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Why Quantitative Tightening Will Fail

Why Quantitative Tightening Will Fail

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

…click on the above link to read the rest of the article…

Myths Behind the War on Cash

Myths Behind the War on Cash5856660723_ef2b89a8e6_z.jpg

The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.

In a highly-recommended study entitled “Cash, Freedom and Crime. Use and Impact of Cash in a World Going Digital,” Deutsche Bank Research demolishes numerous popular myths surrounding cash, inter alia in the context of crime and terrorism. Without cash there are no longer bank robberies at gun point, instead there are now electronic bank robberies. Fraud involving credit cards and ATM cards is massively increasing in Sweden, the country considered the pioneer of the cashless society. The argument that adopting a cashless payment system would facilitate the fight against terrorism doesn’t hold water either:

As regards terrorism in Europe, an analysis of 40 jihadist attacks in the past 20 years shows that most funding came from delinquents’ own funds and 75% of the attacks cost in total less than USD 10,000 to carry out — sums that will hardly raise suspicions even if paid by card.

Moreover, many terrorists, particularly if they are prepared to risk their own death, won’t be deterred by prohibitions, just as stricter gun laws have no impact on people who must use unregistered weapons for their crimes. Often, they are unable to get hold of a weapon by legal means anyway if they have a criminal record. Planned terror attacks are as a rule characterized by a meticulous and careful approach. At best a cash ban might make financing of terrorism more difficult (even that is doubtful), but at the price of subjecting the law-abiding peaceful population at large to even more intrusive surveillance.

…click on the above link to read the rest of the article…

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.
Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
History informs us that rising wealth and income inequality generate social disorder.
Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
…click on the above link to read the rest of the article…

Italy’s newest bank bailout cost as much as its annual defense budget

Italy’s newest bank bailout cost as much as its annual defense budget

Two more Italian banks failed over the weekend– Banco Popolare di Vicenza and Veneto Banca.

(In other news, the sky is blue.)

The Italian Prime Minister himself stated that depositors’ funds were at risk, so the government stepped in with a bailout and guarantee package that could cost taxpayers as much as 17 billion euros.

That’s a lot of money in Italy– around 1% of GDP. In fact it’s basically as much as the 17.1 billion euros they spent on national defense last year (according to an estimate by Italian think tank IAI).

You don’t have to have a PhD in economics to figure out that NO government can afford to spend its entire defense budget every time a couple of medium-sized banks need a bailout.

That goes especially for Italy, whose public debt level is already 132% of GDP… and rising. They simply don’t have the money.

Moreover, the European Union actually has a series of new rules collectively known as the “Bank Recovery and Resolution Directive” which is supposed to prevent failing banks from being bailed out with taxpayer funds.

Here’s the thing– Italy has LOTS of banks that are on the ropes.

So with taxpayer resources exhausted (and technically prohibited), who’s going to be on the hook next time a bank goes under?

Easy. By process of elimination, the only other party left to fleece is the depositor.

Here’s how it works:

Let’s say a bank takes in $1 billion in deposits.

Naturally the bank doesn’t just keep $1 billion in cash sitting in its vault. They invest the money. They make loans. They buy assets.

So the bank’s balance sheet shows $1 billion worth of assets, and $1 billion worth of deposits that they owe to their customers.

But sometimes banks screw up when they invest their customers’ funds. Loans go bad. Borrowers default.

 

…click on the above link to read the rest of the article…

Two Italian Zombie Banks Toppled Friday Night

Two Italian Zombie Banks Toppled Friday Night

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

…click on the above link to read the rest of the article…

The Federal Reserve Is Destroying America

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people.  Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America.  They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet.  To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other.  They both rest upon an impossibility.  Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world.  It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected.  “This is what we do,” they probably said to each other and their followers.  “This is what we’ve always done.  Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

…click on the above link to read the rest of the article…

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

A “prudent” Fed (and China’s “National Team”) have spurred a risk-on rally, as RBC’s head of cross-asset strategy Charlie McElligott notes the market’s ‘Pavolovian’ response to Fed’s ‘dovish hints’ contained within the Minutes – despite simultaneously staying ‘on message’ with hiking / tapering commentary – prompts a “QE of old” response: stocks and Treasuries bid, while the USD faded.

China further perpetuates the ‘risk rally’ via apparent market interventions:

1.       Intervention in FX markets to strengthen the Yuan overnight, with speculation of a number of Chinese banks selling Dollars in the onshore market overnight which drove the Yuan higher.

2.       Chinese “National Team” stock market inventions as well, with sharp-turns higher off of an initially weaker equities opening and again-weaker industrial metals.   Major reversals off lows saw nearly all domestic markets close at highs (Shanghai Prop +2.8%), while Hong Kong’s Hang Seng closed at highs since July 2015, with Chinese real estate developers leading.

Initial (and expected) ‘sell the news’ on the snoozer OPEC outcome, as they extend the output cut 9 months per expectations—which disappointed the ‘bullish surprise’ camp which anticipated more OPEC-‘gaming’ of the market, thinking it was possible for a deeper-cut in conjunction with the consensus extension.

This move lower in crude is notable if it were to escalate the current rollover in ‘inflation expectations’ (10Y BE’s below 200dma) which continue to show as the largest price drivers of risk-assets and major rates markets currently per the QI factor PCA model—although should be noted that both SPX and HYG (US HY proxy) are both deeply OUT OF REGIME with low r-squareds / low explanatory power.

Due to my much-discussed “Chinese deleveraging / Fed tightening / ECB pivoting ‘less dovish’” trifecta, we are seeing good buying in cash USTs and receiving in swaps (strong 5Y auction as well) keeping rates pinned despite the ongoing risk-asset rally.

…click on the above link to read the rest of the article…

All Power to the Banks! The Winners-Take-All Regime of Emmanuel Macron

All Power to the Banks! The Winners-Take-All Regime of Emmanuel Macron

A ghost of the past was the real winner of the French presidential election.  Emmanuel Macron won only because a majority felt they had to vote against the ghost of “fascism” allegedly embodied by his opponent, Marine Le Pen.  Whether out of panic or out of the need to feel respectable, the French voted two to one in favor of a man whose program most of them either ignored or disliked.  Now they are stuck with him for five years.

If people had voted on the issues, the majority would never have elected a man representing the trans-Atlantic elite totally committed to “globalization”, using whatever is left of the power of national governments to weaken them still further, turning over decision-making to “the markets” – that is, to international capital, managed by the major banks and financial institutions, notably those located in the United States, such as Goldman-Sachs.

The significance of this election is so widely misrepresented that clarification requires a fairly thorough explanation, not only of the Macron project, but also of what the (impossible) election of Marine Le Pen would have meant.

From a Two Party to a Single Party System

Despite the multiparty nature of French elections, for the past generation France has been essentially ruled by a two-party system, with government power alternating between the Socialist Party, roughly the equivalent of the U.S. Democratic Party, and a party inherited from the Gaullist tradition which has gone through various name changes before recently settling on calling itself Les Républicains (LR), in obvious imitation of the United States.  For decades, there has been nothing “socialist” about the Socialist Party and nothing Gaullist about The Republicans.

…click on the above link to read the rest of the article…

Canadian banks set to reveal quarterly earnings amid housing & debt concerns

Ratings agency Moody's downgraded the credit ratings for Canada's big banks earlier this month, citing concerns that over-stretched borrowers and high house prices have left lenders vulnerable to potential losses.

Ratings agency Moody’s downgraded the credit ratings for Canada’s big banks earlier this month, citing concerns that over-stretched borrowers and high house prices have left lenders vulnerable to potential losses. (Dillon Hodgin/CBC)

The Canadian banks are expected to benefit from rising U.S. interest rates and fewer bad loans in the oilpatch as they start reporting their latest quarterly results this week, but analysts say worries about the housing market and consumer debt remain key concerns.

“The reality is that given all of the fears about the Canadian mortgage market, I think that even if the results are good, people will dismiss them as being backward-looking,” said analyst Meny Grauman of Cormark Securities.

The Bank of Montreal will kick off the earnings parade on Wednesday, followed by Royal Bank, TD Bank and CIBC  on Thursday. Scotiabank will report May 30.

Edward Jones analyst Jim Shanahan said fee income from trading activities and other types of charges was a key driver of earnings growth last quarter.

That likely moderated during the second quarter, but a strengthening in net-interest margins — stemming from U.S. interest rate hikes in December and March — will likely pick up some of the slack, he said.

BMO and TD are most likely to benefit from the rate increases, Shanahan said.

The banks could also see some improvement in their loan loss provisions as stability has returned to the oilpatch.

“From a credit perspective we should see some continued improvement within the oil and gas portfolios,” Shanahan said.

However, analysts said concerns about high home prices, debt-laden consumers and a liquidity crisis at mortgage lender Home Capital Group  could all weigh on the bank stocks.

…click on the above link to read the rest of the article…

China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”

China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”

Is China’s push to deleverage its financial system over?

That is the question following last night’s dramatic reversal in recent PBOC liquidity moves, when after weeks of mostly draining liquidity, the central bank injected a whopping 170 billion yuan (net of maturities), or $24.7 billion, the biggest one-day cash injection into the country’s financial markets (and contracting shadow banking system as first reported here last week, when we showed the first drop in China Entrusted Loans in a decade) in four months. The surprising move was “a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculation fueled by excessive borrowing” according to the WSJ.

Today’s injection was the the largest since just before the Lunar New Year holiday in January, when Chinese banks traditionally stock up on liquidity.

Why the sudden shift?

On one hand it is possible that the PBOC is simple concerned about the sharp decline, and in fact contraction, in China’s shadow banking system, where as we showed last week Entrusted Loans posted their first decline since 2007 even as China’s M2 continued to decline.

 

The huge cash injection followed comments from Chinese officials in recent days which hinted they are getting concerned that recent moves to tighten market regulation have caused too much disruption. As a reminder, in recent weeks money market rates and yields on corporate bonds had all shot up to multi-year highs.

The real reason may be simpler: with a major leadership shuffle due later this year, the central bank is not taking even the smallest chances of turmoil in the banking sector. and as such admitted that – once again like in 2013 – its posturing to delever the world’s most leveraged financial system was just that. The WSJ has more:

…click on the above link to read the rest of the article…

Bank of China ATMs Go Dark As Ransomware Attack Cripples China

Bank of China ATMs Go Dark As Ransomware Attack Cripples China

In the aftermath of the global WannaCry ransomware attack, which has spread around the globe like wildfire, a significant number of corporations and public services have found their infrastructure grinding to a halt, unable to operate with unprotected if mission-critical computers taken offline indefinitely. Some of the more prominent examples so far include:
  • NHS: The British public health service – the world’s fifth-largest employer, with 1.7 million staff – was badly hit, with interior minister Amber Rudd saying around 45 facilities were affected. Several were forced to cancel or delay treatment for patients.
  • Germany’s Deutsche Bahn national railway operator was affected, with information screens and ticket machines hit. Travelers tweeted pictures of hijacked departure boards showing the ransom demand instead of train times. But the company insisted that trains were running as normal.
  • Renault: The French automobile giant was hit, forcing it to halt production at sites in France and its factory in Slovenia as part of measures to stop the spread of the virus.
  • FedEx: The US package delivery group acknowledged it had been hit by malware and said it was “implementing remediation steps as quickly as possible.” .
  • Russian banks, ministries, railways: Russia’s central bank was targeted, along with several government ministries and the railway system. The interior ministry said 1,000 of its computers were hit by a virus. Officials played down the incident, saying the attacks had been contained.
  • Telefonica: The Spanish telephone giant said it was attacked but “the infected equipment is under control and being reinstalled,” said Chema Alonso, the head of the company’s cyber security unit and a former hacker.
  • Sandvik: Computers handling both administration and production were hit in a number of countries where the company operates, with some production forced to stop. “In some cases the effects were small, in others they were a little larger,” Head of External Communications Par Altan said.

…click on the above link to read the rest of the article…

Just a quick reminder of who’s really in charge

This happens several times each year as the central bank’s Federal Open Market Committee gathers to set monetary policy in the Land of the Free.

To be clear, there is no greater power over a nation than having control of its money supply and interest rates.

Think about it: interest rates influence just about EVERYTHING in the economy.

Changes in interest rates influence housing prices, company stock prices, retail sales, food prices, oil prices, and major business purchases.

Interest rates have a significant impact over employment, business investment, inflation, and the currency’s international exchange rate.

Increases in the interest rate even have the power to bring a government to its knees.

This is pretty extraordinary power. And it has been awarded to an unelected committee that has an astonishing track record of getting it wrong.

Former Fed chair Ben Bernanke famously predicted in January 2008 that “the Federal Reserve is currently NOT forecasting a recession.”

It turns out that the recession had officially started one month before in December 2007.

While that’s just one small example, the numbers show that these guys perpetually miss the mark.

In January 2011 the Fed projected 2011 GDP growth would be 3.7%. It turned out to be 2%. So proportionally speaking they were off by 85%.

In January 2012 they predicted 2.5% growth that year. Actual growth in 2012 was 1.6%, so they were ‘only’ off by 56%.

Their 2016 GDP growth forecast was 2.4%, while actual growth was 1.6%, another 50% error.

And just recently for the first quarter of 2017, the Fed’s predictions were 1.2% growth, while actual GDP growth was just 0.7%… a 70%+ overshoot.

Here’s the funny thing– even the Federal Reserve’s own internal study shows that they consistently miss the mark in their projections.

…click on the above link to read the rest of the article…

So China’s Authorities Crack Down on Housing Speculation?

So China’s Authorities Crack Down on Housing Speculation?

Who’s Behind China’s Wild House Price Bubble? State-Owned Property Developers, Funded by State-Owned Banks.

Beijing’s municipal government summoned representatives of state-owned property developers on Monday and told them to stop hyping the already overheated housing market, according to the portal, Chinese Real Estate Business (CREB), cited by Reuters.

State-owned property developers, funded by state-owned banks, have been a major force in inflating home prices as they bid aggressively for land to gain market share. According to CREB, state-owned developers bid for nearly half of the most expensive land in China during the first five months of 2016. And that trend has continued. But after the meeting with the municipal government of Beijing, these firms may be forced “to change their land strategy.”

Telling state-owned developers to stop hyping, as CREB put it, “operational and market activities” would be the latest effort to crack down on property speculation gone wild in China. It would come on top of the numerous other ways local and central authorities have tried to curb this speculation, without success so far.

Today, the National Bureau of Statistics reported that new home prices in 70 cities surged 11.3% in March year-over-year. It was the 18th month in a row of year-over-year gains. Prices jumped 19% in Beijing and 16.8% in Shanghai (chart by Trading Economics):

On a monthly basis, new home prices rose 0.6%, the fastest in four months, up from 0.3% in February. Of the 70 cities in the index, 62 experienced a month-to-month price gain, up from 56 cities in February, once again defying expectations of a slowdown. Prices jumped the most in Haikou (2.6%), Sanya (2.5%), and Guangzhou 2.3%), followed by other second- and third-tier cities, to which the speculative fire has been spreading.

…click on the above link to read the rest of the article…

World Out Of Whack: Iceland, You Won’t Believe It

World Out Of Whack: Iceland, You Won’t Believe It

The developed world is going to hell and probably deserves it. Today, I’m going to show you what should have been done both during and post the GFC. That it wasn’t, and now almost certainly won’t, is a problem for us all but that’s a story for another day.

Today, we look to Iceland and marvel at what they managed to accomplish both leading into the GFC and then coming out of it, and then we scratch our heads at the latest news just out from their central bank.

On with it then…

It was over a decade ago now when I very nearly took a flight to Reykjavik but at the last minute opted instead to go to Copenhagen, which I regret since I’m told it’s like Scotland on steroids (sounds like a blast). What clinched the decision in the end was that a scotch was about 3 times the price in Reykjavik, and since I was heading out for a wild boys week this was important in our considerations, though I’m told that in the land of fire and ice the women are indeed unbelievable.

Its history is that of an arctic backwater reliant on fishing fishing, energy, aluminium smelting, and tourism. A place with hardy living conditions and hardier people.

Between the late 90’s and 2008 they, however, went through what can only be described as a stratospheric rise from this backwater specialising in fishing to one which specialised in global finance.

Using the Irish financial model as a blueprint, Iceland decided to revamp its economy repositioning itself in the international community as a low-tax jurisdiction for foreign finance and investment.

…click on the above link to read the rest of the article…

Gary Cohn Backs Reinstating Glass-Steagal, Breaking Up Big Banks

Gary Cohn Backs Reinstating Glass-Steagal, Breaking Up Big Banks

In an unexpected statement made by the former COO of Goldman Sachs and current director of Trump’s National Economic Council, Gary Cohn told a private meeting with lawmakers on the Senate Banking Committee on Wednesday evening that he could support legislation breaking up the largest U.S. banks – a development that could provide support to congressional efforts to reinstate the Depression-era Glass-Steagall law – and impact if not so much his former employer, Goldman Sachs, whose depository business is relatively modest, then certainly the balance sheets of some of Goldman’s biggest competitors including JPM and BofA.

According to Bloomberg, Cohn said he generally favors banking going back to how it was “when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans.”

What Cohn may not have mentioned is that with rates as low as they are, issuing loans – i.e., profiting from the Net Interest Margin spread – remains far less profitable than trading and underwriting securities in a world in which virtually every “developed world” central banker is either directly spawned from Goldman, or is advised by an ex-Goldman employee,

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

As Bloomberg further notes, Wednesday’s Capitol Hill meeting with Cohn was arranged by Senate Banking Committee Chairman Mike Crapo, and included lawmakers from both political parties and their staffs. The discussion covered a wide range of topics, including financial regulations and overhauling the tax code, the people said.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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