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.
Tags: BOE, BOJ, Brexit, British pound, ECB, Footsie, JGB, Mario Draghi, Mark Carney, QE, Theresa May
July 14, 2016 at 7:36 pm |
Great post Yra.
Spot on castigation of central bankers who don’t get that their assumption of the role of savior dooms them to be the devil that fools everyone into thinking they can do it all (even themselves.) That’s been an increasingly intense theme of mine since early last year: no structural reform, no real growth.
That is the reason Carney deserved the kudos you gave him for reasonable assessment. And as for that fool Bernanke, of course he can never admit that being a total wimp when Chuck Schumer gave him those infamous “Get to work Mr. Chairman” marching orders four years ago (almost exactly) instead of following Corker’s advice to toss it back to Congress is at the core of the US problem.
He’d rather run around telling everyone else how it is all they can do, and they better do more… of something that has failed, and in Japan’s case for over 20 years. Did you catch Santelli today?
Maybe the Europeans are so pissed about Brexit because it has the potential to tip over supranational control and excessive fiscal rigidity at the same time. Wouldn’t it be great if after a few years the Brits were growing better than the continent under supply-side economics’ lower regulations and taxes? We can only hope so, and that the idiots here maybe get the message too.
Best-
Rohr
July 14, 2016 at 7:37 pm |
Will the FED look past rising inflation data if consumption data is weak? “Transitory”, is the operative response.
Germans are drinking Draghi Kool-Aid and liking it. Else they might be arrested and sent away on a train?
July 14, 2016 at 7:50 pm |
chicken–we don’t seek to offend anybody but C.Wright Mills power elite–no bashing of nations even remainers.
July 15, 2016 at 10:23 am
Precisely, yra.
July 14, 2016 at 7:49 pm |
off topic. what would a trump presidency mean to treasuries? do your readers have ideas. its totally serious question because i think he is going to win. not an endorsement just a prediction.
July 14, 2016 at 8:08 pm |
David–i can’t ponder that yet—too much in the intervening period
July 15, 2016 at 7:07 am |
David — I echo Yra but add that you can’t ignore role of congress. They fill the Treasury and my gut tells me a GOP congress would push back harder on Trump than they ever did on Obama. I believe Trump would propose borrowing at these ZIRP rates in unprecedented amounts for “infrastructure.” Often overlooked in observing how much government recklessly spends, is what it spends money on. It does matter.
July 15, 2016 at 3:24 pm |
David,–trumped just got trumped for the markets and a Prairie Fire has Been Lit—-wonder if this points to the increasing role of Russia in Syria supported by the U.S.–Putin was coming for Erdogan and this will change that and interesting it comes before the olympics when VLADY likes to get busy
July 16, 2016 at 5:24 pm
How fair and equitable are Turkish elections, if you oppose an aristocracy is a false coup arranged as an excuse for your being arrested and sent away?
July 15, 2016 at 2:56 am |
Clinton vs Trump
http://projects.fivethirtyeight.com/2016-election-forecast/
July 15, 2016 at 5:53 am |
thanks arthur i know he has a good track record but i disagree with him. just wondering what would happen??
July 18, 2016 at 3:20 am |
Hey David,
I also think Trump will win.
Should be lots of market inefficiencies in a Trump president. That’s because Trump is a master of creating perception independent from underlying reality.
Also, Nate Silver has been fantastically wrong this entire election season. Huge hole in his (mental) model which prevents him from understanding emotion and psychologically underlying Trump phenomenon.
Curiously, Silver’s “forecasts” continue to magically increase Trump’s odds of winning 😉
July 18, 2016 at 7:40 am |
yra i dont think boe performed beautifully.
carney simply obeyed to the new cabinet that dont like him cuz he is a non-brexiter. id not be surprised if he will resign soon to pursue the career that he really wants at the moment, that is a politician back in canada.
he has simply lost his reputation in the economics world, promising a rate cut and then disappointing right in a moment of crisis.
time to move on. lets see whos next.
July 18, 2016 at 6:42 pm |
Luigi–I don’t think Carney obeyed but that the pressure was off,the footsie had rallied and the depreciation of the POUND had alreay provided the potential stimulus—it bought Carney some time and he used it to his advantage.I believe his output from the BOE on Brexit was heavily influenced by Georgie Boy Osborne—all favors were called in by the remainers as Cameron called in every political IOU from world leaders to warn against a leave vote.Nothing says this more then the U.S. actually moving the U.K. to the front of the queue on trade as TTIP is dead for the next two years.Just look at the EU trade deal with Canada—can’t get past the Germans or French