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Collapse In Global M1 Signals A Worldwide Recession Has Arrived

By now everyone has seen some iteration of this chart showing that the annual change in central bank liquidity is now negative.

Another way to visualize just the Fed’s balance sheet contraction is courtesy of this chart from Morgan Stanley which shows specifically which assets – Treasurys and MBS – are declining on a monthly basis.

When it comes to markets – where the events of December were a vivid reminder that just as QE blew the world’s biggest asset bubble, so QT will deflate it  – there is a simple explanation of this negative effect of QT on Markets – in terms of both flow and stock – and it is laid out as follows from Morgan Stanley:

  • THE STOCK EFFECT (SE) – GROUP 1
    • The SE relates to the long-term impact on Group 1 asset prices from the overall change to the central bank’s balance sheet and its impact on the stock of available Group 1 assets.
  • THE FLOW EFFECT (FE) – GROUP 1
    • The FE relates to the short-term impact on Group 1 asset prices from each flow that changes the size of the central bank’s balance sheet.
  • THE PORTFOLIO BALANCE CHANNEL EFFECT (PBCE) – GROUP 1 AND 2
    • The PBCE impacts both Group 1 and Group 2 assets and incorporates the pricing elements of both the stock effect and the flow effect.

But while the immediate effect of the expansion and shrinkage of the Fed’s balance sheet on various asset classes is rather intuitive – if not to Fed presidents of, course – a more pressing question is how will the upcoming liquidity shrinkage affect the global economy.

Unfortunately, the answer appears to be ominous.

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

Market Commentary: Issues 2019

Market Commentary: Issues 2019

When I began posting the CBB some twenty years ago, I made a commitment to readers: “I’ll call it as I see it – and let the chips fall where they will.” Over the years, I made a further commitment to myself: Don’t be concerned with reputation – stay diligently focused on analytical integrity.

I attach this odd intro to “Issues 2019” recognizing this is a year where I could look quite foolish. I believe Global Financial Crisis is the Paramount Issue 2019. Last year saw the bursting of a historic global Bubble, Crisis Dynamics commencing with the blow-up of “short vol” strategies and attendant market instabilities. Crisis Dynamics proceeded to engulf the global “Periphery” (Argentina, Turkey, EM, more generally, and China). Receiving a transitory liquidity boost courtesy of the faltering “Periphery,” speculative Bubbles at “Core” U.S. securities markets succumbed to blow-off excess. Crisis Dynamics finally engulfed a vulnerable “Core” during 2018’s tumultuous fourth quarter.

As we begin a new year, rallying risk markets engender optimism. The storm has passed, it is believed. Especially with the Fed’s early winding down of rate “normalization”, there’s no reason why the great bull market can’t be resuscitated and extended. The U.S. economy remains reasonably strong, while Beijing has China’s slowdown well under control. A trade deal would reduce uncertainty, creating a positive boost for markets and economies. With markets stabilized, the EM boom can get back on track. As always, upside volatility reenergizes market bullishness.

I titled Issues 2018, “Market Structure.” I fully anticipate Market Structure to remain a key Issue 2019. Trend-following strategies will continue to foment volatility and instability. U.S. securities markets rallied throughout the summer of 2018 in the face of a deteriorating fundamental backdrop. That rally, surely fueled by ETF flows and derivatives strategies, exacerbated fragilities.
…click on the above link to read the rest of the article…

A Glimpse At 2019​​

A Glimpse At 2019​​

Markets In Critical Transformation, Chaotic Behaviour Has Just Began.

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps Systemic Risk go unattended and build further up. For the first time in a while, elusive economic narratives started to fail at blaming market weakness on secondary-order factors: Trade Wars, the FED, Oil prices. Attempts at dismissing market events as no more than a temporary turbulence miss the bigger picture and cast the fishing net on unaware investors looking for a dip to buy. In contrast, over the last month, conventional market and economic indicators (e.g. breaks of multi-year equity & home price trend-lines, freezing credit markets, softening global PMIs/orders) have all but confirmed what non-traditional measures of system-level fragility signalled all along: that a market crash is incubating, and the cliff is near. Nothing has happened yet.
1.      Early Tremors, Not Market Bottoms
2.      Elusive Narratives Fail, Unveiling a Deeper Malaise
3.      Mainstream Investment Strategies Face a Tougher New Year
4.      Triggers For Market Chaos: A Timeline For 2019
Early Tremors, Not Market Bottoms
After a slow start, the season of market chaos has taken off.
In the last few months, global markets have visibly entered the ‘phase transition zone’, a process of critical transformation that will eventually lead to a new equilibrium at significantly different levels, after severe ruptures and a possible full-cycle market crash.
Rather than ‘a short-term correction in a structural bull market’, or a ‘temporary turmoil in healthy economic conditions’, this is the beginning of a structural adjustment after a decade of liquidity abundance and market manipulation, which reflexively changed the structure itself of the market for private investors in hazardous ways, making it insensitive to fundamentals, passive or quasi-passive, overly-correlated and overly-concentrated. 

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

We Are Entering The “Quantitative Failure” Narrative

For a decade, the world brushed off any concerns about soaring global debt under the rug for a simple reason: between the Fed, the ECB and the BOJ, there was always a buyer of last resort, providing an implicit or, increasingly explicit backstop to bond prices, in the process creating the biggest asset bubble in history as investors seeking return were forced to buy first fixed income securities and then equities and other, even riskier securities.

However, as BofA’s Barnaby Martin is the latest to point out, “early 2019 will be uncharted territory for the market” because after years of central bank purchases crowding investors into risky assets, this dynamic will now reverse. As Zero Hedge readers have observed on countless occasions, the yearly growth of central bank balance sheets is now turning negative as shown in the following chart.

The upshot of this, in Martin’s view, is that markets will continue to experience more “corrections” than normal, leading to bigger and fatter trading ranges for credit spreads in Europe this year.

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

The Crash Of The “Everything Bubble” Started In 2018 – Here’s What Comes Next In 2019

The Crash Of The “Everything Bubble” Started In 2018 – Here’s What Comes Next In 2019

everything bubble

In 2018, a very significant economic change occurred, which sealed the fate of the U.S. economy as well as some other economies around the globe. This change was the shift of central bank policy. The era of stimulus and artificial support of various markets, including stocks, is beginning to fade away as the Federal Reserve pursues policy tightening, including higher interest rates and larger cuts to its balance sheet.

I warned of this change under new Chairman Jerome Powell at the beginning of 2018 in my article ‘New Fed Chairman Will Trigger Stock Market Crash In 2018’. The crash had a false start in February/March, as stocks were saved by massive corporate buybacks through the 2nd and 3rd quarters. However, as interest rates edged higher and Trump’s tax cut cash ran thin, corporate stock buybacks began to dwindle in the final quarter of the year.

As I predicted in September in my article ‘The Everything Bubble: When Will It Finally Crash?’, the crash accelerated in December, as the Fed raised interest rates to their neutral rate of inflation and increased balance sheet cuts to $50 billion per month.

It is important to note that when we speak of a crash in alternative economic circles, we are not only talking about stock markets. Mainstream economists often claim that stocks are a predictive indicator for the future health of the wider economy. This is incorrect. Stocks are actually a trailing indicator; they crash long after all other fundamentals have started to decline.

Housing markets have been plunging in terms of sales as well as prices. The Fed’s interest rate hikes are translating to much higher mortgage rates in the wake of overly inflated values and weaker consumer wages. .

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

Kass: Follow The Money

Kass: Follow The Money

The Tremor Before the Quake and the Fed’s $450 Billion Balance Sheet Reduction

The combination of rate hikes and balance sheet reductions from the Federal Reserve in 2018 sucked up global U.S. dollar liquidity and put emerging markets under immense pressure in 2018. Emerging market equities were 20-30% lower from February through October, then the S&P played catch-up to the downside. This, combined with tariffs from the White House, has placed global manufacturing in a significant slowdown that has begun to circle back into the United States. After all, over $60T of global GDP is OUTSIDE the USA.” – Lawrence McDonald, “Fed Cave-athon Driving Stocks Higher For Now

Why did Fed Chairman Jerome Powell’s comments on Friday get such a ringing endorsement from the equity market?

The answer is simple.

The driver to market movement is not valuations. Rather, it is the degree of the system’s liquidity condition.

Valuations generally don’t matter much when liquidity is injected and expanding price- earnings ratios don’t end bull markets.

But when markets perceive a drying up in liquidity or central bankers pivot, as in late 2018, markets suffer.

Watch the money!

The problem is not rising interest rates in 2019. Regardless of the Fed’s actions this year — and I continue to believe there will be no fed fund hikes this year — the bloated Fed balance sheet will be running off as quantitative easing (QE) is reversed.

The relationship between liquidity and capital markets volatility is inversely related. That is why in the first half of 2018 I called for a new regime of volatility, which we have gotten in spades since late September 2018. And that is why I see a continuation of heightened volatility throughout this year.

Tightened Liquidity

Last week, Dennis Gartman produced this chart of the declining monetary base:

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

How The Federal Reserve Quietly Bankrupted The US Pension System

Actions have consequences.  Even for the Fed.

That’s not a reference to the market’s grumpy reaction to the central bank’s continued rate hikes and quantitative tightening.  No.  The impact of both on financial assets were as obvious as they were inexorable.  To be sure, Wall Street’s resident soothsayers had a good run spinning tales that ‘this time’ was different. A tightening Fed, we were assured, was a good thing—a ringing endorsement of the economy’s indefatigable strength. But, in the end, there was simply no way around the basic fact: Just as rate cuts and QE were designed to expand the pool of credit and incent the embrace of risk, so would rate hikes and QT necessarily beget the reverse. And so they have.

But while the impact of receding liquidity and the reduced reward for reckless speculation and risk-taking have finally begun to play out on Bloomberg screens everywhere, the real devastation has yet to be revealed.  In the ensuing weeks and months the full and lugubrious legacy of the Fed’s great monetary experiment of the last decade will finally come into view.

Beyond inflating and bursting a bubble in corporate debt (with leveraged loans acting as posterchild), the Fed’s decade-long financial repression has had a far larger and more sinister impact: It has silently bankrupted the US pension system.

Sound overly dramatic??

Here are the numbers from no lesser authority than the institution responsible for this destruction itself: the Federal Reserve.   By their calculations, at the end of the 3rd quarter, the funding shortfall of U.S. pension plans (public and private) stood at -$6.18t.  That’s trillion, with a capital ‘t’.  To put that in perspective, that’s roughly 30% of GDP:

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

New Data Suggests Shocking Shale Slowdown

New Data Suggests Shocking Shale Slowdown

Shale rig

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

The 2.3 reading is only slightly positive – zero would mean that business activity from Texas energy firms was flat compared to the prior quarter. A negative reading would mean a contraction in activity.

The deceleration was true for multiple segments within oil and gas. For instance, the oil production index fell from 34.8 in the third quarter to 29.1 in the fourth. The natural gas production index to 24.8 in the fourth quarter, down from 35.5 in the prior quarter.

But even as production held up, drilling activity indicated a sharper slowdown was underway. The index for utilization of equipment by oilfield services firms dropped sharply in the fourth quarter, down from 43 points in the third quarter to just 1.6 in the fourth – falling to the point where there was almost no growth at all quarter-on-quarter.

Meanwhile, employment has also taken a hit. The employment index fell from 31.7 to 17.5, suggesting a “moderating in both employment and work hours growth in the fourth quarter,” the Dallas Fed wrote. Labor conditions in oilfield services were particularly hit hard.

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

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

Being I’m not an economist nor associated with any financial or investment institutions nor do I have anything for you (dear reader) to buy or sell, I have total freedom to say what I please and freedom to share what I see.

In that spirit, I round back on the Federal Reserves balance sheet versus the curious case of excess reserves of the mega-banks.  Last week I detailed that every time the Fed has ceased adding to its balance sheet or outright reduced, the outcome has been decidedly negative for asset prices (HERE).  However, like everything, there is a little more to the story.

The chart below shows the rise in the Fed’s Treasury’s (blue line), Mortgage Backed Securities (red line), and rise plus fall of Bank Excess Reserves.  What is so interesting is that bank excess reserves didn’t begin declining when the Fed’s Quantitative Tightening began, but immediately upon the conclusion of QE in late 2014.  And excess reserves have already declined by $1.2 trillion while the Fed’s balance sheet has declined by “only” about $400 billion.

Now, if I were cynical, I’d say it’s almost like the Fed’s plan with the excess reserves was to use them like a sponge to soak up liquidity during QE and then continue releasing liquidity long after QE ended…and even well after QT was underway (actually, I’m quite cynical).  The term for this is “monetization”, something the Fed said it would “never do”.

The chart below shows the massive rise in the Fed’s balance sheet (white line), bank excess reserves (black line), and the quantity of monetization (yellow line) floating in the system just waiting to be leveraged into 5x’s or 10x’s or perhaps even 20x’s that amount.

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

The Fed, China, And The Markets

Amid market volatility and continued downside surprises in global growth, investors are focusing on the Fed and China. Regarding the Fed, the issue is whether and when it could signal potential changes in balance sheet normalisation (as it has on the policy rate path). On China, the question is when growth could stabilise. We think policy-makers will take the actions necessary to manage their countries’ respective growth trajectories. We believe that China’s growth will bottom in 1Q19, while the Fed has begun to signal some flexibility on its balance sheet policy, if there is a material deterioration in the growth outlook.

The Fed has altered its policy trajectory on rates, but not yet on the balance sheet. Despite robust trailing consumption growth and strong labour market dynamics, the US economy is unlikely to remain immune to slowing global growth. In addition, the recent tightening in financial conditions has affected capex intentions, and we expect the impact of fiscal stimulus on growth to fade in 2019. Recognising this slower growth environment, the Fed has signalled its flexibility on the policy rate path. However, the Fed has not yet given a clear signal on when the balance sheet reduction would end.

The normalisation process has not been as smooth as assumed. The Fed had anticipated that once it announced the path of balance sheet normalisation, markets would discount that “passive and predictable” pathway and that the process would be akin to “watching paint dry”.

However, we see the challenge as follows:

(1) Even though the Fed communicated the pace of the unwind well ahead of its start, uncertainty remains as regards the final, optimal size of the Fed’s balance sheet. Moreover, we believe investors are concerned that the Fed has remained on a set course, even though the US and global growth outlook has weakened.

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

Weekly Commentary: Global Markets’ Plumbing Problem

Weekly Commentary: Global Markets’ Plumbing Problem

“Goldilocks with a capital ‘J’,” exclaimed an enthusiastic Bloomberg Television analyst. The Dow was up 747 points in Friday trading (more than erasing Thursday’s 660-point drubbing) on the back of a stellar jobs report and market-soothing comments from Fed Chairman “Jay” Powell.
December non-farm payrolls surged 312,000. The strongest job gains since February blew away both estimates (184k) and November job creation (revised up 21k to 176k). Manufacturing jobs jumped 32,000 (3-month gain 88k), the biggest increase since December 2017’s 39,000. Average Hourly Earnings rose a stronger-than-expected 0.4% for the month (high since August), pushing y-o-y gains to 3.2%, near the high going back to April 2009.

Just 90 minutes following the jobs report, Chairman Powell joined Janet Yellen and Ben Bernanke for a panel discussion at an American Economic Association meeting in Atlanta. Powell’s comments were not expected to be policy focused (his post-FOMC press conference only two weeks ago). But the Fed Chairman immediately pulled out some prepared comments, perhaps crafted over the previous 24 hours (of rapidly deteriorating global market conditions).

Chairman Powell: “Financial markets have been sending different signals – signals of concern about downside risks, about slowing global growth particularly related to China, about ongoing trade negotiations, about – let’s call – general policy uncertainty coming out of Washington, among other factors. You do have this difference between, on the one hand, strong data, and some tension between financial markets that are signaling concern and downside risks. And the question is, within those contrasting set of factors, how should we think about the outlook and how should we think about monetary policy going forward. When we get conflicting signals, as is not infrequently the case, policy is very much about risk management.

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

The Ugly Truth

The Ugly Truth

For years critics of central bank policy have been dismissed as negative nellies, but the ugly truth is staring us all in the face: Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.

And don’t think this is hyperbole on my part, I will present the evidence of course.

In March 2009 markets bottomed on the expansion of QE1 which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.

When market tumbled in 2015 and 2016 global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017 giving us a grand total of over $15 trillion in central bank balance sheet courtesy FOMC, ECB and BOJ:

When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.

And don’t think the Fed was not still active in the jawboning business despite QE3 ending. After all their official language remained “accommodative”  and their hike schedule was the slowest in history, cautious and tinkering not to upset markets.

With tax cuts coming into the US economy in early 2018 along with record buybacks markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.

And guess what changed? 2 things.

In September 2018, for the first time in 10 years, the FOMC removed one little word from its policy stance: “accommodative” and The Fed increased its QT program. When did US markets peak? September 2018.

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

Fed’s Balance Sheet Reduction Reaches $402 Billion

Fed’s Balance Sheet Reduction Reaches $402 Billion

The QE unwind has started to rattle some nerves.

For the past two months, the sound of wailing and gnashing of teeth about the Fed’s QE unwind has been deafening. The Fed started the QE unwind in October 2017. As I covered it on a monthly basis, my ruminations on how it would unwind part of the asset-price inflation and Bernanke’s “wealth effect” that had resulted from QE were frequently pooh-poohed. They said that the truly glacial pace of the QE unwind was too slow to make any difference; that QE had just been a “book-keeping entry,” and that therefore the QE unwind would also be just a book-keeping entry; that QE had never caused any kind of asset price inflation in the first place, and that therefore the QE unwind would not reverse that asset-price inflation, or whatever.

But in October last year, when all kinds of markets started reversing this asset price inflation, suddenly, the QE unwind got blamed, and the Fed – particularly Fed Chairman Jerome Powell – has been put under intense pressure to cut it out. Yet it continues:

The Fed shed $28 billion in assets over the four weekly balance-sheet periods of December. This reduced the assets on its balance sheet to $4,058 billion, the lowest since January 08, 2014, according to the Fed’s balance sheet for the week ended January 3. Since the beginning of this “balance sheet normalization,” the Fed has now shed $402 billion.

According to the Fed’s plan released when the QE unwind was introduced, the Fed is scheduled to shed “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month – now that the QE unwind has reached cruising speed – for a total of “up to” $50 billion a month. So how did it go in December?

Treasury Securities

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

Trump Is A Pied Piper For The New World Order Agenda

Trump Is A Pied Piper For The New World Order Agenda

In my last article, ‘The Fed Is A Suicide Bomber With A Deeper Agenda’, I explored and dismantled recent propaganda surrounding the Federal Reserve’s tightening actions, including the propaganda that Jerome Powell is some kind of rogue central banker who is rebalancing the system for the good of the nation.  To summarize the points made in that article:

The Fed deliberately created the “Everything Bubble” so that it could be deliberately imploded at the proper time – in other words, the crash we have been witnessing so far during the final quarter of 2018 and continuing into 2019 is a controlled demolition of the economy.  Jerome Powell is not some “rebel” going against the easy money dictates of the Fed.  Jerome Powell is playing the role that has been given to him.  Ben Bernanke and Janet Yellen’s job was to inflate the bubble.  Jerome Powell’s job is to crash the bubble.

This is a tactic used by the Fed and the globalists that run it for over 100 years – conjure a debt bubble, deflate the debt bubble, cause a crisis, siphon up hard assets for pennies on the dollar, use the panic to gain more power and centralization, introduce new control measures while everyone is distracted, rinse, repeat.

This process of controlled demolition needs a considerable distraction so that the central banks and the globalists ultimately avoid blame for the painful consequences of the event.  Enter Donald Trump and the false Trump vs. Globalist paradigm.  As I mentioned last week, the Fed is only one side of the equation for the crash; Trump is the other side.

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

Drain, drain, drain…

Drain, drain, drain…

Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.

Our friend Michael Pollaro recently provided us with an update of outstanding Fed credit as of 26 December 2018. Overall, the numbers appear not yet all that dramatic, but the devil is in the details, or rather in the time frames one considers.

The pace of the year-on-year decrease in net Fed credit has eased a bit from the previous month, as the December 2017 figures made for an easier comparison – but that is bound to change again with the January data. If one looks at the q/q rate of change, it has accelerated rather significantly since turning negative for good in April of last year.

Below are the most recent money supply and bank lending data as a reminder that   “QT” indeed weighs on money supply growth rates. It was unavoidable that the slowdown in money supply growth would have an impact on asset prices and eventually on economic activity.

Note that in the short to medium term, the effects exerted by money supply growth rates are far more important than any of the president’s policy initiatives, whether they are positive (lower taxes, fewer regulations) or negative (erection of protectionist trade barriers). The effects of changes in money supply growth are also subject to a lag, but in this case the lag appears to be over.

Any effects seemingly triggered by “news flow” are usually only of the very short term knee-jerk variety, and they are often anyway the opposite of what one would normally expect – particularly in phases when news flow actually lags market action (see the recent case of disappointingly weak PMI and ISM data). The primary trend cannot be altered by these short term gyrations.

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

 

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