Приветствую всех своих читателей! Сегодня решил объединить и индекс и нефть, потому что во-первых хочется сразу после заседания ФРС подвести некие итоги, а во-вторых они ведь частенько корелируют, хоть и с лагом по времени, по этому хочется посмотреть как это выглядит сейчас. Разумеется стоит смотреть последние статьи по индексу и нефти если не читали, а то смысловая нагрузка может потеряться Индекс; Нефть Для начала по нефти хочу сказать, она пробила треугольник, о котором писал в прошлой статье и идет по цели, по дороге рисует дополнительные фигуры, и вот сейчас тоже на 60-ти минутном графике строит очередной «бычий флаг». При этом «древко» я замеряю от последнего импульса, хотя реально его можно взять пониже и тогда и цели будут серьезнее, но не спешу, хочу еще посмотреть. Кроме того между 64,06 и 66,02 по текущему майскому контракту CLK8 практически была пустота, и вот в текущий момент создают профиль, а на это как известно необходимо время. Сам сократил позицию в 2 раза и поднял стоп до 62 (но держу я июньский контракт CLM8 — так что это в его ценах) Разумеется все сделки транслирую в своем Чате, куда можно присоединяться. Или озвучиваю ежедневные видения по рынку и нефти у себя в Канале. Нефть в нем транслирую с мая 17-го и результаты за прошлый год — 23260 баксов на 1 контракт За январь взял 1810 баксов по нефти. Февраль вышел тоже 1810, март на текущий момент по закрытым сделкам 2020. Теперь переходим к индексу и начнем с фактов: 1. Заседание ФРС прошло, ни каких особых сюрпризов оно не принесло, все в рамках ожидания, полагаю не стоит сосредотачиваться на итогах, думаю их все уже прекрасно знают и не раз написали и на СЛ. Меня вот больше волнует, что новый глава ФРС, такая же «вафля» как и предыдущая бабулька. То есть по сути он будет петь, что скажут. Это не фига не Бен Бернанке и тем более не Алан Грниспен, при которых рынок реально реагировал на серьезные решения и заявления 2. Индекс вчера резко вынесли до 2743 — это как раз серьезное сопротивление не раз обозначенное мною на этой неделе как уровень 2743-46, а по сути это минимумы прошлой недели 2745. И в настоящий момент давят снова вниз. Хотя вчера в диапазоне 2715-13 я видел покупателей, по сути регулярную сессию там резко тоже остановили и вывели выше 2720. 3. Сейчас важные уровни 2727 и 2743. Выше 2743 полагаю должен развиться импульсный рост пунктов на 100+ в течение нескольких сессий. И вот тут стоит обратить внимание на то что нефть и индекс зачастую корелируют в движениях, но не всегда по времени одинаково. Вот дневной график нефти а вот дневной график индекса в котором как бы нет подобного движения вверх. Но вот конкретно сейчас пока пишу статью индекс начинает разыгрывать другой график Как видим на 4-х часах есть медвежий флаг и цели его 2675 — 2645. Не раз писал что под 2651 у быков начнутся проблемы, но это не значит что нельзя вынести этот уровень и быстро уйти назад. Ровно так же это и не значит, что вообще туда зайдут. Возможно ограничатся уровнем 2702-696 либо нырнут скажем до 2692-84 На мой взгляд интрига заключается в том, что если все же собираются расти, то надо окончательно вынести попутчиков, что сейчас и делают, обмануть медведей, заманить их в ловушку и быстро уйти вверх. А вчера не пустили выше 2743 возможно еще и потому что по средам экспирации опционные на индекс. Полагаю, что многие участники рынка могли рассчитывать на большую волатильность и покупали стрэнглы скажем, а маркетмейкеры напротив продавали волатильность и всем желающим путы и колы за пределами консолидации. И конечно же им было выгодно оставить рынок в границах, обнулив покупки тем, кто покупал. Кроме того на следующей неделе Пасха у католиков и Пейсах у иудеев, как следствие к этим событиям обычно начинается позитив. Еще хочу добавить, что снижение понедельника было больше обусловлено проблемами у Фесбука, за которым пошли и другие акции, а вот он в свою очередь показал некий минимум, сформировал к нему вчера еще и HL на дневном, а на 60-ти минутном даже умудрился нарисовать фигуру «перевернутая голова и плечи» IH&S с целями 185,13 — что даст закрыть гэп (а такие «дырки» не оставляют на экстремума и он будет однозначно закрыт), а вторая цель выше 198 то есть новые максимумы в акции. Сам по индексу в лонге и планирую добавлять по ситуации, либо снизу, либо на пробой 2743 например, или 2727 — тут пока мысли разные и оценивать уровни надо по их силе тоже. Все свои актуальные мысли ежедневно выкладываю у себя в Канале и в Чате. На текущий момент: Уровни сопротивлений: 2727, 2743, 2756, 2768, 2772, 2784, 2789, 2802, 2808-11, 2821-27, 2846 Уровни поддержек: 2712, 2707-04, 2697, 2686-81, 2651 Всем удачных торгов! Итоги работы Чата за 2017 год по фьючерсу ES (в пунктах на один контракт) — 696 пунктов: Общий январь-февраль 264,75 Март на текущий момент 80 пунктов на 1 контракт. Подробная информация помесячно за прошлый год по ссылке Для желающих присоединиться к чату, координаты ниже. Для связи: Whatsapp +792827944 ( ноль девять ) skype: ivandashkov instagram: idashkov Напоминаю, что помимо своего Чата, где транслирую ежедневно все свои сделки онлайн, еще открыт канал в Telegram где ежедневно пару тройку раз даю свое видение по рынку, но без рекомендаций и конкретики по сделкам. Telegram @I_Dashkov
The market is hoping for 'goldilocks' as Powell faces the press and hopes to offer a 'not too dovish' and 'not too hawkish' perspective after hiking rates, and carefully signalling uncertainty over how much more is to come. As a reminder of what just happened - The Fed hawkishly raised its rate-hike trajectory, raised GDP growth expectations, left the inflation outlook alone, but talked down the economic outlook in its statement - Powell has some 'splaining to do. Ian Shepherdson of Pantheon Macroeconomics notes that "only one FOMC member needs to add another hike to their 2018 profile to raise the median to four hikes this year; that looks like a very good bet for June. In the meantime, though, this is a pretty benign outcome for markets, for now." And we wonder who the 5% dot plot in 2020 is... Bloomberg's Steve Matthews notes that Powell's press conference will be interesting on lots of levels. For one, unlike Janet Yellen and Ben Bernanke, the new chairman tends to be very straightforward in his answers -- there are lots of yeses and nos. Such directness can be a little disquieting to markets -- stocks dropped after his first day of congressional testimony in February. Second, as Fed watcher Roberto Perli notes, new Fed chairs can have a tendency to be a little less polished at first. So fasten your seatbelts. So which will it be? Hawkish 'man of steel'? Or market-pandering goldilocks? Will he mention LIBOR's blowout? The Deficit? Fiscal Unsustainability? Trade wars? Record high sentiment? * * * Live Feed (due to start 1430ET)...
Минувшая неделя принесла с собой одну новость, оставшуюся практически незаметной, считает экономический обозреватель «БИЗНЕС Online» Александр Виноградов. А именно: за весь вторник, 13 марта, не было совершено ни одной сделки купли-продажи японских 10-летних казначейских облигаций. Почему это важно — в нашем материале.
Москва, 15 марта - "Вести.Экономика". Как правило, в экономических кругах и в широкой общественности хорошо известно, что драгметаллы, в том числе золото, пользуются спросом во времена фискальной неопределенности. И для этого есть веская причина.
Как правило, в экономических кругах и в широкой общественности хорошо известно, что драгметаллы, в том числе золото, пользуются спросом во времена фискальной неопределенности. И для этого есть веская причина.
In the past year, there has been a lot of debate whether Trump's tax plan will make the poor poorer and the rich richer. Well, we now have one glaring example of the latter, and to a degree never seen before, if in a different format than most envisioned: according to Bloomberg, Jeffrey Talpins’s Element Capital Management made more than $3 billion in the last five months, mostly as a result of a trade that President Donald Trump’s tax bill would pass successfully, driving stocks and yields on U.S. Treasuries higher. Jeffrey TalpinsTalpins - whom we first profiled back in 2015 when he quietly emerged as a massive buyer of Treasurys - put on the "Trump trade" one year ago when investors still had doubts that a tax bill, or frankly anything proposed by Trump, would succeed. The manager's vision - which was 100% correct - was that Trump and fellow Republicans, having failed to pass major legislation, including an overhaul of Obamacare, would unite to push through a large tax cut for individuals and corporations. That's exactly what happened, and it's not over yet: the hedge fund macro manager still thinks the trade has some room to run. “We expect the U.S. equity market to fully recover the peak to trough decline and hit new highs over the next few months,” he said in a mid-February letter to investors seen by Bloomberg. “As the market gradually recovers its February losses, we also expect that volatility will subside commensurately.’’ Talpins first made his tax call in an April 2017 letter to investors, saying a lack of cohesiveness within the Republican Party and the dim prospect of legislative support from Democrats would drive Republicans to “take the path of least resistance” in the form of a large tax cut for companies and lower marginal rates for individuals. A month later, he told them he had increased his exposure to stocks on the view that a tax package, deregulation, an accommodative Federal Reserve and healthy earnings “all support equity prices moving higher.” In the May letter, he also said that he expects the Fed will raise rates by 25 basis points a quarter this year, and continue to remove accommodation, which has so far been accurate. Oh, and he was also spot on in predicting that back then that there was a high chance for a 10% correction in the next 12 months that would hit commodity trading advisers and volatility targeting funds hardest, though the market would then recover within a few months. As stocks climbed for 2017, and yields on Treasuries jumped at the very end of 2017, Talpins’s correct view was rewarded. So was his bank account. As a result, while most of his peers have languished and scratched their heads how to generate alpha, Elements figured it out: have trust in Trump... and be rewarded. This year its fund has already climbed 11.5%, following a 9% return in the last quarter of 2017 fueling the multibillion-dollar gain. The tax call was the latest correct call for the $13.5 billion Element, which was launched in 2005 after Talpins' stints at Goldman and Citigroup. Incidentally, less than 3 years ago, Elements had less than half in AUM, or roughly $6 billion. Unfamiliar with Talpins? Here is some detail from our 2015 profile of Element, and the formerly unknown hedge fund manager: "Mr. Talpins is an intense and reserved trader formerly at Citigroup Inc. and Goldman Sachs Group Inc. He is known for a tenacious style that can grate on rivals and once tested the patience of former Federal Reserve Chairman Ben Bernanke." According to the NYT, in 2005, Trader Monthly named Mr. Talpins one of the top 30 traders under 30, when he was still an employee of Vega Asset management. "Youth is not wasted on this crop, any of whom could be a billionaire by 40,” the magazine said. “Or, then again, they could be belly up and bust." Back in 2010 the FT profiled Element Capital, then at just $1.5 billion, saying that fixed-income relative value trading, "the hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet." It added that "fixed-income relative value trading – shunned by investors after the collapse of LTCM in 1998 – has been one of the industry’s few outperformers this year, thanks to massive pricing anomalies caused by fiscal stimulus packages and unconventional central bank monetary policies around the world." In any case, Talpins also posted double-digit returns in 2015 and 2016, while other macro traders including Ray Dalio, Paul Tudor Jones and Louis Bacon lost money or made only a few percent. His fund has posted annualized returns of 21% since inception. * * * Now for the not so good news: Talpins warns that he isn’t a long-term bull. In his latest letter, Talpins said that the increased volatility in February was initially caused by pension funds rebalancing their portfolios at the end of January by selling about $50 billion worth of stocks. That pushed stocks lower and caused CTAs, volatility targeting funds and short volatility products to dump an additional $200 billion in stocks. The firm, known for its heavy use of options in its wagers, used baskets of single-name equities as well as call options on the S&P 500 to make the bets. As a hedge, it shorted stock indexes outside the U.S. He also warned that the S&P 500 is about 3% below its January peak, and once stocks surpass that point, rising interest rates, stretched valuations and a maturing economic cycle will start weighing on the market later in the year. In other words, enjoy the next 3-4 months: that's about as good as it will get. Oh, and for those who can't wait to have Talpins manage their money, get in line: the fund has been closed to new investments since last year, when it pulled in $2 billion of fresh capital in two weeks.
Authored by Brandon Smith via Birch Group, It is generally well known in economic circles and in the general public that precious metals, including gold, tend to be the go-to investment during times of fiscal uncertainty. There is a good reason for this. Precious metals have foundation qualities that provide trade stability; these include inherent rarity (rather than artificially engineered rarity such as that associated with cryptocurrencies), tangibility (you can hold gold in your hand, and it is relatively difficult to destroy accidentally), and precious metals are easy to trade. Unless you are attempting to make transactions overseas, or in denominations of billions of dollars, precious metals are the most versatile, tangible trading platform in existence. There are some limitations to metals, but the most commonly parroted criticisms of gold are in most cases incorrect. For example, consider the argument that the limited quantities of gold and silver stifle liquidity and create a trade environment where almost no one has currency to trade because so few people can get their hands on precious metals. This is a naive notion built upon a logical fallacy. Gold backed paper currencies existed for centuries in tandem with the metals trade. Liquidity was rarely an issue, and when such events did occur, they were short lived. In fact, the last great liquidity crisis occurred in 1914, the same year the Federal Reserve began operations and the same year that WWI started. This crisis was, as always, practically fabricated by central banks around the globe. Benjamin Strong, the head of the New York Fed in 1914 and an agent of the JP Morgan syndicate, had interfered with the normal operations of gold flows into the U.S. and thus sabotaged the natural functions of the gold standard. Central banks in Germany, France and England also applied influence to disrupt currency and gold flows, causing a global panic. This engineered disruption seemed to take place through conscious co-operation between central banks. Does any of this sound familiar? For those who are interested, the history of the 1914 liquidity crisis is outlined in detail in the book ‘Lords Of Finance: The Bankers Who Broke The World’, by Liaquat Ahamed. When gold and currency are tied together, gold prices tend to remain rather stable, as they are often set by the national treasury. In 1914, the price of gold was $20 per ounce and had maintained that approximate value for decades. To give some perspective on value, in 1914 the average house cost $3,500, or 175 ounces of gold. But what happens when gold and national currencies become disjointed from each other? Take a look at the hyperinflationary crisis in Weimar Germany. The price of gold per ounce went from 170 marks to 87 trillion marks within five years! Over that same five year period, gold value in Germany had increased at almost TWICE the rate of inflation, indicating that gold not only kept up with the devaluing mark, but made anyone holding gold rather rich in the process. This is a very important fact. The common argument against gold is that the metal is not really a wealth creating investment, but merely protects your buying power. As the Weimar crisis shows, this is not always the case. In some circumstances, often during times of economic disaster, precious metals can in fact generate more wealth than what you put into them. Then there is the issue of government interference in gold markets and trade during crisis. As the Great Depression in the U.S. began to take hold, investors turned aggressively to gold and silver as a means to offset the crashing values of most other assets. In a highly controversial move in 1933, President Roosevelt outlawed the private ownership of gold bullion and set the price of gold at $35 per ounce. Keynesian economists like Ben Bernanke often try to assert that the gold standard was the reason why interest rates had to be hiked as the depression was escalating, and that this was the cause of a greater crash. They are only half correct. Increased rates did indeed cause a larger and more prolonged crisis, but this had little to do with the gold standard. Clearly, in 2008 the U.S. and most of the world was NOT on a gold standard, yet we suffered a very similar collapse in credit and equities as happened in the Great Depression. Also, there is no gold standard forcing the Federal Reserve to raise interest rates today, yet they are doing so despite escalating negative indicators in the real economy. Whether or not this will cause an even more violent economic catastrophe remains to be seen, but Jerome Powell, the new Fed Chairman himself, warned in 2012 that this is exactly what could happen. Jerome Powell has stated in no uncertain terms that rate hikes will continue under his watch in 2018. Central banks were the core institutions to blame for the Great Depression, not the gold standard, considering the fact that central banks did NOT follow a true classical gold standard exchange internationally, and instead tried to establish a global basket exchange system of multiple currencies and gold in what they called the “gold exchange standard”. Add to this the unnecessary interest rate hikes as deflation was pummeling assets, and you have a perfect recipe for calamity. Even Ben Bernanke, in a 2002 speech to honor Milton Friedman, openly admitted that the Fed was the root cause of the prolonged economic carnage during the Great Depression: “In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” The use of gold prohibition had mixed results. Obviously, it did not stop the freight train of the Great Depression. In fact it probably exacerbated difficulties in trade and savings. Black markets took over and precious metals were still highly sought after. As far as the crash of 2008 is concerned (a crash which is still ongoing today), we all know what happened with gold markets. In the lead up to the crash, from 2004 to 2008, gold doubled in value. Then, after the initial crash from 2008 to 2012, it doubled again. Despite predictions by mainstream economic naysayers, gold has not collapsed back down to pre-crash levels. In fact, gold has remained one of the most effective investment performers for years. The question is, what happens next? Setting aside gold confiscation as a factor (a factor which I believe would be impossible to enforce in today’s markets), we can see that massive fiat stimulus as a means to artificially support a deflationary fiscal system, as well as central bank intervention in general, leads to collapse and a flight to hard assets like gold. Even with rising interest rates and the potential for a spike in the dollar index, if the rest of the economy is in steep decline, investors and others will still turn towards precious metals. As I have mentioned in previous articles, the initial reaction of gold prices to faster interest rate hikes may be negative. That said, I do not believe gold will drop as dramatically as mainstream economists expect. Once higher interest rates kill the stock market bubble as well as the renewed housing and credit bubble, gold will skyrocket as one of the only asset classes with tangible real world value.
Authored by John Rubino via DollarCollapse.com, A branch of journalism that might be called, “don’t worry, be happy, because this time is different” tends to pop up at the peak of cycles when imbalances that caused past crashes start to reemerge. Eager to keep the gravy train going, business publications send reporters out to interview industry experts (who are making fortunes from the ongoing expansion) on why this batch of imbalances is actually no problem at all. And sure enough they find all kinds of plausible-sounding rationalizations. In the 1990s dot-com bubble, for instance, stratospheric P/E ratios didn’t matter because for New Age tech companies earnings were “optional.” In the 2000s housing bubble record mortgage debt didn’t matter because home prices would always rise faster than the associated borrowing, keeping homeowners above water and banks ever-solvent. Subsequent events proved this to be nothing more than insiders trying to keep the deals flowing. Now, with pretty much every major indicator signaling a peak for the latest cycle, “don’t worry, be happy” is once again a popular journalistic beat. Here’s an excerpt from yesterday’s Wall Street Journal on why investors fine with record corporate debt: U.S. corporate debt has climbed to levels that have coincided with recent recessions. Many analysts and investors are unconcerned. Even before this week’s blockbuster $40 billion bond sale by CVS Health, corporate debt stood at 45% of GDP, a level it last reached in 2008 as the economy was entering a recession, according to Moody’s Investors Service. Some companies with weaker credit quality are finding it easier to access the bond market, and others are skimping on covenants protecting investors. Yet analysts say the differences between the current period and 2008 and 2001—when corporate debt rose to similar levels as the U.S. tipped toward contraction—are more important than any similarities. Today, signs of economic growth persist, supported by corporate tax cuts and a simulative budget deal, as well as borrowing costs that remain relatively low by historical standards. That means companies can continue to borrow without creating significant economic risks, according to analysts. Moody’s predicts the economy will grow 2.7% this year and expects the default rate on corporate bonds to drop to 2.2% by year-end from 3.2% in January. Today’s credit conditions are also stronger than in the past because of larger capital buffers held by U.S. banks as part of more stringent regulatory standards, Moody’s analysts said. Banks’ bondholdings have shrunk drastically since the financial crisis, in part because of Dodd-Frank banking reforms but also because investors are more willing to buy the securities they underwrite. This signals an improved capacity within the economy to handle the present level of corporate borrowing. Banks formerly held significant amounts of bonds either as unsold inventory from or with their proprietary trading units. In January 2008, the bond dealers in the Federal Reserve’s network of primary dealers who underwrite the U.S. Treasury debt held as much as $279 billion of corporate debt on their balance sheets compared with $24 billion as of last month. Corporations are in a better position to function with higher debt burdens than in the past, some analysts said. “The difference this time is really in the debt affordability,” said Anne van Praagh, head of credit strategy & research at Moody’s Investors Service. The yield on the 10-year Treasury note, which serves as a benchmark lending rate for companies, has climbed this year, recently hitting a multiyear high of 2.943%, compared with an average rate of 4.63% in 2007. And with credit spreads—the difference in yield between corporate bonds and Treasury debt—hovering near multiyear lows, investor demand continues to hold down borrowing costs for most companies. One of the fun ways to read this kind of journalism is to count the sentences likely to come back to haunt the reporter and/or his source a few years hence. The above article has a ton of them, but here are three that stand out: “Banks’ bondholdings have shrunk drastically since the financial crisis, in part because of Dodd-Frank banking reforms but also because investors are more willing to buy the securities they underwrite. This signals an improved capacity within the economy to handle the present level of corporate borrowing.” If there are record amounts of corporate bonds in circulation and banks don’t own them, who does? Bond ETFs and pension funds, neither of which will react well to the next downturn. ETFs will see outflows which require them to sell existing positions, thus pushing prices down even further. Pension funds will fall into a black hole of underfunding if their current investments lose value when they’re supposed to rise by a steady 7% per year. Both ETFs and pension funds are every bit as fragile and systemically dangerous as big banks were prior to the Great Recession. “The yield on the 10-year Treasury note, which serves as a benchmark lending rate for companies, has climbed this year, recently hitting a multiyear high of 2.943%, compared with an average rate of 4.63% in 2007. And with credit spreads—the difference in yield between corporate bonds and Treasury debt—hovering near multiyear lows, investor demand continues to hold down borrowing costs for most companies.” To note that interest rates recently hit a multi-year high but brush that off because they’re still lower than past peaks is the kind of snapshot thinking that ignores trends. And in finance it’s really all about trends. If the 10-year Treasury rate keeps rising, corporate borrowing costs will have to follow – and will eventually spike when higher interest rates destabilize the economy. Put another way, it’s not the nominal interest rate that matters, it’s the resulting interest cost. And with the world approximately twice as indebted as it was a decade ago, a lower interest rate can still generate a debilitating level of interest expense. “Today, signs of economic growth persist, supported by corporate tax cuts and a simulative budget deal, as well as borrowing costs that remain relatively low by historical standards. That means companies can continue to borrow without creating significant economic risks, according to analysts. Moody’s predicts the economy will grow 2.7% this year and expects the default rate on corporate bonds to drop to 2.2% by year-end from 3.2% in January.” Growth is always robust and prospects bright – according to forecasters who get paid by companies and/or governments that benefit from positive perceptions – just before something blows up and stops the expansion. In 2006, everyone from Ben Bernanke to Goldman Sachs thought 2008 was going to be a great year. So insouciant bondholders are just following the standard late-cycle script.
Решение президента США по заградительным пошлинам открывает «ящик Пандоры» Девятого марта президент США Д.Трамп ввел пошлины на импорт стали в размере 25% и алюминия —10%. При подготовке этого указа в полной мере проявились его качества крупного и удачливого бизнесмена с огромным опытом конкуренции, в частности жесткость и одновременно хитрость в отношениях с партнерами (очевидно, стать […]
Submitted by FF Wiley “During the 1980s and 1990s, most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon.” —Ben Bernanke Ben Bernanke began his oft-cited “helicopter speech” in 2002 with a few kind words about his peers, including the excerpt above. Speaking for central bankers, he took a large share of the credit for the low inflation of the 1980s and 1990s. Central bankers had gained a “heightened understanding” of inflation, he said, and he expected the future to bring even more inflation-taming success. Of course, Bernanke’s cohorts took a few knocks in the boom–bust cycle that followed his speech, but their reputations as masters of inflation (and deflation) only grew. Today, the picture he painted seems even more firmly planted in the public mind than it was in 2002, notwithstanding recent data showing inflation creeping higher. Public perceptions aren’t always accurate, though, and public figures aren’t the most reliable arbiters of credit and blame. In this 3-part article, I’m proposing a theory that challenges Bernanke’s narrative, and I’ll back the theory with data in Part 3. I’ll show that it leads to an inflation indicator with an excellent historical record. But first, let’s recap a few points I’ve already discussed. The Endless Tug-of-War In Part 2, I said inflation depends on a tug-of-war between purchasing power (on the demand side) and capacity (on the supply side), and the war takes place within the circular flow, in which spending flows into income and income flows back to spending. Two circular-flow patterns and their causes demand particular attention: When banks inject money into the circular flow in the process of making loans, they can boost spending above the prior period’s income, thereby fattening the flow (or the opposite in the case of a deleveraging). When foreign imports exceed exports, spending might not adequately recycle back to income, opening a leak in the flow (or the opposite in the case of a trade surplus). Those points might sound obvious to some (if not, they might look obvious in the diagrams included in Parts 1 and 2), but they’re inconsistent with mainstream economics. According to models favored by mainstream academics and central bankers, the circular-flow pattern involving bank-created money doesn’t exist. In other words, my way of thinking yields conclusions that you don’t find in mainstream theory or at, say, the Fed. In particular, I’m proposing a circular-flow inflation indicator that consists of bank-created money, the trade balance and real GDP growth. As described in the bullets above, bank-created money and the trade balance measure injections to and leaks from the circular flow—they tell us whether injections and leaks could be upsetting the balance between purchasing power and capacity—while real GDP growth approximates capacity. Using “M63” for bank-created money (see Part 1 for further explanation), the exact inflation indicator is M63 growth plus the trade balance as a percent of GDP minus real GDP growth. History’s Pages To be sure, this is a high-level indicator—it should help predict major trends, not month-to-month volatility. When I tested it against history, I wanted to see if it explains inflation’s big-picture behavior in each business cycle, and it does exactly that, as I’ll demonstrate by comparing the indicator to core inflation over the last eight cycles. Here’s the core inflation data: The chart shows why it makes sense to evaluate each business cycle as a separate event—namely, business-cycle recessions normally act as reset buttons, crushing inflation by constricting pricing power, which then sets the stage for the next expansion. So inflation begins a new life with each expansion, and the chart shows the differences from one to the next. To keep it simple, I assigned each of the business cycles to one of three inflation categories (low, moderate and high), and I also noted whether inflation was rising or falling relative to the previous cycle. My first test, then, is to track the paths followed by the circular-flow indicator during three cycles plagued by high inflation: As you can see, the indicator went three for three, climbing higher during all three cycles. In circular-flow speak, there was too much purchasing power chasing too few goods. Anyone who had followed the indicator during those periods—basically, the 1960s and 1970s—would have expected the inflation dragon to fly free and been on the money. But what about the five cycles marked by disinflation or low inflation? Here are the indicator readings during those cycles: Once again, the indicator had a perfect record—five for five in predicting the inflation dragon was caged and then being proven correct. In each period of disinflation or low inflation, purchasing power was either losing or at a stalemate in the tug-of-war with capacity, and that continues today, although the trend turned sideways during the last three years. The recent turn from downward to sideways doesn’t tarnish the indicator’s historical performance—which I would call stellar—but if it turns upward from here that would become a cause for concern. Notice also that core inflation jumped above the Fed’s current 2% target at some point during every expansion. In other words, core inflation can be volatile regardless of the circular-flow indicator’s direction. In fact, recent trends in monthly data place core CPI inflation above 2% again by spring or early summer, and core PCE inflation could follow. I mention this because I don’t want readers misinterpreting the charts above, which don’t preclude inflation continuing to fuel financial volatility as during the past month. Conclusions More to the point, the indicator bears watching as investors wonder if the recent inflation scare will be contained. It isn’t the only way to evaluate inflation risks, but there’s much to recommend it. I would say it fits the data like caroling fits Christmas, it’s as logical as giving thanks on Thanksgiving, and it supplies information not included in traditional indicators—like Groundhog’s Day but without the nonsense. And that’s not all—the circular flow analysis I’ve proposed can also shine a cold light on stories told by mainstream economists. I discussed two of those stories earlier in this article—the Monetarist story and the story of central bank omnipotence—and I have a few concluding comments on each. Monetarism. As discussed in Part 1, Monetarism enjoys nowhere near the popularity it reached in the late 1970s, despite a small tribe of modern-day descendents who continue to fixate on monetary aggregates such as M2. In my opinion, the 1970s Chicago Monetarists were like the 1990s Buffalo Bills—that is, they came oh so close. (Did you think I was going to call them wide right?) They had plenty of research proving the importance of money creation by banks, but they chose to preserve the mainstream narrative that banks are conduits, not creators, of the “initial monetary impulse.” If all of their eggheads hadn’t crammed into the same M2 basket, their popularity might not have fizzled out as it did. Not only that, but circular-flow analysis such as mine would be standard fare if heterodox (and more realistic) thinking about money creation had forced its way into the mainstream before it became too late, shut off by powerful economists who built careers and reputations on orthodox theory alone. Again, 1970s Monetarism opened a window of opportunity but failed to climb through it—it was foiled by misconceptions about money and banking. (For a more thorough discussion on this topic, see my recently published book, Economics for Independent Thinkers, which applies circular-flow concepts to various issues in economics.) Central Bank omnipotence. I recommend being wary of economists claiming to have everything figured out, whether they claim to have tamed the business cycle or, our topic here, inflation. The economy isn’t an animal or a motor vehicle or any of the other analogies that suggest a designated expert can control it, and the inflation outcomes of the last three decades weren’t engineered in an economics lab somewhere deep in the Eccles Building. On the contrary, it might be perfectly normal for inflation to trend toward low single digits—without central bank intervention—when a large trade deficit diverts purchasing power overseas, foreigners fail to inject that purchasing power cleanly back into America’s circular flow, and commercial banks refrain from rampant money creation. (Okay, banks have sometimes acted stupidly, but not by enough to offset trade-related deflationary forces, as shown in the last chart above.) In other words, the Fed was probably more lucky than skillful, and it certainly wasn’t omnipotent. Finally, inflation surfs the same waves stocks and bonds surf, but on the opposite phase (with exceptions, of course, such as TIPS), suggesting the circular-flow indicator can also help investors create their own luck. In future commentaries, I’ll make recommendations for applying it to economic and capital market forecasting. In particular, look for research supporting our bond outlook, which should give you another reason to swim away from the mainstream. Who knows? Adjusting your stroke for the circular-flow indicator might make a late but lucrative New Year’s resolution.
Authored by Kevin Muir via The Macro Tourist blog, I would like to take you back to 2012. Just a few short years after the soul-searching-scary Great Financial Crisis of 2008-9, market participants had finally given up their worry of the next great depression enveloping the globe, but had replaced it with an equally fervent fear that inflation would uncontrollably explode. The Federal Reserve had recently completed their second round of quantitative easing, much to the chagrin of a large group of distinguished economic thinkers who had gone as far as writing an open letter to the Fed Chairman pleading he reconsider the program. You remember that old A&E show Intervention? Well, this was like an academic peer episode - more neck beards and sophisticated language, but sadly, the same amount of crying. So when the Fed’s favourite inflation gauge, the Core PCE index, spiked up to 2% in 2012, it was especially hard on Chairmen Bernanke. After all, his colleagues had just warned him that this was about to happen. Like any good addict, Bernanke insisted he had his usage under control. In fact, during a 60 minutes TV interview, when faced with the question about how confident he was that he could control inflation, he responded - “100%.” Yet, here was Bernanke, staring down the barrel of 2% inflation, having done nothing to prepare the market for higher rates. He believed the inflation was “transitory” and it would be a mistake to nip off the budding recovery with tighter monetary policy. The hawks went ape-shit. They screamed and yelled. They warned about Weimar Republic style hyper-inflation. But Bernanke hung tough. This was bold. It took guts. Now you might think it was wrong - so be it. I am not so omniscient to give judgment, but more importantly, it’s in the past, so arguing is about as interesting as when your 98-year-old grandma tells you that she was once “quite a dish.” Yeah sure, it might be true - but it ain’t doing anything for anyone today. I am more interested in what this might mean for markets going forward. This episode provided an important “lesson” for markets. I think that Cullen Roche’s admission was symbolic of the change of thinking that went through financial circles - The “Transitory” Inflation… Bernanke was right. I don’t often give Ben Bernanke a lot of credit for the job he’s done. I am admittedly hard on him and perhaps unfairly so. But he deserves some serious credit for his persistent comments on inflation in the last 24 months. Dr. Bernanke was mercilessly mocked in some circles for calling the surging commodity prices following QE2 “transitory”. In early 2011 he was cited: “I think my take on inflation right now is that we are indeed seeing some increases, obviously,” Bernanke said. He attributed them to “global supply and demand conditions.” But he reckons these prices “will eventually stabilize.” “I think the increase in inflation will be transitory,” Bernanke said. But we added: “we have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct than we would certainly have to respond to that.” He was further mocked by some who said the inflation would prove global in nature and that the impact would eventually spread to the USA. But this excellent chart below from Also Sprach Analyst shows that Ben Bernanke was very right about inflation. He deserves a great deal of credit for his prescience on the inflation front. How this will affect markets in the coming years? Although I believe the next surprise will be disappointing global economic growth, and not the other way round, I come from the Yogi Berra school of forecasting - “it’s tough to make predictions, especially about the future”, so I fully accept the possibility that inflation might take off in the coming quarters. But I want to highlight that the stage has already been set for the Federal Reserve to “look through” those increases. Don’t expect Core PCE ticking above 2% to alter the Federal Reserve’s course. After all, I am sure that Bernanke has passed down the secret recipe for being able to 100% control inflation to Powell. No need to worry. Trust him, he just uses it recreationally.
Authored by James Rickards via The Daily Reckoning, The Fed says incessantly that “price stability” is part of their dual mandate and they are committed to maintaining the purchasing power of the dollar. But the Fed has a funny definition of price stability. Common sense says price stability should be zero inflation and zero deflation. A dollar five years from now should have the same purchasing power as a dollar today. Of course, this purchasing power would be “on average,” since some items are always going up or down in price for reasons that have nothing to do with the Fed. And how you construct the price index matters also. It’s an inexact science, but zero inflation seems like the right target. But the Fed target is 2%, not zero. If that sounds low, it’s not. Inflation of 2% cuts the purchasing power of a dollar in half in 35 years and in half again in another 35 years. That means in an average lifetime of 70 years, 2% will cause the dollar to 75% of its purchasing power! Just 3% inflation will cut the purchasing power of a dollar by almost 90% in the same average lifetime. So why does the Fed target 2% inflation instead of zero? The reason is that if a recession hits, the Fed needs to cut interest rates to get the economy out of the recession. If rates and inflation are already zero, there’s nothing to cut and we could be stuck in recession indefinitely. That was the situation from 2008–2015. The Fed has gradually been raising rates since then so they can cut them in the next recession. But there’s a problem. The Fed can raise rates all they want, but they can’t produce inflation. Inflation depends on consumer psychology. We have not had much consumer price inflation, but we have had huge asset price inflation. The “inflation” is not in consumer prices; it’s in asset prices. The printed money has to go somewhere. Instead of chasing goods, investors have been chasing yield. In a recent article, Yale scholar Stephen Roach points out that between 2008 and 2017 the combined balance sheets of the central banks of the U.S., Japan and the eurozone expanded by $8.3 trillion, while nominal GDP in those same economies expanded $2.1 trillion. What happens when you print $8.3 trillion in money and only get $2.1 trillion of growth? What happened to the extra $6.2 trillion of printed money? The answer is that it went into assets. Stocks, bonds and real estate have all been pumped up by central bank money printing. The Fed, first under Ben Bernanke and later under Janet Yellen — repeated Alan Greenspan’s blunder from 2005–06. Greenspan left rates too low for too long and got a monstrous bubble in residential real estate that led the financial world to the brink of total collapse in 2008. Bernanke and Yellen also left rates too low for too long. They should have started rate and balance sheet normalization in 2010 at the early stages of the current expansion when the economy could have borne it. They didn’t. Bernanke and Yellen did not get a residential real estate bubble. Instead, they got an “everything bubble.” In the fullness of time, this will be viewed as the greatest blunder in the history of central banking. The problem with asset prices is that they do not move in a smooth, linear way. Asset prices are prone to bubbles on the upside and panics on the downside. Small moves can cascade out of control (the technical name for this is “hypersynchronous”) and lead to a global liquidity crisis worse than 2008. If the Fed raises rates without inflation, higher real rates can actually cause the recession and/or market crash the Fed is preparing to cure. The systemic dangers are clear. The world is moving toward a sovereign debt crisis because of too much debt and not enough growth. Inflation would help diminish the real value of the debt, but central banks have obviously proved impotent at generating inflation. Now central banks face the prospect of recession and more deflation with few policy options to fight it. So the Fed is now considering some radical ideas to get the inflation they desperately need. One idea is to abandon the 2% inflation target and just let inflation go as high as necessary to change expectations and give the Fed some dry powder for the next recession. That means 3% or even 4% inflation could be coming sooner than the markets expect. But the Fed should be careful what it asks for. Once inflation expectations develop, they can take on lives of their own. Once they take root, inflation will likely strike with a vengeance. Double-digit inflation could quickly follow. Double-digit inflation is a non-linear development. What I mean by that is, inflation doesn’t go simply from two percent, three percent, four, five, six. What happens is it’s really hard to get it from two to three, which is ultimately what the Fed wants. But it can jump rapidly from there. We could see a struggle to get from two to three percent, but then a quick bounce to six, and then a jump to nine or ten percent. The bottom line is, inflation can spin out of control very quickly. So is double-digit inflation rate within the next five years in the future? It’s possible. Though I am not forecasting it. But if it happens, it would happen very quickly. So the Fed is playing with fire if it thinks it can overshoot its inflation targets without consequences. Why is the Fed’s forecasts so consistently wrong? There are many reasons for this horrible record, including the use of equilibrium models to describe a nonequilibrium complex dynamic system. For years I’ve said that the Fed has defective economic models and the worst forecasting record of any major official institution (although the IMF gives the Fed a run for their money in terms of bad forecasts). The facts back up my claim. For eight years in a row, from 2009–2016, the Fed’s one-year forward forecast for annual economic growth was off by orders of magnitude. The Fed has failed to achieve self-sustaining growth anywhere near former trends, along with its failure to achieve its 2% inflation targets. Perhaps the Fed’s biggest analytic and forecasting blunder is their reliance on the Phillips curve, which describes a purported inverse relationship between inflation and unemployment. The hypothesis is that as unemployment goes down, inflation goes up and vice versa. There is no evidence for this theory. In the late 1960s we had low unemployment and rising inflation. In the late 1970s and early 1980s we had high unemployment and high inflation. Today we have low unemployment and low inflation. There is no correlation between employment and inflation at all. The Fed has been pondering this lack of evidence. The Fed has concluded that they don’t really understand the relationship between employment and inflation. That’s a start. Maybe I can help. The reason they don’t understand the relationship is because there is no relationship. Inflation is not catalyzed by employment or money supply. Inflation is a result of psychological expectations and the behavioral patterns of consumers acting on those expectations. If people believe inflation is coming, they will act accordingly en masse, the velocity of money will increase and soon enough the inflation will arrive unless money supply has been severely constricted. That’s how you get the rapid inflation increases I described above. It is only in the past two years that the Fed forecast has become more accurate, and that’s only because the Fed simply trimmed their forecast to the prevailing nine-year trend growth rate of just over 2%. Better late than never. Meanwhile, the Fed is creating financial and economic headwinds with rate hikes and by reducing the money supply through its new program of quantitative tightening, or QT. With the return of stock market uncertainty and the economy not much above stall speed, a severe stock market correction/and or recession is in the cards. I can’t say exactly when, but I’d say it’ll be sooner rather than later. Got gold?
Authored by Jeffrey Snyder via Alhambra Investment Partners, There may come a time not too much further down the road when Brexit will have been not quite forgotten but placed into a second tier of European disintegration. In that top level, if it should continue, would reside all on its own Itexit. The Italians not the Britons will goad the question of the euro, and therefore the whole of the European experiment. By now, the formula is a familiar one. If you are against tighter integration and European Union, then you are a fascist xenophobe, a racist of the first order. Rather than dissuade voters, this has, it appears, worked against those using the slurs who fervently hope to keep the experiment for much longer. Complete vote tallies are not yet available, but by all accounts the Italians in heavy turnout voted heavily yesterday for anti-establishment, anti-euro parties. Though the Italian parliament could be in for a mess in the near future, euroskepticism and anti-establishment fever dominated to a much greater degree than anticipated (for yet another election). Even the mainstream commentary written ostensibly to describe what’s going on can’t refrain from locking out reality: After establishment parties managed to contain populists in German, French and Dutch elections over the past twelve months, their defenses were overwhelmed in Italy as voters rebelled against two decades of lackluster economic growth and a surge in immigration. The upshot is a far more unpredictable partner for European leaders such as Angela Merkel and Emmanuel Macron as they face the U.S. threat of a trade war while trying to reform the bloc. This Bloomberg article (predictably) distills Italian economic angst as “two decades of lackluster economic growth” for the transparent purposes of delegitimizing voter dissatisfaction. A more honest paragraph would have been, “It’s been bad for twenty years, why are they now rebelling? Immigrants.” It wouldn’t have been any more true, just stripped of its obvious bias and the misanthropic intentions behind it. It is technically true that Italy’s economy has been one of the more chronic underperformers, and yet it still can also be the case where that underperformance has changed. Up until 2008 or so, Italians may have been characterized as if not satisfied then at least apathetic about the lackluster nature of their economy under the euro. I don’t think that’s actually true, however, as the EU itself was popular in that country up until the worldwide “dollar” panic. What explains the revolt now is the recovery from that panic; or the lack thereof. As I’ve written before, the dynamic becomes explosive simply because the Italians, like Americans and everyone else, have been told repeatedly that their economy has not just recovered but recently it is booming. For many, it might be. That’s not the issue, however, as in any economy there are always proportions doing well and those not doing well. When far too many reside, and stay, in the former, that’s where trouble starts. And when those people left out of whatever economy hear repeatedly that things are really good and they can’t find exactly where that may be, mistrust and blame are surely the only guaranteed results. The irrational fear of robots is of the same predicament. In not being given any candid answers, people will make up their own minds as to why they can’t seem to experience these boom times. Immigration is a similar if more complex issue (we have to take into account social as well as economic factors). But even that general review understates the severity of the problem to a considerable extent. Even those who are employed, which is significantly less in Italy as a proportion of the population, they aren’t making much if any progress, either. This lack of opportunity can and does become palpable, a frustration that must be met with honest assessment but in this lost decade rarely if ever is. Economists don’t countenance anything but recovery. It doesn’t matter how much evidence is stacked up against it, they will claim it’s there, or if pressed that it will be here tomorrow. This view starts with a conclusion and then seeks evidence for it. The technocracy is defended at all costs, even when it’s most striking feature is its total incompetence. In July of 2012, Mario Draghi promised to “do whatever it takes” to preserve the currency, and thus in political terms to keep the integration dream alive. Most people saw it as a noble gesture, the hard-pressed efforts of a committed statesman to help out the ordinary folks of Europe suffering under financial repression for reasons they couldn’t understand. These people should have instead heard Mario Draghi for what he was, an utterly confused near lunatic: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now — and I think people ask “how come?”– probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. Like his predecessor Jean-Claude Trichet or Ben Bernanke, his counterpart at the Federal Reserve in the US, Mario Draghi has no idea what happened in 2008, or, for that matter, what happened again in 2011. His central bank like all central banks is trying to fix a problem they can’t understand, and the effect of doing so is that nothing ever gets fixed. People might be understandably upset by that fact. It doesn’t take much to acknowledge that these voters might have a case, legitimate criticisms that have nothing whatsoever to do with the darker side of Europe’s tragic history. Economics, however, is the most fragile discipline perhaps ever invented; it prevents even a modicum of honest introspection, largely because it is more of a political force (farce) than a scientific one. Nowhere is that more evident than in Europe. The risk to the European political situation is not really all that complex. It is easily attributed to the one thing nobody is allowed to question: The threat to the euro is today greater than it was in 2012, and for that Draghi has completely failed. It comes not in Target II imbalances and Greek default penalties, but in political upheaval tied directly to what it is that Mario Draghi can’t seem to figure out. He can promise all he wants, but Europe’s fate will not be determined by his euro. It’s recovery or bust for Europe, the same choices as are being faced around the rest of the world for the very same prolonged stagnation. In China, as noted earlier, they are moving in preparation, it appears, for the bust. European voters might seem as irrational, but only if you think the euro was and is like a bumblebee in the capable hands of the brilliant technocratic beekeepers. It hasn’t been two decades of economic problems, just the last one has been more than enough to turn Italy against that which it once enthusiastically embraced. The breakup began in monetary destruction, nurtured by mistake after mistake, and now moves ever closer to completion drawn forward upon technocratic uselessness covered only by political shrillness. Are we really supposed to wonder why it hasn’t been a winning formula at the ballot box? If anything, I think Italians, the British, Americans, etc., have until recently all shown remarkable restraint. They gave the technocrats the benefit of the doubt time and again, with dubious policies and experiments and then promises that haven’t come close to being kept. Ten years is a long, long time for nothing being accomplished. That’s really all there is to it. It’s just that simple. You want to save Europe? You can start by ending all this blatantly dishonest boom nonsense.
Authored by Kevin Muir via The Macro Tourist blog, What a true bond bear market looks like A couple of years ago I remember having a discussion with a hedge fund manager. I told him about my theory that the next big surprise would be higher bond rates, not the other way round. I distinctly remember him lecturing me about the overwhelming forces of demographics, technology and globalization. All of these added up to deflation - not inflation. I couldn’t convince him that when everyone agrees on something, it’s time to expect something different. We agreed to disagree. Today, the tables have completely turned. It’s now fashionable to be a bond bear. So much so, I probably don’t need to repeat the common bond negative narrative that has spread through the financial community faster than chlamydia at a Banff youth hostel. To see the preponderance of negative bond sentiment, all one has to do is look at the speculative positioning in the fixed income futures market. One of the easiest ways to hedge against higher interest rates is the CME 3-month Eurodollar contract. This contract has nothing to do with the euro currency, but instead represents the rate at which banks lend US dollars to one another overseas. Speculators are so confident about higher rates that they are short almost $4 trillion ED futures. That’s a mind bogglingly large position. And it’s not confined to eurodollar futures. The US 5-year treasury future is also stuffed full of speculative short positions. The anecdotal evidence is also adding up. Market legends are appearing all over the newswire - warning about fixed income. “With rates so low, you can’t trust asset prices today. And if you can’t tell by now, I would steer very clear of bonds,” Paul Tudor Jones at a recent Goldman event. It’s easy to see why these pros are so bearish. The tape looks like crap. You might notice that I have been focusing on the front end of the yield curve. That’s on purpose. Not all parts of the curve are the same During the next part of this post, it might appear I am making contradictory arguments, but it’s important to note that different parts of the yield curve react in different ways. It’s not as easy as just saying you are bearish on bonds and then shorting TLT. It’s much more nuanced, and without understanding all the dynamics in play, you might find yourself right about your call, but not making any money. Anyway, here it goes - the statement most likely no one will like. The short end of the yield curve is oversold, while the long end has not even started to understand what a true bond bear market looks like. Huh? What do I mean by that? Well, I think the front end of the curve is overly optimistic about the Fed’s ability to keep hiking, while the long end of the curve is way too sanguine about the Fed’s skill in controlling inflation. So far, most market participants have assumed that Central Banks will keep inflation under wraps. As economic indicators have continued to tick higher, markets have pushed yields up at the front end of the curve. This has traditionally been the playbook. Economy does better. Market rates rise. Fed follows curve higher by raising Fed funds rate. This continues until rates rise enough that the Fed inverts the yield curve and the economy rolls over. Then the Fed slashes rates and the whole process repeats. What’s different this time is that the stakes are so much higher. Although the Fed has raised rates as the economy improved, the consequences of going too fast scare the bejesus out of them. The Great Financial Crisis is still very much gnawing at the back of their mind. Much of Europe is still experimenting with negative rates, Japan’s massive QE and pegging of the 10-year rate ensures their shadow level of interest is still firmly below zero, and to top it off, until recently, inflation has been relatively muted throughout the globe. So it’s no wonder the Fed has not rushed to get out ahead of the curve and raise rates aggressively. Up until a few months ago, overly easy financial conditions were about the only reason to raise rates. But now that inflation is perking up, many market participants are aggressively selling the front end of the curve, assuming the Fed will raise rates to combat rising prices. I think they are wrong. Don’t misunderstand me, the Fed will raise rates - just not as fast as the market expects. And let’s face it, forecasting the direction does not matter. Forecasting the actual amount versus expectations is what pays the bills. Why do I feel the Fed will be slow to raise rates? Two reasons; the Federal Reserve’s and Treasury’s balance sheet. Let’s start with the Federal Reserve. Four-and-a-half trillion dollars of securities. And although they vary in maturity, a fair slug of it is long dated. More than half of it is longer than five years in duration. Holding a portfolio of this monstrous size was all good and fine with rates at 25 basis points, but don’t forget, as the Federal Reserve increases the IOER (Interest on Excess Reserves), they increase the cost of funds that they are paying out. From Bloomberg: (Bloomberg) – The Federal Reserve system provided for payments of $80.2 billion to the U.S. Treasury in 2017, down from $91.5 billion in 2016, based on preliminary results released Wednesday. * Fed’s estimated net income was $80.7 billion in 2017, down $11.7 billion, primarily due to an increase of $13.8 billion in interest expenses * Interest expense rose to $25.9 billion, mostly for interest paid on reserve balances deposited by commercial banks at the Fed; interest expenses on repurchase agreements was $3.4 billion * Interest income on securities held by the Fed totaled $113.6 billion; foreign currency gains were $1.9 billion * Operating expenses were $4.1 billion for reserve banks, $740 million for the Board of Governors, $724 million for costs related to producing, issuing and retiring currency, and $573 million for the Consumer Financial Protection Bureau * Other services provided $442 million in additional earnings * NOTE: The Fed raised interest rates three times in 2017 in quarter percentage-point steps, increasing interest rates paid on reserves, and began trimming the size of its balance sheet, thereby reducing interest income from securities it holds There is a large contingent of inflation/deficit hawks who believe the Federal Reserve should immediately crank rates to head off the coming inflation. Paul Tudor Jones’ rant sums up their feelings awfully well: Allison Nathan (Goldman): So, what should Powell do? Paul Tudor Jones: Unlike his predecessors, he needs to be symmetrically fearless. Policy unorthodoxy needs to be reversed as quickly as it was deployed. After Alan Greenspan ignored the NASDAQ bubble, it crashed and led to this incredible foray into negative real rates. That created the mortgage bubble, which was initially ignored by Ben Bernanke and ultimately spawned the financial crisis, leading us to fiscal and monetary measures that were unfathomable 20 years ago. Today, we need a Fed chair who is proactive, not reactive. Policy-wise, that means moving as quickly as possible to raise rates and restore appropriate risk premia so as to promote the long-term, efficient allocation of capital. While this will hurt a bit in the short run, it is better than the intergenerational theft that is being perpetrated now with the combination of low rates and high deficits. And it definitely will promote a more stable long-term economic equilibrium. Let’s take a moment to think about Jones’ solution. Let’s say that instead of raising every other meeting, the Fed changes to every meeting (just like Greenspan did during the 2004-6 cycle). That would mean 8 raises a year, which would translate into $69 billion in extra interest expense for the Federal Reserve. By early next year, the Federal Reserve would be breaking even on their $4.4 trillion portfolio and from then on, every increase would cost the US Treasury an extra $8.6 billion. Now, I realize this is all semantics. Whether the Fed or the Treasury pays the bill, it doesn’t matter from an absolute point of view. But can you imagine the uproar if the Federal Reserve was not only raising borrowing rates on the average American (who are struggling with high debt loads), but also demanding the Treasury send them an extra $100 billion a year to maintain these high rates? And how do you think Trump & Co. will feel about this increase in rates? The Federal debt level is more than 100% of GDP. The US simply can’t afford higher rates. Especially since the Treasury has consistently missed their chance to extend duration to protect against raising rates. Although wise sages like Paul know that it is better to take the hit up front rather than simply letting them fester until they explode into a crisis, the history of humankind does not make this a good bet. Nope, the higher probability outcome is that the problems will be pushed off into the future until the markets force the issue. I am sure many of my regular readers will be sick of hearing this, but I will repeat it anyway. As Bill Fleckenstein says, “Central Banks will continue with their easy money policies until the bond market takes away the keys.” The specs are short the wrong part of the curve The speculators are short the front end of the curve assuming that inflation will be met with higher rates. To some extent they are correct, but the Fed (and all Central Banks for that matter) will be extremely slow to raise rates. Any excuse at all will cause a delay. An economic hiccup? Pause. Worries about a geopolitical event? Pause. And you would think that this might be bullish for bonds, but no, far from it. A Central Bank that is not willing to invert the curve and take the economic hit from forcing a recession is a bond investor’s nightmare. After all, apart from default, inflation is the absolute worse thing out there. Here is where my argument gets really confusing. I am bearish long bonds because the Fed will be overly easy. And even though it feels like bonds have entered into a vicious bear market, you ain’t see nothing yet. I can’t remember where I heard the line the other day, but supposedly AQR’s Cliff Asness believes when evaluating market strategies, you should take the largest historical drawdown… and double it! He argues that markets have a way of surprising us with moves that we have never before experienced. I couldn’t agree more. We have had a 35 year bond bull market. Almost no one in the investment industry can remember a period where bonds went down for a considerable period. Have a look at this chart of the total return of the US 10-year treasury future. Yeah maybe we are down 10 handles from the high, but in the grand scheme of things, this is barely a scratch. It’s like the Monty Python’s Black Knight. Although the bond market has lost an arm, ‘tis but a scratch. Before this is all through, the bond market will go through years of negative returns. The latest dip is just the start and by no means represents the worst of the bear market. The term premium on long dated bonds will explode higher, and the yield curve will eventually hit record wides. Bonds are going down, but mostly because no one will be able to afford higher rates, so therefore no government will raise rates high enough, thus creating the inflation that bonds fear the most. Buying the front part of the curve and shorting the long end is probably the best risk reward trade on the board. I told you it wouldn’t be as easy as simply shorting the TLT…
**Should-Read**: **Nick Bunker**: [Weekend reading: “Gluts, booms, and crashes” edition](http://equitablegrowth.org/equitablog/weekend-reading-gluts-booms-and-crashes-edition/): "Michael Gee looks at troubling data from the U.S. Equal Employment Opportunity Commission... >...Ben Bernanke interviews former Federal Reserve Chair Janet Yellen.... The United States currently runs an investment income surplus.... Brad Setser writes about how this surplus is likely to decline soon.... Caitlin Dewey reports... the maximum pre-meal benefit available from the Supplemental Nutrition Assistance Program is lower than the average price of meals bought by low-income households in 99 percent of U.S. counties...
При сохранении текущего тренда на ужесточение денежно-кредитной политики Штатов мы рискуем увидеть массовый исход капиталов с развивающихся рынков в сторону развитых, считает экономический обозреватель «БИЗНЕС Online» Александр Виноградов. При этом США, принимая то или иное решение, ориентируются только на себя и свои интересы и их мало волнует, как это отразится на остальном мире.
Считается, что быстрое повышение ставки ФРС США ослабит аппетит инвесторов к риску и положит конец двухлетнему ралли на развивающихся рынках. Данные, однако, говорят об обратном. Даже четыре повышения ставки не остановят ралли EM, пишет Bloomberg.
Несмотря на длительное ралли фондового рынка США и рост показателей по ВВП, в американском обществе за последние годы заметно усилились негативные настроения, во многом благодаря которым к власти пришел президент, разделяющий антиутопические взгляды.