If my radar is right, the coming European Central Bank QE program will be a concoction of asset-backed securities in an effort to remove non-performing loans from bank balance sheets. There have been a multitude of “conjectures” about how the ECB is going to pump liquidity into a very low growth economy. Previously it seemed that some at the ECB wished to install negative yields on bank reserves. This would be an experiment fraught with danger as it could cause great problems for the money funds that have recently returned to Europe. The problem for money market funds was epitomized in a statement from Bank of New York Mellon’s CFO Todd Gibbons after today’s earnings release and reported in tomorrow’s Financial Times:”If the eurozone were to go to negative rates that would actually present the opportunity for us to charge for deposits and we are giving that very serious consideration.” The idea of “negative interest rates on reserves” has been bandied about as some members of the ECB board have tried to stem the euro currency’s recent strength. It has been surmised that charging banks for parking excess reserves at the ECB would force European banks to reverse course and put the funds out to lending rather than having to pay a fee for the safety of the ECB.
In an effort to state how badly the markets are ignoring risk, we at Notes From Underground warned about being short volatility. As we head into the Passover and Easter holidays there is much on the table that financials fail to appreciate. A global market focused on the pantheon of central bankers it is the my task to remind of the major issues facing the world’s POLITICAL ECONOMY.
- The BOJ and the Abe government have gone to great lengths to create a recovery in Japan and with it a modicum of inflation. At this point economic growth in Japan is stalling. With the initiation of the sales tax increase of 3 percent April 1, Japan’s central bank has a great deal at stake. If growth stalls the BOJ will be hard-pressed for even more radical efforts to jump-start the economy through increased bond purchases both of a domestic and foreign nature. The YEN will be under pressure causing stress throughout the global financial system.
- What will happen in China as it tries to stem any debt crisis from too much credit being advanced through the Chinese shadow banking system?
- The problems in the Eurasian land mass as President Putin attempts to undermine the sanction regime of the G7 nations
- The potential for a banking crisis in the European system as the mass of debt becomes a larger burden in a low inflation environment. Compounding the problem is that European banks own a vast amount of sovereign debt of Greece, Spain, Italy, Ireland and Spain,resulting in an adverse feedback loop of monstrous proportions; and
- The Federal Reserve has adopted a position of primary concern for a high unemployment/low wage environment and is pretending that a zero interest rate policy can provide the solution. The FED is putting its credibility on the line in pursuing a jobs-at-all-cost position for if the self-imposed jobs threshold can be easily forsaken, why should investors believe that the inflation threshold will be followed? Keep an eye on the 2/10 yield curve for any signs of the market’s concern with regards to the credibility of the Yellen Fed. For now, the SPOOS and NASDAQ are the default mechanism for all investors for when in doubt, buy equities. As Jefferies’ David Zeros said on CNBC Monday afternoon, SPOOS ARE FOR LOVERS AND GOLD IS FOR HATERS, which may well be … for now. But being short volatility is for the clinically insane. Just hope I have a ticket on the volatility train since “YOU DON’T NEED NO BAGGAGE, JUST GET ON BOARD.”
Also in the spirit of the holidays:
If the U.S. Treasury had done only TARP … it would’ve been enough
If the Fed had only provided QE1 … it would’ve been enough
If the Fed had only done QE2 … it would’ve been enough
If the Fed had only done Operation Twist … it would’ve been enough
If the Fed had only done QE Infinity … it would’ve been enough
If Mario Draghi had pledged no taboos … it would’ve been enough
If Mario Draghi had pledged to do whatever it takes … it would’ve been enough
If the BOJ had only doubled the money supply … it would’ve been enough
If the BOJ had only bought massive amounts of JGBs … it would’ve been enough
If the Japanese were only buying foreign bonds … it would’ve been enough
If all the world’s central banks had lowered interest rates to zero … it would’ve been enough
AND NOW FOR THE BITTER HERBS!
Wishing all of our readers a happy and healthy Passover and Easter.
The idea of Mr. Natural, the guru creation of R. Crumb, comes to mind as the analysts ponder today’s release of the March 18-19 FOMC Minutes. The market seemed shocked to learn that the FED had been misunderstood on its intentions to tighten soon after the conclusion of the its tapering program. When are the markets going to stop listening to the self-proclaimed seers of the Fed’s deepest secrets? The FOMC minutes let the financial world know that the summary economic projections (SEP) have as much credibility in interest forecasting as does the man behind in curtain in the Wizard of Oz. I will offer that the market must lean toward Janet Yellen being a labor economist with a strong moral bent of providing the foundation for any person desiring a job have a job. Again, that is a noble stance but not for the Fed chair. The violent move in the YIELD CURVE after the release of the minutes reflected the markets’ misinterpretation of Yellen’s press conference. If the 2/10 curve gets back above 240 basis positively sloped, it will result in a further selloff of the notes and bonds. The FED will err on staying at the ZIRP band until it is certain that the employment situation has dramatically improved. Quoting from the minutes: “Several participants cited low nominal wage growth as pointing to the existence of continued labor market slack.”
This is a tribute to N.B. and his continued effort to search for perspective (and his love of Joni Mitchell):I’ve looked at life from both sides nowFrom up and down and still somehowIt’s life’s illusions I recallI really don’t know life at all
Friday’s jobs data was almost as the pundits had predicted. Why was there so much activity when the nonfarm payrolls and average hourly earnings and length of work week were basically the right on the consensus predictions? Yes, I’m aware that the “whisper number” was 250,000-plus due to the removal of harsh weather conditions. However, if that was the case, the dollar should have weakened and the short-end of the U.S. yield curve OUGHT to have outperformed the long end resulting in a STEEPENING of the 2/10 (none of which occurred). The 2/10 curve actually flattened as the U.S. stock markets began selling off, a drop initiated by the Nasdaq 100′s key momentum stocks. The weekly charts of the S&P and the Nasdaq took different turns as the SPOOs closed higher on the week and the Nasdaq closed lower, an indication of some reallocation from the momentum-oriented stocks to the more solid large-cap, earnings-based equities.
Our man in Frankfurt did not disappoint today. He was at his best as he kept the “unconventional tool” of negative interest rates in his bag of tricks. Again, the ECB President did not need to expand one euro to achieve a positive outcome. The euro rallied for a brief minute as the report came that the ECB announced “NO CHANGE” in policy. However, as traders we noticed that it was the smallest rally as market expectations were wrong. The EURO remained offered all day once the press conference began and Mr. Draghi announced that the meeting was unanimous in its approach to the use of unconventional tools to combat the UNDER UTILIZED CAPACITY IN THE LABOR FORCE AND THE THREAT OF DEFLATION. The ECB went through his usual litany of reasons as to why the European economies remained with an output gap and subdued inflation: lower energy and food prices, plus the fact that the coming asset quality review was keeping banks from lending. The ECB is aware that bank lending is much more important to the European economy than in the U.S. as the American corporate bond market plays a much greater role in finance.
This is a tribute to Curtis Mayfield and the Chambers Brothers who recorded the song and made it popular. The TRAIN THAT IS COMING IS THE ENGINE OF VOLATILITY. Tomorrow is the ECB meeting and the regularly scheduled press conference 45 minutes later at 7:30 CST in which ECB President Draghi will use nuance to explain the central bank’s decision. Currently, the market is expecting some type of action by the bank because it seems that the Germans have acquiesced to some type of ECB quantitative easing scenario. When the ECB announces its decision at 6:45 a.m., a statement that leaves policy unchanged will result in the EURO rallying against all major currencies for, based on the Bundesbank’s statement last week, the market is anticipating at least a modest cut in the refi rate of maybe 10 basis points.