We at Notes From Underground haven’t been publishing as frequently but we have been working more intensively than ever. The global financial situation is fraught with many areas of potential hazards to shock the established complacencies of current equity market rallies.
Posts Tagged ‘ECB’
Notes From Underground: So Many Piles of Dry Tinder
July 17, 2023Notes From Underground: How Many `Whatever It Takes’ …
March 20, 2023… 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?
Notes From Underground: Is Intend a Strong Word?
March 15, 2023On 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.
Notes From Underground: Meet the Dwarves of Dovishness
February 12, 2023Every 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: Talking With Louis Gave
January 29, 2023It is always a great pleasure to be able to discuss the global financial situation with Louis Gave and have Richard Bonugli moderate the discussion. There are several issues discussed in this hour podcast but I want to provide listeners with a key rule of Gave: While it may seem like forecasting it is anything but. It is merely adapting to a changing landscape as global investing is dynamic in nature while so many critical academic models are STATIC. It is up to those who invest in myriad number of relevant asset classes to be aware of the changing conditions in an effort to MINIMIZE losses from ill-conceived trades while seeking to find the greatest profits potential from being able to analyze the changing conditions.
Notes From Underground: ‘Twas the Week Before Christmas
December 18, 2022Last week, the leaders of the world’s central banks were attempting to regain their souls. FEDERAL RESERVE Chair Jerome Powell told tales of woe as workers were suffering as inflation rose. Crush the evil inflation out of the system is the battle cry in an effort to recreate the melodrama of Andrew Mellon in 1931: liquidate, liquidate, liquidate in an effort to Calvinize the evil from the economy by crushing demand. Powell did note that housing had weakened SIGNIFICANTLY and financial conditions HAVE TIGHTENED CONSIDERABLY but will have to be patient because monetary policy acts with a lag.
Notes From Underground: Cui Bono? (Who Stands to Gain?)
November 28, 2022When it comes to making sense of the global financial system I always have to ask the question who is benefitting from monetary policy? The recent podcasts from the Financial Repression Authority has provided a good backdrop to understanding the importance of debt markets — and by default the significance of the US DOLLAR as the bulwark of the financial system. The mobility of money or what serves the process of globalization has revealed many of the fragilities of the DOLLAR as a funding vehicle because of the FEDERAL RESERVE’S policies, which allowed all the other world’s central banks to sustain a prolonged period of zero and even NEGATIVE NOMINAL RATES.
Notes From Underground: Returning to the Turmoil
October 20, 2022After a period of personal introspection it’s time to return to the turmoil of the world. What better way to reenter than with a couple of podcasts.
Notes From Underground: Get Smart
March 13, 2022There are so many things to consider when trading in the current climate. First and foremost, CAUTION is the key word, not FEAR. As Billy Joel would say, “We didn’t start the fire,” but as traders and investors we have to dance on the embers. The trading environment is dangerous because the algo-driven trading shops are being bombarded with an endless flow of headlines and outlets fighting to be the first to report any news story. Let the speed merchants draw markets to levels where risk can be measured rather than trading just to trade.
Notes From Underground: A Quick Hit On the State of Chaos
March 6, 2022First, our hearts go out to all suffering in the world of insanity brought on by senseless wars that diplomacy OUGHT to have been able to prevent. The world always returns to the insanity that brought us to World War I when nobody could stop the trains once set in motion. As Phil Ochs sang, “It’s always the old who lead us off to war, it’s always to fall, look at all we won with the saber and the gun, tell me is it worth it all?” But here we are and as always the world continues to focus on the minutiae of life, including the financial outcomes responding to the high-speed headlines driven by algorithmic speed machines. There is no context to any news just manufactured volatility fabricators of the latest musings of some “news” outlets’ favorite expert. But as Hyman Roth said so clearly: “Michael this is the profession we have chosen.”