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.
Don't Blame Free Market Capitalism ... We Haven't Had It for a While
Following the Fed’s surprise decision not to ‘taper’ its asset purchases this month, market participants feel misled. That’s hardly a surprise to UBS' Amit Kara who has long argued that central banks have limited ability to guide markets, given that their policies must adjust to hard-to-predict outcomes. Policy pre-commitment is an oxymoron, and central bankers who pledge ‘forward guidance’ do so at considerable risk to their credibility. In an inherently uncertain world, central bankers must adjust current policies to achieve those outcomes. That makes it impossible to pre-commit to a given policy, given that flexibility is required to respond to unforeseeable circumstances.
This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.
When back in February 2012 we first suggested (sarcastically) "A Modest Proposal To Boost US GDP By $852 Quadrillion: Build The Imperial Death Star" which as the title suggested, was a quick and easy way to boost US GDP by $852 quadrillion through 'building' the Imperial Death Star (on credit of course - remember: in modern finance, one's "growth" is only limited by how much debt they can issue), little did we know that this would promptly become a viral campaign which in early 2013 culminated with a White House petition to do just this thing. Unfortunately, since then things have devolved so much that science fiction is rapidly becoming the bedrock of both US fiscal and monetary policy. So as we continue to slide down the rabbit hole of insolvency, in a world of peak absurdity, it only makes sense to revisit some comparable, if smaller scale, ideas that may at least prevent another imminent middle east conflict false flag, seeking solely to boost the US economy. Presenting: space ships.
Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.” That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready. All of this is just hard reality. The best way to prepare is to limit the use of credit in boom times, prevent individuals and companies from borrowing too much, and set high capital requirements for all banks and other financial institutions. The Fed surprised markets last week by deciding to maintain its quantitative-easing policy. But that underscores a larger point for non-US economies: You never know when the Fed will tighten. Get ready.
Following yesterday's modest bounce in equities punctuated by the traditional last minute spike, sentiment has reverted lower once again, driven by the uncertainty surrounding debt ceiling talks in the US, where lawmakers have until next Tuesday to agree to a spending bill, or much of the government will shut down. The Senate will vote on a spending bill later today, which will then be sent back to the House putting republicans in a quandary (Politico explains the complications surrounding the GOP's "Plan C"). It was reported that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill before debating the debt-limit debate. In FX, GBP strengthened across the board this morning after BoE’s Carney said he does not see a case for more quantitative easing.
Taper or no Taper. Tapering is not tightening but flow is more important than stock. Doves being hawkish and hawks fearfully dovish... We have seen it all in the last few weeks. In order to keep it all in perspective, Credit Suisse have created this simple cheat-sheet of their informal determination of the Fed official's policy biases based on each official’s voting history and public comments.
As we warned two weeks ago in "Bernanke's Helicopter is Warming Up", it seems (from the Fed's once uberhawk and now superduperdove Kocherlakota's speech this morning) that the Fed is catching on as to what it needs to do. And what it has no choice but to do. Borrowing from the Europeans, Kocherlakota uttered those three special words: KOCHERLAKOTA SAYS FED MUST DO "WHATEVER IT TAKES" TO AID GROWTH.
There's growing speculation that China will soon announce an overhaul of its financial system to address increasing risks from escalating debt.
Almost 3 years ago we noted the oddly hubris-full confidence of Ben Bernanke of his ability to "exit" from the experimental extreme monetary policies:
"You have what degree of confidence in your ability to control this?" Bernanke: One hundred percent.
But last night we got the truth from Fed's Dudley, who more realistically stated:
Dudley: "Exit from these unconventional set of policies is certainly feasible... But we do have to be a bit humble about what we don’t know."
So which is it? Who do you believe?