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, …”
So, 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