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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.


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.


Draghi Demands Full Federalization Of Europe


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


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

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