The Dreaded ‘Flattening Yield Curve’ Meets QE Unwind

During prior incidents of an ‘inverted’ yield curve, the Fed had no tools to get the market to push up long-term yields. Today it has one: the QE Unwind.
The price of three-month Treasury securities fell and the yield – which moves in the opposite direction – rose, ending the year at 1.39%, after having spiked to 1.47% on December 26, the highest since September 12, 2008. This is in the upper half of the Fed’s new target range for the federal funds rate (1.25% to 1.50%). Back in October 2015, the yield was still at 0%:

This post was published at Wolf Street by Wolf Richter ‘ Dec 30, 2017.

The Fed Plays the Economy Like an Accordion

We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
The yield curve (a plot of interest rates versus the maturities of securities of equal credit quality) is a handy economic and investment tool. It generally slopes upward because investors expect higher returns when their money is tied up for long periods. When the economy is growing robustly, it tends to steepen as more firms break ground on long-term investment projects. For example, firms may decide to build new factories when the economy is rosy. Since these projects take years to complete, firms issue long-term bonds to finance the construction. This increases the supply of long-term bonds along downward-sloping demand, which pushes long-term bond prices down and yields up. The black dots along the black line in the figure below gives the 2004 yield curve. It slopes upward because a robust recovery was underway.

This post was published at Schiffgold on DECEMBER 27, 2017.

The Integrated Non-USD Platforms

The many new integrated non-USD platforms devised and constructed by China finally have critical mass. They threaten the King Dollar as global currency reserve. Clearly, the USDollar cannot be displaced in trade and banking without a viable replacement for widespread daily usage. Two years ago, critics could not point to a viable integrated system outside the USD realm. Now they can. The integration of commercial, construction, financial, transaction, investment, and even security systems can finally be described as having critical mass in displacing the USDollar. The King Dollar faces competition of a very real nature. The Jackass has promoted a major theme in the last several months, that of the Dual Universe. At first the USGovt will admit that it cannot fight the non-USD movement globally. To do so with forceful means would involve sanctions against multiple nations, and a war with both Russia & China. Their value together is formidable in halting the financial battles from becoming a global war. The United States prefers to invade and destroy indefensible nations like Libya, Iraq, Ukraine, Syria, and by proxy Yemen. The USMilitary appears formidable against undeveloped nations, seeking to destroy their infra-structure and their entire economies, in pursuit of the common Langley theme of destabilization. In the process, the USMilitary since the Korean War has killed 25 million civilians, a figure receiving increased publicity. The Eastern nations and the opponents to US financial hegemony will not tolerate the abuse any longer. They have been organizing on a massive scale in the last several years. Ironically, the absent stability can be seen in the United States after coming full circle. The deep division of good versus evil, of honest versus corrupt, of renewed development versus endless war, has come to light front and center within numerous important USGovt offices and agencies.
The shape of the US nation will change with the loss of the USDollar’s status as global currency reserve. The starting point for the global resistance against the King Dollar was 9/11 and the onset of the War on Terror. It has been more aptly described as a war of terror waged by the USGovt as a smokescreen for global narcotics monopoly and tighter control of USD movements. Then later, following the Lehman failure (killjob by JPMorgan and Goldman Sachs) and the installation of the Zero Interest Rate Policy and Quantitative Easing as fixed monetary policies, the community of nations has been objecting fiercely. The zero bound on rates greatly distorted all asset valuations and financial markets. The hyper monetary inflation works to destroy capital in recognized steps. These (ZIRP & QE) are last ditch desperation policies designed to enable much larger liquidity for the insolvent banking structures. Without them, the big US banks would suffer failure. They also provide cover for the amplified relief efforts directed at the multi-$trillion derivative mountain. In no way, can the global tolerate unbridled monetary inflation which undermines the global banking reserves.

This post was published at GoldSeek on 26 December 2017.

ECB Keeps Rates Unchanged, Sees Current Policy Stance “Contributing To Favorable Liquidity Conditions”

As expected, there was little surprise in the ECB monetary policy decision, which kept all three key ECB rates unchanged, and which announced that rates will “remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.”
As it unveiled before, QE will run at 30BN per month from January 2018 until the end of September ‘or beyond, if necessary, and in case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.’ The ECB also noted it can extend QE size or duration if needed.
The central bank repeated it will reinvest maturing debt for extended period after QE, and that the “reinvestment will continue for as long as necessary, will help deliver appropriate stance” and “will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.”
The market reaction to the statement which was completely in line with expectations, was modest, with the EURUSD hardly even moving on the news.
Full statement below

Monetary policy decisions At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

This post was published at Zero Hedge on Dec 14, 2017.

Pound Slides After BOE Holds Rates: Warns Q4 Economy “Slightly Softer”, Sees “Gradual And Limited” Rate Hikes

As previewed moments ago, the BOE decision was rather unexciting, and after its November rate hike – the first in a decade – which many speculated could be a “one and done”, the Bank of England unanimously kept rates unchanged at 0.50% as expected. The lack of dissenters meant this was the first time the nine policy makers have been in agreement since February. The committee also left the BOE’s QE unchanged.
MPC holds #BankRate at 0.50%, maintains government bond purchases at 435bn and corporate bond purchases at 10bn.
— Bank of England (@bankofengland) December 14, 2017

This post was published at Zero Hedge on Dec 14, 2017.

Mark Yusko Hits a Four-Bagger

My friend Mark Yusko, founder and chief investment officer of Morgan Creek Capital Management, is a phenomenon; and when you read his third-quarter letter, excerpted in today’s Outside the Box, you’ll see what I mean. His missive (a 72-pager!), has two main parts: a ‘Letter to Fellow Investors’ and Morgan Creek’s ‘Third Quarter Market Review and Outlook.’
Now, I could subject you to the latter, but the former is a heck of a lot more fun. It’s an amazing disquisition that takes us deep into the weeds on the subjects of Isaac Newton, Yogi Berra, and Willy Wonka. As you savor Mark’s encyclopedic knowledge and obvious love of baseball (and just about everything else), you may begin to understand why he’s such an effective hedge fund manager. Energy like this is hard to top!
And of course, Mark isn’t just spouting off; he’s calling on the aforenamed greats (among others) to help us ‘solve the puzzle’ of today’s increasingly screwball market. As he says,
As we stand here today in November examining the data, Darkness did not Fall and Gravity did not Rule on the equity markets, so what do we make of these results? Has the Universal Law of Gravity (valuation) been repealed? Have the global Central Banks finally discovered Babson’s anti-gravity machine, or is QE the symbol for the new element Upsidasium?
Let’s look back over the past year and see if we can call on a few heavyweights to help us with these questions and then we’ll introduce a couple of new characters to our serial to help us solve the puzzle.

This post was published at Mauldin Economics on DECEMBER 13, 2017.

The Process Through Which the First Major Central Bank Goes Bust Has Begun

In the aftermath of the Great Financial Crisis, Central Banks began cornering the sovereign bond market via Zero or even Negative interest rates and Quantitative Easing (QE) programs.
The goal here was to reflate the financial system by pushing the ‘risk free rate’ to extraordinary lows. By doing this, Central Bankers were hoping to:
1) Backstop the financial system (sovereign bonds are the bedrock for all risk).
2) Induce capital to flee cash (ZIRP and NIRP punish those sitting on cash) and move into risk assets, thereby reflating asset bubbles.
In this regard, these policies worked: the crisis was halted and the financial markets began reflating.
However, Central Banks have now set the stage for a crisis many times worse than 2008.
Let me explain…
The 2008 crisis was triggered by large financial firms going bust as the assets they owned (bonds based on mortgages) turned out to be worth much less (if not worthless), than the financial firms had been asserting.
This induced a panic, as a crisis of confidence rippled throughout the global private banking system.
During the next crisis, this same development will unfold (a crisis in confidence induced by the underlying assets being worth much less than anyone believes), only this time it will be CENTRAL banks (not private banks) facing this issue.

This post was published at GoldSeek on 11 December 2017.

Bitcoin Mania Shows The World Financial System Is a Con

The hidden agenda in the so-called tax reform bill is to act as stop-gap quantitative easing to plug the ‘liquidity’ hole that is opening up as the Federal Reserve (America’s central bank) makes a few gestures to winding down its balance sheet and ‘normalizing’ interest rates. Thus, the aim of the tax bill is to prop up capital markets, and the apprehension of this lately is what keeps stocks making daily record highs. Okay, sorry, a lot to unpack there.
Primer: quantitative easing (QE) is a the Federal Reserve’s weasel phrase for its practice of just creating ‘money’ out of thin air, which it uses to buy US Treasury bonds (and other stuff). The Fed buys this stuff through intermediary Too Big To Fail banks which allows them to cream off a cut and, theoretically, pump the ‘money’ into the economy. This ‘money’ is the ‘liquidity.’ As it happens, most of that money ends up in the capital markets. Stocks go up and up and bond yields stay ultra low with bond prices ultra high. What remains on the balance sheets are a shit-load of IOUs.
The third round of QE was officially halted in 2014 in the USA. However, the world’s other main central banks acted in rotation – passing the baton of QE, like in a relay race – so that when the US slacked off, Japan, Britain, the European Central Bank, and the Bank of China, took over money-printing duties. And because money flies easily around the world via digital banking, a lot of that foreign money ended up in ‘sure-thing’ US capital markets (as well as their own ). Mega-tons of ‘money’ were created out of thin air around the world since the near-collapse of the system in 2008.

This post was published at Wall Street Examiner on December 8, 2017.

Shocking New Stock Market Prediction Shows When We’ll Hit a Top

The current bull market is in its ninth year, but Money Morning Liquidity Specialist Lee Adler’s newest stock market prediction shows that we are now in its final stages. In fact, he sees the S&P 500 hitting its final high sometime in the first quarter of 2018.
As December unfolds, we’ve seen a breakout in stocks, and Adler’s technical analysis bumped up his long-term price target on the S&P 500 to 2,800. That’s based on his work with market cycles and published in his Wall Street Examiner Pro Trader Market Updates each week. Simply put, by rising above 2,630, the market’s character changed for the better, suggesting one more leg higher.
However, December looks like the last chance to ride the current bull markethigher before conditions change and a bear market becomes likely…
Stock Market Prediction: Expect a Market Top in Q1
Pundits considered the U. S. Federal Reserve’s quantitative easing (QE) program as the punch bowl keeping the recovery party going and goosing the economy and the stock market for several years.
However, as Adler has been warning, things will change in 2018…
This Book Could Make You a Millionaire: The secrets in this book have produced 42 chances to double, triple, and even quadruple your money this year alone. Claim your free copy…
And it already has, now that the Fed’s bond purchases are over. Plus, we’ve already seen the first of several planned hikes in short-term interest rates.
So far, it has not made much of a dent.
However, the forces of monetary policy and liquidity will be hostile to the markets in 2018. The Fed’s program, which it calls ‘normalization,’ is designed to reduce the size of its balance sheet.

This post was published at Wall Street Examiner on December 6, 2017.