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The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play
The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed's hiking intentions, with China, or even the ongoing "1998-style" carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program "hasn’t been as successful as we’d hoped."
Why? "It’s simply because they are running out. There are simply too few of these structured products out there."
So six months later, the ECB begrudgingly admitted what we said in March 2015, in "A Complete Preview Of Q€ — And Why It Will Fail", was correct. Namely this:
... the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
... while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
(Actually, we said all of the above first all the way back in 2012, but that's irrelevant.)
So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?
Readers will recall that just yesterday we explained why "Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands" in which we quoted BofA a rates strategist who said that "now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations."
We also said this:
"in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, "suddenly" pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan's QQE going.
The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ's going not only in 2016 but also 2017 and onward. The answer: less and less.
Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.
We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that "The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation."
This was our summary:
The BOJ will not boost QE, and if anything will have no choice but to start tapering it down - just like the Fed did when its interventions created the current illiquidity in the US govt market - especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.
That said, our conclusion, which was not to "expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016's business" may have been a tad premature.
The reason: overnight the IMF released a working paper written by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday... and then some.
Here is Bloomberg's summary of the paper:
The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.
There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.
Here are the excerpts from the paper:
We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.
... there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ's current pace of JGB purchases may become an issue.
Back to Bloomberg:
While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.
Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.
Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only "high quality collateral" assets are JGBs, and as a result of the large scale JGB purchases by the JGB, "a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity."
To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.
For those surprised by the IMF's stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:
So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.
As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: "under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015."
This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:
given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.
Then there are the liquidity issues:
As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.
This, too, is precisely what we warned yesterday would be the outcome: "the BOJ will not boost QE, and if anything will have no choice but to start tapering it down - just like the Fed did when its interventions created the current illiquidity in the US govt market - especially since liquidity in the Japanese government market is now non-existant and getting worse by the day."
The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.
The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ's Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: "the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases."
But the biggest risk is not what else the BOJ could monetize - surely the Japanese government can always create "monetizable" kitchen sinks... but what happens when the regime shifts from the current buying phase to its inverse:
As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.
When considering that by 2018 the BOJ market will have become the world's most illiquid (as the BOJ will hold 60% or more of all issues), the IMF's final warning is that "such a change in market conditions could trigger the potential for abrupt jumps in yields."
At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.
But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that "the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation", what's worse for Abe is that the countdown until his program loses all credibility has begun.
What happens then? As BNP wrote in an August 28-dated report, "Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09."
And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.
But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ - the one central banks whose bank monetization is keeping the world's asset levels afloat now that the ECB has admitted it is having "problems" finding sellers - will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.
It's all downhill from there, and not just for Japan but all other "safe collateral" monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.
But there's no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.
Source: IMF
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There called currency swaps, and the FED will just tag team with the Eurozone and give them as much money as they want.
This doesn't even include grocery bags with the words "IOU" scribbed on them and some prime ministers signature.
Next . . .
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Their goal is to roll out a NWO government not as a government per se, because there would be too much objection, revolt even.The play is like this. "If we can acccomplish changing the largest mountain what else can't we accomplish as we work as one big worldwide team".
But through global accords on trade (you will damn well buy that radioactive fish Taiwan) and agreements on climate that are actual disguises for control of energy....a defacto NWO government is rolled out.
- See more at: http://nukeprofessional.blogspot.com/2015/08/the-new-world-order-sneaks-...
IMF is doing just awesome in the Ukraine as well (apologies for graphics but John Helmer is solid investigative journalist):
http://johnhelmer.net/
Grey screen to right is his script. Black monitor is used to read his lagging fuck off William you cunt, online emails.
http://www.imf.org/external/mmedia/index.aspx
The IMF is a major factor in the nightmare.
IMF = The wrecker of nations.
I have more respect for streetcorner pimps (and hookers).
Three women seem to be quite intimidating for William Murray without doing a little coke before press release.
He didn't seem to be speculatively comfortable in hiding lies.
Solution... same as always (speaking historically now). And that is... drum roll... hyperinflation.
Sure, that too is just kicking the can down the road.
The ultimate solution is collapse, a certainty.
Man Zerohedge needs a major upgrade, its so hard to follow spaghetti. Alls u can do is hit control f word new. My CNET BBS Amiga forums where more modern then this 20 years ago. Sheesh. NOT complaining just saying... You guys need a upgrade. I bet u get 3X hits with the right software... maybe 4. Battleredblog check it out, something close.
Latest joke heard today so you don't own a vehicle, if a emp happens so don't all of you right? Thought about responding paybacks a bitch? ps own alot of vehicles when I ask. If the damn electronics not fried...
Article virtually concludes it comes down to a "shortage of sellers" of bonds to create liquidity.
Well our Fed has an unlimited seller in their buddies at the Treasury Dept and the Fed just prints up unlimited dollars.
Problem solved case closed. Why can’t the ECB and BOJ think of that? Nuf said.
Thx Sam. FINALLY someone stated the bleeding obvious.
ANYONE explain what is wrong with sam site's conclusion.
What are we missing?... Feels like some kind of "1984" double unthink...
"At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops."
Disagree with this personally.
1. By the time it's crisis in Japan things will be much worse in all the dumber countries so Japan will be one of the relatively safe places.
2. Japan's demographics means it is one of the few places that will be able to take full advantage of the robotics wave without mass unemployment - their productivity is going to go through the roof.
Despite the facts listed in this post, in my book the FED will rise the rates measly .25% just to attempt to regain a credibility which they lost long time ago among the population but most of all to bailout Germany where exports are collapsing as we speak just after a month of strengthen euro.
Having said that FED will also use a new facility of hidden QE, not calling it QE, not to really use it but to calm down their own girlymen cronies TBTF (F for “fuck with”).
But why? Because, against their propaganda they need to raise the rates to be able to coerce the bond holders to sell what they are reluctant to sell since they ironically, consider those assets as stable a must in their portfolio, low risk and do not want to load up with more junk, creating even more illiquidity in the market.
Yes, the QE causes illiquidity in the low risk bonds. The ECB set up NegIRP only to allow for QE to somewhat work but it does not since those bonds are more precious than the cash which is just the FED/ECB bond. They have more trust in the German or US government than the ECB or the FED fearing perhaps dissolution of those useless institutions soon.
In the current condition QE cannot work and will not work but if the interest rate is increased it would force those remaining holdouts to sell to the FED and stay in cash or buy more junk like fracking junk bonds, not something they want to do due to low yield or high risk respectively. The paranoia reigns supreme and this bill for the real economy, jobs, income, pensions and all of us is skyrocketing. The FED is a economic doomsday machine and must be stopped.
For what really is going down in the real economy read:
https://contrarianopinion.wordpress.com/economy-update/
FED could be stopped by the change of our attitude toward money, and here is why:
https://contrarianopinion.wordpress.com/2015/04/14/plutus-and-the-myth-o...
Bankers are not the real problem.
Debt is not the real problem.
The desire to live beyond one's means is the real problem. Bankers and debt are the symptoms.
No banksters and no debt then people can *desire* to live beyond their means as much as they like.
Yes, although I might argue that bankers and debt are enablers rather than indicators. I might also argue that governments empowered to borrow in the name of their constituents even if said constituents do not approve is a significant part of the problem as well.
Very few people would consent to borrowing $110,000 on their own account in order to fund the EBT cards, yet they are ignorant ofr the fact that this is eaxactly what has happened.
Educators are scum.
The issue of supply can be rectified rather quickly by these governments just issuing bonds. These governments can deficit spend like crazy because they know the central bank is buying up the supply. All this extra money supply will eventually impact inflation, but inflation is rather low in Japan and the euro zone.
I would rather have this problem than be like Russia and other countries where inflation has skyrocketed due to a collapsing currency. The central bank wouldn't dare buy paper because it would release more money supply into the economy which would exacerbate the inflation.
The bankers must repay us; and we must do this.
They stole "many thousands of trillions" of dollars, which amounts to millions of dollars each for every person on the planet.
http://divinecosmos.com/start-here/davids-blog/1023-financial-tyranny
More examples how the bankers stole from us:
https://www.youtube.com/watch?feature=player_detailpage&v=lyXi1efbYrk#t=863
The Central banksters along with Goldman Sachs had 7 years to dream up even more bolder and outragious schemes to steal wealth from the 99%.
back to grade school arithmetic and the role of central banks as being soemthing requiring more intellect.
unsustainable government pork barrel deficits funded by issuing government bonds with coupons and maturity dates = A for n years (n= last 30-50 years - depending on scale of the mobocratic welfarism of governemnts)
central bank swapping of government bonds to zero coupon perpetual cash = B
reductiion of government bonds in the (regulated) "market" and expansion of cash occurs when B is greater than A.
Can = C (kick it), where B exceeds all of A and you have monetized all A in exchange for all B.
you then wear t-shirts which say "pay no taxes, print money".
A is no longer a valid economic practice, that is government bond markets are not fit for any purpose, this occurs when B crosses a threshold, probably 2% and certainly not 40%.
users of thebeaten up C, realsie that paper moeny is actually worthless.
A new economic model evolves, without the use of the now worthless government bond markets propped up only by the illusion that B ever had any significance.
oh...and by the way...arithmetic needs to be expanded for factor D for dunce when a country monetizes the debt of another country in the name of "coordinated central bank action". Once you add this external D factor, you get a better read on the speed of conversion to mobocracy and the "nouveau economique" of "pay no taxes, print money (or get soemone else to print it, so you pay no taxes)"
"just like the Fed did when its interventions created the current illiquidity in the US govt market"
Say what?! Isn't that precisely the opposite outcome QE was meant to achieve? I mean, the Fed buys securities to increase liquidity. That's Econ 101. They are flooding the market with money, so how is that leading to illiquidity? As far as I know, the only way to create illiquidity is to reduce the number of buyers and I don't see how the Fed could be doing that by buying up all the supply. The reality is that while the Fed buys up everything, everyone else is quietly exiting the market.
This is a warning of super dangerous, impending calamity, extinction-level collapse type stuff. Run for the hills while you still have time!
its simple the political appartus has to rachet up on the fiscal side. this is why the debt celing fiasco in this country turned into political theatre of the absurd, you cant run a QE program while politicians are cutting spending programs. someone told hoehner and the gop that they now live on planet janet, and cuts are no longer possible. the issue for all you muppets is where is the new spending going to be directed? know that and you can join the 1%. its not too late
Thank you for that logical post. At this point the Fed is of course monetizing the debt, but with inflation low, they have a long way to go before they would theoretically need to stop.
without some impetus to spend the fed could get into trouble, nothing to monetise, and this huge debt overhang.
Impetus to spend... how about the interest payments to the USD17tr treasury debtholders... oh wait...
Inflation low? I just paid $5.00 a yard for burlap.
Why are we assuming that the central bankers are trying to find a way out? There's no benevalence coming from these families who would sell their souls for another trillion bucks.
What if the intention is collapse? What if they stand to gain far more by collapsing the global financial system followed by their complete takeover of world govt?
What if the old wealthy Asian families are in the game along with the communist party in China?
Guess we're fucked.
That is a clear possibility: either 1) loot and bring down America and then move on to China or 2) create a global crisis as a precursor for going global.
Even if that wasn't the original intent it may have become so because plan A went wrong.
My gut feel though is there was a plan A: an alliance of banking mafia and MIC going for full spectrum imperial dominance, but the banking mafia screwed it up through greed.
"At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops."
Hang on Kyle!
Depends who you ask. Paulson sure seems to be getting a stiffy in the other zh article
I am very pleased to be privy, thanks to ZH, to the IMF's instructions to Japan on how to proceed. As the IMF is defacto controlled by the US, Inc. and Japan is a defacto vassal state of that entity due to being conquered and occupied to this very day 70 years after hostilities ended, much now does make perfect sense. I'm speaking not of the BOJ monetizing spree but of the ominous stirrings of a new Japanese militarization being undertaken in disdain of overwhelming public sentiment against it and in furtherance of the global Hegemon master plan to encircle China with a ring of steel, errily similar to what is happening far, far away on the European continent involving..........Russia!
The greatest warmonger in the history of this planet does seem to be doing its best to provoke two countries that have essentially NEVER attacked another state outside there own borders.
So the greatest warmongering state ever also can now hold the title of greatest hypocrite and greatest liar along with having imposed it's fraud/currency of plunder on most of the world in 1945. (Russia and China bothe said NYET. leading to the so called Cold War that lasted until 1991 or so and has recently re-ignited when several large countries stopped knuclkling under to....you guessed it....the Bankster/New World Order, the final drive to a dystopian one world dictatorship......but don't get scared....they only have YOUR best interests in mind.
Care to explain how the Rus went from a principality to a continent?
Maybe some Romulans may be in the market for some snake-oil plunder bonds from the grifting banksters, as the inhabitants of Earth are all tapped out.
Zion is a scheme, not an ethnicity.
Do they have guillotines on Romulus?
The picture of Japan's future is both cloudy and complicated by the combination of its massive still growing national debt, an aging population, and their heavy reliance on exports. A recent article in Reuters outlined how Japan is painting itself into a corner when it pointed out the latest fiscal strategy draft being issued by Premier Shinzo Abe lacks the mandatory spending cap. It should be noted the draft is also based on some rather optimistic economic estimates of future events.
This is in many ways about "confidence", the moment it is lost the consequences will be huge. With the government financing almost 40 percent of its annual budget through debt it becomes easy to draw comparisons between Greece and Japan. The obvious difference being Japan is not at the mercy of others and is able to print currency at will.
The bottom-line is the BOJ is in the hot seat and any effort to taper its purchases could cause chaos. Unless the government restores fiscal discipline bond prices will plunge and yields soar on any attempt by the BOJ to cut its bond buying. If it doesn't, fears that the country will monetize its debt will drive funds out of Japan and send the yen into free-fall.
http://brucewilds.blogspot.com/2015/07/japan-and-its-shrinking-number-of...
So...
The author's argument is that while CB's & Gov'ts can produce unlimited amounts of paper called "currency" they cannot produce enough pieces of paper called " bonds"?
Not sure that follows.
This is about monetary policy reaching its limits, not about printing currency.
There is a huge, insurmountable gap between the two. Speculative valuations and negative value feed back loops are why we will not see inflation and why these huge overvaluations in stocks don't translate that way either.