The release of the FOMC minutes today revealed that the FED plans to be more transparent as it will “publish forecasts of its own interest rates for years into the future.” Previous FED forecasts have proved to be very poor at predicting the path of the economy over the near term or yet for any longer period of time. On first read, this attempt at transparency ought to be labeled the VOLUME ENHANCEMENT FOR THE CME EURODOLLAR CURVE. FED prognostications will move the 3-5 year part of the curve all over the place and be very productive at increasing futures and options volume.
THIS BLOG IS ALWAYS FOR INCREASED TRANSPARENCY, but are FED SUMMARY of ECONOMIC PROJECTIONS (SEP) really shining more light onto FED policy making? As I am not of believer in the FED‘s DSGE MODELS, which have failed miserably in their predictive value, the outcome of the FED‘s efforts will certainly create more volatility.
A question in my mind is: WILL THIS NEW TRANSPARENCY MEAN A GREATER POLITICIZED FED AS THE SEP FORECASTS COULD SIGNIFICANTLY IMPACT THE ELECTION CYCLE? Also, as the FED has recently shown, the impact of the global economy can have a significant impact on policy making (SWAP LINES AND COORDINATED RATE CUTS), thus rendering the views of FOMC participants to sudden change and create greater havoc. Is there a point where too much transparency becomes self-defeating?
***The EQUITY MARKETS staged a very solid first day rally as higher oil prices boosted energy stocks and the lack of any headlines from Europe helped to stabilize equity and debt markets. The precious metals also found a reason to rally as it appears that REDEMPTION FORCED LIQUIDATION HAS RUN ITS COURSE FOR THE TIME BEING.
The Globe and Mail, a Canadian newspaper, had an interesting article in which it reported that Greeks and Italians were moving money out of banks and stashing it in home safe deposit boxes and moving the EUROS into German and other safer jurisdiction banks. As we discussed a few weeks ago, this is a contemporary form of GRESHAM’S LAW, as savers in the GIIPS are hoarding the GOOD MONEY (EUROS), as they fear the imposition of exchange controls to prevent the outflow of money.
There are many analysts who believe the current incipient recession in Europe will lead to GOLD sales, but if FOREIGN EXCHANGE CONTROLS BECOME PREVALENT IN EUROPE,THEN GOLD WILL BECOME A HAVEN OF VALUE PRESERVATION. Thus, we will continue to monitor the cross border bank flows within Europe as a precursor to a GOLD RALLY. The Spanish banks have not noted a large outflow yet but as the news from Spain worsens it will be a high probability that Spanish savers seek shelter in other regional banks. Over the weekend there was news from the new Spanish government that the budget deficit was larger than previously stated, 8% vs 6%. As we have seen in Greece, Portugal and Ireland, AUSTERITY BUDGETS AND HIGHER TAXES CREATE THE ADVERSE FEEDBACK LOOP that undermines all economic projections.
***In a positive piece of news, the corporate tax rate in Canada falls this year to 25%–the lowest amongst the G-7. This has been a 5-year process so the impact will not be as severe as if it was a sudden event. The low tax impact should lead to Canada being quicker to raise rates to stem any increased economic stimulus from the lower tax regime. Strong banks, a huge natural resource sector and very low corporate taxes. Canada is far more than just a risk on commodity play, but as always advised: Do your TECHNICALS and let the market tell you when the time is right. Fundamentals, we don’t need no stinking fundamentals!