Mervyn King gave a speech in Helsinki Finland today just before he takes retirement from the Bank of England in which he said that both austerity and growth were at fault of grossly exaggerated statements to purely political ends: "This debate has been vastly exaggerated by people who want to make political arguments”. He went on to add that it was a time for common sense.
It seems the correlation to USDJPY has started to disintegrate and what is more worrisome for the BoJ is the linkage between JGBs and the Nikkei 225. Equities in Japan are about to open to a modest bounce around 1.5% but JGB prices are down around 0.50 (half the limit-down price moves). So, the problem for the BoJ is - do you let JGBs flop to maintain your equity market's appearance of normality? Or are Japanese stocks about to be as implicitly repressed as the bond market? It would appear TPTB are doping their best to ramp the JPY to keep this bounce alive (USDJPY opening just shy of 102.50).
*AMARI SAYS 'ABENOMICS' IS PROGRESSING STEADILY (this is progress?)
*AMARI SAYS BOJ IS COMMUNICATING CLOSELY WITH MARKETS (we suspect the market is communicating back even more)
"Central bankers dream of getting back to "normal" – normal interest rates, a normal balance sheet, and so on. But that point isn't going to come any time soon. They are stuck on a money printing treadmill, and there appears no way off.
In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.
Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate. The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet. What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations.
Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.
News That Matters - Today's news in brief
Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.
- DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
- DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
- DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
- DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
- DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN
And the punchline:
- DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'
Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.
Preview of tomorrow's Bernanke testimony and FOMC minutes.
Fed chairman Ben Bernanke’s testimony to Congress will be important in setting the tone for the markets (particularly the dollar, equities and US treasuries), as traders hunt for clues on when the Fed is likely to ease its rate of asset purchases.
Central bankers overshadow the economic data in the week ahead.
Last week, Bill Gross did not mince his words when he said that he now "sees bubbles everywhere" and that "when that stops there will be repercussions" but for now Benny and the Inkjets, not to mention his band of merry statist men, who take from the poor and give to the wealthy, are playing the music on Max, and so one must dance and dance and dance. And after one legacy bond king, it was the turn of that other, ascendant one - Jeff Gundlach - to share his perspectives Bernanke's amazing bubble machine. His response, to nobody's surprise: "there is a bubble in central banking. We are drowning in central banking and quantitative easing.... And it's not ending until there are some negative consequences."
We are all embarked upon a grand new adventure. It just hasn't been announced yet. It will never be officially announced but we will all get to play this brand new game in any event. Originally many had provided the name, "Currency Wars," to our new game but recent comments and subtle indications have invalidated the title. The new title is, "Global Thermonuclear Devaluation." The outward appearance will be a "Currency Wars" game but that is just a distraction. There are other motives afoot here and deviousness and distraction are always part of great political maneuvers. Devaluation by fiat may also lead to Deflation by fiat and then we may well all find ourselves on the Dark Side.
We feel that now there is a Bermuda Triangle of economics - a space where everything tends to disappear without radar contact, a black hole in which rationality and science is replaced by hope, superstition and nonsense pundits pretending to understand the real drivers of the economy. The Bermuda Triangle in real life runs from Bermuda to Puerto Rico to Miami. The Economic Bermuda Triangle (EBT) one runs from high stock market valuations to high unemployment to low growth/productivity. There is a myth that the sunken Atlantis could be in the middle of this triangle. It has been renamed Modern Monetary Theory (MMT) to make it suit the black hole's main premise of ensuring there is a fancy name for what is essentially the same economic recipe: print and spend money, then wait and pray for better weather. The EBT is getting harder and harder to justify - if for nothing else because the constant reminders of crisis keep us all defensive and non-committed to investing beyond the next quarter. We all naively think we can exit the "risk-on" trade before anyone else. We are due for a new crisis. We have governments and central banks proactively pursuing bubbles. A long time ago, policymakers entered a one-way street where reversing is, if not illegal, then impossible.
There have been quite a few bold predictions, since the beginning of the year, that the dollar was set to soar and that the great "bond bull market" was dead. The primary thesis behind these views was that the economy was set to strengthen and inflation would begin to seep its way back into the system. Furthermore, the "Great Rotation" of bonds into stocks, on the back of said economic strength, would push interest rates substantially higher. While we have no doubt that at some point down the road that inflation will become an issue, interest rates will rise and the dollar will strengthen - it just won't be anytime soon. A wave of "disinflation" is currently engulfing the globe. The deflationary pressures that weigh on the consumer and the economy are likely going to keep downward pressure on rates for some time to come as the Fed comes to realize that they have been caught in the same "liquidity trap" that has plagued Japan for a generation. The real concern for investors, and individuals, is the actual economy.
It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."