Posts Tagged ‘fixed’
America’s Bubble Economy Is Going To Become An Economic Black Hole
Friday, 24 May 2013 16:03
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Submitted by Michael Snyder of The Economic Collapse blog,

What is going to happen when the greatest economic bubble in the history of the world pops?  The mainstream media never talks about that.  They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to.  And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay. (Read more…)  Sadly, that is not the case at all.

Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy.  You can see this when you step back and take a longer-term view of things.  Over the past decade, we have added more than 10 trillion dollars to the national debt.  But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars.

Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks.  But the Dow does not keep setting new records because the underlying economic fundamentals are good.  Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929.  Margin debt is absolutely soaring, and every time that happens a crash rapidly follows.

But this time when a crash happens it could very well be unlike anything that we have ever seen before.  The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up.  After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.

But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term.  Things are good this week and things were good last week, so there is nothing to worry about, right?

Unfortunately, economic reality is not going to change even if all of us try to ignore it.  Those that are willing to take an honest look at what is coming down the road are very troubled.  For example, Bill Gross of PIMCO says that his firm sees “bubbles everywhere”…

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions.

And unfortunately, it is not just the United States that has a bubble economy.  In fact, the gigantic financial bubble over in Japan may burst before our own financial bubble does.  The following is from a recent article by Graham Summers…

#000000;”>First and foremost, Japan is the second largest bond market in the world. If Japan’s sovereign bonds continue to fall, pushing rates higher, then there has been a tectonic shift in the global financial system. Remember the impact that Greece had on asset prices? Greece’s bond market is less than 3% of Japan’s in size.

 

#000000;”>For multiple decades, Japanese bonds have been considered “risk free.” As a result of this, investors have been willing to lend money to Japan at extremely low rates. This has allowed Japan’s economy, the second largest in the world, to putter along marginally.

 

#000000;”>So if Japanese bonds begin to implode, this means that:

#000000;”>

#000000;”>1)   The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).

#000000;”>2)   The second largest economy in the world will collapse (along with the impact on global exports).

#000000;”>

#000000;”>Both of these are truly epic problems for the financial system.

And of course the entire global financial system is a giant bundle of debt, risk and leverage at this point.  We have never seen anything like this in world history.  When you step back and take a good, hard look at the numbers, they truly are staggering.  The following statistics are from one of my previous articles entitled “Why Is The World Economy Doomed? The Global Financial Pyramid Scheme By The Numbers“…

-$70,000,000,000,000 – The approximate size of total world GDP.

-$190,000,000,000,000 – The approximate size of the total amount of debt in the entire world.  It has nearly doubled in size over the past decade.

-$212,525,587,000,000 – According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States.  But those banks only have total assets of about 8.9 trillion dollars combined.  In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.

-$600,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives generally fall within this range.  At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.

The financial meltdown that happened back in 2008 should have been a wake up call for the nations of the world.  They should have corrected the mistakes that happened so that nothing like that would ever happen again.  Unfortunately, nothing was fixed.  Instead, our politicians and the central bankers became obsessed with reinflating the system.  They piled up even more debt, recklessly printed tons of money and kicked the can down the road for a few years.  In the process, they made our long-term problems even worse.  The following is a recent quote from John Williams of shadowstats.com…

The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series (see Public Comment on Inflation). Nonetheless, given the nature of official reporting, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.

 

What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 turmoil. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise.

And there are already lots of signs that the next economic downturn is rapidly approaching.

For example, corporate revenues are falling at Wal-Mart, #000000;”>Proctor and Gamble, Starbucks, AT&T, Safeway, American Express and IBM.

Would revenues at Wal-Mart be falling if the economy was getting better?

U.S. jobless claims hit a six week high last week.  We aren’t in the danger zone yet, but once they hit 400,000 that will be a major red flag.

And even though we are still in the “good times” relatively speaking, the federal government is already talking about tightening welfare programs.  In fact, there are proposals in Congress right now to make significant cuts to the food stamp program.

If food stamps and other welfare programs get cut, that is going to make a lot of people very, very angry.  And that anger and frustration will get even worse when the next economic downturn strikes and millions of people start losing their jobs and their homes.

What we are witnessing right now is the calm before the storm.  Let us hope that it lasts for as long as possible so that we can have more time to prepare.

Unfortunately, this bubble of false hope will not last forever.  At some point it will end, and then the pain will begin.

    



 
As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market… And Will Own All By 2018
Thursday, 23 May 2013 20:37
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As is well-known by everyone, the Fed monetizes the US deficit on a daily basis, thanks to the 45 minutes of POMO love each day when it buys Treasuries from Dealers. Of course, the Fed monetizes bonds from across the entire curve (mostly the longer end), which is why it is somewhat complicated to express the amount of risk transfer the Fed takes on every time the S&P posts an uptick as a result of yet another bond purchase by the hedge fund with the largest fixed income portfolio in the history of the world. However, one simple way of expressing just this risk is through the use of ten year equivalents: Ten-year equivalents are the amount of 10-year notes that must be held by the Fed in order to remove the same amount of interest rate risk (Read more…) the market as its current holdings. What this methodology allows is to represent the Fed’s holdings of all marketable securities on a linear continuum, and represent the remainder, or those bonds held by the private sector, on the side.

So what may come as a surprise to most, is that as of this week’s H.4.1 update, the amount of ten-year equivalents held by the Fed increased to $1.583 trillion from $1.576 trillion in the prior week, which reduces the amount available to the private sector to $3.637 trillion from $3.668 trillion in the prior week. And also, thanks to maturities, and purchase by the Fed from the secondary market, there were $5.219 trillion ten-year equivalents outstanding, down from $5.244 trillion in the prior week.

What this means simply is that as of this moment, the Fed has, in its possession, a record 30.32% of all outstanding ten year equivalents, or said in plain English: duration-adjusted government bonds. It also means that the amount of bonds left in the hands of the private sector has dropped to a record low 69.68% from 69.95% in the prior week.

America may or may not be becoming increasingly socialist and/or nationalized, but there is no doubt about it: its bond market most certainly is.

Chart of total ten year equivalents, broken down by Private sector and the Fed (courtesy of StoneMcCarthy):

The percentage of the entire US bond market currently owned by the Fed (courtesy of StoneMcCarthy):

 

Finally, the above means that with every passing week, the Fed’s creeping takeover of the US bond market absorbs just under 0.3% of all TSY bonds outstanding: a pace which means the Fed will own 45% of all in 2014, 60% in 2015, 75% in 2016 and 90% or so by the end of 2017 (and ifthe US budget deficit is indeed contracting, these targets will be hit far sooner).

By the end of 2018 there would be no privately held US treasury paper.

Still think QE can go on for ever?

Actually, nevermind.  

P.S. as a bonus, here is a breakdown of the Fed’s SOMA holdings by CUSIP


    



 
It’s Central Banker Appreciation Day
Wednesday, 22 May 2013 05:56
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Today is one on those rare days in which everyone stops pretending fundamentals matter, and admits every market uptick is purely a function of what side of the bed Bernanke wakes up on, how loudly Kuroda sneezes, or how much coffee Mark Carney has had before lunch, but more importantly: that all “risk” is in the hands of a few good central-planners. Following last night’s uneventful Bank of Japan meeting, in which Kuroda announced no changes to the “full speed ahead” policy of inflation or bust(ed bank sector following soaring JGB yields) and which pushed the Nikkei225 to surge above the DJIA closing at 15,627, today it is Bernanke’s turn not once but twice, when he first takes the chair in the Joint Economic Committee’s “Economic Outlook” hearing at 10 am, followed by the May (Read more…) minutes release at 2pm (which may or may not have been previously leaked like last month). As a reminder, Politico reported last night that Ben Bernanke had previously met in secret with Darrell Issa and other lawmakers “to discuss the central bank’s efforts to stimulate the economy and how it could exit this strategy in the future, according to people who attended the meeting.”  And since we know how important transparency is to Bernanke and the Congress, “Participants in the meeting declined to disclose specifically what Bernanke told lawmakers beyond saying there was discussion about the Fed’s bond buying programs and other issues.” But as long as Mr. Issa, the wealthiest man in the House, has his advance marching orders, all is well.

Just in case there is still any doubt that the Fed is just as clueless as everyone else in this uncharted territory, Bill Dudley appeared minutes ago on Bloomberg TV with the following key observations:

  • Says QE tapering possible by autumn if economy improves, speaking in interview on Bloomberg TV. Or, if it doesn’t as it won’t as it is the Fed that is preventing growth, then impossible
  • Says Fed wants to make sure markets don’t overreact to taper
  • Says Fed hasn’t decided yet on tapering timing, steps
  • Says he is “very much in sync” with Bernanke on policy
  • Says fiscal drag obscuring stronger economic fundamentals
  • Sees lot of real positive things underneath the surface
  • Says economy not quite at “self-reinforcing” stage yet
  • Says 2%-2.5% growth “pretty good” given fiscal restraint
  • Says he’s “not very nervous” about slower inflation rate

And so on.

In other, irrelevant but still notable news, UK retail sales plunged -1.3% and -1.4% ex autos, on expectations of a +0.1% print for both, while the BOE announced it had voted 6-3 to keep QE unchanged. This will certainly change once Mark Carney takes the helm in just under two months.

And in somewhat strange news, Russia pulled a 33.6 billion ruble bond auction of 2019 OFZ bonds with a yield of 6.33%-6.38% due to lack of bids. A failed bond auction in this carry chasing environment? Surely this can’t happen, and if it did, there is something more than meets the eye. Oh well, let’s just ignore it as it does not fit the narrative of all is well, as confirmed by the EURCHF passing 1.26 for the first time in years, following rumblings out of the SNB’s Jordan about a possible negative deposit rate. Wait, did we say “all is well” – we meant all is centrally-planned.

The remainder of the key events summarized in bulletin format courtesy of Bloomberg:

  • Treasuries little changed before Bernanke speaks on economic outlook, Fed releases May 1 meeting minutes; NY Fed’s Bill Dudley said policy makers will know in three to four months whether economy is healthy enough for QE to be tapered.
  • Dudley cited “tug-of-war between the fiscal drag and the improving economy” in an interview with Bloomberg TV; said that his views and Bernanke’s were “very much in sync”
  • The Bank of Japan pledged to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policy makers’ campaign to revive the world’s third-largest economy
  • BoJ maintained pledge to double monetary base in two years; link to statement
  • BoE Governor Mervyn King was defeated for a fourth month in his bid to expand stimulus as the majority of officials cautioned against the danger of stoking inflation expectations
  • U.K. retail sales fell 1.3% in April (est. +0.1%), led by drop in food sales
  • CHF weakened through 1.26 vs EUR for first time in two years; SNB President Thomas Jordan yesterday said a shift of the cap on the franc and negative interest rates are among steps the central bank could take to prevent a tightening of monetary conditions
  • Government bonds should be excluded from the EU’s planned financial-transaction tax because the levy would drive up sovereign borrowing costs, a panel of European debt-management officials said
  • Apple Inc.’s bonds have lost $280.6m of market value since buyers snapped up $17b of the iPhone maker’s debt last month, declining as yields climb from record lows.

SocGen recaps the already noted key highlights, only better:

Fed chairman Bernanke’s testimony before the Joint Economic Committee last year (7/6/12) produced no fireworks, with the exception of gold. A run of open and closing prices for that day reads as follows: EUR/USD 1.2559/1.2566, USD/JPY 79.13/79.60, UST 10y 1.6541%/1.6388%, gold $1,634/$1,592, S&P 1,316/1,314. What on earth is all the fuss about today, if you are really keen sell JPY and gold. But that’s no rocket science and corresponds neatly with the view any USD bull has today, and there quite a few. Except that the last leg of the dollar rally has not been led by speculative accounts (see chart). Does that mean the rally is running out of steam and a dovish Bernanke reignites risk on and a weaker USD?

Strategically our secular view for a stronger USD has not changed, but the question is whether Bernanke calls for a short-term tactical switch after a 3.7% rally in the USD this month. The currency is by no means technically overbought and bright prospect of additional gains are unchanged over a 6 to12 month time horizon based on our expectations that the Fed will start tapering bond purchases later this year (Q3). However, planning ahead for stimulus exit is not the same as pledging to exit and for Bernanke (and other FOMC voters), the bar is likely to be pretty high before steps are undertaken to dial back from the current purchase rate of $85bn per month.

The FOMC minutes could include an updated guidance of how a roadmap would look once the Fed decides the time has come to take its foot off the monetary accelerator. Speculation has been building steadily since the start of the year but is only a few weeks since FOMC voters and non-voters alike have stepped up the rhetoric with some calling for tapering at soon as the June meeting. We believe Bernanke will stick to the last FOMC statement to allow the central bank maximum flexibility, and in doing so, keep bullish conditions intact for risk assets. Watch the 2.00% level in UST 10y.

It has not been a one-way street for the USD and UST yields despite speculation that 2013 could be a watershed for Fed policy. There have been a few bumps along the road which caused the USD and UST yields to give back some of the early 2013 gains, notably in March and April. In contrast, the equity and credit markets have been on a planet of their own, supported by concerted central bank efforts to support global demand. The S&P gave up 2.8% in February and 3.8% in April over one-week periods but other than that it’s been fairly smooth sailing. With inflation subdued and the labour market still not satisfactory, Bernanke will be careful not to spoil the party.

* * *

And DB’s recap of the past 24 hours.

Central banks are also the key focus over the next 24 hours with the Fed minutes and Bernanke speaking later. However as I type the BoJ have just concluded their latest policy meeting by reaffirming their target to double the monetary base over two years and the inflation target of 2%. In terms of the economic outlook, the BoJ said that exports and business fixed investment have stopped weakening amid improving consumer sentiment. The central bank added that indicators are suggesting a rise in inflation expectations. There was no reference made to the recent JGB volatility which was probably behind the 4bp sell-off in 10yr JGB yields (to 0.895%) in the minutes following the BoJ’s statement. We will probably get more on this at Governor Kuroda’s post-meeting press conference scheduled for 7:30am London time today. USDJPY is steady at 102.5 following the announcement.

Returning to the Fed, relatively dovish comments from the NY Fed’s Dudley and St Louis Fed’s Bullard, both FOMC voters, helped put a floor on risk assets yesterday. Starting with Bullard, who is not generally known for his dovishness, remarked that the Fed should “continue with the present QE program” because it is the best available option for policy makers to boost growth. Bullard added that he doesn’t see a good case for QE tapering unless inflation risks pick up. On the topic of IOER, Bullard said that he advocates negative interest rates arguing that paying interest on excess reserves was “mildly counterproductive”. Dudley backed up some of those comments about the pace of easing but stressed that QE should be largely data-dependent.

In terms of the market reaction, the S&P500 was trading near a session low of -0.1% yesterday, but rallied as Bullard and Dudley spoke to close at another record high of 1669.16 (+0.17%). Sectorally, healthcare (+1.1%), consumer discretionary (+0.5%) and financials (+0.2%) enjoyed the best of the gains. The latter was buoyed by news that JPMorgan’s Jamie Dimon had survived a proposal to split his role of CEO and Chairman. The proposal to split the roles drew only 32% of votes this year, was down from 40% last year, which helped propel JPM’s stock to a 1.4% gain yesterday. Better than expected earnings from Home Depot underscored a strong day for consumer discretionary stocks. As US earnings season draws to a close, it’s fair to say to that results have been somewhat mixed this quarter with 71% of US firms beating estimates, but only about half managing to do the same on the top line.

Outside of equities, 10yr UST yields threatened to breakthrough the 2.00% level yesterday before rallying 7.5bp from the intraday high to close at 1.93%. In addition to the Fedspeak, the volatility was also attributed to short covering ahead of Chairman Bernanke’s testimony today. The USD index closed higher (+0.2%) in an up and down session. Gold (-1.3%) and silver (-2%) gave up most of yesterday’s rebound amid the stronger risk sentiment and stronger USD.

Turning to Asian markets, equities are trading mostly higher overnight led by gains on the Nikkei (+1.2%). The Nikkei traded through the 15,500 mark for the first time since December 2007. The KOSPI (+0.8%) and Shanghai Comp (+0.2%) are also firmer, but the ASX200 (-0.3%) is lagging the region’s broader moves. The Hong Kong equity markets remain shut due to inclement weather (“black rain”) but are due to reopen in the afternoon. I’m glad I flew out last night from there. I did one meeting yesterday where I was so high up that I was practically in the middle of the violent thunderstorm! I was trying to convince the client that I wasn’t in the slightest bit scared!! The reality was a bit different.

In the day ahead, Ben Bernanke takes centre stage when he speaks before the congressional Joint Economic Committee on the US economic outlook at 3pm
London time. The Committee is bipartisan, and it’s safe to say that will be an effort by lawmakers on both sides of politics to prise more detail with respect to the Fed Chairman’s QE plans. The Fed minutes from its Apr30/May1st FOMC meeting are published at 7pm London today. The BoE’s will also publish its latest meeting minutes this morning. US existing homes in April and UK retail sales are the highlights on the data calendar.