There’s a little levity during a very stressful week of trading. Germany meeting Argentina in the World Cup final is symbolic of the battles being waged by the world’s central bankers. Jeremy Stein and the BIS view the threat of financial stability a potential concern of Janet Yellen and Mario Draghi. The world’s financial markets will be watching to see what style of play on the pitch prevails: The aggressive Argentinian speed or the more AUSTERE and supreme defensive style of Germany. In the spirit of global macro humor I ask these questions:
- Will presiding referee Thomas Griesa issue a RED CARD to the entire Argentinian team for defaulting on its debt?
- If the Argentinians get control of the ball will someone from Elliott Associates come and grab it as Griesa deems it an asset of the debtors?
- If Argentina prevails, will the trophy be confiscated and given to the intransigent creditors for sale on E-Bay?
- Will Griesa suffer the slings and arrows of outrageous fortune as he is deemed by FIFA to be a biased American judiciary with no genuine knowledge of the international beautiful game of debtor/creditor?
***The question to which we keep returning: ARE THE WORLD’S CENTRAL BANKS THREATENING THEIR CREDIBILITY? A corollary question: DOES THE FED UNDERSTAND ITS OWN FALLIBILITY? As yesterday’s FOMC minutes revealed, confusion reigns within the FED as to the strength of the real economy, especially in ways to measure the OUTPUT GAP of the employment data. How much slack exists in the labor pool to prevent a dramatic rise in wages is of paramount importance for the Fed’s “forward guidance” (and signaling to markets future FED intentions). The FED speaks with great confidence in its projections but if past performance is a guide investors should treat all Fed projections with skepticism. It was the highly regarded Ben Bernanke who maintained well into late 2007 that the housing slowdown was well contained and should pose no problems for the U.S.economy. Yet, the impact of the U.S. credit crisis was severe enough to effect banks and bondholders across the globe. The bottom line is that the FED is fraught with failings and for investors to treat all Fed releases as pearls of perfection should proceed with caution.
“Ms. Yellen told us that policy under her leadership is not rules based. As such, market participants have to rely on the Fed’s ad hoc assessment. And that is very much like reading tea leaves, as the Fed is looking at backward-looking indicators such as the most recent unemployment report. Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed gauges. That, in turn, forces market participants to try to read Ms. Yellen’s mind. Her statements make it clear that her focus is on keeping rates low to help promote job growth until inflation readings get enough over the targeted 2 percent level to warrant concern in her mind.”
Tags: Argentina, BIS, Dollar, ECB, euro/stokie, Fed, FOMC minutes, Germany, Gold, Janet Yellen, Jeremy Stein, Mario Draghi, PIIGS, World Cup
July 11, 2014 at 10:11 am |
What credibility?
1) The Central Banks totally missed the massive mortgage scams that largely caused the 2008 crisis.
2) The Central Banks responded to the busts caused by the last 2 bubbles, by creating a massive 3rd bubble. They panicked, and did not allow “creative destruction” to create a firm foundation for the next recovery.
3) IMO, Treasury bond yields have stayed low because there is a permanent “flight to quality”, and not because the FED has done a good job controlling inflation. Investors do not trust a jerry-rigged economy.
July 11, 2014 at 12:19 pm |
shocked—your opinion is valid as the bond trade is a conundrum for those looking for higher yields with a higher dollar—fed infallibility
July 14, 2014 at 10:00 am |
The outright level of the BTP 10-year is still far away from the 3.30% peak that sparked a strong return of domestic demand.