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The ‘new normal’ has been postponed (and probably canceled)

The ‘new normal’ has been postponed (and probably canceled)

There remains a hope that once we get past the economic and social effects of the pandemic, all of us will be able to return to something resembling normal life before the pandemic—even if it is a “new normal” marked by heightened vigilance and protection against infectious disease and more work at home for office workers as companies realize they don’t need to maintain as much expensive office space.

But the date for this recovery to a new normal seems to keep getting postponed. The International Air Transport Association now projects a full recovery in international passenger traffic will take until 2024, a year later than the association projected back in April. The hotel industry will get a bit of a jump on the airline industry with a projected recovery by 2023The situation is so bad for restaurants that no one seems to be willing to project a date for anything that might be called a recovery.

Office building owners—who are suffering lower rent collections and lease cancellations—seem lucky in comparison with a recovery expected by the end of 2022.

Retailers of all kinds continue to suffer as closures abound throughout the United States. And, anyone who relies on commuter foot traffic for sales is hurting.

Meanwhile, the U.S. Federal Reserve Bank just signaled that in the wake of such a sluggish economy it will keep short-term interest rates near zero until 2023. One commentator provided a list of hobbies that Fed board members could take up to fill their time between now and then.

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

Fed’s GDP and Unemployment Projections: Who Believes Them?

In addition to its blather about interest rates, the Fed also made numerous economic projections.
Economic Projections

Please consider the Economic Projections of FOMC Participants under their individual assumptions of appropriate monetary policy, September 2020.

Fed’s GDP, Unemployment, PCE Inflation Projections

Fed's GDP, Unemployment, PCE Inflation Projections 2020-09

GDP Projection

The Fed believes GDP will only contract 3.7% in 2020 then rebound 4% in 2021, and 3% in 2022.

Do you believe this?

Unemployment Projection

The Fed believes the Unemployment Rate will be 7.6% in 2020, 5.5% in 2021, and 4.6% in 2022.

Do you believe this?

PCE Inflation Projection

The Fed believes Core Personal Consumption Expenditure inflation (excluding food and energy) will be 1.5% in 2020, 1.7% in 2021, and 1.8% in 2022.

Do you believe this?

GDP Poll

Unemployment Poll

PCE Poll

My Take

  • GDP: I will take the under. Way under. Much of the rebound was due to $600 pandemic stimulus checks that expired on July 25. This will be a huge headwind going forward.
  • Unemployment: I am leery of games with the participation rate and labor force but I will go with higher.
  • PCE : This one is humorous. For months, the Fed has committed not only to 2% but letting inflation run hotter than expected for some time to make up for needed lost inflation. Yet the Fed admits it will not hit its targets until 2023. PCE inflation, as measured, is a joke. So perhaps the Fed is on target.

$65 Oil And $5000 Gold: Traders Expect Volatility In Key Commodities

$65 Oil And $5000 Gold: Traders Expect Volatility In Key Commodities

The year of the pandemic put two commodities under the spotlight, but for different reasons. Gold prices hit an all-time high in August, while crude oil slipped into negative for a day in April, when demand crashed and inventories soared.

Both oil and gold have seen much volatility this year. Oil prices started 2020 at over $60 a barrel, dipped to the low teens in April – with front-month WTI Crude futures settling one day at a negative price – and rose to $40 in the summer, staying rangebound since then. The crash in demand pushed oil lower, while increased uncertainty over the economic and oil demand recovery, as well as the fears of a second COVID-19 wave, pushed investors to seek safe havens such as gold, driving the precious metal’s price to an all-time high of $2,075 an ounce last month.

The wild rides in the two commodities could represent buying opportunities, analysts argue, expecting oil and gold to rise in the medium term.

For oil, the uptrend may not come as soon as it could in gold, because of the heightened concern about the stalled demand recovery. Still, investment banks and analysts expect prices to increase from current levels over the next one to two years, especially if an effective vaccine hits the markets in 2021.

For gold, low or negative interest rates, continued economic stimulus, and the perception that gold is a hedge against uncertainty about the economy and the upcoming U.S. presidential election are expected to drive prices higher.

Alissa Corcoran, Director of Research at Kopernik Global Investors, told MarketWatch’s Myra P. Saefong that the short-term volatility in commodities could be an opportunity instead of risk.

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

Inflation, deflation and other fallacies

Inflation, deflation and other fallacies

There can be little doubt that macroeconomic policies are failing around the world. The fallacies being exposed are so entrenched that there are bound to be twists and turns yet to come.

This article explains the fallacies behind inflation, deflation, economic performance and interest rates. They arise from the modern states’ overriding determination to access the wealth of its electorate instead of being driven by a genuine and considered concern for its welfare. Monetary inflation, which has become runaway, transfers wealth to the state from producers and consumers, and is about to accelerate. Everything about macroeconomics is now with that single economically destructive objective in mind.

Falling prices, the outcome of commercial competition and sound money are more aligned with the interests of ordinary people, but that is so derided by neo-Keynesians that today almost without exception everyone believes in inflationism.

And finally, we conclude that the escape from failing fiat will lead to rising nominal interest rates, with all the consequences which that entails. The inevitable outcome is a flight to commodities, including gold and silver, despite rising interest rates for fiat money.

Demand-siders and supply-siders

In a macroeconomics-driven world, economic fallacies abound. They are periodically trashed when disproved, only to arise again as received wisdom for a new generation of macroeconomists determined to justify their statist beliefs. The most egregious of these is that inflation can only occur as the handmaiden of economic growth, while deflation is similarly linked to a recession spinning out of control into the maelstrom of a slump.

This error is the opposite of the facts.

Conventionally, macroeconomists split into two groups. There are the Keynesians who believe in stimulating demand to ensure there will always be markets for goods and services, which they attempt to achieve through additional spending by governments and by discouraging saving, because it is consumption deferred.

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

They’ve Done It Again

They’ve Done It Again

The stars are back in their courses. The angels are back in the heavens. And the Perfections are back within sight…

For merely 148 trading days after bottoming… the S&P returned to record heights today.

The index closed the day at 3,389 — eclipsing its February 19 height of 3,386.

Thus Jerome Powell’s maniacal persistence has yielded a reward truly fantastic. He has successfully reflated the bubble.

The Federal Reserve has itself become the market.

Shannon Saccocia, Boston Private’s chief investment officer:

Equity markets are reflecting the massive monetary and fiscal stimulus that has been injected over the past four months… the rationale to diversify away from risk assets is hard to pinpoint.

For many the rationale to diversify away from risk assets is indeed hard to pinpoint…

No Longer Considered a Bear Market Rally

Bank of America has concluded its August Global Fund Manager survey. This survey revealed that:

The majority of professional investors no longer believe this market spree represents a bear market rally.

It is as genuine as gold itself, they believe.

What is more, 31% of those surveyed believe it is “early cycle” — the highest percentage since the financial crisis.

Meantime, Deutsche Bank reports, “companies have already restarted buybacks or are considering doing so.”

Buybacks were of course a primary source of helium for the bubble presently reflating.

And the Federal Reserve’s artificially depressed rates opened the taps…

Corporations Take on More Debt Than Ever

These exorbitantly low rates enabled corporations to pile on cheap debt.

With this debt they often purchased their own stock… which reduced shares outstanding… and raised the price per share.

That is, corporations often took on debt to conduct financial sorcery.

And now — as Deutsche Bank reports — the sorcerers are at their tricks again.

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

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

 

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

“Earlier today apparently a woman rang the BBC and said she had heard that there was a hurricane on the way. Well if you are watching, don’t worry, there isn’t.”

It’s blowing a full hooley out there this morning, which is very bad news for my olive trees as the storm is shaking the ripening fruit off. Shame. It’s the first time our little olive grove has produced what looked likely to become full-sized olives. I was going to add them to Dirty Martinis. Meanwhile, mink farms are being wiped out by coronavirus which is proving 100% fatal to the well-dressed ferrets. Interesting, but what does it mean…?

It’s Friday, which means I am allowed to go off on something of a tangent – so let’s not worry about how long this tech rally continues, the rising tensions in Europe, Apple spending $17bln on stock buybacks, China vs US, or the US election.

What’s got me worried this morning is the headline in the FT: UK Public Debt tops £2 trillion for first time on Covid Spending Boom.

Should we worry or should we not? (Clue: the first one…)

Let me ask the question: how long can governments continue to spend their way out of the Coronavirus crisis? The bills for long-term furlough programmes and sectoral bailouts and support, increased social services as unemployment rises, and the urgent need for health spending are going to come due at some point. Is it going to be a problem, and if yes, how big?

Government debt is rocketing higher – but does it matter? Conventional thinking, based on Reinhart and Rogoff, is when debt/GDP exceeds 77% there will a significant slowdown in growth.

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

As the Bubble Slowly Pops, the Economic Chain Reaction Is Now in Progress

As the Bubble Slowly Pops, the Economic Chain Reaction Is Now in Progress

bubble

Much has been written about the economic consequences of covid-19, yet, just as in many of the analyses of the Great Depression and the 2008 crisis, the years of accumulating debt preceding the event do not attract the attention they deserve. Covid-19—or to be more precise, the lockdown—has initiated a cascading liquidation of the debt bubble that has been building for a generation. From the early 1980s, each recession has been responded to with iteratively lower interest rates. Following the bursting of the late 1980s credit bubble, Greenspan inaugurated the loosest monetary policy for a generation, creating the dotcom bubble. When this burst in 2000, it was responded to with even lower interest rates, reaching 1 percent from 2003–04, generating the housing bubble. When this burst in 2007/8, the response was 0 percent interest rates, turning a $150 trillion global debt bubble as it was then—already the largest In history—into a $250 trillion global debt bubble.

When central banks set interest rates it fundamentally distorts the pricing mechanisms of credit markets, just like price setting in other parts of the economy. Friedrich von Hayek won the Nobel Prize in 1974 for articulating that interest rates, like other prices, should be set by the market rather than central planning committees. We are not surprised when the government setting the price of food in Venezuela leads to food shortages, so we should not be surprised that 0 percent interest rates leads to a shortage in yield for investors, leading to a $250 trillion global debt bubble.

(Below is a speech I gave in the European Parliament in 2018 in which I adumbrated these points for a political audience):

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

Central Bank Crisis Expanding

Central Bank Crisis Expanding

QUESTION: Hi Marty.
You mentioned in the blog that all European sovereign debt may end up being converted into perpetual bonds. Will it be through debt mutualization or will each country have each own Consol? Could you please elaborate on how this conversion would affect pension funds, banks, social security and individual investors? Knowing that the ECB already owns 33% of all government bonds in the Euro Zone, can it (ECB) be the buyer of last resort to avoid liquidity issues for all these investors (pension funds, banks, social security and individual investors)? What would make the ECB fail?
Regards

AMD

ANSWER: They will most likely provide no warning and they will simply announce what they have done to prevent anyone from trying to liquidate. The ECB will have it as reserves so that will not change. They were rolling the debt anyway because they cannot sell it without causing interest rates to rise.

The Federal Reserve is buying up corporate bonds to the point that there is now a shortage. They are doing this in a desperate measure to try to prevent interest rates from rising, which will in turn put pressure on the ECB and Emerging Markets. This is demonstrating that the central banks are fearful of the market pushing rates higher because of CREDIT RISK.

After the Fed Punts, the ECB Throws Another Hail Mary

After the Fed Punts, the ECB Throws Another Hail Mary

Last week FOMC Chair Jerome Powell and company did, essentially nothing, at their June meeting. They held interest rates at 0.25%, did not expand QE nor did they indicate any changes.

This wasn’t what the market wanted, as the bond were pushing the Fed to take rates negative and further open up the liquidity spigots.

Rates would be lower for longer and central bank swap lines would remain open. Other than that, the Fed didn’t give the markets what it wanted.

There were plenty of dollars in the system. That dynamic immediately changed after the FOMC meeting.

By punting the Fed put the ball back in the hands of the ECB who had been enjoying the dynamic of a weaker dollar to alleviate offshore dollar liquidity concerns.

It didn’t hurt that political instability here in the U.S. is at a high not seen since the 1860’s.

The stronger euro was assisting the ECB in selling their balance sheet expansion.

The ECB then announced it’s latest TLTRO-3 Auction for this quarter. The total amount of the auction was a stunning $1.3 trillion, which broke down into $550 billion in new lending and $760 billion in rollovers.

And it means the total TLTRO outstanding balance is already at all-time high levels and nothing has been solved yet.

But, as Goldman Sachs through Zerohedge points out, these loans were at incredibly generous rates:

Given improved terms (-1% for YR1 until June 2021, and -0.5% for YR2-3 if lending benchmarks criteria are met) starting with this auction, banks were expected to repay some outstanding TLTRO-II early to refinance at cheaper rates. Taken together, this still leaves some €550bn of net new take-up.

This gives banks the great incentive to get paid to borrow in euros and get the yield spread against other currencies like the dollar or the Japanese yen.

The size of this issuance is your proof that there simply aren’t enough dollars out there to soak up demand or banks wouldn’t have fed so deeply at the trough.

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

US Money Supply – The Pandemic Moonshot

US Money Supply – The Pandemic Moonshot

Printing Until the Cows Come Home…

It started out with Jay Powell planting a happy little money tree in 2019 to keep the repo market from suffering a terminal seizure. This essentially led to a restoration of the status quo ante “QT” (the mythical beast known as “quantitative tightening” that was briefly glimpsed in 2018/19). Thus the roach motel theory of QE was confirmed: once a central bank resorts to QE, a return to “standard monetary policy” becomes impossible. You can check in, but you can never leave.

Phase 1: Jay Powell plants a happy little money tree to rescue the repo market from itself (from: “The Joy of Printing”).

It is easy to see why. Any attempt to seriously reduce outstanding central bank credit will bring about the very situation QE was intended to prevent, i.e., falling asset prices and an economic bust. Seemingly no-one in officialdom ever stops to ask why that should be so. What happened to “self-sustaining recoveries” and “achieving escape velocity”? Could it be the economy is neither a perpetuum mobile nor a space ship?

Before we consider this question, here is what has happened since then: shortly after the double-plus-uncool novel SARS-2 corona-virus traversed several ponds and made landfall in the US, Mr. Powell and his fellow merry pranksters decided to water the money tree with super-gro. Or maybe it was hyper-gro:

The “QE” roach motel, illustrated by the history of the Fed’s balance sheet.

That is a rather noteworthy bout of inflation. Readers may have noticed that in the realms of finance and economics there has also been an inflation of verbiage describing never before seen extremes.  By its very nature, one would normally not expect to hear the term “unprecedented” very often, but it has become disconcertingly commonplace in connection with monetary pumping, deficit spending and debt growth.

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

Minsky Melt-up Explained?!?

Minsky Melt-up Explained?!?

America (and the world at large) are in the midst of an entirely predictable demographically driven crisis, between an economic/financial system requiring infinite growth and a very finite human/physical world (detailed HERE, or HERE).  This mismatch will only become more acute for decades to come.  As the growth of demand is decelerating, central banks are using interest rate policy cuts to encourage higher consumption via greater leverage/debt.  Federal debt is soaring absent the economic (and tax revenue) growth to accompany this deluge of debt.  I will show that the primary purchasing sources of that debt have turned to net sellers…and that into this breach, the Fed has thrust itself as the buyer (counterfeiter) of last resort.  The result is likely to be a Minsky Melt-Up…and then the fall that typically follows.
First, by year end 2020 (estimated below), federal debt will almost surely cross $28 trillion while GDP will collapse in Q2 with likely recovery through Q3/Q4.  The outcome will be a debt to GDP ratio likely around 140%…smashing the WWII previous high water mark.  Noteworthy also in the chart below are the new standards of ZIRP and reliance on the Federal Reserve balance sheet (QE) to maintain zero percent interest rates.

Since 2008, public (marketable) federal debt has nearly quadrupled, up by $14.7 trillion.  Social Security and like Intragovernmental trust fund holdings have risen $1.8 trillion.  The Federal Reserve balance sheet has increased by 8x’s, up by $6.3 trillion.  In fact, most simply, it is the Federal Reserve using it’s balance sheet as the substitute for the demographically decelerating IG purchasing.  As the IG holdings will only continue to decline due to the unfunded liabilities (and with it the primary source of Treasury buying for decades turns to a decade of Treasury selling), the Fed’s balance sheet will rise inversely to avoid an interest rate Armageddon.

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

What Horrified Fund Managers, Banks & UK’s Pension Minister Said About the Bank of England’s Sudden “We Don’t Rule Out” Negative Interest Rates

What Horrified Fund Managers, Banks & UK’s Pension Minister Said About the Bank of England’s Sudden “We Don’t Rule Out” Negative Interest Rates

“The stimulus the country urgently needs is not experimental and dangerous monetary policy.”

Andrew Bailey, the recently appointed governor of the Bank of England (BoE), is considering going where no other BoE governor has ever gone in the central bank’s 325-year history: into negative interest rate territory. On May 20, Bailey told British MPs that the BoE is refusing to rule out cutting the benchmark interest rate below zero in response to the virus crisis.

“We do not rule things out as a matter of principle. That would be a foolish thing to do,” Bailey told MPs. “But that doesn’t mean we rule things in either.”

That statement came just six days after Bailey had told FT readers that negative interest rates are “not something we are currently planning for or contemplating.” Since then, Bailey says he has “changed [his] position a bit.”

Bailey, who replaced Mark Carney as BoE governor just two months ago, is not the only senior BoE official who’s apparently warming to the idea of foisting negative interest rates on the British economy.

So, too, has the central bank’s chief economist Andrew Haldane, who last week said: “The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy. How could we not be?”

In the wake of the virus crisis, the Bank of England has already slashed interest rates by 0.65 basis points to 0.1%, its lowest level ever. It has also revved up its swap lines with the Federal Reserve and other central banks, offered billions of pounds of fresh liquidity support to banks, and expanded its QE program by £100 billion to £745 billion and extended what it buys to include corporate bonds.

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

Here’s What Would Happen If The Fed Launched Negative Rates

Here’s What Would Happen If The Fed Launched Negative Rates

On Thursday, May 7, an unprecedented event took place: after a violent repricing in Eurodollar contracts as near as November 2020, for the first time ever the market was pricing in that negative interest rates are not only coming to the US, but would arrive sometime around the presidential election.

This move prompted a barrage of Fed speakers, including the Fed chair, to remind the public that the Fed really, really, really does not believe in negative rates (but never say never), even though one could say the same thing for the BOJ, the ECB and the SNB… and look at them now. In fact, in a world where growth is only possible with trillions in new debt injections – and with debt already at crushing levels, interest rates have to be as close to zero if not below it – the Fed has emerged as the “rational” outlier that refuses to take rates negative.

And yet, in a world where the economy was already sinking ahead of the catastrophic collapse spawned by the coronavirus, there is only so much the Fed can do before it took is dragged into the NIRP vortex.

To be sure, in many ways the market’s expectation for negative rates is rational. As we pointed out overnight, even Goldman is concerned that the Fed is simply not doing enough QE to monetize the massive upcoming treasury flood let along stimulate a global reflationary wave, which leaves it with just one other option: negative rates. Nordea’s Andreas Steno Larsen looked at this dynamic and reached a similar conclusion: “the Fed is still not buying enough to fully re-ignite the global credit cycle.

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

The Way of the Tao Is Reversal

The Way of the Tao Is Reversal

As Jackson Browne put it: Don’t think it won’t happen just because it hasn’t happened yet.

We can summarize all that will unfold in the next few years in one line: The way of the Tao is reversal. This is the opening line of Chapter 40 of Lao Tzu’s 5,000-character commentary on the Tao, The Tao Te Ching. There are many translations of this slim volume, and for a variety of reasons I favor the 1975 translation by my old professor at the University of Hawaii, Chang Chung-yuan (1907-1988), whom I would occasionally see doing Tai Chi late at night on his front yard in Manoa Valley.Professor Chang–who would often write Chinese characters on the blackboard with great energy to make a point–rendered this line in English as Reverse is the movement of Tao. Others have translated it as Reversal is the movement of Tao.Given the obscurity and ambiguity of Taoist concepts, this line has many interpretations. I prefer the way of the Tao is reversal because the Tao is fundamentally about virtue, power and what we might call authenticity. Thus all that is presented as permanent will be revealed as impermanent, all that is presented as true will be revealed as false and all that is presented as virtuous will be revealed as fraud.

In the present era, we can discern these potential reversals:

1. The all-powerful Federal Reserve will lose control and its power will dissipate into thin air.

2. Rather than linger at zero or negative rates as expected, interest rates will reverse and start moving inexorably higher.

3. What was presented as permanent–the value of national currencies and assets–will be revealed as impermanent.

4. What was presented as the power to force compliance will be revealed as powerlessness.

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

Powell Needs To Immediately Address Negative Rates Or He Will Lose Control

Powell Needs To Immediately Address Negative Rates Or He Will Lose Control

Today was a historic day, not for the latest algo-driven meltup in stocks, but because for the first time ever, fed fund futures priced in negative rates, first in January 2021 and shortly after,  as recently as November 2020.

In response to the dramatic move which reverberated across asset classes, sending stocks and gold sharply higher, and 2Y yields plunging to record lows as markets suddenly realized that NIRP may be coming in just a few months, Richmond Fed president Thomas Barkin said that it’s not worth trying negative rates in the US:

“I think negative interest rates have been tried in other places, and I haven’t seen anything personally that makes me think they’re worth a try here.” He then added that “if you looked at data as of today, you’d see it about as low as it’s going to go. We’ll be bringing people back to work, and eventually hopefully people back to stores and the like, in the coming weeks and months, and I would expect the data to go up from here.”

But one look at fed funds after Barkin’s comments showed that markets barely noticed, with December implied rates still in negative territory.

Which means that only Powell addressing this issue – immediately – can reverse the market’s test of the Fed’s resolve to go from ZIRP to NIRP, because the longer Powell does nothing, the more negative rates will become widely accepted, and any “unexpectedly” denials by Powell in the coming months would be seen as  hawkish reversal and lead to another market crash, which the Fed will argue nobody could have possibly seen and be forced to cut to negative anyway.

…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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