At Jackson Hole there was no Ben Bernanke so therefore no policy announcements as in August 2010 when the famous PORTFOLIO BALANCE CHANNEL (PBC) speech signalled a major shift in Fed policy. Last year was similar as the Fed Chairman used Jackson Hole to alert the market to another round of QE. The most senior Fed official was Janet Yellen and she served more as a panel moderator. This was no place to stake out Vice Chairman Yellen’s claim to the chairmanship. So the discussions of the week were as always, esoteric and academic. But the key take away: There were several papers delivered by acclaimed academics who disagreed with the FED‘s policy of large-scale asset purchases and quantitative easing. Therefore, the conclusion is that the FED‘s present policy is highly theoretical and not based on a SCIENTIFIC proof and the entire basis of QE is open to critical analysis. The talking heads want to believe that TAPERING has a certain outcome. By definition, theoretical outcomes are theoretical and based on probabilities.
Even Minneapolis Fed President Naryana Kocherlakota said, “… it [the Fed] has not been able to lower interest rates enough.” In a Bond Buyer article, it was reported that “… Kocherlakota suggested the FED will need to maintain a highly stimulative monetary policy for some time to come, although he did not explicitly oppose tapering.” (Even though the “… natural interest rate has fallen” because of weak global growth and downward pressure on prices). Any time you read the NATURAL INTEREST RATE it is a reference to the work of Professor Michael Woodford, which he defines the NATURAL INTEREST RATE as the one that maintains a ZERO OUTPUT GAP and STABLE INFLATION. The academics thrive in the theoretical while the markets are real-time responders.
The FED officials and the Bank of England are both perplexed as to why the yields on long-term debt have risen so dramatically in the face of “forward guidance.” The central banks keep hammering the point that they will not raise rates but somebody’s REACTION FUNCTION is having to sell a great deal of long-dated debt. (Maybe it’s the foreign government and/or sovereign wealth funds as the FED‘s theoretical credibility is being questioned.) Since the Monetary Sheriff was not in Jackson Hole, Wyoming, a mainstay of the Wild West, I am left to wonder if some vigilante justice has been meted out, causing the 2/10 yield curve to steepen in the face of the WOODFORD disciple’s “forward guidance.” Bonds, we don’t need no stinkin’ bonds.
***Yesterday, the London Telegraph had an article by Ambrose Evans-Pritchard, “Britain to be Roped Into EU Rescue Aid For Greece.” It has been widely circulated on the German election stump that there would probably be a need for a third bailout package to get Greece through 2014. The Social Democrat Party (SPD) has been beating the drums about the mishandling of the Greek and peripheral nations sovereign debt crisis in an attempt to undermine Chancellor Merkel’s commanding lead in the polls. The mainstream press has been devoid of content criticizing the Greek crisis for fear of positively impacting the anti-Euro AfD party. For the last two weeks I have scanned numerous articles about the German elections and found almost no mention of the AfD. Remember, in Germany a political party must receive at least 5% of the total vote to get any representation in the Bundestag. The German polling institute, FORSA, has had the anti-euro party at around 3%. Manfred Gullner, head of FORSA, is quoted by Evans-Pritchard, saying: “For a long time I thought they had no chance, but I am not so sure any longer. A lot of people out there, speaking very loudly, who think they’re being expropriated by the state. This need watching very closely.”
Today, Chancellor Merkel gave strength to this view while on the campaign trail. The German leader in speaking to a rally of CDU supporters: “Merkel blames Greece on Schroeder as the Greeks should never have been let in.” This was reported in a Bloomberg News article by Stefan Nicola and attacked the previous SPD Chancellor for weakening the stability pact and allowing an unprepared Greek economy to be part of the Euro financial system. “Merkel, by apportioning blame for the havoc caused across the 17-nation euro region on her predecessor, may be seeking to deflect attacks on her crisis policy directed by Peer Steinbrueck,her SPD challenger…” If Merkel is responding by pointing the finger at previous policy makers, it may mean that Manfred Gullner may be sensing some type of numerical shift.