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No, Rate Cuts Were Not Discussed: ECB Insiders Out Draghi as Fabricator & Schemer, and Talk to Reuters

No, Rate Cuts Were Not Discussed: ECB Insiders Out Draghi as Fabricator & Schemer, and Talk to Reuters

Draghi’s shenanigans get hilarious, months before his term ends.

So here’s ECB President Mario Draghi, whose term ends in October, and he’s at the ECB Forum in Portugal, and in a speech on Tuesday titled innocuously, “Twenty Years of the ECB’s monetary policy” – so this wasn’t a press conference after an ECB policy meeting or anything, but a speech on history at an ECB Forum – he suddenly threw out a whole bunch of stuff…

How, “in the absence of improvement” of inflation, “additional stimulus will be required,” in form of “further cuts in policy interest rates” and additional bond purchases, and how “in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability,” and that “all these options were raised and discussed at our last meeting.”

Whoa! Wait a minute, said the good folks who were part of the ECB’s June meeting. These options were not discussed, they told Reuters on Tuesday.

Draghi had ventured out there on his own – apparently trying to push his colleagues into a corner single-handedly as his last hurrah.

His vision laid out on Tuesday was quite a change from the June 6 post-meeting announcement, which didn’t mention anything about even discussing rate cuts. It said that the ECB expects its policy rates to “remain at their present levels at least through the first half of 2020,” before the ECB would begin to raise them, with the bias still on raising rates, not cutting rates. That was less than two weeks ago, and there had not been another ECB policy meeting since then.

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

Blain’s Morning Porridge – 18th June 2019

Blain’s Morning Porridge – 18th June 2019

“Here’s to all the filthy money and where it went..” 

Happy Birthday David! 

Apologies for the lack of commentary y’day.. long, dull boring story involving the Isle of Wight Festival, transport hassles and a whiff of pot on a strike slowed train… 

So much to think and worry about the morning – the market showing its love and appreciation for BoJo and the heightened chances of a no-deal Brexit by spanking sterling to a 6 month low, or Boeing deciding to rename its troubled B-737 MAX by dropping MAX as Airbus orders come flooding in at the Paris Airshow, but the main story is the Fed.. or should that be how much faith the market is putting in the Fed and the FOMC meeting today/tomorrow? I’m not persuaded… 

The market consensus is the Fed will eventually ease US rates, but not this time. It’s how it communicates/hints at timing tomorrow that will be most closely analysed aspect. Expect pages of dot-plot analysis and explanations of whatever he said and meant. Fed-Head Jerome Powell has already made clear the Fed is willing to act to offset slower growth and counter a trade war; “we will act as appropriate to sustain the expansion”. 

This is where it starts to look messy. Is it the Fed’s job to “sustain expansion”? 

It’s clearly a laudable objective, but let’s not confuse the stock market for the economy! It plays right into Trump’s agenda, his simplistic message to the electorate that stock strength proves his deal making success. An ease would provide a potent hit of short-term ecstasy to an addicted stock market, and give Trump something to crow about – a factor the Liberal press is all over like the proverbial cheap suit.

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

Markets are being Lulled into a False Sense of Accommodation

Markets are being Lulled into a False Sense of Accommodation

Those who take an interest in the actions of central banks will know that the advent of Brexit and Donald Trump’s presidency has seen the direction of monetary policy gradually change in both the UK and the U.S.

Since the EU referendum, the Bank of England have raised interest rates twice, after initially cutting them and implementing a new round of quantitative easing in the aftermath of the vote. The first rate hike in November 2017 came over a decade since the bank last increased rates in July 2007.

A month after Donald Trump was confirmed as the 45th American president, the Federal Reserve raised rates for only the second time in nine and a half years. Since Trump’s inauguration, they have gone on to hike a further seven times, and over the course of eighteen months (starting late 2017) the Fed have rolled off over $600 billion in assets from its balance sheet.

As the Fed continue to roll off assets until their balance sheet ‘normalisation‘ programme ends in September, the sentiment amongst traders is that the central bank will soon begin a course of rate cuts in order to stave off the threat of a recession as the prospect of a full blown trade conflict with China and other nation states gathers momentum.

A similar sentiment can be found in the UK over Brexit. With the British economy stagnant and manufacturing and construction sectors in decline, there exists an expectation that the Bank of England will ultimately reverse course if an economic downturn takes hold.

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

“The Market is Almost Always Wrong About What the Fed Will Do”: Chart

“The Market is Almost Always Wrong About What the Fed Will Do”: Chart

The rate cuts for 2019 are a pipe-dream: Goldman Sachs and Deutsche Bank.

It now makes two: The chief economists at investment banks Goldman Sachs and Deutsche Bank have warned their clients that the already priced-in rate cuts this year that markets are so excited about may not materialize.

To proof their point, Deutsche Bank chief economist Torsten Slok and his team dug through the data going back to 2001, comparing the path of the federal funds rate – which reflects the Fed’s rate hikes and cuts – to the futures markets for the federal funds rate. They concluded: “The market is almost always wrong about what the Fed will do.”

And they asked: “Why would the market be right today?” That was a rhetorical question.

Yet, these bets – that are “almost always wrong” about the Fed’s rate decisions – are now being incessantly cited to show that the Fed will cut its target range for the federal funds rate. At the moment, these traders see an 80% probability that the Fed will cut its target range at least twice by the December 11 meeting, including a 31% probability of three cuts by then, and a 10% probability of four cuts, as implied by trading of 30-day Fed Fund futures.

This chart shows how three rate cuts suddenly gained momentum among Fed Funds futures traders on the CME, though tapering a tad over the past two days (chart via Investing.com):

Anytime the rate-cut mongers on Wall Street can twist something a Fed governor says into a rate-cut projection, they will. For example, Fed chair Jerome Powell gave a speech on June 4 about long-term questions the Fed has been mulling over. The speech was unrelated to what the Fed will do over the next few meetings. Out of context, he shoehorned this line – “we will act as appropriate to sustain the expansion” – into the beginning.

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

Weekly Commentary: The Ignore Them, Then Panic Dynamic

Weekly Commentary: The Ignore Them, Then Panic Dynamic

After years of increasingly close cooperation and collaboration, the relationship has turned strained. Both sides are digging in their heels. Credibility is on the line. If one side doesn’t back down, things could really turn problematic. The Fed is asserting that it’s not about to lower the targeted Fed funds rate. Markets are strident: You will cut, and you will cut soon. Bonds are instructing the world to prepare for the Long March.  

Market probability for a rate cut by the December 11th FOMC meeting jumped to 80% this week, up from last week’s 75% and the previous week’s 59%.  

May 22 – Reuters (Howard Schneider and Jason Lange): “U.S. Federal Reserve officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place ‘for some time,’ a further sign policymakers see little need to change rates in either direction. ‘Members observed that a patient approach…would likely remain appropriate for some time,’ with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5%, the Fed… reported in the minutes of the central bank’s April 30-May 1 meeting. Recent weak inflation was viewed by ‘many participants…as likely to be transitory,’ while risks to financial markets and the global economy had appeared to ease – a judgment rendered before the Trump administration imposed higher tariffs on Chinese goods and took other steps that intensified trade tensions.”

Analysts have been quick to point out that additional tariffs along with the breakdown in trade negotiations unfolded post the latest FOMC meeting. True, yet several Fed officials have recently reiterated the message of no urgency to lower rates. This week Atlanta Federal Reserve President Raphael Bostic said he doesn’t see the Fed reducing rates.

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

The Next Economic Crisis and the Looming Post-Multipolar System

 The Next Economic Crisis and the Looming Post-Multipolar System

The Impending Crisis

At one time, specifically during the post-World War 2 Bretton Woods era, it looked like as if the capitalist model could be indefinitely sustainable and avoid plunging the world into major world conflicts. That era began to come to an end during the stagflation crisis of the 1970s, and came to a complete end at the end of the Cold War which ushered in the era of the so-called “globalization” which took form of unbridled competition for markets and resources. At first this competition did not show many signs of trouble. There were many “emerging markets” created as a result of the collapse of the Soviet bloc into which Western corporations could expand. However, the law of diminishing returns being what it is, the initial rapid economic growth rates could not be sustained and attempts to goose it using extremely liberal central bank policies, to the point of zero and even negative interest rates, succeeded in inflating—and bursting—several financial “bubbles”. Even today’s US economy bears many hallmarks of such a bubble, and it is only one of many. Sooner or later the proverbial “black swan” event will unleash a veritable domino effect of popping bubbles and plunge the global economy into a crisis of a magnitude it has not seen since the 1930s. A crisis against which the leading world powers have few weapons to deploy, since they have expended their monetary and fiscal “firepower” on the 2008 crisis, to little avail. The low interest rates and high levels of national debt mean that the next big crisis will not be simply “more of the same.” It will fundamentally rearrange the global economy.

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

Nomura: The Fed Will Go Large; Expect A 50bp Cut Out Of The Gate… And Soon

Nomura: The Fed Will Go Large; Expect A 50bp Cut Out Of The Gate… And Soon

it may seem morbid, if not grotesque, to discuss the Fed cutting rates on the day when the S&P just hit a new all time high, but as a result of the previously discussed US bank liquidity and dollar shortage thesis, now also espoused by JPMorgan,  and the coincident “funding-squeeze” dynamic, which as we have shown over the past week has expressed itself via the much-discussed “Fed Funds (Effective) trading through IOER” phenomenon…

… this is precisely the topic of the latest note from Nomura’s Charlie McElligott who writes this morning that with the Fed increasingly concerned about what even the big banks admit is a funding shortage in the US banking system (ironically enough, with over $1.4 trillion in excess reserves still sloshing in the system), Powell may have no choice but to cut rates aggressively, slash the IOER rate – perhaps as soon as this week – and eventually resume QE.

As if to validate McElligott’s point, amid increasing buzz of an imminent rate cut, the dollar keeps rising, and instead of tracking rate cut odds, which are now back to cycle highs, is instead tracking the excess EFF over IOER tick for tick as the clearest indicator of what is now perceived as a widespread liquidity shortage, and in doing so is escalating the recent turmoil across EMFX, as the US Dollar breaks out to fresh highs despite Friday’s worse than expected (below the surface) GDP print.

As discussed over the weekend, McElligott reminds readers that there is now “again a mounting belief in the market for a Fed “technical” IOER cut at some point into the Summer” –

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

Loonie Tumbles As Bank Of Canada Capitulates

Loonie Tumbles As Bank Of Canada Capitulates

Add The Bank of Canada to the list of flip-flopping central banks as it has now fully abandoned its bias toward raising interest rates as the economy grapples with a slowdown, bringing its policy into line with the Fed.

“Governing Council judges that an accommodative policy interest rate continues to be warranted,” officials led by Governor Stephen Poloz said in the statement.

“We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive.”

The Bank of Canada is keeping its key interest rate unchanged as it releases a downgraded 2019 growth forecast that includes a prediction the economy nearly came to a halt at the start of the year.

The Bank of Canada slashed its GDP growth forecast to 1.2% y/y in 2019, from 1.7% previous, and projecting growth of just 0.3 per cent in the first quarter of 2019.

The decision leaves the trend-setting rate at 1.75 per cent for a fourth-straight announcement – a pause that followed governor Stephen Poloz’s stretch of five hikes between mid-2017 and last fall.

The reaction makes sense – a sudden weakening in the Loonie…

And Canadian bond yields are tumbling…

The Fed is Going to Cut Rates to Negative 3% If Not 5%

The Fed is Going to Cut Rates to Negative 3% If Not 5%

As I warned last week, while most of the investment world has been glued to their trading screens watching the stock market rally.. something nefarious has  been unfolding behind the scenes.

That “something” is the Fed and other regulators implementing plans that will begin allow for large-scale cash grabs when the next downturn hits.

While stocks roared higher, Fed officials began openly calling for more extreme monetary policies including NEGATIVE Interest Rate Policy or NIRP.

NIRP is when a bank charges YOU for the right to keep your money there.

If you think this is conspiracy theory, consider that on February 5th 2019, the IMF published a report outlining how Central Banks could cut rates into DEEPLY negative territory.

We’re not talking negative 0.5%… we’re talking negative 3% or even 5%.

Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.

To get around this problem, a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.

Source: IMF

Any time the elites want to implement a new policy, the IMF is the “go-to” organization to introduce the idea.

It was the IMF that signed off on the disastrous Greek bail-out deals in 2010-2012.

It was also the IMF that “signed off” on the “bail-ins” in Cyprus, in which savings deposits lost as much as 50% in 2013.

Now the IMF is promoting the idea that Central Banks should cut rates into “deeply” negative territory during the next downturn.

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

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…

China & Buying Gold – Why?

China & Buying Gold – Why? 

QUESTION: Mr. Armstrong; I believe you said at the WEC in 2017 that central banks will diversify and increase their gold reserves going into the currency crisis coming in 2021. China has continued to increase its gold reserves. You would please update on that development.

Thank you

PK

ANSWER: Central banks are in a very difficult position. The ECB has really put the entire world at risk. Draghi is now realizing that negative interest rates have seriously harmed the European economy and led to a major growing liquidity crisis in European banking. The euro is regarded as a time bomb for it is neither a national currency nor a stable unit of account. The failure to have consolidated the debts from the outset has simply left the euro vulnerable to separatist movements and sheer chaos.

This is what has been behind the strength in the dollar. Central banks outside Europe have been caught in this dollar vortex. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China also has a debt problem with many provinces and companies who borrowed in dollars. Here in 2019, there is $1.2 trillion in Chinese dollar borrowings that must be rolled over. There is a rising concern that this year there could be a major threat of a dollar funding crunch. The total debt issued in US dollars outside the USA approached $12 trillion at the end of 2018. That is about 50% of the US national debt. The forex risk is huge, no less the interest rate risk on top of that. The more crises we see in Europe, the greater the pressure on the dollar to rise regardless of the Fed trying to stop capital inflows by delaying raising rates.

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

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

There are no extreme “fixes” to secular declines in sales, profits, employment, tax revenues and asset prices. 

The saying “never let a crisis go to waste” embodies several truths worth pondering as the stock market nears new highs. One truth is that extreme policies that would raise objections in typical times can be swept into law in the “we have to do something” panic of a crisis.

Thus wily insiders await (or trigger) a crisis which creates an opportunity for them to rush their self-serving “fix” into law before anyone grasps the long-term consequences.

A second truth is that crises and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras demand extreme solutions. Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.

Speculative credit bubbles inevitably deflate, and this is universally viewed as a crisis, even though the bubble was inflated by easy money, fraud, embezzlement and socializing risk and thus was entirely predictable.

The Federal Reserve and other central banks are ready for bubble-related financial crises: they have the extreme tools of zero-interest rate policy (ZIRP), negative-interest rate policy (NIRP), unlimited credit lines, unlimited liquidity, the purchase of trillions of dollars of assets, etc.

But what if the current speculative credit bubbles in junk bonds, stocks and other assets don’t crash into crisis? What if they deflate slowly, losing value steadily but with the occasional blip up to signal “the Fed has our back” and all is well?

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

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

James Grant, editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns about the growing herd of corporate «zombies» and other fatal market distortions caused by modern monetary policy.

Once again, the expedition to go back to normal has been postponed. After the big market scare at the end of 2018, central banks have abolished their plans to tighten interest rates further. Wall Street loves it. The first quarter has been the best one for risk assets in a decade, and after Lyft’s successful going public, a record year for IPOs seems to be in sight. Jim Grant observes the madding crowd from a sober distance. «Interest rates are the traffic signals of a market economy. Turn them all green, and errors and pileups abound», says the sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer. He states that a decade after the financial crisis, many companies are so heavily addicted to easy monetary policies that they wouldn’t be able to survive on their own. Consequentially, the proficient value seeker has a hard time to find attractive investments in today’s markets. Where he spots rare opportunities, he tells «The Market» in this extended interview.


Mr. Grant, once again, the Federal Reserve is giving investors the green light. US equities are off to their best start since 1998. What’s your take on the current state of the global financial markets?
Stocks are up, bond yields are down and economists are speaking of full employment: Everything seems perfect and improving. But I remain a non-believer in these modern monetary methods. If it were this easy, mankind would have solved the economic problems a long time ago.

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

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

A few years ago, shortly after the 2008 subprime lending disaster, the Fed sent a public relations team around the country to conduct supposedly “educational sessions” about how the Fed works and the wonderful things it does. The public was invited, and there was a question and answer session at the end of the presentation. One such session was held in Des Moines, Iowa. At the time I was teaching a course in Austrian economics at the University of Iowa, so I lusted at the prospect of hearing complete nonsense and having a shot at asking a question. I was not disappointed.

The educational part of the session lasted about an hour, and it became clear to me that the panel of four knew almost nothing about monetary theory. They may even have been hired especially for this grand tour, because all were relatively young, well scrubbed, and very personable–let’s face it, not your typical Fed monetary policy wonks or bank examiners! The panelists discussed only one of the Fed’s two remits–its remit to promote the economic advancement of the nation. Its other remit is to safeguard the monetary system. However, the panelists did touched upon the Fed’s control of interest rates and ensuring that money continued to flow to housing and other high profile areas of the economy.

Finally, at the end of the presentation, those with questions were asked to form a queue and advance one at a time to a microphone. I was last in a line of about a dozen. Here’s my recollection of what followed:

Me: You say that you (the Fed) have the power to increase the money supply. Is that right?

 …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…

Olduvai IV: Courage
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