Tag Archives: Federal Reserve

US Federal Reserve Bank’s Net Worth Turns Negative, They’re Insolvent, A Zombie Bank, That’s All Folks

While the Fed has been engaging in quantitative tightening for over a year now in an attempt to shrink its asset holdings, it still has over $4.1 trillion in bonds on its balance sheet, and as a result of the spike in yields since last summer, their massive portfolio has suffered substantial paper losses which according to the Fed’s latest quarterly financial report, hit a record $66.453 billion in the third quarter, raising questions about their strategy at a politically charged moment for the central bank, whose “independence” has been put increasingly into question as a result of relentless badgering by Donald Trump.

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What immediately caught the attention of financial analysts is that the gaping Q3 loss of over $66 billion, dwarfed the Fed’s $39.1 billion in capital, leaving the US central bank with a negative net worth…

https://www.zerohedge.com/sites/default/files/inline-images/Fed%20BS%2012.12.jpg?itok=f5WkIqu4

… which would suggest insolvency for any ordinary company, but since the Fed gets to print its own money, it is of course anything but an ordinary company as Bloomberg quips.

It’s not just the fact that the US central bank prints the world’s reserve currency, but that it also does not mark its holdings to market. As a result, Fed officials usually play down the significance of the theoretical losses and say they won’t affect the ability of what they call “a unique non-profit entity’’ to carry out monetary policy or remit profits to the Treasury Department. Indeed, confirming this the Fed handed over $51.6 billion to the Treasury in the first nine months of the year.

The risk, however, is that should the Fed’s finances continue to deteriorate if only on paper, it could impair its standing with Congress and the public when it is already under attack from President Donald Trump as being a bigger problem than trade foe China.

Commenting on the Fed’s paper losses, former Fed Governor Kevin Warsh told Bloomberg that “a central bank with a negative net worth matters not in theory. But in practice, it runs the risk of chipping away at Fed credibility, its most powerful asset.’’

Additionally, the growing unrealized losses provide fuel to critics of the Fed’s QE and the monetary operating framework underpinning them, just as central bankers begin discussing the future of its balance sheet. And, as Bloomberg cautions, the metaphoric red ink also could make it politically more difficult for the Fed to resume QE if the economy turns down.

“We’re seeing the downside risk of unconventional monetary policy,’’ said Andy Barr, the outgoing chairman of the monetary policy and trade subcommittee of the House Financial Services panel. “The burden should be on them to tell us why this does not compromise their credibility and why the public and Congress should not be concerned about their solvency.’’

Of course, the culprit for the record loss is not so much the holdings, as the impact on bond prices as a result of rising rates which spiked in the summer as a result of the Fed’s own overoptimism on the economy, and which closed the third quarter at 3.10% on the 10Y Treasury. Indeed, with rates rising slower in the second quarter, the loss for Q3 was a more modest $19.6 billion.

And with yields tumbling in the fourth quarter as a result of the current growth and markets scare, it is likely that the Fed could book a major “profit” for the fourth quarter as the 10Y yield is now trading just barely above the 2.86% where it was on June 30.

Meanwhile, the Fed continues to shrink its bond holdings by a maximum of $50 billion per month, an amount that was hit on October 1, not by selling them, which could force it to recognize but by opting not to reinvest some of the proceeds of securities as they mature.

The Fed is expected to continue shrinking its balance sheet at rate of $50BN / month until the end of 2020 (as shown below) unless of course market stress forces the Fed to halt QT well in advance of its tentative conclusion.

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In any case, the Fed will certainly never return to its far leaner balance sheet from before the crisis, which means that it will continue to indefinitely pay banks interest on the excess reserves they park at the Fed, with many of the recipient banks being foreign entities.

Barr, a Kentucky Republican, has accurately criticized that as a subsidy for the banks, one which will amount to tens of billions in annual “earnings” from the Fed, the higher the IOER rate goes up. He is not alone: so too has California Democrat Maxine Waters, who will take over as chair of the House Financial Services Committee in January following her party’s victory in the November congressional elections.

* * *

Going back to the Fed’s unique treatment of losses on its income statement and its under capitalization, in an Aug. 13 note, Fed officials Brian Bonis, Lauren Fiesthumel and Jamie Noonan defended the central bank’s decision not to follow GAAP in valuing its portfolio. Not only is the central bank a unique creation of Congress, it intends to hold its bonds to maturity, they wrote.

Under GAAP, an institution is required to report trading securities and those available for sale at fair or market value, rather than at face value. The Fed reports its balance-sheet holdings at face value.

The Fed is far less cautious with the treatment of its “profits”, which it regularly hands over to the Treasury: the interest income on its bonds was $80.2 billion in 2017. The central bank turns a profit on its portfolio because it doesn’t pay interest on one of its biggest liabilities – $1.7 trillion in currency outstanding.

The Fed’s unique financial treatments also extends to Congress, which while limiting to $6.8 billion the amount of profits that the Fed can retain to boost its capital has also repeatedly “raided” the Fed’s capital to pay for various government programs, including $19 billion in 2015 for spending on highways.

Still, a negative net worth is sure to raise eyebrows especially after Janet Yellen said in December 2015 that “capital is something that I believe enhances the credibility and confidence in the central bank.”

* * *

Furthermore, as Bloomberg adds, if it had to the Fed could easily operate with negative net worth – as it is doing now – like other central banks in Chile, the Czech Republic and elsewhere have done, according to Nathan Sheets, chief economist at PGIM Fixed Income. That said, questionable Fed finances pose communications and mostly political problems for Fed policymakers.

As for long-time Fed critic and former Fed governor, Kevin Warsh, he zeroed in on the potential impact on quantitative easing.

“QE works predominantly through its signaling to financial markets,’’ he said. “If Fed credibility is diminished for any reason — by misunderstanding the state of the economy, under-estimating the power of QE’s unwind or carrying a persistent negative net worth — QE efficacy is diminished.’’

The biggest irony, of course, is that the more “successful” the Fed is in raising rates – and pushing bond prices lower – the greater the un-booked losses on its bond holdings will become; should they become great enough to invite constant Congressional oversight, the casualty may be none other than the equity market, which owes all of its gains since 2009 to the Federal Reserve.

While a central bank can operate with negative net worth, such a condition could have political consequences, Tobias Adrian, financial markets chief at the IMF said. “An institution with negative equity is not confidence-instilling,’’ he told a Washington conference on Nov. 15. “The perception might be quite destabilizing at some point.”

That point will likely come some time during the next two years as the acrimonious relationship between Trump and Fed Chair Jerome Powell devolves further, at which point the culprit by design, for what would be the biggest market crash in history will be not the Fed – which in the past decade blew the biggest asset bubble in history – but President Trump himself.

Source: ZeroHedge

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Diagnosing What Ails The Market

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The Central Bank Bubble’s Bursting: It Will Be Ugly

The global economy has been living through a period of central bank insanity, thanks to a little-understood expansion strategy known as quantitative easing, which has destroyed main-street and benefited wall street. 

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Central Banks over the last decade simply created credit out of thin air. Snap a finger, and credit magically appears. Only central banks can perform this type of credit magic. It’s called printing money and they have gone on the record saying they are magic people.

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Increasing the money supply lowers interest rates, which makes it easier for banks to offer loans. Easy loans allow businesses to expand and provides consumers with more credit to buy goods and increase their debt. As a country’s debt increases, its currency eventually debases, and the world is currently at historic global debt levels.

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Simply put, the world’s central banks are playing a game of monopoly.

With securities being bought by a currency that is backed by debt rather than actual value, we have recently seen $9.7 trillion in bonds with a negative yield. At maturity, the bond holders will actually lose money, thanks to the global central banks’ strategies. The Federal Reserve has already hinted that negative interest rates will be coming in the next recession. 

These massive bond purchases have kept volatility relatively stable, but that can change quickly. High inflation is becoming a real possibility. China, which is planning to dethrone the dollar by backing the Yuan with gold, may survive the coming central banking bubble. Many other countries will be left scrambling. Some central banks are attempting to turn the current expansion policies around. Both the Federal Reserve, the Bank of Canada, and the Bank of England have plans to hike interest rates. The European Central Bank is planning to reduce its purchases of bonds. Is this too little, too late?

The recent global populist movement is likely to fuel government spending and higher taxes as protectionist policies increase. The call to end wealth inequality may send the value of overvalued bonds crashing in value. The question is, how can an artificially stimulated economic boom last in a debtors’ economy?

Central bankers began to embrace their quantitative easing strategies as a remedy to the 2007 economic slump. Instead of focusing on regulatory policies, central bankers became the rescuers of last resort as they snapped up government bonds, mortgage securities, and corporate bonds. For the first time, regulatory agencies became the worlds’ largest investment group. The strategy served as a temporary band-aid as countries slowly recovered from the global recession. The actual result, however, has been a tremendous distortion of asset valuation as interest rates remain low, allowing banks to continue a debt-backed lending spree.

It’s a monopoly game on steroids.

The results of the central banks’ intervention were mixed. While a small, elite wealthy segment was purchasing assets, the rest of the population felt the widening income gap as wage increases failed to meet expectations and the cost of consumer goods kept rising. The policies of the Federal Reserve were not having the desired effect. While the Federal Reserve Bank began to reverse its quantitative easing policy, other central banks, such as the European Central Bank, the Swiss National Bank, and the European National Bank have become even more aggressive in the quantitative easing strategies by continuing to print money with abandon. By 2017, the Bank of Japan was the owner of three-quarters of Japan’s exchange-traded funds, becoming the major shareholder trading in the Nikkei 225 Index.

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The Swiss National Bank is expanding its quantitative easing policy by including international investments. It is now one of Apple’s major shareholders, with a $2.8 billion investment in the company.

Centrals banks have become the world’s largest investors, mostly with printed money. This is inflating global asset prices at an unprecedented rate. Negative bond yields are just one consequence of this financial distortion.

While the Federal Reserve is reducing its investment purchases, other global banks are keeping a watchful eye on the results. Distorted interest rates will hit investors hard, especially those who have sought out riskier and higher yields as a consequence of quantitative easing (malinvestment).

The policies of the central banks were unsustainable from the start. The stakes in their monopoly game are rising as they are attempting to rectify their negative-yield bond purchasing with purchases of stocks. This is keeping the game alive for the time being. However, these stocks cannot be sold without crashing the market. Who will end up losers and winners? Middle America certainly isn’t going to be happy when the game ends. If central banks continue in their role as stockholders funded by fiat currency, it will change the game completely.

Middle America has cause to feel uneasy…

Source: ZeroHedge

The Fed’s “Magic Trick” Exposed

In 1791, the first Secretary of the Treasury of the US, Alexander Hamilton, convinced then-new president George Washington to create a central bank for the country.

Secretary of State Thomas Jefferson opposed the idea, as he felt that it would lead to speculation, financial manipulation, and corruption. He was correct, and in 1811, its charter was not renewed by Congress.

Then, the US got itself into economic trouble over the War of 1812 and needed money. In 1816, a Second Bank of the United States was created. Andrew Jackson took the same view as Mister Jefferson before him and, in 1836, succeeded in getting the bank dissolved.

Then, in 1913, the leading bankers of the US succeeded in pushing through a third central bank, the Federal Reserve. At that time, critics echoed the sentiments of Messrs. Jefferson and Jackson, but their warnings were not heeded. For over 100 years, the US has been saddled by a central bank, which has been manifestly guilty of speculation, financial manipulation, and corruption, just as predicted by Mister Jefferson.

From its inception, one of the goals of the bank was to create inflation. And, here, it’s important to emphasize the term “goals.” Inflation was not an accidental by-product of the Fed – it was a goal.

Over the last century, the Fed has often stated that inflation is both normal and necessary. And yet, historically, it has often been the case that an individual could go through his entire lifetime without inflation, without detriment to his economic life.

Yet, whenever the American people suffer as a result of inflation, the Fed is quick to advise them that, without it, the country could not function correctly.

In order to illustrate this, the Fed has even come up with its own illustration “explaining” inflation. Here it is, for your edification:

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If the reader is of an age that he can remember the inventions of Rube Goldberg, who designed absurdly complicated machinery that accomplished little or nothing, he might see the resemblance of a Rube Goldberg design in the above illustration.

And yet, the Fed’s illustration can be regarded as effective. After spending several minutes taking in the above complex relationships, an individual would be unlikely to ask, “What did they leave out of the illustration?”

Well, what’s missing is the Fed itself.

As stated above, back in 1913, one of the goals in the creation of the Fed was to have an entity that had the power to create currency, which would mean the power to create inflation.

It’s a given that all governments tax their people. Governments are, by their very nature, parasitical entities that produce nothing but live off the production of others. And, so, it can be expected that any government will increase taxes as much and as often as it can get away with it. The problem is that, at some point, those being taxed rebel, and the government is either overthrown or the tax must be diminished. This dynamic has existed for thousands of years.

However, inflation is a bit of a magic trick. Now, remember, a magician does no magic. What he does is create an illusion, often through the employment of a distraction, which fools the audience into failing to understand what he’s really doing.

And, for a central bank, inflation is the ideal magic trick. The public do not see inflation as a tax; the magician has presented it as a normal and even necessary condition of a healthy economy.

However, what inflation (which has traditionally been defined as the increase in the amount of currency in circulation) really accomplishes is to devalue the currency through oversupply. And, of course, anyone who keeps his wealth (however large or small) in currency units loses a portion of their wealth with each devaluation.

In the 100-plus years since the creation of the Federal Reserve, the Fed has steadily inflated the US dollar. Over time, this has resulted in the dollar being devalued by over 97%.

The dollar is now virtually played out in value and is due for disposal. In order to continue to “tax” the American people through inflation, a reset is needed, with a new currency, which can then also be steadily devalued through inflation.

Once the above process is understood, it’s understandable if the individual feels that his government, along with the Fed, has been robbing him all his life. He’s right—it has.

And it’s done so without ever needing to point a gun to his head.

The magic trick has been an eminently successful one, and there’s no reason to assume that the average person will ever unmask and denounce the magician. However, the individual who understands the trick can choose to mitigate his losses. He or she can take measures to remove their wealth from any state that steadily imposes inflation upon their subjects and store it in physically possessed gold, silver and private cryptocurrency keys.

Source: ZeroHedge

 

Bringing Forward Important Questions About The Fed’s Role In Our Economy Today

I hope this article brings forward important questions about the Federal Reserves role in the US as it attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America’s economy.  At the heart of this discussion is how the Federal Reserve always was, or perhaps morphed, into a state level predatory lender providing the means for a nation to eventually bankrupt itself.

Against the adamant wishes of the Constitution’s framers, in 1913 the Federal Reserve System was Congressionally created.  According to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.”  Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.

A quick overview; monetary policy is the Federal Reserve’s actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States.  The Federal Reserve conducts the nation’s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy.  Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates.  Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.

I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy.  “How”, you ask?  The Fed, believing the free-market to be “imperfect” (aka; wrong) believed it (the Fed) should control and set interest rates, determine full employment, determine asset prices; not the “free market”.  And here’s what happened:

  • From 1913 to 1971, an increase of  $400 billion in federal debt cost $35 billion in additional annual interest payments.
  • From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.
  • From 1981 to 1997, an increase of $4.4 trillion cost $224 billion in additional annual interest payments.
  • From 1997 to 2017, an increase of $15.2 trillion cost “just” $132 billion in additional annual interest payments.

Stop and read through those bullet points again…and then one more time.  In case that hasn’t sunk in, check the chart below…

index1

What was the economic impact of the Federal Reserve encouraging all that debt?  The yellow line in the chart below shows the annual net impact of economic growth (in growing part, spurred by the spending of that new debt)…gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns).  When viewing the chart, the problem should be fairly apparent.  GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as “economic growth”.

index2

Same as above, but a close-up from 1981 to present.  Not pretty.

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Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%).  Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.

index4

Again, according to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.”  However, the chart below shows the Federal Reserve policies’ impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but “safer” or “stable”.

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Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few, at the expense of the many, HERE.

But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent.  The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.

In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means.  The Federal Reserve’s nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it.  Surging asset prices created fast rising tax revenue.  Those espousing “fiscal conservatism” or living within our means (among R’s and/or D’s) were simply unelectable.

This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay.  As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009.  The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently.  However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America’s interest rate continually declined inversely to America’s credit worthiness or ability to repay the debt.

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The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond “Armageddon” (chart below).  All the upside of spending now, with none of the downside of ever paying it back, or even simply paying more in interest.  Politicians were able to tell their constituencies they could have it all…and anyone suggesting otherwise was plainly not in contention.  Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.

  • In 1971, the US paid $36 billion in interest on $400 billion in federal debt…a 9% APR.
  • In 1981, the US paid $142 billion on just under $1 trillion in debt…a 14% APR.
  • In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR…and despite debt nearly doubling by 2007, annual interest payments in ’07 were $30 billion less than a decade earlier.
  • By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt…just a 2% APR.

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The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates.  Few understood that the Fed would cut rates continually over the next three decades.  But by 2008, lower rates were not enough.  The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets.  Previous to this, the Fed has essentially held zero assets beyond short duration assets in it’s role to effect monetary policy.  The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.

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But why the declining interest rates and asset purchases in the first place?

The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle.  What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line).  The FFR has followed the core 25-54yr/old population growth…and the rising, then decelerating, now declining demand that that represented means lower or negative rates are likely just on the horizon (despite the Fed’s current messaging to the contrary).

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Below, a close-up of the above chart from 2000 to present.

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Running out of employees???  Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead.  We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment…and the US is likely to again exceed 80% in 2018.

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Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades.  This is no prediction or estimate, this population has already been born and the only variable is the level of immigration…which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.

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So where will America’s population growth take place?  The 65+yr/old population is set to surge.

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But population growth will be shifting to the most elderly of the elderly…the 75+yr/old population.  I outlined the problems with this previously HERE.

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Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:

  • 1790-1913: Debt to GDP Averaged 14%
  • 1913-2017: Debt to GDP Averaged 53%
    • 1913-1981: 46% Average
    • 1981-2000: 52% Average
    • 2000-2017: 79% Average

As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers.  In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history.  Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war.  Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.

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Any suggestion that the current situation is like any America has seen previously is simply ludicrous.  Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan…but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction…and total debt would not exceed the 1946 high water mark again until 1957.  During that ’46 to ’57 stretch, the economy would boom with zero federal debt growth.

  • 1941…Fed debt = $58 b (Debt to GDP = 44%)
  • 1946…Fed debt = $271 b (Debt to GDP = 119%)
    • 1948…Fed debt = $252 b <$19b> (Debt to GDP = 92%)
    • 1957…Fed debt = $272 b (Debt to GDP = 57%)

If the current crisis ended in 2011 (recession ended by 2010, by July of  2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!?  Instead, debt and debt to GDP are still rising.

  • 2007…Federal debt = $8.9 T (Debt to GDP = 62%)
  • 2011…Federal debt = $13.5 T (Debt to GDP = 95%)
  • 2017…Federal Debt = $20.5 T (Debt to GDP = 105%)

July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt.  America had no intention to ever repay it.  It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement…what could go wrong?

But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills?  Apparently, not foreigners.  If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:

  1. The BRICS (Brazil, Russia, India, China, S. Africa…represented in red in the chart below) ceased net accumulating US debt as of July 2011.
  2. Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland…represented in black in the chart below) stepped in to maintain the bid.
  3. Since QE ended in late 2014, foreigners have followed the Federal Reserve’s example and nearly forgone buying US Treasury debt.

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China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below).  China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011.  China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.

As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt.  From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.

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The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.

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The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from ’08 through ’14.  However, since the end of QE, and that 2/3rds of demand gone…rates continue near generational lows???  Who is buying Treasury debt?  According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid.  The same domestic public buying stocks at record highs and buying housing at record highs.

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Looking at who owns America’s debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt: 

  1. The combined Federal Reserve/Government Accounting Series
  2. Foreigners
  3. Domestic Mutual Funds
  4. And the massive rise in Treasury holdings by domestic “Other Investors” who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.

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Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below).  However, the odd surge of domestic “other investors”, Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.

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No, this is nothing like WWII or any previous “crisis”.  While America has appointed itself “global policeman” and militarily outspends the rest of the world combined, America is not at war.  Simply put, what we are looking at appears little different than the Madoff style Ponzi…but this time it is a state sponsored financial fraud magnitudes larger.

The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation.  And it appears that the Federal Reserve is now directing a state level fraud and farce.  If it isn’t time to reconsider the Fed’s role and continued existence now, then when?

By Chris Hamilton | Econimica

Fed Warns Markets “Vulnerable to Elevated Valuations” [charts]

Hussman Predicts Massive Losses As Cycle Completes After Fed Warns Markets “Vulnerable to Elevated Valuations”

Buried deep in today’s FOMC Minutes was a warning to the equity markets that few noticed…

This overall assessment incorporated the staff’s judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets…

According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.

According to one view, the easing of financial conditions meant that the economic effects of the Committee’s actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.

Roughly translated means – higher equity prices are driving financial conditions to extreme ‘easiness’ and The Fed needs to slow stock prices to regain any effective control over monetary conditions.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_FOMC11.png

And with that ‘explicit bubble warning’, it appears the ‘other’ side of the cycle, that Hussman Funds’ John Hussman has been so vehemently explaining to investors, is about to begin…

Nothing in history leads me to expect that current extremes will end in something other than profound disappointment for investors. In my view, the S&P 500 will likely complete the current cycle at an index level that has only 3-digits. Indeed, a market decline of -63% would presently be required to take the most historically reliable valuation measures we identify to the same norms that they have revisited or breached during the completion of nearly every market cycle in history.

The notion that elevated valuations are “justified” by low interest rates requires the assumption that future cash flows and growth rates are held constant. But any investor familiar with discounted cash flow valuation should recognize that if interest rates are lower because expected growth is also lower, the prospective return on the investment falls without any need for a valuation premium.

At present, however, we observe not only the most obscene level of valuation in history aside from the single week of the March 24, 2000 market peak; not only the most extreme median valuations across individual S&P 500 component stocks in history; not only the most extreme overvalued, overbought, over bullish syndromes we define; but also interest rates that are off the zero-bound, and a key feature that has historically been the hinge between overvalued markets that continue higher and overvalued markets that collapse: widening divergences in internal market action across a broad range of stocks and security types, signaling growing risk-aversion among investors, at valuation levels that provide no cushion against severe losses.

We extract signals about the preferences of investors toward speculation or risk-aversion based on the joint and sometimes subtle behavior of numerous markets and securities, so our inferences don’t map to any short list of indicators. Still, internal dispersion is becoming apparent in measures that are increasingly obvious. For example, a growing proportion of individual stocks falling below their respective 200-day moving averages; widening divergences in leadership (as measured by the proportion of individual issues setting both new highs and new lows); widening dispersion across industry groups and sectors, for example, transportation versus industrial stocks, small-cap stocks versus large-cap stocks; and fresh divergences in the behavior of credit-sensitive junk debt versus debt securities of higher quality. All of this dispersion suggests that risk-aversion is rising, no longer subtly. Across history, this sort of shift in investor preferences, coupled with extreme overvalued, overbought, over bullish conditions, has been the hallmark of major peaks and subsequent market collapses.

The chart below shows the percentage of U.S. stocks above their respective 200-day moving averages, along with the S&P 500 Index. The deterioration and widening dispersion in market internals is no longer subtle.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_huss.png

Market internals suggest that risk-aversion is now accelerating. The most extreme variants of “overvalued, overbought, over bullish” conditions we identify are already in place.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_huss1_0.png

A market loss of [1/2.70-1 =] -63% over the completion of this cycle would be a rather run-of-the-mill outcome from these valuations. All of our key measures of expected market return/risk prospects are unfavorable here. Market conditions will change, and as they do, the prospective market return/risk profile will change as well. Examine all of your investment exposures, and ensure that they are consistent with your actual investment horizon and tolerance for risk.

Source: ZeroHedge

Fed Announced They’re Ready To Start Shrinking Their 4.5T Balance Sheet ― Prepare For Higher Mortgage Rates

Federal Reserve Shocker! What It Means For Housing

The Federal Reserve has announced it will be shrinking its balance sheet. During the last housing meltdown in 2008, it bought the underwater assets of big banks.  It has more than two trillion dollars in mortgage-backed securities that are now worth something because of the latest housing boom.  Gregory Mannarino of TradersChoice.net says the Fed is signaling a market top in housing.  It pumped up the mortgage-backed securities it bought by inflating another housing bubble.  Now, the Fed is going to dump the securities on the market.  Mannarino predicts housing prices will fall and interest rates will rise.

Janet Yellen Explains Why She Hiked In A 0.9% GDP Quarter

It appears, the worse the economy was doing, the higher the odds of a rate hike.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/03/06/20170315_GDPNOW.jpg

Putting the Federal Reserve’s third rate hike in 11 years into context, if the Atlanta Fed’s forecast is accurate, 0.9% GDP would mark the weakest quarter since 1980 in which rates were raised (according to Bloomberg data).

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/03/15/20170315_prefed10.jpg

We look forward to Ms. Yellen explaining her reasoning – Inflation no longer “transitory”? Asset prices in a bubble? Because we want to crush Trump’s economic policies? Because the banks told us to?

For now it appears what matters to The Fed is not ‘hard’ real economic data but ‘soft’ survey and confidence data…

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/03/15/20170315_prefed7.jpg

Source: ZeroHedge