"Central Bank Post-Crisis Quasi-Coordination Has Broken Down"

Tyler Durden's picture


From Guy Haselmann of ScotiaBank

Out There Beyond the Wall

Germany, France, Japan and the Eurozone are expected to follow Italy with flat or negative Q2 GDP when the data is released this week. Italy’s economy grew at -0.2% in Q2 and has not grown in over 10 years. Japan’s Q2 number tonight is expected to show an annualized decline worse than 7% (maybe <10%). These four countries collectively account for 18% of global GDP. 

In a globalized world with vast inter-connected supply chains, protectionism poses the most dangerous risk to economic growth.  Sanctions against Russia combined with significant counter-measures have spanned and impacted international trade between dozens of countries.  In India, newly-elected Modi’s government doubled the minimum price of exporting onions, and doubled tariffs on imported sugar to buoy the local industry.  Sovereign actions to improve competitiveness are often taken to weaken a countries currency, but imposing tariffs and imposing protectionist laws have similar results but with far quicker and more targeted results.

China’s powerful National Development and Reform Commission has gone after many multi-national foreign firms, hiding behind allegations of anti-monopoly practices (for WTO reasons).  There have been several heavily-publicized raids where Chinese officials have interrogated corporate executives and confiscated computers. Some believe the motivation behind the raids is to incite nationalism to give a boost to less-competitive domestic products.  Some of the firms involved include: Apple, Google, Walmart, Starbucks, McDonalds, Microsoft, Qualcomm, Symantec, and Chrysler.  Executives fear the next step is seizure of property.

The global monetary system is diverging and fraying.  Central bank post-crisis quasi-coordination has broken down.  Initially, foreign central banks unhappily followed the Fed in cutting rates toward zero; or else risked an appreciating currency affecting competitiveness. As domestic challenges developed and the Fed initiated ‘tapering’, many central banks pushed rates back up.  Developing world economies have grown from around 30% of global GDP 20 years ago to 50% today.  This improvement has helped motivate the unfolding of a new international economic order between developed and developing world economies. 

Geo-political tensions seem to inch ever-higher with each passing day.  Protectionist actions are on the rise.  Relationships amongst global trading partners are being altered. Supply chains are being disrupted. Shifting Fed policies are unsettling current imbalances (Note: The Jackson Hole forum begins Aug 21).  Too many investors remain exposed to too many financial securities where, simply put, they are not being adequately compensated for the risk. 

  • Portfolios need to adjust to the changing landscape.  Cash is king. Holding outsized allocations of cash has high optionality and low opportunity costs.  The most liquid securities should command a liquidity premium.  On-the-run Treasuries and high-quality corporates are preferred to most securities down the capital structure. The curve will continue to flatten over time.  A liquidity-compromised over-shoot in risk assets is highly probable in the next few months. 

Investors should refrain, as much as possible, from being lulled into complacency by low market volatility or the Fed’s bold promises of providing a “highly accommodative stance” of monetary policy and a “gradual pace” of normalization. Markets are likely in for a wild ride for the balance of the year, due foremost by shifting central bank actions, rising geo-political tensions, and increasing protectionist actions.

For the most part, financial asset prices have performed well over the past 30 years. “Buy dip” typically worked. The main catalyst has been the Fed’s stair-stepping interest rates from the ‘high-teens’ to zero.  However, since official rates have now (5 years ago) reached the end of the line (i.e. zero or ZIRP), and since the Fed balance sheet has reached its practical limit ($4.5 trillion or 40% of the market), shouldn’t risk assets have a negatively skewed risk/reward profile because the main upside catalyst has been exhausted? 

  • After all, prices can no longer be powered much further by interest rates.  At some point equity valuations get ahead of themselves and can only be justified by above average economic growth (but the US is more likely to be trapped in the ‘new normal’).

Paying higher asset price levels today lowers expected and actual returns tomorrow (that’s the simple math).  Earning ever-lower returns creates a feedback loop of ever-extending risk profiles in search of better expected returns.  The lower yields fall and the higher prices rise, the greater the risk.  Fed-created moral hazard has cause irrationally low “risk premiums” at the precise time that there is enormous political and economic uncertainties, and little visibility.

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Tue, 08/12/2014 - 18:26 | 5084333 max2205
max2205's picture

No new highs today?

Tue, 08/12/2014 - 18:36 | 5084374 Escrava Isaura
Escrava Isaura's picture

When Cramer tells me to buy their banks... I know the end is near.


Tue, 08/12/2014 - 18:44 | 5084402 kaiserhoff
kaiserhoff's picture

Developed world economies have grown from around 30% of global GDP 20 years ago to 50% today. 

He must mean "developing" or the rest of the piece makes no sense.  Does anyone proof read anymore?

Sloppy, shallow, same old same old.

Tue, 08/12/2014 - 18:58 | 5084461 Cognitive Dissonance
Cognitive Dissonance's picture

"Does anyone proof read anymore?"

No. It's all about just in time publishing. And speel chck.

Tue, 08/12/2014 - 19:03 | 5084488 Boris Alatovkrap
Boris Alatovkrap's picture

When Central Bank coordination is break down (what is difference, break up, break down...?), is good time for geo political conflict. Remember, all war is bankster war!

Tue, 08/12/2014 - 19:15 | 5084534 NOTaREALmerican
NOTaREALmerican's picture

Re:  what is difference


You "break up" with your girl-friend/boy-friend/multi-gendered-friend.

MC Hammer "breaks it down". 

MC Hammer - U Can't Touch This - YouTube
Tue, 08/12/2014 - 19:03 | 5084465 Escrava Isaura
Escrava Isaura's picture

Sorry. Can't comment! Not gute Englisch.


Tue, 08/12/2014 - 19:05 | 5084490 NoDebt
NoDebt's picture

No, I think he meant developed.

Past tense.  As in "we're done developing them now.  If you don't like the result, please drop a comment in the suggestion box and somebody will get back to you.  Maybe."

Tue, 08/12/2014 - 19:10 | 5084514 Yen Cross
Yen Cross's picture

 Wow, that was englightening! Where would you like your 'batwing tuna wraps' sent?

Tue, 08/12/2014 - 18:26 | 5084334 fonzannoon
fonzannoon's picture

You don't judge central bank coordination by GDP you judge it by bond yields. 

Tue, 08/12/2014 - 18:48 | 5084419 kaiserhoff
kaiserhoff's picture

Yes, either he has a bot cranking this crap out for him, or he needs to check his meds.

Tue, 08/12/2014 - 18:27 | 5084335 ekm1
ekm1's picture

Only paper cash is king.

Electronic cash is screwed, if in large amounts.


Listen to me:

Either Financial Wipeout or World gives up on USD. You'll see dead executives lying on streets.



Tue, 08/12/2014 - 18:37 | 5084378 fonzannoon
fonzannoon's picture

ekm here is some actionable advice.


Tue, 08/12/2014 - 18:41 | 5084390 ekm1
ekm1's picture


Tue, 08/12/2014 - 18:49 | 5084430 MASTER OF UNIVERSE

Financial Wipeout is here and the World already gave up on USD for all intents and purposes. Just the mere move away from USD signals

an ever increasing trend out of USD. BRICS is emblematic of the fall of the USA and the USD collectively. America is set for Chapter 11 and

Hegelian spirals of death across the board IMHO. Executives lying dead in the streets is exagerated too. They will assimilate into the crowd when shtf. The 1%ers will board planes out to vacation on an island

in the tropics while the Zombies duke it out for the last can of dog food

and a tin of stewed tomatoes.

Tue, 08/12/2014 - 19:10 | 5084515 spinone
spinone's picture

we'll know this is over when 4 things happen:

banks are subjected to their old glass-steagall rules

banks must mark to market

interest rates are above 6 percent

CAPE is below 18

Tue, 08/12/2014 - 19:17 | 5084540 NOTaREALmerican
NOTaREALmerican's picture

Or the sun burns out, which-ever happens first.

Tue, 08/12/2014 - 19:53 | 5084682 ekm1
ekm1's picture

You will see dead executives assassinated on streets if wipeout not allowed

Tue, 08/12/2014 - 22:05 | 5085326 Kprime
Kprime's picture

hmmm,, how do you assassinate a "dead executive"?

wouldn't it be more fun to assassinate a live executive?

Wed, 08/13/2014 - 01:09 | 5085858 bluskyes
bluskyes's picture

Naah, live ones can only be assassinated once. Dead ones can be assassinated in purpetuity.

Wed, 08/13/2014 - 06:35 | 5086215 CHX
CHX's picture

Actually the earth will burn up before the sun burns out. Read up on the sun's fate! But I doubt this will ever be a problem of H. sapiens.

Tue, 08/12/2014 - 18:29 | 5084346 SheepDog-One
SheepDog-One's picture

All the petrodollar has going for it is military threats, and they can only be so many places at once and after a while the fear of threats fade anyway.

Tue, 08/12/2014 - 18:30 | 5084351 TheSecondLaw
TheSecondLaw's picture

Diminishing returns...such a drag.

Tue, 08/12/2014 - 18:30 | 5084355 ebworthen
ebworthen's picture

Central Banks are kind of like Quasimodo, his evil doppelganger that is.

Tue, 08/12/2014 - 18:35 | 5084372 q99x2
q99x2's picture

When are we going to fight? I wanna fight.

Wed, 08/13/2014 - 06:31 | 5086210 CHX
CHX's picture

Buy silver.

Tue, 08/12/2014 - 18:47 | 5084407 Yen Cross
Yen Cross's picture

   Has broken down?   How on Gods great green Earth is there only a 4+ basis point (risk premium/spread) between the US T-10 and Spanish debt?

   US 10Y Yield    2.449    2.420    2.451    2.415    +0.029    +1.20%    22:01:00
    Spain 10Y       2.491    2.472    2.559    2.463    +0.018    +0.77%    18:40:50


Italy 10Y 2.738 2.733 2.807 2.720 +0.005 +0.18% 18:40:52

 Even Italy back in a full blown recession, is only 29 basis points off the T-10? 

Tue, 08/12/2014 - 18:48 | 5084424 fonzannoon
fonzannoon's picture

yes exactly contradicts the whole article.

Tue, 08/12/2014 - 18:52 | 5084440 Yen Cross
Yen Cross's picture

  Thanks Fonz. +1

Tue, 08/12/2014 - 18:55 | 5084456 ekm1
ekm1's picture

sovereign yields and not edible, neither can they be used to fuel a car

Tue, 08/12/2014 - 19:04 | 5084482 fonzannoon
fonzannoon's picture

ekm, how about this oversupply in brent crude happening in the U.S lately driving prices down?



king dollah rises again

have not seen crashisoptomistic around lately....

Tue, 08/12/2014 - 19:49 | 5084667 ekm1
ekm1's picture

Inflation is properly measures in 10+ year spans.

Check gas price in 2003.

Some relief now is equal to a knife driving slower through the heart, but still drivingg through 

Tue, 08/12/2014 - 21:58 | 5085293 techstrategy
techstrategy's picture

Brent oil prices are going down as part of economic warfare against Russia.  When have we ever seen conflict on oil producing nations lead to a drop in prices outside of this instance.  Use your brain people.

Tue, 08/12/2014 - 21:59 | 5085295 techstrategy
techstrategy's picture

Brent oil prices are going down as part of economic warfare against Russia.  When have we ever seen conflict on oil producing nations lead to a drop in prices outside of this instance.  Use your brain people.

Tue, 08/12/2014 - 21:58 | 5085298 techstrategy
techstrategy's picture

Brent oil prices are going down as part of economic warfare against Russia.  When have we ever seen conflict on oil producing nations lead to a drop in prices outside of this instance.  Use your brain people.

Tue, 08/12/2014 - 19:07 | 5084494 Yen Cross
Yen Cross's picture

 Sovereign yields most certainly reflect collusion between central banking policy.

   Just as in credit markets and FX markets there's flow. Who decides the flow is open for debate, but non-the-less flow is what keeps these rates close. There's collusion between central banks PERIOD!

  What ever your "conspiracy theory" is ekm, one fact reamains constant. For public investment, also dark pool investment, "Central Banks" are recognised collateral management systems.


Tue, 08/12/2014 - 19:08 | 5084507 fonzannoon
Tue, 08/12/2014 - 19:45 | 5084651 ekm1
ekm1's picture

Investing in real output is not possible if the suppliers use less or outright reject of your money

Tue, 08/12/2014 - 19:48 | 5084658 fonzannoon
fonzannoon's picture

which is not happening

Tue, 08/12/2014 - 19:51 | 5084674 ekm1
ekm1's picture


How about currency swaps and China settling 20% of its trade in yuan?

Tue, 08/12/2014 - 19:52 | 5084681 fonzannoon
fonzannoon's picture

how about crude dropping in usd. like Y/C is saying. Soveriegn yields are dropping. If the world was ditching the dollar yields would be rising and crude prices would be rising.

Tue, 08/12/2014 - 19:56 | 5084689 ekm1
ekm1's picture

A lot of Crude oil is being stores as collateral for derivatives, not available for consumption, hence crude oil price is 100% overpriced 

Tue, 08/12/2014 - 19:57 | 5084698 fonzannoon
fonzannoon's picture

overpriced unless you have a dying currency right? In which case the price would keep rising.

Tue, 08/12/2014 - 20:03 | 5084727 ekm1
ekm1's picture


Higher price means less energy available.

For the economy to rebound oil has to be at max $50 for at least 6 months

Tue, 08/12/2014 - 20:06 | 5084743 fonzannoon
fonzannoon's picture

I mean this with all the respect in the world....Once you give up on this pipe dream that anyone anywhere of any consequence gives a shit about a recovery in anything, you will start to get back on track.

I remember before you bounced last time that you had a hard time, because of your roots, in believeing that the communist hell that you escaped from was nipping at your heels. Well, it is, and there will be no recovery. Not in the way you are envisioning it. So grab a beer and enjoy the ride.

Tue, 08/12/2014 - 20:08 | 5084755 ekm1
ekm1's picture

True observation.

Watch for guns and snipers shooting at executives while enjoying beer

Tue, 08/12/2014 - 20:17 | 5084795 fonzannoon
fonzannoon's picture

you ever notice no one else jumps in here? we gotta stop with this....

Tue, 08/12/2014 - 20:33 | 5084846 hobopants
hobopants's picture

Why? This place could use more honest debate and less coddling of pet theories/cheerleading.

Tue, 08/12/2014 - 22:30 | 5085429 techstrategy
techstrategy's picture

In the short term, prices can be bullied for policy objectives.  Longer term, supply will come offline.  The USD is hosed and few see it because most are assuming western central banks are in control.  They are not.  China and others have USD FX reserves. UST and physical gold.  They can play the long game and use or market manipulation against us.  Have been for 2 years in gold....

Tue, 08/12/2014 - 19:56 | 5084695 Yen Cross
Yen Cross's picture

 It's called "currency settlements" EKM. Currency swaps are when (2) parties agree to exchange a pre-determined amount of currency plus or minus a premium(interest rate=borrowing cost) for a set duration, and cover the transaction at the preset exchange rate, (minus or plus fees).

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