QE Is Much Closer Than You Think

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Today we hazard a thumping prediction:

The next round of quantitative easing — official, actual quantitative easing — is fast approaching.

Yes… the Federal Reserve will soon be clearing for emergency action.

When precisely can you expect it? And why the urgency?

Answers shortly. Let us first squint in on Wall Street…

The Bears Win on Points

The Dow Jones took a 28-point flesh wound today. The S&P lost but three points; the Nasdaq, five.

Gold gained $4 today, while 10-year Treasury yields rose ever so slightly — to 1.83%.

A humdrum performance altogether, this day put in.

But when can you expect the next round of authentic quantitative easing… and why so soon?

We must first distinguish between official quantitative easing and its junior shadow, “QE-lite”…

The Difference Between QE and QE-lite

Quantitative easing had a strategic vision. That is, it was intended to stimulate.

And so it stomped mercilessly upon long-term interest rates… and battered them down to nothing.

QE-lite — conversely — lacks all strategic vision.

It is workaday… and technical. It simply fills a leakage somewhere within the financial plumbing.

It consists of mere “open market operations” the Federal Reserve has always conducted.

And it fixes upon short-term rates — unlike quantitative easing. Its mission is therefore limited.

The Birth of QE-lite

The Federal Reserve initiated QE-lite in September, when liquidity ran dry in the short-term lending markets.

The Federal Reserve’s New York crisis management team rounded into action, unfurled the hoses… and gave these markets a good thorough drenching.

They are still hard at the business — and inflating the balance sheet beautifully.

The Federal Reserve’s balance sheet came in at $3.8 trillion in September. Yet it presently expands to $4.07 trillion.


Yesterday alone the New York crew emptied in $81.4 billion of liquidy credit.

Yet we are assured none of it has seeped into the central water lines of the stock exchanges.

Morgan Stanley’s interest rate strategist Matt Hornbach thus informs us:

There is little debate that the Fed is increasing the quantity of money, or Q. However… the additional money lacks a direct transmission mechanism to the equity markets or other long-duration risk assets.

Just so. QE-lite nonetheless expands the Federal Reserve’s balance sheet, as shown. And the balance sheet is the central scene of action.

Is it coincidence the major indexes have established fresh records recently?

“Like a Fourth Rate Cut This Year”

As we noted last week:

The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.

QE-lite is “like a fourth rate cut this year,” affirms Matthew Miskin, John Hancock co-chief investment strategist.

Meantime, Jerome Powell claims QE-lite has patched the financial plumbing. All leaks are wrenched shut.

Yet independent inspectors are far from convinced. Some see not patched leaks — but ongoing hemorrhagings…


James Bianco of Bianco Research:

The big-picture answer is that the repo market is broken. They are essentially medicating the market into submission. But this is not a long-term solution… This is now far bigger than anyone thought this was going to be. I think they’re hoping the market will magically fix itself. I don’t see why it would.

Nor do we.

The Federal Reserve is currently three months deep into these “temporary” open market operations.

And they will run “at least into the second quarter” of 2020… by Mr. Powell’s own admission.

We bet high they will go into the third quarter of 2020. And likely the fourth.

But why have the Federal Reserve’s heroic floods of liquidity failed to fill the pipes?

Here is the likely answer:

It can pump in its liquid. And it has. But it cannot guarantee it sloshes on through to its intended destination.

Clogs may bottle it up.

The Clogs in the System

We first must understand the repo market piping. Explains Reuters:

In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often just overnight, to finance their trading and lending. The next day, borrowers repay the loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.

Twenty-four banks — or “primary dealers” — run direct lines to the liquidity taps.

That is, they transact directly with the Federal Reserve. From these primary dealers the liquidity goes sluicing out through the repo market.

Yet these banks have evidently chosen to sit on their supplies… rather than lend them to thirsting recipients.

Our minions inform us that over 70 financial institutions presently go without.

Hence the liquidity shortage.

The Bank for International Settlements (BIS) has reached the same conclusion.

BIS fingers four banks in particular. Yet it failed to identify the culprits… for what it is worth to you.

But why are these bloated and hoggish banks refusing to lend as needed?

Bloated and Hoggish Banks

Here is why they decline to put loanable funds on offer:

They can store their hoards at the Federal Reserve instead — where they earn a superior interest.

Bryce Doty, is a senior portfolio manager at Sit Fixed Income. From whom:

The big banks are just hoarding cash. They told the Fed they have more than enough cash in excess reserves to meet regulatory issues, but they prefer having money at the Fed where they can still earn 1.55%, rather than in the repo market.

In addition, elevated post-crisis capital requirements incentivize banks to pile up reserves rather than loan them.

So concludes our brief canvas of the repo market… and its present woes.

Yet we promised a prediction at the outset… that the Federal Reserve will soon undertake the next official round of quantitative easing.

But when?

We now gaze into our polished, haze-free crystal sphere for the answer…

Prepare for Imminent “Official” QE

The Federal Reserve will initiate the next official round of quantitative easing — QE4 — before this year runs out.

That is, before Jan. 1, 2020.

This is actually the near-prediction of Credit Suisse analyst Zoltan Pozsar.

Here is the hinge upon which it rests:

Whether or not the Federal Reserve loses control of overnight rates in the weeks ahead.

Mr. Pozsar has toiled for both the New York Federal Reserve and the United States Department of Treasury.

Thus he is exquisitely familiar with the financial plumbing. And this fellow believes the Federal Reserve’s patchwork has failed to plug the leaks.

Repo market funding remains unequal to requirements, he insists. Meantime, regulatory burdens on the primary banks are “shaping up to be a severe binding constraint.”

And so this Pozsar detects a main pipe groaning, rattling and giving… ready to rupture.

He believes the weeks ahead are “shaping up to be the worst in recent memory.” Moreover, he concludes “the markets are not pricing any of this.”

“If we’re right about funding stresses,” he concludes, “the Fed will be doing ‘QE4’ by year-end.”

But let us take this near-prediction, strip its escape clause, challenge its manhood and put steel in its spine:

The Federal Reserve will be doing “QE4” by year-end.

That is our prediction, presented with a wry grin. Let the countdown begin…


Brian Maher
Managing editor, The Daily Reckoning

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The Fed Is Toying With Fire

This post The Fed Is Toying With Fire appeared first on Daily Reckoning.

Deutsche Bank maintains a strict dossier on all the world’s asset classes.

Stocks, bonds, real estate, commodities — 38 assets, A through Z — Deutsche Bank has them under ruthless and unshakable surveillance.

Last December’s spywork revealed this arresting conclusion:

93% of all the world’s assets traded negative in 2018.

Not even in the fathomless depths of the Great Depression did so many global assets wallow in red.

But last year is last year. Scroll the calendar one year forward… to today.

What do we find?

We find a full 180-degree turning around.

Each and every asset Deutsche Bank tracks — all 38 — trade positive this year.

Affirms Deutsche Bank’s Craig Nicol:

All 38 assets in its tracking universe have posted positive year-to-date (YTD) returns in both local currency and dollar terms.

To what earthly energy can we ascribe this complete and dramatic reversal?

The answer — the truly shocking answer — in one moment.

We first consider a more immediate reversal…

Trump Sends Stocks Reeling

The Dow Jones went badly backwards this morning, down 400 points. It came back a bit in the afternoon, losing only 280 points by closing whistle.

The S&P and Nasdaq followed parallel routes.

The S&P lost 20 points on the day. The Nasdaq lost 47.

The negative catalyst came issuing out of 1600 Pennsylvania Ave. this morning…

Mr. Trump announced that a trade accord can wait. Wait until when?

Until after the 2020 election is concluded:

In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right… I have no deadline… In some ways, I think it is better to wait until after the election if you want to know the truth.

Wall Street’s trading algorithms plucked the news off the wires… and began to sweat.

Trade-sensitive stocks such as Apple and Caterpillar endured the greatest trouncings today, unsurprisingly.

Equally unsurprisingly, safe haven gold jumped $14 on the day.

And so the merry-go-round takes another spin. Which direction tomorrow takes it… who can say?

But to return to our central question:

Why are all 38 assets Deutsche Bank tracks positive on the year — when 93% of these same assets were negative last year?

Too Obvious for Words

We claimed above that the answer was “truly shocking.” But we merely perpetrated a con to hold your attention.

The answer is obvious to anyone with eyes willing and able to see…

The Federal Reserve was increasing interest rates and trimming its balance sheet in 2018. Last December Jerome Powell announced the business would proceed uninterrupted.

That was when the stock market fell into open and general revolt.

By Christmas Eve… it was a whisker away from “correction.”

And so Jerome Powell dropped his weapons, hoisted his surrender flag… and came out hands in the air.

Wall Street had him.

Safely under lock, safely under key… Powell proceeded to lower rates three instances this year.

What is more, he called a premature halt to the quantitative tightening he had previously declared on “autopilot.”

Who can then be surprised that the Dow Jones industrial average has advanced 4,000 points this year?

Or that the other major indexes have marched with it?

But our tale does not conclude here. Instead, it takes a meandering twist down a side road…

A November to Remember

Rate cuts only partially explain this year’s asset extravaganza. The termination of quantitative tightening only partially explains this year’s asset extravaganza.

Can we credit a general optimism on trade (despite this morning’s blood and thunder)?

Perhaps partially — but only partially.

Whatever trade gives, trade takes back.

The promised trade deal has proved an endless frustration, a pretty plum dangled always beyond reach, a Christmas morning put off again, again and again.

For a full and complete explanation of the year in assets… we must peer deep within Deutsche Bank’s report.

There we will find this chestnut sandwiched within:

November posted some of the year’s loveliest asset gains. November, that is, hoisted all boats on its rising tide.

Why November?

For the answer we must first revisit September… and the “repo” market.

Just Don’t Call It QE4

Overnight lending rates leapt to 10% as liquidity ran dry — a high multiple of the federal funds rate then prevailing.

The Federal Reserve instantly hosed in emergency liquids to suppress the insurrection.

Mr. Powell declared the operation “temporary.” But on and on it went — into October, into November (and into December).

By November Mr. Powell and his minions at the New York Federal Reserve emptied in some $280 billion of liquidy credit.

They shrieked, howled and fumed that these “open market operations” were in no way quantitative easing.

Yet these activities inflated the Federal Reserve’s balance sheet… precisely as if they were quantitative easing itself.

From its maximum $4.5 trillion enormity, the quantitative tightening of 2018–19 siphoned down the balance sheet to $3.8 trillion.

But along came September… and its temporary open market operations.

By mid-November they reinflated the balance sheet to $4.04 trillion. Let us reintroduce the evidence we initially entered into record Nov. 15:


Smoking-gun Evidence

In all, the Federal Reserve has inflated the balance sheet $293 billion in under three months.

When was the last occasion the Federal Reserve carried on with such frantic fanaticism?

October 2008 — in the wildest psychosis of the financial crisis.

If you seek a thorough explanation for November’s asset surge, here you are.

But perhaps you demand further evidence. Then further evidence you shall have.

Here is the pistol, smoke oozing from its barrel…

The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.

Mainstream displays of lucidity and insight are rare and shocking. But here you have one, by way of CNBC’s Carl Quintanilla.

Dated Nov. 18:

Whether it should be considered QE4 or not, in the eyes of the market it’s just semantics. Markets view any increase in the size of the Fed’s balance sheet as QE and the $250 billion increase in just two months is no doubt helping to lift stock prices.

And the cup runneth over…

Hence November’s outsized influence on assets in general.

Hence we find all 38 asset classes Deutsche Bank tracks positive on the year.

But here is the danger:

The Federal Reserve’s liquidity may be kerosene that ultimately fans a conflagration…

A Potential Inferno

In Bank of America’s telling, Fed support of repo markets raises systemic financial risk.

That is because it allows excess leverage to pile up. If it comes tumbling down, if the system deleverages… it may strike the match on one royal blaze.

Bank of America’s Ralph Axel:

… there may be a situation in which banks want to deleverage quickly, for example during a money run or a liquidation in some market caused by a sudden reassessment of value as in 2008… the Fed’s abundant-reserve regime may carry a new set of risks by supporting… overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.

Meantime, the Federal Reserve pours forth an average $5 billion of flammable liquid each day.

And someone, somewhere, is holding a match…


Brian Maher
Managing editor, The Daily Reckoning

The post The Fed Is Toying With Fire appeared first on Daily Reckoning.

Chris Temple from The National Investor – Fri 20 Sep, 2019

Look into the divided Fed

Chris Temple, Founder of The National Investor joins me for a look at the US markets and their inability to reach all time highs. This very well could be all part of a longer term topping pattern. We also spend some time discussing the Fed and how divided they are. Making future policy out of the Fed all the more cloudy but quite frankly the Fed is nothing more than market reactive.

Click here to visit Chris’s site and consider signing up for his newsletter.

Are You Ready for Another Recession

This post Are You Ready for Another Recession appeared first on Daily Reckoning.

Dear Rich Lifer,

Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.

Yes, I’m talking about a “Recession”.

Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.

A question I get asked a lot is what should retirees do with their money when a recession is looming?

When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.

The fear of losing everything to another recession is sending a lot of investors running for the hills.

However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.

Here’s a checklist you can follow so that your investments and savings can weather any financial storm.

1. Start tracking your cash flow.

Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.

Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.

If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.

An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.

This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.

2. Top up your emergency fund.

Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.

As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.

The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.

If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.

3. Pay off outstanding debt.

With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.

Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.

Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.

Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.

4. Rebalance your investment portfolio.

Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.

If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.

Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.

The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.

5. Manage your 401(k) wisely

If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.

Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.

Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.

Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.

To a richer life,

Nilus Mattive

Nilus Mattive

The post Are You Ready for Another Recession appeared first on Daily Reckoning.

Chris Temple from The National Investor – Wed 3 Jul, 2019

ECB and Fed nominations continue to lock in low rates for longer

Chris Temple, Founder of The National Investor shares his thoughts on Christine Lagard announced to take the reigns at the ECB and Trump’s more recent nominations for rolls at the Fed. Overall the theme of lower rates seem locked in for a long time. There is also these on going comments regarding currency wars that Trump spurred again today.

Click here to visit Chris’s site and consider signing up for his newsletter.

Has Recession Already Started?

This post Has Recession Already Started? appeared first on Daily Reckoning.

“Sit down before fact like a little child,” Thomas Huxley instructed, and “follow humbly wherever and to whatever abyss Nature leads…”

Today we sit down before facts, childlike… and follow humbly wherever and to whatever abyss they lead.

But what if the facts lead straight to the abyss of recession?

Facts 1: April orders for core nondefense capital goods slipped 0.9%.

Facts 2: April orders for durable goods — items expected to endure three years or more — sank 2.1%. Durable goods shipments overall dropped 1.6%… the most since December 2015.

Facts 3: April orders for transportation equipment plunged 5.9%.

Facts 4: April retail sales slipped 0.2%.

Facts 5: The “yield curve” has inverted good and hard — a nearly perfect omen of recession.

Has Recession Already Arrived?

Stack facts 1–5 one atop the other. What can we conclude?

“U.S. recession probably started in the current quarter.”

This is the considered judgment of A. Gary Shilling. Mr. Shilling is a noted economist and financial analyst.

And he gazes into a crystal ball less murky than most.


In the spring of 1969, he was one of only a few analysts who correctly envisioned the recession at year’s end and was almost a lone voice in 1973… the first significant recession since the Great Depression.

But is not the economy still expanding?

Q1 GDP rang in at a hale and hearty 3.2% — after all.

But peer behind the numbers…

Much Less than Meets the Eye

Much of the jauntiness was owing to transitory factors such as inventory accumulation.

Firms squirreled away acorns to jump out ahead of looming tariffs, giving Q1 GDP a good jolt.

But that jolt has come. And that jolt has gone.

Meantime, Q2 GDP figures will come rising from the bureaucratic depths tomorrow morning.

What can you expect from them?

A severe letting down, it appears…

Q2 GDP Estimates Revised Downward

Morgan Stanley has lowered its Q2 GDP forecast from 1.0%… to a sickly 0.6%.

J.P. Morgan has lowered its own sights from 2.25% to 1%.

Meantime, the professional optimists of the Federal Reserve’s Atlanta command ring in at a slender 1.4%.

Miles and miles — all of them — from the first quarter’s 3.2%.

Might these experts botch the actual figure?

They may at that… and it would not be the first instance.

But the weight of evidence here assembled loads the scales in the other direction.

Besides, recessions first appear in the rearview mirror. They are only identified several months to one year post factum… if not longer.

Perhaps the economy has already started going backward, as Mr. A. Gary Shilling suggests.

Or perhaps he has spotted a phantom menace, a shadow, a false bugaboo.

What does the “yield curve” have to say?

The Message of the Yield Curve

The yield curve is simply the difference between short- and long-term interest rates.

Long-term rates normally run higher than short-term rates. This happy condition reflects the structure of time in a healthy market.

The 10-year yield, for example, should run substantially higher than the 3-month yield.

The reason is close by…

The 10-year Treasury yield rises when markets anticipate higher growth — and higher inflation.

Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.

Bond investors therefore demand greater compensation to hold a 10-year Treasury over a 3-month Treasury.

And the further out in the future, the greater the uncertainty. Thus the greater compensation investors demand for taking the long view.

Compensated, that is, for laying off the sparrow at hand… in exchange for the promise of two in the distant bush.

Time Itself Inverts

But when the 3-month yield and the 10-year yield begin to converge, the yield curve flattens… and time compresses.

When the 10-year yield falls beneath the 3-month yield, the yield curve is said to invert. And in this sense time itself inverts.

The signs that point to the future lead to the past. And vice versa.

In the careening confusion, future and past run right past one another… and end up switching places.

Thus, an inverted yield curve wrecks the market structure of time.

It rewards pursuit of the bird at hand greater than two in the future.

That is, the short-term bondholder is compensated more than the long-term bondholder.

That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more.

That is, something is dreadfully off.

“A Nearly Perfect Omen of Lean Days Ahead”

An inverted yield curve is a nearly perfect omen of lean days ahead. It suggests an economic winter is coming… when investors expect little growth.

Explains Campbell Harvey, partner and senior adviser at Research Affiliates:

When the yield curve inverts, it’s not the time to borrow money to take a vacation to Orlando. It is the time to save, to build a cushion.

An inverted yield curve has accurately forecast all nine U.S. recessions since 1955.

Only once did it yell wolf — in the mid-1960s.

It has also foretold every major stock market calamity for the past 40 years.

The yield curve last inverted in 2007. Prior to 2007, the yield curve last inverted in 1998.

Violent shakings followed each inversion.

History reveals the woeful effects of an inverted yield curve do not manifest for an average 18 months.

And now, in 2019… the doomy portent drifts once again into view.

The Bond Market’s Strongest Signal Since the Financial Crisis

The 3-month and 10-year yield curve inverted in March. It has since straddled the zero line, leaning with the daily headlines.

But this week the inversion has gone steeply negative.

We are informed — reliably — that the yield curve has presently inverted to its deepest point since the financial crisis.

Why is the 3-month versus the 10-year yield curve so all-fired important?

Because that is the section of the yield curve the Federal Reserve tracks closest. It believes this portion gives the truest reading of economic health.

Others give the 10-year versus the 2-year curve a heavier weighting.

But it is the Federal Reserve that sets policy… not others.

Federal fund futures presently offer 86% odds that Mr. Powell will lower interest rates by December… and 60% odds by September.

If recession is not currently underway, we are confident the Federal Reserve’s next rate cut will start the countdown watch.


Come the next rate cut, recession will be three months off — or less.

Why do we crawl so far out upon this tree limb?

President Trump Should Demand Jerome Powell Not Raise Interest Rates

The next rate cut will be the first after a hiking cycle (which commenced in December 2015).

And the past three recessions each followed within 90 days of the first rate cut that ended a hike cycle.

Assume for now the pattern holds.

Assume further the Federal Reserve lowers interest rates later this year.

Add 90 days.

Thus the economy may drop into recession by early next year.

Allow several months for the bean counters at Washington to formally identify and announce it.

You may have just lobbed recession onto the unwanting lap of President Donald John Trump… in time for the furious 2020 election season.

Could the timing be worse for the presidential incumbent?

Mr. Trump has previously attempted to blackjack Jerome Powell into lowering rates.

But if our analysis holds together…

The president should fall upon both knees… and beg Mr. Powell to keep rates right where they are…


Brian Maher
Managing editor, The Daily Reckoning

The post Has Recession Already Started? appeared first on Daily Reckoning.

Central Banks Don’t Matter

This post Central Banks Don’t Matter appeared first on Daily Reckoning.

“There is no money in monetary policy.”

Could it be true? Is there no money in monetary policy?

Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.

Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.

No money stands beneath it, behind it, beside it.

The emperor is well and truly nude.

Who then actually controls monetary policy today?

The answer may very well lie hidden in the “shadows.”

The details — the shocking details — to follow.

Monetary Policy Is Actually About Credit and Debt

First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying… 

Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is debt-based money in today’s lunatic and preposterous world.

The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

None of the foregoing will stagger or flabbergast Daily Reckoning readers.

Money is debt in today’s world. Debt represents a claim upon the future. The Federal Reserve is a vast engine of debt, a menace.

But this Snider fellow strays far beyond the normal run of grievances…

He commits perhaps the grandest heresy in the universes of economics and finance:

That the Federal Reserve and all central banks are largely powerless…

The Central Bank Is Not Central

They are merely men behind curtains… irrelevancies… and the emperor in fact wears no clothing.

Here Snider strips the emperor bare:

The Fed is, largely outside of temporary sentiment, irrelevant. The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central. It flies in the face of everything you have been taught and told your whole life. The media still give these guys every benefit of every doubt, and central bankers (ab)use that privileged platform to perpetuate their myth. 

Central banks are not central? The Federal Reserve is irrelevant?

As well argue that gravity is a vicious fiction, that 2 and 2 is 9, that Washington never axed the cherry tree.

Snider further argues that the interest rate the Federal Reserve monkeys — the fed funds rate — is likewise an irrelevancy:

There is absolutely no legitimate reason why anyone should [notice federal funds.] The federal funds market is a nonentity… pocket change… It is the sparest of spare liquidity… Today, federal funds is nothing, an extraneous anachronism.

The Fed’s Target Audience: You 

Why then does the Federal Reserve target the fed funds rates?

Because it wants you to believe that it bosses the markets, that its false fireworks are real:

What was decided, essentially, was to keep federal funds as the primary monetary policy focus. The reason? You.

Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…

So the FOMC decided that for the public they would still use federal funds to signal to you their intentions… There is no money in monetary policy; it is entirely psychology.

What about quantitative easing? Was it not about “printing money”

QE accomplished next to nothing….QE’s real purpose was …in trying to manage expectations which central bankers were more than happy to let you believe this was all money printing… 

Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.

Blasphemy mounts upon blasphemy!

But if not the central banks… who or what is central?

Who, then, is running monetary policy?

The Shadow Banking System

You will find the answer in the shadows, says Snider — the shadow banking system.

The shadow banking system?

That is the deeply interconnected network of banking institutions that operate outside direct control of central banks.

They include the large banks and their offshore units.

This shadow banking system extends through Europe, the Caribbean and Asia, the world over.

In 2017, the Bank for International Settlements — the central bank of central banks —  estimated $13 trillion to $14 trillion dwell within the shadow system.

But this shadow banking system is invisible.

It hides in shadow, leaving only traces of its activity… as a thief leaves traces of his crime.

Only a properly trained sleuth can sniff them out:

No one can directly observe this global [shadow banking] system, what is actually the world’s reserve currency. First of all, it is primarily based offshore from everywhere, therefore outside of official recognition. There are no direct statistics. The term “shadow” is, in this case, perfectly appropriate.

The United States dollar is the coin of this realm.

The shadow system first took shape in the 1950s and ’60s after Bretton Woods placed the dollar at the center of the international monetary system.

It expanded through the 1980s, ’90s… into the early aughts.

And beneath notice, the shadow banking system shouldered the central banks out of the international monetary system. Snider:

“The global money system moved on without central banks bothering to notice.”

Did the Shadow Banking System Cause the Great Financial Crisis?

These shadow banks traded heavily in derivatives and other risky instruments. All without oversight.

Where do asset bubbles come from, asks Snider? “They came from the shadows” is his answer — including the U.S. housing bubble:

Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade. What actually happened was it became a parallel banking system unto itself… not so much that a company in Japan could import goods from Sweden. But so that the banks in Japan or Sweden or Switzerland or anywhere around the world could participate in this [shadow banking] system that at the time was stoking a U.S. housing bubble, while at the same time creating vast bubbles in emerging market[s]… 

So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.

To repeat:

Snider argues that the 2008 crisis was not merely a housing crisis. It was rather a crisis of the shadow banking system:

The Great Financial Crisis has been laid at the doorstep of subprime, a bunch of greedy Wall Street bankers insufficiently regulated to have not known any better.

That was just a symptom of the first. The housing bubble itself was more than housing. What was going on in the shadows wasn’t bounded by national borders or geography… The Great Financial Crisis was a [shadow banking] event, nothing less. 

Why hasn’t the global economy recovered from the Great Financial Crisis? Might the answer involve the shadow banking system?

More tomorrow…


Brian Maher
Managing editor, The Daily Reckoning

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Is This Cheating the Gov’t, or Is It Justified?

This post Is This Cheating the Gov’t, or Is It Justified? appeared first on Daily Reckoning.

In a recent article about “The Seven Deadly Sins of Retirement,” I said soaring healthcare costs were a major topic that seniors need to think about. I also suggested you consider ways to shelter as much money as possible from nursing homes or government-run healthcare programs.

This is not the first time I’ve said as much, and it once prompted a reader named Pat to write in with the following response …

“Nilus, I have to tell you that I have real ethics trouble with some of your recent advice on retirement: Namely, advising people to give away assets so that they can avoid the Medicaid look-back provision for long-term care.

“Why should I or any other taxpayer have to pay for someone’s care just so they can give their assets to their family?

“Having a mother who is likely to need such care, I certainly don’t think others should have to pay for it just so my siblings and I can have some of her assets.”

I take feedback like this seriously … and I always reconsider my arguments when someone calls me out.

But in this case, I stand behind my initial suggestion 100%.

After all, it’s my job to help readers preserve (and grow) their wealth using every legal means available.

Before we get into the specific case of the Medicaid look-back provision, let’s talk about the general idea of protecting your assets.

Protecting Your Assets

I have never, and will never, advocate using illegal means to hide or protect your accumulated wealth.

Because even if you put morality aside, it simply isn’t worth the risk! 

But should I stop recommending perfectly-legal tax shelters like 401(k)s, IRAs, and other special retirement accounts?

Of course not.

Or to take this completely off of me, should an accountant stop helping his clients use every available credit and deduction to lower their overall tax liability?

No way!

We don’t make the rules. We simply help people understand what the rules are and how to use them for the best possible personal outcome.

This is why I laugh whenever I hear Warren Buffett say his tax rate should be higher than it is.

Yes, he should absolutely speak his mind on the topic, and do his best to convince elected officials to change the law as he envisions it.

At the same time, nothing prevents him from writing a bigger check to the Treasury any time he feels like it. I’m sure they would have no qualms cashing it! 

So you have to wonder whether he really means it. After all, Berkshire Hathaway makes darn sure that it exploits every single advantageous element of the tax code possible. The company has a responsibility to its shareholders to do so.

In a similar vein, if you don’t like using the current rules and laws to your family’s advantage, that’s completely your choice.

But I would much rather give as much of my wealth as possible to my daughter – especially if the alternative choices are nursing homes or the government.

And here’s why I feel very ethical by preserving my wealth in this way …

The Ethics for Preserving Your Wealth

For starters, as I’ve already pointed out, there’s nothing technically (or legally) wrong with signing away all your assets to an heir and then later qualifying for Medicaid.

As to the MORAL argument, how is doing so any different than someone who gave away a good portion of their wealth to big-screen televisions or a gambling habit? 

Why should someone who chose financial responsibility feel guilty for getting to pass along the results of their discipline and hard work?

And how are they bilking the state any more than the spendthrift?

What I’ve observed time and again – and it’s a trend that seems to be accelerating – is the idea that responsible, harder-working, more-disciplined people should always, unquestionably, be there to bail out less responsible parties.

And not by choice but by force.

I see this dynamic at work in the government’s response to the real estate bust … the Fed’s record-low interest rate policies … the various bailouts … the new healthcare exchanges that were established a couple years ago … and plenty of other places.

Bottom Line

In my opinion, these approaches start with good intentions but result in serious moral hazard – a situation that encourages the very behaviors trying to be eradicated.

So, by all means, we should aim to help others whenever it’s within our means to do so …

We should absolutely obey the laws that are in place at any given time …

And we should all feel responsible for voting our consciences in an effort to shape the future as we believe it should be.

But there is absolutely no reason anyone should feel compelled to go one step beyond the letter of the law as it currently stands simply because of guilt.

Quite to the contrary, I feel it’s my ethical duty to continue giving readers the best information I can so they have the widest range of choices possible.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Is This Cheating the Gov’t, or Is It Justified? appeared first on Daily Reckoning.

URGENT: Gold Announcement @ 2PM

This post URGENT: Gold Announcement @ 2PM appeared first on Daily Reckoning.

Do you recognize this chart?

Hint: This is one of my favorite areas of the market. And it’s an opportunity we’ve talked a lot about here at The Daily Edge.

If you correctly identified this as a price chart for gold, give yourself a pat on the back.

Even better, if you’re actually invested in gold, you’re doing even better. Because the higher the price for gold, the more wealth you’re accumulating.

Today, I want to tell you about the biggest catalyst for gold that is happening this afternoon. You definitely won’t want to miss this opportunity!

An “Unofficial” Policy Goes Legit

It’s been a tough road for investors over the last four months. Ever since stocks started pulling back in October, confidence in the market has been weak.

But don’t tell that to gold investors.

If you look at the chart above, you’ll see that while the rest of the market was turning lower, the price for an ounce of gold actually increased.

In other words, gold was a great way to protect your wealth during an uncertain time in the market. Which is exactly what precious metals are supposed to do.

Just this week, gold broke even higher, adding to investors gains. A big part of the reason gold is now trending higher is because of the new theme the Fed has been communicating to markets.

The theme revolves around the Fed’s balance sheet of roughly $4 trillion in treasuries and mortgage backed securities.

Since October of 2017, the Fed has been slowly reducing the amount of these securities held. And this “runoff” in the Fed’s balance sheet has naturally helped to prop up market interest rates.

Jerome Powell spooked investors last December when he told us that the Fed’s balance sheet “runoff” would be on autopilot for the foreseeable future. That told investors that the Fed would continue this subtle force driving interest rates higher, even if the economy weakened.

Of course, in hindsight this was a poor choice of words. Using the term “autopilot” caused investors to panic and drove stocks sharply lower in December.

Unofficially, different members of the Federal Open Market Committee have offered statements to indicate that the Fed will not be on autopilot when it comes to letting its bonds mature. In other words, the Fed is not likely to continue to force market interest rates higher by allowing this “autopilot” runoff in its balance sheet.

Today, I expect the Fed to make this more flexible policy “official” as Chairman Jerome Powell releases a new statement on interest rates and then hosts a press conference shortly after.

Fed Announcement Has Huge Implications for Gold

As an investor, you should be looking for the best ways to profit from this shift in perspective. And there are few better ways to profit from this Fed announcement than the gold market.

In the past, we’ve talked about how the gold market is tied directly to U.S. interest rates.

Lower interest rates generally lead to a weak dollar. This is because fewer people want to hold U.S. dollars if they’re receiving less interest from their cash.

When the dollar weakens, gold trades higher. This is a simple truth because it takes more “weak” dollars to buy an ounce of gold. So with the dollar now starting to weaken, it’s no wonder that gold has been moving higher.

When the Fed releases its announcement today, I don’t expect any change to the Fed’s target short-term rate.

But the announcement will certainly include information on the Fed’s balance sheet of $4 trillion in bonds. And that information will have a big effect on long-term market interest rates.

We’ve already seen those rates move lower based on “unofficial” comments from Fed members. The announcement and press conference today will make that stance more “official.”

With gold already breaking out, any official statement that pressures interest rates should drive the price of gold sharply higher. And as you can see in the chart below, gold has a lot of room to run before catching up to where it was trading a few years ago.

While I recommend always having a portion of your wealth in gold, there are times when it makes sense to add extra exposure to precious metals. This way, you can build your wealth by taking advantage of a sharp increase in the price of gold.

This is one of those times.

Whether you buy shares of the SPDR Gold Trust (GLD), add extra physical gold to your vault, take a long position in a gold futures contract, or even pick up shares of precious metal mining companies, make sure that you act quickly!

Because once the Fed makes its policy official this afternoon, I expect gold prices to rally sharply. You may not see a golden opportunity of this magnitude for the rest of the year!

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
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Three Concerns Hanging Over the Davos Elite

This post Three Concerns Hanging Over the Davos Elite appeared first on Daily Reckoning.

This week, the global elite descended private jets to their version of winter ski-camp – the lifestyles of the rich and powerful version.  The World Economic Forum’s (WEF) five-day annual networking extravaganza kicked off in the upscale ski resort town of Davos, Switzerland.

Every year, the powers-that-be join the WEF, select a theme, uniting some 3000 participants ranging from public office holders to private company executives to the few organizations that truly do help fix the world that they mess up.  This year’s theme is “Globalization 4.0”, or the digital revolution. The idea being, the potential tech take-over of jobs, and what wealthier countries are doing to lesser developed ones in the process.

While the topic might be focused on the future, the present is just as troubling, if not more so, than the future.   Such is the disconnect between real people and corporations.  That’s what the estimated 600,000 Swiss Franc membership to be a part of the WEF constellation gets you as a CEO at the Davos table.

Government leaders like German Chancellor Angela Merkel, Brazil’s president, Jair Bolsonaro and Chinese Vice President, Wang Qishan are in attendance this week. Business leaders like Microsoft co-founder Bill Gates and JPMorgan Chase CEO, Jamie Dimon will also take part in the festivities.

Yet, even though the various leaders will likely promote their achievements, what’s lurking behind the pristine snowcapped Alps, is a dark foreboding of a less secure world. Nearly every major forecast from around the world is projecting an economic slowdown. As one Bloomberg article reports, “companies are the most bearish since 2016 as economic data falls short of expectations and political risks mount amid an international trade war, U.S. government shutdown and Brexit.”

The list of non-attendees includes U.S. President Donald Trump, UK Prime Minister Theresa May and French President, Emmanuel Macron. They are too busy dealing with complex political problems in their own government institutions and domestic home fronts to make the trek.

Below is a breakdown of the three flashpoints that the Davos crowd should be watching in 2019:

Economic Growth Will Slow

Signs of slowing global economic growth are increasing. We’re seeing that in both smaller emerging market countries and larger, more complex ones. Weaker-than-anticipated data from the U.S., China, Japan and Europe are stoking worries about the worldwide outlook for 2019.

Many mainstream outlets are beginning to understand the turmoil ahead. Goldman Sachs, my old firm, is predicting an economic slowdown in the U.S. And the International Monetary Fund (IMF) has revised downward its 2019 U.S. growth prediction to 2.5% from 2.7% from 2018. It believes that the U.S. will be negatively impacted by the economic slowdowns of American trade partners and that the 2020 slowdown could be even “sharper” as a result.

The IMF also points to pressure from ongoing trade tensions between the U.S. and China and growing dysfunction between the U.S. and other major trading partners, such as Europe.

Because the world’s economies have become increasingly interdependent, problems in one economy can have widespread consequences. We learned this once before: the collapse of U.S.-based investment bank, Lehman Brothers, triggered a greater international banking crisis in 2008. That sort of connectivity has only grown. The reality is that we may now face even greater threats than forecast so far, which could lead to another financial or credit crisis.

It is likely that China could be ground zero for a global economic slowdown. Recent data out of China indicates that much global GDP and trade activity that should normally be in the first quarter (Q1) of 2019 was pulled forward into Q4 2018 to “beat” the tariff increase.

It’s likely that the same phenomenon could happen in the U.S. If this trend does snowball, you should expect to see rapidly deteriorating economic numbers arriving in the months ahead.

Debt Burdens Will Worsen

No matter how you slice it, public, corporate and individual debt levels around the world are at historical extremes. Household debt figures from the New York Federal Reserve noted that U.S. household debt (which includes mortgage debt, auto debt and credit card debt) was hovering at around $13.5 trillion. That debt has risen for 17 straight quarters.

What is different this time is that current levels are higher than just before the 2008 financial crisis hit.

In addition, global debt reached $247 trillion in the first quarter of 2018. By mid-year, the global debt-to-GDP ratio had exceeded 318%. That means every dollar of growth cost more than three dollars of debt to produce.

After a decade of low interest rates, courtesy of the Fed and other central banks, the total value of non-financial global debt, both public and private, rose by 60% to hit a record high of $182 trillion.

In addition, the quality of that debt has continued to deteriorate. That sets the scene for a riskier environment. Over on Wall Street they are already disguising debt by stuffing smaller riskier, or “leveraged” loans into more complex securities. It’s the same disastrous formula that was applied in the 2008 subprime crisis.

Now, landmark institutions like Moody’s Investors Service and S&P Global are finally sounding the alarm on these leveraged loans and the Collateralized Loan Obligations (CLOs) that Wall Street is creating from them.

CLO issuance in the U.S. has risen by more than 60% since 2016. Unfortunately, it should come as no surprise that Wall Street is now proposing even looser standards on these risky securities. The idea is that the biggest banks on Wall Street can actively repackage risky leveraged loans into dodgy securities while the music is still playing.

If rates do rise, or economic growth deteriorates, so will these loans and the CLOs that contain them, potentially causing a new credit crisis this year. If the music stops, (or investors no longer want to buy the CLOs that Wall Street is selling) look out below.

Corporate Earnings Will Be Lower

With earnings season now underway, we can expect a lot of gaming of results in contrast to earlier reports and projections. What I learned from my time on Wall Street is that this is a standard dance that happens between financial analysts and corporations.

What you should know is that companies will always want to maximize share prices. There are several ways to do that. One way is for companies to buy their own shares, which we saw happen in record numbers recently. This process was aided by the savings from the Trump corporate tax cuts, as well as the artificial stimulus that was provided by the Fed through its easy money strategy.

Another way is to reduce earnings expectations, or fake out the markets. That way, even if earnings do fall, they look better than forecast, which gives shares a pop in response. However, that pop can be followed by a fall because of the lower earnings.

The third way is to simply do well as a business. In a slowing economic environment, however, that becomes harder to do. Plus, it’s even more difficult in today’s environment of geopolitical uncertainty, as a multitude of key elections take place around the world in the coming months.

These three concerns were central in conversation in Davos. Expect global markets to be alert to the comments coming from the Swiss mountain town. Severe dips and further volatility could be ahead if any gloomy rhetoric streams from the Davos gathering.

How Will the Fed React?

Ready to help, is the answer. This month, yet another top Federal Reserve official noted that economic growth could be slowing down. That would mean the Fed should, as Powell indicated, switch from its prior fixed plan of “gradually” raising interest rates to a more “ad-hoc approach.”

Indeed, Federal Reserve Bank of New York President John Williams, used Chairman Powell’s new buzz phrase, “data dependence,” to indicate that the Fed would be watching the economy more. While he didn’t say it explicitly, it has become largely clear that the markets are determining Fed policy.

Based on my own analysis, along with high-level meetings in DC, I see growing reasons to believe the Fed will back off its hawkish policy stance. As we continue to sound the alarm, there are now a myriad of reasons including trade wars, slowing global economic conditions and market volatility.

Traders are now assigning only a 15% chance of another rate hike by June. Just three months ago, those odds were 45%.

Watch for even more market volatility with upward movements coming from increasingly dovish statements released by the Fed and other central banks. Expect added downward outcomes from state of the global economy along with geo-political pressures.


Nomi Prins

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