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Olduvai III: Catacylsm
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Fourth Turning Accelerating Towards Climax


“At some point, America’s short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed.” – Strauss & Howe – The Fourth Turning

Economists Predict Great Depression II for US Economy: Fast or V ...

I’ve been writing articles about the Fourth Turning for over a decade and nothing has happened since its tumultuous onset in 2008, with the global financial collapse, created by the Federal Reserve and their Wall Street co-conspirator owners, that has not followed along the path described by Strauss and Howe in their 1997 book – The Fourth Turning.

Like molten lava bursting forth from a long dormant (80 years) volcano, the core elements of this Fourth Turning continue to flow along channels of distress, long ago built by bad decisions, corrupt politicians and the greed of bankers. The molten ingredients of this Crisis have been the central drivers since 2008 and this second major eruption is flowing along the same route. The core elements are debt, civic decay, and global disorder, just as Strauss & Howe anticipated over two decades ago.

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

Weekly Commentary: When Money Died

Weekly Commentary: When Money Died

Sitting at the dinner table, our eleven-year old son inquired: “If a big meteor was about to hit the earth, how much money would the Fed print?” I complimented his sense of humor. Yet it was a sad testament to the historic monetary fiasco that will haunt his generation.

Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by year-end.

M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.  

There was a sordid process – rather than a specific date – for When Money Died. But it’s dead and buried. There are a few things that should remain sacrosanct. Money is absolutely one of them. Money is special. Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy. Society trusts Money – and with that trust comes great responsibility and risk.  

Analysis I read some years back on the Gold Standard resonates even more strongly today: Limiting the capacity for inflating its supply, the structure of backing Money with the precious metal worked to promote monetary and economic stability.

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

The Fed’s Balance Sheet: The Other Exponential Curve

The Fed’s Balance Sheet: The Other Exponential Curve

As the threat of COVID-19 keeps millions of Americans locked down at home, businesses and financial markets are suffering.

For example, a survey of small-business owners found that 51% did not believe they could survive the pandemic for longer than three months. At the same time, the S&P 500 posted its worst first-quarter on record.

In response to this havoc, the U.S. Federal Reserve (the Fed) is taking unprecedented steps to try and stabilize the economy. This includes, as Visual Capitalist’s Marcu Lu details below, a return to quantitative easing (QE), a controversial policy which involves adding more money into the banking system. To help us understand the implications of these actions, today’s chart illustrates the swelling balance sheet of the Fed.

How Does Quantitative Easing Work?

Expansionary monetary policies are used by central banks to foster economic growth by increasing the money supply and lowering interest rates. These mechanisms will, in theory, stimulate business investment as well as consumer spending.

However, in the current low interest-rate environment, the effectiveness of such policies is diminished. When short-term rates are already so close to zero, reducing them further will have little impact. To overcome this dilemma in 2008, central banks began experimenting with the unconventional monetary policy of QE to inject new money into the system by purchasing massive quantities of longer-term assets such as Treasury bonds.

These purchases are intended to increase the money supply while decreasing the supply of the longer-term assets. In theory, this should put upward pressure on these assets’ prices (due to less supply) and decrease their yield (interest rates have an inverse relationship with bond prices).

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

#MacroView: Is The “Debt Chasm” Too Big For The Fed To Fill?

#MacroView: Is The “Debt Chasm” Too Big For The Fed To Fill?

Over the last month, the Federal Reserve, and the Government, have unleashed a torrent of liquidity into the U.S. markets to offset a credit crisis of historic proportions. Here is a list of programs already implemented which have already surpassed all programs during the “Financial Crisis.”

  • March 6th – $8.3 billion “emergency spending” package.
  • March 12th – Federal Reserve supplies $1.5 trillion in liquidity.
  • March 13th – President Trump pledges to reprieve student loan interest payments
  • March 13th – President Trump declares a “National Emergency” freeing up $50 billion in funds.
  • March 15th – Federal Reserve cuts rates to zero and launches $700 billion in “Q.E.”
  • March 17th – Fed launches the Primary Dealer Credit Facility to buy corporate bonds.
  • March 18th – Fed creates the Money Market Mutual Fund Liquidity Facility
  • March 18th – President Trump signs “coronavirus” relief plan to expand paid leave ($100 billion)
  • March 20th – President Trump invokes the Defense Production Act.
  • March 23rd – Fed pledges “Unlimited QE” of Treasury, Mortgage, and Corporate Bonds.
  • March 23rd – Fed launches two Corporate Credit Facilities:
    • A Primary Market Facility (Issuance of new 4-year bonds for businesses.)
    • A Secondary Market Facility (Purchase of corporate bonds and corporate bond ETF’s)
  • March 23rd – Fed launches the Term Asset-Backed Security Loan Facility (Small Business Loans)
  • April 9th – Fed launches several new programs:
    • The Paycheck Protection Program Loan Facility (Purchase of $350 billion in SBA Loans)
    • Main Street Business Lending Program ($600 billion in additional Small Business Loans)
    • The Municipal Liquidity Facility (Purchase of $500 billion in Municipal Bonds.)
    • Expands funding for PMCCF, SMCCF and TALF up to $850 billion.

Here is the Fed’s balance sheet through this past Wednesday (estimated at time of writing)

It is currently expected that over the course of the next several quarters, the Fed’s balance sheet will grow to $10 Trillion in total. Such would be a $6 Trillion expansion from the previous levels.

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

A Major Bank Admits QE4 Has Started, And That Stocks Are Rising Because Of The Fed’s Soaring Balance Sheet

A Major Bank Admits QE4 Has Started, And That Stocks Are Rising Because Of The Fed’s Soaring Balance Sheet

There was a period of about two months when some of the more confused, Fed sycophantic elements, would parrot everything Powell would say regarding the recently launched $60 billion in monthly purchases of T-Bills, and which according to this rather vocal, if always wrong, subsegment of financial experts, did not constitute QE. Perhaps one can’t really blame them: after all, unable to think for themselves, they merely repeated what Powell said, namely that  “growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy. In no sense, is this QE.

As it turned out, it was QE from the perspective of the market, which saw the Fed boosting its balance sheet by $60BN per month, and together with another $20BN or so in TSY and MBS maturity reinvestments, as well as tens of billions in overnight and term repos, and soared roughly around the time the Fed announced “not QE.”

And so, as the Fed’s balance sheet exploded by over $400 billion in under four months, a rate of balance sheet expansion that surpassed QE1, QE2 and Qe3…

… stocks blasted off higher roughly at the same time as the Fed’s QE returned, and are now up every single week since the start of the Fed’s QE4 announcement when the Fed’s balance sheet rose, and are down just one week since then: the week when the Fed’s balance sheet shrank.

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

“The Fed Hasn’t Expanded Its Balance Sheet At This Speed Since The Financial Crisis”

“The Fed Hasn’t Expanded Its Balance Sheet At This Speed Since The Financial Crisis”

The Fed’s balance sheet is expanding at a faster rate than during QE1, QE2 or QE3.

* * *

Submitted by Howard Wang of Convoy Investments

Has QE4 begun? The $1.2 trillion per month hole in the repo market.

In the two months since the repo market blow up, the Fed has been making repo open market operation purchases at a rate of $1.2 trillion per month.

Below is the monthly rate of Fed open market purchases since 2000. In the era of QE and ample reserves, the Fed has not touched open market operations for more than 10 years before 2019. Prior to that, the highest rate of open market operations we saw in history was roughly $300 billion/month briefly after the September 11 attacks, with long‐term averages of around $50 billion/month. To say the current rate of $1.2 trillion/month is unprecedented would be an understatement

The planned QE unwinding has hit a brick wall and the Fed balance sheet is now expanding at a rate matched only briefly by QE1, and faster than QE2 or QE3.

Is this a temporary rescue of the repo market or the start of a sustained QE4? To answer that question, we must look at how monetary policy has evolved since the Financial Crisis.

1. Pre‐2008, scarce reserves regime:

  • Total reserves: small (<$50 billion)
  • Excess reserves: none
  • Interest on excess reserves: 0%
  • Managing interest rates: to increase rates, Fed sells securities on the open market and reduces supply of reserves, vice versa to decrease rates.
  • Banks: regulations are lax and risk tolerance is high
  • Treasury department: carefully manages its cash flows to not impact the total reserve levels.

2. 2008‐2019, ample reserves regime:

  • Total reserves: large ($trillions)
  • Excess reserves: large ($trillions)
  • Interest on excess reserves: positive at around Fed funds rate

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

“Not QE”, Monetization, & “Definitely Asset Inflation”

“Not QE”, Monetization, & “Definitely Asset Inflation”

Chart below shows the Federal Reserve holdings of Treasuries, a weekly change (black columns) and total holdings (red line) during QE1, QE2, Operation Twist, QE3, QT, and “Not QE”.  Got it?!?  This current “Not QE” explosion in QE is like some kind of old time vaudeville act (like the old Abbott and Costello bit, “who’s on first, what’s on second, I don’t know’s on third”).

But looking more widely, the chart below shows the total Federal Reserve balance sheet (blue shaded area), bank excess reserves (red line), and the delta between the Fed’s balance sheet and excess reserves…also known as direct monetization.  As the Fed restarted “not QE” but did not go through the façade of attempting to stock the new money away as “excess reserves”, this new money is flowing straight into assets, like monetary heroine.

Below, a close up of the components above solely in 2019 (through November 6th).  Balance sheet soaring once again since the Fed’s sudden pivot, excess reserves continue falling…and the difference in freshly digitized cash in the hands of banks and the like…ready to be levered up.

So, monetization (yellow line) versus the Wilshire 5000 (green line) from 2014 through last week.  For those not familiar, the Wilshire 5000 total market index, is a market-capitalization weighted index of the market value of all US stocks actively traded in the US.

And fascinatingly, since the beginning of 2018, the Wilshire 5000 and direct monetization are becoming more attuned to one another.  And in mock shock, the new record close in the Wilshire just happens to be accompanied by a new record in direct monetization!?!  Almost as if the addition of $320 billion in fresh digital cash since mid August Fed U-turn had something to do with the $2.2 trillion rise in US equities over the same period (a leverage ratio of about 7x).  Hmmm.

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

Collapse In Global M1 Signals A Worldwide Recession Has Arrived

By now everyone has seen some iteration of this chart showing that the annual change in central bank liquidity is now negative.

Another way to visualize just the Fed’s balance sheet contraction is courtesy of this chart from Morgan Stanley which shows specifically which assets – Treasurys and MBS – are declining on a monthly basis.

When it comes to markets – where the events of December were a vivid reminder that just as QE blew the world’s biggest asset bubble, so QT will deflate it  – there is a simple explanation of this negative effect of QT on Markets – in terms of both flow and stock – and it is laid out as follows from Morgan Stanley:

    • The SE relates to the long-term impact on Group 1 asset prices from the overall change to the central bank’s balance sheet and its impact on the stock of available Group 1 assets.
    • The FE relates to the short-term impact on Group 1 asset prices from each flow that changes the size of the central bank’s balance sheet.
    • The PBCE impacts both Group 1 and Group 2 assets and incorporates the pricing elements of both the stock effect and the flow effect.

But while the immediate effect of the expansion and shrinkage of the Fed’s balance sheet on various asset classes is rather intuitive – if not to Fed presidents of, course – a more pressing question is how will the upcoming liquidity shrinkage affect the global economy.

Unfortunately, the answer appears to be ominous.

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

The Fed Is Tightening More Than It Realizes

The Fed Is Tightening More Than It Realizes

effects of fed balance sheet reduction

Before the 2008 collapse of Lehman Brothers, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasury securities. After 59 months of asset purchases to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in 2014.

In October of 2017, the Fed at last began a slow slimming-down of its balance sheet, allowing a growing amount of maturing securities to roll off monthly without reinvesting the proceeds. In former Fed chair Janet Yellen’s words, the central bank did “not have any experience in calibrating the pace and composition of asset redemptions and sales to actual prospective economic conditions.” She therefore stressed that the Fed saw its balance-sheet reduction primarily as a technical exercise separate from the pursuit of its monetary policy goals—in particular, pushing inflation back up to 2%. The Fed’s main tool for tightening monetary policy in a recovering economy would, therefore, she explained, be raising short-term market interest rates by paying banks greater interest on reserves (IOR). Since December 2015, the Fed has raised the rate on IOR by 195 basis points (1.95%), which has pushed up its short-term benchmark rate—the effective federal funds rate—in tandem.

By historical standards, the Fed’s rate hikes have been cautious. Even with inflation on target and unemployment at historic lows, the Fed has been raising short rates more gradually than in any tightening period going back to the 1950s.

We believe, however, that rate hikes understate the degree of tightening the Fed has imposed over the past year. The reason is that the Fed appears to be underestimating the impact of its balance-sheet reduction. Here is why.

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

Fed’s Balance Sheet Shrinks The Most Since Start Of QT; QE Unwind Hits $321 Billion

On Monday, when discussing the two key, opposing forces facing stocks this week, we said that while on one hand stock buybacks will make a triumphant return, as companies with $50bn of quarterly buybacks exited their blackout periods, and the total number of permitted stock repurchases jumps to $110bn by the end of next week and to $145bn the following…

… the offset of the favorable flows from corporate buybacks would be the Fed itself, as the largest Fed balance-sheet reduction-to-date ($-33.3B) would take place on Halloween.

And sure enough, one month after the Fed quantitative tightening entered its peak monthly unwind phase, during which the Fed’s balance sheet is scheduled to shrink by “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month, for a total of “up to” $50 billion a month, on October 31 the balance sheet declined by $33.8 billion  – the biggest weekly total yet – consisting of $23.8 billion in Treasuries, $8 billion in Mortgage Backed Securities, and a modest decline in various other assets.

As a result of Wednesday’s maturities, the Fed’s balance sheet has now shrunk by $321 billion to $4.140 trillion, the lowest since February 12, 2014; since October 2017, when the Fed began its QE unwind, it has now shed $321 billion, or just over 7% from its all time highs.

While MBS totals shifted around over the month, the Treasury decline took place in one day as there were no Treasury securities maturing on Oct. 15, while three security issues matured all in one day on Oct. 31, totaling $23 billion. Those were allowed to “roll off” entirely without replacement. In other words, the Treasury Department paid the Fed $23 billion for them, money which the Fed will promptly “shred”, digitally speaking.

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

Plunge in Interbank Lending: The Straw that Broke the Fed’s Back

Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate.

Interbank Lending Long Term

The plunge in interbank lending is both sudden and dramatic. What’s going on?

Fed Tightening Two Ways

The short answer is a straw broke the Fed’s back.

A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.

Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it.

We can see the effect in other charts.


Year-Over-Year M2 Growth

Money supply growth is falling as are excess reserves.

Excess Reserves

The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.

  • The treasury unwind started at $6 billion per month, increasing by $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
  • The mortgage debt unwind started at $4 billion per month, increasing in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Does the Fed Know What It’s Doing?

Janet Yellen answered that question directly in her speech A Challenging Decade and a Question for the Future, at the Herbert Stein Memorial Lecture National Economists Club on October 20, 2017.

The FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions. Indeed, as the so-called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions.

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

What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?

What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?

The Federal Reserve is likely to decide next week to begin letting assets roll of its balance sheet as bonds mature, instead of reinvesting the proceeds. This means that the balance sheet will begin to shrink in size and other market participants will be forced to absorb the supply of new issuance of treasury and mortgage backed securities. Conventional analysis of supply and demand dynamics might suggest the exiting of a large marginal buyer of these securities would cause yields to rise to some higher equilibrium level, but the QE experience suggests something else entirely. When the Fed was engaged in asset purchases and the rate of change in the Fed’s balance sheet was rising (late 2010, mid 2012 through early 2013) long-term treasury yields rose on the back of juiced growth and inflation expectations produced by the stimulus. When the rate of change in the Fed’s balance sheet would flat line or fall (most of 2010, most of 2013 through 2014) treasury yields fell on the back of subdued growth and inflation expectations. Importantly, it was both real rates (TIPS) and breakeven inflation that followed this pattern, which is indicative of the level of economic stimulus produced by QE. Chart 1 below shows 10-year nominal rates (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis). Chart 2 below shows 10-year real rates (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis). Chart 3 below shows 10-year implied breakeven inflation expectations (red line, right axis) overlaid on the three month difference in the Fed’s balance sheet (blue line, left axis).

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



The Monetary Base, Buybacks and the Stock Market

We often see charts comparing the S&P 500 to the growth in the Federal Reserve’s balance sheet, or more specifically, to assets held by the Fed. There is undeniably a close correlation between the two, but it has struck us as not very useful as a “timing device”, or an early warning device if you will.

Recently we have come across a video of a presentation by Bob Murphy, in which he uses a slightly different comparison that might prove more useful in this respect. Instead of merely looking at Fed assets, he uses the total monetary base. Here is a chart comparing the monetary base to the S&P 500 Index since 2009:

1-Monetary Base vs SPXThe monetary base (red line) vs. the S&P 500 (blue line) – as can be seen, sometimes one or the other series leads, but in recent years the monetary base has been a leading indicator. It probably lagged the market in 2010/11 due to the fact that traders at the time bought stocks in anticipation of more monetary pumping – whereas nowadays the market appears to be reacting with a slight lag to changes in base money – click to enlarge.

Below is a chart that shows consolidated assets held by the Federal Reserve system for comparison. Since the Fed is currently reinvesting funds from MBS and treasuries that mature, its total asset base is basically flat-lining since the end of QE3. Obviously, all that can be gleaned from this fact is that the central bank is currently not activelypumping up the money supply. Currently money supply growth is therefore largely the result of commercial bank credit growth.

2-Fed AssetsAssets held by the Federal Reserve – flat-lining since the end of QE3. Interesting, but not useful as a short term leading indicator of the stock market – click to enlarge.


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Is This How the Next Global Financial Meltdown Will Unfold?

Is This How the Next Global Financial Meltdown Will Unfold?

In effect, a currency crisis is simply the abrupt revaluation of the currency to reflect new realities.

I have long maintained that the structural imbalances of debt and risk that triggered the Global Financial Meltdown of 2008-2009 have effectively been transferred to the foreign exchange (FX) markets.

This creates a problem for the central banks that have orchestrated the “recovery” by goosing asset bubbles in stocks, real estate and bonds: unlike these markets, the currency-FX market is too big for even the Federal Reserve to manipulate for long.

The FX market trades roughly the entire Fed balance sheet of $4.5 trillion every day or two.

Currencies are in the midst of multi-year revaluations that will destabilize the tottering towers of debt, leverage and risk that have propped up global growth since 2009.

Though the relative value of currencies is discovered in the global FX market, there are four fundamental factors that influence the value of any currency:

1. Capital flows into and out of the currency (and the nation that issues the currency).

2. Perceived risk, specifically, will this currency preserve my global purchasing power (i.e. capital) or erode it?

3. The yield or interest rate paid on bonds denominated in this currency.

4. The scarcity or over-abundance of the currency.

If we dig even deeper, we find that currencies reflect the income streams and assets of the issuing nation. Consider the currency of an oil exporting nation that has seen both its income from selling oil and the underlying value of its oil in the ground fall by more than 50%.

Why shouldn’t that nation’s currency decline in parallel with the erosion of income and asset valuation? As a nation’s income and asset base decline, there is less national income to pay interest on sovereign bonds, less private income to tax, and a reduced asset base for additional borrowing.

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

Gold Prices Disprove Krugman

Gold Prices Disprove Krugman

Recently Krugman wrote an op ed ridiculing Ron Paul titled, “The Old Man and the CPI.”(In case you don’t get the reference, he’s alluding to Hemingway.) Ron Paul has responded in this video, but I want to focus on Krugman’s complains about gold bugs:

Ron Paul has been making the same prediction year after year — in fact, he’s been making this prediction at least since 1981!— and has been wrong year after year. It’s hard to think of a doctrine that has been as thoroughly refuted by events as goldbug economics. For a while gold prices did go up, although not for the reasons the goldbugs thought, but now even that has gone into reverse. So why would anyone pay money for this guy’s analysis?

This has been quite the cause for celebration among progressive economists. (I won’t link to some of the lesser lights and reward them for their smugness.) And it’s true that a simple story relating the Fed’s balance sheet to the price of gold doesn’t work out very well:

Gold vs Fed

In the chart above, total Fed assets (red line, left axis) are plotted against the price of gold (blue line, right axis). People who thought the price of gold would move in lockstep with the Fed’s QE programs were sitting pretty during QE and QE2, but then things turned around with QE3. It almost looks as if the commencement of QE3 (when the red line started stairclimbing up) was the catalyst for making gold plunge about $600 an ounce.

Nonetheless, suppose someone bought into the warnings of Ron Paul (and guys like me) when Bernanke began his unprecedented monetary inflation, back in late 2008 / early 2009, and began buying gold as a hedge. Depending on when exactly you got in, gold was selling for anywhere from $700 – $900 an ounce.

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




Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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