Ex-FED Chairman Paul Volcker delivered a speech on May 29, which served as a ”shofar” blast, warning the FED and its governors to be cautious in possibly undermining the credibility that all central bankers strive to maintain. Mr. Volcker does not doubt the intelligence of Chairman Bernanke but what he worries about “… is a matter of good judgment, leadership and institutional backbone” (READ THAT AGAIN). ”A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always a requisite part of a central bank’s DNA.” Now, knee-jerk FED supporters (insert name here) will maintain that is what Bernanke did in presenting QE1, QE2 and QE3–but he certainly had the support of a democrat-controlled HOUSE and SENATE in 2010. Also, the White House was a fervent supporter of massive monetary stimulus as he helped keep the economy from sliding into a chaotic state of asset liquidation. The FED may have suffered the barbs of some “tea party” legislators but for the most part the major powers in Washington and Wall Street provided the needed support for the FED.
Posts Tagged ‘repo’
The markets were tossed back and forth again today as the sudden ubiquitous Fed President John Williams was letting the world know his views about curtailing the Fed’s bond purchases. Why is the Fed’s newest voice busy spouting about the bringing forward tapering of bond purchases? It seems that Williams has decided that the U.S. economy is entering a virtuous cycle of rising home values, creating increased demand for autos and other large priced consumer durables. And then let’s add in the steady rise in equity values, as well as the repaired balance sheet of consumers, which will lead to job creation and possibly inflation. The question arises: Why does John Williams’ opinion carry so much weight? Because of his previous role as a DOVE on the FED board?
First, Happy Memorial Day to all the readers of Notes From Underground. If you are a veteran of the U.S. Military, thank you for your service. If you aren’t a veteran, take the time to thank those who have served to fight for the freedom to write blogs and entertain the free interchange of ideas.
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.
In the most significant news over the weekend, the Basel Committee announced that it was backing off from the implementation of the 2015 enhanced capital requirements for banks. Under the original Basel III requirements, global banks were going to have to have enough LIQUID ASSETS to be able to sustain a possible financial crisis of 30 days. The ability to sell assets to meet a possible run meant that banks would be forced to hold a larger amount of high quality, easily sellable assets. European banks have been clamoring for relief from the new capital rules for fear that the new standards would create less bank lending as banks rushed to shore up their balance sheets. U.S. banks were supporting the lobbying efforts by the European banks and thus the Basel Committee showed forbearance and lessened the possible impact by extending full compliance with the new regs out until 2019.
A an op-ed piece in last weeks WSJ created a great deal of buzz in the financial media. Appearing a few days after the aggressive move by the FED, the opinion piece written by five eminent economists–George Schultz, Michael Boskin, John Cogan, Allan Meltzer and John B. Taylor–criticizes the Bernanke Fed’s QE policy from many different aspects. It is not the criticism that is significant but rather the stature of the economists that are calling the question of the FED’s continued one-dimensional response to the tepid growth following the deep recession of 2007-2008. The media would have the public believe that the only economists qualified to theorize on the problems at hand are those chosen by the FED and its research staff. The financial media bowed to the altar of Alan Greenspan– the Maestro, Oracle and whatever else–and thus the cult of personality was thrust upon the markets.
Friday’s unemployment report solidified the TRIFECTA of LIQUIDITY for the week. ECB President Draghi seeded the “liquidity clouds” at Thursday’s press conference by announcing the installation of the OTM (outright monetary transaction), which will allow the ECB/ESM to purchase unlimited amounts of sovereign debt of up to three-year duration–of course with conditions for those asking for help. Draghi is hoping to buy the whole EU project enough time so that a FISCAL UNION CAN BE FORMED WITH THE ABILITY FOR THE EU TO ISSUE A TRUE EUROBOND.
Notes From Underground: SCHAUBLE Says Spain On The Road To Salvation (IS 25% UNEMPLOYMENT REPENTANCE?)July 9, 2012
First, the U.S. unemployment report was soft although if the ADP stats had not caused the WALL STREET ECONOMISTS to revise their guesstimates upward, the NFP would not have been such a miss from the early consensus. The average hourly earnings were above projections and while MANUFACTURING JOBS were up only 11,000, it was not a negative number. Although it wasn’t a robust number, it certainly wasn’t a huge miss from projections.
Is there anyone involved in financial markets who doesn’t believe that GLOBAL BOND MARKETS ARE BROKEN AS INDICATORS OF PREDICTED ECONOMIC PERFORMANCE? The FED has pursued a policy of TWISTS AND QEs as it pursued a policy of forcing real long-term yields to ultra-low levels in an effort to stimulate the housing market, capital investment and the portfolio balance channel in forcing investors to opt for riskier assets to enhance yield (Greenspan’s beloved wealth effect). The problem is that as the FED and other CENTRAL BANKS have bought TRILLIONS of sovereign debt in an effort to stimulate the global economy much COLLATERAL has gone onto the books of the monetary authorities and left the REPO markets lacking the necessary collateral.
The “MARKET” will resolve to test the GRIT of traders and investors as the mysteries of politics and economics collide to make the daily lives of traders difficult, to say the least. In 2011, the markets left traders and various investors sleeping like babies as we were relegated to getting up every hour to cry. We must remember that the market’s “JOB” is to cause as much heartache and pain to as many people as possible as money seeks to attain a positive return Last year the market was in its full glory as it caused some of the world’s foremost global macro investors to be humbled in a capacity not seen since the credit market debacle of 1994-95. This year seems to be of a similar ilk as the travails of the EUROPEAN UNION will continue to weigh upon the flows of global capital.