Home » Posts tagged 'balance sheet' (Page 2)

Tag Archives: balance sheet

Last week, I highlighted that since ’00, when the Federal Reserve has ceased adding to its balance sheet or begun “normalizing” (via rolling off assets), equity markets have swooned (detailed HERE).

A simple idea today…that the end of population growth (where it matters) has long been upon us (detailed below). Absent population growth among the nations that do nearly all the consuming, a debt based economic and financial system (to coerce ever higher levels of debt fueled consumption) can’t ultimately succeed. That is, without population growth, assets generally don’t appreciate, homes are just shelter rather than “investments”, and debt is generally only a drag on future spending. Likewise, without population growth, total global energy consumption is on the precipice of secular decline (detailed HERE).

In this reality, the only means of maintaining or lifting asset prices further is ever more central bank monetization (aka, centrally planned and executed counterfeiting). Of course, this monetization scheme is doomed to fail but while it continues, the gains are privatized while the losses are socialized. But ultimately markets (and economies, as a means of honest exchange), will get cleared. So, without further ado, I detail the end of population growth (particularly where it matters):

1- Simply put, topline global population growth (births) ceased increasing almost 30 years ago! Looking solely at the top-line (dashed black line, chart below), note that from 1950 to 1989, annual global births increased 73% (+57 million). Conversely, from 1989 to 2018, annual global births have risen just 1% (+1 million). Based on UN data and UN median (overly optimistic) future estimates.

However, the distribution of those births among the differing groupings of nations (by income) has dramatically changed from 1950 to present…and will shift further by 2050.

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

Seeds of Market Collapse in the Federal Reserve’s “Autopilot” Balance Sheet Normalization

December 24, 2018

Seeds of Market Collapse in the Federal Reserve’s “Autopilot” Balance Sheet Normalization

A lot of talk last week centered around the potential for the Federal Reserve to revise their planned “normalization” of holdings on their balance sheet. In particular in the post FOMC press conference, Powell said, “I think that the runoff of the balance sheet has been smooth and has served its purpose and I don’t see us changing that,”…and then “The amount of runoff that we have had so far is pretty small and if you just run the quantitative easing models in reverse, you would get a pretty small adjustment in economic growth, and real outcomes.”

Trouble is, the correlation of changes in the Fed’s balance sheet to changes in asset prices are unambiguous that Powell is either unwittingly wrong or, more likely, knowingly collapsing an asset bubble that was in large part created by the Federal Reserve itself.

Fed Held Treasury’s
To set the table, the chart below shows the total Federal Reserve holdings of US Treasury’s (blue line) and weekly changes (yellow columns) from 2003 to present. The August ’07 through January ’09 period is noteworthy as the only period with a like Treasury holding drawdown to what we are presently witnessing. The subsequent highlighted areas show the periods of no growth in Treasury holdings, or most recently the outright declines. The most recent period represents just $230 billion reduction of a proposed $1 trillion total “normalization” in Treasury holdings.
Perhaps the reason equities tanked when Powell suggested that the Fed’s plan to normalize its balance sheet was on “auto-pilot” can be seen in the chart below. Red line is the Wilshire 5000 (representing all publicly traded US equities) and yellow columns are the weekly change in the Federal Reserve’s holdings of Treasury’s. On the five occasions (highlighted again) since 2007 that the Fed has ceased buying or outright sold Treasury’s, the Wilshire has gone into convulsions or outright cracked lower.

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

U.S. Government Financial Balance Sheet One Step Closer To Blowing Up

September 8, 2018

U.S. Government Financial Balance Sheet One Step Closer To Blowing Up

The U.S. Government’s balance sheet is one step closer to blowing up as its debt, and interest expense hit new record highs. And when I say “new record highs,” I am not exaggerating. It’s been a while since I checked the data on the TreasuryDirect.gov website, but when I researched the figures for this article, I was quite surprised by just how quickly the numbers are rising.

Thus, it’s also no wonder the stock markets continue to grind higher and higher because, without the U.S. Government’s unlimited check-writing ability, the markets would have collapsed years ago. So, to all the Keynesian wanna-be’s who believe the Central Banks can print our way to prosperity forever, please tap your shoes together three times and say, “Everything will be okay because I have my 401k.”

Let’s get started with the tremendous surge in the U.S. Government interest expense. Well, it seems as if things are really starting to get crazy at the U.S. Treasury when its interest expense in July jumped by a whopping 41% year-over-year. That’s correct. The U.S. Government paid $40.5 billion in interest expense this July versus $28.7 billion for the same month last year. That is one heck of an increase.

If we look at the following two tables, we can see that the percentage increase of the interest expense in July is much higher than the previous months:

The interest expense the U.S. Government paid in Apil, May, and June was up 22%, 28%, and 6% respectively versus the same months in 2017. However, July was up 41% compared to July last year. Furthermore, total U.S. interest expense in 2017 was $458 billion while the amount paid this year is $455 billion and we still have two months remaining.

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

The Fed’s QE Unwind Hits $250 Billion

September 7, 2018

The Fed’s QE Unwind Hits $250 Billion

Here’s my math when this “balance sheet normalization” will end.

In August, the Federal Reserve was supposed to shed up to $24 billion in Treasury securities and up to $16 billion in Mortgage Backed Securities (MBS), for a total of $40 billion, according to its QE-unwind plan – or “balance sheet normalization.” The QE unwind, which started in October 2017, is still in ramp-up mode, where the amounts increase each quarter (somewhat symmetrical to the QE declines during the “Taper”). The acceleration to the current pace occurred in July. So how did it go in August?

Treasury Securities

The Fed released its weekly balance sheet Thursday afternoon. Over the period from August 2 through September 5, the balance of Treasury securities declined by $23.7 billion to $2,313 billion, the lowest since March 26, 2014. Since the beginning of the QE-Unwind, the Fed has shed $152 billion in Treasuries:

The step-pattern of the QE unwind in the chart above is a consequence of how the Fed sheds Treasury securities: It doesn’t sell them outright but allows them to “roll off” when they mature; and they only mature mid-month or at the end of the month.

On August 15, $23 billion in Treasuries matured. On August 31, $21 billion matured. In total, $44 billion matured during the month. The Fed replaced about $20 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Wall Street – the “primary dealers” with which the Fed normally does business. Those $20 billion in securities were “rolled over.”

But it did not replace about $24 billion of maturing Treasuries. They “rolled off” and became part of the QE unwind.

Mortgage-Backed Securities (MBS)

…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…

The Fed’s Great Unwind: Will It Sink Us?

December 13, 2017

THE FED’S GREAT UNWIND: WILL IT SINK US?

In the eyes of many people, the Federal Reserve (Fed) is an indispensable institution. We are told it supports growth and employment, fends off the negative shocks, and fights inflation. Nothing could be farther from the truth. The Fed’s fiat money regime is economically and socially highly destructive — causing far-reaching societal and political consequences that extend beyond what most people would imagine.

Fiat money is inflationary, it debases the purchasing power of money; it benefits a few at the expense of the many; it causes boom-and-bust cycles that hurt many people economically; it makes people run into too much debt, leading to over-indebtedness; it corrupts society’s morals; it makes government grow at the expense of individual liberty; it encourages the state’s aggressiveness and fuels its war machine.

Tragically, however, people consider falsely the Fed as their “knight in shining armor” coming to their rescue in times of trouble rather than what the institution really is: the very source of economic and societal grievance. People do not blame the Fed for the trouble it causes, but instead welcome Fed action for overcoming the damage it has caused in the first place. That is why many people keep their fingers crossed that the Fed’s latest “exit plan” will succeed.

The Fed’s Exit Plan

In the course of the financial and economic crisis of 2008–2009, the Fed lowered interest rates to basically zero. It also increased its balance sheet from $879.4 billion at the end of 2007 to $4.5 trillion in September 2017. It did this by purchasing US Treasuries and agency mortgage-backed securities (MBS) in the amount of $2.4 trillion and $1.7 trillion, respectively, thereby having injected additional ‘base money’ into the US banking system.

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

Abracadabra

December 11, 2017

Abracadabra

And so, as they say in the horror movies, it begins…! The unwinding of the Federal Reserve’s balance sheet. Such an esoteric concept! Is there one in ten thousand of the millions of people who sit at desks all day long from sea to shining sea who have a clue how this works? Or what its relationship is to the real world?

I confess, my understanding of it is incomplete and schematic at best — in the way that my understanding of a Las Vegas magic act might be. All the flash and dazzle conceals the magician’s misdirection. The magician is either a scary supernatural being or a magnificent fraud. Anyway, the audience ‘out there’ for the Federal Reserve’s magic act — x-million people preoccupied by their futures slipping away, their cars falling apart, their kid’s $53,000 college loan burden, or the $6,000 bill they just received for going to the emergency room with a cut finger — wouldn’t give a good goddamn even if they knew the Fed’s magic show was going on.

So, the Fed has this thing called a balance sheet, which is actually a computer file, filled with entries that denote securities that it holds. These securities, mostly US government bonds of various categories and bundles of mortgages wrangled together by the mysterious government-sponsored entity called Freddie Mac, represent about $4.5 trillion in debt. They’re IOUs that supposedly pay interest for a set number of years. When that term of years expires, the Fed gets back the money it loaned, which is called the principal. Ahhhh, here’s the cute part!

You see, the money that the Fed loaned to the US government (in exchange for a bond) was never there in the first place. The Fed prestidigitated it out of an alternate universe.

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

The Fed’s QE-Unwind is Really Happening

December 8, 2017

The Fed’s QE-Unwind is Really Happening

Fed’s assets drop to lowest level in over three years.

The Fed’s balance sheet for the week ending December 6, released today, completes the second month of the QE-unwind. Total assets initially zigzagged within a tight range to end October where it started, at $4,456 billion. But in November, holdings drifted lower, and by December 6 were at $4,437 billion, the lowest since September 17, 2014:

“Balance sheet normalization?” Well, in baby steps. But the devil is in the details.

The Fed’s announced plan is to shrink the balance sheet by $10 billion a month in October, November, and December, then accelerate the pace every three months. By October 2018, the Fed would reduce its holdings by up to $50 billion a month (= $600 billion a year) and continue at that rate until it deems the level of its holdings “normal” – the new normal, whatever that may turn out to be.

Still, the decline so far, given the gargantuan size of the balance sheet, barely shows up:

The Fed is unloading its Treasuries alright.

As part of the $10-billion-a-month unwind from October through December, the Fed is supposed to unload $6 billion in Treasury securities a month plus $4 billion in mortgage-backed securities (MBS) a month.

The Fed doesn’t actually sell Treasury securities outright. Instead, it allows some of them, when they mature, to “roll off” the balance sheet without replacement. When the securities mature, the Treasury Department pays the holder the face value. But the Fed, instead of reinvesting the money in new Treasuries, destroys the money – the opposite process of QE, when the Fed created the money to buy securities.

This happens only on dates when Treasuries that the Fed holds mature, usually once or twice a month.

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

Benn Steil: The Fed Could be Tightening More Than it Realizes

November 21, 2017

BENN STEIL: THE FED COULD BE TIGHTENING MORE THAN IT REALIZES

Ten years ago, before the collapse of Lehman Brothers rocked global financial markets, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasuries. After fifty-nine months of asset purchases to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in October 2014.

In October of this year, the Fed at last began a slow slimming-down of the balance sheet, allowing $10 billion in maturing securities to roll off without reinvesting the proceeds. All else being equal, this represents a tightening of monetary policy, as it tends to push up longer-term (10-year) market interest rates.

In Fed chair Janet Yellen’s words, the central bank “does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual prospective economic conditions.” She has therefore stressed that the Fed sees its balance-sheet reduction as a primarily technical exercise separate from the pursuit of its monetary policy goals—in particular, pushing inflation back up to 2%. The Fed’s main tool for tightening monetary policy in a recovering economy would, therefore, she explained, be raising short-term market interest rates by paying banks greater interest on reserves (IOR). Since December 2015, the Fed has raised the rate on IOR by 100 basis points (1%), which has pushed up its short-term benchmark rate—the effective federal funds rate—in tandem.

But is Yellen right that the Fed’s gradual approach to balance-sheet reduction makes it relatively unimportant in its impact on monetary conditions? Our analysis suggests that it will be, in fact, considerably more important than the market, or the Fed itself, realizes. Here is why.

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

Federal Reserve Hesitates on QE Unwind / Balance Sheet Reduction

October 29, 2017

Federal Reserve Hesitates on QE Unwind / Balance Sheet Reduction

Federal Reserve balance sheet reduction not happening yet even as the Fed applauds its own success

Is the Federal Reserve’s Great Unwind already coming unwound? I thought it would be good to check up on Federal Reserve balance sheet reduction since the Fed is supposed to be up and running on the move out of quantitative easing this month. It should be fascinating to see what progress the Fed is making as it happily applauds its own successful recovery.

The Federal Reserve balance sheet reduction that didn’t happen

By Kikuyu3 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Is balance sheet reduction the Fed’s Gordian knot?

After all, the Federal Reserve’s End of Quantitative Easing Didn’t Happen last time they said it would. It turned out the Fed actually planned to continue QE at a gradual level by reinvesting matured assets. Nevertheless, the mere announcement in 2013 that it would terminate QE in 2014 created the infamous “Taper Tantrum.” The Fed hadn’t said anything back then that I was able to find about reinvesting the funds in its balance sheet until after they supposedly stopped QE in the fall of 2014. It turned out the stop was not a quite a full stop.Unwinding its balance sheet is likely to prove to be the Fed’s Gordian knot.

Federal Reserve balance sheet reduction that didn’t happen … again … so far

So, here we are, and so far there is no reduction. It is now three years since the Fed “ended quantitative easing,” and its balance sheet is still holding around the $4.5 trillion mark where QE was supposed to end. Now that’s gradual! It’s taken three years just for the Fed to say it is going to start reducing the balance; so, let’s see how that balance sheet reduction is going for them now that it has supposedly started:

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

“This Is Most Worrying”: In One Year, Central Bank Liquidity Will Collapse From $2 Trillion To Zero

October 11, 2017

Is it complacency, or simply trader paralysis?

A question we first asked three months ago is getting a second wind this morning, when in a report by Deutsche Bank’s Alan Ruskin, the macro strategist points out that “the new 2017 Nobel laureate for Economics is not the only one at a loss to explain low stock market volatility, and thinks investors are in ‘freeze mode’ in the midst of global uncertainties.”

According to Ruskin, however, it’s all about to change.

But why? And what is “the most likely causes of a shift to ‘flight mode’ and a rise in volatility? Here’s one possibility: by the end of next year, the combined expansion of all the major Central Bank balance sheets will have collapsed from a 12 month growth rate of $2 trillion per annum to zero.”

But before we get to the inevitable next step, here’s Deutsche Bank on how we got to the current state of paralytic complacency, or whatever one wants to call it.

To be sure, the wire headlines were catchy: “Nobel prize winner Thaler admits to not understanding the low volatility in the stock market.” The behavioural economist went on to note that investors appeared to be in “freeze” rather than “flight mode”. There are, according to Ruskin, at least three broad explanations for the current low volatility world, and why investor “freeze” appears to be favoured over “flight”, including:

On the behavioural economics side there is the suggestion that many equity investors have entered at good levels and are capable of withstanding fairly sizable negative shocks; and, investors can’t trade or at least time, hypothetical apocalyptic events like a N.Korea accident;

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

The Courage to Normalize Monetary Policy

September 27, 2017

The Courage to Normalize Monetary Policy

A decade after the onset of the global financial crisis, it seems more than appropriate for central bankers to move the levers of policy off their emergency settings. A world in recovery – no matter how anemic it may be – does not require a crisis-like approach to monetary policy.

NEW HAVEN – Three cheers for central banks! That may sound strange coming from someone who has long been critical of the world’s monetary authorities. But I applaud the US Federal Reserve’s long-overdue commitment to the normalization of its policy rate and balance sheet. I say the same for the Bank of England, and for the European Central Bank’s grudging nod in the same direction. The risk, however, is that these moves may be too little too late.

Central banks’ unconventional monetary policies – namely, zero interest rates and massive asset purchases – were put in place in the depths of the 2008-2009 financial crisis. It was an emergency operation, to say the least. With their traditional policy tools all but exhausted, the authorities had to be exceptionally creative in confronting the collapse in financial markets and a looming implosion of the real economy. Central banks, it seemed, had no choice but to opt for the massive liquidity injections known as “quantitative easing.”

This strategy did arrest the free-fall in markets. But it did little to spur meaningful economic recovery. The G7 economies (the United States, Japan, Canada, Germany, the United Kingdom, France, and Italy) have collectively grown at just a 1.8% average annual rate over the 2010-2017 post-crisis period. That is far short of the 3.2% average rebound recorded over comparable eight-year intervals during the two recoveries of the 1980s and the 1990s.

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

Why Economic Data No Longer Matters

September 21, 2017

Why Economic Data No Longer Matters

Back in mid-2009, we said that with the Fed and central banks nationalizing capital markets, macro and even micro data and newsflow will matter increasingly less and less, and the only thing that does matter is the Fed’s weekly H.4.1 statement, showing the changes to the Fed’s balance sheet. It also means that so-called “data dependency” is a farce (it is, and has always been “Dow dependency”), and that the impact of incremental newsflow will shrink with every passing week until virtually nobody pays attention (we have largely reached this state now).

Since then it has been entertaining to watch how one after another stoic trader and commentator has thrown in the towel on conventional market orthodoxy to adopt precisely this kind of “tinfoil” thinking, the latest example being Bloomberg’s macro commentator Mark Cudmore, who in his overnight Macro View writes that “traders should should spend less time studying economic releases and listen to the clear guidance from officials instead.”

The relevance of data is declining. Policymakers around the world are trying to make crystal clear that they’ll ignore that which doesn’t fit their narrative. Many financial commentators have failed to make the transition and are incorrectly transfixed by each data release.

Or, in short, data no longer matters in a world of central planning.

Here is his latest Macro View in which Cudmore explains why “It’s Time for Traders To Listen Rather Than Watch“

Data-dependency is becoming passé for global policymakers. Traders should should spend less time studying economic releases and listen to the clear guidance from officials instead.

For years, policymakers have been emphasizing data dependency. Investors took a while to fully register the message and, as a result, often got whipsawed by throwaway comments from officials.

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

BofA: Even The Bubbles Are Becoming More “Bubbly” Thanks To Central Banks

September 5, 2017

BofA: Even The Bubbles Are Becoming More “Bubbly” Thanks To Central Banks

Back in June, Citi’s credit strategist Hans Lorenzen pointed out that while QE had failed to spark inflation across the broader economy, it had achieved something else: “the principal transmission channel to the real economy has been… lifting asset prices.” That however has required continuous CB balance sheet growth, and with the Fed, ECB and BOJ all poised to “renormalize” over the next year, the global monetary impulse is set to turn negative in the coming year. Meanwhile, as financial markets scramble to maximize every last ounce of what central bank impulse remains, we get such bubbles as London real estate, bitcoin and vintage cars, or as Citi puts it: “the wealth effect is stretching farther and farther afield.”

Three months later, the latest to tackle the issue of central bank bubble creation, is BofA’s Barnaby Martin, who in a note released overnight asks rhetorically “are bubbles becoming more “bubbly”?

Just like Lorenzen, Martin observes the blanket central bank “lower for longer” rates intervention, which leads to “speculative behavior in assets.” Well, technically, Martin hedges by calling it a “risk”, but one look at the chart above and below shows that the bubbles created by central banks are all too real. And as Martin, whose topic is the unprecedented buying spree across credit, notes it’s not just credit markets that are seeing exceptional investor demand at this point in the cycle: so is everything else, or as he puts it:

“As chart 3, over the page shows, asset bubbles seem to be becoming more “bubbly” as time goes by.”

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

Tag Archives: balance sheet

Content

Post categories

Economic Links

Energy/Resource Links

Environmental Links

Geopolitical Links

Liberty Links

News Links

Other Links

Survival Skills

Post Archives by Category

The Fed is unloading its Treasuries alright.

Post navigation

Latest Posts