Fed Buys $587 Billion In Bonds In Past Week, 2.7% Of GDP, Just As Foreign Central Banks Start To Liquidate

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Fed Buys $587 Billion In Bonds In Past Week, 2.7% Of GDP, Just As Foreign Central Banks Start To Liquidate

Having moved from "Not QE" (or QE4 as it was correctly called), to the $750BN QE5 which came and went with the blink of an eye, to the Fed's open-ended and unlimited QEnfinity in the span of one week, the full "shock and awe" of the Fed's money printer is now on full display, and in just the past week, from March 19 to Marc

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h 25, the Fed has purchased $587BN in securities ($375BN in TSYs, $212BN in MBS), or roughly 2.7% of the $21.4TN in US GDP.

This means that as of Wednesday close, when accounting for last week's repo operations, the Fed's balance sheet has increased by roughly $650BN, bringing it to just over $5.3 trillion, an increase of $1.2 trillion in the past two week, or roughly 5.6% of US GDP.

Some more scary statistics: if the Fed continues QE at the current pace of $625 billion per week, the Fed's balance sheet will hit $10 trillion by June, or just below 50% of US GDP. Even assuming the Fed eases back of the gas pedal, its balance sheet is almost certain to hit $7 trillion by June.

Which is hardly an accident: one look at the Treasury securities held in custody at the Fed shows that the past two weeks have seen a whopping $50BN in foreign central bank sales, a 1.7% drop which was the highest in six years since Russia pulled over $100BN in TSYs from the Fed at the start of the Crimean war in 2014.

As Bloomberg observes, the selling may have contributed to record volatility in the Treasury market and prompted the Fed’s intervention. More importantly, it also means that the biggest buyer of US Treasurys in the past decade, foreign official institutions (i.e., central banks and reserve managers) are now sellers, so now the U.S. government needs private investors to soak up the ever increasing debt issuance.

And since those are busy avoiding a deadly virus, it means that only the Fed now can fund the exploding US budget deficit... which is precisely what it is doing.

Ironically, it was back on Jan 28, just as the world was learning about the coronavirus pandemic that we showed the long-term trajectory of the Fed's balance sheet as calculated by the CBO...

... when we said when we said that "MMT will be launched after the next financial crisis, and which will see the Fed directly monetize US debt issuance from the Treasury until the dollar finally loses its reserve currency status."

We were right about the first part. Now we just have to wait for the second.

Tyler Durden

Wed, 03/25/2020 - 22:10

The European Central Bank Is Being Stretched To Its Breaking Point In Italy

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The European Central Bank Is Being Stretched To Its Breaking Point In Italy

Authored by Fabrizio Ferrari via The Mises Institute,

When Mario Draghi’s tenure was approaching its end, I argued for a sterner governor for the European Central Bank (ECB); hence, I was not even slightly enthusiastic when Draghi’s successor turned out to be Christine Lagarde - a patent dove, as can be inferred from her ideological proximity to a famous Keynesi

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an like Olivier Blanchard.

However, I am here to defend the stance she took with her March 12 speech - in which, addressing the economic turmoil spurred by the coronavirus crisis, she declared that it was not a central banker’s job to prevent the occurrence of spreads on financial markets - which has been fiercely attacked both by Italian media and politicians, and even by Italian president Sergio Mattarella. There are three reasons why I deem, for once, Lagarde’s viewpoint to be right. These reasons are based in monetary policy theory, in the institutional framework of European Union, and in the current situation of the Italian economy.

The Limits of Monetary Policy

First, we need to understand that what Lagarde stated—that it is not her job to prevent government bonds’ prices in the European Monetary Union (EMU) from diverging—is absolutely correct from a technical perspective. Indeed, if we consider the theoretical approach to the role of the central bank as a lender of last resort as conceived by both Walter Bagehot and Henry Thornton (both recognized and respected even by mainstream neoclassical economists), we find that actually there should be no room for monetary policy to be influencing assets’ relative prices. In fact, the role of a central bank (i.e., of a lender of last resort in a fiat money and fractional reserve banking system) should be to grant liquidity to temporarily illiquid—but solvent, i.e., structurally sound—commercial banks. In no way should monetary policy be involved in steering (and messing with) asset prices—as has regrettably been occurring in the EMU since the beginning of QE in March 2015—since central banks’ interferences distort the natural market formation of prices, bringing about Cantillon effects and spurring both malinvestment and excessive risk taking (through generally lowering returns on assets and pushing savers to invest in riskier ones).

It is evident that the ECB has already been a hugely interventionist central bank; suffice it to mention that currently the ECB’s balance sheet is roughly 40 percent of the EMU’s GDP and that the European banking system is already flooded with €1.5 trillion in excessive reserves. Hence, it is also frankly hard to see how further room for monetary policy interference in a market capitalist economy could be justifiable—even conceding to hardened shortsighted Keynesians that the current coronavirus shock is a purely demand-side one, which it absolutely is not.

The Institutional Framework of the European Union

Here the argument is pretty simple and straightforward. First of all, we need to remember that EMU is a monetary union in which European national states retain fiscal sovereignty. The problem with such a framework is that Italian monetary nationalists, Keynesian and MMTer (modern monetary theory) pseudoeconomists, and national socialist politicians interpret this international deal as follows: “burdens should be shouldered together and addressed with a common tool (i.e., the currency we all share, the euro), whereas benefits should be enjoyed privately by member states.” Indeed, they do not see (or pretend not to see) that the only way—even under a Keynesian paradigm—whereby monetary policy could be helpful in such a crisis would be if the fiscal policy decision level were the same as the monetary policy one.

This is exactly why the current EMU’s institutional framework—developed in the unideal world we live in, i.e., with fiat money, fractional reserve, and Keynesian macroeconomics—already provides OMT (outright monetary transactions), that is, a safety net for those governments (such as the current Italian one) begging for a monetary policy shield to cover their debt costs. Obviously enough, however, given that the euro is the currency of all Europeans (and not only of Italians), the regulatory framework of OMT requires the applying state to sign a Memorandum of Understanding, which basically transfers its fiscal sovereignty at the European level. So, it is evident that the tool available to the Italian government in order to reduce its financing costs already exists and can be triggered whenever Italian politicians would like to do so.

The problem is that Italian politicians want to squander the dowry of every European (i.e., the euro, which would be inflated and/or whose massive unbalanced injection would cause price distortions) without agreeing to implement those fiscal and institutional reforms that by themselves would suffice to better their public finance lot and to reduce the funding cost of their debt. In other words, Italians want to be saved by the EU without being subject to any conditions. Secondly, we ought not to forget that the ECB has already helped Italian governments a lot: the Public Sector Purchasing Program, indeed, has so far (December 2019) bought roughly €370 billion in Italian bonds and €530 billion in German ones; however, German GDP is now (2019) almost twice as much as Italy's—meaning that in terms of the proportion of government bond purchases to national GDP Italy has been hugely privileged (530/370 = 1.4) through disproportionate monetary policy support for its public debt funding cost.

The Current Situation of the Italian Economy

To put it bluntly, there is nothing monetary policy could do now for the Italian situation. Italy is a paramount example of a capital-consuming economy, where the investment level has plummeted (Figure 1) and labor productivity stagnates (Figure 2).

Figure 1

Figure 2 : GDP per hour worked (Germany, Italy, EMU), 2010 = 100.

Source: OECD (2020), GDP per hour worked (indicator). Accessed Mar. 13, 2020. DOI: 10.1787/1439e590-en.

Moreover, unfavorable demography (almost one Italian in four is older than 65) and decreasing natality (on average roughly half as many children as were born in the 1950s and '60s are born annually) put further stress on the frail pension system—which has was very poorly devised in the 1970s and '80s.

In other words, there exists no magic monetary or financial trick that can save Italy now: the only available path is to reduce pension expenditures (which are the second highest in proportion to GDP among Organisation for Economic Co-operation and Development (OECD) members, immediately after Greece's) and employ these resources in healthcare and tax reductions. However, those are all policies that do not (or should not) at all concern a central banker, and they are exactly the policies that other European partners would request Italy to enact in order to apply for OMT.

Concluding, Lagarde might have been untoward in her timing and the form of her speech; nonetheless, the substance is ironclad and sound. Italy cannot keep whining and hoping for external help: it needs to handle its fate and must take the courageous—and socially and politically tough—path that it has avoided so far. Economies grow—as Hayekian business cycle theory teaches—only if agents are willing to forego consumption today and save and invest in order to deliver higher output (thanks to increased productivity) tomorrow. There is no shortcut.

Tyler Durden

Wed, 03/25/2020 - 02:00

"Liquidity Support Is Not Enough": Why Central Banks Are Powerless To Fix This Crisis

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"Liquidity Support Is Not Enough": Why Central Banks Are Powerless To Fix This Crisis

Something strange happened when the Fed, and all other central banks went all in, and fired one bazooka after another in the past few days.

Nothing. For the first time since the financial crisis, perhaps ever, the masters of the monetary universe unleashed a liquidity tsunami and risk assets barely responded.

Perhaps this is just the

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start: in a note from Barclays strategist Jeffrey Meli, he writes that while the Federal Reserve has been providing abundant liquidity and other measures to unclog balance sheets, more can be done. According to Meli, there’s additional measures that could be taken on the regulatory front to improve the distribution of liquidity, of which the important would be loosening capital requirements through the leverage ratio and a reduction in risk-weighted assets for households and business loans.

"The Fed took a step in this direction with the MMLF," by explicitly eliminating money market risk and capital/balance sheet burdens on the banking system, Meli wrote adding that "this lens is important when assessing the potential efficacy of new programs, to the extent that they represent risk transfer as well as liquidity relief we believe they will be more effective."

However, even these steps are likely not enough: "we also worry liquidity support is not enough," the strategists wrote in the note. One potential solution would be granting the Fed temporary emergency authority to purchase a wider array of municipal securities, as well as IG corporate debt and loans, something which is likely coming after Wednesday's Bernanke/Yellen op-ed.

Another solution according to the Barclays analyst is fiscal support to households in the form of direct payments, tax rebates, or payroll tax deductions and direct assistance and loan guarantees to virus-affected industries such as airlines. And with the third fiscal package now in the works, and said to be around $1.3 trillion, this too is likely coming.

But beneath the rational justifications and explanations of what the Fed can or can not do, there is a more overarching issue: perhaps the Fed simply can't fix a crisis such as this one, in which the entire world is grinding to a halt, and where trillions in cash flows that would have been there, simply won't due to the unprecedented discontinuity in business.

That's the ominous point raised by Deutsche Bank's George Saravelos who writes that unlike the 2007-08 banking crisis, today the stress is driven by rising corporate default risk. As the global economy freezes, banks are hoarding dollars anticipating greater liquidity needs from companies and worried about corporate defaults. This, in turn, is preventing interest rate cuts in the US from being passed on to the FX market, resulting in hairraising moves such as Wednesday multiple Asian FX flash crashes. Indeed, despite the Fed slashing rates, the FX-implied interest rate differential has widened in favor of the dollar last week. Some more details below:

Dollar funding stress is back. Three-month dollar libor fixed higher today despite the Fed interest rate cut and cross-currency basis is widening out. What is driving the move? 

Back in 2007-08 it was fear of counterparty default risk between banks that led to banks refusing to lend dollars. This time round, bank credit spreads are widening out much less compared to corporates. The market is more concerned about company, not bank defaults (chart 2). By extension, the shortage of dollar liquidity is not because banks are afraid of each other, but because they are worried about their clients.

All of this goes right to what we said over the weekend when we discussed about the $12 trillion global dollar margin call.

Addressing this point, Saravellos writes that he is worried that fixing this dollar shortage may be more difficult than policymakers think. And here is the $64 trillion problem as framed so well by the FX strategist: the source of liquidity stress is “real” companies and people, but central banks only have funding lines with banks.

So how can the dollar shortage be fixed: after all the Fed has already thrown the "kitchen sink" at the problem and the dollar keeps rising?  

Well, back in 2007-08 the funding stress was more acute, but perversely it was also easier to fix as it was much more focused and concentrated as the shortages originated within the banks themselves – so long as banks were able to access liquidity or receive government guarantees the immediate tension was resolved. This time the challenge is far deeper: the dollar shortage is emanating from the real economy as corporates are facing an immediate liquidity crunch.

Meanwhile, as risk assets tumble and as the funding crisis get worse, banks’ are swept into a negative feedback loop as their willingness to lend is declining because default risk is rising. Worse, debt moratoria as some have suggested, won’t help improve liquidity. Central banks and governments will have to step in to guarantee corporate creditworthiness if liquidity is to be restored.

To be sure, the massive new QE announced by the Fed on Sunday will help increase dollar liquidity in the global financial system. But the money needs to flow down to the real economy. The Term Asset Lending Facility (TALF) from 2008 is an example of government-guaranteed funding facility, but its size was small and tailored to standardized loan pools of asset-backed securities.

The scale of the challenge this time is much more immense, and as Saravelos warns, "it may be more difficult than 2008." Instead, and as Zoltan Pozsar wrote earlier this week, "governments may need to step in to directly guarantee liquidity provision to thousands of corporates and even people."

With markets seemingly broken beyond repair, with every day that normalization fails to arrive meaning one day more that the global economy loses to the shutdown chaos of the Global Covid Crisis, and every single central bank intervention so far failing to restore confidence, one way or another we will get there. And the fastest way we will get there is for stocks to crash even more: because there is nothing more "stimulating" for politicians than watching an army of people armed with pitchforks get bigger with every percent the stock market loses. The only question is how much longer until we hit the proverbial breaking point.

Tyler Durden

Thu, 03/19/2020 - 18:14

Visualizing Central Bank Gold Buying And Gold Repatriation

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Visualizing Central Bank Gold Buying And Gold Repatriation

Submitted by BullionStar.com,

Gold buying by the worlds’ central banks is now at a 50 year high, with sovereign gold buyers having added a net 650 tonnes of physical gold to their strategic monetary reserves in each of the years 2018 and 2019.

Central banks purchase gold for a number of reasons, chief among them being that gold provides protect

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ion in times of acute market crisis and stress.

Gold is “a major line of defense under extreme market conditions”, says the Hungarian central bank.

Gold provides a kind of anchor of trust, especially in times of stress and crisis”, states the Polish central bank.

According to the German Bundesbank, gold is a type of emergency reserve which can also be used in crisis situations”.

With the entire financial and monetary system currently undergoing monumental dislocations across all asset classes, the gold accumulation and holding strategies of these central banks look more shrewd now than ever. If/when the monetary system is collapsing, gold will most likely be the anchor in the monetary reset stemming from the collapse.

Many influential central banks have also been withdrawing thousands of tonnes of gold from the Bank of England and US Federal Reserve vaults and flying it back to the security and safety of their home countries.

But why are central banks buying more gold bars than at any time since 1971? And what has spooked countries such as Germany, the Netherlands, Poland and Hungary that they no longer have confidence in holding their sovereign gold reserves at custodian vaults in London and New York?

With this visually impressive new infographic from BullionStar, you can now find the answers, including:

  • Which central banks in the world are leading the gold buying scramble?

  • How central bank gold buying mirrors the flow of gold from west to east?

  • What are the motivations of these countries in buying vast quantities of gold?

  • Which leading central banks have airlifted gold back to their home countries?

  • How much gold in total have these repatriating central banks brought back?

  • Why has trust eroded towards the Bank of England and New York Fed vaults?

  • Why gold is likely the strategic anchor of a new future monetary system?

To embed this infographic on your site, copy and paste the code below

Central Bank Gold Buying and Gold Repatriation – An infographic hosted at BullionStar.com

To embed this infographic on your site, copy and past the code below<a href="https://www.bullionstar.com/blogs/bullionstar/infographic-central-bank-…"><img src="https://static.bullionstar.com/blogs/uploads/2020/03/infographic-centra…" width="660"><p> Central Bank Gold Buying and Gold Repatriation – An infographic hosted at <a href="https://www.bullionstar.com">BullionStar.com</a></p>

This infographic from BullionStar.com was originally published on the BullionStar website under the same title "Infographic: Central Bank Gold Buying and Gold Repatriation".


Tyler Durden

Wed, 03/18/2020 - 19:40

Foreign Central Banks Dump Treasuries For 17th Straight Month, Continue To Hoard More Gold

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Foreign Central Banks Dump Treasuries For 17th Straight Month, Continue To Hoard More Gold

For the first time since June, China added to its US Treasury holdings in January (the latest month from TIC data).

The total for China -- the second-largest holder of U.S. government debt after Japan - rose $8.7 billion in January to $1.08 trillion.

Source: Bloomberg

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The coming months’ data will help show if the virus’s blow to China’s economy is starting to pressure central bank officials to sell Treasuries to support the yuan, a step they’ve avoided over the past several years, preferring instead to manage the currency via the daily fixing, says Mark Sobel, former IMF and Treasury official and chair of the OMFIF.

If COVID-19 hit the yuan hard, he said, “China might intervene to cushion any decline.”

Japan remains the largest foreign holder with $1.21 trillion, as the value of its holdings rose $56.8 billion at the start of the year, the data showed.

Source: Bloomberg

Overall, Foreigners were net buyers of US assets excluding corporate debt

  • Foreign net buying of Treasuries at $25.6b

  • Foreign net buying of equities at $2b

  • Foreign net selling of corporate debt at $31.8b

  • Foreign net buying of agency debt at $32.3b

But foreign central banks dumped US Treasuries for the 17th straight month...

Source: Bloomberg

But, while reducing of exposure to US Treasuries continues worldwide, Central banks started out 2020 buying more gold.

Source: Bloomberg

On net, central banks added 21.5 tons of gold to their reserves in January, according to the latest data from the World Gold Council.

Central bank demand came in at 650.3 tons in 2019. That was the second-highest level of annual purchases for 50 years, just slightly below the 2018 net purchases of 656.2 tons. According to the WGC, 2018 marked the highest level of annual net central bank gold purchases since the suspension of dollar convertibility into gold in 1971, and the second-highest annual total on record.

The World Gold Council bases its data on information submitted to the International Monetary Fund.

Turkey was the leading gold-buyer in January. The Turks added 16.2 tons of gold to their reserves.

Russia continued to stockpile the yellow metal, adding another 8.1 tons to their hoard. Russia’s quest for gold has paid off in a big way. The Russian Central Bank’s gold reserves topped $100 billion in September 2019 thanks to continued buying and surging prices.

The Russians have been buying gold for the last several years in an effort to diversify away from the US dollar.  Russian gold reserves increased 274.3 tons in 2018, marking the fourth consecutive year of plus-200 ton growth. Meanwhile, the Russians sold off nearly all of its US Treasury holdings. According to Bank of America analysts,  the amount of US dollars in Russian reserves fell from 46% to 22% in 2018.

Mongolia and Kazakhstan both added 1 ton of gold to their reserves in January. The only other buyer was Greece at 0.1 tons.

There were two significant net-sellers – Uzbekistan (2.2t) and Qatar (1.6t).

The People’s Bank of China did not report any gold purchases for the fourth straight month  It’s not uncommon for China to go silent and then suddenly announce a large increase in reserves.

January’s net gold purchases represented a 57% decline year-on-year. World Gold Council analyst Krishan Gopaul said it was too early to determine what this could mean for 2020.

World Gold Council director of market intelligence Alistair Hewitt said there are two major factors driving central banks to buy gold – geopolitical instability and extraordinarily loose monetary policy.

Central banks are looking toward gold to balance some of that risk. We’ve also got negative rates and yields for a large number of sovereign bonds.”

“This recent trend shouldn’t be ignored. But nor should we also lose sight of the fact that central banks remain net purchasers, even if at a lower level than we have come to expect to in the last two years.”

Peter Schiff has talked about central bank gold-buying. He has noted that the US went off the gold standard in 1971, but he thinks the world is going to go back on it.

The days where the dollar is the reserve currency are numbered and we’re going back to basics. You know, everything old is new again. Gold was money in the past and it will be money again in the future, and central banks that are smart enough to read that writing on the wall are increasing their gold reserves now.”

Ron Paul made a similar point in an episode of the Liberty report. He said foreign central banks are increasingly gravitating to sound money like gold and ripping themselves away from the Fed’s dollar.

The central banks of the world are looking at gold again.”

Tyler Durden

Mon, 03/16/2020 - 16:12

Even The Most Powerful Central Banks Cannot Save Us

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Even The Most Powerful Central Banks Cannot Save Us

Authored by Ye Xie, macro commentator at Bloomberg

Even the Most-Powerful Central Banks Cannot Save Us

First, the European Central Bank tried and failed to calm the market. Then, the Fed brought out the bazooka and it turned out to be a dud.

What the world’s two most-powerful central banks showed Thursday was that they are powerless

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in dealing with a bug. That’s bad news for global markets, and China is no exception.

Literally, there was no place to hide. Gold sold off, along with stocks, credit and oil, for a second day.

European stocks tumbled the most on record and U.S. investment-grade bond funds suffered unprecedented outflows.

It happened even as the ECB boosted its QE and liquidity tools, while the Fed resumed its own asset purchase programs.

What’s more worrying is that the stress is emerging in dollar funding markets as banks and investors scramble for the U.S. currency to hunker down. You can see the dollar hoarding in the widening cross-currency basis swap, and falling CNH forwards.

As a result, the dollar rallied and the offshore yuan tumbled the most since December.

The Fed stepped in quickly Thursday with massive repo operations to alleviate the funding stress. Keep an eye on that to see if it succeeds in calming markets down. If not, the yuan could weaken along with others.

China clearly is not in the eye of the storm. Yet its currency and equity markets are now down for the year. The problem is that the contagion of the virus is still growing exponentially globally.  The following chart shows how the number of confirmed coronavirus cases in the U.S. is following the same path as Italy.

Until other governments start to panic, the worst is yet to come.

Tyler Durden

Thu, 03/12/2020 - 22:45

The Good, Bad, & Ugly Of Virus Response: El-Erian Admits Govts & Central Banks Can Only Do So Much

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The Good, Bad, & Ugly Of Virus Response: El-Erian Admits Govts & Central Banks Can Only Do So Much

Authored by Mohamed El-Erian, op-ed via Bloomberg,

Look for this week to be full of news about governments and central banks signaling their “whatever it takes” willingness to take additional policy measures to fight the contractionary impact of the coronavirus on virtually every economy around the world. Already, the Fede

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ral Reserve signaled on Friday readiness to loosen monetary conditions in the United States while Italy announced on Sunday a “shock therapy” of fiscal measures.

As more announcements materialize during the week, it will be crystal clear that the question will not be about the willingness to act but about the effectiveness of those actions. For the most part, the answer will be only partly satisfactory in the short term until two underlying health conditions change. Less obvious will be the need to weigh immediate benefits — partial and as necessary as they are — against the possibility of longer-term unintended consequences associated with the inevitable use of ill-suited policy tools for the task at hand. Those include more borrowing of growth from the future and even greater reliance on activities bolstered by central bank liquidity injections.

An increasing number of sectors and countries are experiencing sudden-stop dynamics as the economic effects of the coronavirus spread more widely around the world. Both demand and supply are being hit hard and in multiple ways. For example, News Corp., the owner of the Wall Street Journal, banned nonessential travel for its employees this weekend; more conferences are being cancelled around the world; airlines are reducing flights; and companies are asking employees to work from home.

It’s a dynamic that builds on itself in the short term, fueled by a “fear virus” and other behavioral traits that engender paralysis and insecurity. It also promotes self-reinforcing vicious economic cycles with adverse social, political and institutional spillover effects, amplified by the considerable risk of pockets of financial market malfunctioning.

The impact of all this will be a repeat internationally of what I called on Friday the “shock number” out of China: The manufacturing purchasing managers’ index for February not only came in well below expectations — 35.7 compared with the consensus estimate of 45.0 — but was also the worst reading on record. Several countries now face a high likelihood of recession, including Germany, Italy, Japan and Singapore, to name just a few, and some of the more financially stressed ones will experience a rise in credit risk and increasing threats of outright credit rationing.

With that, a growing number of companies will again be forced to revise downward their earnings guidance for the year or withdraw it altogether because of the exceptional uncertainties. Some, with limited cash cushions and maturing debt like their sovereign counterparts, will also have to worry about their refunding prospects, with mounting risk of higher defaults for the most exposed sectors.

In light of all this, it should come as no surprise that a growing number of countries will be announcing emergency stimulus measures. Indeed, those already signaled contain important information:

Friday’s rare four-line statement by the Fed pointed to the “evolving risks” facing the U.S. economy and the central bank’s readiness to deploy “tools and act as appropriate to support the economy.” Just like the Fed’s dramatic 180-degree policy turn a year ago from a multiyear path of raising rates to one of immediate cuts during the year, this opens the door for other central banks to loosen financial conditions. If not coordinated, it will be another year of correlated monetary policy stimulus, in which central bankers respond to the same economic conditions but do not cooperate.

Italy’s announcement highlights not just the more targeted policy focus — tax credits for companies suffering large hits to revenue and additional help to the health sector — but also the willingness of a government to act even in the context of prior fiscal constraints and potential tensions with Brussels.

But the considerable willingness of governments and central banks to act should not be confused with effectiveness.

For the reasons I have detailed before, countering an economic sudden stop, such as the one connected with the coronavirus, is a lot harder in the immediate term than resolving a financial sudden stop. It requires not just well-targeted national and local responses but also internationally coordinated, and not just correlated, efforts. (Think, for example, of the April 2009 G-20 meeting in London.) And, given the use of rapidly designed and poorly suited policy tools, it inevitably involves some collateral damage and unintended consequences, especially for longer-term economic well-being and financial stability.

The best that fiscal and monetary policy interventions can realistically hope for in the next few weeks and months is to:

  • Support sectors critical to a holistic recovery, medical services in particular.

  • Target the most vulnerable, responsive and highly consequential contracting sectors.

  • Provide focused relief to corporate and household balance sheets.

  • Bolster emergency assistance to countries overwhelmed by this exogenous and external shock.

  • Counter pockets of market malfunctioning through timely direct liquidity injections.

  • Provide increasing clarity as to what lies ahead for the global economy, national responses and global policy coordination.

These efforts, however, will not be able to engineer in the short term a generalized global and sustained recovery of the three main drivers of economic activity: consumption, investment and trade.

Consumption will be curtailed by households’ lack of confidence to interact in the economy. Weak demand prospects, as well as disrupted supply chains, will limit corporate investment spending. Trade in goods and services will languish as more countries impose restrictions in their quest to protect the health and safety of their citizens.

To decisively turn the corner, the global economy needs evidence of two health accomplishments:

  1. success in containing the spread of the virus, particularly when it comes to community transmission; and

  2. sustained success in illness recovery and avoidance, with the latter best done through the availability of a new vaccine.

As for financial markets, look for significant price and liquidity swings as traders navigate the tug-of-war between deepening economic and corporate damage on the one hand and central bank liquidity injections, policy announcements and health news on the other.

The immediate opportunity for investors will differ depending on whether they favor highly tactical drivers (that is, day trading and exploiting arbitrage opportunities because of indiscriminate behavior in markets) or secular and structural ones (those looking for longer-term portfolio positioning that can withstand the considerable volatility ahead).

Tyler Durden

Mon, 03/02/2020 - 05:00

Global Demographic Fact Vs. Central Bank Sorcery

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Global Demographic Fact Vs. Central Bank Sorcery

Authored by Chris Hamilton via Econimica blog,


  • The annual growth of the working-age population is the organic baseline for growth in national, regional, and global consumption.

  • However, since World War II, interest rate policy has moved inversely of annual working-age population growth, to

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    incent ever more debt as working-age population growth has decelerated to nothing.

  • Interestingly, total annual change in energy consumption has mirrored annual working-age population growth.except where synthetic growth has been temporarily substituted to maintain the appearance of growth (aka, China).

  • Eventually, the inorganically rising consumption and asset prices will return to their organic baseline.and that will be a very rude new dawn for those who believed in infinite growth.

The 1st world economy lives within a fractional reserve banking system.  In a fractional reserve system, one persons debt is the systems new money, as money is lent into existence. At a progressive rate since 1980, it has been the combination of decelerating working-age population growth, declining interest rates, and ramping utilization of privately loaned debt that has simultaneously been the basis for increasing consumption and the creation of new money.  As borrowers undertook new loans prior to 2008, this borrowing was the primary means of monetary growth.  However, the changing demography since 2008  has changed everything as population growth has shifted from young to old...and federal governments and central banks have taken over money creation via monetization resulting in asset inflation.

  1. New debt is primarily undertaken in the 1st world nations where income and savings are higher but also credit is readily available and standards for this credit vary widely, by asset type (zero for student loans, low for vehicles, moderate to high for homes...since '07).

  2. It is primarily the working-age population that undertakes new debt while those in the post working age population tend to deleverage and pay down existing loans (this has the opposite monetary effect of destroying money). 

  3. From 1950 to 2008, it was the significantly larger developed world growth of the working-age population over that of the post working-age population that supported new debt, money creation, and rising asset prices…the current and future reversal of these proportions is the likely rationale for federal governments and central banks to engage in ZIRP, NIRP, QE, and other activist / experimental policies to offset the demographic driven collapse in the money supply.

  4. The lending amid the declining working age population among the developed world and the decelerating growth among Asia cannot be made up by accelerating demographic growth in Africa.  Global inequality and lack of broadly shared wealth means Africa hasn't the income, savings, and/or access to credit to provide significant global demand.

So, it's the growth of the working-age population in the developed world that is critical for the growth of money within a fractional reserve system.  And that working-age growth need be significantly greater than the growth of the credit averse post working-age population. Growth among the working-age population in Asia (excluding East Asia + Singapore) and/or Africa has relatively little impact as the vast majority there have relatively little income, savings, and/or access to credit.
I divide the world into three mega-regions: developed world, Asia, Africa.

They consist of the following and as of 2020, with following proportions…

Developed World = Western Hemisphere, Oceania, West/East Europe Including Russia), East Asia (China, Japan, Taiwan, S/N Korea)

  • 47% of global working age population but -4% of annual growth in global working age population

    • By 2030, developed world will represent -31% of annual growth in global working-age population

    • By 2040, developed world will represent -19% of annual growth in global working-age population

    • 1st world is 74% of global energy consumption

Asia = (South Asia, Middle East, Central Asia) 

  • 39% of global working-age population but 61% of annual growth in global working-age population

    • By 2030, Asia will represent 59% of annual growth in global working-age population

    • By 2040, Asia will represent 34% of annual growth in global working-age population

    • Asia is 22.5% of global energy consumption


  • 14% of global working-age population but 42% of annual growth in global working age population

    • By 2030, Africa will represent 72% of annual growth in global working-age population

    • By 2040, Africa will represent 85% of annual growth in global working-age population

    • Africa is 3.5% of global energy consumption

Global Working-Age Demography:

The chart below shows total annual growth (in millions) among the 20 to 60-year-old global population. 

Global annual growth of working age adults peaked in 2007.  Since then, annual working age population growth has been decelerating, and by 2030 will be less than half the peak annual growth. What growth remains has shifted to the poorest and turned to outright declines among the relatively wealthier nations.

  • Annual working-age growth in the 1st world has ceased as of 2020, and now outright progressively larger declines will be a secular feature indefinitely.

  • Annual growth among Asia is decelerating and will continue to decelerate indefinitely.

  • Annual growth in Africa is accelerating and will do so through mid-century.

The second chart breaks out the geographical location of the annual 20 to 60 year-old total population growth. This is so critical, because again, it is the far higher incomes, savings, and access to credit among the 1st world working-age population that drives consumption, debt, and resultant money creation (via fractional reserve banking).

Note that the majority of working age population growth was in the 1st world through 1995 and 1st world growth remained a strong feature until 2008. From 2008, the inevitable decline of the 1st world working age population (given the previous decades of declining births and fertility rates...see charts at article end), has meant a collapsing portion of working age growth in the 1st world. And as the chart below details, this 1st world decline is about to get far more severe. Note the portion of growth in Asia will soon peak and begin decelerating rapidly. This leaves a ramping portion of the working age population growth in Africa. This is so important as the population growth of the working-age in Africa is among those with the lowest global incomes (less than 1/10th those of the first world), minimal savings, and little to no access to credit.  This African working age population growth is like multiplying a large number against a tiny fraction. There is little monetary capability for consumption or credit driven demand...there is also no money multiplier.

Impact of Working-Age Demography on Energy Consumption:

Next, I use total energy consumption as the best proxy for real economic capacity and demand. The chart below again splits the world energy consumption among the 1st world, Asia, and Africa (primary energy consumption equals all oil, natural gas, coal, nuclear, and renewable energy consumed in each region). What should be abundantly clear is the 1st world is consuming energy far beyond their share as a population, Asia rising but still far below that of the 1st.  Also noteworthy is the sustained minimal energy consumption of Africa.

Next, looking at energy consumption as a percentage of total consumption by region. Note the percentage growth of consumption in Asia, inverse deceleration of the 1st world energy consumption, and the near non-existence of Africa as a global energy consumer. Africa has consistently consumed only 2% to 4% and shows no signs of imminent increase.

It is clear the 1st world plus Asia do nearly all the consuming (96.5% of the global consuming...true for energy, true for exports, etc.) and these trends show no imminent signs of change and actually it appears with the deceleration taking place in the 1st world, Africa is decelerating with them (details at end of article).  The impacts of the current potential pandemic will only exaggerate the already baked-in decelerations/declines.

Elderly Global Demographics:

But what of the deleveraging elderly?

The next chart focuses on the break-down of the annual 60+ year-old global population growth. As of 2020, the share of elderly (60+ year-olds) around the world is highly skewed to the 1st-world with the following proportions:

  • 1st-world; 65% of 60+ year-olds, 57% of annual growth in elderly

  • Asia; 28% of 60+ year-olds, 35% of annual growth

  • Africa; 7% of 60+ year-olds, 8% of annual growth

60+ year-old annual growth will peak in 2030 and begin decelerating thereafter with annual growth shifting away from first world to Asia and Africa.

Below, the breakdown by region of the still surging growth in 60+ year-olds. At present, the growth is trending toward Asia and away from the 1st world…however, sometime after 2030, the portion of growth in Africa is projected to begin rising and 1st world growth decelerate significantly.

So, by 2030…

  • Global working age population growth will slow by 45%

  • Global working age population growth will shift almost entirely to Africa, decelerate in Asia, and continue declining in the 1st world

  • Global growth in elderly will continue surging, particularly in the 1st world and Asia The impacts on credit/debt utilization and consumption among the declining 1st world working age population should be severely negative with little to no chance for the growth in Africa to overcome the collapsing 1st world demand. With this situation, a negative feedback loop is established for real assets such as homes, commercial real estate, consumer goods (cars, phones, appliances, etc.) and the factories and supply chains that support these. A global decline in real consumption is highly likely as these demographic trends play out and secular economic depression will be the primary feature for decades.

This is the siren song to the central banks to artificially create inflation through monetization rather than rising demand. The current rising asset prices via monetization and interest rate policy misuse is only worsening the eventual workout and rebalancing of the system.

See the full breakdown of regions here...

Tyler Durden

Sat, 02/29/2020 - 11:15

Central Bankers' "Big Dodge"

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Central Bankers' "Big Dodge"

Authored by Sven Henrich via NorthmanTrader.com,

In life you can always tell when someone has something to hide by the way they try to avoid answering a direct question, when they dance, skirt and try to dodge the answer.

In this regard something important happened yesterday, it’s been missed by many, I posted in on my twitter feed, but I wanted to highlight this in a pos

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t so at least people can see it here.

As many of you know I’ve been very much concerned about the possibility that the massive rally since October has been a giant policy mistake by the Fed. Yes they wanted to prevent a recession and yes they reacted to the swoon in December of 2018 by flipping policy and cutting rates 3 times. But each of these 3 rate cuts were actually sold in 2019.

The rally didn’t really take off until the repo crisis forced the Fed into treasury bill buying and repo in October of 2019.

Everything exploded higher, far above any fundamental basis, and markets, already on a multiple expansion train in 2019, just went into the stratosphere continuing this run into February of this year while the Fed continued to go wild:

As of this week the Fed’s holdings of treasuries is now a mere $14B from all time highs and looks to make a new record in March.

Let’s be absolutely crystal clear: This policy was originally born out of a criss, the great financial crisis. The panic of 2008/2009, whatever you want to call it.

The Fed went into panic mode with QE to try to save markets and the economy. And they built that balance sheet for years. It was not until 2018 that they started a process of normalization and it blew up in their face as markets dropped 20% in Q4 of 2018. So then they flipped, started jawboning about stopping the normalization and dangled rate cuts and markets obliged and followed the Fed put like puppies to the morning feeding.

But now look at what happened sine October. An absolute vertical move on the balance sheet. This is panic. This is not orderly buying. They went back in faster then they went out.

And it’s all predicated on a big Fed lie as I called it. “Not QE”. Bullshit. This here has had precisely the same effect, people piling TINA head first into stocks.

We can all see what has happened:

And THIS has been the result:

The largest disconnect in asset prices above underlying GDP in history.

Why is this all so important? Because it’s not sustainable, it’s a bubble, and if the Fed’s policy to fix repo caused all this then the Fed is entirely responsible for what happens when the bubble pops.

Hence I thought it was so important to get a Fed speaker on the record on all this and see what the response would be.

When I heard that Steve Liesman was going to interview Fed Vice Chair Clarida I posed this question on twitter:

The point was to see if Clarida would acknowledge the correlation between the Fed’s treasury bills buying and repo and the impact on asset prices.

I don’t know if Steve saw my question, but I was very pleased to actually seem him ask a derivative of the question.

“Do you worry that with what the Fed has done in terms of inserting a lot of liquidity into the market (Treasury bill buying & repo) has created the recent boom in the stock market?”

Thank you Steve Liesman.

And the response was hugely telling, I call it the big dodge, watch Clarida do everything possible to not answer the question.

You can see the exchange here about 7:00min in:

Clarida’s answer: Tries to skirt/dance with technicals, intent, blah blah, then Steve Liesman pushes him on it when he tries to evade and then Clarida:

“I’ll leave that for others to judge”.

Please. He didn’t want to answer. He can’t. The same way Powell dodged the question. And I tell you why.

If there was no impact on stock prices he could just come out and say it. But since that would be a bold face lie, he can’t deny it. So he hides in a generality, “I’ll leave that for others to judge”. Oh, I’m judging.

And I’m judging that he knows fully well the policy has impacted asset prices. The problem for the Fed is that stocks have reacted much more extremely than they probably expected. And now they have a big fat bubble on their hands.

The Fed created the 2000 bubble with Y2K liquidity injections, they laid the foundation for the housing bubble with easy money policies and then were in denial about that until it blew up in everybody’s face and I submit they are making the same mistake again.

They caused another bubble and now they are in denial mode again. Why? Because they can never admit that the Fed is behind the financial asset bubbles that benefit the few and hurts the most when the bubbles pop.

For if this is true then:

...then the core question perhaps then is this: Why are societies putting up with these organizations that have so much power yet to little accountability to the public, the very public that has absolutely ZERO input as to who runs these organizations whose credibility is highly questionable, who can’t even answer a direct question!!

The general public has zero clue about what central banks are, what they do, and how they impact their lives. The general perception may be that central bankers are heroes who save the economy, a perception propagated by the media:

No, the mathematical truth presents a very much different alternative view: The top 10% keep reaping all the wealth benefits associated with artificially propped up asset prices while the bottom 90% gets settled with all the debt that will hang like a chain around everybody’s neck when the bubble pops.

No, central bankers are not heroes. Rather:

And once the general population figures this out the resulting outcry will challenge the power status quo of central bankers around the world.

Perhaps this explains why central bankers are so desperate trying to avoid the next recession, because as far as bubbles are concerned they’ve created an absolute beast here. They are afraid and rightly so. They are so afraid they can’t even answer a simple question: “Do you worry that with what the Fed has done in terms of inserting a lot of liquidity into the market (Treasury bill buying & repo) has created the recent boom in the stock market?”

The big dodge tells you everything you need to know.

*  *  *

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Tyler Durden

Fri, 02/21/2020 - 08:44

Kolanovic: The Tech Bubble Is Driven By Central Banks And Will Collapse; "This Time Is Not Different"

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Kolanovic: The Tech Bubble Is Driven By Central Banks And Will Collapse; "This Time Is Not Different"

Having been a must-read voice of contrarian originality and market structure insight especially in the arcane realm of quant finance and derivatives for much of 2013-2016, about 3 years ago something flipped and JPM's head quant, Marko Kolanovic abandoned his traditional skeptical perch and became ideologically aligned with the pro-central bank cabal of Fed apolo

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gists who refuse to see any signs of an asset bubble, claim the Fed can do no wrong, and generally mock anyone who warns that the injection of nearly $20 trillion in liquidity into the stock market will have a very unhappy ending. Kolanovic's bizarre reversal went so far as to calling sites, such as this one, "fake news" as he continued to push for a bullish outcome to the debacle that was Q4 2018, if for all the wrong reasons (as this site explained repeatedly). In fact, Kolanovic's forced transformation resulted in in-house confrontations with other JPM quants such as Nick Panigirtzoglou.

Well, in a world devoid of any logic or sense, some normality could have finally returned today when in his latest market commentary note, the real Kolanovic may be finally bacl, calling the market, or rather it best performing strategy - the low-vol/growth/momentum factor which is really just a fancy name for the handful of market-leading tech stocks- for what it is, namely one overinflated asset bubble, made possible by "central banks pushing global yields into negative territory (propping up defensive and secular growth/tech bond proxies), growth of passive indexation and momentum strategies (pushing assets into momentum, mega caps and low volatility stocks) as well as flows based on simplistic ESG schemes that just exponentiate the same crowding trends (e.g. very high correlation of ESG with low volatility, large size and momentum scores as well as sector concentration in tech)."

That said, there may have been an ulterior motive behind Kolanovic's transformation: after all it was last July when the JPM quant said value stocks were a "once in a decade" buying opportunity, and that traders should bet on a convergence between value and low-vol (aka growth) stocks.

"While there is a secular trend of value becoming cheaper and low-volatility stocks becoming more expensive due to secular decline in yields, the nearly vertical move the last few months is not sustainable," Kolanovic argued in a July 2019 research note. "The bubble of low volatility stocks versus value stocks is now more significant than any relative valuation bubble the equity market experienced in modern history."

To justify his case, Kolanovic showed the following chart (which will reappear in an updated format later in this post)...

... and claimed that the stabilization of economic data and progress in the U.S.-China trade war could be the catalyst that triggers this long-overdue convergence. "This rotation would push significantly higher all the laggards such as small caps, oil and gas, materials, and more broadly stocks with low P/E and P/B ratios."

Well something funny happened when the trade war finally ended in January and economic data stabilized at the end of 2019. Nothing.

Indeed, after a very brief period in which value stocks did modestly outperform which was triggered by the great value-growth quant reversal in early September, the divergence not only resumed but as stocks hit all time highs, they were led by just a handful of tech - i.e., low-vol, growth and momentum - names, and the result has been a divergence between growth and value the likes of which have never been seen before.

In short, Kolanovic may have picked the right catalysts, but had the absolutely worst possible trade to go along with them, and the result has been a -20% loss for anyone who held on to the long value-short low vol/momentum convergence trade in just the first two months of 2020!

This outcome - which one can describe as a "once in a decade" loss - may have also prompted some very angry comments from JPM clients, and led to today's note, in which Kolanovic, no longer pretending to be JPMorgan's "good quant cop", penned an angry rant in which he slams not only the ridiculous, disconnected from all fundamentals market leadership but also goes after those responsible (which apparently also includes the coronavirus). To wit:

Our view that cyclical and value assets should rally in the first quarter was set back by the COVID-19 epidemic. Instead, bonds, momentum stocks, and low volatility stocks rallied – pushing the valuation spread between defensive and cyclical stocks to a level 2x worse than during the peak of the late-‘90s tech bubble.

And here again, Kolanovic reposts the same chart he used last July to demonstrate the ridiculous factor divergence, which has now reached even more ridiculous levels. In fact, the last time tech vs value was so stretched was just before the tech bubble peaked.

Commenting on the charts above, Kolanovic says is that "the bubble we are describing is expressed in equity factors (sector-neutral momentum and low volatility factors), however signs of this bubble can be seen in sectors’ performance as well." A bubble which the Croatian quant compares to events during the dot com bubble to get a sense of the prevailing market exuberance:

For instance, the ratio of the S&P 500 technology to energy sector is now the same as during the tech bubble.

He then goes on to note what we pointed out last week, namely that signs that "certain segments of tech are trading at unsustainable valuations are supported by the record level of speculative call option activity and outsized gains in certain tech stocks (Figure 2)." Sound familiar? This is precisely what we wrote one week ago in "Frenzied Traders Send Option Volumes To All Time High; Go All-In Tesla, Tech Calls"

So back to Kolanovic who next asks, rhetorically "how was this factor bubble inflated", and answers:

While this could be a topic for another report (or a book), in short it was driven by central banks pushing global yields into negative territory (propping up defensive and secular growth/tech bond proxies), growth of passive indexation and momentum strategies (pushing assets into momentum, mega caps and low volatility stocks) as well as flows based on simplistic ESG schemes that just exponentiate the same crowding trends (e.g. very high correlation of ESG with low volatility, large size and momentum scores as well as sector concentration in tech).

If this list sounds oddly familiar, it's because this website, which Kolanovic in late 2018 called "fake news", has repeatedly and constantly pounded the table on as the only factors, pardon the pun, that matter in a market that no longer has any relationship to fundamental drivers as a result of floating in an ocean of excess liquidity.

So what about Kolanovic's favorite value stocks?

Value stocks are typically on the other side of all of these trends that inflated this bubble. We caution investors that this bubble will likely collapse, i.e. this time is not ‘different’, with valuations reverting closer to 2010-2020 average.

Yes, Marko, we agree that you will be right eventually on being long value, but not before the central banks, whose blatant and direct intervention in markets for the past 3 years you ignored or merely mocked those who pointed it out (despite it now being abundantly clear as shown in "Here It Is: One Bank Finally Explains How The Fed's Balance Sheet Expansion Pushes Stocks Higher") decide you should be right. And as the past 11 years have shown, that can take a long, long time.

Or maybe not and Kolanovic will have the final laugh. Because instead of capitulating, Kolanovic is once again doubling (or is that tripling down) on the value-lowvol convergence trade, which he now sees as being catalyzed not by the end of the trade war (which for all intents and purposes is over, even if there has been absolutely no change in trade flows between the US and China), but by the fading of the coronavirus pandemic.

In January, hedge funds’ allocation to momentum stocks reached all-time highs (Figure 3 below shows the percentile of factor beta based on HFRX data). Over the last few weeks, funds started to shift their allocation away from momentum and into defensive low volatility exposure which now also has a record allocation. Surprisingly, funds increased exposure to value stocks from low levels (Figure 3). Perhaps some market participants realize that the value rally can happen quickly if the virus epidemic subsides, and are starting to position for reversion. A key question is what will mark the inflection point when bond yields move higher and factors snap back. We think it will be containment of the epidemic and broader reopening of businesses in China.

Yes, well, as we noted earlier, don't hold your breath on that. But in any case, yes, China (eventually) rebooting its economy would likely be a notable event, and one which if Kolanovic is right, could trigger a bigger quant storm than the one observed last September:

Given extreme positioning, and various monetary and fiscal stimulative measures employed or in the pipeline, the snap-back could be more significant than last September’s event.

In theory: yes, of course. In practice: what will likely happen is a continuation of the absolutely ridiculous move higher in tech names which are no longer moving on fundamentals, but on the hundreds of billions in liquidity injected by the Fed since the start of QE4. What we find odd is that not even once does Kolanovic even consider this alternative, and instead is betting it all one just one event: China's return to normalcy, which he even goes so far as to put on the calendar as taking place "within 1-2 weeks".

Given the severity of the outbreak, the market may wait to see not just a decline in the absolute number of cases, but a significant pick up in datasets capturing real-time economic activity. Our base case is that this would happen within 1-2 weeks.

So for all those who got crushed buying the "once in a decade" value-lowvol convergence, Kolanovic has some words of encouragement: hang in there, cause he will eventually be right, even though as he himself admits, he has absolutely no better visibility into what is going on in China than anyone else, demonstrating just how great the dangers of getting wed to a given trade can be, especially when trading without a stop loss threshold:

We reiterate our call to sell out of defensive assets and rotate into cyclical assets such as value stocks, commodity stocks and EM. Risks to our base case include the potential for new epicenters of the disease and reacceleration of new cases. Most investors are not even trying to forecast various  scenarios, but rather look to bond yields for an ‘all-clear’ signal for rotation and rerisking. In various discussions, clients indicated that 10Y bond yields reaching 1.75% would be a signal to sell momentum, sell tech (secular growth) and defensives, and rotate into cyclicals and value.

We'll check back in three weeks - when as JPM's "base case" says predicts the Chinese chaos should be over - to see if maybe this time Kolanovic was finally correct.

Tyler Durden

Wed, 02/19/2020 - 18:05

China Central Bank Orders Lenders To "Tolerate" Higher Bad Debt Levels To Avoid Financial Cataclysm

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China Central Bank Orders Lenders To "Tolerate" Higher Bad Debt Levels To Avoid Financial Cataclysm

Last week we reminded readers that unless Beijing manages to contain the coronavirus epidemic, China faces a fate far worse than just reported its first ever 0% (or negative) GDP print in history. For those who missed it, here it is again: back in November, we reported that as part of a stress test conducted by China's central bank in the first half of 2019, 30 med

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ium- and large-sized banks were tested; In the base-case scenario, assuming GDP growth dropped to 5.3% - nine out of 30 major banks failed and saw their capital adequacy ratio drop to 13.47% from 14.43%. In the worst-case scenario, assuming GDP growth dropped to 4.15%, some 2% below the latest official GDP print, more than half of China's banks, or 17 out of the 30 major banks failed the test. Needless to say, the implications for a Chinese financial system - whose size is roughly $41 trillion - having over $20 trillion in "problematic" bank assets, would be dire.

Well, with GDP set to print negative if Goldman is right (with risk clearly to the downside as China's economy remains completely paralyzed)...

... every single Chinese bank is set to fail a "hypothetical" stress test, and the immediate result is an exponential surge in bad debt. The result, as we discussed in detail last week, is that the bad loan ratio at the nation's 30 biggest banks would soar at least five-fold, and potentially far, far more, flooding the country with trillions in non-performing loans, and unleashing a tsunami of bank defaults.

Of course, regular readers are well aware that China's banks are already suffering record loan defaults as the economy last year expanded at the slowest pace in three decades while bankruptcies soared. As extensively covered here previously, the slump tore through the nation’s $41 trillion banking system, forcing not only the first bank seizure in two decades as Baoshang Bank was nationalized , but also bailouts at  Bank of Jinzhou, China's Heng Feng Bank, as well as two very troubling bank runs at China's Henan Yichuan Rural Commercial Bank at the start of the month, and then more recently at Yingkou Coastal Bank.

All that may be a walk in the park compared to what is coming next.

"The banking industry is taking a big hit," You Chun, a Shanghai-based analyst at National Institution for Finance & Development told Bloomberg. "The outbreak has already damaged China’s most vibrant small businesses and if it prolongs, many firms will go under and be unable to repay their loans."

According to a recent Bloomberg report, S&P estimates that a worst-case scenario (one which however saw GDP remain well in positive territory) would cause bad debt to balloon by 5.6 trillion yuan ($800 billion), for an NPL ratio of about 6.3%, adding to the already daunting 2.4 trillion yuan of non-performing loans China’s banks are sitting on (a number which, like the details of the viral epidemic, is largely massaged lower and the real number is far higher according to even conservative skeptics).

S&P also expects that banks with operations concentrated in Hubei province and its capital city of Wuhan, the epicenter and the region worst hit by the virus, will likely see the greatest increase in problem loans. The region had 4.6 trillion yuan of outstanding loans held by 160 local and foreign banks at the end of 2018, with more than half in Wuhan. The five big state banks had 2.6 trillion yuan of exposure in the region, followed by 78 local rural lenders, according to official data.

Meanwhile, exposing the plight of small bushiness, most of which are indebted to China's banks, a recent nationwide survey showed that about 30% said they expect to see revenue plunge more than 50% this year because of the virus and 85% said they are unable to maintain operations for more than three months with cash currently available. Perhaps they were exaggerating in hopes of garnering enough sympathy from Beijing for a blanket bailout; or perhaps they were just telling the truth.

Finally, the market is increasingly worried that all this bad debt will have a dire impact on bank assets: consider that the “big four” state-owned lenders, which together control more than $14 trillion of assets, currently trade at an average 0.6 times their forecast book value, near a record low. This also means that in the eyes of the market, as much as $6 trillion in bank assets are currently worthless.

All of this led us to conclude last week that "nothing short of a coronavirus cataclysm faces both China's banks and small businesses if the coronavirus isn't contained in the coming weeks."

In retrospect, there is one thing we forgot to footnote, and that is that China could buy some extra time if the central bank suspend financial rules and moves the goalposts once again.

And so, just three days after our first article on China's looming bad debt catastrophe, that's precisely what the PBOC has opted to do, because as Reuters writes, on Saturday the PBOC said that the country's lenders will tolerate higher levels of bad loans, part of efforts to support firms hit by the coronavirus epidemic.

"We will support qualified firms so that they can resume work and production as soon as possible, helping maintain stable operations of the economy and minimizing the epidemic's impact," Fan Yifei, a vice governor at the People's Bank of China, told a news conference.

He added that the problem will be manageable as China has a relatively low bad loan ratio.

What the PBOC really means is that China's zombie companies are about to take zombification to a preciously unseen level, as neither the central bank nor its SOE-commercial bank proxies will demand cash payments amounting to billions if not trillions of dollars from debtors, who will plead "force majeure" as part of their debt default explanation. In other words, we may be about to see the biggest "under the table" debt jubilee in history, as thousands of companies are absolved from the consequences of having too much debt.

Separately, during the same briefing, Liang Tao, vice chairman of the China Banking and Insurance Regulatory Commission, said that lending for key investment projects will be sped up, while Xuan Changneng, vice head of the country's foreign exchange regulator, said China was expected to maintain a small current account surplus and keep a basic balance in international payments. We wouldn't hold our breath for a surplus if China is indeed producing nothing as real-time indicators suggest.

And just so the message that debt will flow no matter what is heard loud and clear, on Friday, said Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission said that financial institutions in the banking sector had provided more than 537 billion yuan ($77 billion) in credit to fight against the novel coronavirus outbreak as of noon on Friday.

"The regulator will soon launch more measures to give stronger credit support to various industries," said Liang at a news conference held by the State Council Information Office on Saturday. "It will continue to lead banks' efforts on increasing loans to small and micro enterprises, making loans accessible to a larger number of small businesses, and further lowering their lending costs."

Hilariously, Liang highlighted the importance for banks to take accurate measures to renew loans for small businesses to reduce their financial pressure. It wasn't clear just how burdening the small businesses with even more debt they will never be able to repay reduces financial pressure, but we can only assume that this is what is known as financial strategy with Chinese characteristics.

The bottom line is simple: no matter how or when the coronavirus epidemic ends, the outcome for China - which already toils under an gargantuan 300% debt/GDP burden...

... will be devastating as more companies are encumbered by even more debt which they will never be able to repay, and once rates jump or the Chinese economy hits another pothole - viral or otherwise - the avalanche in defaults will be a sight to behold.

Tyler Durden

Sun, 02/16/2020 - 20:30

BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

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BofA: We Are Witnessing The Biggest Asset Bubble Ever Created By A Central Bank

Back in March 2018, when commenting on what was then the 2nd longest central-bank induced bull market of all time (it is now the longest ever) Bank of America's CIO Michael Hartnett pointed out that "bull market leadership has been in assets that provide scarce “growth” & scarce “yield”. Specifically, the "deflation" assets, such as bonds, credit, growth stocks (315%)

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, have massively outperformed inflation assets, e.g., commodities, cash, banks, value stocks (249%) since QE1. At the same time, US equities (269%) have massively outperformed non-US equities (106%) since launch of QE1."

And, as happens every time the Fed tries to manage asset prices, it had blown another bubble: commenting on the hyperinflation in risk assets, Hartnett said that the "lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets", which the strategist had called the Icarus Trade since late 2015, noting that the latest, "e-Commerce" bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years."

Fast forward two years, one failed attempt at normalizing interest rates, one QE4, and one historic P/E multiple expansion meltup later, when the same bull market leadership in "growth" assets has led to the unprecedented result that the top 5 stocks now account for a greater share of S&P500 market cap than ever before...

... and when what in 2018 was the third largest bubble of all time only has - thanks to 800 rate cuts by central banks since the Lehman bankruptcy - now been rebranded to "e-Commerce" by BofA's Hartnett, and which as shown in the chart below has - after rising more than 1,000% from its crisis lows - become the single biggest asset bubble of all time.

Commenting on this biggest ever asset bubble in his latest Flow Show report, Hartnett explains it as follows:

... the US dollar off to best start to year since 2015, DXY threatening to breakup toward 104 post-GFC high… bullishly driven by positioning (consensus bearish US$), politics (probability of Trump or Bloomberg victory in US presidential election at fresh high of 77% according to poll aggregator Oddschecker.com), and bubble with global capital flowing to US tech disruption bubble.

Ironically, and confirming the barbell strategy pursued by investors, even as global capital floods into the "growth" sector, a "twin bubble" continues to grow, with inflows into bonds seemingly neverending, and just this week investors poured the most money ever into IG corporate bonds ($13.4BN)...

... in addition to a $1.2BN inflow into tech funds, despite broader FTC "Big Tech" antitrust action into what is now America's least regulated sector:

Meanwhile, easing COVID-19 fears have lent a strong weekly bid to HY corporate bonds ($3.4bn), EM equity ($2.7bn), & EM debt ($2.1bn). In short investors appear to be buying anything that is not nailed down, resulting in record annualized inflows into bond and equity funds.

Of course, the bubble may be the biggest ever, but the action observed now is hardly new, and there is a familiar word to describe what is going on: distribution... as the smartest and richest money in the room - private clients - continue to quietly sell stocks to retail investors even as the buy more and more and more bonds.

Putting it all together, what does Hartnett - who like Morgan Stanley's Michael Wilson - has been reluctantly bullish into this meltup, think happens next, and when will he finally sell? His answer below:

We stay "irrationally bullish" in Q1: positioning not yet "euphoric" & Fed caught in "liquidity trap"; we expect rising probability of a "Minsky moment" to coincide with peak positioning & peak liquidity in Q2 triggering "big top" in risk assets; sell S&P500 when PE >20X, go short credit & stocks when new lows in bond yields & US$ appreciation becomes disorderly bearish signaling tighter Fed liquidity & sparking recession/default fears.

Tyler Durden

Fri, 02/14/2020 - 14:10

"ECB Is Worst-Run Central Bank In The World" - Felix Zulauf Sees 30% Plunge In US Stocks "Taking The World With It"

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"ECB Is Worst-Run Central Bank In The World" - Felix Zulauf Sees 30% Plunge In US Stocks "Taking The World With It"

By Lauren Rublin, via Barrons.com

Felix Zulauf was a member of the Barron’s Roundtable for about 30 years, until relinquishing his seat at our annual investment gathering in 2017. While his predictions were more right than wrong, it was the breadth of his knowledge and the depth of his analysis of global markets t

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hat won him devoted fans among his Roundtable peers, the crew at Barron’s, and beyond. Simply put, Felix, president of Zulauf Asset Management in Baar, Switzerland, always knew—and still knows—better than most how to connect the dots among central bankers’ actions, fiscal policies, currency gyrations, geopolitics, and the price of assets, hard and soft.

With interest rates rising, governments in flux, and the world’s two biggest economies facing off over trade, it seemed the right time to ask him how today’s turmoil will impact investors in the year ahead. Ever gracious, he shared his thoughts and best investment bets in an interview this past week. Read on for the view from Baar.

Barron’s: Felix, how have you been keeping busy since you left the Roundtable?

Felix Zulauf: I’m still running money, but it’s my own money, and I’m still a consultant to investors and institutions. I’m in the market almost every day. I like analyzing the world; the tectonic shifts occurring make it too fascinating to quit.

Which shifts do you mean?

For one, we have left the world of free markets and entered the world of managed economies. This is a major change in my lifetime. Central banks took over the running of economic policy after the financial crisis and run the show to this day. Also, the globalization movie is starting to run backward. The past 30 years saw the biggest globalization process ever, with the integration of China into the world economy. With today’s trade conflict, that is changing. The alternative is more regionalization of the economy, which could create problems for multinational companies.

Is a reversal of globalization inevitable?

The Northeast Asia economic model isn’t compatible with the Western model. In the West, corporations are run for profit. In Northeast Asia, exports have been used to increase employment, income, and market share. In China, average export prices have been unchanged in U.S. dollar terms for the past 15 years, whereas the average wage has gone up six times. A company with such statistics goes bankrupt, but China has escaped that outcome through the use of debt.

The World Trade Organization should have sanctioned China for applying unfair trade practices, but didn’t. Presidents Clinton, Bush, and Obama, and Europeans, were asleep. President Trump has taken up the issue, as he was elected to do. Middle-class incomes in the U.S. and many European countries have been unchanged or down for the past 30 years in purchasing-power terms, while middle-class incomes in China and its satellite economies have risen tremendously. I expect the trade conflict to continue, with all Chinese exports to the U.S. subject to 25% tariffs within 12 months or so. The Chinese will lose a few trade battles, but eventually win the war.

How so?

China will build up its strategic partnerships around Asia, keep expanding in Africa, and try to convince Europe to join its trading bloc. If the U.S. continues to take an aggressive stance, it runs the risk of becoming isolated. I’m not talking about the next 12 months, but the next six or seven years. A trade war might protect U.S. industries for a while, but protectionism weakens industries and economies.

At present, the world economy is desynchronized. The U.S. economy is on steroids due to tax cuts and government spending and growing above trend. China is in a pronounced slowdown that could continue until the middle of next year, at least. The Chinese agenda is to have a strong economy in 2021, the 100th anniversary of the founding of the Communist Party of China, and 2022, the year of the next National Congress. That is why China started to address major problems, such as pollution and financial excesses, in 2017. Cleaning things up led to a slowdown that could intensify in coming months as U.S. tariffs increase.

What will happen thereafter?

China will launch another fiscal-stimulus program, supported by monetary stimulus. When it does, the currency will fall 15% or 20%. The Chinese will let the currency go because they know they can’t please President Trump on trade. They aren’t prepared to do what he’s asking for. We’ll also see fiscal stimulus applied in emerging markets, which are largely dependent on China, and in Europe and maybe the U.S., where President Trump will launch a spending program to boost the economy ahead of the 2020 election.

Global fiscal-stimulus initiatives are poison for bond markets. Bond yields are rising around the world. After major new fiscal-stimulus programs are announced, perhaps from mid-2019 onward, yields will rise quickly, resulting in a decisive bear market in bonds.

What is behind the sudden surge in Treasury yields?

Several factors are pushing yields higher: The U.S. economy is growing above trend, capacity utilization is high, and the intensifying trade conflict with China suggests disruption in some supply chains, which leads to higher prices. The Federal Reserve is selling $50 billion of Treasuries per month, and the U.S. Treasury must issue $1.3 trillion of paper over the next 12 months. All these factors are pushing yields up.

How do Europe’s prospects look to you these days?

Introducing the euro led to forced centralization of the political organization, as imbalances created by the monetary union must be rebalanced through a centralized system. As nations have different needs, the people are revolting; established parties are in decisive decline, and anti-establishment organizations are rising. The risk of a hard Brexit is high. Italy doesn’t listen to Brussels any longer. It kept the budget deficit around 1% of gross domestic product in recent years, as instructed, which meant the country, with a dysfunctional banking system, had no growth and high youth unemployment. The March election brought anti-establishment parties to power that proposed a budget with a 2.4% deficit target. Eventually it will be closer to 4%. The Italian banking system holds €350 billion of government bonds. If 10-year government-bond yields hit 4%, banks’ equity capital will just about equal their nonperforming loans.

By the middle of next year, you’ll see more fiscal stimulation in Germany, Italy, France, and possibly Spain. Governments will not care about the EU’s directives. The EU will have to change, giving more sovereignty to individual nations. If Brussels remains dogmatic, the EU eventually will break apart.

The European Central Bank will quit quantitative easing by the end of this year. The economy has been doing well, the inflation rate has risen, and yet the ECB has continued with aggressive monetary easing, primarily financing the weak governments. This is nonsense. They are the worst-run central bank in the world. I expect the euro to weaken further, possibly to $1.06 from a current $1.15.

So far, the stock market has taken trade tensions and other challenges in stride. Where to from here for U.S. stocks?

The Federal Reserve is draining liquidity from the financial system [by not buying new bonds to replace maturing paper]. It will remove another $600 billion from the market in the next year. The Treasury will issue $1.3 trillion of Treasury paper to finance the budget deficit. All of this means a lot of liquidity is being withdrawn from the market, which is bearish for financial assets. I expect U.S. stocks to slide into the middle of next year, falling maybe 25% to 30% from the top, taking nearly all other markets down with them.

When the declines are big enough, the central planners will come in. Central banks will ease monetary policy, buying assets if necessary. You won’t earn a lot owning equities over the next 10 years, especially if you’re a passive investor in index funds. It will be a much better time for traders and active investors who pick stocks and sectors and do exactly what hasn’t worked for the past 10 years.

In that case, what are your investment recommendations?

I’d be long the dollar, particularly against emerging-market currencies. The Brazilian real could be the next currency that gets clobbered, particularly if a leftist candidate wins the presidential election. I would also short the South African rand, as policies are going in the wrong direction.

I’m bullish on oil because the market is tight. Spare capacity has been declining. Demand has been above supply on a global basis for almost two years. Sanctions on Iran will curtail buying from there, and production in Venezuela and Iraq is declining steadily. One morning, we’ll wake up and crude will be at $95 or $100 a barrel. That will be bullish for U.S. shale-oil producers, oil-service companies, and some exploration and production companies. I would buy the SPDR S&P Oil & Gas Exploration & Productionexchange-traded fund [ticker: XOP]. I would also go long crude, via the spot futures contract. Rising oil prices, a rising dollar, and rising bond yields historically have been a bad combo for equity markets.

Would you short emerging markets at current levels?

I would wait until they bounce a bit more, then short the iShares MSCI Emerging Markets ETF [EEM]. The problems in emerging markets will intensify. Japan, as I mentioned, will be an outperformer. Corporate Japan has worked on improving its balance sheet for 25 years. Japanese companies are highly profitable, and their stocks are cheap. The market is trading for 14 times earnings. The yen is slipping against other currencies, which is a plus. Even if Japan declines with other markets, it will decline less. I recommend buying the DXJ [ WisdomTree Japan Hedged Equit y ETF] and hedging by selling short the S&P 500 against it.

You haven’t mentioned gold, a longtime favorite.

Monetary tightening isn’t bullish for gold. The price might bounce for a few weeks, but I don’t see it moving up in a big way. It is way too early for the bull market in gold. We need a sharp decline in equities (which would lead to further easing of monetary policy) or a weakening of the U.S. economy, which would stop the Fed from tightening further.

What are your thoughts about cryptocurrency?

This area is called Crypto Valley. It is a major center of cryptocurrency and blockchain activity. I’m not a fan of cryptocurrencies because I don’t trust the promises of limited supply, but blockchain technology is here to stay. There will be explosive growth in blockchain applications, which will remove a cost layer in the world economy by removing the need for intermediaries. This is a tremendous plus for productivity.

Tyler Durden

Fri, 02/14/2020 - 05:00

Coronavirus? The Chinese Central Bank Has A "Solution"

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Coronavirus? The Chinese Central Bank Has A "Solution"

Authored by Frank Shostak via The Mises Institute,

In response to the economic paralysis brought about by the coronavirus, the Chinese central bank has pumped $243 billion into financial markets. On Monday February 3 2020, China’s equity market shed $393 billion of its value.

Most experts

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are of the view that in order to counter the damage that the coronavirus has inflicted, loose monetary policy is of utmost importance to stabilize the economy. In this way of thinking, it is believed that the massive monetary pumping will lift overall demand in the economy and this in turn is likely to move the economy out of the stagnation hole.

On this way of thinking consumer confidence, which has weakened as a result of the coronavirus could be lifted by massive monetary pumping.

Now, even if consumers were to become more confident about economic prospects, how is all this related to the damage that the virus continues to inflict? Would the increase in consumer confidence due to the monetary pumping cause individuals to go back to work?

Unless the causes of the virus are ascertained or unless some vaccine is produced to protect individuals against the virus, they are likely to continue to pursue a life of isolation. This means that most people are not going to risk their life and start using the newly pumped money to boost their spending.

It seems that whenever a crisis emerges, central banks are of the view that first of all they must push plenty of money to “cushion” the side effects of the crisis. The central bankers following the idea that if in doubt “grease” the problem with a lot of money.

It did not occur to all the advocates of the aggressive loose monetary policy that this is going to transform a given economic crisis into a much larger one.

Most advocates would respond that it is the central bank’s duty to defend individuals against various bad side effects. The only way they can defend individuals is by not adding more damage.

If loose monetary policy could counter the bad side effects of the coronavirus then we should agree that money pumping is an effective remedy to eradicate side effects of viruses. In this sense, central bankers should be nominated for the Nobel Prize in medicine.

Most experts still don’t get it that money is just the medium of exchange. It produces nothing and it can only provide the services of the medium of exchange. If we begin to consider money as something magical that can fix everything, including eradicating the economic side effects of the coronavirus, this opens the gate for nasty economic surprises.

Tyler Durden

Sun, 02/09/2020 - 19:10


Business Finance


Former Autonomy boss Mike Lynch 'submits himself' for arrest in central London

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Extradition process around US fraud charges has kicked off

Ex-Autonomy boss Mike Lynch has submitted himself for arrest, a formality required as part of the extradition process initiated by the US Department of Justice.…


A European Perspective On Central Bank Digital Currency

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A European Perspective On Central Bank Digital Currency

Authored by Steven Guinness,

Throughout 2019 I posted numerous articles on the subject of central bank digital currency (CBDC’s) and how simultaneous reforms of payment systems throughout the world are being undertaken in preparation for the full digitisation of money.

I have demonstrated through the words of central bankers themselves how

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ng>the goal of introducing digital currency is an integral part of their plans over the next decade. It is on record that global planners want to ‘reset‘ the current financial system and replace it with a new set up underpinned by intangible assets. Global elites refer to this as either the rise of the Fourth Industrial Revolution or a ‘new world order‘ of finance. What is a carefully preordained agenda has been fashioned to appear as nothing more than the innocent evolution of technology. It is a deception that can be challenged using the communications issued by central banks.

Rather than rely on supposition, let’s allow those within the central banking community to speak for themselves.

In November 2019 Johannes Beermann, a member of the German Bundesbank responsible for cash management, gave a speech in China called ‘Cash and digital currencies from a central bank’s perspective.’ Beermann confirmed that cash circulation in Germany is on the rise, with the Bundesbank having issued over half the total value of euro banknotes now in circulation. ‘There may be less cash around‘, said Beermann, ‘but we are far from being cashless.’

Beermann went on to say that new methods of payments ‘tend to evolve in stages‘, and that ‘the transition towards a society with less cash has to be driven by the user and not the supplier.’ But even though a large proportion of German citizens are still demanding banknotes, it has not prevented the Bundesbank from openly discussing the possibility of a central bank digital currency superseding cash in the future.

Publicly, the Bundesbank remain at the stage of viewing blockchain and distributed ledger technology as ‘promising‘, with ‘central banks open to them in principle.’ The ‘transformation‘ of the payment landscape, therefore, remains in flux and ‘anything but complete.’

As mentioned by Beermann, what has propelled the issue of central bank digital currency to the forefront of debate is the prospect of Libra, a new global payment system proposed by Facebook which would be built upon blockchain technology. It has prompted discussions on the need for a ‘pan-European digital payment solution‘. Prior to the announcement of Libra and subsequent criticism by central bank officials, digital currency was largely a niche concept within the mainstream. Only now has it begun to take a more prominent role, and given central banks the platform to shape the narrative on the future of money.

Near term, however, public issuance of central bank digital currency is not on the horizon. ‘We should go one step at a time‘, cautioned Beermann, who believes that cash will ‘continue to enjoy great popularity in the euro area.’

Following on from Beermann was Benoit Coeure, who later this month will step down as a member of the executive board of the European Central Bank to head up the Bank for International Settlement’s Innovation BIS 2025 initiative. In discussing ‘a European strategy‘ for ‘the retail payments of tomorrow‘, Coeure brought up the subject of CBDC’s and payment systems. As with Beermann, he stressed the need for a ‘pan-European market-led solution‘, one that transcends national boundaries and becomes the accepted standard throughout the entire European continent. But as we have come to expect from global planners, ambitions on this scale are advanced gradually. Which is probably why Coeure remarked that ‘global acceptance should be a long-term goal.’

The ECB, according to Coeure, will ‘continue to monitor how new technologies change payment behaviour in the euro area‘. This is predominately in response to a decline in the demand for physical money. The key takeaway from Coeure’s speech was in declaring that the implementation of central bank digital currency would ensure that ‘citizens remain able to use central bank money even if cash is eventually no longer used.’

This is why the notion of central banks being opposed to digital currency and seeing it as a threat to their supremacy is nonsense. With cash comes anonymity, and with that an inability to track and trace the economic behaviour of individuals. It was Mark Carney who back in 2018 declared data to be ‘the new oil‘. What central banks want is for every citizen to become entirely dependent on an all digitised system that the banking elites control. For instance, the growth of contactless payment technology is just one element which has greatly assisted them in this endeavour.

Another voice that is prominent on the subject of digital currency is Francois Villeroy de Galhau, governor of the Bank of France. Speaking in December last year (Central bank digital currency and innovative payments), de Galhau talked about the emergence of ‘new players‘ in the field of payments and how they have taken the initiative to transform the payment industry. De Galhau sees this as a challenge for banks, and potentially even a ‘threat to European sovereignty‘ if these players are based outside of Europe (most notably China).

As you might expect, de Galhau proposed a two fold response to this ‘threat‘. First, central banks should increase the speed on new payment solutions, and second they should consider the viability of introducing central bank digital currency.

In de Galhau’s own words:

We first have to take advantage of the opportunities offered by the digital revolution to develop a genuine pan European payment solution.

We as central banks must and want to take up this call for innovation at a time when private initiatives – especially payments between financial players – and technologies are accelerating, and public and political demand is increasing.

This stance is exactly in line with those of Johannes Beermann and Benoit Coeure, and reinforces the coordinated nature of central bank communications. The innovations of private developers are not so much a threat as more an opportunity to position central banks as the lynch pin of a future all digital system. It is why the likes of the Fed and the Bank of England are engaged in reforming their payment systems. The plan seems to be that the private sector spearheads the technological side, whilst the central banks act as the gatekeepers on aspects such as coverage and regulation. It is they who will ultimately determine who gains access to the next generation of payment systems and who does not, through a swathe of new regulatory requirements.

2020 is the year when the encroachment towards CBDC’s will kick up a notch. In France, de Galhau wants to begin experimenting with the technology over the next few months. It will amount to a test bed for the Euro system as a whole, and for de Galhau will ‘make looking into the possibility of an ‘e-euro’ one of its next focuses.’ The Bank of France will also take part in the BIS Innovation Hub, which will be led by Benoit Coeure. As shown in previous articles, the BIS are at the forefront of the central bank digital currency agenda.

But where will banks start with their experimentation? CBDC’s can be classified on two levels – wholesale and retail. Wholesale refers to payments made exclusively between financial sector firms, whereas the retail variant would be for general consumption at the public level. De Galhau believes that there would be ‘some advantage in moving rapidly to issue at least a wholesale CBDC.’ This would benefit central banks given that a limited release would enable them to iron out deficiencies before moving towards a full scale release that in the end would be at the expense of banknotes.

Finishing out 2019 was a speech by Mark Carney at a farewell dinner in honour of Benoit Coeure. Here, Carney explained the necessity behind central banks and private innovators working together to build a new financial system. The goal is to ‘provide the
best-in-class payment infrastructure that can enable private innovators to deliver the payment products and services our citizens need.’ Infrastructure that is of course controlled by the central banking system. From the Bank of England’s perspective, they plan to ‘allow new entrants access to the same resources as incumbents, while holding similar risks to similar standards.’

Central banks are making every attempt to convince those interested that innovations in the field of payments will result in broader competition and the growth of a decentralised network of operators. If the extent to which global industry is scrupulously monopolised by a handful of corporations is anything to go by, I highly doubt a CBDC future will be decentralised. An indication of this is in how developers and central bank officials have spoken of endorsing ‘permissioned‘ blockchain systems over ‘unpermissioned‘. The developers behind Libra want to use a permissioned network, meaning access is restricted to participants. On the opposite side today you have Bitcoin which uses unpermissioned blockchain. This is one of the reasons why central banks have cited Bitcoin as both an unstable asset and a risk to financial stability. But whilst they may speak out against Bitcoin, what they have not done is ostracise the technology behind it.

So far in 2020 we have heard from Bundesbank President Jens Weidmann and ECB governor Christine Lagarde on the prospect of digital currency. In light of Facebook’s Libra, Weidmann was asked in an interview whether the ECB should counter it with it’s own digital currency. ‘I don’t believe in always calling for the state right away,’ said Weidmann.

Whilst central banks continue to quietly advance their digital currency objectives, a narrative playing out within the financial media is that private innovations such as Libra represent a threat to the financial system due to a lack of regulatory oversight. This has created a sense of distrust with private led innovations. Important to recognise is how CBDC’s are a medium to long term goal. When banks are ready to launch digital currency, they will want it to be in an environment where people are increasingly looking to global institutions to provide stability in an increasingly unstable financial system.

As with fellow central bank officials, Weidmann pledged that central banks ‘will provide cash as long as citizens want it to.’ My concern is that as digital payment options become ever more convenient and cash usage falls, citizens will overlook the obvious dangers of entrusting their life assets to a digital only construct.

In a separate interview, Christine Lagarde was quizzed on whether creating a cryptocurrency was ‘a legitimate task for the ECB‘.

Innovation in the area of payments is racing ahead in response to the urgent demand for quicker and cheaper payments, especially cross-border ones. The Eurosystem in general and the ECB in particular want to play an active role in this field, rather than just acting as observers of a changing world.

I think we can safely take that as a yes.

When you combine all the comments raised there is one overarching message. Central banks are more than prepared for the digital revolution, primarily because they are the leading architects behind its inception.

Tyler Durden

Mon, 01/13/2020 - 05:00


Business Finance


"Massive Reset" Looms, Pento Warns "Central Bankers Are Trapped"

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"Massive Reset" Looms, Pento Warns "Central Bankers Are Trapped"



By Greg Hunter’s USAWatchdog.com,





Money manager Michael Pento says forget about the sky high stock market because everything is being propped up with massive global money printing.








Russia's Central Bank Is Now Testing Real Asset-Pegged Stablecoins

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Russia's Central Bank Is Now Testing Real Asset-Pegged Stablecoins

Authored by Helen Partz via CoinTelegraph.com,

The Bank of Russia, the country’s central bank, has reportedly started testing stablecoins pegged to real assets in a regulatory sandbox.

image courtesy of CoinTelegraph

Elvira Nabiullina, Russia’s central bank head, said

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that the bank doesn’t assume that those stablecoins will function as a means of payment or become a substitute for money, Russian news service Interfax reported on Dec. 25.

Nabiullina noted that the Bank of Russia is exploring the potential uses of stablecoins — cryptocurrencies that are pegged to another asset to prevent the volatility associated with crypto markets. She said:

“We are testing stablecoins in our regulatory ‘sandbox’. We see companies willing to issue tokens pegged to certain real assets. In our regulatory sandbox, we are learning the potential uses of stablecoins but we do not assume that they will function as a means of payment and become a surrogate for money .”

The Bank of Russia also wants to explore CBDCs based on global experience

According to the report, the Russian central bank is also continuing to explore the possibility of issuing its own central bank digital currency (CBDC), the digital ruble, Nabiullina said. The official emphasized that the bank first wants to understand the potential benefits of CBDCs based on the experience of other jurisdictions around the world.

However, Nabiullina warned that the issuance of the digital ruble could lead to some “serious consequences” including changes in the financial market structure such as deposit outflows.

Nabiullina says cryptocurrencies in Russia have lost popularity over the past 2 years

Additionally, the head of Russia's central bank noted that the popularity of cryptocurrencies in Russia has dropped over the past two years. However, there are people who still believe in the possibility of private money without government involvement, Nabiullina said. Regarding this issue, the official claimed:

“We are against private money. If some digital currencies were designed to become a substitute for private money, we could not support that.”

The recent news comes in line with earlier public announcements from the Bank of Russia. As such, Nabiullina said that the bank was exploring the opportunity to launch a CBDC in June 2019. However, the authority didn’t expect to roll out such initiatives in the near future, as reported at the time.

While Russia is planning to follow other countries in testing their CBDCs, France recently revealed its intention to become the first global jurisdiction to pilot its own digital euro project. On Dec. 4, François Villeroy de Galhau, the governor of the Bank of France, announced that the bank will start testing the digital euro project by the end of the first quarter of 2020.

Tyler Durden

Fri, 12/27/2019 - 05:00


Business Finance


China Faces "Systemic Risk" From Debt Cross-Default "Chain Reaction", Top Central Bank Advisor Warns

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China Faces "Systemic Risk" From Debt Cross-Default "Chain Reaction", Top Central Bank Advisor Warns

Just days after China's "moment of reckoning" in the dollar bond market arrived, when China was rocked by not only the biggest dollar bond default in two decades but also the first default by a massive state-owned commodities trader and Global 500 company, when Tianjin's Tewoo Group announced the results of its "unprecedented" debt restructuring which saw a majori

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ty of its bondholders accepting heavy losses, and which according to rating agencies qualified as an event of default, last week a top adviser to China’s central bank warned of a possible "chain reaction" of defaults among the country’s thousands of local government financing vehicles after one of these entities nearly missed a payment this month.

As the FT reported, Ma Jun, an external adviser to the People’s Bank of China, called on the government to introduce "intervention mechanisms" to contain the risk associated with LGFVs — special entities used in the country to fund billions of dollars of roads, bridges and other infrastructure.

“Among the tens of thousands of platform-style institutions nationwide, if only a few publicly breach their contracts it may lead to a chain reaction,” Ma said in an interview published on Wednesday in the state-controlled Securities Times newspaper, adding that "measures should be created as soon as possible to prevent and resolve local hidden debt risks to effectively prevent the systemic risks of platform default and closure."

Ever since Beijing allowed local corporations to fail, China has seen a surge in corporate defaults in local currency and US dollar bonds as economic growth grinds to a 30-year low. As we reported recently, China is set to hit another dismal milestone in 2019 when a record amount of onshore bonds are set to default, confirming that something is indeed cracking in China's financial system and testing the government’s ability to keep financial markets stable as the economy slows and companies struggle to cope with unprecedented levels of debt.

After a brief lull in the third quarter, a burst of at least 20 new defaults since the start of November have sent the year’s total to 131 billion yuan ($18.7 billion), eclipsing the 121.9 billion yuan annual record in 2018.

While this still represents a tiny fraction of China’s $4.4 trillion onshore corporate bond market, the bad news is that the rapidly rising number is approaching a tipping point that could unleash a default cascade, and in the process fueling concerns of potential contagion as investors struggle to gauge which companies have Beijing’s support. As Bloomberg notes, policy makers have been walking a tightrope as they try to roll back the implicit guarantees that have long distorted Chinese debt markets, without dragging down an economy already weakened by the trade war and tepid global growth.

Meanwhile, that "tipping point" could arrive much faster if a surge in government-linked defaults creates a crisis of confidence in China debt markets, which have long been protected by implicit state guarantees.

Besides the record number of default in the local bond market and the recent groundbreaking default of the dollar bonds issued by the state-owned Tewoo, concern has grown in recent months over the vast accumulation of debt in LGFVs, especially after the near default of one such financing platform, Hohhot Economic and Technological Development Zone Investment Development Group, in the Chinese autonomous region of Inner Mongolia earlier this month.

To avoid a cascading collapse in confidence among China's creditors, Ma proposed one potential measure to allow for distressed LGFVs to be taken over by healthier one, very much similar to how a record number of China's small and medium banks were "resolved" in 2019, despite at least two bank runs being triggered last month as previously reported.

The comments by Ma, a former Deutsche Bank economist, come as concerns grow in China’s central government about rising systemic risk. At a high-level planning session in Beijing earlier this month, at which many of the next year’s economic challenges are discussed among senior officials, the avoidance of systemic risk was listed as a priority.

"At the meeting, China’s top policymakers stressed stable macro policy with flexible fine-tuning, and pledged to prevent systematic financial risks,” Mizuho Securities economist Serena Zhou said in a report to investors this month, noting that "such a pledge came the same day as Hohhot Economic and Technological Development Zone Investment Development Group, a LGFV 100 per cent owned by the Hohhot local government, reportedly missed its bond payment."

And while the Hohhot group's repayment deadline was eventually extended after the group failed to repay a 1 billion yuan ($142 million) privately placed bond earlier this month, the situation grabbed the attention of both creditors in other similar LGFV situations as well as analysts.

As the FT notes, China's LGFVs have been key drivers of economic growth in China since the mid-1990s, backing many of the local infrastructure projects that have boosted growth rates in recent years. But they are also closely connected to China’s shadow banking sector, making it difficult for central authorities to fully assess the risk connected to the groups.

Meanwhile, adding to Beijing's list of "default domino" default woes, in addition to rising fears about the stability of LGFVs, Bloomberg points out that the rising default tide is now impacting even one of China's wealthiest provinces, namely Shandong, where six privately owned companies have defaulted on their debt or come close to doing so in the last three months. With 68.1 billion yuan ($9.7 billion) in outstanding debt among those six companies alone, "the distress in Shandong has rattled even seasoned investors."

Of course, the problem isn’t the defaults themselves, as many other provinces have seen more and worse - just last month we showed how cash-strapped Tianjin could soon be ground zero for a Chinese default quake in 2020. The far greater risk as Bloomberg notes, is the practice common among Shandong companies of guaranteeing each others’ debts. As firms don’t have to make public such "off balance sheet" liabilities, investors are left in the dark who’s on the hook and for how much. And with China's once-strong industrial economy flagging, the murky ties between the province’s private companies threaten to drag them all down together.

And with a sharp rise in defaults in both the local and dollar bond markets, and LGFVs teetering, it’s still unclear how the government will intervene in Shandong and elsewhere. Policy makers have been increasingly willing to let weak companies fail, but they’re also under pressure to keep the economy growing and the markets stable.

As of now, Shandong’s city and local governments have stepped in with piecemeal relief. It’s uncertain whether the provincial government will do the same. As a result, the province’s firms risk entering a vicious cycle that “spreads solvency risks to the entire region, swamping the good credits along with the bad,” according to an October report from S&P Global Ratings.

While the default rate for bonds issued by non-state companies across China jumped to a record 4.5% in the first 10 months of 2019, Fitch Ratings warned in a Dec. 3 report that the figure might understate the true level of defaults given that some borrowers settle with bondholders privately rather than through clearing houses. The rate for state-owned companies was just 0.2% thanks to financial support from the government and better access to funding from banks, Fitch said, but even that is set to surge in 2020 following the closely-followed Tewoo bankruptcy.

As Bloomberg notes, Shandong is one of China’s oldest economic centers, built first on trade, then agriculture, mining and oil drilling. Not long ago, the economy was still booming, credit was cheap and private firms were on a spending spree, restrained only by limited access to capital. In communist-run China, state-owned banks tend to favor state-owned companies for loans.

So city governments encouraged the private sector to support itself. Cross-guarantees were one solution. They also concentrated the financial risks, says S&P analyst Cindy Huang.

"Cross-guarantees tend to be clustered around certain cities and regions rather than across the province," she said. "They’re often between private, unlisted companies from either the same city, same sector or where CEOs know one another."

So to loosely paraphrase Ernest Hemingway, "How did you go bankrupt? Two ways: Gradually and then suddenly... and when you do, you take down all your friends down with you."

That's precisely what China has in store for bondholders of its massive $40 trillion financial sector in the coming years.


Tyler Durden

Sat, 12/21/2019 - 18:00


Business Finance


S&P Futures Trade At Record 3,200 After Trump Impeachment, Central Bank Bonanza

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S&P Futures Trade At Record 3,200 After Trump Impeachment, Central Bank Bonanza

Global stocks hovered near all time high on Thursday following a barrage of central bank decision out of Japan, Taiwan, Norway, Sweden and the UK, with US equity futures trading at all time highs of 3,200 as jittery cable reacted to the BOE's latest (unchanged) rate decision while the Swedish crown slumped despite the Swedish central bank's decision to became the first central bank to

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raise interest rates from negative after a five year stint in NIRP territory.

Anyone who expected an adverse reaction to the historic Trump impeachment vote on Wednesday night was disappointed as Wall Street futures suggested the S&P 500 would barely budge, after rising to a fifth consecutive record high on Wednesday despite closing lower just fractionally by -0.04%. Market reaction was limited, since the Republican-controlled Senate is guaranteed not to convict Trump and remove him from office.

"Another day of phase-one trade agreement relief continued to support U.S. and indeed global equities," said Matt Cairns, a strategist at Rabobank in London. Along with improving economic data and the House spending package “these factors are helping to weigh on Treasuries and bunds as the market ends 2019 with what we believe to be a misguided glass-half-full view of the world,” he said.

European equities were little changed in early trading, although they were pressured modestly as the trading day advanced. Britain’s pound recovered from the 3% loss it suffered as fear of a no-deal Brexit returned, after the BOE kept its rates unchanged but suggested it may hike rates in the future.

Europe's Stoxx 600 index drifted in and out of the red, with gains in real estate shares offsetting declines in automakers  while Britain's blue-chip index traded inversely to how the cable reacted to the BOE's announcement.

Earlier, Asian shares had pulled back from a one-and-a-half year peak as trading wound down before the end of the year. Asian stocks dipped, led by technology companies, after Donald Trump was impeached. Most markets in the region were down, with Taiwan and the Philippines leading declines, while India and Thailand rose. The Topix slipped for a second day as the Bank of Japan maintained its target for interest rates and asset purchases. The Shanghai Composite Index closed little changed, as a bank rally countered declines in technology firms. Stocks in China were unchanged after erasing the day’s losses as its central bank mounted another liquidity injection before a year-end cash squeeze. China has returned to the American market to buy soybeans on the heels of a partial trade deal with the U.S. India’s Sensex headed for a fresh peak, with Reliance Industries and Tata Consultancy Services driving the gains.

With year-end looming, traders leaving for vacation and liquidity collapsing, there were few new catalysts on the horizon to revive the equity rally and details of the trade deal remaining vague, keeping stocks in a holding pattern. Central banks were likewise on hold, with policy makers in Japan, Taiwan, Norway and the U.K. leaving interest rates unchanged on Thursday.

There was one notable central bank announcement: as previewed last night, the Swedish central bank raised its key rate to zero after five years in negative territory in a move that will provide relief to the finance industry and a test case for global counterparts with negative borrowing costs. Economists wondered whether Sweden’s hot-running economy would react badly and whether other sub-zero rate central banks in the euro zone, Japan, Denmark, Switzerland and Hungary would follow suit. The crown initially rose 0.2%, a gain that had been widely flagged, however as the session progressed the currency dropped to the lowest level in a week.

Here is a summary of the other key central bank announcements overnight, via RanSquawk:

  • BoJ kept monetary policy settings unchanged as expected with NIRP held at -0.1% and 10yr JGB yield target at around 0%, while it maintained forward guidance that rates will remain at current or lower levels for as long as needed to guard against risk momentum for hitting price target may be lost. BoJ repeated its assessment that Japan's economy is expanding moderately as a trend but cut the assessment on industrial production in which it states industrial output is falling due to impact of natural disasters. BoJ later announced plans decided in April to lend ETFs to markets under a special facility aimed at improving liquidity in the ETF market, while it will amend the scheme aimed at encouraging banks to increase lending and will allow borrowers to roll over lending under certain conditions.

  • Riksbank hiked its Repo Rate by 25bps to 0.00%, as expected. Forecast for repo rate is unchanged, repo rate is expected to remain at 0% in the coming years. Deputy governors Breman and Jansson entered reservations against the rate hike. Improved prospects would justify a higher interest rate. But if the economy were instead to develop more weakly than forecast, the Executive Board could both cut the repo rate and take other measures to make monetary policy more expansionary. (Newswires)

  • Norges Bank left its Key Policy Rate unchanged at 1.50%, as expected in a unanimous decision. Norges Bank left its rate path unchanged for 2020 and 2021 but upgraded 2022 to 1.60% from 1.50%. Norges noted that monetary stance has become less expansionary and a weaker-than-projected krone implies in isolation a higher policy rate path, whilst on the other hand, the upturn in the Norwegian economy appears to be a little more moderate than previously assumed.

And speaking of central banks, they are all that matters: "At the end of the day, this market doesn’t look at macro and earnings, it just looks at monetary developments," said Stéphane Barbier de la Serre, macro strategist at Makor Capital Markets. "If the market thinks central banks (globally) are done with being dovish then we would see some volatility."

Luckily for the bulls, central banks are not only not done, but they will remain dovish until they lose all credibility as a decline in the stock market is now barred by monetary policy.

Don't tell that to bond traders, however, as government bonds fell around the world. Treasuries slipped along with sovereign bonds from London to Tokyo after the barrage of overnight monetary decisions.  Germany’s benchmark 10-year bond yield crept towards the six-month highs it touched last week, with bond traders focussed on the day’s central bank meetings.

Elsewhere in FX, after Sweden’s move, Norway kept its rates at 1.5% and reiterated it was likely to stay there for some time. The dollar slipped against most major peers as Scandinavian currencies gained following central bank policy decisions in the region. The Australian dollar jumped by 0.36% to $0.6879 after better-than-expected labor-market data made interest rate cuts less likely. The yen barely moved from 109.58 per dollar after the Bank of Japan kept its quantitative easing in place and issued a gloomier assessment on factory output. Australia’s dollar climbed after jobs data for November beat forecasts.

In commodities, Brent dipped 0.1% to $66.10 per barrel. WTI also dipped 0.01% to $60.86 a barrel after U.S. government data showed a decline in crude inventories.  Prices are likely to be supported by production cuts coming from the Organization of the Petroleum Exporting Countries and its allies, including Russia.

Expected data include jobless claims and existing home sales. Accenture, Darden, and Nike are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures little changed at 3,200.25

  • STOXX Europe 600 up 0.01% to 414.42

  • MXAP down 0.3% to 169.95

  • MXAPJ down 0.4% to 548.78

  • Nikkei down 0.3% to 23,864.85

  • Topix down 0.1% to 1,736.11

  • Hang Seng Index down 0.3% to 27,800.49

  • Shanghai Composite unchanged at 3,017.07

  • Sensex up 0.2% to 41,654.28

  • Australia S&P/ASX 200 down 0.3% to 6,833.11

  • Kospi up 0.08% to 2,196.56

  • German 10Y yield rose 2.7 bps to -0.222%

  • Euro up 0.2% to $1.1131

  • Italian 10Y yield rose 6.5 bps to 1.169%

  • Spanish 10Y yield rose 2.3 bps to 0.453%

  • Brent futures unchanged at $66.17/bbl

  • Gold spot little changed at $1,474.74

  • U.S. Dollar Index down 0.1% to 97.29

Top Overnight News from Bloomberg

  • The Bank of Japan left policy untouched Thursday as a government stimulus package, progress in U.S.-China trade talks and signs of a bottoming of the global slowdown brightened the economic outlook.

  • Sweden’s central bank ended half a decade of subzero easing in a move that will provide relief to the finance industry and a test case for global counterparts experimenting with negative borrowing costs.

  • Norges Bank kept its deposit rate at 1.50% on Thursday, as expected, and stuck to its main message that a tightening cycle started over a year ago has now been shelved.

  • The European Central Bank may consider downgrading or jettisoning a key element of the Bundesbank-inspired architecture of its monetary policy, according to euro-area officials.

  • Europe’s top court ruled on Thursday that a jailed Catalan secessionist leader has political immunity, complicating acting Prime Minister Pedro Sanchez’s effort to form a governing coalition in Spain.

  • Sterling credit sales will likely make a fast-paced start to a potentially busy 2020 as issuers try to get ahead of another round of Brexit uncertainty.

Asian equity markets were lacklustre following an indecisive lead from US where the major indices finished flat due to a lack of drivers amid the pre-holiday lull. ASX 200 (-0.3%) was subdued by weakness in energy and the top-weighted financials sector, with early gains in the index wiped out after better than expected jobs data dampened February rate cut hopes, while Nikkei 225 (-0.3%) continued its marginal pullback from the 24k level amid a choppy currency and after a lack of fireworks at the BoJ policy meeting. Hang Seng (-0.3%) and Shanghai Comp. (Unch) traded indecisively and failed to take advantage of another substantial liquidity effort by the PBoC as well as expectations it may fine tune measures and use targeted stimulus next year, with some reports suggesting China’s private enterprises are facing the worst funding squeeze in more than two decades. Finally, 10yr JGBs were lower and prices eyed a test on the 152.00 level to the downside with demand subdued alongside an uneventful BoJ policy announcement where the central bank maintained all policy settings as expected and reiterated its forward guidance that rates will remain at current or lower levels for as long as needed.

Top Asian News

  • BOJ Maintains Policy Rate, Keeps 10-Year Bond Yield Target

  • PBOC Injects Largest Amount in Open Operations Since Jan. 17

  • Indonesia Holds Interest Rate as It Sees Growth Rebound

  • Shimao Is Said to Be in Talks to Rescue Debt-Laden Developer

A mostly uninspiring session for European bourses thus far [Euro Stoxx 50 -0.1%] – following on from a similarly lacklustre Asia-Pac session. Sectors are flat/mixed with defensives modestly firmer vs. their cyclical peers, with the exception of energy names who remain buoyed by yesterday’s advances in the complex. Individual stocks stories remain in focus given the lack of fresh macro catalysts. The IT sector failed to capitalise on optimistic earnings from Micron (+4.1% pre-market) late doors yesterday with STMicroelectronics (+0.3%), Micro Focus (-0.1%) and Dialog Semiconductor (-0.1%) all relatively unfazed. Elsewhere, NMC Health (-9.8%) has wiped out yesterday’s gains as the negative note from activist short-seller Muddy Waters continues to cause concern around the Co’s balance sheet. Swatch (-1.2%) and Richemont (-1.4%) are weighed on by a 3.5% YY decline in Swiss watch exports. In terms of other individual movers, Hugo Boss (-2.4%), Capita (-4.2%), TUI (-1.9%) trade near the foot of the Stoxx 600 amid negative broker action.

Top European News

  • U.K. November Retail Sales Decline in Worst Run Since 1996

  • Airbnb Wins EU Court Case Over French Real-Estate Rules

  • Italy Referendum Raises Spectre of Early Elections Again

  • German Lenders Start Sharing Branches in Cost-Cutting Move

In FX, the Aussie and Norwegian Krona are vying for pole position on the G10 grid following better than expected jobs data overnight and a final 2019 Norges Bank policy meeting that was fractionally less dovish than anticipated. Aud/Usd is back within striking distance of 0.6900, albeit off highs and hovering close to a decent option expiry at 0.6875 (1.1 bn), while Eur/Nok has maintained momentum under the psychological 10.0000 level and got close to support from early October (circa 9.9460) as the CB tweaked is rate path to flag 10 bp worth of tightening in 2022.

  • GBP/EUR - The next best majors or beneficiaries of a flagging Dollar, as the DXY drifts down from a 97.421 high to just shy of 97.250, with Cable able to reclaim 1.3100+ status even though UK retail sales fell far short of consensus and the single currency pivots 1.1125 amidst firmer Eurozone bond yields alongside another rise in market-based inflation expectations. Back to the Pound, perhaps some underlying impetus from reports that the EU already has a trade proposal in hand for the UK to consider a day after Brexit on January 31 next year, but more immediately CBI trades loom before the BoE at high noon with the focus on any further dovish dissent or a more united MPC in wake of the election.

  • JPY/CAD/CHF/NZD - All narrowly mixed vs the Greenback, as Usd/Jpy continues meander above 109.50 and the Yen gleans little fresh direction from the BoJ keeping policy unchanged and an easing bias, while Usd/Cad hovers in a tight band on the 1.3100 handle ahead of Canadian AWE and wholesale trade data. Elsewhere, Usd/Chf is still straddling 0.9800 with the Franc not really responding to a wider Swiss trade surplus as key watch exports fell, and similarly Nzd/Usd failed to get any lasting or clear impetus from NZ GDP data for Q3 as firmer than forecast q/q growth was offset by a y/y miss sharp downgrade to the former for the previous quarter.

  • SEK - The Swedish Crown has been choppy between 10.4450-10.4805 parameters in wake of the Riksbank’s last hurrah for the year as a clearly signalled 25 bp repo rate hike was duly delivered, but not without 2 Board members voting against the move and with the accompanying statement caveated by the pledge to ease if the economy does not meet target.

  • EM - Yet more pain for the Turkish Lira, as Usd/Try extended further to the upside through mid-October peaks and the high for that month overall before fading a fraction below Fib resistance awaiting CBRT minutes and unfolding Turkish-US developments on the diplomatic front.

In commodities, WTI and Brent futures remain flat within relatively narrow intraday parameters following the EIA-led upside seen across the complex yesterday. The former resides just under the USD 61/bbl mark, having traded on either side of its 100 WMA (USD 60.77/bbl) throughout APAC hours, while its Brent counterpart remains afloat above the USD 66/bbl mark after testing, but failing to breach support at the round figure overnight. Crude markets have seen little by way of fresh fundamental catalysts in recent days heading into the holiday period, albeit traders will be on the lookout for more “meat on the bones” regarding the China Phase One deal, given the lack of details post-announcement. That said, the thinned market conditions may prompt volatility in energy prices even with a lack of news-flow. Elsewhere, spot gold trades with mild losses and currently resides below the USD 1475/oz mark having dipping below its 50 DMA USD 1477.20/oz with technicians eyeing USD 1470-71/oz for potential support ahead if the 21 DMA at USD 1467.20/oz. Copper prices remain unchanged intraday below the USD 2.8/lb level given the tentative tone around the marketplace. Finally, Shanghai aluminium prices rose to their highest level in over three months and notched a third straight session of gains amid depleting stocks of the metal in Chinese warehouses.

US Event Calendar

  • 8:30am: Current Account Balance, est. $122.0b deficit, prior $128.2b deficit

  • 8:30am: Philadelphia Fed Business Outlook, est. 8, prior 10.4

  • 8:30am: Initial Jobless Claims, est. 225,000, prior 252,000; Continuing Claims, est. 1.68m, prior 1.67m

  • 9:45am: Bloomberg Consumer Comfort, prior 62.1; Bloomberg Economic Expectations, prior 51.5

  • 10am: Leading Index, est. 0.05%, prior -0.1%

  • 10am: Existing Home Sales, est. 5.44m, prior 5.46m; Existing Home Sales MoM, est. -0.37%, prior 1.9%

DB's Jim Reid concludes the overnight wrap

In spite of markets increasingly winding down for Christmas now, central banks are going to be back on the agenda today for some of the last major policy decisions of 2019. One of the main highlights will come from the Bank of England’s decision later, at what will be Governor Carney’s penultimate meeting before he leaves the BoE at the end of January. While the market isn’t expecting any changes in rates at today’s meeting, our UK economics team actually changed their BoE view earlier this week (link here), and now see a 25bp cut at the subsequent January meeting, with the MPC remaining on hold thereafter.

Ahead of today’s BoE decision, sterling fell -0.40% against the US dollar yesterday to close below $1.31 for the first time in over two weeks, where it remains this morning. The moves came amidst continuing concerns that the government’s pledge not to extend the Brexit transition period beyond the end of 2020 will increase the chance that the UK ends up with another Brexit cliff-edge next year, as the UK could exit the transition period without reaching a trade agreement with the EU. Speaking of Brexit, today the Queen’s Speech is taking place here in the UK, which is where the monarch outlines the government’s agenda for the coming session of Parliament. Now that the Conservatives have a 80-seat majority in the House of Commons, in contrast to the previous hung Parliament, the government will have a considerably easier time when it comes to passing the legislation it wants to get through. That process will begin quickly, as Downing Street have said that the Withdrawal Agreement Bill to enact the Brexit deal will be returning to the House of Commons tomorrow.

The other main event to watch out for this morning is the Riksbank’s latest decision, where the consensus expectation is there’ll be an end to negative interest rates with a 25bp hike to 0%. Sweden has had negative rates since February 2015, but assuming the Riksbank hikes today, would be the first country to actually move out of them. It comes at a time when policymakers across Europe are increasingly taking note of the negative side effects of such policies.

Back to yesterday now, and the equity rally following the announcement of a US-China phase one deal petered out, with the S&P 500 breaking a run of 5 successive increases to close down -0.04%. The Dow Jones (-0.10%) also fell modestly, though the Nasdaq (+0.05%) managed to eke out a gain to reach a fresh record. We did get the news that the US House of Representatives had voted to impeach President Trump, but markets had little reaction thanks to Republican control of the Senate, where a two-thirds majority is necessary to remove the President from office, so it’s difficult to imagine that this will actually happen. Equity markets in Europe were a little weaker, with the STOXX 600 ending the session -0.13%, though German equities dragged on the index, with the DAX closing down -0.49%. Over in commodity markets, Brent crude was up +0.11% at a 3-month high.

In fixed income, sovereign debt sold off on both sides of the Atlantic, with 10yr Treasury yields up +3.7bps yesterday to 1.917%, their highest level in a month. Notably, the 2s10s curve was up +3.0bps to 28.4bps, which is the steepest the curve has been since November 2018. Meanwhile in Europe, 10yr bund yields closed +4.4bps, at their highest level in a month as well, while yields on OATs (+4.8bps) and BTPs (+6.5bps) also rose.

Sticking with the central bank theme, overnight the Bank of Japan left interest rates unchanged, with the policy balance rate remaining at -0.10% and the 10yr yield target at 0%. The BoJ’s statement said that “Japan’s economy is likely to continue on a moderate expanding trend, as the impact of the slowdown in overseas economies on domestic demand is expected to be limited”. It also said that “Downside risks concerning overseas economies seem to remain significant”, unlike in October where the statement said these downside risks “seemed to be increasing.” Moreover, the government’s recent fiscal stimulus announcement has further removed pressure on the BoJ to ease policy.

Elsewhere in Asia, equity markets are trading lower this morning, with the Nikkei (-0.27%), Shanghai Comp (-0.20%) Kospi (-0.18%) and the Hang Seng (-0.65%) all losing ground. In the US, S&P futures are down -0.04%.

Separately, Bloomberg reported this morning that the ECB might remove or downgrade the monetary analysis pillar in assessing the economy. Rather than focusing on money supply growth, the article cited officials who said that examining credit or monetary policy’s impact on financial stability could be more appropriate. The rationale according to the officials is that money supply growth has been of little guidance when it comes to inflation.

There wasn’t much in the way of data yesterday, though we did get the December Ifo survey from Germany, which beat expectations as the business climate indicator rose to 96.3 (vs. 95.5 expected), its highest level since June. In a promising sign, both the expectations (93.8) and the current assessment (98.8) readings rose on last month, and the increase contrasts with the flash composite PMI for Germany on Monday, which remained at 49.4 in December, still in contractionary territory.

We also had a number of inflation prints from around the world. In the UK, the November CPI inflation rate remained below the BoE’s 2% target at +1.5% (vs. +1.4% expected), while core CPI also stayed at +1.7%. Looking at the Euro Area, the final November CPI reading was confirmed at +1.0%, in line with the flash estimate. In spite of stubbornly low inflation there, interestingly we did see five-year forward five-year inflation swaps for the Euro Area rise to 1.3075% yesterday, closing above 1.30% for the first time in 3 months.

Finally, New York Fed President Williams said in a CNBC interview that “I do think where we’ve got monetary policy is in the right place”. Later on we also heard from Chicago Fed President Evans, who said that he was “personally worried that inflation has been too low”, and he said that overshooting the inflation target would “further reinforce a view that our objective is in fact symmetric”.

To the day ahead now, and as mentioned central banks will be the highlight, with decisions from the Bank of England and the Riksbank out today, along with the Banco de México this evening. We’ll also hear from the ECB’s Lane, and get the minutes from the Reserve Bank of India’s December meeting. Data releases include French business confidence for December, UK retail sales for November, and from the US, we can expect Q3’s current account balance, November’s existing home sales and leading index, and December’s Philadelphia Fed business outlook. Finally in the US, tonight sees the latest Democratic presidential primary debate, and as mentioned there’s the Queen’s Speech taking place in the UK.

Tyler Durden

Thu, 12/19/2019 - 08:03


Business Finance


Angry French Pensioners Cut Power To Central Bank, Hint At More To Come

zerohedge News angry french pensioners power central bank hint more come All https://www.zerohedge.com   Discuss    Share
Angry French Pensioners Cut Power To Central Bank, Hint At More To Come

France's trade unions on Wednesday defended a series of illegal power cuts to 150,000 homes, thousands of companies and the Bank of France in an effort to force the Macron government to quash its wide-ranging pension reform, according to Reuters.

The power cuts, illegal under French law, deepened a sense of chaos

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in the second week of nationwide strikes that have crippled transport, shut schools and brought more than half a million people onto the street against President Emmanuel Macron’s reform.

Asked on French radio whether the power cuts weren’t a step too far, Philippe Martinez, the head of the hardline CGT union, said the cuts were necessary to force Macron to back down.

“I understand these workers’ anger,” the mustachioed union leader said. “These are targeted cuts. You’ll understand that spitting on the public service can make some of us angry.”

Following a meeting with government officials, he hinted at further cuts, saying “we may amplify these kinds of methods”. -Reuters

French President Emmanuel Macron slammed the pensioners "in the strongest of terms" during a cabinet meeting, according to a government spokeswoman - however his office acknowledged that they were open to "improvements" to their reform package ahead of another day of negotiations between the prime minister and union leaders.

Macron wants to turn the myriad of French pension systems into a single points-based one. That would force staff at state-owned firms such as railway SNCF or utility EDF, who enjoy more generous pension plans than private-sector workers, to work longer.

SNCF train drivers currently can retire at just over 50, for instance, against 62 for those in the private sector. That means taxpayers have to plug the SNCF pensions deficit to the tune of 3 billion euros every year.

According to the leader of the moderate CFDT union, the Macron administration had demonstrated greater "openness," but that an agreement was still "very far" away. Macron officials hope to resolve the dispute before Christmas, when millions of French will be traveling amid the potential ongoing strikes which include transportation workers.

"Cutting power to blue-chip companies, prefectures, shopping malls, that’s already rather questionable," said French Minister of Ecological and Inclusive Transition, Élisabeth Borne. "But clinics, metro stations, fire brigades and thousands of French people also saw power cuts. This is far from normal ways of striking."

The tactic of using power cuts to foment change began over a century ago, and were used after WWII, however they have been rarely employed until the recent protests, according to Stephanie Sirot, a historian at Cergy-Pontoise university.

"In the 90s, it was mostly set aside because some union members were worried it could turn public opinion against them," she told Reuters, adding "So they adopted other methods, like cuts targeting the homes of the elite."

And if polls are to be believed, around 57% of French citizens oppose the reform - an 11 point rise in one week, according to an Elabe poll for BFM TV (via Reuters). Still, 63% want a truce during the year-end holiday period according to the same poll.

Tyler Durden

Thu, 12/19/2019 - 02:45


Social Issues


Rubino Exposes The Central Planners: Desperate Acts By Clueless People

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Rubino Exposes The Central Planners: Desperate Acts By Clueless People

Authored by John Rubino via DollarCollapse.com,

It’s been obvious for a while that the next phase of global monetary madness would be both spectacular and very different from the previous phase. The question was whether the difference would be in degree or kind.

Now the answer is looking like “both.”


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start with “yield curve control,” in which central banks, instead of just pushing down interest rates, intervene to maintain the relationship between short and long-term rates.

In a recent interview, Federal Reserve Governor Lael Brainard said the following:

“I have been interested in exploring approaches that expand the space for targeting interest rates in a more continuous fashion as an extension of our conventional policy space and in a way that reinforces forward guidance on the policy rate. In particular, there may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum — yield curve caps — in tandem with forward guidance that conditions liftoff from the [effective lower bound] on employment and inflation outcomes.

To be specific, once the policy rate declines to the ELB, this approach would smoothly move to capping interest rates on the short-to-medium segment of the yield curve. The yield curve ceilings would transmit additional accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases.”

She sounds a bit like Alan Greenspan back in his peak obscurity days, so here’s a quick translation:

In the next recession, the Fed will promise to keep short rates at or below zero for a long time and also promise to hold longer-term rates a pre-set distance from short rates, thus freezing the slope of the yield curve in place.

As with so much of New Age monetary policy, this sounds like a fairly benign technical tweak – until you remember that interest rates, as the price of credit, actually have a crucial role in the functioning of a capitalist economy. The movements of long and short rates, both in absolute terms and in relationship to each other, tell businesses whether, where and how to allocate capital. Freeze the yield curve in place and the signal goes dark. Investors are left flying blind, with two results:

1) A lot less investment takes place because wise (that is to say risk-averse) capitalists recognize that they have no idea what they’re doing and choose to hoard their cash and refrain from borrowing more.

2) The deals that do get done feature a bigger percentage of mistakes — “malinvestment” in economist-speak — which means the aggregate resulting cash flow is lower and the number of high-profile failures larger, resulting in a society that’s both less rich and more unstable.

Since this will be happening in a world where capital has already been misallocated on a vast scale (think share repurchases and shale oil), increasing the outstanding amount of bad paper just takes us that much closer to the point of systemic failure.

Click here for the DollarCollapse.com Welcome To The Third World series.

Massive ADDITIONAL fiscal deficits

Meanwhile, countries with the most extreme monetary policy – defined as negative interest rates across the yield curve – are finding that beyond a certain point negative rates cause more problems than they solve. So their central banks are calling for “fiscal stimulus” – i.e., bigger deficits. In Japan:

Abe preparing $120 billion stimulus package to bolster fragile economy

(Reuters) – Japan is preparing an economic stimulus package worth $120 billion to support fragile growth, two government officials with direct knowledge of the matter said on Tuesday, and complicating government efforts to fix public finances.

The spending would be earmarked in a supplementary budget for this fiscal year to next March and an annual budget for the coming fiscal year from April. Both budgets will be compiled later this month, the sources told Reuters, declining to be identified because the package has not been finalised.

The package would come to around 13 trillion yen ($120 billion), but that would rise to 25 trillion yen ($230 billion) when private-sector and other spending are included.

Japan’s economic growth slumped to its weakest in a year in the third quarter as soft global demand and the Sino-U.S. trade war hit exports, stoking fears of a recession. Some analysts also worry that a sales tax hike to 10% in October could cool private consumption which has helped cushion weak exports.

Such spending could strain Japan’s coffers – the industrial world’s heaviest public debt burden, which tops more than twice the size of its $5 trillion economy.

Two takeaways here:

First, pushing interest rates into negative territory and not getting an epic debt-driven boom screams “end of the interest rate road.” If paying people to borrow doesn’t induce them to do so, then paying them more probably won’t generate much new action.

Second, running massive deficits and then raising sales taxes to offset the stimulus is the kind of policy mix that’s too stupid to bother discussing.

Desperate acts by clueless people

It was a surprise that QE and NIRP “worked” by staving off collapse for the past decade. It will be absolutely shocking if the coming, even more extreme experiments do the same. So expect the above and a lot more when things get really crazy, including central bank equity purchases, capital controls, wealth taxes, and maybe even price controls. Everything will be on the table and none of it will work.

Tyler Durden

Sat, 12/14/2019 - 11:30


Business Finance


Stocks Drop As Tariff Deadline, Central Banks Looms

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Stocks Drop As Tariff Deadline, Central Banks Looms

Global stocks, US equity futures, 10Y TSY yields and the US dollar dropped for a second day on Tuesday, amid what conventional wisdom said was "caution over a Dec. 15 deadline for the next round of U.S. tariffs" as well as looming Fed and ECB meetings and UK elections (although the real risk factor is the repo market as we will discuss shortly).

Following their count

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erparts in Asia, European shares fell again, with the Stoxx 600 index down over 1%  on course for its biggest decline in a week as 18 of 19 industry sectors slipped, as Germany’s DAX fell to its lowest in a week. Europe's open appeared to spring a trapdoor below the S&P futures which tumbled just around 3am, and undoing all post payroll gains.

The MSCI All-Country World Index was down 0.1%. Market uncertainty before this Sunday's tariff deadline was reinforced by comments from U.S. Agriculture Secretary Sonny Perdue on Monday, who said President Donald Trump did not want to implement tariffs but did want to see “movement” from China. If that comment was supposed to inspire confidence, it has failed.

With investors reluctant to make big bets, MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.17% lower. China’s benchmark Shanghai Composite index was off 0.08%. Australian shares were down 0.34%. Japan’s Nikkei fell 0.08%. 

New data in China showed producer prices fell again in November while consumer prices spiked to the highest level since 2011 on the back of soaring food inflation, complicating efforts to boost demand as economic growth slows.

Additionally, China also reported its latest credit aggregate data which came in modestly stronger than expected, although it was still well below where it should be for China to stimulate its way out of a sub-6% GDP.

In addition to trade, investors were also keeping an eye on the U.S. Federal Reserve. The Fed is expected to keep rates unchanged at its two-day policy meeting although investors will be watching policymakers’ forecasts for future U.S. economic growth.

“What you have seen since the end of the third quarter and the beginning of the fourth quarter was these two risks were receding ... And now this week you see those two concerns coming back on the market,” he said, adding that he expected their effect would be short-term.

Investors have focused this year on the risks of the UK crashing out of the European Union without a deal and a sharp escalation in trade war tensions, said Frank Benzimra, head of equity strategy at Societe Generale.

Euro zone government bond yields were mostly steady, refusing to budge from recent ranges. Germany’s benchmark Bund yield was steady at -0.30%, below a recent high of -0.26%. Italian 10-year bond yields, which fell on Monday, dipped 2.5 basis points to 1.36%.  In the euro zone, Christine Lagarde holds her first meeting and news conference as ECB chief on Thursday.

“Expectations for policy action from the ECB and Fed are subdued,” said Commerzbank rates strategist Rainer Guntermann. “Lagarde’s communication style will be watched closely, but that’s unlikely to lead to any repricing in bond markets.”

European sentiment got another modest boost when Germany's ZEW economic sentiment printed positive for the first time in six months.

In the US, two-year yields dropped to 1.619% on Tuesday, down from its close of 1.627% on Monday. The 10-year Treasury yield was at 1.8138% from a U.S. close of 1.8225% on Monday.

In FX, the Bloomberg Dollar Spot Index was little changed as EUR/USD edged higher after ZEW survey data. The pound edged higher even after data showed the U.K. economy unexpectedly stagnated in October, marking three straight months without growth for the first time since 2009. Norway’s krone dropped after Norges Bank’s regional survey of businesses showed lower growth than expected in the past months and in the half year ahead, lowering the probability of another rate hike

Worries over trade continued to push oil prices lower. Data released on Sunday showed that Chinese exports declined for a  fourth straight month, underscoring the impact of the trade war between the U.S. and China, which is in its 17th month. Global benchmark Brent crude fell 0.09% to $64.20 a barrel and U.S. West Texas Intermediate crude dipped 0.1% to $58.95 a barrel. Gold rose, fetching $1,462.05 per ounce.



Market Snapshot

  • S&P 500 futures down 0.3% to 3,123.75

  • STOXX Europe 600 down 1% to 402.25

  • MXAP down 0.2% to 165.07

  • MXAPJ down 0.3% to 524.35

  • Nikkei down 0.09% to 23,410.19

  • Topix down 0.08% to 1,720.77

  • Hang Seng Index down 0.2% to 26,436.62

  • Shanghai Composite up 0.1% to 2,917.32

  • Sensex down 0.6% to 40,235.57

  • Australia S&P/ASX 200 down 0.3% to 6,706.91

  • Kospi up 0.5% to 2,098.00

  • German 10Y yield rose 1.1 bps to -0.296%

  • Euro up 0.1% to $1.1075

  • Brent Futures down 0.3% to $64.07/bbl

  • Italian 10Y yield fell 7.3 bps to 0.929%

  • Spanish 10Y yield rose 0.4 bps to 0.458%

  • Brent Futures down 0.3% to $64.07/bbl

  • Gold spot up 0.2% to $1,464.71

  • U.S. Dollar Index down 0.06% to 97.59

Top Overnight News

  • The U.S. is unlikely to impose extra tariffs on a new $160 billion swath of Chinese goods including toys and smartphones come Sunday, Agriculture Secretary Sonny Perdue said. American and Chinese negotiators have signaled that they may be drawing closer to agreeing on phase one of a broader accord that would resolve the trade dispute, with the sides in almost “around-the- clock” talks, White House economic adviser Larry Kudlow said

  • Australian Reserve Bank Governor Philip Lowe said he was surprised at the weakness of third-quarter consumption, but doesn’t think it is a pointer to a prolonged period of stagnant spending as households have received an infusion of cash

  • China’s consumer inflation accelerated to a seven-year high in November while producer prices extended their run of declines, complicating the central bank’s efforts to support the economy

  • South Africa’s state power company intensified rolling blackouts to a record, signaling a deepening crisis at the debt- ridden utility and raising the risk of a second recession in as many years

  • Democrats are homing in on accusations that President Donald Trump abused his office in dealing with Ukraine and obstructed a congressional investigation into the matter, indicating they may be heading toward tightly drawn articles of impeachment

  • Hong Kong police defused two homemade bombs at a local Catholic school, in a reminder of the potential for escalation in the restive financial center after a lull in protest violence

  • House Democrats plan to unveil two articles of impeachment against President Donald Trump on Tuesday -- one on abuse of power and the other involving obstruction of Congress, according to four people familiar with the proceedings

  • Morgan Stanley is cutting about 1,500 jobs globally, including several managing directors, as part of a year-end efficiency push; the company was fined 20 million euros ($22.1 million) by French regulators after the bank’s London desk was accused of using “pump and dump” tactics to manipulate sovereign bond prices

  • Christine Lagarde came to the Frankfurt-based ECB pledging to bind environmental concerns much more closely into policy decisions - - echoing her strategy when she ran the International Monetary Fund. Six weeks into the post, she’s refining her message after a clamor of warnings from colleagues such as Bundesbank President Jens Weidmann that their scope is limited by their mandate

  • Sustainable financing has racked up almost half a trillion dollars of deals worldwide in 2019, fueled by a list of notable firsts. Next year may be even bigger

Asian equity markets resumed the cautious global risk tone heading into this week’s plethora of risk events and amid ongoing trade uncertainty from the looming US-China tariff deadline set for December 15th. ASX 200 (-0.3%) and Nikkei 225 (Unch.) were subdued with Australia pressured by underperformance in most of the trade sensitive sectors but with losses limited by resilience in commodity names, while favourable currency moves also helped stem the downside for Tokyo-listed exporters. Hang Seng (-0.2%) and Shanghai Comp. (Unch.) conformed to the lackadaisical picture as participants second-guessed whether the US will proceed with the 15% tariffs on virtually all of the remaining imports from China scheduled for Sunday and in which China have already set retaliatory tariffs due the same day. Furthermore, continued PBoC liquidity inaction, as well as warnings from a senior Chinese economist on looser fiscal and monetary policies next year also contributed to the subdued risk appetite. Finally, 10yr JGBs fluctuated in which prices were initially pressured and briefly slipped below the 152.00 level amid gains in yields in which the 10yr yield rose to 0.0% for the first time since March, with selling in JGBs exacerbated following the weaker results at the 5yr auction which showed a slightly softer b/c, a drop in accepted prices and wider tail in price, although 10yr JGBs then staged an aggressive rebound to recoup all the earlier losses.

Top Asian News

  • China’s Inflation Fastest Since 2012 on Surging Pork Prices

  • Blockchain Aggravates Swiss Money Laundering Risks, Says Finma

  • Japan Bonds Rebound as Benchmark Yield’s Rise to 0% Spurs Demand

European stocks are plumbing the depths [Eurostoxx 50 -1.1%] with the losses seen at the EU cash open accelerating in early trade. DAX futures and cash have retreated below the key 13k level after the former breached its Dec 5th/6th low ~13045 and its Dec low at 12924, with eyes now on its Nov low (12888.5) and 50 DMA (12880) as the index future gives up the 12900 mark. Other major bourses are broadly in the red with little by way of fresh fundamental factors to add to the overall narrative during the session, that said, participants gear up for a risk-packed week, with the US imposition of China tariffs on Dec 15th still looming. Sectors are all in negative territory, although some resilience is seen in defensives which reflects the overall risk picture in the region. The healthcare sector is outperforming its peers as Sanofi (+4.8%) shares cushion the segment - after the drug-maker released plans to reorganise its business which will see it narrow the number of global business units in an attempt to bolster growth and profits, whilst aiming to save EUR 2.0bln by 2022. Other notable movers include Deutsche Bank (-0.3%) whose shares opened higher after affirming its 2019, 2020 and 2022 targets, albeit shares dipped into negative territory on the DAX’s demise. Elsewhere, Ashtead Group (-7.5%) rests at the foot of the FTSE 100 amid fears that the UK market will remain challenging.

Top European News

  • U.K. Economy Fails to Grow Ahead of Brexit-Dominated Election

  • German Investors Turn Optimistic for First Time Since April

  • Ted Baker Chairman and Interim CEO Resign as Crisis Deepens

  • Morgan Stanley Fined $22 Million for Rigging French Bond Markets

In FX, the clear G10 laggard as Eur/Nok bounces further from sub-1.1000 lows towards 10.1900 on the back of the latest Norwegian regional survey revealing downgrades to output over the previous quarter and outlook for 6 months ahead. Norges Bank contacts also reported slower growth in all sectors of the economy and several respondents noted more uncertainty due to the adverse knock-on effects of global trade turbulence. The Q4 findings overshadowed inflation data that came in as forecast across the board in contrast to softer Swedish Prospera CPIF expectations, albeit with relatively little impact on the SEK given the fact that the Riksbank has underscored December repo rate hike intentions.

  • GBP/EUR - Sterling survived another bout of all round selling pressure amidst rising option volatility ahead of Thursday’s UK election and the final YouGov MRP poll to rebound firmly in Cable and Eur/Gbp cross terms even though data was disappointing on balance (m/m GDP flat, ip sub-consensus and trade gaps much wider than anticipated). In fact, the Pound is probing fresh peaks vs the Dollar circa 1.3190 and retesting 0.8400 against the single currency that has not derived much momentum from upbeat ZEW metrics for Germany and the Eurozone as a whole, with the former somewhat diluted by caveats. Indeed, Eur/Usd only mustered enough strength to register a 1.1080 high before fading and perhaps feeling the weight of hefty option expiries sitting between 1.1065-70 (2.3 bn).

  • CHF/JPY - The Franc continues to claw back lost ground vs the Greenback and Euro regardless of the looming SNB quarterly policy review and prospect of any tweak in assessment of the Swiss currency, or even direct intervention, with Usd/Chf edging closer to 0.9850 and Eur/Chf eyeing 1.0900. However, the Yen continues to respect 108.50 resistance and a Fib retracement in very close proximity (108.49) amidst decent expiry interest from 108.60-65 (1.5 bn), as the DXY narrowly maintains 97.500+ status).

  • CAD/NZD/AUD - The Loonie continues to trade on a firmer footing within 1.3245-25 parameters vs its US counterpart alongside the Mexican Peso (between 19.2450-19.2000 on the wide) on USMCA accord hopes, but the Kiwi and Aussie in particular are still treading cautiously ahead of the Fed and US-China tariff deadline, as Nzd/Usd and Aud/Usd pivot 0.6550 and 0.6825 respectively and Aud/Nzd keeps its head above 1.0400.

In commodities, crude markets are choppy – with recent action attributed to potential technical play. Front-month WTI and Brent futures popped higher to 59.40/bbl and 64.68/bbl respectively from below the round figures and with a lack of fresh fundamental news-flow to influence prices. Energy futures then reversed earlier gains and printed fresh session lows. Crude markets are susceptible to increased volatility as we go through the week with a number of key macro risk events on the radar – including FOMC and ECB monetary policy decisions, UK general election, US’ scheduled imposition of tariffs on USD 160bln worth of Chinese goods, whilst crude specific drivers include the weekly inventory data and the monthly oil reports – with the EIA STEO due later today.  Meanwhile, gold prices remain underpinned by the downside in the equity complex and ahead of the aforementioned events, whilst in terms of commentary – Goldman Sachs and UBS both see the yellow metal prices climbing to USD 1600/oz, above Commerzbank view of USD 1500/oz, amid the current trade environment, but caveat that it is unclear what Central Banks will do during 2020. Meanwhile, copper prices remain on the front-foot and is poised (thus far) for a third straight session of gains as the red metal creeps up to USD 2.75/lb. ING highlight a number of factors driving the upside 1) last week’s positive trade message after china said they would wave tariffs on imports of US pork and soybean, 2) China’s Central Economic Conference vowing to maintain economic growth in a reasonable range – adding to copper demand 3) the downward trend in LME inventories and 4) disappointing short-term scrap import quotas. Finally, Dalian iron ore futures rose in excess of 3.0% to its highest in over four months amid supply uncertainties expected to arise in Q1 2020, with some miners such a Vale also lowering production outlook.

US Event Calendar

  • 6am: NFIB Small Business Optimism, 104.7, est. 103, prior 102.4

  • 8:30am: Nonfarm Productivity, est. -0.1%, prior -0.3%

  • 8:30am: Unit Labor Costs, est. 3.4%, prior 3.6%

DB's Jim Reid concludes the overnight wrap

Markets seem to be in a holding pattern ahead of the FOMC, U.K. election and ECB meetings on Wednesday/Thursday so a bit of time to fill in our survey hopefully. We’re also waiting with baited breath for news ahead of Sunday’s key tariff deadline. In the meantime sentiment has been a shade weaker over the last 24 hours albeit on very little news to get excited about. The trade situation in particular has been eerily quiet and rather it’s been the focus on geopolitical tensions in North Korea which appears to be the blame for the mild risk off.

Indeed following Trump’s tweet over the weekend saying that North Korean leader Kim Jong Un was “too smart and has far too much to lose” if he renewed hostility with the US, the state-run Korean Central News Agency released a statement calling Trump “an old man bereft of patience”. Further statements also indicated a bit of an escalation in rhetoric however the overall impact on markets was still fairly muted. The S&P 500 and NASDAQ closed -0.32% and -0.4% last night after the STOXX 600 had edged down -0.24% with the FTSE MIB (-0.97%) underperforming. The VIX also hovered around 1 month highs up 2.2pts to just below 16.

This morning markets in Asia are in a similar holding pattern, with the Nikkei (-0.06%), the Hang Seng (-0.09%) and the Shanghai Comp (-0.20%) all trading slightly lower, although the Kospi (+0.38%) has seen gains. Ahead of the US session, S&P 500 futures (+0.06%) have also struggled for direction. The more notable news is that the Japanese 10yr yield did edge above 0.00% earlier. It hasn’t closed above zero since March. However since it poked its head above ground it’s gone back to -0.02% as we type.

Staying with Asia, overnight we had the November inflation data out of China, where CPI yoy rose to +4.5% (vs. 4.3% expected), the highest reading since January 2012. The increase was driven by food prices, which were up +19.1%, thanks to pork prices which rose +110.2% as a result of a virus creating a large shortfall in supply. Stripping out the more volatile price components, and the core CPI number (excluding food and energy) actually fell a tenth to +1.4%, the lowest reading since February 2016. The PPI number was slightly above expectations, with a -1.4% drop in producer prices (vs. -1.5% expected).

Speaking of China, our economists released their outlook for the country this morning (link here), where their view is that the economy is likely to bottom out in 2020, and they’re forecasting real GDP growth of +6.1% next year, compared with +6.0% in Q3 2019. The drivers behind this for them are a better outlook for exports as the global economy stabilises and further US tariffs come to an end or are even eased. They also see higher consumer spending, particularly on durable goods such as autos and cell phones, and finally they believe supportive fiscal and monetary policies will help growth thanks to infrastructure investment and higher credit growth.

Coming back to yesterday, the flip side of the weaker backdrop for equities was a slightly stronger day for bond markets. Indeed 10y Treasury yields closed down -1bps with the 2s10s curve also flattening -1.25bps. In Europe yields were also down 2-7bps led by BTPs as they reversed over half of the 12bps widening last week. An MNI story which hit the headlines in the afternoon suggesting that the ECB could be on hold for much of 2020 didn’t really change the narrative.

Meanwhile, in FX, Sterling held its gains from last week and is trading around $1.315 this morning with 2 days until the election. There was a poll yesterday, from ICM, which showed the Tories with only a 6ppt lead over Labour at 42% versus 36%. The ICM polls tend to show the narrowest lead for Tories and for context that gap narrowed by 1ppt from the last ICM poll on December 2nd. An interesting stat is that of the 65 polls published since campaigning began, 43 have shown a double digit Tory lead. The second YouGov MRP election model is out at 10pm tonight. The last one two weeks ago showed a healthy 68 seat majority for the Tories but the polls have slightly narrowed at the margin since then including YouGov’s ones so you would expect the predicted seats victory to be lower tonight. A reminder that this poll in 2017 correctly showed a hung Parliament c.9 days before Election Day and was counter to the vast majority of other polls showing a comfortable Tory victory. So it will be closely watched again.

In other news there was a bit of data yesterday but it didn’t really move the dial. In Germany exports surprised to the upside in October (+1.2% vs. -0.3% expected) while imports (0.0% mom vs. -0.1% expected) were more or less in line. Elsewhere, the December Sentix investor confidence reading improved 5.2pts to +0.7 (vs. -5.3 expected). That’s actually the strongest reading since May. Continuing with Germany our local economists reported that the SPD's party congress ended on Sunday without a revolution against the government coalition but with delegates voting for a package of resolutions that should sharpen the SPD's leftist profile and will further fuel tensions between the coalition partners once they shift into pre-election mode. See their note here for more.

Staying with Europe, yesterday DB’s Mark Wall published his outlook for Europe next year. First and foremost Mark has raised his forecast for euro area growth from 0.8% to 1.0%. This is the first upgrade in over a year and is broadly equalling trend growth. It reflects leading indicators brightening slightly and risks reducing. Mark urges caution though. The trade war and hard Brexit remain risks and he notes the scope for significant upgrades is limited. There are also headwinds such as the auto sector's struggle with CO2 regulations. See more in Mark’s full note here.

Staying with the outlook theme, Francis Yared published his rates’ outlook yesterday (link here) and his forecasts for 10y Treasuries and Bunds by the end of next year are 1.90% and 0%, respectively. This assumes that none of the major geopolitical risks materialise. In addition, risks to this yield forecast are tilted to the downside in the US and upside in Europe. Francis also flags that the year-end forecasts hide a tortuous path. The US election uncertainty and seasonal effects should put some downside pressure on yields in Q2/Q3 before recovering in Q4 once election uncertainty dissipates.

To the day ahead now, where the highlight datawise this morning is the December ZEW survey in Germany. Also due out is the October monthly GDP and trade data in the UK along with October industrial production prints in the UK, France and Italy. In the US today we’re due to get the November NFIB small business optimism print and final Q3 revisions for nonfarm productivity and unit labour costs.

Tyler Durden

Tue, 12/10/2019 - 07:56


Business Finance


Morgan Stanley: Central Banks Are Injecting $100 Billion Per Month To Crush Vol And Spike Markets

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Morgan Stanley: Central Banks Are Injecting $100 Billion Per Month To Crush Vol And Spike Markets

One week ago, in response to the recurring question whether the Fed's latest direct intervention in capital markets is QE or is NOT QE, we answered by looking directly at how the market itself was responding to the Fed's liquidity injections.

The answer was clear enough: just like during the POMO days of QE1, QE2, Operation

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Twist, and QE3, stocks have risen in every single week when the Fed's balance sheet increased, following the three weeks of declines that led to the October 11 announcement. What about the one week when the Fed's balance sheet shrank? That was the only week in the past two months since the launch of "NOT QE" when the S&P dropped.

And yet, some doubts still remains.

As Morgan Stanley's Michal Wilson writes today in his Weekly Warm Up piece, "in recent marketing meetings, several clients have asked if we think theFed's $60B/month balance sheet expansion is QE or not." In response, Wilson gives the podium to MS interest rates strategist Matt Hornbach who says that it's "Q" but not "QE." In other words, "there is little debate that the Fed is increasing the quantity of money, or Q. However, they are not taking duration out of the market so the additional money lacks a direct transmission mechanism to the equity markets or other long duration risk assets."

While semantically Wilson and Hornbach are correct, the outcome is obvious: whether it is Q, QE, or NOT QE, the money is clearly making its way to the market when the Fed's balance sheet expands, and vice versa.

And quite a bit of money it is, because it's not just the Fed.

As Wilson further elaborates, "we continue to see the 3 largest central banks in the world expand their balance sheets at the rate of $100B per month ($60B from the Fed, $25B from the ECB and $15B from the BOJ)." As a reminder, several years ago, Citi's fixed income guru Matt King said that it takes $200 billion in quarterly liquidity injections across all central banks to prevent a market crash, and lo and behold we are now well above that bogey.

But wait, there's more: in case $300 billion per quarter was not enough, last week there was also an announcement that Japan would enact a new fiscal stimulus of approximately $120 billion which could be as much as $230 billion when you include the private economy incentives. That, as Wilson puts it, "is a lot of money." It's also an issue for the traditionally bearish Wilson, who as a reminder in mid November got a tap on the shoulder and, kicking and screaming, was "urged" to raise his S&P bull case target to 3,250.

It could go even higher.

As Wilson notes on Monday, "as part of our year ahead outlook published a few weeks ago, we cited this excessive liquidity as a reason why we thought the S&P 500 could trade well above our bull case year end target of 3250 while this policy action persists. As of right now, it appears that the Fed, ECB and BOJ will continue at this pace through the first quarter of next year."

But wait, didn't Wilson just say moments earlier that the liquidity injection by central banks "lacks a direct transmission mechanism to the equity markets?"

Well, yes and no. Wilson connects the two, by explaining that in his view, "the central bank transmission mechanism is via suppressed volatility", to wit:

The recent actions by the Fed were intended to reduce volatility in the repo market but it's also had the effect of reducing the volatility in risk markets. Exhibit 1 and Exhibit 2 show 30 day realized volatility for the S&P 500 for two periods. The first period is the post crisis financial repression era, and the second is the longer term. As you can see, we recently reached one of the lowest readings of this era when we hit 5.7% at the end of last month after a brief spike in September when repo markets became disrupted.

To put this in context, this reading is in the first percentile of the past 7 years, a time when QE and financial repression has been very active...

... almost as if QE is active once more.

Now, the reason why the Fed is directly targeting volatility - assuming MS' thesis is right - is that vol also happens to be the key signal for two of the dominant market investors active today: CTAs and vol-targeting strategies. As shown in Exhibit 3and Exhibit 4, one can see that the flow of funds from these strategies is quite volatile and rather significant in size.

Morgan Stanley's Quantitative Derivative Strategies (QDS) team estimates that since September, inflows to global equities are close to $175B of which ⅔ ended up in the US. The charts also show the two major downdrafts last year around the volatility shock in January/February 2018 and then the end of the year liquidity squeeze from QT and economic growth deterioration. All that changed in 2019, and this year's flows have been quite positive with over $300B into global equities cumulatively with a few shocks in May and August to the downside as market volatility increased around escalating trade tensions and then recession fears. With both of those concerns fading recently along with central bank balance sheet expansion those outflows have reversed sharply to inflows.

More importantly, since these two strategies are directly driven by vol, and specifically the lower the volatility, the greater the leveraging, the inflows and the bullish impact on stocks, the more the Fed depresses volatility, the higher stocks rise.

And so, with central banks remaining stimulative with aggressive balance sheet expansion, Wilson notes that vol should remain suppressed in the absence of a breakdown in trade negotiations or hard evidence that the economic cycle is turning down again. (of course we will know as soon as this Sunday if trade negotiations will indeed not suffer a breakdown).

The question then turns to how high Morgan Stanley can reasonably expect the S&P 500 to rise from here if these trends remain stable. The next chart shows how realized volatility is related to the equity risk premium (ERP). Unsurprisingly, the MS equity strategist finds a positive relationship between the two – i.e. falling/rising vol is relative to falling/rising ERP.

However, there have been some important divergences between the two over the past several years. First, in 2016, the ERP remained somewhat sticky to the upside despite very low realized volatility. This can be attributed to the high political uncertainty during that year due to the US Presidential election and Brexit. There was also a large gap in early 2018 when we experienced a sharp spike in realized vol but the ERP remained quite low. This divergence can be attributed to the observation that the vol shock was more technical in nature and not fundamentally induced. Therefore, the ERP remained low.

Fast forward to today, when we currently observe a third major divergence between the two – the ERP remains more elevated than one might expect based on its relationship with realized vol. So what's going on now?

Here, Morgan Stanley thinks this makes sense given what is likely to be another heightened year of political uncertainty much like 2016. Trade tensions are also likely to remain even with a phase one deal getting signed. Finally, the bank's core bearish view is that corporate margins/profitability will continue to be a drag on earnings growth even in the muddle through late cycle scenario our economists forecast for the US.

And yet, this is where the upside "risk" to Morgan Stanley's bullish forecast lies, because the ERP could certainly fall further, which is why Wilson has been highlighting the near term upside risk for the S&P 500 to trade above his bull case target (3250) so long as the Fed and other central banks keep vol suppressed below "normal" levels. Looking at Exhibit 5, it's fair to argue ERP could fall another 50bps toward 325-50bps if vol stays suppressed. Using the bank's ERP/Rates framework in Exhibit 6 and assuming 10 year Treasury yields remain close to current levels, the forward P/E multiple could expand another couple of turns. Using the currently consensus forward EPS of $177.42 this means that the S&P 500 might be able to overshoot to the upside in this suppressed volatility environment.

Of course, all of the above was written by a Michael Wilson who is merely covering his (bearish) ass in case the S&P does hit 3,400 which as emerged earlier today, is JPMorgan's as well as Goldman's 2020 target. In an ideal world, where the Fed had not launched QE, Wilson's tone would have been decidedly different. Which is also why he adds the footnote that "this is not our base case assumption, mainly because we think the ERP should remain at current levels, or higher, given the uncertainties around politics, policy and earnings growth for next year."

A little more of Wilson's bearishness shines through when he says that he is confident the current consensus forecasts for earnings next year remain 5-10 percent too high. However, he concedes that the market will use the consensus numbers as its best guess/most likely outcome at least until their are proven wrong. Here, just like this year, the reduction in forward EPS is bound to be slow as companies are loathe to reduce forecasts until they absolutely have to, and analysts rarely deviate far from company guidance.

Having offered the market his bull - and even mega-bull - case, Wilson is then allowed to revert back to his normal, bearish self, and pointing to last week's jobs data and consumer confidence data which "were well received by equity investors," he notes that "the action in the bond market and our cyclicals / defensives ratio left a lot to be desired."

Specifically, the strategist notes that despite what has been a series of better data points on the economy and forward looking indicators, both the 10 year Treasury Yield and his cyclicals/defensives stock ratio remain well below key resistance levels. In fact, both are still close to their lows in 2016 and below levels reached last December!

This makes sense and in in fact confirms Wilson's view that "downside risks to growth remain higher than upside risks", especially since the S&P 500 is a very defensive equity market and could be viewed as its own asset class that received a unique allocation in passive portfolios. Meanwhile, the greatest risk in the equity market remains in growth stocks where expectations are too high and priced. From a sector standpoint, this is consumer discretionary broadly and expensive software and secular growth stocks. Since then, Wilson notes that these groups have underperformed and Morgan Stanley thinks that this will continues. Indeed, while consumer discretionary group had a decent day on Friday but its relative performance was still slightly negative remaining well below its 200 day moving average and appearing to be completely broken technically. Broadly, software had an even weaker day on Friday relative to the market capping a poor week and leaving its relative performance in a precarious position technically.

Looking at the chart above, one can argue that the consumer discretionary line - which is now far below its 200DMA -is now in a breakdown. Why is this notable? Because as Wilson concludes, "consumer discretionary is an early cycle sector and we are clearly late cycle." While the stocks had a good 2018 and first half of 2019 because US consumers have benefited from the tax cuts and have been spending well above trend, "this above trend spend however is likely coming to an end."  So, even though the consumer is healthy and likely to continue to spend, he is unlikely to spend at the pace of the past few years, Wilson concludes.

Which brings us to his bearish punchline (at least as much as he is allowed to be bearish), to wit: "stocks are now beginning to discount that slowdown and we think there is likely more downside given the early cycle properties of these stocks in what is a late cycle environment."

Of course, the materialization of this worst-case scenario would just mean even more QE from the Fed, which would then bring up the last -for this cycle - scenario we discussed over the weekend in "When We Fall Back Into A Recession And Real QE Returns, Watch Out."

Tyler Durden

Mon, 12/09/2019 - 19:07


Business Finance


Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis

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Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis

There is something very fishy about the world's economic situation. On one hand, US president Trump keeps repeating that the US economy is the strongest it has ever been, with global strategists, economists and officials parroting as much they can, repeating that the world economy is also set to rebound sharply any minute now. And yet, two things sta

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nd out.

As we pointed out first last month, and as Convoy Investments echoed last week, with the US economy allegedly doing very well, the Fed's balance sheet is now expanding at a rate matched only briefly by QE1, and faster than QE2 or QE3, in the aftermath of September's repo fiasco which provided Powell with an extremely convenient scapegoat on which to hang the return of "NOT QE" (which, we now know, is in fact QE.)

The Fed's unprecedented balance sheet expansion in a time of alleged economic stability and solid growth is a handy explanation why the S&P has been soaring in the past two months, and as we pointed out, a remarkable correlation has emerged whereby the S&P is up every week the Fed's balance sheet is higher, and down whenever the balance sheet has declined.

And so, while helping us understand what has been the fuel for the market's recent blow-off top meltup, the Fed's emergency intervention does beg the question: is there something amiss more than just the repo market, and is Powell telegraphing that a far more serious crisis may be looming.

It's not just Powell, however. It's everyone.

As Bank of America's Michael Hartnett notes in his latest Flows and Liquidity weekly, global monetary policy has flipped from Quantitative Tightening (net 42 hikes & $650bn liquidity removed in 2018) to aggressive Quantitative Easing (net 53 cuts) and represents that fastest pace of central bank cuts since the financial crisis.

Of course, back then, there was a legitimate reason for central banks to be cutting rates as if their lives depended on it: they literally did, because absent stabilization at any cost, fractional reserve banking, modern economics and the entire western way of life was on its way out in the aftermath of the Lehman failure.

Yet now there is none of that.... or so conventional thinking goes. In fact, the global economy - while sputtering - is supposedly doing just fine. And yet, central banks are acting as if a global financial crisis is just around the corner.

And here are the stats backing this up: central banks have injected $400 billion in liquidity since last Christmas, while the dovish ECB and now Fed - which added $107BN in liquidity on Friday lone - are set to boost central bank balance sheets by another $600 billion in 2020 and, as Bank of America's Hartnett concludes "remain chief bullish support for risk assets."

What does this all mean? It means that whereas we once joked that stocks would hit +∞ the moment World War III begins, we are now convinced - and dead serious - that algos will bid up every single asset to whatever is "limit up" (if there is one) when the next depression officially begins, frontrunning the final act, in which central banks buy every single asset out of existential desperation, as the alternative would be a world where the central planning that has defined "markets" for the past decade, is finally over.

Tyler Durden

Sun, 12/08/2019 - 16:59


Business Finance


European Central Banks Are Slowly Preparing For Plan B: Gold

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European Central Banks Are Slowly Preparing For Plan B: Gold

Written by Jan Nieuwenhuijs of Voima,

It was long believed in the gold space that Western central banks are against gold, but things have changed, for quite some years now. Instead of discouraging people from buying gold, or convincing them that gold is an irrelevant asset, many of these central banks are increasingly honest about the true properties of this m

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onetary metal. Stating that gold is the ultimate store of value, that it preserves its purchasing power through time and is a global means of payment. Such statements, combined with actions that will be discussed below, reveal that more and more central banks are preparing for plan B.

The Bundesbank (the German central bank) published a book last year named Germany’s Gold. In the introduction, written by the President of the Bundesbank Jens Weidmann, the view of this bank leaves no room for interpretation. Weidmann writes (emphasis mine):

Ask anyone in Germany what they associate with gold and, more often than not, they will say that it is synonymous with enduring value and economic prosperity.

Ask us at the Bundesbank what our gold holdings mean for us and we will tell you that, first and foremost, they make up a very large share of Germany’s reserve assets ... [and they] are a major anchor underpinning confidence in the intrinsic value of the Bundesbank’s balance sheet.

The Bundesbank produced this publication to give a detailed account, the first of its kind, of how gold has grown in importance over the course of history, first as medium of payment, later as the bedrock of stability for the international monetary system.

For Keynesians these comments might read like the Bundesbank (BuBa) is a “goldbug.” Its remarks, however, are simply common sense. Gold has enduring value. The world over it is associated with economic prosperity. Every reserve currency in the world today is underpinned by vast gold reserves. Otherwise, monetary authorities wouldn’t trust holding the respective currencies, next to holding their own gold reserves. Gold truly is the bedrock of stability for the international monetary system. 

Central Banks and Exter’s Pyramid

What springs to mind when reading Weidmann’s statement is Exter’s Inverse Pyramid. John Exter was an American economist that in the 1960s conceived an upended pyramid of financial assets. Underneath the pyramid is gold that forms the base of most reliable value; all asset classes within the pyramid on progressively higher levels involve more risk. Exter would sometimes refer to his model as the debt pyramid; hence, he positioned gold outside of it as it’s the only asset that has no liability against it.

Tellingly, when Exter addressed the Economic Society of South Africa in Johannesburg on November 16, 1966, he said (source):

Gold is the hard core of our international monetary system.

“Bedrock” (Weidmann) and “hard core” (Exter) are similar, and both point to gold’s strength and what it can carry. An essential element of capitalism is investing—directly, indirectly, through bonds or equity—that involves risk. The higher the risk, the higher the return. The lower the risk, the lower the return. What falls outside of the investment realm has zero risk and no return, but provides the base that carries the debt system. This safe haven is gold, the only asset refuge that has no counterparty risk.

In the Balance of Payments and International Investment Position Manual (BPM6) drafted by the International Monetary Fund (IMF), we read:

Financial assets are economic assets that are financial instruments. Financial assets include financial claims and monetary gold held in the form of gold bullion … A financial claim is a financial instrument that has a counterpart liability. Gold bullion is not a claim and does not have a corresponding liability. It is treated as a financial asset, however, because of its special role as a means of financial exchange in international payments by monetary authorities and as a reserve asset held by monetary authorities.

The IMF considers all financial assets to have counterparty risk, except gold.

On page 112 of BPM6 the IMF lists all international reserve assets by descending order. Crowning the lineup is physical gold, followed by cash, debt securities, equity, and finally derivatives. Nearly an exact copy of Exter’s Pyramid.

Another appearance of the pyramid can be found on the website of the Dutch central bank, De Nederlandsche Bank (DNB). Since April 2019 DNB’s gold information page reads:

A bar of gold always retains its value, crisis or no crisis. This creates a sense of security.

Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis. That is why central banks, including DNB, have traditionally held considerable amounts of gold. Gold is the perfect piggy bank—it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.

Exter’s pyramid all over. Kindly note the similarity between DNB’s and BuBa’s comments on gold providing essential confidence in their balance sheets. It goes to show these two central banks have a long history of cooperating.

I tweeted about DNB’s candid approach last April (a few months later, it went viral).

Let’s continue with another quote, this time from the Bank of Finland (BOF):

Gold – The basis of a monetary system

Gold is called the eternal payment instrument and has been used as a medium of exchange for thousands of years. Gold is a genuinely global means of payment that has maintained its value throughout history.

One more, from the Banque de France (BDF):

Key facts

Gold is a highly sought-after precious metal, considered to be the ultimate store of value.

All central banks quoted agree gold preserves its purchasing power through time.

Preparing for Plan B

Next to strong statements by central banks, they’re acting accordingly. Shortly after the Great Financial Crisis (GFC), central banks as a sector became net buyers; and Germany, the Netherlands, Austria, Hungary and Turkey, among others, repatriated gold. Mainly from the Bank of England in London and the Federal Reserve Bank of New York.

According to BuBa, their repatriation scheme had three objectives: cost efficiency, security, and liquidity. Cost efficiency is about the storage costs in every location. Security involves the safety of the vaults and where those vaults are. The current trend is to have a significant fraction of gold on home soil due to the geopolitical environment. Liquidity is about owning bars that adhere to prevailing industry standards and are located in liquid marketplaces such as London, i.e., to make payments in times of changes in the financial system. This latter aspect deserves special attention.

As we’ve seen, Western monetary authorities mention gold to be, “the anchor of trust for the financial system,” “the bedrock of stability for the international monetary system,” and, “a genuinely global means of payment.” They’re also saying that “if the system collapses, the gold stock can serve as a basis to build it up again.” One wonders if these entities are preparing for a new type of international gold standard. They see it as one possible outcome, as in recent years, several central banks have upgraded their gold reserves to current gold industry standards, also referred to as London Good Delivery.


Throughout history, bars of different purities were traded in wholesale markets. By 1954 every new bar accepted in the London Bullion Market—the center of gold trade since the 18th century—was required to be at least 995 parts per thousand fine and weighing in between 350 and 430 fine troy ounces. Although not every old bar was promptly upgraded. Some remained as they were, in vaults in London and other places. These bars now trade a at discount, usually equal to the cost of upgrading and, if necessary, transporting them to London.

After the GFC many central banks were holding bars that were cast before 1954, which are currently not liquid in wholesale markets. In response, the French, Swedish and German central bank, that I know of, have upgraded their gold reserves to solve this liquidity issue.

From the Banque de France:

Since 2009, the Banque de France has been engaged in an ambitious programme to upgrade the quality of its gold reserves. The target is to ensure that all its bars comply with LBMA [London Bullion Market Association] standards so that they can be traded on an international market.  

From the Swedish Riksbank:

To ensure that the Riksbank has the most liquid gold reserve possible, in 2017 the Riksbank upgraded the part of its gold reserve that did not meet the LGD [London Good Delivery] standard by replacing these bars with new gold bars that do meet the standard.

I don’t have a quote from BuBa itself on their upgrade operation. However, connecting a few dots uncovers when and how they did it. BuBa released a bar list in 2015 disclosing all their gold to be 995 fine or higher. In the book Germany’s Gold, a bar is displayed on page 110 with the subscription:

In the course of the relocation [repatriating] of gold holdings in 2013 and 2014, this bar … was melted down from old bars stored at the Fed and newly manufactured. The remelting served to obtain a detailed picture of the fineness of bars which were produced by various refiners in different years. They are among the Bundesbank’s newest gold bars.

While BuBa states this bar was melted for assaying purposes, in reality, it was part of making their entire stack at least 995 fine. One, because it doesn’t require melting a whole bar for assay testing. Two, on November 11, 2017, the Financial Times published an article on how BuBa repatriated its gold. The article states:

more than 4,400 bars transferred from New York were taken to Switzerland, where two smelters remoulded the bullion into bars that meet London Good Delivery standards for ease of handling.

Just like that one bar wasn’t melted to ‘obtain a detailed picture of the fineness,’ an additional 4,399 bars weren’t melted ‘for ease of handling.’ They were all refined for one reason: to meet London Good Delivery criteria and make Germany’s gold reserves wholly liquid.


According to John Exter, when the debt pyramid has grown in excess and becomes unstable, bubbles burst. Investors, seeking safety, will run down the ladder until they find solid ground (the bedrock). This foundation is gold, which can’t default or be arbitrarily devalued.

The GFC was caused by too much debt (a credit binge). When Lehman fell, and the house of cards came crumbling down, the quickest solution authorities could think of, ironically, was more debt. We went from “extend and pretend” to “delay and pray.” Central bank intervention can be effective, for a while, until the underlying problem resurfaces with a vengeance. Presently the world is more in debt than before the GFC. The Institute of International Finance estimates global debt to GDP is now 320%.

When reading the mainstream media, one can be persuaded to think all central banks are willing to “print” money to infinity and lower interest rates as far as they can—or launch a variety of the same—pushing us further into the abyss. Some of them, though, aren’t that ignorant and are actively preparing for when paper currencies are forced to be devalued by the weight of debt issued in said currencies.

There’s one more development at a Western central bank I like to share. The Banque de France—whose vaults were a vibrant part of the global gold market during the classical gold standard—has not only upgraded its metal but also enhanced its entire vaulting infrastructure since the GFC. From BDF:

Since the 2008 financial crisis, there has been renewed interest in gold from reserve managers.  

As well as upgrading its stock, the Banque de France is taking various other steps to ensure it meets LBMA criteria [these standards apply for trading across the globe] … The renovation of the historical vaults housing the gold reserves has nearly been completed: the floor will be able to support heavy forklift trucks, and intermediary shelves have been inserted between the existing shelves to ensure the gold is only stacked five bars high, making handling easier. Other storage facilities will be available soon: either strong rooms for storing bare bars on shelves or large vaults to store sealed pallets, facilitate handling, transportation and auditing. By the end of the year, a new IT system will be in place to improve our ability to respond to market operation needs and other custody services.

So, after the GFC, not only have Western central banks changed the way they talk about gold—that is, they have become more honest regarding gold’s function as a safe haven—but, as a sector, central banks have also become net buyers. Many central banks have redistributed their gold, carefully considering all possible future risks and developments. A few central banks have upgraded their gold to current industry standards to be able to trade frictionless in international markets. One central bank, BDF, has even enhanced its entire vaulting infrastructure. And this is just based upon publicly available information.

We’re all too familiar with central banks in the East openly buying gold, stimulating citizens to buy gold, setting up new gold exchanges, and de-dollarizing. In the West, these subjects are more sensitive for political reasons. As a result, since the GFC, Western central banks gently started moving towards gold, not to cause any shocks in the market. In 2015, I called this “the slow development towards gold,” and it’s continuing still.

It’s beyond the scope of this article to discuss every probable international monetary development and attribute a percentage chance to each of them. I think it’s clear though, that many central banks are preparing for gold to play a resolving and pivotal role in future global finance. Why else buy, redistribute and upgrade gold, next to enhance trading facilities, increase transparency and then advertise gold’s financial features? Keep in mind what Pericles said around 500 BC, “the key is not to predict the future but to prepare for it.”

Currently, Exter’s Pyramid has grown too big and is unstable. The moment the pyramid falls, “gold will do its job.” History teaches us gold protects its owners through all types of weather, and central banks know this. Ever wondered why virtually every central bank owns gold? Because gold is physical. Immutable, yet divisible. Independent and without counterparty risk. It is the ultimate store of value—as it retains its purchasing power through time—and works as an eternal payment instrument.

Tyler Durden

Wed, 11/27/2019 - 05:00


Business Finance


A $20 Trillion Problem: More Than Half Of China's Banks Fail Central Bank Stress Test

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A $20 Trillion Problem: More Than Half Of China's Banks Fail Central Bank Stress Test

In our latest look at the turmoil among China's small and medium banks, which included not only the recent bailouts and nationalizations of Baoshang Bank , Bank of Jinzhou, China's Heng Feng Bank, but also the two very troubling bank runs at China's Henan Yichuan Rural Commercial Bank at the start of the month, and then more recently at Yingkou Coastal Bank. 


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s we further explained, the reason why so many (for now) smaller Chinese banks have found themselves either getting bailed out or hit by bank runs, is that in a time when China's interbank/repo rates have surged amid growing counterparty concerns, increasingly more banks have been forced to rely almost entirely on deposits to fund themselves, forcing them to hike their deposit rates to keep their funding levels stable.

Meanwhile, cuts in key lending rates since August to stimulate up a slowing economy have only exacerbated net interest margin pressures on banks.

In other words, with less income from lending and without the full suite of funding options available to much larger peers, the interest rates that China’s legion of small banks may have to offer to attract deposits could further undermine their stability. The irony is that to preserve their critical deposit base, small banks have to hike deposit rates even higher to stand out, in the process sapping their own lifeblood and ensuring their self-destruction, or as we dubbed it earlier, China's own version of Europe's "doom loop."

Dai Zhifeng, a banking analyst with Zhongtai Securities, told Reuters the funding difficulties risked distorting small banks’ behavior, making failure even more likely: "Lacking core competitiveness, some of them have turned to high-risk, short-sighted operations," he said, adding that a liquidity crunch was possible at some institutions.

But for a nation with a $40 trillion financial system, double the size of US banks, and well over 4,000 small, medium and massive, state-owned banks, here please recall that the 4 largest banks in the world are now Chinese:

  • ICBC: $4TN

  • China Construction: $3.4TN

  • Agri Bank of China: $3.3TN

  • Bank of China: $3.1TN

... the question how many banks will fail in the near future, is especially relevant not only for China but for the entire world.

Luckily, we got an answer from none other than China's central bank, which on Monday said that China’s banking sector is "showing signs of strain", with more than 13% of 4,379 lenders now considered “high risk” by the central bank.

In other words, take the 5 banks listed above which either suffered a bank run and/or were bailed out or nationalized, and add to them over 500 which are about to suffer the same fate.

As Bloomberg reports, in the PBOC's its 2019 China Financial Stability Report, the high risk category contains 586 banks and financing firms, most of which are smaller rural institutions. The report also comically noted that one bank got a "D" grade this year, meaning it went bankrupt, was taken over or lost its license. No banks were named in the report.

And here is why the next global financial crisis will likely start in some backward Chinese province best known for its massively polluting coal plants, ghost cities and made up GDP data: while foreign and private banks are seen as relatively safe, more than one third of rural lenders were rated "high risk," or those which are near failure.

Additionally, some medium- and small-sized financial institutions received poor ratings because of the slowing economy, with small lenders more sensitive to swings in the economy.

What did the PBOC do with this doomsday list? As Bloomberg reports, the central bank notified each bank of its rating, and required some to increase capital, reduce bad loans, limit dividends and even change management. In short, trillions in Chinese bank (non performing) assets are about to mysteriously disappear off the books while hundreds of local banks scramble to inject liquidity in their balance sheets, effectively removing free liquidity from the interbank market.

Separately, the PBOC also stress tested 30 medium- and large-sized banks in the first half of 2019. In the base-case scenario, assuming GDP growth dropped to 5.3% - or well above where China's real GDP is now - nine out of 30 major banks failed and saw their capital adequacy ratio drop to 13.47% from 14.43%. In the worst-case scenario, assuming GDP growth of 4.15%, or less than 2% below the latest official GDP print, more than half of China's banks, or 17 out of the 30 major banks failed the test. So with the entire Chinese financial system roughly $40 trillion, this suggests that China now has a rather insurmountable $20 trillion problem on its hands.

Separately, a liquidity stress test at 1,171 banks, representing nearly three-quarters of China’s banking sector by assets, showed that 90 failed in the base-case and 159 in the worst-case scenario.

* * *

According to the central bank, it made progress in containing financial risks in the past year, but warned that some potential threats require more time to eliminate. Financial risks can “occur easily” and more frequently as the economy cools and the risk of a slowdown in global growth increases, it said, clearly offering a very non-subtle hint of what is coming.

Faced with this complex situation, the central bank said that it should “stay cool-headed” to keep a balance between economic growth and risk control. It also means that the PBOC is now trapped - on one hand it can't cut rates further as it will push even more small banks into insolvent as per the "doom loop" described earlier, on the other it can't hike rates as then the entire economy would slow, resulting in unprecedented devastation and tens of trillions in bank assets wiped out.

Next year marks the last year in a three-year campaign by policy makers to contain financial risks. The PBOC said it will “fine-tune” its policies to fit the economic situation, ensuring that they aren’t too tight or too loose according to Bloomberg. The general direction of containing financial risks will be unchanged, in other words, despite the clear signs that things are bad and getting worse by the day - yes, there were two bank runs in the past two weeks - after years if not decades without a single bank crisis - the PBOC will do what China has been so good at doing in the past decade when it comes to addressing the unprecedented risks associated with a 320% debt/GDP and a $40 trillion financial system.

Tyler Durden

Tue, 11/26/2019 - 22:41


Business Finance


Sweden's Central Bank Governor Lays Out Digital Currency Vision

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Sweden's Central Bank Governor Lays Out Digital Currency Vision

Authored by Steven Guinness,

Before a technological concept is introduced to the wider public, it is common for it to first undergo beta testing to iron out any deficiencies that may not be immediately obvious to the developers. An example of this in the UK is the latest instalment of the Football Manager franchise. Every year the maker Sports Interactive i

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ssues a beta version which players painstakingly test prior to the official release of the game. After feedback is analysed and acted upon, the aim then is for a smooth launch of the finished product.

Whilst on a much grander scale, beta testing will serve as an equally important aspect in how central banks plan to successfully implement their own variants of digital currency.

In one of my recent articles I discussed an appearance by Federal Reserve board member Lael Brainard at an event held in Washington D.C. called, ‘The Future of Money in the Digital Age‘. Present also at this event was the Governor of Sweden’s central bank (the Sveriges Riksbank) Stefan Ingves. During a panel discussion, Ingves laid out a six step criteria for the introduction of central bank digital currency. Before expanding on Sweden’s specific role pertaining to CBDC’s, here is a summary of the six steps in question:

  1. Large value and retail payments must be settled in central bank money anywhere around the world – in real time – 24 hours a day

  2. Cross currency and cross border payments must also be settled in central bank money under the same conditions

  3. A re-definition of what constitutes legal tender in the digital age

  4. A digital currency issued directly by the central bank and certified as legal tender

  5. Government sponsored digital identification as part of new regulations and a reinforcement of financial inclusion

  6. A requirement for physical money and a system to distribute banknotes in the event that the digital network goes down, to be under the control of the central bank

Out of all the six steps, number five is perhaps the most ambiguous. What it refers to is something Bank of England governor Mark Carney discussed in a speech at Mansion House in London last year. As part of the BOE’s objective to reform the UK’s RTGS payments system, they have been looking to utilise what is known as the ‘Legal Entity Identifier.’ This would mean that every transaction undertaken within the renewed RTGS could be traced back directly to each participating individual. This is significant not just in terms of privacy, but also because as Victoria Cleland of the BOE has mentioned, the vast majority of consumers are completely dependent on RTGS. If implemented, the LEI would, according to Carney, be a format that ‘defines international best practice‘. Central banks hope to deflect concerns over LEI by claiming it will combat terrorist financing and prevent money laundering. In reality it has more to do with depriving consumers of any last vestiges of anonymity.

A good starting point for appreciating the significance of Ingves’ vision is to look at the Riksbank’s commentary on digital currency. Exactly one year ago Ingves gave a speech that outlined the central banks’ ‘e-krona‘ project. Since 2017 the Riksbank have been engaged in an extensive research programme on the potential for issuing a digital version of its Krona currency that would eventually supersede physical money.

Ingves confirmed that the bank is building a pilot version of e-krona. There are two possible models for how it could be introduced. The first is through e-kronas held in an account at the Riksbank, with the second allowing the general public to hold money with the central bank through digital tokens stored on a bank card or mobile app. What the two have in common is that no matter which option was implemented, both would see the public’s money held directly at the Riksbank.

As many readers will already be aware of, physical cash is classified as central bank money. The digital variant of banknotes, for example debit cards, is commercial bank money. Put simply, the private bank you and I hold accounts with have the authority to hold our money electronically and allow us at any time to convert it back into cash e.g. central bank money. Judging by what the Riksbank have said, an e-krona currency could allow individuals to hold electronic money with the central bank, bypassing the traditional commercial banking system.

As for why Sweden in particular are spearheading the digital currency movement

in Europe, one reason is that according to several news sources, a spate of high profile robberies after the year 2000 served to change people’s perception of cash for the worse. A growing number of businesses have ever since been seeking to abandon cash in favour of digital only payments. Even Swedish unions have been campaigning for cash free workplaces, on the grounds of protecting their members.

Aside from this, Sweden’s small population of ten million is looked upon as a pioneer of digital technology within the field of payments. In a survey conducted by the Riksbank in 2018, just 13% said they paid for their most recent purchase using cash. In 2010 that figure was 39%. Cash is no longer accepted in a growing swathe of restaurants and shops, and cannot be used to park your car or pay taxi and bus fares. These circumstances have provided Riksbank governor Ingves with the ammunition to declare that Sweden must now prepare for an all digital payment future.

This is where point three of Ingves’ six step plan comes into focus. With banknotes in rapid decline, the Riksbank is stressing the need to review the Sveriges Riksbank Act that governs their control of the money supply. Chapter five of the act states that banknotes and coins issued by the Riksbank are legal tender. But there are no provisions within the act to accommodate an e-krona, which is why Ingves wants the country’s legal tender legislation re-evaluated.

In April this year the Riksbank proposed a review of the concept of legal tender, arguing that within the near future cash usage could become almost non-existent and leave a void in terms of who has jurisdiction over the issuance of money:

The general public no longer having access to any form of central bank money can make it more difficult for the Riksbank to promote a safe and efficient payment system in Sweden, not just in times of crisis and war but also in peacetime. The Riksbank has previously expressed concern over this development and has therefore analysed the scope for introducing a Central Bank Digital Currency (CBDC).

What the Riksbank want, in their own words, is a review of ‘the state’s role with regard to means of payment in a digitalised economy and the role and responsibility of both the state and the private sector on the payment market.’ This is very similar language to what has been emanating from the Bank of England and the Federal Reserve – a collaborative approach whereby the state and private sector work hand in hand. It is why these same central banks are now in the process of reforming their payment systems to be compatible with the technology being developed by private firms.

In the spring of 2019 the Riksbank made it known that they had begun the process of procuring suppliers for the development of an e-krona. By 2020 they hope to be in a position where a technical platform for e-krona payments can be developed and tested.

Through their communications the bank have attempted to present e-krona as a means of guaranteeing that the Swedish public would continue to have access to state issued money in the absence of cash. They caution that by not pressing ahead with it, the population would be left to depend on private payment alternatives, which in turn would hinder the Riksbank’s ability of promoting a ‘safe and efficient payment system.’

They have yet to release a pilot of e-krona, but Ingves has raised the prospect that such a currency could conceivably connect to the ECB’s 24/7 TIPS payment network. As with all globalist objectives, Ingves believes that it is necessary to begin progress towards an e-krona ‘with small steps forward and to learn along the way.’ This is no surprise given that gradualism is the preferred model for global planners.

To remain at the forefront of the global monetary system, it stands to reason that central banks will over the medium to long term adopt digital currencies. What many in the independent media fail to recognise is that their apparent hostility to entities such as Bitcoin and Facebook’s Libra project is not indicative of hostility towards digital money. They openly want to digitise all capital, but also want to retain jurisdiction over how it is supplied.

As with other central banks, the Riksbank aim is to work in conjunction with private payment providers, not against them. They propose this within a report published in October 2018, ‘The Riksbank’s e-krona project – Report 2‘:

For it to be practically possible to use e‐krona for online purchases or in physical shops, the e‐krona platform, which contains the underlying register for e‐krona, needs to interact with a number of other systems and agents. Banks and other companies, for example, need to be able to join the e‐krona platform in order to be able to develop and offer payment services to households and companies. 

Within this report the importance of being able to ‘record transactions and safeguard who is the rightful owner of the digital krona’ is also raised. The Riksbank make it quite plain that all digital transactions with e-krona would need to be traceable, and from their perspective this is where the focus should be during development.

Going by one of Governor Ingves’ most recent publications – ‘How to ensure the future of the Swedish krona‘ – if an e-krona becomes a reality, the Riksbank are not going to abolish cash overnight. It will be far more subtle than that. Instead they are pledging that citizens will have access to state money in both physical and digital form, and be able to choose either as a means of payment. They expect that once an e-krona becomes part of people’s everyday existence, they will gravitate further away from cash until it eventually disappears from circulation. This way it looks to the wider world like the natural evolution of money rather than a premeditated plan to make the tangible intangible.

But something else to consider is how Ingves frames the necessity for an e-krona. He stated that ‘it is time to act to secure the future of the Swedish krona.’ A narrative I have picked up on over the past year is that if central banks do not develop cash alternatives soon and governments fail to define what constitutes legal tender in the digital age, it could leave the financial system prone to a widespread currency crisis. Particularly with the expansion of cryptocurrencies, stablecoins and the prospect of Facebook’s Libra. The current crop of fiat currencies – led by the dollar’s role as world reserve – could therefore be in jeopardy. Through the eyes of globalists this would be fertile ground for moving the cashless agenda forward to the concept of a global currency framework, led by the linchpins of the system the BIS and the IMF.

Sweden is a template for where internationalists want to take the world in a monetary sense. As the digital currency agenda widens, do not be surprised if fiat currencies in their present guise become more unstable and susceptible to major fluctuations in value. The onset of crises have been shown over the centuries to be an opening for globalists to advance their goals for a ‘new world order‘. Be in no doubt that digital currencies are a vital cog in that ambition.

Tyler Durden

Fri, 11/22/2019 - 05:00


Business Finance


"This Is An Entirely Different Bubble" - Veteran Short-Seller Warns "Central Banks Are Losing Control"

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"This Is An Entirely Different Bubble" - Veteran Short-Seller Warns "Central Banks Are Losing Control"

Authored by Christoph Gisiger via TheMarket.ch,

In an in-depth conversation with The Market, Kevin Duffy, the head of hedge fund Bearing Asset Management, reveals where he sees the most dangerous excesses and which stocks look attractively cheap in today’s environment.

All is good. The trade war

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between China and the United States comes to an end, the global economy has weathered the worst, and central banks are making sure that markets continue to go up. This is the scenario currently shaping the consensus.

Kevin Duffy remains skeptical. The experienced short seller warns that the super easy monetary policy is getting less and less effective.

Although it’s been a brutal year for short sellers, Duffy is convinced his time will come soon. In this in-depth conversation with The Market, he explains why he’s betting against stocks like BlackRock and MSCI – and which names are on his buy list.

Mr. Duffy, investors are in «risk on» mood again: concerns about a global recession are waning, the S&P 500 is at record levels. What’s your take on financial markets?

To me, it’s interesting how everything is out-of-sync: You have the bond market going down, the stock market going up and gold being sort of all over the place. I think central bankers are already starting to lose control as the recent weakness in bonds shows. Just look what’s happening with the 100-year Argentine bond: It has been cut in half since August.

In the US, the yield on ten-year Treasuries is up more than 40 basis points since late August. What’s behind the recent weakness in the bond market?

I think it’s exhaustion. This year, we’ve had this big sea change in terms of the central banks going back to easing and being more accommodative. Yet, the bond market is basically saying: no more! Easy monetary policy is not having the same stimulative effect as it had in the past.

You have been warning about a gigantic bubble in the bond market for some time now. What are the reasons for the excesses in fixed income?

Bill Bonner has a good quip where he says: «When it comes to science and technology, man learns, but when it comes to love, war and finance, he makes the same mistakes over and over again.» The big mistake of our times is the great monetary experiment which started in August 1971 when the US went off the gold standard. Every bubble has a belief system, a unifying narrative. This time it’s that the central bankers are all powerful.

What do you mean by that?

It’s this idea that there is a free lunch when it comes to printing money. That’s what Modern Monetary Theory is all about: We can have our cake and eat it, too. We don’t have to feel the pain of a recession or the pain of a severe bear market. Anytime we get close to a downturn, central banks can just print money. Of course, we know that’s sheer nonsense. There is no free lunch. Polices like negative interest rates and Quantitative Easing are doing damage to the underlying economic engine. They misallocate capital, discourage thrift and promote fast money over slowly building wealth. At the end of the day, central banks are not all powerful. They are not immune to the laws of economics.

What does that mean for investors?

Let’s go back to the last couple of bubbles and compare them to the current one. We know that the seeds of these bubbles are artificially low interest rates. The last two bubbles were sector specific: You had the tech bubble and then the housing and credit bubble. But this one is an entirely different animal. This time, the center of the bubble is the bond market. You can even say at its core is the sovereign debt bubble. Then, you have all these other bubbles at the periphery: the high yield bubble, corporate bonds, auto finance, large cap technology, passive investing, private equity – bubbles everywhere. That’s what we’re looking at: Something on a much greater scale than anything we’ve seen before.

Since the financial crisis, we went through similar growth scares before. Each time central banks printed more money and a global recession was avoided. Why do you think it’s different this time?

With $16 trillion of the world’s bonds priced at negative yields a few months ago, it felt like all of this policy stimulus into the bond market had reached the climactic point. Since then, bond investors have started feeling some pain. One of the signatures of this bubble is the price insensitive buyer, with central bankers at the top of the list. The idea is that if the markets are on autopilot you might as well get rich by front running the central bankers and the index investors who are just blindly buying the index. It’s this narrative that we have a massive steamroller in terms of monetary policy and easy money is there for the taking. But beware the old saying about picking up pennies in front of a steamroller.

Then again, interest rates have been declining for almost four decades. Why do you think we’re at an inflection point?

Besides the absurdity of creditors paying for the privilege of lending money to governments, we’re seeing wild disconnects typical of major inflection points. In this regard, I think a lot about what happened in the late 1970s and early 1980s. At that time, you had severe price inflation and Fed Chairman Paul Volcker coming in to try to break the back of that. The first sign of a change in sentiment was the gold bubble starting to unwind in the spring of 1980. Yet, the stock market floundered and the bond market continued to decline into September of 1981. In other words, investors ignored the early signals of disinflation. The gold market was telling them that something was changing fundamentally. But at first, the other markets were completely disconnected. Then, the bond market started to get in sync and rally because it sniffed out that something was changing. The stock market continued to go down for another eleven months before it turned. That’s a classic example of these disconnects.

How is it going to play out this time?

My thesis is that when this bubble bursts, gold should rally, while bonds and stocks should crash. Against this backdrop, it’s remarkable that gold seems to have bottomed right around late April when Bloomberg BusinessWeek came out with its «Is Inflation Dead?» cover. Yet, this signal from gold was widely ignored and we got this blow-off in the bond market. Since this crazy rally peaked in August, we’ve seen a pretty good decline in bonds. Maybe this is telling us that a change is afoot. Yet, the stock market is breaking out to new highs. These markets can just disconnect for a while and it looks like stocks will be the last to get in line.

Couldn't the recent rally in stocks and the decline in bonds also be a signal that the worst of the global slowdown is behind us and the economic picture is improving?

I think that’s not really the case. That’s not what the economic evidence is showing. We’re ten years into a recovery. It’s not like we went through an economic trough and now we’re just going to have a classic business cycle where the economy starts to recover and rates go up. Something different is happening.

What is happening?

I tend to focus on things like the fact that we have all this easy money which went into malinvestments. To me, that’s more of a forward look compared to, let’s say, labor market statistics which are backward looking. Also, I do a lot of bottom-up work by looking at companies. There, it’s fairly obvious what’s going on: You see growth rates coming down pretty much across the board. Take a look at Apple’s numbers, for instance: Annual gross profits are down over the past twelve months, yet the stock is up close to 70% year-to-date.

What do you mean when you’re referring to malinvestments?

We’re starting to see what’s behind the curtain in terms of the venture capital markets ecosystem. When these unicorns like Uber were still private, there was a tendency to assume they had substance. Now that these companies are under the light of public scrutiny we can see that the emperor is not wearing any clothes. For example, look at SoftBank’s recent $6 billion loss from the WeWork debacle and Uber racking up $20 billion in losses over the past five years. As short sellers, we were thrilled by the prospect that WeWork would go public and we’d get an opportunity to short it. The cracks in the IPO market are telling us that there are limits to easy money. That’s the common theme: we’re getting exhaustion.

In the business of short selling, you are a battle-proven veteran. How are short sellers doing these days?

I have never been through anything like this. As the ultimate price discovery agents fighting a market on auto pilot, our tiny corner of the market has been decimated. It’s been an absolutely brutal year. As of the end of October, inverse Exchange Traded Funds made up only 0.29% of total ETF assets. By comparison, in 2010, this was at 2.35%.

Very few short targets have unravelled this year. At Bearing Asset Management, we’re not only shorting stocks but bonds as well – and the bond market has been even worse up until recently. This Everything Bubble is much more difficult to short than a «normal» bubble since it’s so broad-based and persistent. I’m sure that will change. But honestly, as somebody who’s been doing this for a while, there are times I wish I had never discovered short selling. That’s what a major top feels like.

That said, where do you see the most promising short opportunities?

In auto finance, in the passive bubble and in money losing companies like Tesla or Carvana. These are a few of the themes we’re betting against. But we’re scaling back and trying to stay focused on our best ideas. It’s kind of a circle the wagons, bunker mentality at this point.

What makes this market so difficult for short sellers?

For instance, as a way to bet against the passive bubble, we’re short BlackRock and MSCI. These companies have benefited from rising asset prices and have been able to take in a good portion of the inflows into passive strategies. But they have given most of these benefits back because of fee compression as a result of investors gravitating toward lower cost alternatives. It’s amazing how much of a headwind this has been, yet investors are so far unfazed. BlackRock is up close to 25% year-to-date and MSCI around 65%. For short sellers like us this has been frustrating because I think we’ve gotten a lot of the fundamentals right.

You’re also investing on the long side. Where do you see attractive investments?

Jean-Marie Eveillard, the highly respected value investor who has been in this business for decades, once said that there has been only one market where he was not able to find any value: Japan in the late 80s. There is always value when you look hard enough. One of the things we know from past bubbles is that you often get anti-bubbles. This was clearly the case in the year 2000 when you had the new economy bubble on one side, and the old economy anti-bubble on the other side. When tech stocks peaked in March of 2000, a lot of the «boring» value stocks bottomed at the same time.

Where do you find anti-bubbles today?

One of the reigning narratives is that Amazon is going to put all retailers out of business. This may be true in a lot of cases, particularly in the mall space. But there will be survivors who benefit from their competitors going bust. Many of these names went through massive bear markets over the past three years. That’s why it may pay off to rummage through the junk pile in the retail sector.

Any specific names you have in mind?

American Eagle. They compete in the teen apparel area. Aéropostale, one of their main competitors, is bankrupt and in liquidation. Aéropostale was a poster child for financial engineering: They once had a great balance sheet and were doing well, but squandered it all on buybacks. When the business started to go sour, they didn’t have the balance sheet to weather the storm. In contrast, American Eagle has come through unscathed while everybody else was falling by the wayside. Now, they have less competition. Also, with their Aerie concept they compete with Victoria's Secret and are trying to reach an audience that doesn't have the perfect supermodel body. It’s one of the most successful concepts in retail, and yet it’s wrapped in this older mall-based company that has this «Amazon roadkill» stigma. Another interesting company is Urban Outfitters. The stock is up close to 50% since mid-August, so it’s not quite as cheap as American Eagle. But it’s a high-quality retailer and clear survivor.

Where else do you spot opportunities on the long side?

I’m a little bit hesitant to bang the drum for resource-based stocks and commodities because I think we’re going into a global recession. But there are some interesting areas we’ve been poking around a little bit. For instance, food-related commodities like fertilizer tend to be more defensive as opposed to things that are more sensitive to the economy like copper.

How about gold?

Precious metals and mining stocks are another example of an anti-bubble: Faith in central banking is at the heart of this bubble and precious metals are the inverse of faith in central banks. So we like gold and gold stocks. Admittedly, gold mining is not a good business since it’s very capital intensive and whenever there is a boom there tends to be tremendous waste. But if gold goes up further, these companies are going to benefit.

Are there any other bubbles or anti-bubbles investors should be aware of?

There is also a socially responsible investing aspect – along the lines of environmental, social and governance factors – to this bubble as the Millennials start to take over investing functions. It’s a filter that you have to be aware of. Certainly, Tesla appeals to this ESG crowd. Another example is Beyond Meat, which went public in early May and shot up nearly tenfold in less than three months. At its peak, the company was valued at $15 billion with just $200 million in revenue and barely about to turn a profit.  Large bureaucratic companies in general have become bastions of political correctness willing to cater to the ESG crowd. On the other side, if you’re a small entrepreneurial company, you’re not hiring based on diversity quotas. You’re hiring the most competent people you can find since you don’t have time to collect a bunch of worthless statistics. I feel this will be the gift that keeps on giving for contrarian investors: You want to look for stocks that don't neatly fit into the ESG screens. The obvious example is the energy sector, especially natural gas exploration and production stocks, which are severely depressed. Fossil fuel investments are strictly verboten in the ESG playbook. That's an opportunity.

*  *  *

Kevin Duffy is a battle-proven veteran in the risky business of short selling. He co-founded Bearing Asset Management in 2002. He and his partner were vocal critics of the 2007 credit bubble, successfully shorting many of its most aggressive players including Countrywide Financial and Bear Stearns. Prior to Bearing, Kevin co-founded Lighthouse Capital Management and served as Director of Research from 1988 to 1999. He chronicled the excesses of the Japan and technology bubbles of the late 1980s and the late 1990s. Kevin Duffy bought his first stock at the age of 13. He has a passion for Austrian economics and is the author of the popular Notable and Quotable blog.

Tyler Durden

Wed, 11/20/2019 - 10:45


Business Finance


ECB Member Hints Central Bank Will Buy Stocks When Situation Gets "Really Bad"

zerohedge News member hints central bank will stocks when situation gets really All https://www.zerohedge.com   Discuss    Share
ECB Member Hints Central Bank Will Buy Stocks When Situation Gets "Really Bad"

Following last month's IMF summit where central bankers from around the world conceded the negative rates no longer stimulate the global economy, the ECB's new head, convicted criminal Christine Lagarde has found herself in a quandary: besides demanding a fiscal stimulus boost from Germany, one which is unlikely to come for at least another 6 months now that Berlin narrowly avoided a t

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echnical recession, what else can she demand to stimulate Europe's moribund growth at a time when Europe's key offshore growth dynamo, China, is not only set to grow at the slowest pace on record but is furiously exporting deflation?

The answer came on Saturday courtesy of ECB policy maker Madis Muller, the governor of the Bank of Estonia, who essentially hinted that the ECB could very well buy stocks during the next recession, saying that the central bank could broadened its asset-purchase program, if the economic situation in the euro area deteriorates significantly.

“Right now, we are doing unconventional things,” he told students at a Bundesbank event in Frankfurt on Saturday. "You could - of course - imagine even more unconventional things if the situation gets really bad", which it will of course with slow motion trainwreck Christine Lagarde at its helm whose crowning achievement was approving the IMF's biggest loan on record to Argentina just a few months before the Latin American nation made it clear it is headed for another default. While Muller declined to cite which specific assets the ECB would buy next, the answer is clear - as Larry Fink said point blank in July, the ECB will buy stocks next to somehow stimulate the European economy, when in reality all it will do is stimulate the bank accounts of those Europeans lucky enough to own stocks.

Ironically, Muller opposed September’s decision to resume ECB net asset purchases. Even so, he cited the Japanese and Swiss central banks as examples of policy makers pursuing wider stimulus efforts than in the euro zone - of course, both central banks openly purchase both stocks and ETFs; in fact, as we reported just a few days ago, the SNB now owns a record $93.2 billion in US stocks after a Q3 buying spree.

Muller spoke as the ECB continues to struggle to revive inflation through stimulus measures, while also running the risk of hitting self-imposed limits on how many bonds it can buy from each of the euro zone’s 19 member governments. As we reported one month ago, the ECB now has roughly 10 months left of German bond purchases before it hits a brick wall and is forced to change its self-imposed sovereign debt financing debt purchasing rules.

There "are ways to go beyond the government bonds, and a little bit of corporates and other assets that we are buying now," Muller said. And while he didn’t recommend it, it was clear that someone higher up in the food chain wood.

Mueller is not the first to suggest the ECB can and will expand its universe of eligible assets. Aside from several Reuters trial balloons, back in May 2016, in a moment of what appeared to be either drunken insanity or brutal honesty, Lithuania's central banker and ECB member Vitas Vasiliauskas said that "we still have a lot of tools and we can make surprises for the market. I don’t see for the moment any need for a new rabbit because we should implement what was agreed, what was announced.”

Vasiliauskas' punchline: “Markets say the ECB is done, their box is empty. But we are magic people. Each time we take something and give to the markets - a rabbit out of the hat."

Stay off the drugs, Vitas.

Meanwhile, just to prove him right, the ECB is once again buying €20 billion euros of bonds per month after amassing €2.6 trillion during previous rounds of purchases that ended last year, yet was restarted after just 10 months. Coupled with the Fed's own $60 billion/month in T-Bill purchases, the Fed and ECB will buy a near record $420 billion in assets next 6 months according to Bank of America.

And still it won't be enough, forcing the world's biggest hedge fund also known as the ECB, to start openly buying stocks.

Once it starts, it is unclear when - and if - it will ever stop: the European central bank has pledged to continue quantitative easing until inflation is firmly within its target of just under 2%, something that its own forecasts don’t foresee until at least 2021. Furthermore, as European investors and corporations are incentivized to buy stocks instead of investing in growth and spending money on capex, asset prices will promptly surge even as broader economy inflation slides to zero and eventually turns into outright deflation.

Separately, Muller, who is the youngest member of the ECB's Governing Council at 42, said the central bank needs to think about how low it wants to push government bond yields and what "benefits" that would bring. Of course, one can just ask any European bank about those benefits. Or not: as we reported yesterday, as of this moment, Disney alone has a market cap greater than the capitalization of Europe's top 5 biggest banks.

Muller also noted the usual disclaimers the precede any episode of full-blown equity purchases by an entity that literally prints money out of thin air, stating that policy makers also have to be “aware of different side effects and think twice before you do something,” particularly given how many unconventional steps the ECB has already taken.

We are confident that just like years and years of BIS warnings, the young central banker's attempt to instill some caution among his peers will be for nothing.

Having very low interest rates “makes sense” in the current economic situation, said Muller, who was in favor of the decision to reduce the deposit rate to minus 0.5% in September. Still, going much further may not help as Bundesbank head Weidmann stated on Friday, when he said that rates are close to the lower bound, i.e., that the ECB's reversal rate - or the rate below any further rate cuts become a headwind to the economy - is fast approaching.

"There is a question of how low you can go,” he said. “At some point you could be facing a question of how effective it is."

For rates that is; because somehow when it comes to buying bonds, both sovereign and corporate, and soon stocks, apparently nobody has ever faced a question of how effective that is and to the smart people in the room shown below, only wonderful things come out of central banks directly becoming the only marginal buyer in the world's most important capital markets.

Tyler Durden

Mon, 11/18/2019 - 04:15


Business Finance


"Three Things I Learned In Washington": Central Bankers Aren’t Sure What To Believe Anymore

zerohedge News three things learned washington central bankers arent sure what believe anymore All https://www.zerohedge.com   Discuss    Share
"Three Things I Learned In Washington": Central Bankers Aren’t Sure What To Believe Anymore

Submitted by Huw van Steenis, senior adviser to the CEO of UBS, and formerly senior adviser to Bank of England Governor Mark Carney.

Three things I learned in Washington

As the world's central banks and economic policymakers convened in Washington over the weekend for the annual meetings of th

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e IMF, IIF and World Bank, there was a distinct lack of conviction in the air.

"Globally synchronised slowdown", trade wars, political uncertainty and persistent ultralow interest rates have ground down most investors and policymakers’ belief in the prevailing economic or market narratives.

So the most interesting conversations were about transitions and tail risks. What are the long term implications of negative rates? How disruptive is digital money? And what does the greening of the financial system mean in practice?

Central banks are wrestling with a major challenge: are negative rates starting to do more harm than good? Professor Charles Goodhart of the LSE and I fear we may have already have this “reversal rate” in the Eurozone.

Like steroids, unconventional policy, such as negative rates, can be highly effective in limited dosages but long term usage starts to weaken the skeletal system. Given that negative rates have been in place for over a quarter of the time that the euro has existed, policymakers are starting to worry about the negative consequences — like impaired banking systems and asset bubbles.

I sensed an inflection in the level of concern from two distinct groups: Anglo-Saxon policy makers who simply never want to open the Pandora’s box of negative rates, and European policy makers growing increasingly concerned about the toolkit to break out of the “Japanification” of the eurozone.

What’s more, the penny is dropping that negative rates are hampering the ability of many eurozone banks, aside from the market leaders, to invest confidently in digital technology to serve clients better and fend off the risks from disruptive new entrants. I came away feeling the bar is now incredibly high for any further negative rate cuts.

Second, technology is rapidly changing the way we pay for things. Investors know this well from the huge growth in value of Mastercard, Visa, Paypal and Amex, or new firms like Stripe and Ant Financial.

Little wonder that payments has become the battleground between Big Tech, existing payments firms and banks. The size of the prize can be huge. Alipay and WeChatPay represent 90% of mobile payments in China.

Facebook’s audacious moonshot, Libra, has raised the stakes. Whilst not a single financial boss I met thinks Libra will succeed unless it pivots to a local currency model — think PayTM or Alipay — it has rattled the policy world.

One former central banker highlighted that counterfeiting currency has been a capital offence in many countries over the centuries, and they sounded keen to bring this level of disapproval — if not the actual punishment — to the digital age.

If nothing else, Libra is likely to prompt a flurry of initiatives to improve the plumbing and regulation of payments. But I sensed little appetite for major central banks to create their own blockchain digital currencies — as Fed Governor Brainard argued compellingly, at the Peterson Institute’s “Future of Money” summit.

But the overwhelming theme, if there was one, was the greening of the financial system. Many central banks are following the lead set by Governor Mark Carney that climate change is a legitimate concern for financial regulators.

The transition to a lower-carbon economy will require large scale re-allocation of capital and new investments. Without high quality comparable data, investors, lenders and insurers wont be able to price climate risks and opportunities effectively. That was a key theme of my Future of Finance report.

2019 has been a pivotal year: Japanese firms who have agreed to disclose their climate change footprint according to the standards set by the G20’s Task Force for Climate-related Disclosures (TCFD) have gone from 9 to 199 in just one year. Today four-fifths of the top 1100 companies in the world have now voluntarily signed up.  And pressure will grow in the remainder to report, I heard at the World Economic Forum roundtable.

I see a similar upswing in investor interest. Some two-thirds of new institutional asset management mandates in Europe have sustainable criteria, albeit with massive variation in what clients want.

Taking these new TCFD disclosures and turning them into something decision-useful for portfolios and firms is no small undertaking. And let us be in no doubt, there is a healthy debate about the materiality of these issues amongst policy makers. But this is where the puck is going.

Low conviction meant investors at Washington were largely taking their cue from the late-cycle investing playbook. Seeking to dial up quality across their portfolios and testing the dependability and sustainability of earnings. And thinking about how these transitions and tail risks will play out.

Tyler Durden

Sat, 10/26/2019 - 10:58


Business Finance


Who Owns The World's Central Banks

zerohedge News owns worlds central banks All https://www.zerohedge.com   Discuss    Share
Who Owns The World's Central Banks

More than three years ago, Fed watchers were stunned when none other than Ben Bernanke's former special advisor, Andrew Levin, said that "a lot of people would be stunned to know” the extent to which the Federal Reserve is privately owned, stating next that the Fed "should be a fully public institution just like every other central bank."

But is that true? Are all other central banks "fully public"? For the ans

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wer we go to a recent post from The BOE's Banker Underground blog which looks at the question of who really owns central banks. Here is what it found.

by David Bholat and Karla Martinez Gutierrez

Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?

In this blog post, we explore the variety of central bank ownership structures, both historically and globally.  We also suggest areas for future research on the topic.

The separation of central bank ownership and control

Ownership is a complex concept, a bundle of rights and responsibilities. In ordinary language, if I say I own a bike, then this implies I possess the bike and can use it as I please. Ownership implies control.

However, as Thorstein Veblen, Adolf Berle and Gardiner Means first observed, control is sometimes unbundled from ownership in modern corporations. The owners of corporations (shareholders) are usually abstracted from their day-to-day operations. Instead, control of corporate resources is ordinarily exercised by its management. Therefore, to say that I own shares in a corporation has a much narrower meaning than when I say I own a bike.  In the case of a corporation, I am mainly saying that I have a financial interest in the business, specifically, that I am a residual claimant on the corporation’s profits after all other claimants such as employees, creditors and the government (taxes) have been paid.

Veblen, Berle, and Means developed their ideas with for-profit private sector corporations in mind. Yet, the distinction they drew between ownership and control is surprisingly applicable to most modern central banks. The owners of central banks, mostly governments, are ordinarily responsible for making executive appointments, and receive a share of central banks’ profits. Day-to-day control of the central bank is delegated to the central bank’s senior management and policy committees.

While both modern central banks and modern corporations are often characterised by a separation between ownership and control, there are key differences in their organisational objectives. The purpose of most private sector corporations is the pursuit of profits for shareholders. By contrast, central banks typically have statutory mandates based on economy-wide goals – e.g.  price stability, financial stability and market functioning. This is irrespective of whether central banks are wholly owned by government, or, as in a handful of cases detailed below, their residual claimants are private sector entities.

Consequently, the issue of central bank ownership is considered by most scholars of marginal importance. Yet the issue of central bank ownership is a salient topic to revisit at present when the constitutional basis of central banks is receiving renewed attention (Goodhart and Lastra 2017; Tucker 2018). In what follows, we offer a survey of the variety of central bank ownership structures historically and globally.

The nationalisation of central banking

In the early twentieth century, there was a roughly even mix of central banks with private sector and public sector shareholders (Figure 1). That changed mid-century. Some established central banks, like the Bank of England, were nationalised (Figure 2). At the same time, almost all of the central banks created in post-colonial states were established fully state-owned. By the end of the century, just a handful of central banks with private sector shareholders remained.

Figure 1: Ownership model of central banks globally over time, 1900 to the present

Source: Central banks’ websites

Figure 2: List of nationalised central banks globally in order of year nationalised

Source: Central banks’ websites

While state-owned central banks now predominate, some central banks still have forms of private sector shareholding. These include central banks in the United States, Japan and Switzerland. Figure 3 classifies these central banks according to whether they are owned by government, private sector banks, other private sector shareholders, or some combination of these. ‘Other private sector shareholders’ means individuals and/or non-bank private sector institutions. The European Central Bank (ECB) represents a fourth ownership model not adequately captured by Figure 3, as it is established by treaty among EU member states. Besides the ECB, other supra-national central banks include the Eastern Caribbean Central Bank, the Bank of Central African States and the Central Bank of West African States.

Figure 3: Classification of central banks by ownership

Source: Based on de Kock (1965), Rossouw (2018) and information from central banks’ websites

Figure 4 provides more detailed information on central banks not fully owned by governments. Ownership models vary considerably among these nine central banks. Although the central banks of Japan, San Marino, and Turkey have some private sector shareholders, the majority shareholder is still the state. In Belgium and Switzerland, around half of the shares are held by the government. By contrast, the American, Italian, and South African governments have no formal ownership stake in their central banks. The Bank of Greece presents a more mixed model, although it is worth bearing in mind that it, along with the Belgian and Italian central banks, are members of the Eurosystem.

Figure 4: Institutional detail on central banks not fully owned by governments

Source: Central banks’ websites

Figure 4 also shows heterogeneity among these central banks in how they remunerate their private sector shareholders. In some cases, like the US Federal Reserve, the amount paid to shareholders is fixed such that the dividend closely resembles a coupon payment on a bond. In other cases, as in Turkey, the remuneration is variable and discretionary, although even here it is capped. A recent paper finds that central banks with private sector shareholders do not differ from central banks with only public sector shareholders either in their profitability or in the share of profits they distribute to shareholders.

A forward-looking research agenda

This blog has provided a primer on central bank ownership. Occasionally, some people argue central banks should be fully privatised, with the largest private sector banks playing the role of lenders of last resort. Conversely, some argue central banks should be fully nationalised. However, central bank ownership on its own may not matter. Instead, the crucial factors may be other aspects of their governance, especially their mission statements. Today, all central banks, whether wholly owned by government or with shares held by private sector entities, have mandates based on economy-wide outcomes.  A truly private sector central bank without implicit or explicit government guarantees, and which singularly pursued profits for its shareholders, would likely behave differently from current central banks, which take their objective to be the promotion of the public good.

Even so, we think the issue of central bank ownership is worth greater scholarly inquiry than has been the case to date. We conclude by suggesting two areas for future research. 1. The shares of central banks in Belgium, Greece, Japan, and Switzerland are publicly traded on stock exchanges. It would be interesting to understand the informational content conveyed by these share prices, in particular, the extent to which these central banks’ share prices lead or lag other macroeconomic variables such as GDP or wider stock market indices. For instance, Figure 5 shows that the National Bank of Belgium’s share price closely tracks the benchmark index (BEL 20) of the Euronext Brussels stock exchange on which it trades.

Figure 5:  Year-on-year changes in the value of the National Bank of Belgium’s stock and the BEL 20 stock market index (r = .706)

Source: Reuters

2. In other industries, it is sometimes argued that private sector ownership or public sector ownership full stopimprove an organisation’s ability to achieve its objectives. These general theoretical arguments could be subjected to empirical scrutiny in the specific case of central banks. Although different central banks have different objectives, two of the most common are promotion of monetary and financial stability. Monetary stability can be defined as low inflation, while financial stability can be defined by the absence of financial crises. Researchers could study whether there is any correlation between central bank ownership structure and these macroeconomic outcomes. For example, Figure 6 plots the number of years that OECD and G20 countries have experienced financial crises between 1970 and 2017. Countries are split between those with fully state-owned central banks, and those that have central banks with some form of private sector shareholding. The median value (8 years in a financial crisis) is the same for both countries with fully-state owned central banks, and those that have central banks with some form of private sector shareholding over this time period. There is thus no clear association between financial stability and central bank ownership structure, although we would like to see deeper empirical work to draw firmer conclusions.

Figure 6: Number of years between 1970 and 2017 that OECD and G20 countries experienced a financial crisis, as defined by the sources below, split by central bank ownership type

Source: Harvard Business School and Laeven and Valencia (2018), supplemented by Ueda (1998), Barandiarán and Hernández (1999), Sgard (2012) and  Lo Duca et al. (2017)

Note: The data includes all central banks with private sector shareholders globally, with the exception of San Marino. Saudi Arabia (a G20 country) is excluded from the analysis because no information was available. The Austrian central bank is classified as a central bank with private sector shareholders until 2009, after which it is classified a publicly owned central bank because it was nationalised.

Tyler Durden

Tue, 10/22/2019 - 04:45


Business Finance

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