90 seconds at 9 am: False data revelations

Fed QE windback could come early; China car sales drop; two China provinces caught with false data; Fuji-Xerox scandal claims managers; NAB in ethical hotseat; UST 10yr yield 2.21%; oil up but gold drops; NZ$1 = 72 US¢, TWI-5 = 76.2

13th Jun 17, 7:35am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news of a string of false data revelations in China, Australia - and Auckland.

But first in the US, there are growing expectations that the US Fed could launch its "policy normalisation" (that is, the wind back of QE) as early as Thursday this week. If it doesn't happen then, July is almost certain. And this action - selling some of its stock of securities into the market, and thereby removing cash - will find financial markets not really expecting it.

In China, gloomy market conditions for car sales has seen sales of cars fall for the second month in a row. They were down -2.6% in May and that was on top of the -3.7% drop in April.

And staying in China, two more provinces have been outed for reporting false economic data.

In Japan, four senior management scalps have been claimed over accounting irregularities at Fuji-Xero. These first came to light in Auckland when a whistle-blower reported on the dodgy way leases were being included in their accounts, and the problem was found to be in Australia as well. The subsequent write-down has amounted to nearly NZ$0.5 bln in overstated revenue and has been larger than first thought.

In Australia, the 'false witnessing' accusations against NAB seem to be growing. The accusation is that NAB financial planners had been falsely witnessing death beneficiary forms – legally binding documents that determine who gets a person's super when they die. And after discovering the behaviour, the process for putting things right has come under scrutiny.

In New York, the UST 10yr yield is a little higher at 2.21%.

The price of oil is very little changed today with the US crude benchmark is now just under US$46.50 a barrel, while the Brent benchmark is now under US$48.50.

The price of gold will start also unchanged at US$1,266/oz.

The Kiwi dollar is fractionally softer at 72 USc. On the cross rates we are at 95.6 AU¢, and 64.2 euro cents. The TWI-5 index is now at 76.2. The Kiwi dollar has been in this tight stable range for five days now. On the other side of the ledger, when you went to bed last night, the price of bitcoin had hit a new all-time record of US$3,039. But by the time you woke up today, it was down -12.6% to just US$2.655. Now, that is volatility.

If you want to catch up with all the changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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16 Comments

by Stephen Hulme | 13th Jun 17, 8:45am 1497300347

But first in the US, there are growing expectations that the US Fed could launch its "policy normalisation" (that is, the wind back of QE) as early as Thursday this week. If it doesn't happen then, July is almost certain. And this action - selling some of its stock of securities into the market, and thereby removing cash - will find financial markets not really expecting it.

Isn't that "cash" already sitting around in the reserve accounts of banks/financial institutions authorised to have such ledgers on the balance sheets of the world's global central banks, offsetting the purchased securities? Some of the "cash" balances are in receipt of interest such as IOER at the Fed while others accrue negative interest rate deficits at the ECB and Bank of Japan.

Not that it hardly matters.

Full QE was initially begun in March 2015 over two years ago, and the Continent’s HICP rate barely notices if at all. Despite bond purchases through PSPP of €1.5 trillion, additional covered bond purchases of €162 billion under the third such program, and now €82 billion of corporate bonds added to the various NCB balance sheets (totaling €1.8 trillion altogether), total lending in Europe has in those twenty-six months increased by a paltry €108 billion. Read more

by Stephen Hulme | 13th Jun 17, 9:48am 1497304106

On the other side of the ledger, when you went to bed last night, the price of bitcoin had hit a new all-time record of US$3,039. But by the time you woke up today, it was down -12.6% to just US$2.655. Now, that is volatility.

Hmmmmmm..

There is nothing wrong with trying to forecast the future, nor even in trying to figure out what the future may be worth today. But turning that intangible expectation into something valuable, on terms equivalent with money, is a leap too far. The costs are nearly ten years of global depression, an enormous sum already but with no end yet in sight. Read more

Stock market related losses are evident today.

Consensual positioning is now being ‘bled’ on both ends, with particularly ‘VaR’ –shock behavior seen Friday afternoon. Net / net, this sell-off in ‘market leaders’--which has gained-steam throughout the overnight and now morning--is now showing what looks to be ‘grossing-down’ / de-risking behavior.

The way I interpret this is that we are seeing essentially a pure ‘positioning-cleanse’ of ‘excessive’ longs and short exposures by risk-managers, obvious for all to see after ‘Momentum’ market-neutral strategies came unglued Friday (e.g. ‘long’ the top 10% of price-performers in a benchmark index over the prior 3m, 6m or 12m period against ‘short’ the bottom ‘10%, which had been extremely successful in Q2, especially for the 3m tenor), as a repositioning out of the high-flying ‘secular growth’ names (Tech, Consumer Discretionary) into the downtrodden ‘Value’ sectors (economically-‘cyclical’ ones like Energy, Financials and Materials, which were the S&P’s top 3 sectors on Friday) took-shape, as there is a hard-quantitative phenomenon of ‘alpha’ from H1 / H2 ‘Mean-Reversion’ strategies (selling leaders / buying laggards). Read more

The long term impact of financialisation upon society in terms of "money" for all is minimal.

US Household Net Worth rose to a record $94.8 trillion in Q1 2017. According to the Federal Reserve’s Financial Accounts of the United States (Z1), aggregate paper wealth rose by more than 8% year-over-year mostly as the stock market shook off the effects of “global turmoil.” It was the best rate of expansion since the second quarter of 2014 just prior to this “rising dollar” interruption.

At such a high level, though, the ratio of net worth to spending has skyrocketed. That means the so-called wealth effect doesn’t appear to have any effect whatsoever. In Q1 1995, Household Net Worth was a quaint $27.3 trillion compared to $7.6 trillion in (nominal) Final Sales to Domestic Purchasers. That’s a ratio of $3.60 in “wealth” for every $1 in (nominal) spending. The latest estimates now suggest $4.85 in “wealth” for every $1 in (nominal) spending. Read more

by Brock Landers | 13th Jun 17, 1:23pm 1497316996

It's amazing how little coverage this website gives to cryptocurrencies. It's generally just wall to wall housing.

by scarfie | 13th Jun 17, 1:49pm 1497318564

http://www.oftwominds.com/blogjune17/projecting-BTC6-17.html

I still think it is too speculative, but heck what isn't these days.

by dictator | 13th Jun 17, 1:56pm 1497319001

While I'm not a fan of cryptocurrencies if they get covered they need to be covered well. There are a lot of myths about them that don't withstand scrutiny.

If people want to invest in cryptocurrencies they should understand what they are doing and the risks. They should also factor in that Bitcoin was supposed to be a currency but it's always discussed as USD value. Which is interesting because if someone wants to buy something worth $300 they buy $300 of Bitcoin and then purchase the item. The Bitcoin exchange rate is irrelevant, instead transactions are far more important.

If cryptocurrency coverage were to be extended I'd want it to be more technically complete than what I see reported elsewhere (such as filler articles on cnbc that are devoid of content).

by Stephen Hulme | 13th Jun 17, 10:06am 1497305183

RE: Fed, Survey of Consumer Expectations (Jun 2017)
Inflation Expectations Decline; Spending Growth Outlook Remains at Low Point
The May survey shows that household inflation expectations declined at the one-year-ahead horizon and dropped noticeably at the three-year-ahead horizon. Expectations for home prices continued to edge up. The outlook of consumers in several other areas showed few signs of optimism—spending growth expectations remained at their series low and perceived current and expected future financial situations worsened from the previous month. Read more

by dictator | 13th Jun 17, 12:15pm 1497312947

The Australian banks seem to be riddled with fraudulent behaviour. I suspect the scale of that behaviour would make Fuji's problems seem like nothing.

NZD/USD seems to be spiking up. I'm assuming the bad news for tech stocks is contributing.

by Conrad | 13th Jun 17, 2:19pm 1497320373

If that's what's happening at the head office who know's what those cowboy's in the branch offices are doing?

by waymad | 13th Jun 17, 12:50pm 1497315006

DC - Interest Rates - good article by Gail Tverberg here
http://www.ourfiniteworld.com/2017/06/12/falling-interest-rates-have-po…

A much more nuanced view of Peak Everything than the usual crop..

by Stephen Hulme | 13th Jun 17, 2:35pm 1497321304

This change had the effect of disrupting the “carry trade” in US dollars (borrowing in US dollars and purchasing investments, often debt with a slightly higher yield, in another currency).

Didn't that trade get put to bed, except by gullible retail punters, when institutions moved to collaterlised loans with all counterparties, which meant cross currency basis swaps, hence hedged funding in one's own currency?

I think your author might wish to associate oil prices with reduced global bank eurodollar balance sheet debt creation capacity, hence a rollover shortage of fungible USD credit. Observe recent negative basis Euro, Yen and Stg cross CCY swaps. Moreover, QE credit never left the central banks' liability ledgers, it's too busy balancing the purchased securities.

by dictator | 13th Jun 17, 3:10pm 1497323452

You have a far better understanding of swaps and the debt market than I'll ever have so I'm leaving that part to you. What's interesting is that the Fed's balance sheet assets are about $2.4t of it's own bonds (not surprising) and about $1.7t in MBS. I don't know the composition of the MBS or exactly how the work but I'm assuming the content of them will either expire or default and the Fed is only planning on purchasing more up to a monthly limit.

Who's buying up most of the MBS rubbish on the market? The Fed. I suspect this may impact the cheap finance that's going into US oil exploration and extraction as they are cutting back on the volume of the rubbish that they are purchasing.

by Stephen Hulme | 13th Jun 17, 4:33pm 1497328389

What's interesting is that the Fed's balance sheet assets are about $2.4t of it's own bonds (not surprising) and about $1.7t in MBS. I don't know the composition of the MBS or exactly how the work but I'm assuming the content of them will either expire or default and the Fed is only planning on purchasing more up to a monthly limit.

The $2.4t you refer to are obligations of the US Treasury and the $1.7t MBS are agency obligations similar to Fannie Mae and Freddie Mac and hence subject to a government guarantee.

I guess the later will be liquidated because of ongoing prepayment issues collapsing the collateral pools, which gives the Fed cause to top up the open position with outstanding agency obligations on top of redemptions.

Thereafter, the Fed has to collateralise (balance the books) the circulating notes and coin liability ($1.556t) with easy to maintain, liquid US Treasury Securities. Thus there would be only a further ~$0.9079t of Treasuries to deal with.

by dictator | 13th Jun 17, 4:41pm 1497328889

The Fed's report confirms the Treasury obligations which didn't surprise me. I'm wondering what the MBS composition is really like. I know the markets have filled up with subprime rubbish again including car and solar panel installation debts. I'm not clear who's really been buying up the the car loans etc but someone is going to find out soon that they won't be getting their money back.

In relation to the Fed's bonds I suspect they will let them naturally expire pending any special events that will arise.

by Stephen Hulme | 13th Jun 17, 5:59pm 1497333582

The Fed's report confirms the Treasury obligations which didn't surprise me. I'm wondering what the MBS composition is really like.

Probably the same that caused: The federal takeover of Fannie Mae and Freddie Mac was the placing into conservatorship of the government-sponsored enterprises (GSEs) Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) by the U.S. Treasury in September 2008. It was one of the financial events among many in the ongoing subprime mortgage crisis. Read more

by dictator | 13th Jun 17, 6:09pm 1497334176

Essentially the real value will be approaching zero for the MBS. The market should have been regulated to make the banks own the risk and not let them sell the risk to some suckers.

by Stephen Hulme | 13th Jun 17, 8:25pm 1497342352

The suckers in this case are the taxpayers, since any bank mortgages pooled as pass through certificates and underwritten for sale by agencies to private investors are guaranteed by the same government agencies.

Just another case of privatising the profits and socialising the costs.