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With a sense of urgency. No more dilly-dallying around.

The Fed’s balance sheet for the week ending January 31, released this afternoon, completes the fourth month of QE-unwind. And it’s starting to be a doozie.

This “balance sheet normalization” impacts two types of assets: Treasury securities and mortgage backed securities (MBS) that the Fed acquired during the years of QE and maintained afterwards.

The Fed’s plan, as announced in September, is to shrink the balances of Treasuries and MBS by up to $10 billion per month in October, November, and December 2017, then to accelerate the pace every three months. In January, February, and March 2018, the unwind would be capped at $20 billion a month; in Q2, at $30 billion a month; in Q3, at $40 billion a month; and starting in Q4, at $50 billion a month.

According to this plan, balances of Treasuries and MBS will shrink by $420 billion in 2018, by an additional $600 billion in 2019, and by additional $600 every year going forward until the Fed deems the level of its holdings “normal.” Whatever this level may turn out to be, it will be much higher than the level suggested by the growth trajectory before the Financial Crisis.

For January, the plan called for shedding up to $20 billion: $12 billion in Treasuries and $8 billion in MBS.

So how did it go?

On its December 27 balance sheet, the Fed had $2,454 billion of Treasuries. By January 31, it had $2,436 billion: a drop of $18 billion in one month!

This exceeds the planned drop of $12 billion for January. But hey, over the holidays, most folks at the New York Fed, which does the balance sheet operations, were probably off and not much happened. And so this may have been a catch-up action, with a sense of urgency.

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

Will Monetary Policy Trigger Another Financial Crisis?

January 26, 2018

Will Monetary Policy Trigger Another Financial Crisis?

Sustained unconventional monetary policies in the years after the 2008 global financial crisis created the conditions for the second-longest bull market in history. But they also may have sown the seeds of the next financial crisis, which might take root as central banks continue to normalize their policies and shrink their balance sheets.

LONDON – Former US President Ronald Reagan once quipped that, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” Put another way, policymakers often respond to problems in ways that cause more problems.

Consider the response to the 2008 financial crisis. After almost a decade of unconventional monetary policies by developed countries’ central banks, all 35 OECD economies are now enjoying synchronized growth, and financial markets are in the midst of the second-longest bull market in history. With the S&P 500 having risen 250% since March 2009, it is tempting to declare unprecedented monetary policies such as quantitative easing (QE) and ultra-low interest rates a great success.

But there are three reasons for doubt. First, income inequality has widened dramatically during this period. While negative real (inflation-adjusted) interest rates and QE have hurt savers by repressing cash and government-bond holdings, they have broadly boosted the prices of stocks and other risky financial assets, which are most commonly held by the wealthy. When there is no yield in traditional fixed-income investments such as government bonds, even the most conservative pension funds have little choice but to pile into risk assets, driving prices even higher and further widening the wealth divide.

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

What Will Rising Mortgage Rates Do to Housing Bubble 2?

January 20, 2018

What Will Rising Mortgage Rates Do to Housing Bubble 2?

Oops, they’re already rising.

The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008.

In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind.

September as month of the QE-Unwind announcement keeps cropping up. All kinds of things began to happen, at first quietly, without drawing much attention. But then the trajectory just kept going.

The three-year yield, which had gone nowhere for the first eight months of 2017, rose to 2.20% on Friday, the highest since October 1, 2008. It has spiked 82 basis points since September 8:

The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday.

This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields.

At 2.66%, the 10-year yield has reached its highest level since April 2014, when the “Taper Tantrum” was winding down. That Taper Tantrum was the bond market’s way of saying “we’re shocked and appalled,” when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called “QE Infinity.”

The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):

Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet.

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

According To Albert Edwards, This Country Will Trigger The “Great Unwind”

January 15, 2018

According To Albert Edwards, This Country Will Trigger The “Great Unwind”

For years, SocGen’s permabear Albert Edwards was best known for preaching the gospel of terminal deflation, having introduced the “Ice Age” concept some three decades ago to describe a world trending toward monetary paralysis and the failure of conventional economic policies as central banks fail to stimulate “just the right amount” of inflation to kickstart growth, instead losing the war to deflation as attempts to boost wage growth fail time and again.

Which is surprising, because in his latest letter to clients from last week, the prominent SocGen strategist proposes that not deflation, but rather a unexpected episode of monetary tightening will be the catalyst that will trigger the next “Great Unwind”, bringing the record-setting global stock market to a screeching halt.

What is even more interesting is the country that according to Edwards, will launch this great monetary shock: Japan, also known as ground zero for every failed reflation experiment conducted in the past 30 years.

This time may be different and, far now, most investors fail to see it, according to Edwards.

As he explains, “with so much investor attention focused on the improving US economic outlook and the Trump corporate tax cuts, and with the eurozone having seen a rapid improvement in growth prospects over the past year, the other big developed economy/market has been somewhat overlooked”, that of Japan.

“Japan’s economic situation has been improving too although likely in a more durable fashion. Indeed the front-page chart shows a consistent improvement in consumer expectations that the great deflation in Japan has finally ended – despite headline inflation remaining close to zero. A change in the deflationary mindset may yet be at hand, and that in itself would stimulate the economy by reducing the incentive to delay purchases.”

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

QE Party Over, even by the Bank of Japan

January 6, 2018

QE Party Over, even by the Bank of Japan

First decline in its colossal balance sheet since 2012.

An amazing – or on second thought, given how central banks operate, not so amazing – thing is happening.

On one hand…

Bank of Japan Governor Haruhiko Kuroda keeps saying that the BOJ would “patiently” maintain its ultra-easy monetary policy, so too in his first speech of 2018 in Tokyo, on January 3, when he said the BOJ must continue “patiently” with this monetary policy, though the economy is expanding steadily. The deflationary mindset is not disappearing easily, he said.

On December 20, following the decision by the BOJ to keep its short-term interest-rate target at negative -0.1% and the 10-year bond yield target just above 0%, he’d brushed off criticism that this prolonged easing could destabilize Japan’s banking system. “Our most important goal is to achieve our 2% inflation target at the earliest date possible,” he said.

On the other hand…

In reality, after years of blistering asset purchases, the Bank of Japan disclosed today that total assets on its balance sheet actually inched down by ¥444 billion ($3.9 billion) from the end of November to ¥521.416 trillion on December 31. While small, it was the first month-end to month-end decline since the Abenomics-designed “QQE” kicked off in late 2012.

Under “QQE” – so huge that the BOJ called it Qualitative and Quantitative Easing to distinguish it from mere “QE” as practiced by the Fed at the time – the BOJ has been buying Japanese Government Bonds (JGBs), corporate bonds, Japanese REITs, and equity ETFs, leading to astounding month-end to month-end surges in the balance sheet. But now the “QQE Unwind” has commenced. Note the trend over the past 12 months and the first dip (red):

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

Quantitative Tightening Is the Biggest Economic Threat in 2018

January 5, 2018

Quantitative Tightening Is the Biggest Economic Threat in 2018

In response to the 2008 financial crisis, the Fed and other central banks deployed zero or near-zero interest rates, quantitative easing, and assorted other interventions.

These may have averted an even worse disaster, but their impacts were far from ideal. Nonetheless, the economy slowly lifted off as consumers rebuilt their balance sheets and asset values rose.

The asset values climbed in large part because the Fed practically forced everyone with money to invest it in risk assets: stocks, real estate, corporate bonds, etc. But as my long-time Thoughts from the Frontline readers know, the Fed’s trickle-down monetary policy hasn’t really worked.

The resulting wealth effect theoretically enabled more spending, at least by those in the top income quintile. But the recovery has been slow and ugly, and too many people still don’t feel the progress.

QE Benefits Were Not Evenly Distributed

Those who gripe about income inequality actually have points to make.

Even if you filter out the top one half of 1% (the tech billionaires, Warren Buffett, et al.), there is still a large imbalance in how much the top and bottom earners have benefited from the Fed’s lopsided monetary policy.

The chart below shows that the share of unmarried adults in double-up households has increased in all age brackets, and especially among Millennials.

Source: Zillow

Having a few Millennials in my own family, and even some young Gen Xers, the need to double up is readily apparent to me. Rents are just too high for the average person. Also notice that nearly one in three people between ages 50 and 59 is living with someone else in order to save on rent and other expenses.

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

What A Fed Rate Hike Means For U.S. Shale

September 24, 2017

What A Fed Rate Hike Means For U.S. Shale

North American shale oil and gas companies have proven that they can adapt their business model through the lower crude oil prices cycle. Now, the new challenge for shale producers is how to adjust their financial strategy when the Federal Reserve (Fed) raises interest rates.

Since the 2007 financial crisis, the Fed interest rate has declined from 5 to 1.25 percent, having hit the record low of 0.25 percent in December 2008, just four months after the Lehman Brothers bankruptcy that triggered a domino effect across the financial sector.

The Fed’s actions weren’t enough to stabilize the American economy, but thanks to U.S. Congress approval of the American Recovery and Reinvestment Act of 2009, business activities began to re-emerge due to the nation’s economic stimulus package supported by tax breaks, quantitative easing (QE), and government spending.

At last, those recovery measures and the Fed’s rate cut helped stabilize the financial markets following the financial crisis. But most important for the Fed, it led to lower unemployment rates, which dropped 4.4 percent lower in August 2017.

For these reasons, the Fed has struggled with ‘rate normalization’ (returning rates to pre-crisis levels), having seen market participants become highly reliant on its record-low interest rates and improved access to finances with QE.

QE has also played a key role in capital allocation decisions by forcing investors out of the bond markets and into the riskier stocks/equities markets by suppressing bond yields with the purchase of billions in government debt since late 2008.

The Fed has watched crude oil price closely since the crisis, because when oil prices fall they tend to pull down inflation with them. However, once they begin to stabilize—at whatever level—their impact on inflation dissipates over time. Since the beginning of 2017, not only have crude oil prices stabilized, but they’ve also increased, but the impact on U.S. inflation remained weak throughout this time.

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

QT1 Will Lead to QE4

September 22, 2017

QT1 Will Lead to QE4

There are only three members of the Board of Governors who matter: Janet Yellen, Stan Fischer and Lael Brainard. There is only one Regional Reserve Bank President who matters: Bill Dudley of New York. Yellen, Fischer, Brainard and Dudley are the “Big Four.”

They are the only ones worth listening to. They call the shots. The don’t like dots. Everything else is noise.

Here’s the model the Big Four actually use:

1. Raise rates 0.25% every March, June, September and December until rates reach 3.0% in late 2019.

2. Take a “pause” on rate hikes if one of three pause factors apply: disorderly asset price declines, jobs growth below 75,000 per month, or persistent disinflation.

3. Put balance sheet normalization on auto-pilot and let it run “on background.” Don’t use it as a policy tool.

Simple.

What does this model tell us about a rate hike in December?

Disinflation has been strong and persistent. The Fed’s main metric for this (core PCE deflator year-over-year) has dropped from 1.9% in January to 1.4% in July. The August reading comes out on September 29. This time series is moving strongly in the wrong direction from the Fed’s perspective. This is what caused the September “pause” (which we predicted for readers last March).

After seven months of decline, one month of increase, if it comes, will not be enough to get the Fed to end the pause. It would take at least two months of increases to change the Fed’s mind.

That’s unlikely given the impact of Hurricanes Harvey and Irma. Those effects may be temporary, but they come at exactly the time when the Fed was looking for a turnaround in core inflation. They won’t get it. The pause goes on.

How do I know this?

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

Federal Reserve Will Continue Cutting Economic Life Support

September 20, 2017

Federal Reserve Will Continue Cutting Economic Life Support

I remember back in mid-2013 when the Federal Reserve fielded the notion of a “taper” of quantitative easing measures. More specifically, I remember the response of mainstream economic analysts as well as the alternative economic community. I argued fervently in multiple articles that the Fed would indeed follow through with the taper, and that it made perfect sense for them to do so given that the mission of the central bank is not to protect the U.S. financial system, but to sabotage it carefully and deliberately. The general consensus was that a taper of QE was impossible and that the Fed would “never dare.” Not long after, the Fed launched its taper program.

Two years later, in 2015, I argued once again that the Fed would begin raising interest rates even though multiple mainstream and alternative sources believed that this was also impossible. Without low interest rates, stock buybacks would slowly but surely die out, and the last pillar holding together equities and the general economy (besides blind faith) would be removed. The idea that the Fed would knowingly take such an action seemed to be against their “best self interest;” and yet, not long after, they initiated the beginning of the end for artificially low interest rates.

The process that the Federal Reserve has undertaken has been a long and arduous one cloaked in disinformation. It is a process of dismantlement. Through unprecedented stimulus measures, the central bank has conjured perhaps the largest stock and bond bubbles in history, not to mention a bubble to end all bubbles in the U.S. dollar.

Stocks in particular are irrelevant in the grand scheme of our economy, but this does not stop the populace from using them as a reference point for the health of our system. This creates an environment rife with delusion, just as the open flood of cheap credit created considerable delusion before the crash of 2008.

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

Why Quantitative Tightening Will Fail

July 4, 2017

Why Quantitative Tightening Will Fail

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

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

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

June 25, 2017

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

[Ed. Note: Jim Rickards’ latest New York Times bestseller, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is out now. Learn how to get your free copy – HERE. This vital book transcends rhetoric from the Federal Reserve to prepare you for what you should be watching now.]

The Federal Reserve is now setting out on a new path for quantitative tightening (QT) after nine years of unconventional quantitative (QE) easing policy. It is the evil twin of QE which was used to ease monetary conditions when interest rates were already zero.

First, it is important to examine QE and QT in a broader context of the Fed’s overall policy toolkit. Understanding the many tools the Fed has, which of them they’re using and what the impacts are will allow you to distinguish between what the Fed thinks versus what actually happens.

We have a heavily manipulated system. For years, if not decades, monetary policy has been flipping back and forth between how the economy actually works and what the Fed believes works.

QE was a policy of printing money by buying securities from primary dealers and to ease monetary conditions when interest rates were at zero. QT takes a different approach.

In QT, the Fed will “sell” securities to the primary dealers, take the money, and make it disappear. This is an attempt to ultimately reduce the money supply and implement a policy of tightening money.

There’s a bit of a twist to that selling. Today the Fed’s balance sheet stands at $4.5 trillion. It started at $800 billion in 2008 and has increased over five times that since the crisis. Now they’re going to try to get the balance sheet back to normal levels.

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

Meet QT; QE’s Evil Twin

September 5, 2015

Meet QT; QE’s Evil Twin

There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet “Quantitative Tightening,” the pesky, problematic, and much less disciplined kid brother of “Quantitative Easing.” Now that QE is ready to move out…QT is prepared to take over.

For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.

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

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