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The Fed is Determined to Prove the QTM Right

The Fed is Determined to Prove the QTM Right

gold-dollar-trap

Milton Friedman famously said, “Inflation was always and everywhere a monetary phenomenon.” But Friedman didn’t live through the QE years here in the U.S. and blatantly ignored the twenty plus years of Japanese deflation despite QE and insane levels of money printing during the latter years of his life.

Because Friedman, like a lot of modern economists, adhered strictly to the Quantity Theory of Money (QTM).

And as an Austrian economics kinda guy I somewhat agree with the QTM. I agree with Ludwig von Mises on this, as you would expect. So, how do we square the QTM with the evidence that QE in all of its guises has resulted in deflation, as expressed by the general price level, where ever it has been tried?

Martin Armstrong ask this question all the time and is openly hostile to the QTM. And his arguments have some merit, because, as he rightly points out the QTM only looks at the supply side of the money equation.

It cares not about the demand side. He’s right about that. What he’s wrong about is that the Austrians, like von Mises, haven’t considered this either.

Demand for money is just as important as the supply of it. And during a crisis, the demand side of the equation for any particular currency may, in fact, be more important.

This is what the Fed has struggled with for the past twelve years. The demand for the U.S. dollar has far outstripped the increase in supply, causing a far lower aggregate price rise than anticipated by the QTM.

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

Curing COVID-19 Won’t Cure the Economy

Curing COVID-19 Won’t Cure the Economy

We have been making the case for weeks that we aren’t heading for a quick recovery. We’ve reported on the number of people of small business owners who don’t think they’ll survive, the increasing number of over-leveraged zombie companies, and the tsunami of defaults and bankruptcies on the horizon. Yes, we have seen some economic numbers that are better than expected, but it’s all a function of a Federal Reserve-induced sugar high. The ugly truth is that given the amount of stimulus that the Federal Reserve and the US government have pumped into the economy, unwinding it all will be mission impossible. All of this certainly raises serious questions about the possibility of a “v-shaped” recovery.

We’re not alone in making this case. In the following article recently published at the Mises Wire, economist Brendan Brown provides some additional arguments and asserts  that even if COVID-19 disappeared today, the economy isn’t going back to “normal.”

The opinions expressed are those of Brendan Brown and for your consideration. They do not necessarily reflect those of Peter Schiff or SchiffGold.

Speculative frenzy in the midst of recession is not a new phenomenon. Yet the extent of the “madness” this time might well beat records in the small sample size available from the history laboratory. The combination of extreme monetary radicalism and a receding supply shock has proved to be a potent toxic, impairing mental processes in ways described by the behavioral finance theorists. The pandemic stock “bubble” and resumed hectic demand for risky credit paper provide illustrations.

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

After the Fed Punts, the ECB Throws Another Hail Mary

After the Fed Punts, the ECB Throws Another Hail Mary

Last week FOMC Chair Jerome Powell and company did, essentially nothing, at their June meeting. They held interest rates at 0.25%, did not expand QE nor did they indicate any changes.

This wasn’t what the market wanted, as the bond were pushing the Fed to take rates negative and further open up the liquidity spigots.

Rates would be lower for longer and central bank swap lines would remain open. Other than that, the Fed didn’t give the markets what it wanted.

There were plenty of dollars in the system. That dynamic immediately changed after the FOMC meeting.

By punting the Fed put the ball back in the hands of the ECB who had been enjoying the dynamic of a weaker dollar to alleviate offshore dollar liquidity concerns.

It didn’t hurt that political instability here in the U.S. is at a high not seen since the 1860’s.

The stronger euro was assisting the ECB in selling their balance sheet expansion.

The ECB then announced it’s latest TLTRO-3 Auction for this quarter. The total amount of the auction was a stunning $1.3 trillion, which broke down into $550 billion in new lending and $760 billion in rollovers.

And it means the total TLTRO outstanding balance is already at all-time high levels and nothing has been solved yet.

But, as Goldman Sachs through Zerohedge points out, these loans were at incredibly generous rates:

Given improved terms (-1% for YR1 until June 2021, and -0.5% for YR2-3 if lending benchmarks criteria are met) starting with this auction, banks were expected to repay some outstanding TLTRO-II early to refinance at cheaper rates. Taken together, this still leaves some €550bn of net new take-up.

This gives banks the great incentive to get paid to borrow in euros and get the yield spread against other currencies like the dollar or the Japanese yen.

The size of this issuance is your proof that there simply aren’t enough dollars out there to soak up demand or banks wouldn’t have fed so deeply at the trough.

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

US Money Supply – The Pandemic Moonshot

US Money Supply – The Pandemic Moonshot

Printing Until the Cows Come Home…

It started out with Jay Powell planting a happy little money tree in 2019 to keep the repo market from suffering a terminal seizure. This essentially led to a restoration of the status quo ante “QT” (the mythical beast known as “quantitative tightening” that was briefly glimpsed in 2018/19). Thus the roach motel theory of QE was confirmed: once a central bank resorts to QE, a return to “standard monetary policy” becomes impossible. You can check in, but you can never leave.

Phase 1: Jay Powell plants a happy little money tree to rescue the repo market from itself (from: “The Joy of Printing”).

It is easy to see why. Any attempt to seriously reduce outstanding central bank credit will bring about the very situation QE was intended to prevent, i.e., falling asset prices and an economic bust. Seemingly no-one in officialdom ever stops to ask why that should be so. What happened to “self-sustaining recoveries” and “achieving escape velocity”? Could it be the economy is neither a perpetuum mobile nor a space ship?

Before we consider this question, here is what has happened since then: shortly after the double-plus-uncool novel SARS-2 corona-virus traversed several ponds and made landfall in the US, Mr. Powell and his fellow merry pranksters decided to water the money tree with super-gro. Or maybe it was hyper-gro:

The “QE” roach motel, illustrated by the history of the Fed’s balance sheet.

That is a rather noteworthy bout of inflation. Readers may have noticed that in the realms of finance and economics there has also been an inflation of verbiage describing never before seen extremes.  By its very nature, one would normally not expect to hear the term “unprecedented” very often, but it has become disconcertingly commonplace in connection with monetary pumping, deficit spending and debt growth.

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

This Time, the Fed Can’t Avoid Inflation, Says Expert

This Time, the Fed Can’t Avoid Inflation, Says Expert

inflation

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Is the latest QE program finally going to spike prices, gold cannot be printed by central banks, and virus intensifies the flow of gold to U.S. vaults.

Can the Federal Reserve avoid inflation once again?

As the dust around the 2008 financial crisis settled, some may have been surprised that the eagerness of the Federal Reserve to print money did not cause inflation, or even hyperinflation. Yet those who are expecting the same turnout this time around should look at the underlying nature of both crises.

FXEmpire’s Arkadiusz Sieron points out that 2008 was, in essence, a banking crisis, and banks were the ones receiving aid in the form of bank reserves. While they function in a similar capacity, these notes differ from actual money as they do not enter the economy but are rather used as a medium of exchange between banks. Adding to that was a lack of appetite among individual creditors to take on debt combined with a lack of willingness to issue loans on the banks’ part, as shown by the growth rate of credit supply reaching negative territory.

Now, the scenario appears to be the exact opposite, as consumers and business owners are the ones primarily affected by the crisis. Sieron argues that there is no question as to whether the stimulus will enter the money supply, as programs like the Term Asset-Backed Securities Loan Facility and Main Street Lending Program will ensure funding for eager debtors.

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

Someday They Are Going To Write Books About This!

Someday They Are Going To Write Books About This!

What is occurring today is absolutely mind-boggling. Someday they are going to write books about this! While there have been some messed up financial conundrums over the years none rival the current situation now before us. The dilemma before us is a fast-moving enigma wrapped in a gossamer cloak. Not only are the players that make up the global political-financial complex busy buying up bad debt, stocks, and bailing out those they deem too big to fail, they have destroyed the concept of real interest on loans. They have trampled all over true price discovery the basis of a free market.

The budget forecast be damned, its full speed ahead. The only justification we need is saying it will be far worse if we do nothing.The bungled response of a delusional government so obsessed with the idea that by simply passing legislation they can make things happen should not be overlooked. The Paycheck Protection Program or PPP was originally funded with $350 billion but the money was soon gone. Of the thirty million small businesses in America, only 1.7 million received money from the 2.3 trillion dollar aid package passed to help sustain America during this difficult time.

This resulted in more funding but still, the last report I saw indicated only around 13% of the, less than half the businesses that were eligible, were approved before the fund was again depleted and 60% of these had yet to receive any money.  Just as poorly handled was rapidly getting out money promised to individuals and creating a system where many people could receive more money by collecting unemployment than returning to work. The problem is that when all is said and done, large businesses with access to cheap capital will again be the winners and the big losers are the middle-class, small businesses, and social mobility.

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

Fed Cut Back on Helicopter Money for Wall Street & the Wealthy

Fed Cut Back on Helicopter Money for Wall Street & the Wealthy

Tapered QE-4 Further, Still Hasn’t Bought Junk Bonds or ETFs, Was Just Jawboning.

Total assets on the Fed’s balance sheet rose by $205 billion during the week ending April 22, to $6.57 trillion. Since the week ending March 11, when the bailout of the Everything Bubble and its holders began, the Fed has printed $2.26 trillion.

But the $205 billion increase was the smallest increase since the mega-bailout began with its Sunday March 15 announcement. The Fed is tapering its purchases of Treasury securities and mortgage-backed securities (MBS). Repurchase agreements (repos) are falling into disuse. Lending to Special Purposes Vehicles (SPVs) has leveled off. And foreign central bank liquidity swaps, after having spiked initially, only ticked up by a small-ish amount.

The sharply reduced increases confirm that the Fed is following its various announcements over the past two years that during the next crisis – namely now – it would front-load the bailout QE and after the initial blast would then taper it out of existence, rather than let it drag out for years.

This concept was further confirmed by Fed Chair Jerome Powell on April 10 when he said that the Fed would pack away its emergency tools when “private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth.”

Overall, the Fed has cut the big QE purchases by 65% since the peak week (week ending April 1, $586 billion), to $205 billion:

Purchases of Treasury securities get slashed.

The Fed added $120 billion of Treasury securities to its balance sheet, the smallest amount since this began, down 67% from the $362 billion it had added during the peak week:

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

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

Summary

  • The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated.
  • Its origins are shrouded in mystery and intrigue; its operations are invisible to most; and yet it controls us in many ways. We will attempt to enlighten readers on what it is and what it means.
  • However, it is also a system under huge structural pressures – and as such we may be about to experience a profound paradigm shift with key implications for markets, economies, and geopolitics.
  • Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood

What is The Matrix? 

A new world-class golf course in an Asian country financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets and swapping borrowed EUR to do so. An African retailer importing Chinese-made toys for sale, paying its invoice in USD.

All of these are small examples of the multi-faceted global Eurodollar market. Like The Matrix, it is all around us, and connects us. Also just like The Matrix, most are unaware of its existence even as it defines the parameters we operate within. As we shall explore in this special report, it is additionally a Matrix that encompasses an implicit power struggle that only those who grasp its true nature are cognizant of.

Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.

Yes, it has overcome similar crises before…but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.

So, here is the key question to start with: What is the Eurodollar system? 

For Neo-phytes

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

Takeover

Takeover

We can’t print ourselves out of this crisis again, but that isn’t stopping the Federal Reserve from trying. Thursday’s intervention program, the latest in a string of panic moves to keep the financial system afloat, constitutes a complete takeover attempt of the market ecosphere, only the buying of stocks directly is last missing piece of eventual complete central bank control of equity markets. But seizing control of the bond market is the nearest equivalent step.

Not only that, the Fed is buying junk corporate debt propping up companies that should be let to fail as Chamath Palihapitiya pointed out poignantly this week. But not this Fed, no, with its actions it is again setting up the economy for yet another slower growth recovery, financed by even more debt.

QE doesn’t produce growth, that is the established track record:

Nobody wants to talk about the consequences to come following this crisis, but that doesn’t mean the consequences won’t be a real and present reality.

No, the Fed, while trying to save the world, is once again engaged in vastly distorting asset prices from the fundamental reality of the economy. It is in essence again laying the foundation for the next bubble, while the bursting of this bubble has yet to be fully priced in.

Even the Wall Street Editorial Board has made it perfectly clear what this is all about:


The @WSJ Editorial Board tells you what the new price distortion is all about: Save Wall Street and the top 1% and hope for trickle down economics later:https://www.wsj.com/articles/the-feds-main-street-mistake-11586474912 …

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Asset price inflation to save markets in the hopes of trickle down growth to come.

Absurd.

The message the Fed is again is sending is to invite reckless behavior on the side of investors, the same reckless, TINA, fueled behavior that got us the bubble blow-off top in February.

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

The Fed’s Balance Sheet: The Other Exponential Curve

The Fed’s Balance Sheet: The Other Exponential Curve

As the threat of COVID-19 keeps millions of Americans locked down at home, businesses and financial markets are suffering.

For example, a survey of small-business owners found that 51% did not believe they could survive the pandemic for longer than three months. At the same time, the S&P 500 posted its worst first-quarter on record.

In response to this havoc, the U.S. Federal Reserve (the Fed) is taking unprecedented steps to try and stabilize the economy. This includes, as Visual Capitalist’s Marcu Lu details below, a return to quantitative easing (QE), a controversial policy which involves adding more money into the banking system. To help us understand the implications of these actions, today’s chart illustrates the swelling balance sheet of the Fed.

How Does Quantitative Easing Work?

Expansionary monetary policies are used by central banks to foster economic growth by increasing the money supply and lowering interest rates. These mechanisms will, in theory, stimulate business investment as well as consumer spending.

However, in the current low interest-rate environment, the effectiveness of such policies is diminished. When short-term rates are already so close to zero, reducing them further will have little impact. To overcome this dilemma in 2008, central banks began experimenting with the unconventional monetary policy of QE to inject new money into the system by purchasing massive quantities of longer-term assets such as Treasury bonds.

These purchases are intended to increase the money supply while decreasing the supply of the longer-term assets. In theory, this should put upward pressure on these assets’ prices (due to less supply) and decrease their yield (interest rates have an inverse relationship with bond prices).

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

This Curve Will Never Flatten Again: Fed Balance Sheet Hits $6.1 Trillion, Up $2 Trillion In 1 Month

This Curve Will Never Flatten Again: Fed Balance Sheet Hits $6.1 Trillion, Up $2 Trillion In 1 Month

Here is an example of a curve that everyone wants to flatten.

And here is an example of a curve that while some  – namely the bears – also wants to see collapse, it will never do so  as that would mean the end of western civilization – which is now entirely contingent on the level of the S&P500 – as we know it. We are talking of course, about the Fed balance sheet which is now well above $6 trillion to make sure stocks and bonds don’t crash.

With that in mind here is all you need to know about this particular “curve”:

Total Fed assets grew by $293Bn to $6.08 trillion as of close, April 8, with the increase primarily driven by $294bn of Treasury securities added to the SOMA portfolio. Through its credit facilities, the Fed also extended $680bn in temporary liquidity to various counterparties, a decline of $61bn from last week.

In the past month, the Fed balance sheet has increased by $2 trillion, more than all of QE3, when the balance sheet increased by $1.7 trillion over the span of a year. The balance sheet increase has also been faster on a weekly basis than anything observed during the financial crisis, increasing as follows:

  • April 8: $$272BN
  • April 1: $557BN
  • March 25: $586BN
  • March 17:$356BN

Since the Fed needs to monetize all debt issuance this year, and probably every other year now that the Treasury and Fed have merged and helicopter money has arrived, the pace of the current QE is like nothing ever observed before:

And since we know what the Fed’s POMO schedule is for next week: an increase of $225BN in TSYs and MBS…

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

“Project Zimbabwe”

“Project Zimbabwe”

Roughly a month ago on the afternoon of Sunday, March 8th, Fed Chairman Powell had an emergency staff meeting.

Powell: I want the nuttiest money printing plan ever. What action plans do we have that are prepared and ready to initiate?

Admin: Well, we have this one named “GFC 2.0”

Powell: Sounds tame and sedate. Won’t impress anyone.

Admin: What about this one named “Whatever It Takes”

Powell: Lemme look… Meh… I want more shock and awe. This needs at least two more zeros.

Admin: Well, we have this other one named “Project Zimbabwe” but it’s so ridiculous that the Fed would forever lose all credibility…

Powell: hmmm… I like the sound of “Project Zimbabwe.” Just makes you want to turn dollars into toasters and washing machines to preserve wealth. This one will force guys so far out on the risk curve that they’ll think crypto-coins are value investments.

Admin: Yeah, it’s absolutely Wuhan-bat-shit nutty. We’d be criminally insane to unleash this on a population that isn’t prepared for hyperinflation…

Powell: Perfect!! Let’s have a press conference.

A few hours later…

Powell: Mr. President, I finally took rates to zero and launched QE infinity. Can you stop trolling me on twitter already? I can’t take any more of my wife cracking jokes about your tweets.

Trump: Be a man. You got it easy. Wait until you see what I do to Biden. He puts the “Dem in Dementia” haha…

Powell: Please, no more nasty tweets. Even my kids laugh at me.

Trump: Fine, but you’re thinking too small with “Project Zimbabwe.” Figure out how to print more aggressively. Look at what Mnuchin is doing with all his bailout programs. He’s gonna blow $10 trillion by early summer, then try to double that by election time. You better crank up that printing press of yours. I’ll stop tweeting if you keep monetizing the “Mnuchin Money.”

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

A Corporate-Debt Reckoning Is Coming

A Corporate-Debt Reckoning Is Coming

Corporate debt is the timebomb everyone saw ticking, but no one was able to defuse. Ratings agencies warned about it: Moody’s, S&P. Central banks and international financial institutions did too: the Fed, the Bank of England, the Bank for International Settlements, the IMF. Financial luminaries expressed concern: Jamie Dimon, Seth Klarman, Jes Staley, Jeffrey Gundlach, Henry McVey. Even a presidential candidate brought the issue on the campaign trail: Elizabeth Warren. Yet, as we’ve documented in these pages for more than two years, corporations have only piled on more debt as their balance sheet health has deteriorated.

Total U.S. non-financial corporate debt sits at just under $10 trillion, a record 47% of GDP. One in six U.S. companies is now a zombie, meaning their interest expenses exceed their earnings before interest and taxes. As of year-end 2019, the percentage of listed companies in the U.S. losing money over 12 months sat close to 40%. In the 12 months to November, non-financial S&P 500 cash balances had declined by 11%, the largest percentage decline since at least 1980.

For too long, record-low interest rates inspired complacency, from companies to lenders to regulators and investors. As we warned in WILTW August 8, 2019corporate fundamentals will eventually matter. Now, with COVID-19 grinding the global economy to a halt, that time has come.

Systemic threats are littered throughout the corporate debt ecosystem. Greater than 50% of outstanding debt is rated BBB, one rung above junk. As downgrades come, asset managers will be forced to flood the market with supply at a time demand has dried up. Meanwhile, leveraged loans — which have swelled by 50% since 2015 to over $1.2 trillion — threaten unprecedented losses given covenant deterioration. And bond ETFs could face a liquidity crisis as a flood of redemptions force offloading of all-too-illiquid bonds (see WILTW January 31, 2019).

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

The Federal Reserve’s One Last Hail Mary

The Federal Reserve’s One Last Hail Mary

Over the last few weeks, the Federal Reserve has been in utter desperation mode to try to revive and keep the American economy on life support. What many in the mainstream media have failed to include in this recent coronavirus economic narrative is that the virus was just the pin of one the biggest bubbles ever created, which we call the central bank bubble revolving around U.S sovereign bonds.

Before we dive deep into this, let’s start with what the Fed has been doing to combat against the coronavirus and to keep markets alive for the time being. To begin, welcome back to the era of the printing press, but this time they have made it clear they will conduct “QE infinity” if this is a prolonged depression, which it will be. 

For some prospective, previous QE programs were: 

  • QE1: $1.7 Trillion 
  • QE2: $600 Billion 
  • QE3: $1.6 Trillion 

With this latest being: 

  •    QE4:$1.6 Trillion 

An overwhelming number in such a short period, making previous QE programs look like peanuts in comparison. In fact, the Fed printed roughly $970,000 every second last week to keep the market afloat. To validate that the Fed is artificially keeping the market alive, just look at this next chart: 

This chart showcases that while the Fed balance sheet has shot up ($5.2 Trillion), corporate earnings have plummeted. The market is clearly on life support with the Federal Reserve as its temporary backstop. Presently, the aviation, hotel, and automotive industries, to name a few, are in a major crisis. This applies to all businesses, but since 2008 companies have taken advantage of prolonged zero interest rates and have gone on a total debt binge, with the majority of this debt going strictly to share buybacks and dividends to shareholders.

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

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…

Olduvai IV: Courage
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Olduvai II: Exodus
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