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The Fed’s QE Unwind Hits $321 Billion

November 2, 2018

The Fed’s QE Unwind Hits $321 Billion

The “up to” exacts its pound of flesh.

Over the four-week period from October 3 through October 31, the Federal Reserve shed $35 billion in assets, according to the Fed’s weekly balance sheet released Thursday afternoon. This brought the balance sheet to $4,140 billion, the lowest since February 12, 2014. Since October 2017, when the Fed began its QE unwind, or “balance sheet normalization,” it has now shed $321 billion:

The Fed acquired Treasury securities and mortgage-backed securities (MBS) as part of QE, which ended in 2014. Between the end of QE and the beginning of the QE Unwind in October 2017, the Fed replaced maturing securities with new securities to keep their levels roughly the same. In October last year, the Fed kicked off the QE unwind and began shedding those securities. But the balance sheet also reflects the Fed’s other activities, and the amount of its total assets is always higher than the sum of Treasury securities and MBS it holds.

October was a new milestone: the QE unwind left the ramp-up phase and entered the cruising-speed phase, according to the Fed’s plan. In the cruising-speed phase, the Fed is scheduled to shed “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month, for a total of “up to” $50 billion a month.

From October 3 through October 31, the Fed’s holdings of Treasury Securities fell by $23.8 billion to $2,270 billion, the lowest since February 19, 2014. Since the beginning of the QE-Unwind, the Fed has shed $195 billion in Treasuries:

The “up to” exacts its pound of flesh

The plan calls for shedding “up to” $30 billion in Treasury securities in October. But the Fed shed only $23.8 billion. Why?

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

Europe More Than Europe: From ‘Boom’ To The Precipice of Recession

November 2, 2018

Europe More Than Europe: From ‘Boom’ To The Precipice of Recession

Data dependent, they claim. They aren’t. Mario Draghi at his last press conference admitted, “incoming information, [is] somewhat weaker than expected.” There is so much riding on the word “somewhat.” Because of the weasel, the head of the ECB told the assembled media policy normalization was unimpeded. He did so with a straight face.

Good. Europe’s QE experiment needs to end. Not because it succeeded, rather since there was no hope for it from the beginning. It was a giant waste, at best an enormous distortion. At most, it was a huge distraction from the real problem.

You have to hand it to the Germans. They seem quite capable of the more serious business of economics (small “e”). Where Economists (capital “E”) like Draghi play the game of somewhat data dependent, businesses in Germany refuse license to the same luxury. They are business dependent, meaning that if things really were booming they would act that way. And if something like recession looms, the Germans would know it.

And that’s exactly what they’ve said for much of this year particularly the past four or five months. The global economy, which heavily influences Germany’s, is heading for another downturn. For Europe as a whole, it’s a whole lot of trouble.

The European Union’s statistical body confirms today what German sentiment has been warning about. The European economy is already on the precipice of recession. The ZEW survey in September was as low as it was when Europe was last contracting. In Q3 2018, Eurostat reports that GDP expanded by just 0.16% over Q2. That was about one-third the rate in Q2, which was itself about three-quarters the gain in 2017.

Data dependent. Like the ZEW index, GDP growth was the lowest since Europe’s last recession.

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

Why’s France so Worried about Italy’s Showdown with Brussels?

October 31, 2018

Why’s France so Worried about Italy’s Showdown with Brussels?

The French megabanks are on the hook.

France was just served with a stark reminder of an inconvenient truth: €277 billion of Italian government debt — the equivalent of 14% of French GDP — is owed to French banks. Given that Italy’s government is currently locked in an existential blinking match with both the European Commission and the ECB over its budget plan for 2019, this could be a big problem for France.

On Friday, France’s finance minister, Bruno Le Maire, urged the commission to “reach out to Italy” after rejecting the country’s draft 2019 budget for breaking EU rules on public spending. Le Maire also conceded that while contagion in the Eurozone was definitely contained, the Eurozone “is not sufficiently armed to face a new economic or financial crisis.” As Maire well knows, a full-blown financial crisis in Italy would eventually spread to France’s economy, with French banks serving as the main transmission mechanism.

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

While the exposure of German lenders to Italian debt has waned over the last few years, that of French lenders has actually grown, belying the ECB’s long-held claim that its QE program would help reduce the level of interdependence between European sovereigns and banks.

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

French FinMin: The Euro Zone Is Not Prepared To Face A New Crisis

October 29, 2018

French FinMin: The Euro Zone Is Not Prepared To Face A New Crisis

Europe finds itself at a troubling crossroads: while on one hand the official narrative emanating from Brussels and Berlin (and, of course, the ECB) is that there is no risk of contagion from Italy’s budget crisis in the European Union, on the other hand the euro zone is “not prepared enough to face a new economic crisis”, French Finance Minister Bruno Le Maire told daily Le Parisien on Sunday.

“We do not see any contagion in Europe. The European Commission has reached out to Italy, I hope Italy will seize this hand,” he said in an interview.

“But is the eurozone sufficiently armed to face a new economic or financial crisis? My answer is no. It is urgent to do what we have proposed to our partners in order to have a solid banking union and a euro zone investment budget.”

Le Maire’s remarks come just days after the European Commission rejected Italy’s draft 2019 budget earlier this week for breaking EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action. And while Brussels officials said that Rome’s “unprecedented” standoff with Brussels seems certain to delay the reform process and probably dilute it for good, Italy has remained defiant and has repeatedly said it would not budge on its target deficit at 2.4% of GDP.

The standoff between Italy and the EU, and concerns about who will buy Italian debt after the ECB ends its QE at the end of the year, has sent Italian yields soaring to the highest level in nearly 5 years.

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

Weekly Commentary: “Whatever They Want” Coming Home to Roost

October 27, 2018

Weekly Commentary: “Whatever They Want” Coming Home to Roost

Let’s begin with global. China’s yuan (CNY) traded to 6.9644 to the dollar in early-Friday trading, almost matching the low (vs. dollar) from December 2016 (6.9649). CNY is basically trading at lows going back to 2008 – and has neared the key psychological 7.0 level. CNY rallied late in Friday trading to close the week at 6.9435. From Bloomberg (Tian Chen): “Three traders said at least one big Chinese bank sold the dollar, triggering stop-losses.” Earlier, a PBOC governor “told a briefing that the central bank would continue taking measures to stabilize sentiment. We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other. I think we both have vivid memories of the past.”
The PBOC eventually won that 2016 skirmish with the CNY “shorts”. In general, however, you don’t want your central bank feeling compelled to do battle against the markets. It’s no sign of strength. For “developing” central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market’s response. In a brewing confrontation, the market will test the central bank. If the central bank’s response appears ineffective, markets will instinctively pounce.

Often unobtrusively, the stakes can grow incredibly large. There’s a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and “hot money” heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.

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

“Peak QE”: This Is What Share Of The Market Central Banks Now Own

October 27, 2018

“Peak QE”: This Is What Share Of The Market Central Banks Now Own

After a decade of unprecedented liquidity injections by central banks to preserve the western financial system, global QE has peaked.

First, the aggregate balance sheet of major central banks started to shrink earlier in the year, a reversal that took investors many months to notice but judging by recent market volatility, it is finally being fully appreciated.

Second, beginning this month the Fed’s bond portfolio run-offs as part of its QT are roughly offsetting the combined tapered net QE purchases by the ECB and BoJ. Worse, QT is now set to dominate.

Some facts: between mid-2008 and early 2018, the “Big-6” central banks expanded their balance sheets by nearly $15tn, most of it due to explicit targeted purchases of domestic assets (QE) in addition to other forms of liquidity injections (collateralised lending such as the ECB’s TLTROs or FX interventions equivalent to foreign-asset QE).

According to Deutsche Bank estimates, the four major central banks involved in QE (Fed, ECB, BoJ and BoE) are now collectively holding $11.3tn of securities accumulated through their asset purchase programs.

Why is the above important? Because as Deutsche strategist Michal Jezek, now that liquidity is contracting makes for a timely moment for looking at the proportion of relevant asset classes owned by central banks and putting the ECB’s corporate bond holdings into a wider context.

To begin, as Jezek confirms what we have been saying since the start of 2009, “clearly, QE matters.” As central banks reduced the free float of some securities and QE has worked its magic on confidence and growth, asset valuations reached unprecedented levels while volatility became suppressed. A couple of years ago, a quarter of the global bond market was trading with a negative yield. With global QE fading, this proportion has now fallen by half but remains significant.

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

ECB To End QE In December, Will Keep Rates Unchanged “As Long As Necessary”

October 25, 2018

ECB To End QE In December, Will Keep Rates Unchanged “As Long As Necessary”

In a statement that was a virtual replica from September, the ECB announced it was keeping its three key rates unchanged (main refinancing operations: 0.00%, marginal lending facility: 0.25%; deposit facility: -0.40%), that it will end its LSAP QE program at the end of December however “subject to incoming data confirming the medium-term inflation outlook”, that it will reinvest the principal payments from maturing securities purchased “for an extended period of time” and that in keeping with its prior forward guidance, “rates will remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”

In short, no surprises, even though as Bloomberg notes, the ECB still says it “anticipates” to end new QE purchases in December, while some analysts had suggested the Governing Council might tweak the language to make the commitment stronger. Not yet.

Full statement below:

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

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

 

Eight Reasons a Financial Crisis is Coming

October 24, 2018

Eight Reasons a Financial Crisis is Coming

It’s been about 10 years since the last financial crisis. FocusEconomics wants to know if another one is due.

The short answer is yes.

In the last 10 years not a single fundamental economic flaw has been fixed in the US, Europe, Japan, or China.

The Fed was behind the curve for years contributing to the bubble. Massive rounds of QE in the US, EU, and Japan created extreme equity and junk bond bubbles.

Trump’s tariffs are ill-founded as is Congressional spending wasted on war.

Potential Catalysts

  1. Junk Bond Bubble Bursting
  2. Equity Bubble Bursting
  3. Italy
  4. Tariffs
  5. Brexit
  6. Pensions
  7. Housing
  8. China

Many will blame the Fed. The Fed is surely to blame, but it is prior bubble-blowing policy, not rate hikes now that are the problem.

1. Junk Bonds

Many have labeled this an “everything bubble” which is not quite accurate. Yes, the Fed re-blew the housing bubble as well as an equity bubble. But the real standout is the bubble in junk bonds.

Companies are borrowing money to buy back shares at absurd valuations.

In the US, close to 15% of the companies in the S&P 500 only survive because they can roll over their debt. For discussion, please see Rise of the Zombie Corporations: Percentage Keeps Increasing, BIS Explains Why.

I expect a junk bond crash and that will take equities lower with it.

2. Equity Bubbles

Stock valuations are stretched almost beyond belief. The CAPE – Shiller PE was only surpassed by the DotCom bubble. The CAPE PE on October 3 when I last wrote about it was 33.49.​

There will be few places to hide. GMO Forecasts US Equity Losses for 7 Years.

​We may not see a “crash” per se, but if not, then expect a slow bleed over many years, Japanese style.

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

Blain: “We Are Finally Approaching The End Phase Of The 2008 Global Financial Crisis”

October 23, 2018

Blain: “We Are Finally Approaching The End Phase Of The 2008 Global Financial Crisis”

Blain’s Morning Porridge, Submitted by Bill Blain

“I found Rome a City of Bricks and left it a City of Marble.”

In the Headlights this morning – see www.morningporridge.com for some of the stories I’m watching:

Debt Leverage: Interesting quote I came across y’day. Which country are we talking about? A) Germany, B) Italy, C) China or D) US?  10 points for the first correct answer. (And remember points mean prizes): “local credit rating agencies have applied absurdly optimistic standards, giving top ratings to companies that rank among the most highly leveraged in the world.”

Global Markets?

Null Entrophy sums up the market’s current energy. Stocks seem to have lost their mojo. Even a major boost from the Chinese government expressing its love for the market failed to restore the mood. Indices have stalled. Funnily enough – a number of portfolio managers tell me we seem to be getting to equity price levels where dividend yields make sense for traditional economy names.

Meanwhile, I’m being told by some fixed income managers they see value in current yields in the face of potential global slowdown. Whether they are right or wrong depends on where the global economy goes and if central banks hold their tightening course. (That said, I’ve got to giggle when certain commentators are calling for central banks to ease to save stock markets – FFS! that would be an absolute abrogation of the Invisible Hand, and a far greater offense than bailing out banks… markets need creative destruction to evolve and function!)

What’s really happening? There is a very serious reassessment of trends and expectations underway in both bonds and stocks which could spell trouble all round! It feels like we are finally approaching the end-phase of the 2008 Global Financial Crisis…

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

The (ominous) problem with global liquidity

October 20, 2018

The (ominous) problem with global liquidity

Market liquidity is crucial for well-functioning capital markets. There has been a quite lot of talk about diminished market liquidity and the role of machines in it (see, e.g. Q-review 4/2017, this and this). These are worrying developments.

However, while market liquidity is crucial for markets, global financial flows, i.e. liquidity, is also essential to the real economy and for global economic growth. The availability of credit on a global basis fuels investments and growth around the world.  Such financial flows fell by a massive 90 % during the 2008 crisis, which quickly translated into a global recession.  Investment and consumption collapsed almost everywhere, with the exception of China where a massive credit stimulus was enacted.

Since then, there has been an uneven recovery. Cross-border bank lending has never really recovered (see Q-review 1/2017), but the issuance of vast amounts of government and corporate debt has taken its place. This creates a serious risk for the global real economy if highly over-valued capital markets crash.

The metamorphosis of global liquidity

In its recent quarterly report, the Bank of International Settlements, or BIS, raises three crucial points for global liquidity:

  1. Global outside-US dollar denominated debt has risen to a record.
  2. The role of non-bank institutions on providing funding has increased.
  3. The composition of international credit has shifted from bank loans to debt securities.

Combined with the asset purchase programs of central banks (QE) these developments have far-reaching consequences for the global economy.

Currently, non-banking institutions and households outside the US hold over 11.5 trillion worth of dollar-denominated debt—a record. The “shadow banking” sector could conceivably hold the same amount. This means that all policies affecting global dollar liquidity, will have a large effect on the global economy.

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

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Ten Years After the Last Meltdown: Is Another One Around the Corner?

October 16, 2018

Ten Years After the Last Meltdown: Is Another One Around the Corner?

September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

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

QE Party Is Drying Up, Even at the Bank of Japan

October 9, 2018

QE Party Is Drying Up, Even at the Bank of Japan

Despite repeated speeches to the contrary.

As of September 30, total assets on the Bank of Japan’s elephantine balance sheet dropped by ¥5.4 trillion ($33 billion) from a month earlier, to ¥537 trillion ($4.87 trillion). It was the fourth month-over-month decline in a series that started in December. This chart shows the month-to-month changes of the balance sheet. Despite all the volatility, the trend since mid-2016 is becoming clear:

Abenomics became the economic religion of Japan in later 2012, and “QQE” (Qualitative and Quantitative Easing) was an integral part of it. So has the “QQE Unwind” commenced? Are central bankers, even at the Bank of Japan, getting cold feet about the consequences?

At BOJ policy meetings, concerns have been voiced over  the “sustainability” of the stimulus program, according to the minutes of the July meeting, released on September 25. So the BOJ staff “proposed measures to enhance the sustainability of the current monetary easing while taking into consideration, for example, their effects on financial markets.”

And “flexibility” has been proposed as solution to those concerns.

The minutes reiterated that the BOJ would continue to buy Japanese Government Bonds (JGBs) in “a flexible manner” so that its holdings would increase by about ¥80 trillion a year.

But this is precisely what has not been happening, in line with this “flexibility.” Over the past 12 months, the BOJ’s holdings of JGBs rose by “only” ¥26.2 trillion – not ¥80 trillion. And they declined in September from the prior month (more in a moment).

Shortly after the minutes had been released, BOJ Governor Haruhiko Kuroda, once the most reckless among the money printers, changed his tune and said in a speech that, “in continuing with powerful monetary easing, we now need to consider both its positive effects and side-effects in a balanced manner.”

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

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

October 8, 2018

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The defaults and currency crises in the periphery will then move into the core.

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effectthat made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

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

The Fed’s QE Unwind Reaches $285 Billion

October 5, 2018

The Fed’s QE Unwind Reaches $285 Billion

The “up to” begins to matter for the first time.

The Fed released its weekly balance sheet Thursday afternoon. Over the four-week period from September 6 through October 3, total assets on the Fed’s balance sheet dropped by $34 billion. This brought the decline since October 2017, when the QE unwind began, to $285 billion. At $4,175 billion, total assets are now at the lowest level since March 5, 2014:

During QE, the Fed bought Treasury securities and mortgage-backed securities (MBS). During the “balance sheet normalization,” the Fed is shedding those securities. But the balance sheet also reflects the Fed’s other activities, and so the amount of its total assets is higher than the combined amount of Treasury securities and MBS it holds, and the changes in total assets also reflect its other activities.

The QE unwind was still in ramp-up mode in September, according to the Fed’s plan. For September, the Fed was scheduled to shed “up to” $24 billion in Treasuries and “up to” $16 billion in MBS.

From September 6 through October 3, the Fed’s holdings of Treasury Securities fell by $19 billion to $2,294 billion, the lowest since March 5, 2014. Since the beginning of the QE-Unwind, the Fed has shed $172 billion in Treasuries:

The “up to” begins to matter

Though the plan calls for shedding “up to” $24 billion in Treasury securities in September, the Fed shed only $19 billion. Here’s what happened – and why this will happen more often going forward:

When the Fed sheds Treasury securities, it doesn’t sell them outright but allows them to “roll off” when they mature; Treasuries mature mid-month or at the end of the month. Hence, the step-pattern of the QE unwind in the chart above.

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

People Will Be Dumping Dollars & Buying Gold – Peter Schiff

October 4, 2018

People Will Be Dumping Dollars & Buying Gold – Peter Schiff

Money manager Peter Schiff was in a small group warning of a coming financial meltdown that happened in 2008. Schiff says, “I was kind of a fixture on financial cable TV giving these warnings. My thought was the bubble would burst, and I knew that it would. Once the housing bubble burst and we had this financial crisis, I knew it would follow along with the Great Recession. I thought the Federal Reserve would try the best it could to reflate the bubbles in the stock markets and housing markets. But my thought was that their efforts would fail. The markets would not allow it and that a dollar collapse would intervene and would prevent new debt from being issued to fully reflate those bubbles. I was actually wrong. They didn’t just try to reflate the bubbles, they actually succeeded in blowing them bigger than ever.”

Ten years later, Schiff is warning of another financial calamity bigger than the last one. Schiff says, “The problem is now we are on the precipice of a much bigger crisis than before. The next time, if they try to reflate those bubbles, which they will, it will be a spectacular failure because the markets are now prepared for the opposite. Everybody, right now, assumes the Fed is going to be able to keep raising rates. They assume they are going to shrink its balance sheet and that we have this booming economy that will never bust. When the Fed has to reverse course abruptly, acknowledge the underlying weakness that everybody has been oblivious to and they start cutting rates and launching another round of quantitative easing (money printing), I think the dollar is going to fall through the floor. I think the inflationary fires that are already burning pretty hot are going to ignite.

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

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