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The Fed Wrecked the World’s Most Important Market

December 19, 2020

The Fed Wrecked the World’s Most Important Market

Do you wish to know where the economy is heading? The bond market holds the answer, say the veterans.

The birds of the moment, the flighty birds, flock to the stock market. But the owls nest in the bond market.

The owls are the wiseacres.

The Federal Reserve’s hocus-pocus fails to trick them. They know the card is up the sleeve. And they enjoy exposing the fraud.

New York Times economics reporter Neil Irwin:

Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.

For example: Is inflation ahead? The bond market will tell you — Treasury bonds in particular.

Bonds and Inflation

Longer-dated Treasury notes will telegraph the signal. If they wire an inflationary message, their prices will fall. And their yields will rise.

(Bonds operate as seesaws operate. When prices go up, yields go down. When yields go up, prices go down).

Yields would rise because inflation would eat into the bond’s value… as the termite eats into wood. Under inflation a bond is a sawdust asset.

Bond purchasers would demand a higher yield to compensate them for inflation’s ravages.

That is, they would demand insurance against the termite’s evils.

The Message of the Bond Market

Does today’s bond market indicate inflation is ahead?

It does not. 10-year Treasury notes presently yield under 1% — 0.923%.

These are historic lows. 10-year yields average 4.40% across time.

In brief… the bond market indicates no inflationary menace. Inflation is as tame as a tabby.

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

China’s Rapidly Expanding Credit Affects Global Markets

September 6, 2020

China’s Rapidly Expanding Credit Affects Global Markets

We again are seeing how rapidly expanding credit in China is spilling over into the global market. In reaction to its economy being slammed by covid-19, China like many countries has unleashed several massive stimulus programs to start things moving. Unfortunately for the Chinese people, they have also been dealing with other issues putting their system under stress. Not only is the trade war and a high level of political stress putting China to the test but it is in the midst of the worst flooding in decades and this is also adding to the pressure.

Since the outbreak of the pandemic, Chinese authorities have issued 4.75 trillion yuan ($683 billion) in local and national debt with most of that earmarked for infrastructure projects to boost construction. China is far from transparent and making it difficult to know what exactly is happening. This is also true when it comes to imports which are sometimes stored away rather than used. Speculation and projections of future use all play into this. Whether we are talking about grain prices, oil, or metal, China is a bigger user of commodities and the demand flowing from China affects prices. Factor into this the notion that China is big in projecting a positive narrative of economic growth and the spillover becomes clear.

An example of this can be seen as iron ore prices hit a six and a half year high on Thursday as the Chinese construction and manufacturing sector claims to be experienced levels of activity not seen for almost a decade. Fastmarkets MB reported that benchmark 62% Fe fines imported into Northern China were changing hands for $129.92 a tonne on Tuesday, up 2.1% on the day. That would be the highest level for the steel-making raw material since mid-January 2014 and put gains for 2020 to over 40%.

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

ECB v Fed

June 27, 2020

ECB v Fed

QUESTION: Martin,

You mentioned in a recent blog post that the ECB, unlike the FED, can go bankrupt.

Can you explain further?

Not sure where you get the time, energy and resources to research and write all that you do buy it is truly amazing.

Regards,

ANSWER: The Federal Reserve does not need permission to create elastic money. It has the authority to expand or contract its balance sheet. However, it cannot simply print money out of thin air. The ECB is the only institution that can authorize the printing of euro banknotes. The Federal Reserve must back the banknotes by purchasing US government bonds. The Fed buys and sells US government bonds to influence the money supply whereas the ECB influences the supply of euros in the market by directly controlling the number of euros available to eligible member banks. This structure was created because of Germany’s obsession with its own hyperinflation of the 1920s.

Each member state retained its central bank and those central banks issue the banknotes — not the ECB. Therefore, the ECB works with the central banks in each EU state to formulate monetary policy to help maintain stable prices and strengthen the euro. The ECB was created by the national central banks of the EU member states transferring their monetary policy function to the ECB, which in effect operates on a supervisory role.

There are four decision-making bodies of the ECB that are mandated to undertake the objectives of the institution. These bodies include the Governing Council, Executive Board, the General Council, and the Supervisory Board.

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

China’s Central Bank Vows To Expand Total Credit By 30% Of GDP In 2020

June 18, 2020

China’s Central Bank Vows To Expand Total Credit By 30% Of GDP In 2020

One of the curiosities about the current global financial crisis is that unlike the global financial crisis of 2008 when a massive credit injection by China sparked a generous reflationary wave around the world which pulled it out of a deflationary slump, this time around China has been far more modest as the following chart shows.

All that may be about to change.

Speaking in a financial forum in Shangha, China’s central bank governor Yi Gang said that China will keep liquidity ample in the second half of the year, but it should consider in advance the timely withdrawal of policy measures aimed at countering the effects of the COVID-19 pandemic.

“The financial support during the epidemic response period is (being) phased, we should pay attention to the hangover of the policy,” Yi said. “We should consider the timely withdrawal of policy tools in advance.”

In other words, just like the Fed, China is pretending that whatever is coming will be temporary. Which, in a world of helicopter money will never again be the case.

But more importantly, we know that in order to boost its stagnating economy, China is about to unleash a historic credit injection: Yi said that new loans are likely to hit nearly 20 trillion yuan ($2.83 trillion) this year, up from a record 16.81 trillion yuan in 2019, and total social financing could increase by more than 30 trillion yuan ($4.2 trillion), or about 30% of GDP. A similar number for the US would be about $7 trillion which is more or less what the US deficit will be over the next 12 months.

In other words, we’re going to need a much bigger chart of China’s broad credit.

Yi added that the bank’s balance sheet remains stable around 36 trillion yuan.

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

No to the ECB madness

May 14, 2020

No to the ECB madness

The latest ruling of the Federal Constitutional Court is a drop of bitterness in the idyll of the ECB’s excessive money printing. What Super Mario (Draghi) did and what the IMF-imported Christine Lagarde mercilessly continues – 2.6 trillion euros (since 2015), invested in government, corporate and other securities to boost the economy and inflation – are a blessing for financiers and their customers (plutocracy) and a curse for savers and future pensioners. Roughly speaking, the ECB is buying up the debts of banks and large corporations, but is not worried about citizens’ savings melting away as a result of the negative interest rate, while the bubble is growing in markets overheated by cheap money (including the property market). The owners of real assets are benefiting, while owners of financial assets are losing. Companies that would not have been able to survive under any other circumstances remain in the market as zombies, reducing productivity, the rate of return on capital in the eurozone and their competitiveness in the world.

These trillions of euros are therefore ineffective. After all, the eurozone economy weakened significantly much earlier, before the outbreak of the so-called pandemic. Now the bubble has burst on the stock markets and Lagarde immediately started to take new “measures” from her ivory tower in Frankfurt: money presses are running at full speed, markets are recovering, the economy is still at its worst since the end of the Second World War, unemployment rates very high everywhere, but never mind all that, “The show must go on”, until one day, oh, how unpleasant these German judges!

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

Powell Needs To Immediately Address Negative Rates Or He Will Lose Control

May 7, 2020

Powell Needs To Immediately Address Negative Rates Or He Will Lose Control

Today was a historic day, not for the latest algo-driven meltup in stocks, but because for the first time ever, fed fund futures priced in negative rates, first in January 2021 and shortly after, as recently as November 2020.

In response to the dramatic move which reverberated across asset classes, sending stocks and gold sharply higher, and 2Y yields plunging to record lows as markets suddenly realized that NIRP may be coming in just a few months, Richmond Fed president Thomas Barkin said that it’s not worth trying negative rates in the US:

“I think negative interest rates have been tried in other places, and I haven’t seen anything personally that makes me think they’re worth a try here.” He then added that “if you looked at data as of today, you’d see it about as low as it’s going to go. We’ll be bringing people back to work, and eventually hopefully people back to stores and the like, in the coming weeks and months, and I would expect the data to go up from here.”

But one look at fed funds after Barkin’s comments showed that markets barely noticed, with December implied rates still in negative territory.

Which means that only Powell addressing this issue – immediately – can reverse the market’s test of the Fed’s resolve to go from ZIRP to NIRP, because the longer Powell does nothing, the more negative rates will become widely accepted, and any “unexpectedly” denials by Powell in the coming months would be seen as hawkish reversal and lead to another market crash, which the Fed will argue nobody could have possibly seen and be forced to cut to negative anyway.

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

They’re All High on Fed Fairy Dust

May 1, 2020

They’re All High on Fed Fairy Dust

Everybody realizes the US economy is in a bad spot. But most people still seem to believe it will bounce right back once we deal with the coronavirus.

They’re all high on Federal Reserve fairy dust.

US GDP contracted by 4.8% in the first quarter. It was the first negative GDP reading since a 1.1% decline in the first quarter of 2014 and it was the lowest level since the 8.4% plunge in Q4 of 2008.

And the worst is yet to come.

The Q1 GDP number only captures the first couple of weeks of coronavirus-inspired government lockdowns of the economy. In fact, in January Donald Trump and others were telling us that it was the best economy in the history of the world. That was also in the first quarter.

The first-quarter GDP print came in even worse than expected. Economists were projecting a contraction of 3.5 to 4%. The precipitous and rapid plunge in economic activity not only reflects the impacts of turning off the economy in the midst of coronavirus; it also reveals just how fragile the economy was before the pandemic.

Back in January, President Trump called it the greatest economy in history. Trump continued to talk up the economy during the State of the Union address, taking credit for the “strong” economic growth. At the time, Peter Schiff said nobody should be taking credit for the condition of the US economy. In fact, economic growth wasn’t much different than it was when Obama was president.

The only difference is we had to borrow even more money to achieve the same level of fake GDP growth that we did under Obama. The reality is nobody should be taking credit for the current US economy. The question is who deserves the blame?”

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

Worse Than 2008: We Are Being Warned That The Coronavirus Shutdown “Could Collapse The Mortgage Market”

April 7, 2020

Worse Than 2008: We Are Being Warned That The Coronavirus Shutdown “Could Collapse The Mortgage Market”

The cascading failures that have been set into motion by this “coronavirus shutdown” are going to make the financial crisis of 2008 look like a Sunday picnic. As you will see below, it is being estimated that unemployment in the U.S. is already higher than it was at any point during the last recession. That means that millions of American workers no longer have paychecks coming in and won’t be able to pay their mortgages. On top of that, the CARES Act actually requires all financial institutions to allow borrowers with government-backed mortgages to defer payments for an extended period of time. Of course this is a recipe for disaster for mortgage lenders, and industry insiders are warning that we are literally on the verge of a “collapse” of the mortgage market.

Never before in our history have we seen a jump in unemployment like we just witnessed. If you doubt this, just check out this incredible chart.

Millions upon millions of American workers are now facing a future with virtually no job prospects for the foreseeable future, and former Fed Chair Janet Yellen believes that the unemployment rate in the U.S. is already up to about 13 percent…

Former Federal Reserve Chair Janet Yellen told CNBC on Monday the economy is in the throes of an “absolutely shocking” downturn that is not reflected yet in the current data.
If it were, she said, the unemployment rate probably would be as high as 13% while the overall economic contraction would be about 30%.

If Yellen’s estimate is accurate, that means that unemployment in this country is already significantly worse than it was at any point during the last recession.

And young adults are being hit particularly hard during this downturn…

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

Fed’s Balance Sheet Hits $6 Trillion: Up $1.6 Trillion In 3 Weeks

April 2, 2020

Fed’s Balance Sheet Hits $6 Trillion: Up $1.6 Trillion In 3 Weeks

“We’re going to need a bigger chart.”

That’s all one can say when seeing what happened to the Fed’s balance sheet in the past week.

According to the Fed’s latest weekly H.4.1 (i.e., balance sheet) update, as of April 1 the Fed’s balance sheet hit a record $5.811 trillion, an increase of $557 billion in just one week. And when one adds the $88.5BN in TSY and MBS securities bought by the Fed today…

… we can calculate that as of close of business Thursday, the Fed’s balance sheet was an unprecedented $5.91 trillion, an increase of $1.6 trillion since the start of the Fed’s unprecedented bailout of everything on March 13 when the Fed officially restarted QE. And since we know that tomorrow the Fed will buy another $90 billion, we can conclude that as of Friday’s close, the Fed’s balance sheet will be a nice, round $6 trillion.

Finally, here is what the Fed’s balance sheet looks like over a longer timeframe: it shows that in just the past 3 weeks, the Fed’s balance sheet has increased by a ridiculous $1.6 trillion – the same amount as all of QE3 did over 15 months – and equivalent to an insane 7.5% of US GDP.

One more insane statistic: the Fed’s balance sheet was $3.8 trillion in August 2019 when the shrinkage in reserves supposedly triggered the repo crisis. Fast forward, 6 months, when the Fed’s balance sheet is now 60% higher.

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

Pandemic-Related Unemployment and Shutdowns Are a Recipe for Social Unrest

March 31, 2020

Pandemic-Related Unemployment and Shutdowns Are a Recipe for Social Unrest

That’s a huge concern as forecasters expect the U.S. unemployment rate in the months to come to surpass that seen during the depths of the Great Depression.

krtphotoslive884669 — (Elizabeth Robertson/TNS/Newscom)

Could the stalled economy we’ve inflicted on ourselves in our frantic efforts to battle the COVID-19 pandemic lead to civil disorder? History suggests that’s a real danger.

Around the world, high unemployment and stagnant economic activity tend to lead to social unrest, including demonstrations, strikes, and other forms of potentially violent disruptions. That’s a huge concern as forecasters expect the U.S. unemployment rate in the months to come to surpass that seen during the depths of the Great Depression.

“We’re putting this initial number at 30 percent; that’s a 30 percent unemployment rate” in the second quarter of this year as a result of the planned economic shutdowns, Federal Reserve Bank of St. Louis President James Bullard told Bloomberg News on March 22. Gross Domestic Product, he adds, is expected to drop by 50 percent.

Unlike most bouts of economic malaise, this is a self-inflicted wound meant to counter a serious public health crisis. But, whatever the reasons, it means businesses shuttered and people without jobs and incomes. That’s risky.

“Results from the empirical analysis indicate that economic growth and the unemployment rate are the two most important determinants of social unrest,” notesthe International Labour Organisation (ILO), a United Nations agency that maintains a Social Unrest Index in an attempt to predict civil disorder based, in part, on economic trends. “For example, a one standard deviation increase in unemployment raises social unrest by 0.39 standard deviations, while a one standard deviation increase in GDP growth reduces social unrest by 0.19 standard deviations.”

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

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

February 14, 2020

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

Back in March 2018, when commenting on what was then the 2nd longest central-bank induced bull market of all time (it is now the longest ever) Bank of America’s CIO Michael Hartnett pointed out that “bull market leadership has been in assets that provide scarce “growth” & scarce “yield”. Specifically, the “deflation” assets, such as bonds, credit, growth stocks (315%), have massively outperformed inflation assets, e.g., commodities, cash, banks, value stocks (249%) since QE1. At the same time, US equities (269%) have massively outperformed non-US equities (106%) since launch of QE1.”

And, as happens every time the Fed tries to manage asset prices, it had blown another bubble: commenting on the hyperinflation in risk assets, Hartnett said that the “lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets”, which the strategist had called the Icarus Trade since late 2015, noting that the latest, “e-Commerce” bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years.”

Fast forward two years, one failed attempt at normalizing interest rates, one QE4, and one historic P/E multiple expansion meltup later, when the same bull market leadership in “growth” assets has led to the unprecedented result that the top 5 stocks now account for a greater share of S&P500 market cap than ever before…

… and when what in 2018 was the third largest bubble of all time only has – thanks to 800 rate cuts by central banks since the Lehman bankruptcy – now been rebranded to “e-Commerce” by BofA’s Hartnett, and which as shown in the chart below has – after rising more than 1,000% from its crisis lows – become the single biggest asset bubble of all time.

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

The Triumph of Madness

February 9, 2020

The Triumph of Madness

Viewing the past through the lens of history is unfair to the participants. Missteps are too obvious. Failures are too abundant. Vanities are too absurd. The benefit of hindsight often renders the participants mere imbeciles on parade.

Was George Armstrong Custer really just an arrogant Lieutenant Colonel who led his men to massacre at Little Bighorn? Maybe. Especially when Sitting Bull, Crazy Horse, and numbers estimated to be over ten times his cavalry appeared across the river.

Were George Donner and his brother Jacob naïve fools when they led their traveling party into the Sierra Nevada in late fall? Perhaps. Particularly when they resorted to munching on each other to survive the relentless blizzard.

Certainly, Custer and the Donner brothers were doing the best they could with the information available to them. The decisions they made must have seemed reasoned and calculated at the time. But what they couldn’t see – until it was too late to turn back – was that with each decision, they unwittingly took another step closer to their ultimate demise.

Still they were human just like we are human…no smarter, no dumber. We’re not here to ridicule them; but rather, to learn from them.

A Good Man in a Bad Trade

Rudolf von Havenstein had been president of the Reichsbank – the German central bank – since 1908. He knew the workings of central bank debt issuances better than anyone. He was good at it.

Thus, when he was called upon by history to deliver a miracle for the Deutches Reich in the aftermath of WWI, he knew exactly what to do. He’d deliver monetary stimulus. In fact, he’d already been at it for several years.

On August 4, 1914, at the start of the war, the Goldmark – or gold-backed Reichmark – became the unbacked Papermark. With gold out of the picture, the money supply could be expanded to meet the endless demands of war.

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

Corona Virus? The Chinese Central Bank Has a “Solution”

February 9, 2020

Corona Virus? The Chinese Central Bank Has a “Solution”

In response to the economic paralysis brought about by the coronavirus, the Chinese central bank has pumped $243 billion into financial markets. On Monday February 3 2020, China’s equity market shed $393 billion of its value.

Most experts are of the view that in order to counter the damage that the coronavirus has inflicted, loose monetary policy is of utmost importance to stabilize the economy. In this way of thinking, it is believed that the massive monetary pumping will lift overall demand in the economy and this in turn is likely to move the economy out of the stagnation hole.

On this way of thinking consumer confidence, which has weakened as a result of the coronavirus could be lifted by massive monetary pumping.

Now, even if consumers were to become more confident about economic prospects, how is all this related to the damage that the virus continues to inflict? Would the increase in consumer confidence due to the monetary pumping cause individuals to go back to work?

Unless the causes of the virus are ascertained or unless some vaccine is produced to protect individuals against the virus, they are likely to continue to pursue a life of isolation. This means that most people are not going to risk their life and start using the newly pumped money to boost their spending.

It seems that whenever a crisis emerges, central banks are of the view that first of all they must push plenty of money to “cushion” the side effects of the crisis. The central bankers following the idea that if in doubt “grease” the problem with a lot of money.

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

The Bank of England’s Governor Fears a Liquidity Trap

January 19, 2020

The Bank of England’s Governor Fears a Liquidity Trap

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:

If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.

He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.

What Is a Liquidity Trap?

In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.

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

Is Lebanon’s central bank a Ponzi scheme ?

December 1, 2019

Is Lebanon’s central bank a Ponzi scheme ?

The situation in Lebanon is deteriorating. Traffic lanes have all been reopened, but a rift has emerged between those who favour the free flow of traffic and the road blockers. The Free Patriotic Movement of President Michel Aoun, the Shiite Amal Movement of parliament speaker Nabih Berri and the Hezbollah condemn road closures; while the Future Movement led by Saad Hariri, a Sunni, the Lebanese Forces of the Maronite Samir Geagea and the Progressive Socialist Party of Walid Jumblatt, leader of Lebanon’s Druze, have attempted to reintroduce the roadblocks.

In the current political landscape, pursuing a simultaneous fight against corruption does not seem possible. Gebran Bassil (Free Patriotic Movement) announced that all the leading members of his party would make public their bank accounts. He also tabled a bill aimed at verifying the assets of civil servants. However, several hurdles would render such measures unworkable (the waiver of bank secrecy being prohibited by law in these circumstances; nothing has been said about the bank accounts belonging to the family members of political leaders; etc.).

Actually, corruption in Lebanon is not a violation of the law; it is the law itself that generates it. For example, there are import taxes, which nobody pays since the law grants an exemption to the 17 recognized religious communities. It is therefore sufficient to have the import declared by a person from one of these communities to avoid paying the tax. Thus, the port of Beirut loses out on US$ 3 billion every year.

The liquidity crisis, which sparked the 17 October protest movement, has worsened. Banks only allow cash withdrawals in Lebanese pounds up to a maximum amount equivalent to US$ 500 per week.

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

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