Home » Posts tagged 'fed'

Tag Archives: fed

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

James Grant, editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns about the growing herd of corporate «zombies» and other fatal market distortions caused by modern monetary policy.

Once again, the expedition to go back to normal has been postponed. After the big market scare at the end of 2018, central banks have abolished their plans to tighten interest rates further. Wall Street loves it. The first quarter has been the best one for risk assets in a decade, and after Lyft’s successful going public, a record year for IPOs seems to be in sight. Jim Grant observes the madding crowd from a sober distance. «Interest rates are the traffic signals of a market economy. Turn them all green, and errors and pileups abound», says the sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer. He states that a decade after the financial crisis, many companies are so heavily addicted to easy monetary policies that they wouldn’t be able to survive on their own. Consequentially, the proficient value seeker has a hard time to find attractive investments in today’s markets. Where he spots rare opportunities, he tells «The Market» in this extended interview.


Mr. Grant, once again, the Federal Reserve is giving investors the green light. US equities are off to their best start since 1998. What’s your take on the current state of the global financial markets?
Stocks are up, bond yields are down and economists are speaking of full employment: Everything seems perfect and improving. But I remain a non-believer in these modern monetary methods. If it were this easy, mankind would have solved the economic problems a long time ago.

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

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

A few years ago, shortly after the 2008 subprime lending disaster, the Fed sent a public relations team around the country to conduct supposedly “educational sessions” about how the Fed works and the wonderful things it does. The public was invited, and there was a question and answer session at the end of the presentation. One such session was held in Des Moines, Iowa. At the time I was teaching a course in Austrian economics at the University of Iowa, so I lusted at the prospect of hearing complete nonsense and having a shot at asking a question. I was not disappointed.

The educational part of the session lasted about an hour, and it became clear to me that the panel of four knew almost nothing about monetary theory. They may even have been hired especially for this grand tour, because all were relatively young, well scrubbed, and very personable–let’s face it, not your typical Fed monetary policy wonks or bank examiners! The panelists discussed only one of the Fed’s two remits–its remit to promote the economic advancement of the nation. Its other remit is to safeguard the monetary system. However, the panelists did touched upon the Fed’s control of interest rates and ensuring that money continued to flow to housing and other high profile areas of the economy.

Finally, at the end of the presentation, those with questions were asked to form a queue and advance one at a time to a microphone. I was last in a line of about a dozen. Here’s my recollection of what followed:

Me: You say that you (the Fed) have the power to increase the money supply. Is that right?

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

Unsolicited Advice to Fed Chair Powell

Unsolicited Advice to Fed Chair Powell

American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].

US non-financial corporate debt takes flight – the post 2008 crisis trajectory is breath-taking, to say the least [PT]

What is the significance of $9.1 trillion?  And what are its looming repercussions?  Here, for your edification, we’ll take a moment to properly characterize this number.

For one, non-financial corporate debt of $9.1 trillion is nearly half of real U.S. gross domestic product.  Hence, the realization of profits by private businesses has required a substantial accumulation of debt.  And this debt, like much of today’s outstanding debt, is shaping up to be reckoned with at the worst possible time.

Remember, when corporate debt is increasing faster than profits, it is like a plucked tomato sitting on a store shelf.  It goes bad with little notice.  Frank Holmes, by way of Forbes, offers the grim particulars:

This by now slightly dated chart shows the upcoming wall of maturities in junk bonds and leveraged loans as of mid 2017 – n.b., this doesn’t even include BBB-rated liabilities, which represent the by far biggest potential concern (“Titans’ debt” refers to the debt maturity profiles of the companies carrying the largest securitized debt in absolute terms, such as e.g. AT&T). [PT]

But that is not all…

Compounding Dishonesty

Whereas $9.1 trillion of non-financial corporate debt is nearly half of real U.S. GDP.  And whereas this $9.1 trillion of non-financial corporate debt is the junkiest corporate debt ever seen.  This $9.1 trillion of non-financial corporate debt is nearly double what it was just moments before the financial system exploded a decade ago.

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

The Bull(y) Rally

The Bull(y) Rally

Something unnatural is going on.

“A bully is always a coward.”~ Thomas Chandler Haliburton

The current market rally is like a playground bully; shoving to the ground anyone in its path.

But like all bullies, the braggadocio belies an underlying cowardice.

Those in charge of the status quo must be absolutely terrified to resort to the unnatural lengths they are going to right now to keep the current rally intact.

Unnatural Acts

In reaction to the brief market correction that occurred at the end of 2018, emergency measures were enacted to get stocks moving higher again.

Notably among the scramble to rescue the markets, the Fed pulled a very public and embarrassing policy U-turn, abandoning its short-lived program of planned interest rates hikes designed to start ‘normalizing’ its balance sheet after a decade of flooding the economy with stimulus. Quantitative Tightening, we hardly knew ya …(sniff)

In response to the efforts of the Plunge Protection Team, the Fed, its siblings in the global central banking cartel, the cheerleading media, and the Trump administration, the markets roared back strongly at the start of 2019. 

So strongly, in fact, that 2019 has seen the best start to the year for stocks EVER IN HISTORY.

At this point, the major indices have recouped all of their losses from their December lows and are now back touching their all-time highs.

So…mission accomplished, right? Surely the financial swat team deployed at beginning of the year can stand down and go celebrate over a few well-deserved brewskis?

Not if you’re watching closely. In fact, the efforts to prop up stocks continue to become more frequent, more overt, and more extreme.

Daily Fed Jawboning

As mentioned, the Fed has executed a complete 180-degree policy turnaround in light of the market’s feinting swoon last year. Suddenly, it can’t appear dovish enough:

Fed comments over past 6 months

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

Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented

Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented

In the Hoisington First Quarter Review, Lacy Hunt blasts MMT as “self-perpetuating” inflation.

Please consider the Hoisington Investment Quarterly Outlook for the first quarter of 2019.

MMT Leads to Hyperinflation

Under existing statutes, Fed liabilities, which they can create without limits, are not permitted to be used to pay U.S. government expenditures. As such, the Fed’s liabilities are not legal tender. They can only purchase a limited class of assets, such as U.S. Treasury and federal agency securities, from the banks, who in turn hold the proceeds from this sale in a reserve account at one of the Federal Reserve banks. There is currently, however, a real live proposal to make the Fed’s liabilities legal tender so that the Fed can directly fund the expenditures of the federal government – this is MMT – and it would require a change in law, i.e. a rewrite of the Federal Reserve Act.

This is not a theoretical exercise. Harvard Professor Kenneth Rogoff, writing in ProjectSyndicate.org (March 4, 2019), states “A number of leading U.S. progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.” How would MMT be implemented and what would be the economic implications? The process would be something like this: The Treasury would issue zero maturity and zero interest rate liabilities to the Fed, who in turn, would increase the Treasury’s balances at the Federal Reserve Banks. The Treasury, in turn, could spend these deposits directly to pay for programs, personnel, etc. Thus, the Fed, which is part of the government, would be funding its parent with a worthless IOU.

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

How Asset Inflation Will End–This Time

HOW ASSET INFLATION WILL END — THIS TIME

Life after death for asset inflation: this is what happens when “speculative fever” remains high even after monetary inflation has paused. This may well have been the situation in global markets during 2019 so far. But history and principle suggest that life after death in this monetary sense is short.

Readers may find it odd to be talking about a pause in monetary inflation at a time when the Fed has cancelled programmed rate rises and the ECB has embarked (March 7) on yet further “radical” policy moves. Moreover, the “core” US inflation rate (as measured by PCE) is still at virtually 2 per cent year-on-year.

Yet we know from past cycles that in the early stages of recession many market participants — and, crucially, central banks — mistakenly view a stall in rate rises or actual rate cuts as stimulatory. Later with the benefit of hindsight these policy moves turn out to be insufficient to prevent a tightening of monetary conditions already in process but unrecognized.

Even had monetary conditions been easing rather than tightening, it is highly dubious whether this difference would have meant the powerful momentum behind the business cycle moving into its recession phase would have lessened substantially.

(As a footnote here: under a gold standard regime there is no claim that monetary conditions will evolve perfectly in line with contracyclical fine-tuning. Both in principle and fact monetary conditions could tighten there at first as recessionary forces gathered. Under sound money, however, contracyclical forces would emerge strongly into the recession as directed by the invisible hand.)

Under a fiat money regime, monetary tightening can occur in the transition of a business cycle into recession, despite the opposite intention of the central bank policy-makers, due to endogenous factors such as an undetected increase in demand for money or a fall in the underlying “money multipliers.”

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

The Fed’s Body Count

The Fed’s Body Count

The problem with the war (Vietnam), as it often is, are the metrics. It is a situation where if you can’t count what’s important, you make what you can count important. So, in this particular case what you could count was dead enemy bodies.” – James Willbanks, Army Advisor, General of the Army George C. Marshall Chair of Military History for the Command and General Staff College

If body count is the measure of success, then there’s a tendency to count every enemy body as a soldier. There’s a tendency to want to pile up dead bodies and perhaps to use less discriminate firepower than you otherwise might in order to achieve the result that you’re charged with trying to obtain.” – Lieutenant Colonel Robert Gard, Army and military assistant to Secretary of Defense Robert McNamara

Verbal Jenga

In recent press conferences, speeches, and testimony to Congress, Federal Reserve (Fed) Chairman Jerome Powell emphasized the Fed’s plan to be “patient” regarding further adjustments to interest rates. He also implied it is likely the Fed’s balance sheet reductions (QT) will be halted by the end of the year. 

The support for this sudden shift in policy is obtuse considering his continuing glowing reports about the U.S. economy. For example, the labor market is “strong with the unemployment rate near historic lows and with strong wage gains. Inflation remains near our 2% goal. We continue to expect the American economy will grow at a solid pace in 2019…” The caveats, according to Powell, are that “growth has slowed in some major foreign economies” and “there is elevated uncertainty around several unresolved government policy issues including Brexit, ongoing trade negotiations and the effect from the partial government shutdown.” 

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

Fear of Inflation & Sterilization

Fear of Inflation & Sterilization 

QUESTION: Mr. Armstrong; you were friends with Milton Friedman. Do you agree with his view that the Great Depression was caused in part by the Fed refusing to expand the money supply? Isn’t Quantitative Easing expanding the money supply yet it too has failed to create inflation. Would you comment on this paradox?

Thank you for your thoughtful insight.

P

ANSWER: Yes, this certainly appears to be a paradox. This results from the outdated theory of economics which completely fails to grasp the full scope of the economy and how it functions. This same mistake is leading many down the path of MMT (Modern Monetary Theory) which assumes we can just print without end and Quantitative Easing proves there will be no inflation. They are ignoring the clash between fiscal policy carried out by the government and monetary policy in the hand of the central banks. This is a major confrontation where central banks have expanded the money supply to “stimulate” inflation. Governments are obsessed with enforcing laws against tax evasion and it is destroying the world economy and creating massive deflation.

In 1920, Britain legislated a return to the gold standard at the prewar parity to take effect at the end of a five-year period. That took place in 1925. Britain based its decision in part on the assumption that gold flows to the United States would raise price levels in Britain and limit the domestic deflation needed to reestablish the pre-war parity. In fact, the United States sterilized gold inflows to prevent a rise in domestic prices. In the 1920s, the Federal Reserve held almost twice the amount of gold required to back its note issue. Britain then had to deflate to return to gold at the pre-war parity. Milton saw that the Fed failed to monetize the gold inflows, fearing it would lead to inflation.

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

What’s Cheap? Gold and Silver – John Rubino

What’s Cheap? Gold and Silver – John Rubino

Unemployment is near 3% and President Trump is calling for rate cuts and quantitative easing. Is the economy doing well or getting ready to tank? Financial writer John Rubino says, “We went from being at all-time highs to down 20% in sort of a flash crash in two months towards the end of last year. That told the Fed and the other central banks that they can never tighten again. This is it for this cycle and for the entire remaining time of today’s financial system for higher interest rates. They abruptly announced to never mind about those four rate hikes that were going to happen in 2019. We (the Fed) are not going to do anything. If we do anything, it will be in the opposite direction and cut interest rates and a new round of QE, etcetera and etcetera. The stock market went right back up to record levels. . . . The end part of this story is how good all this is for gold. . . . The next thing from the Fed will be a rate cut, and it will increase and not decrease its balance sheet. . . . We are going to go preemptively to monetary easing, and that’s really new. This is very, very new. You normally don’t do this. You wait until you see a bear market and a slowdown in the economy that gets people laid off before you start aggressively easing. Apparently, we are going to do that stuff before that stuff starts happening. Who knows what the impact of that will be? If it works the way they want, more people will get hired, wages will pick up and we’ll have inflation in the 4% or 5% range before you know it.”

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

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

Jerome Powell has denounced MMT has “just wrong”, but many Wall Street luminaries have surprisingly communicated an openness to the proposal. Most recently Ray Dalio proposed a marriage of monetary and fiscal policy that sounded suspiciously similar to MMT. Bill Gross, once a vocal critic of the Federal Reserve’s stimulus program, told Bloomberg shortly after he retired from managing outside money that higher taxes and the advent of MMT might be ‘necessary evils’  to combat the widening economic gap between the rich and the poor.

MMT has been perhaps the most widely discussed topic in the realm of economics since Alexandria Ocasio-Cortez proposed it as a possible mechanism for financing her ‘revolutionary’ Green New Deal. But this past week, President Trump’s exhortation that the Federal Reserve usher in QE4 by cutting interest rates stoked a frenzy of speculation that the world’s most powerful central bank might be closer to outright debt monetization – aka ‘helicopter money’ – than mainstream economists had realized. Of course, debt monetization is a central plank of the MMT program.

But just days before Trump made his now-infamous QE4 comment, Gluskin Sheff chief economist David Rosenberg offered a prediction during an interview with MacroVoice’s Erik Townsend that, in retrospect, seems surprisingly prescient. 

David Rosenberg

David Rosenberg

During a discussion about how the Fed ‘pause’ impacted Sheff’s monetary policy outlook, Rosenberg, a frequent guest on CNBC, declared that, instead of giving QE another try, the central bank would opt for something even more radical by embracing MMT. And not without good reason. Just because the Fed is ostensibly insulated from political considerations, doesn’t mean it’s not obligated to protect its credibility.

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

Here’s why the Federal Reserve rejected the safest bank in America

Here’s why the Federal Reserve rejected the safest bank in America

In the spring of 1692, an energetic young Scotsman named John Campbell started a new business in central London.

Campbell was a goldsmith, and his business sold jewelry and other crafted metals like plates and silverware.

But Campbell’s new company had another business line as well: banking. And the company he started eventually became Coutts & Co., a bank that still exists today in the UK.

Since the dawn of the Bronze Age thousands of years ago, metal workers (‘smiths’, from the word ‘smite’– to strike) were prominent, highly valued members of society.

Smiths were instrumental in construction, architecture, science, warfare, and art.

And they also provided some of the world’s earliest banking services.

For most of human history, money was metal– primarily gold and silver. And people knew that storing large quantities of gold and silver in their homes made their wealth prone to theft.

Goldsmiths already had tight security in their shops due to their significant inventories of precious metals.

So it was commonplace for other residents in town to store their own gold with the local smith, piggybacking on his security, in exchange for a nominal fee.

This was banking in its most traditional form: customer paid a fee to store wealth at a goldsmith’s shop.

By the time John Campbell set up his bank in the late 1600s, however, times had changed. Goldsmith-bankers had begun making loans… keeping only a small portion of their customers’ gold on reserve in the vault, and loaning out the rest at interest.

This is essentially the same model of banking that still exists today.

Giant institutions control trillions of dollars that we depositors dutifully provide to them.

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

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

There’s is one big reason why the U.S. will go into another recession eventually, but it’s the same reason you will have some time to prepare for it as well. Making money more expensive to borrow will lead to a recession, but the Federal Reserve isn’t raising rates.

That’s great news, but far too many Americans have already overspent and are in massive amounts of debts. Student loan debt is dragging down the economy and will eventually come to a head, regardless of the interest rates arbitrarily chosen by the central bankers at the Fed.

But according to Market Watch, the refusal to make money more expensive to borrow also buys the United States time before the next recession. Ed Yardeni opined that the inverted yield curve drove the Fed’s decision to keep interest rates where they are at as opposed to raising them.

In my recent book, Predicting the Markets, I wrote: “The Yield Curve Model is based on investors’ expectations of how the Fed will respond to inflation. It is more practical for predicting interest rates than is the Inflation Premium Model. It makes sense that the federal funds rate depends mostly on the Fed’s inflation outlook, and that all the other yields to the right of this rate on the yield curve are determined by investors’ expectations for the Fed policy cycle.” –Ed Yardeni, Market Watch

Yardeni suggested that after studying the relationship between the yield curve and the monetary, credit, and business cycles, the conclusion is that credit crunches, not inverted yield curve, and not aging economic expansions that cause recessions. The inverted yield curve also has a great track record when it comes to predicting recessions. 

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

Zombified Economy: What Will the Next Recession Look Like?

Zombified Economy: What Will the Next Recession Look Like?

The short answer is nothing like the last.

If you search for “next recession” numerous ideas pop up. Many believe there will not be a recession soon.

Condition Comparison

Conditions are radically different than in 2007 and 2000.

The Fed re-blew a housing price bubble but the number of jobs tied to construction, sales, CDOs, agents and even the impact on banks is a shell of what happened then.

Technology is bubbly, but not like 2000. This is how I see things.

  1. We will not have bank failures in the US.
  2. There will be major bank failures or bail-ins in Europe.
  3. Housing will not have a major role but will strengthen the recession.
  4. Millennials simply cannot afford houses so housing will not lead a Fed attempt at a recovery even if interest rates plunge.
  5. Low interest rates will keep zombie companies alive for a while longer .
  6. Proliferation of retail stores, Walmart, Target, everything requires minimum staffing levels no matter how poor sales become.
  7. Unemployment will not rise much like last time. Instead, expect to see hours cut.Also expect for many of those currently working two jobs to lose one of them.
  8. Retail sales will plunge with the reduction in work.
  9. The impact of the above is very weak profits but not massive labor disruption
  10. Stocks will get clobbered as earnings take a huge hit.
  11. Junk bonds also get clobbered on fears of rolling over debt.
  12. This malaise can potentially last for years.

Zombified Economy

Japan is in a state of zombification and Europe is on the verge.

The US may not and likely will not go through Japanese-like extremes just yet. However, the demography setup is poor, the student debt problem is a huge overhang, boomers unprepared for retirement is a huge overhang, and pensions are a huge overhang.

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

Is Turkey “City Zero” in Global Contagion

Is Turkey “City Zero” in Global Contagion

Last year Turkey’s lira crisis quickly morphed into a Euro-zone crisis as Italian bond yields blew higher and the euro quickly reversed off a major Q1 high near $1.25.

It nearly sparked a global emerging market meltdown and subsequent melt-up in the dollar.

This week President Erdogan of Turkey banned international short-selling of the Turkish lira in response to the Federal Reserve’s complete reversal of monetary policy from its last rate hike in December.

The markets responded to the Fed with a swift and deepening of the U.S. yield curve inversion. Dollar illiquidity is unfolding right in front of our eyes. 

Turkish credit spreads, CDS rates and Turkey’s foreign exchange reserves all put under massive pressure. Unprecedented moves in were seen as the need for dollars has seized up the short end of the U.S. paper market.

Martin Armstrong talked about this yesterday:

The government [Turkey] simply trapped investors and refuses to allow transactions out of the Turkish lira. Turkey’s stand-off with investors has unnerved traders globally, pushing the world ever closer to a major FINANCIAL PANIC come this May 2019.
There is a major liquidity crisis brewing that could pop in May 2019. 

Martin’s timing models all point to May as a major turning point. And the most obvious thing occurring in May is the European Parliamentary elections which should see Euroskeptics take between 30% and 35% of seats, depending on whether Britain stands for EU elections or not.

That depends on Parliament and the EU agreeing to a longer extension of Brexit in the next two weeks.

Parliament has created “Schroedinger’s Brexit,” neither alive nor dead but definitely bottled up in a box no one dares open. And they want to keep it that way for as long as possible. Their hope is outlasting Leavers into accepting staying in the gods-forsaken fiscal and political black hole that is the European Union.

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

The Federal Reserve’s Controlled Demolition Of The Economy Is Almost Complete

The Federal Reserve is an often misunderstood entity, not only in the mainstream, but also in alternative economic circles. There is this ever pervasive fantasy on both sides of the divide that the central bank actually “cares” about forever protecting the US economy, or at least propping up the US economy in an endless game of “kick the can”. While this might be true at times, it is not true ALL the time. Things change, agendas change, and sometimes the Fed’s goal is not to maintain the economy, but to destroy it.

The delusion that the Fed is seeking to kick the can is highly present today after the latest Fed meeting in which the central bank indicated there would be a pause in interest rate hikes in 2019. As I have noted in numerous articles over the past year, the mainstream media and the Fed have made interest rates the focus of every economic discussion, and I believe this was quite deliberate. In the meantime, the Fed balance sheet and its strange relationship to the stock market bubble is mostly ignored.

The word “capitulation” is getting thrown around quite haphazardly in reference to the Fed’s tightening policy. And yet, even now after all the pundits have declared the Fed “in retreat” or “trapped in a Catch-22”, the Fed continues to tighten, and is set to cut balance sheet assets straight through until the end of September. Perhaps my definition of capitulation is different from some people’s.

One would think that if the Fed was in retreat in terms of tightening, that they would actually STOP tightening. This has not happened. Also, one might also expect that if the Fed is going full “dovish” that they would have cut interest rates in March instead of holding them steady at their neutral rate of inflation.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase