Month: September 2018

The Fed’s QE Unwind Hits $250 Billion

Submitted by Wolf Richter of Wolf Street

Here’s my math when this “balance sheet normalization” will end.

In August, the Federal Reserve was supposed to shed up to $24 billion in Treasury securities and up to $16 billion in Mortgage Backed Securities (MBS), for a total of $40 billion, according to its QE-unwind plan – or “balance sheet normalization.” The QE unwind, which started in October 2017, is still in ramp-up mode, where the amounts increase each quarter (somewhat symmetrical to the QE declines during the “Taper”). The acceleration to the current pace occurred in July. So how did it go in August?

Treasury Securities

The Fed released its weekly balance sheet Thursday afternoon. Over the period from August 2 through September 5, the balance of Treasury securities declined by $23.7 billion to $2,313 billion, the lowest since March 26, 2014. Since the beginning of the QE-Unwind, the Fed has shed $152 billion in Treasuries:

The step-pattern of the QE unwind in the chart above is a consequence of how the Fed sheds Treasury securities: It doesn’t sell them outright but allows them to “roll off” when they mature; and they only mature mid-month or at the end of the month.

On August 15, $23 billion in Treasuries matured. On August 31, $21 billion matured. In total, $44 billion matured during the month. The Fed replaced about $20 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Wall Street – the “primary dealers” with which the Fed normally does business. Those $20 billion in securities were “rolled over.”

But it did not replace about $24 billion of maturing Treasuries. They “rolled off” and became part of the QE unwind.

Mortgage-Backed Securities (MBS)

The Fed is also shedding is pile of MBS. Under QE, the Fed bought residential MBS that were issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Holders of residential MBS receive principal payments as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off.  To keep the balance of MBS from declining after QE had ended, the New York Fed’s Open Market Operations (OMO) kept buying MBS.

The Fed books the trades at settlement, which occurs two to three months after the trade. Due to this lag of two to three months, the Fed’s balance of MBS reflects trades from the second quarter. In August, the cap for shedding MBS was $16 billion. But at the time of the trades reflected on the August balance sheet, the cap was $12 billion.

Over the period from August 2 through September 5, the balance of MBS fell by $11.5 billion, to $1,697 billion, the lowest since October 8, 2014. In total, $73 billion in MBS have been shed since the beginning of the QE unwind:

The QE unwind is scheduled to reach cruising speed in October, when the unwind is capped at $50 billion a month. The plan calls for shedding up to $420 billion in securities in 2018 and up to $600 billion a year in each of the following years until the Fed deems its balance sheet adequately “normalized” – or until something big breaks. Based on current discussions, as part of this “normalization,” the Fed is likely to get rid of all its MBS and retain only Treasury securities.

Total Assets on the Balance Sheet

The balance sheet also reflects the Fed’s other activities. Total assets for the period from August 2 through September 5 dropped by $47 billion. This brought the decline since October 2017, when the QE unwind began, to $252 billion. At $4,208 billion, total assets are now at the lowest level since March 12, 2014:

When will this Balance Sheet Normalization end?

It took the Fed about six years to pile on these securities. It’s going to take a number of years to shed them. But the balance sheet will never go back to where it had been before QE for the simple reason that as the economy grows, the Fed’s balance sheet expands along with it.

The chart below shows this relationship as it existed before the Financial Crisis. It depicts the total assets on the Fed’s balance sheet (black line) and nominal GDP seasonally adjusted annual rate (red line). All data is quarterly:

There is no telling what the Fed will do in terms of its balance sheet. But by looking at the past and extrapolating into the future, we can a least get a feel for the lower range — the level below which the Fed will certainly not go.

GDP: Since 2008, nominal GDP has grown 38% from $14.8 trillion to $20.4 trillion.

Balance sheet: In 2008, just before the Fed’s gyrations started, total assets amounted to $892 billion. If the Fed’s balance sheet had grown since then at the same rate as nominal GDP, it would be $1.23 trillion today. That’s sort of a base line.

The Future:

If nominal GDP (not adjusted for inflation) grows at 5% per year (slightly below the current rate), it will reach $24.8 trillion in Q2 2022.

If the Fed’s balance sheet had not experienced QE, and if it had grown since 2008 at the same rate as nominal GDP, it would reach about $1.5 trillion in Q2 2022.

So, if the QE unwind proceeds at $550 billion a year (below the cap of $600 billion), the Fed’s total assets will drop to about $2 trillion by Q2 2022.

This range between $1.5 trillion and $2 trillion will mark the absolute low end of the Fed’s balance sheet by the time normalization ends in 2022. And most of those assets will be Treasury securities. What little MBS will be left on its balance sheet by then will be shed in future years. This is my math, and I’m sticking to it.

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Kamala Harris, Foe of Legal Sex Work, Questions Whether Laws Exist That Control Male Bodies

While grilling Supreme Court nominee Brett Kavanaugh about whether he’d vote to overturn Roe v. Wade, Sen. Kamala Harris (D–Calif.) posed a question she thought was so clever that she decided to highlight the exchange on Twitter:

Some tweeters immediately shot back with “conscription.” It’s a good point—federal law requires men to register with Selective Service and face the possibility of being drafted to fight in wars—but it doesn’t go far enough. Harris’ wording inadvertently reminds us that virtually all laws give the government the power to make decisions about bodies, both male and female. The drug war, for example, is all about controlling what people put into their bodies.

Harris is a former prosecutor, and she was California’s attorney general before getting elected to the Senate. In those roles, she was not just a willing participant but a loud advocate of the war on sex work. As a prosecutor she went after the men behind Backpage.com, aiming to hold them responsible for the existence of online sex trafficking.

Surely laws against sex work give the government the power to make decisions about male and female bodies. If you are a woman (or man, but really we only talk about the women) who wants to offer up your body for sexual pleasure in exchange for money, Harris is here to use government force to try to stop you. Harris is no supporter of women’s right to decide what they do with their body in areas outside of abortion, and it’s cynical and grotesque (but sadly predictable) that she’d use Kavanaugh’s hearing to present herself as such.

The ultimate irony is the reason why Harris has taken her anti-sex-trafficking role: She argues that it harms innocent children who are forced into the sex trade. In reality, the vast majority of “sex trafficking” busts involve behavior between consenting adults, but set that aside. According to Harris, women cannot decide for themselves what to do with their bodies because the results will harm innocent children. That’s the exact same argument used by those who would ban abortion!

Bonus links: Elizabeth Nolan Brown on Harris’ phony feminism. And at least one woman on Twitter responded to Harris asking her why she’s trying to stop women from participating in sex work if she holds such a position. Don’t hold your breath waiting for a response.

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Trump Says If Cohen Stole Papers Off His Desk He Would “Never Speak To Him Again”

President Trump said on Friday that he would never speak to his former adviser Gary Cohn again if he stole paperwork from his desk, reports Bloomberg.  

“If he did that, I would never speak to him again, I would never speak to him again,” Trump told reporters aboard Air Force One, adding that he thinks the account is a “phony story.” 

According to Bob Woodward’s newest book, Cohn removed a September 5, 2017 letter which would have ended the United States-Korea Free Trade agreement, stating that the pact “is not in the overall best interest of the United States economy,” and states that the agreement would be terminated 180 days after the date of the notice. 

Photo: CNN

Cohn resigned as the head of Trump’s National Economic Council earlier this year, departing on April 2, after failing to stop Trump from levying new tariffs on steel and aluminum. 

According to Woodward, however, Cohn secretly saved the South Korea-US trade agreement, known as Korus, when he removed the letter – allegedly telling a colleague that he stole the letter to protect national security. 

President Trump has called the Woodward book a “scam,” Tweeting on Friday ” I don’t talk the way I am quoted. If I did I would not have been elected President. These quotes were made up. The author uses every trick in the book to demean and belittle. I wish the people could see the real facts...”

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How A Mystery Bond Trader Made $10 Million In Minutes On Today’s Jobs Report

Today’s jobs report – which showed the fastest wage growth since the crisis, in the process sending bond yields surging – was not only lucky for America; it also made at least one bond trader’s richer by $10 million. That, according to Bloomberg, is how much the lucky gambler made in the span of minutes on just one trade as bond yields spiked following the spectacular print.

The bond trader, who was convinced the payrolls report would show an overheating economy, decided to buy puts on 10 Year treasury futures, a bearish bet which cost him about $2.5 million when the 10Y was yielding 2.88%. For the puts to be in the money, the yields – which have been trading in a very tight range in recent weeks  – needed to hit 2.90% by the end of the day, and anything above that would be just added profit. Well, as it happened the mystery trader lucked out, and the unexpectedly strong spike in average hourly earnings pushed the 10-year yield to almost 2.95%, resulting in a tidy 500% profit on the trade.

Bloomberg’s Edward Bolingbroke explains the details of the trade:

At 8:06 a.m. New York time, with the 10-year note futures contract trading around 120-06, 50,000 September Week 1 120 puts were bought at a price of 3 ticks. With open interest in the option only about 12,000 contracts, the trade is consistent with a new position. The 120 strike corresponds roughly to a 2.90 percent yield. As the underlying futures price slid to 119-19, the option’s price jumped to around 16 ticks, according to traders in New York, and the value of the position to $12.5 million.

And visually:

It wasn’t clear if Trader X had closed out his position, although with that kind of profit and with an immediate expiry, one would be silly to stand on the put. And, after Trump’s surprising threat of an additional $267BN in Chinese tariffs, it wouldn’t be surprising if he is now taking the other side of the trade on, as yields are once again slowly fading.

In any event, America’s blistering wage growth just made the full year bonus for at least one lucky trader.

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Trump: DOJ Should Investigate NYT Op-Ed Writer for ‘National Security’ Purposes

President Donald Trump says the Department of Justice should investigate the identity of the “senior official” who criticized him this week in an anonymous New York Times op-ed.

The op-ed represents a “national security” issue, Trump claimed to reporters aboard Air Force One today, according to the Associated Press. “We’re going to take a look at what he had, what he gave, what he’s talking about, also where he is right now.”

Whoever wrote the op-ed shouldn’t be able to attend meetings that require an upper-level security clearance, Trump added.

It’s not clear what crimes the anonymous official is supposed to have committed, though Trump has previously called him/her “gutless” and a “coward.” In a statement to CNN, Justice Department spokesperson Sarah Isgur Flores said the department does “not confirm or deny investigations.”

Trump has spoken out strongly against the op-ed ever since its publication on Wednesday. That evening, he questioned on Twitter whether the senior official even exists or if the Times was using “another phony source.” In that same tweet, Trump said that if the official does exist, the Times “must, for National Security purposes, turn him/her over to government at once!”

Trump continued attacking the op-ed yesterday, suggesting to Fox & Friends that by publishing the piece, the Times is “virtually” guilty of “treason.” Aboard Air Force One today, Trump told reporters he wasn’t sure if he’ll be taking action against the paper. “We’re going to see, I’m looking at that right now,” he said.

According to the Times, the White House has a list of 12 people it suspects of authoring the article.

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Russia’s Huge Natural Gas Pipeline To China Nearly Complete

Submitted by OilPrice.com

Gazprom’s Power of Siberia natural gas pipeline from Russia to China is 93 percent complete, the Russian gas giant said in an update on its major projects.

A total of 2,010 kilometers (1,249 miles) of pipes are laid for the Power of Siberia gas pipeline between Yakutia and the Russian-Chinese border, or on 93 percent of the route’s length, Gazprom said in a statement.

The natural gas pipeline is expected to start sending gas to China at the end of 2019 and its completion is among Gazprom’s top priorities.

The two-string submerged crossing of the Power of Siberia pipeline under the Amur River is 78 percent complete, and the Atamanskaya compressor station adjacent to the border is also under construction, the Russian company says.

Gazprom has a 30-year contract with CNPC for the supply of an annual 1.3 trillion cu ft of natural gas via the infrastructure.

This year, Gazprom plans to invest nearly US$3.2 billion (218 billion Russian rubles) in the pipeline project, up from the US$2.3 billion (158.8 billion rubles) investment last year, according to Russia’s TASS news agency.

Gazprom and CNPC have also discussed another pipeline from Russia to China via the western route—the so-called Power of Siberia 2 pipeline—that would source gas from Western Siberian gas fields, but little progress has been made regarding the specifics of this project.

Gazprom is dominating gas supplies to many European markets while it vies to meet the surging Chinese natural gas demand as the country is in the middle of a massive switch from coal-fired to gas-fired heating in millions of homes.

Although Chinese companies are looking to boost domestic natural gas production, local production won’t come even close to meeting surging demand, and China is expected to increasingly rely on gas imports.

According to the Gas 2018 report by the International Energy Agency (IEA), China will become the world’s largest natural gas importer by 2019. The share of imports in China’s natural gas supply is seen rising from 39 percent to 45 percent by 2023, the Paris-based agency forecasts.

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Ted Cruz and Beto O’Rourke’s Sprint for the Senate Heats Up

|||https://www.tedcruz.org/, LOREN ELLIOTT/REUTERS/NewscomThe fight to fill Texas’ Senate seat is heating up. As of Thursday, RealClearPolitics identifies the race between incumbent Ted Cruz (R–Texas) and Rep. Beto O’Rourke (D–Texas) as a toss-up. According to the RealClearPolitics polling average, Cruz still leads his opponent by 4 points. But that lead was in double digits just a few months ago, and O’Rourke has managed to match Cruz’s funding.

In the past month alone, here are some of the stories to come out of the campaign.

Beto O’Rourke is Too Cool

Both Cruz and O’Rourke have dodged several debate invitations. But when O’Rourke did not accept Cruz’s challenge to debate in late August, the Texas Republican Party suggested that he was busy doing something else. The Texas GOP’s Twitter account took various shots at O’Rourke, telling the world that he used to be a skater, played in a old punk band, and got a DUI.

Setting aside the DUI, several on Twitter questioned whether or not the Texas GOP was going after O’Rourke for being too…cool? Others responded by posting mugshots belonging to former Texas Gov. Rick Perry and sharing reminders that there’s a picture of Cruz dressed as a creepy mime.

Unbothered by the backlash, the Texas GOP later tweeted, “Based on the reaction to our tweets we can confirm that Beto is in fact going to receive 100% of the vote from Buzzfeed contributors, out of state liberals, and people who use the word ‘rad.’ We feel very owned.” The tweet concluded with a crying face.

Cruz also launched his own attack on O’Rourke’s character with an ad criticizing the candidate for saying “fuck” in public.

O’Rourke and the Protesters

O’Rourke’s support for various methods of protest have become a central focus in the race. He attracted attention, for example, for saying those who support or oppose football players taking a knee are “every bit as American, all the same.”

Cruz has accused O’Rourke of supporting another kind of protest: flag-burning. When a man asked O’Rourke what he thought about burning the flag, the candidate gave a long-winded answer that included a comment that “there is something inherently American” about speaking out against injustice. The Cruz campaign cut the exchange down to make it appear as though O’Rourke believed it “inherently American” to burn an American flag.

(It should be noted that the Supreme Court ruled in 1989’s Texas v. Johnson that burning an American flag is protected by the First Amendment’s free speech clause. The late Justice Antonin Scalia, a conservative, was among those who voted in favor of flag-burner Gregory Lee Johnson.)

The Undocumented Immigrant Vote

A few Texas voters received text messages, supposedly sent on behalf of O’Rourke’s campaign, asking if they would be willing to transport undocumented immigrants to polling stations. O’Rourke campaign spokesperson Chris Evans denied that the messages were authorized by the campaign and claimed they were “sent by an imposter.”

Donald Trump Intervenes

It’s no secret that Cruz and President Trump have had a contentious relationship. As opponents in the 2016 Republican presidential primary, Trump tried to tie Cruz’s father to the assassination of President John F. Kennedy, insinuated that Cruz’s wife is unattractive, and even tweeted the following:

Cruz responded by refusing to endorse Trump at the Republican National Convention, saying, “I am not in the habit of supporting people who attack my wife and attack my father.” He reversed himself later and made volunteer phone calls for Trump’s presidential campaign.

Pushing their history aside, Cruz asked Trump to campaign for him in Texas. Trump agreed and tweeted that he would find “the biggest stadium in Texas” for their joint rally in October. In response, activists have started a GoFundMe to place Trump’s February 2016 tweet about Cruz on a mobile billboard.

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“Issue Of National Security”: Trump Demands Sessions Investigate Anonymous Op-Ed, Looking At Legal Action

President Trump on Friday said that he wants Attorney General Jeff Sessions to investigate who wrote an anonymous Op-Ed in the New York Times critical of his administration, as a matter of national security. 

Speaking to reporters on board Air Force One, the President also mentioned possibility of legal action against the Times, which published the Op-Ed claiming to be from “part of the resistance inside the Trump administration.” 

During a Thursday night campaign rally event in Billings, Trump called on the Times to publish the name of the author “at once.” 

PRESIDENT DONALD TRUMP: The so-called resistance is angry because their horrible ideas have been rejected by the American people, and it’s driving them crazy. Crazy. They’re the ones, honestly, that have been driven crazy.

The latest act of resistance is the op-ed published in the failing New York Times by an anonymous — really an anonymous, gutless coward. You just look. He was — nobody knows who the hell he is, or she, although they put he, but probably that’s a little disguise. That means it’s she. 

But for the sake of our national security, the New York Times should publish his name at once. I think their reporters should go and investigate who it is. That would actually be a good scoop. 

(APPLAUSE)

That would be a good scoop. Unelected deep state operatives who defy the voters to push their own secret agendas are truly a threat to democracy itself. And I was so heartened when I looked

Trump added: “I think it’s backfired. Seriously. People that don’t exactly dig us and they don’t exactly like me, they’re fighting for us. It’s an incredible — it’s actually a beautiful thing. We picked up a lot of support, because at some point this whole thing is going to be exposed. And it’s really bad, and it’s really dangerous, and it’s really sad for the media and the mainstream media. It really is sad.”

To that end, Pulitzer Prize winning co-founder of The Intercept, Glenn Greenwald, called the author of the op-ed a “coward” whose ideological issues “voters didn’t ratify.” 

Greenwald continues; “The irony in the op-ed from the NYT’s anonymous WH coward is glaring and massive: s/he accuses Trump of being “anti-democratic” while boasting of membership in an unelected cabal that covertly imposes their own ideology with zero democratic accountability, mandate or transparency.“

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Elizabeth Warren to Cabinet: If You Don’t Like Trump, Give Him the Boot

Sen. Elizabeth Warren (D-Mass.) says if President Donald Trump’s Cabinet really thinks he’s unfit for office, it should use the Constitution to remove him.

“If senior administration officials think the president of the United States is not able to do his job, then they should invoke the 25th Amendment,” Warren tells CNN. “The Constitution provides for a procedure whenever the vice president and senior officials think the president can’t do his job.”

The 25th Amendment to the U.S. Constitution, ratified in 1967, says that if the vice president and a majority of the Cabinet agree the president “is unable to discharge the powers and duties of his office,” they must alert the speaker of the House and the president pro tempore of the Senate. At that point, the vice president becomes acting president. If the president disagrees with his officials, then it’s up to Congress. It takes a two-thirds vote from both the House and Senate to keep the president from reassuming his office.

Warren’s comments came amid a week of turmoil for the Trump administration. On Wednesday, The New York Times published an anonymous op-ed from a “senior official” in the administration. The article describes “early whispers within the cabinet of invoking the 25th Amendment,” but wrote that “no one wanted to precipitate a constitutional crisis.” The day before the op-ed was published, excerpts of veteran journalist Bob Woodward’s upcoming book Fear revealed that top aides reportedly conspired to remove documents from Trump’s desk.

“What kind of a crisis do we have if senior officials believe that the president can’t do his job and then refuse to follow the rules that have been laid down in the Constitution?” the Massachusetts Democrat tells CNN. “They can’t have it both ways. Either they think that the president is not capable of doing his job in which case they follow the rules in the Constitution, or they feel that the president is capable of doing his job, in which case they follow what the president tells them to do.”

Warren expressed similar sentiments on Twitter:

And on her 2018 re-election campaign website, she encourages supporters to “Tell the Cabinet: If Trump is unfit, invoke the 25th.”

While Warren won’t say if she’s running for president in 2020, she’s expected to be one of the top democratic contenders if she does. So her grandstanding against Trump isn’t surprising, just as it wasn’t shocking to see Sen. Cory Booker (D-N.J.) make a scene at Supreme Court nominee Brett Kavanaugh’s confirmation hearing yesterday.

Just because Warren has ulterior motives doesn’t mean she’s wrong, of course. Without getting into whether or not Trump actually is unfit for office, she’s absolutely correct that there’s a legal recourse. Just like impeachment, the 25th Amendment is right there in the Constitution.

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Stocks Plunge On Trump Shocker: Threatens China With Another $267BN In Tariffs

The Friday moment everyone has been waiting for, namely whether or not Trump would greenlight the next $200BN in China tariffs now that the comment period is over. Moments ago we got the answer when Trump, speaking to reporters on board of Air Force 1, just said that another $267BN in China tariffs are ready to go, and could be added to the $200BN which are already contemplated. From Bloomberg:

  • TRUMP: ANOTHER $267B CHINA TARIFFS READY TO GO, ADDED TO $200B
  • TRUMP: EXTRA $267B CHINA TARIFFS COULD BE READY ON SHORT NOTICE

While there were few details, and it was not clear if Trump had activated the original $200BN that was meant to be enacted today, the reaction on the market was instant, and the Dow Jones tumbled by 100 points in seconds once the headlines hit.

Additionally, the dollar spiked to session highs, while over in China, the offshore Yuan tumbled to two-day lows as the worst case outcome from trade wars just got even worse.

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