Let’s clear the air. The lead story in today’s Financial Times was “ECB Officials Met Bankers Before Big Policy Moves.” This is why the battle cry of Notes From Underground for the next two months is PEPPER SPRAY DAVOS. The financial markets have been rendered meaningless. Not by the mere massive QE programs of global central banks but by the sheer possibility policy makers were providing fore-warnings to large private institutions before public releases. This is the epitome of what Adam Smith warned about 250 years ago. It is difficult enough to trade and invest in a zero interest rate world but when the investment is “rigged” by the ability of the large institutions to be privy to information prior to public release, well, the math must be 2+2=5 for nothing is balanced.
The FT was able to secure copies of the diaries of top ECB decision makers, which revealed several meetings with private sector investors just prior to “significant policy decisions.” The article states a very troubling policy approach: “ECB officials regularly talk to market participants. Like their counterparts at other central banks, they have a duty to explain their policies to markets, and believe that doing so can make their actions more effective. The ECB said it was also important for policymakers ‘understand financial markets, since this is how monetary policy is transmitted into the real economy.'” This is unadulterated BULLSHIT. The ECB is citing the rational for all central banks to try to control the outcomes of their policy. THE OBJECT OF MONETARY POLICY OUGHT TO BE TO INITIATE THE POLICY AND FOR THE MARKET TO DECIDE ITS EFFICACY. In monetary policy the markets’ reactions to any stated policy will be the reactions of the yield curves in letting the CENTRAL BANKS know if the policy is appropriate.
The desire of the FED et al. to direct the outcomes of its decisions is what has broken the signalling mechanism of the debt markets. And, of course, currying favor with the established über wealthy certainly helps “foam the runway” for a post-government job. It is astonishing that the SEC and the New York Attorney General search for insider trading in all the wrong places. A 2 million option play on a takeover stock is nothing compared to the vast fortunes made trading debt and equity markets with a tip as to central bank decisions. Wow, the DAVOS crowd knows no limits to its systemic advantages.
***In a follow -up to yesterday’s piece on the European sovereign debt, Bloomberg ran a piece that said the ECB bought 63.7 billion euros of assets in October as the central bank compensated for a shortfall of purchases during the slower summer months. The ECB revealed that its purchases of COVERED BONDS increased at “the fastest rate in seven weeks.” Buying of covered bonds is removing the highest quality private debt from the collateral needs of borrowers. The bottom line is that the actions of the ECB will continue to disorient bond investors unless you have direct access to the central bank bond desks. A possible chink in the ECB QE policy arose last week when the Swedish authorities told its banks to “stop pretending all government bonds are safe.”
Presently, under the Basel Rules sovereign debt is deemed to have a zero-risk weighting so banks don’t need to hold capital against the paper. After the recent bout of stress in the Greek market the Swedes have “… let the cat out of the bag: it is possible to lose money on sovereign debt.” The Swedes have determined that their banks need to assign real value based on market prices. Though the ECB may not believe it, not all sovereign debt is created equal, but of course that relies on the central banks beginning to respect the markets collective wisdom in determining prices … if only.