By now even the most confused establishment Keynesian economists agree that when it comes to economic "growth", what is really being measured are liabilities (i.e., credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system which were just over $15.5 trillion in the same period. What, however, few if any economists will analyze or admit, and neither will financial pundits, is the asset matching of these bank liabilities: after all since there is no loan demand (and creation) those trillions in deposits have to go somewhere - they "go" into Fed reserves (technically it is the reserves creating deposits but that is the topic of a different article). It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth.
As part of the Appendixed disclosures in the aftermath of JPM's London Whale fiasco, we learned the source of funding that Bruno Iksil and company at the firm's Chief Investment Office used to rig and corner the IG and HY market, making billions in profits in what, on paper, were supposed to be safe, hedging investments until it all went to hell and resulted in the most humiliating episode of Jamie Dimon's career and huge losses: it was excess customer customer deposits arising from a $400+ billion gap between loans and deposits. After JPM's fiasco went public, the firm hunkered down and promptly unwound (or is still in the process of doing so) its existing CIO positions at a huge loss. However, that meant that suddenly the firm found itself with nearly $400 billion billion in inert, nonmargined cash: something that was unacceptable to the CEO and the firm's shareholders. In other words, it was time to get to work, Mr. Dimon, and put that cash to good, or bad as the case almost always is, use. So what has JPM allocated all those billions in excess deposits over loans? Courtesy of Fortune magazine we now know the answer - CLOs.
The current regime of extreme monetary policy that has become the new normal - to which we have become entirely desensitized and addicted - remains the biggest (and most dangerous) experiment in central planning in the 100 year history of the Fed. Trusting the beard and his band of PhDs to get this right may be a stretch though, as UBS' Art Cashin notes, their track record has not been stellar and as he notes from the 10th Annual Report of the Fed: "the Fed was supposed to extend credit only for 'productive' and not for 'speculative' purposes."
Much has ben written lately about the fact that the Federal Reserve is beginning to realize that they are caught in a "liquidity trap." However, what exactly is a "liquidity trap?" And perhaps more importantly how did we end up in it - and how do we get out?
The final item of note from today's JPM release is perhaps also the most important one, and once again serves as evidence of all that is broken with the US financial system. To wit: deposits held by JPM rose modestly to a new all time high of $1,202,950 million, or $1.2 trillion. This compares to $970 billion in Q3 2008 at the time Lehman failed. What about the flip side of this key bank liability: loans. As of June 30, 2013, total JPM loans declined from $729 billion to $726 billion, the lowest since September 2012. But more disturbing, this number is $35 billion less than the $761 billion at September 2008. It means that JPM's excess deposits have now risen to a new all time high of $477 billion, up from $474 billion last quarter.
From 'Tapering' to concluding asset-purchases, and from rate-hike-expectations to exit strategies (and what other indicators may be worth watching), BofAML previews the all-important release of the FOMC's last meeting minutes.
The price of gold fell last week to the $1,200 level. The lemming sentiment in capital markets is uniformly bearish, yet every price-drop brings forth hungry buyers for physical gold from all over the world. Even hard-bitten gold bugs in the West are shaken and frightened to call a bottom, yet it is these conditions that accompany a selling climax. This article concludes there is a high possibility that gold will go sharply higher from here. There are three loose ends to consider: valuation, economic and market fundamentals.
It should come as no surprise to most ZeroHedge readers but sometimes the facts and data need to be reiterated to ensure the message is not getting lost. As Michael Snyder rhetorically asks, did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us? We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system. Instead, most of it is sitting at the Fed slowly earning interest for the bankers. Our financial system is a house of cards built on a foundation of risk, leverage and debt. When it all comes tumbling down, it should not be a surprise to any of us.
Tuesday humor struck early, courtesy of Goldman's head of the New York Fed, Bill dudley:
- DUDLEY SAYS FED AT TIMES WAS `TOO OPTIMISTIC' ON FORECASTS
That in itself is not the humor. The humor is, as always the context. Such as this:
- DUDLEY SEES STRONG CASE GROWTH TO PICK UP 'NOTABLY' IN 2014
Now that is funny when one considers the following past headlines...
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
Near-term outlook for the major currencies discussed and a brief analysis of the short-coming of fair-value "discounting" models in understanding recent price action.
At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.
As excess reserves in Europe continue to fall, prompting some to claim this is positive since banks are "no longer hoarding cash," the reality of a dramatically deleveraging European financial system is far worse. As Goldman notes, lending to Non-Financial Corporations (NFCs) fell by a significant EUR17.2bn month-on-month (seasonally adjusted) in May (with a stunning 19.9% drop in Spain). Perhaps more worrisome, while NFCs have been seeing lower lending, households have been 'steady' for much of the last year - until now. Bank lending to households fell by EUR7.5bn in May. This marks the first material decline since July 2012. Simply put, the European economy (ad hoc economic data items aside) is mired in a grand deleveraging and since credit equals growth - and the ECB somewhat scuppered by a German election looming likely to hold down any free money handouts (and the fact that they cling to the OMT promise reality that is clearly not doing anything for the real economy) - with lending collapsing, growth is set to plunge further. As we noted previously, there is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.
The People's Bank of China (PBOC) released an official statement addressing directly the latest liquidity conditions in the banking system and indicating that the central bank intends to maintain sufficient liquidity conditions in the interbank market. As Goldman notes, this clear communication of policy intentions is highly important to guide market expectations, avoid liquidity hoarding, and contain excessive volatility of market. While they hope this calms markets in coming days, Goldman notes that the interbank rates are likely to settle back to a level higher than before to rein in leverage growth. However, in a helpful prompt for more jawboning, the squid notes, continued communications on policy intentions and actions will be helpful to further ease market uncertainties, given the extreme volatility in recent weeks; though we note the tightening bias will remain as the new leadership appears to prefer to take their pain early (and blame previous parties) than wait.
Overview of the great unwind, which I suggest has three components--tapering talk in the US, Japanese selling foreign assets and the liquidity squeeze in China (squeezing another carry carry trade).