The Crazy World Of Libor, Swaps And Treasury Yield Curves (Fire? or Ice Axe Cometh?)

Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.” 

In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).

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What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.

The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”

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Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”

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Goin’ Down! Fed Continues Balance Sheet Shrinking Of $14.2 Billion (Unwind Reaches $434 Billion, Remains on “Autopilot”)

As Bruce Springsteen famously mumbled, The Fed’s Balance Sheet is “Goin’ Down.”

As of Feburary 6, 2016, The Federal Reserve of New York further shrank The Fed’s Balance Sheet by $14.2 billion.

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This week it was $11.665 billion of US Treasury Notes and Bonds and $2,525 billion of US Floating Rate Notes. For a grand total of $14.2 billion reduction in liquidity.

Now The Fed has unwound $434 billion of its prodigious balance sheet.

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While other central banks filling their punch bowls ever further.

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So, The Fed is continuing its draining of the monetary punch bowl on autopilot.

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“Bond King” Gross Retires, Dudley “Amazed and Baffled” About Fed’s Balance Sheet Unwind And World’s Largest Pension Fund Suffers Catastrophic Quarter (Boogie In The Dark?)

I feel like investors are doing the “Boogie In The Dark” when it comes to understanding this broken market.

What’s going on?

First, bond king Bill Gross (formerly of PIMCO then Janus-Henderson) has thrown in the towel after 50 years.  His success at PIMCO was in the greatest bond bull run in modern history. But his Janus fund started near the peak of The Fed’s QE3 balance sheet expansion. Then his fund underperformed when The Fed started unwinding their balance sheet (and raising their target rate). Translation: The Fed got bond king Gross dizzy … and he retired.

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And that brings me to the former New York Fed President William Dudley.

(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley said he’s “amazed and baffled” at the attention the wind-down of the U.S. central bank’s balance sheet has been receiving from investors, pointing to other culprits as the likely cause of recent volatility in financial markets.

Amazed and baffled? Just ask Bill Gross about the importance of Fed’s wind-down.

Then we have the world’s largest pension fund, Japan’s Government Pension Investment Fund that lost 9.1 percent, or 14.8 trillion yen ($136 billion), in the three months ended Dec. 31. The decline in value and the rate of loss were the steepest based on comparable data back to April 2008. Domestic stocks were the fund’s worst performing investment, followed by foreign equities. Assets fell to 150.7 trillion yen at the end of December from a record 165.6 trillion yen in September.

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But who helped break the market by distorting asset prices and returns? The Federal Reserve and other global central banks.

With so many uncertainties in global market (Brexit, trade wars, Venezuela’s meltdown, The Fed’s uncertain policy path, Italian debt crisis. etc., …

(Bloomberg) — Italy is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt, people with knowledge of the plan said.

investors should hedge their risk exposure across markets … or move to cash or short-term Treasuries. In other words, take out some insurance.

Lastly, down in Virginia, we are suffering through yet another embarrassing governor (Northam) after McAuliffe and his electric call debacle.

Bye, bye Bill Gross. I can’t stand to see you go.

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IMF Downgrades Eurozone Growth To 1.6% (Global Forecast At 3-Year Low)

The International Monetary Fund (IMF) has downgraded economic growth for the Eurozone to 1.6 for 2019. weoupdatejan2019.  But Japan is even worse at a forecast of 1.1% for 2019.

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Russia is also forecast to be sub-2% as 1.6%.

The Eurozone and Japan are drunk as a skunk on global Central Bank zero interest rate policies.

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China’s Central Bank Now Has World’s Largest Balance Sheet As $1.1 TRILLION Is Injected Into Markets Via Repos (Curves Kinked)

China’s central bank, the People’s Bank Of China, now has the world’s largest balance sheet topping even the European Central Bank (ECB). Only The Federal Reserve is shrinking its balance sheet … for now.

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The PBOC has injected almost $1.1 trillion in the market over the past two days.

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One of the impacts of the balance sheet expansion and repo injections is a reduction in the volatiilty of Chinese stocks. Better known as “numbing volatility.”

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On the sovereign side, China’s yield and swaps curves are kinked.

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Central bank interfernce in markets seem to be never ending.

Greet the 1970s with the new victories of revolution and production, 1970. From a private collection.

Bubble Trouble? Household Net Worth Rising Faster Than GDP (Debt Bubbles In Canada, Australia And China)

The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.

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And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.

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Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.

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Shrimp on the barbie, mate?

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