Age of Wisdom, Age of Foolishness (46)
“Oh what a web we weave, when we practice to deceive.”
Robert the Bruce would have felt much at home in contemporary times; as today’s similarly tenacious politicians weave their webs of deceit in order to achieve their ultimate goals. The people of Scotland won their devolved powers of self-determination; along with the praise for saving the Union and its permanent seat on the UN Security Council. This should have been a catalyst for the equity markets to go parabolic on the upside; but the bulls had been deceived. Instead, the Scots “No” vote became a market correction point.
Age of Wisdom, Age of Foolishness (42) “Level 3”
“Now Even More to Do.”
Scotland, Terror and Geopolitical Risk
On a more positive note, the Scots referendum has provided gainful employment for the soon to be unemployed Safari Club Chairman William Hague. Hague announced he would be standing down as an MP in the next parliament; so there was a great deal of speculation about his next career move in Age of Wisdom, Age of Foolishness (29) “Don’t Think F-e-e-e-e-l”[i] and Age of Wisdom, Age of Foolishness (42) “Level 3”[ii]. It was assumed that he would be moving on to do some serious empire building; however it is clear that this cannot be done until Union’s polity has been secured first.
“Bring Me Sunshine…”
Before he can head off, for some corner of a foreign field that is forever England however, there is literally “trouble at mill” which he needs to address immediately. In their haste, to do whatever it takes to save the Union, leaders of the three main parties invoked some tendentious divine right; and gave away more powers to the Scots than are currently enjoyed by the democratic “silent majority” in the provinces.
“If the Crown Fits?”
It did not take long for the youngish pretenders, Nigel Farage[iii] and Boris Johnson[iv], to pick up on this spectacular failure of the English democratic process. The three main party leaders therefore are unelectable, because they are unrepresentative and undemocratic. It therefore now falls to William Hague to resurrect what remains of English democracy; and change the Constitution to become democratic once again with social equity and justice for the “silent majority”[v]. Should he fail, Farage and Johnson will make sure that England is for Englishmen and women again.
“There go the people, I am their leader so I must follow them.”
David Cameron’s survival instincts took a dip into the Alexandre Ledru-Rollin book of political survival skills, after the realization dawned amongst the English yeomen (with a little help from Farage and Johnson) that they had been sold out. He swiftly changed political horses; and now rides a fine English charger with the war cry of “English Votes for English Laws”[vi]. Such mendacious behaviour is exactly what switched off Scottish voters to the alleged British democratic process in the first place; so it is unlikely to win any hearts and minds south of Hadrian’s Wall and north of Windsor. As Disraeli observed, Britons do not like coalitions; and it seems that they have even less time for the political expediency of its leaders.
“Volume I and II.”
(Volume I: https://econintersect.com/a/blogs/blog1.php/age-of-wisdom-age-of-4)
(Volume II: http://www.dni.gov/files/documents/2014_NIS_Publication.pdf)
The global webs of deceit have become so dense and convoluted, that DNI James Clapper was forced to opine that “the United States is facing the most diverse set of threats I’ve seen in my 50 years in the intelligence business”; as he laid out the 2014 National Intelligence Strategy[vii] last week.
Readers of Age of Wisdom, Age of Foolishness will by now appreciate the web of paranoia of its general discourse in relation to the issues covered in the National Intelligence Strategy report. This year’s strategy report seeks to examine the strategic long-term threats presented by China, Russia, North Korea and Iran. In addition, it also analyses the newer threats, including the rise of non-state actors such as Islamic State, the destabilizing impact of food and water shortages, climate change, the disruptive effects of social media and demographic changes.
The subtlety required in national security, is clearly not lost on President Obama; which has led to the kind of circumspection that Dick Cheney simplistically characterizes as cowardice and poor leadership. This subtlety required is also not lost on Janet Yellen either; who understands that she must maintain the value of the US Dollar and US Treasury Bonds, whilst simultaneously expanding the money supply to inflate away the domestic economic threats.
As N.M. Rothschild once said, “give me control of a nation’s currency and I care not who makes the laws”. Yellen must therefore remain ambivalent to the politicians; whilst she maintains control over the perceived value of the US Dollar, relative to its challengers for the prize of global reserve currency. The new US Dollars created must be seen to have real economic value, so that they still remain acceptable as the world’s reserve currency.
It is not enough for them just to have value as a medium of exchange for asset prices anymore; because people are starting to see through this game. They must now be increasingly exchanged for American goods and services, which create jobs for Americans. The Fed is not interested in inflating asset prices alone; it now fully intends to inflate the real economy to reflect a perceived value in the currency.
President Obama’s announcement of airstrikes against ISIS was strongly condemned by the Assad Regime, President Putin and Iran[viii]. In Age of Wisdom, Age of Foolishness (45) “Worlds in Motion” it was observed that the Assad regime was the only credible threat to ISIS at present; and also that Iran was entertaining notions of a “New World Order” in which it was the “uber regional power-broker”.
Assad, Putin and Iran would like to deal with ISIS on their own terms, rather than run the risk of American “proxies” seizing the initiative and weakening the Iranian “New World Order”. The murder of Briton David Haines by ISIS[ix], is a catalyst for Britain to join the air war campaign; which further undermines this Iranian vision.
The French Summit, on the ISIS terror threat[x], was the first opportunity to observe the would-be regional “proxies”, through whom America intends to destroy ISIS. So that ISIS should understand that France is not just a venue for conferences, the French air force bombed and killed several ISIS personnel[xi]. This action was received well by the Coalition; however it also killed all hopes for the equity rally based on the Scots “No” vote.
The markets have become blinded by the threat of conflict again. No doubt the negative price action of this threat will ultimately vindicate the central bankers, who wish to increase monetary stimuli in their respective domestic markets. Once their intensions and capabilities are fully understood and vindicated by the headwinds from these conflicts, they can then be discounted by a price recovery and then new highs in equity markets.
A bipartisan Congress gave the President the authority to arm the “moderate” rebel forces; which are fighting both Assad and ISIS[xii]. There was also a useful bit of wiggle room from the lawmakers, which allows the President to put “boots on the ground” in the form of limited numbers of Special Forces personnel.
The conference appeared to have come full-circle; from the starting point of the first Paris Peace Conference at the end the Great War which created this current problem. The fact that Iran was un-invited, clearly signals one country that is not an official “proxy”. Furthermore, Iraqi President Fouad Massoum’s opining[xiii] that Egypt, UAE and Saudi Arabia have no need to bomb ISIS, suggests who the would- be “proxies” will be. Turkey recused itself[xiv], which suggests that it is not happy with the prospect of the emerging oil producing nation of Kurdistan as another “proxy”. This absence is all the more worrying, given that Turkey is a NATO member; and hence obliged to have some skin in the game. Turkey should perhaps be forgiven for avoiding the embarrassment of yet another conference to decide the fate of its once grand Ottoman Empire.
The presence of the nations created out of the rump of the defeated Ottoman Empire, in addition to the Kurds, must have been too much for Erdogan to bear. Perhaps one day, Turkey will call a conference of its own to hand out its own peace terms.
“If at first you don’t succeed….”
Also skilfully lobbying from the side-lines, as did Chaim Weizmann at Versailles, was Prime Minister Netanyahu; who used the murder of David Haines to re-emphasize his mantra that “Hamas is Like ISIS”[xv], which has become his stock in trade quote as westerners are beheaded.
Demise of the Hawks
The view of the US housing market, in the rear view mirror provided by the housing data, is one of deceleration since August.
Mortgage Applications dropped dramatically during this period[xvi]; and the foreclosure rate ticked up on an annual basis for the first time since 2010[xvii]. It should be remembered that in 2010, James Bullard announced a further round of QE in response the slowdown in economic activity. Thus far, the data from the industrial economy continues to show recovery; but housing is starting to show the early signs of stagnation commensurate with an unfolding interest rate scenario which shows rising rates in the near future.
A weak global economic and geopolitical backdrop will no doubt feed into the economic data; and provide the kind of uncertain picture in which the newly data dependent Fed can now hold back on tightening.
Age of Wisdom, Age of Foolishness (37) “The Third Man(date)”
This new tactical positioning is a prelude to the formal adoption of the new Fed mandate, first observed in Age of Wisdom, Age of Foolishness (37) “The Third Man(date)”[xviii]. In this “Third Mandate”, the Fed is given the mandate to regulate the prices of capital market assets; and hence the specific sectors of economic activity associated with the assets being controlled.
This policy emerged under the stewardship of Jeremy Stein, who developed a microeconomic policy toolkit for the Fed to influence asset prices; and hence indirectly the economic sectors associated with its enlarged balance sheet, rather than just the level of interest rates associated with the collateral markets for US Treasuries. At the “Zero Bound”, the benchmark of interest rates associated with US Treasuries is meaningless; so Stein developed new microeconomic tools in order to extend the Fed’s economic influence.
Stein, however, committed the heresy, of maintaining that benchmark interest rate hikes and cuts are still the most effective tools with which to influence policy; by avoiding the general inflation in capital asset prices which can destabilize the underlying economy. Earlier this year, Stein saw evidence of destabilizing asset bubbles developing; however he was banished back to academia, before he could deflate them, by Janet Yellen.
Yellen now has a much more bubble tolerant supporter and mentor, in the form of Stanley Fischer. Understanding clearly that the Fed’s balance sheet must remain expanded indefinitely, in order to avoid the capital loss from the collapse of the asset bubble which Stein observed, Fischer is now pushing for a mandate to achieve this objective. It should be looked on as a form of disintermediation, of the banking system by the Fed.
Originally capital markets disintermediated the banks, by replacing bank loans with securities. This system of disintermediation blew up in the Credit Crunch, because the banks’ proprietary trading books owned the disintermediated loans in the form of bonds. Having avoided the risk in the form of loans, the banks then took it back in the form of Asset Backed Securities; which became as illiquid as loans during the Credit Crunch.
Banks had replaced loans with bonds, because this required less capital. When the liquidity dried up in the Credit Crunch, owning the bonds was as fatal as keeping the original loans on the banks’ books. QE then reflated the values of these securities held by banks, by allowing the companies paying the loans which backed the bonds to borrow at lower interest rates than the coupon being paid on the bonds.
The health of the real economy, which ultimately is the source of income for the repayment of loans, is however still not strong enough to stand on its own without deliberately manipulated low interest rates from the Fed. At this point in time however, the banks are no longer interested in lending to consumers and business; and consumers and businesses are no longer interested in borrowing from banks.
Both counterparties can make a good living leveraging up the Fed’s provision of cheap liquidity; without needing to increase the general level of economic activity through the creation of new credit. The Fed is now faced with the moral hazard that it must disintermediate the banks and directly create new credit itself. In order to do this, the Fed must therefore have a permanently expanded balance sheet; which in effect represents the balance sheet of a newly constituted Federal banking sector.
Fortunately for the Fed, there is a developing consensus that any future tightening will be limited, because economic growth is not strong and inflation is very weak[xix]. The Fed is thus in the fortunate situation; in which it can tighten monetary policy a little without causing a collapse in the bond markets that would destroy the value of its expanded balance sheet. The Fed is also in the fortunate position, in which it can prolong its easy monetary policy without similarly destroying its balance sheet.
In Age of Wisdom, Age of Foolishness (45) “Worlds in Motion”, the macroprudential replacements for Jeremy Stein (Tobias Adrian and Nellie Liang) were observed; signalling that the Fed would like the markets to take some risk off, in relation to a smooth transition to its new data dependent stance. It was said that :
“This report [from Adrian and Lang] is therefore a signal of an upcoming period of risk reduction in American capital markets; rather similar to what happened in Q1 when Jeremy Stein delivered a correction before he was banished by Yellen.”
In the case of the NASDAQ, this risk off was immediately started in the two days preceding the FOMC meeting; creating the shallow correction which was bought before the FOMC announcement. By the time of the announcement, the sell-off had been mostly erased. This shallow correction, of about only 1%, made the previous ones this year look enormous in comparison ; and suggested that the smart money can’t wait for a decent correction to pile back in, because the upside looks so attractive that it doesn’t need to be embellished with a decent 10% fall first.
Adrian and Liang, however, cautioned that there is no need to chase this one. The speculators are ignoring them at their peril. And the market this past week honored their position by increasing the decline of the S&P 500 to 5% since the Scottish vote was counted.
The latest FOMC statement itself, was a classic example of the tenacity of Yellen. After having skilfully manoeuvred the Hawks on the FOMC to accept a range of economic indicators, which will divine when to officially tighten, at the last FOMC she then acquiesced on becoming data dependent; knowing full well that the incoming economic data is equivocal and beginning to soften due to global headwinds. The lowering of the 2015 GDP forecast in the latest FOMC announcement, to acknowledge this weaker growth outlook, therefore totally compromised the Hawks.
Yellen’s “diss” of said Hawks, by equating Fischer and Plosser as not an “abnormally high number of dissenters”, during here Q&A, was the final nail in their coffins. The Fed may now be data dependent, but the outlook for the data is weak.
“Stooged Yet Again.”
The event, of the FOMC announcement and forecast, was a beautiful piece of absurdity.
Deutsche Bank has noticed that the size of the Fed’s balance sheet is correlated directly with the verbosity of the FOMC statement[xx]. It should therefore be noted that both are still trending upwards, despite the Fed’s announcement of another $10 billion in Tapering.
The absurdity in the latest announcement was the presence of word “considerable”, in relation to the time envisaged to elapse before interest rates rise, alongside the latest projection for sharper interest rate increases later in time than at the last projection. Growth was forecast to be weaker and will allegedly also take longer to return back to normal; however when it kicks in, the Fed will allegedly move to tighten aggressively.
The Fed was saying that it wanted a steeper yield curve; but it did not explain the real reason behind this steepening.
In the press conference, Yellen then extemporised that the Fed’s balance sheet would not be back to normal “until the end of the decade”; and that the mortgage bond component would mature rather than get sold. The “considerable” period of time , which the Fed still refers to, can therefore be taken to mean “until the end of the decade” i.e. 2020.
Taken in its entirety, the whole package of communications looked suspiciously more Dovish than the previous announcement. Yellen opined that the threat from Europe, in the meantime, has provided the cause for concern. After dithering, over whether to discount the “considerable” or the steeper evolution of interest rate increases, the markets chose the former immediately after the announcement.
Yellen’s hope, is that the steeper forward curve will go some way to mitigating the burst of speculative activity in risk assets that she has just unleashed. After the Scots “No” vote, which followed the FOMC announcement, the equity markets then had cause to linger on the steeper rise in interest rates signal from the announcement; which consequently undid all of the rally on the Scots result. With no more positive event catalysts and with conflict building in the Middle East, the equity markets have now flipped into the correction mode that Adrian and Lang predicted.
Once speculators start to discount the fact that Yellen has said on the record that it will take “until the end of the decade”, for the Fed’s balance sheet to get back to normal, the rally in risk assets will then go parabolic. Presumably this is also why Stanley Fischer is so keen to push through his “Third Mandate”; in order to control the asset bubble, once it kicks back in after the current correction. It all seems to be falling into place quite nicely for the Fed; if not for the speculators who once again are being driven by Yellen and Fischer’s imperatives.
Bearing in mind that the Helicopter has just been spotted coming in to land, it is interesting to revisit the behaviour of corporations. Thus far, they have been happy to do nothing except raise product prices, cut costs and buy back their own shares or those of competitors.
There are however signs that they are now positioning for the Helicopter environment. Share buybacks are levelling off. It is important to see if M&A similarly tapers off. This would suggest that companies are starting to invest for economic growth. It also implies that equities are getting fully valued; until the growth from the new rounds of capital investment kicks in at the bottom line in the future.
A steeper yield curve also means that the present value of future growth (and hence the current price of shares) is being reduced by the higher future discounting rate. For those who now feel like calling their broker and hitting the bid, it is advisable to wait to see what happens to corporate pricing power once the Helicopter lands; and the tax code has distributed more purchasing power (hence corporate pricing power) to the masses.
The inflation anticipated in the steeper yield curve has still not been discounted as margin expansion in stock prices. Better to sit through a period a P/E compression driven by rising E (earnings) and gather the dividends; until the asset management industry develops the theme of compressing P/E multiples by paying up for earnings. The ensuing P/E multiple expansion should then hit the Fed’s anticipated rise in interest rates head on in a spectacular crash; some time “at the beginning of the next of decade”, based on Yellen’s long-term outlook. In the meantime, the long-only folks should make a name for themselves over the next five years.
“That’s another fine mess you’ve gotten us into Stanley.” Age of Wisdom, Age of Foolishness (37) “The Third Man(date)”
Stanley Fischer had another try at the “Third Mandate” last week; when he became the leader of a new committee; that is the agency through which this “Third Mandate” will operate. The Fed has just created a Financial Stability Panel[xxi], which Fischer will lead. He will be joined by Lael Brainard and Daniel Tarullo.
The platform of the FOMC no longer has utility for Yellen and Fischer as an agency of Fed policy; especially since it has become a forum in which the Hawks and Doves attack each other and create the dynamic which frustrates bold policy action. Yellen has therefore contained the FOMC threat, by limiting its capacity to being that of a data dependent talking shop.
The new agency of economic influence is the Financial Stability Panel; which is conveniently empty of Hawks and other obstacles to Yellen and Fischer. It is a function of emerging bureaucracy to be self-perpetuating and self-reinforcing; so that the new Financial Stability Panel bureaucrats similarly empowered will expand their franchise.
In order to survive and prosper therefore, this panel will continue to erode more power from the FOMC. It will become the custodian of the “Third Mandate”. An important aspect of the new panel is that it is global in nature. The new global financial architecture, being created after the Credit Crunch, is termed Macroprudential.
The FOMC does not have a global mandate; the Financial Stability Panel by implication has a total global mandate which even subsumes that of the FOMC. The Financial Stability Panel therefore takes precedence over the FOMC. In private lobbying sessions, once Congressional financial experts are inculcated into this new global agenda, the “Third Mandate” will become a formality.
Given the absurdity and lack of meaningful data and guidance from the FOMC projections and statement, it can now be concluded with more certainty that the Financial Stability Panel is the true centre of gravity of monetary policy at the Fed.
“Foresight is 2020 vision.”
What Yellen has just signalled is the permanent expansion in the money supply, accommodated through Fed’s expanded balance sheet until the next decade begins. This signal was however totally missed by the Fedwatching community; who seemed more concerned about the fact that John Hilsenrath had been tipped off about the content of the FOMC statement and the forecasts before they were released[xxii].
If the new Financial Stability Panel was flexing its muscles and testing its operational methods; what better way to do so than by manipulating price action to create a market top signal. Given that the statement itself and the forecast contradicted each other, thus rendering them both meaningless, the total redundancy of the whole situation was the absurd point.
The only method in this madness could have possibly been to engineer a market correction. Yellen will now have to re-signal the Helicopter again, when the pundits are less distracted by a messenger; so that they can focus on the real message about the permanent increase in the money supply. Equity markets will however be lower by then, so that they become more receptive to the kind of news which will make them go back the other way.
Yellen and Fischer must be feeling confident that they have found the way to control asset prices; which implies that the “Third Mandate” and its custodian the Financial Stability Panel will be extremely successful. The risk of groupthink at the Fed is compounding again; especially as the Hawks have been emasculated by Yellen’s tactical positioning in relation to the alleged tightening.
Presumably, the envisaged new permanent increase in the money supply will find its way into the hands of those who need it the most, via a change in the tax code. A steeper yield curve, implying a sharp rise in interest rates once the punters understand that the Helicopter has just landed, will hit the value of the assets on the Fed’s balance sheet; but it will not realise these losses by selling and will let the assets mature. The losses will be taken by bond private investors, who think they are rolling down the yield curve; and suddenly find that the roll down effect evaporates after five years.
China and the New Silk Road
Source: Investing.com, National Bureau of Statistics of China (http://soberlook.com/2014/09/china-about-to-miss-75-gdp-growth-target.html)
Perceptions of the Chinese economy dramatically deteriorated last week. The latest economic data[xxiii] suggests that China will miss its sacrosanct 7.5% GDP growth target. There are tangible signs that the PBOC has lost its control of the economy[xxiv], as interest rates have been liberalised from state control. China’s broadest measure of credit creation is stagnating[xxv].
Anxious to take focus away from the GDP number, that now looks like being missed, as the barometer of economic performance the PBOC has a new range of 40 indicators; which are allegedly more representative of economic performance. Failure to deliver economic growth is already having its knock-on effect social problems. Hong Kong has renewed its demands for democracy[xxvi]; and a recent survey by Barclays[xxvii] showed that half of wealthy Chinese are considering emigrating to find greater economic opportunities.
China is also suffering the blowback from its attempts to protect its own industrial base, by applying anti-monopoly laws as a cover for discrimination against foreign multi-nationals. Foreign multi-nationals would seem to not only have competitive advantage in terms of product quality, but also in terms of liquidity and balance sheet strength, over their domestic competitors who are finding credit constrained.
The foreign multi-nationals have stopped investing, so that FDI is now at a four year low[xxviii]. In addition, Secretary Lew has officially complained[xxix] about China’s unfair crackdown on American companies. Faced with these headwinds, there was nothing else that the PBOC could do but inject more liquidity into the nations’ largest banks[xxx] last week. The PBOC also found it necessary to signal that a rate cut is on the way, however that it is not imminent[xxxi].
“Capital Flows Along the Silk Road.”
China signalled that it wishes to follow up on its announcement of a new parallel economic universe, orbiting around the BRICS, by confirming an investment into Indian technology zones during President Xi’s visit to India[xxxii]. Having already bagged some FDI from Japan earlier in the year, India is clearly positioning itself to arbitrage political hostilities between major nations in order to attract capital inflows.
“Accident on the Silk Road.”
There was also a signal from China that it is becoming more deeply involved in the global challenge from the Islamic State. It may have gone unnoticed that in 2013, China deployed combat troops under UN command in Mali[xxxiii], in the face of the Islamist threat there. It may also have gone unnoticed that China is the biggest contributor of troops to UN missions, of all the permanent UN Security Council members. China has therefore been stumbling towards conflict with IS for some time.
At home it is now feeling the blowback from this confrontation, in the form of its Islamic separatist Uighur minority; many of whom are now appearing in global combat zones. Greater focus is now being placed on China’s Islamic terrorist issues, as its first trial of a Uighur separatist approaches[xxxiv].
The western media frames China’s problem as being created by its own myopic policies. Domestically the Uighurs are discriminated against. In foreign countries, which produce the resources that China consumes, corrupt regimes are supported. This allegedly creates the bedrock of Islamic resistance[xxxv]. Going forward, it is therefore logical to expect China to become even more deeply involved with the threat from the Islamic State.
How China deals with the problem, may surprise many. It recently announced a new economic development bloc with the BRICS at the Fortaleza Summit. China may therefore use this platform as a vehicle to deal with Islamic State, rather than through the coalition of “proxies” being created by America. If this were to occur, there would no doubt be considerable friction between America and China.
Given that Al Qaeda recently announced that it was taking its Jihad to the Indian sub-continent, it will be interesting to see which platform India chooses to resolve its terrorist issues going forward.
“New (World) Order – World in Motion..” Age of Wisdom, Age of Foolishness (44) “Worlds in Motion”
It is clear that Iran is pinning its hopes on this alternative BRICS solution occurring; because Ayatollah Khamenei recently made it clear that he has an alternative “New World Order” vision[xxxvi], in which Iran plays a leading role. If by default, Iran were to become China’s “proxy” then the end game in Syria and Iraq would be something currently un-envisioned by those recently sitting around the table in Paris. The superpower dimension, to this alleged regional conflict, will make for some interesting events in the future.
The Western End of the New Silk Road
The important takeaway, for global-macro investors, is that Europe, China (and soon to be India) will soon be facing threats from terrorism; in addition Europe also has another enemy at its eastern gate in Ukraine. Threats of this magnitude have a negative impact on asset prices; which ultimately forces central bankers to correct them with looser monetary policy.
Mario Draghi received a boost, in his ongoing attempt to get the ECB’s Asset Backed Security purchase programme off the ground last week; after his first attempt was politely rebuffed by France and Germany refusing to guarantee the bonds.
The International Securities Commission (IOSCO) is to present its case for the rehabilitation of the ABS market at the upcoming G20 in Australia[xxxvii]. The Australian Treasury Secretary dropped the loaded hint that G20 will not go back on its pledge to stimulate GDP by 2% and above[xxxviii]; so Draghi’s ABS strategy will presumably gain traction and headlines at the G20 level. Once it is endorsed by G20, it will unofficially become a European commitment to support global growth.
Draghi is going to need all the support he can get. The confidence vote in the new French government barely scraped through[xxxix]; which suggests that the pace of economic reform and hence budget discipline in France is going to be a painfully slow and volatile process. In the absence of smooth French reform, Germany is therefore likely to be much less cooperative on supporting Draghi’s policies going forwards.
After the low participation in the first TLTRO, except for the basket case banks in Spain and Italy, consensus is swiftly building that only QE will now stimulate the Eurozone. Closer inspection[xl] revealed that banks were taking the cheaper funds offered in the TLTRO and using them to pay back the more expensive LTRO borrowings which preceded this latest “targeted” round. This suggests that there is still stress in the banking system; in addition to no appetite for credit creation. Draghi now has a TLTRO programme which is broken and an ABS buying programme which has no sponsorship from the policy makers. His policy options have therefore been narrowed down, by a process of elimination, to QE.
And Then There is Japan
“Itoshima.” Age of Wisdom, Age of Foolishness (44) “Worlds in Motion”
Age of Wisdom, Age of Foolishness (44) “Worlds in Motion” observed that Japan had become the first developed nation to resort back to deficit driven fiscal support for its economic growth. No sooner had this been announced, than “Japan Inc.” and “Mr Yen” started to push back. A forum of Osaka businessmen warned Governor Kuroda[xli] that the weak Yen was not boosting exports; and on the contrary was boosting commodity input price inflation. “Mr Yen” then opined virtually the same thing[xlii]; and the issue was underlined by a Reuters survey which showed that a majority of Japanese industrial companies would now prefer a stronger Yen to hold back commodity inflation[xliii].
No doubt Abe and the BOJ will press on with the weak Yen and supplementary budget stimulus plans, because they have no alternatives. They have however been told up front that this will not work, so it is now a matter of patience from the speculators to decide at which point to punish rather than reward them for their actions. So far the Japanese equity market has rallied as the Yen has fallen against the US Dollar.
Given the general global economic weakness, which is just about to get discounted in lower equity prices, it will be interesting to see if the Japanese equity market will continue to rally as the Yen weakens. If Japanese equities start to decouple from the weaker Yen, it will be a signal that patience with Abe is running out.