India's Bipolar Monetary Policy Continues: RBI Cuts Marginal Facility Rate Another 50bps To Boost LiquiditySubmitted by Tyler Durden on 10/07/2013 08:29 -0400
It was less than four weeks ago that the Reserve Bank of India, under new head Raghuram Rajan, stunned the world on September 20 when it announced that it would both hike its repo and cash reserve rates in an inflation fighting step, while lowering its marginal standing facility rate by 75 bps to 9.5% in order to boost banking sector liquidity, hence "bipolar policy" of the kind most recently seen in Europe. Moments ago, the RBI once again showed that when faced with the option of consumer pain, i.e. runaway inflation, and preserving a banking status quo, i.e. liquidity, the central bank will always choose the latter, when in a surprising move the RBI cut its Marginal Standing Facility rate by further 50 basis points, from 9.5% to 9.0%.
If you listen to TV commentators, you’ve been told the worst is behind us. Growth is picking up, and Europe is coming out of its slumber. No one seems to be concerned that this tepid below-2-percent growth is being entirely fed by the central bank’s massive money printing. It’s a “growth at any price” policy. How quickly we forget. We currently fear Fed tapering, as we should. Yet, we should be even more fearful that it doesn’t taper. Today, we really have a dreaded choice of losing an arm now or two arms and a leg tomorrow. Because the price distortions have been massive, the adjustment will be horrendous. Government policy makers and government economists simply do not understand the critical role of prices in helping discovery and coordination.
Looking at the equity market and some of the background dynamics Citi's FX Technical group cannot help but be reminded of 2011. They also warn, despite the constant hope-driven rallies this week, there are also some aspects of what we saw in 1998 and similarities with 2000 that are worth noting. The bottom line, we have had the view for some time that we would see a much deeper correction in the equity market (in excess of 20%). Recent price action and developments might (just might) be suggesting that it is time to revisit that theme.
One of the biggest laughs of the conference came when Smith presented the slide, ‘Emperor … With No Clothes’ which compared how the value of the Roman denarius, silver coin and the U.S. paper dollar have fared during periods of currency debasement.
The chart shows the silver denarius since Nero and the dollar since Nixon and looked at the level of debasement during the reign of each Roman Emperor and the term of each Presidency.
If one wants to see what it looks like when the Federal Reserve has enabled the US government to become completely irrelevant in a world in which fiscal policy is completely meaningless and all that matters is how high the S&P500 is on any given day courtesy of trillions in monetary policy injections stimulating "confidence" and the wealth effect, then look no further than this article by Politico recapping the bad blood in Congress among the four feuding leaders.
With the government shutdown stretching into an improbable 4th day (and with every additional day added on, the likelihood that the impasse continues even longer and hit the debt ceiling X-Date of October 17 becomes greater), today's monthly Non-Farm Payroll data has quickly become No-Farm Payroll. However, just like on day when Europe is closed we still get a ramp into the European close, expect at least several vacuum tube algos to jump the gun at 8:29:59:999 and try to generate some upward momentum ignition in stocks and downward momentum in gold. In addition to no economic data released in the US, President Obama announced last night he has cancelled his trip to Bali, Indonesia, to attend the APEC conference and instead to focus on budget negotiations back at home - which is ironic because his latest story is that he will not negotiate, so why not just not negotiate from Asia? Ah, the optics of shutdown.
The US Federal Reserve’s recent surprise announcement that it would maintain the current pace of its monetary stimulus reflects the ongoing debate about the desirability of cooperation among central banks. Discussion of central-bank cooperation has often centered on a single historical case, in which cooperation initially seemed promising, but turned out to be catastrophic. We are thus left with a paradox: While crises increase demand for central-bank cooperation to deliver the global public good of financial stability, they also dramatically increase the costs of cooperation, especially the fiscal costs associated with stability-enhancing interventions. As a result, in the wake of a crisis, the world often becomes disenchanted with the role of central banks – and central-bank cooperation is, yet again, associated with disaster.
No, we are not talking the stock market reaction, which is driven purely by trillions in excess global, fungible liquidity sloshing around and as a result stocks are up on government shutdown day in a complete mockery of, well, everything. Instead, this is what Wall Street sellside strategists believe will be the impact of the shutdown (and how it ties in with the far more important debt ceiling negotiation). It should not be at all surprising that to virtually everyone, the shutdown (or any other negative development) is a "buying opportunity" which makes sense: after all the person who is truly in charge of the "wealth effect" will be up and running uninterrupted and there is no risk today's $2.75 - $3.50 billion POMO will be even modestly delayed.
If there is one day the Fed's trading desk actually did want futures lower, if only for purely optical purposes and to at least suggest that the government, and not the Fed, is still in charge of the US, it is the day when the US government - for the first time in 17 years - has shut down. They certainly did not want the S&P to be up nearly 0.5% mere hours after Congress and the presidency confirmed to the world that in a world in which "the Chairman gets to work", a functioning government is completely irrelevant. Yet this is precisely what is going on. What is making matters worse is that on the other side of the world, Japan also finally announced the well-telegraphed sales tax increase to8%, offset by a JPY5 trillion yen "stimulus" which however Japan said, much to the Chagrin of Mrs. Watanabe and a 100 pip overnight plunge in the USDJPY, would be funded not with more new bond issuance (and thus without new "wealth effect" generating monetization). It is unclear just how it will be funded but since increasingly more global fiscal and monetary policy is based on science fiction we know better than to ask.
In the upcoming week markets will continue to focus on these fiscal issues in the US, now that a temporary Government shutdown past Tuesday is assured. Still on the fiscal side but outside the US, look forward to Prime Minister Abe announcing his final decision on the VAT hike as well as unveiling a widely anticipated economic stimulus package. Finally, fiscal policy also played a role in the Italian political instability with four ministers resigning from the coalition Government. The backdrop to these events is a rapid deterioration of the political climate after former PM Berlusconi was convicted of tax evasion by a High Court.
European equities trade negatively as political tensions on both sides of the Atlantic dampens risk appetite and a lower than expected HSBC manufacturing PMI figure from China further weighs upon investor sentiment. In the US, government is on the precipice of the first shutdown since 1996 after House Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms. If the Republicans follow through with their threat a shutdown will occur at midnight tonight. As a result a fixed income in the US and core Europe benefit with investors wary of the immediate harm a shutdown will do to confidence in the economy.
"One day this whole credit bubble will be deflated very badly - you are going to experience a complete implosion of all asset prices and the credit system..."
There may be temporary 'benefits in terms of employment gains' if the Fed creates an even more gigantic echo bubble than it has already done. We are willing to grant that much. The Fed apparently believes these days that there should be no limits whatsoever to the Fed's monetary pumping. 'Inflation' targets? Forget about it! Asset bubbles? Who cares! It is as if the past 20 years had not happened – as if they had simply erased the whole period from his memory. Do they really believe that pumping up another giant bubble will have more benefits than drawbacks? Where does it all end? However, there is no such thing as a free lunch, and there cannot be an 'eternal boom' by simply continuing to print, as once envisaged by Keynes. All that will happen is that the ultimate disaster will be even greater. In fact, is seems ever more likely that the next disaster will be the last one of the current monetary system.
Italian bank holdings of Italian debt: €400 billion, an all time high. Oops.