Over the past few weeks, attention in financial markets has once again turned to the prospect of the Federal Reserve tapering back its monetary stimulus, spurred on by public speeches from Fed presidents and articles fromWSJ reporter Jon Hilsenrath, who is viewed as close to the central bank.
As concerns that the Fed may begin exiting the bond market this year have risen, investors have unloaded bonds, causing a swift back-up in interest rates.
Of course, if that sort of thing happens when there is merely talk of tapering stimulus, investors rightfully wonder what would happen if the Fed were to actually begin tapering.
Société Générale fixed income strategist Vincent Chaigneau writes in a note to clients that “this was just a sneak preview of the horror movie that we see coming out this summer: a nasty Treasury sell-off.”
Less, not more QE. Two weeks ago in the FI Weekly, we thought it was premature to be aggressively short, but we presented trades that were most appropriate to position early for a sell-off. The sell-off did come early….
Three Federal Reserve regional bank presidents called for phasing out the Fed’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.
Dallas Federal Reserve Bank President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”
The Federal Open Market Committee said May 1 it will keep up its monthly purchases of mortgage bonds and $45 billion in Treasuries, and is ready to increase or reduce the pace in response to changes in the outlook for inflation and the labor market. Plosser, Lacker and Fisher don’t hold a policy vote this year.
The central bank’s so-called quantitative easing has pushed mortgage rates close to record lows, fueling demand in some housing markets as buyers compete for a tight supply of properties. While values remain well below their peak, 133 of the 150 metropolitan areas tracked by the National Association of Realtors had price increases in the first quarter from a year earlier. Areas such as San Francisco, Atlanta, Phoenix and Reno, Nevada, saw jumps of at least 30 percent…..
The return of confidence and healthy growth in the US risks setting off a “bond crash” comparable to 1994 and triggering a string of upsets across the world, Bank of America has warned.
Below are the notes from the Fed’s December 2012 FOMC minutes (the meeting during which the Fed announced QE 4). I’ve added highlights to emphasize the shift in tone.
With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy.
Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.
Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.
There are three key implications here:
1) The Fed acknowledged that QE causes inflation expectations to rise (red text)
2) The Fed was divided on the efficacy of QE (green text)
3) The Fed was not committed to employing QE forever despite its public declarations to that effect (blue text)
Ex-Soros Advisor Sells “Almost All” Japan Holdings, Shorts Bonds; Sees Market Crash, Default And Hyperinflation
Previously, we have pointed out why Japan’s attempt at reincarnating its economy, geared solely at generating a stock market-based “wealth effect”, and far less focused on boosting the country’s trade surplus or current account, is doomed to failure, namely due the drastically lower equity participation by the general population and financial institutions in the country’s stock market. Sure, foreign investors will come and go renting each rally for a period of time, but unless the local population participates in the “reflation attempt” (which has already sent the price of luxury goods, energy and food through the rood), or in other words change the behavioral patterns of two generations of Japanese in under two years, the inflationary shock will simply leads to a loss of faith in the government and ultimately Abe’s second untimely demise. Not surprisingly, 4 months after Japan set off on the most ludicrous economic experiment in history, and one week after the BOJ announced its plans to double its balance sheet, Abe’s approval rating has already begun sliding with a poll by Asahi just reporting that popular support of Abe’s cabinet is already down to 60%, down from 71% a month ago.
The reflationary reality has finally started to get official recognition with the very Goldman Sachs (who like in Europe and the US is behind this epic experiment in hidden taxation of consumers) asking how popular inflation would be in Japan, and answers:
How popular will inflation be in Japan? Assuming the BoJ is successful and inflation rates rise, one interesting dynamic will be the political support for ‘super-easy’ monetary policy. The majority of financial household assets sit in deposits, which until now have earned a positive real rate. While long-term inflation expectations move higher, the Yen and equities re-price rapidly but the negative impact on deposit returns from negative real rates will only be felt once inflation has actually started to materialise. This is clearly not an immediate concern as the government’s approval ratings remain high ahead of the Upper House elections this Summer. Still, PM Abe’s policy aim of beating deflation may become less popular at some stage because the implied distributional choices of higher inflation may become clearer for voters. For example, higher inflation would re-distribute real income from (older) savers to (younger) wage earners. But again it is worth thinking about the exact sequencing. By the time inflation in Japan becomes settled in positive territory the Fed may well be on the verge of hiking rates. In essence, any concerns about inflation in Japan and debate about a BoJ policy response will likely arrive at a stage when Fed tightening and JPY carry trades have already become the dominant theme.
…Connor goes on to say in further edited excerpts:
Depending on how long and far above the 200 day moving average this thing stretches will determine how violent the stock market crash will be when the forces of regression take over. If this lasts till summer, as I think it could, we could see a crash of 15%-20% and my best guess is that it will come in June or July.
The problem with runaway moves in the stock market is that they stretch way too far above the mean in both price and time. As this process progresses institutional traders become more and more nervous, so the stock market becomes more and more shaky. Kind of like a heavy snowfield just waiting for that last snowflake to turn it into an avalanche – and that’s exactly how these stock market runaway moves end. At some point all of these nervous investors try to get out the door at the same time and you get a crash or semi-crash….
Despite a feeling of relative calm given by both the media and the American and Japanese financial markets going from record to record, the world economy is slowing down badly and a widespread recession is looming. The various players are fully aware of it and, in the face of the challenges of an imminent collapse, countries or regions are putting various strategies in place to try and limit the consequences. Whilst some seem dictated by desperation or last chance solutions, others on the contrary bear witness to a real adaptation to the world’s current changes. And it’s no surprise that, in the first category, we find the “powers of the world before” which no longer have any real options.
Layout of the full article :
1. World recession in sight
2. The banks’ doubtful business
3. Tax haven all hell
4. Neo-protectionism between regional blocs
5. Emerging nations’ strategy in gold
6. The Fed’s last bullets
7. Euroland : national unity governments and the ECB to the rescue
8. High risk strategies
World recession in sight
There is no shortage of indices for that. Europe is already in recession. Exports from China, often considered “the workshop of the world”, are falling heavily (see chart below) and the benchmark signals are contracting or slowing down dangerously (1) with, additionally, a major credit bubble (2).
Why are corporate insiders dumping huge numbers of shares in their own companies right now? Why are some very large investors suddenly making gigantic bets that the stock market will crash at some point in the next 60 days? Do Wall Street insiders expect something really BIG to happen very soon? Do they know something that we do not know? What you are about to read below is startling. Every time that the market has fallen in recent years, insiders have been able to get out ahead of time. David Coleman of the Vickers Weekly Insider report recently noted that Wall Street insiders have shown “a remarkable ability of late to identify both market peaks and troughs”. That is why it is so alarming that corporate insiders are selling nine times as many shares as they are buying right now. In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. So what does all of this mean? Well, it could mean absolutely nothing or it could mean that there are people out there that actually have insider knowledge that a market crash is coming. Evaluate the evidence below and decide for yourself…
For some reason, corporate insiders have chosen this moment to unload huge amounts of stock. According to a CNN article, corporate insiders are now selling nine times more of their own shares than they are buying…
Corporate insiders have one word for investors: sell.
Insiders were nine times more likely to sell shares of their companies than buy new ones last week, according to the Vickers Weekly Insider report by Argus Research.
Fed Balance Sheet Rises To $3.35 Trillion
- Fed Balance Sheet Rises To $3.35 Trillion
- U.K. Property Loans Facing 92 Billion-Pound Financing Gap
- UK pension funds take on leveraged loans in search for yield
- Slovenia’s Fight to Avoid EU Bailout
- Cypriot Bailout Program Faces ‘Unusually High’ Risks, IMF Says
- Mugabe wants to ‘liberate’ Zim from US dollar
- S&P warns to downgrade India’s rating to ‘junk’ status
- Junk rating risk casts shadow over Spanish bonds