And this might become a problem for the Fed. ECB President Mario Draghi wields more power than just about any other public official in Europe, perhaps even including Angela Merkel. The organization he heads not only controls the monetary policy levers of the entire Eurozone, it also supervises the region’s 130 biggest banks. As we’ve seen in recent weeks, it even has the power to decide which of Europe’s struggling banks get to live and which don’t. Yet it is answerable to virtually no one. Until now. Emily O’Reilly, the EU Ombudsman, an arbiter for the public’s complaints about EU-institutions, has just sent Draghi a letter asking him to explain his role in the potentially compromising Group of Thirty (G30) and how he makes sure that he does not divulge insider information or runs into conflicts of interest. The tenor, tone and direction of O’Reilly’s inquiries make it clear that she means business. The Washington-based G30 was founded in the late seventies at the initiative of the Rockefeller Foundation, which also provided start-up funding for the organization. Its current membership reads like a Who’s Who of the world of global finance. It includes current and former central bankers, many of whom now work or worked in the past for major financial corporations, such as:
This post was published at Wolf Street on Jul 10, 2017.
With the Trump inauguration just over 10 days away, attention has now shifted to what Trump will do the moment he steps foot in the White House, and as The Hill reported this morning, judging by his campaign promises, Donald Trump will be a busy man starting on his first day in the Oval Office: “Trump has pledged to take sweeping, unilateral actions on Jan. 20 to roll back President Obama’s policies and set the course for his administration. Many of Obama’s policies he can reverse with the simple stroke of a pen.” The Hill then lays out some of the key agenda items in terms of Immigration, Environment, Lobbying, Trade and Healthcare. The reality, however, is a bit more nuanced than captured in the report, and has to take into consideration not only what Trump’s intentions are, but how they would integrate with Congress, where simply structural limitations could put hurdles ahead of the Trump agenda. So, for a more comprehensive preview of what Trump can – and can not do – both on day one, and for the rest of 2017, we present a recent analysis by Alec Phillips of Goldman Sachs (which, now that Trump has surrounded himself with Goldman alumni will be as critical when it comes to fiscal policy as Goldman was when it came to advising the Federal Reserve on monetary policy), which notes that the political agenda for 2017 is starting to take shape, with tax reform and Obamacare repeal seemingly at the top of the agenda. Trump will be delighted to know that both items can be passed without Democratic support via the budget reconciliation process.
This post was published at Zero Hedge on Jan 9, 2017.
This week the 115th Congress was sworn in, and there are some indications that Fed reform may be on the agenda. The combination of populist anger fueled by Ron Paul’s Presidential campaigns and the 2008 financial crisis coupled with the repeated failings of the Federal Reserve to meet their projections has created a rare window for monetary policy to be both politically advantageous, as well as so obviously needed that even politicians can see it. The question now is what sort of reform is on the table. Congressional Reforms Last Congressional session saw proposals from both the House and the Senate. From the House we have the FORM Act, which would require the Fed to adopt a monetary policy rule and explain to Congress whenever they deviate from that rule. The FORM Act also calls for an annual GAO audit of the Federal Reserve, doubles the number of times the Fed Chairman testifies before Congress, and makes some other tweaks to the makeup and protocol of the Federal Reserve Board. Since the FORM Act passed the House in 2015, there is a good chance we will see it resurrected in 2017. On the Senate side, Banking Committee Chairman Richard Shelby has pushed for the Financial Regulatory Improvement Act. Not only does it lack a catchy acronym, but its reforms to the Fed are far more modest than the FORM Act. The meat of the bill focuses on changes to the Fed board. The head of the New York Fed would no longer be appointed the banks board of the directors, but would instead be nominated by the President and confirmed by the Senate – just like the Federal Reserve Chairman. It would also grant powers to the Fed’s regional presidents that currently only reside with the board of directors. Though early drafts of the Senate bill called for the Fed to adopt rules-based monetary policy, this ended up being stripped from the final proposal due to Democratic opposition – largely because much of the Hill focus has been on the Taylor rule, which many Fed advocates fear is too restricting.
President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending. Unfortunately, he is unlikely to have the room for manoeuvre to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state. It is also becoming increasingly likely that the next fiscal year will be characterised by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector. With the pending appointment of a new President with ideas of his own, this article turns our attention to the effects on government finances. Government outlays are already set to increase, due to price inflation, more than the GDP deflator would suggest. The deflator is always a dumbed-down estimate of price inflation. At the same time, tax receipts will tend to lag behind any uplift from price inflation. Furthermore, the wealth-transfer effect of monetary inflation over a prolonged period reduces the ability of the non-financial private sector to pay the taxes necessary to compensate for the lower purchasing power of an inflating currency. Trump is a businessman. Such people often think that running a country’s economy is merely a scaled-up business project. Not so. Countries can be regarded as not-for-profit organisations, and democratic ones are driven by the consensus of diverse vested interests. The only sustainable approach is to stand back and give individuals the freedom to run their own affairs, and to discretely discourage the business of lobbying. President Calvin Coolidge expressed this best: ‘Perhaps one of the most important accomplishments of my administration has been minding my own business’.
This post was published at GoldMoney on NOVEMBER 10, 2016.
China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent. Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half. ‘Contagion risks are definitely rising,’ said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. ‘The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.’
Former Reagan Budget Director David Stockman joins today’s Liberty Report to talk about his upcoming book, ‘Trumped: A Nation on the Brink of Ruin… And How to Bring it Back.’ What are Stockman’s suggestions on foreign and monetary policy and would they help?
Over the years, the ‘wealth effect’ has been taken as a core component of monetary policy. Central bankers will not admit it, of course, but particularly stock prices are a central element of their strategy. It almost has to be that way given that the modern version of econometrics applies rational expectations theory as a literal condition. Since expectations form the basis of orthodox understanding about how an economy works and why it changes, the biggest effects, economists believe, of any policy are achieved when they impact consumer, financial, or business expectations the most. So it is with record stock prices. By the nature of the Great Recession in terms of its depth (not that it was actually a recession), monetary policy was hugely constrained in how it might respond. As then-former Chairman Ben Bernanke wrote in November 2010 explaining why QE2 was in his viewnecessary: This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
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.
As investors anxiously await the key monetary policy decisions from the Federal Reserve and the Bank of Japan next week, there have been signs that the powerful rally in bond markets, unleashed last year by the threat of global deflation, may be starting to reverse. There has been talk of a major bond tantrum, similar to the one that followed Ben Bernanke’s tapering of bond purchases in 2013. This time, however, the Fed seems unlikely to be at the centre of the tantrum. Even if the FOMC surprises the market by raising US interest rates by 25 basis points next week, this will probably be tempered by another reduction in its expected path for rates in the medium term. Instead, the Bank of Japan has become the centre of global market attention. The results of its comprehensive review of monetary policy, to be announced next week, are shrouded in uncertainty. So far this year, both the content and the communication of the monetary announcements by BoJ governor Haruhiko Kuroda have been less than impressive, and the market’s response has been repeatedly in the opposite direction to that intended by the central bank. As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target. But the board is reported to be split, and the direction of policy is unclear. With the JGB market now having a major impact on yields in the US, that could be the recipe for an accident in the global bond market.
The University of Michigan released its September update for their surveys of consumers. The overall index of consumer ‘sentiment’ was unchanged from August at 89.8, and up just 3% from last September. This ‘confidence’ index peaked in January 2015 at 98.1 and has been sideways to lower ever since. Most of the internals were practically unchanged throughout, leading Chief Economist Richard Curtin to note: …modest gains in the outlook for the national economy have been offset by small declines in income prospects as well as buying plans Not everything in the surveys was so uninteresting. Inflation expectations dropped yet again, as both short-term and intermediate consumer projections for the rate of prices changes continue to sink. The surveyed result for the inflation rate next year fell to 2.3%, the lowest since September 2010 just prior to the start of QE2. Straight away, it would appear that consumers are no longer so convinced that ‘money printing’ actually accomplishes what money printing is supposed to. Since the data is made up of surveys of American consumers we are really talking about perceptions, and thus this reduction in expected inflation has been shaped by recent (money, not monetary policy) events. The peak outlook, the one most faithful to the myth of ‘money printing’, was reached not surprisingly in early 2011. Since then, shorter-term expectations were as inflation breakevens in the TIPS part of UST trading; seemingly stable but only as a matter of being unconvinced about policy efficacy, primarily QE.
My last piece ‘The Matrix Exposed’ generated a bit of a stir. And as per usual the PhD’s had some fairly colourful things to say to me regarding the notion that more money and more credit may actually stall an economy. But look I’m not trying to be offensive to anyone. I’m simply making a case that when consumer credit becomes the basis of growth, well you have a real problem. And that is a pretty reasonable argument even without the hoards of data backing it up. But so allow me an attempt to mend some bridges. Let’s start by looking at the various existing frameworks that drive economic policy. We have Monetary policy (the banks), Fiscal policy (Congress), Microeconomic policy (Corporations). So let’s look at each. Let’s begin with Fiscal policy. The very first issue that should jump out to everyone is that Congress has been utterly ineffective for almost 2 decades now. That is because the partisanship has become so intense that there simply seems no room for compromise in an effort to get any reasonable piece of legislation done. What we are left with is a slew of outdated fiscal policies. Perhaps most detrimental is a corporate tax rate nearly twice that of many other developed nations. The problem with relatively (to other nations) high corporate tax rates is it means that any domestic investment, everything else equal, has a significantly longer breakeven point. Said another way, the return on domestic investment is much lower than the return on foreign capital investment (ceteris paribus). This is a very intuitive concept, easily digestible by all. The implication is that the relative level of corporate tax rates here in the US incentivize corporations to invest elsewhere.
Japanese government bonds hit a six-month low today, and the 10-year came within a whisker of breaking into that long forgotten realm of positive yields. It’s been a ferocious sell-off- the worst in two decades to be precise. Since the 10-year JGB yield hit a record low -0.291 per cent at the end of July, yields have rocketed amid widespread headscratching over what the future holds for Japanese monetary policy, writes Joel Lewin. In July, the Bank of Japan underwhelmed markets with a stimulus boost that fell short of expectations, while the government unveiled a 4.6tn ($45bn) fiscal stimulus package, sparking concerns the BoJ has run out of ammunition and adding fuel to the sell-off.
In case you need any assistance in trying to figure out when Janet Yellen spoke, or at least when the text of her speech was released from embargo, here is a hint: It seems her stream of consciousness was somewhat consistent with the old Greenspan idea of ‘fedspeak.’ People and investors appear to have taken from it what they wished, with some commentary talking about its apparent ‘hawkishness’ before being overwhelmed by others claiming its clear ‘dovishness.’ I don’t think either of those terms apply, and certainly not in the fashion with which they are leveled by the continued conventions of mainstream perspective about monetary policy. What I found in the speech is some good indication for what I wrote yesterday, though you as the reader should be equally suspicious about whether I am falling into that same fedspeak trap (as I so very much look forward to the day when nobody cares one bit what any Fed official or central banker has to say, and that day is coming).
On March 9, 2016, front month trading for Japanese government bond (JGB) futures was halted at 12:32 pm Tokyo time. Selling had become intense, tripping the Osaka Exchange’s dynamic circuit breaker. The total length of the halt was just 30 seconds, but fingers were already being pointed in the direction of the BoJ. More than four months later, on July 28, trading was halted in all products for JGB’s for an estimated 20 minutes starting 9:51 am Tokyo time. While the exchange provided very little information, they eventually blamed a delay in system processing. Whether or not that was the proximate cause doesn’t really matter, as the context for the trading darkness was just hours ahead of BoJ’s latest monetary policy decision. A few days after that, on August 2, JGB 10s experienced their worst single day selloff in 13 years. That ended a 3-day selling binge that cut 2.47 points off the price of the 10-year benchmark, the largest three-day losing streak since May 2013 shortly after QQE had begun. You might get the sense from these events that trading liquidity in JGB’s, cash or futures, isn’t exactly the most robust these days. Violent swings in bond markets are never a good thing in either direction (just ask the US Treasury). It’s not just government bonds, however, that have obtained a direct and palpable disdain from institutions that used to be a major part of the financial plumbing in Japan.
Even a resurgent yen hasn’t dampened Japan’s stock rally over the past couple months, but that’s not necessarily because investors like the market. The Nikkei 225 index has surged around 10 percent since late June, even as the yen has climbed against the dollar, with the pair testing levels under 100. Normally this would be bad news for stocks as a stronger yen is a negative for exporters as it reduces their overseas profits when converted to local currency. So what explains the buoyant stock market? Analysts attributed the gains to the Bank of Japan (BOJ), not fundamentals. In a report titled, ‘BOJ nationalizing the stock market,’ Nicholas Smith, an analyst at CLSA, said that the central bank’s exchange-traded fund (ETF) buying program was distorting the market. At its late July meeting, the BOJ said it would increase its ETF purchases so that their amount outstanding will rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously. Those purchases were particularly distorting to the market because they focused largely on funds tracking the Nikkei 225 index, Smith said in a note dated Sunday, estimating that more than half of the BOJ’s ETF buying was likely in Nikkei-tied funds.
We have all heard the incredible stories of housing riches in commodity producing hotspots such as Western Australia and Canada. People have become millionaires simply by leveraging up and holding on to properties. These are the beneficiaries of a global money-printing spree that pre-dates the financial crisis by decades. The road toward such outsized gains in property is not paved with some global savings glut concocted by theoretical economists, but have rather been a process whereby the US leveraged up its economy-wide asset base allowing the Chinese to print ‘dollars’ with abandon. China, being a top-down system favoured fix asset investments as a means to grow their economy; the newly minted ‘dollars’ were thus used to bid on international commodities. That this increased the nominal values of tangibles, especially commodities with a direct Chinese bid, should come as no surprise. However, now that the Chinese economy is trying to move away from a system based on slave labour, foreign direct investment and exports to an overleveraged world, fixed asset investment growth is slowing down. That this has negatively affected Perth and Calgary is clearly visible in property data. However, one stalwart bubble remain resolute in all of this. A bubble like few before it and which will inevitably burst spectacularly with dire consequences for the small community. If you look to the prosperous fringe of northern Europe, you will note a small resource-based economy that has gone completely haywire. A population befuddled by surging commodity prices in a world where monetary policy is a foreign import. Remember the Impossible Trinity; a country cannot have free capital flows, a fixed exchange rate and a sovereign monetary policy all at the same time. While exchange rates were supposedly freely floating, they were in practice partly managed because a too strong exchange rate would crowd out the non-commodity export based part of the economy. Capital was certainly free to flow across the border, but to dampen the effect on the exchange rate the central bank set its monetary policy with diktat from the Eccles Building in Washington DC via Frankfurt. The result of such folly? We present exhibit A, a gargantuan housing bubble equal to none before it.
In yet another data point that identifies depression rather than a Great Recession, the Wall Street Journal reported last week what most people outside the economics profession had realized a long time ago. Janet Yellen likes to say that the housing market is recovering, highlighting the economic sector as one of the few bright spots left. The FOMC regularly and officially makes mention of it, largely for the same reason. As with everything else in this economy, however, that something is not getting worse does not immediately indicate that it is getting better. The housing market has been out of its crash for five years, but that is not at all the same as a housing recovery. Monetary policy interference is still interference, even if it is done with the best of intentions. The housing recovery that began in 2012 has lifted the overall market but left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans…
Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result. Monetary policy traditionally has involved adjusting a short-term rate of interest that can then, over time, affect the structure of long-term rates that are set by markets. But central banks’ bond purchases and ultralow interest rates mean that distortions are rife. Some ripples are having immediate impacts: the Bank of England’s new quantitative easing program, for instance, has turbocharged the U. K. bond market. The failure of the BOE to buy as many bonds as it wanted Tuesday pushed long-dated gilt yields to new historic lows: the 30-year yield, which three months ago was 2.3%, now stands at 1.3%. Gilts maturing in 25 years or more have returned an extraordinary 34.8% so far in 2016, according to Barclays.
Basic economics has proven that when the supply of something dwindles, absent an offsetting drop in demand the price should rise. When translating these fundamental terms to the labor market especially of the past few years, the supply means ‘slack’ or the available pool of workers not yet working; demand has been, we are told repeatedly, very robust; therefore the price of labor, the hourly wage rate, should be rising and rapidly so if only to match the rhetoric (‘best jobs market in decades’). Monetary policy is already at a great disadvantage because its core philosophy seeks to discourage rapid growth in wages. Figuring that wage inflation leads to actual inflation, central banks believe they must act to control it even though, as noted above, it’s basic economics that shows and truly delivers the best basic economy. This policy handicap isn’t one-sided, however, as this ‘recovery’ has proven beyond any doubt. In other words, central banks have also philosophical problems about getting wages to rise in the first place. In the past nearly decade, it all works around and toward ‘slack.’ Economists claim that the unemployment rate is the best indicator of it largely because of what we find of the past. Despite positive growth since the Great Recession, it was never at any point enough to erase the deep hole with which this post-crisis period started. But because the BLS surveys the labor force and that survey is taken as scientific verification of it, this initial deficit is just ignored as if covered by demographics or other non-economic factors. The unemployment rate says those who want to work are doing so and rapidly enough since the middle of 2014 that the recovery is full and the economy will only getter better from here (so that monetary policy must shift before it gets ‘too’ good).
The mainstream, dominant view of monetary policy remains as if it were ‘accommodative’ or ‘stimulus.’ Low rates and/or balance sheet expansion are treated as one and the same in terms of economic effects. The mountain of economic evidence since the end of the Great Recession, however, argues that that view is backward; starting with the observation that the Great Recession itself was no recession. This is a universal problem and not just one for which the Federal Reserve and the United States economy will suffer. As I wrote earlier today with regard to China’s recalcitrant imports and PBOC policy: Instead, by view of the ‘dollar’, it becomes clear that China’s central bank policies rather than being ‘stimulus’ were not proactive but merely reactive efforts to counteract the ‘rising dollar.’ Thus, as in the US, Europe, and Japan, monetary policy doesn’t tell us anything about what will happen, it is rendered an indication of what already did. This is the determined view of bond and funding markets all over the world. Low and even negative rates don’t indicate an economic friendly financial environment, they prove the exact opposite as financial agents are betting directly against it. Therefore, when policymakers tell us, as they constantly do, that interest rates and other monetary policies must remain ‘accommodative’ for an extended period even after nearly ten years already so, what they really mean is that they are merely following the economy down. There is an increasing risk that the US economy has become trapped in a prolonged period of subdued growth that requires lower official rates than was previously expected, a leading Federal Reserve policymaker has warned.