Home » Posts tagged 'fed'

Tag Archives: fed

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

Liquidity Stress Fractures Begin to Show in the Federal Reserve System

Liquidity Stress Fractures Begin to Show in the Federal Reserve System 

The Fed's great recovery rewind is rapidly depleting the very bank reserves the were built up to protect from bank runs like those in the Great Depression.

In my January Premium Post, “An Interesting Interest Conundrum,” I laid out how the Federal Reserve was losing control over the Fed funds rate — a loss of control over its bedrock interest rate that indicates financial stresses are building in the banking system that increase the risks from runs on the banks:

After the financial crisis, when there was a risk of runs on banks, the Fed … require[d] the banks to hold more money in reserves … as a regulation safeguard when the Fed was trying to avoid total economic collapse. Deposits, after all, are liabilities because depositors are guaranteed they can demand instant cash at will. Depositors get extremely unhappy if this guarantee is not fulfilled. That looks something like this:

Federal Reserve's Great Recovery Rewind is reducing reserves banks hold as protection against runs.

And you don’t want that.

The Fed funds rate is the Fed’s target rate for the amount of interest banks charge each other to make overnight loans to each other from their reserves. In a crisis, when banks need their reserves, the interest they charge each other will naturally skyrocket. To keep the monetary system from freezing up because banks won’t loan to each other, the Fed tries to push that rate down.

During the Fed’s Great-Recovery bond-buying program (quantitative easing), aimed at pushing that rate down, the Fed deposited huge amounts of money created out of thin air into bank reserve accounts to make sure they remained flush so there would be no panic runs on banks, but banks don’t like just sitting on huge piles of money, instead of making even more loans with those piles, especially after the crisis abates. The Fed, however, wanted them to continue to maintain those reserves in case crisis returned.

 …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…

Recession Already in Place, Watch Out – John Williams

Recession Already in Place, Watch Out – John Williams

You might be wondering why the Trump Administration is calling for rate cuts and money printing with all the good news about the economy. Economist John Williams of ShadowStats.com knows why and contends, “We have a recession in place. It’s just a matter of playing out in some of these other funny numbers. The reality is on the downside, where you have mixed pressures right now. People who are really concerned about the economy right now, and that includes President Trump looking at re-election, he’s been arguing that the Fed should lower rates, and I am with him. The Fed created this circumstance. They are pushing for the economy on the upside because they want to continue to keep raising rates. Banks make more money with higher rates, and they are still trying to liquidate the problems they created when they bailed out the banking system back in 2008.”

Williams strips out all the financial gimmicks in his work that make things look better than they really are to give a true picture of the real financial health. Take for example the recent reportedly good news of the trade deficit narrowing. Williams says, “What we saw was the very unusual narrowing of the deficit . . . that’s generally good news . . . but if you look at why the trade deficit was narrowing, it wasn’t that we were having new surging exports . . . instead, we were having collapsing domestic consumption.  People weren’t buying things. People were not buying goods. So, the imports were falling off, and that narrowed the deficit. That is not a healthy sign. The last time you saw something like that was the beginning of the Great Recession (2008–2009). . . . We still haven’t recovered from the Great Recession.”

 …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…

The Company Store

The Company Store

Leaves almost nothing to live on

In the song Sixteen Tons by Merle Travis (and made famous by Tennessee Ernie Ford), the idea of the ‘company store’ referred to a system of debt bondage that effectively trapped workers within an unfair system designed to harvest all of their labor at very low cost.

You load sixteen tons, what do you get?

Another day older and deeper in debt

Saint Peter don’t you call me ’cause I can’t go

I owe my soul to the company store

       Sixteen Tons – Merle Travis

How exactly did the company store system operate?

Under a scrip system, workers were not paid cash; rather they were paid with non-transferable credit vouchers that could be exchanged only for goods sold at the company store. This made it impossible for workers to store up cash savings.

Workers also usually lived in company-owned dormitories or houses, the rent for which was automatically deducted from their pay.

(Source – Wiki)

This model was simple enough to understand.  “Pay” your workers with scrip vouchers, then sell them your marked up goods at the company store, pocketing a nice profit. On top of that, force your employees to live in company housing, too,  also at terms very favorable to the company.

Add it all up and the workers found themselves in perpetual service to their employer. No matter how hard and long they toiled, there was nothing left for their own private benefit after all was said and done.  The company succeeded in skimming off any and all  ‘excess’ for itself.

This vast unfairness eventually led to the formation of unions as well as to regulations providing protection to the workers.

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

One Bank Asks “Is The Fed Losing Control Of The Interest Rate System”

One Bank Asks “Is The Fed Losing Control Of The Interest Rate System”

Last Wednesday, before the Fed “unexpectedly” cut its IOER rate by 5bps o 2.35%, we warned that the “Fed Loses Control Of Rates” when pointing out the ongoing divergence of the effective fed funds rate from the Overnight Repo – IOER rate corridor.

Now, one week later and following the Fed’s admission that even it was surprised by how quickly the overnight funding market plumbing had gotten clogged up, others are starting to ask the very question we posed a week ago.

In a note published overnight by Rabobank’s Phillip Marey, the US strategist – just like us – asks “Is the Fed losing control of the policy rate system?” Needless to say, the answer could have profound implications not only for the future of US monetary policy, but whether or not the dollar can remain as the world’s reserve currency in a world in which the US central bank loses the ability to set the price of money.

Here’s Marey’s full note:

The pause continues

The FOMC statement noted that economic activity rose at a solid rate, but repeated that household spending and business fixed investment slowed in the first quarter. The Fed repeated that job gains have been solid, on average, in recent months, and dropped the reference to the weak February nonfarm payroll figure. The Fed also noted that core inflation has declined and is running below 2%. At the press conference, Powell said that the data are not pushing the FOMC in either direction. The Committee does not see a strong case for a rate move either way.

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

The Fed’s Dangerous Inflation Game

The Fed’s Dangerous Inflation Game

The Fed’s Dangerous Inflation Game

By now you’ve heard that the U.S. economy expanded at an annualized rate of 3.2% in the first quarter of 2019. That was reported by the Commerce Department last Friday morning.

That strong growth coming on top of 4.2% in Q2 2018 and 3.4% in Q3 2018 means that in the past twelve months, the U.S. economy has expanded at about a 3.25% annualized rate. That’s a full point higher than the average growth rate since June 2009 when the expansion began and it’s in line with the 3.22% growth rate of the average expansion since 1980.

It looks as if the “new normal” is back to the old normal of 3% or higher trend growth. Or is it?

The headline growth rate of 3.2% was certainly good news. But, the underlying data was much less encouraging. Most of the growth came from inventory accumulation and government spending (mostly on highway projects). But, business won’t keep building inventories if final demand isn’t there. That’s where the 0.8% growth in personal consumption is troubling.

The consumer didn’t show up for the party in the first quarter.

If they don’t show up soon, that inventory number will fall off a cliff. Likewise, the government spending number looks like a one-time boost; you can’t build the same highway twice. Early signs are that the second quarter is off to a weak start.

Dig deeper and you can see that core PCE (the Fed’s preferred inflation metric) cratered from 1.8% to 1.3%. That’s strong disinflation and dangerously close to outright deflation, which is the Fed’s worst nightmare.

The data just show that the Fed is as far away as ever from its 2% target. But why should it even have 2% as its target?

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

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…

The Fed Is the Bubble

The Fed Is the Bubble

Occam’s Razor: The simplest explanation is often the best explanation. In this case: The Fed panicked in December and by caving to markets reignited the bubble in a major way and now they are losing control as they are trapped and twisted in their own narratives. No rate hikes until 2020 but markets are printing new all time highs less than 4 months following Powell’s famous balance sheet flexibility cave on January 4th, just a couple weeks after President Trump told him “to stop the 50Bs” on twitter.

And markets have done nothing but gone up since then:

View image on Twitter

View image on Twitter

2019

But this appears to be only act one of the drama. Now a mere weeks after a constant drum roll by Kudlow and Trump demanding the Fed to cut rates by 50bp the Fed may actually do just that according to Nomura.

Such a move would surely end whatever may be left of the Fed’s “independence” credibility which one can critically question already following the December cave. Loss of credibility being ironically one of the key risk factors Deutsche sees as a threat to the expansion:

DEUTSCHE: “There are 5 different ways this expansion could end”

1) A sudden blowup in credit markets

2) The US consumer gets tired

3) The US trade war intensifies, in particular with Europe

4) Fed credibility is severely damaged

5) China gets a current account deficit pic.twitter.com/059hmNSU60

Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing still and markets are pricing in a rate cut:

The Fed has already made itself the market’s play thing and hence can’t ill afford to disappoint markets this year and consequently the Fed faces a perhaps impossible choice this week:

Cut rates here by 50bp could only exacerbate the bubble and set markets onto their combustion path following a total credibility loss.

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

Globally Synchronized…

Globally Synchronized…

The economic sickness is predictably spreading. While unexpected in most of the world which still, somehow, depends on central banking forecasts, it really has been almost inevitable. From the very start, just the utterance of the word “decoupling” was the kiss of death. What that meant in the context of globally synchronized growth, 2017’s repeatedly dominant narrative, wasn’t the end of synchronized as many tried to say but the end of growth.

This was more than an economic factor. A fixed system leading into full, meaningful recovery was supposed to heal more than economy. Those political extremists who had multiplied and spread while waiting for it would be revealed as illegitimate, their complaints nothing more than some form of evil “ism.” The New York Times in January 2018 succinctly described its wider significance:

A decade after the world descended into a devastating economic crisis, a key marker of revival has finally been achieved. Every major economy on earth is expanding at once, a synchronous wave of growth that is creating jobs, lifting fortunes and tempering fears of popular discontent.

Well, purported significance anyway. If globally synchronized growth was “tempering fears of popular discontent”, the risks are pretty clear should there not be any. I wrote last September what wasn’t any sort of special insight:

From 2003 to 2009, it went: globally synchronized growth, decoupling, globally synchronized downturn. From 2010 to 2012, it went: globally synchronized growth, decoupling, globally synchronized downturn. From 2013 to 2016, it went: strong global growth (not synchronized), decoupling, synchronized downturn.

Last year [2017] to this year [2018], it has gone: globally synchronized growth, decoupling. What comes next?

The answer is here before us. Yesterday, the Bank of Canada throws in the towel on its end of the global economy. Last October, the Canadians were thinking how they had to get serious with their rate hikes. Now, officials admit in all likelihood there won’t be any more.

Something sure changed.

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

Brace Yourself: The Next Epic Collapse Could Be Weeks Away

Brace Yourself: The Next Epic Collapse Could Be Weeks Away

There wasn’t a group of people more wrong about the 2008 financial crisis than those at the Federal Reserve.

Mere months before the disaster hit in earnest, the nation’s highest economic and financial officials were vocal that there was nothing to worry about.

Most memorable of these are perhaps two comments from former Fed Chairman Ben Bernanke…

In January 2008, he said, “The Federal Reserve is not currently forecasting a recession.”

And later that year, in July, he said Fannie Mae and Freddie Mac – the two government-sponsored enterprises that kicked off the credit crisis a few months later – were “in no danger of failing.”

And it wasn’t just Bernanke. The same delusional sentiment was echoed by almost all the top Fed and Treasury officials… as well as those in the mainstream financial media and academia.

Of course, we all know how things played out…

When the housing bubble burst in 2008, the effects rippled throughout the economy, kicking off the largest financial and economic crisis since the Great Depression.

And the S&P 500 – a good proxy for the U.S. stock market – went on to fall by over 56%.

The reason I’m telling you this today is to remind you that people exhibit laughable sentiments near the peak of bull markets.

And today, we’re hearing much of the same sentiment that was displayed before the 2008 crisis.

But as you’ll see below, it’s not the only sign I’m seeing of a coming crisis…

A Contrarian Indicator

I’ve written before about why I believe we’re near the peak of the largest bubble in human history.

And as I’m about to show you, there are clear indicators of a coming crisis… in the auto sector… the housing sector… and in the economy as a whole.

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

“Everyone Is Thinking It’s The Shanghai Accord All Over Again”

“Everyone Is Thinking It’s The Shanghai Accord All Over Again”

Back on January 9, when the S&P500 was just inches away from its Christmas Day bear market lows, we asked a simple question: is the Shanghai Accord 2.0 coming? Now, with the S&P back at all time highs, China unleashing a historic torrent of new credit after launching monetary and fiscal easing that shocked even the most cynical China skeptics and sent Chinese stocks soaring, and every central bank in the world reversing in the Fed’s footsteps and scrambling to cut rates as the global race to the currency bottom entered what may be its final lap, we have the answer.

Or do we?

For those who are rightfully confused, because while there are countless similarities between the “2016 scenario” and current markets, there are also some very specific differences, here is a great recap of the similarities and differences, excerpted from the latest weekend note by One River asset management’s CIO, Eric Peters:

Deja Vu

“Everyone’s thinking it’s 2016 all over again,” said the CIO. A global growth scare, equity weakness, dollar strength and commodity declines prompted central bankers to hash out the Shanghai accord in early 2016 that dramatically reversed these trends. “They’ve seen China ease this year, the Fed pivot, equities rebound,” he said. By late-April in 2016, the S&P 500 had jumped 17% from the Jan 2016 lows (this year it rallied +20%), and by late-April 2016, Chinese stocks rose +16% (this year +40%). “They’ve looked at this and said green light, risk on.”

“Pulling out the 2016 playbook, people piled into reflation trades,” continued the same CIO. “Short dollar trades, crap beats quality, dash for trash, EM equities and FX, commodities.” By late-April 2016, oil had surged +70% from the Jan 2016 lows (this year +50%), copper rallied +20% then (this year +18%). The dollar index had fallen -6% in 2016 (but this year DXY is up +1%), gold surged +23% (but this year flat). 

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

That Time the Dollar Tide Went Out…

That Time the Dollar Tide Went Out…

dollar-tide-apes-trump

Welcome to the Dollar Rally to end all rallies. This week’s action in the U.S. dollar puts paid all of the moves by the Fed and the ECB over the past three months to forestall this from coming.

First it was January’s FOMC meeting where the Fed completely reversed course after a very unpopular December rate hike threw equity markets into a tailspin by Christmas.

Of course our Narcissist-in-Chief thought it was all about him and implored the Fed to stop raising rates. It was interfering with his ability to shake down the world at his sanctions and tariffs party.

But it wasn’t about him at all. It was about the Fed’s need to normalize rates into a coming global slowdown after a central-bank-induced, decade-long recovery of dubious merit. 

They’d done their job of recapitalizing the banks, somewhat, and now it was time to start trying to address the massive pension system and municipal bond crisis that was on the horizon. 

Or at least that’s what they thought.

Moreover, at some point the Fed had to show the markets something positive. That unwinding its balance sheet alongside significant shift in capital flows thanks to Trump’s tax cuts going into effect in 2019 was a signal to U.S. corporations to invest in something other than balance sheet manipulations themselves — buybacks, special dividends, etc. 

Trump can talk a good game about the ‘greatest economy evahr!’ but reality is even today’s 3.2% GDP print is marred by one-off items like an anomalous contraction of the trade deficit and huge inventory builds as Zerohedge pointed out. 

Let’s not forget how easy it is to get a big GDP print when you’re running the biggest deficits in history.

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

JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity

JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity

Last week we first noted that something unexpected has been going on in overnight funding markets: ever since March 20, the Effective Fed Funds rate has been trading above the IOER. This was unexpected for the simple reason that it is not supposed to happen by definition. 

As a reminder, ever since the financial crisis, in order to push the effective fed funds rate above zero at a time of trillions in excess reserves, the Fed was compelled to create a corridor system for the fed funds rate which was bound on the bottom and top by two specific rates controlled by the Federal Reserve: the corridor “floor” was the overnight reverse repurchase rate (ON-RRP) which usually coincides with the lower bound of the fed funds rate, while on top, the effective fed funds rate is bound by the rate the Fed pays on Excess Reserves (IOER), i.e., the corridor “ceiling.”

Or at least that’s the theory. In practice, the effective FF tends to occasionally diverge from this corridor, and when it does, it prompts fears that the Fed is losing control over the most important instrument available to it: the price of money, which is set via the fed funds rate. And ever since March 20, this fear is front and center because as shown in the chart below, starting on March 20, the effective Fed Funds rate rose above the IOER first by just 1 basis point, and then, last Friday spiked as much as 4 bps above IOER.

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

The Fed is Going to Cut Rates to Negative 3% If Not 5%

The Fed is Going to Cut Rates to Negative 3% If Not 5%

As I warned last week, while most of the investment world has been glued to their trading screens watching the stock market rally.. something nefarious has  been unfolding behind the scenes.

That “something” is the Fed and other regulators implementing plans that will begin allow for large-scale cash grabs when the next downturn hits.

While stocks roared higher, Fed officials began openly calling for more extreme monetary policies including NEGATIVE Interest Rate Policy or NIRP.

NIRP is when a bank charges YOU for the right to keep your money there.

If you think this is conspiracy theory, consider that on February 5th 2019, the IMF published a report outlining how Central Banks could cut rates into DEEPLY negative territory.

We’re not talking negative 0.5%… we’re talking negative 3% or even 5%.

Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.

To get around this problem, a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.

Source: IMF

Any time the elites want to implement a new policy, the IMF is the “go-to” organization to introduce the idea.

It was the IMF that signed off on the disastrous Greek bail-out deals in 2010-2012.

It was also the IMF that “signed off” on the “bail-ins” in Cyprus, in which savings deposits lost as much as 50% in 2013.

Now the IMF is promoting the idea that Central Banks should cut rates into “deeply” negative territory during the next downturn.

 …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