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Wells Fargo Tumbles After Another Ugly Quarter: Loans Shrink Again As Home Lending Tumbles

Wells Fargo Tumbles After Another Ugly Quarter: Loans Shrink Again As Home Lending Tumbles

In a day when the big banks reported generally…

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This article was originally published by Zero Hedge

Wells Fargo Tumbles After Another Ugly Quarter: Loans Shrink Again As Home Lending Tumbles

In a day when the big banks reported generally stellar earnings (especially Bank of America and Morgan Stanley on the back of record advisory fees), easing the bitter aftertaste from yesterday’s disappointing report from JPMorgan, even perennial Wall Street disappointment Wells Fargo managed to beat expectations with net Interest margin posting a much awaited bounce, although there was the usual “but” of higher expenses and failure to post an increase in loan growth..

Wells Fargo reported EPS of $1.17, beating expectations of $0.99, thanks to revenue of $18.83BN, also stronger than the $18.37Bn expected. This translated into income of $5.1 billion, which however was padded by a $1.7 billion reserve release “due to continued
improvements in the economic environment”, resulting in an allowance coverage for total loans down 22 bps from 2Q21 and down 52 bps from 3Q20. 

The firm also took a $250 million charge related to its latest regulatory order, which drove costs higher than analysts expected.  

The company’s earnings summarized:

There was some much awaited good news on the Net Interest front, where both net interest income and margin posted a modest sequential improvement, rising $109MM or 1% from Q1, due to rising yields in Q3. Still, on a Y/Y basis, net interest income decreased $470 million or 5%, “reflecting the impact of lower loan balances due to soft demand and elevated prepayments, and the impact of lower yields on earning assets, partially offset by a decline in long-term debt and lower mortgage-backed securities (MBS) premium amortization.”  In any case, since Wells Fargo is the most net interest income-reliant bank in the US, the reversal in NIM was certainly good news.

With NIM down Y/Y, expenses followed and the bank reported that noninterest expense (which consists mostly of personnel expenses) was flat sequentially and down 12.6% from a year ago, though analysts had expected a 14% drop. And even though headcount fell to 253,871, from 259,196 at the end of June, personnel expenses actually rose 1% from a year ago “as lower salaries expense driven by reduced headcount reflecting efficiency initiatives was more than offset by higher incentive and revenue-related compensation.”

But perhaps the most important, and disappointing aspect of Wells’ results was that total average loans shrank again, and while commercial loans posted a small increase sequentially of $1.2BN to $478.2BN, Consumer Loans dropped by almost $2BN from $377.7BN to $375.9BN in Q3, and down a whopping $58.1BN from a year ago.

The total average loan yield of 3.29%, was down 4 bps from 2Q21 and down 12 bps YoY reflecting the repricing impacts of lower interest rates, as well as lower consumer real estate loans.

Meanwhile, as we have been discussing for the past 5 quarters, average deposits – a proxy for the Fed’s QE – were up $51.9 billion, or 4%, YoY “as growth across most businesses was partially offset by targeted actions to manage to the asset cap, primarily in Corporate Treasury and Corporate and Investment Banking.” The good news it that this remains the cheapest funding possible for Wells – at an average deposit cost of 3 bps, it was stable with 2Q21 and down 6 bps YoY reflecting the lower interest rate environment.

The biggest U.S. banks have been struggling with weak loan growth as consumers and businesses, bolstered by massive government stimulus programs during the pandemic, refrained from borrowing. The rise of the delta variant has also delayed a return to normal and slowed economic activity. Average loans fell 8%, Wells Fargo said.

There was more bad news in the bank’s consumer banking and lending group, where total revenue was down 4% YoY. Some more details:

  • CSBB up 2% YoY primarily due to an increase in consumer activity, including higher debit card transactions, and lower COVID-19-related fee waivers; up 2% from 2Q21 primarily driven by higher deposit-related fees and higher net interest income on higher deposits
  • Credit Card up 4% YoY on higher point-of-sale volume and lower customer accommodations and fee waivers provided in response to COVID-19
  • Auto up 10% YoY and up 7% from 2Q21 on higher loan balances

What was most disappointing was that Home Lending – where Wells Fargo once dominated the market – was down 20% YoY primarily due to lower mortgage banking income on lower gain on sale margins, origination volumes, and servicing fees, as well as lower net interest income on lower loans outstanding. In short, it is the biggest housing bubble in US history – bigger even that 2007- and Wells still can’t capitalize on it!

Finally, while for Wells, Banking and Sales and Trading are mostly an afterthought – after all, who would pick the trading desk at Wells over, well, anyone else – and the bank is not even close in the same ballpark as its bigger peers, it did post a modest, 2% increase in corporate and ibanking revenue to $3.385 billion, which was also up 1%, or $47MM, from last quarter.

  • Banking revenue was up 12% YoY “on higher advisory and equity origination fees, and higher loan balances, partially offset by lower deposit balances predominantly due to actions taken to manage under the asset cap”
  • Commercial Real Estate revenue up 10% YoY reflecting higher commercial servicing income, loan balances, and capital markets results on stronger commercial mortgage gain on sale volumes and margins and higher underwriting fees; down 7% from 2Q21 on lower capital markets volumes and commercial mortgage servicing income

Yet here too there was a disappointment, as markets revenue dropped 15% YoY to just $1.176BN on “lower trading activity across most asset classes primarily due to market conditions”

As Bloomberg notes, the mixed results were a reminder that challenges remain for Scharf, who took the helm of Wells Fargo in 2019. The bank has been cutting jobs and slashing costs as Scharf seeks to boost the firm’s profitability after years of scandals, which have continued this year as the bank has seen several settlements with regulators, a sordid legacy of its ugly past.

“The significant deficiencies that existed when I arrived must remain our top priority,” Scharf said in the statement. “We are a different company today and the operational and cultural changes we’ve made are enabling us to execute with significantly greater discipline than we have in the past.”

Or not: during the quarter, Wells Fargo was hit with a new regulatory action and a $250 million fine over its lack of progress addressing long-standing problems — a topic that is sure to come up on the bank’s analyst call. The firm is also still under a Federal Reserve-imposed asset cap, which limits its balance sheet.

Bottom line: another swing and another miss, with Wells shares the worst performing of all banks this morning.

Tyler Durden
Thu, 10/14/2021 – 10:19




Author: Tyler Durden

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Economics

This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

Thanksgiving Day, an annual national holiday in the US, began as a way…

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This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

Thanksgiving Day, an annual national holiday in the US, began as a way to celebrate the harvest and other blessings of the past year. Nowadays people celebrate the holiday with massive feasts and watch football. But one thing consumers won’t be giving thanks to this year is soaring food inflation that could make Thanksgiving 2021 one of the most expensive on record.

“When you go to the grocery store and it feels more expensive, that’s because it is,” Veronica Nigh, senior economist at the American Farm Bureau Federation, told CBS News. She said food prices in 2021 jumped 3.7% versus a 20-year average of 2.4%. Turkeys and all the trimmings will cost 4% to 5% more this year than a year ago.

Rising food prices have been an ongoing issue since the beginning of the pandemic, as disrupted supply chains and adverse weather conditions around the world have made supplies of crops dwindle. Global food prices are at fresh decade highs and have begun to hit the wallets of consumers. 

September’s Consumer Price Index for food was up 4.6% from a year ago. Prices for meat, poultry, fish, and eggs were up the most, soaring more than 10%. The rise in food prices has spooked the Biden administration. 

Several factors contribute to food inflation, including supply chain snarls, higher transportation costs, and labor shortages. Next year, food inflation may rise further as fertilizer prices jump

“Agriculture is like everybody else — it’s impacted by the supply restraints we’ve seen,” Nigh said. She said 10% of food costs only come from farming, while the rest (90%) are trucking, wages, distribution, and warehousing. 

Besides soaring food costs, consumers may experience widespread supply chain challenges that could make certain food items critical for Turkey Day harder or impossible to find because of shortages. Dr. Krishnakumar S. Davey, president of IRI Client Engagement, published a note explaining IRI’s basket of availability, demand, price, and promotion for Thanksgiving is “recording significant out-of-stock rates on several Thanksgiving-related grocery categories at this time.”

According to Consumer Reports, there is some good news: “turkeys in all sizes will be in abundance.” 

But there’s a dark side to Thanksgiving this year, that is, an income-inequality story which means the top 10% of Americans will be spending more while the working-poor might skip the holiday entirely due to affordability issues. 

Tyler Durden
Tue, 10/26/2021 – 22:30

Author: Tyler Durden

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The True Feasibility Of Moving Away From Fossil Fuels

The True Feasibility Of Moving Away From Fossil Fuels

Authored by Gail Tverberg via Our Finite World blog,

One of the great misconceptions…

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The True Feasibility Of Moving Away From Fossil Fuels

Authored by Gail Tverberg via Our Finite World blog,

One of the great misconceptions of our time is the belief that we can move away from fossil fuels if we make suitable choices on fuels. In one view, we can make the transition to a low-energy economy powered by wind, water, and solar. In other versions, we might include some other energy sources, such as biofuels or nuclear, but the story is not very different.

The problem is the same regardless of what lower bound a person chooses: our economy is way too dependent on consuming an amount of energy that grows with each added human participant in the economy. This added energy is necessary because each person needs food, transportation, housing, and clothing, all of which are dependent upon energy consumption. The economy operates under the laws of physics, and history shows disturbing outcomes if energy consumption per capita declines.

There are a number of issues:

  • The impact of alternative energy sources is smaller than commonly believed.

  • When countries have reduced their energy consumption per capita by significant amounts, the results have been very unsatisfactory.

  • Energy consumption plays a bigger role in our lives than most of us imagine.

  • It seems likely that fossil fuels will leave us before we can leave them.

  • The timing of when fossil fuels will leave us seems to depend on when central banks lose their ability to stimulate the economy through lower interest rates.

  • If fossil fuels leave us, the result could be the collapse of financial systems and governments.

[1] Wind, water and solar provide only a small share of energy consumption today; any transition to the use of renewables alone would have huge repercussions.

According to BP 2018 Statistical Review of World Energy data, wind, water and solar only accounted for 9.4% 0f total energy consumption in 2017.

Figure 1. Wind, Water and Solar as a percentage of total energy consumption, based on BP 2018 Statistical Review of World Energy.

Even if we make the assumption that these types of energy consumption will continue to achieve the same percentage increases as they have achieved in the last 10 years, it will still take 20 more years for wind, water, and solar to reach 20% of total energy consumption.

Thus, even in 20 years, the world would need to reduce energy consumption by 80% in order to operate the economy on wind, water and solar alone. To get down to today’s level of energy production provided by wind, water and solar, we would need to reduce energy consumption by 90%.

[2] Venezuela’s example (Figure 1, above) illustrates that even if a country has an above average contribution of renewables, plus significant oil reserves, it can still have major problems.

One point people miss is that having a large share of renewables doesn’t necessarily mean that the lights will stay on. A major issue is the need for long distance transmission lines to transport the renewable electricity from where it is generated to where it is to be used. These lines must constantly be maintained. Maintenance of electrical transmission lines has been an issue in both Venezuela’s electrical outages and in California’s recent fires attributed to the utility PG&E.

There is also the issue of variability of wind, water and solar energy. (Note the year-to-year variability indicated in the Venezuela line in Figure 1.) A country cannot really depend on its full amount of wind, water, and solar unless it has a truly huge amount of electrical storage: enough to last from season-to-season and year-to-year. Alternatively, an extraordinarily large quantity of long-distance transmission lines, plus the ability to maintain these lines for the long term, would seem to be required.

[3] When individual countries have experienced cutbacks in their energy consumption per capita, the effects have generally been extremely disruptive, even with cutbacks far more modest than the target level of 80% to 90% that we would need to get off fossil fuels. 

Notice that in these analyses, we are looking at “energy consumption per capita.” This calculation takes the total consumption of all kinds of energy (including oil, coal, natural gas, biofuels, nuclear, hydroelectric, and renewables) and divides it by the population.

Energy consumption per capita depends to a significant extent on what citizens within a given economy can afford. It also depends on the extent of industrialization of an economy. If a major portion of industrial jobs are sent to China and India and only service jobs are retained, energy consumption per capita can be expected to fall. This happens partly because local companies no longer need to use as many energy products. Additionally, workers find mostly service jobs available; these jobs pay enough less that workers must cut back on buying goods such as homes and cars, reducing their energy consumption.

Example 1. Spain and Greece Between 2007-2014

Figure 2. Greece and Spain energy consumption per capita. Energy data is from BP 2018 Statistical Review of World Energy; population estimates are UN 2017 population estimates.

The period between 2007 and 2014 was a period when oil prices tended to be very high. Both Greece and Spain are very dependent on oil because of their sizable tourist industries. Higher oil prices made the tourism services these countries sold more expensive for their consumers. In both countries, energy consumption per capita started falling in 2008 and continued to fall until 2014, when oil prices began falling. Spain’s energy consumption per capita fell by 18% between 2007 and 2014; Greece’s fell by 24% over the same period.

Both Greece and Spain experienced high unemployment rates, and both have needed debt bailouts to keep their financial systems operating. Austerity measures were forced on Greece. The effects on the economies of these countries were severe. Regarding Spain, Wikipedia has a section called, “2008 to 2014 Spanish financial crisis,” suggesting that the loss of energy consumption per capita was highly correlated with the country’s financial crisis.

Example 2: France and the UK, 2004 – 2017

Both France and the UK have experienced falling energy consumption per capita since 2004, as oil production dropped (UK) and as industrialization was shifted to countries with a cheaper total cost of labor and fuel. Immigrant labor was added, as well, to better compete with the cost structures of the countries that France and the UK were competing against. With the new mix of workers and jobs, the quantity of goods and services that these workers could afford (per capita) has been falling.

Figure 3. France and UK energy consumption per capita. Energy data is from BP 2018 Statistical Review of World Energy; population estimates are UN 2017 population estimates.

Comparing 2017 to 2004, energy consumption per capita is down 16% for France and 25% in the UK. Many UK citizens have been very unhappy, wanting to leave the European Union.

France recently has been experiencing “Yellow Vest” protests, at least partly related to an increase in carbon taxes. Higher carbon taxes would make energy-based goods and services less affordable. This would likely reduce France’s energy consumption per capita even further. French citizens with their protests are clearly not happy about how they are being affected by these changes.

Example 3: Syria (2006-2016) and Yemen (2009-2016)

Both Syria and Yemen are examples of formerly oil-exporting countries that are far past their peak production. Declining energy consumption per capita has been forced on both countries because, with their oil exports falling, the countries can no longer afford to use as much energy as they did in the past for previous uses, such as irrigation. If less irrigation is used, food production and jobs are lost. (Syria and Yemen)

Figure 4. Syria and Yemen energy consumption per capita. Energy consumption data from US Energy Information Administration; population estimates are UN 2017 estimates.

Between Yemen’s peak year in energy consumption per capita (2009) and the last year shown (2016), its energy consumption per capita dropped by 66%. Yemen has been named by the United Nations as the country with the “world’s worst humanitarian crisis.” Yemen cannot provide adequate food and water for its citizens. Yemen is involved in a civil war that others have entered into as well. I would describe the war as being at least partly a resource war.

The situation with Syria is similar. Syria’s energy consumption per capita declined 55% between its peak year (2006) and the last year available (2016). Syria is also involved in a civil war that has been entered into by others. Here again, the issue seems to be inadequate resources per capita; war participants are to some extent fighting over the limited resources that are available.

Example 4: Venezuela (2008-2017)

Figure 5. Energy consumption per capita for Venezuela, based on BP 2018 Statistical Review of World Energy data and UN 2017 population estimates.

Between 2008 and 2017, energy consumption per capita in Venezuela declined by 23%. This is a little less than the decreases experienced by the UK and Greece during their periods of decline.

Even with this level of decline, Venezuela has been having difficulty providing adequate services to its citizens. There have been reports of empty supermarket shelves. Venezuela has not been able to maintain its electrical system properly, leading to many outages.

[4] Most people are surprised to learn that energy is required for every part of the economy. When adequate energy is not available, an economy is likely to first shrink back in recession; eventually, it may collapse entirely.

Physics tells us that energy consumption in a thermodynamically open system enables all kinds of “complexity.” Energy consumption enables specialization and hierarchical organizations. For example, growing energy consumption enables the organizations and supply lines needed to manufacture computers and other high-tech goods. Of course, energy consumption also enables what we think of as typical energy uses: the transportation of goods, the smelting of metals, the heating and air-conditioning of buildings, and the construction of roads. Energy is even required to allow pixels to appear on a computer screen.

Pre-humans learned to control fire over one million years ago. The burning of biomass was a tool that could be used for many purposes, including keeping warm in colder climates, frightening away predators, and creating better tools. Perhaps its most important use was to permit food to be cooked, because cooking increases food’s nutritional availability. Cooked food seems to have been important in allowing the brains of humans to grow bigger at the same time that teeth, jaws and guts could shrink compared to those of ancestors. Humans today need to be able to continue to cook part of their food to have a reasonable chance of survival.

Any kind of governmental organization requires energy. Having a single leader takes the least energy, especially if the leader can continue to perform his non-leadership duties. Any kind of added governmental service (such as roads or schools) requires energy. Having elected leaders who vote on decisions takes more energy than having a king with a few high-level aides. Having multiple layers of government takes energy. Each new intergovernmental organization requires energy to fly its officials around and implement its programs.

International trade clearly requires energy consumption. In fact, pretty much every activity of businesses requires energy consumption.

Needless to say, the study of science or of medicine requires energy consumption, because without significant energy consumption to leverage human energy, nearly every person must be a subsistence level farmer, with little time to study or to take time off from farming to write (or even read) books. Of course, manufacturing medicines and test tubes requires energy, as does creating sterile environments.

We think of the many parts of the economy as requiring money, but it is really the physical goods and services that money can buy, and the energy that makes these goods and services possible, that are important. These goods and services depend to a very large extent on the supply of energy being consumed at a given point in time–for example, the amount of electricity being delivered to customers and the amount of gasoline and diesel being sold. Supply chains are very dependent on each part of the system being available when needed. If one part is missing, long delays and eventually collapse can occur.

[5] If the supply of energy to an economy is reduced for any reason, the result tends to be very disruptive, as shown in the examples given in Section [3], above.

When an economy doesn’t have enough energy, its self-organizing feature starts eliminating pieces of the economic system that it cannot support. The financial system tends to be very vulnerable because without adequate economic growth, it becomes very difficult for borrowers to repay debt with interest. This was part of the problem that Greece and Spain had in the period when their energy consumption per capita declined. A person wonders what would have happened to these countries without bailouts from the European Union and others.

Another part that is very vulnerable is governmental organizations, especially the higher layers of government that were added last. In 1991, the Soviet Union’s central government was lost, leaving the governments of the 15 republics that were part of the Soviet Union. As energy consumption per capita declines, the European Union would seem to be very vulnerable. Other international organizations, such as the World Trade Organization and the International Monetary Fund, would seem to be vulnerable, as well.

The electrical system is very complex. It seems to be easily disrupted if there is a material decrease in energy consumption per capita because maintenance of the system becomes difficult.

If energy consumption per capita falls dramatically, many changes that don’t seem directly energy-related can be expected. For example, the roles of men and women are likely to change. Without modern medical care, women will likely need to become the mothers of several children in order that an average of two can survive long enough to raise their own children. Men will be valued for the heavy manual labor that they can perform. Today’s view of the equality of the sexes is likely to disappear because sex differences will become much more important in a low-energy world.

Needless to say, other aspects of a low-energy economy might be very different as well. For example, one very low-energy type of economic system is a “gift economy.” In such an economy, the status of each individual is determined by the amount that that person can give away. Anything a person obtains must automatically be shared with the local group or the individual will be expelled from the group. In an economy with very low complexity, this kind of economy seems to work. A gift economy doesn’t require money or debt!

[6] Most people assume that moving away from fossil fuels is something we can choose to do with whatever timing we would like. I would argue that we are not in charge of the process. Instead, fossil fuels will leave us when we lose the ability to reduce interest rates sufficiently to keep oil and other fossil fuel prices high enough for energy producers.

Something that may seem strange to those who do not follow the issue is the fact that oil (and other energy prices) seem to be very much influenced by interest rates and the level of debt. In general, the lower the interest rate, the more affordable high-priced goods such as factories, homes, and automobiles become, and the higher commodity prices of all kinds can be. “Demand” increases with falling interest rates, causing energy prices of all types to rise.

 

Figure 6.

 

The cost of extracting oil is less important in determining oil prices than a person might expect. Instead, prices seem to be determined by what end products consumers (in the aggregate) can afford. In general, the more debt that individual citizens, businesses and governments can obtain, the higher that oil and other energy prices can rise. Of course, if interest rates start rising (instead of falling), there is a significant chance of a debt bubble popping, as defaults rise and asset prices decline.

Interest rates have been generally falling since 1981 (Figure 7). This is the direction needed to support ever-higher energy prices.

Figure 7. Chart of 3-month and 10-year interest rates, prepared by the FRED, using data through March 27, 2019.

The danger now is that interest rates are approaching the lowest level that they can possibly reach. We need lower interest rates to support the higher prices that oil producers require, as their costs rise because of depletion. In fact, if we compare Figures 7 and 8, the Federal Reserve has been supporting higher oil and other energy prices with falling interest rates practically the whole time since oil prices rose above the inflation adjusted level of $20 per barrel!

Figure 8. Historical inflation adjusted prices oil, based on data from 2018 BP Statistical Review of World Energy, with the low price period for oil highlighted.

Once the Federal Reserve and other central banks lose their ability to cut interest rates further to support the need for ever-rising oil prices, the danger is that oil and other commodity prices will fall too low for producers. The situation is likely to look like the second half of 2008 in Figure 6. The difference, as we reach limits on how low interest rates can fall, is that it will no longer be possible to stimulate the economy to get energy and other commodity prices back up to an acceptable level for producers.

[7] Once we hit the “no more stimulus impasse,” fossil fuels will begin leaving us because prices will fall too low for companies extracting these fuels. They will be forced to leave because they cannot make an adequate profit.

One example of an oil producer whose production was affected by an extended period of low prices is the Soviet Union (or USSR).

Figure 9. Oil production of the former Soviet Union together with oil prices in 2017 US$. All amounts from 2018 BP Statistical Review of World Energy.

The US substantially raised interest rates in 1980-1981 (Figure 7). This led to a sharp reduction in oil prices, as the higher interest rates cut back investment of many kinds, around the world. Given the low price of oil, the Soviet Union reduced new investment in new fields. This slowdown in investment first reduced the rate of growth in oil production, and eventually led to a decline in production in 1988 (Figure 9). When oil prices rose again, production did also.

Figure 10. Energy consumption per capita for the former Soviet Union, based on BP 2018 Statistical Review of World Energy data and UN 2017 population estimates.

The Soviet Union’s energy consumption per capita reached its highest level in 1988 and began declining in 1989. The central government of the Soviet Union did not collapse until late 1991, as the economy was increasingly affected by falling oil export revenue.

Some of the changes that occurred as the economy simplified itself were the loss of the central government, the loss of a large share of industry, and a great deal of job loss. Energy consumption per capita dropped by 36% between 1988 and 1998. It has never regained its former level.

Venezuela is another example of an oil exporter that, in theory, could export more oil, if oil prices were higher. It is interesting to note that Venezuela’s highest energy consumption per capita occurred in 2008, when oil prices were high.

We are now getting a chance to observe what the collapse in Venezuela looks like on a day- by-day basis. Figure 5, above, shows Venezuela’s energy consumption per capita pattern through 2017. Low oil prices since 2014 have particularly adversely affected the country.

[8] Conclusion: We can’t know exactly what is ahead, but it is clear that moving away from fossil fuels will be far more destructive of our current economy than nearly everyone expects. 

It is very easy to make optimistic forecasts about the future if a person doesn’t carefully examine what the data and the science seem to be telling us. Most researchers come from narrow academic backgrounds that do not seek out insights from other fields, so they tend not to understand the background story.

A second issue is the desire for a “happy ever after” ending to our current energy predicament. If a researcher is creating an economic model without understanding the underlying principles, why not offer an outcome that citizens will like? Such a solution can help politicians get re-elected and can help researchers get grants for more research.

We should be examining the situation more closely than most people have considered. The fact that interest rates cannot drop much further is particularly concerning.

Tyler Durden
Tue, 10/26/2021 – 22:10







Author: Tyler Durden

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China’s Central Bank Condition Has Consistently Told You Everything About Global (not) Inflation

For several years now, we’ve been harping constantly and consistently about what’s on the PBOC’s balance sheet; or, really, what conspicuously isn’t…

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For several years now, we’ve been harping constantly and consistently about what’s on the PBOC’s balance sheet; or, really, what conspicuously isn’t in very specific line-item numbers. Briefly, simply, if dollars are being extended into China, as has been claimed over the years, particularly the last few, they’re going to show up on the Chinese central bank’s balance sheet.

Specifically, foreign assets. More specifically, foreign reserves.

There’s a difference between those two which historically has meant quite a bit (we’ll get to that in a moment). Going back to 2017 and 2018, the level of foreign assets (which includes reserves) has been beyond stable, constant to the point of clear manipulation. As I wrote last year:

According to the People’s Bank of China (PBOC), the balance of foreign assets reported on its balance sheet for the month of June 2020 was RMB 21,833.26 billion. At the end of the prior month, May, the balance was, get this, RMB 21,833.33 billion.

Rampaging global pandemic, dollar crashing, dollar smashing, global recession questions, massive, complex economic forces to go along with huge changes in financial conditions, as well as questions about those conditions, and the Chinese system pretty much in the middle of everything. The second largest economy in the world, one which is made (and broken) by incoming (or outgoing) monetary flows of which the central bank has involved itself heavily right from the very start of modern China.

And foreign reserves on the central bank balance sheet, the fundamental basis by which Chinese money exists, this moved by the tiniest RMB 70 million? In case you are wondering, it works out to a monthly change of -0.0003%. Nuh uh. No way. That’s a number which was quite obviously engineered.

Just about sums the whole thing up; as does this chart:


What should grab your attention is the slight, though somewhat more noticeable increase in reported foreign assets during this year. We’re being asked to believe this is Jay Powell’s flood of “too much” money finally making its way into the right places; and this general data from China seems to be at least some level of consistent with the idea.

Once you get into the details, though, what’s going on over at the PBOC actually adds to the evidence of its opposite. Dollar problems, scarcity, maybe even growing and outright global money shortage.

Before we get to that, however, we have to back up and review those details. To do that, we’ll begin all the way back in the pre-crisis period when “too much” eurodollar money was a legitimate, provable condition worldwide.

Dollars between 1995 and 2007 were in such worldwide overabundance even the monetary illiterate like Ben Bernanke couldn’t help but notice them – though, captured by his rigid and rigidly incoherent ideology, the Federal Reserve’s Chairman could only muster some nonsense about a global savings glut.

His Chinese counterparts suffered no such illusions, being forced by the monetary onrush to alter both banking and monetary policies for this “hot money” excess. Up until August 2007, that is. No, this is not a coincidence.

Start with the rising blue mass above which is the PBOC’s definition for all its various foreign assets. I’ve then added the dashed black line to begin breaking out the precise pieces within the category. This line represents that vast majority – but not all – of foreign assets, labeled by China’s central bank as “foreign exchange.”

The remainder is left to two other classes. The first is official gold holdings, which for our purposes we’ll ignore (as much as it pains me, the real world ignores it, too). What’s left is what’s always left over in these things: other foreign assets.

It’s in this “other” where both the fun and monetary literacy begin.

The implications are pretty obvious, as are their connection to the burgeoning Global Financial Crisis in a way that pegs said crisis as the only thing it could have ever been: a global dollar shortage. Not subprime mortgages, a systemic rupture in the bank-centered eurodollar system so bad it forced even invulnerable China into some visible countermeasures.

And here (above) you can see one of those: other foreign assets. What is other? Your guess is as good as mine (OK, maybe I might have a slightly better idea having spent enough time poking around, but even then not so much better because this stuff is left opaque by Communist design). For right now, “what” doesn’t matter.

It does matter that whatever it might be that is in “other”, this shows up at the exact moment the global dollar rupture hits in August 2007. Immediately, two things pop out on the PBOC’s balance sheet: fewer foreign exchange assets but more of other. Eurodollar shortage, fewer dollars organically register as foreign exchange. 

In lieu of market-based dollars, though, look what happens to the growth of total foreign assets which is maintained at a nearly constant growth rate by the addition of other foreign assets. It is a workaround, a fill-in to keep up the flow at the margins. A rescue, of  sorts, to buy some time for the eurodollar world to normalize.

For the first few months of 2008, there seemed to be some hope the Federal Reserve’s (how naïve everyone was) “rescues” could work (TAF, overseas dollar swaps “somehow” being overbid by US banks with mostly German names). Foreign exchange pops back up for the PBOC – but only until March 2008.

Bear Stearns.

Taking a guess as to “contingent liabilities” within “other”, Bear was the final straw for China as most of the rest of the world. Too expensive to maintain, Chinese authorities realized they’d instead have to ride out the growing (not past tense) storm; they’d have to switch to other even more opaque tactics unreported anywhere.

After trying to offset the first phase of the GFC1 dollar shortage with “other”, the Chinese then moved to a completely stealth CNY peg (stealth because the back half of whatever transactions don’t show up anywhere). You can see this two-step above; first the jump in “other” while CNY still rises, then total CNY peg as foreign exchange assets stop growing at the same fast pre-crisis rate.

Unlike “new normal” America and Europe, the Chinese emerged from the ensuing Great “Recession” believing their situation/potential hadn’t been altered. A big enough chunk of the eurodollar system seemed to agree – for a time.

Chinese monetary authorities spent 2010 and most of 2011 letting these “other” foreign assets roll off the balance sheet; if actually contingent liabilities, then repaying, terminating and getting out with CNY rising likely making the repayments and retirements economical (and worth whatever cost, so long as nothing really changed for China’s long run).

But, as you can see (two above), a second eurodollar problem erupts in 2011 while the PBOC is still unwinding whatever it had done from late 2007/early 2008. While this meant another stoppage in inbound eurodollar flows, China’s economy appeared able to weather the breakdown (which was focused more on Europe) and with CNY still rising no emergency monetary measures appeared necessary (there was a fiscal “stimulus” package).

At least none of the same outward type which might end up in “other” foreign assets; something else was being done, from September 2011 forward, monetary officials clearly began pegging the aggregate foreign exchange balance on the PBOC’s balance sheet.

The Chinese weren’t so lucky by 2014. Although dollar inflows were restored in 2013 (Reflation #2), there was a serious break during that summer (Summer of SHIBOR) which was consistent with a then emerging emerging market currency crisis (dollar shortage) wrongly blamed on the “taper tantrum.”

Right from the start of the following year, dollars began to disappear again (falling foreign exchange). Already having introduced another batch of “other” intervention right in January 2013, officials instead went back to stealth CNY manipulation (ticking clocks).

It didn’t work, either, as China suffered massive dollar destruction which then caused internal RMB destruction (bank reserves and currency). The freight train of Euro$ #3 hit the system by August 2015, causing CNY to plummet all-at-once, even triggering a flash crash across global stock markets within two weeks from yuan’s crash.

Perhaps understanding what was coming, the PBOC simply got the hell out of its way rather than risk being further sucked into the rising negative money vortex:

A demonstration how even other foreign assets are more like a last resort kind of thing.

The central bank would stay out of the eurodollar’s way until early 2016, coming back in because of the immensely costly damage done to CNY, the RMB system, as well as China’s and the global economy as a whole. The start of ’16 one of those situations that really did demand another last resort.

When confronted by the next one, Euro$ #4, again a clear reluctance to appeal to “other” foreign assets. There had already been a lack of dollars coming back, very few, anyway, during Reflation #3 (2017’s absurdly weak “globally synchronized growth”) leaving China dollar exposed to begin 2018.


Through the middle of 2018, once again the PBOC relied on this other peg to its aggregate foreign exchange balance in the same way it had back in 2012. Only this time, CNY was dropping like a stone, with officials apparently content to accept that outcome.

By October 2018, however, the situation must’ve been judged untenable, at least substantially more serious and dangerous, such that “other” foreign assets began to rise slightly but clearly to somewhat offset foreign exchange assets then declining.

The stealth peg to PBOC’s foreign exchange must’ve been overwhelmed by Euro$ #4’s late 2018 landmine. In its aftermath, CNY would eventually decline more in 2019 despite the offset in China’s “other” foreign assets, as this globally synchronized deflation wore down economies and markets (repo) all over the world.

What does all this mean?

Quite a lot of things we don’t have time or space to get into here, some different things, but among the commonalities is how “other” foreign assets continuously represent a last ditch kind of rescue or at least attempted offset to what therefore has to be among the more serious of already serious dollar shortages. There is no question how these results all fit together.

And, as I began at the outset, it is intuitive. If dollars are actually coming in, in reality rather than Jay Powell’s lying mouth, they show up at the PBOC as foreign exchange.

If they aren’t coming in, China’s balance sheet begins to break down in these specific ways, including, at key times, some sort of increase in other foreign assets.

This brings us back, and up to speed, with the first chart I presented. There has been an increase the PBOC’s reported holdings of total foreign assets which at first might appear on the surface as at least some trickle from the “too much” money we’ve heard all year about. It’s not.

What is it? Other foreign assets. Near entirely:

Foreign exchange assets gained the tiniest sliver, but since June (when CNY went sideways) nothing.

Instead, other foreign assets have picked up going all the way back to January. Yes, the same January.

This January:

There are obviously screwy things going on with the PBOC’s balance sheet, already on top of already screwy things (why a straight line for foreign exchange) that aren’t as obvious. And we know that screwy stuff corresponds religiously to monetary shortages, another eurodollar problem rather than whatever it is Jay Powell is telling the media to report to the public.

Odd developments which long predate delta COVID, aren’t trade wars or subprime mortgages. It’s the same thing repeating since all the way back in August 2007. Again, no coincidence “other” foreign assets showed up at exactly the same moment the eurodollar system broke.

The mainstream theme or narrative for 2021 has all year been inflation, inflation, inflation. In actual monetary terms, which is what inflation must be, shockingly it’s actually been the whole opposite: deflation, deflation, deflation.

You don’t have to take my word for it. The evidence if everywhere (just start with bonds).


Whereas the TIC data is pretty unambiguous about this situation, the PBOC confirms the same from its own figures which are, once you orient them properly, only slightly less explicit even if we have no specific idea the exact transactions the Chinese are being forced into. Yet again.

Whatever those are, China sure isn’t being compelled to undertake them because there’s too much money in what remains the eurodollar’s world.










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