As today was central bank day in Europe, both the ECB and the BOE had rate decision meetings and left their current policies in place. The BOE did announce that it was “halting” the expansion of the QE program at 375 billion pounds as it deems the recent increases in its bond buying program to be less effective. Recently, BOE Deputy Governors Paul Tucker and Charles Bean have stated that “asset purchases may no longer have the same impact on the economy as when first introduced.” (Bloomberg) The market had different interpretations as to the reason that why the BOE was curtailing the QE bond purchases. 1. The recent rise in inflation was causing the halt; or 2. the lessened impact of recent QE was going to mean that the bank was going to increase the funding for lending scheme in which the BOE provides incentives for commercial banks to lend more money to small and medium businesses. This is of interest for FED watchers because BOE Governor Mervyn King has been a trail blazer for creative central bank actions and the FOMC may mimic some of the BOE actions to get a boost to a low velocity of money situation.
I also bring this story to your attention because of the way it was headlined on the financial news wires. Bloomberg headlined it as “BOE Halts Bond Purchases as Officials Focus on Lending,” while the WSJ had it as “BOE Pauses Stimulus Program.” Two headlines with different meanings, which could easily impact the keyword headline-driven algo systems. Just urging caution for those trading during times of important news releases.
The ECB left its policy unchanged today as expected–and Richard Koo warned in parlance–that balance sheet adjustment continues to weigh on the outlook. As I listened to the Draghi press conference, someone asked Mr. Draghi if the price of GOLD was a concern to him and the ECB. The response was: “GOLD IS A MYSTERY TO ME.” He went on to explain that GOLD shouldn’t be concerned about inflation and that GOLD buyers were being overly concerned about the Outright Monetary Transactions as none had even been done yet. Fifteen minutes later, Mr. Draghi was asked if the ECB would lower rates further so as to invigorate the staid EU economy. The ECB president’s answer solved his mystery but he didn’t connect the dots. Draghi said the ECB did not need to lower rates as the REAL YIELD WAS ALREADY NEGATIVE. It is a MYSTERY TO ME that there was no follow-up comment to point that out to the befuddled central banker.
The pressure of global negative yields has made central banks and concerned investors fear FIAT MONEY, THUS THE DEMAND FOR THE HAVEN OF HARD ASSETS. President Draghi: The world is no longer HYPNOTIZED by the intricate models of the world’s academic central bankers. The math may be rocket science but the outcome is rudimentary alchemy. Negative real yields to sustain a “portfolio balance channel” equals a demand for GOLD. It’s as simple a 2+2=5.
***More news from France. The New York Times ran a story, “France Announces Cut in Payroll Taxes for Businesses.” It’s a nice headline but the body of the story raises more questions than provides answers. Prime Minister J-M Ayrault maintains that the tax cut will make France more competitive and help end “ten years of stagnation.” It plans to cut payroll taxes but to help restrain the deficit will raise the main sales tax as well as offer budget cuts. Many economists on the right claim that the Hollande government is merely rescinding the tax hike that was announced in July. To further offset the payroll tax cut the main VAT tax will be raised by 0.4% and the so-called intermediate tax will cover restaurant meals and home renovations.
Again, the net result is minimal and still leaves French labor costs very high in a globalized and highly regionalized economy. The Germans are far more competitive after the implementation of the HARTZ IV reforms set in motion by Chancellor Gerhard Schroeder. The German’s not only had structural labor reforms but at the same time had a EURO CURRENCY that was very weak as it traded down to well below a 1.00, falling all the way to 0.8300 during the restructuring. The French are saddled with a relatively strong currency and as the late, great economist Rudi Dornbusch warned, if you have rigid labor costs you are going to need a very flexible currency for when GLOBALIZATION is in play ,something will have to give.
***Quick Hitter: On Tuesday,November 6 a merger was announced that creates the world’s largest ETHANOL entity. Copersucar, Brazil’s largest sugar exporter, bought Tennessee-based ECO-ENERGY, a biofuels distributor and trading firm. This combines a sugar- and corn-based ethanol producer and is important to watch to see what it means for the global use of biofuels. A very knowledgable source told me that this may mean that biofuels go global as many potential users–airlines–cannot get adequate global ethanol supplies to use in a meaningful way. Tough to put a flex engine on a transcontinental plane that cannot refuel with the necessary energy source. Something to watch for stock and commodity traders alike.
***Something Fun: Two years ago, the New York Times published an interactive budget puzzle, putting readers in charge of the U.S’s finances. It invites everyone to close the projected budget gaps for 2015 and 2016 through a variety of spending cuts and revenue increases. We at NOTES think this is more than relevant as we’re flirting with a FISCAL CLIFF. Click on the text to play along.