Way to go, fellas. The FOMC minutes for the crucial March 2020 meeting further make a mockery of everything the central bank should stand for. Nowadays, the Federal Reserve is thought about in terms of its inflation and employment mandates. Nothing whatsoever to do with the monetary system, at least not directly. That’s the way they want it; officials can’t define let alone control money, so what else are they going to do? Make you think they can maximize employment with minimal inflation all by moving around one short-term rate from just outside the monetary zoo. That’s the puppet show; everything else is just added characters or theater enhancements. Including QE. This much was on full display in the first half of March. No matter the Fed’s move, global markets were lit up anyway.Read More »
Articles by Jeffrey P. Snider
On Sunday, Argentina’s government announced it was postponing payment on any domestically-issued debt instruments denominated in foreign currencies. That means dollars, just not Eurobonds. At least not yet. In response, ratings agencies such as Fitch declared the maneuver a distressed debt exchange.In other words, technically a default.Though this move was expected, still you have to appreciate the sensitivity. Argentina may be Argentina, but it is also the first of maybe eighty (actually the second, Lebanon already went first). The dominoes are falling, those with the biggest dollar shortage pushed toward that default window. The implications are for repo market collateral. The junk infection of 2016 and 2017 is coming back to haunt the real lender-of-last resort. Central banks like theRead More »
Toward the end of March 2012, then-Federal Reserve Chairman Ben Bernanke was busy with so many things. It wasn’t supposed to have been that way, not after two “massive” QE’s launched in the wake of the Great “Recession.” After all, V-shaped recoveries provide their own momentum upon which central bankers might piggy-back. In short, there shouldn’t have been any questions about recovery. Yet, these persisted into 2012 (and long after). In public as well as in private discussions, it never dawned on these people to connect the dots: how the constant need to attend to the global monetary system might have been the very reason for the lack of recovery energy. Deprive any animal of oxygen and watch how it doesn’t move very fast. The consequences were more than just perpetual monetary crisis,Read More »
image courtesy of DavidParkins.comRead More »
On Tuesday, March 18, 2008, the S&P 500 big cap stock index soared. By the end of closing that day, the index had added 4.2%. Investors were increasingly optimistic that new kinds of “stimulus” which had been hastily introduced over the prior few weeks and months would provide enough of a boost so that the economic and financial downside might be very small. It was the beginning of a rally which would last for two months. Bear Stearns had nearly failed during the weekend before the rebound, shocking news announced to the world on Monday, March 17. Yet, by the close of business Tuesday everything seemed fine. Something had changed, though it wasn’t clear just what that might have been. The 18th just so happened to be a regular FOMC meeting. The Committee decided in light of the priorRead More »
When it’s all over with, I think we’re going to find out we’ve all been unnecessarily harmed by two stochastic models. And in the greatest tragic irony of them all, it was entirely predictable. These statistical constructions can’t predict a thing, subject as they all are to GIGO limitations (Garbage In, Garbage Out). It’s the math which gives them the glow and gloss of science, yet the math is merely the means.Everyone had been panicked by the original modeled forecasts for COVID-19, including what’s being revealed as the ridiculous assumptions put together by the Imperial College of London. It had forecast something like 2 million deaths in the US and played a central role in scaring politicians and provoking such draconian responses around the world. The latest estimates are nowhereRead More »
Over the last five weeks, the Federal Reserve has been in crisis mode. As a consequence of all its balance sheet expansions, the expansive alphabet soup of programs, along with QE6, the level of bank reserves has risen by just over $900 billion. That’s the increase leftover for the banking system after everything adds up on the asset side and whatever gets subtracted as liabilities.Most people still call this money printing. Just shy of a trillion in five weeks blows away anything the central bank did during GFC1. From the week of AIG/Lehman until the middle of November 2008, a span of 10 weeks, Ben Bernanke’s FOMC increased the level of bank reserves from practically nothing to more than $600 billion. Powell has outdone him by an additional 50% in half the time. It has been so much soRead More »
The unemployment rate wins again. In a saner era, back when what was called economic growth was actually economic growth, this primary labor ratio did a commendable job accurately indicating the relative conditions in the labor market. You didn’t go looking for corroboration because it was all around; harmony in numbers for a far more peaceful and serene period.Ever since the Great “Recession”, however, the unemployment rate has really struggled. Nearly the entire way during this supposedly record-length labor market win streak the measure was entirely alone in its optimism. Even the Establishment Survey took (more than) a few breaks along the way (including since mid-2018).It didn’t start out like this; the unemployment rate behaved itself during the first part of GFC1. The labor force,Read More »
The Federal Reserve announced the Secondary Market Corporate Credit Facility (SMCCF) on March 23. The intent of this program was to calm the corporate bond market (secondary) then experiencing a massive blowout. Credit spreads of all kinds of corporate securities were exploding, the market in danger of completely shutting down.According to its latest balance sheet statement as of this afternoon, the Fed hasn’t purchased any assets. Nothing. Not a single penny shows up on the comprehensive compilation of H.4.1.The Fed’s stock of assets has swelled, of course, rising an additional $604 billion since last Wednesday; $361 billion more in UST’s, $55 billion in added MBS, even $19 billion and $40 billion from the Primary Dealer Credit Facility and Money Market Mutual Fund Liquidity Facility,Read More »
Gross FIMA misconduct. Jay says, not my problem!
Fire the man. Immediately.
Following up on what I wrote earlier, there were no Lehman’s or anything like it during March 2020. Does that mean there hadn’t been a crisis? According to some, yes. If you were talking specifically about a bank crisis, then, of course, that would be true. There was no bank crisis last month.
It would be hard, however, to claim there wasn’t some kind of crisis. The stock market doesn’t just chop off 35% in a matter of days when everything is fine. Bond yields don’t collapse and oil prices crash. And all of these things at the very same time. An obvious global flush.
Lest we forget, too, the Fed was hard at work during this “it.” Starting with an emergency rate cut on March 3, quickly forgotten after “repo” bazookas, dollar swaps, QE4EVA, and a whole bunch of ’08 alphabeted abbreviations.
It used to be that at each quarter’s end the repo rate would rise often quite far. You may recall the end of 2018, following a wave of global liquidations and curve collapsing when the GC rate (UST) skyrocketed to 5.149%, nearly 300 bps above the RRP “floor.” Chalked up to nothing more than 2a7 or “too many” Treasuries, it was to be ignored as the Fed at that point was still forecasting inflation and rate hikes.
Total financial resilience otherwise.
Yesterday was, of course, another quarter-end. Rather than surge, however, DTCC reported that the GC repo rate (UST) was practically zero. Zilch.
According to their calculations, the weighted average interest rate for all of the repo transactions which took place within its purview on the final day of Q1 2020, a tumultuous three-month period if
The Washington Post began this week by noting how the US economy seems to have lost its purported zip just when it needed that vitality the most. Never missing a chance to take a partisan swipe, of course, still there’s quite a lot of truth behind the charge. An actual economic boom produces cushion, enough of one that President Trump and his administration may have been counting on it when opting for full-blown shutdown.
The coronavirus recession is exposing how the economy was not strong as it seemed https://t.co/ZEtH0vUJ2M
— The Washington Post (@washingtonpost) March 29, 2020
Instead, more and more it looks as if everything just crumbled like a sand castle exposed in the rain. And it’s not as if there weren’t warning signs; underneath the glowing headlines (many of them published byRead More »
It’s another day ending in “y”, therefore there must be some new liquidity scheme being announced by the Federal Reserve. For a crisis that many seem confident has been put in the past, the optimists still are going to have to factor that even US central bankers feel they have to keep pulling repo rabbits out of their…somewhere.
Today it is FIMA. Not just FIMA but the FIMA Repo Facility! The abbreviation stands for Foreign and International Monetary Authorities which once more uncomfortably points the world’s attention to US dollar conditions outside the United States. Offshore, you might even say.
Offshore and repo, imagine that.
Foreign officials. US Treasuries. Smooth functioning of financial markets. Temporary exchange in lieu of sale. International currency. What the hell is going on
India like many emerging market countries around the world holds an enormous stockpile of foreign exchange reserves. According to the latest weekly calculation published by the Reserve Bank of India (RBI), the country’s central bank, that total was a bit less than half a trillion. While it sounds impressive, when the month began the balance was much closer to that mark.
Over the last several crisis-filled weeks, officials in India have been fighting against a “sudden” and shocking plummet in the rupee. The other side of that is, of course, the rising dollar which, contrary to convention, is an indication of severe global monetary strain. QE’s matter less in the offshore shadows than they do in truth on the NYSE.
Trying to rescue the rupee before it did any further damage to the IndianRead More »
It’s one of those crisis-level-of-illiquidity things that if you heard about it in normal times it would make you shake your head in disbelief. During a full-blown meltdown maybe it’s not standard stuff, but given the chaotic conditions it doesn’t seem so preposterous, either. Negative convexity is an otherwise benign phenomenon in fixed income that when combined with a lack of liquidity can rip your throat out in a heartbeat.
The reason it kills is how it can act like proverbial quicksand; you don’t realize you are in big trouble until it’s too late, and by then you’re neck deep in a position you’ve no hope to escape except by taking huge fire sale losses you’d be lucky to survive.
The most famous example of this, and it’s not really well-known, was Morgan Stanley in the late months of
I would write something snarky about bank reserves, but why bother at this point? It’s already been said. If Jay Powell doesn’t mention collateral, no one else does even though it’s the whole ballgame right now. Note: FRBNY’s updated figures shown below are for last week.Read More »
You’ve no doubt heard about the jobless claims number. At an incomprehensible 3.28 million Americans filing for unemployment for the first time, this level far exceeded the wildest expectations as the economic costs of the shutdown continue to come in far more like the worst case. And as bad as 3mm is, the real hidden number is likely much higher.
As next week’s tally will certainly be.
The dislocation is upon us, but that’s no longer our major concern. Having been left no chance to avoid one, the only issue now is how quickly we get out from under it. If 20 million American workers maybe more are dispatched to the unemployment line in the weeks ahead, how soon do we get them back to work?
Just as important, do they all get a chance to go back?
See, that’s the thing about GFC1 and its
Government securities have become so scarce that it is driving down repo rates. A collateral shortage that has become so acute, money dealers won’t part with their stock of government securities no matter what the price. Stop me if you’ve heard this before.
Except, we’re talking about Japan and JGB’s here rather than UST’s. The trick is that both types of government bonds are being hoarded for US$ purposes. The shortage of JGB’s is due to Japanese dealers desperate to source US$ funding.
With so many Japan governments being swapped in US$ money markets, borrowing in yen repo has dwindled pushing the JSDA Tokyo Repo Fixing index below zero and down to a ridiculous -0.88% in yesterday’s trading. Yep, a negative repo rate.
It has become such a big problem that Japanese dealers are, according
If the Fed has promised to print an unlimited supply of money, then why are inflation expectations at crisis lows and falling? At the same time, there are still-growing signs of illiquidity and an interbank crackup. Bazooka after bazooka, yet they don’t seem to be having much effect.
That’s true domestically but more so offshore. You may have seen references to something called the OIS-FRA spread recently as it has gone vertical and refuses to normalize no matter what Jay Powell announces. It’s really much the same as the TED spread, only substituting the Overnight Index Swap (OIS) where TED employs the 3-month T-bill.
Both are measured against 3-month LIBOR which is the main offshore unsecured interbank eurodollar rate. OIS is a futures market that prices what participants think the Fed
There are three things the markets have going for them right now, and none of them have anything to do with the Federal Reserve. More and more conditions resemble the early thirties in that respect, meaning no respect for monetary powers. This isn’t to say we are repeating the Great Depression, only that the paths available to the system to use in order to climb out of this mess have similarly narrowed.
That’s what’s ultimately going to matter the most, not what comes next but what comes after what’s next. This is why it is paramount to pay close attention to longer term indications (and stocks are not among this group).
Those three positive factors begin with the intense buying interest in stocks including short covering. Apparently, the sharp drop on Wall Street has left many especially
Joining me for my inaugural podcast to try to make sense of this GFC2 (and more) is my colleague and fellow monetary enthusiast Emil Kalinowski. We talk repo, collateral, and why there are only dudzookas from the Fed.
It’s also the start and tip of the ice berg for what we hope will become a much bigger project: an expansive, collaborative Eurodollar University.
We’ll have much more to say about that plus making sense of this crazy world in what will be a regular, weekly feature expanding into a more comprehensive platform. There’ll be guests, more content, and eventually regular segments like reader/listener/viewer questions and feedback.
This is your looking glass, the open window invitation to begin (or further) exploring the rabbit hole of monetary scholarship so few others seem
Why didn’t they think about this first? All of a sudden, with markets in the toilet (especially stocks), everyone is itching to get the economy back up and running. The first real peeks at what’s happened to it (as we’ll see in a minute) have definitely contributed to what seems to be an about-face.
Many are starting to ask if the damage from shutting down the economy for a prolonged period will end up being worse than the pandemic itself. It’s a legitimate question.
To state the obvious upfront: this was and remains a no-win situation. Either way, significantly bad things were going to happen. This was one of these pick-your-poison scenarios usually reserved for science fiction novels, to figure out what has the greatest chance of being the least evil except in a real-world setting filled
Faced with severe economic distress and a global market meltdown, they promised that it would be big. Massive fiscal “stimulus”, however, might come at a price. In the short run it was necessary, according to the orthodox view. When a crisis shows up you don’t worry about how to pay for things.
Once all is said and done, the current “stimulus” bill will probably dwarf the last one – not that size will make a lick of difference, mind you. There was a reason that prior effort ended up being ridiculed so much (its bullcrap was the only part of it which was shovel ready).
It seems quaint after a dozen years and no economic growth, but at the depths of the Great “Recession” critics of the American Reinvestment and Recovery Act warned that it would surely hasten the long-predicted return of the
For several weeks now, the Federal Reserve has launched one bazooka after another. Officials there keep reassuring the markets, and the public, they’ve got an unlimited toolkit. However, the fact that they feel it necessary to keep showing you is a warning sign, especially how quickly each one is forgotten and overshadowed by the latest Big New Thing.
The reason why is simple: they are all the same thing just with different letters and bigger numbers. Central bankers can explore infinity along an X-axis not realizing they live in at least two dimensions with also a Y-axis to consider.
When the level of bank reserves starts to rise and accelerate, that’s supposed to be a good thing. It’s not. All that balance tells you is what the Fed is doing, not how successful it might be at its
I knew long before they came out that it was going to be a shitshow, pardon my French. You don’t screw up that badly and let the worst global monetary crisis in four generations happen on your watch with it having been any other way. So, when the FOMC transcripts for 2008 finally came out early in 2014, I knew going into it I would find so many cringeworthy, infuriating discussions transcribed within the hundreds of pages.
I just didn’t expect the level of total incompetence on display. And it wasn’t just the level, but more so the frequency. I figured that there would be some moments of clarity for policymakers, perhaps even soul-searching and honest admissions of how far behind they all were. Nope.
One head scratcher after another. Meeting after meeting. Emergency conference calls filled
The Federal Reserve conducts reverse repo operations (RRP) daily, and has for more than half a decade. These are very different from the “liquidity” operations the central bank has been deploying since last year’s rumble in the repo market; the latter merely mimic a repo transaction and are intended to push bank reserves the Fed creates on the spot out into the Primary Dealer network.
A reverse repo, as the name implies, is the reverse of that transaction. Its purpose therefore is not bank reserve-type liquidity but to establish a floor for depository institutions. Those who are cash rich have the option of “lending” that cash to the Fed receiving in return SOMA holdings as collateral.
Given that option, who in their right mind would ever lend into money markets at a rate less than the
Forward-looking data is starting to trickle in. Germany has been a main area of interest for us right from the beginning, and by beginning I mean Euro$ #4 rather than just COVID-19. What has happened to the German economy has ended up happening everywhere else, a true bellwether especially manufacturing and industry.
The latest sentiment figures from ZEW as well as IFO are sobering. Taking the former first, it had been quite buoyant last year on the false promises, I believe, of last year’s ECB QE introduction. The sentiment index had jumped positive though frustratingly in the same way it had falsely or prematurely done so in the past. Survey respondents seem to love their “stimulus” even after watching it fail to stimulate anything twice before.
The ZEW sentiment index was already on its
The front end of the yield curve is flattened out near enough to zero. While the bill yields I noted this morning did not finish the day session with a negative, they were close and several have traded that way in the after hours session (as of this writing, the benchmark 3-month bill is -1 bps).
This thing doesn’t end until they start doing something about the collateral situation. It is what has thwarted everything the Fed has thrown out there so far. Either this thing just keeps going and finally squares itself whatever level of destructive liquidations along the way, or officials ditch their silly, outdated monetary playbook and start doing some real offshore, shadow math.
So far, Federal Reserve officials have re-applied the PDCF because they just don’t know what else to do. That’s