Notes From Underground: The Bank of Canada Holds Rates Steady, Or, Anything But European Debt

This morning the Bank of Canada (BOC) voted to keep rates steady as 1% as Governor Mark Carney voiced concern over the troubling situation in Europe. The BOC noted that weakness in the EUROPEAN ECONOMY could spread as more austerity is applied to the profligate peripheries. The Canadians are in a difficult situation as the growth in household debt is growing because of continued low rates and this is causing angst with economic policy makers. Finance Minister Flaherty noted that the Canadian government may have to find other ways to halt the increase in household borrowing. I am not a fan of Mr. Flaherty but it is nice to see a government actually thinking ahead of the problem and looking for ways to “LEAN AGAINST THE WIND.”

As my readers know, I believe that Mark Carney is a very solid central banker and his global macro views are first-rate. Giving Governor Carney more credibility is his role as the Chairman of the G-20-inspired Financial Stability Board (FSB). After the Lehman debacle, the G-20 authorized the Financial Stability Forum to establish an oversight board which is charged to analyze the WORLD FINANCIAL SYSTEM and look for ways to enhance the global system by advising nations on how to improve the transparency and strength of their financial systems. In his capacity as chairman, Mark Carney’s views carry greater weight and if he says the Canadians are still bothered by Europe, then we are to all be uneasy by the muddling madness of political Europe.

If the BOC feels itself to be restrained from raising rates, then it is certain that the FED under the hand of Bernanke will also be restrained. The hawks on the FED Board have no global view except for approving DOLLAR SWAP FACILITIES. Just shut up and say AYE.

***The FED‘s announcement several days ago about the new communication policy of stating the economic projections of the individual voters needs to be put in context. Last Thursday (1/12), the FED released the FOMC MINUTES of 2006. Reading through the statements of many of the FED board members should make us always question whatever projections are made. One FOMC member after another failed to understand the depth of the housing market and the New York Fed President at the time, Tim Geithner, was totally off base in understanding WALL STREET’S role in the housing debacle. FED CHAIRMAN BERNANKE was quoted in a Financial Times article from the FOMC minutes: “WE ARE UNLIKELY TO SEE GROWTH BEING DERAILED BY THE HOUSING MARKET.”

There are many other projections made by FED GOVERNORS AND PRESIDENTS and we know how badly flawed these projections were. At the January 31 meeting, Ben Bernanke replaced Alan Greenspan as FED Chairman and the transcript reads as a love PAEAN to the maestro, especially by Tim Geithner. Throughout the year some of the FED staff was growing concerned about the portending doom being transmitted by an inverting YIELD CURVE, but such an indicator did nothing to alter the projections of this august body. The reading of the 2006 minutes should make the FED think twice about inputting the individual projections. Again, this new FED policy will be the largest source of enhanced volume and volatility in the interest rate futures market.

***The newest European prime minister put into power by the Brussels autocrats is growing concerned that Italian austerity appears to be a one-way policy. Mario Monti is openly pleading for Germany to become more stimulative in an effort to relieve some of the stress that austerity is having on the economies of the GIIPS. PM MONTI is seeing that the more austerity the Greeks employ, the greater the strain to their budget. Monti has awoken to the ADVERSE FEEDBACK LOOP and is concerned that the Italian Polity will not be able to withstand the stress of continued financial strain caused by severe budget cutting.

Mario Monti was pleading with Merkel and the Germans that some type of stimulus to lower Italian and other peripheries borrowing costs was in …”its own enlightened self-interest.” Hey Mario, welcome into the house of pain. The collision course of continued budget austerity and ADVERSE FEEDBACK LOOPS will continue to plague the governments of the peripheries. Soon we should be hearing from Spanish PM Mariano Rajoy. Sarkozy would be orating but his balcony seems to be occupied by Marine La Pen.


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6 Responses to “Notes From Underground: The Bank of Canada Holds Rates Steady, Or, Anything But European Debt”

  1. danny Says:

    Happy new year Yra! I want to be bullish on Canada. I can’t help but think Canadian equities and the CAD has chosen to ignore what has been happening in the commodity space as of late. But at the same time, it seems like month after month their housing market is getting rather lofty. From what I have read, it appears the Canadian housing market was/is better regulated and managed than our own…but it still seems like a big pill to swallow to keep any weakness under control should it start to breakdown. What say you? How big of a role does the Canadian housing market play into your thinking?

    Thanks as always


  2. yra Says:

    Danny–the LOONIE has been a hearbreaker and devil on wheels.It suffers from its southern cousin’s bipolar disorder and is used by the global algorythmic diehards as a proxy for growth .Its banking system has been solid and its debt to GDP ration in the public sector is the best in the G7—but Canadian policymakers keep worrying about the credit explosion—the to and fro in the C$ is reflecting all of the above—trade it and do not get married to it but I will say that the cash chart on CAD/YEN needs to be watched to see if the LOONIE is the basis of a solid currency cross

  3. rjlafferty Says:

    Hi Yra, Bloomberg ran an article yesterday (Tuesday) titled Europe’s Libor Gap Vanishing on Fed Swap Surge. How telling is this as an indication of European stability and confidence?


  4. Mayank Says:

    Hey Yra,

    For the last couple of blogs you have mentioned your thoughts on gold. What are your thoughts on Silver? Since the drop in September it has been lagging Gold, if the ECP keep printing money and now IMF proposing for over $600 billion funding, wouldn’t this move be bearish for the dollar and bullish for gold and silver?

  5. yra Says:

    Ron–while this used to be a solid indicator in the present environment of central bank interventions it is much more difficult to tell.I have been using the 2/10 curves as an indicator and as the swaps and LTRO have been instituted the yield curves have positively steepened which is a “GOOD” thing as the previous inversions were a sign of great impending economic doom—so the ECB and the world have bought some time,but as Europe goes from crisis to crisis the question is for how long?

  6. yra Says:

    Mayank–I think that the lackluster action in silver last year especially relative to GOLD forces me to keep an eye on the Silver–especially as the industrial/precious metals–Platinum and Silver should out perform GOLD if the EQUITY markets hold their rallies.There is no question that the world’s Central banks are very committed to assure against a deflationary cycle taking hold so interest rates will be held at zero and liquidity provided as needed

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