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Nomura: The Fed Will Go Large; Expect A 50bp Cut Out Of The Gate… And Soon

Nomura: The Fed Will Go Large; Expect A 50bp Cut Out Of The Gate… And Soon

it may seem morbid, if not grotesque, to discuss the Fed cutting rates on the day when the S&P just hit a new all time high, but as a result of the previously discussed US bank liquidity and dollar shortage thesis, now also espoused by JPMorgan,  and the coincident “funding-squeeze” dynamic, which as we have shown over the past week has expressed itself via the much-discussed “Fed Funds (Effective) trading through IOER” phenomenon…

… this is precisely the topic of the latest note from Nomura’s Charlie McElligott who writes this morning that with the Fed increasingly concerned about what even the big banks admit is a funding shortage in the US banking system (ironically enough, with over $1.4 trillion in excess reserves still sloshing in the system), Powell may have no choice but to cut rates aggressively, slash the IOER rate – perhaps as soon as this week – and eventually resume QE.

As if to validate McElligott’s point, amid increasing buzz of an imminent rate cut, the dollar keeps rising, and instead of tracking rate cut odds, which are now back to cycle highs, is instead tracking the excess EFF over IOER tick for tick as the clearest indicator of what is now perceived as a widespread liquidity shortage, and in doing so is escalating the recent turmoil across EMFX, as the US Dollar breaks out to fresh highs despite Friday’s worse than expected (below the surface) GDP print.

As discussed over the weekend, McElligott reminds readers that there is now “again a mounting belief in the market for a Fed “technical” IOER cut at some point into the Summer” –

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

Loonie Tumbles As Bank Of Canada Capitulates

Loonie Tumbles As Bank Of Canada Capitulates

Add The Bank of Canada to the list of flip-flopping central banks as it has now fully abandoned its bias toward raising interest rates as the economy grapples with a slowdown, bringing its policy into line with the Fed.

“Governing Council judges that an accommodative policy interest rate continues to be warranted,” officials led by Governor Stephen Poloz said in the statement.

“We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive.”

The Bank of Canada is keeping its key interest rate unchanged as it releases a downgraded 2019 growth forecast that includes a prediction the economy nearly came to a halt at the start of the year.

The Bank of Canada slashed its GDP growth forecast to 1.2% y/y in 2019, from 1.7% previous, and projecting growth of just 0.3 per cent in the first quarter of 2019.

The decision leaves the trend-setting rate at 1.75 per cent for a fourth-straight announcement – a pause that followed governor Stephen Poloz’s stretch of five hikes between mid-2017 and last fall.

The reaction makes sense – a sudden weakening in the Loonie…

And Canadian bond yields are tumbling…

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…

Weekly Commentary: Full Capitulation

Weekly Commentary: Full Capitulation

April 16 – Bloomberg (Rich Miller and Craig Torres): “Federal Reserve Chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year. The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until sub-par inflation rises convincingly.”

April 15 – CNBC (Thomas Franck): “Chicago Federal Reserve President Charles Evans said on Monday that he’d be comfortable leaving interest rates alone until autumn 2020 to help ensure sustained inflation in the U.S. ‘I can see the funds rate being flat and unchanged into the fall of 2020. For me, that’s to help support the inflation outlook and make sure it’s sustainable,’ Evans told CNBC’s Steve Liesman.”

April 15 – Reuters (Trevor Hunnicutt): “The U.S. Federal Reserve should embrace inflation above its target half the time and consider cutting rates if prices do not rise as fast as expected, a top policymaker at the central bank said… ‘While policy has been successful in achieving our maximum employment mandate, it has been less successful with regard to our inflation objective,’ Federal Reserve Bank of Chicago President Charles Evans said… ‘To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2% 50% of the time. Indeed, I would communicate comfort with core inflation rates of 2-1/2%, as long as there is no obvious upward momentum and the path back toward 2% can be well managed.”

It’s stunning how dramatically the Fed’s perspective has shifted since the fourth quarter. There’s now a chorus of Fed governors and Federal Reserve Bank Presidents calling for the central bank to accommodate higher inflation.

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

China & Buying Gold – Why?

China & Buying Gold – Why? 

QUESTION: Mr. Armstrong; I believe you said at the WEC in 2017 that central banks will diversify and increase their gold reserves going into the currency crisis coming in 2021. China has continued to increase its gold reserves. You would please update on that development.

Thank you

PK

ANSWER: Central banks are in a very difficult position. The ECB has really put the entire world at risk. Draghi is now realizing that negative interest rates have seriously harmed the European economy and led to a major growing liquidity crisis in European banking. The euro is regarded as a time bomb for it is neither a national currency nor a stable unit of account. The failure to have consolidated the debts from the outset has simply left the euro vulnerable to separatist movements and sheer chaos.

This is what has been behind the strength in the dollar. Central banks outside Europe have been caught in this dollar vortex. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China also has a debt problem with many provinces and companies who borrowed in dollars. Here in 2019, there is $1.2 trillion in Chinese dollar borrowings that must be rolled over. There is a rising concern that this year there could be a major threat of a dollar funding crunch. The total debt issued in US dollars outside the USA approached $12 trillion at the end of 2018. That is about 50% of the US national debt. The forex risk is huge, no less the interest rate risk on top of that. The more crises we see in Europe, the greater the pressure on the dollar to rise regardless of the Fed trying to stop capital inflows by delaying raising rates.

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

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

There are no extreme “fixes” to secular declines in sales, profits, employment, tax revenues and asset prices. 

The saying “never let a crisis go to waste” embodies several truths worth pondering as the stock market nears new highs. One truth is that extreme policies that would raise objections in typical times can be swept into law in the “we have to do something” panic of a crisis.

Thus wily insiders await (or trigger) a crisis which creates an opportunity for them to rush their self-serving “fix” into law before anyone grasps the long-term consequences.

A second truth is that crises and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras demand extreme solutions. Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.

Speculative credit bubbles inevitably deflate, and this is universally viewed as a crisis, even though the bubble was inflated by easy money, fraud, embezzlement and socializing risk and thus was entirely predictable.

The Federal Reserve and other central banks are ready for bubble-related financial crises: they have the extreme tools of zero-interest rate policy (ZIRP), negative-interest rate policy (NIRP), unlimited credit lines, unlimited liquidity, the purchase of trillions of dollars of assets, etc.

But what if the current speculative credit bubbles in junk bonds, stocks and other assets don’t crash into crisis? What if they deflate slowly, losing value steadily but with the occasional blip up to signal “the Fed has our back” and all is well?

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

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

James Grant, editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns about the growing herd of corporate «zombies» and other fatal market distortions caused by modern monetary policy.

Once again, the expedition to go back to normal has been postponed. After the big market scare at the end of 2018, central banks have abolished their plans to tighten interest rates further. Wall Street loves it. The first quarter has been the best one for risk assets in a decade, and after Lyft’s successful going public, a record year for IPOs seems to be in sight. Jim Grant observes the madding crowd from a sober distance. «Interest rates are the traffic signals of a market economy. Turn them all green, and errors and pileups abound», says the sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer. He states that a decade after the financial crisis, many companies are so heavily addicted to easy monetary policies that they wouldn’t be able to survive on their own. Consequentially, the proficient value seeker has a hard time to find attractive investments in today’s markets. Where he spots rare opportunities, he tells «The Market» in this extended interview.


Mr. Grant, once again, the Federal Reserve is giving investors the green light. US equities are off to their best start since 1998. What’s your take on the current state of the global financial markets?
Stocks are up, bond yields are down and economists are speaking of full employment: Everything seems perfect and improving. But I remain a non-believer in these modern monetary methods. If it were this easy, mankind would have solved the economic problems a long time ago.

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

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

A few years ago, shortly after the 2008 subprime lending disaster, the Fed sent a public relations team around the country to conduct supposedly “educational sessions” about how the Fed works and the wonderful things it does. The public was invited, and there was a question and answer session at the end of the presentation. One such session was held in Des Moines, Iowa. At the time I was teaching a course in Austrian economics at the University of Iowa, so I lusted at the prospect of hearing complete nonsense and having a shot at asking a question. I was not disappointed.

The educational part of the session lasted about an hour, and it became clear to me that the panel of four knew almost nothing about monetary theory. They may even have been hired especially for this grand tour, because all were relatively young, well scrubbed, and very personable–let’s face it, not your typical Fed monetary policy wonks or bank examiners! The panelists discussed only one of the Fed’s two remits–its remit to promote the economic advancement of the nation. Its other remit is to safeguard the monetary system. However, the panelists did touched upon the Fed’s control of interest rates and ensuring that money continued to flow to housing and other high profile areas of the economy.

Finally, at the end of the presentation, those with questions were asked to form a queue and advance one at a time to a microphone. I was last in a line of about a dozen. Here’s my recollection of what followed:

Me: You say that you (the Fed) have the power to increase the money supply. Is that right?

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

Combustion

Combustion

This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.

But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.

Fact is central banks are hopelessly trapped:

10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
Anyone?

View image on Twitter

Implications:
1. The Fed stopping here is an admission of failure
2. Full normalization would crash global equities
3. Central banks are trapped & are forced to remain accommodative
4. Central bank policy is still in crisis mode
5. It’s all a propped up shell game

The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.

So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:

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

Can Expansionary Fiscal and Monetary Policies Counter Recessions?

CAN EXPANSIONARY FISCAL AND MONETARY POLICIES COUNTER RECESSIONS?

When signs of economic weakness emerge, most economics experts are quick to embrace the ideas of John Maynard Keynes.

For most economists the Keynesian remedy is always viewed with positive benefits- if in doubt just push more money and boost government spending to resolve any possible economic crisis.

In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes a part of the earnings of another individual, and spending by another individual becomes a part of the first individual’s earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts their spending.

Following this logic, in order to prevent a recession from getting out of hand, the government and the central bank should step in and lift government outlays and monetary pumping, thereby filling the shortfall in the private sector spending.

Once the circular monetary flow is re-established, things should go back to normal and sound economic growth is re-established, so it is held.

Can government really grow an economy?

The whole idea that the government can grow an economy originates from the Keynesian multiplier. On this way of thinking an increase in government outlays gives rise to the economy’s output by a multiple of the initial government increase.

An example will illustrate how initial spending by the government raises the overall output by a multiple of this spending. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditure by $100million. Individuals now have more money to spend because of an increase in government outlays.

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

Interest Rates, Funny Money, and Economic Malaise

Interest Rates, Funny Money, and Economic Malaise

Since the 2007–8 financial crisis, more and more economists have entertained the idea that there might be some connection between artificially low interest rates and business cycles. By “artificially low” I mean interest rates that are pushed below their natural levels by expansionary monetary policy. The relationship between monetary policy and interest rates is tricky; beyond the immediate short run, it is hard to say whether liquidity effects (which tend to push down rates) or rising income effects (which tend to push up rates) dominate. But in the short run, to the extent that expansionary monetary policy is a surprise, there should be a fall in market interest rates that is not justified by economic fundamentals — namely, real saved resources available for investment projects.

The way the business cycle unfolds looks like this: The monetary authority injects new money into capital markets in an attempt to give the economy a shot in the arm. Investors see artificially low rates and increase their investments in projects that will pay out in the future. But households are not saving any more real resources. In fact, households will probably respond to low interest rates in the same way: the costs of reallocating purchasing power from future you to present you have fallen, so you are more likely to borrow to equalize your intertemporal marginal utility of consumption. With both consumers and investors using up more real resources in ways that are fundamentally at odds with each other’s plans, something’s got to give. The comovement of consumption and investment beyond the economy’s production possibility frontier is ultimately unsustainable. When everyone wakes up to the fact that the low interest rates were the result of funny money, rather than real economic forces, the bubble bursts.

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

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

Jerome Powell has denounced MMT has “just wrong”, but many Wall Street luminaries have surprisingly communicated an openness to the proposal. Most recently Ray Dalio proposed a marriage of monetary and fiscal policy that sounded suspiciously similar to MMT. Bill Gross, once a vocal critic of the Federal Reserve’s stimulus program, told Bloomberg shortly after he retired from managing outside money that higher taxes and the advent of MMT might be ‘necessary evils’  to combat the widening economic gap between the rich and the poor.

MMT has been perhaps the most widely discussed topic in the realm of economics since Alexandria Ocasio-Cortez proposed it as a possible mechanism for financing her ‘revolutionary’ Green New Deal. But this past week, President Trump’s exhortation that the Federal Reserve usher in QE4 by cutting interest rates stoked a frenzy of speculation that the world’s most powerful central bank might be closer to outright debt monetization – aka ‘helicopter money’ – than mainstream economists had realized. Of course, debt monetization is a central plank of the MMT program.

But just days before Trump made his now-infamous QE4 comment, Gluskin Sheff chief economist David Rosenberg offered a prediction during an interview with MacroVoice’s Erik Townsend that, in retrospect, seems surprisingly prescient. 

David Rosenberg

David Rosenberg

During a discussion about how the Fed ‘pause’ impacted Sheff’s monetary policy outlook, Rosenberg, a frequent guest on CNBC, declared that, instead of giving QE another try, the central bank would opt for something even more radical by embracing MMT. And not without good reason. Just because the Fed is ostensibly insulated from political considerations, doesn’t mean it’s not obligated to protect its credibility.

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

Utopian Vision

Utopian Vision

There is nothing that a human mind can’t conceive. It can shoot for the stars or dive in the ocean which twinkles in the shadows of stars and ascend back with sparkling mind bearing uncanny ambition only to float contended.  

Today, we live in fear of losing wealth, we worry what economic consequences would do to our cash, we look through a microscope and scrutinize every word, every policy, every regulation or find something to put above ‘every’ and list out the glaring negatives with a slight trace of approval. If only one could notice the lens of the microscope, would then one could tell reel and real apart. 

Such is the case of negative interest rates. It is dealt differently by different flock of loaded individuals, generally in ways which would not only prevent losses but essentially gain cash. This flock stands on one side of the transaction contemplating means to win regardless of the loss that still deliberating other doomed flock endures. Well, this is how the world works. It is a Bernoulli trial. But there exists a splash of humble wit folks floating beneath the starry sky delighted by the victory of each one and beaten down none. 

Theory? Without thinking too much, negative rates indicate that the economy is unable to generate sufficient income to service its debt. Almost always, all roads leads us back to debt sustainability levels. In order for an economic system to reduce debt, it requires growth or inflation or currency devaluation. For an economic system to exercise one of the two (growth not included), capital transfer is to be facilitated. This capital movement in negative rates environment is from the savers to the borrowers. Your invested value, the money you gave to borrowers would have a value lower than the face value. Barbaric! Savers should be the winners not the borrowers!

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

The Japanification of the World

The Japanification of the World

Zombification / Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what’s failed.

A recent theme in the financial media is the Japanification of Europe.Japanification refers to a set of economic and financial conditions that have come to characterize Japan’s economy over the past 28 years: persistent stagnation and deflation, a low-growth and low-inflation economy, very loose monetary policy, a central bank that is actively monetizing debt, i.e. creating currency out of thin air to buy government debt and a government which funds “bridges to nowhere” and other stimulus spending to keep the economy from crashing into outright contraction.

The parallels with Europe are obvious, but they don’t stop there: the entire world is veering into a zombified financial, economic, social and political status quo that is the core of Japanification.

While most commentators focus on the economic characteristics of Japanification, social and political stagnation are equally consequential. If we only measure economic/financial stagnation, it appears as if Japan and Europe are holding their own, i.e.maintaining the status quo via near-zero growth and near-zero interest rates.

But if we measure social and political decay, the erosion is undeniable. Here’s one example. Few Americans have access to or watch Japanese TV, so they are unaware of the emergence of the homeless as a permanent feature of urban Japan. The central state propaganda media is focused on encouraging tourism, a rare bright spot in Japan’s moribund economy, and so you won’t find much media coverage of homelessness or other systemic signs of social breakdown.

If you watch Japanese detective / police procedural dramas, however, you’ll find constant references to homeless people and homeless encampments: detectives seek witnesses to a crime in the nearby homeless encampment; a homeless man living in an abandoned warehouse is found murdered, etc.

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

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

There’s is one big reason why the U.S. will go into another recession eventually, but it’s the same reason you will have some time to prepare for it as well. Making money more expensive to borrow will lead to a recession, but the Federal Reserve isn’t raising rates.

That’s great news, but far too many Americans have already overspent and are in massive amounts of debts. Student loan debt is dragging down the economy and will eventually come to a head, regardless of the interest rates arbitrarily chosen by the central bankers at the Fed.

But according to Market Watch, the refusal to make money more expensive to borrow also buys the United States time before the next recession. Ed Yardeni opined that the inverted yield curve drove the Fed’s decision to keep interest rates where they are at as opposed to raising them.

In my recent book, Predicting the Markets, I wrote: “The Yield Curve Model is based on investors’ expectations of how the Fed will respond to inflation. It is more practical for predicting interest rates than is the Inflation Premium Model. It makes sense that the federal funds rate depends mostly on the Fed’s inflation outlook, and that all the other yields to the right of this rate on the yield curve are determined by investors’ expectations for the Fed policy cycle.” –Ed Yardeni, Market Watch

Yardeni suggested that after studying the relationship between the yield curve and the monetary, credit, and business cycles, the conclusion is that credit crunches, not inverted yield curve, and not aging economic expansions that cause recessions. The inverted yield curve also has a great track record when it comes to predicting recessions. 

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

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