Dozens of firefighters are fighting a blaze which broke out on the top of the Federal Reserve Bank of New York, NBC New York reports. The fire broke out sometime before 8:40 p.m. on the roof of the 14-story building at 33 Liberty St. in Lower Manhattan, the location of the world"s biggest gold vault as Simon Gruber knows too well.
Manhattan: *2 Alarm Fire* Box 061 at 33 Liberty St, heavy fire of a federal reserve bank. Fire on the roof.
Contrary to recurring rumors that the fire was created from excess money creation, the FDNY said that a generator on the roof of the building caused the fire in a chimney, although the severity of the damage to the building is not known.
The Federal Reserve Bank of New York is the most important of the 12 regional Reserve Banks that are part of the Federal Reserve system, the central banking system of the United States. As previously reported, the world"s most important trading desk, also known as the "Plunge Protection Team", is located on the 9th floor of the New York Fed.
Here are some snapshots.
Blake Gwinn, left, and James White in the operations room at the Federal Reserve Bank of New York (source)
A Trader Monitors Four Computer Screens on the Open Market Trading Desk at the Federal Reserve Bank of New York (source)
Open Market Trading Floor at the Federal Reserve Bank of New York (source)
Update: In her prepared remarks, Yellen crucially said,
“A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”
As Bloomberg explains, she is stating a bit more clearly than before that the FOMC doesn’t have a handle on why inflation is low and acknowledging that it may last longer than they predict.
* * *
As we detailed earlier, on the heels of Bostic ("we didn"t blow any bubbles") Brainard ("some barriers to growth are structural") this morning and Kashkari ("no inflation"), Evans ("need more data"), and Dudley ("inflation"s coming soon") yesterday; it is Fed Chair Janet Yellen"s turn to speak this afternoon on "Inflation, Uncertainty and Monetary Policy" as the dollar extends its post-FOMC gains (to 1-month highs).
Since The FOMC, Fed Speakers have been active...
Raphael Bostic, Atlanta Fed president: "I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble."
Lael Brainard, Fed governor: Benefits of a lengthy U.S. recovery “can only go so far” and some barriers appear to be structural, sees "widening gulf" between large, small cities.
Neel Kashkari, president Minneapolis, FOMC voter in 2017: “I don’t see inflation taking off so I see no need to tap the brakes.”
Charles Evans, president Chicago Fed, voting member: “I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation.”
William Dudley, president New York Fed, permanent voter (and most notably considered to be closely aligned with Yellen"s way of thinking): “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.”
As a reminder, the Fed Chair said that "we don"t fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery," but, while Yellen speaking would normally be must-watch, with only a few days having passed since her post-statement press conference, we wonder just how much flip-flopping is possible. At that appearance, the Fed chief also downplayed the significance of the weak core inflation data as the central bank set the start date for the reduction of its balance sheet and signaled that an additional rate hike this year remained appropriate.
Additionally, though we doubt she will comment on it, Republican Senator Richard Shelby said he doesn’t think President Donald Trump will nominate Yellen for a second term at the helm of the U.S. central bank. Shelby said Tuesday in an interview with Bloomberg Television’s Vonnie Quinnthat he had spoken with the president about the Fed.
“I believe he will appoint somebody else to take her place,” the No. 2 Republican on the Senate Banking Committee said. “But ultimately, that is up to the president.”
YELLEN SEES "CONSIDERABLE" ODDS THAT INFLATION WON"T STABILIZE AT 2-PCT OVER NEXT FEW YEARS
FED"S YELLEN SAYS UNCERTAINTIES STRENGTHEN CASE FOR GRADUAL RATE HIKES
YELLEN SAYS GRADUAL APPROACH TO RATE HIKES PARTICULARLY APPROPRIATE IN LIGHT OF SUBDUED INFLATION, LOW NEUTRAL RATE
YELLEN SAYS THERE IS A RISK INFLATION EXPECTATIONS ARE NOT AS WELL-ANCHORED AS THEY APPEAR
YELLEN SAYS DATA SUGGESTS LABOR MARKET IS HEALTHY, WITHOUT SUBSTANTIAL SLACK AND NOT OVERHEATED
YELLEN SAYS EVIDENCE ON LABOR MARKET NOT DEFINITIVE, MUST BE "OPEN-MINDED"
YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT
YELLEN SAYS FED CAN STILL ACHIEVE 2-PCT INFLATION GOAL EVEN IF IT IS UNDERESTIMATING SLACK OR OVERESTIMATING INFLATION EXPECTATIONS
FED"S YELLEN SAYS LOW INFLATION LIKELY DUE TO TRANSITORY FACTORS, SEES MANY UNCERTAINTIES
YELLEN SAYS DOWNWARD PRESSURE ON INFLATION COULD PROVE UNEXPECTEDLY PERSISTENT
YELLEN SAYS FED SHOULD BE `WARY OF MOVING TOO GRADUALLY"
YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT
Via Bloomberg:
Fed Chair Janet Yellen said FOMC may have misjudged fundamental forces driving inflation and strength of labor market, and policy makers “stand ready to modify our views based on what we learn.”
“We will need to stay alert” and adjust monetary policy as information comes in, Yellen said in text of speech Tuesday in Cleveland during annual meeting of National Association for Business Economics
“My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”
Downward pressures on inflation “could prove to be unexpectedly persistent”
Economic outlook is subject to “considerable uncertainty”
FOMC’s understanding of the forces driving inflation is “imperfect,” policy makers recognize “something more persistent” may be responsible for current undershooting of long-run objective
While inflation will most likely stabilize around 2% over the next few years, “odds that it could turn out to be noticeably different are considerable”
There’s also risk that inflation expectations “may not be as well anchored as they appear and perhaps are not consistent with our 2 percent goal”
Stabilizing inflation at around 2% “could prove to be more difficult than expected”
Key assumptions underlying baseline outlook “could be wrong” in ways that imply inflation will remain low for longer than currently projected; for example, labor market conditions may not be as tight as they appear
Under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”
Significant uncertainties strengthen the case for gradual pace of tightening; however, Fed must also be wary of moving too gradually; “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”
Actual value of long-run sustainable unemployment rate “could well be noticeably lower” than FOMC currently projects; can’t rule out possibility that some slack still remains in labor market
Unemployment rate is probably “correct” in signaling that labor-market conditions have returned to pre-crisis levels; however, that doesn’t necessarily mean that economy is now at full employment
Data suggest a generally healthy labor market, although can’t make “any definitive assessment”; policy makers “must remain open minded on this question” and its implications for reaching inflation goal
“Are you kidding? Are you kidding? No one knows what you’re doing.”
– Economist John Taylor in response to William Dudley’s (President Federal Reserve Bank of New York, Vice Chairman of the Federal Open Market Committee) comment that the Federal Reserve (Fed) has been very clear in their discussions about monetary policy.
For the last few years the Fed has repeatedly emphasized that they want to be as open and transparent about monetary policy actions as possible. Amid those reassurances, amateur and professional Fed watchers continue to be flummoxed by the vagaries of language used in speeches, lack of adherence to implied actions and outright contradictions between their words and deeds. As evidenced by the opening quote, one wonders whether they are being intentionally delusory or whether their hubris makes them genuinely oblivious to their own obfuscations.
Confusion
In 2012, the Fed published a Statement on Longer-Run Goals and Monetary Policy Strategy (LINK). That statement has been updated each January since. The opening sentence of that statement contains an interesting modification to its “dual” mandate:
“The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.”
While maximizing employment and engineering stable prices are the official congressionally mandated objectives, the term “moderate long-term interest rates” has never been a part of the congressional mandate. Needless to say, this is confusing and erroneous.
Ironically, with regard to its intent to explain monetary policy decisions as clearly as possible, the statement continues:
“Such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.”
So following the erroneous statement in the opening regarding their mandate, they then provide a lecture on the importance of Fed clarity to our democratic society.
Furthermore, the document is mislabeled as it contains nothing on monetary strategy. The statement only discusses goals presented in an obtuse fashion based on their congressional mandate which they confounded in the first sentence. As for monetary policy strategy (and to emphasize the point) the document conveys nothing coherent about the reaction function of the policy-setting body under scenarios where deviations from the goals emerge.
The members of the Fed have gone to great lengths in countless speeches, congressional testimonies and press conferences to portray a decision-making body that is disciplined and rigorous. Further, they incessantly attempt to set the record straight about their positive contribution to prior periods of economic and financial instability. In their view, they have never been complicit in creating economic malaise and always play the role of the good physician coming to the aid of the country in troubling economic periods. As demonstrated via the confusion mentioned above, their perspective is inconsistent and deceptive.
To offer an illustration of such inconsistencies:
At the end of 1997, the 6-month average rate of inflation as measured by the Core PCE deflator (the Fed’s preferred inflation measure) was 1.43%, the average unemployment rate was 5.2% and the average Fed Funds rate was 5.50%.
At the end of 2003, the 6-month average rate of inflation (Core PCE) was 1.87%, the average unemployment rate was 5.98% and the average Fed Funds rate was 1.0%.
While there are a variety of other considerations for the economy when analyzing the two periods, data related to the two mandated objectives of the Fed were similar and trending in the “right” direction (inflation up, unemployment down). Despite those facts, the Fed Funds interest rate differential between the two periods, 4.50%, is enormous. Contrary to the insistence of the Fed, there is substantial evidence that the long period of low interest rate policy followed by well-telegraphed quarter-point interest rate hikes preceding the financial crisis of 2008 were major factors in generating the instabilities that almost bankrupted the financial sector.
Now, consider conditions today. The average rate of inflation (Core PCE) for the last 6-months is 1.82%, the average unemployment rate is 4.50% and the Fed Funds rate was just increased to 1.00% following 7 years at essentially 0.00%. Taking into account the size of the Fed’s balance sheet ($4.4 trillion) due to quantitative easing, the level of Fed-provided accommodation remains extraordinary even when compared to the aggressively easy monetary policy of the early 2000’s.
The argument for a more normal policy stance is stronger today than it was in either of the two prior instances, and yet the Fed’s stance is stubbornly and unjustifiably extreme.
In fairness, no two time periods are the same and policy responses are never identical. However, if the intent of monetary policy actions are aimed at ensuring the health of the economy, then it is also plausible and logical that policy, improperly applied may produce sick and unstable conditions. Interestingly, that fact is freely acknowledged by current Fed members with regard to monetary policy of the 1970’s and the Great Depression era. Why then, are the increasingly aggressive and interventionist policies of the last 20 years not a concern or even considered a factor in causing the recent boom-bust cycles by those very same Fed members? Even more importantly, why does the market acquiesce and encourage what are certain to be revealed as major policy errors? The good news is that a lot of money can be made by investors who properly identify central banker mistakes.
Summary
Current Fed policy is grossly inconsistent with the actions they have taken in the past and the rules they themselves have discussed in post-crisis years. Evidence of that fact abounds. There is an acute lack of clarity about the strategy for policy normalization, specifics about what dictates their decision-making and how they will go about it. In the late 1970’s and early 1980’s, Paul Volcker was so clear about his policy objectives that he rarely needed to discuss them when he made public comments. Despite the difficulties associated with extracting the country from prior bad monetary policy, everyone knew his intent was to conquer run-away inflation and restore healthy economic growth.
Given the data comparison above and their mandate, there are sound reasons for the Fed to be much more aggressive in raising the Fed Funds rate and reducing the size of their balance sheet. The truth is they are concerned that such “hawkish” actions might greatly reduce the prices of many financial assets. Despite the short-term pain, acknowledging that current eye-watering valuations of many assets are predicated on Fed policy and not fundamentals would seem to be a prudent first step toward “normalization”. Watching the Fed Chairman evade direct answers on the topics of bubbles and policy normalization leaves no doubt that confusion, not clarity, will continue to be the Fed’s tool of choice.
Friday saw the FANG (Growth) dream briefly crushed, and that pain continued through the opening this morning. But then something happened that sent the Nasdaq surging...
Perhaps this is why...
U.S. consumer inflation expectations declined last month to near the lowest levels in the four-year history of a survey conducted by the Federal Reserve Bank of New York. As Bloomberg reports, the median respondent to the May survey of consumers reported an expected inflation rate of 2.47 percent three years from now, down from 2.91 percent in April and just above the 2.45 percent low recorded in January 2016 in a series that goes back to 2013.
The data may add to concerns over a recent decline in U.S. inflation, which has led investors to take a skeptical view toward additional Fed interest-rate increases.
And as the chart above shows, Value-over-Growth has been tracking inflation expectations lower for years (i.e. as inflation expectations tumble, investors are willing to bid for anything that is "growing") and thus - this morning"s print reinforced the longer-term trend and sparked a rebound bid for FANG et al...
This week, the world of banking and finance waited with baited breath for the Federal Reserve in the United States to hike… or not to hike… interest rates.
This happens several times each year as the central bank’s Federal Open Market Committee gathers to set monetary policy in the Land of the Free.
To be clear, there is no greater power over a nation than having control of its money supply and interest rates.
Think about it: interest rates influence just about EVERYTHING in the economy.
Changes in interest rates influence housing prices, company stock prices, retail sales, food prices, oil prices, and major business purchases.
Interest rates have a significant impact over employment, business investment, inflation, and the currency’s international exchange rate.
Increases in the interest rate even have the power to bring a government to its knees.
This is pretty extraordinary power. And it has been awarded to an unelected committee that has an astonishing track record of getting it wrong.
Former Fed chair Ben Bernanke famously predicted in January 2008 that “the Federal Reserve is currently NOT forecasting a recession.”
It turns out that the recession had officially started one month before in December 2007.
While that’s just one small example, the numbers show that these guys perpetually miss the mark.
In January 2011 the Fed projected 2011 GDP growth would be 3.7%. It turned out to be 2%. So proportionally speaking they were off by 85%.
In January 2012 they predicted 2.5% growth that year. Actual growth in 2012 was 1.6%, so they were ‘only’ off by 56%.
Their 2016 GDP growth forecast was 2.4%, while actual growth was 1.6%, another 50% error.
And just recently for the first quarter of 2017, the Fed’s predictions were 1.2% growth, while actual GDP growth was just 0.7%… a 70%+ overshoot.
Here’s the funny thing– even the Federal Reserve’s own internal study shows that they consistently miss the mark in their projections.
Doesn’t it strike you as odd that our system awards unmitigated control over the economy to a committee that gives its own predictive capabilities a failing grade?
It also raises the question– who exactly are these people?
Well, the current Federal Open Market Committee consists of 9 individuals.
Five of them are pure academics with almost zero practical experience in the real world.
They live in theory-land. They’ve never had to hire or fire employees, make multi-million dollar business decisions, design products, or compete in the marketplace.
It would be like me reading (or God forbid, writing) several medical textbooks and then being expected to flawlessly perform open-heart surgery.
Three out of the nine members are ex-Goldman Sachs bankers. I will let you draw your own conclusions about that.
And the remaining member is a lawyer and former partner at none other than the Carlyle Group.
So… five academics, three Goldman Sachs guys, and one attorney.
Not exactly a representative cross section of the country that truly understands the needs and machinations of the US economy.
And remember, not a single one of these people was elected to his/her position by the public.
Yet we’re all simply supposed to trust in their good judgment despite a track record of serial inaccuracies.
Yesterday I wrote to you about how hopelessly outdated modern banking is–something I didn’t discover until I started my own bank.
It turns out that most of the infrastructure at banks across the world is built on obsolete, decades-old technological platforms.
But the obsolescence issue in banking is far greater than just technology.
The entire concept of modern central banking– awarding highly centralized control of the money supply and economy to an unelected, out of touch politburo– may be the most outdated anachronism of all…
The good news is that this system is not going to last. The disruption is already happening.
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.
According to William Dudley, the president of the Federal Reserve bank of New York, we might see the Federal Reserve reducing the size of its balance sheet sooner rather than later. Whilst Dudley seemed to have been hinting at just letting the securities on the balance sheet mature and take the cash out of the market (rather than reinvesting the proceeds), this isn’t the only option on the table.
On the exact same day when Dudley discussed the size of the balance sheet of the Fed, the president of the St Louis Fed, Bullard, also launched his own idea. Rather than just slowly reducing the balance sheet of the central bank by not reinvesting the proceeds from securities which reach their maturity date, Bullard openly discussed the potential to just sell the assets.
Source: St Louis Fed
As you can see on the previous image, the total size of the Fed’s balance sheet is approximately 4.5 Trillion, and figuring out how to reduce it perhaps isn’t the worst idea to investigate. After all, by selling securities on the open market, the Fed will be taking more (easy and cheap) cash out of the market as well. So technically and theoretically, selling (hundreds of) billions in assets on the market could have a similar impact as a rate hike.
After all, selling debt securities will reduce the price of those securities and thus increase the yield to maturity. And this could immediately solve another problem the Fed has been facing.
According to Morningstar, the flattening yield curve is worrying investors, as the spread between the 10 year bonds and 2 year bonds has decreased to just over 1.1%. This could indicate that ‘either the economy is slowing down, or the riskier asset classes are overpriced’.
Source: St Louis Fed
This might very well be true. Due to the cheap money policy of the Federal Reserve and its European counterparts, it became extremely cheap for companies to issue debt. For most robust and strong companies this was a real blessing as the lower interest rates allowed them to cut the interest expenses, which boosted the bottom lines of these companies.
Unfortunately the ultra-low yields (with some companies being able to issue debt with YTM’s of close to 0%) pushed some investors into a ‘yield-chasing’ mode, buying whatever they could to increase the average interest income in their portfolios. This blind yield-chasing has led to some very undesirable results as now even the companies without investment-grade debt quality were able to secure funding.
Source: Bloomberg
And this puts the entire economic system at risk again, as reducing the liquidity in the markets will have a double undesirable effect. First of all, due to the higher interest rates and higher spread, the demand for sub-investment grade securities will decrease (as the yield-chasing appetite will be reduced); and this could (and very likely will) have a negative impact on the survival chances of those companies. And of course, should they go belly-up, the debt holders very likely won’t recoup their original investment, creating a new round of investment losses and a further contraction in available liquidity as the risk appetite will undoubtedly decrease as well.
Whatever the Federal Reserve wants to do next, it should think long and hard before acting as it won’t be easy to repair the damage...
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First, it was Goldman"s chief economist Jan Hatzius, who in a fascinating note explained why the market has totally misread the Fed"s tightening intentions, claiming the market surge is "not the reaction the Fed wanted", alleging that the market"s dramatic "easing" response was "not the outcome the FOMC aimed for" and concluding that "at the margin, it will likely make them more inclined to tighten policy", a polite way of saying that the Fed may now not be behind the inflationary curve, but that it is certainly behind when it comes to "explaining" to the market that it has run ahead of itself.
Now, in a follow up note, RBC"s head of cross-asset strategy makes the exact same point as Goldman, and warns that "the Fed will now view the market response as an ‘overshoot,’ and will perversely be forced to ‘walk-back’ the ‘incorrect’ dovish market interpretation with more hawkish rhetoric in coming weeks / months that will again whipsaw the rates market and likely-drive cross-asset vol higher."
And since Goldman still has a direct hotline, both literal and symbolic, to former Goldman employee Bill Dudley who is in charge of the NY Fed, it would not be surprising if during the Fed"s next public appearance, an FOMC member makes it very clear that having both of its core original mandates, inflation and emloyment, supposedly under control, it is now taking on the 3rd one - preemptive market stability, by making sure that risk assets are halted in their bubbly tracks.
Below are the key excerpts from today"s note by RBC"s Charlie McElliggott:
FED CREATES MORE ROPE TO HANG THEMSELVES WITH
#HOTTAKES:
Despite hiking, the Fed missed a major opportunity to play “catch-up” without disrupting the market—as price-action showed that investors were clearly prepared for ‘hawkish’ outcomes.
Instead, the FOMC / Yellen’s commentary (in light of the above ‘hawkish positioning’ dynamic) actually created EASIER / LOOSER financial conditions, with real rates collapsing lower on the session. This will make the eventual exit-process that much more difficult—thus, “more rope to hang themselves with.”
With Yellen noting that the Fed intended to keep its policy accommodative for “some time”—in conjunction with the overly simplistic market take on the lack of movement in the average dot (FAR more nuanced than that) and the ‘hawkish’ buy-side positioning--the Fed also created significant (under)performance frustration across many strategies yesterday, with the exception of a 2 standard deviation ‘+++’ day for many risk-parity portfolios (which essentially run ‘short convexity’ long only cross-asset books, which are now likely to be in-process of ‘levering-up’ off of the ‘vol crush’).
For the above reasons, I believe the Fed will now view the market response as an ‘overshoot,’ and will perversely be forced to ‘walk-back’ the ‘incorrect’ dovish market interpretation with more hawkish rhetoric in coming weeks / months that will again whipsaw the rates market and likely-drive cross-asset vol higher.
COMMENTARY:
So the Fed hiked….and nominal rates gapped lower, breakevens traded higher, real rates collapsed, and financial conditions LOOSENED. Why? To me, the moves were largely positioning-related, being caught wrong-footed inherently with regards to ‘expectations.’ I do not believe the Fed intended this to be a dovish message, and they are going to have to clarify this to the market in coming weeks, in turn risking / creating more volatility. There is a fixed-income short / ED$ steepener to be laid-back-out soon.
To sum up the ‘by-and-large’ client reaction to yesterday’s post-Fed response (with a touch of relief from the Dutch election sprinkled-in) on a scale of 1 to 10, I’d say the buy-side gave it a “MEHHH.” Optically and absolutely, yesterday WAS of course a day of positive performance for many funds long risky assets, considering SPX +20 handles, EEM +2.6% (+2 SD move), IWM +1.6% (+2 SD move), HYG +1.4% (+3 SD move), LQD +0.9% (+2.6 SD move) et cetera.
Instead though, it felt ‘empty’ or like a missed performance opportunity for many, because despite your longs doing ‘okay,’ many of your shorts were up just as much, if-not-more. And regarding the longs, the stuff that did ‘really well’ yesterday is generally underweighted OR in many cases, has recently been pared-back (i.e. cyclical beta equities). Case-in-point, look at this example within the equities space:
HF VIP Longs + 0.7% against HF VIP Shorts +0.7%
High HF Concentration +0.9% against Low HF Concentration +1.0%
MF Overweights +0.6% against MF Underweights +1.0%
Ugh.
This was an interesting rally because it looked like the old “QE”- varietal, where the interpretation of anything ‘dovish’ (in this case ironically it was a dovish HIKE via a simplified read basically that "unch on median / average dot" countered the recently hawkish momentum / rhetoric / data) actually sent UST"s sharply higher (TY largest ‘up’ day since June ’16) / rates sharply lower / USD sharply lower (BBDXY a -3 SD move lower and largest ‘down’ day since July ’16). Real rates lower = easier financial conditions = Risk-on, Vol smoked = ‘short convexity’ vol trigger strategies likely driving mechanical re-levering.
The real news to me in the Fed message was two-fold:
First, the dot shift was beautifully spotted by Mark Orlsey and Tom Porcelli going-into the event. Looking at the simple scale of the absolute move in the average- or median- dot simply doesn’t ‘cut it’ in the case of “what is to come”—it is far more nuanced. As such, the takeaway I think the market has initially-missed was the fact that the marginal dot ‘shift higher’ came from the bottom of the plot—i.e. IT WAS THE MOST DOVISH FED MEMBERS WHO UPPED THEIR DOTS. This dynamic is going to have to be ‘trued-up’ in coming months considering the data trajectory (new 5 year highs in Bloomberg US Econ Surprise Index yday) and is likely to be a source of interest rate-driven cross-asset volatility.
The second notable takeaway from yesterday was Yellen’s very modest backing-away from prior comments made from Fed officials regarding an absolute-level FF rate (1.00%) acting as a ‘trigger’ for cessation of reinvestments to shrink their balance sheet. This is important bc again, Fed members have made this a point of focus going-forward, and their time-horizon window is shrinking now. From a markets perspective within the mortgage space, losing the ‘buyer of last resort’ (into the daily Fed buybacks) will cause ripples, because if rates are going higher against you as a MBS trader—which is inherently a negatively convex product—you HAVE TO hedge by hitting TY. This is a down-the-road discussion (now a 2018 story), but again will be a source of rate volatility in the future that could be ‘disorderly.’
Regardless of the medium- / long- term potentials…as such with the rates collapse lower on the day, duration sensitive equities were a large part of the equities leadership—e.g. defensives, divy yielders, low vol types like reits, utes, telcos (outside of energy sector with crude"s relief rally), while mega-allocations in tech, consumer discretionary and financials were, relatively speaking, "dead weight" and lagged index. Of course too, the other leadership driver in stocks was the ‘reflation stuff’ that’s been ‘getting pitched’ over the past month like steels, metals & mining, oil services, E&Ps, high beta materials and industrials etc. That stings for the majority of equity funds with regards to their current sector allocations, long ‘secular growth’ after reducing a fair bit of their "cyclical beta" / value exposure in 1Q17. Much of yesterday’s leadership was curious ‘late cycle’ stuff, which o/p ‘early cycle’ by an astounding~140bps:
Obviously, the above dynamic is especially frustrating for many equity HF"s. When you see the broad SPX tape + 0.8%, Russell 2k +1.6 and R3k +0.9% but as a long / short you were only able to eek-out 40bps to 50bps simply due to you net long exposure, it stinks. Even worse, mkt neutrals strats which simply don"t work in "gap higher" tapes.
Bigger picture macro, the rates move spanked fixed-income shorts, while the Dollar crush crunched longs (especially against GBP, EUR and select EM). Another “ouchy.” And think about the initial "trump reflation" worldview themes from 4Q16 where it was Emerging Markets that was viewed as the "biggest loser"...and now is the "high flyer" (EEM +12.3% YTD) as the protectionist rhetoric is ‘walked-back’ (Navarro comments yday) and some thinking (benevolently) that US growth is soon to be the "higher water which will raise all boats." Long EM over DM is now one of the most popular strategy calls going, FWIW.
But was yesterday really about US growth—was that really the case? I"d say that in light of the recent ‘trend trades’ and positioning dynamics, a day where you see fixed-income, (long) duration-sensitives, defensives, low vol, late cycle and EM leadership ‘run higher,’ it speaks to folks looking to buy the "stuff that"s been left behind" in a classic “PM exposure grab” style, yelling to his trader "find me some cheap stuff!" More "lottery ticket" mode than anything else, as evidenced by GDXJ (Jr Gold Miners ETF) finishing +11.5% higher on the day yesterday--a +3.1 SD-move. ALL OF THE LULZ.
As far as the current framework / narrative we’ve been operating under since midyear ’16, it shouldn"t be lost on anybody that this wasn"t a “higher growth = higher nominal rates = equities rally" which has obviously been the story of all global markets since secular lows for rates were put in last summer. It was instead an ‘easier conditions,’ central bank driven rally of old QE-era. As described above, this felt a lot more like “...greedy, not growth-y.”
I think there"s an important message in there.
RBC US ECON TEAM SHOWS 2017 DOT SHIFT WAS ACTUALLY ‘HAWKISH’:
MARK ORSLEY SHOWS 2018 DOT SHIFT WAS ACTUALLY ‘HAWKISH’ / HIGHER AS WELL:
There were no surprises in Yellen"s speech in Chicago on Friday in which the Fed chair confirmed the sudden and dramatic hawkish turn hinted at earlier in the week by Dudley and Williams, and which sent March rate hike odds from the low 30s to nearly 100% in the span of days. According to Yellen, the FOMC would "evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate", and yet the market reacted in a dovish way, selling the news, with the dollar and yields sliding, and most importantly, the curve flattening, suggesting i) that next week"s payrolls report - the only real variable between now and the March 15 FOMC announcement - may be a disappointment, and ii) that continuing the rate hike cycle here is a curve flattening policy error.
While the market"s "selling the news" was perhaps unexpected, Wall Street"s analysts were delighted to be spoon-fed by Yellen, as the "message received" note by Deutsche Bank demonstrates...
... with virtually everyone now expecting a March rate hike. Here is a summary of Wall Street"s Yellen postmortems.
Deutsche Bank (Joesph LaVorgna)
We expect the Fed to raise rates this month, and then two more times this year. The Fed has become less concerned about inflation, as the growth rate of the core PCE deflator (1.7%) is only a tenth below policymaker"s yearend 2017 forecast.
We expect a sharp rise in business spending to lift productivity growth from the doldrums, thus raising wage inflation and perhaps labor force participation, too. The Fed will be keen to let these structural changes play out, instead of short-circuiting the business cycle by rapidly raising rates
JPMorgan (Michael Feroli)
Pulls forward expectations for the next rate increase to March from May; increases forecast to 3 hikes -- in March, June and September -- from two previously
“The notably quick pivot in Fed rhetoric continued today and became even blunter”
UBS Wealth Management (Jason Draho)
Yellen comments clarify Fed rate-increase timing, but markets are still assessing pace
“Until there’s more evidence of accelerated growth or inflation, we don’t think the market’s going to price in more in terms of rate hikes”
Fed chair’s comments have “muted” impact on currencies Friday; UBS sees USD approaching top against EUR and JPY
Expects UST 10Y yield will stay rangebound around 2.5% for next 3, 6 and 12 mos as market digests changes in fiscal policy and Fed tightening cycle
UniCredit Research (Harm Bandholz)
Fed’s eagerness to pull forward next move implies the central bank feels it’s getting too far behind the curve
UniCredit moves expectation for next hike to March, from June; now forecasts three increases this year, up from two previously
“Barring any major negative shock over the next couple of days (e.g. a massive selloff in the market or a really disappointing employment report), the Fed will raise in two weeks –- and it has to”
CIBC (Bipan Rai)
Yellen remarks send clear signal that Fed will raise rates this month
“With March fully in the price, the lack of new information and the focus on the still neutral medium- term outlook has taken some wind out of the USD’s sails”
Fed chair’s comments suggest three rate increases are acceptable this year
TD (Mark McCormick)
USD may consolidate as event risk from Yellen speech passes
“We would use a squeeze in positioning near-term to re- engage fresh long USD exposure into next week’s data releases with long exposure against CAD, EUR and JPY”
Amherst Pierpont Securities (Stephen Stanley)
Yellen comments give “the final go-ahead that the markets were expecting” for a March rate hike
Economic environment is much healthier now than it was in spring 2016, particularly with higher inflation
Expecting a “triple shot of hike-worthy data points” next week, including strong U.S. payroll data, decline in unemployment rate, and acceleration in y/y average hourly earnings advance
FTN Financial (Christopher Low)
Yellen “said they have not yet decided, which implies at least some uncertainty. But, she also drew attention to a particular meeting, which has been used in the past to signal odds of more than 50%. My sense is she believes the FOMC is likely to hike in two weeks, but she has not made up her own mind definitively and will not until she is in the meeting”
Scotiabank (Shaun Osborne)
“Profit-taking is driving USD a bit lower but March looks a lock,” and Fed comments may have increased the potential for more than three hikes this year
Dot plot will increase in importance at March 15 Fed meeting
EUR/USD will need to drop to 1.0545 to extend losses; sees decline to ~1.0400 in the next 1-2 weeks
Silicon Valley Bank (Minh Trang)
Long-term rate differential will favor the USD even if market is “unimpressed” in short term
Goldman (Jan Hatzius)
Given constructive comments about current economic conditions from many Fed officials this week we think committee members will see recent news as consistent with their outlook, and therefore supportive of further tightening.
We see this as a strong signal for action at the upcoming meeting, and have raised our subjective odds of a hike to 95%.
One day after a duo of Fed presidents unleashed the biggest plunge in 2 month Fed Fund futures since 2008, sending March rate hike odds from 50% to 80% in under two hours...
...and resetting the market"s expectations for a March Fed meeting, which suddenly went "live" after NY Fed President William Dudley and SF Fed chief John Williams signaled in separate speeches Tuesday that a rate hike will be considered in FOMC’s March meeting, moments ago the Fed"s uberdovish governor Lael Brainard joined the hawkish parade when in prepared remarks for an event at Harvard, she said that “assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path."
She also said that “we are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time."
Once the headlines from her speech hit, the USDJPY saored, and has since hit intraday highs, on renewed expectations that another 25 bps rate hike may be due as soon as March 15, when the next FOMC meeting takes place.
Some other hawkish statements:
“The past few months have seen continued progress in the labor market."
“Inflation has moved up lately as the effect of past increases in the dollar and declines in energy prices have faded"
"Core inflation has been below 2% target, and further progress is needed to reach and sustain symmetric inflation goal"
“Recent months have seen an increase in the upside risks to domestic demand."
“Near-term risks to the United States from abroad appear to have diminished."
“How fiscal policy affects the economy depends on a lot of things, and of course there’s a lot of uncertainty,”
Brainard also touched on another sensitive topic, namely the Fed"s balance sheet, saying that “as the federal funds rate continues to move higher toward its expected longer-run level, a transition in balance sheet policy will also be warranted." She also added that “there are good reasons to expect a normalized balance sheet to be considerably smaller than its current size but larger than its pre-crisis level."
Some additional observations on her comments from Stone McCarthy:
The March meeting is squarely in focus for a possible rate action in the wake of strong economic data and measures of inflation at long last nearing the Fed 2% objective.
Most policymakers are still speaking in terms of gradual hikes, but also moving "sooner rather than later" to avoid having to more sharply increase rates if growth and/or inflation starts to pick up.
Recent comments from Brainard"s fellow FOMC participants certainly suggest that hawkish sentiment is growing among the voters. However, only Chair Yellen speaks for the FOMC as a whole and it is her remarks on Friday at 13:00 ET that will be decisive.
Brainard said, the economy is "closing in on full employment" and inflation is moving "gradually" back to target, and that "it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path".
Brainard mentioned "increased focus on the balance sheet", and that it will need to be adjusted relative to the fed funds rate depending "on the degree to which they are substitutes". Might prefer fed funds rate as "sole active tool away from the effective lower bound". Once well away from lower bound, "balance sheet would be set on autopilot" to shrink "in a gradual, predictable way".
Near term risks from abroad are "diminished" and overall risks are about balanced.
But it was Brainard"s last statement that was the most interesting, if not ominous: "We are going to be in a slightly different kind of posture, I think, going forward."
Hint aside, all of these statements could be merely trial balloons to test the market"s preparation for an upcoming rate hike: for the real arbiter look to this Friday"s speech by Janet Yellne: if she turns as hawkish as her FOMC peers, than a March hike is effectively assured, especially with the March hike odds now at or around 70%.
US Mint Releases New Fort Knox “Audit Documentation”: First Critical Observations
In response to a FOIA request the US Mint has finally released reports drafted from 1993 through 2008 related to the physical audits of the US official gold reserves. However, the documents released are incomplete and reveal the audit procedures have not been executed proficiently. Moreover, because the Mint could not honor its promises in full the costs ($3,144.96 US dollars) of the FOIA request have been refunded.
Thanks to my readers that donated to the crowdfunding campaign I’ve been able to force the US Mint through a Freedom Of Information Act (FOIA) request to hand over documents related to the physical audits of the US official gold reserves stored at the Mint; also referred to as Deep Storage gold. Although the PDF-package digitally sent to me is redacted, incomplete, includes pages copied twice and materials I didn’t ask for, it’s the closest thing that I’ve ever seen to physical audit documentation of gold at Fort Knox and the other Mint depositories drafted in between 1993 and 2008.
What is worrying is that the reports now in my possession reveal the audit procedures have not competently been executed. Combine that with the fact the documents are incomplete and redacted, and the result is suspicion of fraud. In this blog post we’ll have a first critical look at the reports and the problems to be found within.
For starters, allow me to expand on what I think happened at the Mint’s headquarter on the 8th floor at 801 9th Street NW Washington DC, before these documents were sent to me.
It should be clear that the US Treasury (owner of the gold), US Mint (main custodian), Federal Reserve Bank Of New York (second custodian), and the Office Inspector General of the US Treasury (head auditor), are reluctant to disclose information about the audits of the gold at the four largest depositories that store over 8,000 fine metric tonnes. Consider that the most seasoned gold analysts aren’t even aware this gold is audited.
What nobody knows is that according the US government 100 per cent of the Deep Storage gold has been audited in between 1974 and 2008 (page 4). This period can be divided in two chapters: the first runs from 1974 until 1986 when the Committee for Continuing Audit of the U.S. Government-owned Goldverified the majority of the Deep Storage metal. The second chapter covers 1993 until 2008 when the residual was examined under the supervision of the Office Inspector General of the US Treasury. In my previous posts on this subject we focused on the first chapter, what is written below skims the surface of the second. As promised, eventually I will publish a full in-depth analysis of all chapters (there are additional chapters in the fifties, from 1986-1993, in 2009, 2010 and 2011).
Over the years my inquiries at the US government though regular channels have produced little intelligence about the physical audits of the Deep Storage gold. Some departments cooperated at first, but eventually they stopped replying emails or just hang up the phone while I was talking. The second layer of defense was raised when I started submitting FOIAs. Instead of honoring my requests they tried to delay and dodge most appeals. Clearly, the US government prefers not to answer my questions than to flaunt with the audit results.
However, in 2016 I embraced the motivation to push through and find out how many gold bars were counted, weighed and assayed in between 1993 and 2008, when allegedly the last series of physical audits was conducted. Not surprisingly, zero US government departments could provide me the information I was looking for, but through certain FOIAs I obtained leads to submit new FOIAs, and so on 12 Augustus 2016 I demanded, inter alia, the “memoranda submitted by the US Mint Director’s representative regarding audits of the Mint Schedule of Custodial Gold and Silver Reserves to the Chief Financial Officer drafted from 1993 through 2008”. The Mint replied this request would costs me $3,144.96 dollars because it would take 40 hours to search the respective documents, 8 hours for review, and additional costs would be incurred to duplicate 1,200 pages. I thought this was hogwash – 1,200 pages seemed out of proportion for such memoranda, how hard can it be to find a few pages and how did they know it were going to be 1,200 pages if they had to search 40 hours for it – but decided to start a crowdfunding campaign to collect the money.
Within 24 hours the campaign was completed and late August 2016 I sent the Mint a check, in the hopes to receive the documents a.s.a.p.. After the Mint pretended the check was missing for a few weeks, they communicated on 28 September 2016 the funds had arrived and they were working to get the requested documents out to me (exhibit 1).
Exhibit 1. Screenshot email form the US Mint (Jones, Lateau). My FOIA request was originally dated from 1 August 2016, but was revised on 12 August 2016. Jan Nieuwenhuijs is my real name.
Months past but nothing happened. I sent several emails and called the Mint three times, but time and time again I was maintained with false excuses. Then, finally, on 23 December 2016 the Mint delivered the documents I paid for. Sort of. Instead of 1,200 pages I received 223 redacted pages that contained 68 pages of reports I didn’t ask for and 21 pages that were copied twice. Effectively, I got 134 pages related to my FOIA request.
When I confronted the Mint I paid $3,144.96 dollars for a meager 134 pages they agreed the costs had been estimated to high and a refund was reasonable. Actually, they told me they never cashed the check. So, quickly I told my bank to cancel the check and ordered my crowdfunding platform to refund all my donors.
As of now all donors to my crowdfunding campaign should have received their money back (if not, please write me an email, see below for my address). From the bottom of my heart I would like to thank everyone for the loan that made this operation possible1!
For me a slight doubt remained if the Mint had tried to fend me off by asking a disproportionate amount of money for a few pages that I assume are alphabetically archived, or that they handled my case in all honesty. A skeptical mind would think the former. To find out I read the internal emails of the Mint employees that handled my FOIA. Those are not directly publicly available, but I was told a trick by more experienced FOIA scholars that reached out to me after I published my previous blog posts on this subject, to ask the Mint for internal emails through, what else, a Freedom Of Information Act request (exhibit 2).
Exhibit 2. FOIA asking to obtain email correspondence written or received by Mint employees that was related to my case.
And it worked! On 10 January 2017 I received all (I hope) emails from the Mint I was looking for. Including one wherein Audit Liaison at the United States Mint Tom Noziglia makes an estimate for the costs of my FOIA request of 12 August 2016. Read below (exhibit 3).
Exhibit 3. Email by Noziglia to Saunders-Mitchell, Grimsby and Fletcher.
At first sight it seems Noziglia and his office stick to prudent protocols. But possibly this email is a veil, meant to deceive me if I would ever read it. Actually, yes, I think it’s a cloak and I’ll share my theory.
Exhibit 4. Screen shot LinkedIn page Tom Noziglia. Note, we can read he’s a schooled psychologist that was unemployed from 1985 until 2012 after which he started as auditor at the US Mint. I count 5 typos on this page, which suggests Noziglia is not the most meticulous auditor.
We can read from Noziglia, “as Audit Liaison at the US Mint, I [Noziglia] am responsible for the coordination of all external audit initiatives … I have extensive experience in precious metal inventory, … I … coordinate the execution of the annual OIG [Office Inspector General] Joint Seal Inspection of the Custodial Gold at the US Mint”. This page tells us Noziglia is one of the auditors of the US official gold reserves. So, the email above (exhibit 3) was written by the auditor who was involved in the procedures of which I requested the documentation. Noziglia must have known my inquiry could be simply honored by sending just a few pages of documentation, as he was a co-author of the documents in question.
Firstly, with the benefit of hindsight we know Noziglia was lying in his email because by now I have the documents that count only 134 pages, and he was the coordinator of the annual inspections of custodial gold at the Mint. He must have known there were no “1,200 pages in 80 boxes” and so his $2640.00 dollar estimate is a hoax. I think Noziglia wrote the email expecting I would NOT pay the ludicrous amount of dollars, but possibly DID submit a new FOIA to view the Mint’s internal emails. Chances are slim someone could pay $3,144.96 dollars right? But I’m not the first who submits an additional FOIA to obtain internal emails. Hundreds of people went before me, this is a well-known trick for FOIA pundits, and many public servants in the US must be aware of this hazard. Hence I reckon public servants consciously write emails to colleagues, as if these will be publicly released some day. I’ve come to understand submitting and answering FOIAs is nothing but a cat and mouse game.
Second, the Mint never cashed the check. If they really thought they would have to search 40 hours, why not cash the check immediately and get busy? I guess they knew very well there was no searching required.
Third, in case Noziglia had never seen a “memoranda submitted by the US Mint Director’s representative regarding audits of the Mint Schedule of Custodial Gold and Silver Reserves to the Chief Financial Officer”, which is not likely but let’s give him the benefit of the doubt, he could have viewed the most recent version at his office that wasn’t sent to the National Archives (NARA) yet. By doing so he would have learned very effectively these annual memoranda count only a few pages.
Fourth, Noziglia states in his email (exhibit 3) he’s not sure if he will find the documents at all. But this is impossible because he’s a dedicated Mint auditor so he must know what documents the Mint sends to NARA every year. In addition, there was no need for Noziglia to “order off site” boxes, because he simply could have commanded NARA staff to deliver specific documents – this is common practice.
Fifth, in the CC of Noziglia’s email is Kenyatta Fletcher, who is the Chief of the Accounting Division of the Mint. If, which is a big if, Noziglia didn’t know what I was looking for, Fletcher would’ve known these documents wouldn’t count 1,200 pages. But still I was charged a laughable $3,144.96 dollars.
Sixth, Noziglia’s estimate is $2.640.00 dollars, but I have no emails that clarify why $504.96 dollars were added for a total of $3,144.96 dollars I was charged. This indicates, Mint staff communicated in person or through phone calls to finalize my request, and so could have done likewise to handle it in general. Concluding, Noziglia’s email doesn’t paint the full picture of the internel communication.
Seventh, please read what Noziglia’s colleague Grimsby replied to him after 4 minutes.
Exhibit 5. Email by Grimsby to Noziglia.
“Great email”? Why would Grimsby praise Noziglia for his email? If Grimsby would have written,“I agree”, I can understand. But,“great email”? Perhaps Grimsby meant to write, “great calculation that makes no sense, but is likely deceive an ignorant FOIA requester if he would ever read it!”? It sure looks like it.
My guess is that Noziglia, Grimsby and Saunders-Mitchell met in the hallway in the afternoon of 15 August 2016 and agreed for Noziglia to write a phony email that arrives at an amount of dollars aimed to scare me off. In the email below you can read Noziglia suggested to Grimsby to discuss in person in the afternoon of 15 August 2016 the estimate for the costs.
Exhibit 5.2. Email by Noziglia to Grimsby 15 August 2016.
So far we’re confirmed, again, that the US gold is held in secrecy. No surprises there. Moving on to the content of the documents.
Audit Documents Released Are Incomplete
When one walks into a US Mint repository the main barrier will be the door to the vault room. In the case of Fort Knox this a 20-tonne door of which no one person is entrusted with the combination. Once inside the vault room the gold is stored in segregated compartments that are sealed since at least the fifties.
The official narrative is that by 2008 the load of all 42 compartments had been physically audited. Every compartment had been opened, the gold inside counted, weighed and assayed, after which the gold was stacked in an adjacent compartment in the vault room (in several documents it’s described this is the way the gold is physically audited). Subsequently the target compartment door was closed and placed under Official Joint Seal, if during the verification no discrepancies had been found with the Mint’s bullion ledger. In most years until 2008 one or two compartments were opened for a physical bar examination, while the other compartments were merely inspected for any tampering of the Official Joint Seal (OJS). The purpose of joint seals is to avoid the necessity of verifying all assets in each annual audit.
Thus the audits of the Deep Storage gold consist of two conventions gold verifications, which are the physical audits of gold bars inside the compartments. And OJS inspections, which are checks of the seals placed on the compartment doors. The superintendent in the audit procedures is the Office Inspector General of the US Treasury, in short, the OIG.
When reading the audit documents delivered to me (the Memoranda hereafter) the distinction between gold verifications and OJS inspections is clear. Let me show you an example of Fort Knox. The first screen shots below are from a gold verification at Fort Knox in March 1998.
Exhibit 7.1. Gold verification at Fort Knox March 1998, page 1.
Exhibit 7.2. Gold verification at Fort Knox March 1998, page 2.
Exhibit 7.3. Gold verification at Fort Knox March 1998, page 3.
Exhibit 8.1. OJS inspection at Fort Knox June 1998, page 1.
Exhibit 8.2. OJS inspection at Fort Knox June 1998, page 2.
Exhibit 8.3. OJS inspection at Fort Knox June 1998, page 3.
Exhibit 8.4. OJS inspection at Fort Knox June 1998, page 4.
Clickhereandhereto download all Memoranda sent to me by the US Mint.
After I had organized the documents and imported all data in spreadsheets I noted the 134 pages exclude 27 OJS inspection reports and at least 3 gold verification reports. I’ve asked the Mint to deliver the missing Memoranda, although I’m not expecting them to ever comply.
The fact 30 Memoranda are missing is of course highly problematic. Bear in mind, I offered the Mint $3,144.96 dollars to produce these documents.
Exhibit 9. Overview gold verification and OJS inspection reports Deep Storage gold. Note, throughout time the Memoranda format changed, so in some years one Memorandum included both gold verification and OJS inspection paragraphs.
In case you’re wondering how I know what gold verifications reports I’m missing, this is because references are made to these physical audits in succeeding gold verification reports. Fort OJS inspection reports, those should be done every year.
Below is an example of an Official Joint Seal. I obtained nearly all OJS copies from a separated FOIA request at the OIG.
Exhibit 10. OJS Fort Knox compartment 29.
Submitted a whole bunch of FOIA request at US government departments regarding Fort Knox today. #gold
Fort Knox Compartment 31 Was Opened In 1996 For Dubious Reasons
There are a couple of disturbing lines written in the Fort Knox OJS inspection report of 1996. Although for an OJS inspection seals should only be examined for tampering, on 12 August 1996 at the Fort Knox OJS inspection two representatives of the General Accounting Office (GAO) showed up in the vault room and decided to select “a single joint sealed compartment for opening and inspection”.
Exhibit 10. Fort Knox OJS inspection report 1996.
Unfortunately the report doesn’t say what was in the vault compartment; how many bars and fine troy ounces (FTO) it contained. Based purely on this document it would impossible to decipher what the GAO exactly did. However, by combining the info in the 1996 OJS inspection report with documentation obtained through a FOIA requests at the OIG, we do know what happened.
Have another look at exhibit 10. We can read Fort Knox compartment 29 was sealed in 1998. But the content, 19,800 gold bars weighing 6,470,624.049 FTOs before assays samples were taken, was sourced from compartment 31 that was sealed on 12 August 1996. Was compartment 31 the one opened by the GAO in 1996? Yes, without a doubt.
By examining all OJS copies – such as demonstrated in exhibit 10 – it shows there was no other vault segment freshly sealed on 12 August 1996 other than compartment 31. Moreover, the 1996 OJS inspection report mentions only one joint sealed compartment was breached. Therefore we know the GAO representatives opened Fort Knox compartment 31 comprising 19,800 gold bars weighing 6,470,624.049 FTOs on 12 August 1996.
Furthermore, in the 1995 OJS inspection report we read there was one compartment – the number is redacted – that contained 19,800 gold bars weighing 6,470,624.049 FTOs. And in 1995, 1996 and 1997 there were no gold verifications at Fort Knox as far as I know, other than the GAO incident. Have a look below at a screenshot from the 1995 Fort Knox OJS inspection report.
Exhibit 11. Fort Knox OJS report 1995.
What happened is that on 12 August 1996 compartment 31 was opened by the GAO to “check a few bars”, but then two years later in 1998 the same gold was verified by the OIG; all the gold inside taken out of compartment 31, counted, weighed and assayed, to be stored across the hall in compartment 29. This is suspicious. I quote, “the purpose of joint seals is to avoid the necessity of verifying all assets in each annual audit”.
I do not possess the official rules for US Mint OJS inspection and gold verification for the year 1996 (“MD 8H-1”), but based on the rules that prevailed in 1975, what the GAO did on 12 August 1996 was not done. Read with me.
How come the GAO could open a compartment? The OIG stated under oath in 2011, “since 1993, when we assumed responsibility for the audit, my office has continued to directly observe the inventory and test the gold” (page 4). If the OIG is responsible how come the GAO could break a seal?
Let’s contemplate this: if the “random checks” the GAO performed in 1996 in compartment 31 formed an adequate gold verification, why did the OIG re-audit the exact same gold in 1998? And what was the intention of the GAO in 1996? The GAO couldn’t fully audit compartment 31, because they were present at Fort Knox only for one day (12 August), and no single person or flock of auditors can verify 19,800 large gold bars in one day. The fact these 19,800 gold bars were re-audited in 1998 underlines what the GAO did in 1996 was inappropriate at best.
One theory is that the gold in compartment 31 was prepared in 1996 to be physically audited down the road. Remember what the Fort Knox gold verification report of 1998 stated (exhibit 7.2)? In 1998 the OIG, “selected predetermined individual bars to be drilled for assay”. Possibly, the OIG selected the exact bars in 1998 that were put in in 1996. If this is true the names and autographs of the perpetrators of this crime are on the seal of compartment 29 (exhibit 10).
My succeeding post on this subject will expose that many other Deep Storage compartments at the Mint have been opened for dubious reasons as well. Which could be the reason the Mint didn’t provide us ALL the OJS inspection reports from Denver and West Point from 1993 through 2003 (exhibit 9).
Weighing Sample Size Remarkably Low
We need to discuss the sample size of the gold verifications. In 1998 at Fort Knox 19,800 gold bars were inspected but only 105 of them were weighed and assayed (exhibit 7.2). That’s not much in my humble opinion. In any case, I expected a higher sample size.
In the 1953 audit at Fort Knox (download report here) in total 88,000 bars weighing 48,506,985 FTOs were counted for verification. About 10 % of those were weighed.
During the Continuing Audits from 1974 through 1986 it seems 2 % of the gold counted was weighed. A huge decline from 1953.
Although gold bars tested to be out of tolerance during a Fort Knox audit in 1977 at a sample size of 2 %, by 1998 the sample size had been further debased to 0.53 %. I’m not a professional auditor (if you are one please contact me), but common sense suggests that when irregularities are found the sample size should be increased, not decreased.
To make matters worse, in 1999 at West Point the sample size was 0.52 %, and again, a melt appeared to be out of tolerance.
Exhibit 14. Gold verification report West Point 1999.
Was the sample size increased after 1999? Not really. At Fort Knox in July 2000 the samples size was 0.65 % (93 bars weighed of 14,262 bars counted). But wait until I show you what numbnuts were entrusted handling the scale for the audits of the world’s greatest gold hoard.
Scale Didn’t Work, Repeatedly
Let’s study the 2004 physical audit at West Point. Please read:
Exhibit 15.1. Gold verification report West Point 2004.
Exhibit 15.2. Gold verification report West Point 2004.
When all parties tried to reconcile the weight of samples on 22 and 23 July 2004, they found out, “the scale was reading at ounces rather than fine troy ounces”, because, “a setting on the scale had not been properly changed”. Allegedly this is what caused alternative readings in the books of the Director of the Mint’s Representative and the OIG’s Representative. And presumably because nobody could figure out how to use the scale correctly they decided to postpone re-weighing the samples until 24 August 2004. This failure of how to use a scale is a colossal disaster for the credibility of the Deep Storage audit procedures.
In 2004 a mere 71 bars were weighed and assayed, but it appeared that none of the auditors present knew how to rightly use the scale. The Memoranda mentions they found out the scale wasn’t properly functioning when weighing the assay samples, but what about the weighing of the actual bars? What about the weighing of every Deep Storage gold bar under the supervision of the OIG from 1993 until 2008? We have no guarantee this has ever been executed competently.
To repeat, the official explanation for this blunder reads, “the scale was reading at ounces rather than fine troy ounces”, because, “a setting on the scale had not been properly changed”.
First, in my mind there can be no imaginable circumstances in which setting of the scale should have been changed. The scale should read troy ounces to as many decimals all day long. That’s it. Why change the settings?
Second, they say, “the scale was reading at ounces rather than fine troy ounces”, but scales don’t read fine troy ounces so this statement is fake. A scale reads troy ounces, or digital ones can be set to reading grams; it cannot smell what is the purity of the gold and thus display fine troy ounces. That’s what the assay test is for.
In 2008 at West Point a similar disaster happened. Read with me:
Exhibit 16.1. Gold verification report West Point 2008.
Exhibit 16.2. Gold verification report West Point 2008.
The auditors couldn’t clearly read the decimal point. After assay samples were drilled to be taken out, the auditors weighed the same amount of gold granules to replace the samples, in order for the Deep Storage FTOs to remain flat in 2008. But the assay lab, White Sands Missile Range, which is a division of the US Army, found out from the paper work that the weight of the assay samples didn’t match the weight of the granules. And so West Point compartment 10-H had to be re-opened on 22 September 2008 to put an exact 10.346 ounces of gold in, instead of 1.0346 ounces.
What a catastrophe! Be aware that before weighing the granules the auditors weighed 86 gold bars and the assay samples. How do we know they properly weighed the assay samples and the totals of the 86 bars? The short answer is, we don’t.
Thereby, anybody with a sense for gold can see the difference between 10 ounces and 1 ounce of yellow metal.
Conclusion
From the examples above it should be clear that the Deep Storage gold has not been audited by professionals, but the precious metals have been verified by imbeciles. Clearly the scale was repeatedly handled by amateurs, which throws a wrench at the integrity of the entire US official gold reserves auditing project. I’m not at all surprised the US Mint has tried everything to keep the records of the auditors out from the pubic domain. Fortunately most of it will be out in the open eventually. The citizenry of the world deserves to know everything there is about the Deep Storage gold.
Let’s finish with one more comment from the West Point 2006 audit report.
Exhibit 17.1. Gold verification report West Point 2006.
The auditors couldn’t figure how to use the drill to take assay samples (how about pointing the tip to a bar and press the button). They also were oblivious how to calculate fine troy ounces. We must wonder if these people would be capable of tying their own shoelaces. In any case, the fact the US government chose to assign very inexperienced people widely opens the possibility that the audits are a complete hoax.
