The Success Of Failure.

[tabs]

Originally Posted by black73

The Success Of Failure? You mean like successfully failing to have anything you predict ever come true? Successfully failing to see that there are people much smarter than you that have the situation under control? Successfully failing to see that you do not know everything, as demonstrated by your decades of failed predictions? Successfully failing to see that it is time to STFU or bang a new drum?

The following was an email sent to CNBC on 2/22/13 when FED president Bullard was a guest and read the following in real air time.

An Adverse Shift

Starting with the Financial Crisis in 2008 the United States Treasury embarked on a policy of massive deficit spending resulting in a now 6T USD increase in it's debt level, bringing the upfront debt to roughly 16.5T USD. The Federal Reserve on the monetary front lowered interest rates and instituted a number of Quanatative Easing to increase the liquidity of the financial system in order to at first stabilize the system and then to promote economic growth in that system. The increase of liquidity to the system through Federal Reserve purchases of US debt instruments is roughly 3T USD. In September of 2012 the Federal Reserve embarked on OE3 whose tenets included the purchase of 85B a month in US debt instruments and mortgage backed securities with an open ended time frame of the US economy having a 6.5% unemployment rate.

What the concern in this is are the dislocations that these policies have caused in the stability of the global economy and the attendant political, social and cultural strata. Here one can postulate that as US debt levels climb, it destabilizes the above mentioned strata. This is because of several factors which include that the United States is the largest economy in a globally intertwined economy and that the USD is the Reserve Currency of the World. Being the Reserve Currency for the world means that every nation must hold reserves of USD in order to purchase oil. Further the USD being not only the Reserve currency but having a 200 year history of being a stable and thus responsible currency has made it the favored currency to be held by private concerns and individuals. This has been especially true in times of distress either globally or on a foreign national level. This has recently been a factor in the USD strength in the past several years as there has been a flight to the USD and US debt instruments in the face of a potential meltdown of the European Union due to the amount of leverage it has incurred and its slow response to rectifying it's problems.

However with the "unlimited" nature of both the European Central Bank and US Federal Reserves recent QE programs which for all intents and purposes means an unlimited printing of money to purchase sovereign debt, dislocations in the various economies are now beginning to appear which is resulting in their currencies seeking a new equilibrium. This is caused by a defacto devaluation of the large amount of USD being held either by foreign governments, held by private concerns or individuals which then puts pressure on those local economies. Further the real danger lies in the fact that as the USD becomes evermore diluted/devalued/debased those foreign holders of USDs will feel increasing pressure to divest themselves of those USDs or face continued pressure on their economies. Or going beyond this as Y. Aksoy and T Piskovski state in the conclusion of their paper "Foreign Holders of Dollars And The Information Value Of US Monetary Aggregates,"

"That if the leading role of US dollar as an international currency will be challenged by long term
adverse shifts in the preferences of the foreign holders, the US Federal Reserve may face serious
obstacles in the conduct of monetary policy to stabilize the US macroeconomic environment."

Thus in conclusion the Federal Reserves recent "unlimited" QE program has the potential unintended consequence of being a WMD which could create an economic tsunami that would sweep the world with catastrophic consequences.

Keeping An Eye On The Horizon


When the Fed acts it has to keep an eye on the horizon. As the USD is held so deeply in the worlds economy , because of its historic stability and Reserve currency status. If the the US erodes the worlds confidence in the USD it creates an economic undercurrent which has political and social repercussions felt around the world. For example it was a Street Vendor in Tunisia that lit himself on fire over governmental harassment that started the Arab Spring, in other words it was not a Librarian that started himself on fire. Also one should have noted the correlation in the releasing of the Fed minutes expressing a possible abrogating of QE3 and the almost instantaneous strengthening of the USD on the world market.

The worrisome part of Fed policy is that by creating a Trillion USD's a year to buy US debt instruments and mortgage backed securities the the Fed is rapidly diluting the value of the USD. What is quite ironic is that with the dislocations in the global economy which are partly caused by US economic policy both fiscal and monetary that the USD remains the flavor of choice? This is because of an ON THE BEACH MENTALITY (remember the 1960 movie of the same title?) or a highest ground in a flood mentality. One has to remember that it is emotion that rules peoples hearts and as such with increasing dilution of the USD it creates an increasingly uncertain economic environment which creats increasing economic political and societal instability.

On the other hand the question still remains, that if the Fed steps back from "packing monetary punches" that the US economy will not falter on its own ? This will unfortunately be true if the US debt levels continue to climb as that debt not only is putting a drag o the US economy but is creating evermore instability in the political and social structures. So basically the Fed is caught in a Catch 22 situation. One thinks that 3% growth is highly unlikely and that a continuing muddling through of 1.5% to 2.5% is going to be the new long term NORMAL. Here one should consider that the US economy is only growing at the rate of population increase of apx 1.6%. This would mean that all the Kings Men and all the Kings Horses have not put Humpty Dumpty back together again? If that is true the Gods truly are laughing at us.

[Sooner or later]

His exact quote:

"Last spring, in the midst of an equity market meltdown, and I have been trading for 40 years and I have never seen anything like this, right in an equity market meltdown the bond market went down by 18 points in one day..." he goes on to say that foreign markets sold a trillion dollars and it continues on today.

What you said is not what he said. You:
"for the first time in at least 40 years there was an OUTFLOW of foreign capital from US Treasuries"

There have been outflows in the past. He had not seen outflows in a market meltdown, not that he had never seen outflows. He was clearly talking about 2020, not current 2021.

It was a ***** to find the actual numbers. I had just about given up.. no data released beyond March. They are here:
https://www.federalreserve.gov/data/secholdtrans/treasurybondsnotes20210531.htm
In millions Release date was May 2021.
2019 outflow of 133,489
2020 outflow of 540,042
Jan/March 2021 inflow of 4,271

Jan 2021 outflow 48,739
Feb 2021 outflow 65,464
March 2021 inflow 118,873

[jyl]

Originally Posted by tabs

The FED CAN NOT RAISE INTEREST RATES...debt Service and Equities would have a hissy fit. So how can they curb inflationary pressures..without ruffling feathers? They tighten monetary supply by siphoning off excess liquidity..



This is being done on a daily revolving door basis...it is an arcane mechanism that they can use to achieve their policy aims. creativity

Banks, FED and Treasury are working in a coordinated effort...either they do it or it is or else.

To be selfish and short term about it, I figure: excess liquidity has its largest and fastest effect on financial asset inflation (because you can buy and sell it at the click of a mouse, and greed/mania color most players’ view of the price) and less effect on goods inflation (it gets hard to store pallets of plywood or TVs, and no-one is stupid enough to think they’re gonna get rich filling their garage with either), with real estate inflation somewhere in the middle. So, suppose the BFT get their hands slip off the controls and liquidity goes nuts. Seems to me that financial asset prices will go up faster and by a lot more, before goods prices react and eventually filter through to inflation measures and expectations and force BFT to reach for the punch bowl aka brakes. Which means, you make money :-) before things start turning dour :-/ and you have to go defensive :-(

Isn’t that how market and economic cycles work in the modern economy? Wall St makes lots of money, eventually Main St starts making some money, and that’s about when the reset button gets pressed, and the smart part of Wall St is on the sidelines, the dumb part of Wall St loses money, and Main St loses job/house. Rachet this over and over, and no wonder the rich get richer and the rest maybe just hold on - and why the good investors have staying power through multiple cycles and the bad ones get blown out of the game.

The Redditt and Robinhood kids haven’t experienced a cycle yet. It will be fun when they do.

[tabs]

Originally Posted by Sooner or later

His exact quote:

"Last spring, in the midst of an equity market meltdown, and I have been trading for 40 years and I have never seen anything like this, right in an equity market meltdown the bond market went down by 18 points in one day..." he goes on to say that foreign markets sold a trillion dollars and it continues on today.

What you said is not what he said. You:
"for the first time in at least 40 years there was an OUTFLOW of foreign capital from US Treasuries"

There have been outflows in the past. He had not seen outflows in a market meltdown, not that he had never seen outflows. He was clearly talking about 2020, not current 2021.

It was a ***** to find the actual numbers. I had just about given up.. no data released beyond March. They are here:
https://www.federalreserve.gov/data/secholdtrans/treasurybondsnotes20210531.htm
In millions Release date was May 2021.
2019 outflow of 133,489
2020 outflow of 540,042
Jan/March 2021 inflow of 4,271

Jan 2021 outflow 48,739
Feb 2021 outflow 65,464
March 2021 inflow 118,873

Semantics...

In times of global distress the USD and Treasuries have been "safe havens" or the last best place to put your money. Druckenmiller cited the last 20 years. He said for the first time in his career that their has been a capital outflow from Treasuries inn a time of distress.

This indicates that the USD is NO LONGER BEING viewed as the "Safe Haven" that it once enjoyed. IT IS AN ADVERSE SHIFT..that is NOW taking place..or should one say the nascent stages of that shift. The rise of Crypto is an effort to find a viable alternative..and there in lies the problem there still is NO VIABLE ALTERNATIVE to the USD. Wiley Coyote is stuck with the USD...(Peter Schiff used this analogy to describe foreign holders of USD's..they have as yet not recognized that they are treading on thin air with the USD and when they do like Wiley they will go.. BOOM).

He continued the out flow continues...I posted e a while back that the Chinese were lightening their Treasure load by 200B..down from about 1T...to 800B. The Chinese since 2009 have been rolling their maturity dates into shorter and shorter terms..and have not materially added to their Treasury position of about 1T since that date. They saw the hand writing on the wall back in early 09 and not wanting to shoot themselves in the foot have been positioning themsleves away from USD hegemony.

NO MATTER HOW YOU WANT TO GLOSS IT OVER A CRACK IN THE ARMOR HAS APPEARED IN THE USD, it has wobbled..Further the FED by taking excess liquidity out of the system on a daily revolving basis is tightening the monetary supply by the only viable means that they can..they can not raise rates because of debt service and the hissy fit Equities would have as they would perceive a slowing economy.

It doesn't take a genius to know that there are going to be ebbs and flows in the Treasury market as circumstances change for investors. What is noticeable out flows and inflows are about even...in times past their would be a decided inflow as the US debt load grew..

[Sooner or later]

The Fed sets Federal Fund rate

Bond yields are set by the market during bid.

This year:
10 year from 0.93% to 1.58%
20 year from 1.46% to 2.18%
30 year from 1.66% to 2.26%

The Fed has basically been begging for some sort of inflation and somewhat higher rates. If they are not careful they may get more than they want.

[Sooner or later]

This statement is correct. Your prior one was not.

"He said for the first time in his career that their has been a capital outflow from Treasuries inn a time of distress."

[Sooner or later]

And that March inflow of 118 was an all time records high. Next month's number will be interesting.

https://finance.yahoo.com/news/u-treasuries-post-record-foreign-200627979.html

NEW YORK, May 17 (Reuters) - Foreign inflows into U.S. Treasuries posted a record high in March, with the bulk of investments coming from private investors, data from the U.S. Treasury department showed on Monday.

On a transaction basis, foreign investors bought $118.87 billion in Treasuries in March, compared with an outflow of $65.46 billion the previous month.

[tabs]

Originally Posted by jyl

To be selfish and short term about it, I figure: excess liquidity has its largest and fastest effect on financial asset inflation (because you can buy and sell it at the click of a mouse, and greed/mania color most players’ view of the price) and less effect on goods inflation (it gets hard to store pallets of plywood or TVs, and no-one is stupid enough to think they’re gonna get rich filling their garage with either), with real estate inflation somewhere in the middle. So, suppose the BFT get their hands slip off the controls and liquidity goes nuts. Seems to me that financial asset prices will go up faster and by a lot more, before goods prices react and eventually filter through to inflation measures and expectations and force BFT to reach for the punch bowl aka brakes. Which means, you make money :-) before things start turning dour :-/ and you have to go defensive :-(

Isn’t that how market and economic cycles work in the modern economy? Wall St makes lots of money, eventually Main St starts making some money, and that’s about when the reset button gets pressed, and the smart part of Wall St is on the sidelines, the dumb part of Wall St loses money, and Main St loses job/house. Rachet this over and over, and no wonder the rich get richer and the rest maybe just hold on - and why the good investors have staying power through multiple cycles and the bad ones get blown out of the game.

The Redditt and Robinhood kids haven’t experienced a cycle yet. It will be fun when they do.

Through thick and thin the USD has for 230 years always been there steady as the Rock of Gibraltar.. It is the UNIVERSAL CURRENCY that is the foundation for all business and finance in the world. NO BODY KNOWS ANYTHING DIFFERENT...

Now since 09 the FED has been monetizing debt with the USD...they have DEBASED THE USD...for short term expediency. They have about exhausted it's good will faith and or any intrinsic value that it has.

When that ESSENTIAL CURRENCY's value EVAPORATES...a VACUUM is formed which implodes the Global Economy of Scale...that implosion will have the same effect as a Nuclear War without bombs.. There will be no Global Economy of Scale, it will cease to exist..and with it goes the modern lifestyle..

[black73]

Originally Posted by tabs

Peter Schiffty has just used that metaphor in a Utube vid with Gammon where Wiley is the holder of USD....

He has it backwards just like you.

The END is coming! It's just around the corner! Any day now! I think I see it! Over there!!!! Over there!!!. NO.... another false alarm. LOL!!!!!

[black73]

Originally Posted by tabs

The following was an email sent to CNBC on 2/22/13 when FED president Bullard was a guest and read the following in real air time.

An Adverse Shift

Starting with the Financial Crisis in 2008 the United States Treasury embarked on a policy of massive deficit spending resulting in a now 6T USD increase in it's debt level, bringing the upfront debt to roughly 16.5T USD. The Federal Reserve on the monetary front lowered interest rates and instituted a number of Quanatative Easing to increase the liquidity of the financial system in order to at first stabilize the system and then to promote economic growth in that system. The increase of liquidity to the system through Federal Reserve purchases of US debt instruments is roughly 3T USD. In September of 2012 the Federal Reserve embarked on OE3 whose tenets included the purchase of 85B a month in US debt instruments and mortgage backed securities with an open ended time frame of the US economy having a 6.5% unemployment rate.

What the concern in this is are the dislocations that these policies have caused in the stability of the global economy and the attendant political, social and cultural strata. Here one can postulate that as US debt levels climb, it destabilizes the above mentioned strata. This is because of several factors which include that the United States is the largest economy in a globally intertwined economy and that the USD is the Reserve Currency of the World. Being the Reserve Currency for the world means that every nation must hold reserves of USD in order to purchase oil. Further the USD being not only the Reserve currency but having a 200 year history of being a stable and thus responsible currency has made it the favored currency to be held by private concerns and individuals. This has been especially true in times of distress either globally or on a foreign national level. This has recently been a factor in the USD strength in the past several years as there has been a flight to the USD and US debt instruments in the face of a potential meltdown of the European Union due to the amount of leverage it has incurred and its slow response to rectifying it's problems.

However with the "unlimited" nature of both the European Central Bank and US Federal Reserves recent QE programs which for all intents and purposes means an unlimited printing of money to purchase sovereign debt, dislocations in the various economies are now beginning to appear which is resulting in their currencies seeking a new equilibrium. This is caused by a defacto devaluation of the large amount of USD being held either by foreign governments, held by private concerns or individuals which then puts pressure on those local economies. Further the real danger lies in the fact that as the USD becomes evermore diluted/devalued/debased those foreign holders of USDs will feel increasing pressure to divest themselves of those USDs or face continued pressure on their economies. Or going beyond this as Y. Aksoy and T Piskovski state in the conclusion of their paper "Foreign Holders of Dollars And The Information Value Of US Monetary Aggregates,"

"That if the leading role of US dollar as an international currency will be challenged by long term
adverse shifts in the preferences of the foreign holders, the US Federal Reserve may face serious
obstacles in the conduct of monetary policy to stabilize the US macroeconomic environment."

Thus in conclusion the Federal Reserves recent "unlimited" QE program has the potential unintended consequence of being a WMD which could create an economic tsunami that would sweep the world with catastrophic consequences.

Keeping An Eye On The Horizon


When the Fed acts it has to keep an eye on the horizon. As the USD is held so deeply in the worlds economy , because of its historic stability and Reserve currency status. If the the US erodes the worlds confidence in the USD it creates an economic undercurrent which has political and social repercussions felt around the world. For example it was a Street Vendor in Tunisia that lit himself on fire over governmental harassment that started the Arab Spring, in other words it was not a Librarian that started himself on fire. Also one should have noted the correlation in the releasing of the Fed minutes expressing a possible abrogating of QE3 and the almost instantaneous strengthening of the USD on the world market.

The worrisome part of Fed policy is that by creating a Trillion USD's a year to buy US debt instruments and mortgage backed securities the the Fed is rapidly diluting the value of the USD. What is quite ironic is that with the dislocations in the global economy which are partly caused by US economic policy both fiscal and monetary that the USD remains the flavor of choice? This is because of an ON THE BEACH MENTALITY (remember the 1960 movie of the same title?) or a highest ground in a flood mentality. One has to remember that it is emotion that rules peoples hearts and as such with increasing dilution of the USD it creates an increasingly uncertain economic environment which creats increasing economic political and societal instability.

On the other hand the question still remains, that if the Fed steps back from "packing monetary punches" that the US economy will not falter on its own ? This will unfortunately be true if the US debt levels continue to climb as that debt not only is putting a drag o the US economy but is creating evermore instability in the political and social structures. So basically the Fed is caught in a Catch 22 situation. One thinks that 3% growth is highly unlikely and that a continuing muddling through of 1.5% to 2.5% is going to be the new long term NORMAL. Here one should consider that the US economy is only growing at the rate of population increase of apx 1.6%. This would mean that all the Kings Men and all the Kings Horses have not put Humpty Dumpty back together again? If that is true the Gods truly are laughing at us.

Do you think that proves something? What?

I get the situation is less than ideal, but is being managed by competent career professionals whose livelihoods depends on successful navigation. I trust them much more than the random TV Talking Heads, Keyboard Jockeys and Armchair QBs reading tea leaves, stoking fear and praying for disaster they think will give them relevance.

[Sooner or later]

Actually, the economy grows at about 3 to 4x the rate of population growth. Population growth is than half of what you claimed in 2013. You failed, again, to get the simple things correct.

2/22/2013

"One thinks that 3% growth is highly unlikely and that a continuing muddling through of 1.5% to 2.5% is going to be the new long term NORMAL. Here one should consider that the US economy is only growing at the rate of population increase of apx 1.6%. This would mean that all the Kings Men and all the Kings Horses have not put Humpty Dumpty back together again? If that is true the Gods truly are laughing at us."

Year/pop growth/GDP growrh
2013/0.75/2.61
2014/0.72/2.88
2015/0.69/2.16
2015/0.67/2.07
2017/0.64/2.70
2018/0.62/2.48
2019/0.60/2.34
2020/0.59/-2.39

[jyl]

Originally Posted by jyl

The reverse repo (RRP) thing is interesting.

As I understand it, this is banks and other large financial institutions trying to get excess cash off their books, by exchanging cash for Treasuries. For a bank, $1 of customer deposits is classified as a liability. Normally they turn around and lend that $1 to a borrower, and that loan is classified as an asset. But right now they have more cash deposits than they have loans to make. So they exchange that $1 of cash for $1 of Treasuries. Owning a Treasury bond is like making a loan to the US govt, it is classified as an asset for the bank. And they make a percent or so of interest on the Treasury bond, as opposed to nothing on the cash. These are overnight actions, i.e. the exchange lasts a day. It all takes place electronically, just numbers moving from one of the bank’s accounts at the Fed to another of the bank’s accounts at the Fed.

I am not sure that I consider RRP actions to be particularly important, in themselves. RRP activity reached these levels around 2016-ish as well, and didn’t signify anything horrible. It does indicate that banks have more deposits than they have loan opportunities, at the moment, but that could change in a day - these are just overnight moves.

The bigger picture is that the economy is awash with cash, or liquidity as they say. That’s not unique to the US. China is dealing with the same thing, as is Europe.

The bigger picture is also that the economy is awash with debt. That is also not unique to the US. China’s debt, on a whole economy basis, is soaring and actually they are facing a huge bad debt problem because their economy isn’t as good at allocating credit to productive and creditworthy uses
as the US economy is.

And, at least in the banking sector, the cash is outpacing the debt - hence RRP.

From an individual person’s perspective, debt is often bad. To an economy, debt is a key driver of growth. It moves money from unproductive uses - piling up in vaults doing nothing - to productive uses - starting companies, growing businesses, building wealth. Without debt, there are no loans and no interest. Sometimes it goes bad (2008, etc) but between those episodes, it is good.

More on the RRP actions. https://www.ft.com/content/0cff3e60-6591-493c-b85e-2d37d46f47a0

Banks don’t want more deposits right now. As explained above, for a bank, deposits are liabilities and have to be offset by loans (and other assets) and capital. I know a guy who is selling his house and planned to put the money (about $500K) in the bank pending finding a new house (he has somewhere to live in the meantime). His bank has informed him it won’t accept the deposit. Seriously. He’s going to open a brokerage account to hold the cash. Other people are being steered to money market funds. But government money market fund companies don’t want the cash either. Short term rates are so low, essentially zero, that they are waiving fees on the MM funds and losing money. They have resorted to using the RRP, essentially depositing cash with the Fed at zero interest, just to have somewhere to put it.

[jyl]

A good blog to learn about RRP and quite a bit more besides.

https://fedguy.com/

[tabs]

Today right again Reverse Repo.is over Half a Trillion..503B..

Balance Sheet closing in on 8T..up from 4.3T in March 2020
Projected to be 9T at end of 2022.

I told ya it was gona ratchet up..

[tabs]

An "economic tsuami".."A tsuami of cash."

[jyl]

Yes, yet many people are trying to find reasons to be near-term bearish on the stock market. "Tsunami Of Cash" and "Bear Market" don't often go together. When the tsunami starts cresting, then get afraid . . .