Notes From Underground: It’s An Infamnia

As we come to the Memorial Day holiday, the markets are still focused on Greece; the Fed’s desire to raise rates (or not); the ECB and its new policy of front loading its bond purchases to deal with the low volume of the summer months; China’s slowing growth; and the regular array of global macro concerns from politics to the continued role of central bank liquidity programs and the continued impact of QE on global asset prices. Tonight, the Bank of Japan will announce its interest rate decision and it seems that Governor Kuroda will keep the present policy in place: NO RATE CHANGE AND NO INCREASE IN ASSET PURCHASES.

The YEN has been a non-event in the recent currency moves. However, as the EURO has rallied the YEN has weakened on the all-important EURO/YEN cross. The YEN has depreciated 8 percent against the euro over the last four weeks, almost to the 200-day moving average. The YEN technicals seem to point to a weaker YEN even without the BOJ moving to increase liquidity through more QE. In today’s Fast FT column, it said: YEN, “Extremely Cheap,” says Deutsche Bank.

This is a classic case where the technicals and fundamentals may diverge as the charts reflect weak prices while fundamental analysts utilizing the purchasing power parity analysis maintain that the YEN is severely undervalued. The only thing I am sure of is that the BOJ will not alter its present policy. The Japanese will not want to raise any red flags about its success in weakening the YEN over the last 30 months.

It’s an INFAMNIA. This comes from the scene in the GODFATHER in which all the Families are meeting over the idea of officially getting into the drug business. Don Zaluchi, the head of one of the families proclaims, “Sale of drugs to children would be an INFAMNIA [defined as a disgrace, ignominy  or despicable act].” So I present my own infamnias:

1. Benoit Coeure, an executive director of the ECB, revealed to an audience of private financial chieftains that the ECB would front-load its QE purchases, which resulted in “insiders ” having access to important market news well before the news was released to public investors. The ECB said in a prepared statement: “… the intention had been to release the remarks on Monday as Coeure spoke and that a procedural error prevented that from happening until Tuesday morning. It also said the speech was covered by Chatham House Rules, meaning it wouldn’t normally be published.” (Bloomberg News). It seems that the ECB would provide more liquidity in the summer months to help deal with the lack of participants due to vacations and purchases would be reduced in September to make the average 60 billion euros. The fact that Benoit Coeure is a free man while the British citizen Nav Sarao sits in prison for a highly doubtful criminal act is an INFAMNIA;

2. As Rick Santelli reported, there’s a statement within the FOMC minutes that boggles the mind. “In this connection, it was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds.” So the FED is fearful of raising rates because of the concern of unleashing another taper tantrum by the markets. It is the FED that is largely  responsible for the three elements it cites as creating an environment of possible uncertainty. The continued use of QE as its sole policy has broken the signaling mechanism of the bond market. To point to the potential volatility as a reason not to move too quickly on interest rates is at best disingenuous, and, at worst, an INFAMNIA;

3. Last week, ECB President Mario Draghi delivered a speech to the IMF in Washington, D.C. It was titled, “The ECB’s Recent Monetary Policy Measures: Effectiveness and Challenges.” Draghi discusses many serious issues but in the segment, “Collateral Consequences Of Monetary Policy,” Draghi reveals a great deal about central bank thinking in regards to QE. It seems that the DISTRIBUTIONAL EFFECTS are meant to favor debtors over savers. If the ECB had allowed disinflation to take hold the younger households would have been most affected. The largest debtors according to the ECB are from 16-44 years of age so if prices are falling the burden is of rising debt in real terms. ” In contrast, older households tend to have positive net wealth, some of it held in nominal assets. Inflation undershooting, therefore, results in redistribution from younger to older households.”

In another effort to be “honest” Draghi said: “But such interest rate cuts are necessary to raise aggregate demand by encouraging firms and households to bring forward spending decisions–that is, they discourage excessive savings and incentivize investment by lowering the cost of finance. Moreover, to the extent that borrowers tend to have higher propensities to consume and invest than lenders, such distributional effects may be helpful for the recovery.” Later, Draghi added a caveat that is something that Bernanke or Yellen have been afraid to mention, “For pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward. They may on the contrary become an inducement to save more,to compensate for a slower rate of accumulation of pension assets.”

This is the crux of the QE debate and may solve the riddle plaguing economists as to why growth is so tepid. The baby boomers have cut back their consumption, increased savings in order to have enough assets for when retirement finally arrives. The problem is greater in the U.S. for older people are working longer and not making room for the next generation.

Added to the problems of the “next generation” is the amount of college debt they are saddled with, preventing an increase in their consumption as wages rise. Bottom line is that the FINANCIAL REPRESSION that pervades the reasoning for QE has a cost.Further, in Europe, it is the Germans who are the savers and Italy, Spain France, et. al. Who are the debtors so the burdens of financial repression fall disproportionately on the German citizens. In the eyes of the Bundesbank, this is an INFAMNIA.

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10 Responses to “Notes From Underground: It’s An Infamnia”

  1. Chicken Says:

    So it’s not only transferring wealth from savers to gamblers, it’s also levered by selective control of information.

    Why isn’t this illegal?

  2. Kevin Says:

    Yra a classic post, thank you very much.

    How long until governments feel the need to introduce more financial repression – such as capital controls, prescribed assets and transaction taxes? I guess when they feel they’re losing control of rates…

  3. Alex Says:

    Shocking what’s happened to Nav. He sits in a jail, no bail and no trial. Meanwhile the big banks just get fined another multi-billion amount and we aren’t even allowed to know the names of the crooks who of course won’t go to jail.

    If you’re not connected and don’t pay your shakedowns the Federal government is one nasty enterprise. Full of INFAMNIA.

    Personally I’d rather deal with the Kray twins or the Gambino’s. At least they’re honest about the business they’re in.

  4. mikegre2014 Says:

    In my neighborhood, we call an infamnia a shanda.

  5. yra Says:

    Mike–infamnia has a stronger sense of a wrongful act but it would probably be a shanda + chutzpah for full effect

  6. Mike415 Says:


    Great post as always, keep them coming. Have a great Memorial Day weekend.

  7. Dan DeRose Jr Says:

    Yra, Great post indeed! I wonder if the very fact that the distributional effects of QE can be viewed as an infamnia and not manna from heaven has any implications for central bank omnipotence going forward. If you’re the tip of the spear per usual, how long until others spurn the missionaries of financial alchemy?

  8. kevinwaspi Says:

    Maslow’s hammer, popularly phrased as “if all you have is a hammer, everything looks like a nail” was never more applicable than to the Central Bank folly. Call it financial repression, academic hubris, or INFAMNIA, these fools continue to believe they can create “demand”. Over-levered systems are trying to achieve “equilibrium”, but central bank models don’t understand this.
    Their “equilibrium models” are unable to work with bloated balance sheets and the liquidity trap that they have created with this nonsense. It is not only bond markets that are broken, it is the entirety of “public markets”, unless of course, you happen to be one of Benoit Coeure’s “private investors”.
    Welcome to the new world order, and have a respectful Memorial Day.

  9. Chicken Says:

    Who says crime doesn’t pay? So does deflation, if you’re on the right side of the trade. And what better mechanism is there to ensure future deflation than by pulling demand forward?

  10. ShockedToFindGambling Says:

    Yra, the FED appears to have little market knowledge. You can tell by the way they word statements, that they don’t understand how the markets work.

    High frequency traders have zero net affect…….they buy/sell and then cover quickly.

    Low bond inventories by dealers is a good thing, if the FED thinks they are going to force rates higher……….the dealers will suffer less losses (what I think the FED meant to say was the reluctance of dealers to buy bonds during a decline will be a problem in a bear market, but dealers will just sell futures or other hedges, as they accumulate inventory, exacerbating the decline).

    And elevated assets in bond funds are a problem? OK, I guess they can turn sellers, but it was the FED that stimulated a lot of the bond buying, with QR and ZIRP.

    Had the FED just started to raise interest rates a couple of years ago, before this bubble was so advanced, there would have been minimal negative response.

    It is the FED who through their fear of raising rates and many delays, has turned a mole hill into a mountain.

    At this point, it appears to me that the only viable course of action is for the FED to let the Fed Funds rate float (after fixing the excess reserves situation).

    The FED should really hire Yra to advise them on market dynamics.

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