Last Thursday, Bank of England Governor Mark Carney rationalized the Monetary Policy Committee’s aggressive liquidity addition by citing the desire to head off any risk to economic growth and thus increase in unemployment. Rather than wanting to let the markets digest the impact of the Brexit vote, the BOE moved to “reduce uncertainty.” No matter that the British pound had depreciated by 13%, that the Footsie 100 had rallied more than 10% and bond yields actually dropped to record lows.
But Governor Carney adopted the practices of his fellow global central bankers and distorted the market-signalling mechanism. Carney’s impetuosity has wreaked havoc on the U.K. bond market as the BOE failed to take into account that pension funds, investors and insurance companies were not playing the game and would not sell their holdings. Portfolio managers realize that they have nothing to replace their sovereign debt with if they sell the higher yielding assets they have in inventory. THE ARROGANCE OF GLOBAL CENTRAL BANKERS HAS MADE IT IMPOSSIBLE FOR THE MARKET TO ASCERTAIN ANY SENSE OF BOND VALUE.
Why? Because the all-knowing oracles will not let the markets determine value. And yet we have a BLOG from Ben Bernanke titled, “The Fed’s Shifting Perspective on the Economy and Its Implications for Monetary Policy.” The former Fed chairman noted that the FOMC‘s shifting views “… follow pretty directly from persistent errors in forecasting economic developments in recent years.” The missed forecasts are leading FOMC participants to lower their projections on output, unemployment and thus the fed funds rate. In one particular statement about the lack of output growth Bernanke wrote: “Generally, the unemployment rate tends to fall when output is growing faster than its potential–a basic macroeconomic relationship known as Okun’s Law. The observed combination of slow output growth and rapid unemployment declines can be consistent with Okun’s Law only if growth in potential output has been lower than thought.”
I will not argue the issue of OKUN in this BLOG but I bring Bernanke’s thoughts to the fore because it reflects HOW MISTAKEN THE POLICYMAKERS CAN BE IN THEIR FORECASTS. In simple parlance, ECONOMICS IS NOT ROCKET SCIENCE. Bernanke and others have aggressively continued a policy that may be based on wrong forecasts. Many economists have argued that the FED, ECB, BOJ and BOE have failed to let the markets clear. I have long maintained that QE 1 was necessary combined with some elements of fiscal stimulus to prevent the massive liquidation of assets. Last week’s BOE plan to provide a 100 billion pound TERM LENDING SCHEME would have been a positive force to prevent the mass liquidation of quality assets at bargain prices, as well as just ensuring smaller firms that liquidity would be available for loans.
For the record, Bernanke’s view of growth potential being lower may be a result of demand continually being brought forward or what Bernard Connolly has long argued is INTERTEMPORAL MISALLOCATION or IMBALANCE. Firms will not invest in capital if future demand is being consumed now. It is easier to hire workers to meet present demand then to allow expensive capital to lay dormant. This is MAY BE why the employment data is strong for it signals the possible end of an economic cycle. This is just another theory but it seems to have validity even in reference to Bernanke’s take on Okun.
For our purposes, the AGE OF CENTRAL BANKER UNCERTAINTY OUGHT TO MAKE YELLEN, CARNEY, KURODA, DRAGHI et. al. Proceed with extreme caution but as we learned from the BOE last week, HUBRIS is in plentiful supply. The quiet markets are perplexing so caution is advised. Today the U.S. dollar traded lower than the its unemployment day lows. The euro currency high was 111.62 in the spot and today it appears we will close above that high. The Swiss franc and Japanese yen are higher on the week but not quite as strong as the euro. This is something to watch of during these quiet markets. The U.S. bond yields are lower for the week but that is probably the from the impact of ECB, BOE and BOJ bond purchases. Carney, you’re doing a hell of a job.