• Category Archives Fiscal Policies
  • Deutsche Bank: “The Fed’s ‘Transparency’ Killed Long-Term Investing”

    Two weeks ago, one of our favorite derivatives strategists, BofA Barnaby Martin wrote something we have said for years: “QE has been the most effective way for CBs to ‘sell vol’”, arguing that accommodative monetary policies across the globe amid QE have “clearly supported a strong rebound in fixed income markets.” This should not be a surprise: as Martin calculated, there is now some $51 trillion at risk should rates vol spike, not to mention countless housing bubbles that have been created since the financial crisis where the bulk of middle class wealth has been parked, which in turn have trapped central banks, preventing them from undoing nearly a decade of unprecedented monetary largesse that has pumped over $15 trillion in central bank liquidity.

    The BofA strategist showed that every time the Fed embarked on the different phases of its QE program, credit implied vols declined significantly, while during periods of no monetary easing or when the market started pricing the possibility of easing policy removal (tapering tantrum and the subsequent tapering phase) implied vols advanced.

    This post was published at Zero Hedge on Sep 23, 2017.


  • Week in Review: September 23, 2017

    Almost a decade later, the Federal Reserve this week announced it will begin reversing quantitative easing. Slowly. Very slowly. The balance sheet currently stands at $4.5 trillion and they will begin allowing $10 billion in assets to roll off their sheets next month. Given the unprecedented nature of QE, even this modest reduction has many market observers on edge. Of course, the fallout from the Fed’s actions are still being felt, while the Trump Treasury is making threats that it would have disastrous consequences if acted on.

    This post was published at Ludwig von Mises Institute on September 23, 2017.


  • Weekend Reading: Yellen Takes Away The Punchbowl

    September 20th, 2017 will likely be a day that goes down in market history.
    It will either be remembered as one of the greatest achievements in the history of monetary policy experiments, or the beginning of the next bear market or worse.
    Given the Fed’s inability to spark either inflation or economic growth, as witnessed by their dismal forecasting record shown below, I would lean towards the latter.
    The media is very interesting. Despite the fact there is clear evidence that unbridled Central Bank interventions supported the market on the way up, there is now a consensus that believes the ‘unwinding’ will have ‘no effect’ on the market.

    This post was published at Zero Hedge on Sep 22, 2017.


  • Pound Flash Crashes After Moody’s Downgrades UK To Aa2

    In an otherwise boring day, when Theresa May failed to cause any major ripples with her much anticipated Brexit speech, moments ago it was Moody’s turn to stop out countless cable longs, when shortly after the US close, it downgraded the UK from Aa1 to Aa2, outlook stable, causing yet another flash crash in the pound.
    As reason for the unexpected downgrade, Moodys cited “the outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise.”
    It also said that fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union (EU), and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.
    Moody’s now expects growth of just 1% in 2018 following 1.5% this year; doesn’t expect growth to recover to its historic trend rate over coming years. Expects public debt ratio to increase to close to 90% of GDP this year and to reach its peak at close to 93% of GDP only in 2019.
    And so, once again, it was poor sterling longs who having gotten through today largely unscathed, were unceremoniously stopped out following yet another flash crash in all GBP pairs.
    Full release below:

    This post was published at Zero Hedge on Sep 22, 2017.


  • Broken Velocity: Yellen’s Low Inflation Quandary (Hint: FHFA Home Price Index Growing At 6.62% YoY)

    Here is a brief summary of Fed Chair Janet Yellen’s thoughts from yesterday courtesy of Deutsche Bank’s Peter Hooper: The Fed is on track to raise rates once more this year and three times in 2018. Yellen recognized that inflation has been running low recently, and that while there was some uncertainty around this performance, one-off factors that are not expected to persist, and which have not been associated with the performance of the broader economy, have been important. At the same time, Yellen noted that monetary policy operates with a lag and that labor market tightness will eventually push inflation up.
    Inflation has been running low ‘recently’? Actually, ‘inflation’ (defined as core personal consumption expenditure price growth YoY) has been below 2% since April 2012 and below 3% since July 1992. Notice that hourly wage growth for production and nonsupervisory employees has remained low as well, particularly since 2007.

    This post was published at Wall Street Examiner on September 21, 2017.


  • New York Fed Calculates Inflation Is Running Hottest Since 2007

    As if inflation wasn’t “mysterious” enough to the Fed already, today the New York Fed joined the Atlanta Fed first in releasing its own measure to track underlying inflation called, simply, the Underlying Inflation Gauge. What is notable is that this latest inflation tracker shows prices behaving quite differently from traditional indexes this year.
    According to the UIG’s August measure, broad inflation came in at a red hot 2.74%, the highest since November 2007, according to historical data from the Fed. That compares with just 1.9% annual inflation according to the Labor Department’s CPI and an even more paltry 1.4% as measured by the preferred PCE gauge of Fed policy makers, which matched the lowest since September 2016.

    This is what the latest reading showed:
    The UIG estimated on the ‘full data set’ increased from a revised 2.64% in July to 2.74% in August. The ‘prices-only’ measure increased from a revised 2.09% in July to 2.17% in August. The August CPI showed a further pick up in inflation from June. In response to the firming of CPI inflation, both UIG measures displayed a rise in trend inflation. he UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.7% range, with both registering above the actual twelve-month change in the CPI.

    This post was published at Zero Hedge on Sep 22, 2017.


  • German Elections Void of Any Critical Discussion

    The German Bundestag election campaign has seen a total black-out of any discussion of the major crisis that is building in Europe. Nobody is mentioning that Euro crisis, ECB monetary policy, disintegration of the EU, refugee crisis, pension crisis, the municipalities on the brink of insolvency, or the drastic increases in taxation coming AFTER the election that will only lower disposable incomes and extend deflation.
    The politicians, and the press, are in full swing to hide the real trend at foot. The press is running stories why the Germans Love Merkel, yet she has never won even 40% of the popular vote. Even the press outside of Germany is in on the ‘selling’ of Merkel because she is the leader of Europe – good – bad – indifferent.
    Perhaps the monetary policy of the ECB has set the stage for a serious monetary crisis over the coming years that will seriously disrupt the German economy, in one way or another, depending upon the industry. Mario Draghi has experimented with negative rates which has kept the Eurozone governments on life-support – but they have not used the time to reform anything.

    This post was published at Armstrong Economics on Sep 23, 2017.


  • The Federal Reserve’s Unspoken Truth

    Originally posted at Briefing.com
    The Federal Reserve’s latest policy announcement has generated a lot of opinions about its implications for the capital markets. What it didn’t generate is a lot of movement in the stock market.
    The September Federal Open Market Committee (FOMC) meeting was a two-day affair that concluded on September 20 with the issuance of an updated policy directive, the release of updated economic and policy rate projections, an announcement that the Federal Reserve will start its balance sheet normalization process in October, and a press conference by Fed Chair Yellen to discuss it all.
    Check out Interview: Louise Yamada on Stocks, Tech, and Interest Rates
    There was a whole lot of information to digest. The key talking points from the Fed Day bonanza included the following:
    The target range for the fed funds rate was left unchanged at 1.00% to 1.25%. The vote was unanimous. The Federal Reserve said it will start its balance sheet normalization process in October in accord with the framework laid out in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans

    This post was published at FinancialSense on 09/22/2017.


  • Fed’s Kaplan Makes A Stark Admission: Equilibrium Rate May Be As Low As 0.25%

    As we have hammered away at for years, “the math doesn’t work”, and it appears The Fed just admitted it.
    In a stunning admission that i) US economic potential is lower than consensus assumes and ii) that the Fed is finally considering the gargantuan US debt load in its interest rate calculations, moments ago the Fed’s Kaplan said something very surprising:
    KAPLAN SAYS NEUTRAL RATE MAY BE AS LOW AS 2.25 PCT, LEAVING FED “NOT AS ACCOMMODATIVE AS PEOPLE THINK” Another way of saying this is that r-star, or the equilibrium real interest rate of the US (calculated as the neutral rate less the Fed’s 2.0% inflation target), is a paltry 0.25%.
    What Kaplan effectively said, is that with slow secular economic growth and ‘fast’ debt growth, there’s only so much higher-rate pain America can take before something snaps and as that debt load soars and economic growth slumbers so the long-term real ‘equilibrium’ interest rate is tamped down. It also would explain why the curve has collapsed as rapidly as it did after the Wednesday FOMC meeting, a move which was a clear collective scream of “policy error” from the market.
    This should not come as a surprise. As we showed back in December 2015, in “The Blindingly Simple Reason Why The Fed Is About To Engage In Policy Error“, when calculating r-star, for a country with total debt to GDP of 350%…

    This post was published at Zero Hedge on Sep 22, 2017.


  • You Can’t Make This Up, But You Can Apparently Just Make Up the Data

    This is a syndicated repost courtesy of Alhambra Investments. To view original, click here. Reposted with permission.
    Back in 2014, the Federal Reserve was convinced that the labor market was better than it appeared to be in various data accounts. Though it was called the ‘best jobs market in decades’, researchers at the central bank were keen on showing it. Primarily lacking in wages and incomes, the labor segment was suspected of missing the very elements of sustainable economic growth.
    They came up with the Labor Market Conditions Index (LMCI), a factor model purported to give less weight to any of the 19 data points embedded within it that might be outliers. I assume they really thought the weaker points would be those outliers, and therefore the LMCI would overall gravitate toward suggesting the very robust jobs market they were sure was there.
    The LMCI, of course, behaved in the opposite fashion. It suggested instead that the labor market was weak and getting weaker, not strong and getting stronger. Worse, after suggesting something like recession, which even GDP revisions have subsequently shown as the correct position, the LMCI failed to indicate a robust rebound befitting the by-then ultra-low unemployment rate.

    This post was published at Wall Street Examiner by Jeffrey P. Snider ‘ September 22, 2017.


  • Janet Yellen’s 78-Month Plan for the National Monetary Policy of the United States

    Past the Point of No Return
    Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it. This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return. That’s when the cucumber has pickled over and the prospect of turning back is no longer an option.
    In late November 2008, Federal Reserve Chairman Ben Bernanke put in place a fait accompli. But he didn’t recognize it at the time. For he was blinded by his myopic prejudices.
    Bernanke, a self-fancied Great Depression history buff with the highest academic credentials, gazed back 80 years, observed several credit market parallels, and then made a preconceived diagnosis. After that, he picked up his copy of A Monetary History of the United States by Milton Friedman and Anna Schwartz, turned to the chapter on the Great Depression, and got to work expanding the Fed’s balance sheet.

    This post was published at Acting-Man on September 22, 2017.


  • Stocks and Precious Metals Charts – Ubi Sunt? Not With a Bang, But a Whimper

    ‘Love does not make you weak, because it is the source of all strength, but it makes you see the nothingness of the illusory strength on which you depended before you knew it.’
    Lon Bloy
    Stocks were a little wobbly today, although the VIX continued to be at quite low levels for this year at least.
    The economic news is mixed, as usual.
    The dollar gave a little of yesterday’s sharp rally higher back today. The rally itself was more technical than anything else, given the long decline that it has already seen. Certainly any notions of a hawkish Fed raising rates with enough fortitude to make a difference in the dollar is sheer fantasy.
    The Fed may have one more rate increase in them for this year, but they are already on thin ice given the weak recovery and lingering lack of organic growth. The reasons are so obvious one really hates to keep repeating them. The economists certainly know them, but they are reluctant to discuss the Emperor’s nakedness. Alas, they are too often a craven careerist lot as a whole. But such are the times.
    As my Greek attorney put it just today, “Hillary just wants to tweak the status quo because it works well for her and her donors Bernie wanted to change the status quo, so he was a threat to everyone but the public.”
    Indeed. The credibility trap is alive and well, and crippling the impulse and efforts to reform.
    Have a pleasant evening.

    This post was published at Jesses Crossroads Cafe on 21 SEPTEMBER 2017.


  • The forthcoming global crisis

    The global economy is now in an expansionary phase, with bank credit being increasingly available for non-financial borrowers. This is always the prelude to the crisis phase of the credit cycle. Most national economies are directly boosted by China, the important exception being America. This is confirmed by dollar weakness, which is expected to continue. The likely trigger for the crisis will be from the Eurozone, where the shift in monetary policy and the collapse in bond prices will be greatest. Importantly, we can put a tentative date on the crisis phase in the middle to second half of 2018, or early 2019 at the latest.
    Introduction
    Ever since the last credit crisis in 2007/8, the next crisis has been anticipated by investors. First, it was the inflationary consequences of zero interest rates and quantitative easing, morphing into negative rates in the Eurozone and Japan. Extreme monetary policies surely indicated an economic and financial crisis was just waiting to happen. Then the Eurozone started a series of crises, the first of several Greek ones, the Cyprus bail-in, then Spain, Portugal and Italy. Any of these could have collapsed the world’s financial order.

    This post was published at GoldMoney on September 21, 2017.


  • Fed QT Stocks, Gold Impact

    This week’s landmark Federal Open Market Committee decision to launch quantitative tightening is one of the most-important and most-consequential actions in the Federal Reserve’s entire 104-year history. QT changes everything for world financial markets levitated by years of quantitative easing. The advent of the QT era has enormous implications for stock markets and gold that all investors need to understand.
    This week’s FOMC decision to birth QT in early October certainly wasn’t a surprise. To the Fed’s credit, this unprecedented paradigm shift had been well-telegraphed. Back at its mid-June meeting, the FOMC warned ‘The Committee currently expects to begin implementing a balance sheet normalization program this year’. Its usual FOMC statement was accompanied by an addendum explaining how QT would likely unfold.
    That mid-June trial balloon didn’t tank stock markets, so this week the FOMC decided to implement it with no changes. The FOMC’s new statement from Wednesday declared, ‘In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.’ And thus the long-feared QT era is now upon us.
    The Fed is well aware of how extraordinarily risky quantitative tightening is for QE-inflated stock markets, so it is starting slow. QT is necessary to unwind the vast quantities of bonds purchased since late 2008 via QE. Back in October 2008, the US stock markets experienced their first panic in 101 years. Ironically it was that earlier 1907 panic that led to the Federal Reserve’s creation in 1913 to help prevent future panics.
    Technically a stock panic is a 20%+ stock-market plunge within two weeks. The flagship S&P 500 stock index plummeted 25.9% in just 10 trading days leading into early October 2008, which was certainly a panic-grade plunge! The extreme fear generated by that rare anomaly led the Fed itself to panic, fearing a new depression driven by the wealth effect. When stocks plummet, people get scared and slash their spending.

    This post was published at ZEAL LLC on September 22, 2017.


  • Jim Rickards Warns “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.

    This post was published at Zero Hedge on Sep 21, 2017.


  • Household Wealth Hits A Record $96.2 Trillion… There Is Just One Catch

    In the Fed’s latest Flow of Funds report, today the Fed released the latest snapshot of the US “household” sector as of June 30, 2017. What it revealed is that with $111.4 trillion in assets and a modest $15.2 trillion in liabilities, the net worth of US households rose to a new all time high of $96.2 trillion, up $1.7 trillion as a result of an estimated $564 billion increase in real estate values, but mostly $1.23 trillion increase in various stock-market linked financial assets like corporate equities, mutual and pension funds, and deposits as the market soared to new all time highs thanks to some $2 trillion in central bank liquidity injections this year.
    Total household assets in Q2 rose $1.8 trillion to $111.4 trillion, while at the same time, total liabilities, i.e., household borrowings, rose by only $15 billion from $15.1 trillion to $15.2 trillion, the bulk of which was $9.9 trillion in home mortgages.

    This post was published at Zero Hedge on Sep 21, 2017.