In May 22 testimony to the Joint Economic Committee of Congress, Fed Chairman Ben Bernanke issued another of many similar positive interpretations of central bank policy. Yet again, he continued to argue that quantitative easing has decreased long-term interest rates and produced other benefits. The Fed's polices have not produced the much-promised re-acceleration in economic growth. The standard of living - defined as median household income - has fallen back to the level of 1995. The best approach would be for the Fed to recognize the failure of QE and end the program immediately, thereby allowing price distortions in the markets to correct themselves. By ending the illusion that the Fed can take constructive actions, this might even serve to force federal government leaders to deal with the growing fiscal policy imbalances. Otherwise, debt levels will continue to build and serve to further limit the potential for economic growth.
There is literally no evidence that printing money creates jobs. Look at Japan, they have and continue to maintain QE efforts equal to 40+% of their GDP and unemployment hasn’t budged in 20 years. The UK has engaged in QE equal to over 20% of GDP with no success.
Overnight, just as Japan was threatening to roll risk over even more (at the end of the day, or rather night, it did, sliding over 200 point bringing the two day total plunge to nearly 800 points) China reported trade numbers which were "better than expected" even though the net GDP contribution from the overall surplus was actually less than expected at $17.8 vs $27.1, which in turn pushed US futures solidly into the green. Ironically, while the China data was enough to give the US a solid green momentum it was not enough to give the China market a green close. Recall that this is the same data that forced Goldman to admit in January that "China is cooking the books"... the same data that prompted a Bank of America report analyzing the Chinese data to say the following: "One important question in investors' mind is whether we can trust the quality of these trade statistics because they seemed to be significantly distorted between October 2012 and April 2013.... we believe the quality of trade data was improved a lot. Using our adjustment method for fake trade..." Of course BofA "believes it", and it is only fitting: fake Chinese trade data to push the fake US stock market higher.
Evans, who is one of twelve Federal Reserve Presidents, believes that the economic indicators “are actually really better” and this signals a new, more firmer indication from the Fed that tapering is going to happen.
While there was little macro news to report overnight, the most notable development was yet another USDJPY-driven crash in the Nikkei 225 which plunged by a whopping 576 points, or 4%, to 13825, while the Yen soared to under 96.80 in the longest series of gains since mid-June before recouping some of the losses on pre-US open program trading. The reason attributed for the move were reports that Japan would adhere to pledge to cut its deficit which is the last thing the market wanted to hear, as it realizes that boundless QE is only possible in a context of near-infinite deficit spending. The index, which has now become a volatility joke and woe to anyone whose "wealth effect" is linked to its stability, pushed not only China's Shanghai composite lower by 0.7% but led to losses across the board and as of this moment is seen dragging US equity futures lower for the third day in a row.
Moments ago the Bank of England's Mark Carney, very much as expected and warned previously, announced for the first time as part of the BOE quarterly Inflation Report press conference (the full August inflation report can be found here) the official linkage of monetary policy outlook to unemployment and pledged to expand stimulus if needed as he tried to quell investor bets on higher interest rates. Specifically as part of the BOE's forward guidance, Carney linked interest rates to a 7% unemployment threshold while forecasting that unemployment would be higher than 7% until at least Q3 2016, or in other words, no threat of an end of extraordinary monetary policy any time soon. However, while the market enjoyed the announcement initially and sent cable 100 pips lower to 1.5200, the initial dovish mood was quickly reversed after the market observed that Carney's statement carried with it three "knock out clauses" which made the forward guidance far less explicit and put doubts into the market about the credibility of this latest monetary experiment as a result unwinding an initial 100 pip drop in cable and sending it over 200 pips higher from the lows.
A bearish take on U.S. stocks is about as fashionable as a beehive hairdo at the moment, which makes it a decent time to think like a contrarian. Sell-side strategists with a sense of reality are few and far-between but as ConvergEx's Nick Colas warns, the most important reason for caution currently is, obviously, valuation and complacency. U.S. stocks currently reflect, both in price level (16x current year earnings) and implied volatility (an 11 handle VIX), an economic acceleration which has yet to fully flower. In addition, Colas adds, domestic equities look good in part simply because everything else – Europe, Japan, emerging markets, etc... - look so bad. Wouldn't an accelerating U.S. economy spill over to other regions? So what is lurking around the corner for the next lucky Fed head? And what about the three main memes for why the 'bull' can keep running?
It seems I arrived in New Zealand just in time to see the country implode over a bit of botulism and bad PR. Good thing I haven't converted all my dollars into kiwis just yet!
The “smart” money is fleeing the market en masse (institutions, wealthy private investors, etc.).
The summer doldrums continue. Overnight news included an expected 25 bps rate cut in Australia to a new record low of 2.50%, although the statement surprised by not retaining its expected dovish outlook. Perhaps this is due to the PBOC finally folding and despite raging for weeks that it was dead serious about its tightening experiment, injected another CNY12 billion in its banks via 7-day reverse repos at 4.0% compared to the previous, July 30 CNY14 billion 7 day injection at 4.40%. The Chinese central bank came, saw, and didn't like what it found in the Chinese interbank liquidity situation. Whether and how this will change the Politburo's reform agenda, and whether the provided liquidity will do much if anything, remains to be seen. Elsewhere, in Europe, German factory orders soared 3.8% on expectations of +1.0%, however all driven by Paris airshow orders which boosted bulk orders, and without which orders would have fallen -0.7%. The UK upward momentum continues with Industrial Production's turn now to soar to the highest since January 2011, while Italian GDP declined less than expected, dropping -0.2%, on expectations of a -0.4% slide. In other words Europe continues to rep and warrant that it does not need any assistance from the ECB despite a complete lock up in private lending and credit creation. Good luck with all that.
As the Fed gets ready to taper ‘QE’, UBS' Larry Hatheway warns investors to brace for a period of increased international policy tension. Previously harmonized - but not coordinated - monetary policy stances will give way to conflicting objectives and new strains as adverse ‘spillovers’ occur. As Hatheway notes, we are about to rediscover several inconvenient truths. First, the Fed is the US, not the world’s, central bank. Second, international policy coordination is desirable in an interdependent world but, third, it is no more likely to materialize now than in the past. The world, it seems, is destined for a less comfortable policy co-existence in the coming few years.
Just a few days ago on July 27th President Barack Obama said that the next Fed head had to consider average Americans when setting monetary policy. If only that were true.
We do not inhabit a “normal” economy. We live in a financialised world in which our banks cannot be trusted, our politicians cannot be trusted, our money cannot be trusted, and – not least thanks to ongoing spasms of QE and expectations of much more of the same – our markets cannot be trusted. At some point (though the timing is impossible to predict), asset markets that cannot be pumped artificially any higher will start moving, under the forces of inevitable gravitation, lower.
Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot"Submitted by Tyler Durden on 08/05/2013 11:56 -0400
"This is a delicate moment. The Fed has created a monetary Gordian Knot. Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."
In a somewhat shockingly blunt comment from the mouthpiece of Chinese officialdom, Yao Yudong of the PBoC's monetary policy committee has called for a new Bretton Woods system to strengthen the management of global liquidity. In an article in the China Securities Journal, Yao called for more power to the IMF as international copperation and supervision are needed. While comments seem somewhat barbed towards the rest of the world's currency devaluers, given China's growing physical gold demand and the fixed-exchange-rate peg that 'Bretton Woods' represents, and contrary to prevailing misconceptions that the SDR may be the currency of the future, China just may opt to have its own hard asset backed optionality for the future; suggesting the new 'bancor' would be the barbarous relic (or perhaps worse for the US, the Renminbi). Of course, the writing has been on the wall for China's push to end the dollar reserve supremacy for over two years as we have dutifully noted - since no 'world reserve currency' lasts forever.