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Update on the Fed’s QE Unwind

Update on the Fed’s QE Unwind

With QE, the Fed created money to buy securities and pump up asset prices; now it sheds securities to destroy this money.

Here’s what the Fed’s QE unwind – or the balance sheet normalization, as it calls it – is all about: it reverses over an unknown span of years a large part of what QE had done over the span of five-and-a-half years. During QE, whose stated purpose was the “wealth effect,” the Fed amassed $3.4 trillion in Treasury securities and mortgage-backed securities (MBS). Just as the Fed spent a year tapering QE to zero, it is now spending a year ramping up the QE unwind.

Total assets on the Fed’s balance sheet for the week ending July 4 dropped by $29.4 billion over the past four weeks. This brought the total drop since October, when the QE unwind began, to $171 billion. At $4,289 billion, total assets are now at the lowest level since April 16, 2014, during the middle of the “taper.”

The Fed’s announced plan calls for shedding up to $420 billion in securities this year and up to $600 billion a year in each of the following years until the Fed considers its balance sheet to be “normalized” — or until something major goes awry. For June, the plan calls for the Fed to shed up to $18 billion in Treasuries and up to $12 billion in MBS. So how did it go?

Treasury securities

The balance of Treasury securities fell by $17.5 billion in June to $2,360 billion, the lowest since May 7, 2014. Since the beginning of the QE-Unwind, $105 billion in Treasuries “rolled off.”

The step-pattern in the chart below is a result of how the Fed sheds securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries only mature mid-month or at the end of the month. Hence the stair-steps.

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

Inflation Rearing Its Ugly Head

Inflation Rearing Its Ugly Head

The world of finance and investment, as always, faces many uncertainties. The US economy is booming, say some, and others warn that money supply growth has slowed, raising fears of impending deflation. We fret about the banks, with a well-known systemically-important European name in difficulties. We worry about the disintegration of the Eurozone, with record imbalances and a significant member, Italy, digging in its heels. China’s stock market, we are told, is now officially in bear market territory. Will others follow? But there is one thing that’s so far been widely ignored and that’s inflation.

More correctly, it is the officially recorded rate of increase in prices that’s been ignored. Inflation proper has already occurred through the expansion of the quantity of money and credit following the Lehman crisis ten years ago. The rate of expansion of money and credit has now slowed and that is what now causes concern to the monetarists. But it is what happens to prices that should concern us, because an increase in price inflation violates the stated targets of the Fed. An increase in the general level of prices is confirmation that the purchasing power of a currency is sliding.

According to the official inflation rate, the US’s CPI-U, it is already running significantly above target at 2.8% as of May. Oil prices are rising. Brent (which my colleague Stefan Wieler tells me sets gasoline and diesel prices) is now nearly $80 a barrel. That has risen 62% since last June. If the US economy continues to grow the Fed will have to put up interest rates to slow things down. If it doesn’t, as money-supply followers fear, the Fed may still be forced to put up interest rates to contain price inflation.

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

Irrational Beliefs are Ruling Markets

To understand the consequences of the credit cycle, we must dismiss pure opinion, and examine the evidence rationally. This article assesses the fate of the dollar on the next credit crisis, a subject of increasing topicality. It concludes that the late stage of the credit cycle has important similarities with 1927, when the Fed eased monetary policy, following evidence of a mild recession.

Contemporary financial markets are inherently emotional, mainly because they are awash with government-issued currencies. Investors and speculators would never be as careless with sound money as they are with infinitely-elastic fiat. Instead, they are ready to gamble with it, partly because they know that standing still guarantees a loss of purchasing power and partly because rising asset prices, which is actually the reflection of a falling currency, makes selling currency for assets an appealing proposition. Furthermore, credit for speculation is freely available through futures and options.

Financial markets are also irrational due to modern economics, the explanation for it all, having become a belief system. If all central banks pursue economic beliefs, as an investor you will probably do so as well, otherwise you are out of step in a world that follows trends. That works until it doesn’t. Central bankers pursue policies which are a mishmash of neo-Keynesianism and monetarism, the balance between the two setting the fashion of the day, with an overriding assumption that unregulated markets are the source of all our economic and systemic troubles. But there is one element of monetary policy that does not change, and that is a conviction that everything can be cured by monetary inflation.

Is this condemnation of monetary policy over the top?

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

“Failing” Deutsche Bank May Be Kicked Out Of Key European Index

One day after Deutsche Bank’s US operations failed the Fed’s “stress test”, it appears that this outcome had been priced in by the market as DB’s stock price rose as much as 3% in early Friday trading…

… although looking slightly higher in the capital structure reveals ongoing skepticism, with the yield on DB’s 6% contingent convertibles rising, and set to hit 10% any moment.

However, much to the chagrin of investors in the biggest European lender, the barrage of bad news facing Deutsche Bank is not nearly over, and as the WSJ reports, the sharp drop in DB’s stock price could mean the exit from a major European index, jeopardizing its inclusion in the giant funds that track that benchmark, and assuring new all time lows as mutual fund liquidate their holdings.

The issue is that DB’s share price has dropped by more than 40% this year, as it struggles with falling profitability and other legacies of pre-financial crisis exuberance; the price is so low in fact, it would no longer be included in one of Europe’s most important inidices if there were no changes for the next 2 months.

According to WSJ calculations, Deutsche Bank’s market capitalization has fallen to a level that would see it removed from the Euro Stoxx 50, taking the lender out of the orbit of exchange-traded-funds with €42.5 billion ($49.1 billion) in assets that follow this index.

Still, an expulsion from the index is not assured, as a large bout of buying could save Deutsche Bank’s place in the index when it is rejigged in September, “but its presence in the relegation zone is a dramatic indicator of the once-European banking champion’s fall from grace.”

Some more details on the Stoxx 50, one of the most popular European aggregate indices:

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

India Central Bank Intervenes As Rupee Crashes To Record Low

Just weeks after Urjit Patel, Governor of the Reserve Bank of India, wrote an op-ed in the FT warning that should the US maintain its current pace of monetary policy tightening, it could have serious repercussions for the global economy, it is…

It was the first time this tightening cycle that a prominent foreign central banker has accused the Fed of stirring trouble for emerging markets, with its ongoing tightening, and specifically, the balance sheet reduction coupled with the Treasury debt issuance surge, to wit:

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

Patel’s advice? Immediately taper the tapering, or rather, the Fed should “recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.”

Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank’s Aleksandar Kocic two weeks ago, and which we explained in “Why The Soaring Dollar Will Lead To An “Explosive” Market Repricing.”

 

And Patel’s warnings are coming true as The Fed’s actions are impacting India as much – if not more – than anywhere else.

The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer.

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

How Long Can The Federal Reserve Stave Off the Inevitable?

How Long Can The Federal Reserve Stave Off the Inevitable?

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them. The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs.

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

BIS Confirms Banks Use “Lehman-Style Trick” To Disguise Debt, Engage In “Window Dressing”

Several years ago we showed how the Fed’s then-new Reverse Repo operation had quickly transformed into nothing more than a quarter-end “window dressing” operation for major banks, seeking to make their balance sheets appear healthier and more stable for regulatory purposes.

As we described in article such as “What Just Happened In Today’s “Crazy” And Biggest Ever “Window-Dressing” Reverse Repo?”,Window Dressing On, Window Dressing Off… Amounting To $140 Billion In Two Days”, Month-End Window Dressing Sends Fed Reverse Repo Usage To $208 Billion: Second Highest Ever“, “WTF Chart Of The Day: “Holy $340 Billion In Quarter-End Window Dressing, Batman“, “Record $189 Billion Injected Into Market From “Window Dressing” Reverse Repo Unwind” and so on, we showed how banks were purposefully making their balance sheets appear better than they really with the aid of short-term Fed facilities for quarter-end regulatory purposes, a trick that gained prominence first nearly a decade ago with the infamous Lehman “Repo 105.”

And this is a snapshot of what the reverse-repo usage looked like back in late 2014:

Today, in its latest Annual Economic Report, some 4 years after our original allegations, the Bank for International Settlements has confirmed that banks may indeed be “disguising” their borrowings “in a way similar to that used by Lehman Brothers” as debt ratios fall within limits imposed by regulators just four times a year, thank to the use of repo arrangements.

For those unfamiliar, the BIS explains that window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or quarter-ends and notes that “window-dressing can reflect attempts to optimise a firm’s profit and loss for taxation purposes.”

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

Ike was right!

POITOU, FRANCE – We wait for the world to fall apart.

The Dow is still more than 1,000 points below its high; so we presume the primary trend is down. Treasury yields – on the 10-year note – are near 3%… twice what they were two years ago. So we presume the primary trend for bonds is down, too.

If we’re right, we are at the beginning of a long slide… down, down, down… into chaos, destitution, and destruction.

Faked Out

Our working hypothesis is that General Eisenhower was right. There were two big temptations to the American Republic of the 1950s; subsequent generations gave in to both of them.

They spent their children’s and grandchildren’s money. Now, the country has a government debt of $21 trillion. That’s up from $288 billion when Ike left the White House.

And they allowed the “unwarranted influence” of the “military/industrial complex” to grow into a monster. No president, no matter how good his intentions, can stop it.

A corollary to our major hypothesis is that the rise of the Deep State (the military/industrial/social welfare/security/prison/medical care/education/bureaucrat/crony complex) was funded by the Fed’s fake-money system.

Now, investors, businesses, households, and the feds themselves have all been “faked out” by a fraudulent money system. None of them can survive a cutback in credit.

For nearly 30 years, central banks have backstopped markets and flooded the world with liquidity.

But last week, the Fed turned the screws a little further. It now targets a 2% Fed Funds Rate and claims to be on the path of “normalization.”

And the European Central Bank (ECB) made it official, too; it hasn’t quite begun tightening, but it’s got its toolbox open. And command of the ECB work crew is set to change hands next year anyway, passing on to a German engineer.

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

Next Central Bank Puts QE Unwind on the Calendar

Next Central Bank Puts QE Unwind on the Calendar

The end of an era spreads.

Markets were surprised today when the Bank of England took a “hawkish” turn and announced that three out of nine members of its Monetary Policy Committee – including influential Chief Economist Andrew Haldane, who’d been considered dovish – voted to raise the Bank Rate to 0.75%, thus dissenting from the majority who kept it at 0.5%. This dissension, particularly by Haldane, communicated to the markets that a rate hike at the next meeting in August is likely. The beaten-down UK pound jumped.

But less prominent was the announcement about the QE unwind. Like other central banks, the BoE heavily engaged in QE and maintains a balance sheet of £435 billion ($577 billion) of British government bonds and £10 billion ($13 billion) in UK corporate bonds that it had acquired during the Brexit kerfuffle.

Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed, “reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy,” as it said.

In this, it parallels the Fed. The Fed started its QE unwind in October 2017, after it had already raised its target range for the federal funds rate four times.

The BoE’s previous guidance was that the QE unwind would start when the Bank Rate is “around 2%.” Back in the day when this guidance was given, NIRP had broken out all over Europe, and pundits assumed that the BoE would never be able to raise its rate to anywhere near 2%, and so the QE unwind could never happen.

Today the BoE moved down its guidance about the beginning of the QE unwind to a time when the Bank Rate is “around 1.5%.”

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

The Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT]) Photo credit: Andrew Harrer / Bloomberg

Naturally, the Fed and all other central bankers prefer the definition of inflation as a rise in prices which insidiously hides the fact that they, being the issuers of currency, are the real culprit for increased prices.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards.  In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living!  Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum!  Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

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

Watch Live: The World’s Top 3 Central Bankers Discuss What’s Next

Update: Powell has maintained his hawkish tone from last week’s press conference with his comments in Sintra on the labor market and monetary policy. He expressed confidence in the US economy and said “the case for continued gradual rate hikes is strong.”

According to CitiFX’s market commentary, its traders highlighted one dovish remark when Powell was speaking about the uncertainty surrounding the NAIRU: “Natural rate estimates have always been uncertain, and may be even more so now as inflation has become less responsive to the unemployment rate…as I mentioned, a tight labor market could draw more people into the labor force.”

Here are the headlines:

  • POWELL SAYS CASE FOR CONTINUED GRADUAL RATE HIKES IS `STRONG’
  • POWELL: JOB MARKET TO STRENGTHEN FURTHER, SUPPORT WAGE GROWTH
  • FED’S POWELL REMARKS IN TEXT OF SPEECH AT ECB FORUM IN PORTUGAL
  • POWELL: INFLATION HAS MOVED UP CLOSE TO FED’S 2% GOAL
  • POWELL: U.S. ECONOMY PERFORMING VERY WELL
  • POWELL SAYS GRADUAL RATE-HIKE CASE `BROADLY SUPPORTED’ ON FOMC
  • POWELL: YET TO SEE INFLATION STAY NEAR GOAL ON SUSTAINED BASIS
  • POWELL: U.S. FISCAL POLICY TO ADD TO DEMAND OVER NEXT FEW YEARS

* * *

European Central Bank President Mario Draghi, Fed Chairman Jerome Powell and Bank of Japan Governor Haruhiko Kuroda will appear on a policy panel Wednesday that’s set to begin at 15:30 CET (that’s 10:30 am ET). They will be joined by Philip Lowe, the Governor of the Reserve Bank of Australia. The panel is the last big event of the 2018 ECB annual forum on central banking, which was held in Sintra, Portugal and featured the theme “price and wage-setting in advanced economies.”

Of course, there is likely to be disagreement among the 4 (or 3 big guys) as Kuroda remains pedal to the metal on his easing policies (despite the stealth tapering), Draghi has started to adjust to a tightening regime, and Powell is in full normalization mode.

All of which is ironic given that all three  face notable demises in their recent economic data…

 

Watch the panel live below:

America’s Debt Dependence Makes It An Easy Economic Target

America’s Debt Dependence Makes It An Easy Economic Target

There is a classic denial tactic that many people use when confronted with negative facts about a subject they have a personal attachment to; I would call it “deferral denial” — or a psychological postponing of reality.

For example, point out the fundamentals on the U.S. economy such as the fact that unemployment is not below 4% as official numbers suggest, but actually closer to 20% when you factor in U-6 measurements including the record 96 million people not counted because they have run out of unemployment benefits. Or point out that true consumer inflation in the U.S. is not around 3% as the Federal Reserve and the Bureau of Labor Statistics claims, but closer to 10% according to the way CPI used to be calculated before the government started rigging the numbers.  For a large part of the public including a lot of economic analysts, there is perhaps a momentary acceptance of the danger, but then an immediate deferral — “Well, maybe things will get worse down the road, 10 or 20 years from now, but it’s not that bad today…”

This is cognitive dissonance at its finest. The economy is in steep decline now, but the mind in denial says “it could be worse,” and this is how you get entire populations caught completely off guard by a financial crash. They could have easily seen the signs, but they desperately wanted to believe that all bad things happen in some illusory future, not today.

There is also another denial tactic I see often in the world of politics and economics, which is what I call “paying it backward.” This is what people do when they have a biased attachment to a person or institution and refuse to see the terrible implications of their actions.

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

Kass – Risk Happens Fast

Risk Happens Fast

  • Risk happens fast – Trump trade policy whacks futures this morning
  • We remain in a trading sardine market – not an eating sardine market
  • Hastily crafted policy that conflates politics is dangerous in a flat and networked world
  • The return of an untethered Orange Swan is market unfriendly … brace yourselves
  • The Supreme Tweeter will likely “Make Uncertainty and Volatility Great Again” (#MUVGA)

The First Half of 2018

The first half of 2018 has been a tale of two markets. Maybe three markets.

January brought a market fervor – in which global equities rose dramatically, likely in response to the expected stimulative contribution and impact of the Administration’s reduction in statutory tax rates.

As interest rates began to climb in January, bullish investor sentiment crested and the risk parity trade went array.

Stocks fell violently in February and the new regime of volatility commenced – in a market revealed as increasingly illiquid.

The S&P Index fell from nearly 2900 and successfully tested the 2550 level twice. Several meek rallies commenced but the S&P had 2-3 more successful tests at about 2600 and stocks recently closed in on 2800 (S&P Index).

1Q-2018 corporate revenues and profits didn’t disappoint but the complexion of the market had clearly changed – and valuations (the S&P Index’s price earnings ratio expanded by almost 3 points in 2017) began to contract. Wall Street, which outperformed Main Street in 2017 – reversed roles in the first six months of 2018.

While the stock market reeled with volatility since January 1, the FAANG stocks generally stood tall throughout the year as the market narrowed and investor interest focused on the 5-10 anointed stocks.

The first half of 2018 was also characterized by a series of questionable and controversial presidential policies (the most recent being trade/tariff decisions) at the same time the Federal Reserve was pivoting on monetary policy. By overtly playing to his base, having little sense of economic history, Trump has contributed to even greater volatility in a market without memory from day to day.

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

Living Dangerously

Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

 

living danger 1

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019.

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

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…

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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