Notes From Underground: “Acting Early to Reduce Uncertainty”

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.

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9 Responses to “Notes From Underground: “Acting Early to Reduce Uncertainty””

  1. Chicken Says:

    “In simple parlance, ECONOMICS IS NOT ROCKET SCIENCE.”

    Correct, it’s the black magic of thieves and pompous asses.

  2. Frank C. Says:

    The silence is deafening.
    The credibility of central bankers and their failed hypothesis
    are fading into the abyss.
    Everyone other than the central planners is waiting for
    the next foot to drop.

    Below is from the Oracle of Minnesota.

    Now there’s a wall between us something there’s been lost
    I took too much for granted, I got my signals crossed
    Just to think that it all began on an uneventful morn
    “Come in,” she said,
    “I’ll give you shelter from the storm.”

    Well the deputy walks on hard nails and the preacher rides a mount
    But nothing really matters much it’s doom alone that counts
    And the one-eyed undertaker he blows a futile horn
    “Come in,” she said,
    “I’ll give you shelter from the storm.”

  3. Bojo Says:

    Yes, human hubris, the biggest destroyer of individuals and empires. All because man thinks he can control nature/god. If printing money was path to prosperity, the Romans would have found it.

  4. asherz Says:

    The world’s Central Bankers, working in concert but initially led by the Fed’s Greenspan/Bernanke/Yellin, have passed The Point of No Return.(PONR). Even if one day they woke up and recognized the error of their ways, that the distortion of market pricing has led to valuations that make $10,000 tulip bulbs look reasonable, their hands would be tied as an almost immediate implosion of the financial system would occur. That is why normalizing interest rates is really off the table.
    So as the combined current QEs of almost $200 billion/month leads to a paucity of assets to purchase, we are seeing a form of Gresham’s Law taking place in front of our eyes. Top quality government debt (U.S. Treasury paper) followed by GSE paper, followed by sovereign debt including bankrupt Italian and Greek paper, followed by corporate debt followed by equities.
    Almost a century ago Germany thought that the printing press could solve their debt problem following the Versailles Treaty and the economic challenges they faced, but it led to the collapse of its democratic government replaced by the Fuhrer. The road chosen by the Fed, BOE, ECB and BOJ will have far reaching implications, way beyond their mistaken efforts to reverse the 2008/9 debacle that was itself self inflicted.

    • yra Says:

      Asherz—may the circle be unbroken

      • Asherz Says:

        Rather than subscribing to Okun’s Law , I would suggest that one turns to Occam’s Razor. With GDP weak, revenues and profits down, leveraged balance sheets, the simplest explanation is that job creation has taken place in multiple part-time jobs, low paying, with few benefits especially with health care insurance rising rapidly, to account for a 4.9% unemployment rate. The middle class are being squeezed which accounts for the malaise that is felt roundabout.
        Yra-Will the circle be unbroken is a spiritual song. It went over my head in response to the above.

  5. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Another GREAT overview of this far-reaching situation.

    As I have been anticipating since early 2015, the central banks cannot restore growth on their own, and all they’re doing is allowing the political class to avoid the necessary structural reforms. This specious debate about whether monetary running out of room to maneuver means more fiscal stimulus is necessary again simply extends the current ineffective aspect of the whole show.

    We don’t even hear about structural reform from the financial press any more. And the politicians are glad of it, due to their total lack of desire to tackle the more challenging structural stuff. They’d rather just carp about the central banks low rates being the problem.

    Excellent FT article/analysis today in the impact of last week’s BoE program: It also observes that the ‘sledgehammer’ may turn out to be little more than a ‘token gesture’.

    Yet the most telling observation in the review of whether this will be effective is totally consistent with our views: “The bigger concern is that businesses do not want to invest.” Ya think!! The third quarter in a row of terrible US Non-Farm Productivity is a direct result of the lack of structural reforms, and the real culprit behind low wages.

    Even as they fail miserably, the central bankers are glad to continue to wear the mantle of “economic hero” that might have been reasonable during the 2008-2009 financial crises. Yet much like the excesses of the Credit and Housing Boom they had to come in and address, central bank accommodation is long past the point where it is “too much of a good thing.”

    • Chicken Says:

      I’m experiencing some degree of difficulty accepting the mantle of “economic hero” might have been reasonable for creating the circumstances that enabled the 2008-2009 financial “crisis”.

      My theory is it was another intentional transfer of wealth.

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