Central Banks

 

Does the Dollar Hold Enough Attraction to Break Out and Hold at Higher Levels?

Now is the time to begin looking at the US dollar’s re-ascendance in a different light as we approach 1:1 against the euro. Shorter term we have to expect some possible panics around flat global growth in the face of a strong dollar. Historically, as we saw in the 1980s in Latin America, US dollar rebounds lead to blow-ups among the weaker global credits, just at the point where the dollar begins a breakout not seen in decades. But, times have also changed and we should expect this round of the dollar beating up some countries to slow earlier than perhaps what we saw in the days of the symbolic Reagan induced fall of the Berlin Wall.

 

dyk

Photo credit: Bloomberg News

 

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Policy Adjectives

The big news this week was that the Fed dropped its pledge to be “patient” in raising interest rates. The Fed wants to get the market used to the idea of higher rates sometime in the not so distant future.

But just so you are clear on how valuable this “forward guidance” is, Fed chief Janet Yellen later told reporters, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”

Patient and impatient are not the only possibilities. In between is a vast space in which one can get things done, but without being in a hurry about it. Besides, we can think of many other adjectives that far better describe Yellen’s position – fearful, ignorant, conceited, arrogant, trapped …

 

BN-GB582_yellen_G_20141217162234The markets in thrall to Ms. Yellen’s language games

Photo credit: Bloomberg

 

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“Oh”, or Aiming for a Career on Wall Street

Fátima, our new 10-year-old English-language student, is a stranger to modern economics… as well as to vernacular English.

“What do you think of central bank policies?” we asked.

“What’s a central bank?”

“It’s the bank that provides money to the other banks.”

“Where do they get the money?”

“They create it out of nothing.”

“Oh.”

“Would you like some money from the central bank?”

“I guess so.”

Fátima must be aiming for a career on Wall Street.

 

yellen teaching draghi how to print money funny photoRecent developments indicate he’s got it …

Cartoon via tradingblog.nl

 

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How to Blunt the Absence of a Sentence

Wall Street’s Kremlinologists were not baffled for long. Shortly after the FOMC statement was released, the US dollar tanked and everything that wasn’t nailed down soared in price. Essentially the FOMC has repeated the exercise it first engaged in when it removed the phrase “considerable time” from its statement to replace it with the word “patient”, only in a slightly more wordy manner this time. Essentially, the monetary policy statement was as dovish as it could possibly be in light of the corner Fed board members have talked themselves into with their vaunted communication policy.

The differences between the January and the March statements can be seen at the WSJ’s statement tracker. Apart from an outright assurance that there won’t be a rate hike in April, it was mentioned that the timing of a possible hike thereafter remains uncertain. The remainder of the statement reads a bit like a long lament over the economy’s refusal to obey. Somehow, all the pumping that has occurred thus far hasn’t had much of an effect. Obviously, there was no indication that any of the board members realize that money printing is actually undermining the economy.

 

www.usnews.com

Photo credit: Andrew Harrer / Bloomberg / Getty Images

 

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Eager to Wreak Havoc

Life on the ranch: Fatima, a girl of 10, has asked to learn English. She wants to be able to talk to an aunt who lives in New York. What an unexpected pleasure – for us, not for her – it is to give her lessons. We’ll let you know how it goes. Now, back on our financial beat …

Wow! We never thought we’d have so much help from central bankers. At the start of 2010, for example, we announced our new “Trade of the Decade.” The idea: Sell short Japanese government bonds, which are doomed, and buy Japanese stocks, which are likely to catch a break after decades in the doghouse.

In the event, the break the Japanese stock market caught came to it from the Bank of Japan – more eager than ever to wreak havoc on the economy and its financial markets.

 

NikkeiThe Nikkei has been on a tear for the past three years – click to enlarge.

 

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Linguistic Perversions

While the whole world is waiting with bated breath whether the bureaucrats running the Federal Reserve will alter, remove or retain a single adjective in their monetary policy statement today, it occurred to us to think a bit about the use of language in the context of economics and financial markets.

Many a word has seen its true meaning altered in our Orwellian age. One example we frequently cite in these pages is the term “inflation”. It once used to mean only one thing: An increase in the supply of money. It is the only way in which the term actually makes logical sense. And yet, in modern times its meaning has been altered to designate what is in fact only one of the many possible consequences of inflation, namely rising prices of consumer goods.

As Ludwig von Mises pointed out, this means that we actually no longer have a single word to describe what the term “inflation” once used to describe. By calling rising prices “inflation”, sight is lost of the root cause of rising prices. This is of course deliberate, as the instigators of inflation are now no longer seen for what they truly are. As a result of this it has become fashionable to call central banks “inflation fighters”. This is akin to calling an armed robber a saint, or calling an arsonist a firefighter.

 

ecb1Police are erecting barbed wire fences around the ECB’s new headquarter in Frankfurt.

Photo credit: Kai Pfaffenbach / Reuters

 

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Bear Markets Do Happen

Today… the second of the speech about the end of the world we recently gave at Doug Casey’s La Estancia de Cafayate. (You can catch up on the first part here.) As Yogi Berra would say, America is going to come to a fork in the road… and it’s going to take it.

Right now, the Fed isn’t as aggressive as the European Central Bank (which is set to pump €1.2 trillion into the financial markets by way of its QE program) or as innovative as the Bank of Japan (which is buying stock market funds as well as bonds by way of its QE).

 

LENINE2

Vladimir Ilyich Ulyanov, a.k.a. Lenin, addresses a crowd in St. Petersburg in April 1917

Photo via Wikimedia Commons

 

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John Dizard Has the Right Idea

John Dizard is one of the few FT columnists we actually like to read (much of the paper’s editorial line consists of boring, if in our opinion dangerous, Keynesian shibboleths). Anyway, Mr. Dizard’s most recent column doesn’t disappoint. It contains what is known as “actionable advice” and is entitled “Embrace the contradictions of QE and sell all the good stuff”. It starts with a quote attributed to New York based short seller Ben Smith, reportedly uttered in the fall of 1929: “Sell ’em all! They’re not worth anything!”

 

the dog gets it

Bail-out or not, one way or another it’s eventually going to become a default …

Photo via desicomments.com

 

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All Good Things Must End

Today, I’m going to tell you about the end of the world. Not the end of the world exactly. But the end of the fiat money system President Nixon gave birth to in 1971… when he cut the dollar loose from gold.

And it may feel like the end of the world, because of the social chaos it will provoke. What follows is taken from a speech I gave at Doug Casey’s La Estancia de Cafayate …

 

rorschach (1)

Meet Rorschach, from Alan Moore’s “Watchmen”

 

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Lumber Gets Liquidated

The rather violent demise of a former bubble darling may represent an interesting signal with respect to underlying economic growth in the US. We used to trade treasury bond futures and options back in the 1980s and we distinctly remember a piece of traditional trader wisdom handed down to us by one of the “old hands”: If you trade t-bonds, always keep an eye on lumber prices.

The idea was that lumber prices could be seen as a leading indicator of economic growth. Divergences in the trends of bonds and lumber prices could therefore be used as a signal helping one to avoid what might otherwise be surprising trend changes in bond prices. The manipulation of bond prices by central banks all over the world may have blunted this signal a bit, but lumber prices are presumably still a good leading indicator of economic growth.

 

ljmp

Photo credit: Monty Python

 

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A Crisis Reinforcement Channel Wakes Up

We have recently discussed the alleged “dollar shortage” with Mish and several others. The first thing that springs to mind when hearing of a “dollar shortage” is this: why should there be a shortage of a fiat currency that not only can be printed at will, but the supply of which has in fact more than doubled since early 2008?

 

HMRC-Business-Tax-Record-Checks

Photo credit: Christopher Furlong/Getty Images

 

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Not Quite Right in the Head?

The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.

 

germany-european-central-bank-48-630x437

Photo credit: Michael Probst

 

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Kremlinology

Commentators spent the weekend trying to figure out what Janet Yellen’s testimony before the Senate meant for markets. What did she say? What did it mean? Why was she there at all?

“It is important to emphasize that a modification of the [interest-rate] guidance should not be read as indicating that the [Fed] will necessarily increase the target rate in a couple of meetings,” Ms. Yellen told the Senate.

The modification in question was the elimination of the word “patience” in reference to the Fed’s decision to raise short-term interest rates.

Here, we offer a translation: Pssst … the coast is clear.

 

Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone_02-1931_-_NARA_-_541927_1-1024x726

Photo credit: DPA

 

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Too Much Debt

The Chair and the Vice Chair of the Fed both spoke last week.  Janet Yellen testified in front of the House and Senate with this speech.  Stanley Fischer’s speech was delivered here.  They were basically the same speech, Yellen’s just had more fluff for the politically motivated audience.

The message was negative for housing.  Allow me to elaborate.

 

reid2

Image via typepad.com

 

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Money Supply Growth Surges Across the World

Michael Pollaro has recently updated his global TMS data up to the end of December 2014 (more up-to-date figures aren’t available yet). He delves into far more details than we usually do, and there are a number of things worth mentioning about the most recent data.

First of all, it is worth noting that in the final three months of 2014, and especially in December, money supply growth rates have accelerated sharply on an annualized basis in all three major currency areas (US, euro area, Japan). Here is a summary of the main data points (note, this is monthly growth annualized, quarterly growth annualized and y/y growth):

 

US: TMS-1: 1 month: 62.1%,   3 month: 21.9%, year-on-year: 8.8%

TMS-2: 1 month: 21.8%,   3 month: 13.8%, year-on-year: 7.8%

 

Euro Area: TMS: 1 month: 28%,  3 month: 19.6%, year-on-year: 9.3%

M3: 1 month: 15%,  3 month: 9.8%,   year-on-year: 4.7%

ECB credit was rising at a 73% annualized rate in December 2014 – a result of the CBPP3 (covered bond) and ABS purchasing programs and TLTROs, but not yet including the new sovereign QE program

 

Japan:   TMS: 1 month: 29.1%,  3 month: 13.7%, year-on-year: 4.5%

M3: 1 month: 12.2%, 3 month: 8.0%, year-on-year: 2.8%

 

As can be seen above, year-on-year growth rates are quite high in the US and the euro area, but not at an exceptional level (yet) compared to previous peaks. It could be that the acceleration in annualized growth rates in the fourth quarter and the month of December has partly to do with seasonal effects, but it seems actually more likely that there is more to it than that.

 全球货币Image credit: Matt Collins

 

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