At 8:00 a.m. EST, CNBC‘s announcer says, “From The Most Powerful City In the World, This Is Squawk Box.” What bothers me is the squawking about your importance. What irritates me even more is that Beijing has been the most powerful city when it comes to moving markets. Every other idea spewed this week has been about the impact of the Chinese authorities and the policy impact from the Politburo that “destroyed” trillions of equity market value. It even appears that the Chinese are dominating the discussion in Jackson Hole, Wyoming where the Kansas City Fed is hosting their annual symposium. Even New York Fed President Bill Dudley, aka Less Compelling, cites the Chinese as the reason to be less compelled to raise rates at the September meeting.
Yesterday, the markets were emboldened by Dudley’s comment about market turmoil and global uncertainty possibly delaying any action by the FED in the near future. The key phrase from the NY FED President was the Fed was indeed data dependent, “BUT DATA IS NOT JUST ABOUT ECONOMIC RELEASES.” Dudley explains that “international developments have raised downside risks.” So the NY Fed is aware of events in China and other emerging markets and will consider them in the context of the Fed’s dual mandate. Again, enveloping the Fed in the dual mandate allows the central bank a very wide reach in setting policy. In a world of free capital flows any action by the Fed can cause a negative feedback echo upon the U.S. economy. This certainty lends credibility to the Ben Hunt thesis on central bank omnipotence. The FED defines the rules of its beloved dual mandate and therefore can never be wrong.
The only objective force challenging the Fed’s omnipotence is the market, and the Fed’s QE and forward guidance have done much to emasculate the signalling power of the BOND, currency, precious metals as an opposing force. The equity markets act in concert to help the world’s central banks maintain the illusion of omnipotence. I have heard the rumor that the only way to get in the Jackson Hole Symposium is to follow the green brick road to the Lake Jackson Lodge, knock on the door, click your ruby slippers and pronounce your belief in the omnipotence of the all-knowing central bankers.
***Something to ponder: I have been wondering if the increased volatility and swings in all asset classes is a result of the PBOC actively trading markets. Because it is the Chinese actions moving equity markets, which result in wide swings across all investments, wouldn’t it be in the best interests of China’s central authorities to profit from their vast global influence?
Back in the late 1980s and early 1990s, the largest foreign currency trader in the world was the Monetary Authority of Singapore (MAS) and they could create all types of volatility through release of statements (the central bank of Singapore made huge profits from its ability to disrupt). There’s no proof to my thinking but if I ran a large sovereign wealth fund I would utilize the influence that the market lent to my nation’s credibility for as long as I could.The global-macro tapestry is always filled with pitfalls but the power of a government authority to impact trades is a very real possibility.
***BOJ Governor Kuroda made a strange statement. He said, “Abenomics has corrected excessive YEN appreciation.” Kuroda mentioned this during a speech and Q&A at the japan society in New York. This followed a statement from one of Prime Minister Abe’s lieutenants, who said after last week’s Chinese YUAN devaluation the BOJ could do more QE. Bloomberg News reported at the meeting that Kuroda said a “… Fed rate increase would be good for the World Economy. If Fed officials raise their short-term interest rate target that means that they are confident that the U.S. economy is strong and robust and that is not only good for the U.S. economy but also for the world economy, including the Japanese economy.” Of course if the FED raises rates the Japanese YEN would move down and the world could not blame the BOJ or ABE administration. A lower yen without responsibility.
If the Japanese were to initiate a policy of more YEN weakness, even with a very low print in tonight’s CPI and retail sales data release, the Chinese would PROBABLY respond in kind with a renewed bout of YUAN weakness. Be very attentive to YEN values in a world where financial power emanates from Beijing, even the hills of Wyoming alive with the sounds of Mandarin.