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Jim Grant Warns The Fed “Firemen Are Also The Arsonists”

Jim Grant Warns The Fed “Firemen Are Also The Arsonists”

Having put put America straight on what we are facing and the consequences of these unelected and unaccountable officials terrifying experiments, Grant’s Interest Rate Observer editor Jim Grant is back with another warning that irresponsible policy from the Federal Reserve made the coronavirus crisis worse than it had to be.

As Grant notes“it took a viral invasion to unmask the weakness of American finance.”

Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses; but, as Grant exclaims, the firemen are also the arsonists echoing his earlier in the week comments that:

Jay Powell’s seemingly blinkered proclamation that “he sees no prospective consequences with regard the purchasing power of the dollar” as “very concerning” adding more pertinently that he thinks “that wilful ignorance is a clear-and-present-danger for creditors of The United States.” 

Grant continues:

It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the U.S. economy’s financial integrity.

The coronavirus pandemic would have called forth a dramatic response from the central bank in any case. Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity. But frail corporate balance sheets and overextended markets go far to explain the immensity of the interventions.

Perhaps never before has corporate America carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones quoted only weeks ago.

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

Fed’s Balance Sheet Hits $6 Trillion: Up $1.6 Trillion In 3 Weeks

Fed’s Balance Sheet Hits $6 Trillion: Up $1.6 Trillion In 3 Weeks

“We’re going to need a bigger chart.”

That’s all one can say when seeing what happened to the Fed’s balance sheet in the past week.

According to the Fed’s latest weekly H.4.1 (i.e., balance sheet) update, as of April 1 the Fed’s balance sheet hit a record $5.811 trillion, an increase of $557 billion in just one week. And when one adds the $88.5BN in TSY and MBS securities bought by the Fed today…

… we can calculate that as of close of business Thursday, the Fed’s balance sheet was an unprecedented $5.91 trillion, an increase of $1.6 trillion since the start of the Fed’s unprecedented bailout of everything on March 13 when the Fed officially restarted QE. And since we know that tomorrow the Fed will buy another $90 billion, we can conclude that as of Friday’s close, the Fed’s balance sheet will be a nice, round $6 trillion.

Finally, here is what the Fed’s balance sheet looks like over a longer timeframe: it shows that in just the past 3 weeks, the Fed’s balance sheet has increased by a ridiculous $1.6 trillion – the same amount as all of QE3 did over 15 months  – and equivalent to an insane 7.5% of US GDP. 

One more insane statistic: the Fed’s balance sheet was $3.8 trillion in August 2019 when the shrinkage in reserves supposedly triggered the repo crisis. Fast forward, 6 months, when the Fed’s balance sheet is now 60% higher.

…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…

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

With US dealers no longer using the Fed’s repo facilities (this morning we had another “no bid” overnight repo with just $250MM in MBS submitted for a $500 billion op) as the Fed soaks up all securities via its aggressive QE which is still buying $75BN in paper each day, perhaps Powell felt a bit unloved and at 830am this morning the Fed unveiled yet another “temporary” emergency liquidity providing facility, this time to foreign central banks, in the form of a repo facility targeting “foreign and international monetary authorities”, i.e. foreign central banks which will be allowed to exchange Treasuries held in custody at the Fed for US dollars.

In other words, just a week after the Fed “enhanced” its swap lines with central banks and included a bunch of non G-5 central banks to the list of counterparties, it has found that this is not working – perhaps due to the prohibitive rates on the facility – and is now handing out dollars outright against US denominated securities. We wonder if the central bank uptake will be any higher than the repo facility aimed at US dealers and which is now redundant. Of course, when that fails the Fed can just offer to buy all central bank securities in what even reputable FX strategists now joke is a Fed on full tilt, and intent on buying out all foreign central banks.

And so, just as the financial situation was starting to stabilize, the Fed reminds everyone just how broken everything still is.

Fed launches ANOTHER temporary facility to provide $USD liquidity to foreign central banks (this time foreign central bank holdings of US Treasury’s can be exchanged for dollars).

At this rate, Fed is on course to buy out foreign central banks… and call it an M&A facility pic.twitter.com/iAXRCVoZS9— Viraj Patel (@VPatelFX) March 31, 2020

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

Will Coronavirus End the Fed?

Will Coronavirus End the Fed?

September 17, 2019 was a significant day in American economic history. On that day, the New York Federal Reserve began emergency cash infusions into the repurchasing (repo) market. This is the market banks use to make short-term loans to each other. The New York Fed acted after interest rates in the repo market rose to almost 10 percent, well above the Fed’s target rate.

The New York Fed claimed its intervention was a temporary measure, but it has not stopped pumping money into the repo market since September. Also, the Federal Reserve has been expanding its balance sheet since September. Investment advisor Michael Pento called the balance sheet expansion quantitative easing (QE) “on steroids.”

I mention these interventions to show that the Fed was taking extraordinary measures to prop up the economy months before anyone in China showed the first symptoms of coronavirus.

Now the Fed is using the historic stock market downturn and the (hopefully) temporary closure of businesses in the coronavirus panic to dramatically increase its interventions in the economy. Not only has the Fed increased the amount it is pumping into the repo market, it is purchasing unlimited amounts of Treasury securities and mortgage-backed securities. This was welcome news to Congress and the president, as it came as they were working on setting up trillions of dollars in spending in coronavirus aid/economic stimulus bills.

This month the Fed announced it would start purchasing municipal bonds, thus ensuring the state and local government debt bubble will keep growing for a few more months.

The Fed has also created three new loan facilities to provide hundreds of billions of dollars in credit to businesses. Federal Reserve Chairman Jerome Powell has stated that the Fed will lend out as much as it takes to revive the economy.

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

Jim Grant Warns Fed’s ‘All-In’ Actions Are A “Clear-And-Present-Danger” To US Creditors

Jim Grant Warns Fed’s ‘All-In’ Actions Are A “Clear-And-Present-Danger” To US Creditors

In a veritable treatise on all that was wrong with The Fed’s actions, Jim Grant – founder and editor of Grant’s Interest Rate Observer – was somehow allowed nine minutes on CNBC’s Squawk Box to put America straight on what we are facing and the consequences of these unelected and unaccountable officials terrifying experiments.

Grant began by slamming Jay Powell’s seemingly blinkered proclamation that “he sees no prospective consequences with regard the purchasing power of the dollar” as “very concerning” adding more pertinently that he thinks “that wilful ignorance is a clear-and-present-danger for creditors of The United States.

It appears his fears are starting to be warranted as USA Sovereign credit risk is rising…

“I am in favor of life going on,” says Grant when asked by the anchor, “shouldn’t The Fed do something amid this massive global shutdown?”

The alternative, the venerable bond guru exclaims is the direction we are heading – “shutting everything down and putting the government in charge.”

Bernie Sanders may (or may not) be out of the presidential race but, as Grant highlights, “his programs are being implemented in fact daily.”

“One can die of despair as well as disease,” warned Grant, reminding viewers of the consequences of mass self-incarceration.

“There are health consequences to isolation, and health consequences to unemployment.. and life as it must go on is is a precious thing too and we ought to at least consider what we are condemning ourselves to if we choose to shut everything down for another month or two or three.”

“I think it would be a fatal error.”

Once again, the CNBC anchor urged Grant to support massive intervention but exclaiming “desperate times call for desperate measures.”

His retort shut down her argument quickly:

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

Weekly Commentary: The Solvency Problem

Weekly Commentary: The Solvency Problem

Being an analyst of Credit and Bubbles over the past few decades has come with its share of challenges. Greater challenges await. I expect to dedicate the rest of my life to defending Capitalism. One of the great tragedies from the failure of this multi-decade monetary experiment will be the loss of faith in free market Capitalism – along with our institutions more generally.  

Somehow, we must convince younger generations that the culprit was unsound finance. And it’s absolutely fixable. Deeply flawed, experimental central banking was fundamental to dysfunctional markets and resulting deep financial and economic structural impairment. The Scourge of Inflationism. If we just start learning from mistakes, we can get this ship headed in the right direction.

Over the years, I’ve argued for “rules-based” central banking that would sharply limit the Federal Reserve’s role both in the markets and real economy. The flaw in “discretionary” central banking was identified generations ago: One mistake leads invariably to only bigger blunders.  

What commenced with Alan Greenspan’s market-supporting assurances of liquidity and asymmetric rate policy this week took a dreadful turn for the worse: Open-end QE, PMCCF, SMCCF, MMLF, CPFF, MSBLP, TALF… They’re going to run short of acronyms. Our central bank has taken the plunge into buying corporate bond ETFs, with equities ETFs surely not far behind. The Fed’s balance sheet expanded $586 billion – in a single week ($1.1 TN in four weeks!) – to a record $5.25 TN. Talk has the Fed’s new “Main Street Business Lending Program” leveraging $400 billion of (this week’s $2.2 TN) fiscal stimulus into a $4.0 TN lending operation. Having years back unwaveringly set forth, the ride down the slippery slope of inflationism has reached warp speed careening blindly toward a brick wall. 

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

#MacroView: The Fed Can’t Fix What’s Broken

#MacroView: The Fed Can’t Fix What’s Broken

“The Federal Reserve is poised to spray trillions of dollars into the U.S. economy once a massive aid package to fight the coronavirus and its aftershocks is signed into law. These actions are unprecedented, going beyond anything it did during the 2008 financial crisis in a sign of the extraordinary challenge facing the nation.” – Bloomberg

Currently, the Federal Reserve is in a fight to offset an economic shock bigger than the financial crisis, and they are engaging every possible monetary tool within their arsenal to achieve that goal. The Fed is no longer just a “last resort” for the financial institutions, but now are the lender for the broader economy.

There is just one problem.

The Fed continues to try and stave off an event that is a necessary part of the economic cycle, a debt revulsion.

John Maynard Keynes contended that:

“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”

In other words, when there is a lack of demand from consumers due to high unemployment, then the contraction in demand would force producers to take defensive actions to reduce output. Such a confluence of actions would lead to a recession.

On Thursday, initial jobless claims jumped by 3.3 million. This was the single largest jump in claims ever on record. The chart below shows the 4-week average to give a better scale.

This number will be MUCH worse next week as many individuals are slow to file claims, don’t know how, and states are slow to report them.

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

Forced Liquidation

Forced Liquidation


Historians of the future, pan-roasting fresh-caught June bugs over their campfires, may wonder when, exactly, was the moment when the financial world broke with reality. Was it when Nixon slammed the “gold window” shut? When “maestro” Alan Greenspan first bamboozled a Senate finance committee? When Pets.com face-planted 268 days after its IPO? When Ben Bernanke declared the housing bubble “contained?”

If our reality is a world of human activity, then finance is now completely divorced from it for the obvious reason that, for now, there is no human activity. Everyone, except the doctors and nurses, and some government officials, is locked down. So, the only other thing actually still out there spinning its wheels is finance and, to those of us watching from solitary confinement, it is looking more and more like an IMAX-scale hallucination with Dolby sound.

How many mortals can even pretend to understand the transactions now taking place among treasury and banking officials? On their own terms – TALFs, Special Purpose Vehicles, Commercial Paper Funding Facilities, Repo Rescue Operations, “Helicopter Money” – stand as increasingly empty jargon phrases that signify increasingly futile efforts to paper over the essence of the situation: the world is bankrupt. It’s that simple.

The world is locked down and in hock up to its eyeballs. It faces what the bankers euphemistically call, ahem, a “work-out,” which is to say, a restructuring. The folks in charge are resisting that work-out with all their might, because it will change many of the conditions of everyday life (especially theirs), but it is coming anyway. When debt can’t be paid back, money vanishes. Money isn’t capital, but it represents capital when it is functioning. When it isn’t functioning, it stops being money. Now the whole world realizes that the debt can’t be paid back, will never be paid back… and that’s the jig that’s up.

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

Peter Schiff: Hyperinflation Is the Most Probable Scenario

Peter Schiff: Hyperinflation Is the Most Probable Scenario

March 23 was Peter Schiff’s birthday. It was also the day the Federal Reserve announced QE Infinity. So, Peter spent over three hours hosting a live videocast talking about the latest Fed moves, the potential impact on the economy and answering questions from viewers.

Peter said he was hoping to combat the rampant economic ignorance that is pretty much everywhere.

There’s probably one thing that is spreading right now throughout the country faster than the coronavirus and that is economic ignorance and misinformation. It’s all over the place. It’s gone completely viral … The best thing anybody can do to combat the virus of ignorance is to turn off their television sets or their computers and don’t listen to anything that is being said in conventional media, whether it’s a news-related channel or a financial channel, I can virtually assure you that every single thing that you’re hearing is wrong.”

Peter hammered on a number of central themes you won’t hear discussed in the mainstream. For one thing, the Federal Reserve and the US government are repeating the mistakes of 2008.

Peter reminds us that as the crisis unfolded in ’08, he warned that the policies of bailouts and monetary stimulus were a mistake and that they would lead to a bigger crisis in the future.

Well, welcome to the future.”

He also emphasized that this isn’t about the coronavirus. The virus pricked a bubble that was inflated long ago. The economic chaos we’re seeing today started long before the virus reared its ugly head.

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

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

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

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

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

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

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

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

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

FED BALANCE SHEET 2020

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

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

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

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

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

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

For An Effective Response To The Upcoming Crisis

For An Effective Response To The Upcoming Crisis

Before analyzing the emergency plans that the global economy needs, we must remember that, as in the past, the prudence and responsibility of the civil society and businesses will help us to get out of this crisis.

In the face of an unprecedented crisis, we have to be realistic, responsible and cautious.

This is a supply shock added to a mandatory shutdown of the economy. As such, a serious response must be supply-side driven. It is ludicrous to try to stimulate demand with printed money and public spending in a forced lockdown where any extra demand will not drive supply up, even may drive it down.

A mandatory shutdown due to a supply shock is not solved with government spending or demand-side measures. Printing money and lowering rates help the already indebted and governments with already historic-low bond yields, deficits are already going to soar due to automatic stabilizers, so governments need to work on three things:

First, make sure that once there is a tested and approved vaccine, the production, distribution, and healthcare networks are going to be adequately prepared to respond to the population requirements.

Second, make sure that businesses don’t collapse due to working capital build in a domino of bankruptcies that leads to mass unemployment.

Third, eliminate all unnecessary spending to effectively use all fiscal space to mitigate the crisis effects and allow the economy to breathe and recover.

Governments that overspent in growth times, massively increased debt and ignored the pandemic risks only to then create a widespread lockdown cannot present themselves as the solution. 

Small and medium enterprises do not need a government to incentivize demand, because this is not a demand problem, the shutdown is imposed by law due to a health epidemic that lawmakers preferred to ignore. 

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

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

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

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

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

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

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

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

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

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

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

Olduvai IV: Courage
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Olduvai II: Exodus
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