As I ponder things in the 118 degree heat, it is time for some reflection and perspective:
a. The Bank of England performed beautifully today and took a breath before cutting rates further and/or increasing the BOE’s balance sheet. Now that Prime Minister MAY‘s cabinet is devoid of the idiot George Osborne, it behooved BOE Governor Carney to wait and see if fiscal policy would be the stimulative tool of choice and preserve the monetary policy for future use. I had advised my employers that Carney would be reticent to act because he is a cautious man and his recent plunge into the political realm in cahoots with George Osborne had sullied his reputation. It seems that Carney wants to remove himself from center stage and allow the new cabinet to have a say in just how to provide any stimulus in response to the dire forecasts from the BREXIT outcome.
Meanwhile, the high-priced pundits have certainly failed in their forecasting of outcomes. It’s interesting that the FOOTSIE even sustained its rally without any action from the BOE. Carney was correct in allowing the recent 10 percent POUND depreciation to work its way through providing stimulus to the economy. The only investors who are upset at the strength of the British stock markets are the private equity funds who were waiting for stock prices to drop to absolute panic levels. The GATING of the real estate funds to prevent firesale prices has caused many of the vultures to gulp antidepressants. Remember, “OLD MAN POTTER IS BUYING.”
b. The rage from Japan is that Bernanke has advised the BOJ and Abe government to embark on a massive “helicopter money drop” through the use of perpetual bonds. At this point I will not venture an opinion because it is clouded in the fog of monetary war. It is worth noting because Japan has been the Frankenstein laboratory of monetary policy. Remember, IT AIN’T ROCKET SCIENCE, no matter how many equations are provided to explain the desired outcomes. It is amazing that even with the threat of monetization of DEBT by helicopter drops the 10-year JGB yields remain at a NEGATIVE 25 basis points. (Heisenburg’s sense of scientific objectivity.) What will be the result of the helicopter policy? We just do not know because all we have is rumor and no genuine formulated policy.
c. Today’s PPI data came in HOTTER than expected, which led to a sizable correction in the long-end of the U.S. Treasury market. The U.S. 2/10 curve bounced off that 75 basis point long-term support and closed at 85.9 basis points. Friday we get the CPI numbers as well as retail sales. If the CPI reports HOTTER–consensus is for 0.2%–and retail sales is on the soft side, the long-end will offer a clue as to market concerns about FED policy. Will the FED look past rising inflation data if consumption data is weak? The key will be in how the bonds close if the mix of data shows increased prices, but less consumption.
d. The ECB is the most DANGEROUS institution in the world as it garners more influence via monetary policy to capture fiscal policy. The increased amount of debt piling up on the ECB balance sheet is a clandestine power grab to ensure the solvency of the heavily indebted peripheral nations. By breaking the pricing mechanism of the bond market Mario Draghi provides for lower debt costs for Spain, Italy et. al. Now, the immediate result may be deemed positive but the question ultimately becomes: Who bears the costs of this price manipulation? In going back to 2007 you can see that all sovereign 10-year yields were within 40 basis points of the AAA-rated German bund. The following period of debt stress revealed how dangerous for the financial markets when debt is badly priced. If Germany is not going to be the creditor of all the EU nations then the outcome will be extremely dangerous.
There was a Bloomberg article yesterday titled, “Have You Thought About Tapering ECB Bond Buying, Mario Draghi” by Piotr Skolimowski. The article cites Jens Weidmann’s regular concern about QE, how it “can raise volatility in asset prices, and squeezes risk premia…” Also, Patrick Artus, the chief economist at Natixis, notes that the longer QE is kept the more irreversible it becomes. “If the ECB chose to taper, it would run the risk of sparking a fresh peripheral debt crisis.” This awakens genuine concerns about the question I raised to FOMC Governor Jerome Powell: Who guarantees the ECB? The answer, as my readers know: “THEY HAVE A PRINTING PRESS.” The ECB meets next Thursday and my initial thoughts are that President Draghi will not move to cut rates further into negative territory but will move to RAISE THE LEVEL OF QE TO MINIMUM OF 90 BILLION EUROS A MONTH. He needs to keep piling on the DEBT to put more pressure on the Germans to bail out the entire EU. This is something to contemplate as we move along the watch tower with the JOKER and the THIEF.