Minutia and History Repeating?
Continuing this weeks theme, from Divergence in Quantitative Tightening and Dollar Assets? more reasons for that market dip or free fall?
On June 10, 2017 in History Repeating? we mused about how the FOMC QT (quantitative tightening) might affect $3T in notional bets or net commercial longs in 90 day Eurodollar futures.
On June 10, 2017 in History Repeating? we mused about how the FOMC QT (quantitative tightening) might affect $3T in notional bets or net commercial longs in 90 day Eurodollar futures.
Should the FOMC indicate in its minutia when the big punch bowl is getting taken away (tapered bond buying, reduction of balance sheet), or other circumstances increase the cost of LIBOR (short term loan funds), those [May 2017] bets or hedges with $3T notional will be on the wrong side of the fence, near term. Unless of course a countervailing equities reevaluation appears. TBD.
In the last two weeks, a global bond pullback has been in progress, of which the "synthetic" effects are spreading into equities, viz. margin requirements on leveraged derivative positions are necessitating asset liquidation. Again, bond sales mean additional dollar float and, depending on disposition of those dollars, a lower dollar.
On June 16, 2017, in Fed: Devil in The Details? we spoke to potential affects of the Fed's proposed quantitative tightening or asset purchase tapering program..
QE purchases ending in October 2014, were telegraphed in the July [9th] FOMC minutes release [For the June 18th FOMC meeting], which precipitated a 75% collapse in oil prices.From the July 9th, 2014 FOMC minutes release...
It would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases... this final reduction would occur following the October meeting.This [July 2014] was the last time a death cross (50 dma crossing below 200dma) was seen in Brent or WTI Oil, until almost three years later. The death cross revisited June 14, 2017, when the Fed announced the details of their upcoming QT (quantitative tightening) program, but did not announce specifically WHEN this program was to be implemented.
On June 27, 2017, In Coffee, Crude, Tea Or Me? we spoke to the temporal proximity of the tapering program...
This June's FOMC minutia indicated who, what, where and how the current punch bowl of Fed roll overs and excess reserves (balance sheet reduction) would be gradually taken away, but this Naybob noticed something missing, temporal proximity.
We suspect the final piece of critical information is coming July 5th in the release of the FOMC minutes. viz. temporal proximity as in WHEN.
The players already know what they are going to do, they just don't know WHEN, upon which they will put their forward plans into action. For a possible future, one might pay heed to a chart of oil from July 5th, 2014 on.
WTI: July 7, 2014 104.18 - Feb 8, 2016 26.08
On July 16th, 2017 in Of Dollars, Bonds, Profit And Quantitative Tightening? we speculated as to the knock on effects of the impending, but still unknown as to WHEN, QT program...
Trebek: What happens when your biggest bond customer stops rolling over their bond and MBS purchases to the tune of $10 billion a month and intends to ramp that GAP up to $50 billion a month?
Answer: What is a larger float of available bonds for others to purchase and perhaps less bond purchases? If not the number of transactions, then at least the dollar volume thereof (declining prices, rising yields).
Under normal circumstances, when bonds get bought, dollars get taken out of circulation. Less dollars, higher dollar. Now consider the above, then reverse the last statement. Potential for less dollar volume in bond sales, more dollars floating, lower dollar.
When taking QT (quantitative tightening), be mindful of deleterious side effects. Open market effects can include rising yields and lower bond prices, viz. higher cost of loan funds and operating costs, further reducing profits and cash flow.
Beware of balance sheet palpitation, constriction and angina. Depending who steps up, and if they do, in the case of dealers and commercial banks, precious balance sheet capacity gets squeezed, viz. liquidity and the ability to PPT or speculate elsewhere will suffer, and perhaps other holdings might have to be liquidated?To recap, in four missives between June 10 and July 16th, 2017 we outlined the potential side effects of QT quantitative tightening and how those could lead to:
the FOMC QT (quantitative tightening) might affect $3T in notional bets or net commercial longs in 90 day Eurodollar futures
A larger float of available bonds for others to purchase and perhaps less bond purchases? might result in declining bond prices and rising yields
When bonds get bought, dollars get taken out of circulation. Less dollars, higher dollar. Now consider [bonds being sold] then reverse the last statement. Potential for less dollar volume in bond sales, more dollars floating, lower dollar.
Open market effects can include higher cost of loan funds and operating costs, further reducing profits and cash flow.
Precious balance sheet capacity gets squeezed, viz. liquidity and the ability to PPT or speculate elsewhere will suffer, and perhaps other holdings might have to be liquidated?
QE purchases ending in October 2014, were telegraphed in the July FOMC minutes release, which precipitated a 75% collapse in oil pricesWould any of these possibilities transpire in the next seven months? With regard to reasons for a market dip or free fall? As we will continue our theme next week in Minutia and History Repeating? Part 2, more to come, stay tuned, no flippin.
And now this...
Comments
https://en.wikipedia.org/wiki/Quantitative_easing
And OT, Operation Twist, restructured, i.e., refinanced, like a home mortgage (e.g., home owners HARP’s underwater refinance program expires December 2018), the Gov’ts existing debt load (#1 ran from Sept. 2011 thru Jun. 2012 and involved the restructuring of $400 billion in Fed assets. #2 ran from Jul. 2012 thru Dec. 2012 and restructured $267 billion).
The GFC's world-wide “flight to safe-assets” contributed to an excess of savings over investment opportunities ushered in by chronically deficient AD (secular stagnation). That simultaneously reduced the demand for loan-funds and released the supply of available credit, foreign denominated proffered savings.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614c.htm
“the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). By increasing the amount of longer-term Treasury securities and agency MBS on the Federal Reserve's balance sheet, and thereby reducing the amount of longer-term Treasury securities and agency MBS that the public would have held otherwise, these purchase programs put downward pressure on longer-term interest rates”
https://www.federalreserve.gov/econres/notes/feds-notes/effect-of-the-federal-
reserves-securities-holdings-on-longer-term-interest-rates-20170420.htm
Any recovery in the economy will present a "catch 22" situation. An upturn in the economy will add increased private demand for loan funds, to the insatiable demands of the federal government. The consequent rise in interest rates will effectively abort any recovery. A drastic reduction in government expenditures below the projected levels is the only path to pursue if we are to avoid an unprecedented period of stagnation.
Here comes a VAT.
Dr. Richard G. Anderson (the world’s leading guru on bank reserves): “There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are not binding. But banks need “central bank deposits” for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets.”
The FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of interbank and correspondent bank payments by and large using their “costless" excess reserve balances).
Dr. Richard G. Anderson: “As I tell many audiences, the FOMC targets the federal funds rate, nominally the rate banks charge each other on overnight loans of deposits at the Fed. In fact, what the NY Open market Desk sets each day is the one-day repo rate on Treasuries, that is, the one-day cost-of-carry on government bonds. This is the true policy instrument -- and it affects huge amounts of money (essentially, the one-day return on all government securities), while fed funds transactions daily, in comparison, are a trivial amount. Folks who actually deal in money markets know this; others usually do not.”
Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-parties is largely unpredictable, so too now is the volume and rate of expansion in the money stock on even a quarter-to-quarter basis. FOMC policy has now been capriciously undermined by turning excess reserves into bank earning assets.
The Fed has emasculated its “open market power”, the power to instantaneously alter the money stock and aggregate monetary purchasing power, AD. “Pushing on a string” should have only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" which was terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.
Unfortunately, the FOMC didn’t couch its instructions / directive in terms of reserves available for private non-bank deposits (RPDs), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974. Nor did it use the FOMC's Sept 1966 – Sept 1969 proviso: "bank credit proxy" consisting of daily average member bank deposits subject to reserve requirements, because, according to Dr. Richard Anderson, legal reserves “are driven by payments”.
No, the Manager of System’s Open Market Account at the FRB-NY’s “trading desk” (executing purchases and sale operations on behalf of the system), doesn’t gauge the volume and timing of its OMOs in terms of the amount and desired rate of increase of member bank’s gratis and complicit reserves (aka, “RICCI” flow), but rather in terms of the levels of an administered policy rate (explicitly, the interest rates banks charge other banks on excess balances with the Federal Reserve, implicitly, the one-day cost of credit on all gov’t securities).
So is the Fed “tight” or “easy”. The 2017 decline in the exchange value of the U.S. $ implies that twin deficit financing was temporarily inflationary.
01/1/2017 ,,,,, 0.13 ,,,,, 0.19
02/1/2017 ,,,,, 0.08 ,,,,, 0.16
03/1/2017 ,,,,, 0.06 ,,,,, 0.13
04/1/2017 ,,,,, 0.08 ,,,,, 0.18
05/1/2017 ,,,,, 0.09 ,,,,, 0.23
06/1/2017 ,,,,, 0.07 ,,,,, 0.19
07/1/2017 ,,,,, 0.07 ,,,,, 0.16 commodities & rates bottom
08/1/2017 ,,,,, 0.06 ,,,,, 0.20
09/1/2017 ,,,,, 0.06 ,,,,, 0.21
10/1/2017 ,,,,, 0.01 ,,,,, 0.21
11/1/2017 ,,,,, 0.03 ,,,,, 0.19
12/1/2017 ,,,,, 0.05 ,,,,, 0.11
01/1/2018 ,,,,, 0.01 ,,,,, 0.17
02/1/2018 ,,,,, 0.00 ,,,,, 0.18 (short commodities/buy bonds)
03/1/2018 ,,,,, 0.00 ,,,,, 0.14
04/1/2018 ,,,,, 0.00 ,,,,, 0.11
05/1/2018 ,,,,, 0.00 ,,,,, 0.12
06/1/2018 ,,,,, 0.00 ,,,,, 0.09
07/1/2018 ,,,,, 0.00 ,,,,, 0.09
08/1/2018 ,,,,, 0.00 ,,,,, 0.07
09/1/2018 ,,,,, 0.00 ,,,,, 0.07
10/1/2018 ,,,,, 0.00 ,,,,, 0.06
11/1/2018 ,,,,, 0.00 ,,,,, 0.06
Jun 25, 2017. 02:54 PMLink
This is the most recent trajectory, and it’s one that’s matching:
Parse: date; real-output; inflation
1/1/2018 ,,,,, 0.09 ,,,,, 0.27
2/1/2018 ,,,,, 0.14 ,,,,, 0.34 buy bonds
3/1/2018 ,,,,, 0.12 ,,,,, 0.30
4/1/2018 ,,,,, 0.11 ,,,,, 0.27
5/1/2018 ,,,,, 0.11 ,,,,, 0.27
6/1/2018 ,,,,, 0.11 ,,,,, 0.25
7/1/2018 ,,,,, 0.12 ,,,,, 0.24
8/1/2018 ,,,,, 0.09 ,,,,, 0.22
9/1/2018 ,,,,, 0.08 ,,,,, 0.22
Inflation and R-gDp both peak this February.
Booth goes on (and I agree), The Fed leaders we entrusted with our financial fate had in fact precipitated the crisis”. The fact is that Bankrupt-u-Bernanke caused the GFC all by himself.
…“We never had a decline in house prices on a nationwide basis,” said Bernanke. “So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”
“William Dudley, then chief economist at Goldman Sachs, issued a report on systemic risk, monetary policy, and bubbles. He either couldn’t or wouldn’t acknowledge that the Unites states was in the middle of a big fat housing bubble.”
“But Dudley helpfully pointed out that the Federal Reserve “argues that asset prices should be considered in setting monetary policy only to the extent that movements in asset prices are anticipated to influence output and inflation.
“It is impossible to other achieve the central bank’s mandate in managing the trade-off between growth and inflation over the near term and also limit asset bubbles,” he said.
There is a regime change coming. No longer will supply side schedules determine the level of interest rates.
The markets used to be easy. They have become more difficult. Ratings agencies could downgrade gov’t debt. Trillion dollar fiscal deficits will become the norm.
Today the existing data sources are non-conforming ("based upon statistical aggregates where data cannot be compiled accurately or in a manner which conforms to rigid theoretical concepts, & the entire approach tends to be ex posit and static").
Whereas during 2017, inflation accelerated, during the rest of 2018, inflation will decelerate. If bonds yields are primarily driven by inflation and inflation expectations, then bonds are a buy. However, there are beginning to be some caveats, e.g., the twin deficits. Federal Deficit spending will ultimately begin to crowd out private sector borrowing (probably in 2019).
See: "Failing’ bond auctions are the real reason behind the climb in yields, strategist says"
https://www.cnbc.com/amp/2018/02/14/us-treasury-yield-climb-may-be-due-to-failing-bond-auctions.html
No longer apply.
What if the central bank decided to no longer issue bonds. Or just decided to buy everything themselves.
http://bilbo.economicoutlook.net/blog/?p=11527