In late July, Bundesbank President Jens Weidmann made a comment about being in favor of a rise in German wages. I was citing a Financial Times article, “Bundesbank Shifts Stance To Support Pay Rises.” The article opens with the line, “Germany’s Bundesbank has backed the push by trade unions for inflation-busting wage settlements …” I noted that it was Bundesbank Chief Economist Jens Ulbrich who called recent wage trends moderate, given the strength in the German economy. If the Bundesbank had capitulated on the wage issue look for ECB President Draghi to feel renewed strength in his efforts to weaken the EURO and placate French and European peripheries who have continued to complain about the impact from an overly strong EURO. (This was from the JULY 23 Notes from Underground).
Last Friday, Chair Yellen delivered a speech at the Boston Fed’s Conference on Opportunity and Inequality. The present Fed Chair has frequently opined on the social and economic problems of income equality and I have been very critical of her wading into the waters of social and fiscal policy for many of the previous 80 years issues of wealth inequality have been dealt with through fiscal and social action. I don’t have a moral issue with Yellen’s outlook on wage inequality but I do not think it is the purview of the Federal Reserve Board to use its financial authority in placing the issue into the public domain. The FOMC has enough on its list of responsibilities without taking on the role of advocate for workers of America. Yellen’s dinner table and social engagements is a fine arena for her moral views but she dreads into very dangerous waters when using the political power of her office.
Last week was an appropriate tribute to a song from the 1960s in which the news is looked upon as just so much blather about drivel and evil events. The fears of EBOLA, SECULAR STAGNATION, ISIL, COLLAPSING ENERGY PRICES and EUROPEAN ECONOMIC COLLAPSE converged to create volatility and fear in all asset classes. The nervousness about global equity markets collapsing caused the bond yields to dramatically decline, which led to a capitulation by BOND MARKET SHORTS. In my opinion the volatility in the bond markets was also the results of decreased market making abilities of money center banks due to increased capital regulations. (This is not a commentary on the increased regulations but just an observation about market impacts). Also, many market actors have been selling volatility in an effort to increase returns and got burned for their efforts.
Germany was the issue at the IMF and G-20 meetings as all nations suffering economic headwinds delivered harsh criticism of Angela Merkel, Wolfgang Schaueble and, of course, Bundesbank President Jens Weidmann. It was Germany’s continued emphasis on budget restructuring and fiscal soundness that was holding back Europe and resulting in global economic challenges. France can’t grow because the Germans insists on the French authorities bringing their budget down to the prescribed 3 percent of the Maastricht Treaty. The peripheral nations are saddled with private and public sector debt that is not serviceable during times of economic stagnation.
There is not doubt that Larry Summers is excited by October G-20 and IMF meetings as the top policy makers meet to discuss the state of the world economy and other significant global interests. It’s a time when the media is focused on the world’s leaders and Mr. Summers likes the role of being a major player. There is no question about Summer’s academic qualifications and his wealth of policy making experience. If success in the field of economics was based on eugenics, well, Larry Summers would certainly have a Nobel Prize. My one major criticism of Secretary Summers was his running interference for Robert Rubin and Sandy Weil in their efforts to repeal Glass-Steagall, which even Mr. Weil has admitted was a great mistake. In today’s Financial Times, Larry Summers had an op-ed, “Why Public Investment Really Is A Free Lunch.”
In the mid-October the ECB will announce the results of the Asset Quality Review (AQR), which is a bank stress test by another name. The ECB has measured the riskiness of the European domestic banking system in an effort to measure how much capital banks will need to raise to prevent systemic solvency problems. It is an act of absurdity in some regards because many of Europe’s banks have bought huge amounts of sovereign debt (i.e. Italian and Spanish banks purchasing Italian and Spanish bonds and notes) because they carry a zero risk weighting, requiring no reserves. The problem is that the banks’ assets hide the poor financial health of the banking sector. While European governments are able to borrow at ridiculous rates, private individuals are not able to access credit, which keeps the European economy at a standstill. If the bank stress tests don’t show a dire situation then Mario Draghi will be hard pressed to achieve the massive QE program he would like to undertake.
Mario Draghi, the Caesar of European monetary policy, took the ECB meeting on the road to Naples and wowed the world with his ability to hold an hour-long press conference and say nothing. The world waited for some clarity on the proposed European QE programs and the result was confusion. President Draghi announced that the Asset-Backed Security Purchase Program (ABSPP) would commence this quarter but the ultimate size of the program remains a mystery (NOTE: Europe’s asset-backed securities market is about $317 billion). We do know that the ABSPP is intended to last for two years but if economic activity remains dormant the time period could be extended.
Tonight I’m paying homage to Rudyard Kipling’s great poem, “If.” It’s a reminder of what the fourth quarter holds for global investors, and particularly traders with a much quicker reaction:
If you can keep your head when all about youAre losing theirs and blaming it on you,If you can trust yourself when all men doubt you,But make allowance for their doubting too;If you can wait and not be tired by waiting,Or being lied about,don’t deal in lies,Or being hated,don’t give way to hating,And yet don’t look too good,nor talk too wise