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The Great Unknown
The Great Unknown
QUESTION: Martin, if Europe and Japan have destroyed their bond markets, would it be a good idea for them to get the government out of the bond market and have short term rates be floating in the free market? The free market would probably help since they don’t know how to move rates correctly.
RG
ANSWER: What will happen is that there is already unfolding a bifurcation in interest rates with a widening spread between real rates (Private Sector) and government. If they allow government rates to float, that means they must abandon QE.
Neither the BoJ nor the ECB is ready to admit total failure. This means that the entire Keynesian-Monetarist tools have failed and they have no economic theory upon which to manage the economy. That means the government cannot control the economy and therein lies the denial of power.
Welcome to the Great Unknown
Third and Final Leg of Stock Market Crash in October or Sooner
Third and Final Leg of Stock Market Crash in October or Sooner
I shared the first part of this series of articles last week, explaining why I expect the third and final leg of the crash that began in October 2018 to occur in October 2019, or sooner, and see the S&P 500 fall ~30% to lower lows ~2100-2200.
Until then, I expect the S&P to slowly grind higher towards 3000-3150, short-term pullbacks aside.
This matters to Gold because when stocks crash, the Fed will be forced to reverse policy to rate cuts, QE, and more monetary insanity on steroids, and that will catapult precious metals and miners to new highs.
There are many reasons why I expect another “Crash in the Fall” like that in 2018. I began with Liquidity last week, now let’s cover the technical and Elliott wave case for the crash in October (“or sooner”), especially based on how close we are to the peak above circa 3000 plus.
TECHNICALS
Sven Henrich did some excellent work recently on the S&P from a technical perspective, which I am sharing here.
Drawing the upper trend line (see chart below) from the 2007 highs into the January 2018 and September 2018 highs, and the lower trend line from the 2009 lows, the one that was broken in December 2018 and has been hugged by markets for the past several weeks, they intersect at circa 3100.
The middle trend line dates back to the 1987 crash and formed following the 2000 crash, then ended up being resistance in 2014-2015 and twice in 2018. Note from that chart that it, too, intersects the other two trend lines at the same point, 3100.
Circa 3100 also represents 261.8% Fibonacci level derived from the 2007 highs and the 2009 lows.
Three historic trend lines converging at the same key Fibonacci level is a powerful signal. A quadruple convergence, as Sven puts it. And if that wasn’t sufficiently interesting, then consider “when” they converge: October 2019.
…click on the above link to read the rest of the article…
Bank of Japan & the Bond Crisis
Bank of Japan & the Bond Crisis
The Great Financial Unknown is now upon us. After 10 years of Quantitative Easing, the European Central Bank (ECB) in Europe owns 40% of the national debts in the EU and it can neither sell them nor stop buying without creating a Panic in Interest Rates. Likewise, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in Japan. The Bank of Japan confirmed it is ending free market determination of interest rates for the municipal level and that they “will not require any procedures such as auction as the method of determining lending conditions.” today it may introduce a lending facility for its exchange-traded fund buying program, which would allow it to temporarily lend ETFs to market participants.
4. Introduction of Exchange-Traded Fund (ETF) Lending Facility
The Bank will consider the introduction of ETF Lending Facility, which will make it possible
to temporarily lend ETFs that the Bank holds to market participants.
The statement at the end of the announcement on the last page on its monetary policy has left traders in shock. This appears that the BoJ realizes that it now effectively has destroyed its bond market and realizes that there is not only the end of a free market, but there is a contagion of surrounding lack of liquidity.
We have never before in the history of human society ever witnessed such a major financial crisis. The BoJ makes it clear it will continue its policy of Quantitative Easing. It stated plainly:
The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with
Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is
necessary for maintaining that target in a stable manner.
…click on the above link to read the rest of the article…
The Federal Reserve’s Controlled Demolition Of The Economy Is Almost Complete
The Federal Reserve is an often misunderstood entity, not only in the mainstream, but also in alternative economic circles. There is this ever pervasive fantasy on both sides of the divide that the central bank actually “cares” about forever protecting the US economy, or at least propping up the US economy in an endless game of “kick the can”. While this might be true at times, it is not true ALL the time. Things change, agendas change, and sometimes the Fed’s goal is not to maintain the economy, but to destroy it.
The delusion that the Fed is seeking to kick the can is highly present today after the latest Fed meeting in which the central bank indicated there would be a pause in interest rate hikes in 2019. As I have noted in numerous articles over the past year, the mainstream media and the Fed have made interest rates the focus of every economic discussion, and I believe this was quite deliberate. In the meantime, the Fed balance sheet and its strange relationship to the stock market bubble is mostly ignored.
The word “capitulation” is getting thrown around quite haphazardly in reference to the Fed’s tightening policy. And yet, even now after all the pundits have declared the Fed “in retreat” or “trapped in a Catch-22”, the Fed continues to tighten, and is set to cut balance sheet assets straight through until the end of September. Perhaps my definition of capitulation is different from some people’s.
One would think that if the Fed was in retreat in terms of tightening, that they would actually STOP tightening. This has not happened. Also, one might also expect that if the Fed is going full “dovish” that they would have cut interest rates in March instead of holding them steady at their neutral rate of inflation.
…click on the above link to read the rest of the article…
Over $10 Trillion In Debt Now Has A Negative Yield
Over $10 Trillion In Debt Now Has A Negative Yield
NIRP is back.
On Friday, when Germany reported disastrous mfg and service PMI prints, the 10Y German Bund finally threw in the towel, with the yield sliding back under zero for the first time in three years. When that happened, and when the 3M-10Y yield curve inverted in the US right around that time, just over $400 billion in global debt changed the sign on its yield from positive to negative.
As a result, the total notional of global negative yielding debt soared on Friday, rising above $10 trillion for the first time Since September 2017, and which according to Bloomberg has intensified “the conundrum for investors hungry for returns while fretting the brewing economic slowdown.”
Paradoxically, the amount of negative-yielding debt has nearly doubled in just six months, and confirms that the global asset bubble is back because as Gary Kirk, a founding partner at London-based TwentyFour Asset Management, said “money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing.”
“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”
Despite the Fed’s renewed herding of investors into the riskiest assets, Kirk is so far “resisting the temptation” to snap up longer-dated credit obligations that will be the first to default when the next recession hits, and prefers duration bets in interest-rate markets.
Others won’t be so lucky: as we noted last Friday, the ‘reverse rotation’, or flood into fixed income instruments, is accelerating and fund flows confirmed the fresh panic for yield just as the specter of QE4 returns as investors in the latest week parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to EPFR data.
…click on the above link to read the rest of the article…
Changes in Government Deposits and Money Supply
CHANGES IN GOVERNMENT DEPOSITS AND MONEY SUPPLY
The US debt ceiling suspension, signed in February 2018, expires at the beginning of March this year. Some commentators are of the view that the US Treasury must carry out special measures if it expects a delay in raising the debt ceiling in March.
The Treasury would have to draw down its deposits at the Fed and deposit the cash in various government department accounts at commercial banks, for future use to pay government salaries and contractors’ fees.
These commentators are of the view that the Treasury deposit withdrawals act like QE (quantitative easing) and the Treasury deposit build-ups like QT (quantitative tightening). However, is it the case?
If in an economy people hold $10,000 in cash, we would say that the money supply in this economy is $10,000. If some individuals then decided to place $2,000 of their money in demand deposits, the total money supply will still remain $10,000, comprising of $8,000 cash and $2,000 in demand deposits.
Now, if government taxes people by $1,000, this amount of money is then transferred from individual’s demand deposits to the government’s deposits. Conventional thinking would view this as if the money supply fell by $1,000. In reality, however, the $1,000 is now available for government expenditure meaning that money supply is still $10,000, comprising of $8,000 in cash, $1000 in individuals demand deposits and $1,000 in government deposits.
If the government were to withdraw $1000 from its deposit with the Fed and buy goods from individuals then the amount of money will be still $10,000 comprising of $8,000 in cash and $2,000 in individuals demand deposits.
From this we can conclude that a large withdrawal of money from the government deposit account with the Fed is not going to strengthen the money supply as suggested by popular thinking.
What are the sources for money expansion?
…click on the above link to read the rest of the article…
Don’t Be So Negative
DON’T BE SO NEGATIVE
“FED’S WILLIAMS SAYS IN A DOWNTURN WE COULD CONSIDER QUANTITATIVE EASING, NEGATIVE RATES.”
- Tweet by Reuters’ Jennifer Ablan, reporting on a speech by John Williams of the Federal Reserve Bank of New York at the Economic Club of New York, 6 March 2019.
“Because NIRP worked so well in Europe and Japan ?”
- Response by mac on Twitter.
In February 2016, The Financial Times published an article titled ‘Central Banks: Negative Thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum. The piece in question was atypically sceptical of the received wisdom of QE, i.e., that it works. If it was sceptical as to the efficacy of QE, it was doubly so in relation to the policy of maintaining negative interest rates, or NIRP. Some extracts follow:
Online, the mood has turned to rage. Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting. “Raising commodity prices to overcome deflation, raising consumption taxes, lowering interest rates . . . they are all policies that make us suffer,” wrote one..
The Japanese can be conservative at the best of times, and few think these are the best of times.
But Japan is not the only country affected. A concept once only subject to small-talk among economists is now an uncomfortable reality. With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.
Sweden, Switzerland, Denmark, the eurozone and most recently Japan — adding up to almost a quarter of the global economy — have all introduced some form of negative interest rate policy in an attempt to fight deflationary forces, weaken their currencies and stimulate growth.
…click on the above link to read the rest of the article…
A Week in the Life of a Topsy-Turvy Wildly Whirling World
A Week in the Life of a Topsy-Turvy Wildly Whirling World
![By Germán Torreblanca (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons](http://thegreatrecession.info/blog/wp-content/uploads/FatWomanSculpture1.jpg)
Let’s review this past devilishly whacky week to see if we can divine the way the world is turning and why the markets are churning. It was 2019’s worst week in stocks and, well, just about everything economic all across this crazily spinning planet. Volatility lifted its head back out of the water like Loch Ness’s monster while the citizenry took flight to treasury safe havens, bringing treasury yields down again to the five-year’s lowest point of the year. North Korea’s Rocketman returned to his rocketry, and the Chinese threw up their hands and ran as far from Mar-a-Lago as they could … or maybe they just threw up from too much chocolate cake.
The China syndrome is back
Most notably all over the world, bad news finally moved back to just being bad news, even as it arrived in cloudburst after cloudburst. Gold popped as money dropped and China flopped. Chinese exports fell 20%, outstripping the worst prediction four fold. The central bank of the billions of people of China mainlined major yuan jolts into the Xi dynasty’s tiring economy, and yet the Sino stock market fell off the mountain, taking a full panda bear plunge in one week. Apparently the nouveau riche Chinese ghost-city dwellers are wising up to all this easing and just realized talk of more of the same as far as the eye can see simply means the economy is finished more than it means refreshed hope waits on some distant horizon.
Trump talked and China walked. The best boast Trump could biggly bluster from his tweet blaster was that the stock market would rise again ifChina would only deal; China chose, instead, to cancel Chairman Xi’s second coming at Mar-a-Lago.
…click on the above link to read the rest of the article…
Economic Doom Loop Well Underway
Economic Doom Loop Well Underway
From 2007 through 2018, births in the US have declined by 470 thousand on an annual basis, or an 11% decline. The US fertility rate has likewise cracked lower, from 2.12 births to 1.72, an 18% decline (2.1 births over a females childbearing years is considered zero growth). This has resulted in 4.5 million fewer net births in the US since 2007 than the Census had estimated in 2000 and again in 2008. This is over an entire years worth of births that never took place. The sharp decline in births, against an anticipated rise, and a deceleration from anticipated immigration has resulted in the Census downgrading US population growth through 2050 by over 50 million persons (detailed HERE). This decelerating growth and outright declines are happening across the globe among the “wealthy nations”, leaving little growth opportunity for the “poor nations” (detailed HERE).
The decline in US births has been particularly steep among those with the lowest incomes and assets. From 2007 through 2016, Native American fertility rates have collapsed from 1.62 to 1.23. Hispanic birthrates have fallen from 2.85 to just 2.1. Black birthrates have turned lower from 2.15 to about 1.9 and white birthrates from 1.95 to 1.72. Again, these birthrates are only through 2016 and the declines in 2017 and 2018 are significant and accelerating downward.
The reason for fast declining birthrates since 2007 in the US and among most nations globally seems to be the current ZIRP and low interest rates and Quantitative Easing programs which have the effect of inflating asset prices. The majority of assets are held by large institutions and post child bearing age populations. The flow through of these policies are asset prices rising significantly faster than incomes. For example, non-discretionary items like homes, rent, education, healthcare, insurance, childcare, etc. are skyrocketing versus wages.
…click on the above link to read the rest of the article…
Central Bank Balance Sheet Reductions–Will Anyone Follow the Fed?
CENTRAL BANK BALANCE SHEET REDUCTIONS – WILL ANYONE FOLLOW THE FED?
- The next wave of QE will be different, credit spreads will be controlled
- The Federal Reserve may continue to tighten but few other CB’s can follow
- ECB balance sheet reduction might occur if a crisis does not arrive first
- Interest rates are likely to remain structurally lower than before 2008
The Federal Reserve’s response to the great financial recession of 2008/2009 was swift by comparison with that of the ECB; the BoJ was reticent, too, due to its already extended balance sheet. Now that the other developed economy central banks have fallen into line, the question which dominates markets is, will other central banks have room to reverse QE?
Last month saw the publication of a working paper from the BIS – Risk endogeneity at the lender/investor-of-last-resort – in which the authors investigate the effect of ECB liquidity provision, during the Euro crisis of 2010/2012. They also speculate about the challenge balance sheet reduction poses to systemic risk. Here is an extract from the non-technical summary (the emphasis is mine): –
The Eurosystem’s actions as a large-scale lender- and investor-of-last-resort during the euro area sovereign debt crisis had a first-order impact on the size, composition, and, ultimately, the credit riskiness of its balance sheet. At the time, its policies raised concerns about the central bank taking excessive risks. Particular concern emerged about the materialization of credit risk and its effect on the central bank’s reputation, credibility, independence, and ultimately its ability to steer inflation towards its target of close to but below 2% over the medium term.
…click on the above link to read the rest of the article…
For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity
For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity
Yesterday was a wake up call for the bulls.
Unfortunately it’s only going to get worse. The fact is that no matter what verbal interventions Central Banks or the political elite issue, liquidity is now rapidly leaving the financial system.
The Fed continues to drain $50 billion in liquidity via its QT program every month. The ECB is no longer engaged in QE, which means it too is now draining liquidity as bonds on its balance sheet come due.
This leaves the Bank of Japan, which is running out of assets to buy, resulting in it not being able to expand its QE program (the one that has been running since 2013). Finally, China is attempting to launch its own version of a QE program, though given the insane leverage in its financial system (the country is issuing $25 in new debt for every $1 in GDP growth) this will have little effect.
Bottomline: for the first time since 2007, Central Banks are NET draining liquidity rather than adding it.
No matter how you spin this, it means stocks are on borrowed time.
And the markets KNOW it.
Indeed, we’ve broken the bull market trendline from the 2009 lows. The ultimate downside for this collapse is at best 2,000, and more likely than not we’ll go to the high 1,000s (think 1,750-1,800).
A Crash is coming…
Why Monetary Easing Will Fail
WHY MONETARY EASING WILL FAIL
The major economies have slowed suddenly in the last two or three months, prompting a change of tack in the monetary policies of central banks. The same old tired, failing inflationist responses are being lined up, despite the evidence that monetary easing has never stopped a credit crisis developing. This article demonstrates why monetary policy is doomed by citing three reasons. There is the empirical evidence of money and credit continuing to grow regardless of interest rate changes, the evidence of Gibson’s paradox, and widespread ignorance in macroeconomic circles of the role of time preference.
The current state of play
The Fed’s rowing back on monetary tightening has rescued the world economy from the next credit crisis, or at least that’s the bullish message being churned out by brokers’ analysts and the media hacks that feed off them. It brings to mind Dr Johnson’s cynical observation about an acquaintance’s second marriage being the triumph of hope over experience.
The inflationists insist that more inflation is the cure for all economic ills. In this case, mounting concerns over the ending of the growth phase of the credit cycle is the recurring ill being addressed, so repetitive an event that instead of Dr Johnson’s aphorism, it calls for one that encompasses the madness of central bankers repeating the same policies every credit crisis. But if you are given just one tool to solve a nation’s economic problems, in this case the authority to regulate the nation’s money, you probably end up believing in its efficacy to the exclusion of all else.
…click on the above link to read the rest of the article…
An Obituary: Fred Credibility
An Obituary: Fred Credibility
As with many terminal patients the initial hope is that aggressive treatment would work and cure the patient. But when the one time emergency round of drugs didn’t cure the patient additional drugs were needed and turned the patient into a hopeless junkie. After multiple injections a sense of dread was making the rounds. QE1 did not cure the patient, QE 2 and 3 were required with a little twist here and there thrown in. But the Fed doctors kept promising all would be well and the addiction could be stopped and the patient returned to normal.
And so it looks promising for a while. There was that scary flare up in 2016 when the patient regressed and the normalization had to be put on hold, but then a miracle drug came along called Tax Cut and suddenly it seemed as if the removal of drugs from the system could be accelerated.
So jubilant and optimistic were the Fed doctors that they promised further rounds of withdrawal and kept pointing to their dot plot of normalization.
Yet here we are, a mere 3 months later and the Fed doctors are at a loss again. Unable and unwilling to admit to the patient the true nature of the disease the Fed doctors once again decided to stop all withdrawal of the drugs, worse, they indicated they may have to administer new drugs to come. The patient begged for more drugs and the Fed doctors absolved themselves of their hippocratic oath and capitulated once again to the patient’s scream for another high, a scream only drowned out by the dying sigh of the Fed’s credibility, the initial casualty in this war on monetary drug dependency.
For it is true, the Fed doctors failed to wean off the patient:
…click on the above link to read the rest of the article…
