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The Fed’s $210 Billion Hangover (That No One Is Talking About)

Fed VP Stanley Fischer commented on SOMA maturities in his speech last Friday, but it appears very few have taken notice as yet and even fewer comprehend the challenge soon confronting The Fed.

Many believe that Twist had pushed maturities farther “into the future”. The “future” is Q1 2016. (Note: a shrinking balance sheet is a defacto tightening)

Via Scotiabank’s Dov Zigler,

With more than USD 200bn of Treasury securities held by the Fed due to mature in 2016, the Fed will have to make meaningful monetary policy choices in advance.

The Federal Reserve has expanded its balance sheet tremendously since 2008, bringing it from USD 900bn in August 2008 to USD4.5tn today. The balance sheet expansion also involved an extension of the weighted average maturity of the Federal Reserve’s System Open Market Account (SOMA), accomplished by purchasing longer-dated Treasury securities outright via Large Scale Asset Purchase programs (popularly called ‘quantitative easing’) as well as via a maturity extension program whereby the Fed sold securities with maturities of fewer than three years to buy securities with longer maturities (so-called ’Operation Twist’). As a result of the latter process, by which the Fed sold essentially all of the Treasury securities that it held with maturities of three years or fewer by the end of 2012, the SOMA has not experienced meaningful maturity of Treasury securities from 2013 probably throughout this year. During this period, the Fed also pledged to reinvest principal from maturing mortgage backed securities (MBS) on its balance sheet, which prevented the SOMA from shrinking — a process which the Fed has continued. Even once the Fed completed its asset purchases in November 2014, it therefore still found itself able to remain on a fairly accommodative auto-pilot as its balance sheet was not (and is not) meaningfully contracting.

The Numbers

This state of affairs will not continue indefinitely. As shown in the chart to the right, USD 210bn of Treasury securities mature in 2016, with roughly two-thirds of that amount maturing during the first part of the year. This implies that the Federal Reserve will have to make decisions about the trajectory of monetary policy between now and the start of 2016 — indecision would be a difficult and increasingly unpalatable option, itself tantamount to a decision to tighten monetary policy as the Fed’s balance sheet would shrink.

full article at source here :http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/03/20150308_fed1.jpg

This Is The Biggest Problem Facing The World Today: 9 Countries Have Debt-To-GDP Over 300%

If anyone has stopped to ask just why global central banks are in such a rush to create inflation (but only controlled inflation, not runaway hyperinflation… of course when they fail with the “controlled” part the money paradrop is only a matter of time) over the past 5 years, and have printed over $12 trillion in credit-money since Lehman, the bulk of which has ended up in the stock market, and which for the first time ever are about to monetize all global sovereign debt issuance in 2015, the answer is simple, and can be seen on the chart below.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/Global%20debt%20to%20gdp.jpg

It also shows the biggest problem facing the world today, namely that at least 9 countries have debt/GDP above 300%, and that a whopping 39% countries have debt-to-GDP of over 100%

We have written on this topic on countless occasions in the past, so we will be brief: either the Fed inflates this debt away, or one can kiss any hope of economic growth goodbye, even if that means even more central bank rate cuts, more QEs everywhere, and stock markets trading at +? while the middle class around the globe disappears and only the 0.001% is left standing.

Finally, those curious just how the world got to this unprecedented and sorry state, this full breakdown courtesy of McKinsey should answer all questions.

source:http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/Global%20debt%20to%20gdp.jpg

Draghi Demands Full Federalization Of Europe

20141231_draghi

With GREXIT once again knocking on the Euro’s door, Mario Draghi has come out swinging (or jawboning). As Reuters reports, the non-political, non-meddling, completely independent central bank chief explains, structural reforms were needed to “ensure that each country is better off permanently belonging to the euro area,” adding that Euro zone countries must “complete” their monetary union by integrating economic policies further and working towards a capital markets union. Brussels Uber Alles… (or else “the threat of an exit (from the euro) whose consequences would ultimately hit all members”).

(Reuters) – Euro zone countries must “complete” their monetary union by integrating economic policies further and working towards a capital markets union, European Central Bank President Mario Draghi said.

In an article for Italian daily Il Sole 24 Ore on Wednesday, Draghi said structural reforms were needed to “ensure that each country is better off permanently belonging to the euro area”.

He said the lack of reforms “raises the threat of an exit (from the euro) whose consequences would ultimately hit all members”, adding the ECB’s monetary policy, whose goal is price stability, could not react to shocks in individual countries.

He said an economic union would make markets more confident about future growth prospects — essential for reducing high debt levels — and so less likely to react negatively to setbacks such as a temporary increase in budget deficits.

“This means governing together, going from co-ordination to a common decisional process, from rules to institutions.”

Unifying capital markets to follow this year’s banking union would also make the bloc more resilient.

“How risks are shared is connected to the depth of capital markets, in particular stock markets. As a consequence, we must proceed swiftly towards a capital markets union,” Draghi wrote.

 

 

Futures Rebound, Crude “Flash Smashes” Higher As Dollar Strengthens

After the worst week for stocks in years, and following a significantly oversold condition, it will hardly come as a surprise that the mean reversion algos (if only to the upside), as well as the markets themselves (derivative trading on the NYSE Euronext decided to break early this morning just to give some more comfort that excessive selling would not be tolerated)  are doing all they can to ramp equities around the globe, and futures in the US as high as possible on as little as possible volume. And sure enough, having traded with a modestly bullish bias overnight and rising back over 2000, the E-Mini has seen the now traditional low volume spike in the last few minutes, pushing it up over 15 points with the expectation being that the generic algo ramp in USDJPY ahead of the US open should allow futures to begin today’s regular session solidly in the green, even if it is unclear if the modest rebound in the dollar and crude will sustain, or – like on every day in the past week – roll over quickly after the open. Also, we hope someone at Liberty 33 tells the 10Y that futures are soaring: at 2.13% the 10Y is pricing in nothing but bad economic news as far as the eye can see.

Speaking on oil, Brent gained more than $1, after earlier dropping to lowest since July 13, 2009. There was some bullish sentiment when Libya declared force majeure at oil ports, although that will hardly last once algos process that the combined capacity that is offline is a paltry 580k b/d capacity. WTI trades ~$58.50, climbs more $2 also off 5-yr low, on the same “catalyst.” Expect both fading as the realization that OPEC isn’t kidding about $40 barrel oil filters through.

Finally, as we showed last night, this is what, via Nanex, a direct intervention to push crude higher – because central banks finally realized that plunging oil may be “unambiguously good” for the economy but is increasingly bad for markets – looks like: presenting the well-known “flash smash”, coming to every central-bank traded asset class near you.

full article at source: http://www.zerohedge.com/news/2014-12-15/futures-rebound-crude-flash-smashes-higher-dollar-strengthens

Goldman Warns Greeks Of “Cyprus-Style Prolonged Bank Holiday” If They “Vote Wrong”

Funny what a difference two months make. Back on October 4, we wrote “Here We Go Again: Greece Will Be In Default Within 15 Months, S&P Warns” and… nobody cared as the Greek stock market meltup continued. Now, after the biggest three-day rout in Greek stock market history (or about 30% lower), and with the overhyped, oversold, oversusbcribed recent Greek 5 Year bond issue available in the open market some 16 points lower, and suddenly everyone cares. Including Goldman Sachs.

Overnight the bank with the $58 trillion in derivative exposure issued a note “From GRecovery to GRelapse” which is quite absent on the usual optimism, cheerfulness and happy-ending we have grown to expect from the bank whose former employee is in charge of the European printing press. Here is the punchline: “In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point.

Dear Greeks, “don’t vote wrong” as EU’s Juncker urges you – you have been warned.

Here is the full note.

Why Have Greek Assets Tumbled?

Over the last three months, Greek assets have come under intense selling pressure. The 10y Greek government bond trades at a yield of 9.1% compared to 5.5% in September and the Athens stock exchange is trading 32% lower over the same time-frame (and 40% below the post-crisis peak). As we have written extensively, this deterioration in market conditions has taken place despite an ongoing improvement in macroeconomic indicators. Markets have sold off on the back of election uncertainty ahead of a key year for Greece’s recovery process.

Greece needs official sector funding to pass the 2015 funding hump and ensure financial stability.

Indeed 2015 is a pivotal year for Greece. The most recent growth data prints suggest that the recovery may be gaining momentum. But financial risks still lurk, which could destabilize the Greek economy back into recession. More specifically, 2015 is the last year the government faces large financing needs, nearing €24bn (net of the established primary surplus). Part of those needs may be covered with domestic resources (see Box 1). However, additional funds will likely be required to ensure the government is able to meet its liabilities. As discussed in Box 1, the additional funds required may range between €6bn and €15bn depending on different economic assumptions.

It is important to note that from 2016 onwards, overall financing needs become a lot more manageable (compared to €24bn in 2015) – at or below €10bn until 2022 (lower primary surpluses or higher bond yields than the ones provisioned in the program could push these calculations up somewhat).

With government bond yields at prohibitively high levels, the Greek government will require official sector financing to provide the additional funds for 2015. €7.1bn of IMF funds are currently available as part of the Greek assistance program under relevant conditionality. In addition, the Eurogroup decided on Monday to grant Greece a precautionary credit line (ECCL) provided Greece completes the ongoing review by end of February. There are three main items to be agreed on for the current review to reach a conclusion: a) further reform in labor markets and in union legislation, b) further pension system reform, and c) further budget cuts. Greece is also likely stay under close economic supervision thereafter.

Political complications arise with the presidential vote.

According to the Greek constitution, the parliament needs to elect a President of the Hellenic Republic every five years. The presidential vote requires an extended majority. The term of the incumbent, President Karolos Papoulias, ends in early March 2015. The parliament would need to start the process of electing a new president at least one month in advance – by early February the latest. Should the parliament fail to elect a president, general elections would need to be held.

Due to a tight timeframe between the new deadline for completion of the program review and the deadline for the presidential election, the government decided to speed up the voting process. Three votes will take place – first two on the 17th and the 23rd of December respectively. The first two votes require a majority of 200 votes, which is unlikely to be achieved given the current parliamentary balances. The one that essentially matters is the third and final one on the 29th of December, where the Greek government would need to find 180 votes in the current parliament (of 300 members) to back their presidential candidate. As things stand, the government majority does not suffice to elect a president and avoid elections. 25 independent MPs and MPs from small parties would need to consent to meet the tally.

full article at source|Here:http://www.zerohedge.com/news/2014-12-12/goldman-warns-greeks-cyprus-style-prolonged-bank-holiday-if-they-vote-wrong

Why Monetizing Debt Could End In Revolutions

Much has been made of the decision by the Japanese government to inject another $700 billion into their ailing economy. While some may see this as an earnest attempt to save Japan from further stagnation and deflation, even some of the mainstream media (e.g. Bloomberg) are questioning the wisdom of this reckless act.

Over the last few decades, since the crash of 1989, Japan has injected billions into its banks and stock-market to help its economy but all of it has been a miserable failure. America has, via the Federal Reserve, increased its national debt to formerly unthinkable numbers with almost no effect on its ailing economy. Most of Europe has huge public debt as a result of bank bailouts, but still suffers from stagnating or shrinking economies.

In fact, any privately owned central bank that has undertaken monetization policies (creating more public debt) has failed to improve their nation’s economy and merely created a transfer of wealth from the general public to corporate hands.

Of course, government owned banks such as in China and Russia are and do take somewhat different actions given that they are owned by the public (state owned) and not private individuals or corporate entities. Therein lies the crux of the matter – private ownership means private interests, therefore the needs of the country and the populace are of no concern at all.

All that the Fed, BoJ (Bank of Japan), the Bank of England etc. have been concerned with is the preservation of private banks and the continued propping up of stock markets. None of these institutions really care about the real-world economy, real-world inflation or the ability of individuals to maintain their lives in a prolonged period of economic contraction.

While monetizing is all great news for the banks and stock-markets it is terrible news for any people that do not receive well over average earnings – this is because monetizing debt (printing money) causes inflation. As with everything else connected with the economy, governments cook the books on inflation to the extent that the CPI is a total fantasy designed to give falsely low inflation rates.

Even the most foolish of people can see that month by month food, fuel, utilities, clothing and just about everything is going up in price. Part of this is due to factors such as environmental/weather disasters and conflict that can affect production and therefore prices. However, the continual currency wars – a race to the bottom to expand and devalue the US dollar, Euro, Pound, Yen etc is the fundamental cause of runaway inflation that is affecting most households.

When you couple high real inflation with stagnation or reduction in wages over the years since the 2008 crash then real-world buying power of most individuals is drastically reduced. This doesn’t just make people depressed, it makes them angry – hardworking people do not expect or deserve to be thrust into poverty.

Governments press blindly on, printing money, propping up the financial sector and saddling their voters with more and more debt that must be paid for in taxes. They know that the public is unhappy, but they are more interested in placating their corporate partners than listening to a public that is increasingly poor, increasingly angry and increasingly close to open revolt.

Stimulus has failed to produce any ‘green shoots’ simply because it has been directed to where it is of no benefit (except to the already rich) and not at where it desperately needs to go. Throwing good money after bad is not going to change anything unless it is redirected to the bottom and middle earners who are the lifeblood of any consumer society.

Quoting Raul Ilargi Meyer’s recent article: ‘Any stimulus must be directed at the bottom, or it must of necessity fail… it’s very simply that an economy cannot function without its poorer 90% of citizens spending.’

If this is true, which I believe it is, then more monetizing debt can only lead these ailing economies into further ruination and further beggaring of the masses. If this continues then the bulk of the population will become poor enough and angry enough to demand change on their own terms.

This will begin with mass protest and if it is ignored or suppressed then continued attempts to retain the status quo will lead to insurrections and possibly violent revolutions. One can only hope that governments will act soon in the interest of the people for once instead of lining the pockets of corporations and those that own them.

source: http://www.zerohedge.com/news/2014-11-23/guest-post-why-monetizing-debt-could-end-revolutions

How-petrodollar-quietly-died-and-nobody-noticed

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

full article at source: http://www.zerohedge.com/news/2014-11-03/how-petrodollar-quietly-died-and-nobody-noticed

The Story Changes: Ebola Is Now “Aerostable” And Can Remain On Surfaces For 50 Days

When it comes to Ebola, the story that the government is telling us just keeps on changing.  At first, government officials were claiming that it was very difficult to spread the Ebola virus.  Some of them were even comparing it to HIV.  We were given the impression that we had to have “direct contact” with someone else’s body fluids in order to have any chance of catching the virus.  But of course that is not true at all.  Now authorities are admitting that Ebola is “aerostable”, that it can be “spread through droplets”, and that it can remain on surfaces for up to 50 days.  That is far different information than we have been getting up until this point.  So that means when they were so confidently declaring that they know exactly how Ebola spreads they were lying to us.

On October 24th, a 33 page document was released by the Defense Threat Reduction Agency, and in that document it is admitted that Ebola is “aerostable”.  WND was one of the first news outlets to report on this…

The information was contained in a 33-page report released Oct. 24 by the Defense Threat Reduction Agency, the Department of Defense’s Combat Support Agency for countering weapons of mass destruction.

 

The agency report states “preliminary studies indicate that Ebola is aerostable in an enclosed controlled system in the dark and can survive for long periods in different liquid media and can also be recovered from plastic and glass surfaces at low temperatures for over 3 weeks.”

 

The report says the government is seeking technologies for the “rapid disinfection” of Ebola, including an aerosol version of the virus.

 

“The technology must prove effective against viral contamination either deposited as an aerosol or heavy contaminated combined with body fluids,” reads the solicitation document.

You can view the document for yourself right here.

So is there any difference between “aerostable” and “airborne”?

That is a very good question.

Meanwhile, the CDC has finally come out and publicly admitted that Ebola “is spread through droplets”.

In other words, it can be spread by a cough or a sneeze.

On the CDC website, it now says the following

“A person might also get infected by touching a surface or object that has germs on it and then touching their mouth or nose.”

full article at source: http://www.zerohedge.com/news/2014-10-31/story-changes-ebola-now-aerostable-and-can-remain-surfaces-50-days

Equity Levitation Stumbles After Second ECB Denial Of Corporate Bond Buying, Report Of 11 Stress Test Failures

A day after a Reuters headline blast proclaimed that, in a stunning turn of events, the ECB which has barely started buying covered bond (of countries like Germany today for example, because the record low yielding Bunds clearly need help from the ECB) will also buy corporate bonds, sending the stock market soaring the most in 2014, it has now backtracked for the second time, and following a report from the FT yesterday which denied the report, the second denial came straight from Reuters itself which hours ago said that the ECB “has no concrete plans to buy corporate bonds, but this could be a way to prevent the bank from paying too much for just covered bonds and asset backed securities, ECB governing council member Luc Coene told Belgian media.”

“We still haven’t had a serious discussion about the purchase of corporate bonds,” Coene, who is governor of the Belgian central bank, told business dailies L’Echo and De Tijd. “If we limit ourselves to buying covered bonds and asset backed securities there is a risk that we would pay too high a price. We can prevent that by also buying corporate bonds,” Coene added. “But there is no concrete proposal for that on the table.”

And if and when the ECB ever begins buying corporate bonds (of which there is once again not enough to boost its balance sheet to the required size but more on that later), the ECB can just jawbone that in order to not overpay for bonds, corporate or otherwise, it will just begin buying equities, and so on until the ECB has “no choice” but to monetize the garbage in your trash so as not to overpay for your kitchen sink.

However, if the ultimate goal of yesterday’s leak was to push the EUR lower (and stocks higher of course), then the reason why today’s second rejection did little to rebound the Euro is because once again, just after Europe’s open, Spanish Efe newswire reported that 11 banks from 6 European countries had failed the ECB stress test. Specifically, Efe said Erste, along with banks from Italy, Belgium, Cyprus, Portugal and Greece, had failed the ECB review based on preliminary data, but gave no details of the size of the capital holes at the banks.

The ECB, which likely once again leaked the news, said it could not comment on individual institutions or on speculation. “Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final on 26 October,” said a spokesman. What the ECB certainly did enjoy is that once again, with just one media leak, it had managed to bring down the EURUSD by 50 pips lower, pushing it under 1.27 yet again. We wonder how long until Europe discovers, just like Japan, that merely slamming your currency does little to boost exports. But at least there is a rising market to keep everyone happy so why not.

Finally, circling back to those German record low yields, earlier today Germany sold another €1.428 billion in 30 year paper at a record low yield of 1.77%, far below the 2.25% in the last such auction in May, however, this was also the 10th (!) uncovered, as in failed, German auction of the year with the Buba forced to retain a whopping 28% of the paper, compared to 19% at the last primary issuance.

Elsewhere, the BoE’s October minutes which showed a 7-2 split among MPC members with Weale and McCafferty maintaining their hawkish stance, despite speculation that circulated pre-release that McCafferty may have stepped down in his call to hike rates. The initially reaction was volatile as outside bets of a 8-1 split were unwound, however, the details revealed a decidedly more dovish outlook from the majority of members who noted some signs that UK economic was losing momentum and that the economic outlook had worsened. As such the short sterling curve has flattened aggressively. Prelim Barclays month end extension for US treasuries +0.08yrs

In summary, European equities initially opened higher this morning following a 3rd consecutive day of >1% gains in the S&P 500 for the first time in 3yrs, and with the Nikkei up some 2.6% overnight. However the positive sentiment proved short lived as weak corporate earnings out of BAT’s and Heineken weighed on consumer stables, ECB’s Coene said that there is no concrete proposal for bond buying, refuting claims to the contrary yesterday, and Spanish press reported that 11 banks may fail the ECB stress tests which are due to be released this Sunday (ECB has declined to comment).

Looking ahead attention turns to US CPI (Sep), DoE oil inventories, Boeing (BA) earnings, and the release of the Bank of Canada interest rate decision where all surveyed analysts are expecting rates to remain on hold at 1%

full article at source:http://www.zerohedge.com/news/2014-10-22/equity-levitation-stumbles-after-second-ecb-denial-corporate-bond-buying-report-11-s

Turkey In Turmoil After Tanks Roll Out To Stop Deadly Protests; Stocks Tumble

View image on Twitter

While geopolitics has largely dropped of the front news page, replaced by updates on the global Ebola epidemic (which until recently was considered nothing but fear mongering by those who prefer to avoid reality ews until it is far too late), things in the Middle East are getting worse, and while the US attack against ISIS has achieved absolutely nothing (in fact, the revelation of US strategies may have facilitated the incursion of ISIS into the town of Kobani, a mostly Kurdish city in north Syria), the latest geopolitical hotspot over the past few days has become NATO member Turkey (we provided a big picture summary in “Turkey, The Kurds And Iraq – The Prize & Peril Of Kirkuk“). It is here that violent clashes broke out across the southeast of the nation with several people reported dead and curfews imposed, as the region’s Kurdish people protested the advance of Islamic State just across the border with Syria.

As Bloomberg reports, demonstrators clashed with police and in some areas with members of local Islamist groups, according to Turkish media. Haberturk website said that five people were killed in Diyarbakir, Turkey’s largest Kurdish city. A curfew was imposed there at 10 p.m. local time as well as in Mardin, Siirt, Batman and Van, according to Hurriyet newspaper.

The reason for the anger:  Syrian Kurdish fighters are battling to prevent Islamic State militants from overrunning Kobani, a mostly Kurdish city in north Syria a couple of miles south of the Turkish border. Kurds have blamed the Turkish government for not doing enough to help the Kurds of Kobani.

As a result, Twitter is overrun with photos such as the following:

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