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A lot of digital ink has been spilled in recent days over the perplexing reversal of the Yen, which for years was seen by the market as a “flight to safety” trade (as unexpected crisis events would prompt capital repatriation into Japan or so the traditional explanation went), only to suffer a major selloff in the past week as it suddenly started trading not as a funding currency for risk-on FX pairs, but as a risk asset itself.

To us, the reversal is far less perplexing than some smart people make it out to be: with Japan now effectively in a recession following the catastrophic Q4 GDP print which crashed 6.3% annualized, validated by today’s just as terrible PMI report…

.. and with Japan now set to suffer a major hit due to the coronavirus epidemic spreading like wildfire across the region, it is only a matter of time before the BOJ follows the ECB and Fed in reversing what has been years of QE tapering, and either cuts rates further into negative territory or expands its QQE (with yield control), and starts buying equities (although with the central bank already owning more than 80% of all ETFs, one wonders just what risk assets are left for the central bank to buy). Needless to say, both of these would have an adverse impact on the yen, and potentially lead to destabilization in the Japanese bond market which for years has defied doom-sayers, but it will only take one crack in the BOJ’s confidence for Japan’s entire house of cards to fall apart. That said, we are not there quite yet.

Furthermore, after the bizarre move in the prior two days, overnight the JPY appears to regain some normalcy, when it traded as it should (i.e., it was once again a risk-off proxy), with the USDJPY sliding during the two major “risk-off” events overnight.

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

Will the Bank of England join the loose money bandwagon?

September 18, 2019

Will the Bank of England join the loose money bandwagon?

As the year of the 325th anniversary of the Bank of England’s foundation, and as the month of one of the Bank’s more important rate-setting decisions since 2008, September provides a congruous occasion on which to reflect on the history of the BoE and consider what the future holds for it. Founded in 1694 as a private bank to the government, it was in 1998 that the BoE was granted independence from the government in setting monetary policy. Now the UK faces perhaps its greatest political uncertainty in a generation, it is worth asking the question: to what extent will this independence continue?

We have already seen the effect of populist leaders on central banks that are ostensibly independent. The obvious case is that of the US, but there are other examples to be found of central banks facing political pressure to keep monetary policy easy, from Turkish President Erdogan’s sacking of the then central bank governor, to the ECB’s reaction to persistently low growth in Europe. Even if Trump doesn’t control the Fed directly, he certainly controls the market, which in turn has forced the hand of the central bank and led to the Fed cutting rates with the economy in expansion. And with ever more monetary sweets to choose from in the jar, which politician could resist raiding the cupboard and giving their economy a sugar high of rate cuts, QE and lending?

Pressure on the Fed is likely only to increase as the 2020 elections approach: if President Trump is able to engineer further cuts, and then get the markets soaring with a trade deal and promises of tax cuts just in time for elections, we might begin to agree he is – in his words – “a very stable genius”.

Why Monetary Easing Will Fail

February 8, 2019

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…

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

October 8, 2018

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

On Sunday, the Bank of China cut the level of cash that banks must hold as reserves. The Yuan continued its slide.

Reuters reports China Set to Reopen After Beijing Eases Policy.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.

Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

Reserve requirement ratios (RRRs) – currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks – would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Trade War

China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.

ZeroHedge comments Yuan Set To Plunge Below PBOC “Red Line”.

The CNH is once again dangerously close to the PBOC’s redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.

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

Next Up: Global Synchronized Easing

August 24, 2018

Next Up: Global Synchronized Easing

Global economic tightening is a pipe dream. It hasn’t happened yet, and likely won’t.

Bloomberg writer Komal Sri-Kumar says, and I agree, Don’t be Surprised by a Switch Global Synchronized Easing.

Global investors are positioned for a coordinated tightening of monetary policy by the world’s major central banks. Although the U.S. Federal Reserve is already far down that path, the others are just getting started. The European Central Bank is set to end its bond purchase program by year-end. The Bank of England is leaning toward hiking interest rates for only the third time in 10 years. Concerns were rising that the Bank of Japan could end the zero yield target for 10-year government bonds at its meeting last month.

A factor that may induce the Fed to delay rate increases after September is the surging dollar. U.S. President Donald Trump has already complained that an appreciating dollar has blunted the “competitive edge” of U.S. exports. By increasing the cost of American exports to foreign buyers, a stronger dollar would increase the trade deficit that Trump considers to be an important measure of how other countries are taking unfair advantage of the U.S. On July 19, he openly criticized the Fed for increasing rates several times despite a long-held tradition that the executive branch avoids commenting on monetary policy.

The ECB has to contend with a deteriorating economic situation in Turkey, which owes $467 billion to foreign creditors, including a large exposure to some of the euro zone’s largest commercial banks. The banks may have to write off a portion of their loans to Turkey, requiring an ECB backstop for vulnerable financial institutions rather than tighten monetary policy into a crisis.

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

China Announces New Stimulus Measures

July 26, 2018

China Announces New Stimulus Measures

Another day, another stimulus announcement by China.

One day after Beijing threw in the towel, and in addition to monetary easing announced it would be far more “proactive” in fiscally stimulating the country, Chinese banks received notice from regulators on Wednesday that a core capital requirement will be eased in order to support lending, as Beijing uses the ongoing trade war as a scapegoat to unleash another massive stimulus – think Shanghai Accord just without the foreign central bankers and without the US.

This is merely the latest in a wild scramble of easing initiatives unleashed by China in the past three months, and summarized in the chart below.

As Bloomberg reports, the PBOC told some institutions Wednesday that the so-called “structural parameter” in the Macro-Prudential Assessment of their balance sheets will be lowered by around 0.5 points, reducing required capital buffers.

Acording to Bloomberg sources, the PBOC said that the change is being made to support local financial institutions in meeting credit demand effectively, which is another way of saying allowing the country’s banks to purchase more of China’s AA- rated “junk bonds” which have tumbled in recent months.

Last week, the PBOC offered a record amount of Medium-term Lending Facility loans – with the proceeds meant to be used for purchasing the riskiest bonds – and has cut reserve-requirement ratios three times this year.

China’s scramble to stimulate the economy, both monetarily and fiscally, comes as the country’s broadest credit aggregate, Total Social Financing, has fallen to a record low as a % of China’s M2.

The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain, as credit growth slumps and interest rates rise.

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

It’s Raining Money

February 26, 2018

It’s Raining Money

With apologies to the Dire Straights:

Now look at them yo-yo’s that’s the way you do it
You play the bull on the fin TV
That ain’t workin’ that’s the way you do it
Money for nothin’ and stocks for free

After 9 years of artificial liquidity drenching markets the same game continues in 2018: It’s raining money. Again. Still.

Last week we saw the standard script of the last 9 years unfold: Dovish talk by central bankers and artificial liquidity taking over markets. The latest avalanche of free money entering markets are of course buybacks courtesy of tax cuts which now are expected to reach $650B in 2018 announcements coming to $50B a month.

In many cases companies don’t know what to do with all that free cash, but to buy back their own shares. Warren Buffet pretty much spelled it out this weekend and today:

“A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote.

The firm’s most recent annual letter revealed the investment conglomerate’s net worth surged $65 billion in 2017, with $29 billion of that stemming from tax proceeds. That gain was realized in December, after the passage of the tax plan.

So he has a problem, knowing that stocks are expensive he’s having a hard time investing the cash so he’s opening the door to buy back his own shares over issuing more dividends. None of this creates jobs, jobs, jobs of course, but is a refection of the absurdity of the ill devised tax cuts that will continue to expand wealth inequality but will continue to produce a bid underneath markets until the bitter end.

Lest also not forget that the ECB keeps running QE at 30B Euro a month and overnight the BOJ’s Kuroda announced persistent monetary easing is needed while China injected 150b yuan in overnight liquidity as well and voila a sea of global green:

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

Helicopter Money——The Biggest Fed Power Grab Yet

July 14, 2016

Helicopter Money——The Biggest Fed Power Grab Yet

The Cleveland Fed’s Loretta Mester is a clueless apparatchik and Fed lifer, who joined the system in 1985 fresh out of Barnard and Princeton and has imbibed in its Keynesian groupthink and institutional arrogance ever since. So it’s not surprising that she was out flogging—-albeit downunder in Australia—- the next step in the Fed’s rolling coup d’ etat.

We’re always assessing tools that we could use,” Mester told the ABC’s AM program. “In the US we’ve done quantitative easing and I think that’s proven to be useful.

“So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.

This is beyond the pale because “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt—–that is, purchase of government bonds with central bank credit conjured from thin air.

It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers.

As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank funding of public debt make a wit of difference.

Suppose Washington issues treasury bonds to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for 3 days, 3 months or even 3 years, and then sell them back to the Fed under QE (and most likely at a higher price).

So what!

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

Why Did Japanese NIRP Cause Such Surprise In the Currency Market and Is It More Dangerous?

February 18, 2016

WHY DID JAPANESE NIRP CAUSE SUCH SURPRISE IN THE CURRENCY MARKET AND IS IT MORE DANGEROUS?

The Bank of Japan announcement of NIRP sent shock waves through currency markets
The Yen has strengthened on capital repatriation since the BoJ move
JGB 10 year yields turned negative this week
Longer-term the Yen will weaken

At the end of January the Bank of Japan (BoJ) shocked the financial markets by announcing that they would allow Japanese interest rates to become negative for the first time. USDJYP reacted with an abrupt rise from 118 to 121 which was completely reversed a global stock markets declined USDJYP is currently at 112.06 (11-02-2016). The three year chart below shows the extent of the move:-

USDJPY_-_3yr

Source: Big Charts

Here is an extract from the BOJ Announcement:-

The Introduction of “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate”

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary.

The Bank will introduce a multiple-tier system which some central banks in Europe (e.g. the Swiss National Bank) have put in place. Specifically, it will adopt a three-tier system in which the outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.

“QQE with a Negative Interest Rate” is designed to enable the Bank to pursue additional monetary easing in terms of three dimensions, combining a negative interest rate with quantity and quality.

The Bank will lower the short end of the yield curve and will exert further downward pressure on interest rates across the entire yield curve through a combination of a negative interest rate and large-scale purchases of JGBs.

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

US Money Supply Growth Finally Begins to Crack

November 24, 2015

US Money Supply Growth Finally Begins to Crack

Breaking Below the Shelf

In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.

As we wrote:

“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”

BN-GO061_WAJ_Mo_J_20150121165559

Photo credit: Bari Goodman

In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.

Annual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.

This is the final piece of the puzzle if it keeps up (and why wouldn’t it keep up?). Stock market internals have become ever more atrocious in the course of this year, which we have regarded as a sign that not enough new money was being printed to keep all the pieces of the bubble in the air at once. Now there is even less support.

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

Dear Janet, Seriously!!

October 31, 2015

Dear Janet, Seriously!!

The Fed’s confidence trick this week was, once again, the Keyser Soze gambit (via Beaudelaire)- “convincing the world of Yellen’s hawkishness, when no such character trait exists.” However, unlike the movies, stocks and FX markets have already seen through the con, leaving Fed Funds futures alone to believe the hype. As we noted previously, “The Fed Can’t Raise Rates, But Must Pretend It Will,” repeating its pre-meeting hawkishness to dovishness swing time and again in a “Groundhog Day” meets “Waiting For Godot”-like manner. Time is running out Janet, tick tock…

This is what we are to believe a “data-dependent” Federal Reserve is thinking…

Source: @Not_Jim_Cramer

And for now, Fed Funds Futures are falling for it…

But the broad equity markets aren’t…

Nor are Financials…

And nor is The Dollar…

Because, as we noted previously, the market (and The Fed) know perfectly well that raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things.

First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

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

Breaking: China Cuts Interest Rate By 25 bps, Cuts RRR by 50 bps; Futures Soar; Fed December Rate Hike Back In Play

October 23, 2015

Breaking: China Cuts Interest Rate By 25 bps, Cuts RRR by 50 bps; Futures Soar; Fed December Rate Hike Back In Play

Just two days ago, we noted that according to Citi’s Willem Buiter, there would be “Imminent Easing From Central Banks Of China, Australia, Japan And Europe.” Fast forward 48 hours when he is already half right – not only did Europe confirm it is about to cut, but moments ago none other than China joined the global easing orgy when in a completely unexpected development as it happened on a Friday (we are scouring various databases to find the last time, if ever this happened) China announced it has cut not only its 1 year lending rate and 1 year deposit rate by 25 bps, but also its reserve requirement ratio by 50 bps.

CHINA CUTS BANKS’ RESERVE REQUIREMENT RATIO
CHINA CUTS INTEREST RATES
CHINA CUTS 1-YEAR LENDING RATE BY 0.25 PPT
CHINA CUTS 1-YEAR DEPOSIT RATE BY 0.25 PPT
CHINA REMOVES DEPOSIT RATE CEILING FOR BANKS
CHINA CUTS RESERVE RATIO BY 0.5 PPT
CHINA INTEREST RATE CUT EFFECTIVE FROM OCT. 24

The PBOC’s statement in its google-translated entirety:

People’s Bank of China, from October 24, 2015, down financial institutions RMB benchmark lending and deposit interest rates, in order to further reduce the social cost of financing. Among them, one-year benchmark lending rate by 0.25 percentage point to 4.35%; year benchmark deposit rate by 0.25 percentage point to 1.5%; adjusted for each other grade benchmark interest rate loans and deposits, the People’s Bank lending rates of financial institutions ; personal housing accumulation fund loan interest rates remain unchanged. Meanwhile, commercial banks and rural cooperative financial institutions are no longer set the upper limit of the floating interest rates on deposits, and pay close attention to improve the market-oriented interest rate formation and regulation mechanism, strengthen the central bank interest rate system of regulation and supervision, improve the efficiency of monetary policy transmission.

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

The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%

October 16, 2015

The Latest Evidence That Global Trade Has Collapsed: India’s Exports/Imports Plunge By 25%

Late last month, India surprised 51 out of 52 economists when the RBI cut rates by 50bps.

Although economists have a reputation for being terrible when it comes to making predictions (getting it wrong perpetually is almost a job requirement), it’s difficult to understand how 51 of them failed to see a cut of that magnitude in the cards.

After all, it was just a little over a month earlier when the Indian government’s chief economic advisor Arvind Subramanian told ET Now television that India may need to “respond” to China’s monetary policy stance. He also hinted at further export weakness to come.

Here’s what the REER picture and the export picture looked like going into the RBI meeting:

And here’s what Deutsche Bank had to say in August:

Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. Global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.

Hence the outsized rate cut.

So that’s what the picture looked like going into Thursday’s export data and unsurprisingly, the numbers definitively show that global trade is in freefall. Here’s Reuters:

India’s exports of goods shrank by nearly a quarter in September from a year ago, falling for a 10th straight month and threatening Prime Minister Narendra Modi’s goal of boosting economic growth through manufacturing.

India’s economy, Asia’s third largest, is mostly driven by domestic demand, but the country has still felt the effects of China’s slowdown. Exports have dropped and consumer and industrial demand for imports has weakened.

Imports fell 25.42 percent in September from a year earlier to $32.32 billion.Exports stood at $21.84 billion, according to data released by the Ministry of Commerce and Industry on Thursday.

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

India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues

September 29, 2015

India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues

Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.

The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to “respond” to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.

Reinforcing that contention was the following from Deutsche Bank:

India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports.

Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view.

Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.

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

Global Easing Bonanza Continues As Norway, Taiwan Cut Rates To Spur Struggling Economies

September 24, 2015

Global Easing Bonanza Continues As Norway, Taiwan Cut Rates To Spur Struggling Economies

On several occasions this year we’ve profiled Norway where the central bank, much like the Riksbank in neighboring Sweden, is walking a fine line between keeping rates low to support the economy (not to mention remain competitive in the global currency wars) and being mindful of the effect low rates have on an overheating housing market.

Like the Riksbank, The Norges Bank is in a tough spot. The property bubble quite clearly needs to be arrested but using monetary policy to rein in the housing market means leaning hawkish in a world of DM doves and that can be exceptionally dangerous especially when your economy is heavily dependent on oil and crude prices are crashing.

Indeed, the pain from low oil prices has become so acute that Norway may ultimately be forced to tap its $900 billion sovereign wealth fund in order to avoid fiscal retrenchment.

Given the above, no one was surprised (well, no one except PhD economists, most of whom got this one wrong) when the Norges Bank cut rates on Thursday, taking the overnight depo rate to a record low of 0.75%. Here’s Bloomberg:

Norway’s central bank cut interest rates to an all-time low and said it may ease policy further as it seeks to rescue an expansion in western Europe’s biggest petroleum producer amid a plunge in oil prices.

The overnight deposit rate was lowered by 25 basis points to 0.75 percent, the Oslo-based central bank said Thursday. The move was forecast by seven of the 17 economists surveyed by Bloomberg, with the remainder expecting no change. The bank forecast its rate may fall as low as 0.59 percent in third quarter of next year. The krone plunged 2 percent against the euro on the news, its biggest drop since August.

“Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out,” Governor Oeystein Olsen said in a statement

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

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