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The biggest news overnight, and certainly far bigger than this afternoon’s non-event from Janet Yellen, was the significant change in monetary policy announced by the BOJ which (belatedly) unveiled its re-revised “QQE”… this time “with Yield Curve Control” (or “QQEWYCC“), a phrase used in lieu of “Reverse Operation Twist”, whereby the BOJ is hoping to steepen the yield curve and undo the damage it itseld created in January when it introduced NIRP for the first time to Japan, without doing much of anything else.

While we laid out the theoretical big picture elements of QQEWYCC both earlier, and two weeks ago, there is a small problem when one gets into the practical nuances of the proposed monetary experiment: nobody really knows how it will work, not even Goldman Sachs, whose BOJ expert Naohiko Baba admitted that he has no clue how the BOJ will actually execute its vision.

Confirming that the “JGB market has become increasingly distorted”, Baba says that

“it is very unclear at this time exactly how the BOJ intends to “control” the yield curve in the future. Based only on the official statement, we think it is likely it will maintain the yield curve at more or less the current level for the time being. However, the question is how it will control the overall level and shape of the curve when financial and economic conditions change in the future. While the JGB market needs to take time to study the BOJ’s intentions, with interest rate movements lessening, we think the pricing function of interest rates as a mirror reflecting real economic and financial conditions will be increasingly lost.”

Ah yes, the old problem with nationalizing a market – whether it’s bonds or stocks – is that it is no longer, by definition, a market but merely a policy tool which has ceased to delivers any informational value whatsoever.

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

Time to Get Real: Part I

September 10, 2016

Time to Get Real: Part I

In a world where fair value is a central bank veiled enigma it’s frankly a challenge to keep things real, but I’ll have a go at it in what will be a 3 part series covering central banks, the underlying fundamental picture, and a technical assessment of charts. In this part I’ll be covering central banks and putting their actions into context of the realities of a changing world and will aim to address some of the implications.

Part I: Central banks

After years of watching central bankers do their bidding I’ve come to the conclusion that they are the designers of the ultimate Pokemon Go game by leading investors to ever more extreme locations to find little yield nuggets on their screens.

My largest criticism of this game has been that free market price discovery is largely dead and nobody knows what is real any longer, producing a false sense of security as, at any signs of trouble, central banks feel compelled to intervene ever further removing markets from their natural balance. In short: Creating a bubble with devastating consequences we will all end up paying for in one form or another.

For now one may call it a market of pure multiple expansion as GAAP earnings and price have completely diverged in 2016:

Indeed, as earnings have declined since their peak in 2015 we have seen one central bank intervention after another. Just in 2016 alone we have witnessed dozens of new rate cuts, the ECB modified and added to its QE program with QE3 an almost forgone conclusion, Japan added stimulus with the BOJ on track to own 60% of all ETFs in Japan with more to come. China intervened repeatedly, the UK cut rates and re-launched QE as well, and central banks such as the SNB have been busy expanding their share purchases of US stocks.

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

A Convocation of Interventionists – Part 1

September 10, 2016

A Convocation of Interventionists – Part 1

Modern Economics – It’s All About Central Planning

We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context.
central bank HQs 2 Central bank headquarters: the Fed’s Eccles building, the ECB’s hideously expensive new tower in Frankfurt, and the BOJ’s Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes).

When discussing papers and speeches delivered at the annual Jackson Hole meeting, it is important to consider the wider socio-economic context. As this article suggests (still the most recent reference available on the topic), the Federal Reserve has essentially bought off the economics profession.

A great many US economists list “monetary policy” in some shape or form as a specialty, or more generally, “macroeconomic policy formation and aspects of public finance”. More than half of the editors of the top seven academic economic journals are on the Fed’s payroll and serve as gatekeepers. The Fed employs hundreds of economists directly, and provides 100ds of millions of dollars in grants to outside economists.

We are quite certain that the situation in other countries is very similar. It is easy to see why practically no fundamental criticism of the monetary system is forthcoming from the economics profession. The basic assumption that money and credit should be centrally planned is rarely challenged (or almost never). Economists naturally won’t bite the hand that feeds them.

Instead, debate as a rule revolves around various “plans”. Their authors are mainly suggesting what they think are improvements on existing plans. Obviously, not all of these plans can be correct; but how can one possibly know which ones might be?

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

Will Japan Be the First to Test the Limits of Quantitative Easing?

June 25, 2016

WILL JAPAN BE THE FIRST TO TEST THE LIMITS OF QUANTITATIVE EASING?

The Japanese stock market peaked in December 1989, marking the end of a period of economic expansion which briefly saw Japan eclipse the USA to become the world’s largest economy. Since its zenith, Japan has struggled. I wrote about this topic, in relation to the economic reform package dubbed Abenomics, in my first Macro Letter – Japan: the coming rise back in December 2013:-

As the US withdrew from Japan the political landscape became dominated by the LDP who were elected in 1955 and remained in power until 1993; they remain the incumbent and most powerful party in the Diet to this day. Under the LDP a virtuous triangle emerged between the Kieretsu (big business) the bureaucracy and the LDP. Brian Reading (Lombard Street Research) wrote an excellent, and impeccably timed, book entitled Japan: The Coming Collapse in 1989. By this time the virtuous triangle had become, what he coined the “Iron Triangle”.

Nearly twenty five years after the publication of Brian’s book, the” Iron Triangle” is weaker but alas unbroken. However, the election of Shinzo Abe, with his plan for competitive devaluation, fiscal stimulus and structural reform has given the electorate hope.

In the last two years Abenomics has delivered some transitory benefits but, as this Japan Forum on International Relations – No. 101: Has Abenomics Lost Its Initial Objective?describes, it may have lost its way:-

The key objective of Abenomics is a departure from 20 year deflation. For this purpose, the Bank of Japan supplied a huge amount of base money to cause inflation, and carried out quantitative and qualitative monetary easing so that consumers and businesses have inflationary mindsets.

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

Bank of Japan: The Limits of Monetary Tinkering

May 2, 2016

Bank of Japan: The Limits of Monetary Tinkering

Damned If You Do…

After waking up on Thursday, we quickly glanced at the overnight market action in Asia and noticed that the Nikkei had tanked rather noticeably. Our first thought upon seeing this was “must be the yen” – and so it was:

June yen futures, daily – taking off again – click to enlarge.

Given the BoJ’s bizarre plan to push consumer price inflation to a 2% annualized rate within [enter movable goal post here] years, Mr. Kuroda cannot be overly happy about that. In fact, lately it seemingly doesn’t matter what he decides to do or not to do – the yen is going up anyway.

Last Thursday he reportedly “disappointed” markets by not expanding the BoJ’s madcap asset purchase program even further. We are not quite sure what people believe could possibly be achieved by making the parabola shown below even more parabolic.

Assets held by the BoJ – Mr. Kuroda’s “QQE” (“quantitative and qualitative easing”) was started in April of 2012. The program has certainly impoverished Japan’s citizens, who have seen their real incomes plummet. Lately it has however abjectly failed to achieve its stated goal, which is actually a blessing in disguise… – click to enlarge.

As far as the yen is concerned, we should point out that the trade-weighted real exchange rate of the yen at one point last year had declined to levels last seen in 1973. Combined with the recent strengthening of its technical condition, there is thus actually a good reason for the market to bid the yen up.

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

Quantitative to Qualitative–Is Unelected Nationalisation Next?

April 11, 2016

QUANTITATIVE TO QUALITATIVE – IS UNELECTED NATIONALISATION NEXT?

Last year, in a paper entitled The Stock Market Crash Really Did Cause the Great Recession – Roger Farmer of UCLA argued that the collapse in the stock market was the cause of the Great Recession:-

In November of 2008 the Federal Reserve more than doubled the monetary base from eight hundred billion dollars in October to more than two trillion dollars in December: And over the course of 2009 the Fed purchased eight hundred billion dollars worth of mortgage backed securities. According to the animal spirits explanation of the recession (Farmer, 2010a, 2012a,b, 2013a), these Federal Reserve interventions in the asset markets were a significant factor in engineering the stock market recovery.

The animal spirits theory provides a causal chain that connects movements in the stock market with subsequent changes in the unemployment rate. If this theory is correct, the path of unemployment depicted in Figure 8 is an accurate forecast of what would have occurred in the absence of Federal Reserve intervention. These results support the claim, in the title of this paper, that the stock market crash of 2008 really did cause the Great Recession.

Central banks (CBs) around the globe appear to concur with his view. Their response to the Great Recession has been the provision of abundant liquidity – via quantitative easing – at ever lower rates of interest. They appear to believe that the recovery has been muted due to the inadequate quantity of accommodation and, as rates drift below zero, its targeting.

The Federal Reserve (Fed) was the first to recognise this problem, buying mortgages as well as Treasuries, perhaps guided by the US Treasury’s implementation of TARP in October 2008. The Fed was fortunate in being unencumbered by the political grid-lock which faced the European Central Bank (ECB). They acted, aggressively and rapidly, hoping to avoid the policy mistakes of the Bank of Japan (BoJ). The US has managed to put the great recession behind it. But at what cost? Only time will tell.

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

Steen Jakobsen: The End Of The Debt Cycle

February 23, 2016

Steen Jakobsen: The End Of The Debt Cycle

As transformational as the fall of the Berlin Wall

As we’ve been watching closely, something is wrong with the big banks. Their shares have lost 25-33% of their market value since the beginning of the year. What’s going on?

The turmoil seems greatest in Europe, where bank shares have fallen the hardest, and negative interest rates have appeared with increasingly frequency across member countries.

To make sense of it all, we’ve invited Steen Jakobsen back on, Chief Investment Officer of Saxo Bank, who can provide an eyes-on-the-ground perspective on the European banking system from his location in Copenhagen:

Clearly what we’ve seen over the course of the first quarter this year is that the ability of central banks to do their magic in terms of talking to the market with the rhetoric of “low for longer” and the likes is running on empty now.

If we look back in chronological order of what happened this year, first we had, of course, the Fed with Yellen and Fischer backing down slightly from the three to four hikes they promised in December. That was followed very quickly by, of course, Draghi promising to do ‘Whatever it takes!’ yet again in March this year. Then the BOJ went negative on interest rates and a number of European central banks followed suit. So much so that actually right now if you look at the G7 governments, about 50 percent of all G7 government is now trading at a negative yield, which seems to be the new solution from central banks.

I think the market is seeing right through that because, of course, at the center of all of this at all times will be the banking system, a banking system that is getting penalized for the negative interest rate.

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

Are Asian Central Bankers Even Crazier Than Our Own?

February 22, 2016

Are Asian Central Bankers Even Crazier Than Our Own?

That the world’s central bankers get a lot of things wrong, deliberately or not, and have done so for years now, is nothing new. But that they do things that result in the exact opposite of what they ostensibly aim for, and predictably so, perhaps is. And it’s something that seems to be catching on, especially in Asia.

Now, let’s be clear on one thing first: central bankers have taken on roles and hubris and ‘importance’, that they should never have been allowed to get their fat little greedy fingers on. Central bankers in their 2016 disguise have no place in a functioning economy, let alone society, playing around with trillions of dollars in taxpayer money which they throw around to allegedly save an economy.

They engage solely, since 2008 at the latest, in practices for which there are no historical precedents and for which no empirical research has been done. They literally make it up as they go along. And one might be forgiven for thinking that our societies deserve something better than what amounts to no more than basic crap-shooting by a bunch of economy bookworms. Couldn’t we at least have gotten professional gamblers?

Central bankers who moreover, as I have repeatedly quoted my friend Steve Keen as saying, even have little to no understanding at all of the field they’ve been studying all their adult lives.

They don’t understand their field, plus they have no idea what consequences their next little inventions will have, but they get to execute them anyway and put gargantuan amounts of someone else’s money at risk, money which should really be used to keep economies at least as stable as possible.

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

The Negative Rates Club

February 9, 2016

The Negative Rates Club

BRUSSELS – For the better part of a decade, central banks have been making only limited headway in curbing powerful global deflationary forces. Since 2008, the US Federal Reserve has maintained zero interest rates, while pursuing multiple waves of unprecedented balance-sheet expansion through large-scale bond purchases. The Bank of England, the Bank of Japan, and the European Central Bank have followed suit, each with its own version of so-called “quantitative easing” (QE). Yet inflation has not picked up appreciably anywhere.

Despite their shared struggles with deflationary pressures, these countries’ monetary policies – and economic performance – are now diverging. Whereas the United States and the United Kingdom are now growing strongly enough to exit their expansionary policies and raise interest rates, the eurozone and Japan are doubling down on QE, pushing policy long-term interest rates further into negative territory. What explains this difference?

The short answer is debt. The US and the UK have been running current-account deficits for decades, and are thus debtors, while the eurozone and Japan have been running external surpluses, making them creditors. Because negative rates benefit debtors and harm creditors, introducing them after the global economic crisis spurred a recovery in the US and the UK, but had little effect in the eurozone and Japan.

This is not an isolated phenomenon. By now, most of the world’s creditor countries – those with large and persistent current-account surpluses, such as Denmark and Switzerland – have negative interest rates, not only for long-term governments bonds and other “riskless” debt, but also for medium-term maturities. And it is doing little good.

Despite the weak impact of low interest rates, central banks in these economies remain committed to them.

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

Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

February 8, 2016

Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

And there’s a bitter irony.

The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days.

Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%.

Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. But it was just another desperate move, a head fake, and once the dust would settle, the hot air would go out [read…QE in Japan Nears End: Daiwa Capital Markets].

Now the dust has settled and the hot air has gone out.

On Thursday, January 28, the day before the announcement, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. Today, it closed even lower.

This situation is a bit of an embarrassment for the BOJ which has pushed Japanese asset managers of all kinds, including pension funds, particularly the Government Pension Investment Fund (GPIF), the largest such pension fund in the word, to get off their conservative stance, sell their Japanese Government Bonds which made up the bulk or entirety of their portfolios, and buy risk assets with the proceeds.

This they did, near the peak of the Abenomics bubble. While the BOJ was eagerly mopping up JGBs, the asset managers bought mostly Japanese equities, but they also bought global equities and corporate bonds. And the mere prospect of all this buying, the front-running by hedge funds, and then the actual buying drove up Japanese stock prices in 2014 and early 2015. The bet seemed to work out. Wealth had been created out of nothing.

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

Citi On Why Negative Rates Are Like Potato Chips: “No One Can Have Just One”

January 31, 2016

Citi On Why Negative Rates Are Like Potato Chips: “No One Can Have Just One”

Now that Japan has let the negative rates genie out of the bottle, or as DB put it, ‘opened the Pandora’s Box‘ and in the process unleashed the latest global “silent bank run” and capital flight, prepare to hear a whole lot more about NIRP in the coming weeks because as Citi’s Steven Englander put it, “Why are Negative Rates like Potato Chips? No one can have just one.”

This is what else Englander said:

You can admire the policy boldness of the BoJ move into negative rates, and recognise its powerful asset market effects – positive for equities and negative for JPY. Experience in other countries that have entered into this territory should sober you up on the likely economic and inflation impact. No country that has gone into negative rates has experienced major shifts in its growth and inflation profile – minor, yes; major, no. As a consequence every dip into negative rates has been followed by additional moves.

Negative rates are a powerful inducement for cash to leave the banking system, but there is little evidence that investors take the cash and build steel plants with it. They buy foreign and financial assets, which is probably more than enough for the BoJ.

Some further thoughts from Citi’s FX desk, and why the BOJ ultimately shot itself, and other central banks, in the foot:

As the dust settles on the BoJ reaction, USDJPY is somewhat higher and risk currencies have begun to rebound following an initial dip. However, the price action has not been one-sided. Partly this seems to reflect the tendency of many investors to dismiss the rate move as diluted given its tiered implementation. Of the investors I have spoken to since the decision, a significant majority were inclined to poke holes in the decision.

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

Austrians Get (Some) Mainstream Credibility

January 16, 2016

AUSTRIANS GET (SOME) MAINSTREAM CREDIBILITY

Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain’s Adam Smith Institute publishes a paper by Anthony Evans [Editor’s note: Anthony is a Founding Fellow of The Cobden Centre] that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

The Adam Smith Institute’s paper is not so shy, and includes both “sound money” and “Austrian” in the title, though the first comment on the web version of the press release says talking about “Austrian” proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans’s paper.

The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers’ central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed’s new policy of raising interest rates was influenced by the BIS’s view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

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

Billary Buddy Marc Lasry’s Last Rodeo——The Jig Is Up On 25 Years Of Bottom Fisher Bailouts

January 13, 2016

Billary Buddy Marc Lasry’s Last Rodeo——The Jig Is Up On 25 Years Of Bottom Fisher Bailouts

As the Fed’s third and last bubble of this century heads for its splatter spot, the stench of desperate crony capitalism fills the air. You can count hedge fund mogul and Billary Buddy, Marc Lasry, among the upchucking financiers.

A few months back I heard him say on bubble vision that energy debt was a “once in a lifetime opportunity”. My thought was good luck with that, but even better luck to your investors—–who will need to get out of Dodge fast.

The truth is, Lasry had it upsidedown. Energy prices over the last 15 years were carried skyward by a once in a lifetime central bank driven credit explosion. The latter fueled a surge of phony demand and a tidal wave of malinvestment——not only in oil and gas, but practically everything else in the material and manufacturing economy of the world.

The reason that 2016 will prove to be a great historical inflection point is that the central banks of the world have finally run out of dry powder. After a 20 year spree in which their balance sheets exploded by nearly 11X—–from $2 trillion to $21 trillion—-they are being forced to shutdown their printing presses.

China has been obliged to stop because it has been slammed with a $1 trillion capital flight in the last year, and it’s accelerating. The BOJ and the ECB have already shot their wad and it’s done no good at all. The Fed spent 84 months dithering on the zero bound and now it has no dry powder left as the US economy slides into recession.

Accordingly, the great global credit bubble has finally run out of new central bank fuel. It has now surely reached its apogee at about $225 trillion compared to only $40 trillion back in 1994 when oil prices were still well under $20 per barrel.

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

Europe’s Biggest Bank Dares To Ask: Is The Fed Preparing For A “Controlled Demolition”

September 6, 2015

Europe’s Biggest Bank Dares To Ask: Is The Fed Preparing For A “Controlled Demolition”

Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.”

The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely.

But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.

Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations.

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

Both ECB And BOJ Warn More QE May Be Response To Chinese Currency War

August 13, 2015

Both ECB And BOJ Warn More QE May Be Response To Chinese Currency War

Minutes from the ECB’s most recent policy meeting reveal that Mario Draghi and company have a number of concerns about the pace of economic growth in the euroarea and about the outlook for inflation which, much to the governing council’s surprise, “remains unusually low.”

Board members also took note of increasingly volatile EGB markets and made special mention of the second bund VaR shock which took place at the first of June, something the central bank attributes to “overvaluation [and] one?way market positioning related to the public sector purchase programme.” In other words: “our bad.”

The bank gave itself the now customary pat on the back for the “success” of PSPP noting that the “moderate frontloading of purchases” (a reference to the effective expansion of QE that was leaked to a room full of hedge funds at an event in May) was going smoothly, other than the above-mentioned nasty bout of extreme volatility.

As for the economy and inflation, well, that’s not going so hot. “Overall, the recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing from both a longer-term and an international perspective [while] consumer price inflation had remained unusually low.”

Between that rather grim assessment and the comments cited above regarding volatility, one is certainly left to wonder what it is exactly about PSPP that’s going so “smoothly.”

But as interesting as all of that is (or isn’t), the most compelling comments were related to China. Here’s the excerpt:

In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.

Consider that, and consider the following statement sent to Bloomberg by an adviser to Japanese PM Shinzo Abe:

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

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