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Remaining Focused

A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose. Midterm elections. White House spats with purveyors of fake news. The forced resignation of Attorney General Sessions…

Old drug warrior (otherwise recused) on his way home to Alabama…

Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance. Why stop to really understand what’s behind a headline when hundreds of new headlines pop up by the minute? Why bother to try and figure things out when real thinking is such an inconvenience?

What’s more, the S&P 500 jumped nearly 3 percent between market open Monday and market close Thursday. Clearly, the October mini-panic is now a distant memory. At this rate, we’ll all be rich off stocks by the New Year.

Yet while the mob stampeded from one distraction to the next, we remained focused on the real story: The outright pilfering of the nation’s time, talent, and treasure. This isn’t the story that’s readily presented by the headlines. But it is readily evident for those willing to open their eyes and look around at the world before them.

You see, the real story, the story that’s being largely ignored, is three fold. Rising borrowing costs, a debt crisis, and price inflation are converging with unbearable consequences. You can’t miss it.The “thank God it’s over” election celebration in the stock market. This rally is not likely to last. In fact, it could quite easily morph right back into a panic cycle. [PT]

Fake Money

The U.S. Treasury, if you didn’t know, will issue $1.3 trillion in new debt in 2018. This represents a 146 percent increase in new federal government debt issuance from 2017. By our rough estimation, this number will significantly increase in 2019 and again in 2020.

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

Central Banks Put a Safety Net Under Financial Markets

January 29, 2018

Central Banks Put a Safety Net Under Financial Markets

Most early business cycle indicators suggest that the global economy is pretty much roaring ahead. Production and employment are rising. Firms keep investing and show decent profits. International trade is expanding. Credit is easy to obtain. Stock prices keep moving up to ever higher levels. All seems to be well. Or does it? Unfortunately, the economic upswing shows the devil’s footprints: central banks have set it in motion with their extremely low, and in some countries even negative, interest rate policy and rampant monetary expansion.

Artificially depressed borrowing costs are fueling a “boom.” Consumer loans are as cheap as ever before, seducing people to spend increasingly beyond their means. Low interest rates push down companies’ cost of capital, encouraging additional, and in particular risky investments – they would not have entered into under “normal” interest rate conditions. Financially strained borrowers – in particular states and banks – can refinance their maturing debt load at extremely low interest rates and even take on new debt easily.

By no means less important is the fact that central banks have effectively spread a “safety net” under financial markets: Investors feel assured that monetary authorities will, in case things turning sour, step in and fend off any crisis. The central banks’ safety net has lowered investors’ risk concern. Investors are willing to lend even to borrowers with relatively poor financial strength. Furthermore, it has suppressed risk premia in credit yields, having lowered firms’ cost of debt, which encourages them to run up their leverage to increase return on equity.

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

JPM, ECB Hint At Arrival Of “Helicopter Money” In Europe Following Next “Significant Downturn”

April 7, 2016

JPM, ECB Hint At Arrival Of “Helicopter Money” In Europe Following Next “Significant Downturn”

Moments ago, ECB governing council member and Bank of Italy governor Ignazio Visco had some very troubling comments.

He said that while helicopter money is not currently part of the discussion in the Governing Council that “no policy tool within our mandate can or should be dismissed a priori.” The reason for this startling admission is “the importance of expectations of low inflation in determining wage outcomes, and thus giving rise to second- round effects, may be increasing.”

He cited Italy’s recently signed collective contracts where “it was agreed that parts of future pay rises will be revised downwards in the event that the inflation rate falls short of current forecasts” adding that a “a generalized adoption of this type of contract would significantly decrease the rate of growth of wages and this would in turn be reflected in the dynamics of consumer prices.”

He went on to defend existing monetary policy which has so far only resulted in savings hoarding, ongoing deflation and a slammed banking sector, saying that “Regarding Italy, the effects are estimated to be somewhat stronger: absent the monetary impulse, the Italian recession would have ended only in 2017; inflation would have remained negative for the whole three-year period.”

But back to helicopter money: Visco also said that: “such an extreme measure would undoubtedly be subject to operational and legal constraints.”

Is the ECB really this cloase to helicopter money? It appears so, because as he notes “the redistributive implications and the close ties with fiscal policy would all make it very complex, all the more so in the euro area given its institutional framework.” He concluded that a discussion on the measure “is noteworthy, not much per se, but because it underlines the concern that monetary policy is left to act in isolation.”

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

Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes

February 28, 2016

Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes

Not only has the Yen strengthened and stocks collapsed since BoJ’s Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).

As Bloomberg reports,

The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.

While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.

It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.

“Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”

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

“Time To Panic”? Nigeria Begs World Bank For Massive Loan As Dollar Reserves Dry Up

January 31, 2016

“Time To Panic”? Nigeria Begs World Bank For Massive Loan As Dollar Reserves Dry Up

Having urged “don’t panic” just 4 short months ago, it appears Nigeria just did just that as the global dollar short squeeze forces the eight-month-old government of President Muhammadu Buhari to beg The World Bank and African Development Bank for $3.5bn in emergency loans to help fund a $15bn deficit in a budget heavy on public spending amid collapsing oil revenues. Just as we warned in December, the dollar shortage has arrived, perhaps now is time to panic after all.

In September, Nigerian central bank Governor Godwin Emefiele ruled out a naira devaluation on Thursday and told people not to panic about a government order which risks draining billions of dollars from the financial system.

In an interview with Reuters, Emefiele said he was ready to inject liquidity if needed into the interbank market, which dried up this week following the directive to government departments to move their funds from commercial banks into a “Treasury Single Account” (TSA) at the central bank.

The policy is part of new President Muhammadu Buhari’s drive to fight corruption, but analysts say it could suck up as much as 10 percent of banking sector deposits in Africa’s biggest economy – playing havoc with banks’ liquidity ratios.

With global oil prices tumbling, banks and companies are already struggling with the consequences of a dive in Nigeria’s energy revenues that has hit the naira currency and triggered flows of capital out of the country.

Then JP Morgan kicked Nigeria out of its influential Emerging Markets Bond Index last week due to restrictions that the central bank imposed on the currency market to support the naira and preserve its foreign exchange reserves.

Since taking office in May, Buhari has vowed to rein in Nigeria’s dependency on oil exports which account for 90 percent of foreign currency earnings.

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

Italy Races To Defuse €200 Billion Bad Loan Time Bomb With “Bad Bank”

January 22, 2016

Italy Races To Defuse €200 Billion Bad Loan Time Bomb With “Bad Bank”

When Portugal “surprised” senior Novo Banco bondholders with a €2 billion bail-in late last month, the market got an unwelcome reminder that euro periphery banks are far from “solid.”

Novo was supposed to house the “good” assets salvaged from the wreckage of failed lender Banco Espirito Santo, but as it turned out, a lot of those “good” assets were actually bad, and Novo ended up needing to plug a €1.4 billion hole. Initially, the plan was to sell assets but seizing €2 billion from bondholders ended up being a whole lot easier and far more efficient.

News of the bail-in came just a week after Lisbon announced that a second bank – Banif – would need state aid after running out of cash to repay a previous cash injection from the government.

As we head into the weekend, periphery banks are back in the spotlight, only this time in Italy where PM Matteo Renzi is scrambling to put the finishing touches on a plan to guarantee hundreds of billions of NPLs sitting on the books of Italian banks.

Talks with the EU Commission “have already dragged on for two years,” FT notes and need to be concluded over the next few days lest “the whole initiative should collapse.”

Of course Renzi missed what amounted to a deadline on “fixing” the problem under the old rules governing bank resolutions.

One reason the Novo Banco and Banif bail-in and bailout (respectively) were pushed through in what appeared to be a kind of haphazard, ad hoc fashion was because new rules came into effect on January 1 that would have put uninsured depositors on the hook for losses. The same rules require 8% “of a bank’s liabilities to be wiped out before public money can be used,” FT adds.

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

Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors

October 22, 2015

Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors

In some respects, today’s ECB presser was a snoozer. Reporters asked the same old questions (some of which we’ve been asking for years) and, more importantly, there were no glitter attacks.

Our ears did perk up however, when Mario Draghi admitted that, unlike the governing council’s last meeting, cutting the depo rate further into negative territory was indeed discussed.

This is significant for a number of reasons. At the general level, it shows that DM central bankers are ready and willing to plunge the world further into the Keynesian Twilight Zone. As we outlined last month, this means the Riksbank and the SNB are now on watch. If the ECB cuts again, the Riksbank will be forced to act as well and as Barclays recently opined, the SNB may be compelled to go nuclear on depositors, as removing the negative rate exemption for domestic banks would force them to pass along the “cost” to customers:

“In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms:

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

Brazil Faces Unemployment “Crisis”, As Retail Sales Plunge, Rousseff Blasts “Coup-Mongers”

October 15, 2015

Brazil Faces Unemployment “Crisis”, As Retail Sales Plunge, Rousseff Blasts “Coup-Mongers”

Brazilian President Dilma Rousseff got a rare bit of respite on Tuesday when a Supreme Court justice granted an injunction that delays a lower house vote which could have paved the way for impeachment proceedings.

House speaker Eduardo Cunha has remained defiant, vowing to exercise his “constitutional prerogative” to review impeachment requests.

Of course Cunha has his own set of problems. Allegations of corruption tied to the discovery of Swiss bank accounts have led to calls for his resignation and that, in turn, has Rousseff’s “aides fear[ing] the speaker could try to speed up the impeachment process.” As Reuters notes, if Cunha accepts even one of three impeachment petitions he has on his desk, “a parliamentary commission with representatives of all parties would analyze it and put it to a lower house vote.”

It is essentially a race against time to see if the house ethics committee will force his resignation before he can secure the lower house support to force a Senate impeachment trial.

For her part, Rousseff has accused the opposition of “coup-mongering” following last week’s ruling by the TCU that she cooked the fiscal books.

Meanwhile, as the intractable political stalemate keeps investors on edge regarding whether the government will be stable enough to enact the reforms needed to plug the budget gap, the economy continues to crumble.

We got a look at retail sales for August today and the picture was not pretty. Core retail sales fell by a larger-than-expected 0.9% month on month and July was revised lower to -1.6%. Broad retail sales fell 2.0% auto sales crashed 5.2%. Annually, core fell by 6.9% broad by 9.6% yoy. Here’s Goldman with the takeaway:

The near-term outlook for private consumption and retail sales remains negative owing to the significant deceleration of credit flows from both private and public banks, high levels of household indebtedness, declining job creation and real wage growth, higher interest rates, higher taxes (including via inflation), higher utility and transportation tariffs, heightened economic and political uncertainty and very depressed (record low) consumer confidence.

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

Goldman Warns On Limits Of Central Bank Policy: “The Road To Hell Is Paved With Good Intentions”

September 25, 2015

Goldman Warns On Limits Of Central Bank Policy: “The Road To Hell Is Paved With Good Intentions”

Back in May, we noted that minutes from the ECB’s April 14-15 policy meeting seem to reveal that the central bank is either obtuse or else suffering from a frightening bout of willful ignorance. Here’s are the excerpts which led us to that assessment:

Since the Governing Council’s previous monetary policy meeting on 4-5 March 2015, the implementation of the ECB’s expanded asset purchase programme (APP) had had a significant impact on euro area financial markets, contributing to further declines in government bond yields.

A strong signal needed to be sent to euro area governments urging them to press ahead with structural reforms and to take measures to improve the business environment. Only with such complementary action could the full benefits of the monetary policy measures be reaped.

Now obviously, implementing a €1.1 trillion program designed specifically to lower government borrowing costs is the exact opposite of sending a “strong signal” to policymakers regarding the absolute necessity of getting serious about fiscal rectitude. That is, if it does anything, PSPP discourages governments from reining in spending by artificially suppressing borrowing costs, which effectively robs the market of the ability to price government risk.

Well, as it turns out, even if the ECB doesn’t understand this, Mario Draghi’s former employer certainly does, because a new paper co-authored by Goldman’s Huw Pill and Alain Durre acknowledges the role central banks play in discouraging fiscal discipline. Here’s more from Bloomberg:

The unconventional monetary policies of central banks often face limits because they could end up hurting as well as helping economies.

That’s the warning of Goldman Sachs Group Inc. economists Huw Pill and Alain Durre in a paper prepared for the first annual MMF U.K. Monetary and Financial Policy Conference to be held in London on Friday.

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

S&P Downgrades Japan From AA- To A+ On Doubts Abenomics Will Work – Full Text

September 16, 2015

S&P Downgrades Japan From AA- To A+ On Doubts Abenomics Will Work – Full Text

Who would have thought that decades of ZIRP, an aborted attempt to hike rates over a decade ago, and the annual monetization of well over 10% of sovereign debt would lead to a toxic debt spiral, regardless of how many “Abenomics” arrows one throws at it? Apparently Standard and Poors just had its a-ha subprime flashbulb moment and moments ago, a little over 4 years after it downgraded the US from its legendary AAA-rating which led to angry phone calls from Tim Geithner and a painful US government lawsuit, downgraded Japan from AA- to A+. The reason: rising doubt Abenomics is working.

Apparently S&P has never heard of the Magic Money Tree theory concocted by economists who have never traded an asset in their lives, in which “countries that print their own currency” have nothing to fear about a 250% debt/GDP ratio. In fact, the only fear is that it is not big enough.

Expect the market’s reaction to be that since Abenomics has not worked yet, some nearly three years after it was launched then Japan will be forced to do even more of it, simply because it has no choice – it is now all in, the problem of course being that the BOJ is simply running out of stuff to monetize as even the IMF warned two weeks ago…

Here is the S&P’s full downgrade.

Japan Ratings Lowered To ‘A+/A-1’; Outlook Is Stable

OVERVIEW

Economic support for Japan’s sovereign creditworthiness has continued to weaken in the past three to four years. Despite showing initial promise, the government’s strategy to revive economic growth and end deflation appears unlikely to reverse this deterioration in the next two to three years.
We are lowering our sovereign credit ratings on Japan to ‘A+/A-1’ from ‘AA-/A-1+’.
The outlook on the long-term rating is stable.

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

Don’t Forget China’s “Other” Spinning Plate: Trillions In Hidden Bad Debt

September 5, 2015

Don’t Forget China’s “Other” Spinning Plate: Trillions In Hidden Bad Debt

To be sure, there’s every reason to devote nearly incessant media coverage to China’s bursting stock market bubble and currency devaluation.

The collapse of the margin fueled equity mania is truly a sight to behold and it’s made all the more entertaining (and tragic) by the fact that it represents the inevitable consequence of allowing millions of poorly educated Chinese to deploy massive amounts of leverage on the way to driving a world-beating rally that, at its height, saw day traders doing things like bidding a recently-public umbrella manufacturer up 2,700%.

The entertainment value has been heightened by what at this point has to be some kind of inside baseball competition among media outlets to capture the most hilarious picture of befuddled Chinese traders with their hands on their faces and/or heads with a board full of crashing stock prices visible in the background. Meanwhile, the world has recoiled in horror at China’s crackdown on the media and anyone accused of “maliciously” attempting to exacerbate the sell-off by engaging in what Beijing claims are all manner of “subversive” activities such as using the “wrong” words to describe the debacle and, well, selling stocks. Finally, China’s plunge protection has been widely criticized for, as we put it, “straying outside the bounds of manipulated market decorum.”

And then there’s the yuan devaluation that, as recent commentary out of the G20 makes abundantly clear, is another example of a situation where China will inexplicably be held to a higher standard than everyone else.That is, when China moves to support its export-driven economy it’s “competitive devaluation”, but when the ECB prints €1.1 trillion, it’s “stimulus.”

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

Why It Really All Comes Down To The Death Of The Petrodollar

August 23, 2015

Why It Really All Comes Down To The Death Of The Petrodollar

Last week, in the global currency war’s latest escalation, Kazakhstan instituted a free float for the tenge. The currency immediately plunged by some 25%.

The rationale behind the move was clear enough. The plunge in crude prices along with the relative weakness of the Russian ruble had severely strained Kazakhstan, which is central Asia’s largest crude exporter. As a quick look at a chart of the tenge’s effective exchange rate makes clear, the pressure had been mounting for quite a while and when China devalued the yuan earlier this month, the outlook for trade competitiveness worsened.

What might not be as clear (on the surface anyway) is how recent events in developing economy FX markets following the devaluation of the yuan stem from a seismic shift we began discussing late last year – namely, the death of the petrodollar system which has served to underwrite decades of dollar dominance and was, until recently, a fixture of the post-war global economic order.

In short, the world seems to have underestimated how structurally important collapsing crude prices are to global finance. For years, producers funnelled their dollar proceeds into USD assets providing a perpetual source of liquidity, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop. That all came to an abrupt, if quiet end last year when a confluence of economic (e.g. shale production) and geopolitical (e.g. squeeze the Russians) factors led the Saudis to, as we put it, Plaxico’d themselves and the US.

The ensuing plunge in crude meant that suddenly, the flow of petrodollars was set to dry up and FX reserves across commodity producing countries were poised to come under increased pressure. For the first time in decades, exported petrodollar capital turned negative.

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

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