Showing posts with label Bank of Japan. Show all posts
Showing posts with label Bank of Japan. Show all posts

Wednesday, April 23, 2014

The Shoe Dropped. What's Next?

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)


A persistent presumption here is the limit to U.S. government bond issuance that (important qualification coming) can be traded at government-manufactured rates.  "March 2014 - One Month Closer," issued the reminder: "Bond yields, across the spectrum, have fallen from 4.8% to 2%. In an open market, bond investors handicap their purchases according to a calculated risk. This is a rigged market, though. The rising quantity has produced worse quality, but central planners disguise that fact." The conclusion to "The Economist's Sell Signal," (November 30, 2013) proposed a shorthand approach to investing as we approach the inevitable moment when non-government market participants say "enough": "The Economist's article was unbalanced, sloppy, and abandoned by the starting team: much like the world's markets. A suggestion for current asset allocation: where would you want your money today if you knew interest rates will rise by 4.0% tomorrow?"

            In spectacular fashion, markets did say "enough" in Japan last week. Yet, interest rates did not move. Recall "important qualification coming" in the paragraph above. On Monday, April 14, 2014, and, into Tuesday, April 15, 2014, there was not a single bid for the Japanese 10-year bond. John Rubino, at DollarCollapse.com, in "Amazing Story from Japan," quotes Reuters: "The Bank of Japan's massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day...." Rates did not move because, for every 10-year Japanese government bond seeking a purchaser, the Bank of Japan created electronic yen (it "printed money") and paid exactly the price necessary to hold the 10-year rate at 0.6%. The looming question is how long the Bank of Japan (or, in an entirely imaginable similar situation, the Federal Reserve) will continue printing (electronically crediting yen or dollars to the seller) when the market decides: "I'm outta' here!"

            The Japanese experiment, described and condemned in "We Are All Lab Rats Now," is an exaggerated form of the Federal Reserve's extermination program. Keep in mind how Fed officials brag of their successful "liquidity" apparatus in light of the overdrive, Bank of Japan, balance-sheet expansion. Since March 2013, the BoJ balance sheet has blossomed from ¥125 trillion ($1.23 trillion) to ¥200 trillion ($1.96 trillion) of Japanese government bonds. Bank of Japan Governor Haruhiko Kuroda, more recently labeled Hari Kari Kuroda (that is: here and now) received carte blanche authority to inflate Japanese prices. Inflation is "gaining traction" as economists say, but the results have been exactly and completely in contradiction to Kuroda's promises.

A year into the Kuroda regime, the Bank of Japan has strangled markets. Quoting Rubino: "The fall in market liquidity looks set to intensify as the BoJ has vowed to continue its aggressive buying for at least another year, with market players expecting it to expand its easing some time later this year.... The increasing dominance of the BoJ in the market [has] resulted in a shortage of tradable bonds in the market, reducing trading flows between market players. Brokers are reluctant to go short, fearing that they cannot buy back when they want. On the other hand, few investors are willing to chase prices higher, when the 10-year bonds yield about 0.6%."

Kuroda must think this is a dream come true - the boost to inflation-traction he is supplying by printing enough money to prevent yields on $10 trillion worth of Japanese government bonds from rising. He now holds 20% of Japanese government bonds.

Richard Fisher, President of the Dallas Fed, delivered a presentation in his district on April 16, 2014. Slide number six is appropriate to the current discussion. There is no transcript to this talk on the Dallas Fed website. The title may be ironic or sarcastic, evidence suggested below:

"The U.S. Credit Markets Are Awash in Liquidity"

* As of March 2014, the Fed's par holdings of fixed-rate MBS [mortgage-backed securities - FJS] exceeded 30 percent of the outstanding stock of those securities.

*The Fed owns just shy of 24 percent of the stock of Treasury coupon securities. [The BoJ only holds 20% - FJS]

* Having purchased Treasuries further out on the yield curve, and done so in size, the Fed has driven nominal interest rates across the credit spectrum to lows not seen in over a half century.

* This has allowed U.S. businesses to restructure their balance sheets and creatively manage their earnings.

Source: Federal Reserve Bank of Dallas


On the final point, Fisher has criticized Federal Reserve interest-rate suppression for suctioning capital towards wasteful and misleading operations. Misleading have been the operating-earnings charades (one-time write-offs, every quarter) and substitution of debt for equity to boost stock-option payouts. The April 22, 2013, King Report states "since 2009, total revenue growth [of S&P 500 companies] has grown by just 31% while profits have skyrocketed by 253%." Thus, evidence (as promised) that Richard Fisher may not have discussed Fed interference with equanimity.

The Dallas Fed president is unique, among FOMC members. He actually managed money, including distressed debt, so knows cycles cannot be avoided. Suppression of cycles distorts markets. Market suppression inevitably leads to panic. "Going for Broke" (January 30, 2013) laid out how the Greenspan Fed advertised its liquidity prowess, which inevitably turned into its opposite: "When 'ample liquidity' is the rationalization for participating in detached markets, you can depend upon it: the liquidity will not be there when it is needed most. Following the Long-Term Capital Management hullabaloo in 1998, Marty Fridson, then at Merrill Lynch, now proprietor of FridsonVision LLC, etched this identity in granite: "[LTCM] forgot that in times of panic, all correlations go to one.'"

            Federal Reserve Chairman Janet Yellen can really test her "Communications in Monetary Policy" thesis when all government and mortgage bondholders seek dollar redemption as correlations are moving towards one.

Friday, June 21, 2013

Numbers and Prices

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The Federal Reserve is fully committed to its asset-propping strategy: It will raise the economy by lifting asset numbers.

            This is where it is important to remember the Federal Reserve does not care about economics. The economists at the Fed are central planners. It's not that they don't like economics, they simply are not interested in, so ignore, economics. Those of us not so inclined think of asset numbers as prices, be they shares in the S&P 500 or wheat germ. But the Fed operates in an abstract world; humanity is a distraction.

            At the moment, the Fed's asset-lifting model deigns that the economy, which is a derivative of asset-lifting, will pass muster when the S&P 500 rises another 500 points and house prices rise another 11%.

            These numbers have been typed into the Fed's model. It summons variables to achieve those levels. One supposes the waning influence of QE (looking at the increasing units of QE needed to lift stocks or houses to a specific number) demands a higher level of QE.

            The Fed is currently buying $85 billion of Treasuries and mortgages each month. This will remove about $1 trillion of securities from the market in 2013 (85 x 12). The effort should be aiding its residential real-estate goal, since a large part of the U.S. mortgage market is moving onto the Fed's balance sheet.

            Yet, there are reasons to think the house-lifting program is waning. One of the more interesting developments is the widely reported tactic of house builders holding inventory off the market, or not building houses, to raise prices. Whether true or not (or, whether it matters or not), there seems to have been no reaction. What would Eric Holder's Once-in-Awhile Justice Department do if Big Oil or Big Pharma announced it was doing the same? This is another (supposed, in this case) example of tolerated flim-flammery in the Crony Capitalist growth model.

            The Fed has not boosted, nor talked beyond, its $85 billion a month asset-absorption (and money-printing), since, in April 2013, the Bank of Japan commenced its $80 billion a month of magic wand waving. That is $165 billion of magic money emitted each month by the central banks of the U.S. and Japan. They are not alone: "ECB Says Bond-buying Program is Unlimited" (Reuters, June 9, 2013)

The Japanese experiment is not working as planned, maybe it's early, or maybe another $80 billion a month will be introduced. Some recent headlines: "Yen Drops After Abe Adviser Says BOJ Can Do More" (Bloomberg, May 28, 2013) "BOJ Beat: Mortgage Rates Rise" (Wall Street Journal, June 1, 2013) "Bond Fund Smack-down as 10-Year Treasury Yield Surges" (Reuters, May 29, 2013) For the callous observer, watching everything Chairman Bernanke taught, wrote, and preached turn into its opposite is a delight.

            Continuing in that vein, asset exuberance is slowing down. A new issuance of Rwanda bonds would probably not pass muster today.  (See: "Big Money") Some recent headlines show the change in tone: "Apple Wows Market with $17 Billion Bond Deal" (Reuters, May 1, 2013) "Rising Mortgage Rates, Home Prices a Lethal Brew" (Yahoo, May 29, 2013) "U.S. Bond Funds Suffer Second-biggest Withdrawal Since 1992" (Bloomberg, June 7, 2013) "This is Increasingly Looking Like an Emerging Market Meltdown" (Business Insider, June 11, 2013) "Global Sell-off Hits U.S. High-yield Market (TD Waterhouse, June 11, 2013) "Apple Bonds Lose 9% in Six Weeks" (CNBC, June 12, 2013) "Rising Mortgage Rates Elicit Fears They Could Hurt Recovery" (Washington Post, June 18, 2013) "Mortgage-bond Failures Reach Most in 2013 as Prices Drop" (Bloomberg, June 20, 2013) "Fed Chairman Bernanke Optimistic About the Economy" CBN News, June 20, 2013) "Drunken Ben Bernanke Tells Everyone at Neighborhood Bar How Screwed Up the Economy Is" (The Onion, August 3, 2011)


            Central planning is failing. This means we will get more of the same. After that, the central banks plan to hand out money. Gold fell below $1,300 and silver below $20 on June 20, 2013. Get it while it's cold.