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  • What Is Austrian Business Cycle Theory? [View article]
    This is interesting. The Fed is testing its "CD" program. This basically helps improve the capital of the participating banks.

    This approach has always been interesting. If the Fed pays interest on reserves and in this case, interest on reserves parked in a "CD", what really is happening is that the Fed is taking a security off the balance sheet of a bank and replacing it with some Fed notes. Some of the Fed notes are parked in reserves (or Fed CDs - TDFs), and then "extra" Fed notes (interest) goes to capital. For the Fed this is a debit to expense, which offsets the Fed notes it sends to the Treasury as "profit".

    Another way to do this is to just debit an asset (loan) instead of an expense, and just credit a reserve account, which for the bank would be getting an asset (a debit) but with no place for the credit, except for income, which then rolls to capital. In essence what the Fed has done is to create a capital injection.

    This is how the Fed could be the only bank regulator. It could determine when it wanted to inject capital by virtue of having control over the performance of its bank regulators.

    What's interesting is that the real source of that capital injection is the general wealth of all those that use US dollars. In a sense, its a way of making people purchase a particular bank without them realizing it.
    Sep 4 10:53 AM | Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    Yeah, I was trying to say a "reason for support for lower rates".

    "wring even more risk out of the system which would it seems dampen tendencies toward higher baseline yields. "

    Its also a classic case of different regulatory bodies working at cross purposes. The point of an accommodative central bank regulator is to ease regulations that discourage risk, and then you get the FDIC and other regulators trying to discourage that risk.

    Ironically, the Fed was supposed to be the bank regulator since it was to be the elastic fountain that would assuage runs on banks. After all, what does the FDIC use to "insure" banks? Why, it has to use Fed notes. It accumulates these notes via assessments. Then, if a bank fails, in theory it uses these accumulated Fed notes to pay depositors. In theory, then, you could have no FDIC, and just have the Fed regulate and insure, since it is the fountain of all Fed notes, which the FDIC is not. The setup we have speaks to the ignorance of politicians about the forces they are dealing with, and why we wind up with these cross purposes among the regulatory agencies.

    It all becomes part of the subsidy mix, so it becomes necessary to evaluate the impacts and try and determine the unintended consequences. As such, an arbitrary liquidity ratio is tantamount to the Fed raising the discount rate. It is risk-off, which implies lower rates.
    Sep 4 10:35 AM | Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    Here is another reason to support lower interest rates. This ruling creates incentives for the purchase of Treas and GSEs.

    August 26th ALERT in response to news reports about possible municipal exclusion from the Liquidity Coverage ratio.

    What is the Liquidity Coverage Ratio:
    • In October of last year, the federal banking agencies proposed the creation of a standardized minimum liquidity requirement for large and internationally active banking organizations known as the Liquidity Coverage Ratio (LCR).
    • This proposal corresponds with Basel liquidity recommendations and only applies to institutions with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure--and to systemically important, non-bank financial institutions. (Modified LCR rules would also apply to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets.)
    • Under these proposed requirements, covered institutions would be required to hold minimum amounts of “high-quality, liquid assets” (HQLAs) such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash.
    • Each institution would be required to hold these HQLAs in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period, i.e. 30 days.
    • The LCR is the ratio of the firm's HQLAs to its projected net cash outflow.
    News reports on the proposal:
    • A final rule has not been issued by the regulators, but news reports are circulating that municipal securities will not be included as an allowable “high quality liquid asset”.
    • The regulatory intention to exclude municipal securities was included in the original proposal, but subsequent comment letters and earlier news reports suggested that some allowance for municipal exposures would be made.
    • Regulatory justification for the exclusion in the original proposal was provided as follows: “The proposed rule likely would not permit covered bonds and securities issued by public sector entities, such as a state, local authority, or other government subdivision below the level of a sovereign (including U.S. states and municipalities) to qualify as HQLA at this time. While these assets are assigned a 20 percent risk weight under the standardized approach for risk weighted assets in the agencies’ regulatory capital rules, the agencies believe that, at this time, these assets are not liquid and readily-marketable in U.S. markets and thus do not exhibit the liquidity characteristics necessary to be included in HQLA under this proposed rule.”
    Implications for Banks with less than $50 billion in assets:
    • There are no expectations for existing liquidity benchmarks or requirements to change for banks with less than $50 billion in assets.
    • From a market impact perspective, there could be some selling, but we do not expect anything that would create significant market disintermediation.
    • Large banks have known about the rule, have been preparing for the rule, and for the most part, have already created a sufficient stock of eligible HQLA to cover the ratio.
    • On the whole, financial institutions, as an investor set, own less than 20% of all outstanding municipal bonds, so their ability to impact the market is muted.
    • Municipal supply is down 20% in 2014, so any potential sales will help fill existing demand.
    • Long-term implications for examinations is unknown, but there is no reason for banks that are comfortably below $50 billion in assets to be concerned about regulatory implications at this time.
    Sep 4 10:00 AM | Likes Like |Link to Comment
  • Stability Of The European Union June 2, 2014 To ??? [View instapost]
    We always hear about aging populations. Well of course, when you have labor regulations that chase young people away or encourage young people not to be created, the result will be an aging population. Its a sign of the unintended consequences of gov price regulation.

    You can even see this in Sweden (the so called paradise).
    Sep 4 09:33 AM | 3 Likes Like |Link to Comment
  • Stability Of The European Union June 2, 2014 To ??? [View instapost]
    Italy's Triple Dip
    Sep 4 09:30 AM | 2 Likes Like |Link to Comment
  • Stability Of The European Union June 2, 2014 To ??? [View instapost]
    Well, they really aren't calling it QE, but its sort of a distinction without a difference. It's LTRO with a T at the beginning (TLTRO).

    From what I can tell, its around 400 billion, which is smallish. Full blown QE is still on the table, but it hasn't been launched yet, as far as I know.

    Really, LTRO and QE are really the same thing. QE is supposed to be a purchase, but since a central bank could reverse this decision at any time, the banks never know when they might be forced to buy the securities back. If you think about it, what we really have here is an ASC 860 issue, although we know govs typically pick and choose when they use GAAP.

    Either way, the bottom line here, is the ECB is using the only tool it has, printing money. For the moment they are engaged in printing, but the volume of printing is relatively small. However, in this environment, money printing is typically risk-on.

    During the previous LTRO the Fed was engaged in OT. Back then rates stayed flat, but equities went up. OT didn't grow the balance sheet. Now the Fed is engaged in Taper, which is still growing the balance sheet but only slower. So, we may see a repeat, but with the geopolitical turmoil we may continue to see rates fall. Also, add that the ECB is trying to chase money from reserves which may mean Euro banks buy more sovereigns, so indeed, the world of facts suggest lower rates even while equities rise.
    Sep 4 09:25 AM | 3 Likes Like |Link to Comment
  • Stability Of The European Union June 2, 2014 To ??? [View instapost]
    "from undermining the eurozone's fragile recovery."

    If they really wanted to do that, they could scrap their regulatory regime. Printing more money will only provide further subsidies to the financial markets.

    "The ECB also lowered the rate on overnight bank funds parked at the central bank to -0.2% from -0.1%. "

    Instead of encouraging lending between banks, I've been developing a theory that it has encouraged more lending to govs, hence the recent drop in yields we have seen in Euro sovereign yields. If so, then I guess we should expect yields to drop further.
    Sep 4 08:43 AM | 3 Likes Like |Link to Comment
  • This QE Bower My Prison [View article]
    The break down of foreign holders of Treasury securities can be found here.
    Sep 3 12:50 PM | Likes Like |Link to Comment
  • This QE Bower My Prison [View article]
    Sep 3 06:02 AM | Likes Like |Link to Comment
  • This QE Bower My Prison [View article]
    "rises in tandem with rate increases in the early phases because those increases are usually in response to accelerated demand in the economy."

    Yes, as I noted above, it will depend on the volume of the changes the Fed adopts (if any). However, there are other factors to keep in mind as well. For instance, look at the 10yr since 1980. In general rates have been falling, yet the S&P has continued to go up. Though from 2000 to now, the S&P really hasn't improved very much, especially in relation to its growth before that.

    Its important to understand the macro forces at work on a longer scale as well. Keep in mind the large shift in Asian economies to become more mercantilists during that long downward trend in the 10yr, for example. That switch is a large piece to explain the drop in US Treas yields. There are others, but I am just pointing this one out as example to understand the mix of factors that affect the "Subsidy Mix".

    For the short-term, say the next 12 to 24 months, we seem to be having a situation shaping up similar to what we had during OT and LTRO. During that time, rates stayed flat, but equities continued to increase. Remember, OT didn't grow the Fed balance sheet. That means no new Fed notes. However, LTRO did grow the ECB's balance sheet. LTRO is just another manifestation of QE. The result was support for US asset prices, equities and bonds.

    Now it seems the ECB is heading towards full-on QE (I think they are even planning to call it TLTRO). So what we could get is another OT/LTRO scenario, where rates stay flat, or even fall some more, and the S&P heads towards 2100+.

    The past is useful in determining the future, but you have to make sure you are accounting for all the relevant factors. So just because, in the past, you can find instances of equities trending up as rates go up (risk-on), that does not mean that will repeat if the circumstances that caused the tandem move last time are not the same now. There are also times, when equities and rates have not moved in tandem (as in the overall long-term scenario since the 1980s). The trick is to determine which set of circumstances are setting up the next direction.

    To me, it looks more like an OT/LTRO scenario. I tend to see rates flat (or down some) and equities moving higher, at least for now.
    Sep 2 01:35 PM | 1 Like Like |Link to Comment
  • This QE Bower My Prison [View article]
    "Those awaiting some implosion when QE/ZIRP ends "

    Right. What you want to watch out for would be the Fed reducing the size of its balance sheet, raising the discount rate, or both. What is also important to consider is how fast the Fed utilizes any of these options.

    Its balance sheet can shrink just through maturities, and its discount rate can be raised in small increments. Either way though, both are risk-off. The degree to which risk-off becomes apparent is the degree to which the Fed reduces the supply of Fed notes.
    Sep 2 12:35 PM | 1 Like Like |Link to Comment
  • This QE Bower My Prison [View article]
    "The Fed is considering a preemptive increase in rates because of inflationary concerns."

    It will be important to watch this. Depending on how much the Fed raises its discount rate, will determine how much the change in the subsidy mix has been effected. Its important to note that the Fed doesn't control interest rates. It controls its discount rate, but that is really just another way of saying, "How many Fed notes the Fed is creating or destroying".

    To whatever extent they raise the discount rate, is the extent to which they destroy Fed notes, or at least encourage their destruction, or even discourage their creation. Without those additional Fed notes, the support for asset prices is damaged. As asset prices are damaged, people get nervy, spending retreats, and you get a recession. Again, though, it will all depend on how much the discount rate is increased (if it does happen).

    We are seeing a similar effect with taper now. Equities started to struggle, but now it seems as if ECB QE-lite might turn into full blown QE, so yet again, we have the risk-on scenario shaping up.

    Given the current trajectory we could be looking at what I call a divergence. That's where equity and bond prices both go up at the same time. ECB QE combined with taper will tend to give support to equity prices and bond prices at the same time.

    Again, though it all depends on "if" these things play out this way and then how much the CBs move in either direction. We will just have to keep an eye on them.
    Sep 2 11:57 AM | Likes Like |Link to Comment
  • This QE Bower My Prison [View article]
    There is also another point here to consider. I call it the Colbert effect, after Jean Baptiste Colbert. Colbert became rich via control of gov regulation. The result was a market where gov regulations created barriers to entry for competition. So if you wanted to buy something, you basically had to buy it from Colbert and his ilk (the ruling elite).

    Think about an equity index for a moment. Its simply an index of the REMAINING companies. Thus, if a company gets weak, it eventually falls of the index. Also, if a competitor to one of the companies on the index is squashed before it ever gets a chance to be on the index, then that company never shows up on the index. The index becomes a survivor index. Another way to look at this, is if you could have had an index that reflected Colbert and his cronies' wealth, then as they got richer the index would go up. Another important point is to link the increase in the wealth of indexes with the increase in wealth for the overall economy, and then make sure none of the peasants ever make the connection that an index can go up while peasants get poorer.

    If you as a French peasant could invest in that index, as the ruling elite got wealthier by making you poorer via their marriage of business and gov, you would be able to get some of your wealth back. This is basically what we are seeing in the equity indexes today. If you provide lots of subsidies to the survivors, prevent competition for those survivors, and provide just enough subsidies for the dependent class to purchase bread and circuses, the result will the rich get richer riding on top of an ever growing peasant class who must buy their bread and circuses from the rich, protected class.

    A central bank fits into this is as just another protection for existing wealth. Its job is to protect the financial markets. Forget all the drivel about maximum employment and stable prices. That's just smoke and mirrors to get the averaged, gov schooled person to not see what is really going on. The job of a CB is to stealth tax wealth from the general populace and transfer that wealth to the financial markets.

    In general, the safest place to be is equities. Even though gov regulations and taxes will slow an economy, a central bank is a powerful weapon to keep prices up in equities markets. If you are aware of this, and understand how it works, you can avoid the panics when the Fed or some other central bank causes massive asset deflation.

    Then you can either not panic and fall into the trap that so many do of buying high and selling low, and be ready to ride it out. Another thing you can do (if you have the time and patience) is monitor what I call the "Subsidy Mix". That's basically the notion that the natural state of a free market is to grow, but gov intervention that pollutes the free market will cause asset inflation and deflation around that natural trend line.

    By monitoring how fiscal and monetary policy affect the "Subsidy Mix" you can then predict the risk-on (equities and rates up) and the risk-off (equities and rates down) cycles. This approach maximizes the amount of wealth that can be transferred your way, but you need to allocate the time necessary to manage it.
    Sep 2 11:10 AM | 1 Like Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    This is tantamount to the Fed increasing interest rates or shrinking its balance sheet. Increasing taxes means less Fed notes in the system, just like the Fed soaking them up via increasing the discount rate or selling bonds back to banks. Of course it depends on the volume of Fed notes affected, but in principal less Fed notes in the current subsidy mix is risk-off.
    Aug 29 05:00 PM | Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    More on bond market reaction to economic data and geo-political news.
    Aug 29 04:55 PM | Likes Like |Link to Comment