Q4 2018 Z.1 “Flow of Funds”

By Doug Noland

I’ve been anxiously awaiting the Fed’s Q4 2018 Z.1 “Flow of Funds” report. It provided the first comprehensive look at how this period’s market instability affected various sectors within the financial system. From ballooning Broker/Dealer balance sheets to surging “repo” lending to record Bank loan growth – it’s chock-full of intriguing data. All in all, and despite a Q4 slowdown, 2018 posted the strongest Credit growth since before the crisis – led, of course, by our spendthrift federal government.

Non-Financial Debt (NFD) rose $2.524 TN during 2018 (5.1%), exceeding 2007’s $2.478 TN and second only to 2004’s $2.915 TN growth. NFD closed 2018 at a record 253% of GDP, compared to 230% to end of 2007 and 189% to conclude the nineties. By major category, Federal borrowings expanded $1.258 TN during the year, up from 2017’s $599 billion, and the strongest growth since 2010’s $1.646 TN. Year-over-year growth in Total Household borrowings slowed ($488bn vs. $570bn), led by a drop in Home Mortgages ($285bn vs. $312bn). Total Corporate borrowings slowed to $532 billion from 2017’s $769 billion. Foreign U.S. borrowings declined to $207 billion from 2017’s $389 billion.

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What if ‘Excess’ Reserves Aren’t Really Excess?

By Michael Ashton

One intriguing recent suggestion I have heard recently is that the “Excess” reserves that currently populate the balance sheet of the Federal Reserve aren’t really excess after all. Historically, the quantity of reserves was managed so that banks had enough to support lending to the degree which the Fed wanted: when economic activity was too slow, the Fed would add reserves and banks would use these reserves to make loans; when economic activity was too fast, the Fed would pull back on the growth of reserves and so rein in the growth of bank lending. Thus, at least in theory the Open Markets Desk at the New York Fed could manage economic activity by regulating the supply of reserves in the system. Any given bank, if it discovered it had more reserves than it needed, could lend those reserves in the interbank market to a bank that was short. But there was no significant quantity of “excess” reserves, because holding excess reserves cost money (they didn’t pay interest) – if the system as a whole had “too many” reserves, banks tended to lend more and use them up. So, when the Fed wanted to stuff lots of reserves into the system in the aftermath of the financial crisis, and especially wanted the banks to hold the excess rather than lending it, they had to pay banks to do so and so they began to pay interest on reserves. Voila! Excess reserves appeared.

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The Many Obvious Dots of Keynes, Friedman, And Fisher

By Jeffrey Snider

The obsession with inflation is grounded in historical fact. This is true both of our recent “conundrum” as well as broader circumstances surrounding slow burning structural changes. As to the former, last year the global economy was supposed to take off, concurrently signaled by accelerating inflation rates due to what are always claimed to be tight labor markets.

The worldwide LABOR SHORTAGE!!! was supposed to lead somewhere very good; an end to a decade of increasingly dangerous malaise.

This didn’t happen, a fact more and more central bankers are trying to come to terms with. As you would expect, they are having a lot of trouble doing so. The reason is because every answer is staring right back at them from the mirror.

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What the Fed is Doing: Perception vs. Reality

By Steve Saville

[This blog post is an excerpt from a TSI commentary published on 24th February]

Based on the par value of maturing securities on its balance sheet there was scope for the Fed to withdraw as much as $43B from the financial markets on 15th February. A week ago we noted that this ‘liquidity drain’ had no effect on the stock market, possibly because the effect would occur on the next trading day (Tuesday 19th February) or because the Fed chose to withdraw a lot less money than it could have. Now that the Fed has issued its latest weekly balance sheet update we can see why there was no effect from this potential bout of “quantitative tightening” (QT). We can also see that the general perception of what the Fed is doing has deviated in a big way from what the Fed actually is doing.

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What They Don’t Want You to Know About Prices, Report

By Keith Weiner

Last week, in part I of this essay, we discussed why a central planner cannot know the right interest rate. Central planner’s macroeconomic aggregate measures like GDP are blind to the problem of capital consumption, including especially capital consumption caused by the central plan itself. GDP has an intrinsic bias towards consumption, and makes no distinction between consumption of the yield on capital, and consumption of the capital per se. Between selling the golden egg, and cooking the goose that lays golden eggs.

One could quibble with this and say that, well, really, the central planners should use a different metric. This is not satisfying. It demands the retort, “if there is a better metric than GDP, then why aren’t they using it now?” GDP is, itself, supposed to be that better metric! Nominal GDP targeting is the darling central plan proposal of the Right, supposedly better than consumer price index and unemployment (as Modern Monetary Theory is the darling of the Left).

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Three-Month Libor Fixing Falls by the Most Since May 2009

By Anthony B. Sanders

Signal That The Fed Might CUT Their Target Rate?

One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.

The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.


The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).

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Misconceptions About US Bank Reserves

By Steve Saville

Bank reserves are a throwback to a time when the amount of receipts for money (gold) that could be issued by a bank was limited by the amount of money (gold) the bank held in reserve. Under the current monetary system bank reserves have no real meaning, since it isn’t possible for a dollar in a bank deposit to be genuinely backed by a dollar held somewhere else. The dollar can’t back itself! However, it is still important to understand what today’s bank reserves are/aren’t and how changes in the reserves quantity are linked to changes in the economy-wide money supply. Remarkably, these bank-reserve basics are misunderstood by almost everyone who comments on the topic.

The simplest way for me to deal with the common misunderstandings about bank reserves is in point form, so that’s how I’ll do it. Here goes:

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Gold Rewards Bulls in January as Fed’s Message Wounds Dollar

By Anthony B. Sanders

Gold Vol Remains Subdued

The Federal Reserve’s “maybe we will, maybe we won’t” regarding further shrinking of its balance sheet coupled with keeping its target rate at 2.50% was celebrated by equity investors … and gold investors (including SPDR Gold Shares).


(Bloomberg) — Gold is poised to close out January with a fourth straight monthly gain after the Federal Reserve signaled it’s done raising interest rates for a while, hurting the dollar, and as investors sought a haven against slowing growth and U.S.-China trade disputes.

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Everything You Wanted to Know About MMT (but were afraid to ask)

By Kevin Muir

If you read only one MacroTourist post all year, this is the one I want you to read. I think it’s that important.

Today’s topic is sure to incite some pretty strong reactions. There will be cries of “no! that’s just wrong!” from the hard-money advocates. The cynics will proclaim “that’s going to end in disaster” and the pessimists will shake their head in disbelief while muttering something about “the follies of the ivory tower academics” as they walk away.

For some of you, the topic of Modern Monetary Theory (MMT) will be old hat. For others, this will be a new term. For those who are not familiar, I suggest you take some time to learn about this new branch of economic thinking as it is coming to a screen near you.

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Papa Powell and the Narrative Fallacy

By Charlie Bilello

“My purpose is to make my narrative as truthful as possible.” -George Armstrong Custer

Nothing like a huge rally in a month’s time to make everyone stop talking about a recession.

Remember that December collapse?  Felt like so long ago given just how violent the upswing has been since.  The end of 2018 was dominated by prognosticators saying a recession was imminent, or already underway.  Strangely enough, no one seems to be saying any of that now.

What changed?  One thing and one thing only: price.  At the end of the day, always remember that price dictates emotions, emotions dictate narrative, and narrative results in poor decision making.  Now I know that nearly everyone sees the unleashing of dovishness from Fed Chair “Papa” Powell as the reason for equities closing out the month of January so strong.  But none of this should be a surprise whatsoever given just how severely flat the yield curve has gotten as the Fed has hiked short-term rates.  Nor should it be a surprise whatsoever when inflation expectations have been in a solid downtrend since the middle of last year, largely due to Oil prices faltering.

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Once a Caver, Always a Caver

By Kevin Muir

Remember the Powell of last year? You know, the one that tried to convince us that there “could be no macroeconomic stability without financial stability?” And this Powell was not concerned about financial stability in terms of making sure the stock market never went down, but rather just the opposite. On June 20th, 2018 Powell brought to our attention that;

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Random Predictions for 2019

By Steve Saville

1) Early last year we predicted that the US stock market would experience greater-than-average volatility over the year ahead. This obviously happened, as there were more 2%+ single-day moves in the SPX during 2018 than in an average year.

We expect the same for this year, that is, we expect price volatility to remain elevated. The reason is that the two most likely scenarios involve abnormally-high price volatility. One of these scenarios is that a cyclical bear market began last October, and bear markets are characterised by periods of substantial weakness followed by rapid rebounds. The other scenario is that a very long-in-the-tooth cyclical bull market is about to embark on its final fling to the upside.

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