Tag Archives: central bank policy

Freaky Finances, Grotesque Mutants, & Scammy Policies, by Bill Bonner

Posted on March 18, 2016 | Leave a comment

From Bill Bonner, Chairman, Bonner & Partners, at wolfstreet.com:

Why Interest Rates Are NEVER Going Back to Normal.

Let’s see… U.S. corporate earnings have been going down for three quarters in a row. The median household income is lower than it was 10 years ago. And now JPMorgan Chase has increased its estimated risk of a recession to about one in three.

These things might make sober investors wonder: Is this a good time to pay some of the highest prices in history for U.S. stocks Apparently, they don’t think about it…

Grotesque Mutants

Yesterday, U.S. stocks rose again, after the Fed announced that it would go easy on “normalizing” interest rates. The Dow rose 156 points, putting it in positive territory for 2016.

Hooray! Investors – at least those who passively track the index – are even for the year. And with more central bank fixes, maybe they’ll be able to keep their heads above water for the rest of 2016. Good luck with that!

You may recall our prediction: The Fed will NEVER return to a “normal” interest rate.

Why not? Many Wall Street analysts say the Fed’s move to bring interest rates to a more normal level – after seven years of ZIRP (zero-interest-rate policy) – was “too early.”

We think it was too late. The Fed has already distorted too much for too long. Its EZ money policies have created a hothouse of speculation, mistakes, and misallocation of resources. The financial plants that grew up in that environment – grotesque mutants that require huge doses of liquidity – cannot survive a change of seasons.

But these plants are big. And powerful.

Washington… the health care industry… housing… Wall Street… They control the U.S. government, the bureaucracy, and major economic sectors – notably the $1 trillion-a-year security industry.

What they need – what the entire economy needs – is a correction. Excess debt must be purged. That’s what credit cycles, bankruptcies, and depressions are for.

“Normal” includes corrections. But the feds can’t let it happen.

To continue reading: Freaky Finances, Grotesque Mutants, & Scammy Policies

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The Effects of a Month of Negative Rates in Japan, by Toru Fujioka and James Mayger

Posted on March 14, 2016 | 2 comments

From Toru Fujioka and James Mayger at bloomberg.com:

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16.

Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70 percent of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69 percent of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8 percent rate last week, down from 1.05 percent before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001 percent, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen.

To continue reading: The Effects of a Month of Negative Rates in Japan

 

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No Free Lunches Be Damned, by MN Gordon

Posted on March 12, 2016 | 1 comment

From MN Gordon at economicprism.com:

“There ain’t no such thing as a free lunch,” is one of the essential axioms of economics. No doubt about it, there’s no getting around this simple truth. Everything has a price.

For example, even if someone buys you lunch the lunch still isn’t free. The opportunity cost, your time to eat the lunch when you could’ve been doing something else, has a price. In addition, even if you don’t consider your time a cost, there’s no denying the fact that someone paid for the lunch. Hence, it wasn’t free.

Nonetheless, despite this simple fact, politicians promise free lunches for the many at the expense of the few. This offense is especially on display during a presidential primary election. Free college. Free drugs. Free housing. Free food.

You name it, there’s hardly a lunch out there this season’s crop of presidential candidates haven’t already laid claim to. This is what they must do to get elected. This is how presidential politics works in a democracy.

We don’t like it. We don’t agree with it. But what we think really doesn’t matter. The facts are lucidly clear. On the national level, the populace has shown for the last 80 years – or more – that they’ll vote for whatever candidate promises the most stuff for free.

Nothing for Something

The politicians know there’s no such thing as a free lunch. But they also know that modern day economic policy is predicated on financing government programs through ever expanding debt. This means someone else, perhaps you, will have to pick the tab.

The Federal Reserve makes it all possible by creating enormous amounts of central bank credit, which is then loaned to the government. This also has the secondary effect of debasing the currency. Obviously, the Treasury welcomes this ongoing dilution of value. Over time it lightens the debt burden and allows them to make good on yesterday’s promises with a currency of diminishing value.

For extended periods this may seem to work remarkably well, on the surface. Spendthrift politicians get elected. The populace collects their ‘entitlements.’ Lunches appear to be free.

When an economy’s demographics are young, and growth is strong, the price of lunches looks minimal. The miracle of getting something for nothing seems possible. But as the economy ages, and growth peters out, debt levels become unsustainable.

Eventually, the bill comes due. The lunches must be paid for. Instead of something for nothing, the populace now gets nothing for something.

In other words, the credit expansion reaches its natural limits when the economy can no longer service the debt. That’s when a breakdown, government default, and depression, must occur to purge the debt – the rot – from the system. Prices, assets, and wages are readjusted so they are in line with the economy. Unproductive activities vanish. New, useful, undertakings rise from the ashes.

To continue reading: No Free Lunches Be Damned

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Mario Draghi Got Lost In A Rabbit Hole, by Raúl Ilargi Meijer

Posted on March 11, 2016 | Leave a comment

From Raúl Ilargi Meijer at theautomaticearth.com:

I’ll try and keep this gracefully short: Mario Draghi ‘unleashed’ a bazooka full of desperate tools on the financial markets yesterday and they blew up in his face faster than you could say blowback or backdraft (and that’s just the start of the alphabet). This must and will mean that Draghi’s stint as ECB head is for all intents and purposes done. But…

But there are two questions: 1) who has the power to fire him (not an easy one), and 2) who can replace him. Difficult issues because the only candidates that would even be considered for the job by the same people who hired -no, not elected- Mario -and who will still be in power after he’s gone-, under present conditions, are carbon copies of Draghi. They all went to the same schools, worked for the same banks etc.

So maybe they’ll let him sit a bit longer. Then again, the damage has been done, and Mario has done a lot of destruction, is what the markets said yesterday. But to replace him with someone who’s also already lost all credibility, because they supported Mario every step of the way, carries a very evident risk: that nobody will believe in the entire ECB itself anymore. If you ask me, it’s crazy that anyone still would, but that’s another chapter altogether.

Not that Janet Yellen and Japan’s Kuroda and China’s Zhou Xiaochuan should not also be put out by the curb. While they may -seem to- vary in approaches today, they all started from the same untested, purely theoretical and entirely clueless origins. Just saying. None of them have any idea what negative rates etc will lead to. They’re all in the same rabbit hole. And that’s not a joke, it’s deeply sad.

Ultra-low interest -even negative- rates and bond purchases to the tune of $1 trillion a year, Mario’s schtick, exist all across the formerly rich world. And they all do for the same purpose: to make the people think that they, and their economies, are still rich. Just so bankers can take from them whatever it is they still do have. Think pension funds, investment funds.

Why did this pandemonium of ZIPR and QE ever get started? Because central banks, and the economists that work within them, edged along by bankers who risked behemoth losses, said the most important thing to do was to ‘save’ the banking system, and they can always find some theory to confirm that preference.

To continue reading: Mario Draghi Got Lost In A Rabbit Hole

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Draghi’s Deadly Derangement, by David Stockman

Posted on March 10, 2016 | 1 comment

From David Stockman at davidstockmanscontracorner.com:

Yes, the man is totally deranged, and so is the entire eurozone policy apparatus. Like much of officialdom elsewhere in the world, the ECB is attempting to fight low growth and low inflation with monetary nitroglycerin. Its only a matter of time before they blow the whole financial works sky high.

Low real GDP growth in the eurozone has absolutely nothing to do with the difference between –0.3% on the ECB deposit rate versus the new -0.4% dictate announced this morning; nor does QE bond purchases of EUR 80 billion per month compared to the prior EUR 60 billion rate have anything to do with it, either. The only purpose of such heavy handed financial intrusion is to make borrowing cheaper for households and businesses.

But here’s what the moronic Mario doesn’t get. The European private sector don’t want no more stinkin’ debt; they are up to their eyeballs in it already, and have been for the better part of a decade.

The growth problem in Europe is due to too much socialist welfare and too much statist taxation and regulation, not too little private borrowing. These are issues for fiscal policy and elected politicians, not central bank apparatchiks.

As shown in the chart below, the eurozone private sector had its final borrowing binge during the initial decade of the single currency regime through 2008; debts outstanding grew at the unsustainable rate of 7.5% annually. But since then the eurozone private sector has self-evidently been stranded on the shoals of Peak Debt.

Outstandings have flat-lined for the past eight years—-not withstanding increasingly heavy doses of ECB interest rate repression that have finally taken money market rates into the netherworld of subzero.

To continue reading: Draghi’s Deadly Derangement

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Do Any of the Current Rallies Pass “The Sniff Test”? No. by Charles Hugh Smith

Posted on March 10, 2016 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

But you can’t tame the monster of speculative, legalized looting and financialization.

Everything from iron ore to copper to the Baltic Dry Index to stocks to bat guano is rallying. The problem is not a single rally passes “the sniff test:” is the rally the result of changing fundamentals, or is it merely short-covering and/or speculative hot money leaping from one rally to the next?

Every one of these rallies is bogus, a travesty of a mockery of a sham of price discovery, supposedly the core function of markets. What shift in fundamentals drove this rally? Higher profits? No, profits are declining, especially once the phony adjustments are stripped away. Is the global economy strengthening? Don’t make us laugh!

To continue reading: Do Any of the Current Rallies Pass “The Sniff Test”? No.

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NIRP Kills Off All Money Market Funds in Japan, by Wolf Richter

Posted on March 9, 2016 | Leave a comment

From Wolf Richter at wolfstreet.com:

And the Bitter Irony?

All 11 Japanese asset managers that offer money market funds have stopped accepting new investments into them and are planning to scuttle them after returning their remaining assets to investors. This marks another big accomplishments of negative interest rates.

After years of zero-interest-rate policy, and after gobbling up every Japanese government bond that wasn’t nailed down, the Bank of Japan decided in January to go beyond what had already failed and introduced its negative-interest-rate policy.

As a result of QQE, as it calls its asset-buying program, and the new NIRP, even the 10-year JGB yield is now negative, and yields on shorter maturities are sinking deeper into the negative. Money market funds, which invest in commercial paper and government debt with maturities of less than one year, are at risk of seeing these negative yields eat into their principal.

Money market funds, unlike bank deposits, do not guarantee the principal, but due to their reliance on short-term paper with high credit ratings, they’re considered one of the safest investments, and falling below par value is considered bad form and can trigger runs on the offending fund and neighboring funds by spooked investors.

With an average yield of a record low 0.02% currently – only a hair away from going negative – money market funds are at the verge of systematically falling below par value, not just once, but deeper and deeper, given that the current monetary policy could last for years, or until something big breaks.

Fund managers could absorb the losses, but that’s no fun either. So they’re drawing the line:

The Nikkei:

Nomura Asset Management and Daiwa Asset Management intend to repay investors by August and October, respectively. Mitsubishi UFJ Kokusai Asset Management is preparing to do so in April or May. Five other companies, including Nikko Asset Management, had announced plans as of Monday to return customers’ money.

To continue reading: NIRP Kills Off All Money Market Funds in Japan

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A New Level of Absurdity, by Bill Bonner

Posted on February 22, 2016 | 2 comments

From Bill Bonner, Chairman, Bonner & Partners, at wolfstreet.com:

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments… who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future. Is that weird or what?

Into the Unknown

At least one reader didn’t think it was so odd. “You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”

Ah… we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it… and using it as he sees fit. It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.

When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books. If something goes wrong and you want your money back, you can just get in line behind the other creditors.

The future is always unknown. The bird in the bush could fly away. Or someone else could get him. So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

A New Level of Absurdity

That’s why bonds pay income – to compensate you for that uncertainty. Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.

That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past.

The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.

To continue reading: A New Level of Absurdity

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Another Dead Cat Bounce——-And They’ve Already Buried The Cat, by David Stockman

Posted on February 18, 2016 | Leave a comment

From David Stockman at davidstockmanscontracorner.com:

That didn’t take long. We’ve just had another short-covering rip from the 1870 Bullard Bottom on the S&P 500 and it’s already petered out. Not even another one of the St. Louis Fed President’s bouncing billiard balls could keep the machines slamming the buy key.

And that’s why there is a monumental market storm brewing dead ahead. Yes, James Bullard is a complete joke who gives zig-zagging a whole new meaning. After yesterday’s about face from rate increase hawk to dove, I’d even be inclined to designate him as a “monetary whirling dervish”. His policy pronouncements fit the urban dictionary’s definition perfectly:

(n.) A person whose behavior resembles a rapid, spinning object. These actions are often spastic fidgeting and incessant babbling. The actions of the whirling dervish are irritating and annoying, often exhausting other people in the immediate vicinity.

You can’t disagree with that, but the issue isn’t Bullard; its the entire central bank policy regime that is now racing towards a fiery dead-end. Bullard is just idiomatic—–the least reluctant of what will soon be a desperately flailing gaggle of Fed heads trying to explain that recession has returned, but that they are out of dry powder without a clue on what to do next.

So it won’t be long before we get the big breakout to the downside. The stock market has been churning and cycling in no-man’s land between 1870 and 2130 on the S&P 500 for 700 days now. There have been upwards of 35 rally attempts and all of them have failed, including this most recent machine driven three-day spasm.

It is a sheer understatement to say that the market’s generals are in full retreat and that the internals are looking ever more precarious. As to the latter, fully 60% of the S&P 500 members are down 20% or more and are thereby already wrestling hard with the bear.

To continue reading: Another Dead Cat Bounce——-And They’ve Already Buried The Cat

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Is This Debt’s Last Rattle? by Raúl Ilargi Meijer

Posted on February 12, 2016 | Leave a comment

By Raúl Ilargi Meijer at theautomaticearth.com:

What we see happening today is why we called our news overview the “Debt Rattle” 8 years ago. The last gasps of a broken system ravished by the very much cancer-like progress of debt. Yes, it took longer than it should have, and than we thought. But that’s pretty much irrelevant, unless you were trying to get rich off of the downfall of your own world. Always a noble goal.

There’s one reason for the delay only: central bank hubris. And now the entire shebang is falling to bits. That this would proceed in chaotic ways was always a given. People don’t know where to look first or last, neither central bankers nor investors nor anyone else.

It’s starting to feel like we have functioning markets again. Starting. Central bankers still seek to meddle where and when they can, but their role is largely done. It’s hard to pinpoint what exactly started it, but certainly after Kuroda’s negative rate ‘surprise’ fell as flat on its face as it did, and then fell straight through the floor and subsequently shot up through the midnight skies, a whole lot more ‘omnipotence credibility’ has disappeared.

Kuroda achieved the very opposite of what he wanted, the yen soared up instead of down -big!-, and that will reflect on Yellen, Draghi et al, because they all use the same playbook. And the latter so far still got a little bit of what they were shooting for, not the opposite. Still, one could also make a good case that it was Yellen’s rate hike that was the culprit. Or even Draghi’s ‘whatever it takes’. It doesn’t matter much anymore.

Though what should remain clear is that it was in their interference in markets to begin with, as extremely expensive as it has been extremely useless and dumb, that the real guilt resides. Or we could take it even a step further back and point to the credit bubbles blown in the west before 2008. Central banks could have let that one go, and allow it to run its natural course. Instead, they decided they should inflate their own balance sheets. What could go wrong?

Then again, these inane policies concocted by a bunch of bankers and bookworm academics who don’t even understand how their own field works, as Steve Keen once again explained recently, would have blown up in their faces long before if not for China’s decision to join in and then some. Some $35 trillion, that is.

Money, debt, spent on ghost cities and on what now turn out to be ghost factories. Ghost jobs, ghost prosperity,a ghost future. Makes us wonder all the time what people thought when they saw China used as much cement in 2011-2013 as the US did in the entire 20th century. Did anyone think that would continue for decades, even grow perhaps? Have we lost all sense of perspective?

To continue reading: Is This Debt’s Last Rattle?

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