2012-09-11

Peak Confidence in, Peak interventionism by Central Banks

The interventions of the past 4-5 years are really incomparable with anything in the past 70-80 years and the era of modern, fiat based, Central Banking. These John Laws of modern time have had no result to show for their massive amounts of printing except for enormous debt loads on the sovereign balance sheet of their countries.

Yet, it seems that money printing is the cure for many seemingly totally unrelated issues. Indeed, printing money:
  • Creates jobs
  • Creates economic growth
  • Saves currencies
  • Saves political unions
  • Improves exports
  • Put here whatever you like, money printing will do it for you.
To be honest, one must really have a critical mind to be able to see through most of these urban legends perpetrated by mainstream media and parrot journalists for decades. The still, one of these stands out as the most inept statement ever; yet people seem to believe in it, it's the one about printing an unlimited amount of Euros to save the Euro. The fact that the whole world is still buying into the ever increasing amount of lies and non-sense coming out of the mouth of lunatic central bankers is very telling about the overall sentiment of the market.

Moreover, the amount of intervention done in the past few months alone is so gigantic and its scale so much beyond imagination that it is completely unsustainable going forward, even for a short period of time. Yet, in spite of all this, "inflation", defined as the growth of overall money and credit, is not happening in those economies (namely, in the UK, the EU, the US and Japan).

We have reached what I would like to call the peak confidence in, and peak interventionism by, Central Banks from where there's only one way ahead: disappointment and reduction of interventions:
  • Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
  • Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
  • Draghi Lured by Fractious EU Leaders to Build Euro 2.0
  • Draghi Says Officials Agree on ECB Unlimited Bond-Buying 
  • Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
  • Mario Draghi’s Big Moment, Continued - ECB to "do whatever it takes"
  • SNB’s Franc Defense Swells Reserves to 71% of GDP
  • SNB’s $380 Billion Pile Makes Jordan Wonder

All these plans will come crashing down to the earth, and most of those expecting the Fed doing QE and the ECB buying bonds will be sourly disappointed. I have already been through the reasons before; and the fact that the Central Bankers are talking the markets up without intervening will end up badly for those who believed the lies.

In addition to my previous posts here are quotes from Graham Summers who writes a great newsletter at GainsPainsCapital.com:

Super Mario's Big Bluff
The financial world has entered a new state of mania with the announcement by the ECB that it will engage in "unlimited" bond buying to maintain lower interest rates for trouble EU sovereigns.

As you no doubt know, our firm's forecast was that the ECB would not engage in any large-scale bond purchasing programs.

We maintain this view today regardless of the ECB's announcement. The reason? The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:
  1. Applying for a bailout from the EFSF
  2. Meeting fiscal budget requirements
  3. Implementing major spending cuts and various other austerity measures
  4.  
[...] Let's cut through the BS here. The use of the word "conditions" completely negates the word "unlimited." Saying that you'll buying "unlimited" bonds as long as EU sovereigns meet certain "conditions" actually means nothing.
[...] The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF's funding.
So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!
Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.
What's the Fed Going to Do?
Today we turn our attention to the US's Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.
There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system. So scratch that idea off the list.
Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this: too many consequences with too little to gain (stocks are at four year highs).
Indeed, if anything, the Fed is likely to pull a "ECB" move, namely promising something vague that it actually cannot deliver on. Why would the Fed do this? Because, like the ECB, the Fed is running out of bullets. Indeed,  St Louis Fed President James Bullard all but admitted this to the Financial Times:
"I am a little - maybe more than a little bit - worried about the future of central banking," said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. "We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalise but it's not really happening so far."
The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?
Here's a Fed official, not only openly admitting that Fed policies aren't working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They're running out of bullets.
So where does this leave us? Well, it's highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB's promise of "unlimited" bond purchases based on certain "conditions" being met (an empty promise if ever there was one).
Finally, see for yourself some quotes from various reports listed above which I have collected over past few weeks.

Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8 percent unemployment isn’t doing it for you -- they need a faster acceleration,” said Gapen, who is based in New York. “So, the decision is, ‘OK, let’s hit the pedal.”
Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August.
“The problems have been bigger than anticipated and it will take a while to work our way through these issues,” Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s securities unit, said in an interview on Sept. 6. “The bond market is pricing in pretty close to a very prolonged period of low growth,” said Dyer, whose firm is one of the 21 primary dealers that trade with the central bank.
 Draghi Lured by Fractious EU Leaders to Build Euro 2.0
The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof euro zone.
Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there.
Draghi Says Officials Agree on ECB Unlimited Bond-Buying
European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area.
The ECB needs to be in a position to ensure the transmission of its rates in all euro-area countries, Draghi said after the ECB held its benchmark rate at a record low of 0.75 percent.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi said at a press conference in Frankfurt today.
Draghi has staked his credibility on the bond plan, telling lawmakers in Brussels this week that the ECB needs to intervene to wrest back control of rates in a fragmented euro-area economy and save the single currency. Now it’s up to governments such as Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions.
“Governments must stand ready to activate” the rescue fund in bond markets when needed “with strict and effective conditionality,” Draghi said.
The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, Draghi said.
Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.
Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.
Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the hearing and did not provide any further comment. Draghi’s comments come two days before the ECB’s Governing Council is due to decide on his bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. In the testimony, Draghi rebuts arguments that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”
Mario Draghi’s Big Moment, Continued
Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the European Central Bank, and the plans, if any, he will announce to help manage the European Union’s financial crisis. Next, on Sept. 12, Germany’s constitutional court will rule on the legality of the European Stability Mechanism, the euro area’s new permanent bailout fund, and the fiscal pact that curbs government deficits. If either event goes badly, watch out.
In July, Draghi aroused expectations that he has so far been unable to meet when he promised the ECB would do “whatever it takes” to defend the euro system. This was seen as a pledge of unlimited bond buying aimed at lowering the long-term interest rates that Spain, Italy and other distressed sovereign borrowers must pay.
SNB’s Franc Defense Swells Reserves to 71% of GDP
The Swiss central bank’s foreign- currency reserves surged to a record in July as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc ceiling.
Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs ($420 billion), the Swiss National Bank said on its website today. That pushed holdings to 71 percent of gross domestic product. Walter Meier, an SNB spokesman in Zurich, said “a large part” of the increase resulted from currency purchases to defend the minimum exchange rate.
SNB President Thomas Jordan has pledged to enforce the franc ceiling of 1.20 per euro “with unlimited purchases of foreign currencies if needed.” The central bank implemented the cap in September to fight deflation and help exporters. Its reserves have soared 44 percent since the end of that month, according to SNB data calculated to International Monetary Fund standards.
“The SNB can keep its pace of interventions for a pretty long time unless there is a massive disruption like the collapse of the euro area,” said Maxime Botteron, an economist at Credit Suisse Group AG (CSGN) in Zurich. “As they increase liquidity through their purchases, the only limiting factor is inflation. However, that is not a concern at the moment."
SNB’s $380 Billion Pile Makes Jordan Wonder
Swiss central bank President Thomas Jordan is wondering how to invest his currency reserves as euros pile up at the bank at a record pace.
“The SNB has the same problem as lots of wealth managers,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “Safe assets have become very expensive. So for the time being, they prefer cash over investing.”
With Europe’s debt crisis hurting returns on the least risky bonds, the Swiss National Bank is keeping reserves in cash after its policy to cap the franc swelled currency holdings by 50 percent in the four months through June to a record 365 billion francs ($380 billion). Money held at central banks, the International Monetary Fund and the Bank for International Settlements accounted for 72 percent of the gain.
The SNB has been piling up euro holdings to defend the franc ceiling of 1.20 versus the single currency introduced in September 2011. While the central bank previously mainly invested foreign currencies in government bonds of AAA-rated nations, the surge in cash reserves suggests policy makers are finding it more difficult to find the right investments.

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