Tag Archives: QE

Did Something Just Snap? US Policy Uncertainty Unexpectedly Soars Above Lehman, Sept 11 Levels

With US equity markets within one percent of all-time record highs, and US equity risk back near cycle lows, one could be forgiven for ‘believing’ that all is well in the world.

A China trade deal is imminent, right? A Brexit deal is imminent, right? Turkey ceasefire, right?

Well, according to The Baker, Bloom and Davis daily news-based Economic Policy Uncertainty Index (based on newspaper archives from Access World New’s NewsBank service), US economic policy uncertainty has never, ever been higher than it is currently…

All hands are on deck, like never before, to prevent a credit freeze…

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Global Debt & Liquidity Crisis Update: Repo Locking Up Again As Overnight Fed Operation Oversubscribed, Repo Rate Jumps

‘The Fed is an outpost of a foreign power that controls our economy, most of our politics and our financial future. It’s an instrument of the Rothschild global cabal. It always has been since 1913’

First it was supposed to be just a mid-month tax payment issue coupled with an accelerated cash rebuild by the US Treasury. Then, it was supposed to be just quarter-end pressure. Then, once the Fed rolled out QE4 while keeping both its overnight and term repo operations, the mid-September repo rate fireworks which sent the overnight G/C repo rate as high as 10% was supposed to go away for good as Powell admitted the level of reserves was too low and the Fed launched a $60BN/month Bill POMO to boost the Fed’s balance sheet.

Bottom line: the ongoing repo market pressure – which indicated that one or more banks were severely liquidity constrained – was supposed to be a non-event.

Alas, as of this morning when the Fed’s latest repo operation was once again oversubscribed, it appears that the repo turmoil is not only not going away, but is in fact (to paraphrase Joe Biden) getting worse, because even with both term and overnight repos in play and with the market now expecting the Fed to start injecting copious liquidity tomorrow with the first Bill POMO, banks are still cash starved.

To wit: in its latest overnight operation, the Fed indicated that $80.35BN in collateral ($74.7BN in TSYs, $5.65BN in MBS) had been submitted into an operation that maxed out at $75BN, with a weighted average rate on both TSY and MBS rising to 1.823% and 1.828% respectively.

While it was clear that the repo market was tightening in the past week, with each incremental overnight repo operation rising, today was the first oversubscribed repo operation since September 25, and follows yesterday’s $67.6BN repo and $20.1BN term repo.

But the clearest sign that the repo market is freezing up again came from the overnight general collateral rate itself, which after posting in the 1.80%-1.90% range for much of the past two weeks, spiked as high as 2.275% overnight and was last seen at 2.15%, well above the fed funds upper range…

‘The powers that be would rather us experience a mad max world while they hide in luxury bunkers, than allow a treasury issued gold backed currency, absent a central bank once again’

Source: ZeroHedge

Fed Announces QE4 One Day After BIS Warns QE Has Broken The Market

Following Fed Chair Powell’s surprising announcement today that the Fed was resuming Permanent Open Market Operations after a 5 year hiatus, just as we said last month that it would (see “The Fed Will Restart QE In November: This Is How It Will Do It“)…

… there was a brief debate whether the Fed’s soon to be permanent expansion in its balance sheet is QE or not QE. The answer to this semantic debate simple: Powell defined Quantitative Tightening as removing reserves from the system. Thus, by that simple definition, adding reserves to the system on a permanent basis via permanent open market operations, i.e., bond purchases, is Quantitative Easing. Incidentally, the repo market fireworks were just a smokescreen: the real reason why the Fed is resuming QE is far simpler: the US has facing an avalanche of debt issuance and with China and Japan barely able to keep up, someone has to buy this debt. That someone: the Fed.

And just to shut up anyone who still wants to call the upcoming $400BN expansion in the Fed’s balance sheet, as represented in the following chart by Goldman…

… QE-Lite, here is JPMorgan comparing what is coming with what has been: at a $21BN in monthly 10Yr equivalent TSY purchases, the “upcoming” operation is the same size as QE1.

Yet semantic bullshit aside, what is most infuriating about Powell’s “shocking” announcement (which we previewed a few weeks ago) is that it took place just one day after the central banks’ central bank, the Bank of International Settlements, finally caught up with what we first said in 2009 – for economists being only 10 years behind the curve is actually not terrible – and wrote that “the unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function.”

Ignoring the fact that central bank policies are responsible for such phenomena as Brexit and Trump, as it is the flawed monetary policy of the past decade that made the rich richer beyond their wildest dreams by expanding the biggest asset bubble in history, while destroying the middle class…

… it is disgusting that even as the Fed’s own supervisor admits that its balance sheet expanding policies have broken the market – something this “tinfoil” conspiracy blog has been saying since 2008 – the Fed is doing even more of the same, ensuring that the market will be more broken than ever!

So what was this startling epiphany? According to the BIS, while the immediate impact of this massive balance sheet expansion had eased the severe market strains created by the 2008 financial crisis, there had been several negative side-effects. These included a scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas.

In short: last month’s repo crisis is a direct consequence of central banks’ own actions. as Scott Skyrm explained earlier.

“Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said in the Monday report. “Some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.”

This “could result in market malfunctioning when large central bank balance sheets are eventually unwound”, the BIS warned, adding that “it could make it more difficult for reserves to be redistributed effectively between market participants.” Of course, the BIS was clearly joking because even five-year olds know balance sheets will never be unwound.

Additionally, the BIS went on to point out that negative impacts have been more prevalent when central banks hold a larger share of outstanding assets, as the FT reportedmajor central banks’ holdings of domestic sovereign bonds range from 20% of outstanding paper at the US Fed to over 40% in Japan.

But the BIS said these side-effects had so far only rarely affected financial conditions in such a way as to impede central banks’ monetary policymaking, though it added that the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets.

Worse, the BIS noted that regulations demanding liquidity at large banks might discourage the banks from offering to lend out their reserves — a source of same-day liquidity — into overnight markets. This is similar to what the large banks themselves have said in the last month. But the BIS also noted that since the financial crisis, risk management practices might have changed within the banks themselves.

Sadly, the Fed – which is fully aware of all of this – decided to ignore everything the BIS warned about, and by launching more POMO/QE/”don’t call it QE”, just ensured that the next financial crisis will be the last one.

“So looks like the banks are being re-capitalized, (bailed out) and lower rates are coming, zero or negative.. well.. now the banks can borrow cash for zero, or less directly from the Fed., then shell out loans and credit cards at exorbitant rates to We The People… oh… you are not supposed to know this… (don’t share)…”

Source: ZeroHedge

Global Debt & Liquidity Crisis Update: NY Fed Announces Extension Of Overnight Repos Until Nov 4, Will Offer 8 More Term Repos

The Fed’s “temporary” liquidity injections are starting to look rather permanent…

Anyone who expected that the easing of the quarter-end funding squeeze in the repo market would mean the Fed would gradually fade its interventions in the repo market, was disappointed on Friday afternoon when the NY Fed announced it would extend the duration of overnight repo operations (with a total size of $75BN) for at least another month, while also offering no less than eight 2-week term repo operations until November 4, 2019, which confirms that the funding unlocked via term repo is no longer merely a part of the quarter-end arsenal but an integral part of the Fed’s overall “temporary” open market operations… which are starting to look quite permanent.

This is the statement published today by the NY Fed:

In accordance with the most recent Federal Open Market Committee (FOMC) directive, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct a series of overnight and term repurchase agreement (repo) operations to help maintain the federal funds rate within the target range.

Effective the week of October 7, the Desk will offer term repos through the end of October as indicated in the schedule below. The Desk will continue to offer daily overnight repos for an aggregate amount of at least $75 billion each through Monday, November 4, 2019.

Securities eligible as collateral include Treasury, agency debt, and agency mortgage-backed securities. Awarded amounts may be less than the amount offered, depending on the total quantity of eligible propositions submitted. Additional details about the operations will be released each afternoon for the following day’s operation(s) on the Repurchase Agreement Operational Details web page. The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the Desk.  

What this means is that until such time as the Fed launches Permanent Open Market Operations – either at the November or December FOMC meeting, which according to JPMorgan will be roughly $37BN per month, or approximately the same size as QE1…

… the NY Fed will continue to inject liquidity via the now standard TOMOs: overnight and term repos. At that point, watch as the Fed’s balance sheet, which rose by $185BN in the past month, continues rising indefinitely as QE4 is quietly launched to no fanfare.

And remember: whatever you do, don’t call it QE4!

Trader Gregory Mannarino breaks it down… 

Source: ZeroHedge

The Fed Accelerates its QE Unwind

Mopping up liquidity.

The Fed’s QE Unwind – “balance sheet normalization,” as it calls this – is accelerating toward cruising speed. The first 12 months of the QE unwind, which started in October 2017, are the ramp-up period – just like there was the “Taper” during the final 12 months of QE. The plan calls for shedding up to $420 billion in securities in 2018 and up to $600 billion a year in each of the following years until the balance sheet is sufficiently “normalized” – or until something big breaks.

Treasuries

In July, the QE Unwind accelerated sharply. According to the plan, the Fed was supposed to shed up to $24 billion in Treasury Securities in July, up from $18 billion a month in the prior three months. And? The Fed released its weekly balance sheet Thursday afternoon. Over the four weeks ending August 1, the balance of Treasury securities fell by $23.5 billion to $2,337 billion, the lowest since April 16, 2014. Since the beginning of the QE-Unwind, the Fed has shed $129 billion in Treasuries.

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-Treasuries.png

The step-pattern in the chart above is a result of how the Fed sheds Treasury securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries only mature mid-month or at the end of the month. Hence the stair-steps.

In mid-July, no Treasuries matured. But on July 31, $28.4 billion matured. The Fed replaced about $4 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Walls Street (its “primary dealers”) with which the Fed normally does business. Those $4 billion in securities, to use the jargon, were “rolled over.” But it did not replace about $24 billion of maturing Treasuries. They “rolled off.”

Mortgage-Backed Securities

Under QE, the Fed also bought mortgage-backed securities, which were issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Holders of residential MBS receive principal payments as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off.  So, to keep the MBS balance from declining on the Fed’s balance sheet after QE ended, the New York Fed’s Open Market Operations (OMO) kept buying MBS.

Settlement of those trades occurs two to three months later. Since the Fed books the trades at settlement, there’s a lag of two to three months between the date of the trade and when the trade appears on the Fed’s balance sheet [here’s my detailed explanation]. This is why it took a few months before the QE unwind in MBS showed up distinctively on the balance sheet.

The current changes of MBS on the balance sheet reflect trades from about two months ago. At the time, the cap for shedding MBS was $12 billion a month. And? Over the past four weeks, the balance of MBS fell by $11.8 billion, to $1,710 billion as of August 1, the lowest since October 8, 2014. In total, $61 billion in MBS have been shed since the beginning of the QE unwind:

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-MBS.png

Total Assets on the Balance Sheet

QE only involved Treasuries and MBS. And so the QE unwind only involves Treasuries and MBS. Since the beginning of the QE Unwind, Treasuries dropped by $129 billion and MBS by $61 billion, for a combined decline of $190 billion.

But the balance sheet of the Fed also reflects the Fed’s other functions and activities. And the decline in the overall balance sheet is not going to reflect exactly the amounts shed in Treasuries and MBS.

Total assets on the Fed’s balance sheet for the four weeks ending August 1 dropped by $34.1 billion. This brought the drop since October, when the QE unwind began, to $205 billion. At $4,256 billion, total assets are now at the lowest level since April 9, 2014, during the middle of the “taper.” It took the Fed about six years to pile on these securities, and now it’s going to take years to shed them:

https://wolfstreet.com/wp-content/uploads/2018/08/US-Fed-Balance-sheet-2018-08-02-overall.png

So the pace of the QE Unwind has accelerated in July, as planned. The Fed has not blinked during the sell-offs in the market, and it’s not going to. It is targeting “elevated” asset prices and financial conditions. Asset prices remain elevated and financial conditions remain ultra-loose. Markets have essentially brushed off the Fed so far. And that only acts as an encouragement for the Fed to proceed.

The FOMC, in its August 1 statement, mentioned “strong” five times in describing various aspects of the economy and the labor market – the most hawkish statement in a long time. Rate hikes will continue, and the pace might pick up. And the QE unwind will accelerate to final cruising speed and proceed as planned. The Fed stopped flip-flopping in the fall of 2016 and hasn’t looked back since.

When the economy eventually slows down enough to where the Fed feels like it needs to act, it will cut rates, but it will let the QE unwind proceed on automatic pilot toward “normalization,” whatever that will mean. That’s the stated plan. And the Fed will stick to it – unless something big breaks, such as credit freezing up again in the credit-dependent US economy, at which point all bets are off.

Source: by Wolf Richter | Wolf Street

Exploring The Death Spiral Of Financialization [video]

Each new policy destroys another level of prudent fiscal/financial discipline.

The primary driver of our economy–financialization–is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.

Financial “wealth” created by leveraging more debt on a base of real-world collateral that doesn’t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.

As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.

The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.

These extremes don’t just pile up like bricks–they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.

This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.

Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to Financialization. Each “fix” that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy’s credit-business cycle.

Each new policy destroys another level of prudent fiscal/financial discipline.

The discipline of sound money? Gone.

The discipline of limited leverage? Gone.

The discipline of prudent lending? Gone.

The discipline of mark-to-market discovery of the price of collateral? Gone.

The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.

The discipline of open-market interest rates? Gone.

The discipline of losses being absorbed by those who generated the loans? Gone.

And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation’s seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.

Source: ZeroHedge

Foreign Governments Dump US Treasuries as Never Before, But Who the Heck is Buying Them?

It started with a whimper a couple of years ago and has turned into a roar: foreign governments are dumping US Treasuries. The signs are coming from all sides. The data from the US Treasury Department points at it. The People’s Bank of China points at it in its data releases on its foreign exchange reserves. Japan too has started selling Treasuries, as have other governments and central banks.

Some, like China and Saudi Arabia, are unloading their foreign exchange reserves to counteract capital flight, prop up their own currencies, or defend a currency peg.

Others might sell US Treasuries because QE is over and yields are rising as the Fed has embarked on ending its eight years of zero-interest-rate policy with what looks like years of wild flip-flopping, while some of the Fed heads are talking out loud about unwinding QE and shedding some of the Treasuries on its balance sheet.

Inflation has picked up too, and Treasury yields have begun to rise, and when yields rise, bond prices fall, and so unloading US Treasuries at what might be seen as the peak may just be an investment decision by some official institutions.

The chart below from Goldman Sachs, via Christine Hughes at Otterwood Capital, shows the net transactions of US Treasury bonds and notes in billions of dollars by foreign official institutions (central banks, government funds, and the like) on a 12-month moving average. Note how it started with a whimper, bounced back a little, before turning into wholesale dumping, hitting record after record (red marks added):

https://i1.wp.com/wolfstreet.com/wp-content/uploads/2017/02/US-Treasuries-net-foreign-transactions.png

The People’s Bank of China reported two days ago that foreign exchange reserves fell by another $12.3 billion in January, to $2.998 trillion, the seventh month in a row of declines, and the lowest in six years. They’re down 25%, or almost exactly $1 trillion, from their peak in June 2014 of nearly $4 trillion (via Trading Economics, red line added):

https://i1.wp.com/wolfstreet.com/wp-content/uploads/2017/02/China-Foreign-exchange-reserves-2017-01.png

China’s foreign exchange reserves are composed of assets that are denominated in different currencies, but China does not provide details. So of the $1 trillion in reserves that it shed since 2014, not all were denominated in dollars.

The US Treasury Department provides another partial view, based on data collected primarily from US-based custodians and broker-dealers that are holding these securities for China and other countries. But the US Treasury cannot determine which country owns the Treasuries held in custodial accounts overseas. Based on this limited data, China’s holdings of US Treasuries have plunged by $215.2 billion, or 17%, over the most recent 12 reporting months through November, to just above $1 trillion.

So who is buying all these Treasuries when the formerly largest buyers – the Fed, China, and Japan – have stepped away, and when in fact China, Japan, and other countries have become net sellers, and when the Fed is thinking out loud about shedding some of the Treasuries on its balance sheet, just as nearly $900 billion in net new supply (to fund the US government) flooded the market over the past 12 months?

Turns out, there are plenty of buyers among US investors who may be worried about what might happen to some of the other hyper-inflated asset classes.

And for long suffering NIRP refugees in Europe, there’s a special math behind buying Treasuries. They’re yielding substantially more than, for example, French government bonds, with the US Treasury 10-year yield at 2.4%, and the French 10-year yield at 1.0%, as the ECB under its QE program is currently the relentless bid, buying no matter what, especially if no one else wants this paper. So on the face of it, buying US Treasuries would be a no-brainer.

But the math got a lot more one-sided in recent days as French government bonds now face a new risk, even if faint, of being re-denominated from euros into new French francs, against the will of bondholders, an act of brazen default, and these francs would subsequently get watered down, as per the euro-exit election platform of Marine Le Pen. However distant that possibility, the mere prospect of it, or the prospect of what might happen in Italy, is sending plenty of investors to feed on the richer yields sprouting in less chaos, for the moment at least, across the Atlantic.

By Wolf Richter | Wolf Street