The Balance?

by: The Nattering Naybob


Discussion of the potential effects on equity, bond, commodity, capital and asset markets regarding:

Japanese Industrial Output; Presidential Election Update.

What The Fed Thinks; Balance Sheet Effects of QE.

The French have a word for police informants: la balance. That's because the stool pigeons or snitches hold "the balance" between the cops and the criminals. Nicole is a Parisian streetwalker and Dede is her racketeering boyfriend, on the outs with his mob bosses because of a dispute over Nicole. A key police informant "balance" is murdered and the cops scramble to find a new one. Lacking their "balance" the cops decide on Dede, and begin to put a squeeze on he and Nicole. The title suggests more than one meaning for the phrase, since it's about a couple who are desperately trying to hold everything in their lives, "in the balance". What makes this film more absorbing than the ordinary crime movie is that it's more interested in the characters lives, rather than in their crimes.

Massive BOJ Earthquake?

"as for the mysterious disposition of $65B in CC spending, I DID NOT write the paragraph below, but perhaps it explains the great divergence in credit debt incurred vs. spending since February 2015... and perhaps a certain sound is very apropos, as in tick-tock-tick-tock....

VISA CARD: "ZERO 0% Introductory APR for EIGHTEEN (18) billing cycles for balance transfers made in the first 60 days, then 11.24%-21.24% Variable APR."

That eighteen (18) month at ZERO% grace period could be the only thing holding the consumer credit tidal wave up for the time being." - In Time?

Along those lines, it would seem the hammer of consumer spending has come down in Japan as industrial output dropped 6.2% in February due to sluggish demand both at home and abroad. This was the biggest MoM drop since March 2011, when a devastating earthquake in Japan crippled the country's supply chain. This time the devastating earthquake was provided by Abe-Kuroda?

Past stand out independent Presidential candidates

"One shakes their head wishing to wake up, is this real or a reality TV nightmare? Where are all the bright people of conscience? In Trump, I am reminded of Carter. The electorate fresh off Watergate, Nixon and Ford are "mad as hell and not going to take it anymore". Much like the fallout of bad choices, that we still suffer sixteen long years later, we might as well be electing Neuman/Possum - 2016 "Honest about their idiocy." Food for thought and remember to get out and exercise your freedom of choice." - The Next President?

1980 John Anderson; said we need to raise taxes, nobody wanted to hear that.

1992-96 Perot, in 92 Ross received over 19M or 19% of the electorate, strongest 3rd party vote showing since 1912. His curious "withdrawal" due to "Republican operatives" sealed his fate.

2000 Nader's 2,882,995 or 2.74% of the popular vote. Ralphie and a controversial SCOTUS decision on the Florida recount, combined to begat eight years of Bush Jr.; which begat eight years of Obama; and appears to be delivering either 4 years (to start) of Trump or Clinton?

2016 Presidential Election

Running as an Independent, Trump probably could have made life difficult, but not a serious bid. Running as a Republican was the path of least resistance, as navigating the train wreck, Rubio, Cruz and internal party dissension, was easy. It will be curious to see what Trump will do if he does not have a majority at the RNC. Will he "come to terms" or split off as an Indy? Could be a Waterloo in the balance. TBD.

Above note, pledging Kasich delegates to Cruz cuts Trumps lead to 130 with 943 still up for grabs. Running as a Democrat, Trump would have been snuffed by Sanders and the Dem's "super delegate" predisposition to Clinton. Why even have primaries if 719 super delegates can vote anyway they want, overriding the wishes of both the popular vote and regular delegates. Sound a bit unbalanced?

Above note, excluding super delegates, Clinton's lead is 263 with 1823 regular delegates still up for grabs.

What does the Fed think about QE?

Regarding QE, monetary base and excess reserves... "Critics of QE warn that because QE increases the monetary base significantly, dramatic inflation could result. Currently, banks hold a large amount of reserves, which constitutes the largest component of the monetary base...."

What if banks lent the QE reserves out? "If banks were to loan these reserves, they would effectively increase the money supply. If the money supply were to grow at a rapid rate, the resulting increase in economic activity could cause inflation to accelerate and expectations of future inflation to increase."

As for any resulting inflation and IOER... "The Fed, however, remains confident that its programs, including incentives for banks to retain their reserves, will prevent such an outcome. For example, the Fed pays banks interest on reserves at Fed banks. If the interest rate on these reserves is higher than the return banks could receive from alternative investments (the banks' opportunity cost), reserves will remain idle." - Fed Newsletter April 2011

The Fed seems confident in their ability to maintain "the balance" of inflationary potential with IOER (interest of excess reserves) and RRP (reverse repo).

Balance Sheet Effects of QE

When the Fed deals directly with a Fed account holder: CB/Primary Dealer, GSE or MMF (only recently added), those QE created reserves are not "active" M1 money. Here are the consequences from a balance sheet perspective:

Fed balance sheet

liability + for the new reserves credited to the selling bank

asset + for the securities the Fed purchased from the bank

result +1 gained a liability and a asset

Commercial bank balance sheet

asset + for the new reserve credit from the Fed

asset - for the securities sold to the Fed

result 0 gained a asset, sold a asset

The size of the CB balance sheet does not change, only the nature of the asset and there is no effect on the money stock as defined by M1.

"With the QE transaction, the asset composition has changed from safe interest bearing (UST's) to ultra safe low interest bearing (excess reserves remunerated by IOER at the FRB's). Again, legal tender, Federal Reserve Notes or specie are never printed or minted in this process." - Need For Speed

In the case of the Fed buying direct from a CB, the above statement holds true with regard to the asset composition changing. Now, we are going to test the banking adage: deposits come from loans.

When the CB/Primary Dealer acts as an Intermediary, the QE or "debt buying process" involves "US households" which statistically includes: hedge funds, private equity funds; State, County and Municipal authorities; NB's (non bank financial institutions, GSE's) and non residents (NR deposits are NOT counted in the money supply); and formerly included MMF's. None of these entities have Fed window access excepting GSE's and now MMF's. Here are the consequences from a balance sheet perspective:

Fed balance sheet - no change from above

liability + for the new reserves credited to the bank acting as an intermediary

asset + for the securities the Fed purchased through the intermediary bank from the customer

result +1 gained a liability and a asset

Commercial bank balance sheet - change from above

asset + for the new reserve credit from the Fed

liability + deposits, credit for the sale of the customers securities

result +1 rather than lose a asset (securities), gained a liability along with a asset

Customer of CB balance sheet - new from above

asset + deposit received at the intermediary bank for the securities sold to the Fed

asset - for the securities sold to the Fed

result 0 gained asset deposit at bank, sold asset securities

The above example dictates that the size of the CB balance sheet increased via CB reserve deposits with the Fed and CB liabilities to the customers in the form of deposits. When a bank makes a loan it creates a deposit, but do all deposits come from loans? In the case of a commercial bank, excluding interbank debts and loans, they usually do.

Above note, the linkage between the stock of loans (blue line) and deposits (purple) is disconnected by $2.4T. Adding the CB excess reserves at the Fed to loans and leases (green), achieves la balance. Notice the divergence commences in Q1 2009, the beginning of QE. Coincidence?

In our example above, ceteris paribus both the CB and customer had an increase for deposits and yet NO LOAN was made. Excluding interbank debts and loans, this would seem to violate the CB adage "deposits come from loans". We should perhaps rephrase, not all deposits come from loans? And this begs the question, the dollar volume of QE purchases requiring an intermediary? Hmm? Like the film, how might this effect the delicate systemic "balance"? And could it lead to a squeeze? More to come, stay tuned, no flippin.

Would like to thank you folks fer kindly droppin in. You're all invited back again to this locality. To have a heapin helpin of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!

This is the 24th in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely effect capital, commodity, equity, bond and asset markets.

I wish to dedicate this missive to one of my mentors, Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard


Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.

Market Plays

As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this could tie into any list of investments or assets. Those listed below happen to influence the indices more than most.

There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few. For a complete missive series listing covering those subject and more, click here.

The potential global economic developments discussed in this missive could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.

A List of 17 Potential Market Plays (Long or Short?): Apple Computer (NASDAQ:AAPL); Google (NASDAQ:GOOG); Facebook (NASDAQ:FB); Microsoft (NASDAQ:MSFT); Citigroup (NYSE:C); General Electric (NYSE:GE); Cisco (NASDAQ:CSCO); Bank of America (NYSE:BAC); Amazon (NASDAQ:AMZN); Tesla (NASDAQ:TSLA); SP 500 Trust ETF (NYSEARCA:SPY); Ford (NYSE:F); Starbucks (NASDAQ:SBUX); Intel (NASDAQ:INTC); ATT (NYSE:T); IBM (NYSE:IBM); Exxon/Mobil (NYSE:XOM)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.