Monetary Policy

When QE Leads To Deflation: A Look At The "Confounding" Global Supply Glut

"The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand," WSJ notes, suggesting yet again that QE can cause deflation when those who have access to easy money overproduce but do not witness a comparable increase in demand from those to whom the direct benefits of ultra accommodative policies do not immediately accrue.

The "War On Cash" Migrates To Switzerland

It is undoubtedly a huge red flag when in one of the countries considered to be a member of the “highest economic freedom in the world” club, commercial banks are suddenly refusing their customers access to their cash. This money doesn’t belong to the banks, and it doesn’t belong to the central bank either. If this can happen in prosperous Switzerland, based on some nebulous notion of the “collective good”, which its unelected central planners can arbitrarily determine and base decisions upon, it can probably happen anywhere. Consider yourself warned.

What Will Happen To You When The Dollar Collapses?

The day after the crash (and thereafter), what will be the currency that is used to buy a bag of groceries, a tank of petrol, a meal at a restaurant? Certainly, the need will be immediate and will be on a national level in each impacted country, affecting everyone. Many believe the US will be prepared ahead of time with a new, electronic currency - US citizens will then become the most economically controlled people in the world, overnight. A further possibility is taking place in Mexico today. Mexico is remonetising silver. As the Great Unravelling proceeds, we would be wise to monitor what happens with the Libertad in Mexico and watch for a similar return to precious metals in other jurisdictions.

Volatility Is The Square Root Of Time & Fat Tails

The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail which can be instrumental in moving forward the Federal Reserve’s timeline for lift-off zero bound rates.  The intuition here is stooped in concepts of volatility and how market structure evolution may contribute or detract from asset volatility. Volatility is the square root of time. Financial repression times time equals volatility. Financial repression and/or macro-prudential policy times time equals the inverse of financial stability. Financial stability inverted equals volatility squared.

The Fed Lives In The Past

The picture of this very old telephone reminds of our “esteemed” Federal Reserve. They really seem incapable of any modern thought. Their parallels to, and fears of, the Great Depression [Former Chair Bernanke], seem to drive 2009-2015 monetary policy. It reminds me of incredibly stale thinking... sort of like their incredibly stale personalities. I suppose it’s a good match for them but not for the citizens of the world subjected to their currently ineffective and intellectually lazy policies... rooted in very ancient [just like most of them] history.

5 Things To Ponder: Market Soup

Operating and reported earnings have turned sharply lower over recent quarters which has historically been associated with major market peaks. As shown below, it is also important to notice that revenue has tended to lag these downturns in earnings previously. This is because the measures used to substantially boost profitability from each dollar of revenue generated through accounting gimmickry, share repurchases, and cost cutting are finite in nature. When the effect of those manipulations fade, so does the inflated profitability generated from each dollar of revenue. This will be something worth watching closely over the next few quarters particular as the commentary of a "continued secular bull market" continues to hit the headlines.

Norway's Giant Sovereign Wealth Fund Goes Full Tinfoil Fringe Blog

You know the world has gone mad when one of the world's largest pension funds, mired in its need for the maintenance of the status quo, begins to sound like 'digital dickweeds in their parents' basements'. Norway's massive $890 billion wealth fund has stepped out of the shadows to slam global central bankers for affecting "pricing in today’s market to such an extent that monetary policy itself has been a risk you have to watch;" and market structure, criticizing the proliferation of dark pools, "there’s a rent extraction from all these intermediaries... we’re in favor of trying to reduce the number of block-crossing venues," Schanke said, "one would probably be perfect."

3 Things: Kass, Rosie and Short

The reality is, like dominoes, that once one of these issues becomes a problem, the rest become a problem as well. Central Banks have had the ability to deal with one-off events up to this point by directing monetary policy tools to bail out Greece, boost stock prices to boost confidence or suppress interest rates to support growth. However, it is the contagion of issues that renders such tools ineffective in staving off the tide of the next financial crisis. One thing is for sure, this time is "different than the last" in terms of the catalyst that sparks the next great mean reverting event, but the outcome will be the same as it always has been.

Futures Unexpectedly Red Despite Disappointing Economic Data From Around The Globe

Today is shaping up to be a rerun of yesterday where another frenzied Asian session that has seen both the Shanghai Composite and the Nikkei close higher yet again (following the weakest Chinese HSBC mfg PMI in one year which in an upside down world means more easing and thus higher stocks) has for now led to lower US equity futures with the driver, at least in the early session, being a statement by the BOJ's Kuroda that there’s a "possibility" the Bank of Japan’s 2% inflation target will be delayed and may occur in April 2016.

"Above The Law" Fed Ignores Congressional Deadline On FOMC Minutes Leak Probe

In a stunning shun to Congressional lawmakers, WSJ reports that The Fed has failed to comply with a request that the bank-owned entity identify the individuals who leaked The FOMC Minutes to Medley Global Advisors a day before the official release in October 2012. Rep. Jeb Hensarling sent a letter to Fed Chairwoman Janet Yellen on April 15 asking the Fed to name them by 5 p.m. EDT April 22. The deadline passed without any response by the Fed...

The Humility Of Rates And The Arrogance Of Equities

In 2014, all but a few argued that the path of interest rates was certainly higher. Despite a steady decline beginning on January 1st of 2014 and continuing today, everyone still insists strenuously that interest rates simply have to go up. What if all the arguments about growth in the US economy and much anticipated rate hikes by the Federal Reserve hinged upon a decision-making premise that is flawed? What if instead of the standard and variety of factors informing the consensus perspective about the direction of interest rates it is actually interest rates themselves that are sending signals that should inform our perspective about all other things?

Stop The Presses: Nobel-Prize Winning Economist Slams QE

"An alternate, more sophisticated approach to explaining why QE may not work to stimulate aggregate consumption is, perhaps, because the demographic mix of the U.S. (and most parts of the developed world) has shifted toward older people. Unlike 30 or 40 years ago, the enormous baby boomer generation, and even retirees, are much wealthier (including human capital) than in the past, and they are wealthier than current generations earlier in their life cycle.  So the wealth effect does not lead to an increase in consumption and, potentially, has the opposite outcome."

- Robert Merton