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Forced Liquidation

Forced Liquidation


Historians of the future, pan-roasting fresh-caught June bugs over their campfires, may wonder when, exactly, was the moment when the financial world broke with reality. Was it when Nixon slammed the “gold window” shut? When “maestro” Alan Greenspan first bamboozled a Senate finance committee? When Pets.com face-planted 268 days after its IPO? When Ben Bernanke declared the housing bubble “contained?”

If our reality is a world of human activity, then finance is now completely divorced from it for the obvious reason that, for now, there is no human activity. Everyone, except the doctors and nurses, and some government officials, is locked down. So, the only other thing actually still out there spinning its wheels is finance and, to those of us watching from solitary confinement, it is looking more and more like an IMAX-scale hallucination with Dolby sound.

How many mortals can even pretend to understand the transactions now taking place among treasury and banking officials? On their own terms – TALFs, Special Purpose Vehicles, Commercial Paper Funding Facilities, Repo Rescue Operations, “Helicopter Money” – stand as increasingly empty jargon phrases that signify increasingly futile efforts to paper over the essence of the situation: the world is bankrupt. It’s that simple.

The world is locked down and in hock up to its eyeballs. It faces what the bankers euphemistically call, ahem, a “work-out,” which is to say, a restructuring. The folks in charge are resisting that work-out with all their might, because it will change many of the conditions of everyday life (especially theirs), but it is coming anyway. When debt can’t be paid back, money vanishes. Money isn’t capital, but it represents capital when it is functioning. When it isn’t functioning, it stops being money. Now the whole world realizes that the debt can’t be paid back, will never be paid back… and that’s the jig that’s up.

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

The Greenspan Moon Cult

The Greenspan Moon Cult

Taking another look at what I wrote about repo and the latest developments yesterday, it may be worthwhile to spend some additional time on the “why” as it pertains to so much determined official blindness, an unshakeable devotion to otherwise easily explained lunar events.

The short version: monetary authorities as well as the “experts” describe almost perfectly risk averse behavior among the central money dealing system in outbreaks like September’s repo – but then bend over backward trying to come up with any other kind of explanation for it. The problem must be some complicated stew of otherwise benign technical issues because there’s no possible way, they tell themselves, it can be anything else. Not with bank reserves abundantly over a trillion (now rising again) and Jay Powell pleasantly whispering in their ears about the unemployment rate every other day.

It takes on religious, cult-like properties to try so hard to prove (to themselves) what has already been so thoroughly disproven.

Start with the bond market and interest rates. Over the last half decade or so, ever since Janet Yellen’s ill-advised first rate hike in December 2015 amidst a near recession, a move she immediately regretted, central bankers and Bond Kings have been on a mission to convince the world monetary policy was a tremendous success. It had to have been because it was the biggest thing ever devised and those devising it had promised it was so big the flood of “easing” couldn’t possibly fail.

Something about a printing press.

Anyway, that’s not logic so much as self-delusion and rationalizing; the fallacy of sunk costs. Rather than recognize all the warning signs that it all had indeed failed, policymakers and Economists instead convinced themselves it just needed more time.

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

“Inflation Is Inevitably Going To Rise” – Is Alan Greenspan Right?

“Inflation Is Inevitably Going To Rise” – Is Alan Greenspan Right?

Via DataTrekResearch.com,

“Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise.” That’s from Alan Greenspan on CNBC this week. The “further” relates to US Federal deficit spending, the idea being that +$1 trillion annual budget shortfalls will eventually trigger price inflation.

It isn’t just Greenspan that is worried about rising US consumer price inflation; as we read through the most bearish market commentaries for 2020 this concern often has pride of place. Easy monetary and fiscal policy combined with a reaccelerating US/global economy late in a cycle is THE playbook for rising prices, so fair enough. The counterarguments are more structural (aging demographics, Internet price discovery, etc.), and while those work over the long term we can’t lean on them too hard in any given year. So do the inflation hawks have a case to make about 2020?

You know our methods for evaluating questions like this – a combination of market-based expectations and historical/real time data – so let’s get right to it:

#1: Expected 10-year inflation expectations imbedded in Treasury Inflation Protected bonds (TIPS spreads):

  • Even during the period of Federal Reserve bond buying, TIPS spreads were reasonable proxies for market expectations about long-run future inflation. The lowest they ever got was 1.2% in early 2016 and they have often been +2.0% over the last decade, the Fed’s notional target (see chart below).
  • TIPS spreads were +2.0% for almost all of 2018, for example, only dropping in November along with US/global growth expectations.
  • Expected 10-year forward inflation as measured by the TIPS market hasn’t touched 2.0% in 2019 and currently sits at 1.73%.

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

Really Bad Ideas, Part 8: Yield Curve Control And Mega-Stimulus

Really Bad Ideas, Part 8: Yield Curve Control And Mega-Stimulus

It’s been obvious for a while that the next phase of global monetary madness would be both spectacular and very different from the previous phase. The question was whether the difference would be in degree or kind. 

Now the answer is looking like “both.”

Let’s start with “yield curve control,” in which central banks, instead of just pushing down interest rates, intervene to maintain the relationship between short and long-term rates. 

In a recent interview, Federal Reserve Governor Lael Brainard said the following:

“I have been interested in exploring approaches that expand the space for targeting interest rates in a more continuous fashion as an extension of our conventional policy space and in a way that reinforces forward guidance on the policy rate. In particular, there may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum — yield curve caps — in tandem with forward guidance that conditions liftoff from the [effective lower bound] on employment and inflation outcomes.

To be specific, once the policy rate declines to the ELB, this approach would smoothly move to capping interest rates on the short-to-medium segment of the yield curve. The yield curve ceilings would transmit additional accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases.” 

She sounds a bit like Alan Greenspan back in his peak obscurity days, so here’s a quick translation:

In the next recession, the Fed will promise to keep short rates at or below zero for a long time and also promise to hold longer-term rates a pre-set distance from short rates, thus freezing the slope of the yield curve in place.

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

Weekly Commentary: No One Knows How Monetary Policy Works

Weekly Commentary: No One Knows How Monetary Policy Works

My interest was piqued by a Friday Bloomberg article (Ben Holland), “The Era of Cheap Money Shows No One Knows How Monetary Policy Works.” “Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way. In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.”

I remember when the Fed didn’t even announce changes in rate policy. Our central bank would adjust interest rates by measured bank reserve additions/subtractions that would impact the interbank lending market. Seventies inflation forced Paul Volcker to push short-term interest-rates as high as 20% in early-1980 to squeeze inflation out of the system. 

Federal Reserve policymaking changed profoundly under the authority of Alan Greenspan. Policy rates had already dropped down to 6.75% by the time Greenspan took charge in August 1987. Ending 1979 at 13.3%, y-o-y CPI inflation had dropped below 2% by the end of 1986. Treasury bond yields were as high as 13.8% in May 1984. But by August 1986 – yields were down to 6.9% – having dropped almost 700 bps in 27 months.  

Lower market yields and economic recovery were absolute boon for equities. The S&P500 returned 22.6% in 1983, 5.2% in 1984, 31.5% in 1985, 22% in 1986 – and another 41.5% for 1987 through August 25th. Markets had evolved into a speculative bubble.  

One could pinpointing the start of the great Credit Bubble back with the 70’s inflation. For my purposes, I date its inception at the 1987 stock market crash. At the time, many were drawing parallels between the 1987 and 1929 market crashes – including dire warnings of deflation risk – warnings that have continued off and on for more than three decades.  

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

Where The Next Financial Crisis Begins

Where The Next Financial Crisis Begins

We are not sure of how the next financial crisis will exactly unfold but reasonably confident it will have its roots in the following analysis.   Maybe it has already begun.

The U.S. Treasury market is the center of the financial universe and the 10-year yield is the most important price in the world, of which, all other assets are priced.   We suspect the next major financial crisis may not be in the Treasury market but will most likely emanate from it.

U.S. Public Sector Debt Increase Financed By Central Banks 

The U.S. has had a free ride for this entire century, financing its rapid runup in public sector debt,  from 58 percent of GDP at year-end 2002, to the current level of 105 percent, mostly by foreign central banks and the Fed.

Marketable debt, in particular, notes and bonds, which drive market interest rates have increased by over $9 trillion during the same period, rising from 20 percent to 55 percent of GDP.

Central bank purchases, both the Fed and foreign central banks, have, on average, bought 63 percent of the annual increase in U.S. Treasury notes and bonds from 2003 to 2018.  Note their purchases can be made in the secondary market, or, in the case of foreign central banks,  in the monthly Treasury auctions.

In the shorter time horizon leading up to the end of QE3,  that is 2003 to 2014,  central banks took down, on average, the equivalent of 90 percent of the annual increase in notes and bonds.  All that mattered to the price-insensitive central banks was monetary and exchange rate policy.   Stunning.

Greenspan’s Bond Market Conundrum

The charts and data also explain what Alan Greenspan labeled the bond market conundrum just before the Great Financial Crisis (GFC).   The former Fed chairman was baffled as long-term rates hardly budged while the Fed raised the funds rate by 425 bps from 2004 to 2006, largely, to cool off the housing market.

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

Paul Volcker Trashes Fed, Washington Plutocrats: World’s In “A Hell Of A Mess In Every Direction”

While we have grown used to Alan Greenspan’s flexible world views appearing regularly among US media channels, when former Fed Chair Paul Volcker speaks, it’s low frequency nature tends to make on pay attention, and he is not optimistic about the state of the world… at all.

As ‘Tall Paul’ prepares to publish his memoir (ironically titled – given the current state of the world – “The Quest For Sound Money & Good Government”), he sat down with NYTimes’ Dealbook’s Andrew Ross Sorkin and was not shy about how he sees the world and where it’s going:

When he looks around now, he sees “a hell of a mess in every direction,” including a lack of basic respect for government institutions..

“Respect for government, respect for the Supreme Court, respect for the president, it’s all gone,” he said.

“Even respect for the Federal Reserve.”

“And it’s really bad. At least the military still has all the respect. But I don’t know, how can you run a democracy when nobody believes in the leadership of the country?

…a current Fed that seems to be following a completely arbitrary benchmark…

“I puzzle at the rationale,” he wrote.

“A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.”

…and a “swamp” in Washington run by plutocrats.

“There is no force on earth that can stand up effectively, year after year, against the thousands of individuals and hundreds of millions of dollars in the Washington swamp aimed at influencing the legislative and electoral process,”

Finally, Volcker dispels with the myth that presidents historically haven’t tried to influence interest rates. Recounting a 1984 meeting he had with former President Ronald Reagan, then-chief of staff James Baker flatly told Volcker:

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

Agents of Chaos: Trump, the Federal Reserve and Andrew Jackson

Agents of Chaos: Trump, the Federal Reserve and Andrew Jackson

Photo Source Eli Christman | CC BY 2.0

“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.”

– President Andrew Jackson, Washington, July 10, 1832

They are three players, all problematic in their own way.  They are the creatures of inconvenient chaos.  Donald Trump was born into the role, a misfit of misrule who found his baffling way to the White House on a grievance.  Wall Street, with its various agglomerations of vice and ambition constitute the spear of global instability while the US Federal Reserve, long seen as a gentlemanly symbol of stability, has done its fair share to avoid its remit to right unstable ships, a power in its own right.

The Federal Reserve, despite assuming the role of Apollonian stabiliser, remained blind and indifferent through the Clinton era under the stewardship of Alan Greenspan.  The creatures of Dionysus played, and Greenspan was happy to watch. While he is credited with having contained the shock of the 1987 stock-market crash, he proceeded to push a period of manically low interest rates and minimal financial regulation through the hot growth of the 1990s and early 2000s. Rather than condemning “Ninja loans” and other such bank exotica, he celebrated them as creations of speculative genius.

The mood at the Fed these days might seems chastened.  They are the monkish wowsers and party poopers, those who lock down the bar and tell the merrily sauced to head home.  The sense there is that the market, boosted and inflated, needs correction after years of keeping interest rates at floor levels. Unemployment levels are at 3.7 percent; inflation levels are close to 2 percent.  “If the strong growth in income and jobs continues,” reasoned Federal Reserve chairman Jerome H. Powell in August, “further gradual increases in the target range for the federal funds rate will likely be appropriate.”

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

The Everything Bubble: When Will It Finally Crash?

The Everything Bubble: When Will It Finally Crash?

Much like the laws of physics, there are certain laws of economics that remain constant no matter how much manipulation exists in the markets. Expansion inevitably leads to contraction, and that which goes up must eventually come down. Central banks understand this reality very well; they have spent over a century trying to exploit those laws to their own advantage.

A common misconception among people new to alternative economics is the idea that central banks only seek to keep the economy afloat, or keep it expanding forever. In reality, these institutions and the money elites behind them artificially inflate financial bubbles only to deliberately implode them at opportunistic moments.

As I have outlined in numerous articles, every economic bubble and subsequent crash since 1914 can be linked to the policy actions of central bankers. Sometimes they even admit to culpability (to a point), as Ben Bernanke did on the Great Depression and as Alan Greenspan did on the 2008 credit crisis. You can read more about this in my article ‘The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious.’

Generally, central bankers and international bankers mislead the public into believing that the crashes they are responsible for were caused “by mistake.” They rarely if ever mention the fact that they often use these crises as a means to consolidate control over assets, resources and governments while the masses are distracted by their own financial survival. Centralization is the name of the game. It is certainly no mistake that after every economic implosion the wealth gapbetween the top 0.01% and the rest of humanity widens exponentially.

Yet another crash is being weaponized by the banks, and this time I believe the motivations behind it are rather different. Or at least the goals are supercharged.

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

There’s a New Crash Coming

There’s a New Crash Coming

Donald Trump is the epitome of irrational exuberance.

You might remember that phrase from the 1990s. Alan Greenspan, the head of the Federal Reserve at the time, was describing how the tech boom was creating a bubble by generating enthusiasm way out of proportion to the actual value of the new companies.

Such an unwarranted economic boom was hardly something new, so it was easy to predict what would happen next. Periods of irrational exuberance — whether the dot-com expansion, Dutch tulipmania in the 17th century, or the housing bubble in America of the 2000s — have always led to a sudden crash and a serious hangover.

And now, here we go again.

Trump, always exuberant when talking about himself and his putative accomplishments, loves to boast about how well the American economy is chugging along. The stock market reached its all-time high at the end of August. In its second quarter this year, U.S. economic growth was 4.1 percent. Unemployment remains below 4 percent, and inflation remains moderate. Even wages are going up.

Irrationality enters the picture because there’s little if any connection between the president’s policies and the outcomes he lauds (since these trends began before he took office). Also, the prosperity that has resulted from this economic expansion has largely been enjoyed by the wealthier sectors of society. Finally, Trump’s economic fever dream is fueled by an enormous and growing amount of debt.

When it comes to irrational exuberance, it’s never if there will be a bust but when. On the tenth anniversary of the financial collapse of 2008, it’s worth looking at the potential pinpricks that will pop Trump’s hot-air balloon and send America crashing back to earth.

Mountains of Debt

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How the Trade War Helps Hide Central Bank Sabotage Of The Economy

trade war cover up for Fed

Almost every aspect of the global economic downturn, which started ostensibly in 2007-08 and is still ongoing to this day, can be traced back to the actions and policies of central banks. The Federal Reserve, for example, used artificially low interest rates and easy money to create a supposedly no-risk loan environment. This translated into a vast amount of toxic mortgage debt along with a web of derivatives (Mortgage Backed Securities) attached to that debt.

The Fed ignored all the signs and all the alternative analyst warnings. Agencies like S&P backed the Fed narrative that all was well as they gave AAA ratings to endless toxic market products. The mainstream media backed the Fed by attacking anyone that argued the notion that the U.S. economy was unstable and ready to falter. In that era of economics, the truth was effectively hidden from the public by the system through relatively standard means. Today, things have changed slightly.

Since the 2008 crash, numerous economists and former Fed officials have come out publicly to admit to the culpability of central bankers (sort of). Alan Greenspan first claimed in 2008 that the Fed had “made a mistake” in its analysis and overlooked the potential of a market bubble. Then, in 2013 he came out and admitted all the central bankers KNEW that a bubble was present, but that they believed the markets would self-correct without much damage to GDP or the rest of the economy.

The mainstream financial media went on to blame the Fed for the conditions that caused the crisis, but made excuses for them at the same time. The narrative was that the Fed was blinded by peripheral factors and that it had been ignoring fundamentals. The Central bankers had “painted themselves into a corner” with low interest rates, and had done this unknowingly.

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

Yellen Wants Fed to Commit to Future Booms to Make Up for Busts

Former Fed Chair Yellen promotes “Lower for Longer”, a policy in which the Fed knowingly keeps interest rates too low.

Here’s the asinine policy proposal of the day: Fed Should Commit to Future ‘Booms’ to Make Up for Major Busts.

The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”

What We Are Doing Already

The official policy is what we are doing already. May as well make a policy out of it.

The caveat, of course, is the Fed does not realize what it’s already doing.

Ass Backward

There is one more major flaw. It’s ass Backward. We have major busts because the Fed blew major bubbles.

The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.

The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.

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

Weekly Commentary: Unassailable

Weekly Commentary: Unassailable

I’ve been here before and, candidly, it’s not much fun. Lodged in my mind this week was the brilliant quote from the 19th century German philosopher Arthur Schopenhauer: “All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.”
It’s fascinating how it all works. Looking back, there was definitely a Bubble in 1999. Clearly, 2007 was one huge Bubble. Everything is obvious in hindsight, and most look back now and contend it was pretty conspicuous even at the time. Having toiled through both prolonged Bubble periods – arguing against deeply embedded bullish conventional wisdom – I can attest to the fact that the Bubble viewpoint was violently opposed at the late stages of both cycles.

I don’t feel I’m venturing out on a limb to predict that some years into the future the 2018 Bubble backdrop will be recalled as rather self-evident. Years of experimental “whatever it takes” global monetary stimulus (rates, QE and market manipulation) nurtured excess and imbalances on an unparalleled global scale. EM borrowed excessively, too much denominated in foreign (U.S. dollar!) currencies. The Federal Reserve (all central banks) held rates too low for much too long. Prices for virtually all asset classes were inflated to dangerous extremes.

The resulting Tech Bubble 2.0 dwarfed the earlier nineties version, culminating in a global technology arms race. China was a historic Bubble of reckless proportions. Protectionism and Trade wars were a scourge for markets and global growth. Unsound “money” fueled populism. In the end, the backdrop created a cauldron of deepening geopolitical animosities and flashpoints.
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Weekly Commentary: Powell, Greenspan and Whatever it Takes

Weekly Commentary: Powell, Greenspan and Whatever it Takes

Fed Chairman Powell is in a tough spot, one made no easier now that he’s on the receiving end of disapproving presidential tweets. The global Bubble has begun to falter, which only exacerbates divergences between various markets and economies. The U.S. is booming, while China struggles and EM economies now stumble into the dark downside of an epic cycle. The U.S. economy and markets beckon for tighter financial conditions, while higher U.S. rates pose significant danger to fragile global markets already confronting a major tightening of financial conditions.

Powell played it safe in Jackson Hole. I imagine he’d have preferred to sit this one out. As such, his presentation was too heavy on rationalization and justification. The FOMC is trapped in Greenspan-style “baby steps,” and it is curious that the Fed Chairman would choose to praise Alan Greenspan for his nineties policy approach:

“Under Chairman Greenspan’s leadership, the committee converged on a risk-management strategy that can be distilled into a simple request: ‘Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.’ Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.”

If the Greenspan Fed had in fact adopted a “risk management strategy,” it was a failed attempt. It’s too easy these days to disregard the highly disruptive boom and bust cycles that have been prominent in U.S. and global markets (and economies) over recent decades. And here we are today, the Federal Reserve still accommodating Bubble Dynamics because of its failure to respond to financial developments and contain excess back in the nineties.
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Trump’s Tweets End the Myth of Fed Independence

Trump’s Tweets End the Myth of Fed Independence

President Trump’s recent Tweets expressing displeasure with the Federal Reserve’s (minor) interest rate increases led to accusations that President Trump is undermining the Federal Reserve’s independence. But, the critics ignore the fact that Federal Reserve “independence” is one of the great myths of American politics.

When it comes to intimidating the Federal Reserve, President Trump pales in comparison to President Lyndon Johnson. After the Federal Reserve increased interest rates in 1965, President Johnson summoned then-Fed Chairman William McChesney Martin to Johnson’s Texas ranch where Johnson shoved him against the wall. Physically assaulting the Fed chairman is probably a greater threat to Federal Reserve independence than questioning the Fed’s policies on Twitter.

While Johnson is an extreme example, history is full of cases where presidents pressured the Federal Reserve to adopt policies compatible with the presidents’ agendas — and helpful to their reelection campaigns. Presidents have been pressuring the Fed since its creation. President Warren Harding called on the Fed to lower rates. Richard Nixon was caught on tape joking with then-Fed chair Arthur Burns about Fed independence. And Lloyd Bentsen, President Bill Clinton’s first Treasury secretary, bragged about a “gentleman’s agreement” with then-Fed Chairman Alan Greenspan.

President Trump’s call for low interest rates contradicts Trump’s earlier correct criticism of the Fed’s low interest rate policy as harming middle-class Americans. Low rates can harm the middle class, but they also benefit spend-and-borrow politicians and their favorite special interests by lowering the federal government’s borrowing costs. Significant rate increases could make it impossible for the government to service its existing debt, thus making it difficult for President Trump and Congress to continue increasing welfare and warfare spending.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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