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It's The Fed, Stupid; Why Kuroda And Draghi Are No Match For Quantitative Tightening
Earlier today, Deutsche Bank - who last week won the sellside race to coin a new term for the unfolding EM FX reserve unwind - took a close look at the end of the "Great Accumulation" and what it means for asset prices and DM monetary policy going forward. Here was Deutsche Bank’s "profound" takeaway:
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.
Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income.
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.
But that, as it turns out, is not all.
As you might imagine, EM capital flows have tracked the Fed, BOJ, and the ECB’s balance sheets quite closely (albeit with a lead) in the post-crisis, QE-dominated world.
What’s interesting however, is that there now appears to be a disconnect:
What accounts for that, you ask? Well, according to DB (and this isn't exactly surprising) the simple fact is that EM inflows/outflows are far more dependent on the Fed than they are on the BOJ and ECB and that means that a dovish Kuroda and Draghi will be no match for an even semi-hawkish Fed and that could be very bad news for EM flows considering how far ahead the Fed is in terms of approaching a rate hike cycle and considering, as we noted earlier, that DB's previous answer to the EM FX reserve liquidation quandary was that perhaps "other central banks [will] come in to fill the gap that the PBoC is leaving [as] China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates". From DB:
Given the reliance of EM reserves on QE-enabled financial flows since the 2008 crisis, the speed of reversal should be a key driver of reserves trends going forward. EM capital flows have indeed had a strong relationship with G3 central bank balance sheet growth with a two-quarter lead (Figure 15), given that market pricing anticipates shifts in QE. Projecting G3 balance sheet trends thus offers some clues. In our most hawkish scenario, the Fed stops reinvestment by mid- 2016 and the ECB and BoJ stop QE by September and December 2016, respectively. A more dovish scenario might see the Fed reinvesting ad infinitum and the ECB and BoJ extending QE purchases until end-2017.
Worryingly, EM capital flows are already significantly undershooting the projection from the hawkish scenario. A constructive take on this would be that EM outflows have overreacted and could give way to inflows again as global liquidity conditions remain more accommodative than feared. The less constructive view is that the Fed balance sheet simply matters far more for EM, with liquidity provided by the ECB and BoJ a poor compensation for the Fed’s retrenchment. Indeed, Figure 16 suggests this to be the case, with EM flows tracking the fall in Fed balance sheet growth closely of late. The hawkish scenario of Fed stopping reinvestment next year would suggest that EM flows can get weaker, while even a more dovish scenario of a constant Fed balance sheet would not be enough to lift inflows again.
In other words, even under DB's dovish scenario for the Fed, in which Yellen reinvests the proceeds from maturing securities forever, EM capital flows will likely remain negative, putting perpetual pressure on FX reserves. And as should be abundantly clear by now, perpetual pressure on FX reserves means the unwind of the "Great EM Accumulation" continues unabated until either the Fed launches QE4 or else stands by while the world's emerging economies burn through their cushions and careen into crisis.
Finally - as noted earlier in "ABN Amro Warns There Is A 40% Chance Mario Draghi Expands ECB QE As Soon As This Week" - while we agree with ABN that the ECB may indeed boost QE in a rerun of what the BOJ did in the great Halloween massacre of 2014, it would be largely a non-event, as the ECB biggest limitation remains the availability of monetizable assets. As such, any real monetary offset to the Reverse QE that is about to be unleashed now that the "Great Accumulation" is over, is and will always be the Fed. For a quick explanation of this, re-read "Why QE4 Is Inevitable."
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How the Fed's MONEY systematically destroyed American society >> https://goo.gl/IoiSjv
… I had no idea Janet was so tight!
She's as tight as a retarded cow, and as temporilly relevant as adolescence.
5.3 million jewish bombers + 60 million desperados vs. 240 million Americans. The numbers are the same elsewhere.
7 fed disstricts. Know where they are, their staff and their secret service. And their senators. Then ask yourself, do I want them to step on me here http://thewall-usa.com/, or under my bed?
Hurry up and die, rat traitor Chomsky. Eternity awaits you.
The FED must institute another round of QE. There are no other alternatives. Deflation is so severe that we'll eventually see oil at 30 a barrel. Word to your mother.
Is it the meds that make you all so bat shit crazy or is it that you dont't take enough meds? Holy shit!
The link is to an article that is 101 econ... or not even that. If you follow no financial news at all, it may be informative to you.
Dubai runs out of gold on Diwali rush
http://gulfnews.com/news/uae/general/dubai-runs-out-of-gold-on-diwali-ru...
That article is from 2008 bro
It's possible the FED will raise intrest rates .25 AND reintroduce another form of QE.
QE yes,raise rates well all that crap on the balance sheest at zero becomes more expensive trillions of it-perhaps not
It's possible. I've occasionally speculated (jokingly) they might raise interest rates but pursue more QE at the same time (with the caveat that my head would explode). Problematic only because they've always sold QE as an addition or appendix to the low Fed Funds rate- to boost DOMESTIC consumption. Like kicking in the afterburners.
But you're right- there is no reason they couldn't do both at the same time, technically. Not sure how they would explain it. But I bet it would go something like this:
1. The US Economy is doing OK and can tolerate an increase in the Fed Funds Rate.
2. Internationally, not so good, so we're going to introduce QE4 to buy up all the bonds that other countries (China) are selling until they can get their currency imbalances sorted out. (I.e. it's "temporary" like everything they do which we know is actually permanent.)
Nailed it to the floor.
That's the plan - I'm convinced of it.
Not even sure QE4 will be officially announced, just implmented. Think of how Belgum is buying all those tresuries.
Simply put, when a central bank raises interest rates, there is near-instantaneous re-calibration of exchange rates as well as a fairly transparent impact on lending. With QE, impacts are quite opaque. . . which can be a positive when QE represents pure currency debasement as well as the mythical 'instant value creation'. Effectively, QE creates an artificial wealth effect for an all-too-real decrease in confidence in 'paper' denominated assets (which are not real-time adjusted in nominal asset valuation . . . YET). Eventually, someone will quanitfy this trade-off in a seminal equation like Black-Scholes option pricing. At that moment, the fiat-conjuring game will be OVER. Presently, QE distortions/dimensions of risk are NOT efficiently priced into assets.
They can raise the target for the Fed Funds rate, but without actually allowing the interest rates on bonds to rise (ie. stop QE) how are they going to achieve this?
They could increase the interest rate they pay on excess reserves I guess, but they'd be running massive losses which the government would have to pay (they can create money only under a limited set of circumstances, this ain't one of them). I don't think this is politically feasible.
Old news. Its just a question of gold hitting 5,00 / oz or the Fed / US Treasury outlaws "hoarding " gold. Of course there is the "tax gold" avenue as well.
I think Jim Willie at SD is saying FED is already doing massive stealth QE. What do you guys think? Getting too hard to keep up and digest everything. All I know is unintended consequences keep piling up and it's the death sentence for complex systems.
http://www.silverdoctors.com/jim-willie-hidden-trillion-qe-monthly-volume/
They sure don't keep up to date records. Who really knows how many digital 1 and 0's they created.
150 Days: Treasury Says Debt Has Been Frozen at $18,112,975,000,000
http://cnsnews.com/news/article/terence-p-jeffrey/150-days-treasury-says-debt-has-been-frozen-18112975000000
Stealth QE definitely. Guesstimate 10b USD a day. Dr willie is spot on.
I'm not sure if DTCC reports aged failures together with new ones (ie. cumulative). I know the Fed does though, unless they are lying cumulative failures are relatively low at the moment (75 billion). It was a couple trillion in 2008.
http://www.newyorkfed.org/banking/reportingforms/primarystats/deal.txt
Nomi Prins nailed it, they're all faking it and don't have a clue.
Totally off topic, i would pay big money to motorboat Nomi Prins' funbags...
Nomi can fake it with me anytime, I don't care.
This is as bad a call as saying that gold would go to $5,000. It has no factual or logical support, just jawboning.
What is incredible in all this BS is that jawboning inexistent conspiracy theories against treasuries is the modus operandi of the NY FED - it is their objective to steepen the yield curve in favor of primary dealers at all time, despite record breaking deflationary pressures that will ultimately cause yields to finally crater to levels seen in Europe.
Any bets to the contrary will cause steep losses. Widow maker
Doing God's Work - I want my goddamned slaves!!!
https://www.youtube.com/watch?v=YCc-eF-GyjI
The only quantitative tightening I'd like to see is the rope around yellen's neck
It isn't the Fed's burden -- a burden which ultimately devolves upon the American citizen -- to make sure that every emerging market in the world is flush with liquidity. The BIS knows this and I think even Janet is starting to come around. I think more QE is definitely off the table, and a rate increase is no longer out of the question.
What an unholy mess!
Gold-backed currencies, please.
Why don't the central banks simply just keep printing money? Free stuff, welfare, stocks up etc...print a hundred billion and Greece is fixed...print a trillion and poverty is over....print 10 trillion and fix the world...seems so simple to me...print 100 trillion and no more debt....OK I just fixed the planet....your welcome.
So surely dedollarisation aand trading in own currencies is the solution ??
So what happened to the EM Growth Story that GS and Others packaged into snake oils in which the leemings lapped up ? Coming back to roost. Deformed markets with collapased price discoveries are global not existent witihin developed economies only. Eg: Malaysia - one minor (in amount) alledged corrption in high places that have been the norm during the growth decades now spark a close to 30% decline in its currency. The consequential capital flight is a lagging and not leading indicator. There are still juices for shorts with/without Fed tapers and/or QEs in these SE Asian havens. (Not qualified to talk about the EM places elsewhere as these are not my playgrounds).
Maybe. But in the short term, every night the presence of the BoJ (or lack thereof) and ECb have an effect on e-mini prices. Either that, ofr K-Hen is sucking back the red bull and working in 1 hour shifts with 2 hours off. The price is ramped a bit over an hour then goes sideways and drifts down over 2 hours, rinse -repeat. you get the drill.
https://www.youtube.com/watch?v=ZDzI8ZGUOrE
Something deep, blah, blah, facts and links and pissed off america shit in there that sounds like lee marvin, why type anymore the end of the book chapter is nacho vidal cock slapping you in the face wit alerts and has been for 7 years.
you dont need me me like an overbearing relative, its there, on hand like a fat bitch taking a shit on your new sheets
What? Anal-butt-monkey?
So they will be using helicopters, a rebate check or a nifty app for the next round of stimulus?
Nomi Prins - the coming of cash controls. About 4:30 in.
https://www.youtube.com/watch?v=faY4qtjI-AY