Posts Tagged ‘Kevin Warsh’

Notes From Underground: Seasons Greetings From 1850 K Street

December 18, 2018

On Wednesday the most discussed FOMC meeting in years will take place. The FED has put itself into a box through its use of forward guidance and of the DOT PLOTS to direct investor sentiment. By skipping a rate hike at its November 8 meeting Chairman Powell put the burden on December with a heightened sense of a rate rise as it has a scheduled press conference. There is a murderers row of financial heavyweights arguing for the FED to ABSTAIN FROM A RISE IN RATES and wait for more data to ascertain whether the equity markets are signaling a genuine concern on economic problems, or are merely repricing risk that had premiums WAY TOO LOW during the halcyon days of harmonized QE. As the FED shrinks its balance sheet, the ECB is finished with liquidity. Once you add the BOJ dancing to the tune of a decimated bond market, global liquidity is being restrained.


Notes From Underground: Some Areas Of Concern and Importance

October 16, 2017

As the tinder of prairie fires builds, these areas of concern are important because of the potential impact they can have on the market:

1. Sunday’s election results in Austria give rise to concerns about the rise of euroskeptic groups in several European nations. Yes, the anti-immigration sentiment appears to be the dominant variable in bringing a right-wing government to Vienna, but the sparks from xenophobia can manifest into an anti-ECB issue as domestic citizens are asked to foot the bill for bail-outs of Italian banks. Many citizens of various European states have borne the costs of bailing out Italy, Spain, Ireland, Greece and Cyprus through negative interest rates, the ultimate tool of financial repression. German two-year notes are currently -73 basis points, even though German inflation is approaching 1.7%, resulting in a real yield of NEGATIVE 2.5% for the savers in German-based banks. Regardless of what the ECB does in terms of quantitative tightening President Draghi has maintained that negative rates will remain lower for longer. Financial repression will be the next theme for the European right.


Notes From Underground: You Take Bernanke. I’ll Take Kevin Warsh

March 31, 2015

The most important interview held on ACCESS JOURNALISM TV was the Squawk Box interview with former FED Governor Kevin Warsh. When I say access journalism I mean: The compromises journalists must make in order to have access to sources and places that would be denied them. For years mainstream financial media would treat Alan Greenspan with great deference and the result was a cult of personality that led to the “oracle” falling in love with a flawed policy. If Sir Alan was attacked it may mean that he would never grant another interview to the offending media outlet. The same holds for the Bernanke and Yellen Fed,e specially as the mainstream media wants access to Fed officials and to be invited to all the relevant press conferences. So my point is this: It took a former Fed official to attack the policies of the FOMC for the established media has not the gumption to challenge those sitting on the throne of power. Kevin Warsh criticized the present policies from multiple perspectives:

  1. Policy cannot be based on what is happening on our ticker machine. “The Fed should be focused on what’s happening three or four years out…” This is a justified criticism and certainly pertains to James Bullard. It was October 15 that the St. Louis Fed President spoke out about a new round of QE in an effort to the counter the sell off taking place in the equity markets. Bullard’s comments caused the massive rally in the bond markets and eventually led to the beginning of the recent six month rally in stocks. Fed policy cannot be a minute-to-minute, day-to-day, month-to-month affair;
  2. Central banks need humility. The Fed has provided the impetus for all the world’s central banks to embark on QE even though the exit strategy is uncertain  and its outcomes not riskless. FED Chair Yellen suffers from the effects of the “taper tantrum” and now the “dollar tantrum” for these have caused the Fed to be fearful of any misstep. If the FED raises rates and the DOLLAR has a sizable rally the FED worries about headwinds for the economy. As Warsh so elegantly stated: “The financial markets have Fed Chair Janet Yellen’s number.” This is a very dangerous development for as Warsh argued, “The tail is wagging the dog”;
  3. Most importantly ,markets are not setting rates but rather central banks. This is in direct contradiction of what Ben Bernanke posted on his blog yesterday. Bernanke wrote, “The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors. The Fed influences market rates but not in an unconstrained way; if it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate.” Warsh believes that the Fed and other central banks have to give the market a chance to determine rates and not be afraid of every selloff in equity markets. The May 2013 taper tantrum was a classic example of the FED being afraid of the market beginning to set a real rate of interest based on underlying market forces. A real-time example of the flaws in Bernanke’s post is the level of interest rates in Germany. Today German unemployment made a new low and housing prices are rising as the weak euro strengthens all segments of the German economy. It is because of the ECB policy that interest rates in Germany are artificially low by any economic metrics. Therefore, central bank policy and not market dynamics are instrumental in determining interest rates and financial outcomes.

In summation: Kevin Warsh took the FOMC to task for policy flaws, which is something the new blogger on the block Ben Bernanke will never do. The Bernanke blog will be educational but don’t look for it to be an honest voice in the discussion of Fed and central bank policy. The previous Fed Chairman cannot criticize the Board he was so instrumental in constructing.

***Other articles that were missed but have importance:
 In Sunday’s March 22 London Telegraph, reporter Szu Ping Chan wrote, “France Is Europe’s ‘Big Problem’, Warns Mario Monti.” This is a significant criticism coming from one of the beloved members of the Brussels elite. When Silvio Berlusconi was ousted from the Prime Minister post, Brussels was able to ‘”parachute “in the ultimate Eurocrat to right the situation in Italy. The article quotes Monti: “France is the big problem of the European Union because the whole construct has been leveraged on the foundation of a solid Franco-German entente. If it isn’t there then there is a poor destiny for Europe.” Monti went on to say: “Germany reluctantly accepted the euro to get approval of the other countries for its reunification process. It would have much rather kept to the Deutsche Mark. It was France who insisted to have the single currency and now it’s so uneasy with it.”
     This is amazing criticism from a consummate insider but reflects the fears of the European elite about the rise of anti-euro parties in several European states: Podemos in Spain; National Front in France; Five Star in Italy; and even the Alternative for Deutschland in a very economically healthy Germany. The European bond markets are not pricing in the fears of the establishment because the ECB‘s QE program and Draghi’s “whatever it takes” jawboning has created a sense of complacency. Also, as Bernanke would maintain, the underlying fundamentals of the EU are so weak. However, look at a chart of sovereign debt as percentage of GDP and tell me that sovereign debt is realistically priced. But as J.M.Keynes advised us: “Markets can remain irrational for longer then we can remain solvent” (especially when the balance sheet of the most powerful actors are virtually infinite … or so they believe).
     Today, Reuters posted an interesting article, “Three Weeks Into ECB Quantitative Easing, Markets Begin Taper Talk.” While I think the article is lacking in substance and probably the musings of some banks long euros it is an interesting proposition. The proponents of a quick ECB tapering of its QE make the case that the economic winds are tailwinds in Europe because the ECB waited so long to enact a genuine QE and can therefore remove the program at an earlier date. A shortened QE would result in a EURO rally and give Yellen room to raise rates without a resultant massive rise in the DOLLAR. A Fed rate rise would also curtail too large a EURO rally, thus both the ECB and the FED could proclaim mission accomplished. The only problem would be the volatility unleashed in the European sovereign debt markets and global equity markets. There will be no easy exit from the QE programs of the central banks but at some point the FED and others will have to allow the markets to find their genuine values. I’ll take Kevin Warsh.

Notes From Underground: Dear Senate Republicans & Banking Committee, STFU

November 13, 2013

Ladies and Gentlemen of the Senate: Just put forward the candidacy of Janet Yellen by acclimation because it is a done deal. It cannot be stopped and so any posturing for the voters back home and any potential donors is a waste of time and energy. Also, don’t provide the idiot talking heads with any “red meat” to keep their empty heads talking. This afternoon’s release of Yellen’s testimony proves that Vice Chairwoman Yellen is a very intuitive politician. HERE IS THE MOST ASTUTE POLITICAL PIECE OF THE STATEMENT (in my opinion):


Notes From Underground: Yield Curves Can Yield So Much Information

March 13, 2013

There is not much news that needed to be dissected so I think it is time for a quick look at yield curves. For simplicities sake I will keep the analysis to the generic 2/10 curves in the countries that have sophisticated capital markets. Why are the curves important? In looking back at the crisis that forced the ECB‘s Mario Draghi to announce “there will be no TABOOS and we will do whatever it takes” to sustain the euro currency and the entire European project. It was the 2/10 curves in Europe that were providing so much of the problem. The talking heads in the media continue to point to the 10-year debt instruments in Europe as being the most significant element. The Italian auction did this. The Spanish auction did that. I urge us to be more attentive to the shorter end of the curve and especially the two-year note.


Notes From Underground: LTRO provides the NITRO to hammer the global equity markets

June 29, 2010

NEWS OUT OF EUROPE: The Spanish Banks were all in a rage as the ECB moved to shorten the duration of the TERM DEPOSIT FACILITY, as the terms were shifting to three months from one year. The Long-term Repurchase Operation (LTRO) that was agreed to a year ago provided the needed funding to get European Banks through a difficult liquidity period at a very friendly below-market rate. Now that the ECB has put an end to that program the still-stressed banks are concerned that the ECB removal of the LTRO will cause short-term problems since liquidity is still an issue.