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Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.”

BofA’s Michael Hartnett noted that supersized central bank intervention which he dubbed a “liquidity supernova” is “the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro…”

To be sure, Hartnett’s “discovery” did not come as a surprise to regular readers: back in October 2014, Citi’s Matt King calculated that it costs central banks $200 billion per quarter to avoid a market crash, or as he put it:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

Today we showed just what central bank buying looks like in practical terms when we demonstrated that the Swiss national Bank had purchased a record $17 billion in US equities in just the first quarter, bringing its total US equity long holdings to an all time high above $80 billion…

… in the process soaking up nearly 4 million AAPL shares in the first 3 months of the year.

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

Fake News From the Fed

April 16, 2017

Fake News From the Fed

What you see in the media is mostly “fake news.”

Reuters had this story recently:

Most Federal Reserve policymakers think the central bank should take steps to begin trimming its $4.5 trillion balance sheet later this year as long as the economic data holds up, minutes from their last meeting showed…

Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year,” the Fed said in its minutes.

This is the public spectacle – where tiny and often trivial bits of real news are conflated with vast myths and illusions.

The Fed fiddles with short-term interest rates… President Trump tweets a threat to the Freedom Caucus… the GOP proposes a new health-care plan…

You can’t know what any of these “facts” mean without reference to a huge body of non-facts – beliefs, ideas, and prejudices, many of them absurd.

Remember, a “myth” is not necessarily untrue; it just can’t be tested or disproven.

And since reality is infinitely complex, and a myth can only reflect a small trace of it… no matter how attractive or “true” it is, the myth always leaves out more truth than it describes.

Critical Narrative

We make no pretense of ever knowing the “truth.”

That would be impossible. All we can do is try to identify the most ridiculous myths… and find the most useful one, the one we can believe without getting kicked in the pants.

Imagine you were a Jew in Germany in the 1930s… or a stock market investor in the US in 1929… or a merchant in Mosul, Iraq, in 2003.

In each case, there were plenty of ways to understand what was going on. But the critical narrative was: Time to get out of town.

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

How Heavy Is This?

April 14, 2017

How Heavy Is This?

Here is a glass of water. You’re holding it.

How heavy is it?

The answer is: the actual weight probably doesn’t matter. It’s just a glass of water. What matters is how long you hold it.

Hold it for a minute, it’s no problem. An hour and your arm will ache. A day and your arm will feel paralysed.

The weight doesn’t change but the longer you hold it the heavier it becomes and the greater the probability you finally just have to put it down or risk dropping it altogether.

Now, take a look at this graphic which I nicked from Hugo Salinas:

How Heavy Is This?

Betting against the ability of governments and their central banks to keep holding the proverbial glass of water has been a losing proposition for a looooong time.

Now, simple math tells us that although this debt growth is pretty damned fantastic it needn’t be a problem if income growth has kept up with it. Income, after all, services debt.

Since income growth hasn’t kept up clearly that’s not the case. So what is it?

The answer lies in this chart which shows the cost of capital across the major economies of the US, the EU, the UK, and Japan.

When the cost of debt servicing is low or zero, then the size of debt really doesn’t matter much. It’s as if the glass of water has no weight at all.

Now here’s something worth pondering…

On an historical timeframe we’re at the tail end of the long term debt-cycle… a cycle that typically lasts between 50 and 75 years.

Today, bonds are more sensitive to price movements than at any other time in history and the yield achieved on them so low that it doesn’t take all that much for a positive return (just) to turn into a loss.

Now take a look at this:

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

Yellen’s Balance Sheet Baloney

April 3, 2017

YELLEN’S BALANCE SHEET BALONEY

Of the many questions reporters asked Janet Yellen on Wednesday, at her press conference following the FOMC’s decision to raise the Fed’s policy rates, my favorite was the very first, posed by the Financial Times‘ U.S. Economics Editor, Sam Fleming.

Here is Mr. Fleming’s question:

[You’ve stated that the Fed wants to delay*] balance sheet normalization until [interest rate*] normalization is well under way. Could you give us some sense about “what well under way” means, at least in your mind — what kind of hurdles are you setting, what kind of economic conditions would you like to see, is it a matter of the level of the short term federal funds rate as being the main issue? What kind of role do you see the role of the balance sheet playing in the mobilization process over longer term? Is it an active tool or passive tool? Thanks.

And here is Chair Yellen’s response:

Let me start with the second question first. We have emphasized for quite some time that the committee wishes to use variations in the fed funds rate target or short term interest rate target as our key active tool of policy. We think it’s much easier, in using that tool, to communicate the stance of policy. We have much more experience with it, and have a better idea of its impact on the economy. So, while the balance sheet asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were again up against the zero bound, and faced with substantial weakness in the economy, it’s not a tool that we would want to use as a routine tool of policy.

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

The Fed Can’t Save Us

April 6, 2016

The Fed Can’t Save Us

In December, the Fed hiked its target for the federal funds rate, which is the interest rate banks charge each other for overnight loans of reserves. Since 2008 the Fed’s target for the Fed Funds Rate had been a range of 0 percent – 0.25 percent (or what is referred to as zero to 25 “basis points”). But last month they moved that target range up to 0.25 – 0.50 percent. Ending a seven-year period of effectively zero percent interest rates.

From our vantage point, we already see carnage in the financial markets, with the worst opening week in US history. This of course lines up neatly with standard Austrian business cycle theory, which says that the central bank can give an appearance of prosperity for a while with cheap credit, but that this only sets the economy up for a crash once rates begin rising.

However, there is something new in the present cycle. The Fed is trying to raise rates while simultaneously maintaining its bloated balance sheet. It is attempting to pull off a magic trick whereby it can keep all of the “benefits” of its earlier rounds of monetary expansion (i.e., “quantitative easing” or “QE”) while removing the artificial stimulus of ultra-low interest rates. As we’ll see, this attempt will not end well, for the Fed officials or for the rest of us. In the meantime, Ben Bernanke will look on with concern, writing the occasional blog post and perhaps giving a speech about poor Janet Yellen’s tough predicament.

Austrian Business Cycle Theory

One of the seminal contributions of Ludwig von Mises was what he called the circulation credit theory of the trade cycle. In our times, we simply call it Austrian business cycle theory, sometimes abbreviated as ABCT. The Misesian theory was subsequently elaborated by Friedrich Hayek, and it was partly for this work that Hayek won the Nobel Prize in 1974.

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

Has The Biggest Of All Bubbles Popped: Central Bank Omnipotence?

March 27, 2016

Has The Biggest Of All Bubbles Popped: Central Bank Omnipotence?

Since the initial turmoil began with the onset of what is now referred to as “The great financial crisis.” One strategy has proven more profitable than any other. That strategy? BTFD (buy the f___n’ dip.)

Regardless of what proprietary advice (short of insider trading,) nothing, as well as, nobody has had a track record worthy of comparison. All one has needed to do is, whenever a selloff occurred (as rare as they had been,) when “the dip” presented itself, the only thing to do was to “buy, buy, buy!”

Forget 2/20 management. Forget stock picking. Forget listening to experts, economists, fund managers, et al. You would beat them all over the last 6+ years if you just BTFD, then bought some more. It had been that easy. However, if it was that easy – why didn’t everyone “just do it?” Easy…

A great many (and I put myself squarely in this camp) still believed that the fundamental laws governing free markets and stocks were still at play. No one, and I do mean that as in nobody with a modicum of business acumen thought, let alone believed the extent, as well as, the vast amounts of money printed ex nihilo by the Fed. would go on not only for as long, but also, in the amounts to which it has.

Now, today, some $4,000,000,000,000.00+ (i.e., over 4 TRILLION) later what has all this balance sheet accrual bought? Probably the bubble of all bubbles. The irony? That “bubble” is in the only true asset the Fed. had left. e.g., Confidence in their omnipotence. And it’s beginning to look more like it’s already popped with every passing FOMC meeting. And just as the name “bubble” implies – all it needed was the tiniest of pins to bring it crashing down.

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

Meet China’s Latest $1.8 Trillion “Problem”

February 1, 2016

Meet China’s Latest $1.8 Trillion “Problem”

Last summer we outlined how Chinese banks obscure trillions in credit risk.

The powers that be in Beijing aren’t particularly keen on allowing the banking sector to report “real” data on souring loans – especially given the fragile state of the country’s economy. In some cases, the Politburo will pressure banks to simply roll over bad debt, effectively kicking the can.

In addition, banks carry around 40% of their credit risk outside of “official loans.” Here’s what Fitch had to say last year:

“Off-balance-sheet financing (I.e. trust loans, entrusted loans, acceptances and bills) accounted for 18% of official TSF stock at end-2014, up from less than 2% just over a decade ago,” Fitch wrote. “Of the off-balance-sheet exposure reported at individual banks, this is equivalent to 15% of total assets for state commercial banks and 25% for mid-tier commercial banks, on a weighted average basis. These ratios would be even higher if we included entrusted loans (see Figure 2), although this information is not disclosed at all banks. Fitch estimates that around 38% of credit is outside bank loans.”

In many cases, channel loans (so credit extended by banks via non-bank intermediaries) are carried as “investments classified as receivables” on the balance sheet.

Now, as more Chinese firms lose access to traditional financing amid rising defaults and increasing economic turmoil, banks are increasingly turning to channel loans as a way of extending credit.

In turn, the amount of “investment receivables” on many mid-tier banks’ books is soaring to dizzying levels. “Mid-tier Chinese banks are increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending to China’s slowing economy,” Reuters reports. “The size of this ‘shadow loan’ book rose by a third in the first half of 2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all commercial loans in China.”

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

Is Judgment Day At Hand?

November 12, 2015

Is Judgment Day At Hand?

What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP. It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”. Normalization is the reversal of the QE operations and the raising of interest rates to above zero. Whether we agree or disagree is irrelevant. The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.

juday Batten down the hatches, judgment day approacheth
Image credit: World Wrestling Entertainment (WWE)

The following two charts summarize the Fed’s policies nicely. The first shows the Federal Funds rate. It dropped from over 5% in 2007 to zero today. So we are making a big deal over a possible 25 basis points hike? I will leave that question for later.

Effective Federal Funds rate. It may be hiked from nothing to almost nothing soon, but what difference would it really make? – click to enlarge.

The second chart shows the Fed Balance Sheet, also starting in 2007. It went from $875 billion in 2007 to $4.5 trillion today, an increase of $3.625 trillion.

Total assets held by the Federal reserve. This unprecedented intervention has delivered “the weakest economic recovery of the entire post-WW2 era”. This result should be no surprise to anyone, except perhaps the monetary mandarins themselves – click to enlarge.

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

Looking at the two charts above, they beg the question: How do you normalize the extreme policies of the last 8 years? If normal means a return to a 5% federal funds rate and reducing the Fed’s balance sheet back to under $1 trillion, we have a hell of a long way to go.

Professor Bernanke’s Bogus Contra-factual, Part 1: The Myth Of Great Depression 2.0

October 27, 2015

Professor Bernanke’s Bogus Contra-factual, Part 1: The Myth Of Great Depression 2.0

It took no “courage” whatsoever to inflate the Fed’s balance sheet from $900 billion to $2.3 trillion during just 17 weeks in September-December 2008. What it actually took was an epochal con job by a naïve Keynesian academic whose single idea about economics was primitive, self-serving, borrowed and wrong.

The claim that the Great Depression was caused by the Fed’s failure to go on a bond buying spree in 1930-1933 was Milton Friedman’s monumental error. Professor Bernanke’s scholarship amounted to little more than xeroxing Friedman’s flawed work, and then shouting loudly in the Eccles Building boardroom at the time of the Lehman bankruptcy that Great Depression 2.0 was lurking just around the corner.

That was just plain hysterical malarkey. But at the time, it served the interests of the Wall Street/Washington Corridor perfectly.

As Wall Street’s decade long spree of leveraged speculation was being liquidated in September 2008, Goldman Sachs, Morgan Stanley and their posse of hedge fund speculators desperately needed rescue from their own reckless gambles——especially their funding of giant balance sheets swollen by long-dated, illiquid, risky assets with cheap hot funds in the wholesale money market. So what better excuse to override every principle of free market economics, financial discipline and public policy fairness than stopping a reenactment of the 1930s—–putative soup-lines and all?

At the same time, beltway politicians and fiscal authorities were tickled pink. They would be able to unleash a monumental $800 billion potpourri of K-street pork and tax and entitlement giveaways to “fight” the recession, knowing that Bernanke & Co would finance it with an eruption of public debt monetization that was theretofore unimaginable.

In short, no public official has ever committed an economic folly greater than the horrific misdeed of Ben S. Bernanke when he provided the Great Depression 2.0 cover story for the lunatic outbreak of central bank money printing shown below. It destroyed the last vestige of Wall Street discipline in a financialized economy that had already been bloated and deformed by two decades of Greenspan era Bubble Finance.

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

Fed Taking Emergency Crisis Measures … Shoving Collateral Onto Banks’ Balance Sheets

October 9, 2015

Fed Taking Emergency Crisis Measures … Shoving Collateral Onto Banks’ Balance Sheets

Mike Maloney with an insightful analysis:

Is the Fed Going to Raise Mortgage Interest Rates?

May 20, 2015

Is the Fed Going to Raise Mortgage Interest Rates?

The Interest Rate Guessing Game

Seldom does a day go by without some guru offering his or her prediction on when the Fed is going to raise rates. They all come with scholarly theories supporting their prediction. It sounds like a fun game. I want to play, but I’m not sure what the object of the game is.

By “interest rate”, I assume the gurus are talking about the Federal Funds rate or the discount rate. The chart below from the St Louis Fed shows that the Federal Funds rate has been practically at zero since 2008. This rate has never been so low for so long, rendering it an inconsequential monetary policy tool for years. Aside from representing a symbolic gesture, does it really matter whether the Fed Funds rate is at zero or at zero plus 25 basis points? Is there any chance that the FOMC will ever raise the rate to, say, 3%?

1-FF rate Effective federal funds rate since the 1950s

The following chart, also from the St Louis Fed, shows the asset side of the Fed’s balance sheet. While the Federal Funds rate was kept at zero, the Fed went hog wild and increased its balance sheet from less than $1 trillion in the beginning of 2008 to about $4.5 trillion today.

2-Fed assets Total assets held by the Federal Reserve

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

Why Moody’s Cut Russia to Two Notches above Junk | Wolf Street

October 20, 2014

Why Moody’s Cut Russia to Two Notches above Junk | Wolf Street.

It was not the most productive summit in the history of mankind. President Vladimir Putin, after watching a military parade in Belgrade, Serbia, and questioning Kosovo’s independence, arrived in Milan on Friday so late that Chancellor Angela Merkel, with whom a private meeting had been scheduled, had to cool her heels for hours. Once done at 2 a.m., he headed over to his buddy’s place, persona non grata in EU politics, Silvio Berlusconi. But the Russian economy was not amused.

Russians know that the ruble is in trouble, and are not so naïve to think that their currency will start to strengthen again soon. Countless factors point in favor of further depreciation, not least the inability of Russian entities to borrow from international markets, recent marked falls in oil prices, and expectations of future US rate hikes…. Government estimates that capital flight is likely to reach between $90-120 billion this year look too conservative to us.

[A]s ever with Russia, there are countless risks. What if capital flight accelerates to rates well beyond expectations to generate genuine unease about the adequacy of the CBR’s [Central Bank of Russia] reserves? What if the ruble is completely irresponsive to interest rate hikes, and simply depreciates rapidly further beyond the CBR’s comfort zone, fueling a jump in inflation into double digits? And what if companies, already unable to borrow from international markets because of sanctions, struggle to meet debt repayments? And – perhaps most obviously – what if the geopolitical situation, which is well beyond the control of the CBR, further deteriorates?

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

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