Q4 2015 Flow of Funds

Doug Nolan

I’d been waiting patiently for the Fed’s Q4 2015 Z.1 “flow of funds” report. The fourth quarter was a period of financial instability and tightened financial conditions. What tracks would be left in the data? Moreover, would the report confirm a continuation of the broadening Credit slowdown that had turned more pronounced during Q3, a slowing that would portend weak GDP and corporate earnings. Would the data support the thesis of mounting financial fragility? This Z.1 did not disappoint.

Importantly, Credit did slow almost across the board. For starters, weak Corporate borrowings were evidence of a meaningful tightening of Credit conditions. Q4’s growth rate of 2.7% was the weakest Corporate Credit growth since Q4 2010 and was down significantly from Q3’s 4.6%, Q2’s 8.6% and Q1’s 8.5%. Household Mortgage Debt slowed to 1.5%, verses Q3’s 1.7% and Q2’s 2.5%. The fourth quarter’s 5.9% pace of Consumer (non-mortgage) Credit expansion compared to Q3’s 7.2%, Q2’s 8.5% and Q1’s 5.6%. There was even a marked stalling in State & Local borrowings, with Q4’s flat growth down from Q3’s 1.7%, Q2’s 1.0% and Q1’s 4.3%.

Federal debt was the big outlier in the “almost across the board” Credit slowdown. Federal borrowings expanded at an 18.5% rate, the strongest Washington Credit boom since Q2 2010. 

This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt (NFD) growth accelerated to an 8.6% pace in Q4. This reversed the trend that had seen Q3’s 2.1% at less than half of Q2’s 4.6% pace (Q1 2.6%).

Q4’s surge in Federal borrowing pushed 2015 Total Non-Financial Debt growth to 4.5%, matching 2014. NFD expanded 4.0% in 2013, 5.0% in 2012, 3.5% in 2011 and 4.4% in 2010. 

Total Business (corporate plus business financial) borrowings expanded a robust 6.6% (up from 2014’s 6.3%). Annual Federal borrowings slowed somewhat to 5.0% (from 2014’s 5.4%). 

State & Local borrowings expanded 1.8% after contracting 0.5% in 2014. Consumer Credit expanded 7.0%, the same rate as 2014 (strongest since 2001). Home Mortgage debt expanded 1.5% (strongest since 2007), up from 2014’ 0.5%.

In nominal dollars, NFD expanded $1.961 TN in 2015, up from 2014’s $1.848 TN to the strongest expansion since 2007 ($2.480 TN). Last year’s debt growth was led by $794 billion of total business borrowings, the strongest expansion since 2007. Federal borrowings increased $725 billion, down only slightly from 2014’s $736 billion. Household Mortgage borrowings expanded $137 billion last year, the strongest growth since 2007’s $734 billion. Consumer Credit grew a record $231 billion (up from 2014’s $218bn).

The Domestic Financial Sector saw borrowings slow to a 1.3% pace, down from Q3’s 1.9% and Q2’s 2.4%. Bank (“Private Depository Institutions”) lending ended 2015 on a strong note, expanding SAAR (seasonally-adjusted and annualized rate) $722 billion during Q4. This put 2015 annual loan growth at $674 billion, up from 2014’s $579 billion and the strongest expansion since 2007.

Certainly related the quarter’s financial market instability, there was a significant contraction in Foreign Banking Offices in U.S.  Here, Assets contracted SAAR $562 billion (after Q3’s SAAR $59bn contraction). On the Foreign Bank asset side, Reserves at Federal Reserve dropped SAAR $732 billion. Liabilities saw a SAAR $445 billion contraction in Net Interbank Liabilities to Foreign Banks. “Money” on the move…

Especially during Q4, strong domestic bank lending was more than offset by a notable decline in market-based Credit. Q4 market instability clearly had a major impact on Wall Street. 

Securities Broker/Dealers saw assets contract SAAR $839 billion during the quarter, versus Q3’s $24 billion expansion, Q2’s $124 billion contraction and Q1’s $97 billion expansion. 

Broker/Dealer Debt Securities holdings contracted SAAR $168 billion, and Security Repurchase Agreement assets dropped SAAR $442 billion. Miscellaneous Assets contracted SAAR $266 billion. On the Liability side, Security Repurchase Agreements declined SAAR $502 billion and Other Miscellaneous Liabilities contracted SAAR $406 billion. Wild financial flows…

It’s been my view that policy and speculative market backdrops have unleashed intransigent Monetary Disorder.  Z.1 data offer support for this thesis. The category Federal Funds and Security Repurchase Agreements saw a Q4 contraction of SAAR $333 billion, which followed Q3’s SAAR $575 billion expansion, Q2’s SAAR $214 billion contraction and Q1’s SAAR $181 billion expansion.

Waning marketplace liquidity was apparent in a marked drop in corporate debt issuance. 

Corporate Bonds expanded only SAAR $53 billion during Q4, down from Q3’s SAAR $107 billion, Q2’s SAAR $654 billion and Q1’s SAAR $645 billion. It’s also worth noting that outstanding Asset-Backed Securities (ABS) contracted SAAR $96 billion during Q4, this following Q3’s SAAR $150 billion decline.

In the category “the more things change, the more they stay the same,” waning marketplace liquidity spurred a surge in GSE activity. The GSEs increased assets SAAR $224 billion during Q4, up from Q3’s SAAR $144 billion to the strongest expansion since Q4 2014 ($283bn). On an annualized basis, 2015’s $85 billion GSE expansion was the strongest since 2008 ($234bn).

Agency- and GSE-Backed Mortgage Pools expanded SAAR $196 billion during the period, versus Q3’s SAAR $185 billion, Q2’s SAAR $122 billion and Q1’s SAAR $5.1 billion. For 2015, GSE MBS expanded $127 billion, up from 2014’s $75 billion.

Treasury Securities ended 2007 at $6.051 TN. By 2015’s conclusion, Treasuries had inflated to $15.141 TN, an increase of $9.090 TN, or 150%, in eight years. It’s worth noting that Agency Securities ended 2015 at $8.153 TN, having now almost recovered back to 2008’s record high.

Total Debt Securities (Treasuries, Agencies, Corporates & muni’s) ended 2015 at a record $38.741 TN. Total Debt Securities have increased $11.3 TN, or 41%, from what had been 2007’s record level. Total Debt Securities as a percent of GDP ended 2015 at a near record 217% of GDP. For perspective, this ratio began the eighties at 66%, the nineties at 110%, and the 2000’s at 140%.

Equities ended 2015 at $35.687 TN (down from 2014’s $37.612 TN), or 199% of GDP. This compares to Equities/GDP of 44% to begin the eighties, 67% to start the nineties and 200% to end Bubble Year 1999. Combining Debt and Equity Securities, Total Securities ended 2015 at a record $74.428 TN. This was up 40% from 2007 (a then record 366% of GDP) to 415% of GDP. 

This compares to 109% to begin the eighties, 178% to start the nineties and 341% to end the nineties.

Household (& non-profits) Assets ended 2015 at a record $101.306 TN, up $2.953 TN (3.0%) during the year. Household Assets have increased almost 50% since the end of 2008. And with Household Liabilities rising $345 billion, Household Net Worth jumped another $2.607 TN last year. For the year, Household holdings of Real Estate increased $1.562 TN (to a record $25.267 TN), with Financial Assets up $1.171 TN (to a near-record $70.327 TN). Household Net Worth as a percentage of GDP ended 2015 at 484% (little changed from 2014’s record). For comparison, Household Net Worth to GDP began the nineties at 379%, ended 1999 at 446% and closed Bubble Year 2007 at 461% of GDP.

Total Non-Financial Debt increased $1.912 TN in 2015 to a record $45.149 TN. NFD has increased $10.218 TN, or 29%, over the past seven years. NFD to GDP ended 2015 at a record 252%. For perspective, this ratio began the eighties at 138%, the nineties at 179% and the 2000’s at 179%.

March 18 – Bloomberg (Rich Miller): “Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.”
March 18 – Bloomberg (Luke Kawa): “According to economists at Goldman Sachs…, the Federal Reserve just delivered one of its most dovish decisions of the new millennium. The surprise, per Economists Zach Pandl and Daan Struyven, stemmed from the large reduction in where monetary policymakers expect interest rates to be at year-end if all things go according to plan. The median Federal Open Market Committee member thought that it would be appropriate for the midpoint of the federal funds rate range to be at 0.875% at the end of 2016, down from a median assessment of 1.375% back in December. Excluding two meetings during the depths of the financial crisis in late 2008 and early 2009, the shock of Wednesday's slash to the so-called ‘dot plot’ was only exceeded by introduction of calendar-based forward guidance in 2011, the decision to forego ‘Septaper’ in 2013, and last March's markdown…”
It’s unclear whether a “secret Shanghai Accord” emerged from last month’s G20 meeting. 

There’s no doubt, however, that leading global monetary officials have orchestrated concerted policy measures going back (at least) to the 2012 “European” crisis. It’s also clear that they became trapped in Bubble Dynamics of their own making. When de-risking/de-leveraging (“risk off”) dynamics materialize, market conditions now tend to turn sour rather abruptly. Yet when policy responses then incite short-squeezes and a reversal of market hedges, ensuing powerful rallies take on lives of their own. Under tremendous performance pressure, market participants have little alternative than to jump aboard. Rallies cannot be missed. The upshot is a backdrop of extreme market volatility and extraordinarily challenging market dynamics. To be sure, the fragile domestic and global Credit backdrops are not constructive for economic growth, corporate profits or equities prices.

The death and rebirth of the stock exchange

Trading venues have grown in value despite regulatory, technological and competitive disruption
Ingram Pinn illustration©Ingram Pinn
The clue as to why the London Stock Exchange has risen sevenfold in value in the past seven years is not contained in its name. The best days of being a stock exchange are in the past, when they were near-monopolies owned by market-making members and could easily make money.
That was long ago.
But a funny thing happened on the way to their demise. The businesses formerly run as stock exchanges became more valuable despite a wave of disruption unleashed by regulation, technology and competition. They should be in trouble but the leading ones have instead been transformed.

This phenomenon is on show on both sides of the Atlantic. The IEX trading platform, made famous by Michael Lewis’s book Flash Boys, has applied to become the 13th US stock exchange. The buttonwood tree under which 24 brokers agreed to form the New York Stock Exchange in 1792 has become a forest of competing bourses.

In Europe a battle looms for control of the LSE, which looked vulnerable after the 2008 financial crisis but is now highly prized. It is planning an agreed merger with Deutsche Börse and rivals such as Intercontinental Exchange (ICE), which owns the New York Stock Exchange, are considering counterbids.
The oddity of all this activity is that, as one equity trader puts it: “The core business of matching buyers and sellers is not very profitable and does not have great prospects.” Being a stock exchange was fine while entry barriers were high and they could shield themselves from competition. As soon as that was undermined, particularly in the US, they became vulnerable.

The NYSE’s share of US equity trading has fallen from 72 per cent to 24 per cent in the past decade amid competition from new exchanges and “dark pools” — platforms run by banks and others for institutions to trade privately. Exchange fees are razor-thin; some dark pools in effect pay to attract business.

IEX has provoked an uproar by seeking to impose an infinitesimal delay on outside orders routed through its exchange — 350 microseconds, or less than one-thousandth of the time needed to blink.
The fact that regulators are wrestling over an interval of time that they would not even have noticed a decade ago shows how high-speed trading by computers has taken over.
Trading volumes are huge — the global number of trades rose by 55 per cent last year — and IEX says the delay is needed to stop equity markets being rigged in an arms race of rapid-fire trading.
Exchanges were once strong enough to enforce discipline on brokers; they now accept fees to let high-speed traders locate servers in their buildings and gain a tiny time advantage.
If stock exchanges are so weak, why are the companies that own them so resilient? The answer is simple: the LSE is not really a stock exchange any more. Equity trading comprises about 10 per cent of its revenues (and 7 per cent of the revenues of ICE). The bulk of its business is based neither on shares nor on trading but on other securities and activities.

One of its biggest operations is clearing — taking care of the contracts after trades are done. Its SwapClear division now clears 95 per cent of the global market in over-the-counter interest rate swaps (private interest rate contracts reached by banks). This is less exciting or visible than equity trading but bigger and more profitable; SwapClear often clears $1tn of swaps daily.

War has broken out in the US stock market.

On one side is the establishment, led by the New York Stock Exchange and Nasdaq. On the other is IEX, an upstart trading venue with a tiny sliver of the business but outsized ambitions to disrupt the world’s largest equity market by becoming an exchange itself.

Derivatives clearing has another advantage over share trading: it takes a long time. A clearing house holds cash to cover the moves in the value of a contract over weeks or months. It is a steady money-earner that is far less exposed to competition than a stock exchange. Fees such as these, from derivatives clearing, data and financial indices, are valuable.

The transformation of exchanges offers three lessons. First, regulation works. It does not always work as intended but it affects behaviour. US and European regulators encouraged stock exchange competition and, after the 2008 crisis, pushed banks to use clearing houses to curb risk. Exchanges altered course as their old business grew tougher and another one expanded.

Second, capitalism is highly adaptable. The world of stock exchanges was dominated for decades by entrenched institutions, particularly those in global financial centres such as London and New York. Changes in regulation and financial markets undermined that position so they adapted.

In some cases, such as the LSE’s, stock exchanges remodelled themselves behind the scenes into clearing and data operators. In others, futures exchanges such as the Chicago Mercantile Exchange outstripped stock exchanges in value or acquired them, as ICE has done. Within a decade, stock exchanges were absorbed into exchange groups that mostly do other things.
Last, traditions endure. Exchanges are largely but not wholly unrecognisable from the days of the buttonwood tree. Networks remain powerful — exchanging contracts through a hub rather making a multitude of bilateral deals creates economies of scale. This applies as much to the central clearing of interest rate swaps as to exchange-based share trading.

Stock exchanges remain exchanges, despite all the fragmentation and upheaval. Unlikely as it once seemed, they are still in business.

martes, marzo 22, 2016



Gold Market Update

By: Clive Maund

All the technical evidence suggests that gold is building out an intermediate top area here, which fits with the fundamental situation where complacency and "risk on" are making a comeback, thanks to the boundless generosity of Central Bankers.

Starting with gold's 6-month chart we see that after its parabolic ramp up in January and early February, it has been struggling to make further progress. The supposed (by some) bull Flag or Pennant turned out to be false and although it has edged ahead a little, the passage of time has resulted in its breaking down from the parabola simply by moving sideways, which has, unknown to many, opened up the risk of a potentially severe drop. The most plausible interpretation of pattern development since the parabolic blowoff spike in early - mid February is that it is a bearish Rising Wedge, which the price broke down from about a week ago, before a backtest of the breakdown point with the big up day last Wednesday when the Fed didn't raise rates, which triggered panic short covering. The pattern may also be classified as an upsloping Head-and-Shoulders top, but to avoid clutter we haven't marked this on the chart.

One interpretation that is doing the rounds is that this pattern is the "Handle" of a "Cup and Handle" base, with the parabola being the "Cup", but this is considered invalid, because the Handle should be downsloping with volume declining, instead of which it is upsloping with continuing heavy volume which is viewed as bearish.

Gold 6-Month Chart

The chief reason for showing the 1-year chart for gold below is so that you can compare it with the latest COT chart shown directly below it, which also goes back a year, but this chart does also reveal that gold's advance ran into trouble when it slammed into the trendline target shown.

Gold 1-Year Chart
Gokd COT

Gold's latest COT shows that Commercial short and Large Spec long positions are still at a very high level, which is bearish. There was a slight drop last week but we should not be fooled by this - these figures were taken for last Tuesday's close, when gold had been dropping for 3 days and before it blasted higher on the Fed on Wednesday, so it reasonable to presume that the real readings are back up near or even above the highs. These readings strongly suggest that a sizeable drop is looming.

The latest gold hedgers chart, a form of COT chart, is bearish...

Gold Hedgers Position
Chart courtesy of www.sentimentrader.com

The 6-year chart for gold makes plain that, while gold's rally from the start of the year has certainly been impressive, it is does not necessarily mark the start of a new bullmarket - it might do, but first it will have to break clear out of the major downtrend shown on this chart, which is has yet to do. Right now it is at a perilous juncture perched at the upper boundary of the major downtrend after a steep rise, with two important factors suggesting that it is likely to get beaten down again, one being the highly unfavorable COT structure that we have just looked at, and the other being the fact that the slow stochastic is rolling over at a high cyclical peak - look what followed after the previous occasions that this happened. Fundamentally there are two negative factors coming into play too - the return of a "risk on" mentality where investors are more interested in the broad stockmarket than in gold and the prospect of the dollar rallying again after hitting a downside target.

Gold 6-Year Chart

The gold Optix, or Optimism chart, is in middling ground and doesn't give much indication one way or the other...

Gold Optix
Chart courtesy of www.sentimentrader.com
Finally the Gold Miners Bullish Percent Index is at levels normally indicative of a top. By far the majority of investors are bullish on the sector now, which is obviously a sentiment extreme carrying much more downside risk than upside potential.

Gold Miners Bullish Percent

Now we will look at the latest charts for the dollar index. On its 6-month chart we can see that it dropped to arrive at a trendline target on Thursday, following the Fed saying it wasn't going to raise rates. With the bad news out, and the dollar having arrived at a target not far above strong support in an oversold state, there is a good chance that it will turn higher here - and that the entire commodity complex, which has had a good run on dollar weakness, will now turn lower.

US Dollar Index 6-Month Chart

There are other factors besides whether the Fed decides to raise rates or not that will determine the dollar's trend going forward, with positive factors being safe haven movement into the dollar, and a possible continuation of the carry trade unwind, so it is dangerous to assume that it is "done for" just because the Fed didn't raise rates. Whilst a break below the key support in the 93 area shown on the 2-year dollar index chart shown below would obviously be bearish, and strongly bullish for gold and silver and doubtless other commodities, the latest COTs for the dollar and especially copper, gold and silver suggest that this is not going to happen, and that instead the dollar will turn up from here, which it is certainly well placed to do.

US Dollar Index 2-Year Chart

The conclusion therefore is that the dollar is going to turn up here, or very soon, and that commodities are going to get smacked back down again, especially copper, gold and silver, and oil.

Gold in particular is very vulnerable after it recent frothiness and wild excitement among goldbugs.

The World According to Trump

Bernard-Henri Lévy

Donald Trump in South Carolin

PARIS – The word “trump,” according to the dictionary, is an alteration of the word triumph. And because Donald Trump, the US presidential candidate, appears likely to become the nominee of the Grand Old Party of Abraham Lincoln and Ronald Reagan, we owe it to ourselves to ask in what sense and for whom he represents a triumph.
One thinks of a segment of the American population angered by the eight years of Barack Obama’s presidency, a group that is now feeling vengeful. And one also thinks of the white supremacist, segregationist, nativist strain represented by former Ku Klux Klan leader, David Duke, whose noisy support Trump was so hesitant to reject last week and for whose constituency Trump may be a make-or-break candidate.
One easily gets the sense, when trying to take seriously what little is known about the Trump platform, of a country turning in on itself, walling itself off, and ultimately impoverishing itself by chasing away the Chinese, Muslims, Mexicans, and others who have contributed to the vast melting pot that the most globalized country on the planet has alchemized, in Silicon Valley and elsewhere, into prodigious wealth.
But, as is so often the case with the United States, there is in the Trump phenomenon an element that extends beyond the American national scene. So one is tempted to ask whether Trumpism might not also be the harbinger – or perhaps even the apotheosis – of a truly new episode in world politics.
I watch the head of this Las Vegas croupier, this kitschy carnival performer, coiffed and botoxed, drifting from one television camera to another with his fleshy mouth perpetually half-open: you never know whether those exposed teeth are signs of having drunk or eaten too much, or whether they might indicate that he means to eat you next.
I listen to his swearing, his vulgar rhetoric, his pathetic hatred of women, whom he describes, depending on his mood, as bitches, pigs, or disgusting animals. I hear his smutty jokes in which the careful language of politics has been pushed aside in favor of supposedly authentic popular speech at its most elemental – the language, apparently, of the genitals. ISIS? We’re not going to make war against it, we’re going to “kick its ass.” Marco Rubio’s remark about Trump’s small hands? The rest is not so small, “I guarantee you.”
Then there is the worship of money and the contempt for others that accompanies it. In the mouth of this serially bankrupt billionaire and con artist with possible mafia ties, they have become the bottom line of the American creed – so much mental junk food full of fatty thoughts, overwhelming the lighter cosmopolitan flavors of the myriad traditions that have formed the great American pastoral. In the sequence about small hands, even an ear untuned to the subtleties of that pastoral might have caught (though in a version perverted by the abjectly low level of the exchange) the famous line from e.e. cummings, the American Apollinaire: “Nobody, not even the rain, has such small hands.”
Confronted with this leap forward into coarseness and pettiness, one thinks of Silvio Berlusconi, Vladimir Putin, and the Le Pens, father and daughter. One thinks of a new International, not of communism, but of vulgarity and bling, in which the political landscape shrinks to the dimensions of a television stage. The art of debate collapses into catch phrases; people’s dreams become bombastic illusions; the economy takes the form of the grotesquely physical contortions of verbally deficient Scrooges who despise anyone who thinks; and striving for self-fulfillment deteriorates into the petty swindles taught in the now-defunct Trump University.
That’s right: an International with a capital I: Globalized corruption in the mutual admiration society of Putin, Berlusconi, and Trump. In them we see the face of a cartoon humanity, one that has chosen the low, the elemental, the pre-linguistic in order to ensure its triumph.
Here is a universe of fakery in which one consigns to the oblivion of a now-obsolete history the precariousness of the exiles, migrants, and other voyagers who, on both sides of the Atlantic, have built the true human aristocracy. In the United States, it is that great people composed of Latinos, Eastern European Jews, Italians, Asians, Irish, and, yes, Anglos still dreaming of Oxford-Cambridge sculls now cleaving the waters of the Charles River.
Berlusconi invented this cartoon world. Putin intensified its macho element. Other European demagogues are hitching it to the foulest forms of racism. As for Trump, he gave us his tower, one of the ugliest in Manhattan, with its clunky, derivative architecture, its gigantic atrium, its 25-meter waterfall to impress the tourists – a Tower of Babel in glass and steel built by a Don Corleone from the dregs in which all of the world’s languages will indeed be fused into one.
Careful, though. The new language is no longer that of the America we dreamed would be eternal, the America that has sometimes breathed life back into exhausted cultures. It is the language of a country with balls that has said its goodbyes to books and beauty, that confuses Michelangelo with an Italian designer brand, and that has forgotten that nobody, not even the rain, has such small hands.

America’s economy

On the one hand

Inflation is rising, but households have yet to notice

IT IS a tough time to be a central banker. On March 8th the IMF called for more stimulus globally to see off a lack of demand in the world economy. On the same day economists at the Peterson Institute, a think-tank, issued a report that was labelled a “reality check”, arguing that fears for the world economy were overblown. (One of the report’s authors, Olivier Blanchard, was until last year the IMF’s chief economist.) The disagreement reflects conflicting signals that the Federal Reserve must untangle at its next meeting, which begins on March 15th.

When the Fed raised interest rates by a quarter-point in December, after seven years without a change, inflation was still in the doldrums. According to the central bank’s preferred measure, prices were rising by just 0.5% a year. The Fed raised rates anyway: Janet Yellen, its chair, argued that the fizzing labour market meant inflation must be on the way. Waiting for it to arrive before raising rates might force the Fed to yank them up abruptly later, potentially triggering a recession. Crucially, households’ inflation expectations had not fallen much, so the Fed could argue that its 2% inflation target remained credible even as it tightened policy.

Since “lift-off” in December, worries about the global economy have sent stockmarkets sliding.

The S&P 500 has fallen by about 5% since then; in the gloomiest moment in February, it was 12% down. But America’s labour market has not been gyrating in the same way. In February the economy created 242,000 jobs, many more than the roughly 100,000 thought to be needed to stop unemployment rising.

What is more, Ms Yellen’s prediction is beginning to come true. Core inflation, which excludes food and energy prices, was 1.7% in January, its highest level since 2013. The headline measure has risen too, to 1.3%—still well below target, but a marked increase nonetheless. Rate-setters are likely to raise their forecasts for core inflation at their meeting this month, according to Zach Pandl of Goldman Sachs.

But not every measure is following Ms Yellen’s script. According to the University of Michigan’s survey of consumers, Americans’ inflation expectations have dipped to 2.5%. Although that is above the Fed’s target, consumers usually predict inflation that is higher still. Their expectations today are 0.5 percentage points below their long-term average, and as low as they have been since 2010.

Consumers may have only now adapted to a world of cheap fuel and a strong dollar. If so, rising inflation should gradually turn their forecasts around. But measures of inflation expectations in financial markets—usually thought of as more forward-looking than consumers—have been depressed for some time. The difference between yields on inflation-protected government bonds and the normal kind points to inflation of just 1.4% over the next five years. (This measure also rallied in the second half of February, having previously dipped below 1%, its lowest level since the crisis.)

Ms Yellen is sceptical of these barometers. The market for inflation-protected bonds is less liquid than before the financial crisis. That means investors might demand a higher return to hold these bonds rather than regular ones, compressing the spread between the two. The “inflation-risk premium”, which investors demand to insure themselves against very high levels of inflation, may also have come down (this can happen without the mean forecast for inflation changing). It is unlikely, though, that such factors fully account for investors’ apparent nonchalance about inflation.

The swaps market, which suffers less from such problems, points to medium-term inflation of around 1.7%. Markets, it seems, think the likely path of monetary policy is too tight.

Yet Americans continue to spend strongly, as Mr Blanchard and his colleagues point out. Incomes and spending both rose by a robust 0.5% in January. Retail sales are strong.

In December most rate-setters forecast another interest-rate rise at the coming meeting. That now looks very unlikely, thanks to the gloomy global picture. But the Fed may be in the curious position of marking up its inflation forecasts even as it postpones rate rises. The recent financial volatility, which could be a sign of problems to come, justifies the change of heart. But with the domestic economy purring, it would not take much of a climb in the oil price, or a fall in the dollar, to push inflation higher still. Markets expect only one interest-rate rise this year, and only three more rises by the end of 2018. They are probably underestimating.

The Dillian Loop

Jared Dillian
Editor, The 10th Man

I’ve always wanted a cognitive bias named after me. There is probably already a name for this, but it’s hard to search for these things on Google.

So let’s take Japan, for example. Japan does quantitative easing.


·         If it works, it is declared a success and they do more.

·         If it doesn’t work, it means they need to do more.

Japan has done a lot of quantitative easing.

I’ll give you another one. Dodd-Frank was really meant to prevent bond traders from earning a million dollars. It has been successful, but as an unintended consequence, it has reduced liquidity. Now the SEC is regulating mutual funds even more to address the liquidity problems.

·         If the regulations work, they are declared a success and they write more regulations.

·         If they don’t work, it means they need to have more regulations.

You find many examples of these negative feedback loops in today’s markets. Policymakers will keep doing the same dumb stuff even though it makes the problem worse. It is like they are stuck in some recursive do-loop in Applesoft Basic.

I will call this The Dillian Loop.
Why This Happens

There are a couple of reasons why this happens. The biggest is that policymakers hate losing face more than anything. They are unwilling to admit that a course of action is bad, so they will keep slamming on the square peg to get it in the round hole over and over again until the hammer breaks.

There are countless more examples. Raising taxes raises progressively less revenue, so consequently, you raise taxes even more. You keep doing what doesn’t work, even if it doesn’t work.

This is allegedly an Einstein quote: “The definition of insanity is doing the same thing over and over again and expecting a different result.”

The problem is, there are no controlled experiments in finance. Japan will never know how things would have worked out without Abenomics. Publicly, they will say it would have been worse. But there is no way to know!

After all, see how Depression-era history is taught in the United States. The New Deal saved the world. What if we didn’t have the New Deal? Maybe things would have been better? After all, the crash happened in 1929 and the economy didn’t recover until 1946. Warren Harding’s response to the (very severe) recession of 1921 was to do nothing, and the economy recovered in less than two years.

Interventionism is always praised after the fact. Nobody ever says doing nothing did something.

So the second aspect of this is that policymakers need to be seen doing something.

They can’t be seen doing nothing, because that would mean they are not doing their job, even if their job might be staying out of the way. The concept of laissez-faire seems pretty quaint nowadays.

Japan is dealing with some pretty serious consequences of its interventionism. JGB yields dropped 25 basis points in a day, flattening the yield curve and rendering the banks possibly insolvent (and then went back up 24 hours later).

The Dillian Loop is really just an elaborate argument for laissez-faire, the idea that constant interventionism in a complex system yields results that are highly unpredictable and often deleterious. In this writer’s opinion, the best possible response to the housing crash, the financial crisis, the Great Recession, would have been to do—nothing.

Liquidity Gone, Never to Return

Back when I was trading 10 years ago, liquidity was abundant. You could sell infinite amounts of stuff without having any impact at all. Bond desks nowadays are reduced to trading odd lots and sitting around the rest of the time, while compliance reads their email.

You can regulate the markets a million different ways, but the last thing you want to do is screw with liquidity (a financial transactions tax would reduce what’s left of the capital markets to rubble). The government doesn’t realize that it alone is responsible for the liquidity problems and that additional regulation will only serve to reduce liquidity even more. I wouldn’t be surprised if 40 Act high yield mutual funds disappeared in a few years, which by the way, would mean a higher cost of capital for everyone.

That can’t possibly have any negative economic consequences.

But since we are caught in the Dillian Loop, what is the chance that we will get out of it? I’d say very slim. I’d say we could easily spend another 10-20 years in the Dillian Loop. The only thing that gets you out of the Dillian Loop is when you reach rock bottom, the point of maximum pain, and people are so disgusted with years of ineptitude that they are willing to try something different.

They might even get so desperate, they will try capitalism.

In Germany, Immigrants Bristle at a New Generation

Three million Turks are already living in Germany. And not all of them are embracing the new wave of Syrian refugees.

By Sumi SomaskandaSumi Somaskanda is a freelance journalist living and working in Berlin. 

In Germany, Immigrants Bristle at a New Generation

BERLIN — On a recent Wednesday evening, a queue of families bundled in faded parkas and scarves shuffled into a bright gym in Berlin’s Moabit neighborhood. Many had spent the afternoon outside Berlin’s State Office for Health and Social Affairs, waiting in the relentless rain to register as asylum-seekers.

Tin plates of rice with hot meat stew and thin cups of syrupy sweet tea awaited them in the gym. Imam Abdallah Hajjir comes here most evenings. His mosque and community association, called the House of Wisdom, helps to run this emergency overnight accommodations center.

The imam sees it as a civic and religious duty to help fellow Muslims and anyone in need — especially now. “At a time when a lot of people consider Islam a burden, we wanted to show that we’re also part of the solution,” he said.

Hajjir, who arrived in Berlin from Jordan in 1978, isn’t alone. Of the volunteers who have fed, clothed, and tended to refugees across the country, many — some 30 percent, according to a study from the Berlin Institute for Integration and Migration Research (BIM) — have an immigrant background themselves.

But in a country where issues of integration and identity are fraught, and where anti-foreigner sentiment is on the rise, there is also growing uncertainty, and even fear, among Germany’s immigrant communities over the uninterrupted flow of asylum-seekers. In a November 2015 study conducted by the market-based research company YouGov, 40 percent of Germans with an immigrant background said they believed Berlin should take in fewer refugees. Nearly a quarter said it was time to stop all refugees from entering entirely.

Around 91,000 asylum-seekers arrived in January of this year, and more than 1.1 million entered the country in 2015. Even if the grand bargain between the European Union and Turkey that the German government helped negotiate puts a dent in those numbers, many Germans feel that Chancellor Angela Merkel failed to prepare for the cultural and economic consequences of her open-door refugee policy.

But the disillusionment in Germany’s established immigrant communities has taken on extra dimensions. The refugee crisis has led to a surge in xenophobic violence by populist right-wing groups that make few distinctions between established immigrant communities and new arrivals. The Central Council of Muslims in Germany reported a spike in threatening phone calls and hate mail, following the New Year’s Eve sexual assaults in Cologne, calling it a new dimension of hate, while the Turkish Community in Germany (TGD) says dealing with vicious emails has become a daily occurrence.

It’s not just the prospect of right-wing violence that has triggered concerns, however. Wolfgang Kaschuba, director of BIM, says Turkish, Arab, and African groups often still live on the margins of society and the outskirts of big cities — exactly where refugees end up settling. The competition for affordable housing, low-skilled employment, and jobs in the broader immigrant economy is already stiff, and it looks likely to get even stiffer in the near term.

“The old guard is not amused by the new guard,” said Gilles Duhem, who runs a nonprofit focused on integration and education in Berlin’s heavily immigrant Rollberg neighborhood. “Absolutely not amused. Nobody will tell you that, of course. But there will be a battle for apartments, jobs, social benefits, and schools.”

* * *
Immigrant associations like TGD, mosques like the House of Wisdom, and various civil society groups have been on the front lines of the effort to assist refugees in shelters and schools, and officially, they lobby the government for pro-refugee policies. But those who work within immigrant communities say the rhetoric on the streets can be very different. “Not every migrant here says, automatically, ‘You’re a migrant as well. I will help you,’” said Kaschuba.

“They’re worried about the positions they’ve just managed to win themselves.”

The troubled history of Germany’s Turkish community, the country’s largest immigrant group, has inflamed the “us vs. them” narrative. Waves of Turkish guest workers first began arriving in the 1960s and 1970s to help fuel the postwar boom in West Germany. They were expected to return home after their labor schemes expired, but they put down roots instead.

They brought over their families and all the trappings of Turkish culture, setting up mosques and grocery stores and bakeries. It took decades for Germans to realize they were here to stay.

Today, some 3 million people of Turkish descent live in the country. The debate surrounding their failed integration runs deep and fierce. A 2009 study from the Berlin Institute for Population and Development ranked Turks as the immigrant community least integrated into German society, particularly in education and the labor market. And according to a report compiled by the Federal Office for Migration and Refugees in 2010, one in five Turks reported having poor German skills, and 50 percent said they had little contact with Germans. German politicians have accused Turks of building parallel societies while refusing to embrace the language and way of life; Turks insist they were never welcome in the first place. Systemic racism and alienation have been a barrier to integration, and even second or third generations are not considered German.

Their struggles have taken on new dimensions now, as the German government has rolled out measures to help integrate the newest wave of arrivals. There are free language courses, welcome classes designed for refugee children, special university enrollment programs, and initiatives to open access to the labor market.

Many Turks, meanwhile, recall having to claw for everything. While they represent the largest and most influential immigrant group in Germany today — populating posts in ministries and think tanks and big business — they received little support and often had to overcome many hurdles, including discrimination, to get there.

For some, like Gulcan Kiraz, years of witnessing her parents struggle to grasp German, and watching as her brother was downgraded in school despite bright academic abilities, drove her to make the path smoother for other newcomers. Kiraz, now an integration officer in the city of Werdohl in western Germany, helps refugee children in Werdohl’s schools to integrate seamlessly into society.

“For the last 20 years, my criticism has always been that integration wasn’t thought through. It’s good to see that they’re learning from mistakes, that refugees can directly take part in language classes right away,” she said.

But Kiraz adds that she is also aware of a growing wariness among immigrant families over the influx of so many new people. Studies indicate that immigrants still face significant discrimination in finding jobs, regardless of whether or not they were born in Germany. Now the country must absorb an estimated 300,000 working-age refugees into the labor market — mostly in the shrinking low-skilled sector.

Ersin, a 35-year-old German of Kurdish origin who owns and operates a successful internet cafe and shop in Berlin’s Schöneberg neighborhood, says that he has heard those concerns echoing among his circle of friends and family.

“I think it’s the people who are not as well integrated themselves who are thinking about it,” said Ersin, who declined to give his last name.
“I’m not worried because I speak German and other languages as well, but the people who aren’t as well educated or who don’t have good prospects, they’re the ones who are uneasy.”
At an intersection near Ersin’s shop dotted with Turkish grocery stores and social housing, a portly, graying man who also only gave his first name — Ozturk — says he barely makes ends meet with his cramped convenience store. Ever since he arrived from Istanbul 20 years ago, he has watched jobs and wages steadily dwindle. The only options now are in the cleaning industry or creating businesses like his, he says. “For normal people who live here, there’s no work,” he said with exasperation. “What about the refugees?”

* * *
Ironically, these latest tensions come at a time when the heated discourse surrounding Germany’s Turkish community in particular might be growing obsolete. Second and third generations of Turkish families, born and raised here, have started to build successful businesses and establish a foothold in media, politics, and academia. Today, the government is increasingly turning to Turkish leaders for advice and aid in integrating the refugees.

“We’re the ones who have been living in Germany for more than 50 years and have experience with integration,” said Gokay Sofuoglu, the TGD’s chairman, a German of Turkish origin who has lived in the country for 36 years. “We know all the mistakes that were made, and we also know how to do things right here.” Language and education are the most essential tools, says Sofuoglu, but cultural and social integration — understanding the laws and ways of the land — is crucial.

The influx could also open opportunities to reshape identities for many of those with an immigrant background. Turkish and Arab Germans who live and work here, and speak the language, no longer appear so foreign, at least not compared to the Syrians and Iraqis now arriving. Like concentric circles, the newest occupy the outermost rungs of social order, and those who have been in the country longer move toward the center, said BIM’s Kaschuba. He has seen it in practice already, in the way established immigrants are discussing Germany’s policy on the refugee crisis among themselves and with broader society.

“You have the situation today where you have a taxi driver of Turkish descent or from an Arab family, and they ask, ‘What are we [Germans] doing?’ They’re saying ‘we.’”

Meanwhile, community leaders are urging Germans from an immigrant background to maintain compassion and empathy toward those trying to adapt to a new country and culture, even amid tensions. In an atmosphere increasingly poisoned by xenophobia and hate, now is not the time to allow media to portray refugees as threats, said Sofuoglu.

“We can’t allow two societies to be created among immigrants — those who came 50 years ago and the refugees coming now,” he said. “We can’t let ourselves be divided.”

The Only Safe Haven Left In The World Is Gold

Chris Vermeulen


Globally, Central Banks are resorting to measures which have never before been witnessed in history. Since the beginning of time, ‘boom and bust cycles’ have been a natural economic cycle. Economies, globally auto correct themselves by punishing the ‘excesses’ and ‘rewarding prudence.’

Nonetheless, since the last ‘financial crisis’, the Central Banks, around the world, have been attempting to avert this cycle by artificially supporting the economy and their markets, by using various ‘financial engineering’ tools. However, they have not been capable of solving the problem! They are merely postponing the inevitable!

When Bubbles Burst, Banks Make Mistakes

Following the ‘dotcom bubble burst’, the FED embarked upon an easy monetary policy, which encouraged subprime lending and thereby finally resulting in a ‘financial crisis’ Since 2009, the FED maintained a zero interest rate policy, until December of 2015, at which time they increased rates by 25 bps. Technically, interest rates are still close to zero percent, as indicated in the chart below.

US Fed funds rate

Surprisingly, the policy makers of the Eurozone, Japan, the UK and China have also copied this ‘quick fix’ methodology by the FED, leading to the same disastrous results, globally.

All of these years of ‘easy monetary policy’ have led to inflated assets globally. Vikram Mansharamani, a lecturer at Yale University, told CNBC, "I think it all started with the China investment bubble that has burst and that brought commodities down with it, which started deflation and those ripples are landing on the shore of countries literally everywhere. I mean, we've got a bubble bursting, In Australian housing markets look like they are beginning to crack; South Africa — the whole economy; Canada — housing and the economy;  We can keep going on and on."

Did the Central Banks only resolve these issues by reducing interest rates? No!  They have also resorted to massive money printing, as well. Since the ‘financial crisis’, the total debt of the world, has increased dramatically, as indicated in the chart below.

Central Banks Go Negative Above

Considering the ‘easy monetary policy’ worldwide, and the amount of money printed, one would assume inflation to be skyrocketing, and growth to be expanding.  However, the reality is far from this situation. Most nations are struggling to ward off deflation, and avoid further recession, which means that the Central Banks have not been capable of achieving their objectives.

This has led a few Central Banks to push interest rates into negative territory, for the first time ever. It all began with the ECB, and has spread to Sweden, Switzerland and Japan. As the negative interest rates have not achieved their objectives, the ECB and Bank of Japan are contemplating pushing interest rates even further and deeper into a more negative territory.

The FED even considered following the same path. Chairwoman Yellen recently stated, “they are studying it closely, in order to use it, if needed in the future”.

There are a number of experts who believe that the current low inflation rates and low growth environment are due to the incorrect monetary policy of the Central Banks. The Bank of England's Governor, Mark Carney, recently said, “Negative interest rates will only help to perpetuate a world of lower rates and slower growth and are a signal that central bank monetary policy options are now severely limited”, as reported by The Week.

The world is frantically losing confidence that the Central Banks, led by the FED, will be able to react to any financial crisis, within the near future. This was evident in the recent ‘market crash’, despite announcements that were made of further easing by the ECB and negative interest rates, by the Bank of Japan.

When the Central Banks fail, investors move towards different asset classes which are perceived as ‘safe havens’. The U.S. Dollar, the Japanese Yen and the Swiss Franc have been considered ‘safe havens’, in the past. However, no longer are they deemed so! The famous investor, Jim Rogers, states that the U.S. Dollar is the most flawed currency, the Yen is a ticking time bomb considering the unmanageable debt of Japan, and the actions of the Swiss Central Banks led to massive bankruptcies in January of 2015.  

Gold Is The Definition Of A Safe Haven

This brings us to the final ‘safe haven’, which has withstood the ‘test of time’, which is gold. It has maintained its’ value during the past 5000 years, and the current rise in gold during the ‘market collapse’ is proof that it is a ‘safe haven status’ which is still intact. Gold rose more than 16%, within two months, on the notion of a ‘financial crisis’.  Imagine how high gold will rise when the ‘real crisis’ affects the world economies.

Gold is still more than 30% below its highs. As advised in my last article, traders and investors should buy 10-15% of their portfolio allocation in gold, when it drops to $1150-$1190/oz. levels which I expect will happen over the next 1-4 weeks.

How high can gold go? I believe it can elevate as high as $5000/oz., during a ‘full blown crisis’.

With a limited downside risk, and a huge profit potential, followers should buy gold.  

The Coming Collapse of Saudi Arabia…How to Make Huge Profits

by Nick Giambruno

They met in secret to plan a devastating attack…

Two powerful men, colluding at a palace in the Middle East.

In September 2014, U.S. Secretary of State John Kerry flew to Saudi Arabia. He was there to meet with King Abdullah, the country’s ruler and one of the richest men in the world.

Informed observers say Kerry and Abdullah drew up a plan at this meeting to destroy their common enemies: Russia and Iran.

To carry out the attack, they wouldn’t use fighter jets, tanks and ground troops. They would use a much more powerful weapon…


Oil is the world’s most traded commodity. Saudi Arabia is the world’s largest oil exporter. It has arguably more control over the price of oil than any other country does.

Insiders say Saudi Arabia agreed to flood the oil market at this secret meeting. The purpose was to drive down the price of oil. This would hurt Russia’s and Iran’s economies. They both depend heavily on oil sales.

They wanted to hurt Russia for supporting their regional foe, Syrian President Bashar al-Assad. They wanted to hurt Iran for the same reason. Iran is the Saudis’ fierce geopolitical rival in the region.

Their strategy has had some success.

As you can see in the chart below, the price of oil has plummeted over 70% since John Kerry’s secret meeting with Kind Abdullah in September 2014.

There’s so much conflict in the Middle East—but oil prices are falling.

And despite China’s economic slowdown…it still imported more oil in 2015 than in 2014. China is the world’s number two oil consumer behind the U.S.

Turmoil plus demand says oil should be going up, not down. But the mystery is explained by the Saudis’ oil war and their strategy of flooding the market to bankrupt competitors.

Saudi Arabia’s Other Target

The Saudis have also declared war on the U.S. shale oil industry.

In the 1990s, the U.S. imported close to 25% of its oil from Saudi Arabia. Today—because of high U.S. shale oil production—we import only 5%.

By keeping the market saturated with oil, the Saudis are driving down the price. They hope to drive it down low enough and long enough to bankrupt the shale industry…since shale oil costs more than Saudi oil to produce.

This would knock out a major competitor and let the Saudis regain lost market share.

But economic warfare doesn’t always go according to plan. I think the Saudis made a colossal mistake…

Impaled on Their Own Sword

I think the Saudis have overplayed their hand…big time.

Oil makes up 90% of Saudi government revenue. So the price drop has been very painful.

They’re bleeding through their reserves.

The market is putting more pressure on their currency peg than at any time in its history.

For over 30 years, Saudi Arabia has pegged its currency at 3.75 riyals per U.S. dollar. To maintain this, it needs a large stash of U.S. dollars. With its historically large reserves, this has never been a problem.

But now, the Saudi budget is under serious pressure. The government is only staying afloat by draining its foreign exchange reserves. This threatens Saudi Arabia’s ability to support its currency peg.

If the currency peg breaks—which is exactly what the current market expects—the riyal would be devalued. This would increase the cost of living for Saudis across the board.

It would also increase social unrest.

The Saudis are also losing billions underwriting foolhardy wars in Yemen and Syria.

The Saudis thought they could support armed Syrian rebels and topple the Assad government in a matter of months. They figured Assad would fall just as easily as Gadhafi did in Libya in 2011. It was a gross miscalculation.

There’s also the Saudi war in Yemen, Saudi Arabia’s southern neighbor.

The Saudis launched the war in March 2015. They wanted to reinstate a Saudi-friendly government. The Saudis thought the intervention would last a few months, then they’d declare “mission accomplished” and go home. That’s not what happened.

The political and economic stars are aligning against the Saudis. It’s their most vulnerable moment since the kingdom was founded in 1932.

Crisis Investing 101

The Saudis are having some success. In the past year, at least 67 U.S. oil companies have filed for bankruptcy. Analysts estimate as many as 150 could follow. The shale oil industry is in “survival mode.”

And the crisis in the oil market could spread. That’s because many banks made big loans to these distressed shale oil companies. A wave of bankruptcies means those loans could go bad, which would be a huge threat to those banks.

It has the potential to trigger another meltdown in the financial system. The warning signs are there.

I wouldn’t own any bank that has big exposure to risky shale plays…nor keep my life savings there.

The Saudis have damaged the U.S. shale oil industry. And they’ll continue to cause more damage.

But they won’t bankrupt every producer.

The shale industry has more staying power than Saudi Arabia. Some producers now say they’re profitable with $40 oil. And their pace of innovation will drive that even lower. The industry will survive.

All the Saudis have done is create an existential crisis for themselves.

If the Saudis don’t stop flooding the market—and there are no signs they will—they won’t be shooting themselves in the foot…but in the head. Saudi Arabia will either collapse or surrender—and stop flooding the market.

Either way, oil will eventually go a lot higher.

In the meantime, we have a huge opportunity…

The crisis in the oil market gives us a second chance to invest in the American shale revolution.

Now is the time to get ready to buy the highest-quality shale companies at bargain prices.

There will be explosive profits once oil prices start recovering.

Crisis investing is all about making huge profits by buying elite companies during times of turmoil.