The last two days has seen two of the world’s key central banks deliver fresh interest rate decisions and there was very little in way of surprises. In a salute to the philosopher Isiah Berlin, I have noted that Chairman Bernanke is a HEDGEHOG and President Draghi a FOX. A hedgehog is one who “views the world through a single defining idea.” The economy is slowing, unemployment is high, inflation is low, so it is appropriate for the FED to buy and continue buying Treasury debt. You say it is not having the desired effect? Buy more. In yesterday’s FOMC statement, the FED noted that ”… FISCAL POLICY IS RESTRAINING ECONOMIC GROWTH.” The meaning of this is that Washington is acting irresponsibly, thus the FED needs to possibly INCREASE its bond and mortgage-backed securities purchases. Whatever it is, QE IS THE ANSWER.
Posts Tagged ‘Mario Draghi’
The central banks were in play today and while the Bank of England held to its present course, the Bank of Japan declared that they were now in full battle gear and announced a very aggressive monetary policy agenda. I was surprised by the tenacity of the announced program and certainly by its timing. The recent movements in the YEN, and,especially the EUR/YEN crossrate meant that the BOJ and the Japanese Finance Ministry had some breathing space to allow some of the ill effects of the Cypriot crisis to calm. No such by the BOJ as they “damned the torpedoes and announced full speed ahead.” If other central banks wish to muddle about that is their business but the Japanese are determined to end the deflation that has plagued their economy. The steps that the BOJ announced, which had the greatest impact on the YEN and the Nikkei were:
The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
It made little sense to blog about Cyprus last night because the initial news release was so vapid it was of little use. Those who perceived a risk-on based “settlement ” proved to be disappointed this morning. Long before Dutch Finance Minister Dijsselbloem opened his mouth, the euro and its various correlated trades were in a turnaround from last night’s movement. Mr. Dijsselbloem also serves as the head of the ECOFIN (European Finance Ministers) so his voice carried more weight than the usually opining of a podium-addicted eurocrat. It seems that the ECOFIN honcho made it known that the severe punishment of investors and depositors in Cyprus was to serve as the TEMPLATE for all future European banking insolvencies. The stern tone of the message sent global equities lower and the DOLLAR and any currency not in Europe, rallying.
Notes From Underground: The Fed’s Zero Rate, Quantitative Easing Policies Are Stock Market FundamentalsMarch 10, 2013
The continued parade of stock market analysts who proclaim the equity market is rallying merely on Fed monetary policy instead of market fundamentals have spent far too much time doing case studies and not reading economic history. Interest rates as the variable signaling the cost of money are a very critical element and a key fundamental of the economy and especially the equity markets. U.S. multinational corporations are sitting on record piles of cash and also reporting strong profits. Much of the growth in profits can be attributed to two factors: Very low borrowing costs and continued pressure on wages. The FED has created the low interest rates and has hoped that the profitability resulting from low borrowing costs would bleed into higher wages and thus the need for increased hiring. The problem is many fold on the lack of success in aiding jobs creation. Globalization has kept pressure off wages and the deleveraging of the private balance sheets has meant that downward pressure remains on demand.
Click on the image to watch Yra discuss the ECB meeting with Rick Sanely
It seems that Mario Draghi has taken the stance that he can hold off doing any further QUANTITATIVE EASING (QE) as he waits for the policies of the British, Japanese and the U.S. to generate enough growth to allow Europe to muddle through its problems for the next few years. President Draghi seems to believe that if the global economy can achieve a growth rate of 4% or more it will buy time for Europe to begin to correct some of its problems and at least put a halt to its economic downturn. The ECB has accepted the slide in the YEN in the hope that stimulating Japanese growth will alleviate some of the stress of the global economy. The Japanese economy has been a laggard for the last two decades, give or take a year here or there, and it was able to muddle though based on the growth of the rest of the world.
The recent Italian elections wound up in a very inconclusive result. In a political lineup of the three Bs–(no Chuck, not Biggio, Berkman and Bagwell)–Bersani, Berlusconi and Beppe, the Italian populace dealt a massive defeat to Brussel-appointed technocrat Mario Monti. The vox populi raised its voice against continuing austerity and will look to whatever government is formed to be one of a pro-growth economic agenda. The biggest loser from the Italian election may in fact be another Italian, ECB President Mario Draghi. If European nations say no to more austerity then Draghi’s program of doing anything to stem the Euro crisis comes to an end. WHY? The Outright Monetary Transactions (OMT) are based upon ECB intervention and the quid pro quo of conditionality of acceptance of austerity budgets. If you accept that the basis of OMT is a form of quantitative easing and the recipients of the QE won’t accept the severity of conditionality that is demanded by the ECB, then emperor Draghi is truly naked and not dressed in a fine Italian suit.
There are ideas permeating the financial media that need to be challenged. There is a continuing idea that the present value of the U.S. stock market is stretched based on historical valuations. I will continue to question this assessment FOR HOW DOES AN INVESTOR VALUE FUTURE EARNINGS IN A ZERO INTEREST RATE ENVIRONMENT? Further more, corporate earnings need to be evaluated with consideration for record low borrowing costs and stagnant wages. This week I hope to take a look at the historical percentages of payroll and interest expense and to see where the present numbers fall in relative terms. The markets may well be overvalued on some normal assessment but we are not operating in any sense of “normalcy.” This present financial atmosphere renders so much historical analysis worthless, which is why this year portends to be so volatile.
Tomorrow the Bank of England (BOE) and European Central Bank will grace us with their interest rate announcements. The BOE is expected to hold overnight rates at 0.5% and to keep the QE program at its present level of 375 billion pounds. The current weakness in the British pound will keep Governor Mervyn King from tampering with present policy, and, with a new Governor of the BOE in July, it makes no sense to expend any type of easing before the change of leadership unless some new crisis emerges. Current BOE policies and renewed weakness in the British economy have driven the EUR/GBP rate to 15-month highs, thus putting the pound in the middle of the “currency wars.”