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Central Bank Crisis Expanding

Central Bank Crisis Expanding

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?


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…

Banks Will Not Bail Out The Economy

Banks Will Not Bail Out The Economy

These days, we hear a lot that banks were the problem in the 2008 crisis and now they are the part of the solution. 

Banking was not the main problem of the 2008 crisis, but one of the symptoms that indicated a more serious disease, the excess risk taken by public and private economic agents after massive interest rate cuts and direct incentives to take more debt coming from legislation as well as local and supranational regulation. Lehman Brothers was not a cause, it was a consequence of years of legislation and monetary policies that encouraged risk-taking.

The second part of the sentence, “now banks are the solution,” is dangerous. It starts from a wrong premise, that banks are stronger than ever and can bail out the global economy. Banking may be part of the solution, but we cannot place, as the eurozone is doing, the entire burden of the crisis on the banks’ balance sheet. I will explain why.

When economists in Europe talk endlessly about the differences in growth and success of monetary and fiscal policy between the United States and Europe, many ignore two key factors. In the United States, according to the St Louis Federal Reserve, less than 15% of the real economy is financed through the banking channel, in the European Union, it is almost 80%. In addition, in the United States, there is an open, diversified, more efficient and faster mechanism to clean non-performing loans and recapitalize the economy that adds to its high diversification in private non-bank financing channels. 

It is, therefore, essential that in periods of crisis countries, particularly in Europe, do not relax risk analysis mechanisms, because the economic recovery may be slowed down by ongoing problems in the financial sector and even lead to a banking crisis in the midterm. The worst measure that countries can take in a crisis is to force incentives to take a disproportionate risk.

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

Credit Markets – The Waiting Game

Credit Markets – The Waiting Game

Everything and the Kitchen Sink

After the first inter-meeting rate cut in early March, we opined that further rate cuts were a near certainty and that “not-QE” would swiftly morph into “QE, next iteration” (see Rate Cutters Unanimous for the details). As it turned out, the monetary mandarins did not even wait for the official FOMC meeting before deciding to throw everything and the kitchen sink at the markets. Not only were rates insta-ZIRPed, but “not-QE” became “QE on steroids, plus”.

The federal debt monetization machinery goes into orbit. Moon landing next?

The “plus” stands for the alphabet soup of additional support programs for various slices of the credit markets, ranging from money markets to commercial paper to corporate bonds (investment grade only – for now). Alan Greenspan once said in Congressional testimony that if need be, the Fed would one day even “monetize oxen” – he may well live to see it.

What spooked the central bank was clearly the fact that corporate credit markets froze in response to the stock market crash and the lockdown measures. The latter have left a great many companies bereft of cash flows, not an ideal situation considering that trillions in corporate debt have to be refinanced in coming months and years. We have long argued that burgeoning corporate debt was the Achilles heel of the bubble, and this remains the case.

When the stock market crash started, money initially continued to flow into investment grade corporate bonds. LQD (investment grade corporate bond ETF) still made new highs in early March, while stocks were already in free-fall. But that didn’t last, and in less than two weeks LQD not only joined the crash, but began to trade at unprecedentedly large discounts to its NAV.

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

The House that Ben Built

The House that Ben Built

Yes, this collapse does portend to be far worse than the last and it’s a very different type of financial collapse too.

After credit markets froze in the subprime crash of 2008-2009 Ben Bernanke and the Fed conjured up a number of monetary tricks to keep the system afloat.  POMO, Twist, QE, TARP, repos, and currency swaps (and other monetary tricks) were used to provide liquidity to an essentially bankrupt system sporting a weaponized US dollar.[1] Even though the monetary tricks worked – or seemed to – they were based on a deeply flawed, immoral, and unlawful prospect: the privatization of profit enabled by the socialization of loss.

So the bubble that burst in 2008-2009 was simply reinflated by the Fed/Treasury with a good bit of collusion among global players… with differences to be addressed.  Trouble has been brewing among Central Banks and their dealers for years; notably HSBC, Deutsche Bank, and the Royal Bank of Scotland with many other structural defects apparent. As such monetary realists have warned for years that the coming economic collapse would be far worse than the last.

Since 2009 we’ve had trade wars, proxy wars, and punishing sanctions. Covert or overt interventionism and weaponization of the US dollar on behalf of war profiteers and economic hitmen — which Washington has blessed as being free market entrepreneurs — is not something that the rest of the world will forgive easily.

Yes, this collapse does portend to be far worse than the last and it’s a very different type of financial collapse too. The difference is remarkable in that global markets have become ever more co-dependent than they were ten years ago still largely relying on a weaponized US dollar as world reserve currency.

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

Fed Disaster: S&P Futures Crash, Halted Limit Down; Gold, Treasuries Soar After Historic Fed Panic

Fed Disaster: S&P Futures Crash, Halted Limit Down; Gold, Treasuries Soar After Historic Fed Panic

The Fed may have a very big problem on its hands.

After firing the biggest emergency “shock and awe” bazooka in Fed historyone which was meant to restore not just partial but full normalcy to asset and funding markets, Emini futures are not only not higher, but tumbling by the -5% limit down at the start of trading…

… Dow futures down 1,000 and also limit down…

Mishkin Says the Idea That Fed Solves Everything With Rate Cuts Is ‘Wacky’

… the VIX surging 14%….

… perhaps because the Fed has not only tipped its hand that something is very wrong by simply waiting an additional three days until the March 18 FOMC, but that it can do nothing more to fix the underlying problem, while gold is surging over 3% following today’s dollar devastation (if only until risk parity funds resume their wholesale liquidation at some point this evening)…

… as US Treasury futures soar (which will also likely be puked shortly once macro funds are hit again on their basis trades), as it now appears that the Fed’s emergency rate cut to 0% coupled with a $700BN QE is seen as note enough by a market which is now openly freaking out that the Fed is out of ammo and has not done enough.

In short, with the ES plunging limit down, this has been an absolutely catastrophic response to the Fed’s bazooka; expect negative interest rates across the curve momentarily.

As FX strategist Viraj Patel puts it, “the Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX. Fed making US risky assets relatively more attractive may support $USD”

Negative interest rates in the US are virtually guaranteed now

Negative interest rates in the US are virtually guaranteed now

On October 19, 1987, the US stock market suffered the worst crash in its more than 200 year history, dropping more than 23% in a matter of hours.

It wasn’t just in the United States, either. More than 20 major stock markets around the world, from London to Hong Kong to Australia, fell by similar amounts.

And economists estimate that stocks worldwide lost roughly $1.7 trillion of value (approximately 10% of global GDP at the time) during the October 1987 crash.

The next morning on October 20th, the Federal Reserve announced that they would do whatever it takes to support the economy.

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And ten days later they cut interest rates by 0.5%.

Yesterday the Federal Reserve did the same thing. Stock markets worldwide have been jittery lately due to Corona Virus fears, so the Federal Reserve stepped in and cut interest rates by 0.5%.

Honestly there are so many things that are remarkable about this—

First, the Fed already has a regularly scheduled meeting coming up in two weeks on March 17th. But apparently they thought the situation was so severe that they held an emergency meeting yesterday and hastily voted to cut interest rates by 0.5%.

Just think about what that means: 30+ years ago, the Fed cut rates by half a percent after, literally, the worst day in the history of the stock market.

Today’s stock market turmoil is nowhere near as bad as it was in 1987. Sure, the market is down around 10% over the past two weeks.  But where is the law that says the stock market isn’t allowed to fall? Capitalism is all about risk and reward. There are supposed to be periods of decline.

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

Global Demographic Fact Vs. Central Bank Sorcery

Global Demographic Fact Vs. Central Bank Sorcery


  • The annual growth of the working-age population is the organic baseline for growth in national, regional, and global consumption.
  • However, since World War II, interest rate policy has moved inversely of annual working-age population growth, to incent ever more debt as working-age population growth has decelerated to nothing.
  • Interestingly, total annual change in energy consumption has mirrored annual working-age population growth.except where synthetic growth has been temporarily substituted to maintain the appearance of growth (aka, China).
  • Eventually, the inorganically rising consumption and asset prices will return to their organic baseline.and that will be a very rude new dawn for those who believed in infinite growth.

The 1st world economy lives within a fractional reserve banking system.  In a fractional reserve system, one persons debt is the systems new money, as money is lent into existence. At a progressive rate since 1980, it has been the combination of decelerating working-age population growth, declining interest rates, and ramping utilization of privately loaned debt that has simultaneously been the basis for increasing consumption and the creation of new money.  As borrowers undertook new loans prior to 2008, this borrowing was the primary means of monetary growth.  However, the changing demography since 2008  has changed everything as population growth has shifted from young to old…and federal governments and central banks have taken over money creation via monetization resulting in asset inflation.

  1. New debt is primarily undertaken in the 1st world nations where income and savings are higher but also credit is readily available and standards for this credit vary widely, by asset type (zero for student loans, low for vehicles, moderate to high for homes…since ’07).
  2. It is primarily the working-age population that undertakes new debt while those in the post working age population tend to deleverage and pay down existing loans (this has the opposite monetary effect of destroying money). 

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

Hitting Zero: 700 Years of Declining Global Real Interest Rates

Hitting Zero: 700 Years of Declining Global Real Interest Rates

Are negative interests here to stay?

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Hitting Zero: 700 Years of Declining Global Real Interest Rates</span>

A recent study by Yale economist Paul Schmelzing suggests that global real interest rates “could soon enter permanently negative territory.”

In Mesopotamia around the third millennium B.C. there were two types of money circulating: barley and silver. The interest rate on a barley loan was usually 33%, whereas, on silver, it was 20%. At the time of writing, the interest rate where I live (the Netherlands) on my savings account—technically a loan to the bank—is zero percent. And my country is no exception. An enormous difference compared to the earliest economy we have written evidence of—that of the Sumerians living in Mesopotamia 4,500 years ago.

Schmelzing’s study, titled Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018, illustrates the historical decline in not only nominal interest rates, but also real interest rates. According to Schmelzing, there is a seven-hundred-year declining trend in real rates, which is not likely to reverse course.

In one of my previous articles I showed the (current) correlation between long-term real interest rates on sovereign bonds and the price of gold. I wrote:

One of the key drivers … for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk).

Regarding this correlation, it’s valuable to get a sense of where real rates are heading.

Schmelzing points out real rates have declined (depending on the type of debt) by 0.006-0.016 % per year since 1311. Remarkably, he states, “that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates” have been falling.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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