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Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

August 21, 2017

Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

“Let markets clear.” It’ll be just “a financial engineering shock.”

Stock and bond markets are in denial about the effects of the Fed’s forthcoming QE unwind, whose kick-off is getting closer by the day, according to the minutes of the Fed’s July meeting.

“Several participants” were fretting how financial conditions had eased since the rate hikes began in earnest last December, instead of tightening. “Further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions,” they said. So something needs to be done about it.

And “several participants were prepared to announce a starting date for the program at the current meeting” – so the meeting in July – “most preferred to defer that decision until an upcoming meeting.” So the September meeting. And markets are now expecting the QE unwind to be announced in September.

Since then, short-term Treasury yields have remained relatively stable, reflecting the Fed’s current target range for the federal funds rate of 1% to 1.25%. But long-term rates, which the Fed intends to push up with the QE unwind, have come down further. As a consequence, the yield curve has flattened further, which is the opposite of what the Fed wants to accomplish.

The chart shows how the yield curve for current yields (red line) across the maturities has flattened against the yield curve on December 14 (blue line), when the Fed got serious about tightening:

Yields of junk bonds at the riskiest end (rated CCC or below) surged in the second half of 2015 and in early 2016, peaking above 20% on average, as bond prices have plunged (they move in opposite directions) in part due to the collapse of energy junk bonds, which caused a phenomenal bout of Fed flip-flopping.

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

The ECB Morphs into the Mother of All “Bad Banks”

July 25, 2017

The ECB Morphs into the Mother of All “Bad Banks”

More than just a few “fallen angels.”.

As part of its QE operations, the ECB continues to pour billions of freshly created euros each month into corporate bonds – and sometimes when it buys bonds via “private placements” directly into some of Europe’s biggest corporations and the European subsidiaries of non-European transnationals. Its total corporate bond purchases recently passed the €100 billion threshold. And it’s growing at a rate of roughly €7 billion a month. And it’s in the process of becoming the biggest “bad bank.”

When the ECB first embarked on its corporate bond-buying scheme in March 2016, it stated that it would buy only investment-grade rated debt. But shortly after that, concerns were raised about what might happen if a name it owned was downgraded to below investment grade. A few months later a representative of the bank put such fears to rest by announcing that it “is not required to sell its holdings in the event of a downgrade” to junk, raising the prospect of it holding so-called “fallen angels.”

Now, sixteen months into the program, it turns out that the ECB has bought into 981 different corporate bond issuances, of which 34 are currently rated BB+, so non-investment grade, or junk. And 208 of the issuances are non-rated (NR). So in total, a quarter of the bond issuances it purchased are either junk or not rated (red bars):

The ECB initially said it would only buy bonds that are “rated” — and rated investment grade. Thus having a quarter of the bonds on its books either junk or not rated represents a major violation of that promise.

The ECB is clearly loading up on risk and possibly bad credit that Draghi’s successor is going to have to eat at some point further down the road.

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

Banks Are Scheming to Dominate a Future Cashless Society

July 25, 2017

Banks Are Scheming to Dominate a Future Cashless Society

(ANTIMEDIA) — Visa recently announced its new Cashless Challenge program, which offers $10,000 to restaurants willing to transition into accepting only digital payments.  As the largest credit card processor in the U.S., it’s no surprise Visa is spearheading this campaign. Under the guise of increasing transparency and efficiency, they’ve partnered with governments around the world to help convert financial systems into cashless models, but their real incentive is the billions of dollars in extra transaction fees it would generate.

“We are declaring war on cash,” Visa spokesman Andy Gerlt proudly proclaimed after the program was announced.

The food-based small businesses Visa is targeting are among those that benefit most from accepting cash from customers. When transactions are for amounts less than $10, the fees charged cut significantly into profits. Only 28% of food trucks currently accept credit card payments because of the huge losses they incur from them. The bribe from Visa may seem appealing up front but will be mostly paid back to them over the next few years in fees alone.

Liz Garner, Vice President of the Merchant Advisory Group, which represents over 100 of the largest businesses in the U.S., explained some of the hurdles faced when dealing with card networks:

“For many businesses – both large and small – the cost of accepting plastic cards and other forms of electronic payments is one of their highest operating costs. Most business owners have no qualms about paying reasonable fees for business services, and they do so every day for items such as cleaning services, security systems, Wi-Fi, and other basic needs. However, they have the ability to negotiate for those services in a fair and transparent marketplace, which they do not with the two major credit and debit card networks….Credit card and debit card fees are dictated directly by Visa and MasterCard and are imposed on the majority of merchants in a take-it-or-leave-it fashion. 

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

Why Quantitative Tightening Will Fail

July 4, 2017

Why Quantitative Tightening Will Fail

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

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

Myths Behind the War on Cash

June 28, 2017

Myths Behind the War on Cash5856660723_ef2b89a8e6_z.jpg

The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.

In a highly-recommended study entitled “Cash, Freedom and Crime. Use and Impact of Cash in a World Going Digital,” Deutsche Bank Research demolishes numerous popular myths surrounding cash, inter alia in the context of crime and terrorism. Without cash there are no longer bank robberies at gun point, instead there are now electronic bank robberies. Fraud involving credit cards and ATM cards is massively increasing in Sweden, the country considered the pioneer of the cashless society. The argument that adopting a cashless payment system would facilitate the fight against terrorism doesn’t hold water either:

As regards terrorism in Europe, an analysis of 40 jihadist attacks in the past 20 years shows that most funding came from delinquents’ own funds and 75% of the attacks cost in total less than USD 10,000 to carry out — sums that will hardly raise suspicions even if paid by card.

Moreover, many terrorists, particularly if they are prepared to risk their own death, won’t be deterred by prohibitions, just as stricter gun laws have no impact on people who must use unregistered weapons for their crimes. Often, they are unable to get hold of a weapon by legal means anyway if they have a criminal record. Planned terror attacks are as a rule characterized by a meticulous and careful approach. At best a cash ban might make financing of terrorism more difficult (even that is doubtful), but at the price of subjecting the law-abiding peaceful population at large to even more intrusive surveillance.

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

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

June 27, 2017

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.
Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
History informs us that rising wealth and income inequality generate social disorder.
Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
…click on the above link to read the rest of the article…

Italy’s newest bank bailout cost as much as its annual defense budget

June 27, 2017

Italy’s newest bank bailout cost as much as its annual defense budget

Two more Italian banks failed over the weekend– Banco Popolare di Vicenza and Veneto Banca.

(In other news, the sky is blue.)

The Italian Prime Minister himself stated that depositors’ funds were at risk, so the government stepped in with a bailout and guarantee package that could cost taxpayers as much as 17 billion euros.

That’s a lot of money in Italy– around 1% of GDP. In fact it’s basically as much as the 17.1 billion euros they spent on national defense last year (according to an estimate by Italian think tank IAI).

You don’t have to have a PhD in economics to figure out that NO government can afford to spend its entire defense budget every time a couple of medium-sized banks need a bailout.

That goes especially for Italy, whose public debt level is already 132% of GDP… and rising. They simply don’t have the money.

Moreover, the European Union actually has a series of new rules collectively known as the “Bank Recovery and Resolution Directive” which is supposed to prevent failing banks from being bailed out with taxpayer funds.

Here’s the thing– Italy has LOTS of banks that are on the ropes.

So with taxpayer resources exhausted (and technically prohibited), who’s going to be on the hook next time a bank goes under?

Easy. By process of elimination, the only other party left to fleece is the depositor.

Here’s how it works:

Let’s say a bank takes in $1 billion in deposits.

Naturally the bank doesn’t just keep $1 billion in cash sitting in its vault. They invest the money. They make loans. They buy assets.

So the bank’s balance sheet shows $1 billion worth of assets, and $1 billion worth of deposits that they owe to their customers.

But sometimes banks screw up when they invest their customers’ funds. Loans go bad. Borrowers default.

 

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

Two Italian Zombie Banks Toppled Friday Night

June 24, 2017

Two Italian Zombie Banks Toppled Friday Night

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

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

The Federal Reserve Is Destroying America

May 27, 2017

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people.  Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America.  They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet.  To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other.  They both rest upon an impossibility.  Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world.  It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected.  “This is what we do,” they probably said to each other and their followers.  “This is what we’ve always done.  Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

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

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

May 25, 2017

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

A “prudent” Fed (and China’s “National Team”) have spurred a risk-on rally, as RBC’s head of cross-asset strategy Charlie McElligott notes the market’s ‘Pavolovian’ response to Fed’s ‘dovish hints’ contained within the Minutes – despite simultaneously staying ‘on message’ with hiking / tapering commentary – prompts a “QE of old” response: stocks and Treasuries bid, while the USD faded.

China further perpetuates the ‘risk rally’ via apparent market interventions:

1.       Intervention in FX markets to strengthen the Yuan overnight, with speculation of a number of Chinese banks selling Dollars in the onshore market overnight which drove the Yuan higher.

2.       Chinese “National Team” stock market inventions as well, with sharp-turns higher off of an initially weaker equities opening and again-weaker industrial metals.   Major reversals off lows saw nearly all domestic markets close at highs (Shanghai Prop +2.8%), while Hong Kong’s Hang Seng closed at highs since July 2015, with Chinese real estate developers leading.

Initial (and expected) ‘sell the news’ on the snoozer OPEC outcome, as they extend the output cut 9 months per expectations—which disappointed the ‘bullish surprise’ camp which anticipated more OPEC-‘gaming’ of the market, thinking it was possible for a deeper-cut in conjunction with the consensus extension.

This move lower in crude is notable if it were to escalate the current rollover in ‘inflation expectations’ (10Y BE’s below 200dma) which continue to show as the largest price drivers of risk-assets and major rates markets currently per the QI factor PCA model—although should be noted that both SPX and HYG (US HY proxy) are both deeply OUT OF REGIME with low r-squareds / low explanatory power.

Due to my much-discussed “Chinese deleveraging / Fed tightening / ECB pivoting ‘less dovish’” trifecta, we are seeing good buying in cash USTs and receiving in swaps (strong 5Y auction as well) keeping rates pinned despite the ongoing risk-asset rally.

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

All Power to the Banks! The Winners-Take-All Regime of Emmanuel Macron

May 22, 2017

All Power to the Banks! The Winners-Take-All Regime of Emmanuel Macron

A ghost of the past was the real winner of the French presidential election.  Emmanuel Macron won only because a majority felt they had to vote against the ghost of “fascism” allegedly embodied by his opponent, Marine Le Pen.  Whether out of panic or out of the need to feel respectable, the French voted two to one in favor of a man whose program most of them either ignored or disliked.  Now they are stuck with him for five years.

If people had voted on the issues, the majority would never have elected a man representing the trans-Atlantic elite totally committed to “globalization”, using whatever is left of the power of national governments to weaken them still further, turning over decision-making to “the markets” – that is, to international capital, managed by the major banks and financial institutions, notably those located in the United States, such as Goldman-Sachs.

The significance of this election is so widely misrepresented that clarification requires a fairly thorough explanation, not only of the Macron project, but also of what the (impossible) election of Marine Le Pen would have meant.

From a Two Party to a Single Party System

Despite the multiparty nature of French elections, for the past generation France has been essentially ruled by a two-party system, with government power alternating between the Socialist Party, roughly the equivalent of the U.S. Democratic Party, and a party inherited from the Gaullist tradition which has gone through various name changes before recently settling on calling itself Les Républicains (LR), in obvious imitation of the United States.  For decades, there has been nothing “socialist” about the Socialist Party and nothing Gaullist about The Republicans.

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

Canadian banks set to reveal quarterly earnings amid housing & debt concerns

May 22, 2017

Canadian banks set to reveal quarterly earnings amid housing & debt concerns

Ratings agency Moody's downgraded the credit ratings for Canada's big banks earlier this month, citing concerns that over-stretched borrowers and high house prices have left lenders vulnerable to potential losses.

Ratings agency Moody’s downgraded the credit ratings for Canada’s big banks earlier this month, citing concerns that over-stretched borrowers and high house prices have left lenders vulnerable to potential losses. (Dillon Hodgin/CBC)

The Canadian banks are expected to benefit from rising U.S. interest rates and fewer bad loans in the oilpatch as they start reporting their latest quarterly results this week, but analysts say worries about the housing market and consumer debt remain key concerns.

“The reality is that given all of the fears about the Canadian mortgage market, I think that even if the results are good, people will dismiss them as being backward-looking,” said analyst Meny Grauman of Cormark Securities.

The Bank of Montreal will kick off the earnings parade on Wednesday, followed by Royal Bank, TD Bank and CIBC  on Thursday. Scotiabank will report May 30.

Edward Jones analyst Jim Shanahan said fee income from trading activities and other types of charges was a key driver of earnings growth last quarter.

That likely moderated during the second quarter, but a strengthening in net-interest margins — stemming from U.S. interest rate hikes in December and March — will likely pick up some of the slack, he said.

BMO and TD are most likely to benefit from the rate increases, Shanahan said.

The banks could also see some improvement in their loan loss provisions as stability has returned to the oilpatch.

“From a credit perspective we should see some continued improvement within the oil and gas portfolios,” Shanahan said.

However, analysts said concerns about high home prices, debt-laden consumers and a liquidity crisis at mortgage lender Home Capital Group  could all weigh on the bank stocks.

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

China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”

May 16, 2017

China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”

Is China’s push to deleverage its financial system over?

That is the question following last night’s dramatic reversal in recent PBOC liquidity moves, when after weeks of mostly draining liquidity, the central bank injected a whopping 170 billion yuan (net of maturities), or $24.7 billion, the biggest one-day cash injection into the country’s financial markets (and contracting shadow banking system as first reported here last week, when we showed the first drop in China Entrusted Loans in a decade) in four months. The surprising move was “a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculation fueled by excessive borrowing” according to the WSJ.

Today’s injection was the the largest since just before the Lunar New Year holiday in January, when Chinese banks traditionally stock up on liquidity.

Why the sudden shift?

On one hand it is possible that the PBOC is simple concerned about the sharp decline, and in fact contraction, in China’s shadow banking system, where as we showed last week Entrusted Loans posted their first decline since 2007 even as China’s M2 continued to decline.

 

The huge cash injection followed comments from Chinese officials in recent days which hinted they are getting concerned that recent moves to tighten market regulation have caused too much disruption. As a reminder, in recent weeks money market rates and yields on corporate bonds had all shot up to multi-year highs.

The real reason may be simpler: with a major leadership shuffle due later this year, the central bank is not taking even the smallest chances of turmoil in the banking sector. and as such admitted that – once again like in 2013 – its posturing to delever the world’s most leveraged financial system was just that. The WSJ has more:

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

Bank of China ATMs Go Dark As Ransomware Attack Cripples China

May 13, 2017

Bank of China ATMs Go Dark As Ransomware Attack Cripples China

In the aftermath of the global WannaCry ransomware attack, which has spread around the globe like wildfire, a significant number of corporations and public services have found their infrastructure grinding to a halt, unable to operate with unprotected if mission-critical computers taken offline indefinitely. Some of the more prominent examples so far include:
  • NHS: The British public health service – the world’s fifth-largest employer, with 1.7 million staff – was badly hit, with interior minister Amber Rudd saying around 45 facilities were affected. Several were forced to cancel or delay treatment for patients.
  • Germany’s Deutsche Bahn national railway operator was affected, with information screens and ticket machines hit. Travelers tweeted pictures of hijacked departure boards showing the ransom demand instead of train times. But the company insisted that trains were running as normal.
  • Renault: The French automobile giant was hit, forcing it to halt production at sites in France and its factory in Slovenia as part of measures to stop the spread of the virus.
  • FedEx: The US package delivery group acknowledged it had been hit by malware and said it was “implementing remediation steps as quickly as possible.” .
  • Russian banks, ministries, railways: Russia’s central bank was targeted, along with several government ministries and the railway system. The interior ministry said 1,000 of its computers were hit by a virus. Officials played down the incident, saying the attacks had been contained.
  • Telefonica: The Spanish telephone giant said it was attacked but “the infected equipment is under control and being reinstalled,” said Chema Alonso, the head of the company’s cyber security unit and a former hacker.
  • Sandvik: Computers handling both administration and production were hit in a number of countries where the company operates, with some production forced to stop. “In some cases the effects were small, in others they were a little larger,” Head of External Communications Par Altan said.

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

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