Thursday, May 02, 2013

Central Bank Alchemy and more Negativity

It's been a week or so since our last post and May is lining up to be another case of capitulation. Capitulation on the inflation trade, capitulation on the growth trade and capitulation of the "world is normal" trade. And throughout this equities march onwards. Buy buy buy buy.

There's plenty being said at the moment about what other people think, to the point that TMM are getting quotosensitive (much like "photosensitive", but this brings us out in hives when we hear other people's opinions repeated as religious portents). If we want opinions from people who have just as little clue as everyone else then we will talk to ourselves thank you. We don't care what Bill or Warren or Paul or Roggoff or Rienhart or any pundit thinks. We should stop reading what other people think and start thinking for ourselves.

 Is this part of the Twitter problem? Recycling of thoughts diminishes the ratio of originality to quote to such a point it's not worth thinking for yourself? Or is it something to do with education? One of TMM's offspring was writing an essay last week and had an original thought to add but felt they couldn't because they had to reference all thoughts and ideas. "Reference yourself" we suggested. But no, a rare original thought bit the dust because someone else HADN'T said it first.

 The Roggoff Rienhart witch hunt appears to us to be more of a blame game in a world of desperation rather than anything important. Are people really not thinking things through enough for themselves, that a spreadsheet error can cause global policy error (this isn't rocket science). Oh actually scrub that, we've just remembered how the Buba work.

But, wow, imagine this ...

WEIDMANN: " Hey Wolfie, you won't guess what, I've just found a +/- error in cell A3, you know all zat shit about ze periphery and all zat austerity stuff, guess what?  We should be giving them MORE not less HAHAHAHA",
SCHAUBLE:- "No shit! That's hilarious! Do we tell Cyprus?"
WEIDMANN:- "Nah, fuck 'em. Let's tell zem we want a special haircut on ze depos, you know a "cyprus special", its like a normal haircut but twice the price and rubbish "

Policy is not swung on spreadsheet corrections and if it is then it's time to change the policy makers.

TMM have been doing lots of pondering recently, mulling their own thoughts around and it's pretty hard not to just come out with a rehash of many themes we have posted here already over the past couple of years. So excuse the a number of back links. But one over-riding trend is the growing push against austerity. Populations get impatient and the data is still looking dire. Money multipliers are not working and the machine is grinding to a halt. Well that's the concern. Desperation is kicking in and any money that is being printed doesn't appear to be ending up where the printers would like it to. So today was another of those days when the world looks to the central bank wizards for results, but at this rate the great book of Central Bank Policy will one day be filed in libraries under "alchemy".

Dr Aghi, Abe and Bendrick hard at work -

So what did Dr Aghi come up with? On the face of it not a lot. A predicted 25bp cut and no special methods other than the special method of saying thalt he is prepared to use special methods. One of which is the much talked about possibility of negative rates -

"On the deposit facility rate, we said it in the past: we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. We will look at this with an open mind and we stand ready to act if needed"

Looking at negative deposit rates “with an open mind”? This has prompted TMM to go back to thinking about the if/how/why/whether they will be implemented. In this respect, a speech by Benoît Cœuré in February 2012 seems especially applicable and we wonder if Dr Aghi is paying direct reference to it - here is the link, along with some select sentences:

• From a technical point of view, there is in fact nothing that prevents central banks from paying negative rates for the security they offer to depositors, at least temporarily
• Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes.
• And there is a degree of hysteresis: a temporary situation of zero or negative interest rates can have long-lasting implications for banks and their trading incentives… The Japanese experience is of course relevant here. [9] Within three months of the introduction of the zero interest rate policy, the volume of transactions declined by around one-half and low turnover persisted until end-2006 when the zero interest rate policy was discontinued.
• Important market intermediaries, such as money market funds, could be driven out of business, as their business model loses profitability, for both domestic and foreign investors with excess liquidity may shift their investments to alternative, more profitable market segments.
• zero or negative interest rates may produce adverse effects on the profitability of commercial banks and financial intermediaries more broadly. In a financial crisis this can result in a credit contraction. All in all, the impact of zero rates on the profitability of banks remains uncertain and highly dependent, among other determinants, on parallel regulatory response.
• Overall, a switch to zero or negative interest rates bears some risks – mainly of a microeconomic nature – which would have to be weighed against potential benefits in terms of additional macroeconomic stimuli. It also has to be noted that such steps would be warranted only in the face of clear downward risks to price stability, which today are not present in the euro area. In particular, the discussion about deflation risks remains largely speculative.

For comparison, here are the ECB staff forecasts then and now:

Now, TMM recognizes that Euro area HICP inflation has been especially subdued recently. But even with these considerations, the ECB would have to sharply change the definition of ‘downward risks to price stability’ for negative rates to be justified given current forecasts, assuming it is still using the above prerequisites. Of course, it is possible that the ECB council has internally relaxed its criteria for negative rates – but that does not yet appear evident based on ECB member speeches.

But all this has led us back to looking at the effects of negative interest rates and some of the possible consequences, however we have discussed most of those HERE (Was that nearly a year ago already? Don't crises drag on?). But we were particularly reminded of this post by Cœuré's line "Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes" which prompted us to think of ways of making holding cash even less attractive.

 Other than those listed in the previous post we suddenly had a Eureka moment that unifies an old anthropological conundrum of the small Micronesian Island of Yap with todays ECB policy dilemma. If you really want to make cash unattractive as a handy medium of exchange then you can't do much better than the Rai Stones of Yap . It is therefore obvious that the origin of these stones was a case of runaway deflation caused by a tribesman incentivised by large bonuses, leveraging his balance sheet by using complex derivatives to the point of creating a credit bubble resulting in a deflationary economic collapse and the implementation of negative rates on cash deposits by the Yapese central bank followed by the logical introduction of the most useless form of cash on the planet.

So TMM would like to introduce you to the new 1 Euro coin.

And how it will be used:-

The ECB committee popping out for a box of matches.


Secret.Sauce said...

TSIPRAS: "Your King has made a pact with the devil - your children are dying."

SCHAUBLE: "Only a few. Does that sound cruel?"

Anon, good central banker! Slay the dragon!

Nic said...

I don't think its just a twitter problem.
All central banks think that the stock market is the economy and QE is "unconventional" monetary policy even though everyone is doing it.

VandalsStoleMyHandle said...

Well, the zero rate, you know I just can't jump it,
Sometimes it gets so hard, you see,
I'm just sitting here, blowing on my trumpet,
With all the promises the PIIGs left for me...

Well, anybody can cut just like me obviously,
But then again, not too many can be like EU, fortunately...

Well, the repo rate cut that we did promise,
Was finally delivered down to the periphery,
But to live outside the law you must be honest,
That's the whole basis for the OMT.

- Absolutely Sweet Mari(o), Bob Dylan

Nico G said...

smells of capitulation indeed.

talking about central banks 'square' the bank of Israel is now buying European equities. When they announced the same last year, that they'd start diversifying into US equities it was the week the market topped.

abee crombie said...

before only gold = money, then banknotes = money, with a caveat, then credit = money bc you could trade it easily, now equties = money because everyone wants them as well.

Its all just a big game for those that actually have the money (Surplus countries/Cbs, and the 1%) Faber had a nice report on it recently.

If the aim of the Fed and presumably most other CBs exECB, is to get the economy going again, why not just 'invest' in start-ups. (Hey Billy-Bob, how many 'users' do you have for your organic farm) That way MONEY will actually go to labour, not just being recycled, which is the problem today. There is no wealth trickle down. If we are in the game of debasing money, might as well try something that lets the intended class benefit.

But until then the equity game keeps going. I'll wait for 30x P/E Kellog/Nestle/P&G before i start getting more bearish. now its just futile.

Anonymous said...

I wouldn't invest in any "start up" that actually employs humans. Give me drones/robots/3d printing any day, however.

Anonymous said...

I think that we're gradually marching towards monetary event horizon where the economy can no longer achieve escape velocity from deflation.

We've seen this in Japan. The aging demographics with no equilibrium - birthrate of 2.1 or lower with high immigration - in the horizon, puts an enormous downward pressure on domestic consumption and upward pressure on saving.

Imagine the implications. Rather than being abnormal, the deficits and deflation are perfectly normal part of an economy slowly spiralling towards extinction.

With over 3/4 of the world's GDP locked in countries which will face the Japan-scenario in not so distant future, we need to start considering the possibility of "new normal" with no inflation, very slow growth and chronic deficits.

Leftback said...

Agreed with the above regarding the Japanese event horizon...

BUT, today, another great day to have a bit of a YC steepener on since last Thursday and making LOADSAMONEY, mate. Serious Wonga.

By Wednesday evening, if we get to 1,85% 10y they will have all the hyper inflationary nut jobs on TV and will be talking about certificates of confiscation again, then it will be time to take off the hedges and buy more Treasuries.

Anonymous said...

Its becoming difficult to rely on whether bonds will get bid in short term. Ben-Krug are looking like winners in short term as markets and business cycles with curent monetary policy looks fully disturbed or hijacked while favouring for short term instead of long term.

Conservative were always in favour of predictability. Markets no longer have the tool of predictability now as the tool is damaged by highly risked "depending on" monetary policy actions.

Without predictability, what could be further direction. If its hard for anyone to guess including erian, buffet then markets will teach the lesson of rules and predictability to every retarded bull. That's the lesson nobody has learnt uptil now whoever started his learning process from greenspan/bernanke eras.

Anonymous said...

We can see from latest comment that there is still a lot of resistance against the idea that perhaps, the Fed got this one right.

Does it occur to the "it's going to be Greenspan all over again" crowd that perhaps this time the policy of buying time was warranted. System healed, banks are in better shape, and even labour markets are slowly improving, all the while inflation has been low and stable.

What we mean by this is that, perhaps the real pavlovian response is not the risk-chasing behaviour brought on by the "policy put", but instead the risk-adverse mindset that this put is bound to crack under pressure in the LT.

We are not fully convinced but there are still a lot of ifs and buts even with the very bullish crowd. It is almost as if everybody expects the shit to hit the fan. But perhaps the true contrarian view is to fully side with the Bernank and the Fed this time.

/end rant


PS: and goddamn AUD still refuses to go lower by any significant extent. Even our AGBs are like, "meh, whatever"

Anonymous said...

@anon I suggest that "low and stable" inflation is not a good thing in this NWO.

Leftback said...

This is really fascinating. A positive correlation between home ownership and unemployment in the US, from former BoE member and Dartmouth professor, David "Danny" Blanchflower*.

* Special prize to anyone who can explain his nickname.

Anonymous said...

That homeownership would hinder labor markets is completely intuitive and has been posited for years now, no?

Leftback said...

Sure - but it hasn't been shown with hard data and was theory only for years, until the housing price collapse (I never call it a crisis, the bubble was the crisis). Because underwater homeowners are locked in, the normally flexible US labor markets can't operate.

Leftback said...

TMM, What do you think about Bashing Betty here for a few weeks? GBPUSD at resistance.

Anonymous said...

Well one thing is for sure: this elongated equity rally has not been trader friendly. But I bet the buy-and-hold investors are having a blast.

Anyone has the stats on how professionals/hedge funds have been fairing during the last 3-6 months? I am curious to know if they are being beaten by buy-and-hold crowd as well.

It will be tragically comical if SPY/QQQ/ETFs end up returning %30 by the end of this year while active traders manage to squeeze out %10.

abee crombie said...

DD, I think you are correct, as the Fed should be given a lot of the benefit for the recent healing. However the unintended consequences start to bear fruit going forward.

Bernanke isnt going to lift off the accelerator until the party is almost over. The question will be what tools he has left for the next inevitable downturn.

At some point printing money has consequences. That I am positive of!

Leftback said...

Once again, it appears that a lot of HFs are having a total stinker this year (Exhibit A: Mr J Paulson) and being absolutely hammered by passive investors.

Of course, the year isn't over.... besides, it's really not how you do in the bull market that makes you good, it's how you handle the bear - and the Swans, black or otherwise.

Anonymous said...

Re: The FED, they are just pissing into a bucket that has a hole in it..... aggregate demand remains low.

Alex Rose-Innes said...

@anon @9.13pm

The Reformed Broker is at new record highs of smugness, showing huge contempt for anyone who isn't BOLIVIAN.

Anonymous said...

The contrairian indicator started many months back (atleast for us and we were never short) but just like general public always notice it at top of everything. So now healing itself has reached its top.

Japanese yen severe decline last time started asian financial crisis in 1997. The notion is greenspan/bernanke extended loose policies for too long (contraian to Volcker). At every crucial juncture, Rules based monteary policy is ignored and overtaken by "depending on" circumstances which exacerbated recession and more crisis. Deflaitonary corrections will be inevitable and the more one will go up, more it will come down.

darthtrader said...

"We don't care what Bill or Warren or Paul or Roggoff or Rienhart or any pundit thinks."

Paul, Roggoff, Rienhart - fair enough. As for Buffett - if you want to be dismissive of the views of people with multi-decade track records of double-digit returns, then of course that is your decision.

Would be willing to bet, however, that the guy's record is meaningfully better than yours, so perhaps is in your interests not to be so casually dismissive of people with proven track records over a number of cycles.

Just sayin'

long time lurker said...

This market is like playing poker against an imbecile........ who also happens to be a trillionaire.

To the post above who is positing that maybe the fed has it right. Well,there were Communists who thought they could one day control the weather ...... as well as their business cycles.

To place your faith and your solvency in their hands is completely fair enough, but don't come whingeing when your leverage works in reverse

F me I sound like I should be on Z hedge.

Layterz !

Anonymous said...

Rampagingruss says:
Markets seems to be following the exact same playbook of Japanese markets over the last twenty years. As long as Europe, the US and Japan can keep their currencies cheap versus the ROW (commodity producers and EM) corporates can make heaps of money, but as soon as EM begins to devalue, then we might some DM equity weakness. Given the collapse in current accounts across EM - it just seems a matter of time - but maybe next year.

Anonymous said...

We were just saying, for those trying a little bit too hard to play contrarian, the real contrarian opinion out there is "Fed was right, job well done". Whether we agree with this, let alone position accordingly, is a different matter. But there is no denying in our view that the consensus opinion is to expect the other shoe *will* drop - even for ppl of bullish inclination.

Now, as for the Warren tirade above. Please. His "multi-decade track records of double-digit returns" and the actual worth of his "nuggets of wisdom" have a correlation of about the same as T-bills yields.


Jill said...

Japanese mortgage rates are now at 1.8 percent.

Japanese interests rates are at ZERO.

Gross public debt as percentage of GDP off the charts:

The policies are an absolute disaster:

Is there a lesson here or do we just ignore it?

Anonymous said...

Rampagingruss -
On my last trip to the US the general feeling was that the Fed had done a great job - and you just had to get long the market. Maybe for people who have had a good long look at Japan see only disaster - the average punter in the US sees only success. So no - I dont think the contrarian trade is that the Fed is right. I think they have created a perfect enviroment of low interest rates, cheap dollar, falling commodity prices. One of those things is wrong - and I think the cheap dollar is the one. When that breaks then we can see how well the US is doing.

Anonymous said...

A true black swan event would be something you don't think could happen because it hasn't before. So if the S&P trades up every month for an entire year without pulling back, to say 1800-2000, that would be a black swan, no?

Anonymous said...

to wit:

Leftback said...

Anon @ 5:38 you must be Laszlo Birinyi.... !!!
Or Jeremy Siegel...

Nico G said...

do not lose sight with all this hype. do not get greedy

you need to cool down, step away from finviz news and all that noise,

and do a little mental exercise.

if on January 1st they had asked you:

'let's say you see 1620 SPX early in May, higher than current 2013 performance average forecast

without a 5% correction from now to then

come on don't laugh at me, assume this would happen

what would you do?'

the trading plan you would prepare for this fiction, can now be executed on a 'real' level brought to you by all those doctors

Anonymous said...

Do not get greedy? WTF is the point of all this then?

abee crombie said...

Louis Gave predicts that if yesterday's investment mantra was "Buy what the Chinese are buying," tomorrow's will be "Buy what the Japanese are buying." As a result, valuations of defensive, dividend-paying stocks may continue to defy economic logic.

interesting thoughts for DVY and friends.

Quite big moves in copper and nat gas recently.

is the yen ever gonna break 100 or is everyone just gonna pile into the NKY and forget about the currency

Anonymous said...

So if the S&P trades up every month for an entire year without pulling back, to say 1800-2000, that would be a black swan, no?

No that wouldn't be a black swan. It has happened before. Many times!

Go pull up the chart of SPX for 1995-1996 period. The market went up in a straight line, every month, non-stop for 18 months. During the pre-crisis phase, the markets strongly correlate with central bank activity/planning. Too bad the crisis phases tend to be quick and sharp, making them difficult to forecast and profit from.

A black swan would be if US goes to with Russia overnight over to something really stupid. Or a massive earthquake leveling Los Angles and killing millions, etc.

On a side note, anyone notice the 10yr yields have started to edge up again?

Gnome of Zurich said...

Anon @ 5:38 could be right.

According to Artegmis Vega's nice graphs, investors are paying huge and unprecedented premium to insure themselves against the next 2008 and a 50% drop of the stock market over the next 12 months - and almost nothing for calls with a 50% higher strike. It was vice versa in 2007. So the Black Swan of today would certainly be to the upside. Why could the S&P not go up by 50% and squeeze everyone like in 1995... these things can happen every 18 years or so and obviously only when they are least expected.

Anonymous said...

"1995-96" isn't many times, and I wasn't being literal. But I think you get my drift. And to be honest I disagree that the Russia or earthquake scenario is black swan. I don't define black swan simply as 'unexpected' or 'inconvenient' or 'golly, what are the odds of that!' But maybe this is just semantics.

Anonymous said...

Well put GoZ 8.33

We have been saying this for a while but we dont like playing for direction in this market, either way, but we do agree that retarded upside risk is overlooked, and as discussed in the comments section of a previous post, we still feel meltup insurance is not expensive (obviously this gets less and less true every day).

We mentioned SPY calls one year out for strikes 175-180, and these still make sense.

Fed fueled, poor earnings, record margins yada yada, the portfolio still needs to work. Fighting the tape is foolish if there are risk-conscious way for you to participate.


Nico G said...

people joining discussing a further 50% upside from here. This is what i call greedy, this discussion makes me even more comfortable to jump the other side in a 'risk conscious' way as you say

i remember 95-97, people were discovering equities, besides the 98 shake it all went well until early 2000..

same for Shanghai going parabolic not so long ago when again retail punters discovered the game, and the leverage. Where is SHanghai now?

i would say that it is different today, those pojama people have deep scars. Then you could argue that human stupidity should never be underestimated

nota bene wink wink: my timeframe is shorter than yours (multi weeks correction only)

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Nico G said...

PS: i forgot the best market timers ever

a very good friend from the very same team wrote a famous paper in 2007 saying that 'sistemic risk has disappeared'

Anonymous said...

IMO one could argue that HICP well below 2% but still positive is deflation. HICP has an upside measurement bias (stemming from statistical reasons, like quality changes etc. that cannot be fully filtered out) and if you define price stability as ‘below but close to 2%’, you could call say HICP at 1% y/y deflation. 1.3% is not that far…I agree, it is a stretch but I think not an extremely big one…if one wanted to invent an argument to support further monetary policy action for whatever reason, that could do...thanks for all the posts!

Anonymous said...

C Says
Good article Nico. The beauty line up is still alive and well.Relativity remains what it is all about.The spread is where it's at.Enough of the 60's!It's been clear for quite a long time to me that the issue of equity value can't be divorced from the spread in that and the alternatives available. The Black Swan threat is whatever might cause that spread to radically change in it's appeal.
As to consequences it's enough for me to see junk sub 5% to know they will be coming. I just don't know when.

Anonymous said...

Nico G, please do not get me wrong. We are not at all arguing for 50pc upside from here. At all. We are simply saying that not being prepared for it simply "because it can't really go that much further innit" does not appeal to us. You know ... markets, irrational, solvent and all that.

Now JNK with a 4 handle, we have a much much stronger opinion about (if you catch our drift). We do not know when this is going to happen, but some unsuspecting yield chasers are going to find out about duration risk at some point. The hard way.


Jill said...

More caution on earnings...

Except for Japan...

Merrill tracks the positive changes in company earnings per share estimates versus negative changes in EPS….

Yen forecasts…

Leftback said...

CS on USDJPY, using their usual "lay down the ruler and extend the line in the same direction" technique, I see. People get paid for this?

Vandals @12.21, that verse of "Absolutely Sweet Marie" from "Blonde on Blonde" was quite superb. More, when you are so moved, please.

VIX seems to be making higher lows of late, rather than plumbing new depths. This suggests that even the boldest of vol sellers are now giving some thought to a summer swoon. Perhaps credit will lead the way before equities follow?

The 3.00% level on the long bond has attracted buyers so far this week. We prefer that to the 2.66% yield on the Fruit, just at the moment. As DD points out, the real issue in the credit markets is the unfeasibly tight spread - junk can suffer in one of two ways here, via duration risk or credit risk, and we fear the latter far more than the former for the time being.

Too much attention being paid every week to unemployment claims (a classic lagging indicator), but JOLTS telling a rather different story. Markets aren't pricing in what likely will prove to be a stagnant jobs picture, they are pricing in a rapid employment recovery. Risk will have to be repriced at some point.

Leftback said...

Contrarian indicator flashing a BUY signal for Treasuries? This group has a surprisingly poor record in predicting f/i markets:

Ivy League Trims Treasuries

Anonymous said...


Good call on the aussi. It finally broke down. At what levels do you guys see the bottom?

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