Notes From Underground

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.

Tags: Ben Bernanke, Benoit Coeure, BOJ, ECB, Euro/Yen, Fed, financial repression, FOMC, Infamnia, Janet Yellen, Mario Draghi, QE

This entry was posted on May 21, 2015 at 5:33 pm and is filed under BoJ, Central Banks, Currency, ECB, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.