The Stock Market & Central Bankers

When we discussed Wednesday's action in the stock market yesterday – referring to the big give-back of the post FOMC rally, we noted that:

The market essentially took back Tuesday's rally in its entirety, but we would caution bears that this has merely left it in the same oversold position it inhabited before. Unless the system really blows a gasket here and now, chances are that we are approaching a rebound in spite of this renewed decline. As always, the short term action is very difficult to forecast, and we acknowledge that risk remains elevated. Alas, experience tells us to be wary, whereby we must caution that it is our impression from anecdotal evidence that there is still a lot of nonchalance out there about this decline.”

Sometimes the market complies in spite of the difficulty inherent in forecasting the very short term outcome, especially in volatile markets. However, be aware that this recent 'down-up-down-up' sequence on the daily chart does not yet preclude that we will see one more wave down in the near term. If such an additional wave down were to occur, it would however almost certainly create divergences with various momentum oscillators such as the RSI, so it would also not change anything said in the above quote. If the market were to exceed Thursday's intra-day high on a closing basis, one could be reasonably certain that a bigger rebound is underway, whereby our working assumption remains that such a rebound would likely test the broken support/neckline on the daily chart (approx. at the 1250 level for the SPX). However, we wouldn't necessarily mortgage the farm on that assumption. Consider our remarks  on money supply growth at the end of this missive as well though.



Vertigo-inducing action – down, up, down, up….in daily ranges we normally don't get to see every day – click for higher resolution.


This by the way prompts us to briefly quote something Steve Saville said yesterday, as it really hits the nail on the head:

“It's just as well we have central banks to stabilise the markets. Otherwise there would be huge volatility, with the Dow Industrials Index regularly moving by more than 400 points in a day.”

Indeed, the recent behavior of the financial markets is yet another rather obvious indication that central planning doesn't work – as the current market volatility is in principle nothing but the symptom of yet another one of those plans gone wrong. It's not that the 'planning' of central bankers is very sophisticated – as we read elsewhere in a spot-on characterization of Ben Bernanke's policies, 'to someone with a hammer, everything looks like a nail'. Aside from lowering interest rates below the natural rate and pumping up the money supply by a variety of means, there isn't anything in Bernanke's bag of tricks. It hasn't occurred to him – and likely never will – that to decree that the cost of capital shall be zero can only hamper economic calculation and  investment/resource allocation.

As Dr. Marc Faber recently remarked in an interview at Bloomberg, 'the best the Federal Reserve board could do for the economy would be to collectively resign'.

Unfortunately that is unlikely to happen anytime soon, which, as Bob Moriarty at remarks, 'forces us all to be speculators' until further notice. Further notice will be given either by the markets themselves – the markets one day may simply take away the Bernank's 'toolbox' to his vast surprise – or by a bigger 'palace revolt' at the central bank. Let us not forget, every bureaucracy is first and foremost concentrating on its own survival and enlargement and if other members and representatives of the banking cartel feel that the helicopter pilot is endangering their foremost institution's survival, they may take action to depose him. For now, the facade of unity remains intact, in spite of the recent dissents at the August FOMC meeting. As the WSJ reports, dissenters Fisher and Kocherlakota are 'full of praise' for the mad hatter.

“On this occasion, I dissented from the committee’s decision,” Mr. Kocherlakota said in a statement to the Wall Street Journal, in response to a question about Mr. Bernanke’s leadership of the Fed. “Regardless, I have nothing but the highest regard for the acumen, integrity, and ability of all other FOMC meeting participants, including the chairman.”


This report was brought to us by the Fed's premier press mouthpiece Jon Hilsenrath (the current 'man with access') and essentially it is designed to give us the message 'don't worry, the establishment is still firmly embarked on the same course that has brought about the recent string of catastrophes. No-one is as of yet truly deviating from the party line. Neither Keynesian nor monetarist recipes have worked thus far, we just need to try out more of the same. One day they will work. Honest.'

By the way, we also do not doubt the good chairman's integrity or his acumen. He's neither corrupt nor stupid – he's just misguided and dangerous.

Euro Area Bank Funding Troubles

Meanwhile, the 'trigger' for Wednesday's market decline, namely the rumors swirling around French banks, specifically SocGen, didn't really go back into hibernation, as more disturbing reports came to light. The stock did recover a little bit though from its intraday sell-off and judging from the recent daily candles on the chart is set to rebound – alas, as Reuters reports:

One bank in Asia has cut credit lines to major French lenders while five other banks in Asia are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral euro zone debt mounts, banking sources told Reuters on Thursday.

Rumours on Wednesday that France was to lose its AAA rating, later denied by ratings agencies, helped trigger the biggest widening in the European credit default swap index since the credit crunch in 2008.

That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said. Contacted about the moves by the banks in Asia, a spokeswoman for top French lender BNP Paribas (BNPP.PA) in Paris said: "We never comment on market rumours."

Societe Generale (SOGN.PA) had no immediate comment to make while a spokeswoman for Credit Agricole (CAGR.PA), which will publish its second-quarter earnings later in August, said the bank would not make any comment.

The banks in Asia and the sources — a mix of risk officers, senior traders and loan bankers — could not be identified because of the sensitive nature of the information.

The head of treasury risk management for Asia at one bank in Singapore said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.

"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official said. The bank official declined to name the French banks.

Societe Generale put out a statement on Wednesday denying rumours about its financial health after its shares fell by as much as 21 percent.“


(emphasis added)

While the sources are anonymous, we actually don't doubt what they say – this is what risk managers are won't to do. It confirms something we have emphasized ever since it came to light that French banks were the biggest borrowers from US-based money market funds: wholesale and interbank funding is becoming increasingly problematic for the euro-area banking system. Counterparty risk perceptions are clearly on the rise. This is inter alia the message from the 3-month euro basis swap, which keeps widening deeply into negative territory:



3 month euro basis swap, a component of the 'euro-doom' indicator keeps going the wrong way in a big hurry. It hasn't been 'normal' since Qu.1 of 2008, as this swap should normally not spread away much from the zero line at all, but oscillate around it – click for higher resolution.



In this context it is not too surprising that the ECB suddenly 'added liquidity to the banking system' on August 4 to 'ease strains in bank funding markets.'

As stated at  Marketwatch:

“Trichet indicated the ECB has resumed purchases of government bonds amid fears the euro zone’s sovereign-debt crisis could engulf Italy and Spain, while also boosting liquidity in money markets amid signs of strain in bank funding markets.

“The ECB is starting to sound more like other central banks in saying the risk backdrop looks less favorable,” said David Watt, senior fixed income and currency strategist at RBC Capital Markets.


This has evidently continued,  as a WSJ report from yesterday indicates. Apparently, Lehmanesque visions plague Austria's representative at the ECB board:


„Use of the European Central Bank's overnight lending facility jumped to its highest level in three months Wednesday amid renewed worries over the European banking sector's exposure to Greek debt and a broader economic slowdown.

Commercial banks borrowed EUR4.058 billion from the ECB Wednesday compared with just EUR2 million borrowed Tuesday, data showed Thursday.

"Stock markets were under a lot of pressure yesterday and fixed income rallied very strongly as a safe haven," said Peter Chatwell, a rates strategist at Credit Agricole CIB. "Because we are hitting that cycle of rumor and then denial it could well serve to spook some participants, meaning some of the interbank market could have dried up."

European bank stocks are again under pressure in Thursday afternoon trading amid the ongoing fears about interbank funding and the fiscal stability of euro-zone members states. Amid the market volatility Thursday, the French government said French president Nicolas Sarkozy will meet German chancellor Angela Merkel next Tuesday in Paris to discuss proposals to strengthen the euro zone's economic governance.

The euro also faced volatile trading Thursday afternoon, sustaining losses booked Wednesday and trading at around $1.42.

"Unfounded rumors around France's creditworthiness and financial system and rising generalized worries over European banks hurt already fragile sentiment," RBC Capital Markets said in a note to clients.

Increased use of the ECB overnight facilities by banks can be a reflection of high market tension, as banks shy away from borrowing and lending amongst themselves. ECB Governing Council Member Ewald Nowotny warned earlier this week that recent high use of the ECB's deposit facility was 'not a good sign," adding that he sees parallels to the meltdown following Lehman Brothers collapse in 2008.


(emphasis added)

Novotny is exaggerating a little bit, as the amounts banks have borrowed from the ECB lately are a long way from what the ECB had to shell out during the 2008 crisis – alas, as we noted yesterday, in some respects the current crisis is already worse, especially with regards to market perceptions about the creditworthiness of euro area banks as expressed in CDS spreads on their debt.



SocGen, daily chart –  getting ready to bounce? The high trading volume and long lower shadows on the daily candles seem to be saying so – click for higher resolution.



In addition, while the TED spread has recently been moving in the wrong direction as well, it remains historically low and has yet to break out from the rectangular formation we highlighted previously:



The Ted spread – moving in the wrong direction lately, but it is still historically low – click for higher resolution.



Our guess is that the markets will calm down for a while and that a rebound in stocks and a pullback in euro area yields and CDS prices and the prices of 'save haven' instruments is the most likely near term outcome. In this context note also that the Swiss National Bank is stepping up its interventionist rhetoric regarding the Swiss franc, which has recently gone ballistic, but has suffered a huge setback in yesterday's trading. The latest idea is to 'peg the franc to the euro', as Bloomberg reports.

“The franc weakened after Swiss Central Bank Vice President Thomas Jordan said a temporary franc peg is within the range of options that policy makers could use to stem the currency’s record-breaking rally.

“Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” Jordan said in an interview with Tages-Anzeiger today, when asked about a general currency peg. Swiss National Bank spokesman Walter Meier confirmed the remarks. The franc weakened as much as 2.5 percent.

The comments highlight the scale of the crisis engulfing the Swiss economy as policy makers seek measures to fight off investors piling into the franc, a haven in times of crisis. While President Philipp Hildebrand has signaled the central bank is unwilling to give up its sovereignty, some economists have said the franc’s surge toward euro parity is adding pressure on the SNB to consider a peg for the first time since the Bretton Woods currency system was abandoned in 1973.“

In our opinion the CHF may well plunge quite a bit of its own accord if 'risk assets' rebound. It is massively overbought and the bullish consensus on it is literally at an 'off the charts' extreme.



The Swissie got clocked on Thursday. There's probably a lot more downside to come in the near term – click for higher resolution.



Public opinion on the CHF per – it doesn't get any more lopsided – click for higher resolution.



Also noteworthy is that crude oil seems to have found a short term low, which would also argue in favor of a 'risk asset' rebound:



Crude oil – this looks rather convincing – a short term low has been put in – click for higher resolution.



Money Supply Growth Ratchets Up Globally

We encourage readers to now and then look at Michael Pollaro's true money supply updates (link also available on the left hand sidebar), as they are an indispensable advance warning tool. You can be sure that whenever TMS growth accelerates, certain prices will eventually follow. While it can't be predicted with certainty which prices are going to rise, titles to capital and commodities are the most likely targets nowadays (houses obviously still have to work through the bubble excesses).

From the most recent update we learn that broad US TMS-2 has grown at a 16.1% annualized rate lately, and 12% year-on-year.

Euro area true money supply growth is also accelerating – while it has been very tame over the past year at just 1.1%, this seems to be changing now, as the monthly growth rate has accelerated to 14.6% annualized.

In Japan, the strong negative growth of the previous month has been replaced by positive growth of 18.6% annualized. This has brought Japan's year-on-year  TMS growth to 5%, which is quite high for Japan (the upper end of the range used to be in the 3% region).

We therefore have to be alive to the fact that strong rebounds in risk assets may occur, especially if the chief printer announces fresh measures at the Jackson Hole central monetary planners confab.

In any case, this is yet another good reason to hang on to one's gold, even if there is likely a great deal of near term volatility in store.


 Charts by:, Bloomberg,




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6 Responses to “Markets, Banks, Money Supply – An Update”

  • kopavi:

    On Bernanke: There is a profound difference between “intelligent” and “wise”. I don’t doubt his intelligence.


  • What German military? In any case, who would they want to conquer this time, as they are surrounded by idiots.

    Pater, you might note that the money market funds are collapsing. Much of this money supply may be to allow for the liquidation of these assets into other accounts. Private debt hasn’t gone much of anywhere for nearly 4 years. The money, in my mind, is more a requirement to support rotting asset prices. There is more debt on the other side of the ledger than there is money to pay it. I think we are in a time where collateral is more fleeting than before and much of this money could disappear all of a sudden and may have already done so.

  • Floyd:

    By the way, we also do not doubt the good chairman’s integrity or his acumen. He’s neither corrupt nor stupid – he’s just misguided and dangerous.

    FWIW, I do doubt the chairman.
    Given the Fed’s abysmal track record – can he be competent, truthful and sane [simultaneously]?

    • amun1:

      I have to agree with you Floyd. I’m not sure which to doubt but the current level of market intervention is unwise, and that’s as much of an understatement as I can possibly muster.

      Looking at what’s happening in the debt/forex markets, the fed is obviously trying to prevent a violent unwind of the dollar carry trade. Promising ZIRP for two years, driving bond yields massively lower, in context with serious Euro concerns, smacks of desperate attempts to keep that hot money from contracting back upon itself.

      How far is Bernanke willing to follow the Euro toward the event horizon of this fiat black hole? Short of German military takeover of the periphery, it’s clear that the Euro experiment has reached a political, if not financial, impasse. I’m wondering if a decision has been reached; if the Euro goes down, the dollar’s going too.

      • Floyd:

        Why do you think “if the Euro goes down, the dollar’s going too”?
        In fact, I used to think that EUR troubles are USD positive.

        On the other hand, my hunch is that the US Treasury market will implode soon after JGB market implodes.
        Because once market participants learn to suspect the historically rock solid Japan Gov Bonds, they will suspect any gov bond offering (including the US’).
        What I don’t know is when will the JGB market implode.
        (Just a hunch, though, I may be completely off).

        • amun1:

          Well, I don’t know that for sure. What I do know is that for the last three years, Ben Bernanke has created trillions of dollars in support of European banks and the Euro, and his latest pronouncement of ZIRP 4EVA is a continuation of that theme. He’s trying to prevent a collapse of the Euro by destroying any notion of the dollar as a safehaven currency. After all, how can the dollar be a safehaven when practically the entire yield curve offers negative real rates of interest ad infinitum, with the promise of more printing if needed.

          I don’t think it’s a coincidence that the Fed has maintained their swap lines with European banks, nor that every time Europe gets into trouble, Bernanke’s policy gets looser. His justification, of course, would be that a strong dollar (crashing Euro) would be deflationary in the US. At this point, just about any policy that doesn’t keep up with global “beggar thy neighbor” monetary policy is deflationary. I’m still waiting to see if any central banker has the nerve to say no mas, or if they all just spiral down together.

          There are trillions of borrowed dollars out there, supporting financial asset prices all around the globe. That has been our entire monetary policy and the reason for “extended period” language, to reassure all those leveraged carry traders that the fed won’t let their dollar shorts backfire. Bottom line, Bernanke is effectively saying I’ll do whatever it takes to prevent dollar appreciation vs other fiat currencies, even ones that are now obviously doomed to fail. Time will tell, but it’s possibly the most dangerous threat ever made by a non-head of state in history.

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