Monetary Policy

All you need to read.

What is more amusing than the pathological liars that are Tim Geithner or Ben Bernanke testifying to congress? Both of them testifying at the same time. Such as now. From C-Span: Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke go before the House Oversight and Government Reform Committee Wednesday to discuss lessons learned from Europe’s sovereign debt crisis. In a hearing titled, “Europe’s Sovereign Debt Crisis: Causes, Consequences for the United States and Lessons Learned,” both financial chiefs will share their personal experiences.  Since the crisis, the Federal Reserve has assisted foreign counterparts by provide monetary support. In November, the Fed and it's worldwide counterparts announced a cut in the interest rate premium charged to over seas banks which borrow in dollars.  The monetary policy targeted struggling European banks. In a Senate hearing earlier this year, leading economists also testified on the European debt crisis and the outlook for the eurozone. They said that the U.S. should treat the crisis as a wake-up call and urged lawmakers to bring down debt and spending to sustainable levels.

Earlier today, Goldman's Peter Oppenheimer made the news following publication of his report "The Long Good Buy" posted here. In itself, that would be nothing spectacular - just one man's opinion. However, when taken in the entirety of Goldman's views on the world, it bears some criticism, because while on one hand we have a key Goldman strategist telling the world it is all clear in stocks, virtually at the same time Goldman's chief economic strategist, Jan Hatzius, who is German, gave the following interview to Handelsblatt, in which he lays out his "doubts about an early recovery of the U.S. economy. In this interview he explains why positive unemployment figures are deceptive, and why the real estate crisis will have lasting effect." Perhaps his most important observation, when asked if Americans have learned anything from the crisis: "I do not think there has been a big change in behavior. During the crisis, Americans simply responded to the realities. They could no longer borrow as much money. Now again a little more credit is available, and you can borrow some more money again. But I do not think there has been a fundamental change." Alas he is correct, and incidentally the reason why Goldman has such a massive credibility problem is that while on one hand one part of the firm goes ahead and pitches equities, on the other, a respected economist says that the economy is so sluggish that he gives a greater than 50% chance of more QE. Perhaps at this point it is bear reminding what a third Goldman strategist said back in October 2010: "Goldman Sachs Admits The Truth: "The Economy Is Not The Market And QE2 Is Not A Panacea." Then again, with career risk once again paramount for every money manager out there, as the bulk of hedge funds once again underperform the market, perhaps not.

The EURUSD, Treasuries, and European sovereign spreads had been leaking in a risk-off direction from around 530amET this morning but European risk assets (followed quickly by US) accelerated shortly after comments by Citi's Willem Buiter, in a scathing Bloomberg Radio interview that pulled no punches with regard to US and European fiscal and monetary policy, noted Spain is 'at greater risk than ever before' of debt restructuring. The EUR reacted quickly and started to drop - now lower on the day - and sovereign spreads (which had been leaking gently wider) accelerated. "Spain is the key country about which I'm most worried", Buiter added, "and it has moved to the wrong wide of the spectrum". Simultaneously the DAX dropped (after stabilizing at slightly positive levels from a higher open) shifting into the red, US Treasuries went bid with the 10Y yields dropping almost 5bps from its overnight highs, and US equity futures fell 4pts back to unch. European corporate credit is still digesting the technicals of the roll and is less reactive so far though broadly speaking equities are underperforming.

Heading into the North American open, EU stocks are seen lower across the board as market participants reacted to cautious comments from Moody’s rating agency on Spain, which noted that Spain’s fiscal outlook remains challenging despite easier targets. Still, the ratings agency further commented that easier targets do not affect Spain’s A3 government bond rating with a negative outlook. Separately to this, a BHP Billiton executive said that Chinese demand for iron ore is flattening, while according to China's state-backed auto association, China's vehicles sales this year will probably miss their growth forecasts. As a result, basic materials sector has been the worst performing sector today, while auto related stocks such as Daimler and VW also posted significant losses. The ONS reported that inflation in the UK fell to 3.4% in February, down from 3.6% in January. However, higher alcohol prices stopped the rate declining further. Going forward, the latter half of the session sees the release of the latest US housing data, as well as the weekly API report.

We (and Charles Biderman) have previously discussed the seasonal adjustments to NFP data, which while potentially credible in a releveraging context, is far less meaningful when used on apples to apples basis for months in which there is material wholesale deleveraging and record warm weather. Yet the rub lies precisely in the seasonal adjustment, which for January and February has "added" nearly 4 million jobs based on nothing but historical regression patterns, and the "beats" represented less than 5% of the total addition, implying even a modest miscalculcation would have had a huge impact on market, and political, interpretation of the data (as explained here). Today, it is the turn of Art Cashin, quoting Lakshman Achuthan, to provide his take on "unadjusted seasonal adjustments."

This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.

The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine. That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.

Marc Faber does not mince words. He believes the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world's currencies on an inexorable, accelerating inflationary down slope. The dangers of money printing are many in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions. It's no surprise then that he's feeling particularly defensive these days. While he generally advises those looking to protect their purchasing power to invest capital in precious metals and the equity markets (the rationale being inflation should hurt equity prices less than bond prices), he warns that equities appear overbought at this time.

 I believe Central Bank intervention is not a drug or “hit” for an addict. Instead, it is a cancer that has spread throughout the financial system’s psyche and which is killing the markets and Democratic capitalism.

Ahead of the US open, markets are exhibiting some modest risk appetite, with all major European bourses trading higher, and financials outperforming all other sectors. There has been little in the way of key data from Europe, however we have seen the Eurozone Trade Balance coming in alongside expectations in the seasonally adjusted reading. Bund futures continue to move lower in recent trade as US participants come into the market, with the 10-year German yield crossing the 2% level to the upside, trading at a level not seen since the 10th February. Bunds may also have experienced some pressure following the release of a research note from a major US bank recommending rotation trade with the selling of bonds and the buying of equities. USD/JPY is seen trading higher ahead of the US open following the overnight release of some relatively dovish BoJ minutes, with commentary suggesting further easing in Japan in the future. Taking a look at the energy complex, The IEA have commented on yesterday’s speculation concerning the use of the US’ Special Petroleum Reserve, stating that they have not received any contact regarding any emergency oil release. As such, WTI and Brent crude futures are seen higher; however they have seen some selling off in recent trade.

Confused why every asset class is up again today (yes, even gold), despite the pundit interpretation by the media of the FOMC statement that the Fed has halted more easing? Simple - as we said yesterday, there is $3.6 trillion more in QE coming. But while we are too humble to take credit for moving something as idiotic as the market, the fact that just today, none other than Goldman Sachs' Jan Hatzius came out, roughly at the same time as its call to buy Russell 2000, and said that the Fed would announce THE NEW QE^TM, as soon as next month, and as late as June. Furthermore, as Goldman has previously explained, sterilization of QE makes absolutely no difference on risk asset behavior, and it is a certainty that the $500-$750 billion in new money (well on its way to fulfilling our expectation of a total $3.6 trillion in more easing to come), in the form of UST and MBS purchases, will blow out all assets across all classes, while impaling the dollar. Which in turn explains all of today's action - dollar down, everything else (including bonds, which Goldman said yesterday to sell which we correctly, at least for now, said was the bottom in rates) up. Finally, as we said, yesterday, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals." Because when the market finally understands what is happening, despite all the relentless smoke and mirrors whose only goal is to avoid a surge in crude like a few weeks ago ahead of the presidential election, gold will be far, far higher. Yet for some truly high humor, here is the justification for why the Fed will need to do more QE, even though Goldman itself has been expounding on the improving economy: "The improvement might not last." In other words, unless the "economic improvement" is guaranteed in perpetuity, the Fed will always ease. Thank you central planning - because of you we no longer have to worry about either mean reversion or a business cycle.

We have previously discussed the substantial, and growing, threat to the German economy that is the Bundesbank's negative TARGET2 balance, which we have formerly dubbed Europe's €2.5 trillion closed liquidity loop, which just rose to a new record over €550 billion (in "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?", "Goldman's Take On TARGET2 And How The Bundesbank Will Suffer Massive Losses If The Eurozone Fails", and most recently  in "Dear Germans: Bring Out Ze Checkbooks") which in turn merely represents the taxpayer funded capital flow to insure that the Eurozone remains solvent for one more day as Germany's peripheral trading partners receive rescue capital every day in the form of recycled German current account surplus. It now appears that the Bundesbank president has taken to these allegations of monetary instability strongly enough to where he has just released the following response on Target2 in "What is the origin and meaning of the Target2 balances?" Full letter below.

All you need to read.

In keeping with the tradition of waking up to reality with a several month delay on downgrades (if being the first to upgrade insolvent Eurozone members), here comes Fitch, to boldly go where Moody's went long ago.

• UNITED KINGDOM L-T IDR OUTLOOK TO NEGATIVE FROM STABLE BY FITCH
• FITCH AFFS UNITED KINGDOM AT 'AAA'; REVISES OUTLOOK TO NEGATIVE

As a reminder, UK consolidated debt/GDP is... oh... ~1000%