This is a tribute to N.B. and his continued effort to search for perspective (and his love of Joni Mitchell):I’ve looked at life from both sides nowFrom up and down and still somehowIt’s life’s illusions I recallI really don’t know life at all
The first QE was activated in late 2008 after it appeared that merely cutting interest rates was not enough to prevent the mass liquidation of financial assets. So the Fed begins purchasing mortgage-backed securities and U.S. Treasuries to provide ample liquidity to the financial system. The failure of the economy to respond with more robust growth led the FED to do more QE and so we got QE2 in November 2010 and an open-ended QE3 in September 2012. The advent of QE3 was necessitated by the European sovereign debt crisis, which caused a global flattening of yield curves as frightened European investors and global money funds were terrified of buying any short-term debt instrument for fear of a European sovereign failure. European two-year note yields soared and U.S. long-term yields dropped as fear forced investors to relatively safe harbors. The U.S. and European yield curves made their flattened on the same day (July 24, 2012) for the next day ECB President Draghi made his now famous statement–“We will do whatever it takes”–to ensure the solvency of the European peripheral nation and of course the euro currency.
The low on the U.S. 2/10 in July was a relatively flat 117 basis points. As the global economy steadied and the Fed increased its balance sheet, the yield curve has again steepened to the current level of 230 basis points. When the financial pundits warn of flattening it’s with no perspective longer than 24 hours. I maintain that the curve is at a robust level and while flatter than three months ago, it is far from flat. As the Bloomberg chart shows, the average level for the last eight years is 160 basis point. Is this a flat curve? Hardly. While I believe the yield curves are very directional, I want us to maintain perspective … “From Both Sides Now.”
***Tonight the BOJ will announce its interest rate policy. While there will be no change in the current 0.10% rate some analysts believe that the BOJ will bring forward its asset purchase programs to help the markets adjust to the recent three percent increase in the sales tax. While the Abe Government would like to see Japanese investors reallocate their portfolios to equities from bonds, it may fall upon the BOJ to be the initiator of increased stock purchases. The BOJ is authorized to purchase some types of Japanese equities so be mindful of the NIKKEI and other stock indexes to judge the impact of any effort by the BOJ to increase liquidity by bringing forward its stock purchases. The Nikkei closed near its 200-day moving average today so the markets are waiting to see if the BOJ can have a similar effect to the FED in causing a change in the PORTFOLIO BALANCE CHANNEL. Will Japanese pension funds and other investors come to believe that the 20 years of deflation are ending and that bonds are a miserable investment in the time of rising inflation? The Abe Government has much vested in the “three arrows” strategy of creating economic growth and this policy is at a critical juncture as growth has begun to dissipate. The BOJ under Governor Haruhiko Kuroda has been a willing participant in the Abe policy and has its credibility on the line. What say you Mr. Kuroda?
***We are awaiting election results from Canada, especially Quebec. The Canadian dollar has performed well during the last five trading days so its appears the Liberal Party will prevail and the secessionist Parti Quebecois will be handily defeated, but do not have any hard results as of yet.