Tag: finance

In an unexpected statement made by the former COO of Goldman Sachs and current director of Trump’s National Economic Council, Gary Cohn told a private meeting with lawmakers on the Senate Banking Committee on Wednesday evening that he could support legislation breaking up the largest U.S. banks – a development that could provide support to congressional efforts to reinstate the Depression-era Glass-Steagall law – and impact if not so much his former employer, Goldman Sachs, whose depository business is relatively modest, then certainly the balance sheets of some of Goldman’s biggest competitors including JPM and BofA.

According to Bloomberg, Cohn said he generally favors banking going back to how it was “when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans.”

What Cohn may not have mentioned is that with rates as low as they are, issuing loans – i.e., profiting from the Net Interest Margin spread – remains far less profitable than trading and underwriting securities in a world in which virtually every “developed world” central banker is either directly spawned from Goldman, or is advised by an ex-Goldman employee,

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

 

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

As Bloomberg further notes, Wednesday’s Capitol Hill meeting with Cohn was arranged by Senate Banking Committee Chairman Mike Crapo, and included lawmakers from both political parties and their staffs. The discussion covered a wide range of topics, including financial regulations and overhauling the tax code, the people said.

The WSJ adds that Cohn was asked by Sen. Elizabeth Warren (D., Mass.) whether the administration planned to carry out a promise included in the Republican 2016 platform—and made by the Trump campaign—to restore the law separating traditional commercial banking from Wall Street investment banking. The law was repealed in 1999. Cohn expressed an openness to working with Warren on the issue, and said he could support a simple policy completely separating the two businesses, these people said.

There are various ideas for restoring some form of Glass-Steagall, running the gamut from splitting apart firms completely to separating their various operations under an umbrella holding company.

 

While Cohn’s comments are consistent with other statements by Trump administration officials, it isn’t clear how much support there is for the idea among Republicans more broadly. Warren has in the past introduced a bill she called the 21st Century Glass-Steagall Act. In the last Congress, it received one Republican co-sponsor. Additionally, while Treasury Secretary Steven Mnuchin has also said the administration is open to implementing some version of President Donald Trump’s campaign promise. But in his Jan. 17 confirmation hearing, he expressed concern that “separating out banks and investment banks right now under Glass-Steagall would have very big implications to the liquidity in the capital markets and banks being able to perform necessary lending.”

While the Trump team has endorsed the Glass-Steagall idea, it hasn’t come forward with its own proposal. Meanwhile, Treasury officials are meeting with financial-industry officials to discuss ways to roll back rules adopted under the Obama administration. They are due to make recommendations to the White House in early June.

Some observers said they didn’t view Mr. Cohn’s comments as a threat. “We continue to believe that a return of some form of Glass-Steagall remains more of a headline risk rather than a real policy risk and we think the odds are against the reinstatement of the law,” Brian Gardner, an analyst with Keefe, Bruyette & Woods, said in a note to clients Thursday.

 

“I don’t think we’re concerned,” said one banker at a large firm. The bank is “pleased with the direction” of Mr. Trump’s administration and its executives aren’t racing to change strategy or make a big new lobbying push. “It’s the same day as it was yesterday,” this person said. “It’s not a time to go crazy.”

 

Tim Pawlenty, president of the Financial Services Roundtable trade group, said Thursday: “Large financial institutions play a role in the American economy other institutions are not able to fill. We are working with Congress and the administration on a common-sense approach to financial regulation modernization and look forward to more progress.”

Still, while Cohn’s statement may be simply posturing, some see Cohn’s support as notable: “he was the most likely obstacle within the Trump White House” to restoring Glass-Steagall, said Jaret Seiberg, an analyst with Cowen & Co., in a note to clients. “With him supporting Glass-Steagall’s restoration, there is no one in the inner circle left to fight it.”

Mr. Seiberg said banks may be underestimating the threat: “At some point the market is going to have to accept that the Trump administration is serious about restoring the Glass-Steagall separation between commercial and investment banking.”

As a reminder, Glass-Steagall was adopted in the 1930s as a way to keep securities businesses separate from taxpayer-insured banks. The separation between lending and investment banking slowly eroded in the latter part of the 20th century, as banks won regulatory exceptions to diversify their businesses. Since Congress repealed the law in 1999 under Bill Clinton, some liberals have pushed for reinstating it, “calling such a move a simple way to make the economy more stable by removing a taxpayer backstop from risky activities. Proponents of bringing back the law also say it would diminish the size and political influence of large Wall Street banks.”

The 2010 Dodd-Frank regulatory-overhaul law took a half-step toward Glass-Steagall when it mandated the Volcker rule, which bars banks from certain activities unless they are trading on behalf of their customers. Many banks have since closed so-called proprietary trading desks.

Ultimately, even with Cohn allegedly behind the push repeal, the Glass-Steagall idea hasn’t gained broad support yet, even among Democrats. As the WSJ concludes, former Federal Reserve Gov. Daniel Tarullo, the Fed regulatory guru who stepped down Wednesday, was asked about Glass-Steagall earlier this week. He pointed out that in 2008, Bear Stearns and Lehman Brothers—two investment banks without traditional lending businesses—caused significant financial stress.

“Just by separating things doesn’t mean people stay out of trouble,” he said, adding that there would be costs to forcing banks to separate and lose the potential business advantages of combining their operations. “If you are going to have those costs and still have financial stability problems…then maybe we are not getting much after all.”

Unfortunately he may be right: the current financial environment is one in which the concern is not so much separating securities businesses from taxpayer-insured operations, as separating the $14 trillion in global liquidity sloshing around courtesy of central banks, from the rest of “organic” liquidity. It is that particular separation that will be a far bigger headache in the coming years than even reinstating Glass-Steagal.

* * *

Finally, while the likelihood of a new Glass-Steagall is low, the financial industry is already preparing for a worst case scenario, and firms such as Credit Sights are warning that a return of the Depression-era law would hurt banks.

In a note from CreditSights’ Pri de Silva, he writes that while some politicians and regulators, including Donald Trump, have been calling for a new Glass-Steagall Act separating investment and commercial banking, only FDIC Vice Chairman Thomas Hoenig has put forward a detailed proposal; “implementing it could hurt global financial markets and financial stability.”

• Sees severely harming credit profiles of the big 6 banks (BofA, Citigroup, Goldman, JPMorgan, Morgan Stanley, Wells Fargo), bondholders, trading counterparties and other bank creditors of these banks, U.S. banks’ global competitive advantage, and liquidity in bond, repo markets
• Could also curtail credit creation due to constraints placed on banks/brokers, steep capital requirements, which in turn would become headwind for economic growth and “the smooth functioning” of financial markets
• If broker-¬dealers’ ability to make markets is constrained, ability to act as shock absorbers would be pruned, spikes in volatility may increase
• Notes potential lack of clarity about parent-¬level debt (issued for TLAC)
• Notes proposal calls for eliminating or watering down many of the “prudent safeguards” implemented since the credit crisis, including CCAR, DFAST stress tests, and replacing them with 10% tangible equity ratio that doesn’t distinguish between a subprime mortgage or a leveraged loan and a U.S. government obligation

In short, while it was the post-Glass Steagall world that led to the 2008 financial crisis, Wall Street has already fallen back to its traditional defense mechanism: threatening that far greater doom and gloom lie in story if the Trump administration does the one thing that may actually protect taxpayers. As a result, with Wall Street effectively running the current administration, we doubt the probability of a Glass Steagall reinstatement is even worth talking about.

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Authored by Mike Krieger via Liberty Blitzkrieg blog,

During a recent interview with Democracy Now, Noam Chomsky demonstrated what everyone with a clear head and capacity for critical thought should already know. Just because you have a strong dislike for Donald Trump, doesn’t mean you latch on like a lunatic to every nonsensical Russia conspiracy theory because you’re still crying about Hillary’s loss.

As Noam Chomsky accurately states:

JUAN GONZÁLEZ: Noam Chomsky, I’d like to ask you about something that’s been in the news a lot lately. Obviously, all the cable channels, that’s all they talk about these days, is the whole situation of Russia’s supposed intervention in American elections. For a country that’s intervened in so many governments and so many elections around the world, that’s kind of a strange topic. But I know you’ve referred to this as a joke. Could you give us your view on what’s happening and why there’s so much emphasis on this particular issue?

 

NOAM CHOMSKY: It’s a pretty remarkable fact that—first of all, it is a joke. Half the world is cracking up in laughter. The United States doesn’t just interfere in elections. It overthrows governments it doesn’t like, institutes military dictatorships. Simply in the case of Russia alone—it’s the least of it—the U.S. government, under Clinton, intervened quite blatantly and openly, then tried to conceal it, to get their man Yeltsin in, in all sorts of ways. So, this, as I say, it’s considered—it’s turning the United States, again, into a laughingstock in the world.

 

 

So why are the Democrats focusing on this? In fact, why are they focusing so much attention on the one element of Trump’s programs which is fairly reasonable, the one ray of light in this gloom: trying to reduce tensions with Russia? That’s—the tensions on the Russian border are extremely serious. They could escalate to a major terminal war. Efforts to try to reduce them should be welcomed. Just a couple of days ago, the former U.S. ambassador to Russia, Jack Matlock, came out and said he just can’t believe that so much attention is being paid to apparent efforts by the incoming administration to establish connections with Russia. He said, “Sure, that’s just what they ought to be doing.”

 

So, meanwhile, this one topic is the primary locus of concern and critique, while, meanwhile, the policies are proceeding step by step, which are extremely destructive and harmful. So, you know, yeah, maybe the Russians tried to interfere in the election. That’s not a major issue. Maybe the people in the Trump campaign were talking to the Russians. Well, OK, not a major point, certainly less than is being done constantly. And it is a kind of a paradox, I think, that the one issue that seems to inflame the Democratic opposition is the one thing that has some justification and reasonable aspects to it.

Watch the clip here.

Yes, I know. Chomsky works for Putin too.

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The U.S. government’s foreign surveillance incidentally collects information on lawmakers and their staffs as often as once a month, according to a new report.

In what seems like the first attempt to shift the narrative of Susan Rice's alleged wrongdoings, the report positions the 'unmaskings' as "routine" almost as if the fact that 'everyone's doing it' somehow negates the fact that the law was allegedly broken.. (as The Hill reports)

Congress frequently receives alerts that its members and their aides have been unmasked and their identities shared with intelligence and law enforcement forces, Circa said Thursday.

 

Circa said such alerts, named “The Gates Notification” after former CIA Director Robert Gates, go to the Gang of Eight leadership team in Congress. The Gang of Eight includes the Speaker and House minority leader, the Senate Democratic and Republican leaders, and the bipartisan heads of both chambers’ intelligence committees.

 

Circa added the lawmakers often don't learn about such unmasking unless it involves a hacking or security threat.

 

Intelligence community sources speaking on the condition of anonymity confirmed to Circa that lawmakers'  names may appear in executive branch intelligence reports.

However, the plot thickens further, as Fox news reports that the intelligence reports at the center of the Susan Rice unmasking controversy were detailed, and almost resembled a private investigator’s file, according to a Republican congressman familiar with the documents.

"This is information about their everyday lives," Rep. Peter King of New York, a member of the House Intelligence committee said. "Sort of like in a divorce case where lawyers are hired, investigators are hired just to find out what the other person is doing from morning until night and then you try to piece it together later on.”

 

On the House Intelligence Committee, only the Republican chairman, Devin Nunes of California, and the ranking Democrat Adam Schiff, also of California, have personally reviewed the intelligence reports. Some members were given broad outlines.

 

Nunes has consistently stated that the files caused him deep concern because the unmasking went beyond the former national security adviser Mike Flynn, and the information was not related to Moscow.

…

The most recent government data shows that unmasking or identifying Americans happens in a number of cases. The Office for the Director of National Intelligence, which oversees the 17 intelligence agencies, said "…in 2015, NSA disseminated 4,290 FAA Section 702 intelligence reports that included U.S. person information. Of those 4,290 reports, the U.S. person information was masked in 3,168 reports and unmasked in 1,122 reports."  

The report said "NSA is allowed to unmask the identity for the specific requesting recipient only under certain conditions and where specific additional controls are in place" and those conditions were met for "654 U.S. person identities" in 2015.

That means Americans were identified in 26 percent of the cases, or roughly one in four intelligence reports.

Still we are sure CNN will keep plugging away with its "nothing to see here, move along" narrative… until the last lonely viewer has switched off.

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…..then…….

………..then……

…….and, finally……….

All of which proves, if you’re going to be a complete screw-up and try to glide by on your blonde hair alone, you really need to learn from the mistress of them all.

via http://ift.tt/2oNKYPG Tim Knight from Slope of Hope

Authored by Irina Slav via OilPrice.com,

Iraq has plans to boost its crude oil production by 600,000 bpd to 5 million bpd by the end of this year, regardless of its participation in OPEC’s production cut deal. Iraq is the cartel’s second-biggest exporter of crude and has been the most disinclined of all parties to the agreement since its inception, with a lot of observers expecting it to be the first one to cheat.

Iraq’s first problem is that as much as 95 percent of its budget revenues come from crude oil. There are no viable alternatives in sight for revenues at the moment. The second problem that the country has to contend with is its war with Islamic State, which makes these revenues more important than ever.

Amid the final push against IS in Mosul, Iraq is working hard to ensure the sustainable growth of its oil and gas industry—OPEC deal or no OPEC deal. Three months ago, Oil Minister Jabar al-Luaibi said that Baghdad is planning to build five new refineries on an investment basis, in addition to fixing and expanding existing refineries that were damaged in the war with IS.

While Al-Luaibi has repeatedly assured media – and indirectly, investors – that Iraq will stick to its OPEC commitment, Iraq is doing whatever it can to boost its returns from its only significant natural resource.

As part of these efforts, the government recently started a review of the contracts it has with foreign oil companies operating local fields in a bid to better match its interests to those of the operators. Currently, international oil companies in Iraq are working under the so-called technical service contracts, which a few years ago, forced them to reduce production from some of the country’s biggest fields because Baghdad had no money to pay them for operating the fields.

Baghdad is also cooperating with Tehran to make the most of the oil finds that the two neighbors share. Bilateral relations have been uneven historically but now that both Iraq and Iran are scrambling with their respective problems, a partnership has emerged as the mutually beneficial way to proceed. It is also strengthening its ties with other neighbors and farther countries such as Egypt, European Union members, and the U.S.

A 600,000-bpd production increase would be substantial, but Al-Luaibi did not disclose the source of this increase. Huge fields such as West Qurna, Rumaila, and Majnoon are nowhere near depletion, so Iraq could significantly boost production in these fields.

Then there is one more candidate for additional production: the Kirkuk field in the Kurdistan Autonomous Region. Kirkuk currently produces less than half a million barrels of crude daily, even though its can pump as much as 1 million bpd. The problem – yet another big one for Baghdad – is that the Kurdistan Regional Government is as eager as Baghdad to take full control of the field.

Tensions between the central government and the KRG have been simmering for a while now, and of course, it’s all about the oil, as both sides throw accusations at each other of overstepping its boundaries.

For now, Iraq’s plans to increase production seem to be vague, unless Al-Luaibi and the rest of the government just don’t want to go public with more specific plans. Given the price environment, however, and the growing likelihood that the production cut will be extended, Iraq’s output-boosting efforts have the potential of a major headwind for prices in the second half of the year.

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Moments ago Twitter shares slumped, then rebounded…

… after Ev Williams, co-founder of Twitter, published an article on Medium in which he explained why he – along with apparently everyone else these days – is "selling some twitter shares"

As he explains…  "After a year and a half of no selling, I have filed a new 10b5–1 plan to liquidate a minority of my TWTR over the next year. It actually pains me to be selling at this point, but this sale is all about personal context, not company context….

Here’s the short story: I like to invest a lot in things I care about. For example, I’m the largest LP at Obvious Ventures, which is now on its second fund and has invested in over 35 world-positive companies. In addition, my wife and I have done a fair amount of philanthropic giving and—especially in the last year—upped our political donations significantly ????. These are all efforts to help build a smarter, more sustainable world. I’ve been doing all of them for a while, and I’d like to continue."

In short, for that reason or any other, he prefers cash over TWTR shares here.

His full note is below:

Why I’m selling some Twitter shares 

 

A note for Twitter shareholders and employees

 

If you’re not a Twitter shareholder or employee (or reporter who covers such things), this is exceedingly uninteresting?—?check out the Medium homepage instead. If you are, I wanted to provide some context, in anticipation of potential speculation due to a public filing today.

 

The vast majority of my assets are in the form of Twitter stock, as has been the case since, well, since it was worth much. That will continue to be the case for the foreseeable future. I’m proud to be on the board and optimistic about the future of the company. I’m also really gratified by the recent efforts at Twitter to curb abuse, the upward tick in usage, and recent additions to senior staff, among other things.

 

After a year and a half of no selling, I have filed a new 10b5–1 plan to liquidate a minority of my TWTR over the next year. This plan kicked in on Monday. It actually pains me to be selling at this point, but this sale is all about personal context, not company context.

 

Here’s the short story: I like to invest a lot in things I care about. For example, I’m the largest LP at Obvious Ventures, which is now on its second fund and has invested in over 35 world-positive companies. In addition, my wife and I have done a fair amount of philanthropic giving and—especially in the last year—upped our political donations significantly. These are all efforts to help build a smarter, more sustainable world. I’ve been doing all of them for a while, and I’d like to continue. (In the early days, I also funded Medium, but have not in recent years and don’t have any plans to, thanks to awesome investor/partners.)

 

I’m not a public market investor. And I feel very fortunate to be able to use funds to enable other people to do good things. Thank you for your understanding and thanks, especially, to the employees working to serve the important role Twitter plays in the world today.

It appears the news is less 'positive' after all…

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While most eyes are focused on the longer-end of the curve and the butterfly-rotations in the Treasury complex…

RBC's Mark Orsley points out that there is a substantial repricing going on in the front-end that could bleed into the broader reflation theme.

Arguably the most popular way in rates to play reflation and the thought of a more aggressive Fed has been the EDZ7/EDZ8 steepener (buying Dec ’17 Eurodollars/selling Dec ’18 Eurodollars).  Conventional wisdom was the curve had 2 hikes priced in, the Fed has been saying 3 hikes for 2018 so its 1 hike light and thus a buy (steepener).  Fair enough and I was a believer of this theory as well.   However, Dudley really threw the Eurodollar market for a loop when he:

• talked down the Fed’s urgency to hike
• revealed that the taper of reinvestments represents a hike or two
• showed us that the markets current pricing for terminal rates is pretty fair when he said there is 100-150bps more of hikes (was priced)

As I have been saying in the past couple notes, this caused a recalculation of Fed hike expectations by the Eurodollar market and that caused the bleed lower in the EDZ7/EDZ8 spread.  It may not look like much in the charts but we are talking about a significant move.  From the pre-March FOMC high to now, that curve has fallen from 57bps to 38bps (19bps).  That is an 11 standard deviation move.  For those equity minded, it would be equivalent to S&P’s dropping 150 points (~7%).

Yesterday’s FOMC minutes from the March meeting only exasperated the move in Eurodollars.  The statement that most Fed officials saw reinvestments shift warranted this year was slightly more aggressive in terms of the timing that many in the market expected. Thus when coupled with Dudley comments, the Fed is confirming that tapering is on the way which means there will be 1 or 2 less hikes than we all originally expected.  That flattens the Eurodollar curve and pushes the Eurodollar unwind further. 

So now what?  I think the take away is when you look at the chart of EDZ7/EDZ8; it is the same formation as 10yrs.  While 10yrs are holding its range, Eurodollar spreads are potentially foreshadowing a pending break down in yields.    Essentially, Eurodollar curves are breaking the equivalent level as the all-important 2.31% level in 10yrs which is being watched by everyone in the world.

EDZ7/EDZ8 spread…

Looks familiar doesn’t it? We noted the critical levels on US 10yr rates…

The bottom line is, although getting a slight reprieve this morning, the breakdown in Eurodollar spreads increases the probability of a support break in 10yr yields which is watched by the entire market and has repercussions beyond rates (into financial equity names and credit products to name a few).  If it does break, it will likely lead to a significant round of capitulation in reflation trades.  From there, the story will turn to knock on effects and potential liquidations in other products (ie: book gains in S&P longs against losses in Eurodollars).

The trend line break this week in US 10yr yields to me indicates the froth being taken off the Trump side of the reflation theme.  If the support level at 2.31% gives way, this will mean rates will retrace to the longer term trend line first put in place post-Brexit.  This post-Brexit trend line represents the stronger economic data momentum (non-Trump induced) and central banks pivoting away from easing themes.  Those two themes still persist.   It would not be unreasonable to see 2.15% by May which fills the gap from November and meets up with the longer-term uptrend that I think will end up holding. 

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It appears that the neo-cons are on the verge of victory again: according to CNN, Trump has told some members of Congress that he is considering military action in Syria in retaliation for this week’s chemical attack and recognizes the seriousness of the situation, a source familiar with the calls tells CNN.

Source: Trump is considering military action in Syria, recognizes the seriousness of the situation https://t.co/G19JoiQtni http://pic.twitter.com/uWl0FjyyRM

— CNN (@CNN) April 6, 2017

CNN hedges by noting that its source said the president had not firmly decided to go ahead with it, but said he was discussing possible actions with Defense Secretary Mattis. Trump is relying on Mattis’ judgment, according to the source.

US officials told CNN “the Pentagon has long standing options to strike Syria’s chemical weapons capability and has presented those options to the administration.“

The sources stressed a decision has not been made.

We now look forward to Russia’s response as the geopolitical situation in Syria devolves to precisely where it was during the Obama administration.

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While investors hang on every dovish word bluffed from a venerable Fed speaker's mouth, the cognitive dissonance when something negative is uttered is stunning. Since Greenspan's "irrational exuberance" moment, asset-gatherers and commission-takers have advised ignoring Fedspeak on stocks… historically, that was a mistake for investors.

Having shocked a soaring market yesterday with the Minutes stating:

"Broad U.S. equity price indexes increased over the intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. … Some participants viewed equity prices as quite high relative to standard valuation measures."

Of course, business media was quick to assert this is nothing to worry about, however, as CNBC's Mike Santoli reports, traders shouldn't be so quick to dismiss these comments from Fed officials.

History shows when worries about valuation appear in these official minutes, stocks often struggle in the following year.

We found six mentions of an overvalued stock market in the minutes by searching the Fed's website for the word "valuation" going back to 1996. According to Kensho, here's the performance of the major market averages one year after the meeting when such a mention took place.

Here are the specific mentions of high "valuation" in the minutes, according to the Fed's website, along with the S&P 500's subsequent return from the meeting when that mention was made.

Meeting: April 28-29 — 2015 S&P 500 return 1-year later: -1.97%

 

"However, some indicators suggested that valuations remained stretched for some asset classes. An estimate of the expected real return on equities moved down, reflecting an increase in stock prices and downward revisions to forecasts of corporate earnings, and corporate bond spreads declined somewhat."

 

Sept. 16-17, 2014 — S&P 500 return 1-year later: -0.57%

 

"Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads."

 

Jan. 27-28, 2004 — S&P 500 return 1-year later: +3.8%

 

"A number of members commented that expectations of sustained policy accommodation appeared to have contributed to valuations in financial markets that left little room for downside risks, and the change in wording might prompt those markets to adjust more appropriately to changing economic circumstances in the future."

 

Dec. 11, 2001 — S&P 500 return 1-year later: -20.39%

 

"Among those risks, members cited the apparently reduced prospects for additional fiscal stimulus legislation, the vulnerability of current stock market valuations should forecasts of a robust rebound in earnings fail to materialize, the possibility of further terrorist incidents, and especially the potentially adverse effect on consumer confidence and spending of additional deterioration in labor market conditions."

 

March 21, 2000 — S&P 500 return 1-year later: -24.88%

 

"The divergence, at least until recently, in the stock market between the valuations of high-tech firms and those of more traditional, established firms was inducing a redirection of investment funds to business activities that were perceived to be more productive. While the associated capital investments undoubtedly had contributed to the acceleration in productivity, some members expressed concern that the historically elevated valuations of many high-tech stocks were subject to a sizable market adjustment at some point. That risk was underscored by the increased volatility of the stock market."

 

Dec. 17, 1996 — S&P 500 return 1-year later: 32.99%

 

"The rise over recent years had been extraordinary and had brought market valuations to fairly high levels relative to earnings and dividends. In these circumstances, the members recognized the need to monitor with special care price movements in the stock market and asset markets more generally for their implications for consumer and other spending."

Of course, it's different this time though and markets can only go up… because Trump tax reform… stimulus… earnings… right?

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With the question of the Fed’s portfolio normalization now all the rage, accentuated by yesterday’s FOMC Minutes announcement that runoff could start later this year – even as many traders admit nobody has any idea what will happen if and when the Fed starts reducing its holdings, mostly of MBS – on Thursday the NY Fed, the Fed’s trading desk, provided a glimpse into its thinking on how this will play out in its latest Domestic Market Operations annual report.

According to the report, the Fed’s bond holdings could drop to about $2.8 trillion by the end of 2021 – a $1.7 trillion reduction over the next 5 years – with the New York Fed now projecting its balance sheet will reach a “normalized” state some two quarter earlier however with approximately $600 billion more assets than in a year-ago estimate. The U.S. central bank currently has some $4.5 trillion in Treasury and mortgage bonds.

To be sure, many things can and will happen between now and 2021, including the US may have a new president.

Which is why what we found more interesting was the NY Fed’s own forecast on the start of renormalization, which disagreed with the FOMC Minutes, in that Bill Dudley’s Fed does not expect the Fed to start “renormalizing” until mid-2018, to wit: “the size of the SOMA portfolio is projected to remain largely unchanged at its current level of approximately $4.2 trillion through mid-2018, while full reinvestments continue.“

What happens to the balance sheet then:

After that date, it starts to decline as reinvestments are phased out and then ended altogether in mid-2019. The Federal Reserve’s securities holdings then decline until the portfolio reaches its normalized size in the fourth quarter of 2021 (Chart 26). At that time, the domestic securities portfolio is estimated to be about $2.8 trillion, with a slightly higher concentration in Treasury securities than in agency MBS. Thereafter, Treasury-driven growth of securities holdings supports trend balance sheet growth, and agency debt and agency MBS holdings continue to run off.

The NY Fed on suspension of reinvestments vs outright selling:

Once the FOMC ends reinvestments, the pace of the reduction in the size of the SOMA portfolio will largely be driven by the pace of principal receipts from SOMA securities holdings (Chart 27). The timing of principal payments from maturing Treasury securities and agency debt securities is a known function of current SOMA holdings. In contrast, projected principal pay-downs associated with agency MBS are model-based estimates that are subject to considerable uncertainty because of the embedded prepayment option. The actual pay-down path will depend on a variety of factors, including the path of interest rates, changes in housing prices, credit conditions, and other government policy initiatives.

Finally, how the latest forecast differs from last years:

The point of normalization in late 2021 is projected to occur almost two quarters earlier than in the 2015 baseline (Chart 28). The balance sheet starts to contract just over a year later than it was expected to in the 2015 baseline given a longer-than-previously anticipated period for reinvestments to continue. (The December 2015 baseline was modeled on an assumption that reinvestments would begin to be phased out in the first half of 2017.) However, a larger long-run balance sheet size in the current baseline, driven by the assumption about a higher level of reserve balance liabilities in a future policy implementation framework, requires less of the portfolio to run off once such a contraction starts.

And some parting words:

Of course, banks’ demand for reserves and the level of reserves the FOMC will choose to maintain in its long-run policy implementation framework remain uncertain. A set of alternative scenarios highlights  the sensitivity of SOMA portfolio balances to different long-run levels of Federal Reserve liabilities. These scenarios illustrate the degree to which increases (decreases) in liabilities imply a larger (smaller)  level of the SOMA in the long run and how long it might take to achieve a normalized portfolio size. While the projections are modeled with regard to alternative levels of reserve balances, the specific type  of liability is not material; the effect on SOMA portfolio balances would be similar if the alternative levels of liabilities arose from changes in other line items, such as Federal Reserve notes, the TGA, the  foreign repo pool, or DFMU balances.

 

Under a scenario in which reserve balances are $100 billion in the long run (the baseline in prior years’ reports), the size of the balance sheet is normalized in the fourth quarter of 2022, approximately one  year later than in the baseline scenario (Chart 29). In contrast, under a scenario in which reserves are $1 trillion in the long run, the size of the balance sheet is normalized in the fourth quarter of 2020,  nearly one year sooner than in the baseline. Given that Treasury purchases resume at an earlier date, by the end of the forecast horizon the portfolio is more heavily weighted to Treasury securities than it is  in the baseline scenario.

In other words, if all goes according to plan, the Fed will consider its “renormalization” mission complete in about 5 years, at which point it will have no qualms about launching even more QE if it has to.

Source

via http://ift.tt/2ngJRKZ Tyler Durden