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Amid the growing debate whether rates will keep rising once they hit 3.00%, or they will fall as asset managers find the new level attractive enough to dip their toes and buy duration, one analyst laughs at everyone calling for lower rates from here onward.

In a note published overnight, Deutsche Bank credit strategist Jim Reid writes that “rates and yields will continue to structurally move higher in the quarters and years ahead regardless of any short-term moves, and we hope policymakers won’t be derailed by the inevitable macro issues that this will bring.”

While we will share some more details from this note, the first in a series of why Deutsche believes that global yields have nowhere to go but up, we wanted to highlight one chart which according to Deustche does not make any sense in the context of the ongoing debate of potentially lower yields: the projection of global debt to GDP forecasts for the next 30 years.

According to Reid, “notwithstanding the short-term low supply expectations in Europe, a real head-scratcher going forward is how the market will cope over the years and even decades to come with the central case scenario of higher and higher government debt around the world. Figure 13 looks at the US, Germany and Japan government debt/GDP with forecasts from the US CBO and BIS.”

And here is the chart that is at the crux of Reid’s conundrum: this is the same chart which prompted Fed president Robert Kaplan to suggest that the US debt trajectory is headed toward unsustainability.

Reid’s summary:

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

It Was Not Effective, But We’ll Do It Again

February 24, 2018

It Was Not Effective, But We’ll Do It Again

Boston Fed President Eric Rosengren has some interesting comments about QE today.

The Bond Buyer reports Rosengren Expects Fed to Again Resort to Asset Purchases.

Although large scale asset purchase programs may not be as effective as previously believed, Federal Reserve Bank of Boston President Eric Rosengren said Friday, “it is quite likely” that the programs will be needed in the future.

Crisis-Era Failures

The Wall Street Journal reports Fed’s Crisis-Era, Bond-Buying Plan Was Largely Ineffective, Economists Say.

The Federal Reserve’s signature bond buying stimulus program undertaken during and in the wake of the financial crisis was largely a dud for the economy, argues a new paper authored by a group of prominent economists.

The paper, which was to be presented Friday at a conference held in New York by the University of Chicago Booth School of Business, takes aim at the central bank’s controversial purchases of long-term Treasury and mortgage debt.

Given the unorthodox nature of the stimulus, arriving in an economy undergoing huge stress, central bankers and academics have long struggled to understand what the Fed got for a policy that took its portfolio of cash and bonds from a pre-crisis level of just over $800 billion in 2007 to a peak of $4.5 trillion.

“We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist,” the paper’s authors wrote. Their findings were based on a study of Fed policy announcements referenced against market reactions.

William Dudley of the Federal Reserve Bank of New York and Eric Rosengren of the Federal Reserve Bank of Boston both said on a panel discussing the paper’s findings that they agree it’s hard to understand the exact impact of the bond buying.

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

ECB minutes reveal fears over Trump currency wars

February 23, 2018

Euro zone concerns over the weakness of the dollar were laid bare in a set of European Central Bank minutes that highlighted fears the Trump administration was deliberately trying to engage in currency wars.

The account of the ECB’s January monetary policy meeting also reveals that its hawkish members pushed for a change in the bank’s communications, arguing economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown.

Mario Draghi, ECB president, last month hit out at US treasury secretary Steven Mnuchin’s claim that a weak dollar was good for the American economy. Mr Draghi said Washington needed to uphold the rules of the international monetary system, which forbid nations from deliberately devaluing their currencies.

Mr Mnuchin’s remarks were seen as a signal that the US could ditch its strong dollar policy – which could lower euro zone exports and make it harder for the ECB to hit its inflation target.

Mr Mnuchin later said his comments were “completely consistent with what I’ve said before” and that he had merely made a “factual statement” that a weaker dollar would help the US on trade in the short term. President Donald Trump has also since reaffirmed the strong dollar policy.

The accounts of the ECB meeting on January 24th -25th, published on Thursday, show Mr Draghi’s fears were widely shared among the bank’s decision makers. “Concerns were…expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations,” the account said.

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

Fed President Sounds Panic Over Level Of US Debt

February 21, 2018

Fed President Sounds Panic Over Level Of US Debt

Nearly a decade after the US unleashed its biggest debt-issuance binge in history, made possible only thanks to the Fed’s monetization of nearly $4 trillion in deficits (and debt issuance), the Fed is starting to get nervous about the (un)sustainability of the US debt.

The Federal Reserve should continue to raise U.S. interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

“I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018,” Kaplan said in an essay updating his views on the economic and policy outlook.

“History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.” The Fed is widely expected to raise rates three times this year, starting next month.

Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year. But he warned Wednesday that falling behind the curve on rate hikes could make a recession more likely.

Echoing the recent Goldman analysis, warning that the recently implemented budget could lead to an “unsustainable” debt load, Kaplan – who previously worked for Goldman – also had some cautionary words about the Trump administration’s recent tax overhaul, which he said would help lift U.S. economic growth to 2.5% to 2.75% this year, pushing the U.S. unemployment rate, now at 4.1% down to 3.6% by the end of 2018.

On the all important issue of inflation, he projected it would firm this year on route to the Fed’s 2-percent goal.

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

Latest Wealth Data Shows Disproportionate Gains to the Rich During Era of QE

February 19, 2018

LATEST WEALTH DATA SHOWS DISPROPORTIONATE GAINS TO THE RICH DURING ERA OF QE

The latest ONS Wealth and Assets Survey, released last Thursday, once again showed the sheer extent of wealth inequality in the UK. A comparison of percentile figures with those from the previous wave suggests households in the wealthiest 10% gained on average nearly 700 times as much as the poorest 10% between 2012-2014 and 2014-2016.

The average total wealth of the of the bottom 10 percentile households rose by £330 between 2012-2014 and 2014-2016 (from £5,293 to £5623). The average total wealth of the top 10 percentile households increased by £229,541 over the same period (from £1,663,912 to £1,893,453).

The distribution of total wealth across UK households is extremely unequal. Naturally, so too are the gains in wealth in recent years.

The figures are significant because they are the latest to contradict the position taken by Bank of England governor Mark Carney in a 2016 speech, when he used the ONS data to claim that the “poorest have gained the most” from the Bank’s quantitative easing programme. As Positive Money showed in an analysis from October last year, the Bank painted a misleading picture by using relative rather than absolute figures. Data from the the 2006-08 to 2012-14 waves of the Wealth and Assets Survey showed an absolute gain for the wealthiest 10% almost 200 times greater than that for the poorest.

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

Is The Fed Back To “Quantitative Easing?”

February 19, 2018

Is The Fed Back To “Quantitative Easing?”

The Fed added $11 billion to its SOMA account for the week ending yesterday. It purchased $11 billion in mortgage securities directly from banks. This injects $11 billion into the banking system. Cash is “high powered” money, meaning it can be leveraged 10x (banks need to hold 10% in reserves against “high powered” money. $11 billion is $110 billion of leverage for the banks to use for activities such as propping up the stock market.

This certainly explains why there appears to be another “V” recovery in the stock market after a near-10% drawdown in the Dow and the SPX. This is very similar to the 10% market plunges in August 2015 and January 2016, both of which were followed with highly unusual “V” recoveries.

This is also likely the catalyst that powered gold’s $41 rise since February 9th.

Clearly the Federal Reserve – not withstanding the fecal odor that emanates from Fed officials’ mouths when they speak – has an implicit monetary policy that targets the stock prices.

Furthermore, the Fed must be getting worried about the housing market. Removing $11 billion in mortgage securities from the banking system and replacing those securities with cash was likely a move targeting the rate spread between conventional mortgages and the 10-yr Treasury. Mortgage purchase applications plunged 6% last week. This was without question in response to mortgage rates pushed meaningfully higher by the rising 10yr Treasury yield and the widening of spreads associated with higher volatility in the markets.

I remain highly skeptical that the Fed will actually follow-through with its stated plan to raise monthly its balance sheet reduction to $30 billion this year. In fact, the Fed has yet to disclose a definitive schedule for said balance sheet reduction. I’m taking wagers that we do not see this occur.

Danielle DiMartino Booth: Don’t Count On The Powell Fed To Rescue The Markets

February 12, 2018

Danielle DiMartino Booth: Don’t Count On The Powell Fed To Rescue The Markets

The new Fed Chair may break from his predecessors

The recent gut-wrenching drop in asset prices began on the first day of the job for new Federal Reserve Chairman Jerome Powell.

How is Mr. Powell likely to react to a suddenly sick-looking market? Will he step in forcefully to reassure investors that there’s a “Powell put” in place as a backstop?

To address these questions, former analyst at the Federal Reserve Bank of Dallas, Danielle DiMartino Booth, returns to the podcast this week. In her opinion, having studied Powell’s previous statements, she thinks those expecting him to continue the market support his predecessors provided will likely be quite disappointed.

Powell appears to be no large fan of continued quantitative easing, and has long been on the record as concerned about the eventual pain its unwind will cause. He very well may resist riding to the market’s rescue at this time, allowing natural market forces to finally have their way:

Look, this is a message that market participants do not want to hear: It is not the Federal Reserves job to put a floor under risky asset prices.

Compare and contrast Jerome Powell’s silence in the wake of the flash crash on his first day at work to Alan Greenspan — who got on an airplane the day after the Black Monday crash of 1987, canceling an appearance he was to have made, and reassuring the markets with a statement on Tuesday morning that the Federal Reserve was standing by and ready and willing and available to satisfy any kind of disruption in the banking and financial systems. That was the day — October 20, 1987 — that the Greenspan put was born.

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

A Warning Knell From the Housing Market–Inciting a Riot

February 7, 2018

A WARNING KNELL FROM THE HOUSING MARKET – INCITING A RIOT?

Global residential real estate prices continue to rise but momentum is slowing
Prices in Russia continue to fall but Australian house prices look set to follow
After a decade of QE, real estate will be more sensitive to interest rate increases

As anyone who owns a house will tell you, all property markets are, ‘local.’ Location is key. Nonetheless, when looking for indicators of a change in sentiment with regard to asset prices in general, residential real estate lends support to equity bull markets. Whilst it usually follows the performance of the stock market, this time it may be a harbinger of austerity to come.

The most expensive real estate is to be found in areas of limited supply; as Mark Twain once quipped, when asked what asset one should invest in, he replied, ‘Buy land, they’re not making it anymore.’ Mega cities are a good example of this phenomenon. They are a sign of progress. As Ian Stewart of Deloittes put it in this week’s Monday Briefing – How distance survived the communication revolution:-

In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased.

Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job.

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

Weekly Commentary: The Grand Crowded Trade of Financial Speculation

February 3, 2018

Weekly Commentary: The Grand Crowded Trade of Financial Speculation

Even well into 2017, variations of the “secular stagnation” thesis remained popular within the economics community. Accelerating synchronized global growth notwithstanding, there’s been this enduring notion that economies are burdened by “insufficient aggregate demand.” The “natural rate” (R-Star) has sunk to a historical low. Conviction in the central bank community has held firm – as years have passed – that the only remedy for this backdrop is extraordinarily low rates and aggressive “money” printing. Over-liquefied financial markets have enjoyed quite a prolonged celebration.

Going back to early CBBs, I’ve found it useful to caricature the analysis into two distinctly separate systems, the “Real Economy Sphere” and the “Financial Sphere.” It’s been my long-held view that financial and monetary policy innovations fueled momentous “Financial Sphere” inflation. This financial Bubble has created increasingly systemic maladjustment and structural impairment within both the Real Economy and Financial Spheres. I believe finance today is fundamentally unstable, though the associated acute fragility remains suppressed so long as securities prices are inflating.

The mortgage finance Bubble period engendered major U.S. structural economic impairment. This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities. Moreover, it had become a global phenomenon that demanded a coordinated central bank response.

Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.”

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

The Pension Ponzi Scheme is Coming to an End

February 2, 2018

The Pension Ponzi Scheme is Coming to an End

Inevitably, all things must come to an end. Our entire problem with government is we have ZERO accountability and ZEROqualification standards to even run for office. The Democrats have put forth blacks and women, not because of their abilities, but simply because they want to score votes. The latest proposal was to put Oprah Winfrey up for president. She is black and a woman. This is the qualification requirement? This is like going to Jay Leno for brain surgery. This is why we are in such a crisis. Oprah may be a nice person, but that does not qualify her to make a decision in international relations no less economics.

We impose no qualifications to be a politician. Anyone can run for office. We are in serious trouble because we elect people who have no idea what is going on and just assume everything has been working so why change it? I have warned that the Central Banks in quantitative Easing set the stage for the next crisis. The excessive low-interest rates for nearly 10 years has undermined the pension system while all governments have borrowed like crazy never considering what happens if rates rise?

In Britain, two out of three pension funds are in the deficit. In total, some 3,710 pension schemes are in deficit according to the Pension Protection Fund watchdog. The entire Ponzi Scheme of pension is falling apart. We need crisis management right NOW and there isn’t a hope in hell of moving to such a position of a Crisis Manager. Millions of workers around the world who believed in government are going to see their futures wiped out.

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

Fed’s QE Unwind Accelerates Sharply

February 2, 2018

Fed’s QE Unwind Accelerates Sharply

With a sense of urgency. No more dilly-dallying around.

The Fed’s balance sheet for the week ending January 31, released this afternoon, completes the fourth month of QE-unwind. And it’s starting to be a doozie.

This “balance sheet normalization” impacts two types of assets: Treasury securities and mortgage backed securities (MBS) that the Fed acquired during the years of QE and maintained afterwards.

The Fed’s plan, as announced in September, is to shrink the balances of Treasuries and MBS by up to $10 billion per month in October, November, and December 2017, then to accelerate the pace every three months. In January, February, and March 2018, the unwind would be capped at $20 billion a month; in Q2, at $30 billion a month; in Q3, at $40 billion a month; and starting in Q4, at $50 billion a month.

According to this plan, balances of Treasuries and MBS will shrink by $420 billion in 2018, by an additional $600 billion in 2019, and by additional $600 every year going forward until the Fed deems the level of its holdings “normal.” Whatever this level may turn out to be, it will be much higher than the level suggested by the growth trajectory before the Financial Crisis.

For January, the plan called for shedding up to $20 billion: $12 billion in Treasuries and $8 billion in MBS.

So how did it go?

On its December 27 balance sheet, the Fed had $2,454 billion of Treasuries. By January 31, it had $2,436 billion: a drop of $18 billion in one month!

This exceeds the planned drop of $12 billion for January. But hey, over the holidays, most folks at the New York Fed, which does the balance sheet operations, were probably off and not much happened. And so this may have been a catch-up action, with a sense of urgency.

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

QE…The Gift That Just Kept Giving…Is Now Taking

February 1, 2018

QE…The Gift That Just Kept Giving…Is Now Taking

I know the Federal Reserve doesn’t effectively create money or directly monetize. I know this because then Fed chief, Ben Bernanke, told us so (HERE). But still, something has me wondering about that exchange, now almost a decade ago. The simplest of math.

The plan to utilize quantitative easing and avoid direct monetization went like this. The Fed would digitally conjure “money” to buy the US Treasury bonds and Mortgage Backed Securities (remove assets from the market) from the big banks. However, the Fed would force those banks to deposit the newly conjured “money” at the Federal Reserve. This would avoid the trillions of newly created dollars from going in search of the remaining assets (particularly levered from somewhere between 5x’s to 10x’s…turning a trillion into five to 10 trillion…or more).

The chart below shows the Federal Reserve balance sheet (red line) and the quantity of those newly created dollars that the recipients of those dollars, the banks, deposited at the Federal Reserve (blue line). But the green line is the quantity of newly created dollars that have “leaked” out…also known as “monetized”.

The interplay of QE and excess reserves resulted in the peak QE impact taking effect long after QE was tapered and had ceased (chart below). The trillions in assets remaining with the Fed, but the new cash no longer under lock and key at the Fed.

The impact of $800+ billion of pure monetization from late 2014 through year end 2016 was spectacular. In the hands of the largest banks (multiplied by “conservative” leverage somewhere between 5 to 10x’s) easily amounting to trillions in new cash looking for assets. A “bull market” beyond belief should not have been surprising.

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

Will Monetary Policy Trigger Another Financial Crisis?

January 26, 2018

Will Monetary Policy Trigger Another Financial Crisis?

Sustained unconventional monetary policies in the years after the 2008 global financial crisis created the conditions for the second-longest bull market in history. But they also may have sown the seeds of the next financial crisis, which might take root as central banks continue to normalize their policies and shrink their balance sheets.

LONDON – Former US President Ronald Reagan once quipped that, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” Put another way, policymakers often respond to problems in ways that cause more problems.

Consider the response to the 2008 financial crisis. After almost a decade of unconventional monetary policies by developed countries’ central banks, all 35 OECD economies are now enjoying synchronized growth, and financial markets are in the midst of the second-longest bull market in history. With the S&P 500 having risen 250% since March 2009, it is tempting to declare unprecedented monetary policies such as quantitative easing (QE) and ultra-low interest rates a great success.

But there are three reasons for doubt. First, income inequality has widened dramatically during this period. While negative real (inflation-adjusted) interest rates and QE have hurt savers by repressing cash and government-bond holdings, they have broadly boosted the prices of stocks and other risky financial assets, which are most commonly held by the wealthy. When there is no yield in traditional fixed-income investments such as government bonds, even the most conservative pension funds have little choice but to pile into risk assets, driving prices even higher and further widening the wealth divide.

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

‘Perfect storm’: Global financial system showing danger signs, says senior OECD economist

January 25, 2018

‘Perfect storm’: Global financial system showing danger signs, says senior OECD economist

Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.

William White says the lessons from the GFC have been forgotten.

Photo: AP

“All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.

The Trump Administration's tax and spending blitz has pushed the US budget deficit toward $US1 trillion. — The Trump Administration’s tax and spending blitz has pushed the US budget deficit toward $US1 trillion.

Professor White said disturbing evidence of credit degradation is emerging almost daily. The latest is the disclosure that distressed UK construction group Carillion quietly raised £112 million ($195 million) through German Schuldschein bonds. South African retailer Steinhoff also tapped this obscure market, borrowing €730 million ($1.11 billion).

Schuldschein loans were once a feature of rock-solid lending to family Mittelstand companies in Germany. The transformation of this corner of the market into a form of high-risk shadow banking shows how the lending system has been distorted by quantitative easing (QE) and negative interest rates. Professor White said there was an intoxicating optimism at the top of every unstable boom when people convince themselves that risk is fading, but that is when the worst mistakes are made. Stress indicators were equally depressed in 2007 just before the storm broke.

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

What Will Rising Mortgage Rates Do to Housing Bubble 2?

January 20, 2018

What Will Rising Mortgage Rates Do to Housing Bubble 2?

Oops, they’re already rising.

The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008.

In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind.

September as month of the QE-Unwind announcement keeps cropping up. All kinds of things began to happen, at first quietly, without drawing much attention. But then the trajectory just kept going.

The three-year yield, which had gone nowhere for the first eight months of 2017, rose to 2.20% on Friday, the highest since October 1, 2008. It has spiked 82 basis points since September 8:

The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday.

This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields.

At 2.66%, the 10-year yield has reached its highest level since April 2014, when the “Taper Tantrum” was winding down. That Taper Tantrum was the bond market’s way of saying “we’re shocked and appalled,” when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called “QE Infinity.”

The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):

Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet.

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

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