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The Bank of England’s Governor Fears a Liquidity Trap

The Bank of England’s Governor Fears a Liquidity Trap

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:

If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.

He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.

What Is a Liquidity Trap?

In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.

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

“The Fed Was Suddenly Facing Multiple LTCMs”: BIS Offers A Stunning Explanation Of What Really Happened On Repocalypse Day

“The Fed Was Suddenly Facing Multiple LTCMs”: BIS Offers A Stunning Explanation Of What Really Happened On Repocalypse Day

About a month ago, we first laid out how the sequence of liquidity-shrinking events that started about a year ago, and which starred the largest US commercial bank, JPMorgan, ultimately culminated with the mid-September repo explosion. Specifically we showed how JPM’s drain of liquidity via Money Markets and reserves parked at the Fed may have prompted the September repo crisis and subsequent launch of “Not QE” by the Fed in order to reduce its at risk capital and potentially lower its G-SIB charge – currently the highest of all major US banks.

Shortly thereafter, the FT was kind enough to provide confirmation that the biggest US bank had been quietly rotating out of cash, while repositioning its balance sheet in a major way, pushing more than $130bn of excess cash away from reserves in the process significantly tightening overall liquidity in the interbank market. We learned that the bulk of this money was allocated to long-dated bonds while cutting the amount of loans it holds, in what the FT dubbed was a “major shift in how the largest US bank by assets manages its enormous balance sheet.”

The moves saw the bank’s bond portfolio soar by 50%, and were prompted by capital rules that treated loans as riskier than bonds. And since JPM has been aggressively returning billions of dollars to shareholders in dividends and share buybacks each year, JPMorgan had far less room than most rivals to hold riskier assets, explaining its substantially higher G-SIB surcharge, which indicated that the Fed currently perceives JPM as the riskiest US bank for a variety of reasons.

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

The Lessons From Japan’s Monetary Experiment

The Lessons From Japan’s Monetary Experiment

A recent article in the Financial Times, “Abenomics provides a lesson for the rich world“, mentioned that the experiment started by prime minister Shinzo Abe in the early 2010s should serve as an important warning for rich countries. Unfortunately, the article’s “lessons” were rather disappointing. These were mainly that the central bank can do a lot more than the ECB and the Fed are doing, and that Japan is not doing so badly. I disagree.

The failure of Abenomics has been phenomenal. The balance sheet of the central bank of Japan has ballooned to more than 100% of the country’s GDP, the central bank owns almost 70% of the country’s ETFs and is one of the top 10 shareholders in the majority of the largest companies of the Nikkei index. Government debt to GDP has swelled to 236%, and despite the record-low cost of debt, the government spends almost 22% of the budget on interest expenses. All of this to achieve what?

None of the results that were expected from the massive monetary experiment, inventively called QQE (quantitative and qualitative easing) have been achieved, even remotely. Growth is expected to be one of the weakest in the world in 2020, according to the IMF, and the country has consistently missed both its inflation and economic growth targets, while the balance sheet of the central banks and the country’s debt soared.

Real wages have been stagnant for years, and economic activity continues to be as poor as it was in the previous two decades of constant stimulus.

The main lessons that global economies should learn from Japan are the following:

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

Broke Bond Markets Mounting: Italy Surpasses Greece As Europe’s Riskiest Sovereign

Broke Bond Markets Mounting: Italy Surpasses Greece As Europe’s Riskiest Sovereign

As yields soar optimistically around the world, pushing negative-yielding debt below $12 trillion – the lowest since June, but hey, it’s still $12,000,000,000,000 of insanity, central-planners’ incessant meddling with global markets has sparked another WTF-moment in capital market history.

A mere twelve trillion dollars worth of nonsense debt remains…

Source: Bloomberg

China Corporate Bond Defaults Nearing a Record

And, as The FT reports, for the first time since 2008, Greece has lost the dubious distinction of being the riskiest government borrower in the eurozone after its bond yields dipped below Italy’s…

Source: Bloomberg

Greek bonds have soared this year as investors hungry for yields have snapped up debt from former euro area crisis spots — a trend that gained further momentum after S&P’s upgraded Athens’ credit rating to BB- late last month.

As FT notes,  the small size of Greece’s bond market – much of its enormous debt load is in the form of low interest loans to the EU and IMF following a series of bailouts – means there is less immediate pressure on government finances compared with Italy, which relies solely on markets to refinance its own huge debt pile.

“We still hold some Greek bonds based on our view that the economy has bottomed,” said Chris Jeffery, a fixed-income strategist at Legal & General Investment Management.

“But much more important is the debt structure. There are very few cash flow requirements for the next five years. With Italy, you always have the rollover risk.”

5Y Greek bond yields topped 60% in early 2012, they are now below 0.50%!!

Source: Bloomberg

Finally, as the chart above shows, Italian debt has also performed strongly during the summer’s global bond rally, but some investors remain wary due to the effects of last year’s political tensions.

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

US Fast-Food Drive-Thrus Will Soon Use License Plate And Facial Recognition Technology

US Fast-Food Drive-Thrus Will Soon Use License Plate And Facial Recognition Technology

License plate recognition could be the new big thing at American drive-thrus, according to FT. Chains are now looking to deploy cameras that recognize license plates and help identify customers, personalizing digital menus and speeding up sales.

Starbucks began a pilot program in Korea last year with customers who voluntarily pre-registered their cars and now restaurants in the United States are looking to also give it a try. License plate recognition has existed since the 1970s but has mostly been associated with law-enforcement. Cameras attached to police cars or street fixtures read the license plates of passing vehicles and compare results to databases.

But as the cost of the software comes down, uses for LPR have grown. For retailers, LPR can help identify repeat customers, allowing businesses to link a customer’s credit card and order history up to a vehicle.

Customers who are signed up to loyalty programs or apps can load their information in voluntarily and cameras in the drive-thru lanes can also take photos of car plates. Software will then determine whether or not it belongs to a recurring customer that the restaurant has information for.

LPR start up 5Thru said that several chains in the U.S. and Canada were trying out its technology. It is expected to sign its first major contract by the end of the year.

Chief executive Daniel McCann said:

5Thru’s technology helped restaurants process around an extra 30 cars a day, by reducing order time. The artificial intelligence-driven system also improves upselling by recommending items based on a customer’s past orders, the weather and how busy a store’s kitchen is.”

Tracking customers using cameras is just another way stores are seeking to become more efficient in the age of online shopping. Recall, we posted a couple months ago a story about how are malls were tracking people’s locations using their smartphones in order to help bolster business.

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

Weekly Commentary: No Mystery

Weekly Commentary: No Mystery

January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”

The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”

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

IMF Warns World “Dangerously Unprepared” For Upcoming Global Recession

In the starkest warning yet about the upcoming global recession, which some believe will hit in late 2019 or 2020 at the latest, the IMF warned that the leaders of the world’s largest countries are “dangerously unprepared” for the consequences of a serious global slowdown. The IMF’s chief concern: much of the ammunition to fight a slowdown has been exhausted and governments will find it hard to use fiscal or monetary measures to offset the next recession, while the system of cross-border support mechanisms — such as central bank swap lines — has been undermined, warned David Lipton, first deputy managing director of the IMF.

IMF Deputy Managing Director David Lipton

“The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008],” Lipton told the Financial Times during the annual meeting of the American Economic Association. “Given this, countries should be paying attention to keeping their economy on a level trajectory, building buffers and not fighting with each other.”

“China is clearly slowing down — we think China’s growth has to slow, but keeping it from slowing in a dangerous way is an important objective,” he said, noting that a downshift would be “material very broadly, not just in Asia.”

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

 

The FT Editorial Board has a problem with those who pretend to solve climate change. Who might they have in mind?

The FT Editorial Board has a problem with those who pretend to solve climate change. Who might they have in mind?

“The depressing reality about climate change is that we could solve the problem, at manageable cost, but are failing to do so.” So the Financial Times Editorial Board concluded on 26th December. “This failure is due to a mixture of blindness and self-deception. The blindness comes from those, such as US president Donald Trump, who deny the reality of climate change. The self-deception comes from those who accept the reality, but only pretend to solve it.”

Being diplomatic, the Board does not elaborate on those who are guilty of self deception and pretence. Let me offer a few examples for them.

I view this as rather more than a self-imposed academic exercise. The UN Secretary-General António Guterres spoke for many when he said, at the annual climate summit earlier this month, that those who do not wish to accelerate the decarbonisation goal of the Paris Agreement – knowing what climate scientists tell us of the dangers – are guilty of “immoral” and “suicidal” behaviour. Those with the most to lose, the young, spoke with anguished voices at that summit of a clear and present danger to the civilisation they hope to live in. Among the oldsters who see the stakes no differently, David Attenborough was an interesting new voice.

Anyone who has dipped into my compilations of the history will appreciate that I do not consider myself short of choice when it comes to those who are pretending when it comes to climate action. Let me limit myself to the pages of the FT this year, in the interests of brevity.

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

ECB Takes “Unprecedented” Step Of Putting Italy’s Banca Carige In Administration

Investors who had hoped that the resolution of Italy’s budget showdown with the EU would mark an end to a volatile period for Italian bonds and stocks were disappointed Wednesday when fears about an Italian banking crisis reemerged after the ECB appointed a slate of temporary administrators to oversee troubled Italian lender Banca Carige after nearly its entire board resigned.

Earlier on Wednesday, Consob, Italy’s market watchdog, said it had suspended trading in shares of Banca Carige for the session following a request by the bank, according to Reuters.

European bank stocks dropped while bonds rallied as fears about softer-than-expected factory orders across the Continent were compounded by the developments in Italy (which proved an exception to the trend of weak PMIs).

Banca

Fabio Innocenzi, Pietro Modiano and Raffaele Lener have been appointed as temporary administrators while Gianluca Brancadoro, Andrea Guaccero and Alessandro Zanotti have appointed as members of the surveillance committee.

The “unprecedented” move – as Bloomberg called it – follows a failed attempt to raise some 400 million euros last month after the Malacalza family, the billionaire shareholders who control nearly one-third of Carige, abstained from a vote on a turnaround plan, which sought to fill the capital hole left by the fraud scandal.

Carige

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

Weekly Commentary: The Perils of Inflationism

Weekly Commentary: The Perils of Inflationism

December 13 – Financial Times (Chris Giles and Claire Jones): “When the European Central Bank switches off its money-printing press at the turn of this year and stops buying fresh assets, it will mark the end of a decade-long global experiment in how to stave off economic meltdowns. Quantitative easing, the policy that aims to boost spending and inflation by creating electronic money and pumping it into the economy by buying assets such as government bonds, is on the verge of becoming quantitative tightening. With the Federal Reserve slowly reducing its stocks of Treasuries, central banks are no longer in the buying business. Globally, only the Bank of Japan is left as a leading central bank that has not formally called time on expanding its stock of asset purchases. Arguments over how, or even if, the trillions spent by policymakers helped the global economy recover will rage for years to come. But as central banks step back, the initial view is that the purchases worked — whether through encouraging investors to hold more risky assets, easing constraints on borrowing, providing finance so governments could run larger budget deficits or just showing that central banks still had an answer to weak demand and low inflation.”
At this point, the prevailing view holds that QE “worked.” Moreover, central banks are seen ready and willing to call upon “money printing” operations as need. The great virtue of this policy course, many believe, is that there is essentially no limit to the scope and duration of “QE infinity.” The FT quoted Mario Draghi: “[QE] is permanent and may be usable in contingencies that the governing council will assess in its independence.” Melvyn Krauss, from the Hoover Institution, captured conventional thinking: “No one willingly walks into a room from which there is no exit. Because QE proved temporary, because it worked and because it has ended, it is likely to be used again.”…click on the above link to read the rest of the article…

France Takes The Lead In Protecting Iran Oil Trade From U.S. Sanctions

France Takes The Lead In Protecting Iran Oil Trade From U.S. Sanctions

Tank farm

France aims to lead the European Union (EU) efforts in defying U.S. sanctions on Iran, by supporting the creation of a payment mechanism to keep trade with Iran and making the euro more powerful, France’s Economy Minister Bruno Le Maire said in an interview with the Financial Times.

“Europe refuses to allow the US to be the trade policeman of the world,” Le Maire told FT, adding that the EU needs to affirm its independence in the rift between the EU and the United States over the sanctions on Iran.

The EU has been trying to create a special purpose vehicle (SPV) that would allow the bloc to continue buying Iranian oil and keep trade in other products with Iran after the U.S. sanctions on Tehran return.

The idea behind the SPV is to have it act as a clearing house into which buyers of Iranian oil would pay, allowing the EU to trade oil with Iran without having to directly pay the Islamic Republic.

As the U.S. sanctions on Iran snapped back on Monday, the SPV hasn’t been operational and reports have had it that the undertaking is very complicated and politically sensitive. The bloc is also said to be struggling with the set-up, because no EU member is willing to host it for fear of angering the United States, the Financial Times reported recently, citing EU diplomats.

On Monday, the Belgium-based international financial messaging system SWIFT said that it would comply with the U.S. sanctions on Iran and would cut off sanctioned Iranian banks from its network. This was a blow to the EU’s attempts to defy the U.S. sanctions.

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

UK Readies Apocalyptic Flotilla Of Emergency Supplies In Case Of “No-Deal” Brexit

UK authorities are drawing up plans to charter a flotilla of supply ships to ferry in emergency food and medicines in the event of a “no-deal” Brexit next March, according to FT, which reports that the move was “greeted with disbelief at a stormy meeting of Theresa May’s cabinet on Tuesday.”

The cabinet was told that the heavily used Dover-Calais route could quickly become blocked by new customs controls on the French side, forcing Britain to seek alternative ways of bringing in “critical supplies”.

The warnings about the consequences of a disorderly British exit from the EU came at a cabinet meeting which saw ministers divided into two camps over how to unlock a deal in Brussels. One witness said there was “an almighty row”.

The prospect of Britain facing shortages of perishable food and medicines provided a bleak backdrop to the cabinet discussions, as Mrs May urged her ministers to back her attempts to secure a breakthrough. –FT

Theresa May announced weekly cabinet discussions on preparations for Brexit, deal or no-deal, saying “The government’s priority is to secure a deal.”

May’s de facto deputy, David Lidington, told the cabinet that under a no-deal Brexit, the Dover-Calais route would be significantly crippled – running at just 12-25% of normal capacity for up to six months.

“Whatever we do at our end, the French could cause chaos if they carry out checks at their end,” said one UK official. “Dover-Calais would be the obvious pinch point. The French would say they were only applying the rules.”

If Britain left the EU under World Trade Organization rules, the UK and EU would be in different customs jurisdictions and would be expected to carry out checks on trade across the English Channel.

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

Natural Gas Inventories “Dangerously Low”

Natural Gas Inventories “Dangerously Low”

NatGas

Futures markets are suggesting the currently benign level of natural gas price volatility may not remain through the winter months.

According to the Financial Times, market volatility this year has been the lowest on record despite inventory levels falling 19.5 percent below average and by the time winter starts are set to be at their lowest in more than a decade.

(Click to enlarge)

Source: Bloomberg (via Financial Times)

The Financial Times puts this down to investors being lulled into complacency by a seemingly unstoppable wave of new supply from the shale market rising inexorably to meet rising demand. The government last week forecast 81.1 billion cubic feet per day in dry gas production for 2018 — a record high — and up by 7.5 billion cu ft/d from 2017, the Financial Times reports.

But is the market safe to assume shale gas will supply regardless of demand?

Natural gas producers are systematically hedging their sales throughout next year, often a sign they plan to continue an aggressive policy of drilling and expansion. That activity has contributed to a dipping of forward prices, as there are more sellers in the futures market than buyers.

But inventory levels are low — some would suggest dangerously low — after a high summer demand due to hot weather increasing demand for air conditioning. Natural gas “power burn” surged to a record 37.7 billion cubic feet per day during July, the Financial Times reports.

Such strong demand comes after a cold winter depleting stocks to unusually low levels. Inventory levels were low at the end of the summer and have not managed to be replaced during the normally slacker summer months. High demand is not helped by exports of natural gas and distillates running at record levels, aided by strong international demand and low U.S. domestic prices relative to global markets.

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

America Is Overdue for Another Economic Disaster

America Is Overdue for Another Economic Disaster

A trader monitors screens on the New York Stock Exchange. (Lucas Jackson/Reuters)

Underneath the current economic boom, there are some truly worrying signs.Eric Sevareid (1912–1992), the author and broadcaster, said he was a pessimist about tomorrow but an optimist about the day after tomorrow. Regarding America’s economy, prudent people should reverse that.

This Wednesday, according to the Financial Times‘ Robin Wigglesworth and Nicole Bullock, “the U.S. stock market will officially have enjoyed its longest-ever bull run” — one that rises 20 percent from its low, until it drops 20 percent from its peak. And September 15 will be the tenth anniversary of the collapse of Lehman Bros., the fourth-largest U.S. investment bank. History’s largest bankruptcy filing presaged the October 2008 evaporation of almost $10 trillion in global market capitalization.

The durable market rise that began March 6, 2009, is as intoxicating as the Lehman anniversary should be sobering: Nothing lasts. Those who see no Lehman-like episode on the horizon did not see the last one.

Economists debate, inconclusively, this question: Do economic expansions die of old age (the current one began in June 2009) or are they slain by big events or bad policies? What is known is that all expansions end. God, a wit has warned, is going to come down and pull civilization over for speeding. When He, or something, decides that today’s expansion, currently in its 111th month (approaching twice the 58-month average length of post-1945 expansions), has gone on long enough, the contraction probably will begin with the annual budget deficit exceeding $1 trillion.

The president’s Office of Management and Budget — not that there really is a meaningful budget getting actual management — projects that the deficit for fiscal year 2019, which begins in six weeks, will be $1.085 trillion. This is while the economy is, according to the economic historian in the Oval Office, “as good as it’s ever been, ever.

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

Stock markets look ever more like Ponzi schemes

Stock markets look ever more like Ponzi schemes

The FT has reported this morning that:

Debt at UK listed companies has soared to hit a record high of £390bn as companies have scrambled to maintain dividend payouts in response to shareholder demand despite weak profitability.

They added:

UK plc’s net debt has surpassed pre-crisis levels to reach £390.7bn in the 2017-18 financial year, according to analysis from Link Asset Services, which assessed balance sheet data from 440 UK listed companies.

So what, you might ask? Does it matter that companies are making sense of low-interest rates to raise money when I am saying that government could and should be doing the same thing?

Actually, yes it does. And that’s because of what the cash is being used for. Borrowing for investment makes sense. Borrowing to fund revenue investment (that is training, for example, which cannot go on the balance sheet but still adds value to the business) makes sense. But borrowing to pay a dividend when current profits and cash flow would not support it? No, that makes no sense at all.

Unless, of course, you are CEO on a large share price linked bonus package and your aim is to manipulate the market price of the company. It is that manipulation that is going on here, I suggest. These loans are being used to artificially inflate share prices.

The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation.

And this manipulation does matter.

People think their savings and pensions are safe because of rising share prices. They do not realise it is all a con-trick.

…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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