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Is Draghi Really Ending QE?

Mario Draghi said the euro-area economy is strong enough to overcome increased risk,  and therefore this justifies the European Central Bank’s decision to end bond purchases bringing to an end a decade-long failed experiment. The truth behind this statement is starkly different than being portrayed in the press. Draghi also pledged to keep interest rates unchanged at current record lows until his personal term is finished next year. There is the contradiction for if the ECB stops buying debt, who will do so at artificially low rates of interest?

Draghi knows full well that he has utterly destroyed the bond markets in Europe. The ECB has also made it clear that they will REINVEST when the bonds previously purchased mature. The Federal Reserves has taken the opposite position and will NOT reinvest allowing their balance sheet to shrink.

If the economy is that strong, then why not end the QE right now? The fallacy here is that this has nothing to do with the economy. The ECB has simply had the member states on life-support. Interest rates will soar in Europe on long-term debt or there will be no buyers. Pension funds cannot buy 10-year bonds at even 3% when they need 8% to cover liabilities.

The statement by Draghi is creating a total paradox. You cannot keep short-term interest rates where they are and charge negative rates for deposits and simultaneously end QE and expect to sell bonds to the public at insanely low levels.

The press interprets this as the ECB with ending QE because they are “betting that the euro-area economy is robust enough to ride out an apparent slowdown amid risks including U.S. trade tariffs and nervousness that Italy’s populist government will spark another financial crisis” reported Bloomberg.

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

Weekly Commentary: The Great Fallacy

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.
The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 – Financial Times (Sam Fleming): “Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters ‘a public conversation’ about what the US central bank is up to. The Fed’s statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell’s break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy.”
…click on the above link to read the rest of the article…

Nomi Prins: The central banking heist has put the world at risk

“The 2008 financial crisis was the consequence of a loosely regulated banking system in which power was concentrated in the hands of too limited a cast of speculators,” Nomi Prins tell me. “And after the crisis, the way the US government and the Federal Reserve dealt with this corrupt and criminal banking system was to give them a subsidy.”

Such strong, withering analysis is, perhaps, unexpected from someone who has held senior roles at Wall Street finance houses such as Bear Stearns and Goldman Sachs. But Prins is no ordinary former banker.

Prins has chronicled the closed and often confusing world of high finance through the 2008 crisis and beyond

The US author and journalist left the financial services industry in 2001. She did so, in her own words, “partly because life was too short”, and “partly out of disgust at how citizens everywhere had become collateral damage, and later hostages, to the banking system”.

Since then, Prins has chronicled the closed and often confusing world of high finance through the 2008 crisis and beyond. Her writing combines deep insider knowledge with on-the-ground reporting with sharp, searing prose. Alongside countless articles for New York Times, Forbes and Fortune, she has produced six books – including Collusion: how central bankers rigged the world, which has just been published.

Her main target in the new work is “quantitative easing” – described by Prins as “a conjuring trick” in which “a central bank manufactures electronic money, then injects it into private banks and financial markets”. Over the last decade, she tells me when we meet in London, “under the guise of QE, central bankers have massively overstepped their traditional mandates, directing the flow of epic sums of fabricated money, without any checks or balances, towards the private banking sector”.

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

A Hard Rain’s a-Gonna Fall

A Hard Rain’s a-Gonna Fall

The prospects for the rest of the year are awful

Après moi, le déluge

~ King Louis XV of France

A hard rain’s a-gonna fall

~ Bob Dylan (the first)

As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response.

“The Fed just announced: We want economic growth, and we don’t care if there’s inflation… have they ever said that before?”

He then famously uttered the line “You gotta love a put”, referring to the Fed’s declared willingness to print $trillions to backstop the economy and financial makets.

Nine years later we see that Tepper was right, likely even more so than he realized at the time.

The other world central banks followed the Fed’s lead. Mario Draghi of the ECB declared a similar “whatever it takes” policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country’s entire bond market. And no central bank has printed more than the People’s Bank of China.

It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn’t diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected ‘thin-air’ money ever:

Total Assets Of Majro Central Banks

In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.

And everyone learned to love the ‘Fed put’ and stop worrying.

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

ECB & Bonds – People Believe What They Want to Believe

QUESTION: the ECB is arguing that given the low free float of EU bonds (especially German), bonds not owned by the ECB or other central banks, the impact of an end to APP purchases will be nowhere comparable to the tapering sell-off in the US in 2013. Bank research teams are hanging on to this idea to make positive forecasts in the EUR exchange rate versus the USD. They say an end-date for the APP programme may not result in a higher risk/term premium in the European government bond market.
Could you comment on this, please? Many thanks for all your work,
GM

ANSWER: The ECB knows it has to stop the QE program. They also know that Yellen was correct in lecturing them that interest rates had to be “normalized” so they know there is a real meltdown coming. That is inevitable. Pension funds cannot buy 10-year bonds at 1.5% or even 3% locking in losses for 10 years. I really fail to see that claiming there is such a small float, because the ECB has been the 800-pound gorilla buying everything, that interest rates will not rise. That is just complete fallacy. There is a small float because they have DESTROYED the bond market in Europe.

Draghi has proved something incredibly important – Demand-Side Economics has been a complete and utter failure. After 10 years of manipulating interest rates, that they want to put private bankers in prison for under the Libor Scandal, the ECB has failed completely. In just 7 days, the German bunds dropped from 16415 to 15939 – that was 5.9%. The 2013 decline in US 30-year Treasuries back in 2013 was 16%. So what the Bunds did in 7 days in their decline based upon events in Italy reflect that the ECB is trying to paint a picture that yes – rates will rise and bonds will decline.

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

Ben Bernanke: The US Economy Is Going To Go Off The Cliff In 2020

It looks like Ben Bernanke is a Bridgewater client.

Recall that earlier this week we reported that in the May 31 “Daily Observations” letter to select clients, authored by Bridgewater co-CIO Greg Jensen, the world’s biggest hedge had an ominous, if not dire appraisal of the current economic and financial situation facing the US, and concluded that “We Are Bearish On Almost All Financial Assets

While Ray Dalio’s co-Chief Investment Officer listed several specific reasons for his unprecedented bearishness, noting that “markets are already vulnerable as the Fed is pulling back liquidity and raising rates, making cash scarcer and more attractive”, pointing out that “options pricing reflects little investor demand for protection against the potential for the economy to bubble over and also shows virtually no chance of deflation, which is a high likelihood in the next downturn”, what really spooked Bridgewater is what happens in 2020 when the impact from the Trump stimulus peaks, and goes into reverse. This is what Jensen wrote:

while such strong conditions would call for further Fed tightening, there’s almost no further tightening priced in beyond the end of 2019. Bond yields are not priced in to rise much, implying that the yield curve will continue to flatten. This seems to imply an unsustainable set of conditions, given that government deficits will continue growing even after the peak of fiscal stimulation and the Fed is scheduled to continue unwinding is balance sheet, it is difficult to imagine attracting sufficient bond buyers with the yield curve continuing to flatten.”

The result was the hedge fund’s now infamous conclusion:

We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”

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

Train Crash Preview

Train Crash Preview

Today we will summarize something I’ve been thinking about for a long time. Exactly how will we get from the credit crisis, which I think is coming in the next 12–18 months, to what I call the Great Reset, when the global debt will be “rationalized” via some form of nonpayment. Whatever you want to call it, I think a worldwide debt default is likely in the next 10–12 years.

I began this tale last week in Credit-Driven Train Crash, Part 1. Today is Part 2 of a yet-undetermined number of installments. We may break away for a week or two if other events intrude, but I will keep coming back to this. It has many threads to explore. I’m going to talk about my expectations given today’s reality, without the prophetically inconvenient practice of predicting actual dates.

Also, while I think this is the probable path, it’s not locked in stone. Later in this series, I’ll describe how we might avoid the rather difficult circumstances I foresee. While it is difficult now to imagine cooperation between the developed world’s various factions, it has happened before. There are countries like Switzerland that have avoided war and economic catastrophe. We’ll hope our better angels prevail while taking a somber look at the more probable.

The experts who investigate transport disasters, crimes, and terror incidents usually create a chronology of events. Reading them in hindsight can be haunting—you know what’s coming and you want to scream, “Don’t do that!” But of course, it’s too late.

We do something similar in economics when we look back at past recessions and market crashes. The causes seem obvious and we wonder why people didn’t see it at the time. In fact, some people usually did see it at the time, but excessive exuberance by the crowds and willful ignorance among the powerful drowned out their warnings. I’ve been in that position myself and it is quite frustrating.

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

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

A Movie We Have Seen Before – Repatriation Effect?

There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.

The y/y growth rate of TMS-2 increased from 2.68% in February to 4.85% in March. The 12-month moving average nevertheless continued to decline and stands now at 4.1%.

The sole component of TMS-2 showing sizable growth in March was the US Treasury’s general account with the Fed. This is included in the money supply because, well, it is money. The Treasury department will spend it, therefore this is not money that can be considered to reside “outside” of the economy (such as  bank reserves).

We were wondering what was behind the spurt in the amount held in the general account. While there was a decline in the growth rate of US demand deposits, the slowdown in momentum did not really offset the surge in funds held by the Treasury.

This reminded us of a subject discussed by the Treasury Borrowing Advisory Committee (TBAC) in the second half of 2016 in the wake of the change in money market fund regulations. This led to a repatriation of money MM funds previously lent out in the euro-dollar market to European issuers of commercial paper (mainly European banks).

Readers may recall that there was a mysterious surge in the growth rate of the domestic US money supply (again, only visible in TMS 1 & 2) into November 2016, despite a lack of QE and no discernible positive momentum in the rate of change of inflationary bank lending growth.

 

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

Is the US Exporting a Recession?

  • The Federal Reserve continue to raise rates as S&P earnings beat estimates
  • The ECB and BoJ maintain QE
  • Globally, corporations rely on US$ financing, nonetheless
  • Signs of a slowdown in growth are clearer outside the US

After last week’s ECB meeting, Mario Draghi gave the usual press conference. He confirmed the continuance of stimulus and mentioned the moderation in the rate of growth and below-target inflation. He also referred to the steady expansion in money supply. When it came to the Q&A he revealed rather more:-

It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries.

It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators. Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction. Then we had declines in industrial production, in capital goods production. The PMI in exports orders also declined. Also we had declines in national business and confidence indicators.

I quote this passage out of context because the entire answer was more nuanced. My reason? To highlight the difference between the situation in the EU and the US. In Europe, money supply (M3) is growing at 4.3% yet inflation (HICP) is a mere 1.3%. Meanwhile in the US, inflation (CPI) is running at 2.4% and money supply (M2) is hovering a fraction above 2%. Here is a chart of Eurozone M3 since 1999:-

EU M3 Money Supply

Source: Eurostat

The recent weakening of momentum is a concern, but the absolute level is consistent with a continued expansion.

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

The Real Inflation Rate May Signal That the U.S. Economy is in a Death Spiral

The Real Inflation Rate May Signal That the U.S. Economy is in a Death Spiral

real inflation us economy collapse

Just like a car with a bad cooling system, the U.S. economy may be overheating, and could break down soon. Why?

Aside from trade wars, geopolitical tension, and debt, inflation might stand center-stage as the final nail in the U.S. economic “coffin”.

According to Torsten Slok, the Chief International Economist at Deutsche Bank, inflation “is the mother of all risks here”.

You see, the floundering U.S. dollar, tight labor market, Quantitative Easing and trade wars have all paved the way for rising inflation. And, in a recent survey of global fund managers conducted by Bank of America, 82% expect the CPI index to keep climbing over the next year.

But the “inflation nation” might be overheating, as reported by CNBC:

Earlier this month, inflation numbers came in hotter than anticipated, signaling inflation pressures could be mounting. The Labor Department reported its CPI rose 2.4 percent year on year, its fastest annual pace in 12 months.

Even if you factor out energy and food — factors which the U.S. Government likes to leave out to make the CPI inflation rate more appealing — it’s still 2.1%.

That’s the fastest rise since February 2017, higher than the benchmark of 2%, and still rising. Which begs a serious question…

“What is the real inflation rate?”

The Consumer Price Index (CPI) is a set of methods that track the inflation rate, monitored by the Bureau of Labor and Statistics (BLS).us inflation higher matrix

It was designed to help businesses, individuals and the government adjust for the impact of inflation. It worked well until politicians started messing with the methodology in the 1990’s.

In 2011, John Melloy reported on the “real” inflation rate, calculated with the methodology used before 1980 (bolding ours):

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

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

Japan Expects to Hit 2% Inflation in 5 Years, Aggressive Easing Will Continue

The BOJ thinks Japan may hit its 2% inflation target in 5 years. Kuroda says risks are to the downside.

It may take Japan five more years to reach its 2% inflation targetaccording to BOJ governor Haruhiko Kuroda.

“Sometime within the next five years, we will reach [our] 2 percent inflation target,” Governor Haruhiko Kuroda told CNBC’s Sara Eisen over the weekend. Once that level is reached, we will start “discussing how to gradually normalize the monetary condition.”

Inflation remains low. Japan reported its consumer price index, excluding fresh food and energy, rose half a percent in the 12 months through March.

“In order to reach [our] 2 percent inflation target, I think the Bank of Japan must continue very strong accommodative monetary policy for some time,” Kuroda added in his interview with CNBC.

Protectionism, unexpected rapid tightening of monetary policy in some countries, and geopolitical tensions in North Korea and the Middle East pose potential risks, Kuroda said.

It’s pretty amazing how Japan has failed to destroy its currency despite decades of trying. Once again, I repeat my foolproof plan to cure low inflation in Japan.

Mish’s Four Pronged Proposal to End Japanese Deflation

  1. Negative Sales Taxes
  2. One Percent Tax, Per Month, on Government Bonds
  3. National Tax Free Lottery
  4. Hav-a-Kid

Why wait another five years?

Here is my follow-up article that brings MMT into the picture: Note to BoJ: Try Something Different or Look Perpetually Foolish.

Draghi Admits “Growth May Have Peaked”; ECB To Delay QE Unwind

As we have showed repeatedly over the past month, the European economic imploding, and nowhere is this more obvious than the Citi Eurozone Economic Surprise Index why will soon hit its post financial crisis lows.

It appears that after weeks of dithering, someone at the ECB also figured out how to pull up this chart on their Bloomberg because moments ago, and one month after the ECB first admitted that things are not ok when the central bank cut its 2019 inflation forecast, arguably due to protectionism concerns…

… Mario Draghi finally admitted what we all know:

  • ECB’S DRAGHI EURO-AREA GROWTH CYCLE MAY HAVE PEAKED

To be sure, Draghi also brought up the usual spate of platitudes he mentions every time, including that: “Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue”, that protectionism “may have already had some negative impact on global sentiment indicators” and that “while our confidence in the inflation outlook has increased, remaining uncertainties still warrant patience, persistence and prudence with regard to monetary policy.”

His conclusion was the punchline: “An ample degree of monetary stimulus remains necessary.”

Which leads us to the second point. As Draghi was speaking, Bloomberg reported the latest ECB “trial balloon” according to which Central Bank policymakers “see scope to wait until their July meeting to announce how they’ll end their bond-buying program”, according to euro-area officials familiar with the matter.

In other words, so much for the ECB tightening, or being able to tighten, any time soon.

More details:

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

Why Trade Wars Ignite and Why They’re Spreading

Why Trade Wars Ignite and Why They’re Spreading

The monetary distortions, imbalances and perverse incentives are finally bearing fruit: trade wars.
What ignites trade wars? The oft-cited sources include unfair trade practices and big trade deficits. But since these have been in place for decades, they don’t explain why trade wars are igniting now.
To truly understand why trade wars are igniting and spreading, we need to start with financial repression, a catch-all for all the monetary stimulus programs launched after the Global Financial Meltdown/Crisis of 2008/09.
These include zero interest rate policy (ZIRP), quantitative easing (QE), central bank purchases of government and corporate bonds and stocks and measures to backstop lenders and increase liquidity.
The policies of financial repression force risk-averse investors back into risk assets if they want any return on their capital, and brings consumption forward, that is, encourages consumers to borrow and buy now rather than delay purchases until they can be funded with savings.
As Gordon Long and I explain in the second part of our series on Trade Warsfinancial repression generates over-capacity and over-consumption: with credit almost free to corporations and financiers, new production facilities are brought online in the hopes of earning a profit as the global economy “recovers.”
Soon there is more productive capacity than there is demand for the good being produced: this is over-capacity, and it leads to over-production, which as a result of supply and demand, leads to a loss of pricing power: producers can’t raise prices due to global gluts, so they end up dumping their over-production wherever they can.
If the producers are state-owned enterprises subsidized by governments and central banks, these producers can sell at a loss because their only function is to sustain employment; profitability is a bonus.

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

What to Expect From Central Bankers

  • The Federal Reserve continues to tighten and other Central Banks will follow
  • The BIS expects stocks to lose their lustre and bond yields to rise
  • The normalisation process will be protracted, like the QE it replaces
  • Macro prudential policy will have greater emphasis during the next boom

As financial markets adjust to a new, higher, level of volatility, it is worth considering what the Central Banks might be thinking longer term. Many commentators have been blaming geopolitical tensions for the recent fall in stocks, but the Central Banks, led by the Fed, have been signalling clearly for some while. The sudden change in the tempo of the stock market must have another root.

Whenever one considers the collective views of Central Banks it behoves one to consider the opinions of the Central Bankers bank, the BIS. In their Q4 review they discuss the paradox of a tightening Federal Reserve and the continued easing in US national financial conditions. BIS Quarterly Review – December 2017 – A paradoxical tightening?:-

Overall, global financial conditions paradoxically eased despite the persistent, if cautious, Fed tightening. Term spreads flattened in the US Treasury market, while other asset markets in the United States and elsewhere were buoyant…

Chicago Fed’s National Financial Conditions Index (NFCI) trended down to a 24-year trough, in line with several other gauges of financial conditions.

The authors go on to observe that the environment is more reminiscent of the mid-2000’s than the tightening cycle of 1994. Writing in December they attribute the lack of market reaction to the improved communications policies of the Federal Reserve – and, for that matter, other Central Banks. These policies of gradualism and predictability may have contributed to, what the BIS perceive to be, a paradoxical easing of monetary conditions despite the reversals of official accommodation and concomitant rise in interest rates.

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

BofA’s Striking Admission: Markets Will Soon Begin To Panic About Debt Sustainability

In the latest BofA survey of European fixed income investors (both IG and high yiled), the bank’s credit analyst Barnaby Martin writes that “after fretting about inflation at the start of the year, April’s credit survey shows that the biggest concern has reverted back to “Quantitative Failure”, driven by the recent data slowdown.”

Indeed, as the chart below shows, whereas the evolution of “biggest risks” for Euro investors indicated that strong growth at the start of the year provoked worries over rising inflation, “the recent data moderation has meant that these concerns have quickly given way to worries about a lack of inflation – and thus “Quantitative Failure”.”  And yes, it took just three months for the market to make a 180 and worry not about inflation, but deflation, and a Fed that may be pursuing too many rate hikes into 2018. As Martin notes, “the speed at which inflation concerns have flipped highlights the slim margin of error for a “goldilocks” economic backdrop in ’18.”

In retrospect, however, the sudden reversal is probably not that much of a surprise: as we showed this morning, according to the Citi G-10 Eco Surprise index, after hitting the highest level since the financial crisis, economic surprises promptly tumbled into the red just three months later, confirming how tenuous and fleeting the so-called “global coordinated economic recovery” had been all along.

And yet this sudden reversal puts the Fed and central banks in a major quandary. Recall that in a world with over $200 trillion in debt, amounting to well over 300% of Global GDP, the only saving grace is for the debt to get inflated as the alternative is default, either sovereign or private.

…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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