http://www.zerohedge.com/news/2015-06-25/first-time-ever-qe-has-officially-failed For The First Time Ever, QE Has Officially Failed Submitted by Tyler Durden on 06/25/2015 23:50 -0400 Algorithmic Trading Bond Central Banks Citigroup Danske Bank Equity Markets Germany Gross Domestic Product Market Crash Monetization Quantitative Easing Repo Market Sovereign Debt in Share 77 Over two years ago in " Desperately Seeking $11.2 Trillion In Collateral ", Zero Hedge first warned that as a result of relentless central bank monetization of debt, liquidity in bond markets would decline at an ever faster pace even as, paradoxically, these same central banks added "phantom liquidity" (the topic of another post from two years ago ) to equity markets in their attempt to artificially inflate stock prices to record levels without fundamental justification. Sure enough, with the usual 2-5 year delay, in 2015 the primary financial topic sweeping the mainstream financial media and all the "serious" pundits, is the collapse in bond market liquidity. Some, the more naive ones, blame regulation. Others, such as iconic Citigroup credit strategist Matt King strategist explained - once again - that Dodd Frank is a negligible reason for the total plunge in bond market liquidity which is the result of, just as we warned, central bank intervention and the relentless ascent of algorithmic trading. But even as everyone is finally arguing about the cause of the plunging bond market liquidity and has no clue how to resolve this biggest nightmare for what once used to be the deepest and most liquidity of markets (at least not without forcing central banks to sell the trillions in bonds they hold, a step which would free up collateral but also result in the biggest market crash ever), a far more ominous question has reappeared. One which, as usual, we asked nearly three years ago : what happens when central banks soak up too much liquidity. Our answer, at that point, QE will have officially failed, because instead of lowering bond yields - which as a reminder is the primary QE transmission mechanism, one which forces investor to reach not only for yield but also for risk in other asset classes such as equities - any incremental bond purchases will start raising yields as the adverse impact from the illiquidity "premium" surpasses the price appreciation benefit from frontrun central bank buying. Impossible, you say? Not only not impossible but in one country it just happened. Sweden, and as Bloomberg sarcastically notes , "It’s probably not what the Riksbank expected." What is "it" ? Precisely what we said would happen three years ago: Quantitative easing is supposed to drive down longer-dated yields. But as investors obsess over market depth, the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher. “The financial conditions -- the currency and the bond yields -- are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said by phone. The assumption is that “the Riksbank wants yields to go down and the krona to weaken, but it’s been the opposite direction recently. That should pose a problem.” As can be seen on the chart below, Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago. And though Swedish yield spreads have narrowed relative to German bonds, investors can still earn about 15 basis points more by holding AAA-rated 10-year notes issued by Sweden than they can holding similar notes from Germany. Why? Danske Bank explains: “ Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program. ” The Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, SEB AB and Danske Bank have said. Adding insult to injury, now that the "virtuous QE cycle" is broken, the extra yield is adding to the appeal of the krona. "Since the Riksbank started its bond-purchase program in mid-February, Sweden’s currency has appreciated more than 4 percent against the euro. It’s up 5 percent against Norway’s krone and is 3 percent higher versus the dollar." That will make it harder for the bank to prevent disinflation as import prices decline. And since Swedish QE has now officially broken and every incremental monetization will merely boost yields that much higher as the bonds become ever scarcer, the Riksbank can well proceed to monetize more... only to end up with higher yields... and an even stronger currency! Which is precisely the opposite of what QE is intended to achieve. And just like that, for the first time ever we see just how the closed QE loop transitions from virtuous to absolutely vicious, and how suddenly the central bank is left without any recourse to push yields lower as the very mechanism that has been designed for this now is pushing yields higher. The good news for the rest of the world is that there is still some unencumbered collateral left, and that - at best - the world's central banks probably have 2-3 years of monetization dry powder left. After that it's pretty much game over... and the monetary paradrop. For Sweden, however, it may be far too late. Then again, the locals don't seem too concerned.
Central Banks Have Failed Because They Can't Push Wages Higher (待审核) 2014-12-11 11:33 Central Banks Have Failed Because They Can't Push Wages Higher Submitted by Tyler Durden on 12/10/2014 10:14 -0500 Abenomics B+ Central Banks China Consumer Prices ETC Free Money Japan Purchasing Power Yen Yuan in Share 20 Submitted by Charles Hugh-Smith of OfTwoMinds blog , You can print all the money you want, but it will never boost wages to keep up with prices. Central banks have been pursuing two goals for the past six years: ignite inflation and an expansion of debt that will supposedly generate "growth." Despite squandering trillions of dollars, yen, yuan and euros, central banks have failed to ignite sustainable inflation or growth. There's nothing mysterious about their failure: you can't get "good" inflation or growth if wages are stagnant or declining. The central banks don't bother to distinguish between "good" and "bad" inflation: any and all inflation is considered not only wonderful but essential to propping up the Ponzi scheme of debt-dependent consumption, a dynamic I described in Central Banks Create Deflation, Not Inflation. "Good" inflation is wages rising faster than prices. When wages rise faster than consumer prices, households have more money to spend on consumption, and it's progressively easier for them to pay down debt and support additional borrowing. "Bad" inflation is prices rising while wages stagnate. In "bad" inflation, prices keep rising as central bank money-printing devalues the currency, but wages don't rise along with prices. As a result, wages decline in real terms, i.e. purchasing power. In Japan, where the central bank and government have struggled for years to generate price inflation as the means to "re-start growth," wages have fallen by 9% in real terms since 1997. ( source: Voodoo Abenomics: Japan's Failed Comeback Plan Foreign Affairs) I explain this in further depth in Inflation Is Not "Growth" (July 23, 2014). These charts reflect the stagnation of American wages and household incomes. source: Rising Wages Where? Real Wages Post First Annual Decline Since 2012 Real household income has declined across the entire income spectrum: Deduct healthcare expenses and debt service, and what's left of wages for the rest of life's expenses is tanking: Courtesy of longtime correspondent B.C.: Meanwhile, the purchasing power of wages is in steady decline: source: What Inflation Means to You: Inside the Consumer Price Index (Doug Short) The point is that lowering interest rates to zero and issuing unlimited free money for financiers to generate asset bubbles has had a negative effect on wages and household income. This is not accidental or bad luck-- central bank money-printing and bond-buying have not had any positive effect on wages because they cannot possibly have any positive impact on wages. In effect, central banks have been trying to pound nails with a handsaw: they don't have the tools to counteract the deflationary influences of labor surplus. Wages are stagnating/declining not because money isn't cheap enough or assets aren't high enough; wages are in structural decline due to three factors: 1. Global wage arbitrage: everybody is competing with everyone else globally for work that is tradable or that can be commoditized 2. Costly human labor is increasingly replaceable with software and robotics 3. The rising costs of labor overhead (social welfare taxes, healthcare, etc.) push employers' costs higher even as employees' paychecks stagnate or shrink. These are global factors , affecting employers everywhere from the U.S. to China. No amount of liquidity or free money can reverse these structural trends. Frantic voices can now be heard suggesting central banks issue free money directly to households. Considering central banks have stolen hundreds of billions of dollars in interest from saver-households in the past six years, there is a painful irony in these calls for free money to households , now that free money for financiers has failed so catastrophically. A free money giveaway won't fix anything; all it would do is give households the means to pay down a bit of debt or make interest payments on subprime auto loans for another month or two. Free money giveaways are not a substitute for earned income. Debt jubilees won't work either, as all the debt that proponents want to cancel is an asset to somebody else--and often that "somebody" is a public or private pension fund or another worker's 401K retirement fund. The game has been lost, but central bankers are still on the field, wandering around in disbelief that their unspeakable powers to issue money and credit have failed. You can print all the money you want, but it will never boost wages to keep up with prices. Average: 4.714285 Your rating:None Average:4.7 (14votes)
Because Of The Fed "Mortgage Market Liquidity Is As Bad As When Bear Stearns Failed" Submitted by Tyler Durden on 11/05/2013 18:22 -0500 Bear Stearns Bond Moral Hazard REITs Russell 2000 in Share 0 Remember the main reason why the Fed should have tapered, namely the illiquidity in the bond market it is creating with its feverish pace of collateral extraction, and conversion of quality collateral into 500x fwd P/E dot com dot two stocks? Here to put it all in context is Scotiabank's Guy Haselmann: "Through its QE policy, the Fed buys $3 of mortgages for every $1 of origination. The consequence is that secondary mortgage market liquidity has been decimated: it is as bad as when Bear Stearns failed ." That's just MBS for now. However, since the Fed has refused and refuses to taper, the same liquidity collapse is coming to Treasury's first, then corporates, then ETFs, then REITs and everything else that the Fed will eventually monetize. Just like the BOJ. As a post script, here are some other observations from Haselmann: Moral Hazard has run wild due to Fed policies . Risk appetite, complacency, and market speculation are at elevated levels. Buyers are scrambling to find assets to buy. As a result, there has been a surge in debt issuance, especially of riskier securities like covenant-lite loans, leveraged loans, and payment-in-kind bonds. The Fed does not have an inflation problem, simply because the $3 trillion+ it has created out of thin air has not been lent into the fractional reserve system. In other words, the velocity of money has been falling. The lack of visibility health care costs, the national fiscal budget, the tax code, regulatory rules and economic growth generally (to name a few), is so widespread that it is impossible to assess the financial logic behind potential capital investment projects. When this uncertainty fades, the velocity of money will rise and the Fed’s ability to control inflation with be challenged accordingly. IPO’s have also come at a fierce pace, taking advantage of investors scrambling to put easy money to work; and who may not be giving enough attention to valuations and the risks involved. Market pundits seem to fuel investor complacency with daily statements that equity P/E’s are historically cheap. However, comparing today’s “new normal” growth trajectory to the high growth period of the 1990’s seems misguided. Furthermore, the current environment is unprecedented and the “E” is a rapidly moving target. The P/E’s of the top 50 Russell 2000 stocks is over 45. The P/E of Linkedin is 755, AOL’s is1278, Chipotle’s is 54. After Twitter’s IPO tomorrow, the stock will trade near 42X revenues (because it has no “E”). Now that is “cheap”- at least relative to where some stocks traded during the dot.com bubble. Average: 4.57143 Your rating: None Average: 4.6 ( 7 votes) !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisements - Login or register to post comments 4961 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility FRBNY President And Former Goldman Partner Dudley Discusses Politicization Of The Fed Guest Post: Goldman's Disinformation Campaign: Drilling Down Into The Documents Guest Post: 2011 - Catch-22 Year In Review Paul Volcker Blasts The Goldman Business Model, Moral Hazard, And Calls For A Return Of Glass-Steagall
The $3,200,000,000,000 Question: Why Housing Has Much More To Drop Before It Bottoms Submitted by Tyler Durden on 08/31/2012 09:44 -0400 Credit Conditions Great Depression Home Equity LTRO recovery It is no secret that having failed repeatedly at the trickle down aspect of QE1, QE2, Op Twist 1, Op Twist 2 (and implicitly LTRO 1 and LTRO 2) as it pertains to the man in the street (if not the man in Wall Street, who was subject to 1-2 years of subpar bonuses which have since regained their upward trendline), the last effort the central planners of the world, and the administration, have is to furiously do everything in their power to reflate housing one more time, following what is already a triple dip in home prices ever since the December 2007 start of the Second Great Depression. Which is why month after month we get seasonally fudged, conflicted and outright manipulated data from various sources how housing has bottomed, for real this time, and things are finally looking up. Remember: with any con game, the key word is confidence, and the US consumers need to regain their confidence. Sadly, as the following very simple chart and accompanying explanation, the answer to the housing question is only one: there will be no housing recovery until much more debt is eliminated. $3.2 trillion to be precise. Everything else is merely fits and spurts of upward action predicated by easy money hitting the market either directly, or via the "REO-to-Rental" stimulus program du jour, which lasts for a few months then promptly evaporates. The chart in question: And what it means: The standard wealth effect does not account for the role of credit availability, which can amplify the effect. When home prices are increasing and credit conditions are easy, households can more easily realize the appreciation in wealth. We saw this phenomenon during the boom when easy credit conditions allowed homeowners to use their homes as “ATMs.” The reverse is true as well; if credit conditions are tight while home prices are falling, households are stuck in their home and are forced to accept the decline in wealth. In addition, once home prices start to turn higher in an environment of tight credit, the ability to realize that appreciation is limited. This is the case today. Home equity lines of credit and cash-out refinancing has been minimal, even for those borrowers who are already in positive equity. This reflects the slow deleveraging process. Housing assets plunged 29% from the peak in mid-2006, but mortgage debt only edged down 8% from its peak in mid-2008. This has left the aggregate loan-to-value ratio at 60%. Prior to the crisis, the loan-to-value ratio averaged 40% (Chart 2). To restore a normal loan-to-value at the current level of housing wealth, households would need to pay down their mortgage debt by US$3.2tn. That's $3,200,000,000,000 in excess debt before true price clearing can commence. That's also more in debt than QE1 and QE2 combined have monetized so far. Good luck. Average: 4.70588 Your rating: None Average: 4.7 ( 17 votes) Tweet Login or register to post comments 8172 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: The twin lost decades in housing and stocks What Housing Recovery? Existing Home Sales Miss By Most In 2 Years LTRO Stigma Becomes Acute Days Ahead Of Second Operation The resurgence of the low down payment market Three Reasons Why The Housing Recovery Dream Is Overdone
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