18/3/20: Banks, The Fed and Money Markets Woes

My article for the International Banker on pre-Covid monetary policy bottlenecks in the US markets is out and available here: https://internationalbanker.com/finance/banks-the-fed-and-money-markets-woes/

1/9/19: Priming the Bubble Pump: Extreme Credit Accommodation in the U.S.

Using Chicago Fed National Financial Conditions Credit Subindex (weekly, not seasonally adjusted data), I have plotted credit conditions measurements for expansionary cycles from 1971 through late August 2019. Positive values of the index indicate tightening of credit conditions in the economy, while negative values denote loosening of credit conditions.

Since the start of the 1982 expansionary cycle, every consecutive cycle was associated with sustained, long term loosening of credit conditions, which means the Fed and the regulatory authorities have effectively pumped up credit in the economy during economic expansions - a mark of a pro-cyclical approach to financial policies. This trend became extreme in the last three expansionary cycles, including the current one. In simple terms, credit conditions from the end of the 1990s recession, through today, have been exceptionally accommodating. Not surprisingly, all three expansionary cycles in question have been associated with massive increases in leverage and financialization of the economy, as well as resulting asset bubbles (dot.com bubble in the 1990s, property bubble in the 2000s, and financial assets bubbles in the 2010s).

The current cycle, however, takes this broader trend toward pro-cyclical financial policies to a new level in terms of the duration of accommodation and the fact that it lacks any significant indication of moderation.

16/7/19: Monetary Policy Paradigm: To Cut or To Cut, and Not to Not Cut

QE is back... almost. After a decade plus of failing to deliver on its core objectives, and having primed the massive bubble in risky assets, while pumping sky high wealth inequality through massive monetary transfers to the established Wall Street elites... all while denying that we are in an ongoing secular stagnation. So, courtesy of the unpredictable, erratic and highly uneven economic parameters performance of the last 12 months, we now have this:

Because, for all the obvious reasons, doing more of the same and expecting a different result is the wisdom of the policymaking in the 21st century.

19/1/18: Tears over QE & U.S. Household Debt Problem

As (some) White House-linked (or favouring) economists lament the Fed's QE (and there are reasons to lament it), one thing is clear: the unprecedented monetary policies of the recent years have achieved two things:

1. The Fed QE has fuelled an unprecedented boom in risky assets (bonds, equities, property, cryptos, you name it); and
2. The Fed QE sustained a dangerous explosion of personal household debt

Which, taken together, means that the rich got richer, and the middle classes and the poor got poorer. Because debt is not wealth. Worse, the policies past have set the stage for a massive unraveling of the credit bubble to come, if the Fed were to attempt to seriously raise rates.

Note: the figures below are not reflective of a reportedly massive jump in consumer credit in 4Q 2017 (see: https://www.marketwatch.com/story/consumer-credit-growth-surges-in-november-by-most-in-16-years-2018-01-08?siteid=bnbh). 

Here is the latest data on personal household debt:

\And here is the aggregate data (also through 3Q 2017) from the NY Fed:

Year on year, 3Q 2015 growth in total household debt in the U.S. stood at 3.03%. This fell to 2.36% in 2016, before rising to 4.90% in 2017, the highest annual rate of growth for the third quarter period since Q3 2007.

Aggregate household debt in 3Q 2017, relative to 2005-2007 average was:

• 11.8% higher in 3Q 2017 for Mortgages;
• 23.4% lower for HE Revolving;
• 51.9% higher for Auto Loans;
• 6.6% higher for Credit Cards;
• 201.2% higher for Student Loans;
• 6.5% lower for Other forms of debt; and
• 19.7% higher for Total household debt

In current environment, a 25 bps hike in Fed rate, if fully passed through to household credit markets, will increase the cost of household credit by USD32.4 billion per annum. The same shock five years ago would have cost the U.S. household USD 28.3 billion per annum. Now, put this into perspective: current markets expectations are for three Fed rate hikes (and increasingly, the markets are factoring a fourth surprise hike) in 2018. Assuming the range of 3-4 hikes moves to raise rates by 75-100 basis points, the impact on American households of the QE 'normalization' can be estimated in the region of USD98-130 billion per annum. Since much of this will take form of the non-deductible interest payments, the Fed 'unwinding' risks wiping out the entire benefit from the recent tax cuts for the lower-to-upper-middle class segments of population. 

Now, let's cry about the QE... 

22/6/17: Unwinding Monetary Excesses: FocusEconomics

Focus Economics are running my comment (amongst other analysts') on the Fed and ECB paths for unwinding QE: http://www.focus-economics.com/blog/how-will-fed-reduce-balance-sheet-how-will-ecb-end-qe.

12/4/17: Incoming Inflation Uptick: Gear Up

My contribution for Manning Financial on the topic of gearing investment portfolios against incoming uptick in inflation is now available here: https://issuu.com/publicationire/docs/mf__spring_2017?e=16572344/47063502.

24/2/17: Monetary Policy Outlook for 2017

My article for Manning Financial covering monetary policy outlook is out and can be viewed here: https://issuu.com/publicationire/docs/mf_february_2017__1_?e=16572344/44717793.

Alternatively, click on the following images to enlarge

15/12/16: Long-Term Fed Path May Force ECB to Act

My post-mortem analysis of the U.S. Fed's FOMC meeting and policy changes announcements for Sunday Business Post: https://www.businesspost.ie/opinion/constantin-gurdgiev-positives-ireland-feds-move-373461.

Hint: It's about longer term game and the neutral federal funds rate... and traces back to August...

21/9/16: BOJ New (non) Bazuka

A bit more on BOJ 'inverse' Twist here: http://expresso.sapo.pt/economia/2016-09-21-Banco-do-Japao-lanca-mao-de-nova-bazuca.

21/9/16: BOJ & Fed: Surprises at the End of Policy Line?

My comment for Portugal's Expresso on Bank of Japan and U.S. Fed rate setting meetings (comment prior to both): http://expresso.sapo.pt/economia/2016-09-20-Mercados-nao-esperam-subida-de-juros-nos-Estados-Unidos

English version:

With Bank of Japan clearly running out of assets to buy to sustain its continued efforts to further ease money supply, the Bank’s September 20th meeting is likely to be more significant from the markets perspective than the Fed’s. Back in July, Bank of Japan initiated a comprehensive review of its current policy measures. This move was based on two key pressures faced by Tokyo: the complete lack of monetary policy effectiveness and the shortages of assets eligible for BOJ purchases, still remaining in the markets.

My suspicion is that BOJ is likely to go for the reversal of the Fed’s Operation Twist, buying - as Washington did in 1961 and 2011 - shorter maturity bonds. In 2011, the Fed opted to buy longer-term debt and selling short term bonds. The Fed objective back then was to flatten the yield curve. Bank of Japan today is more desperate to see steepening in maturity curve instead. Paired with deeper foray into negative deposit rates territory, such an Inverse Twist move is probably the likeliest outrun of the current BOJ policy debate, with both policy changes carrying a probability of around 60-70 percent for September 20th meeting. On a longer odds side, expansion of volumes of purchases of bonds (doing more of the same option) for BOJ, in my opinion carries a probability of just 30-40 percent.

BOJ announcement of new policies is potentially more important to the global markets than the Fed’s, in the short run, because BOJ policy options are pretty much similar to those of the ECB, and because Tokyo faces a greater urgency to move this time around. Across the bonds markets, in recent months, there has been an increasing sense that ultra-aggressive monetary policies (those led by BOJ and ECB) have lost their effectiveness just at the time when the central bankers are rapidly running out of option to produce further monetary stimulus without engaging in an outright helicopter money creation. At the same time, as monetary policy effectiveness declined, markets reliance on central banks pumping more and more liquidity into the global financial system is rising as economic fundamentals stubbornly refusing to support current markets valuations in both equities and bonds.


Fed’s rate setting meeting, coming hours after Bank of Japan’s one, will be less predictable and has the capacity to take markets off guard. Prevailing market consensus is that the Fed will simply amplify its extremely moderate hawkish position, signalling once again the growing consensus toward a rate rise after the November Presidential election. In my view, this is the most probable outrun with a probability of around 75 percent. However, given the signs of strengthening economy over 3Q 2016, and the early indications of improving inflationary outlook on foot of August figures, the Fed might surprise with a 25 bps hike in base rates - a low probability (roughly 25%) event. On the ‘hold policy’ side, there has been some disappointing recent economic releases, with a decline in retail sales, flat producer prices inflation and a large drop in industrial production. These, alongside the political cycle, weigh heavily on the probability of a rate hike this week.


The key to the September rates outlook and the markets dynamics will be the twin combination of BOJ and Fed moves. Dovish Fed, alongside further aggressive expansion of Japan’s monetary policy will serve as a forward signal for the ECB to boost its own asset purchasing programme. This is a more likely outcome of Wednesday news flow, given the conditions in the domestic economies and in the global trade environment. Any surprises on the side of the Fed or BOJ deviating from dovish stands will likely be interpreted by the markets as a trigger for bonds sell-off and will also be negative for share prices.

7/9/16: Don't Tell the Cheerleaders: U.S. Corporates Are Getting Sicker

Some at the U.S. Fed think the U.S. economy is in a rude health (http://www.cnbc.com/2016/09/06/federal-reserve-interest-rate-outllok-williams-wants-hike-as-us-economy-in-good-shape.html), and others in the financial world think the U.S. corporates are doing just fine (http://www.wsj.com/articles/u-s-corporate-profits-rise-as-gdp-ticks-down-to-1-1-1472214856). But the reality is different.

In fact, U.S. companies are bleeding cash like there is no tomorrow (http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash) and they are doing so not to support capex or investment, but to support share prices.

Source: Bloomberg

And earnings are down:

Meanwhile, earnings per share are falling (and not only in the U.S.), as noted here: http://trueeconomics.blogspot.com/2016/09/4916-earnings-per-share.html

And here is 12 ko Forward P/E ratio for the U.S. on 12mo MA basis:

iSource: FactSet https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_9.2.16

And it gets worse on a trailing basis

So, quite obviously, things are really going swimmingly in the U.S. economy... as long as you don't  look at the production / supply side of it and focus on 'real' indicators like jobs creation (unadjusted for productivity and quality) or student loans (unadjusted for risk of default) or home sales (pending or new, of course, but not existing). Which should be helped marvelously by a Fed hike, because in a credit-based economy, sucking out fuel vapours from an empty tank is undoubtedly a great prescription for sustaining forward growth.

3/3/16: Hitting Record Deflationary Expectations & Waves of Monetary Activism

In a fully-repaired world of the global economy...

Source: Bloomberg

Per SocGen, thus, all the QE and monetary activism have gone pretty much nowhere, as deflationary expectations are hitting all-time record levels. And that with the U.S. inflationary readings coming in relatively strong (see http://www.bloomberg.com/news/articles/2016-03-03/socgen-global-deflationary-fears-just-hit-an-all-time-high).

Which might be a positive thing today, but can turn into a pesky problem tomorrow. Why? Because U.S. inflationary firming up may be a result of the past monetary policy mismatches between the Fed and the rest of the world. If so, we are witnessing not a structural return to 'normalcy' but a simple iteration of a vicious cycle, whereby competitive devaluations, financial repressions and monetary easing waves simply transfer liquidity surpluses around the world, cancelling each other out when it comes to global growth.

Give that possibility a thought...

28/2/16: Every Little Hurts: U.S. Consumers and Inflation Perceptions

I have written quite a bit about the wobbles of time-space continuum in the U.S. economic growth universe in recent months. But throughout the entire process, the bedrock of U.S. growth - consumer sentiment - appeared to be relatively stable as if immune to the volatility in the fortunes of the broader economy.

This stability is deceptive. Here is a chart plotting sub-series in the University of Michigan surveys of consumer confidence:

The above shows several things, some historical, others more current.

Firstly, the impact of the crisis of 2008 and subsequent second dip in the economic crisis fortunes in 2011. These were sizeable and comparable in terms of the magnitude to the abysmal late 1970s-early 1980s period.

Secondly, a steady decline in inflationary pressures on households since the early 2012. A trend bending solidly the Fed narrative of well-anchored inflationary expectations post-QE. A trend that accelerated since mid-2014 to flatten out (without a solid confirmation) toward the end of 2015.

Thirdly, a longer view of the things: despite low by historical standards inflation, the share of U.S. households still concerned with its impact on their well being is... err... high and sits well above the average for 1993-2004 golden years of the first 'Great Moderation'.

All of which, in my view, continues to highlight the utter and complete failure of traditional fiscal-monetary policies mix deployed since 2008 by the U.S. Fed and richly copied by the likes of the ECB. It also reflects a simple fact that inflation (even at near-zero bound) remains a concern for households who experience decades of weak income growth.

If, per Tesco adds, every little helps, then, when it comes to the household wealth destroying economic policies, every little also hurts...

30/12/15: Blink by 25bps, chew through billions: U.S. rates 'normalization'

In a post yesterday, I mentioned USD3 trillion hole in global bonds markets looming on the horizon as the U.S. Fed embarks on its cautious tightening cycle. Now, couple more victims of that fabled 'normalization' that few in the markets expected.

First up, U.S. own bonds:

Source: @Schuldensuehner 

As noted, US 2-year yields are now at 1.09%, their highest level since April 2010 and roughly double January 2015 average. Now, estimated interest on U.S. federal debt in 2015 stood at around USD251 billion for publicly held debt of USD13,124 billion. Now, suppose we slap on another 0.55%-odd on that. That pushes interest payments on publicly held portion of U.S. debt pile to over USD323 billion. Not exactly chop change...

And another casualty of 'normalization' - global profit margins per BCA Research:
"Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle."

Here's a chart showing both:

Source: BCA Research

Now, absence of margins = absence of capex. And absence of margins = profits growth on scale alone. Both of which mean things are a not likely to be getting easier for global growth.

Now, take BCA conclusion: "Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds. Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned."

In other words, given the leverage take on since the crisis, and given the prospects for organic growth, as well as the simple fact that advanced economies' corporates have been reliant for a good part of decade and a half on emerging markets to find growth opportunities, all this rates 'normalizing' ain't hitting the EMs alone but is bound to under the skin of the U.S. and European corporates too.

Good luck trading on current equity markets valuations for long...

29/12/15: There Are Two Ways 2016 Can Play Out for Euro Area Bonds

With the pause in ECB QE over the holidays season, bond markets have been largely looking forward to 2016 and counting the blessings of the year past. The blessings are pretty impressive: ECB’s purchases of government bonds have driven prices up and yields down so much so that at the end of this month, yields on some USD1.68 trillion worth of Government bonds across 10 euro area countries have been pushed below zero.

Per Bloomberg chart:

Value of bonds with yields below ECB’s -0.3% deposit rate, which makes them ineligible for purchases by the ECB, is $616 billion, just shy of 10 percent of the $6.35 trillion of bonds covered by the Bloomberg Eurozone Sovereign Bond Index. As the share of the total pool of marketable European bonds, negative yield bonds amounted to more than 40% of the total across Europe at the start of December (see here: http://www.marketwatch.com/story/40-of-european-government-bonds-sport-negative-yields-and-more-may-follow-2015-12-02).

Two questions weigh on the bond markets right now:
1) Will the ECB expand the current programme? Market consensus is that it will and that the programme will run well beyond 1Q 2016 and spread to a broader range of securities; and
2) Will low inflation environment remain supportive of monetary easing? Market consensus is that it will and that inflation is unlikely to rise much above 1% in 2016.

In my view, both consensus positions are highly risky. On ECB expectations. Setting aside inflationary dynamics, ECB has continuously failed to ‘surprise’ the markets on the dovish side. Nonetheless, the markets continued to price in such a surprise throughout 2015. In other words, current pricing is probably already reflecting high probability of the QE extension/amplification. There is not much room between priced-in expectations and what ECB might/can do forward.

Beyond that, my sense is that ECB is growing weary of the QE. The hope - at the end of 2014 - was that QE will give sovereigns a chance to reform their finances and that the economies will boom on foot of cheaper funding costs. Neither has happened and, if anything, public finances are remaining weak across the Euro area. The ECB has been getting a signal: QE ≠ support for reforms. And this is bound to weigh heavily on Frankfurt.

On inflationary side, when we strip out energy prices, inflation was running at around 1.0% in November and 1.2% in October. On Services side, inflation is at 1.2% and on Food, alcohol & tobacco it is at 1.5%. This is hardly consistent with expectations for further aggressive QE deployment and were ECB to engage in more stimulus, any reversion of energy prices toward the mean will trigger much sharper tightening cycle on monetary side.

The dangers of such tightening are material. Per Bloomberg estimate, a 1% rise in the U.S. Fed rates spells estimated USD3 trillion wipe-out from the about USD45 trillion valuation in investment-grade bonds issued in major currencies, including government, corporate, mortgage and other asset-backed securities tracked by BAML index:

Source here.

European bonds are more sensitive to the ECB rate hikes than the global bonds are to the Fed hike, primarily because they are already trading at much lower yields.

Overall, thus, there is a serious risk build up in the Euro area bond markets. And this risk can go only two ways in 2016: up (and toward a much worse blowout in the future) or down (and into a serious pain in 2016). There, really, is no third way…

25/12/15: Comment for Expresso on U.S. Fed hike

My comment for Portugal's Expresso (December 19) on U.S. Fed rate hike:

16/12/15: 36 years of interest rates across major advanced economies

As we inch closer to the U.S. Fed rates decision today, here is a useful chart summing up evolution of interest rates in key advanced economies over the last 36 years:

Happy lifting... 

14/12/15: U.S. Rates Impact on Euro: Expresso, December 12

My comments on potential impact on Euro and Euro area economy from the Fed rate hike for Portuguese Expresso (December, 12 page 03):

7/12/15: Of Monetary Activism and Growth: CB Balancesheets vs Economies Balancesheets

There is much talk around two matters relating to the monetary policy expectations:

1. The 'normalisation' course allegedly pursued by the Fed (rates rises); and
2. The justification for (1) by references to the monetary policy-repaired economy, made wholesome once again thanks to the Central Banks' activism (see recent Janet Yellen speech on the subject here)

Except, of course, the second point is... err... questionable. For all the estimates of percentage points of growth uplifts and unemployment reductions delivered by the Fed-linked economics analysts, there are two simple facts stubbornly persisting out there:

Fact 1: U.S. (and European, and Japanese, and global) growth since the end of the Great Recession has been much slower than historical records for recoveries suggest; and

Fact 2: Fact 1 comes on foot of a historically unprecedented monetary expansions, that are, by far, not over yet.

Here are two charts on the second fact:

Now, observe: as of today, Big 4 CB balancesheets expanded almost 4-fold. By the end of 2017 (per BAML), projected balancesheets are expected to rise even further, by more than 4.5-fold. Both BOJ and ECB will be leading this latter stage of monetary easing - the two economies that are by far fairing the worst throughout the crisis, despite the fact that whilst the ECB adopted a more conservative stand in the earlier stages of the crisis, BOJ raced ahead of everyone else with Abenomics arrival.

In other words, since 2012 through 2015, CB balancesheets grew by more than 50 percent. Meanwhile, what happened to growth rates and growth expectations?

Which, sort of, suggests that all this 'normalisation' of growth under the monetary policies activism is... well... imaginary?..

21/2/2014: Fed Transcripts, 2008: Icebergs, Titanic, Violins...

Marketwatch are running a live blog on Fed's release of 2008 transcripts

http://blogs.marketwatch.com/capitolreport/2014/02/21/the-feds-crisis-era-transcripts-of-its-2008-meetings-live-blog/

My comment: Fed transcripts from 2008 show a circus hit by a hurricane drowning in a surge of self-delusion.

Bernanke waffling on, in September 2008, about 'moral hazard' in a virtually academic exercise that is more about him being 'decidedly confused and muddled' shows the extent to which the Fed (and do keep in mind - this is the most competent Central Bank out there) was left completely unprepared for a systemic crisis. Forget the nature of the crisis or specific causes of it. The point is that some 14 months into huge pressure pilling up in the markets, the Fed was utterly unprepared to face a crisis.

Now, observe that having done the deed of acting outside any confidence about the impact of his actions, Bernanke subsequently defends his choices by saying that "I just don't believe that you can allow systemically critical institutions to fail in the middle of financial crises and expect it to be not a problem." Which, of course begs the question: does he believe that he should fail these institutions ex post after the crisis is over? And how the hell does he propose we go about that restoration of 'zero moral hazard' state? By sending in the FBI?..

In short, the man is still out of touch with reality. First, with the one he was thrown into in September 2008, second, with the one he constructed in response to September 2008 events.

Poor Ben... he goes on: "“We did not have—as the Europeans have or as we have FDICIA for banks—a system that was set up to allow a reasonable and responsible orderly resolution of nonbank systemically critical institutions. I think we now have made a lot of progress there. The TARP will provide a good interim solution.”"

Come again? What is that that 'the Europeans' have? "a system ...to allow a reasonable and responsible orderly resolution of nonbank systemically critical institutions"? Dear, oh dear... he needed retirement rest and relaxation back in 2008.

Still, the Fed transcripts show how the Central Bank did move to face the reality, unlike 'the Europeans' who basically used the Mongols' tactic for capturing Beijing - throw bodies against the walls. Even though Fed's 'data' included Yellen's quotes about plastic surgeons reporting customers delaying elective procedures... and she subsequently followed up on this pearl by expressing (in December 2008) concern about rising labour force participation...


In short, the transcripts make us, macroeconomists, look decidedly scientific and impossibly human, compared to the Central Bankers... And this before we get any transcripts from that bastion of surreality in Frankfurt, called the ECB...