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Capital Flows–Is a Reckoning Nigh?

March 18, 2019

CAPITAL FLOWS – IS A RECKONING NIGH?

  • Borrowing in Euros continues to rise even as the rate of US borrowing slows
  • The BIS has identified an Expansionary Lower Bound for interest rates
  • Developed economies might not be immune to the ELB
  • Demographic deflation will thwart growth for decades to come

In Macro Letter – No 108 – 18-01-2019 – A world of debt – where are the risks? I looked at the increase in debt globally, however, there has been another trend, since 2009, which is worth investigating as we consider from whence the greatest risk to global growth may hail. The BIS global liquidity indicators at end-September 2018 – released at the end of January, provides an insight: –

The annual growth rate of US dollar credit to non-bank borrowers outside the United States slowed down to 3%, compared with its most recent peak of 7% at end-2017. The outstanding stock stood at $11.5 trillion.

In contrast, euro-denominated credit to non-bank borrowers outside the euro area rose by 9% year on year, taking the outstanding stock to €3.2 trillion (equivalent to $3.7 trillion). Euro-denominated credit to non-bank borrowers located in emerging market and developing economies (EMDEs) grew even more strongly, up by 13%.

The chart below shows the slowing rate of US$ credit growth, while euro credit accelerates: –

gli1901_graph1

Source: BIS global liquidity indicators

The rising demand for Euro denominated borrowing has been in train since the end of the Great Financial Recession in 2009. Lower interest rates in the Eurozone have been a part of this process; a tendency for the Japanese Yen to rise in times of economic and geopolitical concern has no doubt helped European lenders to gain market share. This trend, however, remains over-shadowed by the sheer size of the US credit markets. The US$ has remained preeminent due to structurally higher interest rates and bond yields than Europe or Japan: investors, rather than borrowers, dictate capital flows.

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

The Big Picture: Paper Money vs. Gold

December 12, 2018

The Big Picture: Paper Money vs. Gold

Numbers from Bizarro-World

The past few months have been really challenging for anyone invested in gold or silver; for me personally as well. Despite serious warning signs in the economy, staggering debt levels and a multitude of significant geopolitical threats at play, the rally in risk assets seemed to continue unabated.

Bizarro-World intrudes into our reality, courtesy of central banks. [PT]

In fact, I was struggling with this seeming paradox myself. As I kept looking at the state of the markets, I couldn’t help but wonder “what if they just keep kicking the can down the road for the next 20 years, or even longer?”

Since the peak in 2011, gold and silver have been in a strong correction period and overall, prices haven’t benefited from all the trillions that have been injected into the markets since 2008. Total credit growth was approximately $80 trillion, climbing from $160 trillion to around $240 trillion in a mere 10 years.

The major central banks combined increased their balance sheet by buying government and institutional debt from $6 trillion to $21 trillion (FED, ECB, BOJ, PBoC), but none of it went into gold. However, even though these days we read and hear these numbers so often, it is still almost impossible for the true meaning of these sums to really sink in.

A trillion is hard to truly take in and understand; $80 trillion in debt is something already so far beyond our grasp that it might as well be $100, $200, or $300 trillion and it would almost make no conceptual difference. A good way to correct this dissonance is just think about the fact that 1 million seconds are 8 days, 1 billion seconds are 35 years and 1 trillion seconds translate into 32,000 years – bringing us back to the Stone Age.

Assets held by major central banks.

PBoC balance sheet

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

The Federal Punch Bowl Removal Agency

November 30, 2018

The Federal Punch Bowl Removal Agency

US Money Supply and Credit Growth Continue to Slow Down

Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.

Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.

We say this for two reasons: for one thing, the Fed is reactive and when it moves   from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.

In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).

Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October.  Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).

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

Does the Market Need a Heimlich Maneuver?

November 21, 2018

Does the Market Need a Heimlich Maneuver?

For all we know, the panic selling is Wall Street’s way of forcing the Fed’s hand: stop with the rates increases already or Mr. Market expires.

Markets everywhere are gagging on something: they’re sagging, crashing, imploding, blowing up, dropping and generally exhibiting signs of distress.

Does the market need a Heimlich Maneuver? Is there some way to expel whatever’s choking the market?

So what’s choking the market? There are a number of possibilities: somewhere near the top of most observers’ lists are: rising interest rates, weakening credit growth in China, the slowing of China’s economy, trade wars, European uncertainties, currently centered around Italy but by no means restricted to Italy, Japan’s slowing economy, an over-supply of oil, the rolling over of global real estate markets, geopolitical tensions and various technical signals that suggest the 10-year Bull market in just about everything financial is ending.

That’s a lot to gag on. Take a quick glance at the effective Fed funds rate chart below: the Fed funds rate is up, up and away, accelerating to the moon. No wonder Mr. Market is holding his throat and making panicky motions of distress.

Which is worse–too much oil or a scarcity of oil? Depends on who you ask.Suppliers are panicking with prices pushing $50/barrel while consumers were anxious when prices pushed $80/barrel.

Who can perform the Heimlich Maneuver on Mr. Market? The European Central Bank has been “doing whatever it takes” for 6+ years, and the central banks of Japan and China have had the pedal to the metal of credit expansion / asset purchases for years.

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

Real Canadian Mortgage Credit Growth Is Pointing To An Early 80s Style Meltdown

November 14, 2018

Real Canadian Mortgage Credit Growth Is Pointing To An Early 80s Style Meltdown

Canadian mortgage credit growth is falling, but how bad is it in real terms? People are comparing today’s low growth numbers to the mid-1990s. While there are some parallels, it more accurately resembles the early 1980s. Mortgage credit growth, when adjusted for inflation, is heading towards negative numbers. We haven’t actually experienced negative real growth in over 30 years.

Why Real Mortgage Credit Is Important

In order to more accurately observe trends, analysts will sometimes inflation adjust dollar amounts. Inflation is the decrease in power of money, caused by rising or falling prices in goods. Inflation tends to obfuscate the true trend over long periods of time. Did the currency go to s**t, or did we see a behavioral change? Was it low growth, or negative growth? To get a better picture, it’s sometimes (almost always) useful to adjust for inflation. When numbers are adjusted for inflation, they’re called real numbers.

Looking at real numbers allows us to observe the trend, without the distortion of currency value at the time. This is particularly important when looking at the early 1980s for Canada. During that period, inflation was totally out of control. Today we often think of that period as low growth, with a brief negative contraction. In actuality, it was a very large contraction in real terms.

Okay, no one thinks about the early 1980s rate of credit growth, but some of you should!

Canadian Mortgage Credit Growth Is Over 3%

Canadian mortgage credit growth is pretty weak when looking at unadjusted numbers. The annual pace of growth fell to 3.38% in September, down 38.76% from last year. This is the lowest pace since June 2001, and on target to head lower according to recent performance. It’s low growth, but at least it’s not negative is what most are thinking.

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

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

May 10, 2018

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

A Movie We Have Seen Before – Repatriation Effect?

There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.

The y/y growth rate of TMS-2 increased from 2.68% in February to 4.85% in March. The 12-month moving average nevertheless continued to decline and stands now at 4.1%.

The sole component of TMS-2 showing sizable growth in March was the US Treasury’s general account with the Fed. This is included in the money supply because, well, it is money. The Treasury department will spend it, therefore this is not money that can be considered to reside “outside” of the economy (such as  bank reserves).

We were wondering what was behind the spurt in the amount held in the general account. While there was a decline in the growth rate of US demand deposits, the slowdown in momentum did not really offset the surge in funds held by the Treasury.

This reminded us of a subject discussed by the Treasury Borrowing Advisory Committee (TBAC) in the second half of 2016 in the wake of the change in money market fund regulations. This led to a repatriation of money MM funds previously lent out in the euro-dollar market to European issuers of commercial paper (mainly European banks).

Readers may recall that there was a mysterious surge in the growth rate of the domestic US money supply (again, only visible in TMS 1 & 2) into November 2016, despite a lack of QE and no discernible positive momentum in the rate of change of inflationary bank lending growth.

 

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

IMF Stress Tests Find $280 Billion Black Hole In Chinese Banks’ Capital

December 8, 2017

IMF Stress Tests Find $280 Billion Black Hole In Chinese Banks’ Capital

The IMF released a new analysis on the instability stability of the Chinese financial system. Speaking to the media in an online briefing, some of the insights from Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department, hardly advanced our knowledge much.

Sahay noted that “Risks are large. Having said that, the authorities are really aware of risks and they are working proactively to contain these risks.”

That’s why the authorities are finally racing to contain the worst excesses of China’s insane credit boom following October’s Party Congress, for example overhauling the $15 trillion shadow banking and asset management sector. As we noted on the latter, the new measures don’t take effect until the end of June 2019, no doubt reflecting the enormity of the problems uncovered by Chinese regulators.

Sahay pointed to three main risks: credit growth, the complex and opaque financial system and implicit guarantees which “encourage excessive risk-taking” (think WMPs).

However, the IMF does a better job in explaining why a massive financial crisis in China is all but inevitable – the conflicting needs of social stability versus financial stability. According to Reuters.

But the near-term prioritisation of social stability seems to depend on credit growth to sustain financing to firms even when they are non-viable, it said. “The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability,” the report said. “Regulators should reinforce the primacy of financial stability over development objectives,” the fund said.

Too late.

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

Moving Closer to the Precipice

May 24, 2017

Moving Closer to the Precipice

Money Supply and Credit Growth Continue to Falter

The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since October of 2008, when the Fed had just begun to pump quite heavily.

US money supply and credit growth keep slowing.

The monthly y/y growth rate of M1 fell rather more sharply in April, from 8.76% to 7.07% (the most recent weekly annualized growth rate is lower at 6.80%). The composition of M1 is close to, but not quite equal to narrow money AMS (or TMS-1) – in particular, it does not contain the balances held at the Treasury’s general account with the Fed.

As a result, the growth rates of the two measures have drifted apart more sharply since 2016 than they usually do, as there were huge swings in the Treasury’s general account from mid 2016 to early 2017. These swings were very likely connected with money market funds moving large amounts of dollars from the euro-dollar market into treasury bills.

Reports by the Treasury Borrowing Advisory Committee suggest that the topic was on the agenda for a while. The surge in demand from MM funds may well have been accommodated by an increase in debt issuance, which the growing cash hoard mirrored.

Monthly y/y growth rates of TMS-2 and M1 – TMS-2 growth remains at the lowest level since October 2008 – click to enlarge.

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

Canada due for debt crisis and recession, economist argues

March 30, 2016

Canada due for debt crisis and recession, economist argues

Credit growth has to stop at some point, and then economy shrinks, argues Steve Keen

Finance Minister Bill Morneau has just delivered a budget that will put Canada deeper in debt. A Forbes columnist argues that puts Canada on track for a credit crisis.

Finance Minister Bill Morneau has just delivered a budget that will put Canada deeper in debt. A Forbes columnist argues that puts Canada on track for a credit crisis. (Sean Kilpatrick/Canadian Press)

An economist writing for Forbes magazine has tapped Canada as one of seven countries in the world that are due for a debt crisis and an ensuing recession in the next one to three years.

The trigger will be too much credit, with companies and individuals discouraged from borrowing because their debt is too high and banks then balk at lending, said Steve Keen, head of the school of economics, politics and history at Kingston University London.

A critic of conventional economics, he argues that economists failed to anticipate the global financial crisis of 2008 because they ignored the phenomenon of banks lending too much money.

That’s the situation Canada is approaching now, along with China, Australia, Sweden, Hong Kong, Korea and Norway, he writes in “The seven countries most vulnerable to a debt crisis.”

“Timing precisely when these countries will have their recessions is not possible, because it depends on when the private sector’s willingness to borrow from the banks — and the banking sector’s willingness to lend — stops,” he writes.

Government stimulus programs and programs to support first-time home buyers can postpone the pain, he argues, but credit cannot keep growing at such a rapid rate, unless GDP is growing more rapidly.

Soon to be ‘walking wounded’

“When it arrives, these countries — many of which appeared to avoid the worst of the crisis in 2008 — will join the world’s long list of walking wounded economies,” Keen says.

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

US Money Supply and Debt – Early Warning Signs Remain Operative

March 18, 2016

US Money Supply and Debt – Early Warning Signs Remain Operative 

Still Slowing Down

Year-end distortions have begun to slowly come out of the data, and while broad true US money supply growth remains fairly brisk, it has begun to slow again relative to January’s y/y growth rate, to 7.8% from 8.32%.

Many dollars in the format of a gift box

So far it remains in the sideways channel (indicated by the blue lines below) between approx. 7.4% and 8.6%, in which it has meandered since mid 2013. We believe the next break “below the shelf” is likely to be a significant event.

1-TMS-2-y-o-y-growthBroad true US money supply TMS-2, annual growth rate: still in the channel, but slowing again from January’s brief upward spike – click to enlarge.

Readers may recall that it was primarily the US treasury’s general account at the Fed which was responsible for the recent upward spike in the growth rate of TMS-2, combined with a  year-end surge in deposit money. We suspect the latter had to do with offshore dollars being moved to domestic accounts at year-end for various accounting-related reasons. This suspicion has been confirmed by the fact that the move has been largely reversed in the new year.

As an aside, total bank credit growth (total loans and leases, excl. mortgage debt) stands at 8.24% y/y as of the end of February, which is still well below the peak growth rates seen in previous boom periods (these were closer to 13%).

As can be seen below, the amount of money held in the general account has declined further in February as well, but it seems to us that this money has merely moved into other demand deposits, i.e., there has simply been a shift from one categorization to another:

2-US treasury general accountMoney held in the treasury’s general account at the Fed – the recent record spike has begun to reverse – click to enlarge.

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

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