The markets are in turmoil and it gets the mind to thinking: What could possibly have caused today’s reversal in the stock market and the long end of the BOND MARKET? The market seemed like it was on the edge of a complete risk capitulation. The dollar was dropping, bonds all over the world were in rally mode and the precious metals were finally finding some technical strength as the GOLD (in pure dollar terms) had finally rallied through its 200-day moving average. Even the SILVER was able to synchronize with the GOLD and break out of three months of resistance. (The silver 200-day is at 15.13, still a bit above its closing price.) The global stock markets were cascading lower as the Nikkei and German DAX took out their lows made the night of the BOJ’s surprise move to a three-tiered negative interest rate policy.
First, tomorrow morning Goldman’s Lloyd Blankfein will be rolled out on CNBC to share his wisdom about the state of global markets. Maybe he will remind investors that Goldman and other banks are doing GOD’S WORK. I will write what I wrote recently: Noah and the flood were also GOD’s work so it is important for the world’s banks to signal which part of GOD’s work in which they are involved. The European bank stocks are under stress again. Deutsche Bank and many other EU money center banks continue to make new lows every day. What are investors fleeing from? Probably the huge amount of NON-PERFORMING LOANS that exist on bank balance sheet and will have to be met with NEW CAPITAL to meet the more stringent regulatory requirements from the European oversight authority, as well as increased capital requirements under Basel III. There is a great effort to initiate a FDIC-type of deposit insurance program for all of Europe–a single agency–but the Germans will not allow their CREDIT CARD TO BE USED UNTIL THE PRESENT BALANCE SHEETS OF ALL THE FINANCIALLY STRESSED INSTITUTIONS ARE PURGED OF INSOLVENT, ZOMBIE TYPE LOANS. The lack of any banking guarantee is creating an underlying tension throughout the European financial system and without a robust corporate bond market there is nothing to disintermediate the financial power of the banks. The ECB is vacuuming up all the high quality collateral so finding adequate borrowing instruments to facilitate lending is adding to the drag on the EU economy.
Here we go again. Bank of Japan Governor Kuroda “shocked and awed” the markets by taking BOJ deposit rates into negative territory in a HYBRID sort of way as it is a three-tiered methodology that does not apply to money already being held at the BOJ in reserve. Also, money that is deemed regulatory-type capital will receive ZERO interest and won’t be punished with a surcharge, but any new funds making it onto the reserve balance sheet of the BOJ will receive NEGATIVE INTEREST RATES. Kuroda-san delivered this shock after promising last week that the BOJ would not go negative on its deposit rate. Kuroda will learn hat if you keep intentionally pumping the markets with disinformation the markets will have their time when the BOJ needs it the most, like maybe selling off the massive JGB portfolio on its balance sheet. But through the power of negative compounding of interest earnings Kuroda has brought Stevie “Guitar” Miller’s words to life:
It seems that the FOMC meets in Noah’s Ark (Genesis Chapter 8;Verse 8-12): “Then he sent out the DOVE from him to see whether the waters had subsided from the face of the ground. But the DOVE could not find a resting place for the sole of its foot and it returned to him to the ARK, for water was upon the surface of all the earth …. He waited again another seven days, and again sent out the DOVE from the ARK. The DOVE came back to him in the evening and behold! an olive leaf it had plucked with its bill! And Noah knew that the waters had subsided from upon the earth” (Artscroll Translation).
The market is in disarray as it anticipates tomorrow’s FOMC statement. Will it lean dovish? The turmoil in global markets is having negative impacts on capex and the wealth effect as global equity markets have dropped considerably since the December 16 rate increase. Do I believe that the 25 basis point rise is the catalyst for the destruction of household wealth? NO. But the FED is confronted with a worsening condition in terms of TOO MUCH DEBT IN A DECLINING PROFIT ENVIRONMENT. As Michael Pettis, Felix Zulauf and others have postulated for a very long time, too much debt on a balance only matters when the debt can’t be serviced. Zulauf and Jeffrey Gundlach have voiced concerns about the FED being irresponsible for raising rates as the global economy slows. Art Cashin, the great voice of reason and stability, has been on record for weeks predicting the FED will lower rates to ZERO before the market ever sees ONE PERCENT.
Standard dictionary definition of a CONFIDENCE MAN: “A SWINDLER WHO TRIES TO GAIN THE CONFIDENCE OF THE VICTIM IN ORDER TO DEFRAUD.” In a speech given by ECB President Mario Draghi at a Deutsche Borse reception in Germany, he mentioned the word CONFIDENCE many times. Draghi admits that there is little that the ECB can do to resolve the problems of the world economy but the Bank can continue to do a great deal to revive the economic prospects for the European Union. The ECB needs to continue to keep liquidity flowing in order to support the EU financial system. Draghi succinctly states: “The KEY ELEMENT IS CONFIDENCE. CONFIDENCE IN GROWTH, CONFIDENCE IN STABILITY, AND CONFIDENCE IN THE FUTURE OF THE EURO AREA.ONLY BY BUILDING CONFIDENCE CAN WE TURN THE ONGOING CYCLICAL RECOVERY INTO A ROBUST, STRUCTURAL RECOVERY.”
Today, President Mario Draghi guided the ECB Board to a status quo decision on the monetary policy of the EU. In yesterday’s NOTES, I opined that when Merkel and Draghi met in Berlin last Friday it was to receive the blessing from the Empress of Europe for a renewed effort at monetary stimulus. Chancellor Merkel was reticent to fan the flames of the AfD and other parties disillusioned with the present state of Germany’s position in the EU. The repression of German savers in an effort to bail out the European financial system is a below the surface issue for voters who are protesting in the streets against the ill-advised policy of a million refugees. Before Draghi can embark on more QE or some other unconventional monetary tool, GERMANY MUST BE SUPPORTIVE.
Open question to Goldman Sachs: ARE YOU ARROGANT OR DEAF? There’s a story in tomorrow’s Financial Times there is a story titled, “Goldman Sachs Makes Large Donation to Pro-EU Campaign.” It is being reported that Goldman has made a large six-figure donation to Britain Stronger in Europe. Whoever thought this up needs their head examined. There is nothing in the world more TOXIC than the big investment banks. In a potentially existential issue for British democracy, the idea of a large U.S. investment bank playing in the U.K. referendum will stir the anti-EU forces to push harder for a NO vote. The anti-euro camp has many strong, legitimate former officials working hard to push England further from the restrictions of an overzealous group of Brussels eurocrats.
(Will the Collapse In Energy Prices Grease a Cut In Rates Or the Introduction of QE?)
Just some tidying up and refocus on things besides China, Iran and the debt of ingratitude to the fracking revolution. Tomorrow at 9:00 a.m. CST the Bank of Canada announces its overnight interest rate. The bank rate in Canada is currently 0.5% and consensus is calling for a rate cut of 25 basis points to 0.25%. Other market participants are suggesting that BOC Governor Poloz will announce a large-scale asset purchase program (better known as QE). I doubt the BOC will change policy at this time even as the Canadian economy suffers from the severe drop in fossil fuel prices and other commodities.
As Poloz articulated in a speech in Ottawa at a BIS BREAKFAST SERIES January 7 (regarding monetary policy divergence): “It is very important that we understand the reasons for these policy divergences. On one level, they simply reflect actions taken by central banks tailored to their own economies. But the underlying forces acting on the global economy are powerful, slow-moving and affect various economies differently. This means that the theme of divergence – both financial and economic – is likely to remain with us for some time to come.”
The Canadian real-estate market has run hot for too long and even though Canadian banks are not of the sub-prime model lenders, Mr. Poloz will not wish to just continue to inflate property values. It would behoove the BOC Governor to wait to see what the newly elected Prime Minister Trudeau puts on offer from a fiscal stimulus perspective before racing down the monetary stimulus track that many other central banks have followed with no proven success (except for counter-factual arguments).