One of the most important elements to the purpose of the financial markets is to be an indicator of flawed policy. If money is too loose, the BOND VIGILANTES will assure policy makers that it is time to tighten by pressuring BOND YIELDS higher. As Bill Clinton’s attack dogJames Carville so elegantly stated: “I want to be reincarnated as the bond market because it intimidates everyone.” The huge FED QE PROGRAM has temporarily castrated the BOND market as FED INTERVENTION means that the BOND VIGILANTES lack the fortitude to signal the markets. Even the EUROPEANS have momentarily silenced the market by the huge liquidity pump via the LTRO program with another LTRO coming at the end of February.
For all the “pundits” proclaiming the onset of Bretton Woods II, it has arrived but it is in the fixing of BOND YIELD rather than currency levels. The lack of BOND sellers is going to force the FED into a massive buy of MBS under the guise of attempting to push mortgage rates down, but the only seller they will find will be the CHINESE AUTHORITIES as they seek to unload U.S. DEBT at artificially set prices. When will the markets become UNBROKEN? I don’t know but as sure as night follows day it will happen and the end result will be that the FED will not be pushing imaginary profits back into the U.S. Treasuries coffers.
Many analysts believe that the U.S. equals Japan and the U.S. Treasury market will resemble the JGB markets for many years to come … pure nonsense. Japan is different because 97% of JGBs are owned by Japanese citizens, thus the act of currency debasement through inflation would punish the voters on which the politicians depend. In the U.S., foreigners own 47% of U.S. PUBLIC DEBT, thus debasement through inflation means that the pain will be shared globally. As the need to inflate our way out of the “DELEVERAGING OF BALANCE SHEETS,” the onus will be on many nonvoters, unlike Japan.
Also, remember that Japan had a huge amount of savings to lean on and therefore a severe bout of inflation to minimize the pain of deflation would have caused huge problems for the pensioners in Tokyo. Deflation in Japan has not been nearly as brutal as the zero interest rate policy has been on savers in the U.S. as inflation outstrips the gross interest rate levels.
Yes, in 2011 the net capital return outpaced all other assets as the FED’S QE program and market fears pushed up the prices on the long end of the curve, but BANK DEPOSITS and MONEY MARKET FUNDS suffered under the FED‘s guiding hand of FINANCIAL REPRESSION. Are BONDS CORRECTLY PRICED? A broken market certainly cannot speak its mind. BUT HELL WILL HAVE NO FURY LIKE A VIGILANTE SCORNED.
***The January 5 WSJ had a most interesting letter to the editor from the President of the New York Fed, William C. Dudley. It seems that the most powerful Fed president had to answer the critics of the DOLLAR SWAP program in a very public medium. Mr. Dudley was answering an op-ed piece by Gerald O’Driscoll Jr., “The Federal Reserve’s Covert bailout of Europe.” President Dudley does not answer the covert nature of Driscoll’s criticism but merely goes on in the letter to justify why the action was necessary.
“The intention is to ensure that financial institutions headquartered outside the U.S. that are deemed creditworthy by their central banks have the dollars they need to fund their U.S. dollar assets and activities.”
Dudley further states, “if their access to dollar funding was severely impaired it could necessitate the abrupt forced sale of dollar assets, which could seriously disrupt U.S. markets and raise the costs for borrowing and lending in the U.S.” This last part is particularly problematic because under this rationale the FED is empowered to deem whenever they desire to intervene to halt a POTENTIAL credit crisis anywhere in the world.
Yes, the FED will argue that no money has ever been lost by those deemed creditworthy, but failed borrowers that are recapitalized through the printing press result in the quiet devaluation of money. The logic of President Dudley’s thinking should give us all pause as the FED has taken on the role of global banker under the guise of world systemic risk. Carville is going to have to amend his view to include the FED CHAIRMAN.
***A quick hit on the resignation of Philipp Hildebrand from his position as head of the Swiss National Bank (SNB). Mr. Hildebrand abused his position by allowing his wife to trade currency positions in a joint account that the two controlled. Readers of NOTES FROM UNDERGROUND know that I was pushing the same trade back in mid-August as the SWISSIE became absurdly overvalued. Fortunately, it was not pillow talk on my part.
The market has been roiled by this recent event but the fact is that Hildebrand’s replacement is Thomas Jordan, who in actuality has been the intellectual power behind the SNB’s intervention policy. It appears that Swiss currency policy will not be impacted as the market first thought, but actually may become more dynamic as Mr. Jordan has reportedly pushed for the institution of a PEG against the EURO so as to lessen the deflationary impact of a severely overvalued currency.
If the PEG becomes threatened, look for the imposition of NEGATIVE CURRENCY RATES OR FOR THE SNB TO POSSIBLY PURCHASE OTHER CURRENCIES BESIDES THE EURO.