The Fed is heading for another catastrophe - page 4
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Almost $100 Million of VIX Options Traded Hands in a Split Second Today
Almost $100 million worth of options pegged to volatility in U.S. equities changed hands in a split second today in Chicago, transactions that together would represent more than half a normal day’s volume.
About 40 different trades went off at 12:16:04 p.m., encompassing contracts that gain in value should the Chicago Board Options Exchange Volatility Index rise over the next few months, according to options data compiled by Bloomberg. The four biggest were each more than 130,000 contracts.
While divining the motive of a single trader who may be operating in more than one market is impossible, buying a call on the VIX is a bet the equity market turbulence will rise, which usually happens when stocks fall. To Jamie Tyrrell, a VIX specialist on the CBOE floor, the trades had characteristics of someone hedging stocks.
“I’m not sure if it’s the biggest trade ever, but it’s certainly one of them,” said Tyrrell, who works for Group One Trading LP, the primary market maker for VIX options. “Someone is interested in owning a lot of protection, but not in the near-term.”
Options Flurry
Just over 1 million contracts were traded, all told, about 54 percent of the total amount of index options that traded at the CBOE all day Friday. The trades were spread among four contracts that pay off at different dates and prices, say if the VIX rises to 17 by June or 23 by July.
The VIX jumped 3.3 percent to 13.29 at 1:59 p.m. in New York. More than 1.4 million VIX options have changed hands in total today, the highest daily volume since October.
The transactions all occurred at the same second, through they spanned more than three dozen individual trades. While that’s not proof they were connected, it’s common on electronic venues for large blocks to be divided into smaller units.
Expectations of higher volatility have been creeping back into the market through options on the VIX. Traders owned about 5 million calls as of Friday, the most since November and more than double the open interest in January. They held 2.6 calls for every put, around the highest ratio since October.
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Fed’s Williams in ‘Wait and See Mode’ on Interest-Rate Increases
Federal Reserve Bank of San Francisco President John Williams said the U.S. central bank could decide to begin raising interest rates at any policy meeting, and that he is in “wait and see mode” headed into the next gathering in June.
Additional economic data to be released between now and the policy-setting Federal Open Market Committee’s June 16-17 meeting “should paint a more complete picture than we have now,” Williams said Tuesday in the text of a speech in New York. “Either way, there’s no pressure to decide on the future path of policy today, so I am in ‘wait and see mode,’ with a keen eye on the data.”
Williams is a voting member of the FOMC this year.
The Fed has said it will raise its benchmark federal funds rate -- which has been near zero since December 2008 -- when it sees further labor-market improvement and is “reasonably confident” inflation will rise back to its 2 percent goal over time. Most economists in a Bloomberg survey late last month predicted the central bank will start tightening in September.
Incoming data “may push us a little in one direction or the other, and there will be a lot of discussion and debate” about when to begin, Williams said. “The decision to raise rates is actually three decisions: Not just when, but how quickly and how high. I see a safer course in a gradual increase, and that calls for starting a bit earlier.”
The San Francisco Fed chief played down weak economic growth in the first quarter, citing transitory factors including harsh winter weather and a slowdown at West Coast ports caused by labor disputes. The economy expanded at a 0.2 percent annualized pace in the January-March period, down from 2.2 percent in the previous three months, according to initial estimates from the U.S. government.
“With that in mind, and looking at the past several years, I expect that 2015 will match the pattern that’s emerged: After a disappointing first quarter, we should see above-trend growth for the rest of the year,” Williams said.
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US Fed Evans repeats that he's in no hurry to tighten monetary policy
Chicago Fed pres Charles Evans, a voting member of the FOMC this year, repeating his known bearish stance in a speech to be delivered in Stockholm
Wall Street is on the verge of saying 'recession'
Wall Street has almost said it.
In a note to clients on Monday morning, Deutsche Bank's Jim Reid comes within inches of saying the word "recession" to describe the US economy's fate during the first half of the year.
Here's Reid:
It's not infeasible that the US economy will have shrunk in H1 2015. This is perhaps not the most likely scenario but with Q1 likely to be revised down to around -1.0% and with Atlanta Fed GDPNow forecasting +0.7% for Q2 then it's a distinct possibility. The street is still around 2.5% for Q2 but we probably need some decent hard data soon to justify it.
After the initial reading on gross domestic product showed the US economy grew just 0.2% in the first quarter, subsequent data has led Wall Street economists to take their outlooks for future Q1 revisions well into negative territory. Current estimates from Bloomberg show Wall Street thinks the economy contracted by 0.8% to start 2015.
The second estimate on first-quarter GDP is set for release on May 29.
And now with the Atlanta Fed's GDPNow tracker — which was spot-on in predicting first-quarter GDP — showing such a tepid bounce back in the second quarter, the economy appears to be teetering on the edge of a recession. A recession is defined as two consecutive quarters of negative growth.
Last week after the worse-than-expected retail sales report, we highlighted comments from one bond trader who said the economy appeared headed toward recession.
And consumer confidence data released Friday indicated that Americans were starting to lose faith in an economic rebound in the second quarter.
Wall Street is still looking for GDP to grow by about 2.5% in the second quarter, an expectation that appears to be drifting out of touch with recent data.
Here's the latest discrepancy between Wall Street and the Atlanta Fed, and clearly something will have to give: Either the data gets better or Wall Street cuts expectations.
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It Is Mathematically Impossible To Pay Off All Of Our Debt
Did you know that if you took every single penny away from everyone in the United States that it still would not be enough to pay off the national debt? Today, the debt of the federal government exceeds $145,000 per household, and it is getting worse with each passing year. Many believe that if we paid it off a little bit at a time that we could eventually pay it all off, but as you will see below that isn’t going to work either. It has been projected that “mandatory” federal spending on programs such as Social Security, Medicaid and Medicare plus interest on the national debt will exceed total federal revenue by the year 2025. That is before a single dollar is spent on the U.S. military, homeland security, paying federal workers or building any roads and bridges. So no, we aren’t going to be “paying down” our debt any time in the foreseeable future. And of course it isn’t just our 18 trillion dollar national debt that we need to be concerned about. Overall, Americans are a total of 58 trillion dollars in debt. 35 years ago, that number was sitting at just 4.3 trillion dollars. There is no way in the world that all of that debt can ever be repaid. The only thing that we can hope for now is for this debt bubble to last for as long as possible before it finally explodes. It shocks many people to learn that our debt is far larger than the total amount of money in existence. So let’s take a few moments and go through some of the numbers.
When most people think of “money”, they think of coins, paper money and checking accounts. All of those are contained in one of the most basic measures of money known as M1. The following definition of M1 comes from Investopedia…
As you can see from the chart below, M1 has really grown in recent years thanks to rampant quantitative easing by the Federal Reserve. At the moment it is sitting just shy of 3 trillion dollars…So if you gathered up all coins, all paper currency and all money in everyone’s checking accounts, would that even make much of a dent in our debt?
Nope.
We’ll have to find more “money” to grab.
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"The Fed Has Been Horribly Wrong" Deutsche Bank Admits, Dares To Ask If Yellen Is Planning A Housing Market Crash
The reason why Zero Hedge has been steadfast over the past 6 years in its accusation that the Fed is making a mockery of, and destroying not only the very fabric of capital markets (something which Citigroup now openly admits almost every week) but the US economy itself (as Goldman most recently hinted last week when it lowered its long-term "potential GDP" growthof the US by 0.5% to 1.75%), is simple: all along we knew we have been right, and all the career economists, Wall Street weathermen-cum-strategists, and "straight to CNBC" book-talking pundits were wrong. Not to mention the Fed.
Indeed, the onus was not on us to prove how the Fed is wrong, but on the Fed - those smartest career academics in the room- to show it can grow the economy even as it has pushed global capital markets into a state of epic, bubble frenzy, with new all time highs a daily event across the globe, while the living standard of an ever increasing part of the world's middle-class deteriorates with every passing year. We merely point out the truth that the propaganda media was too compromised, too ashamed or to clueless to comprehend.
And now, 7 years after the start of the Fed's grand - and doomed - experiment, the flood of other "serious people", not finally admitting the "tinfoil, fringe blogs" were right all along, and the Fed was wrong, has finally been unleashed.
Here is Deutsche Bank admitting that not only the Fed is lying to the American people:
But has been "horribly wrong" all along: And the kicker: it is no longer some "tinfoil, fringe blog", but the bank with over €50 trillion in derivatives on its balance sheet itself which dares to hint that in order to make a housing-led recovery possible, the Fed itself is willing to crash the housing market! Here is the full note from Deutsche Bank which we expect every other primary dealer to copycat in the coming weeks and months now that the truth among the "very serious people" is finally out.read more
Fed policy helping rich get richer: BlackRock pro
Federal Reserve policy is creating "economic distortions" resulting in a transfer of wealth to the people who need it least, according to an analysis from a prominent Wall Street bond expert.
A stock buyback frenzy that has boosted the market and put money in the hands of those seeking short-term gains is but one of the less-desirable Fed benefits cited by BlackRock's Rick Rieder in a blog post on the firm's website.
"The global economy is witnessing a massive redistribution of wealth and income with borrowers, equity shareholders and short-term investors benefiting; and savers, bondholders and longer-term investors being placed at risk," wrote Rieder, chief investment officer of BlackRock's Fundamental Fixed Income division and co-head of Americas Fixed Income.
BlackRock is just the latest Wall Street voice to express concern over an environment in which companies are eschewing long-term investments in plants, infrastructure and jobs in favor of short-term moves like buybacks and dividend issuance aimed at pleasing deep-pocketed and vocal shareholders.
In a similar analysis a few days ago, Goldman Sachs strategists pointed out that companies have spent $2 trillion over the past five years on buybacks. Capital investment, meanwhile, has slumped from 29 percent of operating cash flow to 23 percent while dividends and buybacks surged to 36 percent.
Citigroup also has weighed in on the subject, pointing out in a note in April that companies in the S&P 500 have spent $4 trillion on buybacks over the past 10 years.
With its $4.65 trillion in assets under management, BlackRock's voice carries strong weight. Company CEO Larry Fink has issued several of his own warnings about the market's Fed-fueled short-term thinking.
Rieder's analysis notes that S&P 500 companies announced $133 billion in buybacks for April alone—a record—while the investment grade debt-to-equity ratio has jumped from 72 percent in 2010 to 85 percent now. In a separate report Wednesday, Dealogic said corporate bond volume issuance has hit a record $543.4 billion in 2015.
Such trends, Rieder argued, are the result of "excessively accommodative monetary policy" from the Fed, which has exploded its balance sheet to $4.5 trillion and kept short-term interest rates near zero since late 2008 in an effort to improve economic activity, which nonetheless has remained below trend throughout.
While companies were using the cheap debt to shore up their balance sheets in the early post-financial crisis days, "we have increasingly seen debt used for stock buybacks and dividends ... in essence rewarding equity-holders at the (possible) expense of bondholders," Rieder said.
"Now, there is nothing wrong with stock buybacks and dividends per se, and indeed they can contribute to a very sensible corporate capital allocation strategy," he added. "But should this use of capital crowd out long-term capital expenditure (investment) in a firm's core business, or begin to threaten its credit quality, then it can become concerning. And this is what we are seeing today."
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Fed Urged by IMF to Delay Rate Liftoff to First Half of 2016
The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time this year.
The lender also said that the dollar was “moderately overvalued” and a further marked appreciation would be “harmful,” in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.
“We still believe that the underpinnings for continued expansion are in place,” IMF Managing Director Christine Lagarde said at a press briefing in Washington. “The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months.”
That means the Fed should wait until early 2016, even if there’s a risk of “slight overinflation” relative to the central bank’s 2 percent target, Lagarde said.
A stronger dollar, declining oil investment and a West Coast port strike in the first quarter will pull down U.S. growth to 2.5 percent this year, said the fund, which previously projected the world’s largest economy to expand by 3.1 percent in 2015. Economists surveyed by Bloomberg also expect U.S. growth of 2.5 percent this year.
Lagarde also spoke about the debt standoff between Greece and its creditors including the IMF, saying a joint proposal from the creditors this week “has clearly demonstrated significant flexibility.” She noted that Greek Prime Minister Alexis Tsipras indicated Wednesday that the nation would make a $339 million payment to the IMF due Friday.
No Comment
Fed spokeswoman Michelle Smith declined to comment on the IMF’s rate recommendation.
Fed Chair Janet Yellen on May 22 said she still expects to increase interest rates this year if the economy meets her forecasts. The Fed, which hasn’t raised rates since 2006, will need to see continued improvement in labor market conditions and be “reasonably confident” that inflation will move back to 2 percent, she said.
Investors currently expect the Fed to move in December, according to bets placed in interest-rate futures markets.
The Fed’s policy-setting committee “should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,” the IMF said in its statement. Based on the fund’s economic forecast, and “barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.”
Blunt Advice
The fund’s latest U.S. monetary-policy advice is among its most explicit on record. In 2012, for instance, IMF staff suggested that further easing might be warranted if the outlook worsened, while in the crisis of 2008 they said rates “should stay on hold” until a recovery is established.
“The IMF is making a pronouncement on the Fed because the U.S. economy is still so important to the globe,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who expects a September rate increase. “The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no.”
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Lagarde's Lecture to Yellen Means It's Time for Everyone to Brush up on Dornbusch 101
"The day when Rudi Dornbusch presented his 1976 overshooting paper was different. All the graphs were labeled that day and he seemed to have organized notes, not that he drew on them much. The excitement in the room was palpable, as the logic behind overshooting unfolded. You could see in the students' faces that something special was happening."
The above quote is from Kenneth S. Rogoff's speech Dornbusch's Overshooting Model After Twenty-Five Years, delivered at the 2001 Mundell-Fleming Lecture.
I assume they are 50 shades of livid at the Fed today, after the IMF urged it to hold off on rate hikes.
Mohamed El-Erian spoke of the "specificity" of Madame Lagarde's bombshell announcement this morning. The International Monetary Fund suggested the Federal Open Market Committee delay any-and-all rate increases until 2016. The phrase 'til-hell-freezes-over was not mentioned.
My key Bloomberg headline was:
*LAGARDE: BETTER FOR FED TO WAIT EVEN IF INFLATION OVERSHOOTS
Of course Chair Yellen does not need to brush up on "overshoots." We mere mortals do. Enter the legacy of Rudiger Dornbusch.
Start here with a spectacular modest-mathy walk-through by Ken Rogoff of this strange word "overshoot".
Note, that it is used with precision by the economics clan and used and disabused by the rest of us.
My quick take is Professor Rogoff emphasizes the international system's ability to "undershoot" as well. Most, including all politicians, desire to overshoot 365 days of the year, or at least until the next election.
Also, the complexity of the international financial framework hints at the need for humility in guessing the vector and amplitude, the outcome of said shooting.
The coming months will be interesting and were made more interesting this morning. All will wait with baited breath for sustained growth, investment and the jobs that follow from investment. All will be vigilant in looking for exogenous shocks. Lagarde and Yellen will have data and theory to debate and consider. In the meantime, we should brushing up on Dornbusch 101.
Bond Traders to Lagarde: You’re Wrong, the Fed Will Hike in 2015
U.S. bond traders had a very clear message for Christine Lagarde on Friday morning: Your advice to the Federal Reserve is wrong.
Lagarde, managing director of the International Monetary Fund, advised the Fed on Thursday to wait until 2016 before hiking interest rates.
Bond traders don’t think the U.S. central bank will heed that recommendation. On Friday, they quickly pulled forward their expectations for a rate increase -- assigning better than even odds of a move in September after a jobs report showed American payrolls climbed the most in May in five months. That’s up from a 46 percent probability on Thursday, according to Bloomberg calculations.
As John Silvia, chief economist at Wells Fargo & Co. wrote in a note Friday morning, “Even if the Fed does not move credit markets already have moved.”
Bond traders dumped Treasuries Friday, sending yields on 10-year notes to the highest since October.
So while Lagarde may have raised some eyebrows on Wall Street Thursday by saying the Fed shouldn’t move this year, traders aren’t listening any more. After all, there’s data to examine.