Home » Posts tagged 'central banks'

Tag Archives: central banks

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

Broadly speaking, banks operate under the concept of maturity transformation. Banks take short-term – less than one year – financing vehicles, such as customer deposits, and use that to finance long-term – more than one year – returns. These returns range from the most commonly understood loans, such as auto loans and mortgages, to investments in equity, bonds and public debt. Banks make money on the interest spread between what they pay to the owners of the money and what is earned from the operations. Banks also make money on other services, such as wealth management and account fees, though these are relatively small compared to the maturity transformation business.

In terms of assets, the primary asset a bank holds is the demand deposit, also referred to as the core deposit. These are your everyday savings and checking accounts. Banks also sell Wholesale Deposits, such as CDs, have shareholder equity and also can take out debt, such as interbank lending. As these assets are owned by someone else, each of them demands a return for the use of those assets. These are part of the costs of operation for a bank. There are also more fixed operating costs, such as employees, buildings and equipment that must also be financed.

So, a bank will take assets and formulate loans on them. Like most of the world, the US operates on a fractional reserve system, one where banks originate loans in excess of the deposits on-hand. Take a look at the balance sheet of a large regional bank, 5/3 Bank, for example. For the 2018 fiscal year, 5/3 reported non-capital assets of $94 billion and a deposit base of $108 billion. However, the cash and cash equivalent component of these assets stood at $4.4 billion, or just 4% of demand deposits.

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

Central banks are buying gold at the fastest pace in six years

Central banks are buying gold at the fastest pace in six years

Earlier this month the World Gold Council published its quarterly report– and it shows that central banks and foreign governments from around the world are buying up gold at their fastest pace in six years.

This is pretty big news, and it says a LOT about the future of the dollar.

Remember, central banks and foreign governments hold literally TRILLIONS of dollars of reserves… and traditionally they do this by buying US government debt.

It sounds strange, but to big institutions, banks, etc., US government debt is equivalent to cash. They use it as a form of money.

Did you know? You can receive all our actionable articles straight to your email inbox… Click here to signup for our Notes from the Field newsletter.

More importantly, they hold US dollars because that’s the global standard: the US dollar has been the world’s primary international reserve currency for seventy five years.

So US debt is extremely liquid. In fact, the $22 trillion US debt market is the biggest and most liquid market in the world.

But foreign governments have started breaking with the tradition of buying treasuries.

As the World Gold Council’s report showed us, foreign governments and central banks have been buying a LOT more gold than in previous years.

Net gold purchases in Q1/2019 among foreign governments and central banks was nearly 70% greater than Q1/2018… and the highest rate of first quarter purchases in six years.

The Chinese in particular, have been stockpiling gold faster than ever, while at the same time, Chinese ownership of US treasuries as a percentage of total holdings has been gradually declining over the past years.

And it’s not just China.

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

In The Fed We Trust – Part 1

In The Fed We Trust – Part 1

This article is the first part of a two-part article. Due to its length and importance, we split it to help readers’ better digest the information. The purpose of the article is to define money and currency and discuss their differences and risks. It is with this knowledge that we can better appreciate the path that massive deficits and monetary tomfoolery are putting us on and what we can do to protect ourselves.   

How often do you think about what the dollar bills in your wallet or the pixel dollar signs in your bank account are? The correct definitions of currency and money are crucial to our understanding of an economy, investing and just as importantly, the social fabric of a nation. It’s time we tackle the differences between currency and money and within that conversation break the news to you that deficits do matter, TRUST me. 

At a basic level, currency can be anything that is broadly accepted as a medium of exchange that comes in standardized units. In current times, fiat currency is the currency of choice worldwide. Fiat currency is paper notes, coins, and digital 0s and 1s that are governed and regulated by central banks and/or governments. Note, we did not use the word guaranteed to describe the role of the central bank or government. The value and worth of a fiat currency rest solely on the TRUST of the receiver of the currency that it will retain its value and the TRUST that others will accept it in the future in exchange for goods and services. 

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

The Drastic Alteration of QE that is About to be Unleashed

The Drastic Alteration of QE that is About to be Unleashed 

QUESTION #1: Sir,

You stated in your blog that Fed may fix 2 and 10 year bond rates. Doesn’t this negate the yield curve concept/ credit theory? Won’t this accelerate the distrust for government? Wont this further accelerate/aggravate the pension crisis?

Appreciate you teaching the little guys

See you in Oct

DK

QUESTION #2: Marty; What you are describing with the change in QE is clearly coming from your contacts behind the curtain. How do you think this will play out?

CB

ANSWER: It is clear QE is dead. However, at the same time it has trapped all central banks. I am preparing an important paper on this subject. It is complicated, but it is the very reason why the West will collapse and the financial capital of the world will move to China, who has come out and stated publicly that they will not engage in QE. As far as accelerating the distrust in government, this will be felt within the professional class. It will take time to filter into the general public and it will most likely take the form of another cause altogether. It is unlikely that the general media will even understand this subject matter.

As to how will this play out, I can only say get ready. This is most likely the last straw that will eventually break the back of the monetary system. The general press will not understand that this shift in policy was the last straw. They will not even understand the ramifications for probably two years.

Global Economic Growth In Serious Trouble When U.S. Shale Oil Peaks & Declines

Global Economic Growth In Serious Trouble When U.S. Shale Oil Peaks & Declines

The global economy would be in serious trouble if it weren’t for the rapid growth of U.S. shale oil production.  Since the 2008 financial crisis, U.S. shale oil production has increased by more than 6 million barrels per day.  Without these additional barrels of oil, the massive money printing and asset purchases by the central banks would not have been as successful in propping up the economy and markets.

We must remember this simple fact; energy drives the markets, not finance. Finance steers the market.  So, for the economy to expand, there must be oil production growth.  However, it would be unwise for the market-economy to rely upon the U.S. shale industry as the leading driver of global oil production growth for the foreseeable future.

Why?  Well, there are several reasons, but let’s first look at how much the increase in U.S. shale oil production has accounted for the rise in global oil supply since 2008. Of the 9.6 million barrels per day (mbd) of global oil production growth 2008-2017, the United States supplied two-thirds or 6.3 mbd of the total:

Interestingly, global oil production minus the United States and Canada didn’t increase in 2009, 2010 or 2011.  There was a small bump up in 2012 and finally by 2105-2017 did global oil production minus the U.S. and Canada increase by 1.7 mbd.  Now, let me repeat that.  If we add up ALL THE OTHER COUNTRIES in the world producing oil, the net increase from 2008 to 2017 was only 1.7 mbd. Thus, of the total 9.6 mbd of global oil production growth 2008-2017, the U.S. (6.3 mbd) and Canada (1.6 mbd) accounted for 82% of the total.

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

Uncertain Future for Monetary Policy as POTUS Publicly Calls for Rate Cut While Fed Holds Steady

trump and jerome powell

Photo by The White House

Uncertain Future for Monetary Policy as POTUS Publicly Calls for Rate Cut While Fed Holds Steady

On Tuesday, POTUS took to Twitter and called for the Fed to cut rates by 1%, pointing to 3.2% GDP growth and “wonderfully low inflation.”

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…

….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

However, it’s hard to say if inflation is as “wonderfully low” as POTUS claims.

After all, official sources saw CPI inflation jump to 1.9%, with rapidly rising food prices reported as the leading cause. Plus, the “growing” economy POTUS alludes to appears to have topped out since January 2018 (see red arrow in the chart below – source):

DJIA Weekly Inflation

Additionally, according to an official source, a 3.2% or higher GDP growth rate has happened on 3 differentoccasions before POTUS took office. The same source also reports that GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2019. So really, current GDP growth only appears to be on par with the average.

White House officials including POTUS and top economic advisor Larry Kudlow have recommended the Fed cut rates by half a point in the past. Despite all the information above, CNBC reports that, with his 1% cut recommendation, POTUS has “doubled down” on this approach.

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

Why Fed Chair Powell is a Laughingstock

Why Fed Chair Powell is a Laughingstock

Fake Work

Clarity.  Simplicity.  Elegance.  These fundamentals are all in short supply.  But are they in high demand? As far as we can tell, hardly a soul among us gives much of a rip about any of them.  Instead, nearly everyone wants things to be more muddled, more complicated, and more crude with each passing day.  That’s where the high demand is.

One can always meet the perils of overweening bureaucracy with pretend happiness… [PT]

For example, executing and delivering work in accordance with the terms and conditions of a professional services contract these days is utterly dreadful.  The real work is secondary to fake work, trivialities, and minutia.  Superfluous paperwork and an encumbrance of mandatory web-based tools are immense time and capital sucks.

While each T & C may have been developed for one good reason or another, over time, they’ve piled up into something that’s an unworkable mess.  But like tax law, or local zoning codes, they must be followed with arduous rigor.

Crushing futility… [PT]

What’s more, many livelihoods depend on all the fake work that’s now built into what should be a simple contract.  Auditors, contract administrators, accountants, MBAs, spreadsheet jockeys, risk managers, and many other fake professionals, run about with rank importance.  What would happen to these plate spinners if the fake work disappeared?

Without all the unnecessary rigmarole, the unemployment rate would quadruple overnight.  Hence, like fake money, fake work is piled on by the boatload to stimulate the need for more fake work.  And like a handshake agreement – or sound money – the return to an era of greater clarity, simplicity, and elegance is mere wishful thinking.

Plotted Dots

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

The Rich Get Richer when Central Banks Print Money

The Rich Get Richer when Central Banks Print Money

The Netherlands Central Bank has just published a fascinating new paper, titled “Monetary policy and the top one percent: Evidence from a century of modern economic history”. Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV: https://www.dnb.nl/en/binaries/Working%20paper%20No.%20632_tcm47-383633.pdf), the paper “examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, …estimating the dynamic responses of the top 1% income share to a monetary policy shock.” The authors “exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions.” Note: the macroeconomic policy trilemma “states that a country cannot simultaneously achieve free capital mobility, a fixed exchange rate and independent monetary policy”.

Per authors, “The central idea that guided this paper’s argument is that the existing literature considers the distributional effects of monetary policy using data on inequality over a short period of time. However, inequalities tend to vary more in the medium-to-long run. We address this shortcoming by studying how changes in monetary policy stance over a century impacted the income distribution while controlling for the determinants of inequality.”

They find that “loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices.

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

Weekly Commentary: Transitory Histrionics

Weekly Commentary: Transitory Histrionics

May 3 – Financial Times (Sam Fleming): “Having lamented low inflation as one of the great challenges facing central bankers today in March, Jay Powell on Wednesday wrongfooted many investors with comments that seemed to play down the gravity of the problem. The new message from the Federal Reserve chairman — that ‘transitory’ drags may be slowing price growth, rather than more persistent problems — marked a rude awakening for investors who had been hoping that he would signal an ‘insurance’ interest rate cut this summer because of low inflation. To critics, Mr Powell’s sharp change in tone extends a pattern of unpredictable communications that have made Fed policy more difficult to read. While many accept that investors got ahead of themselves in treating a 2019 rate cut as a fait accompli, the risk is that in his effort to dial back expectations of easier policy Mr Powell undercut the central bank’s broader message: that it will do whatever is necessary to get stubbornly low inflation back on target.”

To many, Chairman Powell’s Wednesday news conference was one more bungled performance. It may not have been at the same level as December’s “tone deaf” “incompetence.” But his message on inflation was muddled and clumsily inconsistent. How on earth can Powell refer to below-target inflation as “Transitory”?

Chairman Powell should be applauded. Sure, he “caved” in January. And while he can be faulted (along with about everyone) for not appreciating the degree of market fragility back in December, markets had over years grown way too comfortable with the Fed “put”/backstop.  

I don’t fault the Powell Fed for having attempted in December to let the markets begin standing on their own. It was about time – actually, way overdue. Fault instead unsound markets and decades of “activist” Fed policymaking.

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

The Great Unknown

The Great Unknown 

QUESTION: Martin, if Europe and Japan have destroyed their bond markets, would it be a good idea for them to get the government out of the bond market and have short term rates be floating in the free market?  The free market would probably help since they don’t know how to move rates correctly.

RG

ANSWER: What will happen is that there is already unfolding a bifurcation in interest rates with a widening spread between real rates (Private Sector) and government. If they allow government rates to float, that means they must abandon QE.

Neither the BoJ nor the ECB is ready to admit total failure. This means that the entire Keynesian-Monetarist tools have failed and they have no economic theory upon which to manage the economy. That means the government cannot control the economy and therein lies the denial of power.

Welcome to the Great Unknown

All That’s Missing Is a Black Swan

All That’s Missing Is a Black Swan

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
– Ludwig von Mises

The Federal Reserve chart above only goes back to 1970, but its message is clear, nevertheless. The velocity of money has dropped below that which was necessary to maintain a productive economy in 2009 and has never recovered.

The velocity of money can be defined as, “the rate at which money circulates or is exchanged in an economy in a given period.” It’s generally measured as a ratio of gross national product (GNP) to a country’s total money supply.

No money turnover… no economy.

But, if that’s so – if the chart is correct and the money turnover is by far the lowest since 1970 – why did the economy recover after 2010 and why are we in a bull market? Surely, the quantitative easing programme initiated by the Fed corrected the problem and happy days are here again.

Well, actually, neither of those commonly-held assumptions is correct. Quantitative easing didn’t pump money back into the failing economy and, more to the point, it wasn’t intended to. Most of the money that was created through quantitative easing never actually hit the streets.

To back up a bit, in 1999, the Fed, then under Alan Greenspan, convinced the US government, then under President Bill Clinton, to repeal the Glass Steagall Act, an act created in 1933 to assure that banks would never again recklessly create loans to the public that could never be repaid.

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

Peter Schiff: The Bigger the Boom, the Bigger the Bust (Video)

Peter Schiff: The Bigger the Boom, the Bigger the Bust (Video)

During the New Orleans Investment Conference, Peter Schiff participated in a panel discussion with Ben Hunt and Mike Larson. They talked about bubbles, booms and busts.

Hunt called it the “bubble of everything.” But he said the “gravitational force” created by all of the assets central banks have purchased over the last year have changed the “bubble-popping process.” That makes it hard to predict when things will actually start to deflate. He said it will take something the undermines the market confidence that central banks can bail us out. Hunt said inflation was possibly the pin that could prick the bubble.

Larson called it the “uber-bubble,” and he said he already sees some of the background concerns that have been simmering for  a long time are starting to “bubble over.” (Pun intended.) He said the last two bubbles were high in amplitude, but limited to certain parts of the economy (dot-coms and housing). The current bubble isn’t as high in amplitude, but it’s broader-based. We see bubbles in stocks, high-yield bonds, housing (again), and commercial real estate, along with a lot of other assets you don’t hear as much about – such as art and comic books.

I think the process of unwinding this is already beginning.”

Peter focused in on the cause of the bubbles.

When you see rampant, wide-scale bad decisions, generally a central banker is behind it, and they have made a bad decision to create too much money and to artificially manipulate interest rates down.”

This creates distortions in the economy because interest rates are really nothing more than price signals.

And like all prices, they need to be determined by the free market.”

Whenever the government – and central banks are really an extension of governments – price fixes something, it creates big distortions and malinvestments. 

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


Third and Final Leg of Stock Market Crash in October or Sooner

Third and Final Leg of Stock Market Crash in October or Sooner

Third and Final Leg of Stock Market Crash in October or Sooner – Part 2 David Brady (25/04/2019)

I shared the first part of this series of articles last week, explaining why I expect the third and final leg of the crash that began in October 2018 to occur in October 2019, or sooner, and see the S&P 500 fall ~30% to lower lows ~2100-2200.

Until then, I expect the S&P to slowly grind higher towards 3000-3150, short-term pullbacks aside.

This matters to Gold because when stocks crash, the Fed will be forced to reverse policy to rate cuts, QE, and more monetary insanity on steroids, and that will catapult precious metals and miners to new highs.

There are many reasons why I expect another “Crash in the Fall” like that in 2018. I began with Liquidity last week, now let’s cover the technical and Elliott wave case for the crash in October (“or sooner”), especially based on how close we are to the peak above circa 3000 plus.

TECHNICALS

Sven Henrich did some excellent work recently on the S&P from a technical perspective, which I am sharing here. 

Drawing the upper trend line (see chart below) from the 2007 highs into the January 2018 and September 2018 highs, and the lower trend line from the 2009 lows, the one that was broken in December 2018 and has been hugged by markets for the past several weeks, they intersect at circa 3100. 

The middle trend line dates back to the 1987 crash and formed following the 2000 crash, then ended up being resistance in 2014-2015 and twice in 2018. Note from that chart that it, too, intersects the other two trend lines at the same point, 3100.

Circa 3100 also represents 261.8% Fibonacci level derived from the 2007 highs and the 2009 lows. 

Three historic trend lines converging at the same key Fibonacci level is a powerful signal. A quadruple convergence, as Sven puts it. And if that wasn’t sufficiently interesting, then consider “when” they converge: October 2019.

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

Economic Iliad & Odyssey

Economic Iliad & Odyssey 

The term “iliad” in Greek mean a series of miseries or disastrous events and “Odyssey” meant a long wandering or voyage usually marked by many changes of fortune. Welcome to the Economic Iliad & Odyssey. What we are facing is truly extraordinary. There is absolutely NO economic theory from Adam Smith to Keynes that ever addressed negative interest rates no less sustaining such a trend. There have been four major players who ventured into the negative interest rates territory but the disasters of this policy in Europe and Japan were implemented in hopes to stimulating the economy. In the case of Switzerland, they were seeking to prevent capital flowing into the Swiss franc as a safe-haven.

We are now on the threshold of the most PROFOUND economic event which has never before in history ever taken place. This is where opinion becomes worthless. All we can do is approach this on a collective basis internationally and without bias.

Central Banking Is Central Planning

Central Banking Is Central Planning

At a time when the appeal of and demands for a new “democratic” socialism seem to have caught the imagination of many among the young and are reflected in the promises of a good number of political candidates running for high office, there is one already-existing socialist institution in America with few opponents: the Federal Reserve System.

The fact is, central banking is a form of central planning. The Federal Reserve has a legal monopoly over the monetary system of the United States. It plans the quantity of money in circulation and its availability for lending purposes; and it sets a target for the annual rate of price inflation (currently around 2 percent), while also intentionally influencing interest rates, affecting investment spending, and supporting full employment. Almost all discussions and debates concerning the Federal Reserve revolve around how it should undertake its monetary central planning: which policy tools should be used, what target goals should be aimed for, and who should be in charge of directing America’s central bank.

Federal Reserve Independence in the Trump Era

A complementary issue that has received renewed attention concerns the question of how much “independence” the Federal Reserve and other central banks should have to determine and implement monetary and interest rate policy. This has recently come to the fore due to comments made by President Donald Trump concerning Federal Reserve interest rate policy and the individuals he has recently proposed for positions on the Federal Reserve Board of Governors.

Several times over the last year, President Trump has expressed irritation and frustration with increases in market rates of interest under the Federal Reserve Board leadership of Jerome Powell, who Trump nominated for Fed chairman and who has held that position since February 2018. 

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase