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In addition to the suddenly escalating global trade war, overnight traders had one more thing to worry about: another central bank unwinding its QE program. This happened shortly after midnight ET, when BOJ Governor Kuroda unexpectedly announced that the Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, and that there could be policy change before the 2% inflation target is achieved, marking the first time he’s provided any clear guidance on timing for normalizing policy.

“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too,” he said. “I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”

In immediate reaction, Japanese shares fell sharply, the Nikkei sliding as much as 2.9% as the Yen surged as much as 0.5%, with the USDJPY tumbling below 106, a 15 month low, while JGB yields jumped across the curve.

“Kuroda’s comments are important because he officially acknowledged a change in policy was likely before the end of fiscal year 2019,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. “A move sub-105 yen over the coming days wouldn’t be surprising under the current risk off/trade war concern environment”

In testimony that lasted about three hours, Kuroda seemed to try mitigating the negative market impact by saying that this doesn’t affect his “overshooting commitment,” which pledges the BOJ to continue expanding the monetary base until inflation exceeds 2 percent in a stable manner.

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

It’s Raining Money

February 26, 2018

It’s Raining Money

With apologies to the Dire Straights:

Now look at them yo-yo’s that’s the way you do it
You play the bull on the fin TV
That ain’t workin’ that’s the way you do it
Money for nothin’ and stocks for free

After 9 years of artificial liquidity drenching markets the same game continues in 2018: It’s raining money. Again. Still.

Last week we saw the standard script of the last 9 years unfold: Dovish talk by central bankers and artificial liquidity taking over markets. The latest avalanche of free money entering markets are of course buybacks courtesy of tax cuts which now are expected to reach $650B in 2018 announcements coming to $50B a month.

In many cases companies don’t know what to do with all that free cash, but to buy back their own shares. Warren Buffet pretty much spelled it out this weekend and today:

“A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote.

The firm’s most recent annual letter revealed the investment conglomerate’s net worth surged $65 billion in 2017, with $29 billion of that stemming from tax proceeds. That gain was realized in December, after the passage of the tax plan.

So he has a problem, knowing that stocks are expensive he’s having a hard time investing the cash so he’s opening the door to buy back his own shares over issuing more dividends. None of this creates jobs, jobs, jobs of course, but is a refection of the absurdity of the ill devised tax cuts that will continue to expand wealth inequality but will continue to produce a bid underneath markets until the bitter end.

Lest also not forget that the ECB keeps running QE at 30B Euro a month and overnight the BOJ’s Kuroda announced persistent monetary easing is needed while China injected 150b yuan in overnight liquidity as well and voila a sea of global green:

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

Central Banks Will Let The Next Crash Happen

February 15, 2018

Central Banks Will Let The Next Crash Happen

If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.

For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.

This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.

First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.

Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program.

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

Do Financial Markets Still Exist?

February 15, 2018

Do Financial Markets Still Exist?

For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.

No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.

Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html

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

It’s Looking A Lot Like 2008 Now…

February 3, 2018

It’s Looking A Lot Like 2008 Now…

Did today’s market plunge mark the start of the next crash?

Economic and market conditions are eerily like they were in late 2007/early 2008.

Remember back then? Everything was going great.

Home prices were soaring. Jobs were plentiful.

The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.

And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.

It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…

The Fed’s ‘Reign Of Error’

Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.

In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.

It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.

The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):

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

QE Party Over, even by the Bank of Japan

January 6, 2018

QE Party Over, even by the Bank of Japan

First decline in its colossal balance sheet since 2012.

An amazing – or on second thought, given how central banks operate, not so amazing – thing is happening.

On one hand…

Bank of Japan Governor Haruhiko Kuroda keeps saying that the BOJ would “patiently” maintain its ultra-easy monetary policy, so too in his first speech of 2018 in Tokyo, on January 3, when he said the BOJ must continue “patiently” with this monetary policy, though the economy is expanding steadily. The deflationary mindset is not disappearing easily, he said.

On December 20, following the decision by the BOJ to keep its short-term interest-rate target at negative -0.1% and the 10-year bond yield target just above 0%, he’d brushed off criticism that this prolonged easing could destabilize Japan’s banking system. “Our most important goal is to achieve our 2% inflation target at the earliest date possible,” he said.

On the other hand…

In reality, after years of blistering asset purchases, the Bank of Japan disclosed today that total assets on its balance sheet actually inched down by ¥444 billion ($3.9 billion) from the end of November to ¥521.416 trillion on December 31. While small, it was the first month-end to month-end decline since the Abenomics-designed “QQE” kicked off in late 2012.

Under “QQE” – so huge that the BOJ called it Qualitative and Quantitative Easing to distinguish it from mere “QE” as practiced by the Fed at the time – the BOJ has been buying Japanese Government Bonds (JGBs), corporate bonds, Japanese REITs, and equity ETFs, leading to astounding month-end to month-end surges in the balance sheet. But now the “QQE Unwind” has commenced. Note the trend over the past 12 months and the first dip (red):

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

Bank of Japan Tapers (Quietly), QE Party Over

December 5, 2017

Bank of Japan Tapers (Quietly), QE Party Over

No flashy announcement, to avoid alarming the markets.

After years of blistering asset purchases, the Bank of Japan disclosed today that it held a total of ¥521.6 trillion in assets as of November 30, including Japanese Government Bonds (JGBs), gold, corporate bonds, Japanese REITs, equity ETFs, loans, etc. That is quite a pile, so to speak. It amounts to about 96% of Japan’s GDP.

By this measure, the BOJ’s balance sheet dwarfs the Fed’s balance sheet, which amounts to 23% of US GDP. When it comes to QE, no one can hold a candle to Japan. Its holdings of JGBs alone rose to ¥443.6 trillion. Its balance sheet looks like a typical post-Financial-Crisis central-bank balance sheet on steroids (chart in trillion yen):

There a couple of differences compared to other central banks: One, the BOJ started QE long before anyone even called it “QE,” but in 2013, it really got going, and those giant moves made the prior periods of QE look minuscule. And two, the BOJ actually unwound some of its earlier QE starting in late 2005 but soon gave up on it.

Now something else has been happening: Starting in December 2016 – the month the Fed raised rates and a few months after some Fed governors started to kick around the idea publicly that QE should be unwound – the BOJ began to curtail its asset purchases.

In other words, it began to “taper.” Assets are still increasing but at a much slower rate. During peak QE – the 12-month period ending December 31, 2016 – it added ¥93.4 trillion (about $830 billion) to its balance sheet. Over the 12-month period ending November 30, 2017, it has added “only” ¥50.8 trillion to its balance sheet. Though that’s still a good chunk of money (about $450 billion), that addition is down 46%.

This chart shows the 12-month change in the balance sheet in trillion yen, going back to the Financial Crisis:

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

Nonsensical Global Worries Over Subdued Inflation: Yellen, Draghi, Kuroda

October 16, 2017

Nonsensical Global Worries Over Subdued Inflation: Yellen, Draghi, Kuroda

Central bank presidents at the Fed, the ECB, and Bank of Japan are all concerned over low inflation. The Fed wants to hike anyway, but the Bank of Japan will keep pursuing aggressive monetary easing. Meanwhile, asset prices are in the biggest ever bubble.

Bank of Japan

Bank of Japan Governor, Haruhiko Kuroda, says the BOJ Will Keep Pursuing Aggressive Monetary Easing.

“The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price stability target at the earliest possible time,” Mr. Kuroda said at a meeting of the Group of 30 in Washington.

“Achieving the 2% target is still a long way off,” Mr. Kuroda said.

“Once price increases become widespread, medium- to long-term inflation expectations for firms and households are expected to rise gradually and actual inflation will increase toward 2%,” he said.

ECB

ECB president Mario Draghi says the ECB must be ‘Persistent’ with Monetary Policy in Face of Weak Inflation.

‘It’s going to take time. We have got to be persistent with our monetary policy,” Draghi said on the sidelines of the meetings of the International Monetary Fund and World Bank in Washington, reported The Wall Street Journal.

Draghi gave an upbeat outlook on the 19-nation eurozone economy, but said inflation remains too weak, possibly due to subpar wage growth, he said. The ECB’s program of buying 60 billion euros ($70.9 billion) of bonds a month is set to expire in December. Policy makers are expected at a meeting on Oct. 26 to announce plans to begin scaling down the monthly purchases next year, but Draghi suggested the decision could be delayed again, the report said.

Fed

Fed chair Janet Yellen says the Fed is Watching Inflation Closely but Economy is Strong.

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

The Upcoming Increase in Interest Rates

October 16, 2017

THE UPCOMING INCREASE IN INTEREST RATES

Last week, both Janet Yellen of the Fed and Mark Carney of the Bank of England prepared financial markets for interest rate increases. The working assumption should be that this was coordinated, and that both the ECB and the Bank of Japan must be considering similar moves.

Central banks coordinate their monetary policies as much as possible, which is why we can take the view we are about to embark on a new policy phase of higher interest rates. The intention of this new phase must be to normalise rates in the belief they are too stimulative for current economic conditions. Doubtless, investors will be reassessing their portfolio allocations in this light.

It should become clear to them that bond yields will rise from the short end of the yield curve, producing headwinds for equities. The effects will vary between jurisdictions, depending on multiple factors, not least of which is the extent to which interest rates and bond yields will have to rise to reflect developing economic conditions. The two markets where the change in interest rate policy are likely to have the greatest effect are in the Eurozone countries and Japan, where financial stimulus and negative rates have yet to be reversed.

Investors who do not understand these changing dynamics could lose a lot of money. Based on price theory and historical experience, this article concludes that bond yields are likely to rise more than currently expected, and equities will have to weather credit outflows from financial assets. Therefore, equities are likely to enter a bear market soon. Commercial and industrial property should benefit from capital flows redirected from financial assets, giving them one last spurt before the inevitable financial crisis. Sound money, physical gold, should become the safest asset of all, and should see increasing investment demand.

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

Fed’s Asset Bubbles Now At The Mercy Of The Rest Of The World’s Central Bankers

September 20, 2017

Fed’s Asset Bubbles Now At The Mercy Of The Rest Of The World’s Central Bankers

“Like watching paint dry,” is how The Fed describes the beginning of the end of its experiment with massively inflating its balance sheet to save the world. As former fund manager Richard Breslow notes, however, Yellen’s decision today means the risk-suppression boot is on the other foot (or feet) of The SNB, The ECB, and The BoJ; as he writes, “have no fear, The SNB knows what it’s doing.”

As we reported previously, In the second quarter of the year, one in which unlike in Q1 fund flows showed a persistent and perplexing outflow from US stocks, a trading desk rumor emerged that even as institutional traders dumped stocks and retail investors piled into ETFs, a “mystery” central bank was quietly bidding up risk assets by aggressively buying stocks.

The answer was revealed this morning when the hedge fund known as the “Swiss National Bank” posted its latest 13-F holdings. What it showed is that, as rumored, the Swiss National Bank had gone on another aggressive buying spree in the second quarter, and following its record purchases in the first quarter, the central bank boosted its total equity holdings to an all time high $84.3 billion, up 5% or $4.1 billion from the $80.4 billion at the end of the first quarter.

Via Bloomberg,

So here we go with the latest installment of the Fed’s will they or won’t they show. It seems from reading all the insights that we’re meant to expect a dovishly spun hawkish move.

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

Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

May 18, 2017

Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.

* * *

Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…

… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.

Under questioning from opposition party lawmaker Seiji Maehara, who noted that the pace of bond accumulation by the BOJ had slowed, Kuroda said the trend could continue, without elaborating. He noted that the central bank’s target is to control interest rates rather than the amount of bond purchases. “This development signals to me that they are going with rates without talking about a quantitative target,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. “That will be better when they think about an exit.”

While the BOJ’s purchase slowdown has been visible for months in data released by the central bank, Kuroda’s confirmation of this reality in parliament last Wednesday marks a stark change. As Bloomberg notes, until now he’d struggled to emphasize that the annual pace could vary from an indicative 80 trillion yen, depending on the state of the economy and financial markets. He now appears to have thrown in the towel. Meanwhile, investors are watching for any hint of tightening in monetary policy amid speculation that the central bank’s bond purchase regime is unsustainable and as consumer prices in Japan are expected to pick up later this year.

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

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

May 7, 2017

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

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…

Hell To Pay

September 24, 2016

SkillUp/Shutterstock

Hell To Pay

The final condition for a market crash is falling into place

Sometimes I wonder if I’m ever going to run out of new things to say about the economy. Nothing interesting has happened in a long time.

Our liquidity-drunk “markets” remain over-priced due to the chronic intervention of the global central banking cartel, which has demonstrated over and over again that it won’t tolerate even the slightest drop in asset prices.

Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular — or even recognizable — feature.

It’s destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out.

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.

The Beginning of the End

It’s been a long 7 years for those of us who believe fundamentals matter. For quite some time they have not.

So we reality-based fundamentalists have largely been reduced to pointing at the parade of policy failures and ham-fisted market manipulations and saying, essentially, That’s just dumb.

But ‘dumb’ mistakes have become ‘stupid’, and ‘stupid’ became ‘idiotic’, and now ‘idiotic’ mistakes are piling up, accumulating into a mountain of stored potential energy that will someday topple destructively across the global markets. We’ve all known, deep down, that money printing is not the same as capital formation, and that prosperity never truly results from redistributing wealth from one group to another. And yet, far too many have been willing to play along and place their trust in the central banks.

Well, we’ve finally reached the beginning of the end.

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

Traveling Circus

September 24, 2016

Traveling Circus

After Wednesday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias.

Central banks in G7 economies have been carrying a heavy load for a very long time, especially noticeable to all since 2009. Zero and negative sovereign interest rates, asset purchase programs and whack-a-mole currency devaluations have avoided a counterfactual that would have included credit exhaustion, debt deflation and economic contraction.

Their now conventional unconventional monetary policies have been overlaid by communications policies that have fostered a narrative of economic normality and cyclicality. It all seems rather disingenuous given their successful coup de marché, and maybe a bit delusional too given their serious demeanors discussing Philips curve stuff in the face of balance sheet time bombs.

And now…central banks seem exhausted too, not only in terms of being able to stimulate consumption and levitate asset prices, but also in terms of their communications policies that suggest they can.

The BOJ may have jumped the shark when it embarked on a new program called “QQE with yield curve control” whereby it will pin 10 year JGB yields at 0%. The BOJ also signed on to a new program called “inflation overshooting commitment” whereby it will keep creating sufficient base money until CPI inflation exceeds 2%. Let there be no mistake: this is formalized QE Infinity.

It was a tacit admission that lowering funding rates further would have no stimulative impact on the Japanese economy, and that all it can do at this point is expand the size of its balance sheet. BOJ watchers do not understand why more attention wasn’t paid to the short end of the curve, which would be easier to manage.

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

State Street: “Move Over Zero Hedge, There Is A New Bear In Town”

September 23, 2016

State Street: “Move Over Zero Hedge, There Is A New Bear In Town”

By Mr. Risk – State Street Global Markets

Unleash Volatility Beast

Thanks for nothing, central banks!

If central banks provided the prototypical inflection point, risk assets should get destroyed next week.
Feast your eyes on a compendium of volatility charts. The beast wants out.
Keys to watch: DXY, EURAUD, and 10-year yields. Move over ZEROHEDGE. There is a new BEAR in town,

* * *

Ahead of the BOJ and Fed meetings, volumes slowed to a trickle, traders got back to flat, and algos reached for the offswitch. Now that event risk is in the rear view mirror, it is time to vote. Buy-the-dip or ‘‘sell everything?’’ If classic market reflexes are in play, a market meltdown following the passing of event risks is by far the more likely outcome. That US equities launched higher is nothing, because it always does that on Fed day. The obligatory central bank forensic is a good place to begin.

Expectations as measured by overnight volatility ahead of the BOJ were the third highest in 3-years. Notably, 7 out of the 10 highest readings have occurred in 2016, which says something about the growing perception about policy failure. Expanding monetary base has not delivered higher inflation expectations or a weaker currency. Just about every 2016 meeting USDJPY sunk like the proverbial stone.

The ‘‘monetary assessment’’ conducted by the BOJ was an admission that QQE was unsustainable, and needed to be tweaked. Plan B is ‘‘QQE with yield curve control.’’ No, that is not a new shampoo. Here is the stripped down ghetto-economist version.

Negative interest rate
Stabilize 10-year yields at 0%
Keep asset purchases at ¥80 tn/year
Abandon monetary base target
Aim to overshoot the 2.0% inflation target
Rebalance ETF by buying less Nikkei 225 linked ETFs and more Topix, removing a well-flagged distortion.

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

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