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As recently as a month ago we were pounding the table that the Fed’s reverse-repo program, which was long said to be, alongside the IOER, the key component that would enable the Fed to hike rates in an environment in which the Fed Funds rate is no longer relevant, is a joke, most notably in “Why The Fed Is Full Of It: Reverse Repo Is A Fairy Tale.”

What we also repeated is that while the RRP is meaningless for actual monetary policy it is quite meaningful as a Fed-funded and subsidized quarter-end window dressing facility, widely used by money market funds and banks at the end of every quarter to make their balance sheets appear of higher quality than they are.

Which brings us to yesterday’s FOMC minutes. It was there that the FOMC once again reminded everyone of the trivial folly which is speculation just when the Fed will hike rates, when the Fed itself still has no idea how it will actually implement this mechanically, theoretically or practically.

From the FOMC Minutes:

the manager reported on potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve  as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization; the manager noted possible next steps that the staff could potentially undertake to investigate the issues related to such arrangements.

So what are segregated cash accounts? Goldman explains:

The October FOMC minutes revealed a discussion of “potential arrangements that would allow depository institutions to pledge funds held in a segregated reserve account at the Federal Reserve as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization.” This idea has been discussed in the past by Fed officials, but has not figured prominently into exit discussions to date. 

 

To understand the importance of this proposal, note that a traditional bank deposit has only a general claim on the assets of the bank, which includes both risk-free assets (such as reserve balances and T-bills) and risky assets (loans, securities, etc.) The proposal would create a special class of account that has a “perfected collateral interest” in specific risk-free reserve assets held by the bank at the Fed. Essentially, it would make the investment risk free from the perspective of the depositor. This is the case regardless of whether the deposit would not otherwise qualify for FDIC insurance. Implementation of these kinds of accounts would presumably reduce the shortage of short-term liquid assets discussed, for instance, at the most recent Treasury Borrowing Advisory Committee (TBAC) meeting. 

 

The bank would earn interest paid on excess reserves (IOER) on the balances, while the rate earned by the depositor would be market-determined. As a result, the extent to which this proposal could smooth the implementation of monetary policy depends heavily on whether such accounts would qualify for a regulatory exemption of some kind, for instance, if banks could treat reserve balances collateralizing the accounts as custodial (and hence off balance sheet) assets. This would reduce the intermediation spread charged by banks—the reason why the effective fed funds rate is much lower than IOER currently—and allow money market rates to be pulled up closer to IOER. 

 

Even without any special favorable capital treatment, segregated reserve accounts could enhance the transmission of monetary policy due to market microstructure considerations. Increasing the number of counterparties with whom cash-rich participants would potentially be willing to invest would increase the bargaining power of lenders vs. borrowers in the money market, perhaps resulting in slightly firmer short-term interest rates. 

 

In addition, we expect that some important lenders in fed funds would prefer segregated reserve accounts to participation in the RRP facility, as it would likely afford more flexibility in when cash could be returned vs. tri-party repo.

Quick note: where Goldman says “segregated reserve accounts could enhance the transmission of monetary policy due to market microstructure considerations” what they mean is simple: there is an unprecedented collateral shortage across all asset classes, which in turn is putting various collateral-extracting counterparties under the microscope by other counterparties. The paradox, clearly, then is that through its 6 years of easing, the Fed has made the very process tightening impossible, and is now scrambling to find new and improved ways for the banks to agree to stick their hands in the sand and pretend like there is no high quality collateral shortage.

This approach failed to gain traction with the Reverse Repo facility, so the Fed is now hoping it may work with “segreggated reserve accounts.”

So, sure enough, one after another banker, the same who lauded the RRP program when it was first introduced a year ago, are rushing to praise the segregated accounts idea. Some soundbites from Bloomberg:

• Potential segregated accounts proposal mentioned in Oct. 28-29 FOMC minutes could be an alternative to the Fed’s O/N RRP facility, Credit Agricole strategist David Keeble said in phone interview.
• Fed officials don’t like the reverse repo facility; “they see it as poison”; Segregated accounts ARE “just another way to suck out cash” Keeble said adding banks won’t incur FDIC deposit fees so the accounts “circumvent problems domestic banks have” and put all institutions “on a level playing field”
• Fed has capped O/N RRP at $300b “so they need to look at other ways to put a harder floor under rates. It’s prudent planning on their part,” Citi strategist  Andrew Hollenhorst said in phone interview
• If the Fed goes “down this route with segregated accounts, all money market rates will rise.”
• Segregated cash account (SCA) proposal hearkens to New York Fed/ECB workshop on excess liquidity and money market function in Nov. 2012
• SCAs could “perfect a collateral interest in specific assets (reserves)” on bank’s balance sheet
• Would be created at bank by three-party agreement with lender, bank and Fed: Funds could be wired into account, which directs reserve balances
• Only lender-depositor could issue instructions to make payments out of account, can’t be moved by bank

And so on, but the gist is clear: over a year into the lifetime of one of the two key rate hiking pillars, the RRP, the Fed has given up on its as a primary component of the tightening cycle, and now, a few months ahead of when many believe the Fed will proceed to hike rates, the Fed is proposing a brand new and completely untested mechanism with which to extract record cash from the system.

Bottom line: it has become quite clear that the Fed neither has the intention, nor the market mechanism to do any of that, and certainly not in a 3-6 month timeframe. Which may explain the Fed’s hawkish words on any potential surge in market vol. After all, if the nearly $3 trillion in excess reserves remain on bank balance sheets for another year, then the only reason why vol could surge is if the Fed lose the faith of the markets terminally. At that point the last worry anyone will have is whether and how the Fed will tighten monetary policy.

via Zero Hedge http://ift.tt/1x5rBNu Tyler Durden

Day after day, well-dressed talking heads are paraded on business media and proclaim how cheap Japan is, how Abenomics will work (he promise… if it doesn't we'll have to question everything we believe in), how GDP is backward-looking (so ignore it… and every other economic indicator), and how being long Japanese stocks (of course, hedged back to dollars because you don't want to take the currency risk that Abe is creating) is a "no brainer." The problem with that strategy is… in 2014, the JPY-hedged Japanese stock market investor in the US has not had a daily close in the green year-to-date and is down over 5% for the year… but it gets worse.

 

Here is CNBC just this morning proclaiming why being long Japanese stocks is the best trade… Fund Managers are the most bullish Japan in nine years…

 

However…

Since 12/30/2013, the USD investor who is long the Nikkei 225 hedged back to USDs has yet to see a green close and has seen a total return notably worse than even the worst performing US index – small cap stocks…

 

The problem is growing… Since the BoJ's big QQE triple-down plan, the USD-based investor in Japanese stocks is back to breakeven…

 

And since the GDP print, the USD-based investor in Japanese stocks is down hard…

 

Of course, this is all pointless facts as the meme is that Japanese stocks are the no-brainer trade thanks to Abenomics.. besides Japanese Chief Cabinet Secretary Yoshihide Suga explained last night:

• SUGA: STOCK PRICES DOUBLING SHOW POLICIES PERMEATING THROUGH

Which must mean Venezuela's policies are proving massively supportive for their ecoonomy?

 

Simply put – the nominal value of all these indices may be rising but the currency is devaluing at a more rapid pace. As Kyle Bass previously warned, beware the 'nominal' stock market cheerleaders…

Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC's Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected). However, he caveats that nominally bullish statement with a critical point, "Zimbabwe's stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs" as purchasing power is crushed. Investors, he says, are "too focused on nominal prices" as the rate of growth of the monetary base is destroying true wealth.

*  *  *

So apart from the fact that Japanese stocks for a US investor have been a terrible investment this year even with all the efforts of the BoJ and Abe… fund managers are exuberantly bullish still…?

 

 

via Zero Hedge http://ift.tt/1uXoieu Tyler Durden

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

As Hillary Clinton starts to ponder the curtains she wants to hang in the Oval Office, there is only one person who can realistically stand in her way: Rand Paul.

Readers of this site will be well aware that I spend very little time focusing on Presidential politics. There are many reasons for this, but more than anything else, I believe there are two key components to genuine cultural change, and none of them have to do with electing a savior. These are:

1) Knowledge – Ignorance is not bliss. Particularly when it comes to the advance or decline of a civilization. Thomas Jefferson said it best:

Enlighten the people generally, and tyranny and oppressions of body and mind will vanish like evil spirits at the dawn of day. 

I am trying to do my own little part in that regard here at Liberty Blitzkrieg.

2) Internal Change – It is much easier to complain about others and the world at large than it is to improve oneself. I’m as guilty of this as anyone, but I am cognizant that you can’t change the outside world unless you have changed what’s inside. Gandhi said it best:

We but mirror the world. All the tendencies present in the outer world are to be found in the world of our body. If we could change ourselves, the tendencies in the world would also change. As a man changes his own nature, so does the attitude of the world change towards him. This is the divine mystery supreme. A wonderful thing it is and the source of our happiness. We need not wait to see what others do.

We can elect all the saviors we want to positions of power, but unless we are able to master the above, nothing will permanently evolve in the right direction, and we will be cursed into repeating the same painful cycle over and over again. Crash and burn.

All that said, I don’t think Presidential politics, or politics in general, have to be as horribly corrupt as they are today. I do think it is possible to elect courageous statesmen as opposed to power hungry, money grubbing frontmen and women.

As a consequence of my spending so much time reading about the world around me, I think I have a reasonable grasp of the potential contenders for the 2016 Presidential election from both of the tired and corrupt main parties. For all the chatter about Elizabeth Warren, I think Hillary Clinton is an absolute lock for the Democratic nomination. In fact, just yesterday the Huffington Post published an article detailing how the Democrat establishment had already made its move to cleverly neuter Warren by giving her more power within the Senate. For example:

Throughout Senate history, individual members have often steered away from leadership positions, worried that the horse-trading and consensus-gathering that leadership involves would neuter their power. But the Senate has been evolving in recent years into a much more leadership-driven institution, in which individual senators and even chairmen have less power than they once did compared to caucus leadership. Today, decisions that would have been made in side negotiations, in committee or on the floor are instead made by leadership.

 

It’s those meetings that Warren will now be a part of. At the same time, she will diminish her ability to maintain that inside position if she criticizes the party from the outside. That dilemma, however, has been with her every step of her career, as she has moved closer to the center of power.

We’ll see how this turns out, but it looks to me that the Democrats are giving her a sense of importance so she “plays ball.” Particularly when it comes to 2016.

On the Republican side, there isn’t a single candidate I would even consider supporting other than Rand Paul. Besides him, everyone else is either a neo-con establishment crony (Jeb Bush, Mitt Romney), or an intellectually challenged up and comer pandering basely to the lowest common denominator.

I am not considering Rand because I think he will “save America” or because his father is Ron Paul. I am considering Rand because I agree with him on enough positions that are important to me. Don’t take it from me though. Read the following article from H. A. Goodman, titled: I’m a Liberal Democrat. I’m Voting for Rand Paul in 2016. Here Is Why. Here are some excerpts:

Rand Paul is my candidate in 2016, even though the Tea Party would consider me Joseph Stalin’s love child. I’m for immigration reform and believe that illegal immigrants benefit this country. I’ve written many articles criticizing Tea Party paranoia. I’m against demagoguery from people like Paul Ryan who unfairly target inner city citizens and I’m for the federal legalization of gay marriage and marijuana. I think Ted Cruz is a buffoon and that we should listen to Stephen Hawking over Senator “Green Eggs and Ham” on climate change. Finally, I’ve also written two novels about the evils of religious fundamentalism and political demagoguery.

 

On all these possible points of contention with Rand Paul, the reality is that he isn’t Ted Cruz or Lou Dobbs on these matters. Sen. Paul is a self-described “moderate” on immigration, much to the dismay of Tea Party Republicans. Paul’s recent Bill Maher interview shows he’s open to cleaner energy alternatives. Most importantly, Paul doesn’t abide by the right-wing rhetoric blaming poor people for their predicament, or claiming God wants people to do this or that. Congress at the end of the day has the power of the purse, so if President Rand Paul scares you on economic matters, simply remember that only Congress can repeal or alter government programs and decide on budgets.

 

I’ve never voted for a Republican in my life, but in 2016, Kentucky Senator Rand Paul will be my choice for president. On issues that affect the long-term survival of this country; grandiose concerns like perpetual war that could send generations of Americans fighting and dying in the Middle East, domestic spying that could eventually lead to a police state, and numerous other topics, Rand Paul has shown that he bucks both the Republican and Democratic penchant for succumbing to public opinion, an overreaction to the terror threat, and a gross indifference to an egregious assault on our rights as citizens.

 

Yes, I’ll have to concede some of my beliefs and roll the dice as to whether or not he’ll flip-flop on issues, but Hillary Clinton and President Obama have changed their views on everything from gay marriage to marijuana legalization and Iraq, so I’m taking an educated gamble with Sen. Paul. Hillary Clinton alone has gone back and forth on enough issues to make the former Secretary of State a human version of Pong, so I’m not too worried about voting for Paul. Below are ten reasons this Democrat is voting for Rand Paul in 2016 and if my liberal membership card is revoked, I’ll live with that; I’m not an ideologue like Sean Hannity, I’m an American.

 

1. Rand Paul will be more cautious with waging war than Hillary Clinton or Jeb Bush. Sen. Paul has called Obama’s ISIS war illegal and isn’t against defending American interests through military intervention, but stresses the importance of Congress making these decisions. Hillary Clinton, in contrast, thinks we should have armed the Syrian rebel groups several years ago. Try naming even one of the Syrian rebel groups and explaining their differences with ISIS. Furthermore,The Week states that “Clinton’s instincts appear to be far more hawkish than Barack Obama’s.” Imagine a more hawkish Obama and you’ll get the next President Clinton. Also, famed neocon Robert Kagan is one of Clinton’s advisers and states in The New York Times, “I feel comfortable with her on foreign policy.” That should tell you how liberal Clinton will be on matters of perpetual war in the Middle East.

 

2. The Los Angeles Times has referred to Paul as “one of the foremost critics of the government’s domestic spying program.” In early 2014, Sen. Paul filed a lawsuit against the NSA over domestic spying. Neither Hillary Clinton, Jeb Bush, nor any other candidate in 2016 has made this a top priority in their campaign. Sen. Paul has also voted against PATRIOT Act Extension bills, voted for an amendment that prohibits detention of U.S. citizens without trial (which of course didn’t pass the Senate), and his voting record protects American citizens from politicians paranoid over terrorism. Sen. Paul was vehemently against the NDAA Indefinite Detention Bill that passed in 2013, because, “This bill takes away that right and says that if someone thinks you’re dangerous, we will hold you without a trial. It’s an abomination.”

 

3. Rand Paul has teamed up with liberal Democratic Sen. Cory Booker to reform the criminal justice system. Their bill would improve the lives of hundreds of thousands of Americans who’ve been adversely affected by non-violent criminal sentences. Hillary Clinton and Jeb Bush don’t care about reforming the criminal justice system, and if they do, it’s on the bottom of their to do lists, far behind cozying up to Wall Street and increasing America’s military presence in the Middle East.

 

4. POLITICO states Hillary Clinton is “Wall Street Republicans’ dark secret” in 2016. I don’t see Clinton as being any more liberal than Paul on Wall Street or banking, although perhaps she’d be more willing to save failed corporations than the Kentucky Senator. Also, Paul is one of the few Republicans who’s addressed the GOP’s love affair with corporations, stating that, “We cannot be the party of fat cats, rich people, and Wall Street…corporate welfare should once and for all be ended.”

 

5. Sen. Paul thinks Edward Snowden was treated unfairly as a whistleblower and should have only spent “a few years” in prison. No other candidate in 2016 would dare take that position. The Wall Street Journal criticizedPaul’s position on the Snowden matter, and their criticism actually makes me like Rand Paul in 2016 even more. Hillary Clinton, on the other hand, is “puzzled” why Snowden would want to leave the U.S. and feels he might have helped terrorists with his disclosures.

 

6. Rand Paul publicized the issue of a possible government drone strike, on American soil, against American citizens. No, I’m not making this up. I don’t want to get blown up eating a burrito at Chipotle because I visited Egypt to see the pyramids and happened to sit in a café frequented by a terrorist. In 2013, Rand Paul asked Eric Holder whether or not American citizens could be targeted by drones on American soil. Jon Stewart has a great segment about this. Eric Holder actually answered that theoretically, yes, drone strikes to kill Americans on U.S. soil could be viewed as legal, depending on the circumstance. If this doesn’t frighten you, then vote for Hillary Clinton or Jeb Bush, since neither one cares about this matter. Issues like drone strikes on American soil, against Americans, is why I don’t believe in conspiracy theories. This sort of thing is being discussed today in plain sight, yet only Rand Paul and a few others have shown outrage over the potential of our government to possibly target its own citizens. If it’s not an ISIL beheading video, nobody seems to care nowadays.

 

7. Rand Paul could bring back an era in American politics when conservatives and liberals socialized with one another. This alone would solve some of the gridlock in Washington. Paul has worked with 7 leading Democratson a number of issues; working on everything from judicial reform, NSA surveillance, the limits of presidential authority to launch strikes in Iraq, and other issues. Imagine Ted Cruz reaching out to Nancy Pelosi, or Mitch McConnell having lunch with Hillary Clinton. Rand Paul, on the other hand, has worked to emulate this picture.

 

8. Rand Paul will not gut the economic safety nets of this country in the manner espoused by Paul Ryan and others. He doesn’t want to dismantleSocial Security. I do disagree with his view of the SNAP Program and certain other issues. However, Paul has stated, “I’m for a social safety net, but it should be minimized to helping those who can’t help themselves.” I don’t ever recall Ted Cruz or Paul Ryan making that type of statement and mainstream Republicans do everything in their power to promote the view that safety nets equate to communism or socialism.

 

9. Neoconservatives hate Rand Paul. They like Hillary Clinton and Jeb Bush a lot more, and The Weekly Standard, National Review, and others have voiced their reservations about a Rand Paul presidency. If neocons disagree with you, then you must be doing something right.

 

10. Rand Paul could be the answer to our philosophical conundrum as a nation. We’re stuck with a GOP who thinks the globe is one giant Stratego board game with God helping roll the dice, a Democratic Party more focused on defending Obamacare than stopping endless wars or protecting civil liberties, and a populace that cares more about beheading videos than the erosion of rights or the welfare of our warriors. Is Paul the answer? I’m not certain. But compared to Hillary and Jeb Bush, I’ll take the man who stated, “I do blame the Iraq War on the chaos that is in the Middle East.”

What is so interesting to me about the above list, is that although I would strongly disagree with Mr. Goodman on many issues, I concur with his assessment of the importance of the above. NSA spying, aggressive and unconstitutional foreign policy, reforming the criminal justice system and drone strikes. These aren’t side issues to me. They are core issues. He didn’t even mention Audit the Fed, which Rand sponsored in the Senate and would almost surely continue to push for.

These issues cut cross meaningless labels of “liberal,” “conservative,” “progressive” and “libertarian.” These are human issues. Issues of civil liberties and decency (read:#StandwithRand: The Filibuster that United Libertarian and Progressive Activists). They are issues on which Rand Paul is on the right side of history and Hilary Clinton clearly on the wrong. That’s precisely why I think the GOP establishment will do everything in its power to prevent him from getting the nomination. Why you ask?

The reason is the establishment GOP is part of the status quo, and the status quo likes things as they are. Hilary Clinton would be merely a more militant version of Barack Obama with even deeper Wall Street ties (read: Glenn Greenwald on Hilary Clinton: “Soulless, Principle-Free, Power Hungry…”).

. A less hillbilly version of George W. Bush. I strongly believe that the GOP establishment would rather have Hilary Clinton in power than Rand Paul. I dare them to prove me wrong.

Rand recently appeared on Bill Maher’s show. At the end, Bill said:

I think it’s only a good thing for America, when I’m not sure who I’m gonna vote for next time. 

Think about that for a minute. Unless he makes some spectacular flip-flops, Rand Paul would get all the libertarian votes, all the GOP votes (they’d vote for Satan to keep Hillary out of office), and a lot more genuine liberal/progressive votes than you might think.

He is the only candidate who can beat Hilary. That’s why Rand Paul is Hillary Clinton’s worst nightmare.

via Zero Hedge http://ift.tt/1qA8yhS Tyler Durden