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The Dollar Shortage & China’s Bond Selling Are About To Corner the Fed

The Dollar Shortage & China’s Bond Selling Are About To Corner the Fed

Earlier this week – news went by relatively unnoticed by the ‘mainstream’ financial media (CNCB and such) that Beijing’s started selling their U.S. debt holdings.

Putting it another way – they’re dumping U.S. bonds. . .

China’s ownership of U.S. bonds, bills and notes slipped to $1.17 trillion, the lowest level since January and down from $1.18 trillion in June.”

Remember – dumping U.S. debt is China’s nuclear option (which I wrote about back in April – click here to read if you missed it).

And although they’re starting to sell U.S. bonds – expect it to be at a slow and steady pace. They don’t want to risk hurting themselves over this.

I believe China may be selling just enough to get the attention of Trump and the Treasury. A soft warning for them not to take things too far with tariffs and trade.

Yet already just as news hit the wire that China was selling bonds a few days ago – U.S. yields spiked above 3%. . .

Don’t forget that China’s the U.S.’s largest foreign creditor. And this is an asset for them.

And although them selling is worrisome – the real problems started months ago. . .

Over the last few months, my macro research and articles are all finally coming together. This thesis we had is finally taking shape in the real world.

I wrote in a detailed piece a few months back that foreigners just aren’t lending to the U.S. as much anymore (you can read that here).

I called this the ‘silent problem’. . .

Long story short: the U.S. is running huge deficits. They haven’t been this big since the Great Financial Recession of 08.

And it shouldn’t come as a surprise to many.

Because of Trump’s tax cuts, there’s less government revenue coming in. And that means the increased military spending and other Federal spending has to be paid for on someone else’s tab.

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

Leveraged Loan Demand Is Off The Charts As Dangers Mount

Ten years after the crisis, demands for leveraged loan offerings is once again off the charts. Portfolio managers who are seeking rising yields as the Federal Reserve hikes rates have shown unprecedented demand for recent deals, despite repeated warnings that they may be buying “at the wrong time.”

Leveraged loans are a type of debt that is offered to an entity that may already have significant amounts of leverage or a poor credit history. As rates move higher, the loans – whose interest rates reference such floating instruments as Libor or Prime – pay out more. As a result, as the Fed tightens the money supply, defaults tend to increase as the interest expenses rise and as the overall cost of capital increases.

Gershon Distenfeld, co-head of fixed income at AllianceBernstein LP and a longtime “skeptic of bank loans” told Bloomberg that a good way to gauge the risk in the loan market is to look at returns when loans price too high. Currently, the average outstanding loan is priced at about 98.5 cents on the dollar. According to Distenfeld’s research of market prices between 1992 and 2018, when priced at this level, annual returns are about 2.8% for the following two years – lagging both behind 5 year treasuries and high yield bonds. And yet investors are piling in, hoping for even more generous payments, and oblivious of whether the underlying credit will be viable in a higher interest rate environment.

Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC kept it simpler: “It’s not a good time to be buying bank loans,” he stated. He also noted something we have demonstrated on numerous prior occasions: lender protections are worse than usual and there’s a smaller pool of creditors to absorb losses, and as covenant protection has never been weaker.

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

By the Time the Fed Hits Its Goals, the Markets Will Be Crashing

By the Time the Fed Hits Its Goals, the Markets Will Be Crashing

The Powell Fed has set one goal and one goal only for its policy…

Hitting the “neutral rate of interest.”

The neutral rate of interest is when the Fed has rates equal to the pace of inflation. While this is technicallywhat the Fed is SUPPOSED to be doing, NO Fed (or any other Central Bank for that matter) has done it in over 30 years: the Greenspan, Bernanke, and Yellen Feds were all notorious for running “accommodative” policy in which rates were kept well BELOW the rate of inflation.

Indeed, if you had to summate Fed policy from 1987 to 2018, the best word would be “accommodative.” It is not coincidental that this time period coincided with serial bubbles in the financial markets. This was done intentionally by Alan Greenspan, Ben Bernanke, and Janet Yellen.

Not Jerome Powell.  During his July Q&A session with Congress in July, Fed Chair Powell emphasized that the most important focus for the Fed under his leadership would be “a neutral rate of interest.”

In answering a question [concerning the yield curve flattening] from Senator Pat Toomey of Pennsylvania, Powell said that, in his view, “What really matters is what the neutral rate of interest is.” And perhaps longer-term Treasury yields send a message about that rate.

Source: Bloomberg

I initially thought this was Powell playing to Congress (for 30+ years Fed Chairs have simply told Congress what it wanted to hear during their testimony). However, since that time, the Powell Fed has made it 100% clear that it did in fact WANT neutral rates.

Last month, Dallas Fed President Robert Kaplan outlined this in no uncertain terms.

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

Mortgage Rates Head to 6%, 10-Year Yield to 4%, Yield Curve Fails to “Invert,” and Fed Keeps Hiking

Mortgage Rates Head to 6%, 10-Year Yield to 4%, Yield Curve Fails to “Invert,” and Fed Keeps Hiking

Nightmare scenario for the markets? They just shrugged. But homebuyers haven’t done the math yet.

There’s an interesting thing that just happened, which shows that the US Treasury 10-year yield is ready for the next leg up, and that the yield curve might not invert just yet: the 10-year yield climbed over the 3% hurdle again, and there was none of the financial-media excitement about it as there was when that happened last time. It just dabbled with 3% on Monday, climbed over 3% yesterday, and closed at 3.08% today, and it was met with shrugs. In other words, this move is now accepted.

Note how the 10-year yield rose in two big surges since the historic low in June 2016, interspersed by some backtracking. This market might be setting up for the next surge:

And it’s impacting mortgage rates – which move roughly in parallel with the 10-year Treasury yield. The Mortgage Bankers Association (MBA) reported this morning that the average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) and a 20% down-payment rose to 4.88% for the week ending September 14, 2018, the highest since April 2011.

And this doesn’t even include the 9-basis-point uptick of the 10-year Treasury yield since the end of the reporting week on September 14, from 2.99% to 3.08% (chart via Investing.com; red marks added):

While 5% may sound high for the average 30-year fixed rate mortgage, given the inflated home prices that must be financed at this rate, and while 6% seems impossibly high under current home price conditions, these rates are low when looking back at rates during the Great Recession and before (chart via Investing.com):

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

Central Planning Failed in the USSR, but Central Banks Have Revived It

Central Planning Failed in the USSR, but Central Banks Have Revived It

fed1_1.PNG

The Federal Reserve’s changing of the guard — the end of Janet Yellen’s tenure and the beginning of the Jerome Powell era — has me remembering what it was like to grow up in the former Soviet Union.

Back then, our local grocery store had two types of sugar: The cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away.

If all Russian housewives (and house-husbands) had decided to go on an apple-pie diet and started baking pies for breakfast, lunch, and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a common occurrence in the Soviet era.

In a capitalist economy, the invisible hand serves a very important but underappreciated role: It is a signaling mechanism that helps balance supply and demand. High demand leads to higher prices, telegraphing suppliers that they’ll make more money if they produce extra goods. Additional supply lowers prices, bringing them to a new equilibrium. This is how prices are set for millions of goods globally on a daily basis in free-market economies.

In the command-and-control economy of the Soviet Union, the prices of goods often had little to do with supply and demand but were instead typically used as a political tool. This in part is why the Soviet economy failed — to make good decisions you need good data, and if price carries no data, it is hard to make good business decisions.

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

 

How the Trade War Helps Hide Central Bank Sabotage Of The Economy

trade war cover up for Fed

Almost every aspect of the global economic downturn, which started ostensibly in 2007-08 and is still ongoing to this day, can be traced back to the actions and policies of central banks. The Federal Reserve, for example, used artificially low interest rates and easy money to create a supposedly no-risk loan environment. This translated into a vast amount of toxic mortgage debt along with a web of derivatives (Mortgage Backed Securities) attached to that debt.

The Fed ignored all the signs and all the alternative analyst warnings. Agencies like S&P backed the Fed narrative that all was well as they gave AAA ratings to endless toxic market products. The mainstream media backed the Fed by attacking anyone that argued the notion that the U.S. economy was unstable and ready to falter. In that era of economics, the truth was effectively hidden from the public by the system through relatively standard means. Today, things have changed slightly.

Since the 2008 crash, numerous economists and former Fed officials have come out publicly to admit to the culpability of central bankers (sort of). Alan Greenspan first claimed in 2008 that the Fed had “made a mistake” in its analysis and overlooked the potential of a market bubble. Then, in 2013 he came out and admitted all the central bankers KNEW that a bubble was present, but that they believed the markets would self-correct without much damage to GDP or the rest of the economy.

The mainstream financial media went on to blame the Fed for the conditions that caused the crisis, but made excuses for them at the same time. The narrative was that the Fed was blinded by peripheral factors and that it had been ignoring fundamentals. The Central bankers had “painted themselves into a corner” with low interest rates, and had done this unknowingly.

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

The Committee to Destroy the World: The Federal Reserve

The general belief among average citizens is that the purpose of central banks is to help the economy by fighting inflation and mitigating financial crisis. It’s a fairy tale that politicians like to encourage. If there were any truth to it, however, where was the Federal Reserve during the crisis of 2007? Rather than helping, it was widening the crisis with its easy money policies.

While central banks are not a government entity, their primary purpose is to create money for the benefit of the government. By mindlessly printing fiat currency, central banks create a shaky illusion of financial stability. In reality, each central bank is a monopoly that controls the production of distribution of currency and interest rates. Most importantly, it also controls gold reserves. While paper currency allegedly has the backing of the government, it is the central bank that controls the value of the currency at any specific time.

The first central bank, the Central Bank of England, was created in the 17th century as a scheme to enable the king to pay off his debts. As each country established its own central bank, it has been used by its government as a personal bank account.

With the government’s permission, central banks print money for the use of commercial banks to lend out at a specified rate of interest. Together, they work at inflating the money supply through a system called fractional-reserve banking. Commercial banks are required to keep a fraction of their money in reserve. For example, if someone deposits $1,000, the bank has to keep 10 percent in its vaults. That $100 cannot be lent out. It can only lend out $900, thereby creating two separate claims on those funds: the original deposit of $1,000 and the subsequent borrower of the $900. The supply of money in circulation has been artificially increased to $1,900. That is only one of the ways central banks manipulate the fiat money supply.

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

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Why the Fed Denied the Narrow Bank

It’s not every day that a clear example showing the horrors of central planning comes along—the doublethink, the distortions, and the perverse incentives. It’s not every year that such an example occurs for monetary central planning. One came to the national attention this week.

A company called TNB applied for a Master Account with the Federal Reserve Bank of New York. Their application was denied. They have sued.

First, let’s consider TNB. It’s an acronym for The Narrow Bank. A so called narrow bank is a bank that does not engage in most of the activities of a regular bank. It simply takes in deposits and puts them in an account at the Fed. The Fed pays 1.95%, and a narrow bank would have low costs, so it could pass most of this to its depositors. This is pretty attractive, and without the real estate and commercial lending risks—not to mention derivatives exposure—it’s less risky than a regular bank. According to Bloomberg’s Matt Levine, saving accounts for large depositors average only 0.08% interest.

So it’s easy to see why many believe that the Fed’s reason to refuse an account to TNB is unsavory: to protecting the crony too-big-to-fail banks. That is a plausible explanation for sure, but there is much more.

The Bank: Spindled, Folded, and Mutilated

There has been a long, slow process—punctuated by big changes in responses to crises—of perverting the banks. Before the first world war, when a retailer received consumer goods he would sign a bill acknowledging delivery. Typically, he had 90 days to pay, which was enough time to sell the goods through to the consumer. The wholesaler could endorse this and pass it to his creditors. The bill traded at a discount to its face value.

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

The Bank Bailout of 2008 was Unnecessa

The Bank Bailout of 2008 was Unnecessary

Photo Source Xavier | CC BY 2.0

This week marked 10 years since the harrowing descent into the financial crisis — when the huge investment bank Lehman Bros. went into bankruptcy, with the country’s largest insurer, AIG, about to follow. No one was sure which financial institution might be next to fall.

The banking system started to freeze up. Banks typically extend short-term credit to one another for a few hundredths of a percentage point more than the cost of borrowing from the federal government. This gap exploded to 4 or 5 percentage points after Lehman collapsed. Federal Reserve Chair Ben Bernanke — along with Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner — rushed to Congress to get $700 billion to bail out the banks. “If we don’t do this today we won’t have an economy on Monday,” is the line famously attributed to Bernanke.

The trio argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression.

Neither part of that story was true.

Still, news reports on the crisis raised the prospect of empty ATMs and checks uncashed. There were stories in major media outlets about the bank runs of 1929.

No such scenario was in the cards in 2008. Unlike 1929, we have the Federal Deposit Insurance Corporation. The FDIC was created precisely to prevent the sort of bank runs that were common during the Great Depression and earlier financial panics. The FDIC is very good at taking over a failed bank to ensure that checks are honored and ATMs keep working. In fact, the FDIC took over several major banks and many minor ones during the Great Recession. Business carried on as normal and most customers — unless they were following the news closely — remained unaware.

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

BCA: The “Bubble In Everything” Threatens $400 Trillion In Assets

By now, it’s a very familiar question: how high can the Fed hike rates before it causes a major market “event.”

Two weeks ago, Stifel analyst Barry Banister became the latest to issue a timeline on how many more rate hikes the Fed can push through before the market is finally impacted. According to his calculations, just two more rate hikes would put the central bank above the neutral rate – the interest rate that neither stimulates nor holds back the economy. The Fed’s long-term projection of its policy rate has risen from 2.8% at the end of 2017 to 2.9% in June. As the following chart, every time this has happened, a bear market has inevitably followed.

A similar argument was made recently by both Deutsche Bank and Bank of America, which in two parallel analyses observed last year that every Fed tightening cycle tends to end in a crisis.

Now, it’s the turn of BCA research to warn that ultimately the fate of risk assets depends on the relative size of the inflationary impulse being spawned by the Fed vs the remnant disinflationary impulse from monetary policies over the past decade.

In a report issued on Friday, BCA’s strategists make the key point that the performance of bonds – and stocks – in an inflation scare would depend on the relative size of the inflationary impulse compared with the disinflationary impulse that resulted from sharply lower risk-asset prices.

They make the point that if central banks were more concerned about the inflationary impulse, which at least for Fed chair Powell appears to be the case for now – Janet Yellen’s “lower for longer revised forward guidance” notwithstanding – they would have to keep tightening – in which case, bond yields would be liberated to reach elevated territory.

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

Honest Work for Dishonest Pay

Honest Work for Dishonest Pay

Misadventures and Mishaps

Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened.  The sickness of too much debt has been seemingly cured with massive dosages of even more debt.  This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.

The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt issuance has continued with gay abandon this year. [PT]

But how can dosages of more debt be the cure for too much debt?  Can more Cutty Sark be the cure for a dipsomaniac?  Certainly, in both instances, and after some interim relief, the cure always proves to be much worse than the disease.

Without question, a moment of clarity is approaching that will bisect the world of today from the world of tomorrow, like the Patriot Act bisects the present world from its prior state of bliss.  Thus, what follows is a rudimentary preview of what’s in store.  But first, some context is in order…

The fake money system – a system centered on debt based legal tender and centrally fabricated interest rates – produces booms and busts of greater extremes with each progression of the business cycle.  This century alone we’ve experienced two iterations of these boom and bust scenarios.  First the dotcom bubble and bust.  Then the housing boom and crash.

The “well-contained” end of the housing boom…  [PT]

Make no mistake, these booms and busts were anything but garden variety gyrations of the business cycle.  In fact, the Federal Reserve’s finger prints are all over them.  The booms originated from Fed monetary policy misadventures.  The busts were triggered by Fed monetary policy mishaps.

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

When The U.S. Stock Market Crashes, Buy Gold – David Brady 

When The U.S. Stock Market Crashes, Buy Gold – David Brady 

While we wait for news on the 25% tariffs on $200bln or 40% of Chinese exports to the U.S.—and with the threat of the same on the remaining ~$300bln to follow—I want to outline the endgame for the dollar and the likely beginning of the explosive rally for Gold.

Simply put: When the U.S. stock market crashes, buy Gold.

To be more specific: when the S&P 500 has fallen 20-30%, buy Gold, in my opinion, because the ‘Fed Put’ will soon be exercised at that point. The Fed will reverse policy to stimulus on steroids. The dollar rallied from April 2008 and peaked in March 2009, when stocks bottomed out—the same time the Fed announced QE, or QE1 as we now know it. Then the dollar fell. It is not unreasonable to expect the same to happen this time around. Gold bottomed out in October 2008, as stocks plummeted and then soared 280% to greater than 1900 over the next three years, as QE1 and QE2 were underway.

The coming crash in the U.S. stock market is the catalyst for the Fed’s reversal in policy, so why do I expect a crash?

Quantitative Tightening and Budget Deficits

Lee Adler pointed out several weeks ago that as the budget deficit soars, Treasury bond issuance is increasing by around $100bln per month. At the same time, the Fed is increasing its balance sheet reduction, or “QT” program, to $50bln a month in October, a run-rate of $600bln per year. That means $150bln of additional demand for U.S. Treasuries is required every month.

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

Yellen Wants Fed to Commit to Future Booms to Make Up for Busts

Former Fed Chair Yellen promotes “Lower for Longer”, a policy in which the Fed knowingly keeps interest rates too low.

Here’s the asinine policy proposal of the day: Fed Should Commit to Future ‘Booms’ to Make Up for Major Busts.

The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”

What We Are Doing Already

The official policy is what we are doing already. May as well make a policy out of it.

The caveat, of course, is the Fed does not realize what it’s already doing.

Ass Backward

There is one more major flaw. It’s ass Backward. We have major busts because the Fed blew major bubbles.

The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.

The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.

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

As The Fed Raises Rates, The Ghost of Lehman Bros Lingers

As The Fed Raises Rates, The Ghost of Lehman Bros Lingers

In just two days – September 15 – it will be the 10-year anniversary of Lehman Brothers collapse. The date they filed bankruptcy.

With nearly $620 billion in debts, it was the largest bankruptcy in history.

Now, a decade late – it appears the mainstream’s learned nothing. And many have forgotten the crisis that was 2008. . .

The banks are bigger and the damage of them crashing will be even greater this time around.

The elites – led by the Federal Reserve – have since 2008 told banks to continue lending and for consumers to continue borrowing. They did this by cranking interest rates down to zero (technically 0.25%). This allowed funds and ‘shadow banks’ to borrow huge amounts on margin.

It also kept commercial banks continually lending out loans. And at the end of the day if they lent out too much and didn’t have enough legal ‘reserves’ (deposits) to close, they’d simply ring up another bank (or the Fed) and borrow the amount needed.

“Hey BofA, we need $26 million.”
“Okay Citi, sounds good.”

Borrowing at near zero and lending out at higher rates was very lucrative. And basically, free money.

Banks can ultimately borrow from the Fed for 0.25% and lend out to the U.S. government for a solid 2-3% nominal return. Or even better, they’ll lend out to consumers who want a new house at a higher interest rate. Students that need debt for college. Auto loans. Or Emerging economies that need funding.

There’s more to it – and I’ll highlight it more in-depth in later articles. But aslong as interest rates are low, the game continues.

But the problem is – and just like before 2008 kicked off – short term interest rates are now rising.

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

The Fed and Asset Bubbles

In his speech on April 7 2010 at the Economic Club of New York the President of the New York Fed, William Dudley argued that asset bubbles pose a serious threat to real economic activity.

The New York Fed chief is of the view that the US central bank should develop effective tools to counter this menace.

According to Dudley, it should be the role of the Fed to stop the expansion of the bubble whilst it is still in the making.

By an asset bubble, I mean price increases (or declines) that become unmoored from fundamental valuations.[1]

Dudley is of the view that the way people trade also generates bubbles. On this, he suggests that,

Bubbles may simply emerge from the way market participant’s process information and trade. In many carefully controlled experiments in which the intrinsic value of the asset could be determined with certainty, participants still bid prices up far above fundamental valuations, with the bubbles being followed by sharp declines in prices.[2]

Furthermore, Dudley is of the view that,

A bubble is difficult to discern and, second, each bubble has unique characteristics. This implies that a rules-based approach to bubbles is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment.[3]

In conclusion, the New York Fed President has suggested,

Let me underscore the challenge that central bankers face in combating asset price bubbles. Doing so effectively requires us to be successful in both identifying the incipient bubble and in developing and implementing a response that will limit bubble growth and avert a destructive asset price crash. This is not easy because asset bubbles are hard to recognize in real time and each asset bubble is different. However, these challenges cannot be an excuse for inaction.[4]

The Fed and bubbles – is there any relation?

…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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