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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…

Jim Bianco Says This Is QE, Like Y2K

Jim Bianco Says This Is QE, Like Y2K

In contrast to Hussman, Jim Bianco, at Bianco Research says the Fed’s repo actions are QE. 

Earlier today I posted, Hussman Sides with Powell: It’s Not QE4.

If Hussman convinced you the Fed was not conducting QE, I will give you a chance to change your mind again.

“Not QE” Looks a Lot Like Y2K

This is a guest post by permission from Jim Bianco

Jim Bianco at Bianco Research says “Not QE” Looks a Lot Like Y2K

We would argue the special lending facility that started in late 1999 to support the feared Y2K computer glitch offers a historical analogy to the current period.

Stories 20 years ago sound like they are describing what is happening today:

Dow Jones News Service – (December 28, 1999) CASH IS FLOWING LIKE CHAMPAGNE FOR Y2K
The volume of cash that the Federal Reserve has temporarily given to banks to avert potential Year 2000 strains is rising to dizzying levels. Including nearly $20 billion it gave to the banking system in the form of term “repurchase” agreements Monday, the Fed has almost $100 billion in hard currency loans outstanding to banks. That’s the most money lent out through repurchase agreements ever, said Peter Bakstansky, spokesman for the New York Federal Reserve. For some perspective, the Fed had $23 billion in outstanding “repos” in December 1998, and around $9 billion in December 1997.

The Y2K special lending facility had a similar effect on the Fed’s balance sheet. It was also done for “plumbing reasons.”

And, as the [Champagne] story points out, the Fed supplied record amounts of repo never before seen at the time.

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

Economy Still Falling Off a Cliff – John Williams

Economy Still Falling Off a Cliff – John Williams

Economist John Williams says don’t put too much faith in the good employment numbers that came out last week because “It’s not as happy of a picture as it looks.” Williams is the founder of ShadowStats.com. His calculations strip out government accounting gimmicks to give a more accurate picture of economic data. Williams explains, “What the Fed has done with their easing, according to the Fed, is they created a circumstance of sustainable moderate economic growth. So, they don’t need to cut rates anymore. That’s nonsense. You don’t have sustainable moderate growth. For example, look at this last month, industrial production is in a state of collapse. . . . Manufacturing is negative. . . . Oil production is collapsing year to year as oil and gas exploration has plunged. . . . Retail sales have been overstated in employment . . . . That’s going to be revised lower. . . . We have been getting better numbers as of late, and the economy is still falling off a cliff.”

Maybe that explains the Fed’s panic moves with $60 billion a month QE, which it says is not QE, and extreme intervention in the repo market where the Fed routinely pumps out tens of billions of dollars in liquidly a night. Williams says, “The system is not stable, and it probably is insolvent. They blew the system back in 2007. They gave up on the domestic economy to save the banking system. . . . They spent all their resources propping up the banks, and they are still doing the same thing, and it’s still costing us in terms of economic growth.”

So, the Fed is pumping out billions of dollars every month, and yet, the economy keeps sinking. What does this tell Williams? “The system is not operating properly. These are stopgap measures, stopgap liquidity that the Fed is putting into the system.

Economy Still Falling Off a Cliff – John Williams

Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis

Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis

There is something very fishy about the world’s economic situation. On one hand, US president Trump keeps repeating that the US economy is the strongest it has ever been, with global strategists, economists and officials parroting as much they can, repeating that the world economy is also set to rebound sharply any minute now. And yet, two things stand out.

As we pointed out first last month, and as Convoy Investments echoed last week, with the US economy allegedly doing very well, the Fed’s balance sheet is now expanding at a rate matched only briefly by QE1, and faster than QE2 or QE3, in the aftermath of September’s repo fiasco which provided Powell with an extremely convenient scapegoat on which to hang the return of “NOT QE” (which, we now know, is in fact QE.)

The Fed’s unprecedented balance sheet expansion in a time of alleged economic stability and solid growth is a handy explanation why the S&P has been soaring in the past two months, and as we pointed out, a remarkable correlation has emerged whereby the S&P is up every week the Fed’s balance sheet is higher, and down whenever the balance sheet has declined.

And so, while helping us understand what has been the fuel for the market’s recent blow-off top meltup, the Fed’s emergency intervention does beg the question: is there something amiss more than just the repo market, and is Powell telegraphing that a far more serious crisis may be looming.

It’s not just Powell, however. It’s everyone.

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

Trapped

Trapped

What? You thought a 850+ point drop in the $DJIA would result in a down week? No Sir. The unholy alliance has struck again. Massive jawboning by multiple administration officials about how well the China trade deal was going, a favorable jobs report and above all, the US Federal Reserve, all contributed to a furious rally to make markets green for the week on (when else?) magic risk free Friday.

What was the tell? The same tell it’s been every week since the beginning of October. When the Fed’s balance sheet rises so does the market. One down week in the Fed’s balance sheet coincided with the only down week in markets since then.

Before you know it you have a trend (via zerohedge):

This is how predictable our markets have become. Tell me the size of Fed’s balance sheet next week and I’ll tell you what markets will do next week. Is it really this farcical? It appears so.

By that measure of course we can presume markets will just keep rising until next June as the Fed has indicated “not QE” will continue until then and their daily repo operations are now the ones on autopilot.

Investors are rightfully cheering gains having now realized that nothing matters but the Fed.

But be careful in cheering too much. All this action hides a rather very uncomfortable fact, a fact that may eventually see the air come out of this ballon faster than it is going in.
And that fact is that the Fed, and all other central banks, are trapped. Trapped in a coming disaster of their own making.

And be clear: As we saw this week again, the air can come out quickly. After all 90% of November gains simply disappeared in a matter of a couple of days. The subsequent furious comeback leaving a rather unusual weekly candle on $SPX (I’ll discuss this separately in an upcoming technical update).

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

What Happens After The Economic Momentum Ends?

What Happens After The Economic Momentum Ends?

At Some Point We Have Simply Overbuilt!

The economic landscape before us continues to look like something out of  “Alice And The Looking Glass”. A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. For over a decade this paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality. Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term, it makes the economy feel good, but in the long run, it is much worse off. Unfortunately, what was once the “long-run” or “distant future” is now getting much closer.

Many people are now set to blame any slowdown in global growth on what has been declared avery dangerous and protracted trade war. Going into it many economists warned it could be truly disastrous for the entire global economy. In my opinion, the fear of slowing trade and how it will affect America is being overplayed and is not the chief catalyst for a slowdown here in America. While it is easy to target trade as the culprit and Trump as the instigator this conclusion is not supported by facts. We should remember the economy moves in cycles and this one is long in the tooth by historical standards.

Since the Bernanke experiment began, time and time again, the green shoots of economic growth have withered and required more stimulus in order to move to the next level. Each prediction of achieving escape velocity has proven to be short-lived or overly optimistic. These bursts of good news have continually been followed by disappointing economic data forcing some kind of stimulus to get the economy over the next hurdle. 

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

The Phantom Mania

The Phantom Mania

There’s nothing of substance underlying the current market melt-up

Well, stocks are back at all-time highs. Ignited by the Fed’s “Not-QE” program and endless Trump administration teases of an “imminent” China deal, the S&P 500 has been propelled above its upward Bollinger band — a hyperextension only seen one other time since 2007:

Every week since Not-QE was announced has seen the S&P close green (this week finally ending the streak, barely). We’re officially in a melt-up, where both good news and bad news are accepted as valid reasons to push stocks even higher.

But what’s notable about this melt-up is that it’s missing a compelling narrative. Every past asset price mania required a feel-good mantra that convinced the masses “This time is different!”.

The South Sea bubble promised access to the untapped riches of the vast Asian sub-continent. Dotcom companies were going to unlock tremendous value previously trapped by the inefficiency of the old analog way of doing business. In 2017, Bitcoin looked like it just might replace fiat currencies overnight.

During the price melt-ups accompanying each of these manias, the public fell for the siren song of a radically better future, available RIGHT NOW if you just jump on the party train before it’s too late.

But today? What’s the radically better future being promised? Where’s the party train headed to?

A Parade Of Horribles

As best I can tell, it seems the rationale (I’m using that term very generously) for the current market melt-up is that:

  1. The Fed is backstopping the market again
  2. A trade deal with China is going to happen, likely soon

Let’s dig into each of these. But before we do, let’s be clear that neither of these promises a “radically better” future.

The Fed, and its central bank brethren around the globe, have been backstopping the market for the past decade. There’s really nothing new in that.

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

The Free Money Bubble Is About To Burst

The Free Money Bubble Is About To Burst

Free Money Bubble

Recently, there has been a parade of central bankers along with their lackeys on Wall Street coming on the financial news networks and desperately trying to convince investors that there are no bubbles extant in the world today. Indeed, the Fed sees no economic or market imbalances anywhere that should give perma-bulls cause for concern. You can listen to Jerome Powell’s upbeat assessment of the situation in his own words during the latest FOMC press conference here. The Fed Chair did, however, manage to acknowledge that corporate debt levels are in fact a bit on the high side. But he added that “we have been monitoring it carefully and taken appropriate steps.” By taking appropriate steps to reduce debt levels Powell must mean slashing interest rates and going back into QE. The problem with that strategy being that is exactly what caused the debt binge and overleveraged condition of corporations in the first place.

Global central banks have abrogated the free market and are in the practice of repealing the business cycle and ensuring stocks are in a permanent bull market. Massive and unrelenting money printing is the “tool” that they use. The good old USA had its central bank cut rates to 0 percent by the end of 2008 to combat the Great Recession; and that paved the way for the EU to join the free-money parade by 2016. In fact, the Band of Japan had already been at the zero-bound range years before. This means much of the developed world has been giving money away gratis for the better part of a decade.

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

The Federal Reserve Is Directly Monetizing US Debt

The Federal Reserve Is Directly Monetizing US Debt

In a very real way, MMT is already here

Sure, it’s not admitting to this. And it’s using several technical jinks and jives to offer a pretense that things are otherwise.

But it’s not terribly difficult to predict what’s going to happen next: the Federal Reserve will drop the secrecy and start buying US debt openly.

At a time, mind you, when US fiscal deficits are exploding and foreign buyers are heading for the exits.

How It’s Supposed to Work

Here’s how it’s supposed to work when the US government issues new debt:

  1. If the US Treasury needs to raise new funds, it announces an upcoming auction of US Treasury bills/notes/bonds.
  2. A date for the auction is set.
  3. Various participants bid for those bills/notes/bonds (including ‘regular folks’ like you and me if we’re using the government’s Treasury Direct program).
  4. At a later date, the Fed can buy those US Treasury bills/notes/bonds. The various holders of that debt submit offers to sell, and the Fed (presumably) selects the best offers on the best terms.

The Federal Reserve, under no conditions, buys Treasury paper directly.  The Federal Reserve’s own website still maintains that this is the case:

(Source)

There are two important claims plus one assertion I’ve highlighted in there, each in a different color:

  1. Yellow: Treasury securities may “only be bought and sold in the open market.”
  2. Blue: doing otherwise might compromise the independence of the Fed.
  3. Purple: the Fed mostly buys “old” securities.

So according to the Fed: it’s independent, it follows the rules set forth in the Federal Reserve Act of 1913, and it mostly buys “old” Treasury paper that the market has already properly priced in a free and fair system.

But that’s not really what’s going on…

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

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

After a month of constant verbal gymnastics (and diarrhea from financial pundit sycophants who can’t think creatively or originally and merely parrot their echo chamber in hopes of likes/retweets) by the Fed that the recent launch of $60 billion in T-Bill purchases is anything but QE (whatever you do, don’t call it “QE 4”, just call it “NOT QE” please), one bank finally had the guts to say what was so obvious to anyone who isn’t challenged by simple logic: the Fed’s “NOT QE” is really “QE.”

In a note warning that the Fed’s latest purchase program – whether one calls it QE or NOT QE – will have big, potentially catastrophic costs, Bank of America’s Ralph Axel writes that in the aftermath of the Fed’s new program of T-bill purchases to increase the amount of reserves in the banking system, the Fed made an effort to repeatedly inform markets that this is not a new round of quantitative easing, and yet as the BofA strategist notes, “in important ways it is similar.”

But is it QE? Well, in his October FOMC press conference, Fed Chair Powell said “our T-bill purchases should not be confused with the large-scale asset purchase program that we deployed after the financial crisis. In contrast, purchasing Tbills should not materially affect demand and supply for longer-term securities or financial conditions more broadly.” Chair Powell gives a succinct definition of QE as having two basic elements: (1) supporting longer-term security prices, and (2) easing financial conditions.

Here’s the problem: as we have said since the beginning, and as Bank of America now writes, “the Fed’s T-bill purchase program delivers on both fronts and is therefore similar to QE,” with one exception – the element of forward guidance.

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

Blain’s Morning Porridge – Nov 15th 2019

Blain’s Morning Porridge – Nov 15th 2019

“Liberty, equality, fraternity, or death; the last, much the easiest to bestow, O Guillotine!”

As it’s a Friday I am contractually entitled to have a rant and whine about whatever I want to write about. Which, today, isn’t really the cut and thrust of markets. 

To be brutally frank – we all know what the problems are: Too much money in the markets pushing up the prices of market assets. The fact is too much of that too much money is owned by too few people who use their too much money to buy all these financial assets. These too few people who own all the financial assets get richer everyday as their too much money makes their too many financial assets even more valuable. And these too few people get even richer by getting even more too much money to put into the already too expensive financial markets by “persuading” central banks to keep rates low, to buy financial assets through QE, and get their in-the-pocket politicians to enact tax cuts so their too much money is even more too much money… 

With me so far??

Meanwhile, politicians pay for the too much money they give to too rich people, by taking it away from the much more numerous too many too poor people through Austerity. The too many people who don’t have any assets and owe any money they have to the people who have too much money and too many assets – aren’t happy. They blame society, they blame governments and as they get even more unhappy they get angry. These too poor too angry people then get very angry and start blaming people. which is what is happening across the globe..

Still there?… 

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

“Not QE”, Monetization, & “Definitely Asset Inflation”

“Not QE”, Monetization, & “Definitely Asset Inflation”

Chart below shows the Federal Reserve holdings of Treasuries, a weekly change (black columns) and total holdings (red line) during QE1, QE2, Operation Twist, QE3, QT, and “Not QE”.  Got it?!?  This current “Not QE” explosion in QE is like some kind of old time vaudeville act (like the old Abbott and Costello bit, “who’s on first, what’s on second, I don’t know’s on third”).

But looking more widely, the chart below shows the total Federal Reserve balance sheet (blue shaded area), bank excess reserves (red line), and the delta between the Fed’s balance sheet and excess reserves…also known as direct monetization.  As the Fed restarted “not QE” but did not go through the façade of attempting to stock the new money away as “excess reserves”, this new money is flowing straight into assets, like monetary heroine.

Below, a close up of the components above solely in 2019 (through November 6th).  Balance sheet soaring once again since the Fed’s sudden pivot, excess reserves continue falling…and the difference in freshly digitized cash in the hands of banks and the like…ready to be levered up.

So, monetization (yellow line) versus the Wilshire 5000 (green line) from 2014 through last week.  For those not familiar, the Wilshire 5000 total market index, is a market-capitalization weighted index of the market value of all US stocks actively traded in the US.

And fascinatingly, since the beginning of 2018, the Wilshire 5000 and direct monetization are becoming more attuned to one another.  And in mock shock, the new record close in the Wilshire just happens to be accompanied by a new record in direct monetization!?!  Almost as if the addition of $320 billion in fresh digital cash since mid August Fed U-turn had something to do with the $2.2 trillion rise in US equities over the same period (a leverage ratio of about 7x).  Hmmm.

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

Bankers Going for Broke Because They Know it’s Broke – G. Edward Griffin

Bankers Going for Broke Because They Know it’s Broke – G. Edward Griffin

Edward Griffin, author of the wildly popular book about the Federal Reserve “The Creature from Jekyll Island,” is holding a conference this weekend called “Red Pill Expo.” It is all about waking people up from the illusions they are being told. Griffin explains, “The illusions are in health, in politics and in education. The illusions are in the media, in money and in banking, which is my specialty. So, people are coming, some of whom are informed, but most respond to the slogan we are using for the “Red Pill Expo,” and the slogan is ‘Because you know something is wrong.’ That sort of spells it out for most people, not just in America, but for people all over the world. People everywhere are being fed propaganda, lies and false stimuli of all kinds, but deep in their hearts, deep in their instincts, they know something is wrong.”

What’s wrong in the financial world with the longest expansion in history and the Fed starting QE (money printing) again? Griffin says, “We are living in a system of the banks, by the banks and for the banks, and that is the reality. . . . They see that the wheels are coming off. . . . The system of inflation in which we live cannot go on forever. . . . All systems of exponential growth always collapse. They come to an end at some point, and it’s hard to tell exactly at what point, but you do know there is a breaking point where it just moves beyond reality. The banks know this better than anybody. So, I am assuming that they feel they are at the end. You can smell it. You can see it. You can touch it almost.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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