The Wall Street Examiner » Wall Street Examiner Exclusives http://wallstreetexaminer.com Get the facts. Tue, 21 Apr 2015 00:51:41 +0000 en-US hourly 1 Will Weak Economic Data Force The Fed To Back Off? http://wallstreetexaminer.com/2015/04/will-weak-economic-data-force-the-fed-to-back-off/ http://wallstreetexaminer.com/2015/04/will-weak-economic-data-force-the-fed-to-back-off/#comments Fri, 17 Apr 2015 14:44:27 +0000 http://radiofreewallstreet.fm/?p=27737 Read more →

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This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Lee Adler goes behind the paper curtain of Wall Street propaganda to strip away the media hype and hysteria around the financial news headlines to show you the actual facts. This week he examines the economic data for any signs that might cause the Fed to change course from its current plan of attack. He also reviews the New York Fed’s attempt to convince market participants via its Son of Harry Potter road show that the Fed will be able to control short term rates with its unconventional tools. Potter may have scored some points.

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Today’s RFWS was absolutely outstanding. (I’m glad I actually watched this one rather than just listening while running.) When it comes to financial journalism, Lee, you remain an island of sanity in a huge sea of crap. Thanks.

Bob

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Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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First Time Claims Balloon But Is It A Warning? http://wallstreetexaminer.com/2015/04/first-time-claims-balloon-but-is-it-a-warning/ http://wallstreetexaminer.com/2015/04/first-time-claims-balloon-but-is-it-a-warning/#comments Thu, 16 Apr 2015 18:41:35 +0000 http://wallstreetexaminer.com/?p=244020 The headline, fictional, seasonally adjusted (SA) number of initial unemployment claims for last week came in at 294,000. The Wall Street conomist crowd consensus guess was 280,000. In the game of pin the tail on the number, this week was a miss.

According to the Department of Labor the actual, unmanipulated numbers were as follows. “The advance number of actual initial claims under state programs, unadjusted, totaled 307,500 in the week ending April 11, an increase of 53,967 (or 21.3 percent) from the previous week. The seasonal factors had expected an increase of 41,129 (or 16.2 percent) from the previous week. There were 318,793 initial claims in the comparable week in 2014.”

Initial Claims and Annual Rate of Change- Click to enlarge

Initial Claims and Annual Rate of Change- Click to enlarge

The week to week change was worse than average for that week of April. The actual increase of 54,000 (rounded) compared with the 10 year average increase for that week of 38,000 (rounded). Claims increased by just 19,000 in the comparable week last year.

Looking at the momentum of change over the longer term, actual claims were 3.5% lower than the same week a year ago. Since 2010 the annual change rate has mostly fluctuated between -5% and -15%. The current number is slightly above the range but not so much that it would indicate that the trend is beginning to weaken.

At the last bubble peak in 2006, claims began to increase late in that year. The housing bubble had already peaked a few months earlier but the stock market continued on its merry way for 9 more months, not finally ending its run until September 2007. In that instance a clear breakout in the number of claims toward the end of 2006 gave plenty of advance warning that all was not well before stock investors got a clue. Conversely, at the 2000 top, claims had given little advance warning. They began to break out concurrently with the top in stock prices through midyear 2000.

The oil price collapse may be analogous to the housing bubble peak in 2006.

The impact of the oil price collapse started to show up in state claims data in the November-January period. While most states show the level of initial claims well below the levels of a year ago, in the oil producing states of Texas, North Dakota, and Louisiana, claims have been above year ago levels since the turn of the year. North Dakota and Louisiana claims first increased above the year ago level in November. Texas reversed in late January. In the most current state data, for the April 4 week, claims in these states were well above year ago levels. Texas was up 14%, Louisiana +9%, and North Dakota +87%. Another oil producing state, Oklahoma, was up by 30%.

With its huge and widely diversified economy, Texas could be the harbinger of things to come for the entire nation as the ripple effects of the oil collapse and the disappearance of those $85,000 per year jobs spread through the US economy.

In the April 4 week, 11 states had more claims than in the same week in 2014. That’s down from 17 at the end of February. In that regard, there’s been some improvement, but at the end of 2014 only 8 were up year to year. At the end of the third quarter of 2014 there were just 5. This is akin to a stock market advance-decline line in a negative divergence from an advance in the market averages. It may be a warning sign of deterioration that is not apparent in the topline numbers.

I track the daily real time Federal Withholding Tax data in the Wall Street Examiner Professional Edition. The year to year growth rate in withholding taxes in real time is running slightly above 5% in nominal terms. This is down from a peak of over 8% in February, but it remains a strong number that supports the likelihood of a solid gain in payrolls for April.

The jobs data will continue to encourage the Fed to engage in the charade of pretending to raise interest rates sooner rather than later.

Initial Claims Inverted and Stock Prices- Click to enlarge

Initial Claims Inverted and Stock Prices- Click to enlarge

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Industrial Production Chirps Like A Canary http://wallstreetexaminer.com/2015/04/industrial-production-chirps-like-a-canary/ http://wallstreetexaminer.com/2015/04/industrial-production-chirps-like-a-canary/#comments Wed, 15 Apr 2015 16:19:27 +0000 http://wallstreetexaminer.com/?p=243801 The US Industrial Production (IP) Index slowed in March to an annual growth rate of +2.0%. That was the slowest since July 2013 when the growth rate briefly dropped to +1.7%. IP is measured on the basis of units of production, so no adjustment is necessary for inflation.

On a month to month basis the actual IP index (not seasonally manipulated) dropped by less than 0.1. March is normally an up month with an average gain of +0.7 over the past 10 years. So even though the number was little changed from February, it’s a bad number. However, it’s too soon to tell if this is the beginning of the end or just a pause. If the slowdown in IP persists, the correlation on this chart suggests that it will be bad news for the stock market.

Industrial Production- Click to enlarge

Industrial Production- Click to enlarge

 

The US oil and gas boom/bubble has skewed total IP upward since 2011. In spite of the crash in oil prices, production and capacity growth hasn’t slowed much yet. Production is still growing at a 12% annual rate. That’s about the same growth rate since the peak in prices in mid year last year.

Oil and Gas Capacity and Production- Click to enlarge

Oil and Gas Capacity and Production- Click to enlarge

Where would we be without the oil/gas production boom?

Where Would We Be Without Oil and Gas Boom?  Click to enlarge

Where Would We Be Without Oil and Gas Boom? Click to enlarge

 

A partial answer is that non-energy industrial production has only recently recovered to 2007 levels, and just barely.

Non Energy Industrial Production- Click to enlarge

Non Energy Industrial Production- Click to enlarge

Considering that the oil/gas production boom probably helped to boost not just related businesses but even unrelated industries via ripple effects, industrial production probably would not have been even this strong without the fracking revolution. While Bernanke likes to take credit for saving the world, in truth the fracking boom did more to boost the US economy. It got overdone, but it was real production with high paying jobs and widespread ripple effects throughout the US economy.

Now we must wait and see what happens to the US economy when the collapse of the oil price bubble finally begins to curtail production. If the housing bubble is any guide, it can take up to a year or so for production to collapse in reaction to the reality of the marketplace.

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Here’s Why Strong Retail Sales Per Capita Ex Gas Chirps Like A Canary http://wallstreetexaminer.com/2015/04/heres-why-strong-retail-sales-per-capita-ex-gas-sound-like-a-canary/ http://wallstreetexaminer.com/2015/04/heres-why-strong-retail-sales-per-capita-ex-gas-sound-like-a-canary/#comments Tue, 14 Apr 2015 16:06:25 +0000 http://wallstreetexaminer.com/?p=243650 The headline seasonally adjusted retail sales number slightly missed conomists’ expectations this morning, but beneath the headlines, the actual hard data tells a different story.

Nominal retail sales, not seasonally adjusted and not adjusted for inflation (or deflation), rose by $54.9 billion in March from February. March is always an up month. This month was better than the average increase for the past 10 years of $44.5 billion ($48.4 billion average ex 2008-2009). It was also slightly better than the March 2014 gain of $53.6 billion. On a top line basis, this was a strong performance.

On a year to year basis, nominal sales rose 1.6%, which was just 0.1% better than February’s 1.5% year to year gain. That was the smallest yearly rate of increase since a +0.9% reading in February 2013. It is at the low end of the rate of change of the past 2 years but it is still within the range. There’s no evidence here yet that the economy is sliding into a ditch.  In 2012 there was a radical slowing in the growth rate since the bungee rebound years of 2010 and 2011, but since then the growth rate has been rangebound.

Nominal Retail Sales- Click to enlarge

Nominal Retail Sales- Click to enlarge

 

The rate of change graph may look ominous when we don’t consider the skewing effect of gas prices collapsing. Much of the slowing in the growth rate is attributable to the decline in gasoline prices, which reduced total nominal sales over the past 9 months.

Backing out gasoline sales and adjusting the nominal sales for changes in the price level over time gives a picture of real sales over time, without the counter trend distortion of large changes in gas prices.

Real Retail Sales Ex Gas- Click to enlarge

Real Retail Sales Ex Gas- Click to enlarge

Real retail sales excluding gasoline sales jumped by 13.3% from February to March. That’s modestly stronger than the average March gain of +12.6% for the past 12 years and about the same as the March 2014 gain of +13.2%. The annual growth rate was +1.6%, about the same as in February and somewhat above the low side of the growth rate range of the past 2 years, which was as low as slightly negative in early 2013.

To normalize the data for population growth I also divided by total US population resulting in a figure for real retail sales ex gas on a per capita basis.

Real Retail Sales Per Capita- Click to enlarge

Real Retail Sales Per Capita- Click to enlarge

Here, the picture looks stronger. The monthly change of +13.1% is stronger than the 10 year average for March of +12.2%, but the big difference is in the annual growth rate. At +3.2% it is well above the bottom of the range of the past 2 years. The growth rate has been trending up since the middle of last year when gas prices peaked. This shows that consumers have increased their spending on items other than gas, benefitting those sectors of the economy while energy production and sales suffer.

That’s a logical impact. What was illogical was conomists’ conclusion, including those at the Fed, that the US economy as a whole would be boosted. Transferring income from one sector of the economy to another does not add to total economic output.

In spite of this surge in spending, retail sales per capita ex gas are still below the peak housing bubble years of 2004-2007. Cash-out refinancing of homes in those years allowed people to spend more than their income would normally permit. This time around they have no such benefit, so the numbers lag behind those peak levels. However, the surge in the growth rate to above 5% in January could be a sign of spending exhaustion at this late stage of the growth cycle. Similar surges in 2004 and 2005 marked the “as good as it gets” stage of the housing bubble economy.

While the top 10% of the income spectrum does most of the spending, the gain that took place from the middle of last year through January was still a remarkable surge. Hidden beneath the headline numbers was a spending orgy, which may have exhausted itself in January when the annual growth rate hit +5.6%. February and March have been softer as an after effect of that surge.

Mid and lower income consumers have shifted their dollars formerly spent at the Mini Mart gas pump to WalMart, Costco, and maybe even the local car dealer. When non discretionary spending declines thanks to a drop in gas prices, discretionary spending may or may not increase, depending on whether people opt to spend, save, or pay down debt. Consumers have shifted some spending. But total spending will remain the same or decline. For consumers to spend more in total, their income must increase. For the bulk of Americans, that isn’t happening.

Lower gas prices have stimulated some times of retail spending. But the other shoe has yet to drop. That is the weakening that will occur from the layoffs of highly paid oil and gas workers, plus the shutdown of orders of related machinery, equipment and materials, and the major ripple effects including job losses and the accompanying decline in spending that will follow. Those are still in the works. The effects of slowing oil exploration and production have yet show up in the broader economic data.

The invisible retail spending orgy since mid 2014 could be the final stages of a bubble. Only nobody realizes it yet. The pundits were too busy wailing over the misleading weak headline numbers in January and February. This could take a year or more to play out, but the canary may have already sung.

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St. Louis Fed is Doing It Backward http://wallstreetexaminer.com/2015/04/st-louis-fed-is-doing-it-backward/ http://wallstreetexaminer.com/2015/04/st-louis-fed-is-doing-it-backward/#comments Sun, 12 Apr 2015 23:53:22 +0000 http://wallstreetexaminer.com/?p=243451 Each week the St. Louis Fed produces what it calls the Financial Market Stress Index. It issues a press release updating the index. This week it read like this.

Financial market stress fell slightly over the previous week, according to the St. Louis Fed Financial Stress Index (STLFSI). For the week ending April 3, 2015, the STLFSI measured -1.072, down from the previous week’s revised value of -1.068. This is the third consecutive weekly decline.

It explains:

The St. Louis Fed Financial Stress Index (STLFSI)

The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.

How to interpret the index
The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress.

And their chart.

CCbT8TfWYAAMzof

Low stress. Ho hum, right?

Not so fast! Because, you see, they’re doing it backward.

St. Louis Stress Index Inverted - Click to enlarge

St. Louis Stress Index Inverted – Click to enlarge

Technical analysts and market chartist call that orange line since the middle of last year a negative divergence. Last time there was one lasting as long as this was in 2007. Apparently it works well at bottoms too, with months long positive divergences developing ahead of stock market turns.

Useful? I’ll let you be the judge.

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Bears May Need To Batten Down The Hatches Again http://wallstreetexaminer.com/2015/04/bears-may-need-to-batten-down-the-hatches-again/ http://wallstreetexaminer.com/2015/04/bears-may-need-to-batten-down-the-hatches-again/#comments Sat, 11 Apr 2015 20:50:49 +0000 http://radiofreewallstreet.fm/?p=27689 This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Lee Adler goes behind the paper curtain of Wall Street propaganda to strip away the media hype and hysteria around the financial news headlines to show you the actual facts drowned out by all the noise. This week he explains why things may get tough for bears over the next few weeks, and what to look for as triggers.

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Today’s RFWS was absolutely outstanding. (I’m glad I actually watched this one rather than just listening while running.) When it comes to financial journalism, Lee, you remain an island of sanity in a huge sea of crap. Thanks.

Bob

Join now and lock in the current price! Use the form below.

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Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Hilsenrath Shows Up On Schedule to Ask How Fed Will Raise Rates http://wallstreetexaminer.com/2015/04/hilsenrath-shows-up-on-schedule-to-ask-how-fed-will-raise-rates/ http://wallstreetexaminer.com/2015/04/hilsenrath-shows-up-on-schedule-to-ask-how-fed-will-raise-rates/#comments Thu, 09 Apr 2015 16:17:25 +0000 http://wallstreetexaminer.com/?p=243147 On March 26, I wrote the following on the issue of how the Fed will raise rates:

This is a subject that I have been ranting about for months. The mainstream media has avoided it assiduously in spite of me constantly haranguing various Fed reporters about it. Now that Spicer has broken the story, the floodgates will open. You can be sure that the Wall Street Journal’s Jon Hilsenrat will be on it like a fly on horseshit to get all the credit for it next week. He’ll report the Fed authorized, whitewashed, rubber stamped, and promoted version of the story.

Here’s Why The NY Fed’s Head Trader Is Now Doing A Dog and Pony Show That You Need To Know About

My timing was off by just a week. Hilsy was out today with a WSJ blog post that reports but, as predicted, soft pedals, the issue.

Minutes released by the Federal Reserve of its March policy meeting were a reminder that the central bank could face real operational challenges when it decides to start raising short-term interest rates.

I’ll say. Their unconventional tools of increasing IOER, or RRP and TDF, won’t work because they will pay an additional subsidy to the banks, increasing their income and reducing their cost of funds. ‘Splain to me again how that will induce them to raise rates.

As part of its bond-buying programs, the Fed has flooded the banking system with $2.7 trillion of funds known as reserves. Bank reserves are like a dollar in your pocket – they pay no interest.

Come on Jonny Boy. You know that’s not true. You know that the Fed is paying interest on those balances. The media even coined an acronym, IOER. And it’s coming right out of taxpayer pockets because it reduces the surplus interest income the Fed recieves which it returns to the Treasury.

This abundance of funds is a giant weight keeping short-term interest rates near zero. When it comes time to raise interest rates the Fed will need to either a) eliminate those reserves or b) pay a higher interest rate than zero to private financial institutions in exchange for them. The Fed has chosen the latter route for the early stages of the rate hike cycle, but the minutes showed Fed officials are still struggling to define the tools they’ll use to pull this off.

Because they KNOW, but are not saying, that paying interest to the banks won’t induce the banks to raise rates. Au contraire.

Paying higher rates to banks is simple since they have accounts with the Fed. But the reserves seep out of the banking system into other financial institutions like money market mutual funds and officials are reluctant to use a new instrument – overnight reverse repo trades – designed to manage rates outside of the banking system. Last September they set a $300 billion cap on these trades. In March they agreed they might need to ignore their own cap, according to the minutes.

This is laughable gibberish. Reserves do not “seep out of the banking system.” They are cash assets on the books of the commercial banking system. They can move from bank to bank, but like the Hotel California, they can’t leave unless the Fed extinguishes them. The only way to do that is for the Fed to sell assets. That results in the liquidation of the reserve deposits on the Fed’s balance sheet as the banks exchange their cash for the paper which the Fed sells to them.

Fed officials also entertained ways to eliminate reserves more quickly than planned, including by selling some securities before they mature or allowing some to mature without reinvesting the proceeds. It is striking that they discussed new strategies for eliminating reserves at the March meeting.

Dude! They discussed it in January! Did you not read those minutes. They had pages of discussion on it. No one in the mainstream media reported it. Not you. Not anyone. Just one crazy, lone, independent analyst, waving his fist at the sky in a raging lightning storm. Everybody else just played through, as if the sun were shining, no thunder crashing around them.

For months it had sounded like Fed officials were settled on their plans on this front – no asset sales and continued reinvestment of proceeds from maturing securities until after the Fed had already started raising rates. Now they don’t sound so sure about that strategy. “A number of participants suggested that it would be useful to consider specific plans for these and other details of policy normalization under a range of post-liftoff scenarios,” the minutes said.

This is where I get to say I told you so. I said that you’ll know the Fed is serious about raising rates when they start floating trial balloons about shrinking the balance sheet. Because that’s the only way they can get rates to go up.

For years, Fed officials have sought to reassure the public that they had all the tools they would need to raise interest rates when the time came, even with all of these reserves in the banking system. The minutes show that even now the mechanics of how they’ll do this are very much a work in progress, and a possible source of market uncertainty as the Fed looks toward rate increases later this year.

The truth is that they know that their “unconventional tools” won’t work. They need to start shedding assets. Whether they do that by allowing them to run off or selling is the question. My guess is that allowing paper to mature won’t have much effect initially. They would need to start selling assets. There are those who would argue that that will never happen because markets would disintegrate. They may be correct. Will the Fed be willing to test that?

From March 17-

Why Are We Speculating About When The Fed Will Raise Rates When The Real Issue Is How

And the February 18 video.

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Here’s Why ECB Balance Sheet Growth on New QE Can’t Be Called “Success” http://wallstreetexaminer.com/2015/04/ecb-balance-sheet-success/ http://wallstreetexaminer.com/2015/04/ecb-balance-sheet-success/#comments Tue, 07 Apr 2015 18:22:31 +0000 http://wallstreetexaminer.com/?p=242732 The ECB reported today that it “successfully” purchased €60 billion in bonds in March, meeting its goal under the new QE program. Mainstream finanshill media headlines repeated the “Success!” mantra. However, a closer look at the ECB’s balance sheet data suggests that perhaps that “success” was a hollow one. The balance sheet did expand by €116 billion in March, but €97 billion of that was via a new TLTRO (Targeted Long Term Lending Operation) takedown on March 25. Apparently a net gain of only €19 billion came from the outright asset purchases. That’s because approximately €41 billion of weekly MRO (Main Refinancing Operations) and regular LTRO loans were paid down.

19 billion is barely a rounding error on the ECB’s €2.2 trillion balance sheet. It certainly won’t get the ECB to its goal of growing the balance sheet by a trillion. Nor will 100 billion in quarterly TLTRO, even assuming that the use of that program won’t continue to decline.

I have warned since the announcement of this latest iteration of QE that the banks very well might use the cash to pay down outstanding debt to the ECB. That appears to have happened in March. Banks historically have used funds from ECB long term lending operations to fund carry trades.The TLTRO cash is likely to be used to purchase US Treasuries or other safe securities in a carry trade. Banks are eligible for TLTRO funds as long as they meet minimal targets for loan growth. The ECB effectively has no control over what the banks do with the funds.

As with other central banks’ QE programs, the funds essentially only inflate asset price bubbles. It’s a simple case of too much printed money each month chasing a relatively slower growing pool of assets. Wall Street shills call it “appreciation” or “multiple expansion,” but it’s really just a manifestation of inflation, one that conomists ignore.

The fact that the latest TLTRO takedown was “only” €98 billion is notable. It’s about 25% less than the December takedown of €130 billion. Confidence in carry trades or other uses of these funds is beginning to wane. The next TLTRO bump in the ECB’s balance sheet will come when the next round of these operations closes in June. It would not be surprising to see the amount shrink again. In the meantime we’ll get to see in the April and May data just how well the asset purchase program is working to boost the ECB’s balance sheet.

ECB Balance Sheet - Click to enlarge

ECB Balance Sheet – Click to enlarge

Jim Bach at Money Morning has written a helpful explainer of the complexities of the ECB’s QE program. In the course of that report he rehashed the conomic theory behind QE. Most observers, including otherwise thoughtful analysts, accept this particular conomic theory as gospel. I think that it’s nonsense, and unfortunate that it was included in an otherwise brilliant explainer. Here’s the relevant quote.

It’s important to understand that ECB QE is not “money printing.” And even just by itself, it’s not inflationary.

Here’s how it works. The European Central Bank – or one of the Eurozone member’s national central banks – will transfer a government bond from a commercial bank’s balance sheet to its own. The bond will show up on the asset side of the central bank’s balance sheet. Then the central bank will credit the commercial bank’s reserve account the value of that bond.

The central bank’s balance sheet will increase on the asset side by the value of the bond, and the liabilities by the increase in value of the commercial bank’s reserve account.

But in this transaction, the commercial bank’s balance sheet doesn’t change at all in value, only in composition. It is an asset swap. The commercial bank swaps a less liquid asset (a government bond) for a more liquid asset (euros).

All this does is increase liquidity within the commercial bank. It allows the banks a larger capacity to issue more loans.

As firms and households borrow that money and credit expands, more money is moving around in the economy. This is known as the velocity of money. It’s this velocity that’s supposed to help fight deflation and get dollars moving in the private economy.

In short, QE is an effort to facilitate a higher velocity of money by giving banks more lending capacity.

I would take issue with the statement that “It’s important to understand that ECB QE is not “money printing.” In fact, it is. Even Reuters calls it “money printing” in its stories reporting on the ECB’s balance sheet.

Also, the theory that QE will stimulate velocity is wrong. QE causes velocity to plunge because money supply grows faster than GDP or even potential GDP. Velocity is a derived number, essentially GDP/M. It’s a meaningless construct. As long as central banks are printing mass quantities of money, V will continue to fall. When they stop printing, V will rebound.

As for money printing, where did the ECB (or NCBs) get the funds to buy the bonds? Answer- They printed it. It did not exist before the purchase transaction. The ECB’s balance sheet expanded as a result. Central bank purchases of government bonds during periods when governments are in deficit and financing spending with debt, are quintessential money printing.

The purchase transaction itself does not expand the banks’ balance sheets as Mr. Bach points out, but governments spending the funds they raised with those bond issues does. It’s why US money supply expanded almost precisely dollar for dollar with Fed QE, and why bank balance sheets, and hence money supply, will grow as a result of this program UNLESS the banks use the funds to pay down debt, particularly ECB debt. In that case, both Euro money supply, and the ECB’s total assets will do no better than stagnate.

The ECB only prints the money to buy the paper. After that, it’s out of the ECB’s hands. The ECB has no control over what the banks do with the cash. If the banks opt to use the cash to pay down debt, then the ECB’s program will be an abject failure, just as all its other recent programs have failed to cause its balance sheet to grow. It would be an especially embarrassing failure if the banks use the cash to pay down outstanding ECB credit. The negative deposit rate acts as an incentive for them to do so.

The ECB, with its money printing and negative deposit rates has created, if not a Catch 22, then at least a Gordian knot. QE does not and cannot force banks to lend. Banks can lend whenever they want, without any central bank cash whatsoever. What banks need to make loans is qualified loan demand. Without that, they won’t lend, or if they do, they’ll just create more bad debt.

The only thing QE can do, and does do, is inflate asset prices. The question is how long it will be before the central banks finally grow tired of seeing asset prices inflate into bubbles. The Fed has already reached that point. It has stopped queeing, and is making threatening noises about interest rates (which it can’t deliver on). That leaves the ECB and BoJ. When they finally get exasperated enough by the failure of QE to achieve its stated goals, or worried enough about dangerously bloated asset prices, they will finally pull the plug.

That’s when things will get really ugly.

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Non Farm Payrolls- What A Picture Is Worth http://wallstreetexaminer.com/2015/04/non-farm-payrolls-what-a-picture-is-worth/ http://wallstreetexaminer.com/2015/04/non-farm-payrolls-what-a-picture-is-worth/#comments Sat, 04 Apr 2015 18:14:36 +0000 http://wallstreetexaminer.com/?p=242538 What is a picture worth? Think of all the words you read about Friday’s Nonfarm Payrolls report and then look at the picture.

Non Farm Payrolls- Click to enlarge

Non Farm Payrolls- Click to enlarge

This is the actual, not seasonally adjusted data. What has changed?

Please understand that I’m not saying that this is bullish. In fact the opposite. Markets crumble when central banks pull the plug. They pull the plug when they deem the economy is strong and inflation (or, in spite of what they say- excessive speculation) is a threat.

Now maybe there are irregularities and deficiencies in the way that the BLS collects and presents this data. But tax collections don’t lie and the real time daily withholding tax collections through April 1 did not suggest a change of trend, or any material slowing yet, either.

Federal Withholding Tax Collections- Click to enlargea

Federal Withholding Tax Collections- Click to enlargea

So there you have the pictures. What are they worth? I’ll let you be the judge.

 

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Where’s The Access King When You Need Him? http://wallstreetexaminer.com/2015/03/wheres-the-access-king-when-you-need-him/ http://wallstreetexaminer.com/2015/03/wheres-the-access-king-when-you-need-him/#comments Sat, 28 Mar 2015 19:23:53 +0000 http://wallstreetexaminer.com/?p=241776 Jon Access King Hilsenrath and Mikentucky Derby posted a report in the Wall Street Journal this weekend on Janet Holleran Yellen’s Friday speech to an adoring crowd of professional conomists in San Francisco. The reporters spent 16 paragraphs on a news free rehash of the Chairlady’s, seeming endless, and endlessly boring, no news is good news, tour d’farce on all the reasons the Fed will take its time raising rates. She, and they, covered everything we already knew about the US economy, while avoiding the elephant in the room– that is, the real reason why the Fed will delay, delay, delay in raising rates. It knows that Abracadabra Theory does not work.

In the good old days the Fed more or less controlled the Fed Funds rate by keeping reserves in the system tight. Each day it would enter the market and add or drain a small amount of money to or from the system to herd the Fed Funds rate toward the target range. Usually that worked. Today they can’t do that. There’s just too much cash in the system.

So the New York Fed is doing a dog and pony road show to try to convince market insiders- the Primary Dealers, banks and money market funds that are active in the short term paper market, that yes, Virginia, the Fed really does have the tools to control interest rates when there’s $2.7 billion in excess cash in the banking system. The Fed is, after all, the great and powerful Oz! All we need do is click our ruby slippers and believe. The Fed will pull a magic wand from its toolbox, wave it around, shout “Abracadabra, rates go UP!” and voila! The market will believe and rates will magically rise, in spite of all that excess cash lying around.

Jonathan Spicer at Reuters was the first mainstream media guy to begin to pull the covers off this subject. Meanwhile, not a peep about it from Access King or Mikentucky. The Wall Street Journal always breaks bad news after the horse has bolted from the stable.

In case you missed it-

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