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The New World Financial Disorder
Submitted by Doug Noland via Credit Bubble Bulletin,
The Federal Reserve is flailing and global currency markets are in disarray. Notably, the Brazilian real dropped more than 10% in five sessions, before Thursday’s sharp recovery reversed much of the week’s loss. This week the Colombian peso dropped 3.0%, and the Chilean peso fell 3.1%. The Mexican peso dropped 1.9%. The Malaysian ringgit sank 4.5% for the week, with the South Korean won down 2.7% and the Indonesia rupiah losing 2.2%. The Singapore dollar fell 1.8%. The South African rand sank 4.4% and the Turkish lira fell 1.4%. Notably, market dislocation was not limited to EM. The Norwegian krone was hit for 4.4%, and the Swedish krona lost 2.0%. The British pound declined 2.3%. The Australian dollar also lost 2.3%.
Apparently alarmed by the market’s poor reaction to last week’s no hike decision, the Ultra-Dovish Fed this week attempted to slip on a little hawk attire. It’s looking really awkward. On Thursday evening, chair Yellen did her best to backtrack from last week’s FOMC statement with its focus on global issues. The markets are doing their best not to panic.
Securities markets have over the years grown too accustomed to knowing almost precisely what the Fed’s (and global central bankers) next move would be and what indicators were driving the decision-making (and timing) process. Transparency and clarity are hallmarks of New Age central banking. But chairman Bernanke back in 2013 significantly muddied the waters with his comments that the Fed was ready to push back against a “tightening of financial conditions.” Markets celebrated short-term ramifications: the Fed was overtly signaling it would react to “risk off” speculative dynamics.
And for more than two years, global market Bubble vulnerabilities ensured the Fed stayed firmly planted at zero. Meanwhile, the U.S. unemployment rate dropped to 5.1%. Stock prices shot to record highs, with conspicuous signs of speculative excess (biotech and tech!) The U.S. recovery soldiered on, Bubble excesses and imbalances on clear display.
At least to the adults on the FOMC, crisis-period zero rates some time ago became inappropriate. So it’s time to at least attempt a semblance of responsible central banking. There is, however, no thought of really tightening policy. Just a baby-step – or perhaps two – so history won’t look back and say the Fed sat back, watched the Bubble inflate and did absolutely nothing. The problem today is that even 25 bps will upset the fragile apple cart.
The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end.
As the unfolding EM crisis gathered further momentum this week, the transmission mechanism to the U.S. has begun to clearly show itself. While “full retreat” may be a little too strong at this point, the global leveraged speculating community is backpedaling. Biotech stocks suffered double-digit losses this week, as a significant Bubble deflates in earnest. It’s also worth noting that the broader market underperformed. The speculator Crowd hiding out in the small caps on the thesis that these companies were largely immune to global maladies must be feeling uncomfortable. The small cap universe is a dangerous place in the midst of de-leveraging/de-risking.
There was a new Z.1 “flow of funds” report released from the Fed last week. The “flow of funds” always turns fascinating at inflection points.
...
Ultra-loose financial conditions spurred resurgent system debt growth. Federal borrowings dominated Credit creation from 2008 through 2012, in the process bolstering household incomes, spending and corporate profits. Of late, corporate debt growth – notably to finance stock buybacks and M&A - has been instrumental in sustaining system reflation. It's central to my analysis that the corporate debt market is increasingly vulnerable to the faltering global Bubble.
“Flow of funds” analysis will now take special interest in the Rest of World (ROW) sector. ROW holdings of U.S. Financial Assets ended Q2 at a record $23.402 TN. For perspective, ROW holdings began the 1990s at $1.74 TN before ending the decade at $5.62 TN. ROW holdings surpassed $10.0 TN for the first time in 2005, before concluding 2007 at $14.56 TN. Since ending 2008 at $13.70 TN, massive post-Bubble U.S. fiscal and monetary inflation (inundating the world with dollar balances) has seen ROW U.S. Financial Asset holdings surge 71%.
Not surprisingly (from the perspective of a faltering global Bubble), Q2 ROW activity was notable. Rest of World holdings of U.S. Financial Assets increased SAAR $1.145 TN. Curiously, ROW Securities Repo holdings contracted SAAR $245 billion, Net Inter-Bank Assets contracted SAAR $115 billion, and Time & Checkable Deposits contracted SAAR $92 billion. Meanwhile, during the quarter holdings of Treasuries surged SAAR $565 billion, Agency Securities increased SAAR $128 billion and holdings of Corporate bonds jumped an eye-catching SAAR $705 billion. It's worth noting that ROW holdings of Corporate debt increased an unprecedented $266 billion over the past year. This data confirm highly unstable global financial flows.
Current dynamics in the corporate debt market recall the pivotal 2007 to 2008 inflection point period in the mortgage finance Bubble. Recall how the initial crack in subprime (spring 2007) actually spurred a loosening of conditions in prime (GSE) mortgage Credit and the corporate debt market. This worked to extend “Terminal Phase” excesses and vulnerabilities that would come home to roost later in 2008.
I do not know the sources of extraordinary Rest of World demand for U.S. corporate bonds and other securities. I suspect there is a speculative component – “carry trades,” and other “hot money” flows seeking refuge in the perceived safety of U.S. securities markets. I would also posit that, similar to late-2008 dynamics, there is now potential for an abrupt reversal of speculative flows as the faltering Bubble takes increasing aim at The Core.
Looking back to Q4 2007, even in the midst of a faltering Bubble, Non-Financial Debt (NFD) growth remained at an elevated SAAR $2.50 TN pace. Importantly, system Credit expansion (and fragilities) was being dominated by late-cycle excesses throughout mortgage and corporate finance. And by Q2 2008, NFD had sunk to SAAR $1.13 TN. Mortgage borrowings had collapsed and Corporate borrowings had fallen by more than half.
The U.S. corporate debt market is increasingly impinged by the forces of a faltering global Bubble and a resulting “risk off” speculative dynamic. Financial conditions have tightened meaningfully in the energy and commodities sectors. More generally, the market is now looking at leveraged balance sheets with rising trepidation. And as financial conditions tighten more generally and equities succumb to harsh new realities, I would expect corporate Treasurers to approach borrowing for stock buybacks with newfound caution. Heightened global economic and market risk should also prick the M&A Bubble. Heightened risk aversion, slowing stock buybacks and less M&A combine for a much less hospitable backdrop for equities. Faltering equities will further weigh on fragile sentiment in corporate debt markets. And faltering markets will hit Household wealth and spending.
Anticipating Fed policy moves has become tricky business. A faltering global Bubble will surely at some point pressure the Fed into additional QE. After all, who will be on the other side of a major cycle of speculative deleveraging? By default, it will be our and global central banks. Meanwhile, the Fed currently believes the market prefers a Fed rate increase. I suspect this preference will prove transitory.
Markets have been fearing a disorderly unwind of global leveraged “carry trades.” In particular, bouts of dollar weakness were pressuring short positions in the yen and euro (used to finance speculative bets in higher-yielding currencies). The Ultra-Dovish Fed statement pressured the dollar along with de-risking/deleveraging. And while Fed backtracking this past week did bolster the dollar, it came at the expense of increasingly disorderly EM and currency markets more generally.
I actually believe the faltering global Bubble has progressed beyond the point where Fed rate policy has much impact. Yet the Fed is determined to “push back against a tightening of financial conditions.” But are so-called “financial conditions” being tightened by happenings in China? Or is the culprit pressure on yen and euro short positions? Could it be because of a panicked “hot money” exit from EM – exposing Trillions of problematic dollar-denominated debt? How about an unwind of “risk parity” and other leveraged strategies that will not perform well in the New World Disorder of liquidity-challenged and unstable currency and financial markets? What about the possibility that the global leveraged speculating community is in increasing disarray? How about fears of potential counter-party issues in the convoluted world of derivatives trading? Could it be because of mounting fears of a crisis of confidence in Chinese and EM banking systems? Analysts and the media always like to pick a culprit du jour.
Perhaps chair Yellen and the FOMC is beginning to appreciate that it is not in control of the markets – and is certainly not in control of the faltering global Bubble. And Chinese officials are not in control – nor the BOJ nor ECB. EM central bankers, facing a currency crisis, have certainly lost control. And with European and U.S. equities Bubbles succumbing, the unfolding global crisis has penetrated The Core. Things turn even more serious when contagion begins impinging liquidity in the U.S. corporate debt market.
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60 Minutes of Putin: Quotes From Charlie Rose Interview
http://thenewsdoctors.com/?p=513115
Israel is a sitting duck so it will initiate a False Flag event, and get this party started.
They don't need a false flag. Obama treaty and Iran mouth. This war is Israeli dream come true.. But for the rest of us there are dominoes that will fall on everyone
what is truly comical is the writing on the wall and jimmies trust fund. Fuck your trust fund!
Chart seems optimistic.
Here is another chart to look at.
Its NIKE chart, HERE ==> http://www.bit.ly/1fMcakI Its going to be a $160 stock soon. Took the calls there on FRIDAY. WOW!!!! at new highs while the market looks horrible. The chart looks ridiculously good!!!
There are so many bears out there, now and that idiot faber who keeps calling fire and brimestone, and it never happens. These guys, get paid to spruke on about their bearish bullshit, and months later we rally to new highs. Go and study the seaonsality chart, you will see that a HUGE and MASSIVE rally is coming soon, into XMAS, the same it always does in BULL MARKETS from END OCT to DEC...... everyone who is looking for the DOW to go to 3000 is going to get annihhilated.
Am I wrong? dunno, but since 2008 we keep seeing all these guys come out of the wood-work, and say how the market will crash to zero, and that bullshit of "oh but this time its different" LOL.... and basically they have been wrong each time, we keep going to new highs, and more highs, and the bull market lives on. Can you see a trend here deveoloping yet?
IT ground hog day againd, it seems the more people get bearish, and call for a crash, the shorter the time we see the market bottom and make a HUGE RALLY OCCUR. So i think one needs to listen to what ones intuition says, because I am yet to see any accurate BEARS since 2008 get their calls right, infact, I am sure they are broke, and have no money left trying to call a top and trade that. OUCH!!!
The only way a giant rally can happen is if someone pumps the markets full of money, and it wont be investors. The FED. If it rallies its a fake B.S. market that is being pumped full of digital liquidity, just because people are buying cheap sneakers means nothing, its like people buying iphones. This whole thing is manipulated. Im not saying your wrong but if they dump a bunch of money in this market it will be infuriating to most. It will just continue to compound the problems we have?
If gold and silver go down the people need to go after the FED and UNCLE SHAM for gold and silver price manipulation. What they are doing in my opinion and others is they are manipulating the price of metals down. This is not a "free" market and It wont get better till it is. If I was a miner I would fight these phony manipulators. They are crooks and they have a plan to destroy our economy. They are doing a great job of it too. We probably couldnt do a better job if we tried. Another smack down this morning. THEY HAVE NO RIGHT TO DO THIS.
We have lunatics in charge. The country has been going in the wrong direction for a very long time.
This is how it began. And they knew what they were about to do. https://www.youtube.com/watch?v=Rkgx1C_S6ls&index=33&list=LLDTyFInPPEz35...
It has never been the same since. We need to get this crew out!
Ross Perot "We have to cut it out" Its still going on Ross? I cant Imagine these dipshits have ruled for so long. Americans dont seem to be very bright.
As Obama is going down the tubes, he will take Israel with him.
Good.
whoever finally takes 'em down, can't be a bad thing.
Not that I worry about downs, I'd lke to be clear, this has nothing to do with religion, that's another topic by itself.
Israel's government is the ultimate example of racist hatred given political power.
The crazies in power there act in a way that is bound to produce hatred, then criticize those who take them to task.
How many times can you play that card and get away with it?
Maybe we'll find out soon.
Unfortunately the lunatics have nukes. The message may be delivered in a very unpleasant way.
Cornered animals are very dangerous
they are externinating the original occupants of the land for shopping centers-and practicing GENOCIDE
On a lighter note.....
Catalonia.
http://www.bbc.com/news/world-europe-34372548
might not be what knocks down the first domino, but one of these days, something will.
I'm hoping this is IT.
The suspense is killing me.
If your Fed jumped off a cliff? Would you follow?
Trump, 60 minutes.
Did you see that pretty little vag mouth queefing out the jew message? I never notice how much that hole looks like a vag.
Nice, in a freakish way.
Securities markets have over the years grown too accustomed to knowing almost precisely what the Fed’s (and global central bankers) next move would be
They printed for 7 years. What is there to know. They are going to print more. What are you stupid. They are banksters. That's what banksters do. You have to arrest them and lock them up to stop them.
http://blogs.economictimes.indiatimes.com/signals-noise/fear-qe4-not-mon...
Fear QE4, not monetary tightening
September 27, 2015
By Vatsal Srivastava
The negative market reaction in developed markets to the decision of the US Fed in maintaining the status quo and keeping policy rates near the zero bound is quite telling and counterintuitive.
While Yellen’s policy decision was on expected lines, her tone when referring to the threats posed by global factors, especially China, were quite a mood dampener. Clearly, the new FOMC reaction function assigns a greater weight to global financial market developments. The last time international factors stopped the US Fed from hiking rates was in 1997-1998 when the Asian financial crisis, Russia’s default and the fall of LTCM posed serious global systemic risks. Her positive remarks about the health of the US economy were largely overshadowed by the constant references to developments in China and emerging markets posing significant threats to the global economy. One would have to view last Thursday’s Federal Open Market Committee (FOMC) meet as highly dovish and accommodative.
The fact is that the markets, especially in the developed world, want to see a US monetary normalization as soon as possible. Keeping rates at or near emergency situation levels made sense during much of the last 7 years, but don’t do so now. Quantitative Easing (QE) measures were initially a response to prevent the financial system from falling off the cliff during the peak of the credit crisis but soon turned into instruments to simulate the real economy. The debate is still on within academics as to how effective these measures were and many blame QE for a further rise in inequality in advanced economies. But to the extent that the unemployment rate has halved since its peak in the US, housing prices have stabilized largely due to the wealth effect created by booming stock prices fuelled by cheap liquidity and there has not been runaway inflation as many warned back in 2008—QE in the US should be labeled as successful. However, it is also true that QE exhibits the law of diminishing returns. QE 1 was more effective than QE 2, which in turn was more effective than ‘operation twist’ and QE 3. This was in terms of their effect on the real economy. The markets however cheered each round of QE with equal if not more enthusiasm. The classic risk on move was: bad data implies more QE implies higher asset prices.
Now things are all set to change. US bulls are aware that the monetary normalization undertaken by the Fed will be accommodative and data dependent. But from now onwards, any major disappointment on the economic data front which signals that the US Fed has to backtrack and consider cutting rates again will not be met by cheers. Risk on now means: moderate/good data implies moderate rate hikes over the coming years implies higher asset prices. If this is not the case, then the trust over the efficacy of easy money central bank policies will be completely broken. The cue will be taken from the US Fed. The same policies have been adopted by the Bank of England which is also looking at raising rates in early to mid 2016. The European Central Bank and the Bank of Japan are also in QE mode and there are expectations of more easing from both these institutions in the coming months. Thus, if US monetary normalization fails, it naturally implies that the goals of the ECB and the BoJ QE will most likely not be met.
What ammunition will central banks have left? Moving to negative interest rates will be one option. But the underlying investor psychology will still remain the same: central banks have no more firepower left. We are entering an era where the financial headlines will read ‘’QE sends markets tumbling’’.
What would happen if the Fed never eased again, never tightened again, and was just stifled?
What would people do? How could civilization possibly provide for itself?
How could an economy be without a totem pole in the middle.
OC if a country imported everything it would be fucked up for a decade or two. Coming to a theatre near you soon.
Let's Revisit the punishment handed out to LTMC.
"...and the fall of LTCM..."
Let me guess that just as the Savings & Loan Crisis did not curtail Federal Deregulation... and did not curtail Accounting Control Fraud even while prosecuted... the crimes were given wrist slaps in the case of LTCM.
And as corporate lobbyist sought out protections, further deregulation, loose accounting and financial disclosures... Protection Methods were refined to protect Lobbyist and Bankers.
Just like so many other Putsch:
1913 - Federal Reserve Act
1964 - Gulf of Tonkin, Congress gives up War Powers, Legislative Powers, and Budget Powers
1973 - War Powers Resolution (Allows 60 days combat/war without congressional declaration)
1974 - Federal Energy Administration Act of 1974 (R. Nixon)
1978 - Bankruptcy Reform Act of 1978,
1980 - Depository Institutions (J. Carter, followed by S&L Crisis, 5000 convictions, RTC)
1981 - Executive Order 12287, (R. Reagan, removed price controls on Petrol)
1984 - Caribbean Basin Initiative (Free Imports to USA)
1992 - Energy Policy Act (H.W. Bush)
1994 - NAFTA, Deregulation of Trade, 3 Nations (W. Clinton)
1995 - Community Reinvestment Act, the Clinton Admin urged flexibility,
1995 - HUD advocated greater involvement of state and local organizations
1996 - Energy Deregulation (W. Clinton, followed by ENRON Scandal)
1996 - Telecommunications Act (W. Clinton, cross ownership)
1996 - Start of a Period of Accounting Fraud in USA which continues today
1997 - M2 Money Velocity Top
1998 - Clinton's Kosovo War (over 60 Days)
1998 - Brooksly Born Rejected on her concerns on OTC Derivatives
1998 - Derivatives expanded and were not regulated
1998 - Citicorp & Travelers Insurance Merger
1999 - Gramm–Leach–Bliley Act (Phil Gramm, W. Clinton, followed by 2008 Financial Crisis)
1999 - bombing campaign in Kosovo (W. Clinton, over 60 days)
2000 - Commodity Futures Modernization Act of 2000 (P. Gramm, W. Clinton, derivatives)
2002 - McCain–Feingold Act (G.W. Bush, Campaign Finance, soft money unlimited)
2005 - Energy Policy Act (G.W. Bush, subsidies, excluded clean air Water acts)
2005 - Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
2005 - CAFTA-DR Ratified, 2006 El Salvador, Honduras, Nicaragua, Guatemala
2008 - TARP & FED Secret Loans to Anyone with big Money at Risk in a complete REVERSAL of Capitalism
2008 - 2014 QE & LIRP/ZIRP (B. Bernanke, J. Yellen, B Obama)
2009 - 2014 Continuing Resolutions in which Congress gives up Budget Powers
2010 - Citizens United v. Federal Election Commission (money is free speech for corps)
2011 - US combat in Libya (B Obama, over 60 days)
2014 - lift ban on crude oil exports (B Obama, Commodities Deregulation
According to Itau BBA:
http://is.gd/XzTkOs
The Big Fear
Thus, Fed announcement day arrived with most equity markets up 5%-10% off the late August lows, commodity prices higher and rates priced for Fed action. The main concern coming into the Fed meeting was not that the Fed would hike; it seemed quite clear that it would not go against virtually the entire global economic policymaking community and raise rates. No, the concern was that the Fed would stand pat and stocks, rather than rally, would sell off.
Lo and behold, that is exactly what happened, and that is why we need to be very, very concerned about how things move from here. It remains unclear whether the equity market reaction to the Fed decision was (hopefully) just a classic case of buy the rumor (no hike) and sell the news, or something much worse, namely that investors might be starting to price in policymakers? loss of control – The Big Fear.
The Big Fear of policymakers losing control has been lurking underneath the global equity market for years, underpinned as markets have been by central bank support. Think of it this way: there are two global growth drivers: China and the US. Recently, the competence of the policymaking community in both countries has been called into question, suggesting a possible loss of faith in policymakers, which if true is very worrisome, thus the Big Fear concept.
Why is the Big Fear so worrisome? It’s simple. If investors lose faith in policymakers and decide that cash or bonds are a better place for their money, then stocks are likely to sell off much further. How much further? One never knows, but maybe asking a few questions might help. First, at what level does the S&P need to be for the Fed to engage in QE 4? Second, what S&P level will be considered cheap (keep in mind 2016 E estimates need to come in sharply)? I don’t know the answer to either question, but it seems reasonable to expect that the S&P would need to go much lower than the 1870 level it bottomed at in late August or the 1830 level of a year ago.
The economic implications of such a sell-off would likely be a US and global recession. Such an environment could create a negative feedback loop between financial markets and the real economy, which policymakers would find very difficult to break.
It seems clear that the Fed will not raise rates this year, neither next month when they meet again nor in December, which is the last meeting of the year. Will they raise rates in 2016? From this armchair, the odds are against it, as the forces of recession gather while the forces of reflation stagnate. On this front, one has to question the Fed's 2016 inflation forecast of 1.6%, up from 0.4% this year. The Fed’s crystal ball has been mighty cloudy for years, but this forecast takes the cake.
A look at the global economy helps explain why. Four factors stick out: excess debt, an absence of inflation, insufficient demand and excess supply of raw materials and manufactured goods. None of this is new – what is new is how the various hopes and remedies have fallen short while the problems deepen. The toxic combo of excess debt and disinflation is one powerful reason why the Fed did not move, and excess supply in commodities and manufactured items (look at the PPIs around the world) is another. The global economy needs demand-creation or production shut-ins, and to date both have been lacking.
There are small signs that the commodity complex is starting to finally adjust, with closures, dividend cuts and stock issuance in the mining sector and talks about talks in the world oil market. However, the manufacturing segment of the world economy is quite far behind the commodity segment, suggesting that China's need to shift excess production will ensure manufactured-goods disinflation for the foreseeable future.
One can wish for inflation and for the Fed to be able to hike, but one also needs to be focused on the realities of the current global economy. Where is the demand going to come from? Who is going to shut in production? Let?s look at the three main economic regions: Asia, Europe and the Americas. Asia is likely to be a source of manufactured-goods disinflation as it seeks to rebalance itself to a China that is a competitor first, a customer second. Japan's recovery is sputtering; it will continue QE while a fiscal stimulus package seems quite likely in the months ahead. Europe remains quite weak, and with the refugee issue now occupying policymakers, ECB-led QE seems the only game in town.
The Americas is a concern. South America is in a deep funk, whether it is Mexico's subpar growth rate, Brazil's political and economic travails, Andean copper dependency or the impact of weak oil on countries such as Colombia or Venezuela. All this is pretty well known.
The US is most worrisome because of its combination of still-high equity prices and a very bare policy toolbox to confront any economic weakness. How bare? Well, monetary policy is on hold, and the bar to QE4 is likely a much lower S&P. What about US fiscal policy, one might ask? Great question. Here is the only thing one needs to know about the US presidential election process: it takes fiscal policy flexibility away and locks it in the freezer until late 2017, two whole years from now. In other words, at a time when the US economic expansion is close to seven years old, with the Fed on hold, incomes flat, debt levels high, a strong dollar and absolutely no inflation, fiscal policy is locked away for the next two years at least!
By the way, the UK confronts similar issues and could possibly be a canary in the coalmine for US monetary policy – QE for the people on BOTH sides of the Atlantic perhaps? The UK's negative rate discussion is likely to move across the pond over the next quarter or so. One other way of thinking about it is this: which comes first, the end of ECB QE or QE4 in America? I would go with the latter.
How does one vanquish the Big Fear? With aggressive policy action on the demand-and-supply side. What is the likelihood of that? Exactly. Seen in this light, it makes perfect sense for investors to worry that policymakers no longer have their back, and thus they take some money off the table. One analogy is that the US economy is like a ship that has engine trouble, is drifting towards the rocks and is left to hope that the wind shifts and takes it away from the reef…. not exactly a bull-market, high-valuation tableau. Hope is not a strategy.
I am your huckleberry.
You are a daisy if you do.
Great article, Doug, per usual!