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This Fed is on a Mission

This Fed is on a Mission

QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.

The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.

The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.

Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.

The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it.

The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike.

This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.

Even hurricanes won’t push the Fed off track.

The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

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

Federal Reserve Will Continue Cutting Economic Life Support

Federal Reserve Will Continue Cutting Economic Life Support

I remember back in mid-2013 when the Federal Reserve fielded the notion of a “taper” of quantitative easing measures. More specifically, I remember the response of mainstream economic analysts as well as the alternative economic community. I argued fervently in multiple articles that the Fed would indeed follow through with the taper, and that it made perfect sense for them to do so given that the mission of the central bank is not to protect the U.S. financial system, but to sabotage it carefully and deliberately. The general consensus was that a taper of QE was impossible and that the Fed would “never dare.” Not long after, the Fed launched its taper program.

Two years later, in 2015, I argued once again that the Fed would begin raising interest rates even though multiple mainstream and alternative sources believed that this was also impossible. Without low interest rates, stock buybacks would slowly but surely die out, and the last pillar holding together equities and the general economy (besides blind faith) would be removed. The idea that the Fed would knowingly take such an action seemed to be against their “best self interest;” and yet, not long after, they initiated the beginning of the end for artificially low interest rates.

The process that the Federal Reserve has undertaken has been a long and arduous one cloaked in disinformation. It is a process of dismantlement. Through unprecedented stimulus measures, the central bank has conjured perhaps the largest stock and bond bubbles in history, not to mention a bubble to end all bubbles in the U.S. dollar.

Stocks in particular are irrelevant in the grand scheme of our economy, but this does not stop the populace from using them as a reference point for the health of our system. This creates an environment rife with delusion, just as the open flood of cheap credit created considerable delusion before the crash of 2008.

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

When This Debt Bubble Bursts, Central Banks Will Turn to Money Printing… Again

When This Debt Bubble Bursts, Central Banks Will Turn to Money Printing… Again

Let’s face the facts.

The only reason the financial system has held together so well since 2008 is because Central Banks have created a bubble in bonds via massive QE programs and seven years of ZIRP/NIRP.

As a result of this, the entire world has gone on a debt binge issuing debt by the trillions of dollars. Today, if you looked at the world economy, you’d find it sporting a Debt to GDP ratio of over 327%.

Well guess what? The REAL situation is even worse than this. The Bank of International Settlements (the Central Banks’ Central Bank) just published a report  revealing that globally the financial system has $13 trillion MORE debt hidden via junk derivatives contracts.

Global debt may be under-reported by around $13 trillion because traditional accounting practices exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said on Sunday.

Source: Yahoo! Finance.

As has been the case for every single crisis since the mid’90s, the problem is derivatives.

Consider that as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives.

Born said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would “implode.”

Fast-forward to 2007, and once again unregulated derivatives trigger a massive crisis, this time regarding the Housing Bubble

And today, we find out that once again, derivatives are at the root of the current bubble (debt). And once again, the Central Banks will be cranking up the printing presses to paper over this mess when the stuff hits the fan.

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

Bubble Fortunes


Wynn Bullock Child on a Forest Road 1958
 

A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation. His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..” Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma? But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

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

Why Quantitative Easing In The Eurozone Will Be Extended

Why Quantitative Easing In The Eurozone Will Be Extended

The staff of the European Central Bank has now released the new macro-economic projections for the Eurozone and whilst the introduction sounds optimistic about an ever-increasing GDP and a relatively stable GDP growth rate, reading between the lines suggests we could see an extended Quantitative Easing program.

The ECB is probably correct when it claims the economic recovery will remain ‘robust’, but it also mentions the ‘favorable financing conditions’ as one of the main drivers of this economic recovery. This is quite the ‘catch 22’ scenario. The economy is recovering due to the low interest rate policy of the ECB, but without this ‘easy money policy’, the recovery would be either much slower or non-existing at all. Whilst we have heard several voices from ECB committee members the central bank is getting close to the point it will start to increase the interest rates again, the working paper from the ECB staffers is pretty clear on the need for continuous (monetary) support to protect the current economic recovery.

Source: ECB paper

What’s even more intriguing is the fact the ECB’s assumptions are taking an even LOWER interest rate into account. The study was based on the market circumstances and market expectations as of half August, and back then, the market was taking an average 10 year government bond yield of 1.3% in 2018 and 1.6% in 2019 into consideration. However, this has now been revised downward with approximately 10-20 basis points. This could indicate the market has started to price in a longer period of easy and free money.

And that’s an important starting point. As the loans to businesses (and individuals) are priced based on the anticipated ‘risk-free’ interest rate of a government bond, the lower expectations for sovereign debt yields will trickle down to the ‘real’ economy (underpinning the growth expectations), but it’s unlikely this effect will still be noticeable should the ECB reduce its QE program.

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

What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?

What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?

The Federal Reserve is likely to decide next week to begin letting assets roll of its balance sheet as bonds mature, instead of reinvesting the proceeds. This means that the balance sheet will begin to shrink in size and other market participants will be forced to absorb the supply of new issuance of treasury and mortgage backed securities. Conventional analysis of supply and demand dynamics might suggest the exiting of a large marginal buyer of these securities would cause yields to rise to some higher equilibrium level, but the QE experience suggests something else entirely. When the Fed was engaged in asset purchases and the rate of change in the Fed’s balance sheet was rising (late 2010, mid 2012 through early 2013) long-term treasury yields rose on the back of juiced growth and inflation expectations produced by the stimulus. When the rate of change in the Fed’s balance sheet would flat line or fall (most of 2010, most of 2013 through 2014) treasury yields fell on the back of subdued growth and inflation expectations. Importantly, it was both real rates (TIPS) and breakeven inflation that followed this pattern, which is indicative of the level of economic stimulus produced by QE. Chart 1 below shows 10-year nominal rates (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis). Chart 2 below shows 10-year real rates (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis). Chart 3 below shows 10-year implied breakeven inflation expectations (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis).

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

 

 

Gold Jumps After Mnuchin Says “Less Concerned About Inflation Than Economic Growth”

Gold Jumps After Mnuchin Says “Less Concerned About Inflation Than Economic Growth”

In a potentially revealing glimpse of what is to come from the next Fed head, Treasury Secretary Steven Mnuchin, speaking during a Politico forum, told the audience:

“Although we respect the Fed’s independence, we are concerned about economic growth. We’re doing everything we can — whether it’s tax reform, whether it’s regulatory relief, whether it’s trade — to create economic growth. And we’re less concerned about inflation at the moment.”

Seemingly suggesting that the administration will do “whatever it takes” to get economic growth (cough QE moar cough), no matter what inflationary impact.

The reaction was quick – Gold jumped to the high of the day and USDJPY spiked lower – but no follow through for now…

Mnuchin also replayed Trump’s comments on Yellen, saying he “respected her” and “enjoys working with her” perhaps in some further conditioning for the market that Yellen may be asked to stay around (as long as she remains uber-dovish, perhaps).

Bill Blain Crawls Back Into His Pit: “There Is Apparently Nothing To Worry About”

Bill Blain Crawls Back Into His Pit: “There Is Apparently Nothing To Worry About”

What do we know different this morning?

There is apparently nothing to worry about. Everything is coming up roses. These are not the droids you are looking for – says my market guru Steve Previs. All the old market bears, like me, are looking for stuff to grumble about – terrified by the unintended consequences of QE, caught in the headlights of apparently overbought markets, of whatever else panics them… etc.

But what do we know?

We know nothing – the markets continue to make new highs supported by a blaze of good news and positive expectations. The disappointing China data and threat of poor US data is momentary… apparently.. But, but and but again…  mood and sentiment can change on a dime…

I shall crawl back into my pit and ponder…

I could list a whole run of things likely to worry the markets in coming months. As usual, 99% of things the market unwisely labels “known unknowns” prove nothing more that whispy worries and momentary concerns – that with the benefit of hindsight we built up out of all proportion.

But, I am still convinced there is trouble ahead in bonds. The fact countries like Tajikistan and Ukraine are doing blowout deals is one thing – it shows price compression is out of sync and we are approaching a Ukrainian Chicken Farm Moment in the new issue bond market. It’s inevitable. The UCFM is an immutable law of bond physics.

I suspect there is trouble ahead in Investment Grade as well – which spells trouble for delicate sovereign sentiment. I got lots of positive feedback on my comments on the Austria “2% for 100” years deal yesterday, including a very astute observation from a US client as I tried to whet his interest:

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

BofA: Even The Bubbles Are Becoming More “Bubbly” Thanks To Central Banks

BofA: Even The Bubbles Are Becoming More “Bubbly” Thanks To Central Banks

Back in June, Citi’s credit strategist Hans Lorenzen pointed out that while QE had failed to spark inflation across the broader economy, it had achieved something else: “the principal transmission channel to the real economy has been… lifting asset prices.” That however has required continuous CB balance sheet growth, and with the Fed, ECB and BOJ all poised to “renormalize” over the next year, the global monetary impulse is set to turn negative in the coming year. Meanwhile, as financial markets scramble to maximize every last ounce of what central bank impulse remains, we get such bubbles as London real estate, bitcoin and vintage cars, or as Citi puts it: “the wealth effect is stretching farther and farther afield.” 

Three months later, the latest to tackle the issue of central bank bubble creation, is BofA’s Barnaby Martin, who in a note released overnight asks rhetorically “are bubbles becoming more “bubbly”?

Just like Lorenzen, Martin observes the blanket central bank “lower for longer” rates intervention, which leads to “speculative behavior in assets.” Well, technically, Martin hedges by calling it a “risk”, but one look at the chart above and below shows that the bubbles created by central banks are all too real. And as Martin, whose topic is the unprecedented buying spree across credit, notes it’s not just credit markets that are seeing exceptional investor demand at this point in the cycle: so is everything else, or as he puts it:

As chart 3, over the page shows, asset bubbles seem to be becoming more “bubbly” as time goes by.”

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

ECB – Draghi & Tapering

The European Central Bank (ECB) is expected to begin reducing its bond purchases gradually tampering its stimulation program of Quantitative Easing (QE). Nevertheless, reliable sources tell of the ECB being extremely cautious fearing what will happen if buyers do not appear and rates begin to rise sharply. The difference between the ECB and the Fed is stark. The ECB owns 40% of Eurozone government debt. The Fed does not even come close.

Obviously, the European financial markets have become addicted to the unprecedented inflow of cheap money even though there has been no appreciable rise in economic growth or inflation as was expected. This raises the question only asked behind the curtain: Will the economy spiral downward if QE ends? The Fed never reached the levels of ECB’s QE program so there is no comparison with the States.

The ECB expects to gradually lower the constant QE purchases of government debt in the Eurozone, which has really kept the governments on life-support. In part, this is why Macron is pushing to federalize Europe in its budgetary and financial markets. There is a fear that there will be severe distortions on the exchanges in the months ahead. What is hoped is that the Euro will decline and make the difficult weaning more tolerable by increasing exports and creating inflation. A lower currency will help to stimulate the Eurozone whereas a rising currency will only add to the deflationary pressures.

The ECB will most likely allow bonds to simply mature rather than sell them back to the marketplace. Any news of the ECB actually selling bonds would send a wave of panic through the European markets. Thus, the only practical way to approach this is to (1) reduce purchases and (2) allow current holding to mature and hopefully they money will be reinvested by the private sector.

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

Jackson Hole and the Appalachians


Henri Cartier-Bresson Trafalgar Square on the Day of the Coronation of George VI 1937
 

The Jackson Hole gathering of central bankers and other economics big shots is on again. They all still like themselves very much. Apart from a pesky inflation problem that none of them can get a grip on, they publicly maintain that they’re doing great, and they’re saving the planet (doing God’s work is already taken).

But the inflation problem lies in the fact that they don’t know what inflation is, and they’re just as knowledgeable when it comes to all other issues. They get sent tons of numbers and stats, and then compare these to their economic models. They don’t understand economics, and they’re not interested in trying to understand it. All they want is for the numbers to fit the models, and if they don’t, get different numbers.

Meanwhile they continue to make the most outrageous claims. Bank of England Governor Mark Carney said in early July that “We have fixed the issues that caused the last crisis.” What do you say to that? Do you take him on a tour of Britain? Or do you just let him rot?

Fed head Janet Yellen a few days earlier had proclaimed that “[US] Banks are ‘very much stronger’, and another financial crisis is not likely ‘in our lifetime’. “ While we wish her a long and healthy life for many years to come, we must realize that we have to pick one: it has to be either a long life, or no crisis in her lifetime.

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

Did the Economy Just Stumble Off a Cliff?

Did the Economy Just Stumble Off a Cliff?

The signs are everywhere for those willing to look: something has changed beneath the surface of complacent faith in permanent growth.
This is more intuitive than quantitative, but my gut feeling is that the economy just stumbled off a cliff. Neither the cliff edge nor the fatal misstep are visible yet; both remain in the shadows of the intangible foundation of the economy: trust, animal spirits, faith in authorities’ management, etc.
Since credit expansion is the lifeblood of the global economy, let’s look at credit expansion. Courtesy of Market Daily Briefing, here is a chart of total credit in the U.S. and a chart of the percentage increase of credit.
Notice the difference between credit expansion in 1990 – 2008 and the expansion of 2009 – 2017. Credit expanded by a monumental $40+ trillion in 1990 – 2008 without any monetary easing (QE) or zero-interest rate policy (ZIRP). The expansion of 2009 – 2017 required 8 long years of massive monetary/fiscal stimulus and ZIRP.
This chart of credit change (%) reveal just how lackluster the current expansion of credit has been, despite unprecedented trillions of stimulus pumped into the financial sector.
Here are two other snapshots of debt: margin debt and private credit. Both have hit new highs.
Note the tight correlation of margin debt to the S&P 500 stock index: when punters borrow more on margin to buy more stock, stocks keep rising.
When credit stops expanding, the economy stumbles into recession.
Back in the real world, have you noticed a slowing of animal spirits borrowing and spending? Have you tightened up your household budget recently, or witnessed cutbacks in the spending habits of friends and family? Have you noticed retail parking lots aren’t very full nowadays, and once-full cafes now have empty tables?

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

Draghi: Trillions In QE Have Made Economies “More Resilient”

Draghi: Trillions In QE Have Made Economies “More Resilient”

When last night we previewed this week’s annual Jackson Hole symposium at which Mario Draghi is scheduled to speak just before the market close on Friday, we said that the ECB head is warming up for the trip by speaking at the Lindau economics symposium in Germany this morning “and as such he could front run himself.” Unfortunately for many who were expecting some advance highlights, Draghi disappointed those who hoped he would preview his Jackson Hole appearance.

So what did Draghi talk about? Instead of previewing the ECB’s inevitable taper (especially as the central bank will soon run out of Bunds to buy at the current pace of monetization), the central banker defended growing criticism of his unorthodox monetary policy, and said the ECB’s policies such as QE and NIRP, saying they have been a success on both sides of the Atlantic, and that the purchase of some $15 trillion in assets has somehow made economies “more resilient.”

Speaking to the Lindau audience of 17 Nobel laureates and 350 young German economists, a nation which has been one of the stiffest critics of ECB policies such as quantitative easing, Draghi’s speech avoided any specific hints on current ECB deliberations, and instead said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.”

He then launched into a vocal defense of QE, saying that “when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power”

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

Bill Blain: There Is A “Last Days Of Rome” Feel To The News These Days…

Bill Blain: There Is A “Last Days Of Rome” Feel To The News These Days…

By Bill Blain of Mint Partners

Blain’s Morning Porridge – August 22nd 2017

“”Forty-two,” said Deep Thought, with infinite majesty and calm.… ”

I’m wondering if I’ve stumbled into a parallel universe after coming back to the office yesterday. Its too damn quiet out-there! Everybody else is apparently still on holiday. It’s scary. Every headline is about thin markets or how markets have shrugged off last week’s sell off.. (what about next week’s?) There doesn’t seem to be anyone actually at their desks… That’ll change…

This week? Since no one is out there.. I can say what I like.. It’s no wonder news flow noise is being magnified out of proportion..

It used to be the summer was the right time for big Jackson Hole style gatherings – safe on the basis holiday markets weren’t paying much attention. Central bankers/economists/investors and other influencers could gab and pontificate without upsetting anyone. But today.. well maybe there are just too many journalists, bloggers and other market parasites just desperately keen to make sure folk are acting upon their supremely important insights into what Stephen Mnuchin’s wife was wearing during his visit to Fort Knox and what it means for global asset prices.

There is a “last days of Rome” feel to the news these days…

But some stuff is still well worth thinking about, so I have to comment on a great Bloomberg Article this morning: “Unintended Consequences of Quantitative Easing” by Jean-Michel Paul.

Regular readers of the morning porridge will know I’ve been deeply suspicious about QE since Day 1. I’ve been writing about the dangers of QE and asset price inflation, for years. Cassandra like, I’m probably right to be concerned, but was anyone listening?

THEY ARE NOW!

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

Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

“Let markets clear.” It’ll be just “a financial engineering shock.”

Stock and bond markets are in denial about the effects of the Fed’s forthcoming QE unwind, whose kick-off is getting closer by the day, according to the minutes of the Fed’s July meeting.

“Several participants” were fretting how financial conditions had eased since the rate hikes began in earnest last December, instead of tightening. “Further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions,” they said. So something needs to be done about it.

And “several participants were prepared to announce a starting date for the program at the current meeting” – so the meeting in July – “most preferred to defer that decision until an upcoming meeting.” So the September meeting. And markets are now expecting the QE unwind to be announced in September.

Since then, short-term Treasury yields have remained relatively stable, reflecting the Fed’s current target range for the federal funds rate of 1% to 1.25%. But long-term rates, which the Fed intends to push up with the QE unwind, have come down further. As a consequence, the yield curve has flattened further, which is the opposite of what the Fed wants to accomplish.

The chart shows how the yield curve for current yields (red line) across the maturities has flattened against the yield curve on December 14 (blue line), when the Fed got serious about tightening:

Yields of junk bonds at the riskiest end (rated CCC or below) surged in the second half of 2015 and in early 2016, peaking above 20% on average, as bond prices have plunged (they move in opposite directions) in part due to the collapse of energy junk bonds, which caused a phenomenal bout of Fed flip-flopping.

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

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