Is the Taper a Big Lie?

(NOTE TO READER: There was a considerable time lag between the beginning of the QE3 taper’s declared beginning and when it actually started. This article was written during the lag, suggesting that the taper was all hype and no reality. Since then, the taper did become real and QE3 ended.)

The much-talked-about taper could be nothing more than a big joke. Where is the statistical evidence of the taper?

Let’s look at the last 10 years of the Federal Reserve’s balance sheet.

taper1

Here you can see all three QEs laid out nicely.

Let’s “zoom in” and look at just the last year.

taper2

The rate of growth briefly slowed then picked right back up. Other purchases appear to be offsetting the taper, at least so far. On net, no taper. Watch what they do, don’t fret too much over what they say (central bankers lie all the time).

Meanwhile, despite media reports and promises from European central bankers that they will inflate to prevent recession, the ECB is engaged in a deflationary policy, and has been for nearly a year.

Sometimes the official central bank statistics don’t match their words.

The Fed has been saying it will not let interest rates rise, yet at the same time it will slow its rate of purchasing assets. I don’t know how that is supposed to work, since regardless of the Federal Funds target rate, the market sets the real Federal Funds rate. Yet it almost makes sense if you assume while they might buy less crap via QE3, they will balance that with more purchases of different crap.

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Fed Discontinues “Excess Reserves” Chart

The St. Louis Federal Reserve Bank will no longer publish the chart showing excess reserves of commercial banks.

I can say little about why this decision was made. I suspect the Fed wants to draw minimal attention to the fact that most QE money goes into excess reserves.

The charts unequivocally show that the increase in excess reserves has corresponded almost exactly to the increase in the Fed’s monetary base. Observe:

MONETARY BASE

FRED Graph

EXCESS RESERVES

Graph of Excess Reserves of Depository Institutions

Why is this important? It shows to what extent the Fed’s different batches of QE are stockpiled by the commercial banks rather than pumped into the economy in the forms of loans.

When the Fed increases its balance sheet, the general rule is that the money will cause the money supply to increase because of fractional reserve banking.

However, after in the 2008 crisis, the M1 Multiplier tanked, meaning that each dollar added to the monetary base added much less to the money supply (M1). 

Graph of M1 Money Multiplier

The Fed has expanded its monetary base dramatically, but the M1 Multiplier makes us wonder where all that money went. The excess reserves chart shows us where most of the QE money goes.

As QE continues, we will have to assume excess reserves are rising if the M1 Multiplier remains extremely low. If the multiplier begins to rise, then more new money is entering the economy, not being added excess reserves. If M1 begins to skyrocket, then that means excess reserves are being loaned out.

— No more excess reserves charts — 

 

 

Chinese Demand for Gold Is the Real Deal, Long Term

You have to see these images from China.

During the Dragon Boat Festival, ten thousand Chinese demonstrated the depth of their gold fever by lining up to buy that “stupid” investment. This is despite the relative respite from inflation, according to official Chinese statistics.

All these people want gold:

Gold Line 1_0

Gold Line 2_0

Gold Line 3_0

Gold Line 5_0

Gold Line 6_0

Gold Line 4_0

China is a source of demand for gold that will be significant in the long term.

Read more at Mises.ca

Carney vs. the British Pound

UK citizens are running out of time before Mark Carney takes over their central bank.

Carney got the Bank of England job because he was a friend of bank bailouts and has shown no reluctance when it comes to printing money.

Mike Amey, head of sterling bonds at PIMCO, believe that’s what Carney plans to do when he takes over the BoE. He predicts Carney will devalue the pound by as much as 15%. That’s because Britain is desperate, and central bankers don’t really have any solutions other than “MOAR PRINTING.”

I’m so glad Carney’s going to be gone, not that I expect Stephen Poloz to be any better. But we should feel bad for the citizens of the UK. The pound has already lost significant value in recent years.

— Read more at The Telegraph —

 

Mark Carney - HERE I COME BRITAIN YOU SHOULD SELL YOUR POUNDS BEFORE I GET THERE

The European Central Bank Is Deflating

A lot of people talk on and on about how all the central banks are printing money.

But, to the dismay of radical Keynesians, central banks are not always printing money all the time.

The ECB has spent the last several months deflating.

ecb assets

This will put pressure on Europe. It will be interesting to see how long this lasts, given how bad things seem to be over there.

Are Chinese Women Smarter Than Warren Buffett?

Warren Buffett is one of the world’s most successful investors. He is also a well-known critic of gold as an investment. He believes buying gold is “stupid.”

Middle-aged Chinese women did not get university economics or finance degrees. They do not understand the difference between economic schools of thought. But they have lived under brutal Communism. They have suffered extreme poverty. They understand what it takes to preserve wealth under tyranny.

These Chinese women are buying gold. More than Indian fathers. From a recent report:

On Sunday afternoon, a microblogger in Beijing logged into Sina Weibo, China’s leading social media platform, to gossip about the “auntie” next door. It’s a broad term of respect for an older woman, and his followers understood precisely what he meant when he tweeted, “The auntie next door used all of her retirement savings to buy gold. When asked what she’d do if prices keep dropping, she replied that if everyone kept buying gold, the price wouldn’t drop…”

This might strike a conservative investor as reckless. But in China, where gold has long been a national obsession, a mid-April record crash in global gold prices has been seen as an unprecedented buying opportunity. According to reports in China, Chinese have purchased 300 tons of gold worth more than $16 billion since the crash.

These people are not trading gold futures on margin. They are allocating their savings to precious metals.

Photos of crowds packing jewelry shops and emptying their shelves are now regular features in the news media. On Monday, a police officer in Shanxi province tweeted, in regard to his actual aunt: “My aunt’s family has a gold store, and my colleague who’s in the market for some gold for his mother asked if I could get him a cheap price. I asked, and my aunt said first come and take a look to see if anything catches your eye. But at the moment the display cases are empty, and they are unable to get new inventory. All I can say is that the power of the Chinese is frightening.”

China’s voracious appetite for gold is long-standing. At Chinese jewelry stores, the spot price for gold is always prominently displayed. Calculators and scales are never out of a customer’s reach. Gold jewelry is desirable, but so are gold bars, and any jewelry store that considers itself full-service will stock ingots of various weights. (In April, an investor in Guangzhou bought 44 pounds of the bars, according to a local newspaper.) Special commemorative bars in various weights and designs were issued for the 2008 Beijing Olympics and the 2010 World Expo in Shanghai.

The current rush is unusual in two ways. The first is its epic scale. The second is that, according to both traditional and social media, aunties are doing most of the buying.

This activity is widespread in China. When something is widespread in a country with 1.35 billion people, it’s a real phenomenon.

Social media tends to take a less critical, and more personal, view of the aunties. Depictions involving mother-daughter interactions, in particular, are very common. On Saturday, Zhongxiao Fang Fang Fang, the handle for a microblogger in Shenzhen, tweeted: “Yesterday my mother called me to say the price of gold has fallen, and to ask me to go to Hong Kong to buy gold. I said I didn’t want any. She very calmly said it would be good to prepare a dowry so I can get married!”

Reported elsewhere:

Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They’ve never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won’t possess gold. Maybe what Chinese aunties care about is not the price of gold tomorrow, their desire is perhaps nothing more than to buy gold, to delight in gold, to hold it. Chinese aunties’ gold investment strategies are simple and unsophisticated, they just “buy what they want.”

What do the Chinese aunties know that Warren Buffett doesn’t?

Read more at Bloomberg

When Will Interest Rates Rise?

Everyone wants to know: when will long-term interest rates rise?

Are we so sure they aren’t rising now?

Let’s consider a few recent events: Microsoft recently raised $2 billion selling bonds. Soon after, Apple raised $17 billion selling bonds. These companies have historically shied away from borrowing long-term money. Microsoft has not sold debt since 1996. The last time Apple sold debt was 20 years ago.

They both have huge amounts of cash, but the interest rates on these instruments were ridiculously low for both companies. Investors wanted a slightly higher rate from Apple than from Microsoft. In any case, both normally debt-averse companies believe that now is the time to lock in low rates. These companies must believe that rates will stay low or rise. Either way, they do well at the expense of bondholders. If rates rise, then they have cheap borrowed money with which to cash in on the higher rates. They borrow at 4-5% and make double, triple, or more on that money. If rates fall, then they can buy back the bonds and reissue the debt at lower rates.

When asked about Apple bonds specifically, Warren Buffett said: “We’re not buying bonds of Apple — we’re not buying bonds of anybody. It has nothing to do with them being a tech company. The yields are too low.” Berkshire Hathaway has been selling corporate bonds over the last two years.

I had a spasm of intuition in reading about the above events. “Are we at or around the bottom”? It seems to be a fair interpretation that “smart money” is selling bonds, and “dumb money” is buying bonds. Look at corporate debt — can those rates seriously go lower?

FRED Graph

The economy is bad, but is it Great Depression bad? Apparently not, so maybe the rates can’t go any lower… for now.

This year, it seems those rates have been pushed up. Is fear of inflation creeping in there?

Look at the 30 year Treasury yield, which has fallen to insane lows post-2008. Yet at the right end of the graph, we see the rate trending upward despite Operation Twist.

Chart forTreasuryYield30Years (^TYX)

I am talking about long-term rates. Short-term rates are basically going nowhere. As I wrote last year, I believe this is because there is fear and “regime uncertainty.”

FRED Graph

Even so, data seems to indicate that real rates are climbing back into positive territory.

fed real int

CONCLUSION

While people can describe the conditions under which rates will rise, they cannot reliably predict when this will occur. It seems assured that anytime someone says with confidence, “Rates cannot get any lower,” the rates still get lower. If you want an example that baffles investors endlessly, look at Japan. There is a reason shorting Japanese government bonds is a trade known as the “widow-maker.”

I don’t want to be one of “those” guys, but I think we are around the bottom on long-term interest rates for this stage of the business cycle. I’m not making a “hard” prediction on this, because I think a recession will push rates down further. I think that recession will occur soon. However, it is theoretically possible to muscle through the recession with expansionary monetary policy and keep the “boom” going. The Fed is in full offensive mode. Short-term and long-term rates will rise if the Fed continues this policy and banks are no longer willing to stockpile excess reserves. In Canada, the BoC has been buying debt for Harper and the Conservatives, resulting in net increases in assets for two years. I interpret this to mean that both American and Canadian central banks are desperate to hold off recession.

“The yields are too low.”

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