Archive for the ‘BoJ’ Category

Notes From Underground: Back To Our Regularly Scheduled Programming

June 19, 2023

A giant hello and salutations from Notes From Underground.

It has been quite a long time since I have sat down to write about the state of things, but it is not because I haven’t been working. In fact, I have recorded numerous podcasts with the Financial Repression Authority over the last six weeks, sitting down with David Rosenberg, Michael Every and Kevin Muir. Links are below for your listening pleasure.

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Notes From Underground: Why Ueda Needs To Raise Rates Or Expand Yield Curve Control

April 24, 2023

I have a hypothesis of major significance:

As the markets have seesawed for the past six weeks one asset has been consistent: the EUR/YEN cross. The SVB fallout coupled with concern about savings fleeing from other regional and community banks has subsided, allowing for the global equity markets to slough off concerns over undue leveraged risks causing further pain for investors. The Credit Suisse writedown on AT1 bonds — contingent convertibles or COCOS — has dissipated sending the EURO and SWISS currencies to recent highs against the DOLLAR, and, more importantly, versus the YEN.

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Notes From Underground: Meet the Dwarves of Dovishness

February 12, 2023

Every day my inbox is filled with tweets and stories about which FOMC member said what. It’s been less than a year since the Fed ended quantitative easing and merely eight months since it started unwinding its balance sheet. The Powell-led Fed kept pumping liquidity into the system, even as they started raising rates, which reflects how little confidence policymakers had in their own models.

And now the media lavishes praise on Neel Kashkari, John Williams, Lael Brainard, Susan Collins, Mary Daly, Rafael Bostic and others as if they were great forecasters by continually bombarding the financial pages with the need to have a “terminal rate” somewhere around 5.5%, prompting others to race ahead with calls for 6% or, as we heard from one pundit last week, 8%.

It is time for the Fed to slow their roll and engage in humility for the true FED policy of ZERO rates is the measure of just how far off FOMC forecasts have been, dating back to Alan Greenspan. Most importantly, former Fed Chair Ben Bernanke, the progenitor of forward guidance and QE, proclaimed that the SUBPRIME CRISIS was contained just prior to it devolving into the GLOBAL FINANCIAL CRISIS. When Jerome Powell is on target it serves as a reminder to WALL STREET what a poor forecaster the central bank actually is when moving to a much more pragmatic policy.

If you didn’t watch the Powell’s discussion with David Rubenstein last week I would advise doing so as it showed the Fed chair at his best. The most critical part of the interview was when Rubenstein got Powell to walk back his disinflation view that was deemed dovish at the post-FOMC press conference the week before. Many analysts believed Powell would walk back disinflationary rhetoric following the huge jobs number on Feb. 3. Powell didn’t walk it back and seems to be leaning toward slowing the FED in an effort to assess the impact of a year’s rapid increase in interest rates coupled with an effort at quantitative tightening.

Powell has to be careful for in this AGE OF ENORMOUS DEBT there can be no inner VOLCKER. There was an article in the Wall Street Journal Friday by Andrew Duehren titled, “Fed’s Inflation Fight Pushes Up Cost of U.S. Debt.” For several months we at NOTES FROM UNDERGROUND have warned that the politics of percentages was going to come into play as the cost of financing the massive debt piled up by Trump’s ill-conceived tax cuts and Biden’s profligacy was came to be paid. Duehren wrote: “The Treasury’s spending on interest on the debt is up 41% to $198 billion in the first four months of this fiscal year with $140 billion in the same period last year.” The story went on to use the CBO projections about how much the costs of financing the massive deficit will, but the CBO projections were based on INTEREST RATES BEING 1.9% by end of 2022 and 2.6% at the end of 2023.

However, please take this story with a grain of salt because the Congressional Budget Office will release its updated outlook on Wednesday, Feb. 15, which should account for the rise in interest rates.

The key issue for the entire global financial system is how can the price of sovereign debt be able to absorb the blows from inflation at 5% with a massive increase in the cost of financing the debt as central banks seek to remain HIGHER FOR LONGER. Who is buying all the US long-term debt at 3.6%?

***It is also of paramount importance to note that the ECB, BOJ, SNB, BOE, BOC, RBA, RBNZ, as well as many emerging market central banks are striving to raise rates in an effort to keep their currency stable. The ECB will raise rates more aggressively than most as President Lagarde is under extreme pressure from the HAWKS .

Following the Feb. 2 meeting, the hawks were filling the media with calls for faster rate hikes. Lagarde has already committed to a half a percentage point increase at the March meeting in an effort to keep the hawks in place. QT is a dangerous tool for the ECB because it will certainly lead to FRAGMENTATION of the European bond markets, which more concerning for Brussels. If the ECB violates its Lisbon Treaty rules to prevent fragmentation then the anti-EU voices in Germany will be back at the German Constitutional Court creating potential problems for an already besieged Olaf Scholz.

If this is not enough to concern markets we now have rumors that Ueda Kazuo will be the new Governor of the Bank of Japan. This has not been ascertained but is on the boil and I suggest you read the insightful piece by Tobias Harris at Observing Japan on this appointment. It is important to note that Ueda is an MIT PHD in the same group as Bernanke and many other central bankers and I would further advise looking at the members of G-30 to understand why Ueda would be a comfortable fit. But if Japan begins to alter its YCC policy further bond markets will suffer further stress because of the gigantic impact of Japanese banks, pension funds and insurance companies on global financial flows.

Again, many piles of tinder set to ignite on the global financial situation.

Notes From Underground: The Sounds Of Silence, as Sung by Hyman Minsky

October 28, 2019

Equity markets on Monday sustained their global rally as markets across Asia, Europe and the United States powered higher, even as the political backdrop continues to foment greater uncertainty. This week brings three key central bank meetings: The Bank of Canada, the Federal Reserve and the Bank of Japan. (more…)

Notes From Underground: How Many Fed Speakers Does It Take To Make a Greenspan?

February 24, 2019

More than two decades ago, then-Fed Chairman Alan Greenspan said, “I know you think you understand what you thought I said but I’m not sure you realize that what you hear is not what I meant.”

It seems that the cacophony of Fed speakers on Friday accomplished what the so-called Oracle did by his own design .The headlines pulled out the narrative of the FED leaving a larger balance sheet and more reserves thus allowing for more liquidity in the U.S. financial system. Equity markets, bond markets and hard assets all experienced a sigh of relief and rallied in anticipation of removal of what Druckenmiller referred to as the double-barrel approach of FED tightening policy. Fed Vice Chairman Richard Clarida spoke about the FED‘s use of balance sheet and forward guidance dynamics as two exceptional tools the Fed used to combat the Global Financial Crisis. If policy was already at the “effective lower bound” the Fed may invoke a Bank of Japan-type policy of yield curve control (YCC) by capping the rates on longer maturities.

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Notes From Underground: Happy Anniversary Twentieth ZIRPiversary, BOJ!

February 12, 2019

This is the perfect time to discuss the effects of zero interest rates as it has been 20 years since the Bank of Japan embarked upon the path of crushing interest rates in an effort to jump-start inflation in Japan. This is very important as we enter into the discussions about the potential for negative interest rates in the U.S. while also entertaining the idea that the U.S.’s growing debt pile and deficit have no consequence as long as the government borrows in its own currency and optimizes its printing press.

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Notes From Underground: Germany and France Codify the Premise of Europe

January 22, 2019

In a desperate attempt to deflect from the damage to his presidency, Emmanuel Macron on Tuesday codified what Bernard Connolly has written about for 25 years. As Charles de Gaulle supposedly said to Konrad Adenauer: “Europe is France and Germany, the rest trimmings.” In a resurrection of European history, Angela Merkel and Macron signed a new Treaty of Aachen. While the treaty language is vapid, the symbolism cannot be minimized. Germany and France promise to come to each other’s defense if attacked while also promising to work for a more unified financial and fiscal system.

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Notes From Underground: Around the World With Yra + Rick

September 20, 2018

On Thursday Rick Santelli pushed and prodded and as a result, we were able to travel from Japan to Europe in an effort to discuss some of the more pressing issues confronting the global macro world. First, we stopped in Japan to discuss how the BOJ and Governor Kuroda will be able to extricate itself from five years of QQE which has seen the BOJ accumulate Japanese debt and equities. Of course the end game is to reach the self-imposed inflation level of 2 percent that has proved to be an agonizing level to achieve. As a reminder, when a nation is saddled with huge debts the best relief is to be found in inflation, which results in an ultimate money illusion as debts are paid back with an ever-depreciated currency.

Click on the image to watch me and Rick discuss global policy.

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Notes From Underground: Areas of Global Macro Concern

July 24, 2018

President Donald Trump’s continuous tweeting creates volatility in the markets but the impact lessens as participants become hardened to the vagaries of the tweets. An area that does concern me, though, is the amount of insider trading I suspect is taking place.

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Notes From Underground: Headlines Drive the Algos and the Circle Remains Unbroken

June 12, 2018

I’m going to be off for a few days, even if this Fed meeting proves to be the most market-moving week in many years.

The news from North Korea proves to be a non-event (as suspected). On Wednesday, we get the FOMC statement, which OUGHT to meet market expectations with a 25 basis point increase and some sense of the interest on excess reserve (IOER) rate in reference to fed funds. There is much discussion about the FED reaching “normal” interest rates, meaning neither too weak nor too strong to reach its dual mandate.

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