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Nobody Knows Anything

Nobody Knows Anything

The more I read and observe the clearer the message: Nobody knows anything. And by that I mean nobody truly knows how any of this will turn out and I think this point needs to be driven home more clearly.

Tons of projections of this, that and the other. Just stop. I happen to think there are times to simply step back and not make grand predictions. For us that’s ok because we focus primarily on market technicals and that’s an ever evolving picture that offers us pivot points to decide when and where to get engaged in.

But on the macro? Give me a break. Nobody knows anything. Everybody is just guessing.

Exhibit A: GDP forecast for Q2:

Ok great. How’s that helping anyone in trying to value companies, cash flow, revenues, earnings? It doesn’t. -9% is a completely different planet than -40% and so is everything in between.

How does one qualify central bank and stimulus intervention? It changes every single day. Today the Fed cranked out an international repo program. Global central banks unite I guess. Also today Donald Trump tweeted about a $2 trillion infrastructure program. Who knows if it will happen. The Fed already increased its balance sheet by $1.3 trillion since the same time last year and may well be heading toward $9  or $10 trillion balance sheet position within a year. Last week they added $600B, basically all of QE2 in a week.

These are insane numbers thrown around, all on top of the $2.2 trillion stimulus package just passed. What’s the deficit going to be? I guess it depends on whether GDP drops by 40% or 9%.

Give me a break. How do you make any forecasts that have a predictive meaning whatsoever in this environment? Other than a lucky guess, the answer is nobody. Why? Because nobody knows anything.

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

What Will Be the Unintended Consequences of Printing Trillions of Dollars to Backstop the Entire System?

What Will Be the Unintended Consequences of Printing Trillions of Dollars to Backstop the Entire System?

Stocks are up somewhat this morning.

This marks the second Monday stocks will open in the green (last Monday was a green open as well) following two horrifically bad weekend sessions that saw stocks open limit down or close to limit down (March 2nd and 9th).

In the simplest of terms, the panic in the markets appears to be abating. It is clear stocks have broken the downtrend from the panic (blue lines). What is not clear is whether this rally will continue or not.

Stocks stalled out under resistance (red line) last week. A break above that line would open the door to a run to 3,000.

At the end of the day, stocks are actually a minor player in this mess. The BIG story is what happens with the bond markets.

Going into last week, it was clear the financial system was facing a debt crisis. Across the board everything from corporate bonds to municipal bonds were breaking down in a catastrophic fashion.

The Fed managed to stop this massacre by announcing it would backstop everything.  

The question now is whether that will be enough. Bonds have staged a major bounce in the last five days, but what happens if they turn down again?

Will the Fed’s announcement that it intends to buy corporate bonds be enough to stop the $10 trillion corporate bond bubble from imploding? 

What about the $16-$19 trillion commercial real estate market? Will the shutdown, which has closed so many restaurants and retailers, result in a crisis in this market as businesses begin skipping monthly payments or breaking contracts outright?

And what about the $23 trillion U.S. treasury bubble? Will the $2 trillion in stimulus, which both the President and the Democrats have suggested will be the first of several, be what finally pushes the U.S.’s debt loads into a crisis?

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

The Fed’s Faustian Bargain: “We’re Experiencing The End-Game Of The Great Debt Super-Cycle”

The Fed’s Faustian Bargain: “We’re Experiencing The End-Game Of The Great Debt Super-Cycle”

Echoing many of Jim Grant’s recent fearsGuggenheim Investments’ CIO Scott Minerd fears the consequences of policymakers returning to the same tools employed in the financial crisis as a grand Faustian bargain.

“In Goethe’s 1831 drama Faust, the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied upon quantitative easing (QE) instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history.

– Scott Minerd “Global CIO Outlook”, August 21, 2012

With the global economy slipping into recession and many economists estimating second-quarter gross domestic product (GDP) growth in the United States will fall by 15 percent or more, the world is being confronted with the worst downturn since the 1930s.

In the post-Keynesian era, the standard policy solution to a business cycle downturn has been for governments to temporarily offset any decline in demand with increased fiscal stimulus and easy money. This prescription has provided for smaller and less frequent slowdowns. The ultimate consequence is that businesses and households have been carrying larger debt loads and smaller cash reserves, confident that policymakers will restrain the severity of the consequences created by any shock to the economy.

This process of accumulating larger debt balances after each successive downturn is often referred to as the great debt super cycle. Over the past decades, the successful use of Keynesian stabilization policies has increasingly raised the confidence of investors and creditors alike that government can successfully truncate the downside of any recession.

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

Loonie Dips After Bank Of Canada Emergency Rate-Cut, Launches QE

Loonie Dips After Bank Of Canada Emergency Rate-Cut, Launches QE

The Bank of Canada has just gone full-Fed-tard by slashing rates to just 0.2% and launching a commercial-paper-buying program and has committed to buy C$5bn Canadian Treasuries per week…

Negative rates next?

Full Bank of Canada Statement:

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic.

The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy.

The Bank is playing an important complementary role in this effort. Its interest rate setting cushions the impact of the shocks by easing the cost of borrowing. Its efforts to maintain the functioning of the financial system are helping keep credit available to people and companies. The intent of our decision today is to support the financial system in its central role of providing credit in the economy, and to lay the foundation for the economy’s return to normalcy.

The Bank’s efforts have been primarily focused on ensuring the availability of credit by providing liquidity to help markets continue to function.  To promote credit availability, the Bank has expanded its various term repo facilities. To preserve market function, the Bank is conducting Government of Canada bond buybacks and switches, purchases of Canada Mortgage Bonds and banker’s acceptances, and purchases of provincial money market instruments. All these additional measures have been detailed on the Bank’s website and will be extended or augmented as needed.

Today, the Bank is launching two new programs.

Despite Massive QE And Congress Bill, The US Dollar Shortage Intensifies

Despite Massive QE And Congress Bill, The US Dollar Shortage Intensifies

How can the Fed launch an “unlimited” monetary stimulus with congress approving a $2 trillion package and the dollar index remain strong? The answer lies in the rising global dollar shortage, and should be a lesson for monetary alchemists around the world.

The $2 trillion stimulus package agreed by Congress is around 10% of GDP and, if we include the Fed borrowing facilities for working capital, it means $6 trillion in liquidity for consumers and firms over the next nine months. 

The stimulus package approved by Congress is made up of the next key items: Permanent fiscal transfers to households and firms of almost $5 trillion. Individuals will receive a $1,200 cash payment ($300 billion in total). The loans for small businesses, which become grants if jobs are maintained ($367 billion). Increase in unemployment insurance payments which now cover 100% of lost wages for four months ($200 billion). $100 billion for the healthcare system, as well as $150bn for state and local governments. The remainder of the package comes from temporary liquidity support to households and firms, including tax delays and waivers. Finally, the use of the Treasury’s Exchange Stabilization Fund for $500bn of loans for non-financial firms.

To this, we must add the massive quantitative easing program announced by the Fed. 

First, we must understand that the word “unlimited” is only a communication tool. It is not unlimited. It is limited by the confidence and demand of US dollars. 

I have had the pleasure of working with several members of the Federal Reserve, and the truth is that it is not unlimited. But they know that communication matters.

FED BALANCE SHEET 2020

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

Japan’s QE On Verge Of Failure As Nobody Wants To Sell To The BOJ

Japan’s QE On Verge Of Failure As Nobody Wants To Sell To The BOJ

Over a decade since central bankers started a stealthy nationalization of capital markets by purchasing a wide range of securities from Trasuries, to MBS, to corporate bonds, to ETFs and single stocks, their actions are finally catching up to them, and in the process breaking the very markets central bankers have worked so hard to prop up. And nowhere is this more obvious than in Japan, where the shrinking universe of Japanese government bonds (as a reminder the BOJ now owns more than 100% of Japanese GDP in JGBs) is “causing havoc” in Japanese money markets as the Bank of Japan continues to buy while dealers refuse to sell.

The result is that rates in Japan’s repo market, which traditionally connects holders of bonds with investors looking to borrow them, jumped to a record Tuesday (although they since retreated on Wednesday) because as Bloomberg notes, “the introduction of cheaper, more regular dollar-swap auctions has generated huge demand from U.S. currency-starved dealers who are keeping their JGBs to put them down as collateral.”

So here is what the math looks like now that the Fed has launched enhanced swap lines with central banks such as the BOJ, allowing local entities to obtain dollar funding at much lower rates: in last week’s first round of the Fed’s revamped dollar-swap auctions, banks borrowed greenbacks for about 3-months at 0.37%, a massive discount to the near 2% it would cost them in the currency swap market. $32 billion was alloted in the first operation.

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

In Unprecedented Move, Fed Unveils Open-Ended QE Including Corporate Bonds

In Unprecedented Move, Fed Unveils Open-Ended QE Including Corporate Bonds

Coming into Monday, the Fed had a problem: it had already used up half of its entire emergency $700BN QE5 announced last weekend.

Which, together with the plunge in stocks, is why at 8am on Monday, just as we expected – given the political cover they have been provided– The Fed unveiled an unprecedented expansion to its mandate, announcing open-ended QE which also gave it the mandate to buy corporates bonds (in the primary and secondary market) to unclog the frozen corporate bond market as we just one step away from a full Fed nationalization of the market (only Fed stock purchases remain now).

As noted elsewhere, the Fed’s new credit facilities carry limits on paying dividends and making stock buybacks for firms that defer interest payments, but have no explicit restrictions preventing beneficiaries from laying off workers.

Additionally, in addition to Treasuries, The Fed will buy Agency Commercial MBS all in unlimited size.

The Fed will buy Treasuries and agency mortgage-backed securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy,” and will also buy agency commercial mortgage-backed securities, according to a statement.

The Fed also said it will support “the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing.” It will be backed by $30 billion from the Treasury’s Exchange Stabilization Fund.

Coincidentally, this unprecedented action takes place just hours after real estate billionaire Tom Barrack (and friend of Trump) said the U.S. commercial-mortgage market is on the brink of collapse and predicted a “domino effect” of catastrophic economic consequences if banks and government don’t take prompt action to keep borrowers from defaulting.

…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”

The Collapse Of This Historic Correlation Suggests A Major Crisis Is Imminent

The Collapse Of This Historic Correlation Suggests A Major Crisis Is Imminent

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…

Truth

Truth

Every once in a while the truth shines through and we got a few doses of it today. Recently critics who suggested that the Fed’s QE policies artificially elevate asset prices were dismissed as QE conspiracists, but the truth is that central bank policies are directly responsible for the asset price levitations since early 2019 and well before then of course as well.

Loose money policies by central banks are goosing up asset prices. I’ve said it for a long time, others have as well despite constant pushback by apologists and deniers: No, no, asset prices are a reflection of a growing economy and earnings or so we were told.

All of this was revealed to be hogwash last year when asset prices soared to new record highs on flat to negative earnings growth and this farce continues to this day as the coronavirus is the new trigger for reductions in growth estimates yet asset prices continue to ascent to record highs following the Fed’s record liquidity injections:

But now the truth is officially out and can no longer be denied.

Here’s new ECB president Largard stating it plainly:


Kudos to @Lagarde for stating the obvious:

“European Central Bank President Christine Lagarde said her institution’s loose monetary policy is hitting savers and stoking asset prices”https://www.bloomberg.com/news/articles/2020-02-11/lagarde-says-ecb-low-rate-side-effects-puts-onus-on-governments?sref=q1j4E2z1 …

Lagarde Says ECB Policy Side Effects Put Onus on Governments

European Central Bank President Christine Lagarde said her institution’s loose monetary policy is hitting savers and stoking asset prices, as she called on governments to do more to boost the economy.bloomberg.com


But it’s not only Lagarde.

Even President Trump implicitly lays it all out as he’s apparently watching every tick on the $DJIA:

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

How the Fed Created a QE “Monster” for the Markets

How the Fed Created a QE “Monster” for the Markets

qe monster
Photo by Flickr.com | CC BY | Photoshopped

Like Victor Frankenstein, the Fed may have created its own monster. It’s been called many things, such as Quantitative Easing (QE), QE Lite, QE/Not QE, “Organic” Balance Sheet Growth, and more.

But no matter what you choose to call it, the bottom line is this:

The Fed is growing its official balance sheet at a frantic pace to provide liquidity to various banking operations, including the repo markets.

In fact, the balance sheet has grown about $400 billion since August, as reflected in the uptick at the far right of this chart:

FRED

Along with the Fed’s decision to increase its balance sheet is a rise in risky asset prices. According to a piece at Newsmax, this is raising eyebrows:

Prices for stocks and other risky assets are also rising at a fast clip – a state of affairs that a growing chorus of investors, economists and former Fed officials say is no coincidence, and potentially a problem.

This pattern of rising prices in risky assets is similar to what happened when the Fed initiated the first three rounds of QE.

The potential problem behind a pattern like this is the “monster” that the Fed is creating. Addressing the problem means answering a critical question…

When and how does the spigot of Fed cash flow get turned off?

Peter Boockvar, chief investment officer with Bleakley Advisory Group, thinks we will have to wait and see what happens:

The risk is what happens when the Fed stops increasing their balance sheet… What will stocks do when that liquidity spigot stops? We’ll have to see.

Of course, if we “wait and see”, any potential damage to the economy will already have started.

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

He Knows

He Knows

Last week we found out that Dallas Fed president Kaplan knows that the Fed is creating excess and imbalances in stocks. Yes, bloating the Fed’s balance sheet by over $400B  in four months has a massive impact on stock markets. And billions of repo liquidity unleashed each day can be seen impacting the daily action as well (see: Repo Lightning).

So what’s Jerome Powell have to say about all this? Silence. Not a word. Of course he doesn’t have to because the crack reporters never confront him on the issue in his post Fed meeting press conferences. Bubble away accountability free. Why bother asking the hard questions? That may just get you disinvited from the next press conference. Too strong of an assessment? I let you be the judge, but why are the hard questions not asked when it matters?

But actually we don’t need to wait for the answer from a press conference. Why? Because we already know the answer and the answer is: He knows.

Powell knows exactly the behavior he’s instilling in investors, the artificial levitation of asset prices and the disconnects and dangers that is poses.

All one has to do is dig in the Fed minutes from October 2012. Pages 192-194. It’s all there:

“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.
First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. 

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

“Last Hurrah” for Central Bankers

“Last Hurrah” for Central Bankers

“Last Hurrah” for Central Bankers

We’ve all seen zombie movies where the good guys shoot the zombies but the zombies just keep coming because… they’re zombies!

Market observers can’t be blamed for feeling the same way about former Fed Chair Ben Bernanke.

Bernanke was Fed chair from 2006–2014 before handing over the gavel to Janet Yellen. After his term, Bernanke did not return to academia (he had been a professor at Princeton) but became affiliated with the center-left Brookings Institution in Washington, D.C.

Bernanke is proof that Washington has a strange pull on people. They come from all over, but most of them never leave. It gets more like Imperial Rome every day.

But just when we thought that Bernanke might be buried in the D.C. swamp, never to be heard from again… like a zombie, he’s baaack!

Bernanke gave a high-profile address to the American Economic Association at a meeting in San Diego on Jan. 4. In his address, Bernanke said the Fed has plenty of tools to fight a new recession.

He included quantitative easing (QE), negative interest rates and forward guidance among the tools in the toolkit. He estimates that combined, they’re equal to three percentage points of additional rate cuts. But that’s nonsense.

Here’s the actual record…

That QE2 and QE3 did not stimulate the economy at all; this has been the weakest economic expansion in U.S. history. All QE did was create asset bubbles in stocks, bonds and real estate that have yet to deflate (if we’re lucky) or crash (if we’re not).

Meanwhile, negative interest rates do not encourage people to spend as Bernanke expects. Instead, people save more to make up for what the bank is confiscating as “negative” interest. That hurts growth and pushes the Fed even further away from its inflation target.

What about “forward guidance?”

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

Global Financial System Is A Big Rube Goldberg Machine

Global Financial System Is A Big Rube Goldberg Machine

While pondering the current economy that is becoming more of a conundrum every day, I stumbled upon an analogy I would like to share. The global economy is like a giant “Rube Goldberg” machine. It is a ridiculously complicated contraption built to perform what should normally be a simple task. Rube Goldberg machines often mimic the real world in that they are goal-oriented with many parts coming together to complete a task.

In the real world, things are usually not intentionally designed to be complicated but the reality is that they just are. It is an understatement to say the global financial system is not a well-oiled machine. More often than we would like to admit various systems and parts are thrown or “cobbled together” in a haphazard way to get the job done. We tend to try and explain events in terms of cause and effect but in doing so the bigger picture has a way of getting lost. Often hidden away is the nature of the risk that results from complexity and systems becoming codependent upon others. Bestselling author Nassim Taleb who wrote, “The Black Swan” detailed in his book how when something is highly complicated highly improbable and unpredictable events can and do occur.

Some of this is playing out right now and can be seen in the Fed’s key reversal in policy. In an effort to avoid a crisis the Fed has been forced to deal with a liquidity issue in repo rates since a sudden and dramatic surge began in September. While it is difficult to see the difference between QE and an injection aimed at maintaining liquidity, in this case, several reasons exist to believe this is not QE but something far more disturbing. 

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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