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Square Minus Zero

Square Minus Zero

Gustave Courbet The village maidens  1852

I intentionally start writing this mere minutes away from Fed chair Jay Powell’s latest comments. Intentionally, because the importance ascribed to those comments only means we have gotten so far removed from what capitalism and free markets are supposed to be about, that it’s pathetic. The comments mean something for rich socialists, but nothing for the man in the street. Or, rather, they mean that the man in the street will get screwed worse for longer.

And it’s not just the Fed, all central banks have it and do it. They play around with rates and definitions and semantics until the cows can never come home again. And they have such levels of control over their respective societies and economies that the mere use of the word “markets” should result in loud and unending ridicule. There are no markets, because there is no price discovery, the Fed and ECB and BOJ got it all covered. Any downside risks, that is.

But it doesn’t, because the people who pretend they’re in those markets hang on central banks’ every word for their meal tickets. These are the same people we once knew as traders and investors, but who today function only as rich socialists sucking the Fed’s teats for ever more mother’s milk.

Our economic systems have been destroyed by our central bankers. Who pretend they’re saving them. And we all eat it up hook line and sinker. Because the rich bankers and their media have no reasons to counter Fed or ECB actions and word plays, and because anyone who’s not a rich banker or investor is kept by the media from understanding those reasons.

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

No, Rate Cuts Were Not Discussed: ECB Insiders Out Draghi as Fabricator & Schemer, and Talk to Reuters

No, Rate Cuts Were Not Discussed: ECB Insiders Out Draghi as Fabricator & Schemer, and Talk to Reuters

Draghi’s shenanigans get hilarious, months before his term ends.

So here’s ECB President Mario Draghi, whose term ends in October, and he’s at the ECB Forum in Portugal, and in a speech on Tuesday titled innocuously, “Twenty Years of the ECB’s monetary policy” – so this wasn’t a press conference after an ECB policy meeting or anything, but a speech on history at an ECB Forum – he suddenly threw out a whole bunch of stuff…

How, “in the absence of improvement” of inflation, “additional stimulus will be required,” in form of “further cuts in policy interest rates” and additional bond purchases, and how “in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability,” and that “all these options were raised and discussed at our last meeting.”

Whoa! Wait a minute, said the good folks who were part of the ECB’s June meeting. These options were not discussed, they told Reuters on Tuesday.

Draghi had ventured out there on his own – apparently trying to push his colleagues into a corner single-handedly as his last hurrah.

His vision laid out on Tuesday was quite a change from the June 6 post-meeting announcement, which didn’t mention anything about even discussing rate cuts. It said that the ECB expects its policy rates to “remain at their present levels at least through the first half of 2020,” before the ECB would begin to raise them, with the bias still on raising rates, not cutting rates. That was less than two weeks ago, and there had not been another ECB policy meeting since then.

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

Debt is the Hidden Issue in The European Elections

Debt is the Hidden Issue in The European Elections

The citizens of the European Union are called to vote this week for the European Parliament. It is not a real parliament, and it lacks prospects for becoming one, since all important decisions are taken by the unelected heads of the European Commission and the European Central Bank, dubbed “the worst-run Central Bank in the world”.

These elections capture however the general mood of exasperation with current policies. Conservative and extreme Right parties will rise, reflecting widespread scepticism as to the economic course of the EU and its lack of benefits for the common people. The mainstream Left unfortunately neglects these issues, and it will pay the price.

The conservatives generally blame the weak and scapegoat the refugees, the immigrants, the women, and the poor, while promising to save the middle class from the onslaught of big capital. They create false hopes of easy reform, and they never denounce the exploitation inherent in today’s system. History shows however that small owners manage to resist financial stranglehold only when they make common cause with workers and the poor, and they are not afraid to fight.

The economy looks ever more frail. In all, the Eurozone’s nominal GDP stagnates, shrinking 12% in its six largest economies in 2008-2017. The European Union remains indifferent to the peoples’ needs, while it caters for every whim of the corporations. Even so, Quantitative Easing and other crony capitalist schemes promoted by the ECB, such as the Private-Public Partnerships (PPPs) or the new Targeted Long-term Refinancing Operations (TLTRO-III) cannot save the day.

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

Bank of Japan & the Bond Crisis

Bank of Japan & the Bond Crisis 

BoJ Statement 4-24-2019

The Great Financial Unknown is now upon us. After 10 years of Quantitative Easing, the European Central Bank (ECB) in Europe owns 40% of the national debts in the EU and it can neither sell them nor stop buying without creating a Panic in Interest Rates. Likewise, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in Japan. The Bank of Japan confirmed it is ending free market determination of interest rates for the municipal level and that they “will not require any procedures such as auction as the method of determining lending conditions.”  today it may introduce a lending facility for its exchange-traded fund buying program, which would allow it to temporarily lend ETFs to market participants.

4. Introduction of Exchange-Traded Fund (ETF) Lending Facility
The Bank will consider the introduction of ETF Lending Facility, which will make it possible
to temporarily lend ETFs that the Bank holds to market participants.

The statement at the end of the announcement on the last page on its monetary policy has left traders in shock. This appears that the BoJ realizes that it now effectively has destroyed its bond market and realizes that there is not only the end of a free market, but there is a contagion of surrounding lack of liquidity.

We have never before in the history of human society ever witnessed such a major financial crisis. The BoJ makes it clear it will continue its policy of Quantitative Easing. It stated plainly:

The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with
Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is
necessary for maintaining that target in a stable manner.

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

China & Buying Gold – Why?

China & Buying Gold – Why? 

QUESTION: Mr. Armstrong; I believe you said at the WEC in 2017 that central banks will diversify and increase their gold reserves going into the currency crisis coming in 2021. China has continued to increase its gold reserves. You would please update on that development.

Thank you

PK

ANSWER: Central banks are in a very difficult position. The ECB has really put the entire world at risk. Draghi is now realizing that negative interest rates have seriously harmed the European economy and led to a major growing liquidity crisis in European banking. The euro is regarded as a time bomb for it is neither a national currency nor a stable unit of account. The failure to have consolidated the debts from the outset has simply left the euro vulnerable to separatist movements and sheer chaos.

This is what has been behind the strength in the dollar. Central banks outside Europe have been caught in this dollar vortex. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China also has a debt problem with many provinces and companies who borrowed in dollars. Here in 2019, there is $1.2 trillion in Chinese dollar borrowings that must be rolled over. There is a rising concern that this year there could be a major threat of a dollar funding crunch. The total debt issued in US dollars outside the USA approached $12 trillion at the end of 2018. That is about 50% of the US national debt. The forex risk is huge, no less the interest rate risk on top of that. The more crises we see in Europe, the greater the pressure on the dollar to rise regardless of the Fed trying to stop capital inflows by delaying raising rates.

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

ECB Inflationists are Crippling Europe

ECB Inflationists are Crippling Europe

Last week, the ECB announced the reintroduction of targeted long-term refinancing operations for the third time. TLTRO-III is scheduled to start from next September. The idea is to make yet more money available for the banks at attractive rates on condition they increase their lending to non-financial entities.

The policy is justified because the ECB sees growing signs the Eurozone economy is stalling, possibly badly. The weaker Eurozone economies are moving into outright recession, and Germany’s motor exports appear to have dramatically slowed, putting a constraint on her whole economy. 

The ECB’s reintroduction of TLTRO is an offer of yet more monetary and credit inflation, despite the evidence that unprecedented waves of monetary inflation in the last ten years have failed in all the objectives for which they were designed, except two: governments have continued to get the funds to spend without meaningful restraint, and insolvent banks have been preserved.

Only two months after its asset purchase programme officially ended, the inflationists are at it again. But one wonders why the ECB bothers to delay TLTRO-III until September. If it is such a good thing, why not introduce it now?

There is another explanation, and that is the ECB is intellectually adrift with no economic compass. We do not know how many economists and monetary specialists are employed in the Eurosystem, which includes the ECB and the regional central banks, but they are certainly not economists, otherwise they would understand money. They may be technicians, which is not the same thing. If they were economists, or more precisely properly schooled in the human sub-science of catallactics (the theory of exchange ratios and prices) they would more fully appreciate the consequences of monetary inflation.

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

Can the EU Survive the Next Financial Crisis?

Can the EU Survive the Next Financial Crisis?

Despite the ECB’s subsidy of the Eurozone’s banking system, it remains in a sleepwalking state similar to the non-financial, non-crony-capitalist zombified economy. Gone are the heady days of investment banking. There is now a legacy of derivatives and regulators’ fines. Technology has made the over-extended branch network, typical of a European retail bank, a costly white elephant. The market for emptying bank buildings in the towns and villages throughout Europe must be dire, a source of under-provisioned losses. On top of this, the ECB’s interest rate policy has led to lending margins becoming paper-thin. 

A negative deposit rate of 0.4% at the ECB has led to negative wholesale (Euribor) money market rates along the yield curve to at least 12 months. This has allowed French banks, for example, to fund Italian government bond positions, stripping out 33 basis points on a “riskless” one-year bond. It’s the peak of collapsed lending margins when even the hare-brained can see the risk is greater than the reward, whatever the regulator says. The entire yield curve is considerably lower than Italian risk implies it should be, given its existing debt obligations, with 10-year Italian government bonds yielding only 2.55%. That’s less than equivalent US Treasuries, the global risk-free standard.

Government bond yields have been and remain considerably reduced through the ECB’s interest rate suppression and its bond-buying programs. The expansion of Eurozone government debt since the Lehman crisis has been about 50% to €9.69 trillion. This expansion, representing €3.1 trillion, compares with the expansion of the Eurosystem’s own balance sheet of €2.8 trillion since 2009. In other words, the expansion of Eurozone government debt has been nearly matched by the ECB’s monetary creation.

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

A Week in the Life of a Topsy-Turvy Wildly Whirling World

A Week in the Life of a Topsy-Turvy Wildly Whirling World 

By Germán Torreblanca (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Let’s review this past devilishly whacky week to see if we can divine the way the world is turning and why the markets are churning. It was 2019’s worst week in stocks and, well, just about everything economic all across this crazily spinning planet. Volatility lifted its head back out of the water like Loch Ness’s monster while the citizenry took flight to treasury safe havens, bringing treasury yields down again to the five-year’s lowest point of the year. North Korea’s Rocketman returned to his rocketry, and the Chinese threw up their hands and ran as far from Mar-a-Lago as they could … or maybe they just threw up from too much chocolate cake.

The China syndrome is back

Most notably all over the world, bad news finally moved back to just being bad news, even as it arrived in cloudburst after cloudburst. Gold popped as money dropped and China flopped. Chinese exports fell 20%, outstripping the worst prediction four fold. The central bank of the billions of people of China mainlined major yuan jolts into the Xi dynasty’s tiring economy, and yet the Sino stock market fell off the mountain, taking a full panda bear plunge in one week. Apparently the nouveau riche Chinese ghost-city dwellers are wising up to all this easing and just realized talk of more of the same as far as the eye can see simply means the economy is finished more than it means refreshed hope waits on some distant horizon. 

Trump talked and China walked. The best boast Trump could biggly bluster from his tweet blaster was that the stock market would rise again ifChina would only deal; China chose, instead, to cancel Chairman Xi’s second coming at Mar-a-Lago. 

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

Super Mario Draghi’s Day of Reckoning Has Arrived

Super Mario Draghi’s Day of Reckoning Has Arrived

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” — MARIO DRAGHI JULY 26TH 2012

No quote better defines Mario Draghi’s seven-plus years as the President of the European Central Bank than that quote. Draghi has thrown literally everything at the deflationary spiral the Euro-zone is in to no avail.

What has been enough has been nothing more than a holding pattern. 

And after more than six years of the market believing Draghi’s words, after all of the alphabet soup programs — ESM, LTRO, TLTRO, OMB, ZOMG, BBQSAUCE — Draghi finally made chumps out of traders yesterday.

Draghi reversed himself after December’s overly hawkish statement in grand fashion but none dare call it capitulation. For years he has patched together a flawed euro papering over cracks with enough liquidity spackle to hide the deepest cracks. 

The Ponzi scheme needs to be maintained just a little while longer.

He’s not alone. In fact, all the major central banks have been working in concert since the day they broke the gold bull market back in September 2011, when the Swiss National Bank pegged the Franc to the euro which began the era of coordinated central bank policy.

And since 2013’s Taper Tantrum when then FOMC-Chair Ben Bernanke  
timidly announced a future without QE the markets have consistently tore at their resolve to normalize monetary policy.

Because when you paper over reality you don’t fix the underlying problems. The losses are still there, hidden in plain sight, held at mark-to-model prices, on central bank balance sheets. 

Ben retired and Janet took over. She held the fort for nearly her entire term, refusing to raise rates while Draghi sent rates negative alongside Japan’s Kuroda. 

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

ECB Warns Slowdown Isn’t Temporary: Draghi Announces Bold Stimulus Plan

ECB Warns Slowdown Isn’t Temporary: Draghi Announces Bold Stimulus Plan

Mario Draghi surprised even the doves with his bold new stimulus plan. It won’t help one iota.

The Wall Street Journal reports ECB Reverses Course With New Stimulus Measures.

The European Central Bank made a major policy reversal Thursday, unveiling plans for fresh measures to stimulate the eurozone’s faltering economy less than three months after phasing out a €2.6 trillion ($2.9 trillion) bond-buying program, making it the first rich-country central bank to ease policy in response to the global slowdown.

The ECB said it would hold interest rates at their current levels at least through the end of this year—months longer than previously signaled—and announced plans for a fresh batch of cheap long-term loans for banks. The first loans will be launched in September, each with a maturity of two years.

Despite the new stimulus, ECB President Mario Draghi said that the risks to the economy remain prevalent, though the likelihood of a recession is very low. Thursday’s decision was unanimous, he said at a press conference. “Given the complexity of the package, I think this is a very positive sign,” he added. The ECB also slashed is forecast for gross domestic product growth this year to 1.1% from 1.7% in December. It lowered its inflation projection to 1.2% from 1.6%, further below the ECB’s target of just under 2%.

Still, the ECB refrained from more extreme measures such as restarting its bond-buying program or cutting its deposit rate further from minus 0.4%. These options weren’t discussed, Mr. Draghi said. “In a dark room, you move with tiny steps,” he said.

Bold New Plans

Please consider ECB’s Draghi Surprised Colleagues with Bold Stimulus Plans.

European Central Bank President Mario Draghi caught even dovish rate-setters off guard by pushing on Thursday for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said.

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

Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal.

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

Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy.

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

Central Bank Balance Sheet Reductions–Will Anyone Follow the Fed?

CENTRAL BANK BALANCE SHEET REDUCTIONS – WILL ANYONE FOLLOW THE FED?

  • The next wave of QE will be different, credit spreads will be controlled
  • The Federal Reserve may continue to tighten but few other CB’s can follow
  • ECB balance sheet reduction might occur if a crisis does not arrive first
  • Interest rates are likely to remain structurally lower than before 2008

The Federal Reserve’s response to the great financial recession of 2008/2009 was swift by comparison with that of the ECB; the BoJ was reticent, too, due to its already extended balance sheet. Now that the other developed economy central banks have fallen into line, the question which dominates markets is, will other central banks have room to reverse QE?

Last month saw the publication of a working paper from the BIS – Risk endogeneity at the lender/investor-of-last-resort – in which the authors investigate the effect of ECB liquidity provision, during the Euro crisis of 2010/2012. They also speculate about the challenge balance sheet reduction poses to systemic risk. Here is an extract from the non-technical summary (the emphasis is mine): –

The Eurosystem’s actions as a large-scale lender- and investor-of-last-resort during the euro area sovereign debt crisis had a first-order impact on the size, composition, and, ultimately, the credit riskiness of its balance sheet. At the time, its policies raised concerns about the central bank taking excessive risks. Particular concern emerged about the materialization of credit risk and its effect on the central bank’s reputation, credibility, independence, and ultimately its ability to steer inflation towards its target of close to but below 2% over the medium term.

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

Blain: It Feels Like A Liquidity Storm Is Coming Soon

Blain: It Feels Like A Liquidity Storm Is Coming Soon

I note with some delight Bernie Sanders plans to stand for US President. One of my US chums sent me the story of the Half-a-Bernie sign propped up against a wall. Someone had cut it neatly in two and left the wooden handle affixed to the remaining half. Attached was a note: “Dear Bernie; you had a sign and I didn’t, so I took half. I’m sure you understand.” 

I did feel something of a market judder yesterday – just a moment where it felt like all the negativity was on the verge of swamping markets. Whether is the cumulative effect of US rate path expectations (Fed today), China Trade Wars, Trump vs Europe, (ECB tomorrow), Brexit, and all the rest.. or the UK mid-term holidays, the whole market feels thin and rudderless.

At least Wal-Mart surprised to the upside! One of my top stock technical commentators is my old buddy Steve Previs of Mint who calls it “complacent.” That’s never a good thing. His charts are telling him to look for a “corrective C wave” but for now he’s patient as “FOMO” (Fear of Missing Out) continues to drive the current trend.

I am fortunate enough to work with some very bright folk here at Shard. Yesterday we were shooting the breeze on the current market uncertainties, threats and fears. We came to the conclusion we’ll know the moment we hit the Reefs of Crisis when we hear the crashing wail of market liquidity vanishing. What’s that sound – it’s the Macro Liquidity Storm! Coming to a market near you. Maybe Very Soon!

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

How the Euro Enabled Europe’s Debt Bubbles

How the Euro Enabled Europe’s Debt Bubbles

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated, it is being blamed for many — if not all — of the Eurozone’s ills. 

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

The Birth of the Euro

To swap a number of existing currencies for a wholly new currency requires the users to accept that the purchasing powers of the old will be transferred to the new. This was not going to be a certainty, and the greatest reservations would come from the people of Germany. Germans saved, and therefore risked the security of their deposits in a new money and monetary system. They were reassured by the presence of the hard-money men in the Bundesbank, who had a mission to protect the mark’s characteristics against the weaknesses that would almost certainly be transferred into the new euro from more inflationary currencies.

These anxieties were assuaged to a degree by establishing the ECB in Frankfurt, close to the watchful eye of the Bundesbank. The other nations were sold the project as bringing greater monetary stability than offered by their individual currencies and the reduction of cross-border transaction costs. Borrowers in formally inflationary currencies also relished the prospect of lower interest rates.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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Olduvai II: Exodus
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