Posts Tagged ‘European Central Bank’

Notes 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: Powell, Lagarde and Payrolls, Oh My

February 2, 2023

It was the week that was as three main central bank interest rate decisions from the FEDERAL RESERVE, BANK OF ENGLAND and EUROPEAN CENTRAL BANK rocked the markets. There is more to follow Friday morning as the vaunted employment data will be released. The market is expecting 190,000 jobs created, a 3.6% unemployment rate, a 34.4-hour workweek and a 0.3% gain in average hourly earnings. After all of the central bank-induced volatility that last data point carries little weight unless it shocks to the robust economic upside.

If the unemployment rate fell too much — to say, 3.3% — or AHE soared above 0.7% it would send bond yields much higher, reversing the recent sizable rally in global bond prices triggered by central banks preparing to “pause.”

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Notes From Underground: Returning to the Turmoil

October 20, 2022

After 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.

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Notes From Underground: Get Smart

March 13, 2022

There 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.

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Notes From Underground: Wow Unto Chair Powell

July 27, 2021
The previous blog post about President Lagarde painting the FEDERAL RESERVE into a corner OUGHT to be revealed tomorrow as there is expected to be no change in FED policy and I believe that Chair Jerome Powell will do his best to pose as dovish as possible. If there is a CHANGE it will be in the mix of the QE as the SOMA will be moved to cut MBS purchases and replace mortgages with longer-term treasuries.

Notes From Underground: What A Week (Or Was It a Month)

July 22, 2021

At the beginning of the week, the COVID DELTA VARIANT was the major concern as the weekend brought news of a widespread increase. It seemed world financial markets were in the throes of concern of another pandemic lockdown with the Olympics being cancelled. We at NOTES FROM UNDERGROUND offered context and stressed that the zero interest-rate markets would provide a far different backdrop than what occurred in March 2020. We did learn that zero interest rates lowered inflation concerns and the Olympics are still taking place, although to empty stadiums. SO THE BULL MARKET MUST GO ON.

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Notes From Underground: Central Bank Poker

January 21, 2021

This week, three G-7 central banks had meetings and all decided to CHECK and leave policy unchanged. This was widely expected as there was little reason to UPSET the incoming Biden administration with any idea of currency manipulation. However, the Bank of Canada, Bank of Japan and European Central Bank all discussed the fear of a further slowdown from an increased spread of covid-19.

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Notes From Underground: The Darkness of Foreign Exchange

December 10, 2020

There were two central bank meetings in the past two days: The Bank of Canada and the European Central Bank. The BOC stayed its current course with no change in policy. Several analysts were looking for more dovish action because of the appreciation of the Canadian dollar but the BOC was wise in noting that a “broad-based decline” in the U.S. exchange rate has contributed to a “further appreciation of the Canadian dollar.” As a result, the BOC has ZERO concerns about its currency appreciating as long as it is BROAD-BASED.

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Notes From Underground: Central Bank Policy Peeks

June 2, 2020

On Monday night, the Reserve Bank of Australia issued its policy decision and as expected, there was no change in overnight rates at 0.25%. More importantly, the RBA is targeting three-year Aussie government bonds at 0.25%, keeping the yield curve flat or inverted out to that point.

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Notes From Underground: The markets will labor with the unemployment report

January 6, 2011

Let me state out again as to why the FOREX markets are going to be a difficult investment in 2011. The emerging markets and commodity-based currencies have been the repositories of global capital seeking to take advantage of the Chinese and India growth phenomena without having to actually invest in the countries themselves. If you like China, buy the Australian equity or currency as it provides a proxy on Beijing’s growth policies: A classic case of providing picks and shovels rather than mining yourself.

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