Notes From Underground: How Many `Whatever It Takes’ …

… Does it take to screw up banking systems?
For those who may not remember, in July 2012 then-ECB President Mario Draghi said he would use any monetary policy tool in an effort to PRESERVE THE EURO.
During a testimony before EU Parliament on Monday, European Central Bank President Christine Lagarde boasted that the central bank and the EUROPEAN UNION had all the necessary tools to ensure against a banking situation similar to the US and the Swiss authorities. The problem for Lagarde is that EU banks were progenitors of the COCO bonds that caused so many Credit Suisse investors a great deal of financial pain. (Speaking of which, here is a post from 2013 in which we warned about the proliferation of COCO bonds.)
The markets achieved a sense of calm in believing that the global authorities have things “under control” as equity markets rallied, precious metals stabilized and BOND prices fell as now the focus turns to the FOMC meeting that begins Tuesday. Many pundits such as Larry Summers and Mohamed El-Erian are advising Chair Powell to stay the course on the inflation fight and raise interest rates 25 basis points at this week’s meeting that concludes on Wednesday.
The rationale for doing so is that the inflation fight is far from over and because the ECB boosted its benchmark rates by 50 basis points last Thursday some rate increase is warranted. We at NOTES FROM UNDERGROUND VEHEMENTLY DISAGREE. For at least the last four months central bank credibility has been an issue because the PRICE of GOLD was rising even as the central banks became more aggressive in their inflation fight. This has been MY MANTRA for 30 years about GOLD: It’s not an inflation hedge but a hedge against central bank credibility in a fiat currency world. If I were Chair Powell I would confront the PUNDITS with the following wisdom:
The Committee decided to hold rates at 4.75% because of the rapid increase in the TIGHTENING OF FINANCIAL CONDITIONS. We are well aware that last week the ECB raised its overnight bank rate by 50 basis points and applaud their continued efforts to confront their inflation problem. But, the FED has already increased its RATE to 4.75% while our inflation levels have dropped well below those of the EU. It seems that energy and food prices have moderated while FINANCIAL CONDITIONS have tightened  just as I postured at the last press conference. We are PAUSING because we believe LENDING CONDITIONS WILL BE TIGHTENING in response to the turmoil in the bank markets, both locally and globally. While the Committee has acted with the Treasury and FDIC to provide enough liquidity to restore calm we believe the present fragility of the banking system requires DISCRETION AND NOT BLIND ADHERENCE TO THEORETICAL MODEL OF FORWARD GUIDANCE.
In closing, I would add this wisdom from former Chair Alan Greenspan in a speech he delivered at Jackson Hole in August 2003:
“Despite the extensive efforts to capture and quantify … these key macroeconomic relationships, our knowledge about many of the important linkages is far from complete and in all likelihood will always remain so. Every model, no matter how detailed or how well designed conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-to-day basis. Consequently, even with large advances in computational capabilities and greater comprehension of economic linkages, our knowledge base is barely able to keep pace with ever-increasing complexity of our global economy.”
We at NOTES FROM UNDERGROUND have been a consistent critic of the Fed — 13 years and counting — and endlessly warned that QE and all of its baggage was subverting central bank credibility. We have repeatedly cautioned that global leveraged risk in so many forms would result in financial instability as BANKS rushed to curb transitory inflation.
STOP DEPENDING ON EQUITY MARKETS AS THE TELL IN FINANCIAL CONDITIONS it is a methodology promoted by the purveyors of asset peddling. PAUSE AND TAKE A MEASURE OF THE FINANCIAL UNCERTAINTY INFECTING THE GLOBAL FINANCIAL SYSTEM. The political backlash you will be facing from those warning about how workers will pay the price in unemployment while the RENTIERS GET BAILED OUT. It is FIRST REPUBLIC ON THE BOIL NOW BUT WITH LESS LENDING AND HIGHER RATES ON THE HORIZON THE COMMERCIAL REAL ESTATE LENDERS WILL BE NEXT. IS 25 BASIS POINTS WORTH IT? Where is your cost-benefit analysis?

Tags: , , , , ,

16 Responses to “Notes From Underground: How Many `Whatever It Takes’ …”

  1. richard Says:

    One of your all-time best Notes from Underground!

    • Yra Says:

      richard–thank you and now having listened to the press conference there is no doubt about the great concern of SOME at the FED of tightening financial conditions and Powell seems to have agreed as he said”probably by more than the traditional indexes say” taking our cue and all of the comments to the blog—the SPOOS matter not an iota except to the algo headline readers and the HFT systems programmed to trade off the key words.Even though the vote was unanimous because a consensus organization is the hiding place of cowards as someone once said—but dissension seemed to have been in attendance.

  2. Scooter Goode (@ScooterGut) Says:

    The last paragraph is everything.

  3. Judd Hirschberg Says:

    I’ll be watching the response Wednesday. The Federal Reserve track record over the past decade is to never miss an opportunity to do the wrong thing. I wholeheartedly agree that for once they should be pragmatic and let the dust settle on the recent tightening before embarking on another round of hikes. Labor costs might be rising but they are not factoring in the lag effect to falling commodity prices. Let it breathe.

  4. Michael Temple Says:

    Less than 3 weeks ago, SVB SBNY FRC and CS were on the lips of the Fed heads.

    FHLB borrowings have shot up nearly $600 BN since then to tide over gigantic liquidity needs at regional banks as depositors have fled.

    Now is the time to pause, not finesse the markets..
    Recession will dull inflation in the near term. Longer term, it will resurface. So what?

    We can live with 6%/8% inflation. We can’t live in a deflationary death trap which was what we saw last weekend when a 1930s bank run hit the system

    We are too overlevered to ever channel Paul Mellon and liquidate liquidate liquidate

  5. Michael Temple Says:

    SVB et al were NOT on the lips of Powell.
    How is it that Chris Whalen identified SVB Silvergate and SBNY as Titanic’s in an ice field

    But all the FOMC dunderheads completely missed it.
    A one year subscription to o Whalen or even a free peak at Underground Notes and Powrll would have been better prepared.

    Professional malfeasance by Yellen and Powell.vut, hey, at least the Fed had a good DEI score while the banking system burns. Perhaps a little more diversity of market thoughts, rather than the tired old conformity of keeping an eye on hot labor markets

  6. Yra Says:

    I advise reading the Kevin Warsh piece in the WSJ–this is what a FED Chair ought to be expounding on.If Trump had not been afraid of a strong FED Chair Kevin Warsh would have been the one as he did interview for the FED job following Yellen.

  7. paul heffernan Says:

    It’s the spending . Both parties putting 20 trillion in ten years is not going to be reconciled quickly. It takes 36 thousand years to count to a trillion. Inflation is not going away soon. What if China and Russia and the Saudi’s and Iran start pricing oil in Rubles or Yuan. The fed has performed horribly but have also been dealt an untenable task. With rates here 1 trillion in interest is only a couple of years away. It Bitcoin rally is another place people have placed assets in fear of central banks credibility.
    Paul Heffernan

    • Yra Says:

      yo Paulie—thanks for the high quality comment/analysis .Hope all are well in the Heffernan clan –miss our long discussions in the breakroom but glad to see you remain on top of global finance

  8. Asherz Says:

    You’ve been a Fed critic for 13 years. I’ve been one for 35 years ever since they created The President’s Group on Financial Markets (PPT) which began the gross interference of the markets by the Fed.
    What these dunderheads don’t get is that recessions and bear markets are cleansing methods to correct imbalances. The more you interfere the worse it gets when payment day finally arrives. This time the Fed and government monetary and fiscal policies have created a giant bubble that might even bring Adam Smith’s vision to its knees.
    The finger pointing goes right to Greenspan and his successors.

    • Yra Says:

      Asherz –I have been a critic of this FED and its Portfolio Balance Channel means of concocting monetary policy.It is Bernanke who has spent his academic life prepping for preventing another 1937 period –the FED has a built in FEAR of deflation as the backbone of the Bernanke doctrine which is why the Washington Football team should be named the 37ers for the DC crowd is hell bent on preventing deflation for a society /economy dependent on DEBT.Our tax laws and all else is built on DEBTISM not Capitalism —see the tax code for further proof.The US has not had deflation in any way shape or form since the 1930s.Now a deep deflation culminating in massive unemployment would be a terrible experience and not being promoted here—but the other extreme certainly has its costs

      • Asherz Says:

        Deflation would destroy the economy. Hyperinflation will destroy the currency. Either way most people are losers.
        History will point to Germany 1919-1924 and the U.S. 1929-1941 and 2007-2023.
        BUY GOLD.

  9. Yra Says:

    Jason Furman tweeted out that four esteemed former FED officials say the FED has to raise 25 basis point tomorrow or markets will perceive their is a problem and act accordingly.This is exactly what is the problem with Forward Guidance and why its flaws have caused such poor policy decisions.Keynes was a master trader as well as Global Macro analysts and when the facts changed so did the father of Keynesianism but then again he didn’t go to MIT to become an electrical engineer—-again its ain’t rocket science

  10. kevinwaspi Says:

    Hubris, the fatal flaw of the Fed. Their models suck. They are always late, never prescriptive, but always certain of their actions. “Forward Guidance” was just the latest example of inbred thinking by career academics with no real world experience. These are the people who KNOW they are the smartest people in ANY room, just ask them. I have the unspoken motto of the Fed’s history:
    Theory is when you understand everything, but nothing works; Practice is when everything works, but nobody understands why; At the Fed, theory and practice are united, nothing works and nobody understands why.

    • Yra Says:

      Well being a man of Praxis i like this analysis but i will reside with Deng Xioa Ping—Practice is the sole criterion of judging truth —this was in an effort to gain ascendance over Mao’s two whatevers—the world needs to get to the same sense in order to undo the whatevers of Bernanke and Draghi—the problem is too much theory and not enough practice in which to judge and when the practice is dispelling the theory the FED chooses to continue to rely on the theory—see it isn’t rocket science

  11. Arthur Says:

    Following Yra’s argument & Co. look to me that, at the end of the day, we have high probabilities of stagflation: persistent high inflation combined with high unemployment and stagnant demand.

    Bridgewater Associates: The next big risk is recessions that are deeper and longer than what we’ve seen in the past 40 years.


Leave a Reply

%d bloggers like this: