Notes From Underground: The ECB, FOMC Minutes and Dudley’s Speech

On Wednesday, I joined Rick Santelli for a chat, which was centered on the ECB and other central banks’ impact on global equity and debt markets. Just before the appearance, there appeared a Reuters story that said President Draghi would not speak about the ECB’s potential Quantitative Tightening, which my readers know supported what I have been steadfast in my conjecturing about possible ECB actions. IN A NOD TO A READER (hello, AGH), while it appears that all central banks pursue a common policy, THERE’S NO MONETARY EQUIVALENCE. Yes, they all purport to raise inflation the political variables each push for different outcomes.

(Click on the image to watch me and Rick discuss the central banks.)

The BOJ wants inflation but their efforts have been conducted through massive purchases of Japanese equities and the Japanese bond market. Under Mario Draghi, ,the ECB has expanded its mandate to ensure the continuation of the EURO currency (whatever it takes). This pushes Draghi to build the ECB balance sheet in an effort to stealthily create the MECHANISM for the establishment of a EUROBOND. The FED pretends to adhere to a DUAL MANDATE of jobs and inflation but its guardianship of the world’s reserve currency provides it with the mandate of the global financial system. In an effort to simplify outcomes the financial media treats all policy decisions in a uniform fashion. WE WON’T BE FOOLED AGAIN.

In this vein I point out that three recent central bank meetings have set their own course in VIOLATION of all G-20/G-7 communiques for the last decade. The RBNZ, RBA and even the ECB noted the strength of their currencies in making their policies on monetary policy:

  1. On August 9, the Reserve Bank of New Zealand noted, “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth”;
  2. In its August 4 statement, the Reserve Bank of Australia in its August 4th statement said: “The forecasts for economic growth and inflation in Australia are based on the technical assumption that the exchange rate will remain around its current level. Further exchange rate appreciation could tend to generate a slower pick-up in economic activity and inflation currently forecast”; and
  3. On Thursday we learned that in its most recent meeting the ECB raised concerns about the rapid appreciation of the euro currency. From the ECB minutes: “Despite the flattening of the yield curve in the United States, financial conditions had tightened since the Governing Council’s previous monetary policy meeting in the early June, mainly owing to an appreciation of the euro and an upward shift in bond market yields, which had also been reflected in a rise in real interest rates.”

Every participant in the G-20 agrees to restrain from using monetary policy to affect currency levels, but here we have THREE central banks all concerned about the strength of their currencies and therefore holding interest rates so as to prevent further strengthening of the kiwi, Aussie dollar and euro.

When reading the ECB minutes it suggests that it’s highly doubtful there will be a change in the ECB QE program. The EURO dropped 0.75% on the ECB release but the political situation in the U.S., coupled with the DOVISH FOMC minutes keeps selling pressure on the U.S. dollar. In a significant juxtaposition, the ECB notes the strong euro is responsible for tightening financial conditions while the FOMC minutes continued to point to a loosening of financial conditions as the stock market rallies and spreads between U.S Treasuries and JUNK compress to near-record lows.

Last week, a reader (h/t C.M.) sent me a chart on Market Watch that was constructed by Tiho Brkan and overlays European junk debt yield versus the U.S. 10-YEAR TREASURY YIELD. The yield differential is: European junk 2.42% versus 2.24% 10-year. A mere 18 basis point differential between the best global credit versus European corporate junk.This is the ECB’S impact on debt markets and it causes us to doubt the wisdom of the complacency of volatility sellers.The signalling mechanisms of global financed have been so badly distorted that volatility sellers are dealing with a reality that cannot be measured.

A mere 18 basis point differential between the best global credit and European corporate junk. This is the ECB’s impact on debt markets and it causes us to doubt the wisdom of volatility sellers, where complacency rules. The signalling mechanisms of global financed have been so badly distorted that volatility sellers are dealing with a reality that cannot be measured.

***FOMC minutes were deemed very dovish as the Committee seems to be most concerned about the downward stickiness of inflation. The statement was laden with the low-inflation references and in particular a few participants noted “… the restraints on pricing power from global developments and from innovations to business models spurred by advances in technology.” There was certainly discussion about shrinking the FED balance sheet as “… several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.”

So several is always significant but MOST IS MOST. But we also know the FED is mesmerized with the issue of financial conditions. New York Fed President Bill Dudley said SEVERAL times in his speech last week that LOOSENING FINANCIAL CONDITIONS are a primary reason to begin shrinking the Fed’s balance sheet. Also, Dudley raised an issue the global financial community should be well aware: “We need to be somewhat humble about what we know about this [shrinking balance sheet] because WE’VE NEVER DONE THIS BEFORE. And that’s why I think we’ve been very careful in terms of how we’ve gradually rolled this out, so that people can see how we’re planning” to do this. Again, the FED‘s models are not rocket science. We know where the SOLAR ECLIPSE will take place but the FED does not know the impact of its actions.

***A LITTLE HUMOR: Anthony Scaramucci was seen DONNING a Lou Gehrig uniform on his way to Yankee Stadium mumbling this: “Fans, for the past two weeks you have been reading about the bad break I got. But today I am the luckiest man on the face of the earth.”

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4 Responses to “Notes From Underground: The ECB, FOMC Minutes and Dudley’s Speech”

  1. Asherz Says:

    I’ve been saying for too long now that the stock and bond market have lost one of their key functions; their proper pricing abilities. They are no longer, as Ben Graham said years ago, a weighing machine.
    There have been several big thumbs on the scale to ensure certain outcomes. Listening to central banker announcements is a lesson in learning the art of skepticism. Socrates and his students would have been enthralled.
    They can say all they want about raising rates and reducing balance sheets. It is all b— —t. They all know that any unwinding of the liquidity project sends the markets to kingdom come. The global debt/GDP ratio is way beyond the point of no return, as it keeps growing by $200B/month They are holding a tiger by the tail, and letting go would result in a sumptuous meal for the big, striped cat.

    • yra harris Says:

      Asherz—point is spot on and the DEBT overhangs it all unless inflation erodes the value and then let’s just start all over—-a JUBILATION that does not need 50 years

  2. Trader 1 Says:


    How can any Fed Governor make a statement that 10yrs are at x% yield for whatever economic reason they choose to site?

    Are they truly oblivious to the distortions they’ve created???

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