Bonds & Interest Rates

Groundhog Day at the Fed

Posted by Peter Schiff - Euro Pacific Capital Capital

on Tuesday, 22 September 2015 13:57

UnknownEvery dictator knows that a continuous state of emergency is the best means to justify tyrannical policies. The trick is to keep the fictitious emergency from breeding so much paranoia that routine activities come to a halt. Many have discovered that its best to make the threat external, intangible and ultimately, unverifiable. In Orwell’s 1984 the preferred mantra was “We’ve always been at war with Eurasia,” even though everyone knew it wasn’t true. In its rate decision this week the Federal Reserve, adopted a similar approach and conjured up an external threat to maintain a policy that is becoming increasingly absurd.  

 
In blaming its continued inaction on “uncertainties abroad” (an excuse never before invoked by the Fed in the current period of zero interest rates), the Fed was able to maintain the pretense of a strong domestic economy, and its desire to lift rates at the earliest appropriate moment while continuing the economic life support of zero percent rates. Unbelievably, the media swallowed the propaganda hook, line, and sinker.  
 
Over the summer it all seemed so certain. In mid-August the Wall Street Journal conducted a poll revealing that 95% of economists expected a rate hike by the end of 2015, with 82% expecting the first move to come in September. On July 29, Marketwatch reported that changes in Fed language were the “smoking gun” that made a September move a certainty. I was one of the few who publicly predicted that all the tough talk from the Fed was a bluff, and that there would be no hike in 2015. For taking that stance, I was largely ignored and ridiculed. In a July 16 interview on CNBC’s Futures Now (I am no longer invited to be on their television broadcasts), pundit Scott Nations took me to task for making the “outlandish” suggestion that the Fed would not raise in 2015, saying (to paraphrase):
 
“If price is truth and Fed funds futures are the collective wisdom of everybody in the world, and they are absolutely a lock for the Fed to raise rates by the end of the year, why is everybody else wrong and you are right?” 
 
But now, in mid-September, it has all changed, far fewer economists expect a hike this year. However, despite this dramatic reversal, few have downgraded their forecasts or weakened their belief that the Fed remains committed to tighten policy…eventually. In other words, the Fed has achieved a complete communications victory.
 
Just like it has in prior statements, the Fed painted a picture of a stable and growing economy that was ready for a hike. In fact, in her press conference, Janet Yellen said that the Fed was “impressed” by the strength of the domestic economy. Although such statements began to resemble the film Groundhog Day, no one seems to tire of it.
 
A cornucopia of metaphors should have come to mind: The Fed’s bite had failed to live up to its bark; its “open mouth” operations wrote a check that its Open Market Committee was unable to cash; the Fed has become Lucy of the comic strip Peanuts, always promising to hold the football for Charlie Brown to kick, but always taking it away before he kicks it. Instead, the dominant theme of the coverage was that the Fed’s understanding of the global economy was just better than the rest of us. It apparently understood that a 25 basis point increase in rates in the U.S. could ripple through to the world markets and could potentially push China’s tottering stock market into the abyss. That was a risk it believed was not worth taking.
 
To keep the story line going requires that the steady torrent of negative data be ignored (see manufacturing data in September Manufacturing Business Outlook Survey of Philly Fed]. Similar weakness is evident in business investment, productivity, and consumer confidence numbers. Based on those data sets, conventional Keynesian “wisdom” suggests the Fed should be preparing a fresh round of stimulus, not readying its first economic sedative in nine years.
 
The big news is the introduction of “international developments” as an ongoing input into the Fed’s rate deliberation process. This addition allows the Fed nearly limitless latitude to perpetually kick the can down the road. After all, it is a great big world, and it will always be possible to find a problem somewhere. A Reuters article issued after the decision describes the new reality (9/18/15, Howard Schneider):
 
“It is a situation that could leave the Fed stranded in its hunt for a rate liftoff until the entire global economy is growing in sync, and the horizon is clear of risks.”
 
So there you have it. The Fed is no longer just the central bank of the United States, but the central bank of the entire world. As such it will need to consider any possible negative impacts, anywhere, before it pulls the trigger. This isn’t just moving the goalposts; it is dismantling them completely, putting them in crates, and losing them in a government warehouse…much like the Ark of the Covenant at the end of the first Indiana Jones movie. 
 
The height of yesterday’s absurdity came during Janet Yellen’s press conference when Ann Saphir from Reuters asked her about the possibility that interest rates could stay at zero “forever.” While characterizing that likelihood as “extreme,” Yellen incredibly stated that she could not rule out the possibility. Of course the absurd suggestion that American civilization may never see rates above zero did not even raise eyebrows in the mainstream media. But the statement itself raises some interesting questions about Yellen’s actual thinking. First, how can she really be contemplating at 2015 rate hike, if she cannot even rule out the possibility of rates remaining at zero forever? Second, is she really that naïve and arrogant to believe that currency markets would allow the Fed to hold interest rates at zero indefinitely, without creating a dollar crisis, even if the Fed wanted to hold them there?
 
As I have maintained continuously, rate hike talk from the Fed is just a bluff to disguise its inability to tighten, as even small increases could be sufficient to prick the biggest bubble it has ever inflated. It is no coincidence that the stunning 170% increase in the Dow Jones, that occurred between March 2009 and the end of 2014, happened while the Fed was stimulating the economy almost continuously with QE, and that the rally came to an abrupt end when the QE stopped.
 
The recent 10% correction on Wall Street confirms to me just how sensitive the markets remain to the prospect of any rates higher than zero. In reality, that sell-off was a much greater factor than China in keeping the Fed quiet. That steep correction occurred at a time when most forecasters believed that a September hike was in the cards. For years, they had known that a rate hike was coming, but they always thought it would arrive when the economy was healthy. But when the big day became a clear and present danger, and the economy was still less than optimal, markets began to panic. It was only when Fed officials came out with publicly dovish statements that the sell-off ended. Despite this obvious connection, the markets are still blaming China, despite the fact that big sell-offs in China had been occurring for much of 2015 without sparking follow on panics in the U.S. 
 
As a result, it should be clear that ongoing Fed decision-making is not just “data dependent” (and now we are talking about international, not just domestic, data), but also “market dependent,” meaning the Fed won’t raise rates if markets sell off sharply on expectations that it will raise. Given these impossible conditions, perhaps a perpetual zero rates are not so outlandish. But the reality is Central banks can’t really control interest rates across the spectrum, just the short end of the curve…when markets really panic, they won’t be able to stop economically devastating interest rate spikes on the long end. 
 
In the meantime, I can only hope that the foreign exchange and commodity markets are finally getting the picture that the Fed appears impotent. The tremendous rally in the dollar over the past 18 months was predicated on the belief that interest rates would be rising in the U.S. just as they were falling everywhere else. Now that that premise is in tatters, the dollar should be giving back its undeserved gains. Recent moves in the foreign exchange market reveal that this is the case.    
 
When the year began, opinion was divided between those who thought the Fed would move in March, and those who thought it wouldn’t happen until June. When June came and went, September became the odds-on favorite. Now those same experts are once again divided between December and sometime in 2016. When will these “experts” finally connect the real dots and discover that the monetary medicine that the Fed has doused over the economy since 2008 has only created a weak and utterly dependent economy. A rate hike is supposed to be a signal that the economy has a clean bill of health. But as the patient fails to recover, another dose of QE will be just what the doctor orders.

 
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Fed Makes Same Mistake as It Did in 1927

Posted by Martin Armstrong - Armstrong Economics

on Friday, 18 September 2015 14:12

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The Federal Reserve yielded to international pressure, making the very same mistake that it made during 1927. Back then, there was a secret meeting and the Fed agreed to lower U.S. rates to try to help Europe to deflect capital inflows back to Europe. The exact opposite unfolded in the aftermath when even more money abandoned Europe and flowed directly into the U.S. share market.

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In 1927, the Fed lowered U.S. rates in the middle of an economic debt crisis, which is the same path taken today. It is very curious how history repeats. We have just witnessed the Fed yield to international pressure once again. In doing so, they are condemning the elderly and U.S. pension funds to financial doom by setting in motion the next financial crisis.

also from Martin: 

Sovereign Debts: How Defaults May Unfold

The Worst-Case Scenario For The Fed

Posted by Eric Parnell

on Thursday, 17 September 2015 14:12

UnknownSummary

The Fed is considering raising interest rates this week.

The Fed desperately wants to raise interest rates, not because the economy is so strong but so that they can have a policy buffer in preparation for the next recession.

But after too many years of waiting and coddling the markets, they are now very late in seeking to make such a move.

A misstep on Thursday could effectively close the window on their ability to raise rates going forward.

…..continue reading HERE

Big Banks Cutting Tens Of Thousands Of Jobs; Huge Implications

Posted by John Rubino - DollarCollapse.com

on Wednesday, 16 September 2015 8:10

sdfSome major banks — which over the past few decades have grown into the biggest financial entities the world has ever seen — appear to have hit a wall, and are now shedding tens of thousands of workers. Some recent examples:

Barclays plans to cut more than 30,000 jobs

(CNBC) – Barclays plans to cut more than 30,000 jobs within two years after firing Chief Executive Antony Jenkins this month, The Times reported on Sunday.

This redundancy program, which could reduce the bank’s global workforce below 100,000 by 2017 end, is considered as the only way to address the bank’s chronic underperformance and double its share price, the newspaper said, citing senior sources.

These job cuts are likely to affect staff at middle and back office operations, where largest savings are achieved, the Times said.

The paper said that a potential candidate, who would replace Jenkins, is expected to ax jobs much faster and more deeply than the ousted boss.

Deutsche Bank to cut workforce by a quarter

(Reuters) – Deutsche Bank aims to cut roughly 23,000 jobs, or about one quarter of total staff, through layoffs mainly in technology activities and by spinning off its PostBank division, financial sources said on Monday.

That would bring the group’s workforce down to around 75,000 full-time positions under a reorganization being finalised by new Chief Executive John Cryan, who took control of Germany’s biggest bank in July with the promise to cut costs.

Deutsche’s share price has suffered badly under stalled reforms and rising costs on top of fines and settlements that have pushed the bank down to the bottom of the valuation rankings of global investment banks. It has a price-book ratio of around 0.5, according to ThomsonReuters data.

Deutsche is mainly reviewing cuts to the parts of its technology and back office operations that process transactions and work orders for staff who deal with clients.

A significant number of the roughly 20,000 positions in that area will be reviewed for possible cuts, a financial source said. Back-office jobs in the group’s large investment banking division will be concentrated in London, New York and Frankfurt, the source said.

PostBank has about 15,000 positions, pointing to roughly 8,000 layoffs at Deutsche once the unit’s spinoff is completed as planned in 2016.

UniCredit plans to cut around 10,000 jobs

(Reuters) – UniCredit (CRDI.MI), Italy’s biggest bank by assets, is planning to cut around 10,000 jobs, or 7 percent of its workforce, as it seeks to slash costs and boost profits, a source at the bank told Reuters on Monday.

The planned cuts will be concentrated in Italy, Germany and Austria, several sources said, adding that they include 2,700 layoffs in Italy that have already been announced.

A UniCredit spokesman declined comment beyond noting that the bank’s CEO Federico Ghizzoni had on Sept. 3 said there were no concrete numbers on potential lay-offs, after a report said it was considering eliminating 10,000 positions in coming years.

UniCredit, which has 146,600 employees across 17 countries, is under pressure to boost its profits as low interest rates are expected to keep hurting its earnings in coming years.

Such a sudden, widespread retrenchment can mean several things:

  1. Technology is making a lot of back office staff redundant. That’s reasonable and to be expected. Automation of knowledge work will be one of the big stories of the coming decade and finance is a prime target. A quick look at the growth of crowdfunding (from zero in 2009 to an estimated $50 billion in peer-to-peer loans in 2016) tells you all you need to know about the future of conventional bank lending.

  2. The profitability of core banking operations is going to crater in the coming year and these guys are trying to get out in front of it — while hoping to hide the deterioration within massive workforce reduction write-offs.

  3. The availability of good jobs for European college graduates — already too low — is going to shrink further. It’s virtually impossible for a finance-dependent system to grow while major banks are shrinking, so Europe will remain stuck in neutral while its governments pile up ever-greater debts and more peripheral countries join Greece on the public dole. And the euro will, at some point, be devalued suddenly and drastically.

  4. The other big banks can’t be in much better shape, since they’re all operating in the same zero-interest rate, low-growth world. In the US, where auto loans have been a singular bright spot, what happens when cars stop selling? We may be about to find out. See U.S. factory output declines on sharp drop in auto production.

  5. The global recovery is a mirage. Six years in, with stock and bond prices near record levels, demand for support staff in deal-driven entities like banks should be rising. Layoffs on this scale are bottom-of-a-recession events.

Add it all up, and significant Fed tightening looks like a hard sell. The opposite is much more likely.

Life Is Uncertain and So Are Interest Rates

Posted by Frank Holmes - US Global Investors

on Sunday, 13 September 2015 10:10

COMM-US-Global-Will-Never-Forget-09112015Today is an emotional day for Americans. In an instant, on a beautiful blue sky morning 14 years ago, all of our lives changed forever. 

September 11 is a day when we pause and reflect on where we were when—when the towers came crumbling down, when our nation’s capital came under attack, when so many lives were cut short, when so many heroes rushed in. 

I was in Manhattan with colleagues that day, attending a financial industry conference uptown. At the time, we didn’t know how fortunate we were that our meeting had been changed from 9:00 a.m. to 11:00 a.m. I was en route when everything stopped, and soon after, I saw all the people covered in dust and walking home across the bridge. The cell phones in the city stopped working, but because mine had a San Antonio area code, I was able to get through to the office to let everyone know we were safe.

….continue reading this very comprehensive SWOT analysis of all markets from Stocks, The Economy and Bond Market, Gold, Energy, China, Europe, Leaders, Laggards. Its long and detailed weekend reading – Money Talks Editor