Monthly Archives: December 2014

Small talk.

Bank gossip. Thank you BIS.-

When the going gets tough, it’s always revitalizing to read somebody else (with a prominent reputation), that comes to back your views. I will be for a lifetime morally indebted to the BIS for playing that role ever so frequently. This is what they had to say about the October market swings that motivated my November post “CB’s win another round in financial markets”. Read Claudio Borio, head of the Economic Department, on the December quarterly review of events. Emphasis is mine.

“… what is going on? It is too early to say what exactly triggered these sharp, if brief, price swings.

…To my mind, these events underline the fragility – dare I say growing fragility? – hidden beneath the markets’ buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets’ buoyancy hinges on central banks’ every word and deed.

The highly abnormal is becoming uncomfortably normal.”

In fact, what Borio is saying, is consistent with his thoughts expressed many times before. “The Economist” has labeled him as one of the world’s most provocative and interesting monetary economists. Financial cycles keep on being used and abused, once and again, to induce spurious short term reactions in the real economy. See what he was saying back in december 2012.

“Economists are now trying hard to incorporate financial factors into standard macroeconomic models… (but) the approach is firmly anchored in the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) paradigm… In the environment that has prevailed for at least three decades now, just as in the one that prevailed in the pre-WW2 years, it is simply not possible to understand business fluctuations and their policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies. And it calls for significant adjustments to macroeconomic policies.”

Needless to say, the BISs last  wording is fully applicable to the December swings -coetaneous to the recent, but nearly forgotten, crude oil black swan. A fresh victory on this last episode of financial instability is a done deal. Central Banks did a lot better than last time. It is undeniable that we didn’t get the 257 point S&P 500  rally Jason Haver was suggesting, but they got a better bang for their buck (word). Amazingly, they didn’t even have to mention the verb “print” in any of its forms. Verbal manipulation was nothing short of exquisite. No nervous breakdowns like back in October. This is an excerpt of what the FOMC actually skillfully said.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, …”

patience buddistSo, they dropped the term “considerable time”, …. and simultaneously they said that in fact they didn’t. Not even the “maestro” can beat that. Fedspeak at its very best. Janet Yellen then teased the reporters at the FOMC press conference when characterizing “patience” as … “a couple” of meetings.  Further questioned on the issue,  she reluctantly  detailed “a couple” as meaning two or more meetings. Undoubtedly a tiring depuration process for new words incorporated to Fedspeak. I find it easier to call a spade, a spade. But then, nobody would follow me at my press conferences. Continue reading

Markets are losing their cool.

Markets are not hermaphrodite, they are female. They are not about abstract intelligence, but more of the emotional intelligence type. So they move along in fits and starts, even though they do value objective data in the (very) long run. Women are very pragmatic and business minded, and markets also end up being rational. But in the short run, they are prone to effervescence. And, to be sure, waiting for rational conduct by the market can give you a hard time. Ask John Hussman.

When moving markets, greed, fear, hope, or denial, come first. Lately, Central Bank intervention has crept up to a consolidated second place in importance. Two decades ago, they weren’t even trading the global market.

Me-at-desk

9th floor of the NY Federal Reserve Building

There were no POMO desks, and the emblematic NY Fed desk ignored the underlying size of an “E-mini” contract. They only traded treasuries and USD crosses. Now they have incorporated the contract size in their spreadsheet macros. They even get a special discounted brokerage fee for their trading.

Prolific and highly inconsistent Bullard now affirms that they shouldn’t be intervening all the time. He must now think that verbal jawboning can do the job. Maybe, from now on, POMOs can permanently take monday to friday off. ¿Or should we just give each POMO desk member a pink slip?

In today’s market pricing process, fundamentals are a very distant last. They have always been last. The oddity is that they lost the second place to central banks, and are now well behind the first two factors. Decidedly, the keynesian proverb about the capacity of the market to remain irrational, for longer than you can stay solvent, has gone hyperbolic. Keynes would be pleased to know. It vexes most first class financial analysts. Benjamin Graham delineated the issue more precisely:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

You probably don’t understand why the market is selling off, on what should be considered good news. At least for main street. ¿Why on earth are deflation and cheaper energy a problem for equities, weak currencies, or interest rate spreads?

There is a simple answer to that one. Markets are very upset, because everybody hates it when somebody changes the rules of the game without notice. Young and old were assuming that the main four factors sustaining their happy financial life were still there. They had been told that: Continue reading

It’s a mad, mad world.

Insanity in individuals is something rare — but in groups, parties, nations, and epochs it is the rule.
Friedrich Nietzsche

John Lennon famously once said that life is what happens while you are busy making other plans. That was good advice for sure, and his own death is a clear example. We do not know how long we are going to last, and must avoid reproducing the pattern. The best lesson of history, is that we human beings fail to remember the very same lessons of history. We’ll try otherwise, but I am not optimistic.

Paraphrasing the maestro, if you think you understood what I am saying, you could be wrong. Nowadays I am not sure of anything, except debt unsustainability. I often conclude I end up twisting and turning  all arguments  when theorizing on the economy or life -just like a central banker. I worry I am so obsessed with Central bankers, that I am even changing my personality tics. ¡I sound like Greenspan! I promise it hasn’t been like this all the time. When I was young, I fantasized with beautiful women just like nearly every other male. More thinking, and less sex, is the way you ensure you become at least as old as your birthday date can attest.

5477691-happy-laughing-women-drinking-champagne-and-singing-xmas-songIn my particular case, I have to be particularly watchful about allocating a disproportionate amount of time to the most prescient analysis I can reasonably achieve, and forget to live in the meantime. Drinking, singing or sailing (and all other “ing'” that are sinful or enjoyable) are more important than the dissection of the malfunctions of our economic system.

In this line o thought, I was actually thinking of rounding up the current state of affairs in the global village. After reading Roubini’s last post at Marketwatch, I decided to leave the update for a later time. We all seem to keep on talking about the same things, with a monotonous result. My wife says so, and she is always, by definition, correct.

The last fad is finding new superlatives for the last series of desperate efforts by brainless politicians to balance the boat. Like critizising predictably predictable Jean Claude Juncker, and his latest insane, no money, more debt, free lunch, investment plan. Or underscoring the fact that Kuroda et al are increasingly out of their minds.  But it can also be about Christine Lagarde’s or Summer’s new terminologies  for El Erian’s “new normal” (rebaptized as secular stagnation or whatever).

240px-Cocktail1Theorizing on the different possible mixes of monetary and fiscal policies tops the list. As of late, we have found a brand new reason why macro policies implemented in the OECD over the last couple of years got it wrong. Not only do we need to increase the dose, but we have to change the policy mix. I think the closing paragraph in Roubini’s latest article in Marketwatch sums it all up. That’s it, the cocktail was long of gin and too short of  tonic and lemon.

“The right policies — less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing — are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.”

For once (I will try not to make a habit out of this), I quite disagree with Nouriel. We can discuss all night what came first, the chicken or the egg. By the way, I stand for the latter. But we will miss the point. The problem is not the keynesian mix, but the keynesian approach in itself. Continue reading