In a September 11 post, I criticized the Japanese Central Banks’s policy for its technical approach to attempt to steepen its 2/10 yield. I wrote the following:
Posts Tagged ‘Kuroda’
The Wizard of Oz provides so many appropriate metaphors for dealing with global central bank policy. The failure of the wisdom of those who meet behind the “curtain” enthrall the members of the elite media who genuflect on the altar of access. Provide the necessary backdrop of equations and the media believes everything. It reinforces the sentiment of the Greenspan era: “If you think you understood what I said, I must have misspoken.” The idea of an “all-knowing Fed” is beginning to lose its luster as markets begin to understand that FED policy is not rocket science. There is no predictable outcome for the global experiment of negative interest rates or zero interest rates. Even the growth of supersized central bank sheets is causing doubts among the blind followers of free money forever.
Janet Yellen and company are discussing the wrong issue. A FED FUNDS rate hike has already taken place due to the increase in LIBOR rates, which has led to a pricing of the December eurodollar futures contract, currently trading at 99.08–an effective six month yield of 92 BASIS POINTS. This due to the Oct. 14 regulatory compliance deadline for money market funds. In order to ensure there’s enough liquidity to protect against unknown outflows, institutional prime funds are shortening the maturities of their commercial paper, CD holdings, pushing up the CP/CD rates and LIBOR with it. Some prime funds have converted to government-only to circumvent the impending regulations, which has created more demand for U.S. Treasuries. (According to the SEC’s July money market report, govt funds had inflows of $77 billion while prime funds saw outflows of $41 billion.) As a result, the TED spread has widened 15 BASIS POINTS during the past two months. The September eurodollar/fed fund futures spread is trading at 53 basis points. WHAT THE FED HAS TO DO IS BEGIN SHRINKING ITS BALANCE SHEET BY 100 BILLION ASSETS A MONTH. Why?
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.
Today the Fed delivered as expected, leaving rates unchanged and the market conjecturing about the sincerity of the FED’s data dependency (again). Some analysts and algo readers initially thought the FOMC statement was “hawkish” because the FED removed most of the rhetoric about the headwinds of international global and financial developments. I say most because the Fed left in “net exports have been soft.” This is either a concern about the lack of global growth and/or an overly strong U.S. dollar. It is MY OPINION that the Fed removed the language about international financial risks as an offering to the HAWKS as a way to get consensus.
Wednesday brings the results of the FOMC meeting and the official policy statement laying out Fed insights into the domestic and of recent concern the fragile state of the global economy. There will be no press conference so the “kremlinologists” of fedspeak will be busy parsing every nuanced word. I WILL BE WATCHING WHAT OUTFIT THE FED CHAIR IS WEARING. IF SHE IS WEARING A NEHRU JACKET I WILL ASSUME THE FED IS MORE CONCERNED ABOUT THE EFFECT OF GLOBAL MARKETS KEEPING DOWNWARD PRESSURE ON AMERICAN WAGES. Domestic-oriented analysts focus on the U.S. unemployment rate of 5.0% as the key factor for the need for the FED to raise rates. The flawed models of the FED fail to take into account the pressures on the U.S. economy from capital and labor situations worldwide.
There is so much in the political realm that proves the concept of 2+2=5. I will continue the analysis of the impact of politics on markets but remember there is so much political tinder that can ignite the fires of market volatility. A quick sample from over the weekend can be found in Europe where local elections in Frankfurt, the home of the ECB, resulted in large gains for the AfD right-wing party. More dramatically, a small Neo-Nazi party won 17 percent in one district. Support for Merkel’s party, the CDU, and her coalition partner SPD, dwindled. This weekend’s regional elections in three German states will probably result in more losses for the Merkel government. Again, as bad as the refugee problem is in Germany it seems that the monetary policies of the authoritarian ECB and President Draghi are causing greater angst among the German population. Negative interest rates in Germany continue to repress German savers, resulting in a loss of confidence in the established political elite.
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.
Here we go again. Bank of Japan Governor Kuroda “shocked and awed” the markets by taking BOJ deposit rates into negative territory in a HYBRID sort of way as it is a three-tiered methodology that does not apply to money already being held at the BOJ in reserve. Also, money that is deemed regulatory-type capital will receive ZERO interest and won’t be punished with a surcharge, but any new funds making it onto the reserve balance sheet of the BOJ will receive NEGATIVE INTEREST RATES. Kuroda-san delivered this shock after promising last week that the BOJ would not go negative on its deposit rate. Kuroda will learn hat if you keep intentionally pumping the markets with disinformation the markets will have their time when the BOJ needs it the most, like maybe selling off the massive JGB portfolio on its balance sheet. But through the power of negative compounding of interest earnings Kuroda has brought Stevie “Guitar” Miller’s words to life: