Notes From Underground: Is Intend a Strong Word?

On the Thursday, the ECB will announce its intentions on EU monetary policy. It still looks like the market is still forecasting a 50 basis point increase in its main financing rate as it rises from 3% to 3.5%. At the previous meeting, Madame Christine Lagarde was adamant that the ECB would be a fortress of solitude in its effort to squelch inflation. This will be important for if the European Central Bank crumbles under the potential collapse of Credit Suisse then it means that the global financial system is very worried about a systemic crisis. CRUMBLE infers the ECB PAUSING in an effort to measure the negative effects of a tumultuous global funding market on GENUINE FINANCIAL CONDITIONS.

It has been LORIE LOGAN and JEROME POWELL who have maintained that US financial conditions have been tightening over the last YEAR, not loosening over the last WEEK. It was a month ago that Dallas President Logan said in a FEBRUARY 14 speech at Prairie View A&M:

“What do I mean by tightening monetary policy? The FOMC’s primary policy tool is the target range for federal funds rate. Since the start of 2022, we have raised this target by 4.5percentage points, the largest one-year increase in four decades. In addition, since last June, we have been reducing our holdings of Treasury and agency mortgage-backed securities. Both of these tools push up interest rates for consumers and companies throughout the economy. Financial conditions have therefore, tightened significantly.”

It seems that San Francisco President Mary Daly, my favorite foil, failed to comprehend what the previous head of SOMA was conveying. The San Francisco Fed was responsible for oversight of Silicon Valley Bank, which was experiencing severe tightening in its financial conditions and yet the squawking hawk failed to be aware of this. This was even more problematic because its CEO Gary Becker was on its Board of Directors. Rather than pursuing microphones President Daly ought to have been heeding the advice of Lorie Logan.

FINANCIAL CONDITIONS  are more than the daily price settlement of the S&Ps. The FED HAWKS are going to be watching the ECB closely Thursday for if the ECB President Lagarde turns from her intentions it will signal the FED will certainly PAUSE, for all the major central banks will deem the Credit Suisse situation as a significant systemic event that provokes contagion fears. And it’s yet another reason why the central banks should abandon forward guidance. It locks them into a predetermined outcome even as the facts change. But if the ECB proceeds as intended and the markets decline will FINANCIAL CONDITIONS TIGHTEN FURTHER? If so, watch the markets deliver a severe blow to asset prices and economic forecasts.

My Summary of Economic Projections IS SEVERE TIGHTENING OF FINANCIAL CONDITIONS if intentions are met. It is of great importance that the BIS has designated Credit Suisse as a Systemically Important Global Bank —-along with many others. Be PATIENT IN YOUR TRADING.

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9 Responses to “Notes From Underground: Is Intend a Strong Word?”

  1. Michael Temple Says:

    Fed and ECB are now trapped.
    “Unusual and exigent circumstances” call for emergency actions.

    Yet, ECB /Fed may feel that cutting rates now conveys panic. So, better, perhaps to hike just 25; and then loudly proclaim PAUSS. Or, maybe just PAUSE right now.

    The breathtaking plummet in front end yield curves is NOT the market necessarily pricing in rate cuts now.

    Rather, it represents a manic and wild bid for HQLAs during this liquidity crisis/crisis of confidence.

    1 Mo TBill rates well below RRP. Not rational.

    SNB just provided $54 BN liquidity lifeline to CS

    I still think the Swiss Govt is going to have to pump real equity into it.

    SNB can sell some of its AAPL and FANGs and buy a $50 BN conv pfd of CS and take 80% stake

  2. Asherz ll Says:

    SNB taking 80% stake is nationalizing CS. That may happen with all the troubled banks and should have happened in 2009 here instead of taxpayers bailing out C and GS. Moral hazard ensued until now when the proverbial can is hitting a wall.
    Yra, if we pause now what happens to inflation and the dollar? Raising rates will produce more CS banks. Pauses will kill fiat currencies.

  3. LetUsHavePeace Says:

    A question from the bleachers. The US central bank has just told its member banks that they now have a 1 year Walter Bagehot line of credit that will accept SVB under water assets at par. The fundamental faith in the Bank of England’s discount rate was that its credit was so perfect that a sufficiently high overnight rate could draw gold coinage from bank vaults on the moon. But how can the Fed’s rate now matter as anything but a call money quote when all assets have become equal if they are owned by a bank?

    • Yra Says:

      LetUS–very good question and it seems to me that what the FED did is bring TLTRO to the US shore—-this is just a long term repo with no haircut on the value so your concern is certainly justified

  4. Pierre Says:

    I thought this was interesting enough to share with this group. Xi’s crackdown on corruption leading to outflows of Chinese monies from western banks?

  5. Richard H Papp Says:

    Thanks Pierre well worth the time spent!

    • Pierre Says:

      You’re very welcome Richard!
      The financial decoupling of the worlds two biggest economies is not something I hear about everyday.

  6. ARTHUR Says:

    Sam Zell: This is the Weimar Republic

    • Yra Says:

      arthur—thanks a good post always worth hearing from Sam Zell—don’t always agree of course but I respect his hard earned wisdom–the best in real estate who understands credit cycles

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