Central Banks

     

 

 

Chaos in Overnight Funding Markets

Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.

 

There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week, which was the biggest such spike on record, exceeding even that seen in the 2008 crisis.

 

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Groping in the Dark

This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble. Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance.  What in the world do they think they are doing?

 

Central planning committee in the analysis and forecasting phase… [PT]

 

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An Odd Combination of Serenity and Panic

The United States, with untroubled ease, continued its approach toward catastrophe this week.  The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement.  Yet, on the surface, all still remained in the superlative.

 

S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]

 

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Inflation and “Price Stability”

We still remember when sometime in the mid 1980s, the German Bundesbank proudly pointed to the fact that Germany’s y/y consumer price inflation rate had declined to zero. It was considered a “mission accomplished” moment. No-one mentioned that economic nirvana would remain out of sight unless price inflation was pushed to 2% per year.

 

CPI, annual rate of change. During the “stagflation” period of the 1970s, Congress enacted the Federal Reserve Reform Act and the Humphrey-Hawkins Act, which specified a list of miracles the Fed was supposed to perform.

 

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The Negative Interest Rates Abomination

Our readers are probably aware that assorted central bankers and the economic advisors orbiting them occasionally mention the “natural interest rate” (a.k.a. “originary interest rate”) in speeches and papers. It is generally assumed that it has declined, which is to say, time preferences are assumed to have decreased.

 

This is actually an understatement…

 

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How to Hang on to Greenland

Jim Bianco, head of the eponymous research firm, handily won the internet last Thursday with the following tweet:

 

 

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A Case of Highway Robbery

What if the savings in your bank account lost 55 percent of its value over the last 12 months?  Would you be somewhat peeved?  Would you transfer some of your savings to another currency?

 

USD-ARS, weekly. For several years the Argentine Peso has followed a certain pattern: it declines mildly, but steadily, with little volatility for long time periods, and then spikes in crash waves whenever a crisis situation comes to a head. In early 2011, it took roughly four pesos to buy one US dollar – which was already an enormous loss of value relative to the 1:1 exchange rate that prevailed under Argentina’s currency board prior to the government default and banking system collapse of 2001. When Mr. Macri was elected president, it was widely held that his market reforms would finally repair Argentina’s economy, which had been ruined by almost two decades of economic mismanagement and inflation under the previous Peronist administration. Alas, Macri made a mistake no Argentine government that gains the trust of foreign investors seems able to resist: he embarked on a big borrowing spree, much of it denominated in USD, until it became clear that the government would no longer be able to defend the peso or service its debt. Then he exacerbated his mistake by borrowing even more money from the IMF – which should be filed under “a movie we have seen before”. And just as had happened in that earlier escapade, his government is now likely to default on its IMF loan as well. Not surprisingly, the peso has collapsed – and in well-worn fashion Macri is now trying to save the village by destroying it and has introduced capital controls. [PT]

 

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Fiat Money Woes

Monday was Labor Day holiday in the US. The facts are that the euro lost another 1.4%, the pound another 1.1%, and the yuan another 0.9% last week.

 

Assorted foreign fiat confetti against the US dollar – we have added the Argentine peso as well, as it demonstrates what can happen when things really get out of hand. [PT]

 

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The Pointlessness of Negative Yields

If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.

 

Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]

 

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Tending Towards Maximum Perversity

According to Finagle’s corollary to Murphy’s law, “Anything that can go wrong, will — at the worst possible moment.”  Taken a degree further, per O’Toole’s corollary of Finagle’s law, and the second law of thermodynamics, “The perversity of the Universe tends towards a maximum.”

 

Murphy’s law in action… not even Murphy himself was safe from it. [PT]

 

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A Good Story with Minor Imperfections

If you don’t know where you are going, any road will get you there,” is a quote that’s oft misattributed to Lewis Carrol. The fact that there is ambiguity about who is behind this quote on ambiguity seems fitting. For our purposes today, the spirit of the quote is what we are after. We think it may help elucidate the strange and confusing world of fake money in which we all travel.

 

Consumer price index, y/y rate of change – the Fed is not satisfied with the speed at which monetary debasement raises everybody’s cost of living lately. And no, they don’t think said speed should be lowered. [PT]

 

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A Change in Interest Rate Expectations

In the last issue of Seasonal Insights I discussed the typical pattern of stock prices when the Federal Reserve cuts interest rates.  As one would expect, the stock market tends to stabilize after cuts in the federal funds rate.

The issue is topical, as many investors and analysts expect rate cuts to be implemented soon given that signs of an economic slowdown are beginning to proliferate.

 

Market expectations about the direction of administered interest rates have changed significantly since last November. [PT]

 

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