posted on 08 September 2015
Attempts are being made to move the debate, over the third Greek bailout, away from Germany's anchoring of the negotiation to a 'reform or else' Grexit baseline. French Finance Minister Sapin helped to widen the expanding rift with Germany, when he said that his German counterpart had erred, but was acting out of sincere belief rather than playing games by trying to keep the Grexit option on the table - [i]. Jean-Claude Juncker tried his best to positively frame the debate, by stating that he expects a successful conclusion of the third bailout agreement by August 20th - [ii].
As he procrastinates over the next monetary stimulus, Governor Kuroda is getting creative. Last week he opined that falling negative real interest rates are a key signal that his inflation target is within reach - [iii]. Those who buy into this story will conclude that the BOJ is therefore on hold. The IMF was swift to disabuse Kuroda and the more credulous observers. Just as he was opining that rising inflation is driving falling real interest rates more negative, the IMF suggested that rising demand for JGB's is the real driver ceteris paribus. Rising JGB demand from the BOJ, as part of QE and stable demand from Japanese institutional savers has collapsed yields into the negative zone; rather similar to what Mario Draghi did for European government bonds earlier in the year. The IMF concluded that the BOJ will have to go on hold, because there is insufficient supply of JGB's - [iv] to all those who must invest in them.
This implies that the next round of QE from the BOJ will involve some other form of asset purchase than JGB's.
The BOJ's predicament has been made worse by the "boom-bust" impact of the discounting effect on the real economy from the sales tax anticipation behaviour of the consumer - [v]. The process resembles a Taper Tantrum all of its own; as first consumption rises as consumers rush to beat the tax deadline and then activity is choked off by its arrival. The BOJ will therefore have to adopt a counter-cyclical behaviour, which its recent comments suggest is already being done, in relation to the tailwind/headwind impact of the sales tax policy action.
The IMF's semantics, in relation to the web of deceit surrounding China's application for the Yuan to join the SDR basket, continued in their hallmark passive aggressive modus operandi. Whilst closing the door firmly on immediate SDR basket entry another door was left open to entry in one year's time; assuming that the Chinese have completed the miracle of freeing the Yuan to float on the whims of the currency speculators - [vi], whilst containing the collapsing asset bubble that is driving these flows. Given the appetite for capital flight from within China, discretion remains the better part of valour; which means that there will be no free float and hence no entry to the SDR basket until this appetite for flight has gone.
The highlight of the week was the US August Employment Situation, which was anticipated to shed further light on the timing and magnitude of the Fed's Taper. Little attention was paid to the alarming statistic released earlier in the week, which showed that America's non-mortgage debt bubble has reached new post Credit Crunch highs - [vii].
Clearly anyone with a good memory would have seen the perfect symmetry forming. The Fed is now faced with the prospect of tightening to deflate a credit bubble that is already maturing; without bursting it as it did in 2008. Great store is now being set in the raft of macroprudential stability regulations set up since 2008 by US lawmakers; and their ability to prevent the deflating debt bubble from becoming another source of systemic risk to the global financial system. It is now time for all this macroprudential regulation to be put to the test.
America may have got its own house in order but, China most certainly has not so, the global threats are out there. Fortunately for the Fed, the ECB seems willing to pump liquidity into the void being created by the Taper. There is therefore great scope for a managed deflation of the American debt bubble, which will then meet a new wave of Fed liquidity when the global impact of the Taper Tantrum has choked off growth sufficiently for the Fed to feel confident to ease again. The inflation backdrop is benign-to-deflationary, thanks to the commodities rout, so the Fed can play the tightening game for a short while in the knowledge that a new wave of monetary expansion is just around the corner. Fundamental investors, waiting to buy the American dip have been frustrated by both the BOJ's and ECB's willingness to ease and keep global liquidity conditions healthy enough to hold up US equities.
Global central banks have been passing the liquidity baton with great skill, thus keeping the equity markets alive; and show no signs of dropping it.
Despite the idiosyncrasies of the British economy, Mark Carney has done his best not to fumble the global liquidity baton. The latest MPC 8-1 decision to keep rates on hold and a downward revision in the inflation forecast suggests that, far from tightening ahead of the Fed, the BOE will actually ease before it - [viii]. Vindicating the MPC's caution, the latest permanent job creation and wage data showed the pace of hiring and starting salaries falling to an 18-month low - [ix].
Epoch of Belief, Epoch of Incredulity (31) "Collateral Damage" explained the strategy being adopted by the UK Government and its back in favour media baron Rupert Murdoch, to serve up a tasty dish of useful idiots; in order to deflect public opinion away from the bigger question of who is covering up the perpetrators of sexual abuse of the vulnerable members of the Big Society. As the tactical execution of the strategy was unrolled with the latest useful idiot, former Prime Minister Edward Heath - [x], it was becoming apparent that deceased alleged criminals will now be dug up for summary justice; in order to avoid contagion from the scandal infecting the living criminals and their protectors who remain at large in the Big Society today.
Desperate for a signal on the expected FOMC interest rate increase, speculators were left in limbo by the August US Employment Situation report. The report was inconclusive, but started to gnaw away at the convictions of US Dollar Bull, Gold and Treasury Bears; as was anticipated in Epoch of Belief, Epoch of Incredulity (31) "Collateral Damage". Whilst central bankers may feel that they have also been given a breather by this data, they should perhaps start to develop a global consensus on what the really important impact of falling commodity prices is. It's not just a simplistic deflationary conclusion.
For the hard currency central bankers, in which we will include the Fed the ECB and the BOJ, the net impact is an economic stimulus; and transfer of wealth to their respective economies from the commodity producers. Since the Fed has been in tightening mode, the stimulus from falling commodities has been balanced; ditto the Bank of England.
The ECB and the BOJ have been in easing mode; so that they have double up on the stimulative effect of falling commodities with pro-cyclical monetary policies. The FX markets, in strengthening the US Dollar and Sterling versus the Euro and the Yen, have accommodated this policy divergence. The speculators are now involved in some very crowded trades that also reflect this policy divergence. Given the weak data coming out of the UK and USA and the recovering data in the Eurozone combined with the forestalling of the Grexit, it looks like time to test the conviction of the short Euro traders. The Yen is a tougher one, because it now depends on the boom/bust cycle of consumer anticipation of the next sales tax hike; and the BOJ's counter-cyclical reactions.
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