover spells in nursing homes.

Slowly, however, countries are reforming. In 2014 the WHO recommended integrating palliative care with health systems. Some developing countries, including Ecuador, Mongolia and Sri Lanka, are beginning to do so. In America some insurers are realising that what would be better for patients would be better for them, too. In 2015 Medicare announced that it would pay for conversations about end-of-life care between doctors and patients.

“Talking almost always helps and yet we don’t talk,” says Susan Block of Harvard Medical School.

To improve end-of-life care, she says, “every doctor needs to be an expert in communicating.”

American oncologists, for example, need to have an average of 35 conversations per month about end-of-life care. In a study of patients with congestive heart failure, doctors rarely followed up after a patient expressed a fear of death. Nearly three-quarters of nephrologists were never taught how to tell patients they are dying. A common cause of burnout among doctors is an inability to talk with patients about death.

To fill this gap Ariadne Labs, a research group founded by Dr Gawande, has launched the “Serious Illness Conversation Guide”. It is a straightforward checklist of the topics doctors should be sure to talk about with their terminally ill patients. They should start by asking what patients understand about their conditions, check how much each wants to know, offer an honest prognosis, and ask about their goals and the trade-offs each is willing to make.

Early results from a trial of the guide at the Dana-Farber Cancer Institute in Boston suggest it led to doctors having more and earlier conversations. Patients reported less anxiety. Tension between doctors and families was eased. The scheme is being expanded; in February Baylor Scott & White became the first big provider to use it for all its staff. England’s National Health Service is trying it out in Clatterbridge, near Liverpool. Japan is retraining its oncologists in how to talk about death.

In America advance directives and living wills, documents that spell out the treatment people want if they become incapacitated, have become more popular over the past few decades. In our survey 51% of Americans over 65 had written down their end-of-life wishes. Yet such documents cannot cover all the possibilities that may arise as the end nears. Doctors worry that patients may have changed their minds. In one study just 43% of people who had written living wills wanted the same treatment course two years later.
Living wills are rare outside America (see chart 2). But there is a broader cultural shift. More than 4,400 “death cafés”, where people eat cake and talk about mortality, have sprung up. They discuss books such as “When Breath Becomes Air”, by the late Paul Kalanithi, a neurosurgeon, and the documentary “Extremis”, which is set in an intensive-care unit and offers a more honest account of hospital care than in popular TV shows. In Japan “ending notebooks” are now available, to record messages and instructions for relatives.

Here at the end of all things

In 2010 Ellen Goodman, an American author, founded the Conversation Project, which started with people gathering to share stories of the “good deaths” and “bad deaths” experienced by their loved ones. It publishes guides like those from Ariadne Labs, but for use by people without medical training. Laurie Kay, an 80-something from Boston, recently told her husband and daughter that what mattered to her was dignity. She wants to look good: her nails should be painted. Her views may change, she says, but “having opened the conversation now we can reopen it later.”

Experiences of death are being shared online. Dying Matters is a popular forum. In 2013 Scott Simon, a journalist, tweeted from his mother’s bedside as she died (“Heart rate dropping. Heart dropping”, read one tweet). Kate Granger, an English geriatrician who died of cancer last year, planned to tweet during her final days using the tag #deathbedlive. She did not quite manage it, but a tweet she prepared was sent posthumously: “TY all for being part of my life. Pls look after my amazing hubby @PointonChris (Ps - Don’t let him spend all his money on a Range Rover) xx”.

Bringing death “within the pale of conversation” is needed to overhaul end-of-life care, argues Dr Warraich. Yet the “death positive” movement is not an excuse for medicine to remain stuck in its ways. Death will remain terrifying for many people. Unless the way health care is organised changes, most people will continue to suffer unnecessarily at the end.