Real Interest Rates
The only thing that can be said about Janet Yellen’s simple-minded paint-by-the-numbers performance yesterday is that the Keynesian apotheosis is complete. American capitalism and all political life, too, is now ruled by a 12-member monetary politburo, which is essentially accountable to no one except its own misbegotten doctrine that prosperity flows from the end of a printing press.
You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night. We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that "to all intents and purposes, there is no JGB market." And this lack of trading on a day when major macro data printed far worse than expected... well played Abe... you entirely broke your bond market.
Der Spiegel deemed it was the “end of capitalism”, while Die Welt described Mr Draghi as Europe’s Bismarck and as a near autocrat beyond control. Throughout history, currency debasement has been the easy option for emperors, kings, queens and governments. It is the easy option of central banks and of Goldman's Draghi today.
In his recent note “Treacherous Market Conditions,” Scotiabank's Guy Haselmann attempted to outline the precarious position the FOMC has put itself in. The Fed’s depleted ammunition applies greater pressure on its attempts to ensure a strong recovery; yet, as Haselmann hinted, the Fed is in a race against time, because risks to financial stability aggregate with each passing day, while economic benefits approach zero. Despite differences as to the extent and degree of financial risks, FOMC members have (finally) become aware that they have arisen. Draghi seems to share concerns about bubble conditions... and now the BIS fears that a "persistently aggressive monetary policy risks exacerbating collateral damage."
Gold surged 1.6% in euros to €928/oz after the historic ECB announcement to adopt negative interest rates. Cheap money, financial repression and currency debasement are classic recipes for short term financial and economic gains. Throughout history, they have been the easy options for emperors, kings, queens and governments. They are the easy option for the ECB and central banks today.
Interview: Bailins May Cause Bank Runs and Capital Controls In Western World - Russia, China Opt OutSubmitted by GoldCore on 05/14/2014 18:05 -0400
And in Cyprus when it happened, the authorities said it was a once-off, because of all of the hot Russian money that is in Cyprus, and this will not happen anywhere else...but meanwhile they are planning for that scenario in most of our countries. People need to be aware of that and they need to prepare.
This time is different - check; Moral Hazard - check; Easy Money - check; Overblown growth stories - check; No valuation anchor - check; Conspicuous consumption - check; Ponzi finance - check... and, of course, Irrational exuberance: check!
*YELLEN SAYS FED COMMITTED TO ACCOMMODATION TO SUPPORT RECOVERY
Markets will be hanging on every word of what is likely Janet Yellen's first monetary policy speech and even more so the Q&A afterwards as she suggests that a considerable time is more than 6 months, and the delicate balance she has to play between admitting the economy is ugly while admitting that QE is over no matter what... all the while maintaining some semblance of credibility. One has to wonder if the ripfest rally of the last 24 hours is a buy the rumor ramp ahead of a sell the Yellen news event as once again she is tested...
The EU agreement on a common rulebook for handling bank failures, including bail-ins, is in danger of unravelling over the fine print restricting when a state can intervene to rescue a struggling bank. It is important to realise that not just the EU, but also the UK, the U.S., Canada, Australia, New Zealand and most G20 nations have plans for depositor bail-ins ...
The monetary watchdog says so...
The reasons to hold gold (and silver), and we mean physical bullion, are pretty straightforward. So let’s begin with the primary ones:
- To protect against monetary recklessness
- As insulation against fiscal foolishness
- As insurance against the possibility of a major calamity in the banking/financial system
- For the embedded 'option value' that will pay out handsomely if gold is re-monetized
The punch line is this: Gold (and silver) is not in bubble territory, and its largest gains remain yet to be realized; especially if current monetary, fiscal, and fundamental supply-and-demand trends remain in play.
Bill Gross lost "Bob" this week. The death of his cat sparked some longer-term reflection on the hubris of risk-takers, the mirage of magnificent performance, and the ongoing debate in bond markets - extend duration (increase interest rate risk) or reduce quality (increase credit risk). As the PIMCO boss explains, a Bull Market almost guarantees good looking Sharpe ratios and makes risk takers compared to their indices (or Treasury Bills) look good as well. The lesson to be learned from this longer-term history is that risk was rewarded even when volatility or sleepless nights were factored into the equation. But that was then, and now is now.
Being that markets are unrigged and all, at least according to every single proponent of HFT that is, futures have done their overnight levitation as they have every day for the past month driven by the one staple - the Yen carry trade - even if in recent days the broader market slump during the actual daytrading session mostly impacted biotechs yesterday. And since any news is good news, we don't expect today's main event, the ECB's rate announcement and Draghi press conference, both of which are expected to announce nothing new despite Europe's outright inflationary collapse which most recently dropped to 0.5%, the lowest since 2009.
Contrary to most consensus views (including Citi's FX technical group) EURUSD has failed to move lower in 2014. Why?
As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these 'IOUs of past economic activity' would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put, there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?