Lies, lies, you’re tellin’ me that you’ll be true
That’s all I ever hear from you
I shed a million tears for you
And now you’re lovin’ someone new
Someday I am gonna be happy
But I don’t when just now
A-breakin’ my heart
You think you are such a smart girl
And I’ll believe what you say
But who do you think you are girl?
To lead me on this way, hey!
This song can be applied to so many policy makers: Draghi, Lagarde, Kuroda and, of course, Yellen. This week has brought interest rate policies from five central banks and the biggest impact was from the Fed as the market believes that the “dot plot” has thickened since the projections for “four is still in the park” has certainly left the rate increases stranded at SECOND. Today, three banks announced policy decisions. The Swiss National Bank left policy unchanged but noted it believed that the global economy was soft and as usual the Swiss franc was overvalued. The SNB reserves the privilege of intervening to weaken the FRANC whenever it deems it appropriate. The recent strength of the EURO and the stability of the EUR/CHF cross should keep the Swiss quiet but vigilant.
The Bank of England also kept its QE and interest rate policy unchanged and again the vote was unanimous. Mark Carney committed a blunder by opining on the economic uncertainty caused by the BREXIT referendum. It is best for central bankers to carry a big wallet and say little about politics and fiscal policy. The BOE left the overnight rate at 0.5% and yet the British pound had a significant rally as DOLLAR weakness was the key feature of the market. Slowing growth in emerging markets is likely to keep downward pressure on inflation.
The Norges Bank cut interest rates by 25 basis points to 0.5%, as was expected. The Norwegians said NEGATIVE rates were a possibility but that is talk for the current success of negative rates is being debated in many circles. Just another week of central banks trying to keep the world afloat by perpetuating the global equity rally funded by a continued malpricing of global credit.
***There are many news stories circulating about the severity of the underfunded public pension funds. It seems that the ultra-low yields on sovereign bonds are preventing pension funds form meeting their funding requirements, especially as equity markets have been roiled by extreme volatility, which has led to diminished returns. Many pension funds have covenants preventing the use of high-risk assets and thus are subjected to the REPRESSIVE YIELDS SET BY CENTRAL BANKS. Fed Chairmen Ben Bernanke and Janet Yellen have told the “complainers ” to silence themselves about low yields because there have been many benefits to the policy of financial repression: Housing prices are higher; equity markets have risen dramatically; your grandchild or neighbor has a job and so on. But the bottom line is that the burden has fallen on middle class savers as their pensions have been the recipients of the Fed’s financial repression. It is not the wealthy who live off pension fund cash flows.
This is a classic case of what Fyodor Dostoyevsky so beautifully detailed in the chapter from the Brothers Karamazov, “The Grand Inquisitor.” The story is the object of authority, miracle, mystery for it is the Fed’s authority that allows it the miracle of levitating the equity markets and its financial repression is but a mystery. After all, the FED has created the ultimate perpetual money machine as it earns profits that are handed over to the U.S. Treasury. So ends another week where we are hypnotized by the government’s ability to take our BREAD with the left hand and return the bread with the right hand and we buy more of the value stretched assets. Lies, lies you think you are such a smart girl.