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The "Great Accumulation" Is Over: The Biggest Risk Facing The World's Central Banks Has Arrived
To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century.
When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets.
Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.
On Tuesday, Deutsche Bank is out extending their "quantitative tightening" (QT) analysis with a look at what’s ahead now that the so-called "Great Accumulation" is over.
"Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years," DB begins, before noting what we outlined above, namely that the "three cyclical drivers point[ing] to further reserve draw-downs in the short term [are] China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price."
In an attempt to quantify the effect of China’s reserve liquidation, we’ve quoted Citi, who, after reviewing the extant literature noted that for every $500 billion in EM FX reserve draw downs, the effect is to put around 108 bps of upward pressure on 10Y UST yields. Applying that to the possibility that China will have to sell up to $1.1 trillion in assets to offset the unwind of the great RMB carry and you end up, theoretically, with over 200 bps of upward pressure on yields, which would of course pressure the US economy and force the Fed, to whatever degree they might have tightened by the time China’s 365-day liquidation sale ends, to reverse course quickly.
Deutsche Bank comes to similar conclusions. To wit:
The implications of our conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. For every $100bn (exogenous) reduction in global reserves, we estimate EUR/USD will weaken by ~3 big figures.
[...]
Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income. A recent working paper by ECB staff shows that the increase in foreign holdings of euro area bonds from 2000 to mid-2006... is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, in line with the estimated impact on US Treasury yields by other studies. On the short-term impact, one recent paper estimates that “if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5- year Treasury rates would rise by about 40–60 basis points in the short run”, consistent with our estimates above. China and oil exporting countries played an important role in these flows.
Which of course means the Fed is stuck:
The current secular shift in reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty.
Put simply, raising rates now would be to tighten into a tightening.
That is, the liquidation of EM FX reserves is QE in reverse. The end of the great EM FX reserve accumulation means QT is set to proliferate in the face of stubbornly low commodity prices and decelerating Chinese growth. And indeed, if the slowdown in global demand and trade turns out to be structural and endemic rather than cyclical, the pressure on EM could continue unabated for years to come. The bottom line is this: if the Fed hikes into QT, it will exacerbate capital outflows from EM, which will intensify reserve draw downs, necessitating a quick (and likely embarrassing) reversal of Fed policy and perhaps even QE4.
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Let's hike rates bitchez!
What’s wrong dude!? You Yellen!, Ahahahahaha that’s what I thought, A Yellen Pelly http://youtu.be/0c-UIkfsk1U?t=1m49s
Party like its 1999 -
-Prince
Dance like it's 911.
-Err, you know who.
It's sounds odd but the statistics show that stocks actually do better in an increasing interest rate environment.Who's afraid of all the trillions worldwide pouring back into the U.S?It's their only way out and it's every man for himself now.And since when did The U.S. Government or The Fed give a Flyin' "F" about anybody else (emerging markets) or anyone else they bomb the piss out of around the world?It's all about them,nobody else.
The FED migth just be following the market to have their foward guidance look correct, and thus regain lost confidence.
reff see september 2015 issue of The International Journal of Central Banking keynote adress:
http://www.ijcb.org/journal/ijcb15q4a1.pdf
Forget the mumbo jumbo, here is what the policy should have been about 2011-12 when we turned the corner (not out of the woods).
http://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/
Who says we have to tighten OR loosen?
http://www.kitco.com/news/2015-09-01/The-U-S-Fed-s-Looming-Rate-Hike-Nee...
The U.S. Fed Needs To Raise Rates For Possible QE4
By Daniela Cambone of Kitco News
Tuesday September 01, 2015 09:45
NEW YORK ( Kitco News) -- As markets digest the recent central bank meeting in Jackson Hole, Wyoming, one market participant says that the U.S. Federal Reserve has ulterior motives to push up an interest rate hike.
Keith Fitz-Gerald, chief investment strategist for moneymorning.com, noted that the central bank needs to raise rates to allow for a potential fourth round of quantitative easing. 'The Fed wants desperately to raise rates not because there is inflation but in the event they have to do QE4,' he said in an interview with Kitco News. The central bank has held short-term rates near zero since December 2008; the impending end of that era may be around the corner."
Fitz-Gerald acknowledged that it is counterintuitive to think they would raise rates to print money, but said it is the only option the central bank has.
'When you take off the rose-colored glasses and you get past the illusion of prosperity they try and create, it makes sense,' Fitz-Gerald said. 'Right now we have a zero interest rate policy -- the Fed can't do anything else if it has to -- what that tells me is that things are so difficult that they may have to resort to more money printing down-the-line and raising rates gives them the opportunity to do that.'
After months of speculation surrounding a September rate hike, the Jackson Hole Symposium showed a more concrete direction for an interest rate hike. The consensus from the gathering of world central bankers is that the Fed should begin tightening monetary policy with rate hikes as early as mid-September. Fed Vice Chair, Stanley Fisher, added to the speculation by noting that the Fed wouldn't need to see inflation pick up to justify a rate hike.
As for the September timing, Fitz-Gerald said it would be 'totally irresponsible.' Citing a weak China, a downbeat consumer, lackluster data and an America public that has been 'absolutely eviscerated,' Fitz-Gerald highlighted this is the wrong time to raise rates. 'They missed the window yet again,' he said.
On the topic of gold, Fitz-Gerald said investors should be looking at the yellow metal. Gold is off the 6-week high it hit in August on concerns over China's weak economy and stock market volatility, but Fitz-Gerald said investors need it in their portfolios. "No investor today can afford to be without gold - gold is not necessarily an inflation protector like everybody thinks it is but definitely correlated to interest rates," he said.
I stated that this (rate hike AND MOAR money printing) was going to be their policy months ago. Geez... can't we just get to the discussion of:
You wanna know who knows outlaws? It was famed western writer Louis L'Amour. And where were their hideouts -- from Robber's Roost to the Hole-in-the-Wall, Brown's Hole or Jackson's Hole...all hideouts on the Outlaw Trail.
Can't wait till the picture of this traitorous criminal witch goes off of the front page and into the archive do die.
You can see 1913 in her eyeballs.
The FED is a scapegoat.
And you ask why it's chaired by Jews decade after decade?
Time to flush every last fucking bond holder down the loo.
Genial
Fed waited until China started imploding. Desirable rate rise soon rather than later will be a double whammy. Someones must be
left with Black Pete in their hands.
What a picture of Ms. Dumas.
A pensive old troll or clueless old troll?
Seems as if the USD will depreciate somewhat unless the Federal Reserve raises the interest rates somewhat.
And so? Lots of nonsence. Can you tell me what interest rates the fed can raise or lower because it is not the federal funds rate. And how does one expect the federal fund rates to rise if the fed is paying interest on excess banking reserves? Why should banks lend? With no lending how can interest rates rise?
And so what if china dumps? It just means a great buy for the buyer. It seems that most of you have no understanding of banking.