On Monday, in “Central Banks Now In 'Dangerous Situation': 'You've Thrown The Kitchen Sink At It, What's Next?' [10]", we said the following about the global fiat confidence game:
Here's the real danger: the degree to which unconventional monetary policy is effective is in no small part dependent on perception. That is, the fiat regime is in large part a giant confidence game. If that confidence starts to evaporate in the minds of very "serious" people, this will all come to an end, and that's not simply the latest rant from a "fringe blog", that's just the way confidence games work. Ironically, the best thing developed market central bankers could do right now is simply stop the madness and allow capital markets to crash and reset. There may still be some hope of preserving the notion of central bank omnipotence here if everyone suddenly comes to their senses, steps back from the money printing, and lets creative destruction purge the system. That would allow the world's foremost monetary authorities to start from scratch and perhaps reclaim some credibility on the way to rebuilding things.
Well, we aren’t the only ones with serious questions about just how long this charade can hold up and indeed, when traders start questioning the central planner narrative, it’s proof positive that said narrative has been lost.
On that note we bring you the following from Bloomberg’s Richard Breslow, the man who, you're reminded, is also concerned about whether Janet Yellen has the proper training to serve as the market's "head trader [11]":
There has been no shortage of debates on whether central banks have lost their credibility. Early versions of this debate came to a more favorable central bank outcome because at the height of quantitative easing the market came to the realization that fighting those flows was a mug’s game. It felt like it was working because investors were not only going with the flow, but trying to front-run it. The central banks didn’t mind. The best fill wasn’t their objective.
- But now the tide is turning. We still have a zero interest rate world and policy effectiveness is being questioned as rate rises are as elusive as ever. The fixed income market continues to fade central bank rhetoric and correctly forecast central bank action
- Last May, futures forecast a rate rise about a year out. The force of Fed guidance, despite the China meltdown, made analysts move to a September liffoff. Futures never really bought that and are back to pricing ’’see you no time soon.’’ The market continually being right and the bankers wrong does not further the Fed’s much stated goal of ensuring financial stability
- Since U.S. payrolls, two comments from a Fed president struck me. One, referring to September’s no rate rise, “It looks like that was a pretty good decision.” This seemed in bad taste and counter to everything they had been suggesting. So much for Rational Expectation Theory. The other was, “I don’t think the markets have veto power over what we’re going to be doing.” Probably true, but neither the Fed nor the market have acted that way
- Central bank credibility is priceless and they desperately need to reclaim the intellectual high ground. The continuous public back-and-forth through speeches and attempts at expectation management just aren’t working
