Today, the trial of former IMF Director Dominique Strauss-Kahn [DSK] began in Paris. The former IMF director is charged with “aggravated pimping in an organized group.” Well, if DSK is on trial for aggravated pimping, it seems that St.Louis Fed President James Bullard OUGHT to be indicted on a similar charge.
Today, President Bullard reversed course from his October 15 comments about the possible need for the Fed to enact more QE. If you can remember, that was the day the U.S. BOND MARKET was in the middle of a massive day rally as the SPOOS and other equity markets were under severe selling pressure. Many pundits surmised that it was Bullard’s comments that provided the impetus for the SPOO rally that saved the day for equity investors.
Well now that the equity markets have regained their upward momentum, President Bullard found an alternative voice while speaking at a conference in Delaware. In a Reuters report, Bullard purportedly downplayed the Fed’s recent concern over “international developments” and said the “… Fed needs to raise rates sooner” as it seems that he believes lower energy prices will provide a tailwind to the U.S. economy and that low energy prices are also distorting inflation data.
In my opinion, Bullard reflects how much Fed policy makers bend to the movement of equity markets, which is a TERRIBLE way to manage monetary policy. If the SPOOS are the major factor in determining FED policy then the world’s most powerful bank is merely pimping for Wall Street. Markets down means Fed is dovish. Yet when equities rise the hawks come home to roost. That is serious “AGGRAVATED PIMPING.” President Bullard, please resign from your FED post and preserve any dignity you may have left.
***A PERSPECTIVE ON CURRENCY PEGS. Last week, Denmark announced that they were stopping selling longer-term bonds because investors were purchasing Danish debt, which was putting upward pressure on the Danish kroner. The kroner, like the Swiss franc, is pegged to the euro and the euro weakness has forced the central bank to move to negative interest rates in an effort stem the currency’s appreciation. Unlike the Swiss, the Danes have not been buying euros in large quantities to maintain the PEG but speculators believe that the Danes will capitulate and end the PEG and allow the kroner to appreciate. But because the Danes have the support of the ECB in supporting the PEG, it has more firepower in which to punish speculators. (The PEG is 7.46 kroner to a euro with a range of a 4.5% move, 2.25% up and 2.25 down from the long-established PEG).
The power of the Danes, though, is to utilize negative interest rates to punish speculators, especially the use of NEGATIVE RATES on short-term funding. By stopping the sale of BONDS the Danish Central Bank will force all foreigners into the short end. That is where the bank can punish Danish kroner buyers. In 1992, when the French franc was under speculative pressure to devalue against the D-Mark, the French Central Bank would raise overnight interest rates to 100% to punish speculators by having to fund their short positions at a very punitive rate. The French prevailed and successfully defended “Le Fort Franc” and defeated speculators of the magnitude of George Soros.
In an opposite move, it looks as if the Danes are set to lower overnight rates to maintain its PEG (as a lesson to the Swiss National Bank). Manipulating interest rates is far easier than selling massive amounts of your own currency. The Danish Central Bank is prepared to lower rates to unheard of levels in an effort to prevail, thus no need to fund the government in the bond market. Can the Danes take overnight rates to 5%, 10% or what? How much are speculators willing to pay to fund their positions?