#Fed

Who left the currency printer on?

CBs

This chart shows how fast he printing presses have been flying to boost the “asset” line of the Bank of Japan (blue), the US Federal Reserve (red) and the ECB (green).

The BoJ has grown its “assets” from ¥100 trillion in 2008 to ¥585 trillion today. Yes, that is right the Japanese central bank has printed so much money that the assets on the book are the equivalent of 100% of GDP, 5x that of 12 years ago.

Does MMT predicate that it is ok to print another 100%? After all the existing Japanese national debt pile is ¥1000 trillion. So who is counting?

We note that the shares in Japan’s biggest currency printing press maker Komori (6349) quadrupled during the boom and only tapered off as the BoJ slowed the rate in early 2018. Maybe coronavirus will get the BoJ back to its wicked ways as it buys up even more of the stock market??? It already owns 58% of outstanding ETFs and by stealth has become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door.

The US Fed has grown “assets” from just shy of US$1 trillion at the time of GFC when the economy was worth US$15.7 trillion or around 6%. There was a nice breathing period between 2014 and 2018 before tapering started.

However, in October 2019 we noted that the Fed was getting a LOT more active in the repo market. Now with coronavirus upon us and the volatility in capital markets at the start of 2020 we can see that another $1.6 trillion has been added to the asset line to a record $5.8 trillion or around 30% of current GDP.

The European Central Bank (ECB) has powered up its balance sheet too from around Eur 1.4 trillion to Eur 4.7 trillion. or 40% of Europe 19’s Eur 10.7 trillion GDP. At the time of the GFC, Europe 19’s combined GDP was Eur 9.3 trillion meaning ECB assets were only 15% of the total. Note the ECB has discontinued reporting its assets.

The point is with the world economy about to hit a brick wall, will markets just face more central bank distortion? Surely no one honestly believes that central banks have got this under control with such an appalling record.

To be honest, if modern monetary theory (MMT) was truly working to date, there should be no unemployment, no poverty, no taxes and we could have easily funded all that renewable energy without even having a debate. Just print and spend.

Therein lies its fatal flaw of MMT. Eventually, conjuring money out of thin air hits terminal velocity. Truth be told the tales above show that each asset that the central banks have bought has created less and less impact in the real economy. Velocity has been sliding for decades.

It is a bit like taking morphine to kill the pain. Take too much and the side effects are:

  1. nausea and vomiting
  2. constipation
  3. itching
  4. loss of appetite
  5. lower body temperature
  6. difficulty urinating
  7. slow breathing
  8. sleepiness
  9. changes in heart rate
  10. weakness
  11. dizziness upon standing up
  12. confusion
  13. nervousness
  14. erectile dysfunction
  15. osteoporosis and risk of fractures

Not unlike the symptoms being shown by the global economy today.

A gem on how to work our way out of the coming economic crisis

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Jonathan Rochford of Narrow Road Capital has written a gem on the role of central banks in spawning this current crisis. An excerpt here:

The rapid and widespread sell-off over the last four weeks is a textbook systemic deleveraging. Whilst the culprits are many; hedge funds, risk parity strategies and investors using margin loans have all been caught out, the underlying cause is excessive leverage across the economy and particularly the financial system. The timing of the unwind and the economic damage from the Coronavirus wasn’t predictable, but such a highly leveraged system was like a truck loaded with nitroglycerin driving down a road dotted with landmines.

Frustratingly, this inevitable deleveraging was clearly predicted. Rather than act to reduce systemic risks central banks encouraged governments, businesses and investors to increase their risk tolerances and debt levels.

Naturally, it fits our own long-held view on central banks.

Jonathan adds some sensible actions which are contained in this link. The question remains whether governments will put principle ahead of expediency in the cleanup?

Central banks are climate change experts now. If only they possessed such skill in their core competency

Are these people for real? Does the Bank for International Settlements (BIS) truly believe that world’s central banks will become “climate rescuers of last resort”? Do we really want our central banks to be more proactive in pushing governments toward a greener economy by suggesting a carbon tax as “first-best solution“? The problem with central bankers is that every problem looks like a nail when they only have a hammer in the toolkit.

First, on what level do central banks have a clue about climate change? If they had even the foggiest notion about the science they would never have embarked on a set of reckless monetary policy measures that created the very conditions for excessive debt, mal-investment and over-consumption which they now seek to punish us for via the adoption of a carbon tax.

We should not forget the almost $300 trillion of global debt now racked up thanks to abnormally low interest rates. It is politically expedient to run budget deficits too because central banks are only too happy to keep (near) ZIRP or NIRP which makes servicing ballooning deficits appear almost perpetually affordable with short term focused politicians. It is but a figment of their imagination.

How easy it is to sound the alarm on climate change to mask the policy blunders of the last two decades. It would be nice if we could believe they possessed expertise in their mandated role before embarking into a field they have no sound base to work from. It is a dangerous distraction.

It is worth citing a few examples of the record of central banks around the world since GFC.

In 2018, the US Fed stopped reporting changes in the balance sheet. It did this to prevent spooking the markets over tapering. It reminds FNF Media of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. Why is there a need for a lack of transparency if it wishes to instill market confidence via its policy settings?

Has the Fed reflected on the fact that over half of listed corporates have a credit rating of BBB or below? Ford Motor Co’s credit rating was downgraded by Moody’s to junk. $84bn worth of debt now no longer investment grade. It will be the first of many Fortune 500s to fall foul to this reality. In 2008, there was around $800bn of BBB status credit. That number exceeds $3.186 trillion today. Brought to you courtesy of low interest rates.

The Bank of Japan (BoJ) is now responsible for 60% of all ETF market ownership. Latest reports confirm the Bank of Japan (BoJ) has now become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door. The BoJ now owns $250bn of listed Japanese equities. It is the top shareholder in household Japanese brands such as Omron, Nidec and Fanuc. At current investment rates, the BoJ is set to own $400bn worth of the market by 2020-end.

The BoJ’s manipulation of the JGB market caused several of the major Japanese banks to hand back their trading licenses because they served no purpose anymore given the central bank’s manipulation.

The ECB has dropped the ball in Europe. Jonathan Rochford of Narrowroad Capital wrote,

Many European banks have failed to use the last decade to materially de-risk. The most obvious outworking of this is that European banks continue to receive taxpayer funded bailouts, with Germany’s NordLB and Italy’s Banca Popolare di Bari both receiving lifelines this monthOne final issue that lurks particularly amongst European banks is their gaming of capital ratios. European banks have become masters of finding assets that require little risk capital but can generate a decent margin. Government debt from Italy is one example, with pressure now being put on the ECB to allow for unlimited purchases of Greek government debt. This would substantially increase the already significant “doom loop” risk. This risk arises from the potential for a default on government debt to bankrupt the banks, and the converse situation where failing banks look for a taxpayer bailout and bankrupt the country.

The list goes on and on. Central banks are in no position to lecture the rest of us on anything given their command of their core competence remains so flawed.

Global money velocity has been declining for two decades. Every dollar printed creates an ever shrinking fraction of GDP impact. Yet all we did was double down on all the failed measures that led us into the GFC

What we do know is that the BIS has sought the advice of literature professors to come up with the phrase that climate change presented a “colossal and potentially irreversible risk of staggering complexity.”

Really?

It is easy for the BIS to shout that a “green swan” event could send us into the financial abyss. However the reality is that dreadful stewardship of monetary conditions has set us up for a huge fall. Not a bushfire, storm or flood. Perhaps we might view a green swan event as wishful thinking by central banks because it would allow them to absolve themselves of all responsibility in getting us into this mess in the first place. They want to see themselves as saviors, not culprits.

Rochford sums up central banks brilliantly with this comment,

When it comes to central banks, I would prefer to believe it is a combination of groupthink, an unwillingness to take career risk by speaking the truth and a willingness to either ignore or disregard counter evidence that has resulted in the detrimental decisions since the financial crisis. However, the increasing amount of evidence, often produced by central banks themselves, points to central banks being more culpable than gullible.

So given this condition why on earth are we paying any attention to their prescriptions on saving the planet? When they quit the excuses and fess up that the last two decades of monetary policy has failed to fix the excesses built in the system then we might lend an ear. Until then they join the list of government agencies who don’t want to be caught out not being in line with the settled politics. Truly sick.

Yellen’s Fedtime stories

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US Fed Chair Janet Yellen uttered perhaps some of the most bizarre words to come out of a central banker. So much so that Alan Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” seems almost comprehensible by comparison. Yellen told an audience that she believes we won’t see another severe financial crisis in our lifetimes. Either Ms Yellen is not long for the world or denial is running deep within her veins. One of her own FOMC board members (James Bullard) wrote a piece on why the Fed needs to trim its balance sheet from $4.47tn to around $2.5 trillion) so they can prepare for the next horror that awaits.  Even Minnesota Fed Reserve Bank President Neel Kashkari said the likelihood of another financial crisis is 2/3rds. We have a world with debt up to its eyeballs and global interest rate policies that have only led to the slowest post slowdown growth in history. The signs of a global slowdown are becoming ever more obvious even in the US. Slowing auto sales and rising delinquencies are but one signal. The imminent collapse of so many public pension funds another.

Had she not seen the European Commission’s decision to let Italy spend up to 17 billion euros to clean up the mess left by two failed banks? The news is not only another whack for Italian taxpayers but a setback for the euro zone’s banking union, and a backflip for the EU’s stance on non-standard bailouts. The Italian government wound down Banca Popolare di Vicenza and Veneto Banca, two regional lenders struggling under the weight of non-performing loans which averages 20% across the nation and up to 50% in the south. Intesa Sanpaolo bought the banks’ good assets for one euro, and was promised another 4.8 billion euros in state aid to deal with restructuring costs and bolster its capital ratio. Italy’s taxpayers get to keep the bad loans, which could end up costing them another 12 billion euros. Even the Single Resolution Board — whose purpose is to take the politically difficult decision of whether to close a bank out of the hands of governments — chose not to intervene.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.

The Bank of Japan has no plans to cut back on the world’s largest central bank balance sheet. It continues to Hoover up 60% of new ETF issues at such an alarming pace it is the largest shareholder of over 100 corporates. Then there is the suggestion of buying all $10 trillion of outstanding JGBs and convert them into zero-rate (+miniscule annual service fee) perpetuals.

Australia’s banks are now the most loaded with mortgage debt globally at 60% of the total loan book.  Second is daylight and third Norway at 40%. Private sector debt to GDP is 185%. We have a government who can’t tighten its belt basing its budget on rosy scenarios that will be improbable. Aussie banks have been slapped with a new tax and with the backdrop of a rising US rate environment, the 40% wholesale funded Aussie banks will be forced to accept higher cost of funds. That will be passed straight onto consumers that are already being crushed under the weight of mortgages. One bank survey by ME Bank in Australia said that 1/3rd would struggle to pay a month’s mortgage if they lost their jobs.

Had Ms Yellen forgot to read the St Louis Fed’s survey which revealed that 45% of Americans can’t raise $400 in an emergency without selling something? USA Today reported that 7 out of 10 Americans have less than $1,000 in savings to their name.

“Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account…Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.”

So Chair Yellen, we are not sure what dreamland you are living but to suggest that we won’t see another financial crisis in our lifetime almost guarantees it will happen. The Titanic was thought unsinkable until history proved otherwise. Money velocity is not rising and every dollar printed is having less and less impact. I thought it nigh on impossible to surpass the stupidity of Greenspan but alas you have managed it.

If the Fed were surgeons you’d never want them operating on you

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In Fed Chairman Janet Yellen’s speech at  Jackson Hole she said the following:

“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018. 2 The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions.”

It seems Yellen is trying to suggest a consensus of “private and government” forecasts. Does the Fed not trust its own research that it needs to justify a gap wide enough to fit a 747 through? It’s concerning. It’s group think. 70% confidence in statistical terms is effectively zero. Statisticians usually talk of 95% and 99% confidence intervals. 70% is a joke and basing it on a consensus makes it even more ridiculous. If I gave such forecasts as a financial analyst I’d be fired. If the Fed were surgeons you’d never get them to operate on you.

How could anyone possibly think the Fed has the first clue what it is doing? Japan has been going through typhoons recently and the Fed chart must have taken its inspiration from the Japanese Buteau of Meteorology.

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The Fed’s number one role is to drive confidence in business and consumer behaviour. The US economy is at stall speed. The last three quarters have nose dived. Business investment is rock bottom. as l’ve mentioned before, businesses invest because they see a cycle, not because rates are low.

Yellen’s went on:

“The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy.”

So again Yellen only proved central banks have colluded in their group think. “Challenges”? “Innovations in communication”? That almost topped  the comment from the FOMC minutes in July where it said “monetary and fiscal policy is far better prepared for large positive shocks than negative ones”

Then there was this cry for help:

“As I will argue, one lesson from the crisis is that our pre-crisis toolkit was inadequate to address the range of economic circumstances that we faced. Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”

I’d argue the policy tool kit is more inadequate now than in 2008.  Moreover even the Fed thinks it might be too optimistic

“Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases…Finally, the simulation analysis certainly overstates the FOMC’s current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment”

In closing perhaps we should be worried that the group thinking central banks are likely to depend on each other for more clueless guidance such as broadening the types of toxic waste it can shove on its balance sheet:

“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.”

We should be gravely concerned when we read between the lines. Zero confidence and it is being more widely understood by the day.

Bank of Japan’s “assets” as big as US Fed – huh?

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The Bank of Japan (BoJ) now has the equivalent of Y420 trillion yen (US$4tn) of ‘assets (!?)’ on its balance sheet. Asset is a broadly used term. When I looked at the US Fed’s balance sheet it is approximately $4.4tn (below). The BoJ is now 58% of purchases of equity ETFs in its home market and near as makes no difference 100% of new bond auctions. It is simple debt monetisation. So if we look at the immediate post GFC reaction the Fed doubled its balance sheet and has doubled it again (i.e 4x). The Japanese have also quadrupled since Abenomics and the Europeans have tripled. All courtesy of the printing press.

FRED FEDThe ECB has started to hoover up ‘assets’ recently too now totalling 3.1tn euros (US$3.5tn)

FRED ECB

Despite all this massive capital injection into the markets, economic growth continues to falter and inflation is such an elusive goal that the next thing we should await is a rejigging of the CPI baskets to fool us into thinking everything is OK!

Juggling hand-grenades with the pins pulled out

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Do people need a reminder in bond duration? The longer the life of a bond the more  susceptible it is to changes in interest rates (not to be confused with the coupon rate). While you might have a 5% coupon bond which pays you that, if prevailing interest rates are much lower then your bond is worth a lot more because you can collect 5% so anyone who wanted to collect that 5% would have to compensate the difference. That is why bond prices move. However if you buy the bond at 1% effective yield your bond will be pretty expensive but if interest rates were to double to 2% the impact to your bond price would be pretty drastic versus if you bought the bond at 10% and it went to 11%. The same 1% move would create two different results because of the “scale of the move.

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We are now at the thin end of the wedge. There are $10 TRILLION in negative interest yielding products. The average sovereign debt rate is 0.67%. So if you are a pensioner or an asset manager who needs to go further out the yield curve you risk even greater potential losses if interest rates reverse. This chart above shows a 3 & a 10 year bond yield curve but a 30 year curve would be even steeper meaning at low effective yields any rise in interest rates would cause a collapse in prices but because shorter duration bonds yield often less than zero one is forced out the curve,.

I agree with Bill Gross’s assessment that this is a time bomb. The more this goes on the more people that want to save are being buried or forced into riskier asset classes that are already over priced. Hence my argument that people should be shifting to “hard” assets like gold and other precious metals. This is going to get ugly. Think about it. Most of the people buying negative rate products are the central banks themselves. It is debt monetisation. Just hit print money key and buy treasury debt. Sadly economics doesn’t operate like this because if it did they would have been better of doing it 16 years ago. This is an economic experiment that is trying to defy the laws of economics which have been set in stone. Sadly the pins of these hand grenades has been pulled. Detonation of the debt bomb is coming.