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The “up to” begins to matter for the first time.

The Fed released its weekly balance sheet Thursday afternoon. Over the four-week period from September 6 through October 3, total assets on the Fed’s balance sheet dropped by $34 billion. This brought the decline since October 2017, when the QE unwind began, to $285 billion. At $4,175 billion, total assets are now at the lowest level since March 5, 2014:

During QE, the Fed bought Treasury securities and mortgage-backed securities (MBS). During the “balance sheet normalization,” the Fed is shedding those securities. But the balance sheet also reflects the Fed’s other activities, and so the amount of its total assets is higher than the combined amount of Treasury securities and MBS it holds, and the changes in total assets also reflect its other activities.

The QE unwind was still in ramp-up mode in September, according to the Fed’s plan. For September, the Fed was scheduled to shed “up to” $24 billion in Treasuries and “up to” $16 billion in MBS.

From September 6 through October 3, the Fed’s holdings of Treasury Securities fell by $19 billion to $2,294 billion, the lowest since March 5, 2014. Since the beginning of the QE-Unwind, the Fed has shed $172 billion in Treasuries:

The “up to” begins to matter

Though the plan calls for shedding “up to” $24 billion in Treasury securities in September, the Fed shed only $19 billion. Here’s what happened – and why this will happen more often going forward:

When the Fed sheds Treasury securities, it doesn’t sell them outright but allows them to “roll off” when they mature; Treasuries mature mid-month or at the end of the month. Hence, the step-pattern of the QE unwind in the chart above.

…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…

US vs. China–Is it ‘Art of the Deal’ or Economic Warfare?

July 4, 2018

US VS CHINA – IS IT ‘ART OF THE DEAL’ OR ECONOMIC WARFARE?

If monetary tightening remains the main risk for global stock markets, the threat of a trade war continues to dominate the headlines.THE DONALD’S DEALMAKING

Some of those in Washington pushing this policy view China as some kind of strategic rival for global leadership. For such people this is about far more than just tariffs.

The question raised by Donald Trump’s trade agenda with China remains, in essence, extremely simple. It is whether The Donald is engaged in a typical ‘Art of the Deal’ negotiation, where he can suddenly turn on a dime and declare a ‘win’, or whether he is really seriously trying to stop Chinaupgrading its economy by targeting ‘Made in China 2025’.

Such a stance would amount to an act of economic warfare. On this point, it should be understood that some of those in Washington pushing this policy view of China as some kind of strategic rival for global leadership. For such people this is about far more than just tariffs.

The markets had been assuming that the American president would not take this too far. But, as discussed here before, concerns have grown as it has increasingly looked like Trump is supporting Robert Lighthizer’s (US Trade Representative) and Peter Navarro’s (White House Economic Adviser) agenda.

HOW LIKELY IS ECONOMIC WARFARE?

On July 6, first the US and then Chinese 25% tariffs on US$34 billion worth of goods are due to go into effect. If bilateral negotiations do not resume before that date, then the chances of the US and China entering a so-called trade war grow significantly.

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

Why India’s Surprise Rate Hike May Lead To The Next Emerging Market Crisis

June 6, 2018

Why India’s Surprise Rate Hike May Lead To The Next Emerging Market Crisis

Following RBI governor Urjit Patel’s Op-ed earlier this week, in which he lamented the growing dollar shortage as a result of the Fed’s ongoing tightening, it is perhaps not surprising that this morning India became the latest central bank to “surprise” markets with an unexpected rate hike as the country did everything it could to if not prevent, then delay the capital outflow Patel hinted at.

And it was a “surprise”, because only a third, or 14 of 44 economists surveyed by Bloomberg, predicted the RBI would hike the repurchase rate by 25 bps to 6.25%, as it did, with the rest predicting an unchanged announcement.

To be sure, the decision was welcomed domestically, where inflation has been trending higher, and Economic Affairs Secretary Subhash Chandra Garg said in a twitter post that he Welcomes the “monetary policy statement. Quite balanced assessment of growth, inflation and external situation and expectations.”

The market was a bit more tempered, although after an confused initial reaction to the hike in the INR, which first jumped, the slumped, it eventually closed near session highs, just as the RBI had intended.

The desired response may not last, however.

In a note by Bloomberg’s Abhishek Gupta, the economist writes that the rate hike may not help the rupee, because as a standard rule of thumb, while raising interest rates attracts capital inflows, causing the local currency to appreciate, this is generally only true for developed economies, and doesn’t necessarily hold for emerging markets, where capital typically doesn’t have free mobility. For that reason, a rate hike by the Reserve Bank of India “would likely add to downward pressure on the rupee, which is already suffering from higher crude oil prices.”

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

Weekly Commentary: End of an Era

November 4, 2017

Weekly Commentary: End of an Era

Of the diverse strains of inflation, asset inflation is by far the most dangerous. A bout of consumer price inflation would be generally recognized as problematic and rectified through a tightening of monetary conditions. On the other hand, asset price inflation is both celebrated and venerated. There is simply no constituency calling for a tightening of conditions to ward off the deleterious effects of rising asset prices, Bubbles and attendant economic maladjustment. And as we’ve witnessed, the bigger the Bubble the more powerful the constituencies that rationalize, justify and promote Bubble excess.

About one year ago, I was expecting a securities markets sell-off in the event of an unexpected Donald Trump win. A Trump presidency would create disruption, upheaval and major uncertainties – political, geopolitical, economic and social. Instead of a fall, the markets experienced a short squeeze and unwind of hedges. Over-liquefied markets and a powerful inflationary bias throughout global securities markets won the day – and the winning runs unabated.

We’ve come a long way since 1992 and James Carville’s “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” New age central banking has pacified bond markets and eradicated the vigilantes. These days it’s the great equities bull market as all-powerful intimidator.

The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I’ve always held the view that prolonged bull markets foster a portentous concentration of power – not only in the financial markets but within the financial system more generally.

…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…

Yellen Is Trapped in the Worst Nightmare Ever

September 20, 2015

Yellen Is Trapped in the Worst Nightmare Ever

Yellen has inherited a complete nightmare. Thursday’s decision to delay yet again the long-awaited liftoff from zero interest rates is illustrating that the world economy is totally screwed. There is a lot of speculation about why the Fed seems so reluctant to“normalize monetary policy”. There are of course the typical domestic issues that there is low inflation, weak wage gains in the face of strong job growth, a hike will increase the Federal deficit and then there is the argument that corporations that now have $12.5 trillion in debt. All that is nice, but with corporate debt, our clients are locking in long-term at these levels, not funding anything short-term. Those clients who have listened are preparing for what is to come unlike government which has been forced to shorten the average duration of their debts blind to what happens when rates rise, which will be set in motion by the markets – not Yellen.

Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate they MUST raise rates of they will bankrupt countless pension funds and international where emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the US national debt.

By avoiding the normalization of interest rates (hikes), the Fed has encouraged government to spend far more than they realize because money is cheap. This will eventually light the fire under the economy helping to fuel the Sovereign Debt Crisis. There appears to be no hope for the Fed and they will be forced to raise rates only when they see asset inflation in equities. Then they will have no choice. This is the worst possible mess and the longer they have waited to normalize interest rates, the worst the total crisis is becoming for they will have zero control over the economy and once that is seen, holy Hell will break lose.

“Everyone Preparing for the Wrong Outcome”: Schiff Says QE4 is Coming, Not a Rate Hike!

September 9, 2015

“Everyone Preparing for the Wrong Outcome”: Schiff Says QE4 is Coming, Not a Rate Hike!

The printing presses are firing up all over again… err, at least the digital ledgers are, anyway.

Financial expert and infamous goldbug Peter Schiff was interviewed by Fox Business from the floor of the U.S. Stock Exchange.

Schiff warned viewers that “everyone is preparing for the wrong outcome with the U.S. economy.”

That outcome? The financial world has been waiting with feverish anticipation for “the big day” when the Federal Reserve finally raises interest rates – a quiet move big enough to shift economic tectonic plates.

But contrary to conventional wisdom about when the Federal Reserve will raise interest rates, and thus turn the page on a new era of the economy, Schiff says they can’t and won’t raise rates anytime soon – though they should have several years ago.

It didn’t happen months ago when many expected it. It won’t happen now in September, and likely not for a long time.

Why?

Because the Federal Reserve can’t raise rates without collapsing the bubble economy.

“I was saying they weren’t going to raise rates. Not because they shouldn’t, but because they can’t, because they will prick this bubble economy that they worked so hard to inflate,” Peter Schiff told Fox Business.

Instead of letting certain markets fail as they should have, they were propped up by the Fed. And these zombie banks and businesses have been sucking life out of the real economy – at great expense to average people.

“The economy has never been good. We’ve really been in a recession, I think, for the entirety of the recovery. I think the policies that the Federal Reserve has used to prop up the stock market and the real estate market have hurt the real economy. That’s why things are actually getting worse. But on Wall Street, yeah, things look good. But if the Fed takes away those monetary supports, we’re going to be in a bear market. We’re going to be in a deeper recession. We’re going to resume the financial crisis that was interrupted by this monetary policy.”

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

The Media Is Wrong About The Fed

June 24, 2015

The Media Is Wrong About The Fed

Earlier this year, most of the financial stories were about how the Fed will start to raise interest rates in June. Much of this speculation was due to the lower unemployment rate, and the expectation that the U.S. economy would be in full recovery. This past Wednesday, the Fed decided not to raise interest rates, despite the fact that most media pundits were certain that it would finally have normalized its monetary policy by now.

Despite the recent inaction by the Fed, many still believe a rate hike will occur inSeptember. The problem with this assumption is that most media analysts are basing it on a headline number such as unemployment, and not the underlying details of the labor market.

Currently, the unemployment rate stands at 5.5%. Although this looks great on the surface, one of the reasons the unemployment rate is so low, is because only62% of the population is participating in the work force.

When looking at this chart, one can see a clear correlation between the decline in the unemployment rate, and the decline in the labor participation rate. The mainstream press attributes this to the retirement of baby boomers, but the statistics don’t support their thesis.

This chart clearly shows that the declining labor participation rate has come from the age groups between 16-54 years old, people that are considered to be in their prime working years. The age group of 55-75, has actually increased its labor participation rate. This is the opposite of what normally would occur.

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

The Ghost of ’37

April 5, 2015

The Ghost of ’37

With the Fed supposedly steeling itself at last to remove a little of its emergency ‘accommodation’, it has suddenly become fashionable to warn of the awful parallels with 1937, as the highly-respected Ray Dalio of Bridgewater has notably done.

That year, the story goes, the nation’s ascent from the depths of the Great Depression was aborted because the Fed ‘tightened’ and the government ‘cut spending’: a sharp recession was the immediate and highly avoidable result. Therefore, we are told, we must not act today.

We strongly refute the analogy: Fed actions were marginal and largely technical in nature while the real fiscal story was the rise in taxes, not any slashing of regular outlays

Far more instrumental in the slump was the nature of those taxes – being steep, ideologically motivated increases in levies on wealth, profits, and capital.

Also to blame were the government’s tolerance of labour militancy and its concerted campaign against ‘tax avoiders’, ‘economic royalists’ and the ‘top sixty families’ – all of which frightened and discouraged the entrepreneurial classes. This fear intensified greatly when the Supreme Court was neutered as means of seeking relief from the state’s attacks.

It is in such displays of pitchfork populism by financially and intellectually bankrupt governments that we – in the age of Piketty, of the organized deprecation of the ‘1%’ and of the abuse of the ‘Fair Share of Tax’ slogan – need to draw the most pertinent comparisons

The real Ghost of ’37 takes the form of such mean-spirited and, counter-productive politics: the spectre should not be conjured up to excuse the central bank from further delaying its overdue embarkation on the long road back to normality and policy minimalism.

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

The Fed Blew It

March 11, 2015

The Fed Blew It

The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE).

The Federal Reserve blew it by not normalizing interest rates a long time ago. The consensus in financial circles is the exact opposite: the Fed has blown it in the past by nudging rates up too early.

Let’s examine the idea that the Fed can’t possibly go wrong keeping interest rates at near-zero for as long as it takes to create inflation (the Keynesian Cargo Cult’s talisman) and push unemployment below 6% (mission accomplished).

One problem with this “keep interest rates low forever” strategy is that it leaves the Fed no room to lower rates in the next recession. By keeping interest rates at near-zero for six long years of “recovery,” the Fed is now facing a global recession with no real policy option to lower rates.

The Fed blew it by waiting six long years to even discuss raising rates.

Let’s consider the impact on the real economy of a 1% rise in the Fed funds rate. The move from 0% to 1% is not very large in terms of its impact on monthly payments for borrowers. Borrowers with poor credit are paying in excess of 15% right now on credit cards and subprime auto loans, and many student loans are in the 7%-8% range. A 1% increase isn’t going to impact these borrowers much.

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

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