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Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

At least one reserve bank globally is starting to ponder the question that many central banks across the world will soon inevitably be asking: what happens if we cut to zero and the economy continues to falter?

This has led Australia to start considering QE, following in the footsteps of a world full of central bankers all offering each other as much confirmation bias necessary to continue to walk down the path of eventual economic destruction.

In Australia, the reserve bank has cut to 1% and “nobody expects them to stop cutting,” according to News.com.au. The bank released this chart days ago, showing that market is expecting further cuts. 

The average of all expectations is for the market to fall to 0.37% by September 2020. That exact outcome is described as “unlikely”, but the RBA could have rates at 0.25% or 0.5% by then. That would only leave room for one or two more cuts before rates are at zero.

Then what? Destroy your currency and print your way out of your problems. 

Apparently convinced that economies only exist as permanent booms now, the RBA said last week that it would begin a program similar to QE in the United States, wherein the central bank would buy financial assets in exchange for cash. The RBA is considering buying Australian government bonds.

“We could take action to lower the risk-free rates further out along the term spectrum,” said the RBA Governor.

Justifying this nonsense, the article then gives the quintessential example of how QE bond buying works in practice:

Bonds are how the government borrows. Here’s how it works in simplified terms:

The government offers to sell a piece of paper that says, “Australia will pay you back a million dollars in 10 years” (a 10-year bond).

Someone buys that for, let’s say, $900,000.

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

Can the Fed really Control the Economy?

Can the Fed really Control the Economy? 

QUESTION: This whirligig talk of whether the Fed cuts rates by 25 or 50 basis points is carnival-level absurdity. Does the Fed have the “pretense of knowledge,” as F.A. Hayek, said, that they can regulate the economy like turning up or down the thermostat? I know you don’t agree with this, Martin, but then, Wall St. trades on daily sentiment not ideology.

TM

ANSWER: I understand the theory, but where it is seriously flawed is the idea that people will borrow simply because you lower rates. More than 10 years of Quantitative Easing, which has failed, answers that question. The way the Fed was originally designed allowed it to stimulate the economy by purchasing corporate paper directly, which placed it in a better management position. Buying only government paper from banks who in turn hoard the money fails. As Larry Summers admitted, they have NEVER been able to predict a recession even once.

The Fed lowered rates during every recession to no avail just as the ECB has moved to negative rates without success. The central banks are trapped and they are quietly asking for help from the politicians which will never happen.

Peter Schiff: If You Understood What This Means, You Would Be Buying Gold as Fast as You Can

Peter Schiff: If You Understood What This Means, You Would Be Buying Gold as Fast as You Can

Gold has risen to six-year highs in recent weeks as the Federal Reserve has pivoted back toward an easy-money monetary policy. Markets widely anticipate a Federal Reserve interest rate cut this week and the economy appears to be slowing.

Peter Schiff recently appeared on RT Boom Bust to explain why he believes this is the beginning of a much bigger long-term rise in the price of gold. And it’s not just because the Fed is cutting rates.

In fact, they are going to cut rates next week and this is going to be the first step on the road back to zero. And the Fed is also going to return to quantitative easing. But we just found out that Donald Trump is cutting a deal with a Democrats to basically throw out any progress Republicans made back in 2011, thanks to efforts of the Tea Party, to at least try to rein in the increase in government spending. So, they’re throwing caution to the wind. We are going to see deficits going through the roof over the next several years, and that’s even without the recession, which I believe is coming and which is going to make them much, much worse.”

Consider that in the midst of what is supposed to be a strong economy, we’re already seeing record-setting deficits. As Peter pointed out, bigger deficits mean more money-printing and that means more inflation.

All of this is very bullish for gold … If you understood what all of this means, you would be buying gold as fast as you can.”

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

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The longer the signals in capital markets go haywire under the influence of “monetary stimulus,” the bigger is the cumulative economic cost. That is one big reason why this fourth Fed stimulus — in the present already-longest (but lowest-growth) of super-long business cycles — is so dangerous.

True, there is nothing new about the Fed imparting stimulus well into a business cycle expansion with the intention of combating a threat of recession. Think of 1927, 1962, 1967, 1985, 1988, 1995, and 1998.

This time, though, we’ve seen it four times (2010/11, 2012/13, 2016/17, 2019) in a single cycle. That is a record. Normally, a jump in recorded goods and services inflation, or concerns about rampant speculation, have trumped the inclination to stimulate after one — or at most two — episodes of stimulus.

Also we should recognize that the length of time during which capital-market signaling remains haywire, is only one of several variables determining the overall economic cost of monetary “stimulus.” But it is a very important one.

Haywire signaling is not just a matter of interest rates being artificially low. Alongside this there is extensive mis-pricing of risk capital. Some of this is related to the flourishing of speculative hypotheses freed from the normal constraints (operative under sound money) of rational cynicism. Enterprises at the center of such stories enjoy super-favorable conditions for raising capital.

There are also the giant carry trades into high-yielding debt, long-maturity bonds, high-interest currencies, and illiquid assets, driven by some combination of hunger for yield and super-confidence in trend extrapolation. In consequence, premiums for credit risk, currency risk, illiquidity, and term risk, are artificially low. Meanwhile a boom in financial engineering — the camouflaging of leverage to produce high momentum gains — adds to the overall distortion of market signals.

 …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 Drastic Alteration of QE that is About to be Unleashed

The Drastic Alteration of QE that is About to be Unleashed 

QUESTION #1: Sir,

You stated in your blog that Fed may fix 2 and 10 year bond rates. Doesn’t this negate the yield curve concept/ credit theory? Won’t this accelerate the distrust for government? Wont this further accelerate/aggravate the pension crisis?

Appreciate you teaching the little guys

See you in Oct

DK

QUESTION #2: Marty; What you are describing with the change in QE is clearly coming from your contacts behind the curtain. How do you think this will play out?

CB

ANSWER: It is clear QE is dead. However, at the same time it has trapped all central banks. I am preparing an important paper on this subject. It is complicated, but it is the very reason why the West will collapse and the financial capital of the world will move to China, who has come out and stated publicly that they will not engage in QE. As far as accelerating the distrust in government, this will be felt within the professional class. It will take time to filter into the general public and it will most likely take the form of another cause altogether. It is unlikely that the general media will even understand this subject matter.

As to how will this play out, I can only say get ready. This is most likely the last straw that will eventually break the back of the monetary system. The general press will not understand that this shift in policy was the last straw. They will not even understand the ramifications for probably two years.

Weekly Commentary: Officially on “Periphery” Contagion Watch

Weekly Commentary: Officially on “Periphery” Contagion Watch

This week saw all-time highs in the S&P500, the Nasdaq Composite, the Nasdaq100, and the Philadelphia Semiconductor Index. Microsoft’s market capitalization reached $1 TN for the first time. First quarter GDP was reported at a stronger-than-expected 3.2% pace.  

So why would the market this week increase the probability of a rate cut by the December 11th FOMC meeting to 66.6% from last week’s 44.6%? What’s behind the 10 bps drop in two-year yields to 2.28%? And the eight bps decline in five-year Treasury yields to a one-month low 2.29% (10-yr yields down 6bps to 2.50%)? In Europe, German bund yields declined five bps back into negative territory (-0.02%). Spain’s 10-year yields declined five bps to 1.02% (low since 2016), and Portugal’s yields fell four bps to an all-time low 1.13%. French yields were down to 0.35%. Why would markets be pricing in another round of ECB QE?

In the currencies, king dollar gained 0.6%, trading above 98 for the first time in almost two-years. The Japanese yen outperformed even the dollar, adding 0.3%.  

April 22 – Financial Times (Hudson Lockett and Yizhen Jia): “Chinese stocks fell on Monday amid concerns that Beijing may renew a campaign against shadow banking that contributed to a heavy sell-off across the market last year. Analysts pinned much of the blame… on a statement issued late on Friday following a politburo meeting chaired by President Xi Jinping in Beijing. They were particularly alarmed by a term that surfaced in state media reports of the meeting of top Communist party leaders: ‘deleveraging’. That word set off alarm bells among investors still hurting from Beijing’s campaign against leverage in the country’s financial system last year. Those reforms focused largely on so-called shadow banking, which before the clampdown saw lenders channel huge sums of money to fund managers who then invested it in stocks.”

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

Bank of Japan & the Bond Crisis

Bank of Japan & the Bond Crisis 

BoJ Statement 4-24-2019

The Great Financial Unknown is now upon us. After 10 years of Quantitative Easing, the European Central Bank (ECB) in Europe owns 40% of the national debts in the EU and it can neither sell them nor stop buying without creating a Panic in Interest Rates. Likewise, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in Japan. The Bank of Japan confirmed it is ending free market determination of interest rates for the municipal level and that they “will not require any procedures such as auction as the method of determining lending conditions.”  today it may introduce a lending facility for its exchange-traded fund buying program, which would allow it to temporarily lend ETFs to market participants.

4. Introduction of Exchange-Traded Fund (ETF) Lending Facility
The Bank will consider the introduction of ETF Lending Facility, which will make it possible
to temporarily lend ETFs that the Bank holds to market participants.

The statement at the end of the announcement on the last page on its monetary policy has left traders in shock. This appears that the BoJ realizes that it now effectively has destroyed its bond market and realizes that there is not only the end of a free market, but there is a contagion of surrounding lack of liquidity.

We have never before in the history of human society ever witnessed such a major financial crisis. The BoJ makes it clear it will continue its policy of Quantitative Easing. It stated plainly:

The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with
Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is
necessary for maintaining that target in a stable manner.

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

Over $10 Trillion In Debt Now Has A Negative Yield

Over $10 Trillion In Debt Now Has A Negative Yield

NIRP is back.

On Friday, when Germany reported disastrous mfg and service PMI prints, the 10Y German Bund finally threw in the towel, with the yield sliding back under zero for the first time in three years. When that happened, and when the 3M-10Y yield curve inverted in the US right around that time, just over $400 billion in global debt changed the sign on its yield from positive to negative.

As a result, the total notional of global negative yielding debt soared on Friday, rising above $10 trillion for the first time Since September 2017, and which according to Bloomberg has intensified “the conundrum for investors hungry for returns while fretting the brewing economic slowdown.”

Paradoxically, the amount of negative-yielding debt has nearly doubled in just six months, and confirms that the global asset bubble is back because as Gary Kirk, a founding partner at London-based TwentyFour Asset Management, said “money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing.”

“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Despite the Fed’s renewed herding of investors into the riskiest assets, Kirk is so far “resisting the temptation” to snap up longer-dated credit obligations that will be the first to default when the next recession hits, and prefers duration bets in interest-rate markets.

Others won’t be so lucky: as we noted last Friday, the ‘reverse rotation’, or flood into fixed income instruments, is accelerating and fund flows confirmed the fresh panic for yield just as the specter of QE4 returns as investors in the latest week parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to EPFR data.

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

The Fed Has Given Up: Get Ready for More QE

The Fed Has Given Up: Get Ready for More QE

The Federal Reserve’s Federal Open Market Committee on Wednesday voted unanimously to keep the federal funds rate unchanged. Overall, the FOMC signaled it has made a dovish turn away from the promised normalization of monetary policy which the Fed has promised will be implemented “some day” for a decade. Although the Fed began to slowly raise rates in late 2016 — after nearly a decade of near-zero rates — the target rate never returned to even three percent, and thus remains well below what would have been a more normal rate of the sort seen prior to the 2008 financial crisis.

ank3.jpg

Much of the Fed’s continued reluctance to upset the easy-money apple cart comes from growing concerns over the strength of the economy. Although job growth numbers have been high in recent years — and this has been assumed to be proof of a robust economy — other indicators point toward less strength. Workforce participation numbers, wage growth, net worth numbers, auto-loan delinquencies and other indicators suggest many Americans are in a more precarious position than headlines might suggest.

The Fed’s refusal to follow through on raising rates, however, has highlighted this economic weakness, and today’s front-page headline in the Wall Street Journal reads: “Growth Fears to Keep Fed on Hold”

Abandoning Plans to Reduce the Balance Sheet

For similar reasons, the Fed has also signaled it won’t be doing much about it’s enormous balance sheet which ballooned to over four trillion dollars in the wake of the financial crisis. Faced with enormous amounts of unwanted assets such as mortgage-backed securities, the Fed began buying up these assets both to prop up — and bail out — banks and to produce an artificially high price for debt of all sort.

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

Don’t Be So Negative

DON’T BE SO NEGATIVE

“FED’S WILLIAMS SAYS IN A DOWNTURN WE COULD CONSIDER QUANTITATIVE EASING, NEGATIVE RATES.”

  • Tweet by Reuters’ Jennifer Ablan, reporting on a speech by John Williams of the Federal Reserve Bank of New York at the Economic Club of New York, 6 March 2019.

“Because NIRP worked so well in Europe and Japan ?”

  • Response by mac on Twitter.

In February 2016, The Financial Times published an article titled ‘Central Banks: Negative Thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum. The piece in question was atypically sceptical of the received wisdom of QE, i.e., that it works. If it was sceptical as to the efficacy of QE, it was doubly so in relation to the policy of maintaining negative interest rates, or NIRP. Some extracts follow:

Online, the mood has turned to rage. Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting. “Raising commodity prices to overcome deflation, raising consumption taxes, lowering interest rates . . . they are all policies that make us suffer,” wrote one..

The Japanese can be conservative at the best of times, and few think these are the best of times.

But Japan is not the only country affected. A concept once only subject to small-talk among economists is now an uncomfortable reality. With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.

Sweden, Switzerland, Denmark, the eurozone and most recently Japan — adding up to almost a quarter of the global economy — have all introduced some form of negative interest rate policy in an attempt to fight deflationary forces, weaken their currencies and stimulate growth.

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

Economic Doom Loop Well Underway

Economic Doom Loop Well Underway

From 2007 through 2018, births in the US have declined by 470 thousand on an annual basis, or an 11% decline.  The US fertility rate has likewise cracked lower, from 2.12 births to 1.72, an 18% decline (2.1 births over a females childbearing years is considered zero growth).  This has resulted in 4.5 million fewer net births in the US since 2007 than the Census had estimated in 2000 and again in 2008.  This is over an entire years worth of births that never took place.  The sharp decline in births, against an anticipated rise, and a deceleration from anticipated immigration has resulted in the Census downgrading US population growth through 2050 by over 50 million persons (detailed HERE).  This decelerating growth and outright declines are happening across the globe among the “wealthy nations”, leaving little growth opportunity for the “poor nations” (detailed HERE).

The decline in US births has been particularly steep among those with the lowest incomes and assets.  From 2007 through 2016, Native American fertility rates have collapsed from 1.62 to 1.23.  Hispanic birthrates have fallen from 2.85 to just 2.1.  Black birthrates have turned lower from 2.15 to about 1.9 and white birthrates from 1.95 to 1.72.  Again, these birthrates are only through 2016 and the declines in 2017 and 2018 are significant and accelerating downward.

The reason for fast declining birthrates since 2007 in the US and among most nations globally seems to be the current ZIRP and low interest rates and Quantitative Easing programs which have the effect of inflating asset prices.  The majority of assets are held by large institutions and post child bearing age populations.  The flow through of these policies are asset prices rising significantly faster than incomes.  For example, non-discretionary items like homes, rent, education, healthcare, insurance, childcare, etc. are skyrocketing versus wages.

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

Central Bank Balance Sheet Reductions–Will Anyone Follow the Fed?

CENTRAL BANK BALANCE SHEET REDUCTIONS – WILL ANYONE FOLLOW THE FED?

  • The next wave of QE will be different, credit spreads will be controlled
  • The Federal Reserve may continue to tighten but few other CB’s can follow
  • ECB balance sheet reduction might occur if a crisis does not arrive first
  • Interest rates are likely to remain structurally lower than before 2008

The Federal Reserve’s response to the great financial recession of 2008/2009 was swift by comparison with that of the ECB; the BoJ was reticent, too, due to its already extended balance sheet. Now that the other developed economy central banks have fallen into line, the question which dominates markets is, will other central banks have room to reverse QE?

Last month saw the publication of a working paper from the BIS – Risk endogeneity at the lender/investor-of-last-resort – in which the authors investigate the effect of ECB liquidity provision, during the Euro crisis of 2010/2012. They also speculate about the challenge balance sheet reduction poses to systemic risk. Here is an extract from the non-technical summary (the emphasis is mine): –

The Eurosystem’s actions as a large-scale lender- and investor-of-last-resort during the euro area sovereign debt crisis had a first-order impact on the size, composition, and, ultimately, the credit riskiness of its balance sheet. At the time, its policies raised concerns about the central bank taking excessive risks. Particular concern emerged about the materialization of credit risk and its effect on the central bank’s reputation, credibility, independence, and ultimately its ability to steer inflation towards its target of close to but below 2% over the medium term.

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

Gold Will Become the Next Global Currency of Choice

Gold Will Become the Next Global Currency of Choice

With a wobbly stock market, falling Treasury yields and rampant geopolitical strife, the focus on gold as an asset has been intense as of late. The metal’s price gains reflect this, as gold recently proved able to hold above a key resistance level, which holds bullish implications.

But according to Kitco, Sprott CEO Peter Grosskopf sees gold moving past its role as a mere asset and eventually returning to its status as a true global currency. In an interview, Grosskopf explained that this will be fueled by ballooning global debt, which will ultimately debase all fiat currencies.

As Grosskopf pointed out, recent data shows that the global debt rests above $244 trillion and, as such, is more than three times larger than the global economy itself. Whether governments decide to deal with this through quantitative easing or financial repression, he says gold prices will invariably spike.

The recognition of gold’s role in wealth preservation is on the rise, said Grosskopf, with investors increasingly shying away from fiat currencies and moving into gold. The widespread loss of faith in not just assets, but currencies as well, is already in effect, with Grosskopf’s firm noticing more interest from all corners of the investment spectrum.

“We think the overall trend for gold is positive because it is being accumulated,” said the CEO. “It’s being accumulated by central banks; it’s being accumulated by billionaires, it’s been accumulated by endowments and it’s more accepted as a class of currencies in portfolios.”

This New Catalyst Will Drive Silver Prices Higher in 2019

Money Morning’s Peter Krauth writes silver’s recent pullback below the $16 level was not only expected, but also irrelevant for its long-term picture. Even after the pullback, the metal remains up 12% since November, and Krauth sees more gains coming in the near future.

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

What Happens When More QE Fails to Reverse the Recession?

What Happens When More QE Fails to Reverse the Recession?

The smart money is liquidating assets, paying off debt and moving capital into collateral that isn’t impaired by debt or speculative valuations.

The Federal Reserve’s sudden return to “accommodative” dovishness in response to the stock market’s swoon telegraphs its intent to fire up QE once the recession kicks into gear. QE (quantitative easing) are monetary policies designed to ease borrowing and the issuance of credit, and to prop up assets such as stocks and real estate.

The basic idea is that the Fed creates currency out of thin air and uses the new money to buy Treasury bonds and other assets. This injects fresh money into the financial system and lowers the yield on Treasury bonds, as the Fed will buy bonds at near-zero yield or even less than zero in pursuit of its policy goals of goosing assets higher and increasing borrowing/spending.

This is pretty much the Fed’s only lever, and it pulls this lever at any sign of weakness in stocks or the economy. That sets up an obvious question that few seem to ask: what happens when QE fails? What happens when the Fed launches QE and stocks fall as punters realize the rally is over? What happens when lowering interest rates doesn’t spark more borrowing?

What happens is the smart money sells everything that isn’t nailed down, a process that is arguably already well underway.

Why sell assets when QE has guaranteed gains in the past? Answer: exhaustion. There are limits to everything financial, and once those limits are reached, no amount of goosing will push the limits higher. Rather, further goosing only increases the fragility and vulnerability of the system.Price-earnings ratios only go so high before reversing, rents only go so high before reversing, and so on.

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

Olduvai IV: Courage
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