Kitchen Sink From The Fed – Up To $365 Billion In The Next Month!

The Fed appears to be concerned about end of the year liquidity, judging by their latest statement on their repo operations.

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the schedule of repurchase agreement (repo) operations for the monthly period from December 13, 2019 through January 14, 2020.  In accordance with the most recent FOMC directive, the Desk will conduct repo operations to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures around year end that could adversely affect policy implementation.

The Desk will continue to offer two-week term repo operations twice per week, four of which span year end. In addition, the Desk will also offer another longer-maturity term repo operation that spans year end. The amount offered in this operation will be at least $50 billion.    

Overnight repo operations will continue to be held each day.  On December 31, 2019 and January 2, 2020, the overnight repo offering will increase to at least $150 billion.  In addition, on December 30, 2019, the Desk will offer a $75 billion repo that settles on December 31, 2019 and matures on January 2, 2020. 

The Desk intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, consistent with the directive from the FOMC.

Detailed information on the schedule and parameters of term and overnight repurchase agreement operations are provided on the Repurchase Agreement Operational Details site.

So, the NY Fed will continue to offer two-week term repo operations twice per week, four of which run across the end of the year end. Plus, they will also offer another longer-maturity term repo operation that spans year end. The amount offered in this operation will be at least $50 billion.

Beyond that, they announced that the overnight repo offering will increase to at least $150 billion to cover the “turn” in a flood of overnight liquidity.  And on December 30, 2019, the Desk will offer a $75 billion repo that settles on December 31, 2019 and matures on January 2, 2020.

And they leave the door open to more if need by saying “intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, consistent with the directive from the FOMC.”

So in essence, as well has growing the size its overnight repos to $150 billion, the Fed will run nine term repos covering the year-end turn from Dec 16th to Jan 14th, 8 of which will amount to $35 billion and the first will be $50 billion, for a total injection of $365 billion in the coming month.

This is what the Fed Balance Sheet might look like. If this is not QE, I do not know what is….

The core question is what are they afraid of?

Has Deutsche Bank’s Tide Turned?

On 10 December, Deutsche Bank AG hosted an investor day following the announcement this summer of its more radical shift in strategy. Via Moody’s.

We see the bank as being on track to achieving the majority of the plan’s targets, in particular with regard to the proposed de-risking, downsizing and cost-cutting measures, while achievement of the revenue growth targets may prove more challenging. Continued fast and steady progress in achieving the new goals and repositioning DB’s business model will be important to maintaining its current credit strength, which we believe will continue to be supported by its clean balance sheet and solid capital and liquidity metrics during execution.

Within the bank’s capital release unit (CRU), its key wind-down unit, the bank expects risk-weighted assets (RWAs) to decline toward €52 billion by the end of 2019, down 28% year over year, while it expects leverage exposures to fall to €120 billion, a decline of 57% year over year. This includes the effect of DB’s transaction agreement with BNP Paribas on DB’s global prime finance and electronic equities business, supporting further swift de-risking and downsizing of the CRU, as well as help financing the group’s restructuring program out of its own financial resources. DB expects adjusted costs to be €21.5 billion in 2019, and reiterated its target of €19.5 billion of adjusted costs in 2020 and €17 billion in2021.

Notwithstanding continued strong credit-positive cost control, management also guided for lower revenue growth, largely owing to lower interest rates negatively affecting its private bank franchise. DB now expects group revenue to be around €24.5 billion by 2022, a slight reduction from the earlier €25 billion target. This includes a cumulative negative revenue effect of €1.2 billion during the restructuring period. However, DB has already initiated measures aimed at offsetting approximately two-thirds of this revenue strain. Sustained execution success will therefore rely on DB’s ability to rebuild and stabilize core bank revenue against the backdrop of the increasingly challenging macroeconomic environment.

Despite the meaningful restructuring-related charges to date, DB maintained its Common Equity Tier 1 (CET1) ratio at 13.4% as of 30 September 2019, a solid buffer above the recently lowered European Central Bank CET1 capital ratio requirement of 11.59%. In addition, DB’s €243 billion liquidity reserve is well in excess of the requirements stipulated by the liquidity coverage ratio, which was 139% as of 30 September 2019 (its net buffer was €59 billion). DB expects its corporate bank unit to report compound revenue growth of 3% during the 2018-22 restructuring period, unchanged from the July announcement. DB aims to build on its strong global transaction banking, cash management and securities service franchises,as well as grow lending to German corporate customers.

DB expects costs to remain virtually flat as it retains client-facing staff and continues to invest in its franchise. Revenue growth will be supported by focusing on the aforementioned focus areas, as well as passing on negative interest rates to partly compensate for challenges in the euro area.

The investment bank unit aims to achieve 2% compound revenue growth, with an increase expected during the 2019-22 period. DB cited stronger-than-anticipated client retention and a rise in top 100 institutional client revenue as supporting its goals over the next few years. The investment bank unit’s profitability should further benefit from the announced cost-cutting measures over time, of which parts will have to be reinvested in technology and infrastructure to maintain leading positions in credit, foreign exchange, fixed income and currencies in Asia-Pacific and Europe, Middle East and Africa. The private bank will suffer most from the even lower interest rate environment. The bank now expects compound revenue growth to be flat over the 2018-22 period, a reduction from the 2% target set out in July. Private banking will remain key to extracting synergies from the integration of the DB franchise with the former Postbank, converting low-margin deposits into fee-producing investment products through collaboration with asset and wealth management, as well as the corporate bank.

The bank expects its asset management unit’s revenue to report a compound annual growth rate of 1% during the period. The reduced target takes into account lower equity market forecasts and a continued strain on margins in the asset management industry. The unit aims to extract a further €150 million of gross cost synergies by 2022, moving its cost-to-income ratio to below 70% (the bank’s asset management unit target is around 65%). Assets under management increased by 9% to €754 billion, driven by positive market performance and another quarter of positive net new money flows. The CRU has been able to downsize exposures faster than anticipated. Quickly reducing the CRU’s revenue and profitability drag to achieve fast and steady progress in reaching the new goals and repositioning DB’s business model will be important to maintaining its current credit strength, as well as safeguarding its capital adequacy metrics.

MYEFO – What To Expect

On Monday the Australian government will release the Mid-Year Economic and Fiscal Outlook (MYEFO). This will – as required by the Charter of Budget Honesty – provide an update on the key assumptions made in this year’s budget, and track the implications of decisions made since the budget for the projected surplus. Via The Conversation.

There are two things you can count on about MYEFO.

First, the government will have to pare back its forecasts for economic growth, wages growth and employment growth.

Second, no matter what the economic reality is, the forecast for a budget surplus will remain.

The government has made economic management – as measured by the rather dubious criterion of budget balance – the central plank of its electoral strategy. As the Australian National University’s 2019 Australian Election Study revealed, voters preferred the government’s economic policies to Labor’s by a wide margin (47% to 21%, with 17% thinking there was no difference). On the management of government debt, the margin was 44% to 18%.

But the economy isn’t doing very well. GDP annual growth is 1.7%, not the 2.75% forecast in the budget. The unemployment rate is 5.3%, compared to the forecast of 5.0%. Wage growth is 2.2%, not the 2.75% forecast.

Iron ore supplements

The forecast budget surplus for the fiscal year to June 2020 will be made to hang together, thanks to a higher-than-forecast iron ore price.

That price – which determines the dollar value of Australia’s biggest export and hence the tax revenue it generates – is not reflected in the GDP figure, which only takes into account volumes.

The iron-ore price is now US$92.50 a tonne. The budget assumed the average price would be $US88 for the 2020 budget year, thanks to a reduction in the international supply of iron ore caused by a tailings dam bursting in January at the Córrego do Feijão mine near the town of Brumadinho in southeastern Brazil.

The dam’s collapse released a tsunami of sludge that destroyed farms, houses, roads and bridges, and killed 272 people.

The river of sludge released by the dam spill in Brumadinho, Minas Gerais, Brazil, January 26 2019. Antonio Lacerda/EPA

Ensuing mine shutdowns reduced iron ore output from operator Vale (the world’s biggest iron ore miner) by about a third. This in turn led to the price of iron ore this year being very high, as the following chart illustrates.

Iron ore price (US$/MT) tradingeconomics.com, CC BY-NC-SA

The Australian government sensibly assumed the Brazilian mine would come back online and the ore price would revert to $US55 per tonne by March 2020.

But just think about the 2020-21 fiscal year. The government’s own sensitivity analysis shows for the full 2020-21 budget year a difference in the iron ore price of US$10 a tonne translates to a A$3.7 billion difference in the budget bottom line.

That has helped this year, but it also shows how dependent the budget’s relatively small A$7.1 billion “underlying cash balance” is on a commodity price that’s out of our control.

Yet, given the political non-negotiability of the surplus, we can expect assumptions that stretch credulity to maintain a surplus forecast.

Some action?

This is all against a backdrop of calls for fiscal stimulus from the governor of the Reserve Bank of Australia, the Business Council, every mainstream economist and recently Australia’s top chief executives.

But any stimulus meaningful enough to boost the ailing economy would blow the budget surplus. And the assumptions have already been stretched to breaking point, so there’s very little room for the government to manoeuvre.

The government will probably announce some sort of “investment allowance” – where companies get a modest tax break for specific types of investments in the short term. As I have argued before, this will do something to boost investment and the economy generally, but not nearly as much as a full-scale reduction in the company tax rate to 25% for all businesses.

But the government can’t afford to do a proper tax cut because of its devotion to a wafer-thin surplus.

The danger of too little action

In the end, what the government ends up announcing will really be an allocation of responsibilities. It will determine how much of the work of economic recovery it will do itself, and how much it will want to palm off to the Reserve Bank.

The downside of the former is losing the budget surplus.

The downside of the latter is that the Reserve Bank will have no choice but to cut the cash rate to 0.25% in early 2020 and then embark upon a bond-buying program – i.e. “quantitative easing” or “QE”.

As even Reserve Bank governor Philip Lowe has himself admitted, more aggressive monetary policy brings with it the (further) risk of asset-price bubbles and financial instability.

Right now the government is putting all its chips on the surplus. Will that turn out to be a good bet? Time will tell.

2020 will reveal much about the future of the Australian economy and whether we manage to escape dramatic problems like a recession.

We live in interesting times – but perhaps more in the “Ancient Chinese curse” kind of way than any of us would like.

Author: Richard Holden, Professor of Economics, UNSW

The Cash Ban Cowards Can’t Hide The Truth!

Today the Senate held their first hearing (at short notice) on the Cash Restrictions Bill.

I discuss the lead up and hearing with Robbie Barwick.

Note the next hearing has been scheduled for SYDNEY on 29th January 2020!

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

You can watch the full sessions via ParlView: http://parlview.aph.gov.au/browse.php

Dodging the Debt Disaster with Prof. Steve Keen | Nucleus Investment Insights

In the latest from Nucleus Wealth, Head of Investment Damien Klassen, and Head of Operations Tim Fuller, chat with Economist and Hon. Prof. of the University College of London, Steve Keen.

You can find Steve’s work at: https://www.patreon.com/ProfSteveKeen

Topics include credit creation and its limits, weighing up its pro’s and con’s, central banks reaching the end of the road for interest rate cuts with debt being at near record highs, the drivers of weak demand and inflation globally, Modern Monetary Theory (MTT) and its differences with Keynesian Stimulus, which countries are closest to incorporating MMT, Steve’s ideas for central banks depositing directly into citizens bank accounts and “Universal Basic Carbon.” Nucleus Wealth is a Melbourne based investment house that can help you reach your financial goals through transparent, low cost, ethically tailored portfolios.

Listen in podcast form: http://bit.ly/NucleusPod

Disclaimer: The information on this podcast contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen and Tim Fuller are an authorised representative of Nucleus Wealth Management. Nucleus Wealth is a business name of Nucleus Wealth Management Pty Ltd (ABN 54 614 386 266 ) and is a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796

Adam And I Chat…

I was interviewed by Adam Stokes who runs his own YT channel, mainly covering Crypto. This is my version of the discussion.

The show covered a wide range of issues, from Crypto, Central Banks, Cash Bans and Negative Rates through to politics and democracy.

Adam’s version: https://www.youtube.com/watch?v=vWzhuqM_aoU

Check out his channel: https://www.youtube.com/user/adamstokes224

26 lenders announced for First Home Loan Deposit Scheme

Twenty-six additional lenders have been appointed to the initial panel of the government’s First Home Loan Deposit Scheme, including major bank, Commonwealth Bank. Via The Adviser.

The National Housing Finance and Investment Corporation (NHFIC) has announced its full panel of lenders taking part in the federal government’s First Home Loan Deposit Scheme (FHLDS).

Following on from the announcement that NAB had been chosen as the first major lender for the panel, CBA has been named as the second major bank to offer loans under the scheme, along with 25 non-major lenders.

The participating lenders will have the ability to write loans for first-home buyers (FHBs) who have saved deposits as little as 5 percent, with the government set to guarantee the rest of the deposit under the FHLDS.

CBA and NAB will reportedly be able to issue up to 50 per cent of the 10,000 annual guaranteed loans provided per financial year, according to the NHFIC Investment Mandate.

The two major banks will be accepting applications for the scheme from 1 January 2020.

The other 50 per cent of guaranteed loans will be written by the other non-major lenders on the NHFIC lending panel.

The non-majors will be taking applications from 1 February 2020.

The full list of lenders on the panel, along with NAB and CBA, are as follows:

  • Australian Military Bank
  • Auswide Bank
  • Bank Australia
  • Bank First
  • Bank of us
  • Bendigo Bank
  • Beyond Bank Australia
  • Community First Credit Union
  • CUA
  • Defence Bank
  • Gateway Bank
  • G&C Mutual Bank
  • Indigenous Business Australia
  • Mortgageport
  • MyState Bank
  • People’s Choice Credit Union
  • Police Bank (including the Border Bank and Bank of Heritage Isle)
  • P&N Bank
  • QBANK
  • Queensland Country Credit Union
  • Regional Australia Bank
  • Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd)
  • Teachers Mutual Bank Limited (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank)
  • The Mutual Bank
  • WAW Credit Union

Applications for the scheme will begin on 1 January 2020, and can be made either directly to participating lenders, or via the broker channel. The NHFIC will not be taking any direct applications.

According to the NHFIC, members of the panel have been chosen on the basis of competitiveness of offerings, geographic reach, customer care, and their ability to meet the deadline for the implementation of the scheme.

Further, the NHFIC and federal Minister for Housing and Assistant Treasurer Michael Sukkar have stated that members on the lending panel, will not be able to charge eligible customers higher interest rates than equivalent customers outside the scheme.

Additional lenders may be “periodically” added to the panel after the scheme has launched, according to the NHFIC.

Panel will ‘enable strong activation of mortgage broker channels’

Commenting on the news, the federal Minister for Housing and Assistant Treasurer, Michael Sukkar, commented: “The Morrison Coalition Government is committed to helping make home ownership a reality for more Australians and to get them into the property market sooner.

“Today, the government welcomes confirmation from the National Housing Finance and Investment Corporation (NHFIC) that 27 lenders have been selected, from a wide pool of applicants, to form the initial panel offering guarantee-backed loans under the First Home Loan Deposit Scheme.

“The National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA), together with 25 non-major lenders have been appointed as participating lenders in the Scheme.

“Importantly, all lenders have committed not to charge eligible customers higher interest rates than equivalent customers outside of the scheme,” he said.

Mr Sukkar continued: “The scheme has been warmly welcomed by major industry peak bodies, and the composition of the initial lending panel reflects the industry’s confidence in the Morrison Coalition Government’s plan to assist first home buyers.

“Further, the scheme has been deliberately designed to ensure strong representation of smaller lenders on the panel. This will promote competition between the large and small banks, and ensure the Scheme has broad geographic reach, including in regional and remote communities.

“The composition of the panel should also enable strong activation of mortgage broker channels and promote choice for first home buyers,” he concluded.

BlackRock weighs in on Australia recession fears

The Australian economy is being almost entirely propped up by public sector jobs growth and infrastructure spending, according to BlackRock, via InvestorDaily.

Consumers and businesses just aren’t spending money, despite the Reserve Bank cutting the cash rate by 50 per cent over the last 12 months. Google searches for “Australia recession” reached GFC levels in October. 

While the RBA is battling with the federal government over fiscal stimulus, BlackRock head of Australia fixed income Craig Vardy explained that there is an enormous amount of infrastructure spending going on at the moment with quite a substantial pipeline.

“Really, it has been holding up growth in Australia for quite some time now. That is clearly a concern. Strip away the government proportion of real GDP and you are not left with much at all,” he said.

It remains very important for the RBA that infrastructure spending continues, particularly after three rates cuts in 2019 have failed to drive economic growth or see the Reserve Bank hit its inflation and employment targets.

“The concerning thing about employment is that almost all of the jobs created over the last 12 months have been in the public sector,” Mr Vardy said. “There [have] been almost no jobs growth in the private sector. That is quite concerning.”

BlackRock is predicting the RBA will cut rates to 50 basis points in the first quarter of 2020 and again to 25 basis points in the second half. Reserve Bank governor Philip Lowe has already flagged that 25 basis points is the lower bound for the central bank; once it reaches a cash rate of 0.25 basis points it will enact quantitative easing by buying Australian government bonds.

While few economists have called out the risks of a recession, in some ways the Australian economy has already experienced a number of mini recessions in 2019 if measured on a GDP per capita basis.

What is preventing the economy slipping into a technical recession (two consecutive quarters of negative GDP growth) is population growth, which is currently running at 1.5 per cent annually.

“It is actually very difficult to get a recession in Australia when you’ve got that tailwind behind you,” Mr Vardy said.

For the RBA however, strong population growth presents another issue: creating enough jobs.

“You’ve always got this new employment funnel of people coming through. The RBA has very little chance of hitting its 4.5 per cent unemployment target when population growth is so strong,” Mr Vardy said.

“They need to get the underemployment rate down. That has stalled. The lever they pull is cutting rates. Rates will continue to be cut. I think they have to keep rates low to try and generate employment.”

Fed Holds Their Cash Rate

Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.