Since I’m 62 years old, my references of social icons goes back to a more simple time. Alfred E. Neuman of Mad Magazine fame would ask, “What, Me Worry?” The other side of the equation would be Arthur Fonzarelli from the television show, “Happy Days.” who would stutter before ever admitting that he was WRONG. The world’s central banks are a reflection of these two icons. It seems that Yellen, Draghi and Kuroda all suffer from both views. They have nothing to worry about and they certainly cannot admit to being wrong. The central banks are under attack from investors and traders for pursuing quantitative easing and negative yields even though the efficacy of such programs is certainly in doubt.
Posts Tagged ‘Draghi’
As I begin my further analysis of the unfolding political/economic factors facing the global markets I seek your indulgence and set the table by quoting from what I believe is one of the most significant chapters in western literature. Notes From Underground takes its title from the essay of the same name of by Fyodor Dostoyevsky. The tagline, 2+2=5, is a summation by Dostoyevsky to poke at the Rationalists of his day. But the chapter of note is from the novel The Brothers Karamazov titled, “The Grand Inquisitor.” The scene is set as the Grand Inquisitor has arrested the Christ figure for daring to upset the social order that the Church has created. The entire chapter is so moving but allow me to quote a small part:
Given the dizzying moves in the market during the past couple of days/weeks, I felt that it would be better to link back to my February 1 appearance with Rick Santelli on CNBC.
As I was watching Fed Chair Yellen testify before Congress for the past two days, I saw the shine of the all-knowing Fed Chair fade. Yellen was extremely uncomfortable as she bore the brunt of Congress’s slings and arrows. The anger of Main Street has manifested in victories for Trump and Sanders, which has sent the ineffective “leaders” in Washington searching for culprits to blame. Chair Yellen was tied to the whipping post, especially in the House of Representatives.
Presented with comment:
Yesterday, the airwaves were filled with global financial speakers singing from the hymnal of disinflation. His eminence, MR. 250 GRAND, was wowing the private speakers circuit with his opinion on stock market valuations and economic growth. Mr. Bernanke, please do not follow in the footsteps of Sir Alan Greenspan, who in his post-chairman life proved that he had very little understanding of the economy he was trying control. Only in the world of access journalism do the anointed powers pretend to be all-knowing oracles. As Bernanke hits the lecture circuit and speaks freely without the Fed backdrop it puts the current Fed Chair Janet Yellen into a very difficult position.T he media is in search of a story and a hero to worship, which propagates the idea of Fed decisions being based on rocket science with Fed policy a certainty. Again, theory and practice (praxis) do not produce hard facts in the world economics. In further support of the Fed’s “uncertainty principle,” yesterday the Wall Street Journal ran a Jon Hilsenrath interview with Boston Fed President Eric Rosengren. The interview is based on the operational techniques the Fed plans to utilize to “Raise Short-Term Interest Rates.”
The pundits have been pontificating about the low valuations of European financial stocks–based on correlations to other developed-market financials–and proclaiming it’s time to purchase the “undervalued.” Why, this is the greatest no-brainer since sub-prime debt and Orange County Treasurer Robert Citron buying very risky inverse floaters prior to 1994 (sarcasm intended). The only problem with the pundits pushing European bank stocks is the following chart of Deutsche Bank. There is a great disconnect between the huge U.S. banks and Deutsche Bank. Even more significant is that the massive Swiss Banks (UBS and Credit Suisse) are holding their rallies despite settling with financial regulators in many different markets. What is wrong with the crown jewel of Europe and Germany?
It is a similar problem for the large Japanese banks, which have been underperforming the Nikkei rally and the euphoria about the success of ABENOMICS. If Japan is on the road to some inflation and increased economic activity, the banks are supremely undervalued and efficient market theory maintains that it can’t be so. It appears that there is a major disconnect between reality and perception. The Japanese banks OUGHT TO BE outperforming all the global financials because of the aggressive action they have taken to offload their hoard of JGBs. Japanese banks are acting rationally by selling off a potential depreciating asset to the market’s largest buyer: the BOJ. According to a Bloomberg article by Finbarr Flynn and Monami Yui from January 31, Sumitomo Mitsui cut its JGB holdings by 56 percent.
If Abenomics is ultimately successful, why would any investor want to hold bonds that will be a negative yield as inflation levels rise? BUT IF BANKS LIKE SUMITOMO are raising cash by selling JGBs what are they doing with the cash? If the Japanese economy was indeed growing, domestic loans should be rising. Flynn and Yui report that domestic loans increased by only 4.3 percent last year. Also, Tokyo-based Moody’s analyst Graem Knowd notes: “Banks need to rebalance their portfolios away from JGBs. It it turns out that Abenomics hasn’t worked and only ended up leaving Japan with a bigger pile of debt” and a “doomsday scenario for JGBs isn’t a zero probability scenario.” Again, if the banks are invoking the correct policy, why has the market failed to raise their equity valuations. (I am buying some of the banks on a very slow and correction only basis–in my opinion this is a low risk valuation relative to the pricing of other global equities.)
Bringing more focus to the efforts of the Japanese banks to rebalance their assets away from JGBs is the recent discussions taking place in Japan over the issue of the Government Pension Investment Fund (GPIF). The Japanese public pension fund has 1.26 TRILLION DOLLARS in assets and targets a very conservative style of investment. Currently, the GPIF invests 60 percent in JGBs and 12 percent in Japanese equities, according to a March 5 Reuters article. Prime Minister Abe’s government is “… pressing the GPIF to buy more stocks and invest relatively less in bonds to generate higher returns for Japan’s fast-greying population.” The issue of maintaining a decent rate of return on its national pension will be a challenge for the administrators of the fund. If not JGBs, what will be the most efficient mix of assets? Regardless, the Japanese banks are pressing ahead and dumping questionable assets on the major buyer of last resort, the BOJ.
The theme of banks continues through an article from March 7 piece in the International Financing Review by Gore and Whittall, “Eurozone Banks’ Sovereign Exposure Hits New High.” This is a very serious issue for it creates the potential for an adverse feedback loop that can bring the European economy to a depression. “Banks in the region now hold about 1.75 trillion euros in government debt, equivalent to 5.7 percent of their assets, and the highest relative exposure since 2006, according to ECB data. In Italy and Spain, roughly one in every 10 euros in the entire banking system is now on loan to governments.” The Eurozone banks are loading up with sovereign bonds because under the Basel rules sovereign debt is deemed a “riskless” asset and therefore banks need not to hold reserves to protect sovereigns in case of a stress event.
Let’s remember that it was only 18 months ago that the European bond markets were under great strain and President Draghi announced that the ECB would do “whatever it takes” to secure the European sovereign debt market as well as the Euro currency itself. As the article goes on to say, “Banks’ holdings of government bonds have risen by 355 billion euros–or about 25 percent–since the liquidity injections in 2011 and early 2012. Banks in fiscally weak countries have increased their purchases the most, with Italian, Portuguese and Spanish banks increasing their holdings by 62%, 52% and 45%, respectively.” Look at the chart of Deutsche Bank again and one gets the sense of a negative feedback loop in full development, which should raise a yellow caution flag. Now, how about those sanctions on Russia?
The ECB and The Bank of England delivered their interest rate announcements, and, as I expected on Tuesday, the result was absolutely no change to current policy. The FED had paved the way for maintaining the present course and the Europeans were certainly not willing to risk upsetting the markets. What surprised me was the fact that the EURO CURRENCY rallied strongly as President Draghi presided over a press conference in which he put on an act of stonewalling and obfuscation that made Alan Greenspan look like a freshman debater. Wow, Mr. Draghi can evade the best of questions and believe me I listened to the entire press conference and the questions were of a very high caliber. Mr. Draghi did invoke a new strategy and that was lengthening his answers so no one could remember what he had really said in the beginning. The bottom line is this:
While I have been on hiatus the financial markets have awaken to old problems and the damage to markets is real but the damage has been contained … for now. The concerns du jour are more of a political nature then economic but as this blog’s readers well know POLITICAL ECONOMY is the entire basis of NOTES FROM UNDERGROUND. What is political today will manifest itself economically and the opposite being true. Nothing illustrates this better than the current rage over income inequality, thus wealth creation is less significant than its distribution.
As the U.S. Congress and executives continue the pursuit of political one-upmanship, it seems as if nothing else matters in the global finance. European banks, German politics, the Trans-Pacific Trade Agreement, IMF upgrading the British economic outlook … nope nothing going on except in the BOWELS of Washington. The U.S. has the media’s focus but today the Washington drama affected the bond markets in a very serious way. At 10:30 a.m. CST, Treasury auctioned 4-week TREASURY BILLS at 0.35%, the highest since October 2008, as markets are beginning to WORRY about some type of U.S. government default. There was a lack of bidders for the short-term BILLS as bond traders and market makers worry that default fears will make certain debt instruments unacceptable as collateral.
First and foremost: This week’s postponement of the unemployment report has provided me with an idea. Because of the fear of data leaks from the sequestered media and the influence of high frequency trading and headline algorithm readers, I HEREBY PROPOSE THAT ALL GOVERNMENT DATA RELEASES SHOULD TAKE PLACE ON SUNDAY MORNING, OR IN THE SPIRIT OF PAUL VOLCKER, SATURDAY EVENING. By releasing the Federal data on the weekend, market participants and journalists could analyze the data and do their releases prior to the Asia openings on Sunday night. This would make the markets more efficient but of course less volatile. I know it will mean less opportunity for the high-speed correlative traders but the result would be to provide the markets with more causation and less correlation and hopefully return a modicum of trust to the retail trader who appears to be missing from the present market environment. Just trying to bring some sanity to the madness that currently exists on a day-to-day basis. The closing of some government functions may allow some thoughts on alternative ideas. Just thinking outside the beltway.