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Weekly Commentary: Full Capitulation

Weekly Commentary: Full Capitulation

April 16 – Bloomberg (Rich Miller and Craig Torres): “Federal Reserve Chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year. The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until sub-par inflation rises convincingly.”

April 15 – CNBC (Thomas Franck): “Chicago Federal Reserve President Charles Evans said on Monday that he’d be comfortable leaving interest rates alone until autumn 2020 to help ensure sustained inflation in the U.S. ‘I can see the funds rate being flat and unchanged into the fall of 2020. For me, that’s to help support the inflation outlook and make sure it’s sustainable,’ Evans told CNBC’s Steve Liesman.”

April 15 – Reuters (Trevor Hunnicutt): “The U.S. Federal Reserve should embrace inflation above its target half the time and consider cutting rates if prices do not rise as fast as expected, a top policymaker at the central bank said… ‘While policy has been successful in achieving our maximum employment mandate, it has been less successful with regard to our inflation objective,’ Federal Reserve Bank of Chicago President Charles Evans said… ‘To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2% 50% of the time. Indeed, I would communicate comfort with core inflation rates of 2-1/2%, as long as there is no obvious upward momentum and the path back toward 2% can be well managed.”

It’s stunning how dramatically the Fed’s perspective has shifted since the fourth quarter. There’s now a chorus of Fed governors and Federal Reserve Bank Presidents calling for the central bank to accommodate higher inflation.

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

Combustion

Combustion

This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.

But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.

Fact is central banks are hopelessly trapped:

10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
Anyone?

View image on Twitter

Implications:
1. The Fed stopping here is an admission of failure
2. Full normalization would crash global equities
3. Central banks are trapped & are forced to remain accommodative
4. Central bank policy is still in crisis mode
5. It’s all a propped up shell game

The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.

So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:

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

Interest Rates, Funny Money, and Economic Malaise

Interest Rates, Funny Money, and Economic Malaise

Since the 2007–8 financial crisis, more and more economists have entertained the idea that there might be some connection between artificially low interest rates and business cycles. By “artificially low” I mean interest rates that are pushed below their natural levels by expansionary monetary policy. The relationship between monetary policy and interest rates is tricky; beyond the immediate short run, it is hard to say whether liquidity effects (which tend to push down rates) or rising income effects (which tend to push up rates) dominate. But in the short run, to the extent that expansionary monetary policy is a surprise, there should be a fall in market interest rates that is not justified by economic fundamentals — namely, real saved resources available for investment projects.

The way the business cycle unfolds looks like this: The monetary authority injects new money into capital markets in an attempt to give the economy a shot in the arm. Investors see artificially low rates and increase their investments in projects that will pay out in the future. But households are not saving any more real resources. In fact, households will probably respond to low interest rates in the same way: the costs of reallocating purchasing power from future you to present you have fallen, so you are more likely to borrow to equalize your intertemporal marginal utility of consumption. With both consumers and investors using up more real resources in ways that are fundamentally at odds with each other’s plans, something’s got to give. The comovement of consumption and investment beyond the economy’s production possibility frontier is ultimately unsustainable. When everyone wakes up to the fact that the low interest rates were the result of funny money, rather than real economic forces, the bubble bursts.

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

Being and Time (And Central Banks)

BEING AND TIME (AND CENTRAL BANKS)

People value present goods more highly than future goods. For instance, an apple available today is considered more valuable than the same apple available in, say, one month. This is expressive of time preference — which is an undeniable fact, a category of human action.

The sentence “Humans act” is a logically irrefutable truth. It cannot be denied without causing a logical contradiction. By saying “Humans can not act”, you act and thus contradict your very statement.

From the true insight that humans act we can deduce that human action takes place in time. There is no timeless human action. Were it otherwise, people’s goals would be instantaneously reached, and action would be impossible — but we cannot think that we cannot act.

The market interest rate is expressive of time preference, and as such, it is also a category of human action. If determined in an unhampered market, the (natural) market interest rate denotes the discount that future goods are subject to relative to present goods.

If one US-dollar available in a year is trading at, say, 0.95 US-dollar, it means that the market interest rate is 5.0% (the calculation is: [0.95 / 1 – 1]*100).

Should people start valuing present goods more highly than future goods — which is expressive of a rise in time preference —, the discount on future goods vis-à-vis present goods and thus the market interest rate go up.

If peoples’ time preference declines, the discount on future goods vis-à-vis present goods drops, and so does the market interest rate — meaning that people wish to save more and consume less out of their current income.

The interest rate and central banking

In an unhampered market, the market interest rate reflects peoples’ time preference. Nowadays, however, the market interest rate is no longer determined in an unhampered market. It is dictated by the central bank.

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

Over $10 Trillion In Debt Now Has A Negative Yield

Over $10 Trillion In Debt Now Has A Negative Yield

NIRP is back.

On Friday, when Germany reported disastrous mfg and service PMI prints, the 10Y German Bund finally threw in the towel, with the yield sliding back under zero for the first time in three years. When that happened, and when the 3M-10Y yield curve inverted in the US right around that time, just over $400 billion in global debt changed the sign on its yield from positive to negative.

As a result, the total notional of global negative yielding debt soared on Friday, rising above $10 trillion for the first time Since September 2017, and which according to Bloomberg has intensified “the conundrum for investors hungry for returns while fretting the brewing economic slowdown.”

Paradoxically, the amount of negative-yielding debt has nearly doubled in just six months, and confirms that the global asset bubble is back because as Gary Kirk, a founding partner at London-based TwentyFour Asset Management, said “money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing.”

“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Despite the Fed’s renewed herding of investors into the riskiest assets, Kirk is so far “resisting the temptation” to snap up longer-dated credit obligations that will be the first to default when the next recession hits, and prefers duration bets in interest-rate markets.

Others won’t be so lucky: as we noted last Friday, the ‘reverse rotation’, or flood into fixed income instruments, is accelerating and fund flows confirmed the fresh panic for yield just as the specter of QE4 returns as investors in the latest week parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to EPFR data.

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

The Capitulation of Jerome Powell and the Fed

The Capitulation of Jerome Powell and the Fed

This past week, on March 20, 2019, Federal Reserve chairman Jerome Powell announced the US central bank would not raise interest rates in 2019. The Fed’s benchmark rate, called the Fed Funds rate, is thus frozen at 2.375% for the foreseeable future, i.e. leaving the central bank virtually no room to lower rates in the event of the next recession, which is now just around the corner.

The Fed’s formal decision to freeze rates follows Powell’s prior earlier January 2019 announcement that the Fed was suspending its 2018 plan to raise rates three to four more times in 2019. That came in the wake of intense Trump and business pressure in December to get Powell and the Fed to stop raising rates. The administration had begun to panic by mid-December as financial markets appeared in freefall since October. Treasury Secretary, Steve Mnuchin, hurriedly called a dozen, still unknown influential big capitalists and bankers to his office in Washington the week before the Christmas holiday. With stock markets plunging 30% in just six weeks, junk bond markets freezing up, oil futures prices plummeting 40%, etc., it was beginning to look like 2008 all over again. Public mouthpieces for the business community in the media and business press were calling for Trump to fire Fed chair Powell and Trump on December 24 issued his strongest threat and warning to Powell to stop raising rates to stop financial markets imploding further.

In early January, in response to the growing crescendo of criticism, Powell announced the central bank would adopt a ‘wait and see’ attitude whether or not to raise rates further. The Fed’s prior announced plan, in effect during 2017-18, to raise rates 3 to 4 more times in 2019 was thus swept from the table. So much for perennial academic economist gibberish about central banks being independent! Or the Fed’s long held claim that it doesn’t change policy in response to developments in financial markets!

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

A Major Bank Capitulates: “This May Be The Time For Helicopter Money Drops”

A Major Bank Capitulates: “This May Be The Time For Helicopter Money Drops”

Long before the Fed was humiliated into reversing its hawkish rate hike policy in January and then again in March, we published – back in June 2015 – “The Blindingly Simple Reason Why The Fed Is About To Engage In Policy Error“, in which we predicted, correctly, that the neutral rate of interest is far too low to allow a lengthy tightening campaign by the Federal Reserve, as the real Fed Funds rate would promptly rise above the neutral rate, further depressing demand, resulting in a policy error.

More importantly, instead of some arcane calculation of the infamous, convoluted r-star (or neutral rate of interest) we said that one might argue for low “implied” equilibrium short rates via debt ratios. For example, if nominal growth is 3 percent and the debt GDP ratio is 300 percent, the implied equilibrium nominal rates is around 1 percent. This is because at 1% rates, 100% of GDP growth is necessary to service interest costs.

So to help the Fed and pundits calculate just where r star is in an economy where total debt/GDP is 350% and rising, and where GDP is 2% and falling, we presented – all the way back in 2015 – a sensitivity table which looks at just two simple variables: nominal growth, or GDP, and total debt/GDP. Assuming the current leverage of the US and assuming 2% in nominal growth, the short-run equilibrium real interest rate is just about 0.57%, something which the Fed now appears to have discovered on its own. 

%.

As an aside, we also said that such a policy error could reinforce itself by causing structural damage that puts additional downward pressure on the equilibrium real rate adding that “in this case the yield curve would flatten meaningfully, at least until the Fed actually reversed course by cutting rates.” This is precisely what happened.

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

Europe is so weak it can’t even handle 0% interest rates

Europe is so weak it can’t even handle 0% interest rates

Europe’s leading economic policy makers have officially thrown in the towel.

Last week, the European Central Bank admitted economic conditions are so dire that it already has to reverse its monetary policy.

I’ll get back to that in a minute…

Following the Great Financial Crisis in 2008, central banks printed trillions of dollars and pushed interest rates to their lowest levels in human history. Low interest rates (and lots of new money sloshing around the system) mean people should go out and buy things that would otherwise be out of reach… new houses, new cars, businesses, etc.

And, in theory, all of that activity creates jobs and helps the economy grow… in theory.

Ten years into this monetary experiment, central banks did create growth…

US Gross Domestic Product (GDP) was about $15 trillion in 2008. Current GDP is about $22 trillion. That’s $7 trillion of economic growth.

Impressive… until you figure the cost of that growth.

Over the same period, the US national debt increased from $10 trillion to $22 trillion.

So, it took $12 trillion of debt to create $7 trillion of economic growth.  

The marginal utility of all of this new debt is decreasing (remember this point for later). And it’s the same story all over the world. 

The US economy is so dependent on cheap money, it can’t even handle 2% interest rates (the Fed hiked rates from 2.25% to 2.5% last December and stocks fell 20%).

But Europe is even worse. Europe has negative interest rates. And the European economy is so weak (it grew 0.2% in Q4), it can’t even handle ZERO percent interest rates.

Last week the ECB announced it would keep interest rates negative. And it’s starting its third round of cheap loans to banks (who, in turn, are supposed to lend to businesses and households).

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

Central Banks Cave, Usher In The Crack-Up Boom

Central Banks Cave, Usher In The Crack-Up Boom

This was going to be the year when the other big central banks joined the Fed in “normalizing” interest rates and reversing the past decade’s QE experiment. Instead, the other central banks blinked and went back to aggressive ease, and the Fed is following them. This is a very big deal. 

Let’s consider some before-and-after stories: 

In September 2018, the European Central Bank began tightening: 

European Central Bank to take next step in tapering stimulus

(AP) – The European Central Bank is expected to ratchet back its stimulus efforts again on Thursday as it gingerly phases out extraordinary support for the economy left over from the Great Recession and the euro currency union’s debt crisis.

The bank’s 25-member governing council is expected to cut its monthly bond-purchase stimulus to 15 billion euros ($17.4 billion) a month from 30 billion a month, on the way to ending the purchases at the end of the year.

Reinhard Cluse, chief European economist for UBS, said that after the June meeting “the ECB is now essentially on autopilot.” Cluse said that the ECB can phase out the bond purchases and then decide the exact timing of next year’s first rate increase in the summer or fall.

But before any actual tightening took place, the EU economy slowed and turmoil flared in Italy and France. This week: 

European Central Bank announces major policy reversal

(WSWS) – The European Central Bank has reversed its policy of slight monetary tightening and announced a new stimulus package in the face of data which show a sharp downturn in growth in the euro zone. The unanimous decision was taken at the meeting of the ECB’s governing council held in Frankfurt yesterday.

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

A Modest Proposal for the Fed

A Modest Proposal for the Fed

Quantitative easing, the program of asset buying initiated by the US Federal Reserve Bank in 2008, represents the most profound monetary experiment in the history of the world. Between fall of 2008 and fall of 2014, three successive rounds of QE quadrupled the monetary base of the world’s most-used and dominant currency, from less than $1 trillion to more than $4 trillion. The Fed literally created new money, bought Treasury debt and mortgage-backed debt (of dubious character) from commercial banks, and credited them with new reserves.

fredgraph (1)_1.png

It was a great trick. If QE can be done without adverse effects or with few adverse effects, it represents nothing short of monetary alchemy (h/t Nomi Prins). Everything we thought we knew about the Fed as backstop lender of last resort to commercial banks, as hallway monitor of inflation and unemployment, is out the window.

If QE works, then every government on earth must take notice of the opportunity to effectively recapitalize their own banks and industries free of charge. QE turns central banks into kings of capital markets, into active participants in the economy. As one twitterati put it, expansionary QE created the biggest untold American story of the last twenty years: the Fed can now inflate and deflate assets, devalue savings, influence wages and productivity, encourage corporate malfeasance, and engineer balance sheets—all the while creating economic winners and losers. 

What politician or central banker could resist?

Recall how defenders of QE not only argued it was necessary, but beneficial. Paul Krugman was among the worst offenders, insisting that low interest rates would mitigate any harms from such rapid monetary expansion. These defenders dismissed, and continue to dismiss, what is now obvious: since 2008 the US economy has experienced significant asset inflation in equity markets and certain housing markets, plus a creeping but steady rise in many consumer prices.  

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

The Super Wealthy Are Already Preparing For NIRP and Worse

The Super Wealthy Are Already Preparing For NIRP and Worse

The Global Elite are preparing for Negative Interest Rate Policy (NIRP) and Wealth Grabs.

How do I know?

They’re moving their money into physical cash.

Physical cash represents one of the rare loopholes in our current financial system. When money is in actual physical cash it can’t be charged interest by a bank engaged in NIRP. It’s also much easier to hide from the Political Class intent of imposing wealth taxes and other capital grabs.

With that in mind, consider that the number of $100 bills in circulation has DOUBLED since 2008. In fact, there are now MORE $100 bills that $1 bills in the financial system.

The number of outstanding U.S. $100 bills has doubled since the financial crisis, with more than 12 billion of them across the world, according to the latest data from the Federal Reserve. C-notes have passed $1 bills in circulation, Deutsche Bank chief international economist Torsten Slok said in a note to clients this week.

Source: CNBC

Let’s be blunt here, the folks who have a lot of money to hide are usually the ones with the best connections to the elites.

As a result, they typically know what is coming down the pike before the rest of us. Which is why it’s critical to pay attention to what these people DO rather than just say.

Consider the following:

  • The IMF has already called for a wealth tax of 10% on NET WEALTH.
  • More than one Presidential candidate for the 2020 US Presidential Race has already openly called for a wealth tax in the US.
  • Polls suggest that the majority of Americans support a wealth tax.

And if you think this will stop with the super wealthy, you’re mistaken. You could tax 100% of the wealth of the top 1% and it would finance the US deficit for less than six months.

Which means…

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

Remember, The Fed Hasn’t Actually Done Anything Yet

Remember, The Fed Hasn’t Actually Done Anything Yet

When the financial markets got, um, choppy towards the end of 2018, the Fed caved almost instantly. But only rhetorically. 

Fed chair Powell promised to stop raising interest rates and shrinking the money supply, and the financial markets, trained to salivate at the sound of Fed happy talk, immediately morphed from “risk-off” to “risk-on.” Stocks are now approaching last year’s all-time highs, bond prices are way up (which is to say long-term interest rates are way down) and the financial press is back to celebrating the “Goldilocks economy.”

But remember that as far as actual monetary policy goes, nothing has changed. Last year’s Fed Funds rate increases are still in place, while the Fed’s balance sheet remains diminished (which is to say the cash drained from the economy as the bonds in the Fed’s account were retired remains out of action). So the damage has not been undone, and it’s starting to bite. Some examples: 

US retail sales are falling:


source: tradingeconomics.com

Housing, which a year ago was in a mini-bubble, is rolling over. Housing starts are down…


source: tradingeconomics.com

… while existing home sales have cratered: 


source: tradingeconomics.com

US manufacturing orders missed big in the most recent reporting month:

Manufacturing orders permenant QE

Corporate earnings, meanwhile, are so weak that analysts are talking about an “earnings recession”:

From a February Zero Hedge article

One week ago, when looking at the dramatic collapse in consensus Q1 EPS estimates, we noted that the “profit party” is over and the days of near record earnings growth are about to end with a bang as a result of the recent barrage in profit warnings and negative preannouncements, first and foremost starting with Apple, which issued a shocking guidance cut one month ago for the first time since 2001.

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

Peter Schiff: ‘This Is The Beginning Of The End’ For The Economy

Peter Schiff: ‘This Is The Beginning Of The End’ For The Economy

Peter Schiff, the President and CEO of Euro Pacific Capital, and one of the few who predicted the 2008 Great Recession before it happened has said that what we are experiencing now is “the beginning of the end.” Schiff made his comments during his keynote speech at the Vancouver Resource Investment Conference.

The economic guru says that the Federal Reserve has made the decision to halt interest rate hikes in order to attempt to save the flailing stock market – the key indicator for far too many of how “healthy” the economy is at current. According to Seeking Alpha, the markets responded to the Fed’s decision in a positive manner, leading many to think we are “out of the woods” and no longer in danger of a recession.

However, Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put the United States on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get to the actual financial disaster than he expected.

“The reason that I originally said that I did not expect the Fed to raise rates again was because I knew that raising rates was the first step in a journey that they could not finish, that in their attempt to normalize rates, the stock market bubble would burst and the economy would reenter recession.

Normalizing interest rates when you’ve created an abnormal amount of debt is impossible.

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

Why Monetary Easing Will Fail

WHY MONETARY EASING WILL FAIL

The major economies have slowed suddenly in the last two or three months, prompting a change of tack in the monetary policies of central banks. The same old tired, failing inflationist responses are being lined up, despite the evidence that monetary easing has never stopped a credit crisis developing. This article demonstrates why monetary policy is doomed by citing three reasons. There is the empirical evidence of money and credit continuing to grow regardless of interest rate changes, the evidence of Gibson’s paradox, and widespread ignorance in macroeconomic circles of the role of time preference.

The current state of play

The Fed’s rowing back on monetary tightening has rescued the world economy from the next credit crisis, or at least that’s the bullish message being churned out by brokers’ analysts and the media hacks that feed off them. It brings to mind Dr Johnson’s cynical observation about an acquaintance’s second marriage being the triumph of hope over experience.

The inflationists insist that more inflation is the cure for all economic ills. In this case, mounting concerns over the ending of the growth phase of the credit cycle is the recurring ill being addressed, so repetitive an event that instead of Dr Johnson’s aphorism, it calls for one that encompasses the madness of central bankers repeating the same policies every credit crisis. But if you are given just one tool to solve a nation’s economic problems, in this case the authority to regulate the nation’s money, you probably end up believing in its efficacy to the exclusion of all else.

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

Peter Schiff: This Is the Beginning of the End (Video)

Peter Schiff: This Is the Beginning of the End (Video)

During his keynote speech at the Vancouver Resource Investment Conference, Peter Schiff said we are at the beginning of the end.

The Fed appears to have paused interest rate hikes in order to save the stock market. The markets have reacted positively and a lot of analysts seem to think we’re out of the wood. But Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put us on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get here than he expected. 

HIGHLIGHTS FROM THE SPEECH

“I have been forecasting that the Federal Reserve would not be able to complete its rate normalization process since before they raised rates for the first time.”

“I still believe if Hillary Clinton won that election, which was widely expected, I think it would have been one-and-done. I don’t think the second rate hike would have taken place had Hillary Clinton won.”

“I think that had Hillary Clinton won, the stock market would have tanked. The conventional wisdom before the election was that if Trump won it was going to be a disaster for the stock market, but if Hillary Clinton won, the market was going to like it. Well, Trump won and the market went way up, the opposite of what was expected. I believe that had Hillary Clinton won, the market would have gone down. Also the opposite of what had been expected. And I believe the US would have entered recession much sooner.”

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

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