Wednesday, November 30, 2016

Economists Reveal Massive Market Forces in Bonds Before and After QE

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/bonds/economists-reveal-massive-market-forces-in-bonds-before-and-after-qe?post=102509&uid=4798

The debate over Market Monetarism and long bond demand continues. The problem is that few economists, including market monetarists, address the issue of massive demand for long government bonds that I have written about more than once on Talkmarkets. Economists are technicians, and it is often difficult to get them to think outside their boxes.

But there are a few encouraging signs that economists are at least starting to think about massive bond demand and/or the roll of clearinghouses in the new normal system we face. And with the new LCR requirement for banks for short duration bonds and notes, studies, like one cited at the end of this article, from Gary Gorton and Tyler Muir, are now being done. The study by Gorton and Muir that shows some bond yields declining arises from the need for better and better collateral by BIS rule and requirement.*

David Beckworth (another Market Monetarist like Scott Sumner) appears to understand most if not all of the history behind the concept of massive market forces in the bond market. Mr Beckworth said this:
“This downward march of interest rates has occurred prior to and after QE programs and is therefore not the result of central bank tinkering. Rather, it is the result of far bigger global market forces. One interpretation of this movement (based on the expectation theory of interest rates) is that the market expects future short-term interest rates to be increasingly lower. As Tim Duy notes, the Fed is fighting against this force and is unlikely to win. Put differently, interest rates are being suppressed by market forces despite the Fed’s best efforts. The Fed will not be able to raise interest rates this year and maybe even next year”


And, Ari Blask describes what George Selgin, of the Cato blog, Alt-M, has said:

George Selgin discussed clearinghouses' role in the pre-Fed American financial system, which came to include providing liquidity during panics. After the failure of the Ohio Life and Trust Insurance Company in 1857 led to a system wide suspension of specie payments in New York, the recently formed New York Clearing House issued temporary loan certificates to member banks for use in settling transactions...

...Selgin closed by noting the advantages of the 19th century’s spontaneous and private clearinghouses relative to today’s government imposed and run versions. In addition to the Fed, Dodd-Frank’s mandated central clearinghouses for OTC derivatives will socialize risk and create moral hazard, removing an incentive for the private sector innovation that might actually improve payments and settlement in the derivatives market.
  
So, we know that because of the clearinghouses, and need for collateral, why bond demand is now so intense after QE. But it must be asked why bond demand was so strong absence recessions in the mid 1980's way before modern QE. The Fred chart shows this decline in yields in non recessionary times.


The Relentless Decline in Bond Yields Took Place in the Absence of Major Recessions from the Mid 1980's



Clearly around 1985, bond demand picked up fairly consistently and yields declined in an almost relentless manner.The appointment of Alan Greenspan as Fed Chairman soon after the S&L crisis (August, 1987), coupled with structured finance coming into its own through Salomon Brothers collateral risk management program appears to be related to this increasing demand for bonds.

See my articles about Structured Finance and Salomon bond hoarding and also why bonds were not affected by the ending of QE, at the end of this article for a more detailed history. 

Unfortunately, some prominent market monetarists have not chosen to comment on the massive forces driving bond yields down with or without QE being operational.

Here is a background to this tension between market monetarism and massive market forces in the bond market.

1. You do not have to be an economist to understand Market Monetarist NGDP Targeting. Inflation was targeted by the Fed, missing the drop in nominal GDP in 2007-2008.

However, now, NGDP targeting will not be permitted by the Fed since this massive demand for bonds which is a market force that cannot be stopped, and raising rates even a little, unsettles that force of demand for bonds as collateral.

So, if you have a 1 percent GDP growth, and your NGDP target is 5 percent, you would have the Fed generate 4 percent inflation to reach your target. But clearly, being strapped to NGDP targeting could result in the Fed, and central banks everywhere, destroying the collateral. We can't have the collateral destroyed, or the deck of cards could fall. At the very least the yield curve would be inverted grotesquely and banks would be weakened.  

2. You do not have to be an economist to know that while NGDP targeting would have helped in 2008 as the Fed flew blind just targeting inflation, it will not be permitted in this low rate environment. We have the market monetarists to thank for pointing out the truth of the Fed's mistakes in 2007-2008, as GDP crumbled.

But, in this clearinghouse environment where systemic risk is now held by those clearinghouses, NGDP targeting is dead as a concept, in my opinion. Stability has been achieved unless systemic risk creeps into the system.

There are three main ways I see that systemic risk could upend the system, throwing risk back onto the financial system:

1. There are not enough bonds to use as collateral in the clearinghouses. Banks do not have enough bonds for LCR requirements.

2. The bonds that are used as collateral lose their value with yields rising.

3. Counterparties do not meet their margin calls in the event yields did rise putting the clearinghouses in financial danger.

* This is from Gary Gorton and Tyler Muir:

The LCR is a very significant policy change. It requires that short-term bank debt be backed dollar for dollar with “high-quality liquid assets.” In essence, all repurchase agreements, or repo, would have to be financed with Treasuries, one for one. This policy will tie up a lot of Treasuries, a potential problem because they have a convenience yield. This means that the interest rate on Treasuries is lower than it would otherwise have to be because part of the demand for Treasuries comes from their use as safe debt – a way to safely transfer value through time. Convenience yield is the basic property of money, so Treasuries are essentially money. The LCR then requires that government money (Treasuries) must be used to back bank money – i.e., short-term debt, a kind of narrow banking...
 ...The second problem is that the LCR may result in a shortage of safe debt because too much of the Treasuries is tied up in backing repo. When there is a shortage of government-produced safe debt, the private sector steps in to produce close substitutes, asset-backed securities. But the private sector can’t produce riskless debt. [Emphasis Mine]
It is clear that central banks are looking for, and finding new ways to tie up sovereign bonds, whether in bank capital regulations or through regulations governing clearinghouses. It is also clear that this means bonds do not necessarily react to other market forces. They have their own demand, which, because of a mistrust of asset backed securities, is growing ever stronger.

For further reading:

Hoarding the New Gold, Early History about Structured Finance 

Everyone Said Treasury Bond Yields Would Go Up After QE Ended 

Basel's Liquidity Coverage Ratio: Redux

Goldman: Treasury Markets No Longer React to Economic Data







Monday, November 21, 2016

Greenspan on Yields, Slow Growth and Hyperinflation.

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/bonds/greenspan-on-yields-slow-growth-and-hyperinflation?post=101845&uid=4798

Alan Greenspan occasionally rolls out his dog and pony show, presumably to move the markets. He has, on more than one occasion, said that investors want better yields on their government bonds, and most recently, that government bond yields are so low that they stifle economic growth. But he says more. That is what is explored in this article.

I showed in a recent article, entitled Hoarding the New Gold: Early History About Structured Finance, that the march towards diminished yields, in both good and bad times, corresponded to his tenure as head of the Fed. Alan Greenspan succeeded in his goal of stabilizing banking, pushing risk off the balance sheet of banks. But he created an environment where bonds are hoarded, where bond yields relentlessly decline. He now looks at the system and sees the threat of hyperinflation. I think he is confused or perhaps conundrummed. I made up that word, but it could mean, being prisoner to your own plan, leading to massive confusion. More on that and hyperinflation later.

We cannot blame the former Fed chief directly for the more recent creation of clearinghouses that have pushed demand for bonds up even more than thought possible. But clearly, they are an extension of the usage of treasury bonds as collateral in the derivatives markets that he fostered. If you want to make sure people have good collateral, you don't want to be dealing with an AIG, you want clearinghouses that verify the counterparty financial soundness.

While I believe that Greenspan is sincere in his desire to see bond yields rise and the economy prosper, there is always that doubt created in my mind because he presided over most of the structured finance we see today. When the asset based structured finance (MBSs) failed in the housing crash of 2008, it became apparent that treasury bonds were the safest of all collateral. One could say that Greenspan's efforts to undermine that bond collateral by seeking higher yields is a conundrum in itself. It seems out of character for one so concerned about bank risk. Why would he want to destroy the collateral for the derivatives market he fostered? It makes no sense that he would want to saddle the big banks with even more risk and threat of margin calls.

Alan Greenspan 13th Chairman of the Federal Reserve


Maybe he has regrets about this system he was instrumental in creating. Or maybe Greenspan is just displaying a form of tantrum. There is evidence that efforts are always made to push long bond yields up, because the main players in bonds-as-collateral want to get the lowest price they can when they buy the bonds. A lower price relates to higher yields. Push yields up and you get your potential collateral at a much cheaper price.

Here is one example, not of a tantrum, but of big player interference in determining yield in the bond auctions. Bloomberg said plaintiffs in a lawsuit against primary dealers said:

When the second set of Treasuries is issued, their prices and yields can be compared with the identical securities already trading in the secondary market. If there are pricing differences, that could be evidence of a problem. According to the plaintiffs, 69 percent of the auctions of reissued Treasuries from 2009 to 2015 appear to have been rigged, artificially boosting yields by 0.91 basis points.
And I cannot tell you how many pundits, some who contribute to Talkmarkets, warned of rising interest rates after QE, and even the IMF warned of rising rates. Tyler Durden, who generously contributes lots off good information to Talkmarkets, was caught up in the rush to show how yields would go higher and spoke of an ugly week for bonds, reminiscent of the first taper tantrum in 2013. Yields have cratered since that Durden article.

The truth of course is, QE tapering and the tantrums that followed were shortlived, and yields went down below where they were before the tantrums started. 10 year yield is about 1.49 percent. And certainly, if there is no bubble in the Eurozone, where long rates are often negative, the argument of the tantrumteers (I made up that word too), that there is a bubble in US treasury bonds sounds more and more like the boy who cried wolf.

So, is Greenspan just engaging in still another tantrum, hoping to move markets a little bit so deals can be had? Seems like people are not even listening in the bond markets anymore.

Please, understand that this argument I make, that there is no bond bubble in the US long bond, is not investment advice. I suppose there could be circumstances that would cause people to panic and sell out of the treasury bond market. But based on the laws of supply and demand for treasury bonds, over the last 30 years, the proof needs to come from the tantrumteers that we are really in a bond bubble for the 10 year long bonds.

The only thing we can take from Greenspan's information that we know to be true is that low long yields stunt economic growth. I have been saying that for awhile, but it is nice to see someone as influential as Greenspan come out and speak the truth to that issue.

The truth is,  not only are savers hurt by lower interest yields, but I believe the Fed has lost the power to raise interest rates significantly, in order to slow down a hot economy. So, without that power, because the collateral is so important, the Fed cannot allow big economic growth.

There are social costs to slow growth. Populist politicians in both parties want change. Efforts to shut down the government in the past threatens to weaken the credit worthiness of the United States. That would impact the collateral in the clearinghouses.

And all this makes you wonder about why the architect of structured finance, Alan Greenspan, is taking the position he is. After all, he was for going back to the gold standard, not exactly expansionary, and warns of hyperinflation. But hyperinflation is usually associated with wars, and the inability to tax the population. There are plenty of people who could pay taxes in the modern western economies if they were not so busy hiding money offshore.

And, while hyperinflation is associated with the inability to convert cash into gold or silver, the truth is, treasury bonds are rated higher than gold itself in the derivatives markets as collateral. You can convert your cash into treasury bonds, and it is better than gold itself.

Does Alan Greenspan have no faith in the system he created? Is he getting nervous? Yes, he says he is. If he is opposed the very system he created, you wonder why he created it in the first place! 

Greenspan has acted like he does not want people to be taxed. That is the general libertarian/objectivist position. Ayn Rand was adamant in her loathing of taxation. But surely he knows this position is what leads to the hyperinflation he fears so much.

And, by the way, hyperinflation is not caused by careful expansion of the money supply through helicopter money when you are experiencing negative rates. I do not know why so many financial insiders believe hyperinflation and helicopter money must be joined at the hip.

Helicopter money would result in greater prosperity, leading to more taxable income for the government. So many monetarists seem to ignore Milton Friedman and fall back on their libertarian/objectivist/austere/liquidation roots. Libertarians are liquidators as have been Fed leaders. Hopefully that is not what Greenspan is peddling, but I not convinced otherwise.

For Further Study:

Responsibly Expand the Monetary Base Before It Is Too Late



Wednesday, November 16, 2016

Hoarding the New Gold. Early History About Structured Finance and Greenspan

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/bonds/hoarding-the-new-gold-early-history-about-structured-finance?post=101531&uid=4798 

Structured finance is best known for taking real world assets, or debt backed by assets, and pushing them off the balance sheet of the banks. Alan Greenspan and others looked for ways to keep banks lending in the face of the need to carry loans on the books. But debt backed by assets was only part of the scheme to pass risk on to counterparties. Treasury debt backed by only faith in the United States allowed counterparties to collateralize risk with a new valuable tool, bonds as collateral. This new gold was hoarded early as you will see.

Alan Greenspan was obsessed with pushing risk off of the banks and placing it into the hands of someone else. He worked in the S&L industry and saw the S&L's get crushed. He said in a speech in 2005:


Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.

To be sure, the benefits of derivatives, both to individual institutions and to the financial system and the economy as a whole, could be diminished, and financial instability could result, if the risks associated with their use are not managed effectively. Of particular importance is the management of counterparty credit risks. Risk transfer through derivatives is effective only if the parties to whom risk is transferred can perform their contractual obligations. These parties include both derivatives dealers that act as intermediaries in these markets and hedge funds and other nonbank financial entities that increasingly are the ultimate bearers of risk. [emphasis mine]

Securitization  of asset backed securities was the preferred way that banks passed the risk to investors, gaining the power to loan again and again.

Securitization failed when the housing bubble in 4 states crashed, when the Fed tightened the money supply after the housing price crash, and when the investors would no longer take the mispriced CDOs and other structured financial products secured by declining real estate values, off the backs of the banks. The banks were forced to keep many bad loans, take loans once off the balance sheet in SIVs, and taxpayers bailed them out.

It turns out that treasury bonds in big demand prior to the explosion of the interest rate swaps markets? They were in demand long before QE, and the demand started in the 1980's, corresponding somewhat to the appointment of Alan Greenspan to the Fed, as he took office in August, 1987. I will cover the shocking tale of Salomon Brothers as this article continues. While all debt assets began to be hoarded near the beginning of Greenspan's tenure, treasury bonds, debt now considered an asset in itself, were also hoarded.

Alan Greenspan presided over much of the relentless march towards zero yield that is continuing to this day



Strangely, there could have been noble aspect to this process of banks shedding risk. It keeps the GDP growing, unless the risk is mispriced, as CDOs were mispriced by Basel 2. Big issues with LIBOR and other problems have made this potentially noble effort, removal of risk, into a less noble game that takes advantage of counterparties relentlessly. Even banks complain about it! Structured finance that doesn't alleviate risk, just postponed the day of reckoning and the Fed seemed to freeze up under Bernanke, making the situation much worse.



So, why did the use of interest rate swaps and bond collateral become so important when we had debt backed by real assets? Well, clearly, securitization was hampered by the Great Recession. Securitization was no longer the means by which the banks could alleviate their risk. Interest rate derivatives or swaps became the primary means of protecting banks in the loan making process, as they hedged their bets against the loans they made. But since they worried about their counterparties, think AIG, they wanted clearinghouses to be the center of those hedges, insuring that the system would be fair and that counterparties could be trusted, or come up with collateral if their pledged collateral diminished in value.

As we see in the PIMCO article, vanilla swaps are the most common. Even they have been at the center of dispute, with LIBOR, but they are used extensively. These swaps have existed since the 1980's, according to the PIMCO article. As we see by the behavior of Salomon Brothers, taking on risk as a counterparty required new tools and a hoarding of the new gold.

Salomon Brothers and others did set up collateral management roughly corresponding to the installment of Greenspan in the summer of 1987, as Fed chairman. And in 1990-91, this startling action took place showing that people needed bonds, and were willing to hoard lots of them:

In 1991, US Treasury Deputy Assistant Secretary Mike Basham learned that Salomon trader Paul Mozer had been submitting false bids in an attempt to purchase more treasury bonds than permitted by one buyer during the period between December 1990 and May 1991. Salomon was fined $290 million for this infraction, the largest fine ever levied on an investment bank at the time. The firm was weakened by the scandal, which led to its acquisition by Travelers Group. CEO Gutfreund left the company in August 1991 and a U.S. Securities and Exchange Commission (SEC) settlement resulted in a fine of $100,000 and his being barred from serving as a chief executive of a brokerage firm.[10] The scandal was then documented in the 1993 book Nightmare on Wall Street.
Business insiders wanted the new gold in a big way even before the modern interest rate swap market we now see took off. The conspiracy to buy bonds was surely fostered by Alan Greenspan as he certainly encouraged "sophisticated risk management approaches" from the beginning of his term as Fed chairman, because you could collateralize them to limit bank risk.

The relentless slide toward zero rates and even toward negative, is proven to be a function of bank risk aversion, and of the central bank's willingness to accommodate that risk aversion no matter what happens to the real economy.  

Big bond demand pushes derivatives risk off of bank balance sheets, unless the new clearing houses go bust, and you know what would happen after that. So far, the Fed has been able to keep a little growth going forward, and stability has been achieved. But if the real economy starts to fail, would the Fed ban bonds as an asset class? Or would the Fed get base money into the hands of the people?

Greenspan succeeded in creating a system that achieves what could be long term stability for the banks. But this system has caused America to be hollowed out, with prosperity eluding many in the real economy. Worse yet, it causes the march towards negative yields to be relentless in its nature. Lack of sufficient new gold in the system could prove to be its undoing.

For Further Reading:

Timeline of S&L crisis

Hope for the Real Economy



Saturday, November 12, 2016

CIA Was Responsible for JFK Assassination and More

It is pretty much acknowledged by most that the CIA was instrumental in the assassination of John Fitzgerald Kennedy, perhaps the most popular president in the history of the USA. Kennedy wanted to make the nation a better place. Failure to take out the CIA has lead to Israel controlling much of what the USA does, leading to 9/11/2001, and the regime change in the middle east. Not taking out the CIA has lead to the central bank establishment of structured finance and slow growth, and as a result, Donald Trump's presidency, which will likely lead to the destruction of the Palestinian state.

JFK had something to say about the CIA and these quotes together represent strong evidence that the CIA does what it wants, and that no one can stop it, well, until God almighty destroys America with a vengeance. Fighting the CIA is futile, but knowing what goes on in the world is important. Empires always end, always. JFK wanted to stop the empire and failed. But not even the Roman Empire survived. This new Roman Empire won't last either.


"We will have to deal with CIA... no one has dealt with CIA"--JFK
------
1. "In a 1966 New York Times feature article on the CIA, this statement by JFK appeared without further comment: “President Kennedy, as the enormity of the Bay of Pigs disaster came home to him, said to one of the highest officials of his Administration that he wanted ‘to splinter the C.I.A. in a thousand pieces and scatter it to the winds.’”Presidential adviser Arthur M. Schlesinger, Jr., said the president told him, while the Bay of Pigs battle was still going on, “It’s a hell of a way to learn things, but I have learned one thing from this business—that is, that we will have to deal with CIA . . . no one has dealt with CIA.”-- from JFK and the Unspeakable: Why He Died and Why It Matters by James W. Douglass [re, response to CIA operation against his political authority during the Bay of Pigs Invasion, 1961.
___________________
2. “…our Government is the CIA and the Pentagon, with Congress reduced to a debating society… We won't build Dachaus and Auschwitzes; the clever manipulation of the mass media is creating a concentration camp of the mind that promises to be far more effective in keeping the populace in line … I've learned enough about the machinations of the CIA in the past year to know that this is no longer the dream world America I once believed in … Huey Long once said, “Fascism will come to America in the name of anti-fascism.” I'm afraid, based on my own experience, that fascism will come to America in the name of national security.” - Jim Garrison, New Orleans DA who prosecuted CIA for JFK Assassination, and took on the entire US National Security state including all media, October, 1967
__________________
3. "The column includes two extraordinary paragraphs. The first reflects the combination of arrogance and contempt with which the unelected “deep state,” of which the CIA is a part, looks upon those more ephemeral figures elected to high office by the voters. The second is a blunt account of Hayden’s first briefing in November 2008 of President-elect Barack Obama and Vice President-elect Joe Biden.
Here are the paragraphs:
“The briefings themselves will be intense. The president-elect will be shown great deference personally, but his or her campaign positions could be treated more harshly. This is the chance for the intelligence professionals to set the record, as they see it, straight. “I had my own experience. After Election Day in 2008, I was briefing Mr. Obama on CIA renditions when Joseph R. Biden Jr., the vice president-elect, interrupted to observe that the agency had conducted that program—which entailed sending suspected terrorists to third countries—simply to “rough them up.” I rejected the contention and advised him that he needed to stop saying that. I haven’t heard him say it again.”
In the latter paragraph, Hayden quite openly refers to the CIA program that included systematic torture at CIA “black sites” around the world. He makes no bones about the program or his role in it. He brags of having silenced the impudent Mr. Biden and put him in his place." -- WSWS August, 2016


LBJ the Wink

Some people say it was a rogue element of the CIA that killed JFK, but really, it was likely more than just rogue. LBJ didn't seem upset about it. His hatred of JFK was well known and obvious in pictures readily available on the internet. Jackie Kennedy, as the link below indicates, believed LBJ was in on the CIA plot. And America is a much worse place because of it.


See also:

http://www.commdiginews.com/news-2/jacqueline-kennedys-jfk-assassination-theory-28064/

and:

 http://www.aljazeera.com/amp/indepth/opinion/2016/11/trump-israel-161112090345387.html






Friday, November 11, 2016

Hope for the Real Economy, Pigou Effect, TLTRO Helicopter Money

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/education/hope-for-the-real-economy-pigou-effect-tltro-helicopter-money?post=101055&uid=4798

Eric Lonergan defined, precisely, direct applications of helicopter money sans fiscal burden on governments. Now Mr Lonergan is defining a new kind of helicopter money, with the same principle of base money but through a lending mechanism from the ECB to banks that has a perpetual quality to it.

Lonergan explains a mechanism by which the ECB is actually involved in a program of helicopter money. Certainly, the Eurozone, in my opinion, is not the ideal venue for this process, because of issues regarding the fusion European State. But as things quiet down to a sort of equilibrium and status quo there, it appears that the central bank, the ECB, is really on the ball when it comes to monetarism.

Lonergan has said that other central banks have not taken monetarism and helicopter money seriously enough. So, here is the plan for the Eurozone as he explains it:

There are two types of  interest rates. One is the official rate. It is negative in the Eurozone. Lonergan gives arguments that this rate may be causing a tightening. This is not necessarily the view of market monetarists, who I have written about often, depending on which side of the bed they role out of in the morning.

But for Lonergan, there is evidence for this tightening.  Lonergan points to Japan as proof, early proof, that negative rates may result in a slowing of the economy and a strengthening of the currency.

The second type of interest rates is what is called the Targeted Long-term Refinancing Operations
(TLTRO) and goes according to the Friedman rule, that the central bank is never impotent, though so many monetarists seem to think so these days.  Lonergan says:

But what if households held all the base money, and furthermore the amount was increased dramatically? Surely then a Pigou effect would be large. This line of reasoning in fact pointed me towards cash transfers (as I argued in the FT in 2002).
I was reminded of this line of reasoning when recently re-reading Milton Friedman’s 1968 AER presidential address. It is famous for its critique of the Philips curve. Reading it today, it is far more interesting for its perspective on Keynes – presenting a much more interesting perspective than that of today’s “New Keynesians”.



And as quoted by Lonergan, Friedman himself said, in defense of base money being held by the people as a more affective tool than QE and asset purchases by the Fed:


“This revival [of belief in the potency of monetary policy] was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel – namely, changes in wealth – whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates. These theoretical developments did not undermine Keynes’ argument against the potency of orthodox monetary measures when liquidity preference is absolute since under such circumstances the usual monetary operations involve simply substituting money for other assets without changing total wealth [i.e. QE]. But they did show how changes in the quantity of money produced in other ways could affect total spending even under such circumstances. [italics added]”...
...Whatever one calls it, what Friedman and Haberler are clearly arguing is that cash transfers to households financed by base money would stimulate demand under deflation and the transmission mechanism is rising real balances. Base money is not a liability, so Ricardian equivalence – if you care about it – is not relevant. And neither if one thinks about it, is the issue of “permanence”.
With the TLTRO, the ECB is never out of bullets. Lonergan says :

With every TLTRO the ECB chooses the interest rate, the duration of the loan, and potentially, the credit risk. Why is this potentially more important than all other monetary tools? Because the ECB is never out of ammunition with a TLTRO...
Eric Lonergan goes on to say that negative rates are possibly a tightening, because as they go more and more negative, the result is that the banks are taxed. The TLTRO avoids that tax, and makes it possible for the official rate to stay positive.

While Lonergan is not specific on the nuts and bolts of the resulting policy toward the retail household, it appears that the banks could use that base money to offer perpetual zero interest loans or other innovative financing to help households and non financial businesses, in other words, the real economy.

I will be watching for more information on the outworking of this program as it effects the retail consumer. I hope we will get more from Eric Lonergan as the program unfolds. Base money in the hands of the people would create wealth and would not burden governments and would not simply swap one set of assets for another as QE does. 

For further reading:

Targeted Longer-term Refinancing Operations

Can QE Rescue the Eurozone (Video)

Fed Tricksters, Put Your Monetarism Where Your Mouths Are

Wikipedia Pigou Effect

Wikipedia Arthur Cecil Pigou



Tuesday, November 8, 2016

Donald Trump Is President. What Will He Fix? Hold Him to It.

So, the Aryan Supremacist and cult leader with unseemly urges has won the presidency of the United States. Yet, in his acceptance speech, he promised to be a president of all the people. So, what did he promise and what can we hold him to? 

Here is the most important thing: will he stop the neocon quest for world domination or will he hate Muslims so much that he plays into the hands of the neocons?

Here are other promises we will see that he keeps or not.

1. He promised to make allies pay for our protection. Let's see if he carries through. It could put the world in danger trying this stunt, but he promised it.

2. He said he would create many jobs. Let's hold him to it. We need more jobs and better paying jobs. He hates high tech, where those jobs exist. I am no fan of the abuses of globalization, but closing America off to trading partners will mean his once deplorable supporters could be the first ones laid off.

3. He said he would not go to war in the middle east. Let's see if he won't. We hope he does not succumb to the temptation for war.

4. He said he would investigate 9/11. I believe it was a conspiracy as well, so let's see if there are any arrests.

5. He said he would fortify border security. Let's see if he does without destroying our relationship with Mexico.




Here are a few things I hope he doesn't do.

1. I hope he doesn't deport 11 million illegal aliens. That is inhumane.

2. I hope he doesn't raise the hate level because minorities feel hated by him.

3. I hope he doesn't hurt US security with his friendship with Putin and his threat not to protect nations that don't pay him for it.

4. I hope school children will see less bullying but he is a bully himself, so we will see.

5. I hope his economic plan does not turn the coming recession into another Great Depression. 

See:

http://www.talkmarkets.com/content/bonds/edward-lambert-on-bond-demand-the-coming-recession-and-new-normal?post=111806&uid=4798


But here we are, with Donald Trump calming the stock market and I explained it by this comment on my fellow Talkmarkets blogger, Phil Flynn's article:

So Trump is just Cheney reborn. Deficits don't matter. As long as Wall Street and energy companies get their fix, it is business as usual. Didn't Trump run on a different platform than that?

Truth is, as long as Wall Street and big energy get their tax breaks, the deficits will go up. I can't imagine that is what the supporters formerly known as deplorables wanted, can you?

Trump at least must get the Fed to raise short term interest rates. That may push long term rates up a bit. They cannot go up much but it would help retirees, and pension funds, and insurance companies so they won't raise rates so much. The theory behind raising rates is called neoFisherism.

Monday, November 7, 2016

Central Bank Victory and Negative Bond Rates

This article was first published by me on Talkmarkets:  http://www.talkmarkets.com/content/global-markets/central-bank-victory-and-negative-bond-rates?post=100707&uid=4798

Before discussing negative bond rates, and Martin Armstrong's article, it is becoming clear that the central banks in Europe, the USA and Japan are victorious in their plan to stabilize the world financial system.

All I hear about is people saying the Fed is a failure and the Fed has no control of things and collapse is imminent. They are usually talking about collapse of the bond market. I don't see it. That doesn't mean the central banks have not hurt people in order to prevail. Saving the economy was not the mandate of the central banks. If you want the economy first, you probably would have to ban or take over central banks. And even then you may not get what you want. 

I don't see negative bonds being the endgame of the financial system as Addison Quale says.  I don't see negative bond yields as being the precursor of financial collapse. In fact, as long as demand is high for negative yielding bonds, the central bank leaders look like geniuses.

That does not mean that their genius helps out the real economy that much. It does help, some, by providing stability, but robust growth is no longer important to the central banks. Growth must remain slow, as you can't disrupt the bonds, the value of bonds in the world. Those values will continue to increase and yields will continue to diminish. I suppose if this slow growth plan ends up killing the real economy, then it could turn into chaos.

But the central banks have engineered just enough growth to stabilize the banks and keep the economy growing a bit. This infuriates market monetarists, and people who feel disenfranchised and seniors who cannot get a return on their investments. It is a new world now, and those people who desire real robust growth don't matter so much. The Fed and central banks have lost one power, the ability to raise interest rates in the face of so much bond collateral in the derivatives markets.

This new system hurts a lot of people. Genius can be unfair, and it has proven to be very hurtful to many on mainstreet.  But, the economies seem to be muddling through.

And proving the above statement, Stephen Williamson once said at his blog that he went to Switzerland, and the economy seemed to be fine, even with negative long bonds. 

I once said to Scott Sumner:

...the Fed is done, the Fed has its demand for bonds, so it is resting and ignoring NGDP and ignoring helicopter money and ignoring things that could improve interest rates, all because the bonds cannot be disturbed as to value. Too much is riding on their stability now.
I still hold out hope that the central banks could carefully dole out helicopter money in such a way as to limit the inflation that would occur to their targets, saving the bond values for the most part.

The Fed, then, has saved the banks and the elite, thrown the middle class and poor a bone, a well chewed upon bone, and has made bond yields untouchable to the upside. The Fed simply has nothing more to do. Greenspan's plan is now fully in place. Bank risk is minimized because derivatives take away risk for banks, as long as the collateral remains stable. 

There are just a few details to iron out in the future, perhaps cashless societies and perhaps a global currency. The system has dreadful potential consequences for people, but it is firmly in charge.

Are there weaknesses in the system going forward?  Yes, global shocks to the real economy, and a shortage of pristine collateral could undermine the stability of the new system. A nuclear war wouldn't help much either.

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I take issue with Martin Armstrong's view of negative Euro bond rates. As most people know, German 10 year bond yields have crossed into negative territory, joining Switzerland and Scandinavian nations in negative long bond territory.

Mr Armstrong has said that negative rated bonds are not eligible for the ECB purchasing program. He is absolutely correct about that. But there are two issues in his article that we need to look at for clarity:

1. He says that the bonds will crash, since the central bank cannot pick up the demand for the bonds. He likens it to World War 2 in America when he says:  "This is similar to the US bonds during World War II when the government ordered the central bank to support the government bonds at par. When that directive ended in 1951, the bond market crashed."

But, with such a shortage as exists today for Euro bonds, that crash seems unlikely.  The ECB is likely confident that bond demand will continue even though rates are negative. Higher and higher quality bonds are being required as collateral in the derivatives markets the world over. So there is plenty of demand for bonds, even negative yielding ones.

The ECB is clever. It is smart enough not to buy bonds with negative rates, but knows investors must buy those bonds as much needed collateral, resulting in reduction of government debt!

2. Mr Armstrong goes on to say that negative bonds are a bet against the currency, against the Euro. This currency collapse theory is plausible, I suppose, but seems to me to be pretty unlikely. The Yen was supposed to collapse. It didn't. The dollar was supposed to collapse. It didn't. The Euro has already collapsed some, but appears to be stabilizing. Bond yields are declining as the Euro is stabilizing.

So, all in all, the system is what it is, and people will not like it, and they have good reasons and I sympathize with them.

But the question remains, how negative can yields go before people want Fed and central bank heads on a stick? So far, the Fed has been able to reap few enemies, as most people don't care about economics. But could it one day be everyone against the Fed? That would depend on continued prosperity for at least most of us. And the Fed seems to be pulling that trick off so far. We are not yet negative in the long bond as they are in Europe.

And negative bond yields do alleviate government debt, allowing government to spend a little on society. I am sure that the central banks are feeling victorious about all of this outworking of events.

And I, as a result, am Comfortably Numb.