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As reported last week, shortly after SWIFT caved to US pressure and defied the EU announcing it would cut off a selection of Iranian banks, on Monday, the US Treasury said the Iranian Central Bank has been officially cut off the SWIFT financial messaging system. The disconnection, which comes at a time when Iran’s economy is reeling and its currency is tumbling as a result of restricted oil exports (albeit offset by numerous temporary waivers for top Iranian oil clients), will made it far more difficult for the Islamic Republic to settle import and export bills.

Treasury Secretary Steven Mnuchin said that the move is “the right decision to protect the integrity of the international financial system”, and comes after several days planning by SWIFT.

✔

I understand that SWIFT will be discontinuing service to the Central Bank of Iran and designated Iranian financial institutions. SWIFT is making the right decision to protect the integrity of the international financial system.

As previously discussed, SWIFT said it would begin cutting off access to several unspecified Iranian banks. More than 70 Iranian and Iranian-linked financial institutions were sanctioned, including a host of banks that allegedly provided services to Hamas and Hezbollah, and others that provided services to the Iranian armed forces.

While the US could not directly force SWIFT to cut off Iranian banks, US Secretary of State Mike Pompeo had warned that penalties would be applied to SWIFT and any other firms that refused to comply with the latest sanctions, effectively forcing SWIFT to pick between compliance with US demands or angering top EU officials. It picked the former.

An allegedly “neutral” entity, SWIFT had found itself torn between a US-EU diplomatic row as of late.

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

Treasury Announces Record Debt Sale In Upcoming Refunding Auction

October 31, 2018

Treasury Announces Record Debt Sale In Upcoming Refunding Auction

Treasury Secretary Steven Mnuchin is about to surpass Timothy Geithner’s achievement of selling a record amount of notes and bonds as he seeks to finance America’s soaring budget deficit.

According to the latest quarterly refunding statement, the US Treasury is about to sell a record amount of debt, surpassing levels seen both in the aftermath of the Great Depression and the Global Financial Crisis.

On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed’s ongoing balance sheet shrinkage.

Here are the details of the TBAC’s proposal:

Auctions for 2-, 3- and 5-year notes will increase by $1 billion in both of the next two months; last quarter Treasury implemented increases in all three months
- As a result, the size of 2-, 3-, and 5-year note auctions will increase by $2 billion, respectively, by the end of January.
Auctions for 7-, 10-, 30-year notes to be raised by $1 billion in November and then kept steady through January
Auctions for 2-year floating-rate note will rise by $1 billion in November
Auctions for TIPS will see various changes with total tips issuance rising $20 billion-$30 billion in 2019, however there will be no TIPS supply changes over next three months; a new CUSIP 5-year will be added to the TIPS calendar, with the new security to be introduced October 2019

In total, the Treasury will sell $83 billion in long-term debt next week – consisting of $37BN in 3 Year notes, $27BN in 10 Year notes and $19BN in 30 Year notes, versus $78 billion in August’s refunding week sales.

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

“One Size Fits Germany” Math Impossibility, Get Your Money Out of Italy Now!

October 19, 2018

“One Size Fits Germany” Math Impossibility, Get Your Money Out of Italy Now!

Italy, on the Euro, has a currency that is 9% too high. Germany, on the Euro, has a currency that is 11% too low.

There was much discussion yesterday about the US Treasury report that determined China was not a currency manipulator.

However, there are six countries on the manipulation watch list: China, Japan, Korea, India, Germany, and Switzerland.

Japan, Germany, and Korea have met two of the three criteria in every Report since the April 2016 Report having material current account surpluses combined with significant bilateral trade surpluses with the United States.
Germany has the world’s largest current account surplus in nominal dollar terms, $329 billion over the four quarters through June 2018, which represented its highest nominal level on record. Germany also maintains a sizable bilateral goods trade surplus with the United States, at $67 billion over the four quarters through June 2018. There has been essentially no progress in reducing either the massive current account surplus or the large bilateral trade imbalance with the United States in recent years, in part because domestic demand in Germany has not been sufficiently strong to facilitate external rebalancing and because Germany’s low inflation rate has contributed to a weak real effective exchange rate.

Try Fixing This

The Euro is 11% undervalued in Germany, the largest Eurozone economy.
The Euro is 9% overvalued in Italy, the third largest Eurozone economy.

The normal way central banks make adjustments to fix over-valued or undervalued situation is through interest rate policy or direct currency intervention.

No matter which the ECB does, it will impact Italy and Germany in opposite directions.

Meanwhile, interest rates are on the verge of spiraling out of control in Italy.

Italy vs Germany 10-Year Bond Spread

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

China Crashes As Flood Of Margin Calls Sparks “Liquidity Crisis”, Panic Selling

October 18, 2018

China Crashes As Flood Of Margin Calls Sparks “Liquidity Crisis”, Panic Selling

The Treasury’s latest semiannual FX report may have spared China the designation of currency manipulator (for now… in a new twist, there was a section dedicated exclusively to China in the Executive Summary, a clear signal from the Treasury that China is the disproportionate focus of the report stating that ‘it is is clear that China is not resisting depreciation through intervention as it had in the recent past’), but the market was not as forgiving.

In the latest shock to Chinese confidence and stability, overnight Chinese shares extended the world’s worst slump as the yuan touched its weakest level in almost two years, testing the government’s ability to maintain market stability and calm as risks continued to mount for Asia’s largest economy.

Two days after we reported that concerns about pledged shares, in which major investors put up stock as collateral for personal loans – a disastrous practice when stock prices are dropping, emerged as a key pressure point for China’s market, overnight Bloomberg reported that “rising fears of widespread margin calls fueled a 3 percent tumble in the Shanghai Composite Index, which sank to a nearly four-year low as more than 13 stocks fell for each that rose.”

The concentrated selloff, sent the Shanghai Composite down 2.9%, closing at session lows of 2,486, the lowest level since November 2014, as China’s plunge-protecting “National Team” was nowhere to be seen.

Chinese stocks have dropped 30% below their January highs, as the spread between China’s market and the rest of the world grows alarmingly wide.

Meanwhile, local government efforts to shore up confidence in smaller companies failed to boost sentiment, while the yuan tumbled to 6.94, just shy of its one and a half year low of 6.9587 touched in August, after the U.S. Treasury Department stopped short of declaring China a currency manipulator, a move that some interpreted as giving Beijing breathing room to allow a weaker exchange rate.

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

Weekly Commentary: Portending an Interesting Q4

September 30, 2018

Weekly Commentary: Portending an Interesting Q4

“Those who do not learn history are doomed to repeat it.” I’ll add that those that learn the wrong lessons from Bubbles are doomed to face greater future peril. The ten-year anniversary of the financial crisis has generated interesting discussion, interviews and scores of articles. I can’t help but to see much of the analysis as completely missing the critical lessons that should have been garnered from such a harrowing experience. For many, a quite complex financial breakdown essentially boils down to a single flawed policy decision: a Lehman Brothers bailout would have averted – or at least significantly mitigated – crisis dynamics.

I was interested to listen Friday (Bloomberg TV interview) to former Treasury Secretary Hank Paulson’s thoughts after a decade of contemplation.

Bloomberg’s David Westin: “It’s been ten years, as you know, since the great financial crisis that you stepped into. Tell us the main way in which the financial system is different today than what you faced when you came into the Treasury?”

Former Treasury Secretary Hank Paulson: “Well, it’s very, very different today. So, let’s talk about what I faced. What I faced was a situation where going back decades the government had really failed the American people, because the financial system had not kept pace with the modern financial markets. The protections that were put in place after the Great Depression to deal with panics were focused on banks – protecting depositors with deposit insurance. Meanwhile, the financial markets changed. And when I arrived (2006), half or more of the Credit was flowing outside of the banking system.

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

Weekly Commentary: Portending an Interesting Q4

September 29, 2018

Weekly Commentary: Portending an Interesting Q4

I was interested to listen Friday (Bloomberg TV interview) to former Treasury Secretary Hank Paulson’s thoughts after a decade of contemplation.

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

Iran Sanctions Are Damaging The Dollar

September 19, 2018

Iran Sanctions Are Damaging The Dollar

Painful sanctions on Iran have demonstrated the long reach of the U.S. Treasury, forcing much of the globe to fall in line and cut oil imports from Iran despite widespread disagreement over the policy. Yet, we are only in the first few chapters of what may ultimately be a long story that ends with the erosion of the power of the U.S. dollar.

The role of the greenback in the international financial system is the reason why the U.S. can prevent much of the world from buying oil from Iran. Oil is traded in dollars, and so much of international commerce is based in dollars. In fact, as much as 88 percent of all foreign exchange trades involve the greenback.

Moreover, multinational companies inevitably have some commercial ties to the U.S., so when faced with the choice of business with Iran or losing access to the U.S. financial system and the American market, the choice is an easy one.

That means that even if European governments, for instance, support importing oil from Iran, the dominance of the U.S.-based financial system leaves them with very few tools to do so. European policymakers have scrambled to try to maintain a relationship with Iran and have tried to convince Iran to stick with the terms of the 2015 nuclear deal – and Iran is still complying – but that doesn’t mean that European refiners, who are private companies, will run the risk of getting hit by U.S. sanctions by continuing to import oil from Iran. In fact, they began drastically cutting oil purchases from Iran months ago.

The dollar is supreme, it seems.

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

Think That Governments Won’t Default? Think Again

September 11, 2018

Think That Governments Won’t Default? Think Again

The Congressional Budget Office (CBO) just reported that the U.S. budget deficit is widening in a ‘big way’.

And what’s even worse – last month the net interest on public debt jumped 25% compared to last August. . .

I wrote last January about the soaring cost of interest that the U.S. Treasury’s paying on its outstanding debts (you can skim that here). And it looks like things keep getting out of control – especially as the Federal Reserve continues raising rates (which further increases borrowing costs).

Besides this very expensive ‘interest’ problem – the CBO reported that the U.S. budget deficit widened to its fifth highest ever.

And as Trump’s tax cuts continue taking away from Federal revenue, while government spending – including interest payments – keeps growing, we need to ask ourselves some important questions. . .

The next time the U.S. slides into a recession – will they be able to continue borrowing such enormous amounts while maintaining their interest payments? Will they follow the same route that the Emerging Markets are headed today?

We see many talking heads on CNBC and other mainstream financial media tell us that there’s virtually no risk of the U.S. defaulting. Same thing with any other major country.

Even worse, there’s a growing point of view preaching to the masses that aslong as country has a central bank, they can issue all the debt they need without risk of default.

Why would anybody think that?

Because – for instance – if the U.S. didn’t have enough cash flow (tax revenue) to pay creditors (buyers of U.S. bonds). And if they weren’t able to borrow anymore to roll over debt – the Fed would simply print U.S. dollars instead.

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

Bernanke, Geithner and Paulson Still Don’t Have a Clue About the Financial Crisis

September 11, 2018

Bernanke, Geithner and Paulson Still Don’t Have a Clue About the Financial Crisis

NYT readers were no doubt disturbed to see a column in which former Fed Reserve Board chair Ben Bernanke, Obama Treasury Secretary Timothy Geithner, and Bush Treasury Secretary Henry Paulson patted themselves on the back for their performance in the financial crisis. First, as they acknowledge in the piece, all three completely failed to see the crisis coming.

During the years when house prices were getting way out of line with both their long-term trend and rents, Bernanke was a Fed governor, then head of the Council of Economic Advisers, and then Fed chair. He openly dismissed the idea that the run-up in house prices could pose any threat to the economy. Henry Paulson was at Goldman Sachs until he became Treasury Secretary in the middle of 2006. As the bank’s CEO he was personally profiting from the bubble as the bank played a central role in securitizing mortgage backed securities. Timothy Geithner was president of the New York Fed, where he was paid over $400,000 a year to make sure that the Wall Street banks were not taking on excessive risk.

It is bad enough that these three didn’t see the crisis coming, but they still seem utterly clueless. They tell readers:

“Productivity growth was slowing, wages were stagnating, and the share of Americans who were working was shrinking. That put pressure on family incomes even as inequality rose and upward social mobility declined. The desire to maintain relative living standards no doubt contributed to a surge in household borrowing before the crisis.”

Actually productivty growth didn’t begin to slow until 2006, as the bubble was hitting its peak. Growth was quite strong from 2000 to 2005, which means the cause of wage stagnation in those years must lie elsewhere.

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

Tenth Anniversary Of Financial Collapse, Preparing For The Next Crash

September 5, 2018

Tenth Anniversary Of Financial Collapse, Preparing For The Next Crash

Ten years ago, there was panic in Washington, DC, New York City and financial centers around the world as the United States was in the midst of an economic collapse. The crash became the focus of the presidential campaign between Barack Obama and John McCain and was followed by protests that created a popular movement, which continues to this day.

Banks: Bailed Out; The People: Sold Out

On the campaign trail, in March 2008, Obama blamed mismanagement of the economy on both Democrats and Republicans for rewarding financial manipulation rather than economic productivity. He called for funds to protect homeowners from foreclosure and to stabilize local governments and urged a 21st Century regulation of the financial system. John McCain opposed federal intervention, saying the country should not bail out banks or homeowners who knowingly took financial risks.

By September 2008, McCain and Obama met with President George W. Bush and together they called for a $700 billion bailout of the banks, not the people. Obama and McCain issued a joint statement that called the bank bailout plan “flawed,” but said, “the effort to protect the American economy must not fail.” Obama expressed “outrage” at the “crisis,” which was “a direct result of the greed and irresponsibility that has dominated Washington and Wall Street for years.”

By October 2008, the Troubled Asset Relief Program (TARP), or bank bailout, had recapitalized the banks, the Treasury had stabilized money market mutual funds and the FDIC had guaranteed the bank debts. The Federal Reserve began flowing money to banks, which would ultimately total almost twice the $16 trillion claimed in a federal audit. Researchers at the University of Missouri found that the Federal Reserve gave over $29 trillion to the banks. These are historically these are signs of a coming recession.

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

US Debt Sales To Surge: Treasury Raises 2018 Borrowing Need To $1.33 Trillion

July 31, 2018

US Debt Sales To Surge: Treasury Raises 2018 Borrowing Need To $1.33 Trillion

America’s funding needs are starting to grow at a dangerous pace.

Even before the NYT reported of Trump’s startling suggestion of a further $100 billion tax cut in the form of an inflation-adjusted capital gains tax cost basis which mostly benefits the wealthy, earlier today the U.S. Treasury said it expects to borrow $56 billion more during the third quarter than previously estimated, while market participants expect shorter-dated Treasuries to absorb the brunt of the new supply as the Trump administration grapples with a mushrooming budget deficit.

In the Treasury’s latest quarterly Sources and Uses table, it revealed that it expects to issue $329 billion in net marketable debt from July through September, and $56 billion more than the $273 billion estimated three months ago, in April. assuming an end-of-September cash balance of $350 billion, matching its previous estimate. It also forecast $440 billion of borrowing in the final three months of the year, with a $390 billion cash balance on December 31.

The borrowing estimate for the third quarter is the highest since the same period in 2010 and the fourth largest on record for the July-September quarter, according to Reuters. In the second quarter, net borrowing totaled $72 billion, slightly below the earlier prediction of $75 billion.

The US fiscal picture continues to darken as a result of rising social security costs, military spending and debt service expenses while corporate tax income is declining after last year’s tax reforms. As a result, the federal budget deficit is expected to reach $833 billion this year, up from $666 billion in the budget year ended last September, a number that is well below the net funding demands for the US Treasury.

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

Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

June 14, 2018

Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

The Fed upped the interest it pays on excess reserves to 1.95% today. This is free money (taxpayer funded) to banks.

The Fed bumped up the interest it pays on excess reserves today to 1.95%. Currently, excess reserves sit at $1.894 trillion.

The math is simple enough. At the current rate, the Fed will hand over approximately $36.93 billion of taxpayer money to banks. That assumes the status quo, but things will change.

Factors

The Fed is shrinking its balance sheet slowly. That reduces excess reserves the Fed pays interest rates on.
When the Fed hikes interest rates, it also increases the interest it pays on excess reserves.

The first point acts to reduce free money, the second acts to increase free money.

Note to ECB

If you want to recapitalize Italian banks, just give them free money instead of your profit-reducing policy of holding rates negative.

Taxpayer money?

Yes! Otherwise the Fed would return this money to the US Treasury.

Some claim free money is paying banks to not lend. The claim is fallacious. Banks do not lend from excess reserves.

For discussion, please see Free Money! Banks Paid $22 Billion to Not Lend?

That was the amount I calculated on April 17, 2017. Interest then was 1.0%.

Even though the Fed’s balance sheet is lower, the increased rate bumped up the free money calculation to $36.93 billion.

No Outrage!

Why isn’t $36.93 billion in free money to banks an outrage?

There is Over $7.5 Trillion In Debt That’s Highly Vulnerable To Rising Rates – Here’s What To Expect

April 25, 2018

There is Over $7.5 Trillion In Debt That’s Highly Vulnerable To Rising Rates – Here’s What To Expect

The 10-year interest rate hit the critical level of 3% this morning.

And this is the highest level it’s been since 2014 – four years ago. . .

A couple months back, I highlighted the correlation of the rise in the Fed Funds Rate (FFR) and the Interest Payments Due on the U.S. National Debt. And as President Trump and Congress are showing no signs of slowing down their borrowing – this debt service cost will only keep rising.

But the U.S. Treasury will get funded no matter what – foreigners will buy the debt, or the Fed will print dollars to do it. Either way, they will borrow – no matter the cost.

But individuals and companies that borrow aren’t as lucky. . .

They’re forced to pay the higher interest payments.

So, with interest rates moving up, it would be smart to see what businesses and sectors are most vulnerable to rising yields.

And for this, we need to look at the LIBOR rate. . .

LIBOR stands for London Interbank Offered Rate and is a benchmark rate that the world’s leading banks charge each other for short-term lending. It’s the first step when calculating interest rates on various kinds of loans – whether government bonds, corporate bonds, mortgages, or student debt.

You might have heard about LIBOR over the last few years. Many of the world’s leading financial institutions were caught manipulating the rate for years to profit and protect themselves.

Here’s an example: back in the 2007-08 financial meltdown, Barclays Bank manipulated the LIBOR downward. This lowering of rates in a time where rates were trending higher because of global bankruptcy risks gave off the impression that they were ‘less’ risky.

The LIBOR Scandal is known as one of the greatest financial crimes in history. And banks were hit with many billions in fines.

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

Iran Sanctions Will Help China’s Petro-Yuan

January 9, 2018

Iran Sanctions Will Help China’s Petro-Yuan

In a few days, U.S. President Trump may try to re-impose sanctions on Iran, a dramatic step that could heighten tensions between the two countries. Some analysts believe the move could contribute to a much broader global economic power shift from the U.S. to China.

The connection between the issues may not be obvious at first glance, but by seeking to isolate Iran from the international market, Iran could look elsewhere. Because the global oil trade is conducted in greenbacks, the U.S Treasury was able to restrict Iran’s ability to access the global financial system in the past. That made it extremely difficult for Iran to sell its oil prior to the thaw in relations in 2015, which kept millions of barrels of daily oil production on the sidelines.

This time around, however, the U.S. will likely go it alone. The Trump administration won’t have the backing of the international community in its campaign to resurrect sanctions against Iran, which will make isolation much more difficult. A few months ago, Goldman Sachs predicted that unilateral sanctions from the U.S. could affect a few hundred thousand barrels per day from Iran, but without help from the rest of the world, the effort would not curtail nearly the same amount of oil as the last time around.

Moreover, some analysts argue that the Washington crackdown could merely push Iran to begin selling oil under contracts denominated in yuan rather than dollars.

“Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “This may spark a move away from the present long-established U.S. Dollar (USD) denominated oil trading regime.”

…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…

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