Will the FED lift rates?

[Mega]

They have to be mad, but they might be?

Mike

[Mega]

Re: Will the FED lift rates?

Global banks retreat as the US and China tighten in lockstep

The glory days of "maximum liquidity" we have enjoyed in the post-Lehman era are coming to an end, warns Bank of America


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China's own variant of global QE is slowing to a halt Photo: AFP



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By Ambrose Evans-Pritchard

8:19PM BST 12 Sep 2014

38 Comments


The world financial system is at an inflection point as the US and China both switch off monetary stimulus, a form of synchronized tightening by "G2" superpowers.


Bank of America has warned clients that the glory days of "maximum liquidity" we have enjoyed in the post-Lehman era are coming to an end, with sweeping implications for asset markets across the world.


The yield on 10-year US Treasuries - the benchmark price of global money - has already jumped 20 basis points to 2.54pc since mid-August as it becomes clear that the US economy has survived its Winter wobble and is moving into an incipient boom. Growth reached 4.2pc in the second quarter, with the ISM manufacturing gauge near 30-year peaks.

Bank of America expects yields to jump to 3.1pc this year, and 3.75pc by the end of 2015 as the Federal Reserve raises interest rates in earnest.


This implies a torrid rally in the US dollar akin to the Fed tightening cycles of the early 1980s and the mid-1990s, a stress test for the vast edifice of dollar debt in Asia and the developing world.

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Two Fed papers have rattled the markets this month. One, by the San Francisco branch, said investors "seem to expect a more accommodative policy” than the Fed itself. The other, by staff in Washington, said the reason why millions of people have dropped out of the workforce since the Great Recession is mostly "structural", the effects of ageing and shifting technology.

The implication is that the economy is close to the critical turning point (NAIRU) when a shortage of workers starts to set off a wage pressures. On cue, average hourly earnings have sprung back to life, rising 2.1pc in August. The "hiring rate" is now higher than in January 2008. Even Fed doves are turning twitchy. "We expect the first rate hike in March 2015," said Paul Ashworth, from Capital Economics.

Some hope the European Central Bank will step into the breach, launching its own quantitative easing in time to keep the party going. This is wishful thinking. The ECB's Yves Mersch warned this week that plans to buy private securities "are neither comparable with a broad programme of QE, nor do they represent overtures to that".

Most of the ECB's €1 trillion blitz - paired back to €800bn in later leaks - would be bank loans (TLTROs) that offset old loans being repaid. This is not QE, and is far less potent. Only a fraction of the stimulus - as yet undisclosed - will come as high-octane asset purchases.

In aggregate, the great central banks are turning hawkish. China's premier, Li Keqiang, sent a chill through the World Economic Forum in Tianjin this week, warning that markets can no longer count on easy money. "We are restructuring instead of expanding the monetary supply," he said.

The Communist Party is willing to endure the economic slowdown, no longer responding to each hiccup with more credit, so long as urban unemployment remains near 5pc. For now the economy is still generating 1.2m jobs a month.
China's budget reform will soon halt rampant borrowing by local governments, adding fiscal tightening to the mix. Regulators are shutting down chunks of the shadowing banking industry.

This had to come after the epic malinvestments of the past five years. Loans have risen from $9 trillion to $25 trillion, equal to the US and Japanese banking systems combined. Stephen Green, from Standard Chartered, says credit already exceeds 250pc of GDP on all measures, vertiginously high for an emerging market.

Whether China can extricate itself from this without trauma is an open question. “China’s development unfortunately has largely followed the script written by Japan some 30 years ago,” said Bank of America's Naoki Kamiyama and David Cui. If anything it is worse.

“China’s growth was more imbalanced, its reliance on external demand was heavier, the government’s monetary response to the external demand shock was looser, debt growth was faster, over-capacity was worse and asset price appreciation had been just as rapid,” the pair said.

For now, China vows to tough it out. The consequences are being felt by the commodity nexus in Latin America, the Middle East and Australia, and by all who live from feeding the dragon. China's thirst for oil seems quenched, causing the International Energy Agency to cuts it global demand forecast yet again this month. “It is ever clearer that Chinese oil demand growth will struggle to get much above 2pc,"it said.

Goldman Sachs says we have reached the "end of the Iron Age". The global surplus of iron ore will triple to 163m tonnes next year. Prices have already halved and will grind down for years to come, a painful prospect for Brazil's Vale, trading at a fifth of its former value. "The day when steel production in China will peak gets ever closer,” said Goldman.

China's own variant of global QE is slowing to a halt. The central bank was still buying foreign assets at a pace of $40bn a month in the first quarter, mostly US and EMU bonds. This has stopped since Li Keqiang said in May that the country's $4 trillion reserves had become a "burden", stoking inflation.

Nomura's Jens Nordvig says net accumulation by central banks fell to $63bn in the second quarter of this year, from $89bn in the first quarter, and $181bn in the fourth quarter of 2013 (adjusted for currency swings).

The commodity bloc and Asia's rising powers, among others, have amassed $12 trillion of foreign reserves, gobbling up the supply of Treasuries, Gilts, Bunds or gold, displacing huge sums into every asset market, a form of world QE. Holdings have risen from 5pc to 13pc of GDP since 2000, or 22pc including sovereign wealth funds. If they start selling, the global financial structure is turned on its head.

This wall of money was a key cause of the pre-Lehman asset boom and continues to drive new bubbles everywhere, what the Bank for International Settlements calls the "puzzling disconnect between the markets’ buoyancy and underlying economic developments globally”. The BIS says the Tobin's Q measure of US equities is more stretched today than it was just before the storm broke in 2007.

Hans Redeker, currency chief at Morgan Stanley, advises clients to batten down the hatches and buy the dollar, expected to hit $1.15 against the euro next year. "The world's biggest and second biggest economies are tightening and we know what that means for asset markets. At some point this is going to snap," he said.

The epicentre of risk is in global dollar debt. BIS data show that cross-border bank lending has reached $12.6 trillion, 63pc in dollars. "Global dollar leverage has never been higher as a share of GDP. Many borrowed when rates were very low and are dependent on cheap capital," he said.

The BIS said emerging market companies - mostly in Asia - have borrowed a further $2 trillion in dollars since 2009, lately at real rates of 1pc. The emerging world imported the West's ultra-stimulus at the wrong time in their own economic cycles, driving their debt ratios to a record 175pc of GDP. They too have been corrupted.

Emerging markets have already suffered two major squalls since the Fed began to pivot, the "taper tantrums" of May 2013 and January 2014. They recovered but must soon face the real test - "rates rage" as it is dubbed - when the Fed actually tightens.

Some have bolstered their defences, like Mexico. Most have not. Stephen Jen, from SLJ Macro Partners, said fresh carry trades have washed over these countries yet again, masking risks. "Economic fundamentals have continued to worsen and current account deficits have widened again. Few have undertaken any meaningful structural reforms. They are vulnerable to a shock," he said.

Leaders of the BRICS and mini-BRICS - and their many advocates in the City - insist that these countries have outgrown the problems of the 1980s and 1990s and are strong enough these days to shake off anything happening in the US. They will soon have a chance to prove it, as the dollar sweeps all before it with tidal force.

[Mega]

Re: Will the FED lift rates?

THis might explain why Jim Rickards has gone "down market"............he sez the FED will QE4, that rates will NEVER go up...........if this comes to be than he is proven wrong. Has he got wind of this?.......is this why he plugging his book to the "Alex Jones" types...........make hay while the sun is out?

If so, then GOLD IS GOING TO GET KILLED !!!!!!!!!!!

Mike

[Mega]

Re: Will the FED lift rates?

OK, this is how it will play out:


#1. The price of Oil will cause massive gyrations on the world market (though not limited to Oil)

#2. The market begins to collapse. The Fed and the US Treasury stuff enormous quantities of liquidity into the market to try and stop it from falling further. It does not work

#3. The Fed the US Treasury is joined by the UK Exchequer and the Bank of England and then Central banks around the world. They cannot stop the plunge.

#4 as a last resort, the Fed pulls the plug - and shut the entire US-dollar based economic and financial system down to stop it collapsing.

#5. the Rest Of The World (Read: China, Russia, Brazil) fall all over themselves as they start trading without the US dollar ostensibly because they are forced to.

#6. Saudi Arabia, to try and prevent it's own economic collapse, has to start trading in whatever the Russians and Chinese start trading in

#7. In a panic, the US Fed and US Treasury re-open the markets and US Dollar denominated financial system, which then collapse. The US dollar is formally abandoned as the World's Reserve Currency

#8. All that printed money returns to the US - which then experiences Hyperinflation.


That about covers it.