Distortions by the Central Banks - BOJ in focus , trapped like rats .......
Submitted by Tyler Durden on 10/30/2013 20:01 -0400
Submitted by Tyler Durden on 10/30/2013 17:47 -0400
http://www.zerohedge.com/news/2013-10-30/guest-post-larry-summers-admits-fed-liquidity-trap
Submitted by Tyler Durden on 10/30/2013 15:35 -0400
and....
Submitted by Tyler Durden on 10/30/2013 13:00 -0400
ECB trapped as well.....
Submitted by Tyler Durden on 10/30/2013 10:26 -0400
China - what happens when they stop injections
of liquidity , repo rates go wide again !
Submitted by Tyler Durden on 10/29/2013 22:50 -0400
Meanwhile In Japan... "The BoJ Is Swallowing Everything"
The Bank of Japan's governor Kuroda proudly told the world "long-term yields are bound to rise at some point, but we can curb it when it happens," and on a grand scale - that is what they have done (for now). But market participants are growing increasingly concerned. As we have warned numerous times, the suppression of 'normal' volatility in teh short-term can only lead to larger uncontrollable moves in the future. As The FT reports, some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness - "effectively we have removed the light from the lighthouse." Some say the transition has been unsettling as many analysts talk more openly of the risks inherent in what the BoJ is trying to pull off. For one thing, liquidity has evaporated... "volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk."
As if to support this view that the Japanese are hiding reality, the US Treasury had some thoughts:
- *U.S. SAYS IT WILL CLOSELY MONITOR JAPAN FOR DOMESTIC DEMAND
Realized vol has collapsed in JGB rates (but forward implied volas for Japan swaptions is surging again)...
There are few bigger bond bulls than Haruhiko Kuroda.The governor of the Bank of Japan told a New York forum this month that flat or falling yields in Japan’s Y936tn ($10tn) government bond market “can, and should continue” – even as inflation keeps edging towards the central bank’s target of 2 per cent....since the end of June, yields have settled into a gentle downward groove, meaning that JGBs have beaten all other markets bar some peripheral Europeans. Bond yields move inversely to prices.Indeed, on Wednesday the benchmark 10-year yield dropped below 0.6 per cent, to its lowest since early May, stretching away from Switzerland as the lowest in the world, as investors anticipated another firm commitment to easing at the BoJ’s policy meeting on Thursday.This is what the governor ordered....But some say the transition has been unsettling. Analysts are beginning to talk more openly of the risks inherent in what Mr Kuroda is trying to pull off.For one thing, liquidity has evaporated. Banks that used to be busy making markets for private-sector institutions say they have been marginalised...“If a client asks us to bid it’s easy, as the market is very, very stable,” says one dealer who asked not to be named. “But if a client comes with an offer, it is a problem, as the duration to cover a short position is much longer and no one is offering. The BoJ is swallowing everything.”...In the first week of October, for example, the yield on the benchmark 10-year bond moved by just 0.001 per cent, or one-tenth of one basis point, on three consecutive days....“Volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk.”Some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness....Under its previous governor, Masaaki Shirakawa, the BoJ was always sensitive to the charge that it was indulging a profligate government. Under Mr Kuroda, the bank still argues that because the purchases are not made directly from the finance ministry, they do not fall foul of a 1947 law that banned central bank underwriting.But it is an increasingly fine distinction, say analysts....“Effectively we have removed the light from the lighthouse.”...But the bond market seems to be storing up tensions anyway, says Yasunari Ueno, chief market economist at Mizuho Securities.Investors “should remember”, he says, “that the currently irrational movement will probably translate into a growing momentum for a large price move in the future”.
Or as Taleb wrote: "There is no freedom without noise - and no stability without volatility."
And always a great read on the real dangers of suppressing natural volatility:
Fed trapped too - QE to Infinity !
http://www.zerohedge.com/news/2013-10-30/elliotts-paul-singer-warns-something-wrong-and-dangerous
Elliott's Paul Singer Warns "Something Is Wrong And Dangerous"
"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."-Paul Singer, Elliott Management
In his latest letter to investment partners, the outspoken realist pulls the curtain on everything from loss of faith on fiat currencies to unsound policies such as Obamacare, the missing jobs recovery, and media misunderstandings of the nature of hedge funds.
On The Fed's "temporary" effects on bonds and stocks:
The volatility in fixed income markets earlier this year, occasioned by the Fed’s use of the word “tapering” (meaning a possible gradual reduction in the pace of Fed bondbuying), resulted in medium- and long-term interest rates rising back to the levels of the spring of 2009. In other words, $3.8 trillion of bond-buying since 2008 by the Fed has had only a temporary effect on medium- and long-term interest rates. It is impossible to predict the prices of bonds in the event the Fed stops buying, or actually starts to sell off its massive portfolio, although it is a decent bet that prices would be much lower than current levels.It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. However, the fragility of capital markets, so reliant on zero percent interest rates (ZIRP) and QE Infinity for their equilibrium, is clearer. The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed (though they would probably call it “focused and determined”) and afraid (perhaps they would say “prudently risk-averse”) to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets.
On The Fed's lack of effects on the real economy:
The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy. However, the economy is now in its fifth year of subpar growth, with little pick-up in sight.
On Hedge Funds:
Lately we have seen a number of reports about the “disappointing” results of hedge funds. But as we have noted many times before,hedge funds that are actually hedging are unlikely to perform as well as equities during a bull run....We understand it is not easy for investors to distinguish who is good and sustainable from who is a flash in the pan, but the task is worthwhile, and investors who do the hard work are likely to be pleased with their manager selection in the medium to long term. Unfortunately, the supply of firms that can produce (or at least have a reasonable prospect of achieving) absolute returns is far lower than the demand for such results.
On the "unsound" underlying structural issues of US Fiscal policy:
What has been happening with the U.S. federal government in its recent highly-theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events....we are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future. As we have pointed out, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control. It is not a trillion dollars. The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan. No combination of achievable growth rates and taxes can pay for the promises that have been made. The numbers are clear and inexorable.None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates....As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin....The situation is deeply unstable.It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly-financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.
On The Global financial system's fragility:
The global financial system is not much healthier. In the last five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers.But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and overleveraged....The really bad news is that the “hair-trigger” aspect of modern global trading markets is just getting more intense. Market action from earlier this year is a harbinger of how modern markets will react to a real change in perceptions. In this past spring’s episode, a sign from the Fed that it might gently begin scaling back the pace of its bond-buying caused medium- and long-term bonds to be abruptly repriced, which removed just about all of the price elevation caused by four years of Fed purchases. The lesson of the crash of 2008 was that it is essential to act immediately to save your assets from an uncertain counterparty or clearing firm.
On Yellen and The Fed admitting its wrong:
it is unlikely that her reign will be characterized by any more courage or deep understanding than that of her predecessor, “Helicopter Ben” Bernanke....The problem is that they all, including Yellen, are looking in the wrong direction. Similar to Bernanke (and arguably more so), Yellen places a heavy reliance on the Fed’s data-driven financial models to draw conclusions and make predictions. Sadly, she also seems to share Bernanke’s lack of humility regarding the inescapable fact that the Fed’s models and predictions were catastrophically wrong about the financial system, financial institutions and risks in the period leading up to and during the financial crisis.For the Fed’s governors to admit that they got it profoundly and tragically (for the millions of people who are unemployed, underemployed or now deeply steeped in the brine of dependency) wrong, and that their role needs to be more modest than holding up the entire world on their shoulders, would also take courage.
On ZIRP and QE's lack of societal benefit:
In the absence of that courage, which could only be exhibited by the Fed (or perhaps by Congress if it legislated an end to the “dual mandate”), it is not easy to see where current Fed policy leads the country. We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs.ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.
On timing the collapse:
Although the risks are clear, the probabilities and timing are not.We do know that the transmission mechanism would be a loss of confidence – in the government, in its ability to pay its obligations, in its ability to provide the conditions for acceptable levels of economic growth and job creation in a competitive world beset by the glories and challenges of job-crushing technological change, and in paper money itself.
On the idiocy of the counter-factual:
To those who maintain that things would have been even worse if the government hadn’t initiated QE2 (and beyond), our response is that this is the wrong test. The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess, get the economy growing as fast as it reasonably could and counteract the job-suppressive aspects of the march of otherwise-wonderful technology. If and only if those growth-enhancing policies failed would it have made sense to declare a further emergency and do something as distortionary and risky as further rounds of QE.Frustratingly, in no part of the developed world were those “pro-growth” policies pursued. Instead, central bankers went right ahead after stepping back from the precipice and pursued QE in unprecedented size, from then until this day. In effect, this has provided cover for the leaders of the developed countries to continue buying votes with dependency-enhancing policies, avoiding difficult decisions and eschewing effective but contentious pro-growth policies. This is a bad mix, and it will lead to bad outcomes.
On The Endgame:
Chairman Bernanke has been administering painkillers and artificial respiration instead of telling the President and Congress to take intelligent action to improve economic growth. As we have said over and over: Leadership is wanting; leadership is needed.If QE loses effectiveness now and the plug is pulled, the economic consequences could be disastrous, because the Fed didn’t force the President and Congress to adopt progrowth policies when it had the chance. At the same time, if the current course is maintained, the ultimate results are likely to be much worse.
http://www.zerohedge.com/news/2013-10-30/guest-post-larry-summers-admits-fed-liquidity-trap
Guest Post: Larry Summers Admits The Fed Is In A Liquidity Trap
Submitted by Lance Roberts of STA Wealth Management,
I recently wrote an article entitled "What Is A Liquidity Trap & Why Is Bernanke Caught In It?"wherein I discussed the definition of a liquidity trap as:
"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation,insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in the general price levels."
Importantly, this evidence is mounting that the Federal Reserve has now become trapped within this dynamic. The boost in asset prices caused by the increased levels of liquidity in the system has benefited the wealthy while doing little to jumpstart the real economy. As I stated previously:
"However, the real question is whether, or not, all of this excess liquidity and artificially low interest rates is spurring economic activity? To answer that question let's take a look at a 4-panel chart of the most common measures of economic activity - Real GDP, Industrial Production, Employment and Real Consumption."
"While an argument could be made that the early initial rounds of QE contributed to a bounce in economic activity; it is also important to remember several things about that particular period. First, if you refer to the long term chart of GDP above you will see that economic growth has ALWAYS surged post recessionary weakness. This is due to the pent-up demand that was built up during the recession that is unleashed back into the economy. Secondly, during 2009 there were multiple bailouts going on from 'cash for houses', 'cash for clunkers', direct bailouts of the banking system and the economy, etc. However, the real test for the success of the Fed's interventions actually began in 2010 as the Fed became 'the only game in town'. As shown above, at best, we can assume that the increases in liquidity have been responsible in keeping the economy from slipping into a secondary recession. Currently, with most economic indicators showing signs of weakness, it is clear that the Federal Reserve is currently experiencing adiminishing rate of return from their monetary policies."
From this standpoint it was shocking to see someone, particularly Larry Summers, actually discuss this issue during a recent CNBC interview stating his case on why it is wrong to rely on monetary policy as the main driver of the economy.
and....
Pulling The Plug On QE – Will The Fed Ever Taper?
Saxo Capital Markets’ latest infographic explores the long-term value of quantitative easing (QE) and, surveying the effect on the US economy, asks whether the US Federal Reserve will ever taper QE.
The Fed first launched quantitative easing in November 2008 after efforts to boost the economy by lowering interest rates failed.The first programme of QE saw $600 billion injected into the economy by the Fed via mortgage-backed securities and government-sponsored enterprises. This then increased to $1.25 trillion as part of an expansion due to low initial impact. Again, the Fed tried QE in November 2010 with another $600 million invested in longer term Treasury securities. When this still failed to make a great enough impact, Ben Bernanke, chairman of the Federal Reserve, introduced a continuous QE programme, dubbed ‘QE Infinity’, which commits the Fed to buying up bonds at an alarming rate of $85 billion a month.
Quantitative easing, experts once assured us, would inspire the US economic recovery, leading the flagging economy to full health.But will this fiscal stimulus experiment instead drive the US economy to inflation and financial disaster? The Federal Reserve’s decision not to begin a tapering of its asset purchase programme signals a deeper dependency on intangible money printing. Last September’s third round of QE bond purchases were enacted in order to drive down interest rates, allowing businesses to borrow more easily, consequently boosting stock valuations. The QE addiction risks long-term hyperinflation and massive currency devaluation, fuelling market distortions and long-term reliance. Yet tapering may spark a climb in interest rates, prompting further – widespread – financial problems.
Saxo Capital Markets’ infographic draws attention to a mending US economy, with unemployment rates falling to 7.3% - albeit propped up by part-time workers – and Q2 GDP rising by 2.5% in 2013. Can the Fed kick the habit? These indications of growth prompted Bernanke to hint at QE tapering in June of this year, even stating that asset purchases (how the Fed has achieved QE) could come to an end if the US unemployment rate “is in the vicinity of 7%”. You can find more detailed figures, and see graphs of the changes and predictions, by checking the infographic.
Although QE tapering has been suggested, Bernanke has yet to announce a specific date when the artificially-sustained US economy will begin to be weaned off QE. Now, in October, the Fed has said that it will reduce asset purchases in early 2014, but they have laid out no specific timeline for this tapering. The Fed is also reluctant to make changes to Federal rates, announcing that they will remain at their current low levels. It is not until 2015 that they plan to start raising them again. You can see the expected pace of policy firming based on FOMC forecasts by viewing the graph in the infographic – the ‘long term’ forecast is for interest rates to return to 4%, but after how long?
There’s no doubt that QE Infinity has had an effect on a number of financial areas, including market rates. Ten Year US Treasury Yields have almost doubled in the last four months – you can see the visualised growth of US bond yields in the infographic – and this increase in growth could deter the Fed from tapering QE. Saxo Bank’s Head of FX Strategy, John Hardy, believes this may be the case and thinks that QE tapering could be “derailed by a weak US economy that can’t withstand the rise in interest rates we have already seen”.
Equity markets have also rallied in response to QE because the asset purchase programmes have invested money into private companies and their stocks have increased as a result. Savers are also choosing to invest in stocks whilst interest rates are low. When the FOMC decided not to start tapering QE, it meant equity markets continued to increase. You can track the value of the Dow Jones, DAX and FTSE over the last year in the infographic. If QE is encouraging the equity markets increase, will the Fed ever risk tapering?
ECB trapped as well.....
European Stocks Slump On German Double-Whammy ; US Markets "Crossed"
US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal - well they would wouldn't they) and then later in the day when Germany's emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany's balance sheet) -The Debt-Redemption Fund - leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active - and of course, markets are broken with NASDAQ options prices 'crossed' according to some sources.
Europe's markets are falling rapidly...
And the US is unhappy...
What's wrong with this picture...
China - what happens when they stop injections
of liquidity , repo rates go wide again !
Despite PBOC Liquidity, Chinese Repo Rates Blow-Out To 4-Month Wides
The last two weeks have seen US equity markets on a one-way path to the moon, breaking multi-year records in terms of rate of change and soaring to new all-time highs. However, away from the mainstream media's glare, another 'market' has been soaring - but this time it is not good news. Chinese overnight repo rates - the harbinger of ultimate liquidity crisis - have exploded from 6-month lows (at 2.5%) to 4-month highs (6.7% today). The PBOC even added liquidity for the first time in months yesterday (via Reverse Repo - at much higher than normal rates) but clearly, that was not enough and the banks are running scared once again that the re-ignition of the housing bubble in China will mean more than 'selective' liquidity restrictions.
“The surge in money rates and the very volatile intraday trading shows the market is totally confused about the PBOC’s intentions,” says Frances Cheung, Hong Kong-based rate strategist at Credit Agricole CIB. “The central bank’s reverse-repo operations yesterday are deemed not enough by the market.”
It would seem yesterday's reverse repo - at considerably higher than normal rates - was a shot across the bow of Chinese banks that the liquidity spigot may not be as open they hoped.
As MNI reports, the 1Y Chinese Treasuries went off at 4.01%, significantly higher than market rates at 3.8% and were only 1.22 times oversubscribed (as opposed to a more normal 2x).
Traders said demand was weak because liquidity is tight on end-of-month squeeze...
Is the Fed finally getting to China?
As we noted previously,
Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, the country grows; if it's shut - it stagnates, as we described in "China: No Leverage, No Growth."
But a far bigger problem is that while China's debt is already at record levels, it needs an increasingly greater "credit impulse" to generate the same or smaller amount of GDP "growth" as before, a phenomenon we described in April.
The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.
But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic superbubble house of cards crashing on everyone's head, a key issue is that the price discovery process of insolvent entities in China is simply non-existent.
Which all ties rather nicely into Michael Pettis recent note that China's hidden debts still need to paid...
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