The Fed released the minutes from the March 17-18 FOMC meeting and we would all do well to remember to be PATIENT and not be so quick to react to the headlines. (Again, I am going on record to plead that the Fed not release any data early to journalists so they may be able to release their headlines in unison with the actual Fed release. Many journalists write headlines that are misleading and allow the HFT algorithms to exploit key word phrases that are not substantiated by the actual story.) A case in point is the CNBC headline that appeared at the moment of the Fed release: “Several Participants Judged That Economic Data And Outlook Were Likely To Warrant Beginning Normalization At The June Meeting.” Yes, this is a direct quote from the minutes but it comes with a QUALIFIER. Following that line is this: “HOWEVER [emphasis mine], others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.”
The FED Minutes repeatedly use the words, MAJORITY, MANY, A NUMBER OF PARTICIPANTS to convey the people’s interactions during the FOMC meeting. There are only TEN members who voted at the March meeting so these measures of possible combinations of votes do not demand such vague verbiage. Tell us the absolute numbers of pros and cons and let market participants draw their conclusions. The FED is creating volatility through poor communication. If you have something to definitively say, just say it. In using the aforementioned terms, the Fed conveys that there were those in opposition to the FOMC‘s decision and brings to question how the vote was unanimous. It just doesn’t add up.
The minutes did reveal a great deal of discussion about the use of the O/N RRP and IOER to drain excess reserves and even noted the idea of SELLING ASSETS from its balance sheet as a way of reducing O/N RRP usage. From the Minutes:
“Many participants mentioned that selling assets that will mature in a relatively short time could be considered at some stage, if necessary to reduce O/N RRP usage. However, a number of participants noted that it could be difficult to communicate the reason for such sales to the public, and in particular, that the announcement of such sales would risk an outsized market reaction, as the public could view the sales as a signal of a tighter overall stance of monetary than they had anticipated or as an indication that the Committee might be more willing than had been thought to sell longer-term assets.”
This is an absolute admittance that the FED IS CAPTIVE TO THE PHOBIA OF ANOTHER TAPER TANTRUM. The FED is heavily dependent on the reaction function of the market place and I would assume that the word PUBLIC is a euphemism for WALL STREET. As I wrote in response to the FOMC meeting and Yellen’s press conference, the FED CAME, SAW and FAILED TO CONQUER ITS FEAR. In the fashion of Colin Powell it seems the FED has broken the markets through massive QE and now it turns out they own the outcomes. ASSET PRICES ARE THE NEW WEAPONS OF MASS DESTRUCTION.
***Last night, the Bank of Japan decided to stay the course on interest rates and its QQE Program (quantitative and qualitative easing). The vote was 8-1 with one BOJ member pushing for an increase in monetary stimulus. The market may have been a little surprised because of a Reuters article from April 1. Titled, “Abenomics Architect Says BOJ Must Ease Again on April 30,” the substance of the news being that Kozo Yamamoto, a leading LDP expert on monetary was pushing for more stimulus by the BOJ. It seems that Mr.Yamamoto was the main push behind last October’s surprise move by the BOJ to increase QQE asset purchases.
The market didn’t react aggressively to the Reuters article but it is something that should stay on our radars. In talking with Tobias Harris, his initial response was that there is push back to Mr. Yamamoto because the weakened YEN has been a burden to the middle class as import prices have risen. (A secondary effect of a weakened yen as it impacts the average Japanese purchasing power and thus it would be too soon for the BOJ to enhance its asset purchases.) If more information appears I will analyze it.
Tomorrow, the Bank of England announces its interest decision. There will be no change because of the upcoming elections and Governor Carney is not happy with the strength of the British pound relative to the EURO. Britain’s main trading partner is Europe and with the current account deteriorating Mark Carney will not to anything to add further strength to the British Pound,thus no change.
***Pay no attention to the IMF and its warnings about a global slowdown. The IMF is a fine micro analyst but its macro views would not be of value for investors. Yesterday, in its World Economic Outlook, the IMF joined the club of “SECULAR STAGNATIONISTS” and lowered its growth forecasts for the next five years. The media relishes the IMF announcements but investors would be much poorer if they invested in response to the output of IMF research. More importantly, the IMF is a conduit of G-7 political as well as economic policy and its research is to be judged in that regard. The present IMF involvement in the Greek bailout is a classic case of politics before economics as is the current efforts in the Ukraine. Caution indeed.
***A tip of the hat to Fred Smith, the Chairman of FEDEX. It was announced yesterday that FEDEX is planning to purchase TNT EXPRESS in an effort to expand its European presence. In a Financial Times article Fred Smith is quoted as saying “… the timing of the deal with the Netherlands company was influenced by the strength of the U.S. dollar as well as signs that lower oil prices and the ECB’s monetary stimulus were delivering a boost to Europe’s economy.” It is an intelligent CEO who uses a strong dollar and low borrowing costs to acquire assets when financial opportunities arise. The DOLLAR won’t be strong forever so it is wise to use an asset that has recently appreciated 25 percent to add growth. The work of Andrew Smithers in using Tobin’s Q theory about mean reversion in finance is what Fred Smith utilized. TNT‘s assets became cheap in dollar terms so in classic Tobin theory it became cheaper to buy than to build.
Many others will follow FEDEX in an effort to increase a European and global footprint ,so analyze foreign companies that are possible acquisition targets. In Canada, POTASH corporation has been a possible type of target. In 2010, BHP Corp offered to buy the world’s largest fertilizer company for the equivalent of $40 billion and the Canadian dollar was very strong at 1.05 Canadian to the U.S. DOLLAR. Today the POTASH market cap is roughly $27 billion and the Canadian dollar has depreciated by 20 percent to 1.25. In terms of the Chinese yuan, the Canadian dollar is more than 30 percent cheaper making the world’s largest fertilizer company a tempting target to the world’s largest food consumer. Low interest and depreciated currencies can prove to be a potent mix.