Behind the Curve? Pussycat Yellen Confronts “Largest Dovish Policy Deviation Since the 70s”

By Heisenberg

Some folks will be talking about the Fed today.

In just a few hours we’ll get a hike, but once again, it’s all about the messaging. Any kind of dovish lean would be a (bigly) surprise. What’s got some people spooked is the possibility that, in their rush to prove they aren’t behind the proverbial curve, they get too aggressive with the messaging. Here’s what SocGen said overnight (and please, just forget that you ever heard the term “pussy-cat” in a sentence that refers to Janet Yellen):

The Fed is a pussy-cat that would like to change its spots into something more like a leopard’s. In practical terms, that means that this evening’s FOMC announcement (6pm GMT, with a press conference half an hour later) is all about the Fed’s projections rather than whether they raise rates or not. Anything other than a 25bp rate hike would be a huge surprise to the market. Discounting that possibility on the grounds that the Fed is so (too) obsessed with managing market expectations ahead of policy moves, what we’ll watch are the ‘dots’ showing FOMC’s projections of where Fed Funds might go. Market pricing of Fed Funds through 2017- 19 is at the bottom of what the Fed currently projects. Our US economists think that the 2017/18 dots probably won’t move but beyond that, an upward adjustment is possible to send a signal to the market that the FOMC is serious about normalising policy.

Yes, “to send a signal to the market that the FOMC is serious about normalizing policy.” And see that’s the problem. The Fed already tried that. And since March odds converged on 100%, we’ve seen nothing but signs that while this market will probably be willing to write off one hike as a positive development (you know, as confirmation of the reflation narrative’s legitimacy), anything beyond that in terms of an overzealous normalization trajectory could very well trigger a tantrum and undercut oil prices further.

So is the Fed behind the curve? Or, put differently, are we right to fear an FOMC that sees itself as playing catch up? In short, probably. Here’s Goldman:

Exhibit 1 shows the gap between the funds rate and the rule-implied rates. Positive values indicate that policy is “too tight,” while negative values indicate that policy is “too easy.” The results using the HLW estimate of r* imply that policy is just over 1pp easier than the rule-prescribed rate, while the results using a 2% neutral rate imply that policy is almost 3pp easier. Accounting for the impact of the balance sheet would make both gaps moderately larger. The constant neutral rate assumption implies that the current policy stance represents the largest dovish policy deviation since the 1970s, though it is only half as large as the most extreme gaps of the 1960s and 1970s.


If the Fed is behind, what would it take to catch up? Last week, we showed that the Fed’s projections over the next few years already correct the modestly “too easy” stance implied by its depressed r* view. Under the alternative assumption that critics of the low r* thesis are right and a 2% neutral rate is a better guide, current policy is about 3.5pp too easy and the Fed’s terminal rate estimate about 1pp too low, requiring 1 additional hike per year beyond those already planned to catch up by 2020.

Got that? Ok, good.

Continue reading Behind the Curve? Pussycat Yellen Confronts “Largest Dovish Policy Deviation Since the 70s”

Loosening is the New Tightening

By Steve Saville

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984″ had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

The Priceless Parable of Price Discovery

By Danielle DiMartino Booth

The Priceless Parable of Price Discovery, Danielle DiMartino Booth, Money Strong LLC“Gentlemen prefer bonds.” So quipped Andrew Mellon in 1929 as stocks fell and investors rushed into bonds, pushing their yields down and prices up. Historians recount that the flight to safety had anything but a smooth landing. Within two years, almost all of the sovereign bonds of foreign nations had defaulted, triggering massive losses for American investors and a stream of bank runs that would mark the darkest days of the Great Depression.

What cometh from this despair? Why hope, of course.

Picture the backdrop 85 years ago: Shanty towns that would come to be called ‘Hoovervilles’ had sprung up across the nation as the Clutch Plague took hold. The largest was located in New York’s Central Park. Suffice it to say, the men laboring a handful of city blocks south did anything but take their good fortune for granted. They knew penury was but a paycheck away. In response, they did as we all must during this season – they gave of what they had.

On Christmas Eve, 1931, workers at the Rockefeller Center Construction site pooled their money together to buy a 20-foot balsam fir tree. Erected at the work site, it was decorated with, “strings of cranberries, garlands of paper and even a few tin cans.” Today, a half a million people from all over the world will gaze with wonder at this humble tree’s successor. Another half million will follow in their footsteps tomorrow as will be the case every day it stands, shining as a beacon of hope in its purest form.

To mark the occasion of this holiday season, please accept all I can humbly offer you, week in and week out – my words. For those of you who have read these missives for some time or ever heard me speak, you’ll recognize what follows. For newer readers, settle back. You’re in for not one, but two, real treats, one of which is wrapped in an iconic robin’s egg blue box.

It will come as no surprise to any who have met him that the giver of the gifts you’re about to receive is Arthur Cashin, one of the greatest storytellers of all time. For over a decade, I’ve had the honor to call him friend. Readers of Cashin’s Comments, a daily offering that delights his followers the world round, would agree that it’s hard to pin down the very best story he has told over the years. These are my two favorites.

You may note that 2017 marks the 30-year anniversary of a momentous day in stock market history. It is Cashin’s recollection of the day that followed the 1987 crash that is among my favorites. On the Tuesday, October the 20th, the Dow initially opened up 200 points. But trading quickly turned negative. Adding fuel to the panicked fire, banks were in the process of cutting off lines of credit to the specialists on the floor. What would have followed, had the banks stood firm, could have been catastrophic.

At the moment bad was turning to worse, Alan Greenspan was on an airplane headed back to Washington DC. The freshly appointed Federal Reserve chairman had landed in Dallas on Black Monday just in time to learn that while he had been in flight, the Dow had fallen by 22 percent. This shocking news prompted Greenspan’s cancelling his Dallas engagement and heading back to DC. Unfortunately, for the markets, he was once again in the air, just as another historic sell-off ensued.

As Cashin wrote on the 25th anniversary of the crash, news that Greenspan couldn’t be reached was of little comfort to NYSE Chairman John Phelan: Desperate, Phelan called the President of the New York Fed, Gerry Corrigan. He sensed the danger immediately and began calling the banks to reopen the credit lines. They were reluctant but Corrigan ultimately cajoled them. The credit lines were reopened and the halted stocks were reopened. Best of all, the market started to rally and closed higher on the day.

I hope you agree the story of the day the NYSE didn’t crash harder is a classic. But it doesn’t resonate as much as it once did. Since October 19, 1987, the stock market has operated in an increasingly contained vacuum thanks in large part to overly-easy monetary policy. That makes the following story, generously gifted to me in its unabridged form by Cashin, the most relevant of the day as we look to the new year with stocks at record highs. The two main characters of this timeless tale are Charles Lewis Tiffany and John Pierpont Morgan.

Being the astute jeweler that he was, Mr. Tiffany knew that Mr. Morgan had an acute affinity for diamond stickpins. One day, Tiffany came across a particularly unusual and extraordinarily beautiful stickpin. As was the custom of the day, he sent a man around to Morgan’s office with the stickpin elegantly wrapped in a robin’s egg blue gift box with the following note:

“My dear Mr. Morgan. Knowing your exceptional taste in stickpins, I have sent this rare and exquisite piece for your consideration. Due to its rarity, it is priced at $5,000. If you choose to accept it, please send a man to my offices tomorrow with your check for $5,000. If you choose not to accept, you may send your man back with the pin.”

The next day, the Morgan man arrived at Tiffany’s with the same box in new wrapping and a different envelope. In that envelope was a note which read:

“Dear Mr. Tiffany. The pin is truly magnificent. The price of $5,000 may be a bit rich. I have enclosed a check for $4,000. If you choose to accept, send my man back with the box. If not, send back the check and he will leave the box with you.”

Tiffany stared at the check for several minutes. It was indeed a great deal of money. Yet he was sure the pin was worth $5,000. Finally, he said to the man: “You may return the check to Mr. Morgan. My price was firm.”

And so, the man took the check and placed the gift-wrapped box on Tiffany’s desk. Tiffany sat for a minute thinking of the check he had returned. Then he unwrapped the box to remove the stickpin.

When he opened the box he found – not the stickpin – but rather a check from Morgan for $5,000 and a note with a single sentence – “JUST CHECKING THE PRICE.” 

Please share this timeless legend of price discovery far and wide. Do your part to make sure this priceless parable keeps giving the greatest gift of all — hope.

As Exciting as the 1930s

By Doug Noland

Credit Bubble Bulletin: As Exciting as the 1930s

“One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.” “The Memoirs of Herbert Hoover – The Great Depression 1929-1941”

There are few apt comparisons to today’s extraordinary backdrop. Late in the “Roaring Twenties” period offers the closest parallel – the global nature of vulnerabilities and faltering booms; policymaker confusion and increasing ineffectiveness; fundamental deterioration in the face of impenetrable speculative impulses. It was by 1929 deeply embedded in speculator psyche that the enlightened Federal Reserve would never allow a market or economic collapse.

Top Federal Reserve officials (Yellen, Dudley, Bullard) this week suggested that Trump policies specifically target productivity. It must be a tough pill to swallow for the Fed to admit that their policies have succeeded in stimulating Credit growth and record securities prices, while coming up dreadfully short with respect to productivity gains.

By the late 1920s it had become an objective of the Federal Reserve to stimulate productive Credit. While there was deepening concern for market speculation, the weakened economic backdrop had the Fed determined to support ongoing Credit expansion.

An increasingly entrenched speculative Bubble had over years fomented financial and economic fragilities. Meanwhile, the Federal Reserve’s focus on the increasingly vulnerable economy worked to underpin speculator enthusiasm. Even as the fundamental backdrop turned alarming, a manic inflationary psychology grew only more powerfully entrenched in the marketplace. In the end, efforts to promote productive Credit fatefully prolonged the life of “Terminal Phase” Bubble excess.

November 13 – Bloomberg: “China’s new home sales growth slowed in October from a year earlier, suggesting the push by policy makers to rein in runaway prices is getting traction. The value of homes sold rose 38% to 941 billion yuan ($138bn) last month from a year earlier… The increase compares with a 61% gain the previous month. Slower home sales have helped moderate credit growth. New medium- and long-term household loans, mostly residential mortgages, stood at 489.1 billion yuan in October, down from 571.3 billion yuan in September…”

Continue reading As Exciting as the 1930s

Peak Monetary Stimulus

By Doug Noland

Credit Bubble Bulletin – Peak Monetary Stimulus

October 28 – Bloomberg (Eliza Ronalds-Hannon and Claire Boston): “After all central bankers have done since the financial crisis to prop up bond prices, it didn’t take much for them to send the global debt market reeling. Bonds worldwide have lost 2.9% in October, according to the Bloomberg Barclays Global Aggregate Index, which tracks everything from sovereign obligations to mortgage-backed debt to corporate borrowings. The last time the bond world was dealt such a blow was May 2013, when then-Federal Reserve Chairman Ben S. Bernanke signaled the central bank might slow its unprecedented bond buying.”

German bund yields surged 16 bps this week to 0.16% (high since May), with Bloomberg calling performance the “worst month since 2013.” French yields jumped 18 bps this week (to 0.46%), and UK gilt yields rose 17 bps (to 1.26%). Italian yields surged a notable 21 bps to a multi-month high 1.58%.

A cruel October has seen German 10-year yields surging 31bps, with yields up 58 bps in the UK, 31 bps in France, 40 bps in Italy, 33 bps in Spain and 30 bps in the Netherlands. Ten-year yields have surged 43 bps in Australia, 40 bps in New Zealand and 25 bps in South Korea.

Countering global bond markets, Chinese 10-year yields traded Monday at a record low 2.60%. There seems to be a robust safe haven dynamic at work. It’s worth noting that China’s one-year swap rate ended the week at an 18-month high 2.73%, with China’s version of the “TED” spread (interest-rate swaps versus government yields) also widening to 18-month highs.

Here at home, 10-year Treasury yields this week jumped 12 bps to 1.85%, the high since May. Long-bond yields rose 15 bps to 2.62%, with yields up 30 bps in four weeks.

And while sovereign bond investors are seeing a chunk of their great year disappear into thin air, the jump in yields at this point hasn’t caused significant general angst. During the October sell-off, corporate debt has outperformed sovereign, and there are even U.S. high yield indices that have generated small positive returns for the month. Corporate spreads generally remain narrow – not indicating worries of recession or market illiquidity.

October 27 – Wall Street Journal (Ben Eisen): “By some measures, October is already a record month for mergers and acquisitions. Qualcomm $39 billion deal to buy NXP Semiconductors helped push U.S. announced deal volume this month to $248.9 billion, according to… Dealogic. That tops the previous record of $240.2 billion from last July… It was assisted by last week’s record weekly U.S. volume of $177.4 billion.”

And while bond sales have slowed somewhat in October, global corporate bond issuance has already surpassed $2.0 TN. The Financial Times is calling it “the best year in a decade,” with issuance running 9% ahead of a very strong 2015. According to Bloomberg, this was the third-strongest week of corporate debt issuance this year.

Continue reading Peak Monetary Stimulus

What Progress Looks Like

By Jeffrey Snider of Alhambra

The world is finally waking up to its dollar problem, though in reality it is much, much more than that; it is a full “dollar” shortage

It is often very difficult not to smile even though there is little lately to smile about. Every so often the world produces an absurdity that proves yet again God has a sense of humor, or that cosmic irony is a real thing. In economics and finance, all of the past few decades have revolved around actual money, which has been nothing like what the textbooks say. Though there was some great debate about 2008, in reality most people were just too stunned to see through the wreckage for what it was, more concerned with just surviving it than the full truth of it.

That left the events of last year as the great pivot. On the one hand there were the economists who made much out of very little in 2014 in order to claim as often as they could that QE had worked and the global economy was finally moving in the right direction and at the right pace. On the other side was the bond market, predicting worse than the malaise that had been obvious up to that point, suggesting that the insufficient economy was about to instead become the deficient economy.

In early 2015, it all came to a head with mostly oil. To economists, it was a temporary problem of too much economic success in finding and producing the black stuff; to the bond market it was an “I told you so” moment. For several months it looked like the economists might have been partially right, that lower crude prices and whatever weakness would accompany them were actually “transitory.” Then August happened, first with China shocking economists not just because of the “devaluation” or the intensity of it, but more so because they had no idea the monetary significance of it. It was revealed to them a few weeks later.

Just as all that was taking place, for all intents and purposes ending the dreams of “transitory”, the ECB decided it would install a sculpture by Giuseppe Penone outside the primary entrance of its headquarters in Frankfurt. Standing an impressive 17.5 meters, the piece depicts a tree made of bronze and granite clustered with gilded leaves. Benoît Cœuré, chair of the art jury and Member of the ECB’s Executive Board, said, “Giuseppe Penone’s tree conveys a sense of stability and growth and is rooted in the humanist values of Europe in the most beautiful way.”

I, and many others, saw it quite differently:

Continue reading What Progress Looks Like

Yellen: Maybe We Don’t Know What We Are Doing

By Jeffrey Snider of Alhambra

The Fed is losing control with increasing doubts about what monetary policy actually is

In 1953, Milton Friedman wrote out what have been the guiding principles of modern, orthodox economics that were necessary should it wish to join the ranks of serious science. In his Methodology of Positive Economics, Friedman recognized economics unlike harder sciences proceeds from an enormous disadvantage, meaning that for the most part all of it is unobservable. We know that an economy happens and that there are observable conditions that relate to the immense and complicated interactions that make up any economic system, but to figure out exactly how A becomes B is all but impossible. You and I may arrive at the same place, economically or financially speaking, but the way in which we did might be extremely different and that might be important.

This was, of course, Adam Smith’s “invisible hand” of free market economies where social progress was a product of mutual interdependence. But economists of the post-Great Depression era were concerned that because so much was invisible leaving it up to markets alone was too messy and far too often violent. Many, like Friedman, were actually concerned that without a more central role for someone (it was only human that economists saw themselves in that role) that free markets altogether would be subsumed by raw statism, as so many other places had already experienced. To them, to save it was to corrupt it.

To get to that place of a more delimited and therefore “optimal” structure meant that economists had to overcome this information limitation. This is what Positive Economics meant to accomplish, to set out the rules by which economists could still fulfill their self-selected goal even with that possibly disqualifying handicap. In truth, Positive Economics was and remains quite simple as I wrote back in July:

To get to this point, Friedman claims a hypothesis must be “important”, by which he defines as, “if it ‘explains’ much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone.” In statistical usage, this is justification for ignoring the “error” terms so long as the few independent variables supply sufficient predictive capacity. [emphasis added]

In terms of the activist central banks that followed from this thinking, Alan Greenspan’s Fed, for instance, could stake a claim to economic control by nothing more than the federal funds rate even though they truly had no idea how that “control” actually worked. That much they were unconcerned about because the mathematical correlations of that time showed a high degree of relationship between all the important economic variables leading back to short-term interest rates. Greenspan didn’t need to understand how or why, according to Positive Economics, he just needed to be assured that he could explain a whole lot (borrowing, inflation, economy) by a very little (the federal funds rate); which he believed he did and so did “everyone” else.

Continue reading Yellen: Maybe We Don’t Know What We Are Doing

What Will Result From Sideways?

By Jeffrey Snider of Alhambra

The economy of 2015 started out “unexpectedly” weak before succumbing to “global turmoil.” It was the events of last summer that began to sow serious doubts about not just the economic narrative seeking to dismiss weakness (“transitory”) but rather central banking and QE itself. The repeat in January/February further eroded mainstream credibility, particularly since only a few weeks before the Federal Reserve in particular pronounced full health. It was an embarrassing but poignant “dollar” rebuke.

In the middle of 2015 just prior to the outbreak of the “dollar” “run”, it was perhaps somewhat understandable for the layperson or the general public to wonder what was going on. Any disruption in terms of the domestic economy did seem as Janet Yellen was claiming. For all the grief even by late July last year, everything seemed to be limited to overseas events; a fact which economists and policymakers played up whenever they could. They should have known better.

I wrote at the end of last July that what was going on overseas was yet another warning even though it may not have seemed like it had anything to do with the United States:

Sticking with purely financial expression of the eurodollar standard it is easy at times to forget such monetary influence has very real consequences. That is true in the US in particular, as even though the recovery is both deficient and waning it isn’t the disaster it is in other, connected places. It was, after all, the rise of the eurodollar standard as a wholesale system starting in the middle 1990’s that more tightly stitched the global economy, an open system architecture that eludes, still, the grasp of monetary policymakers. As such, they have a great tendency to miss and misapprehend what is really happening and because of that they will simply make it all worse without much hope for an upside.

That might be the biggest difference between this year and last, at least as far as credibility. Warnings aren’t so easily set aside anymore, meaning central banker assurances aren’t nearly so potent. From February 11 forward, economists and policymakers have had everything going for them; the end of the liquidations and the further lack of a third; economic accounts that seem, on the surface, to be much better certainly in comparison to the start of the year; and stocks, the go-to signal for everything that is supposed to be right, at new record highs (S&P 500 anyway). Yet, for all that, there remain very clear nagging doubts.

These start with the steady stream of “anomalies”, market or economic hurdles that continue to crop up with some noticeable regularity. Learning from last year, people now understand (even if they don’t get why) that supposedly random “overseas” occurrences have had a consistent tendency to cross any and all boundaries. Even stocks like those of the S&P 500 that while the overall index hit a record high it wasn’t as if that started another leg in the “bull market.” Since mid-July, stocks have more or less pushed sideways, following a great many other markets into conspicuous indecision.

Continue reading What Will Result From Sideways?


By Doug Noland

Credit Bubble Bulletin: Reversals

Commenting on Friday’s jump in global bond yields, a fund manager on Bloomberg Television downplayed the move: “Yields are back to where they were last week.” Such thinking badly misses the point.

Greed and Fear ensure that markets have an inherent tendency to “overshoot.” Over-liquefied markets can significantly overshoot on the upside. Markets for years dominated by ultra-low rates and massive central bank buying should be expected to overshoot in historic fashion. And that’s exactly what has unfolded. Major market Reversals tend to be violent and unpredictable affairs, catching almost everyone unprepared.

At the minimum, summer complacency ended rather abruptly Friday. Bloomberg: “Stocks, Bonds Spiral Lower Together in Replay of Past Hawk Raids.” Long-bond Treasury yields jumped 13 bps Friday, with a two-day surge of 20 bps (“biggest two-day rise since August 2015”). Ten-year Treasury yields rose seven bps this week to the highest level (1.67%) since June. German 10-year bund yields rose 13 bps (“biggest slide since March”) in two sessions to the first positive yield (0.01%) since July 15.

September 8 – Bloomberg (Kevin Buckland, Wes Goodman and Shigeki Nozawa): “One of the pillars of 2016’s record-setting global bond rally is starting to buckle. Japan’s sovereign debt is suffering its worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds amid speculation the Bank of Japan plans to change its asset-purchase strategy. The reversal is spurring concern the second-largest debt market is the vanguard for a broader selloff… The impact of the BOJ’s stimulus is that the bond markets worldwide are becoming one market,’ said Chotaro Morita, the chief rates strategist at… SMBC Nikko Securities Inc., one of the 21 primary dealers that trade directly with the central bank. ‘If there’s a reversal of policy, you can’t rule out that it would roil global debt.”

The Bank of Japan is divided and wavering – an unsettling situation for Japanese and global bond markets. The BOJ is in the process of reviewing current stimulus measures, as it heads into a key September 20-21 policy meeting. After championing negative interest-rates, there is now recognition that prolonged negative rates and market yields have turned problematic for the banking system and pension complex. There is speculation that the BOJ may employ measures to steepen the yield curve, with all the uncertainty this latest policy gambit would entail.

Super Mario failed Thursday to allay market concerns. Restless markets were hoping that the ECB would commit to extending its QE program past the stipulated March ending date, while also expanding/tinkering with the mix of securities to be purchased (running short of bunds and other bonds to buy). Months pass by quickly. Seeking immediate assurances of “whatever it takes forever,” markets were left disappointed. Have Germany and the euro-area “hawks” been waiting patiently to reassert themselves?

Contentious central bank debates are not limited to the BOJ and ECB. Markets were hit with an untimely Friday morning “increasingly risky to delay U.S. rate hike” from none other than Fed dove Eric Rosengren. A spate of weaker data had moved sentiment away from expecting a September rate hike. Yet there is clearly an FOMC contingent that believes rates are too low considering the backdrop (M2 “money” supply up almost $900bn y-o-y; 4.9% stated unemployment rate; asset Bubbles, etc.).

History has demonstrated that, once commenced, monetary inflations are exceedingly difficult to control – let alone rein in. Speculative markets have been keen to this powerful dynamic. Once the Bernanke Fed targeted inflating securities markets as the prevailing mechanism for post-Bubble reflationary measures, there would be no returning to conventional. The Fed talked “normalization” and “Exit Strategy” in 2011, only to double-down with massive stimulus after European-led market tumult erupted in 2012. Then there was Bernanke’s – the Fed will “push back against a tightening of financial conditions” that quashed the markets’ 2013 “taper tantrum.” Repeatedly the Fed shied away from even a little baby-step rate increase in response to unsettled global markets.

It was not much different in early-2016. After at long last initiating “lift off” in December, unstable global markets in January and February saw the Fed lose its nerve to follow through. Meanwhile, the BOJ, ECB, BOE and others adopted even more outlandish monetary stimulus. For good reason, markets fully embraced “whatever it takes for as long as it takes”. The latest monetary management iteration removed any potential QE limitation. Limits to negative rates were not yet close at hand. And if sovereign buying programs ran into constraints, central banks would simply shift their buying onslaughts to corporate bonds and equities.

Central bankers had fully embraced booming global securities markets. After years of aggressive support, they were all in. No turning back. Only a surge in consumer price inflation could possibly bring about a rethink of extreme monetary stimulus; and surely that wasn’t about to happen. For the markets: The sky’s the limit.

As for global securities markets, the central bank-induced short squeeze morphed into an historic 2016 global market speculative melt-up. Caution was thrown to the wind – by central bankers, speculators, investment managers and investors alike.

Continue reading Reversals

Reforming Priors and Re-Forming Europe

By Michael Ashton

By now, you have probably heard that the sun did not set on the British Empire as a result of BrExit. Here is one chart from Tuesday’s Daily Shot letter – and see that letter for others.


This is not at all shocking. While in the long-term it is possible (though I think unlikely) that Germany and other major European trading partners may choose to reduce the business they do with the UK – business which is bilateral, by the way – the immediate short-term impact of a lower pound sterling was much easier to read. In the immediate aftermath of the vote, I made the bold prediction that “Britain Survived the Blitz and Will Survive Brexit,” and then later that week in a post called “Twits and Brits” I made the fairly out-of-consensus prediction that “For what it’s worth, I think that thanks to the weakening of sterling Brexit is likely to be mildly stimulative to the UK economy, as well as somewhat inflationary, and slightly contractionary and disinflationary to the rest of the world.”

Oh, I should also point out that in early July I asked the question whether UK property price declines were rational, or overdone and concluded that “I don’t believe the current drop in listed UK property funds is a rational response to correcting bubble pricing, and it’s probably a good opportunity for cool-headed investors…and, more to the point, cool-headed investors who aren’t expecting to liquidate investments overnight.” What has happened since? See the chart below (Source: Daily Shot).

Continue reading Reforming Priors and Re-Forming Europe