So, globally interest rates are at ZERO or even negative and the markets have realized that QE doesn’t do much. What exactly does this leave for Central Banks to do?
In Which We Read That The "Proper Role Of A Central Bank Is To Counteract Market Turbulence Before It Happens"Submitted by Tyler Durden on 08/08/2014 13:03 -0500
Want to read a really terrifying article? Take a look at this August 6th Op-Ed piece in the FT by Draghi’s former colleague, Lorenzo Bini Smaghi: “The ECB Must Move to Counteract Market Turbulence”. Are you kidding me? This is what we have come to … that the proper role of a central bank is to counteract “market turbulence” before it happens? I’d laugh, but then I remember that Yellen means exactly the same thing when she refers to “macroprudential policy”, and I want to cry.
Late yesterday, after Nobel peace prize-winning president Obama revealed his latest military incursion, years of pent up can-kicking almost caught up with futures, which dared to tumble by a whopping 0.7%, a move which hit Europe far more than the US, and shortly after Europe's open, the Euro Stoxx 50 Index dropped 10% from its 2014 high, marking an official correction in Europe where the Dax continues to be the key risk indicator, and which dropped as low as 8,903 before recovering to a drop of only 0.9% while German Bunds continues to print record highs day after day on fears what the escalating Russian trade war will do to the German economy, and other such "costs." US futures meanwhile have seen most of their losses recovered thanks to the usual relentless low volume USDJPY levitation, which pushed ES down to just -0.2% after a nearly four times greater drop. Still, while futures may be surging, the 10 Year has not gotten the memo and remains stuck just above 2.36% or its lowest print since June 2013, a clear indication that at least the bond market has given up all hope of a so-called US recovery for the conceivable future. What is most important however, is that at this pace, the Friday confidence effect, i.e., a green close, may be recovered: let's all just wait and see what the NY Fed trading desk decides to do, and escalating world wars aside, let's just pretend that HY didn't just sugger the biggest weekly HY outflow in history didn't just take place.
This represents a tectonic shift in the financial markets. It does not mean that Central Banks will never engage in QE again. But it does show that they are increasingly aware that QE is no longer the “be all, end all” for monetary policy.
Outspoken non-status-quo thinker Reserve Bank of India Governor Raghuram Rajan may be set to have his central banker card revoked... for telling too much truth (here in 2012, here in 2013, and most recently here). Having previously noted that "international monetary cooperation has broken down," the WSJ reports that Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. Simply put, he concludes, "we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost."
There were some minor fireworks in the overnight session following the worst Australian unemployment data in 12 years reported previously (and which sent the AUD crashing), most notably news that the Japanese Pension Fund would throw more pensioner money away by boosting the allocation to domestic stocks from 12% to 20%, while reducing holdings of JGBs from 60% to 40%. This in turn sent the USDJPY soaring (ironically, following yesterday's mini flash crash) if only briefly before it retraced much of the gains, even as the Pension asset reallocation news now appears to be entirely priced in. It may be all downhill from here for Japanese stocks. It was certainly downhill for Europe where after ugly German factory orders yesterday, it was the turn of Europe's growth dynamo to report just as ugly Industrial Production which missed expectations of a 1.2% print rising only 0.3%. Nonetheless, asset classes have not seen major moves yet, as today's main event is the ECB announcement due out in less than an hour. Consensus expects Draghi to do nothing, however with fresh cyclical lows in European inflation prints, and an economy which is clearly rolling over from Germany to the periphery, the ex-Goldmanite just may surprise watchers.
Irony aside, the growth of income (trough to peak) during so-called 'economic expansions' has changed... and President Obama's "recovery" is the worst of the lot...
Steve Forbes has had enough of the Federal Reserve and its "sinning" policies to undermine the dollar. In this brief interview with Birch Gold Group, the publisher and CEO of Forbes, Inc. exposes the damage that the central bank has created, "Bernanke was a disaster...has totally mucked up the credit markets." Blasting Janet Yellen "who needs to go to re-education camp," Forbes explains why he believes so strongly in the gold standard, and the one single scenario under which he would ever sell his gold.
In the first seven months of 2014, Goldman notes that equity, fixed income, and FX markets were most intently focused on the labor market with a number of the largest moves occurring due to employment reports and jobless claims. The equity market responded to a mix of economic, monetary policy, and geopolitical news. The fixed income market focused on employment reports, although other factors also resulted in large one-day moves. The dollar, although less volatile than usual, did move on both US economic developments and news out of Europe.
Today, everyone believes that market price levels are largely driven by monetary policy and that we are all being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that market price levels are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.... There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass... It’s the public markets where faith has been lost, and that’s why the Golden Age of the Central Banker poses existential risks for firms and business strategies based on trading activity within those public markets.
Fed officials have repeatedly emphasized the importance of financial stability for monetary policy. But, as Goldman Sachs points out, knowing which financial and macroeconomic imbalances to monitor is challenging, not least because of the limited number of past crisis episodes in the US. To help The Fed, Goldman surveys a large economic literature that studies the effectiveness of "Early Warning Systems" (EWS) in detecting banking crises, costly asset price busts, and currency crises across a broad range of countries. While they suggest subtlely that the Fed is clueless with regard what to look for, they note that credit markets and asset-price run-ups (especially when they occur together) provide a statistically clear warning signal... and as we know, both are flashing red currently.
President Barack Obama has a direct message for the leaders of America’s biggest companies: if you have a complaint, you can keep your complaint. "If you look at what’s happened over the last four or five years, the folks who don’t have a right to complain are the folks at the top," Obama said in an interview with The Economist published over the weekend. As The WSJ adds, Obama maintained that complaints from corporate CEOs in the current environment should be taken with “a grain of salt” as most policies he has implemented have "generally been friendly towards business." In other words, thank me for the recovery, but don't blame me for the inequality - an irony we have noted numerous times.
Unlike last week's economic report deluge, this week has virtually no A-grade updates of note, with the key events being Factory Orders (exp. 0.6%), ISM non-mfg (exp. 56.5), Trade balance (Exp. -$44.9 bn), Unit Labor Costs (1.2%) and Wholesale Inventories (0.7%).
- New War Risk on Russia Fringes Amid Armenia-Azeri Clashes (BBG)
- Palestinians accuse Israel of breaking seven-hour Gaza truce (Reuters)
- Argentine Default Sours Outlook for Peso as Talks Ordered (BBG)
- Espírito Santo Saga Entangles Swiss Company (WSJ)
- Booming African Lion Economies Gear Up to Emulate Asians (BBG)
- CME Profit Falls as Trading Volume Declines (WSJ)
- Why Recalled Cars Stay on the Road (WSJ)
- London Renters Win in Billionaire Backyard as Prices Soar (BBG)
- Junk-Debt Liquidity Concerns Bring Sales (WSJ)
- Rescuers race to find survivors after 400 die in China quake (AFP)
In recent weeks France has defied US demands not to build Mistrals for Russia, has questioned dollar imperialism and the Petrodollar, and has blasted the US banking regulator's fines as "accelerating the decline of the dollar." So it is likely not a huge surprise that ahead of the G-20 meeting of world leaders later in the year, The FT reports, France has gathered support to challenge US regulators imposing heavy penalties on foreign banks. Berlin, London and Rome have backed Paris in its push to have its concerns about so-called US extraterritoriality discussed when leaders of the world’s top 20 economies meet hoping to bring "more proportionality" to bank fines. With allies like this...