For the first time in its country’s history, Portugal sold 6 month T-bills at a negative yield. The 300 million euros ($333 million) worth of bills due in November 2015 sold at an average yield of minus 0.002%. A negative yield means investors buying these securities will get back less money from the government than they paid when the debt matures.
In Why the Fed will change its exit strategy…again we argued that the added net supply of TSY from the Federal Reserve over the next coming years will create problems for elevated markets as the reallocation of funds held by the private sector and corresponding higher interest rate will pop the bubble the Federal Reserve created in the first place.
One reason that portfolio risk management is so crucial is that it is not "missing the 10-best days" that is important; it is "missing the 10-worst days." The chart shows the comparison of $100,000 invested in the S&P 500 Index (log scale base 2) and the return when adjusted for missing the 10 best...
At some point in the middle of the last century, economics of money shifted to economics of psychology. When Milton Friedman wrote his 1963 book, A Monetary History, it was an effort that uncovered the role of money in the collapse of the Great Depression as he and his co-author, Anna Schwartz, saw it. Whether or not it was a full explanation, it wasn’t, it became widely adopted as the model for central bank behavior. At its heart, however, it was a treatise about the role of currency and liquidity.
– Gold is “100% guarantee from legal and political risks” – Russia’s central bank buys another 300,000 ounces in April – Russia views its overseas assets as vulnerable – ‘De Dollarisation’ continues across Asia – Gold offers protection from growing risks today
The importance of this post stands apart from the majority of the material on POM. The relevance and timing of this information corresponds with the evolution to some of my own initial assumptions and the full application of logic. The post itself will be made available free to all readers in the hope that the information will get to those who need to hear it the most.
Robert Reich, former Labor Secretary in Bill Clinton’s administration and currently Professor of Public Policy at the University of California at Berkeley, is an important voice for tackling income inequality in America by bringing back the Glass-Steagall Act, busting up the too-big-to-fail banks, and imposing a securities transaction tax.
– China’s new gold fund – 60 countries to develop gold mining projects – Allow member central banks to have easier access to gold – Gold to be traded on increasingly important Shanghai Gold Exchange – Another important step in making yuan reserve currency – China and Russia challenging U.S. dominance in key Eurasia – New gold fund shows monetary importance placed on gold by China – China ensuring supply in event gold flows from West to East end – Gold’s reemergence as important monetary asset both for individuals and powerful nations
The Financial Times recently discussed the Greek financial situation in “Tsipras Letter Reveals Precariousness of Greece’s Finances”:
“Greek Prime Minister, Alexis Tsipras, wrote a letter to IMF head, Ms. Lagarde, warning that the IMF repayment would be missed unless the European Central Bank immediately raised its curbs on Greece’s ability to issue short-term debt.”
Joe Russo's insight:
I'm certain that Greece is not alone in its inability to repay its debts.
In the age of ZIRP it can be difficult to gain perspective especially about interest rate movements. Trying to analyze the ups and downs including any relevance or importance is clouded by the lack of historical clarity on that account. We really have no idea about the true significance of scales at and near the zero lower bound because this is the first time we have ever been forced to visit it. The closest comparisons are to 2010 and 2011, but even then there are the matters of “dollar” swaps and a few more QE’s to contend with as potential systemic alterations that may have altered the baseline.
Volatility in UST trading declined a bit in the past few days, as treasury yields became far more settled intraday. While that breaks the exact duplication Monday and Tuesday this week traced from Monday and Tuesday last week, the past two weeks overall remain remarkably similar. And for all the noise, the ups and downs along the way, treasury yields haven’t much changed. That observation applies as far back as May 6, which means that for all the mess there isn’t any more clarity.
It is hard to believe that in these allegedly enlightened times this question even needs to be asked. Are there really educated adults who believe that by dropping helicopter money conjured from thin air, the central bank can actually make society wealthier?
A “liquidity regime” – the condition we now have as the Fed and other central banks douse markets with liquidity to manipulate asset prices higher – is “far more dangerous for investors” than when markets are left to their own devices. Under the current liquidity regime, asset prices are determined by central bank policies and move together. And there is “no possibility to diversify portfolios or hedge.”
Joe Russo's insight:
The only way to truly hedge amid this type of liquidity regime is by implementing short positions when quantified changes in trend occur at varying degrees....
We live in a world of massive monetary inflation and extremely low interest rates. Mortgage rates are near historic lows and yet it seems that people cannot get loans. Home sales are up, but with a near record percentage of sales made with cash, rather than a mortgage. The unemployment rate is nearing “full employment” and yet a record number of people do not have jobs.
Trade agreements like the TPP and NAFTA, on the other hand, leave these decisions not up to individual citizens, but to government regulators and negotiators who make decisions in the interest of the state and its favored special interests.
Because of this, any agreement that threatened to implement true free trade would pose a significant threat to the status quo which greatly favors powerful special interests over the interests of small business owners and ordinary consumers.
In its 84th Annual Report released last June, the Bank for International Settlements departed from usual central bankish conventions and decried the growing departure from market discipline and even reality. The BIS even used the loaded term “euphoric” to describe what it saw as risk market prices no longer affected by fundamental economic conditions. As the Financial Times noted then,
Back in February, Russia detailed a SWIFT alternative that would link 91 domestic banks to the Central Bank of Russia.
On the one hand, the plan represented yet another move towards global de-dollarization but on the other, was borne out of necessity when Russia began to believe it may be expelled from SWIFT as punishment for its support of rebels in Ukraine. Prime Minister Dmitry Medvedev warned of “unlimited consequences” if the West decided on a punitive SWIFT freeze.
Nobody really knows what is going to happen as Greece disproves all the narratives about the ECB’s ability to actually fix anything. As with all things monetarism, the attempts of liquidity were really about time rather than dissuading imbalances. But the funny thing about trying to buy time is that it so often removes the very pressure necessary to instill discipline in the first place. In the case of Greece, they defaulted (twice) on their debt, but only a short time later they were back at it issuing billions in a bond market far too eager to oversubscribe as if nothing had ever happened.
A little over two years ago, in the middle of April 2013, there was a gold crash that came seemingly out of nowhere. Worse, for gold investors anyway, that crash was repeated just a few months later. Where gold had stood just shy of $1,800 an ounce at the start of QE3, those cascades had brought the metal price down to just $1,200. For many, especially orthodox economists, it heralded the end of the “fear trade” and meant, unambiguously, that the recovery had finally at long last arrived.
The madness of the Fed’s pending 81 month run of zero interest rates comes down to an inflation subterfuge that has no logical or empirical grounding in real world economics. Essentially, the Keynesians who currently inhabit the Eccles Building have turned all of central banking’s anti-inflation history on its head, saying, instead, that there is not enough of it to create optimum economic growth and wealth; and, besides, the CPI is running below the 2% target—so prolonging the free money gravy train can’t do much harm.
Alan Greenspan: "We don't have the rest of the world out there all of the sudden saying "we're doing far better than the United States and we will effectively succeed in moving you up." The exchange rate tells us it's not the case. Everyone is doing worse than we are. So we've got all sorts of problems which says that the sooner we come to grips with this [debt] problem - and we're going to have to come to grips with it - or the markets will do it for us. And that is not going to be a very happy experience. The longer we wait... the more difficult it's going to be to implement it. And there's a presumption out there that central banks can do as they see fit. The ECB has got a problem in many respects more difficult than ours. Because if the Federal Reserve were ever to go bankrupt, we have the sovereign Credit of the United States standing behind it. But who stands behind the ECB. It's got this other monetary transaction which has not been drawn upon, but some day it will be. And the question is if there's a run on the European Central Bank, I'm not sure where they go. So when we talked this morning about all the problems that the United States has, we can match them abroad. And that is not a good message for the United States."
China and much of the world is intent on developing the largest economic development project in history, one that could have dramatic ripple effects throughout the world economy.
The project is expected to take decades, with costs running into the hundreds of billions of dollars, if not trillions. What that will mean for the world economy and trade is almost inconceivable. Is it any wonder then, that the world’s largest hedge funds, like Goldman Sachs and Blackstone, are rushing to market new multi-billion dollar international infrastructure investment funds?
No doubt a project as large and complex as this is likely to have failures, and is certain to face many western geopolitical obstructions. Assuredly, the “great game” will continue. Look no further than US President Barack Obama, who also senses the urgency. “If we don’t write the rules, China will write the rules out in that region,” he said in defense of the Trans-Pacific Partnership.
Statistics have become very misleading: in particular we are being badly misled into believing that the US is teetering on the edge of price deflation, because the US official rate of inflation is barely positive, a level that US bonds and therefore all other financial markets have priced in without accepting it is actually significantly higher.
The general consensus is that QE4 is impossible because the Federal Reserve has exhausted all of its policy tools or “levers” that we know about. No one thinks (myself included) they’re capable of another TARP, Twist, or other not-so-cloaked money printing experiment — the outrage of the American public is too big of a concern. Further, the chorus of those calling for normalization in interest rate policy has grown now to a cacophonous roar.
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