Tag: Monetary Policy (page 1 of 26)

The Stage Has Been Set For The Next Financial Crisis

Authored by Constantin Gurdgiev via CaymanFinancialReview.com,

Last month, the Japanese government auctioned off some US$4 billion worth of new two-year bonds at a new record low yield of negative 0.149 percent. The country’s five-year debt is currently yielding minus 0.135 percent per annum, and its 10-year bonds are trading at -0.001 percent. Strange as it may sound, the safe haven status of Japanese bonds means that there is an ample demand among private investors, especially foreign buyers, for giving away free money to the Japanese government: the bid-to-cover ratio in the latest auction was at a hefty US$19.9 billion or 4.97 times the targeted volume. The average bid-to-cover ratio in the past 12 auctions was similar at 4.75 times. Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future. See chart 1

In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements. And this expectation is not only contributing to the continued inflation of a massive asset bubble, but also widens the financial sustainability gap within the insurance and pensions sectors. The stage has been set, cleaned and lit for the next global financial crisis.

Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies. Just under 85 percent of all government bonds outstanding and traded worldwide are carrying yields below the global inflation rate. In simple terms, fixed income investments can only stay in the positive real returns territory if speculative bets made by investors on the direction of the global exchange rates play out.

We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies.

The first part of the problem is that with negative or ultra-low yields, this debt delivers poor income streams on the current portfolio. Earlier this year, Stanford’s Hoover Institution research showed that “in aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97 percent of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion. Key culprit: the U.S. pension funds require 7.5-8 percent average annual returns on their assets to break even on their future expected liabilities. In 2013-2016 they achieved an average return of below 3 percent. This year, things are looking even worse. Last year, Milliman research showed that on average, over 2012-2016, U.S. pension funds held 27-30 percent of their assets in cash (3-4 percent) and bonds (23-27 percent), generating total median returns over the same period of around 1.31 percent per annum.

Not surprisingly, over the recent years, traditionally conservative investment portfolios of the insurance companies and pensions funds have shifted dramatically toward higher risk and more exotic (or in simple parlance, more complex) assets. BlackRock Inc recently looked at the portfolio allocations, as disclosed in regulatory filings, of more than 500 insurance companies. The analysts found that their asset books – investments that sustain insurance companies’ solvency – can be expected to suffer an 11 percent drop in values, on average, in the case of another financial crisis. In other words, half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007. Milliman 2016 report showed that among pension funds, share of assets allocated to private equity and real estate rose from 19 percent in 2012 to 24 percent in 2016.

The reason for this is that the insurance companies, just as the pension funds, re-insurers and other longer-term “mandated” investment vehicles have spent the last eight years loading up on highly risky assets, such as illiquid private equity, hedge funds and real estate. All in the name of chasing the yield: while mainstream low-risk assets-generated income (as opposed to capital gains) returned around zero percent per annum, higher risk assets were turning up double-digit yields through 2014 and high single digits since then. At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there.

The second reason to worry about the current assets mix in insurance and pension funds portfolios relates to monetary policy cycle timing. The prospect of serious monetary tightening is looming on the horizon in the U.S., U.K., Australia, Canada and the eurozone; meanwhile, the risk of the slower rate of bonds monetization in Japan is also quite real. This means that the capital values of the low-risk assets are unlikely to post significant capital gains going forward, which spells trouble for capital buffers and trading income for the mandated intermediaries.

Thirdly, the Central Banks continue to hold large volumes of top-rated debt. As of Aug. 1, 2017, the Fed, Bank of Japan and the ECB held combined US$13.8 trillion worth of assets, with both Bank of Japan (US$4.55 trillion) and the ECB (US$5.1 trillion) now exceeding the Fed holdings (US$4.3 trillion) for the third month in a row.

Debt maturity profiles are exacerbating the risks of contagion from the monetary policy tightening to insurance and pension funds balance sheets. In the case of the U.S., based on data from Pimco, the maturity cliff for the Federal Reserve holdings of the Treasury bonds, Agency debt and TIPS, as well as MBS is falling on 1Q 2018 – 3Q 2020. Per Bloomberg data, the maturity cliff for the U.S. insurers and pensions funds debt assets is closer to 2020-2022. If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital. The picture is similar in the U.K. and Canada, but the risks are even more pronounced in the euro area, where the QE started later (2Q 2015 as opposed to the U.S. 1Q 2013) and, as of today, involves more significant interventions in the sovereign bonds markets than at the peak of the Fed interventions.

How distorted the EU markets for sovereign debt have become? At the end of August, Cyprus – a country that suffered a structural banking crisis, requiring bail-in of depositors and complete restructuring of the banking sector in March 2013 – has joined the club of euro area sovereigns with negative yields on two-year government debt. All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields.

The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital. Even after the immediate crisis rescinded, growth returned, unemployment fell and the household debt dramatically ticked up, the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month.

Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.) As recently warned by the Bank for International Settlements, the global debt pile has reached 325 percent of the world’s GDP, just as the labor and total factor productivity growth measures collapsed.

The only two ways in which these financial and monetary excesses can be unwound involves pain.

The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net. These transfers will likely start with tax increases, but will inevitably morph into another financial crisis and internal devaluation (inflation and currencies devaluations, coupled with a deep recession).

The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners). As a part of spending reforms, public investment and state pensions provisions should be shifted to private sector providers, while existent public sector pension funds should be forced to raise their members contributions to solvency-consistent levels.

Beyond this, we need serious rethink of the monetary policy institutions going forward. Historically, taxpayers and middle class and professionals have paid for both, the bailouts of the insolvent financial institutions and for the creation of conditions that lead to this insolvency. In other words, the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken.

Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.

http://WarMachines.com

ECB Proposes End To Deposit Protection

Submitted by GoldCore

It is the 'opinion of the European Central Bank' that the deposit protection scheme is no longer necessary:

'covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.'

To translate the legalese jargon of the ECB bureaucrats this could mean that the current €100,000 (£85,000) deposit level currently protected in the event of a bail-in may soon be no more. But worry not fellow savers, as the ECB is fully aware of the uproar this may cause so they have been kind enough to propose that:

"…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

So that's a relief, you'll only need to wait five days for some 'competent authority' to deem what is an 'appropriate amount' of your own money for you to have access to in order eat, pay bills and get to work.

The above has been taken from an ECB paper published on 8 November 2017 entitled 'on revisions to the Union crisis management framework'.

It's 58 pages long, the majority of which are proposed amendments to the Union crisis management framework and the current text of the Capital Requirements Directive (CRD).

It's pretty boring reading but there are some key snippets which should be raising a few alarms. It is evidence that once again a central bank can keep manipulating situations well beyond the likes of monetary policy. It is also a lesson for savers to diversify their assets in order to reduce their exposure to counterparty risks.

Bail-ins, who are they for?

According to the May 2016 Financial Stability Review, the EU bail-in tool is 'welcome' as it:

 
 

…contributes to reducing the burden on taxpayers when resolving large, systemic financial institutions and mitigates some of the moral hazard incentives associated with too-big-to-fail institutions.

As we have discussed in the past, we're confused by the apparent separation between 'taxpayer' and those who have put their hard-earned cash into the bank. After all, are they not taxpayers? This doesn't matter, believes Matthew C.Klein in the FT who recently argued that "Bail-ins are theoretically preferable because they preserve market discipline without causing undue harm to innocent people."

 

Ultimately bail-ins are so central banks can keep their merry game of easy money and irresponsibility going. They have been sanctioned because rather than fix and learn from the mess of the bailouts nearly a decade ago, they have just decided to find an even bigger band-aid to patch up the system.

 
 

'Bailouts, by contrast, are unfair and inefficient. Governments tend to do them, however, out of misplaced concern about “preserving the system”. This stokes (justified) resentment that elites care about protecting their friends more than they care about helping regular people.' – Matthew C. Klein

But what about the regular people who have placed their money in the bank, believing they're safe from another financial crisis? Are they not 'innocent' and deserving of protection?

When Klein wrote his latest on bail-ins, it was just over a week before the release of this latest ECB paper. With fairness to Klein at the time of his writing depositors with less than €100,000 in the bank were protected under the terms of the ECB covered deposit rules.

This still seemed absurd to us who thought it questionable that anyone's money in the bank could suddenly be sanctioned for use to prop up an ailing institution. We have regularly pointed out that just because there is currently a protected level at which deposits will not be pilfered, this could change at any minute.

The latest proposed amendments suggest this is about to happen.

 

Why change the bail-in rules?

The ECB's 58-page amendment proposal is tough going but it is about halfway through when you come across the suggestion that 'covered deposits' no longer need to be protected. This is determined because the ECB is concerned about a run on the failing bank:

 
 

If the failure of a bank appears to be imminent, a substantial number of covered depositors might still withdraw their funds immediately in order to ensure uninterrupted access or because they have no faith in the guarantee scheme.

This could be particularly damning for big banks and cause a further crisis of confidence in the system:

 
 

Such a scenario is particularly likely for large banks, where the sheer amount of covered deposits might erode confidence in the capacity of the deposit guarantee scheme. In such a scenario, if the scope of the moratorium power does not include covered deposits, the moratorium might alert covered depositors of the strong possibility that the institution has a failing or likely to fail assessment.

Therefore, argue the ECB the current moratorium that protects deposits could be 'counterproductive'. (For the banks, obviously, not for the people whose money it really is:

 
 

The moratorium would therefore be counterproductive, causing a bank run instead of preventing it. Such an outcome could be detrimental to the bank’s orderly resolution, which could ultimately cause severe harm to creditors and significantly strain the deposit guarantee scheme. In addition, such an exemption could lead to a worse treatment for depositor funded banks, as the exemption needs to be factored in when determining the seriousness of the liquidity situation of the bank. Finally, any potential technical impediments may require further assessment.

The ECB instead proposes that 'certain safeguards' be put in place to allow restricted access to deposits…for no more than five working days. But let's see how long that lasts for.

 
 

Therefore, an exception for covered depositors from the application of the moratorium would cast serious doubts on the overall usefulness of the tool. Instead of mandating a general exemption, the BRRD should instead include certain safeguards to protect the rights of depositors, such as clear communication on when access will be regained and a restriction of the suspension to a maximum of five working days by avoiding a cumulative use by the competent authority and the resolution authority.

Even after a year of studying and reading bail-ins I am still horrified that something like this is deemed to be preferable and fairer to other solutions, namely fixing the banking system. The bureaucrats running the EU and ECB are still blind to the pain such proposals can cause and have caused.

Look to Italy for damage prevention

At the beginning of the month, we explained how the banking meltdown in Veneto Italy destroyed 200,000 savers and 40,000 businesses.

In that same article, we outlined how exposed Italians were to the banking system. Over €31 billion of sub-retail bonds have been sold to everyday savers, investors, and pensioners. It is these bonds that will be sucked into the sinkhole each time a bank goes under.

A 2015 IMF study found that the majority of Italy’s 15 largest banks a bank rescue would ‘imply bail-in of retail investors of subordinated debt’. Only two-thirds of potential bail-ins would affect senior bond-holders, i.e. those who are most likely to be institutional investors rather than pensioners with limited funds.

Why is this the case? As we have previously explained:

 
 

Bondholders are seen as creditors. The same type of creditor that EU rules state must take responsibility for a bank’s financial failure, rather than the taxpayer. This is a bail-in scenario.

 

In a bail-in scenario the type of junior bonds held by the retail investors in the street is the first to take the hit. When the world’s oldest bank Monte dei Paschi di Siena collapsed ordinary people (who also happen to be taxpayers) owned €5 billion ($5.5 billion) of subordinated debt. It vanished.

Despite the biggest bail-in in history occurring within the EU, few people have paid attention and protested against such measures. A bail-in is not unique to Italy, it is possible for all those living and banking within the EU.

Yet, so far there have been no protests. We're not talking about protesting on the streets, we're talking about protesting where it hurts – with your money.

As we have seen from the EU's response to Brexit and Catalonia, officials could not give two hoots about the grievances of its citizens. So when it comes to banking there is little point in expressing disgust in the same way. Instead, investors must take stock and assess the best way for them to protect their savings from the tyranny of central bank policy.

To refresh your memory, the ECB is proposing that in the event of a bail-in it will give you an allowance from your own savings. An allowance it will control:

"…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

Savers should be looking for means in which they can keep their money within instant reach and their reach only. At this point physical, allocated and segregated gold and silver comes to mind. This gives you outright legal ownership. There are no counterparties who can claim it is legally theirs (unlike with cash in the bank) or legislation that rules they get first dibs on it. Gold and silver are the financial insurance against bail-ins, political mismanagement, and overreaching government bodies. As each year goes by it becomes more pertinent than ever to protect yourself from such risks.

 

http://WarMachines.com

Moody’s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country's growth potential. The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody's believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India's 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government's debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody's for an upgrade, but failed. The agency raised doubts about the country's debt levels and fragile banks, and declined to budge despite the government's criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody's noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government's objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," said Moody's.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

  • “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”
  • “India is on the right long-term path with capital markets — in both debt and equity — pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

  • “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise — we do believe all the rating agencies have been behind the curve somewhat”
  • Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

  • This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.
  • Investors like us who have long positions on India always expected an upgrade.
  • The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

  • Equity markets have already given a thumbs up to the news”.
  • It will lead to a reduction in borrowing costs, which is a major improvement.
  • “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

  • Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.
  • “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.
  • “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

  • The upgrade confirms Invesco’s positive view on India’s structural economic reforms.
  • “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

  • The upgrade is “very positive for banks, infrastructure and cyclical sectors”.
  • “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

  • The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.
  • “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

  • “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.
  • “It makes a big difference to investors and we will see more dollar bond supply from India”.

http://WarMachines.com

How Uncle Sam Inflates Away Your Life

Authored by MN Gordon via EconomicPrism.com,

“Inflation is always and everywhere a monetary phenomenon,” once remarked economist and Nobel Prize recipient Milton Friedman.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.

As more and more money is issued relative to the output of goods and services in an economy, the money’s watered down and loses value. 

By this account, price inflation is not in itself rising prices.  Rather, it’s the loss of purchasing power resulting from an inflating money supply.

Indeed, Friedman offered a shrewd insight.  However, he also accompanied it with an opportunist mindset.  Friedman saw promise in the phenomenon of monetary inflation.  Moreover, he saw it as a means to improve human productivity and economic growth.

You see, a stable money supply was not good enough for Friedman.  He advocated for moderate levels of monetary growth, and inflation, to perpetually stimulate the economy.  By hardwiring consumers with the expectation of higher prices, policy makers could compel a relentless consumer demand.

This desire to harness and control the inflation phenomenon has infected practically every government economist’s brain since the early 1970s. 

Over the decades they’ve somehow come to a consensus that 2 percent price inflation is the idyllic rate for provoking economic nirvana.  The Fed even tinkers with its federal funds rate for the purpose of targeting this magic 2 percent rate of price inflation.

Shadow Stats

On Wednesday the Bureau of Labor Statistics (BLS) published its October Consumer Price Index (CPI) report.  According to the government number crunchers, consumer prices are increasing at an annual rate of 2 percent.  Of course, anyone who lives and works in the real world knows prices are rising much faster.

For example, John Williams of Shadow Government Statistics calculates the CPI using early-1980s methods.  Williams re-creates how the government previously calculated the CPI before they reconfigured their scheme to understate inflation versus common experience.  By Williams’ calculations the CPI is increasing at an annual rate of 9.8 percent.

What price inflation number you believe is up to you.  We’re merely providing information for your consideration.  Are consumer prices rising at 9.8 percent per years, as Williams suggests?  Are they rising at 5 percent?  Are they going down?

We suppose it depends on if you’re buying a flannel shirt at Wal-Mart or paying your utility bill.  Still, many would agree that, overall, their day to day experience includes price increases far greater than 2 percent per year.

If we assume price inflation to be 3 percent per year, that means the purchasing power of your cash drops by 30 percent over a 12 year period. 

Hence, if you retire at age 62, that means you’ll see the purchasing power of each dollar you own decline to $0.70 by age 74.  By age 86, your purchasing power will be cut in half.

In short, 3 percent annual price inflation reduces each dollar you own to just $0.50 in less than 25 years.  Without question, this is a significant loss in purchasing power. 

What’s more, generating consistent investment income to overcome this loss in purchasing power is a tall order.  Surely, you can’t rely on the government’s cost of living adjustments (COLA), which are tied to the CPI, to maintain your living standard.

How Uncle Sam Inflates Away Your Life

We doubt that the dollar devaluing effects of price inflation is a new concept for you.  Most likely you’ve heard this many times before.  Certainly, you experience it as you go about your business.

However, this stealthy destruction of your wealth bears repeating.  The fact is over the course of your retirement half of your life-savings will be covertly confiscated from your bank account.  We find this to be wholly intolerable.

Remember, your life-savings is just that.  It represents your life.  Specifically, it’s stored up time you traded a portion of your life to earn.  So, too, it’s a measure of your financial discipline and ability to save and invest overtime in lieu of supersized spending.

When Uncle Sam confiscates your life-savings via the inflation tax something more is happening.  Not only are you being robbed of your money, you’re being robbed of your life.  Your life’s simply inflated away.  Poof!

Factor in federal and state income taxes, social security, disability, Medicare, capital gains taxes, outrageous health insurance costs, subsidizing luxury electric vehicles and grape flavored soda pop, and a vast array of fees and exactions, it’s a miracle you have any money left over at all.

Alas, what money you somehow manage to hold onto will be inflated away long before you need it most.

http://WarMachines.com

Another Step Forward For Sound Money: Location Picked For Texas Gold Depository

Via SchiffGold.com,

The Texas Bullion Depository took a step closer becoming operational earlier this month when officials announced the location of the new facility.

The creation of a state bullion depository in Texas represents a power shift away from the federal government to the state, and it provides a blueprint that could ultimately end the Federal Reserve’s monopoly on money.

Gov. Greg Abbot signed legislation creating the state gold bullion and precious metal depository in June of 2015. The facility will not only provide a secure place for individuals, business, cities, counties, government agencies and even other countries to store gold and other precious metals, the law also creates a mechanism to facilitate the everyday use of gold and silver in business transactions. In short, a person will be able to deposit gold or silver in the depository and pay other people through electronic means or checks – in sound money.

Earlier this summer, Texas Comptroller Glenn Hegar announced Austin-based Lone Star Tangible Assets will build and operate the Texas Bullion Depository. On Nov. 3, the company announced it will construct the facility in the city of Leander, located about 30 miles northwest of Austin. According to the Community Impact Newspaper, the Leander City Council has approved an economic development agreement with Lone Star. Construction of the depository is expected to begin in early 2018. Lone Star officials say it will take about a year to complete construction of the 60,000-square-foot secure facility located on a 10-acre campus.

The depository will operate out of Lone Star’s existing facilities during construction. It will provide services nationwide beginning in early 2018, with international services to be offered in the future phases, according to Community Impact.

“This state-of-the-art facility will provide tremendous benefits to the citizens of Leander and will give Texans a secure facility right here in the Lone Star State where their gold and precious metals will be kept safe and close at hand,” Hegar said in the press release.

The Texas Bullion Depository has already established an online presence. You can visit the depository website HERE.

According to an article in the Star-Telegram, state officials want a facility ‘with an e-commerce component that also provides for secure physical storage for Bullion.’ Officials say plans for a depository should include online services that would let customers accept, transfer and withdraw bullion deposits and related fees.

By making gold and silver available for regular, daily transactions by the general public, the new law has the potential for wide-reaching effect. Professor William Greene is an expert on constitutional tender and said in a paper for the Mises Institute that when people in multiple states actually start using gold and silver instead of Federal Reserve notes, it would effectively nullify the Federal Reserve and end the federal government’s monopoly on money.

“Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes).

 

“As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state – as people in other states carry out their desire to bank with sound money – and an eventual outcry against the use of Federal Reserve notes for any transactions.”

University of Houston political science professor Brandon Rottinghaus called the development of a state gold depository a step toward independence.

“This is another in a long line of ways to make Texas more self-reliant and less tethered to the federal government. The financial impact is small but the political impact is telling, Many conservatives are interested in returning to the gold standard and circumvent the Federal reserve in whatever small way they can.”

The Texas gold depository will create a mechanism to challenge the federal government’s monopoly on money and provides a blueprint for other states to follow. If the majority of states controlled their own supply of gold, it could conceivably make the Federal Reserve completely irrelevant.

The depository is part of a broader movement at the state level to facilitate sound money, and potentially undermine the Fed’s money monopoly. A number of states have repealed taxes on the sale of gold and silver over the last two years, and that trend is expected to continue. A legislator in Alabama has already filed a bill to repeal the sales and use tax on gold, silver, platinum, and palladium bullion and coins in that state. As Ron Paul has said, “We ought not to tax money – and that’s a good idea. It makes no sense to tax money.”

Reporting from the Tenth Amendment Center contributed to this report.

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Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks

Mario Draghi gave the keynote speech at the Frankfurt European Banking Congress this morning in which he focused on the strong outlook for the Eurozone economy and how his monetary policy is playing a vital role. The speech was peppered with upbeat phrases and adjectives like solid, robust, unabated, endogenous propagation, resilient, remarkable and ongoing. According to Draghi.

The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.

Draghi is confident that future growth will be unabated for three reasons.

  • Previous headwinds have dissipated;
  • Drivers of growth are increasingly endogenous rather than exogenous; and
  • The Eurozone economy is more resilient to new shocks.

In terms of previous headwinds, Draghi notes that global growth and trade have recovered, while the eurozone has de-leveraged.

For some years global growth and world trade have been a drag on the recovery. Now, we are seeing signs of a sustained expansion. Global PMIs remain strong. The share of countries in which growth has been improving relative to the previous three years has risen from 20% in mid-2016 to 60% today. And this has fed through into a rebound in world trade, which is growing at its strongest annual rate in six years, and may well become a tailwind going forward.

Domestically, a key headwind in the past has been the necessary deleveraging by firms and households. But this is also now diminishing as debt returns to more sustainable levels. For the euro area, gross corporate debt to value added is now roughly back to its pre-crisis level. In vulnerable countries the decline has been steeper. In Spain, corporate debt has fallen from 215% of gross value added in early 2012 to close to 150% today – the same level it had at the end of 2004. Italian firms have seen their debt ratio fall by around 30 percentage points since end 2012, returning to the same level as in mid-2007.

For households, gross indebtedness is also edging down and now stands just below its mid-2008 level. And importantly for the recovery, household deleveraging is now happening largely “passively” – i.e. through nominal growth – rather than “actively”, that is, through paying down debt or write offs.

Regarding the second reason, Draghi sees the exogenous factors of falling oil prices and monetary policy have less impact as growth has become self-sustaining. This sort of confidence from central bankers is often mistimed, but this is Draghi’s assertion.

Now, we see more signs that growth is “feeding on itself”, i.e. spending multipliers and endogenous propagation are again supporting activity. This cycle is most evident for private consumption, which has remained robust even as oil prices have risen by about 30 dollars since the start of 2016. Consumption is being supported by a virtuous circle between rising labour income and rising employment. Employment in the euro area has reached its highest level ever, while unemployment has fallen to its lowest rate since January 2009. Importantly, this has taken place against the backdrop of a rising participation rate, which is now 2 percentage points above its pre-crisis level… The fact that unemployment has fallen so much while labour participation has been rising is a remarkable success story. As consumption has strengthened and spending multipliers have taken hold, investment has also followed with a lag. Since 2016, investment has contributed almost 45% to annual GDP growth, compared with under 30% in the two years previously.

Turning to his third reason, Draghi believes that two factors are behind the Eurozone’s increasing reliance to new shocks. First, the increasing convergence between the performance of Eurozone countries, for example, in terms of GDP growth and employment, and credit conditions. Second, the resilience of the financial sector. We will refrain from making any remark about Deutsche Bank or a big chunk of the Italian banking industry, but this was Draghi’s comment.

The other trend is the growing resilience of the financial sector. The total capital ratio of significant banks has increased by more than 170 basis points since early 2015. Their return on equity has risen from 4.4% at the end of 2015 to 7.1% at the start of this year, even as their leverage ratios have declined. All banks have benefited from the upward trend in returns on assets since the start of our monetary policy easing in 2014, although in some cases starting from low levels. Clearly this trend hides some variation among banks, which is largely driven by differences in their business models.

Low-for-long interest rates might contribute to a build-up of financial risks, and this has to be carefully monitored. At present we do not see systemic risks emerging at the euro area level. If there are some local pockets of risk, the defence lies in micro-prudential and macro-prudential policies, not changing area-wide monetary policy. Furthermore, in such an environment any backtracking on financial regulation would be a mistake, as the pre-crisis experience has shown.

Draghi would be rare amongst central bankers if he did see systemic risks, just like they never see asset bubbles, but we digress. One area where Draghi had to acknowledge a less than stellar performance was inflation, given the misguided view that reducing purchasing power is a good thing. He characterised progress as “incomplete and partial”. However, he sees two reasons for optimism.

Two indicators are important for gauging the durability of inflation. The first is the outlook for growth, since this helps us assess whether inflation will continue to rise as we expect. The second is underlying inflation. This allows us to assess whether inflation will stabilise around our aim once the effects of volatile factors, such as oil and food price swings, have faded away.

The growth outlook is now clearly improving, for all the reasons I have mentioned. But the underlying inflation trend remains subdued. According to a broad range of measures, underlying inflation has ticked up moderately since the start of this year, but it still lacks clear upward momentum. A key issue here is wage growth. Since the trough in mid-2016, growth in compensation per employee has risen, recovering around half of the gap towards its historical average. But overall trends remain subdued and are not broad-based.

On the ECB’s asset purchase program, Draghi stated that the reduction in monthly purchases from 60 billion Euros to 30 billion reflects the “growing confidence” in the economy. Asset purchases could be extended beyond September 2018 if there has not been a “sustained adjustment in the path of inflation”. Indeed, he noted that the reduced pace of purchases coupled with the extension of the time horizon had essentially left financial conditions unchanged. Having talked up the Eurozone recovery and prospects, Draghi urged politicians to do their part, a not so subtle way of taking credit for recent successes.

With the recovery ongoing, now is the right moment for the euro area to address further challenges to stability. This means actively putting our fiscal houses in order and building up buffers for the future – not just waiting for growth to gradually reduce debt. It means implementing structural reforms that will allow our economies to converge and grow at higher speeds over the long term. And it means addressing the remaining gaps in the institutional architecture of our monetary union.

So Draghi is very bullish, although we suspect his Eurozone recovery is somewhat more fragile than he would admit, but time will tell. Mark Ostwald, global strategist at ADM ISI, commenting on the timing of Draghi’s speech noted:"It comes ahead of next week's 'account' of the October council meeting, which may well highlight that Signor Draghi was rather economical with the truth about how many council members wanted to signal a specific end point for the QE programme, as has been more than evident in speeches since."

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Mueller Subpoena Spooks Dollar, Sends European Stocks, US Futures Lower

Yesterday’s torrid, broad-based rally looked set to continue overnight until early in the Japanese session, when the USD tumbled and dragged down with it the USDJPY, Nikkei, and US futures following a WSJ report that Robert Mueller had issued a subpoena to more than a dozen top Trump administration officials in mid October.

And as traders sit at their desks on Friday, U.S. index futures point to a lower open as European stocks fall, struggling to follow Asian equities higher as the euro strengthened at the end of a tumultuous week. Chinese stocks dropped while Indian shares and the rupee gain on Moody’s upgrade. The MSCI world equity index was up 0.1% on the day, but was heading for a 0.1% fall on the week. The dollar declined against most major peers, while Treasury yields dropped and oil rose. 

Europe’s Stoxx 600 Index fluctuated before turning lower as much as 0.3% in brisk volumes, dropping towards the 200-DMA, although about 1% above Wednesday’s intraday low; weakness was observed in retail, mining, utilities sectors. In the past two weeks, the basic resources sector index is down 6%, oil & gas down 5.8%, autos down 4.9%, retail down 3.4%; while real estate is the only sector in green, up 0.1%. The Stoxx 600 is on track to record a weekly loss of 1.3%, adding to last week’s sell-off amid sharp rebound in euro, global equity pullback. The Euro climbed for the first time in three days after ECB President Mario Draghi said he was optimistic for wage growth in the region, although stressed the need for patience, speaking in Frankfurt. European bonds were mixed. The pound pared some of its earlier gains after comments from Brexit Secretary David Davis signaling a continued stand-off in negotiations with the European Union.

In Asia, the Nikkei 225 took its time to catch up to the WSJ report that US Special Counsel Mueller has issued a Subpoena for Russia-related documents from Trump campaign officials, although reports pointing to North Korea conducting ‘aggressive’ work on the construction of a ballistic missile submarine helped the selloff. The Japanese blue-chip index rose as much as 1.8% in early dealing, but the broad-based dollar retreat led to the index unwinding the bulk of its gains; the index finished the session up 0.2% as the yen jumped to the strongest in four-weeks. Australia’s ASX 200 added 0.2% with IT, healthcare and telecoms leading the way, as utilities lagged. Mainland Chinese stocks fell, with the Shanghai Comp down circa 0.5% as the PBoC’s reversel in liquidity injections (overnight net drain of 10bn yuan) did little to boost risk appetite, as Kweichou Moutai (viewed as a bellwether among Chinese blue chips) fell sharply. This left the index facing its biggest weekly loss in 3 months, while the Hang Seng rallied with IT leading the way higher. Indian stocks and the currency advanced after Moody’s Investors Service raised the nation’s credit rating.

The dollar was pressured even as tax reform moved a step forward given Trump-Russia probe came back into focus. Two-year Treasury yield hit a fresh high and bonds slipped. The euro stayed on course to its best week in two months as Draghi remains bullish on prospects of higher wages; the kiwi hit its lowest level since June 2016.

Meanwhile, the U.S. Treasury yield curve remained on investors’ radar, reaching its flattest levels in a decade, reflecting a belief that the Federal Reserve will continue to raise interest rates.

The U.S. House of Representatives passed a tax overhaul expected to boost share prices if it becomes law. The legislative battle now shifts to the Senate. As Bloomberg notes, as “Washington took one step closer to tax reform and China’s central bank injected the most cash since January into its financial system this week, investors have been trying to decide if resilient global growth and strong earnings forecasts warrant sticking it out in equities. Lofty valuations contributed to fund managers paring back some exposure after global shares reached record highs earlier this month.”

As earnings season drew to a close with 90 percent of U.S. and European companies having reported, analysts said results were supportive but weaker than the previous quarters. “While they look good overall, the strong momentum apparent since Q1 is now fading,” said Societe Generale analysts, adding that consensus earnings estimates are no longer being raised for U.S. or euro zone stocks.

As also reported on Thursday, Fed’s Williams suggested that central banks should consider unconventional policy tools for use in the future, including higher inflation targets and income targeting. Williams also suggested that negative rates need to be on list of potential tools if the US enters a recession, even as he said that a December hike, followed by 3 hikes in 2018 is perfectly reasonable. “What really matters is gradual normalisation not timing, should raise rates to around 2.5% in the next couple of years” he said adding that “Low inflation in a way is lucky as it allows strong growth, however, if it does not pick up over the next few years he will re-think the rate path.”

Oil prices were on track for weekly losses, slipping from two-year highs hit last week on signs that U.S. supply is rising and could potentially undermine OPEC’s efforts to tighten the market. U.S. light crude stood at $55.53 a barrel, up 0.7 percent on the day but still within its trading range in the past couple of days. It was down 2.1 percent on the week. Brent futures hit a two-week low of $61.08 a barrel but last stood 0.3 percent higher at $61.53. It was down 3.1 percent for the week.

Economic data today includes housing starts, building permits.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,583.25
  • STOXX Europe 600 down 0.2% to 384.06
  • MSCI Asia up 0.4% to 170.15
  • MSCI Asia ex Japan up 0.5% to 558.90
  • Nikkei up 0.2% to 22,396.80
  • Topix up 0.1% to 1,763.76
  • Hang Seng Index up 0.6% to 29,199.04
  • Shanghai Composite down 0.5% to 3,382.91
  • Sensex up 0.8% to 33,377.55
  • Australia S&P/ASX 200 up 0.2% to 5,957.25
  • Kospi down 0.03% to 2,533.99
  • German 10Y yield rose 1.1 bps to 0.387%
  • Euro up 0.2% to $1.1795
  • Brent Futures up 0.7% to $61.78/bbl
  • Italian 10Y yield rose 0.2 bps to 1.572%
  • Spanish 10Y yield rose 0.6 bps to 1.548%
  • Brent Futures up 0.7% to $61.78/bbl
  • Gold spot up 0.3% to $1,282.59
  • U.S. Dollar Index down 0.3% to 93.69

Top Overnight News

  • House Republicans pass tax bill, while Senate Finance Committee approves different version
  • Special Counsel Robert Mueller is said to have served President Donald Trump’s election campaign a subpoena in mid-October seeking documents related to Russia contacts
  • ECB President Mario Draghi said he was confident for wage growth in the euro area
  • While U.K. Brexit Secretary David Davis said there would be some clarity on the Britain’s divorce bill with the European Union in a “a few more weeks,” there are signs that talks with EU leaders are in a new stand-off
  • Japanese PM Shinzo Abe says he will push through initiatives to boost productivity and compile a new economic policy package next month
  • Canada is open to a Mexican proposal to review the North American Free Trade Agreement every five years instead of ending the deal automatically if not renegotiated, which the U.S. had demanded, Reuters reports, citing two unidentified government sources
  • Senate Panel Approves Tax Plan as GOP Leaders Gird for Battle
  • Murdoch Has His Pick of Suitors as He Ponders Fox’s Fate; Sky Rises Most Since June on Interest From Comcast, Verizon
  • Chinese Stocks Tumble as State Media Warning Triggers Selloff
  • India’s First Moody’s Upgrade in 14 Years Bets on Reforms
  • Draghi Says Confidence on Inflation Will Help Drive Wage Gains
  • China Issues Draft Rules to Curb Asset Management Product Risks
  • Bitcoin Flirts With Record $8,000 High, Leaving Sell-Off Behind
  • PDVSA Looks Like a ‘Zero’ to Man Who Ran Elliott’s Argentina Bet
  • Manafort Spent Millions on Home Updates But Numbers Don’t Add Up
  • Tesla Seals Order From Michigan Grocery Chain for Semi Trucks
  • Luxoft Holding Second Quarter Adjusted EPS Beats Estimates
  • JPMorgan’s Gu Sees ‘Very Robust’ Pipeline for Hong Kong IPOs

In Asia, the Nikkei 225 took its time to catch up to a report suggesting that US Special Counsel Mueller has issued a Subpoena for Russia-related documents from Trump campaign officials, although reports pointing to North Korea conducting ‘aggressive’ work on the construction of a ballistic missile submarine probably helped the selloff. The Japanese blue-chip index rose as much as 1.8% in early dealing, but the broad-based dollar retreat led to the index unwinding the bulk of its gains; the index finished the session up 0.2%. Australia’s ASX 200 added 0.2% with IT, healthcare and telecoms leading the way, as utilities lagged. Mainland Chinese stocks fell, with the Shanghai Comp down circa 0.4% as the PBoC’s injections have done little to underscore risk appetite, as Kweichou Moutai (viewed as a bellwether among Chinese blue chips) fell sharply. This left the index facing its biggest weekly loss in 3 months, while  the Hang Seng rallied with IT leading the way higher. The PBoC injected a net CNY 810bln this week, against a net drain of CNY 230bln last week. Japanese PM Abe promised to rid the country of deflation once and for all. He pledged to use all policy tools, including tax reforms and deregulation, to push up wages in order to put an end to the country’s persistent deflation he also noted that he wants to increase pressure on North Korea along with the international community. Japanese Finance Minister Aso stated that Japan is to continue to firmly escape deflation. South Korea’s FX authority warned that the pace of the KRW’s gains has been fast. A BoK official warned that the KRW has appreciated fast in a short time, and reiterates that FX authorities are monitoring the situation. Moody’s raised India’s sovereign rating to Baa2 from Baa3, outlook to stable from positive.

Top Asian News

  • India Rating Raised by Moody’s as Reforms Boost Growth Potential
  • China to Rein Risks in Asset Management Industry
  • China Warning Wipes $6 Billion From Stock Loved by Goldman
  • Erdogan Says Turkey Has Withdrawn Troops From NATO Exercise
  • China Stocks Cap Worst Week Since August as Moutai Battered

European bourses trading modestly lower this morning, with downbeat earnings weighing sentiment, while the spill-over from a soft Asian session has dented risk in Europe. Vivendi shares had been lower as much as 2% after a weak earnings update. FTSE 100 slipping slight amid the strength in GBP, which is back above 1.32 against the greenback. Comments from ECB’s Draghi have sparked some additional movement, as while largely sticking to the post-October 26 policy meeting presser he appeared more confident about the growth and inflation outlook (economic activity more self-propelling, underlying inflation to converge with headline etc). Hence, a decline in Bunds below parity to a 162.50 low, but again not yet posing a real threat to more substantial downside targets/supports. Market contacts suggest that 162.48 needs to be breached from an intraday chart perspective to bring Thursday’s 162.38 Eurex base into contention, and recall there are more/bigger stops anticipated below 162.36. On the upside, assuming 162.48 holds, yesterday’s 162.82 session high is the first proper line of resistance. Gilts have also retreated into negative territory alongside Bunds and USTs, to 124.45 vs 124.77 at best and their 124.72 previous settlement.

Top European News

  • We’ll Wait for U.K. Brexit Concessions, EU Leaders Tell May
  • From EON to Fortum: How to Save Nasdaq’s Fading Power Market
  • Carige Talks With Underwriters Continue as Deadline Looms
  • Elior Plunges Most on Record as Hurricane Irma Wrecks Party
  • Norway Idea to Exit Oil Stocks Is ‘Shot Heard Around the World’

In FX, the USD is down again, but off worst levels seen so far this week as the Index holds within a 93.500-93.900 broad range. Some respite for Dollar from progress on the tax reform bill, but another Russian-related probe into Trump’s election campaign has capped the upside. The Euro was underpinned by upbeat comments from ECB President Draghi, and holding close to 1.1800 vs the Usd. Hefty option expiries still in play from 1.1790-1.1800 through 1.18250 and up to 1.1840-50. The Yen regaining a safe-haven bid amid the latest US political challenge against the President, with Usd/Jpy down to new multi-week
lows sub-112.50. AUD/NZD is the biggest G10 losers on broad risk-off sentiment and the recovering Greenback, with Aud/Usd back below 0.7600 and Nzd/Usd even weaker under the 0.6800 handle. Note, cross flow also weakening the Kiwi as Aud/Nzd trades back at 1.1100+ levels.

In commodities, Brent and WTI crude futures trading higher by 0.4% and 1.3% respectively, the latter making a break above yesterday’s at USD 55.59, however has met resistance at the USD 56 handle. Iraq/Kurd oil flow to Ceyhan rises to 254k bpd, according to Port Agent

Looking at the day ahead, a slightly quieter end to the week although the ECB’s Draghi is due to give a keynote address on “Europe into a new era – how to seize the opportunities”. The Bundesbank’s Weidmann is also slated to speak while the Fed’s Williams speaks in the evening. US housing starts for October and the Kansas City Fed’s manufacturing activity index for November are the data highlights.

US Event Calendar

  • 8:30am: Housing Starts, est. 1.19m, prior 1.13m; MoM, est. 5.59%, prior -4.7%
  • 8:30am: Building Permits, est. 1.25m, prior 1.22m; MoM, est. 2.04%, prior -4.5%
  • 10am: MBA Mortgage Foreclosures, prior 1.29%; Mortgage Delinquencies, prior 4.24%
  • 11am: Kansas City Fed Manf. Activity, est. 20.5, prior 23

DB’s Jim Reid concludes the overnight wrap

Maybe the S&P 500 will be the new hard currency of the world as nothing seems to break it at the moment. After a very nervous last week (longer in HY and EM) for markets, the S&P 500 closed +0.82% last night (best day since September 11th) and for all the recent fury and angst is only 0.34% off its’ all-time closing high. The Nasdaq gained 1.30% to a fresh all time high and the Stoxx 600 was also up for the first time in eight days. The positive reaction seems to have started in Asia yesterday, in part as commodity prices stabilised somewhat and news that China’s PBoC injected cash with the largest reverse repo operation since January. Then US markets got an additional boost from Cisco guiding to its first revenue gain in eight quarters and Wal-Mart posting its strongest US sales in more than eight years. There was also a little sentiment boost from the House passing its tax bill.

This morning in Asia, markets are strengthening further. The Nikkei (+0.11%), Hang Seng (+0.78%) and Kospi (+0.28%) are all modestly up while the Shanghai Comp. is down 0.55% as we type. Moody’s upgraded India’s sovereign bond rating for the first time since 2004. It’s one notch higher to Baa2/Stable (also one notch higher than S&P’s BBB-) with the agency citing ongoing progress in economic and institutional reforms. India’s 10y bond yields is down c10bp this morning to 6.96%. Elsewhere, UST 10y has partly reversed yesterday’s moves and is trading c2bp lower.

Now back to US tax reforms, which is a small step closer to resolution. The House has voted (227-205) to pass its version of the tax reform bill despite 13 Republicans dissenting. President Trump tweeted “a big step toward fulfilling our promise to deliver historic tax cuts…by the end of the year”. Notably, the more challenging task may now begin in terms of passing the Senate’s version where fiscal constraints are tighter and the Republicans only have 52 of the 100 seats in the Chamber. Overnight, the Senate Finance Committee voted to approve its revised tax package, so a full chamber vote could come as early as the  week after Thanksgiving. If passed, the two versions of the tax bill will need to be somehow reconciled. Our US economist believes there is a decent chance that some version of tax reform can be achieved, but this is likely to be a Q1 event with potential stumbling blocks along the way.

Turning to the various Brexit headlines, PM May flew out last night to Sweden for an informal summit with European leaders seeking to kick start the stalled Brexit talks. She is expected to meet with the Swedish Premier and Irish counterpart before meeting with EU President Tusk on Friday. Following on, the Brexit Secretary Davis noted that we have to “wait a few more weeks” for clarity on how much UK is willing to pay in the divorce settlement. Elsewhere, Goldman Sachs CEO Blankfein tweeted “many (fellow business leaders) wish for a confirming vote on (Brexit)…so much at stake, why not make sure consensus still there?”

Moving onto central bankers’ commentaries. In the US, the Fed’s Mester sounded reasonably balanced and remains supportive of continued gradual policy tightening. She noted “anecdotal feedback from business contacts suggest they are increasing wages”, but it’s going to be hard to see strong wage growth because productivity growth is low. Overall, she sees “good reasons” that inflation will rise back to 2% goal, but “it’s going to take a little longer…”

The Fed’s Williams noted one more rate hike this year and three more in 2018 remains a “reasonable guess” subject to incoming data. Finally, the Fed’s Kaplan  reiterated the Fed would continue to make progress towards achieving its 2% inflation target, but noted that the neutral fed funds rate is “not that far away”.

In the UK, BOE Governor Carney reiterated that interest rates would probably rise “a couple of times over the next few years” if the economy evolved in line with the Bank’s projections, but also cautioned that the fundamental economic impacts of Brexit will only be “known over a very long period of time”. That said, he noted the BOE will remain nimble and support the economy no matter what the result of the Brexit negotiations will be. Elsewhere, Chancellor Hammond has confirmed that the Treasury does not plan to change the inflation gauge that the BOE targets from CPI to CPIH – which includes owner occupied housing costs and is the new preferred price measure by the Office for National Statistics.

Now recapping other markets performance yesterday. Within the S&P, only the energy and utilities sector were modestly in the red (-0.58%), partly weighed down by Norway’s sovereign wealth fund plans to sell c$40bln of energy related stocks to make it less vulnerable to the sector. Elsewhere, gains were led by telco, consumer staples and tech stocks. European markets were all higher, with the DAX and CAC up c0.6% while the FTSE 100 was the relative underperformer at +0.19%. The VIX index dropped 10.4% to 11.76.

Over in government bonds, UST 10y yields rose 5.3bp following the House’s approval of the tax plans and a solid beat for industrial production, while Gilts also rose 2.3bp, in part due to slightly stronger retail sales figures. Other core bond yields were little changed (10y Bunds flat, OATs -0.4bp), while Italian yields marginally underperformed (+0.5bp), partly reflecting that Banca Carige has failed to get banks to underwrite its planned share sale – making a bail in more likely, as well as recent polls (eg: Ipsos) showing the 5SM party taking a modest lead versus peers. Elsewhere, some of the recent pressure in the HY space appears to be reversing with the Crossover index 9.2bp tighter.

Key currencies were little changed, with the US dollar index up 0.13% while Sterling gained 0.18% and Euro fell 0.18%. In commodities, WTI oil dipped 0.34% yesterday but is trading marginally higher this morning after Saudi Arabia reaffirmed its willingness to extend oil cuts at the November 30 OPEC meeting. Elsewhere, precious metals were slightly higher (Gold +0.03%; Silver +0.54%) while other base metals continue to softened, although losses are moderating (Copper -0.17%; Zinc -0.84%; Aluminium -0.35%).

Away from the markets, our US economists have published their latest outlook for the US economy. They note the US economy is on good footing for continued above-trend growth in 2018 and beyond. Overall, they believe private sector fundamentals are broadly sound, the labour market has more than achieved full employment and financial conditions are highly supportive of growth. On real GDP growth, their forecast for 2018 is unchanged at 2.3%, but 2019 is up a tenth to 2.1% while growth in 2020 is expected to slow to 1.5% as monetary policy tightening gains traction. The Unemployment rate is expected to fall to 3.5% by early 2019, so although inflation should remain low through year-end, our team’s medium-term view that core inflation should normalise is intact. Hence, in terms of rates outlook, they still expect the next rate increase in December, followed by three hikes in 2018 and four more in 2019. Elsewhere, tax reform is a wild card, though it faces significant political challenges. Conversely, potential disruptions to trade policy would be a negative development. For more detail, refer to their note.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the October IP was above expectations at 0.9% mom (vs. 0.5%) and 2.9% yoy – the highest since January 2015, in part as the post storm recovery efforts gets underway. Aggregate capacity utilization was also beat at 77% (vs. 76.3% expected) – highest since April 2015 and the NAHB housing market index was also above at 70 (vs. 67) – highest since March. Elsewhere, the November Philly Fed index was slightly below expectations but still solid at 22.7 (vs. 24.6 expected), with both the new orders and employment indices above 20. Finally, the weekly initial jobless claims was slightly higher (249k vs. 235k expected), perhaps impacted by the delayed filings following the storms and the Veteran’s day holiday, while continuing claims fell to a new 44 year low (1,860k vs. 1,900k expected).

In the UK, core retail sales (ex-auto fuel) for October slightly beat expectations, at 0.1% mom (vs. flat expected) and -0.3% yoy (vs. -0.4% expected). In the Eurozone, the final reading for October CPI was unrevised at 0.1% mom and 1.4% yoy, but France’s 3Q unemployment was slightly higher than expected at 9.7% (vs. 9.5%).

Looking at the day ahead, a slightly quieter end to the week although the ECB’s Draghi is due to give a keynote address on “Europe into a new era – how to seize the opportunities”. The Bundesbank’s Weidmann is also slated to speak while the Fed’s Williams speaks in the evening. US housing starts for October and the Kansas City Fed’s manufacturing activity index for November are the data highlights.

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Keep Calm & Carry On

Authored by 720Global's Michael Liebowitz via RealInvestmentAdvice.com,

“Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” – Mark Carney, Bank of England Governor

In 1939, the British Government, through the Ministry of Information, produced a series of morale-boosting posters which were hung in public places throughout the British Isles. Faced with German air raids and the imminent threat of invasion, the slogans were aimed at helping the British public brave the testing times that lay ahead. The most enduring of these slogans simply read:

 “Keep Calm and Carry On.”

Ironically, it was the only one of the series that was never actually displayed in public as it was reserved for a German invasion that never transpired. Today, the British Government may wish to summon a fresh propaganda strategy to address a new threat on the horizon, that of the eventuality of Brexit.

The Kingdom Divided

The United Kingdom (UK) is in the process of negotiating out of all policies that, since 1972, formally tied it to the economic dynamics of the broader western European community. Since the unthinkable Brexit vote passage in June 2016, the unthinkable has now become the undoable. The negotiations, policy discussions, logistical considerations and legal wrangling are becoming increasingly problematic as they affect every industry in the UK from trade and finance to hazardous materials, produce, air travel and even Formula 1 racing.

The worst case scenario of a disorderly or “hard” Brexit, whereby no deal is reached by the March 2019 deadline, is the most extreme for investors along the spectrum of potential outcomes. A deadlock, which is unfortunately the most likely scenario, would result in tariffs on trade between the UK and the European Union (EU). Such an outcome would result in a rapid deterioration of British economic prospects, job losses and the migration of talent and businesses out of the country. Even before the path of Brexit is known, a number of large companies with UK operations, including Barclays Bank, Diageo, Goldman Sachs, and Microsoft, are discussing plans to move or are already actively moving personnel out of Britain. Although less pronounced, the impact of a “hard” Brexit on the EU would not be positive either.

The least damaging Brexit outcome minimizes costs and disruption to business and takes the form of agreement around many of the key issues, most notably the principle of the freedom of movement of labor. The current progression of events and negotiations suggests such an agreement is unlikely. The outcome of negotiations between the UK and the EU will be determined by politics, with the UK seeking to protect its interests while the EU and its 27 member states negotiate to protect their own.

To highlight the complexities involved, the challenges associated with reaching agreements, and why a hard Brexit seems most likely, consider the following:

  • Offering an early indication of the challenges ahead, German Prime Minister Angela Merkel stated that she wants the “divorce arrangement” to be agreed on before terms of the future relationship are negotiated. The UK has expressed a desire for these negotiations to run concurrently
  • A withdrawal agreement (once achieved) would need to be ratified by the UK
  • A withdrawal agreement would have to be approved by the European Parliament
  • A withdrawal agreement would have to be approved by 20 of the 27 member states
  • The 20 approving states must make up at least 65% of the population of the EU or an ex-UK population of 290 million people
  • If the deal on the future relationship impacts policy areas for which specific EU member states are primarily responsible, then the agreement would have to be approved by all the national parliaments of the 27 member states

The summary above shows that the unprecedented amount of coordination and negotiation required within the 27 member states and between the EU Commission, the EU Council and the EU Parliament, to say nothing of the UK.

The “do nothing and see what happens” stance taken by the British and the EU would likely deliver a unique brand of instability but one for which there is a precedent.

The last time we observed an economic event unfold in this way, investment firm Lehman Brothers disappeared along with several trillion dollars of global net worth. Although the Lehman bankruptcy was much more abrupt and less predictable, a hard Brexit seems likely to similarly roil global markets. The “no deal” exit option, which is the path currently being followed, threatens to upend the intricate and endlessly interconnected system of global financial arbitrage. Markets are complacent and seem to have resigned themselves to the conclusion that since no consequences have yet emerged, then they are not likely.

Lehman Goes Down

In late 2007 and early 2008, as U.S. national housing prices were falling, it was becoming evident that the financial sector was in serious trouble. By March of 2008, Bear Stearns was sold to JP Morgan for $2 per share in a Fed-arranged transaction to stave off bankruptcy. Bear Stearns stock traded at $28/share two days before the transaction and as high as $172 per share in January 2007. Even as evidence of problems grew throughout the summer of 2008, investors remained complacent. After the Bear Stearns failure, the S&P 500 rallied by over 14% through mid-May and was still up over 3% by the end of August following the government seizure of Fannie Mae and Freddie Mac. While investors were paying little attention, the solvency of many large financial entities was becoming more questionable. Having been denied a Federal Reserve backstop, Lehman failed on September 15, 2008 and an important link in the global financial system suddenly disappeared. The consequences would ultimately prove to be severe.

On September 16, 2008, the first trading day after Lehman Brothers filed for bankruptcy, the S&P 500 index closed at 1192. On September 25, just 10-days later, it closed 1.43% higher at 1209. The market, in short time, would eventually collapse and bottom at 666 in six short months. Investors’ inability to see the bankruptcy coming followed by an inability to recognize the consequences of Lehman’s failure seems eerily familiar as it relates to the current status of Brexit negotiations.

If all efforts to navigate through Brexit requirements are as complicated and difficult as currently portrayed, then what are we to expect regarding adverse consequences when the day of reckoning arrives? Is it unfair to suspect that the disruptions are likely to be severe or potentially even historic? After all, we are not talking about the proper dissolution of an imprudently leveraged financial institution; this is a G10 country! The parallel we are trying to draw here is not one of bankruptcy, it is one of disruptions.

As it relates to Brexit, Dr. Andreas Dombret, member of the executive board of the Deutsche Bundesbank, said this in a February 2017 speech to the Bank of International Settlements –

“So while economic policy will of course be an important topic during negotiations, we should not count on economic sanity being the main guiding principle. And that means we also have to factor in the possibility that the UK will leave the bloc in 2019 without an exit package, let alone the sweeping trade accord it is seeking. The fact that this scenario would most probably hurt economic activity considerably on both sides of the Channel will not necessarily prevent it from happening.”

Rhyming

On June 23, 2016, the day before the Brexit vote, the FTSE 100 closed at 6338. After a few hours of turbulence following the surprising results, the FTSE recovered and by the end of that month was up 2.6%. Today, the index is up 17.5% from the pre-Brexit close. The escalating risks of a hard exit from the EU clearly are not priced into the risky equity markets of Great Britain.

Data Courtesy: Bloomberg

Conversely, what has not recovered is the currency of the United Kingdom (chart below). The British Pound Sterling (GBP) closed at 1.4877 per U.S. dollar on June 23, 2016, and dropped by 15 points (-10%) to 1.33 by the end of the month following the Brexit vote. Over the past several months the pound has fallen to as low as 1.20 but more recently it has recovered to 1.33 on higher inflation readings and hawkish monetary policy language from Bank of England (BoE) governor Mark Carney. Despite following through on his recent threats to hike interest rates, the pound has begun to again trend lower.

Data Courtesy: Bloomberg

Carney has voiced concern over Brexit-induced inflation by saying that if global integration in recent decades suppressed price growth then the reduced openness to foreign markets and workers due to Brexit should result in higher inflation. This creates a potential problem for the BoE as a disorderly exit from the EU hurts the economy while at the same time inducing inflation. Such a stagflation dynamic would impair the BoE’s ability to engage in meaningful monetary stimulus of the sort global financial markets have become accustomed since the financial crisis. If the central bankers lose control of inflation, QE becomes worthless.

Some astute observers of the currency markets and BoE pronouncements argue that Carney’s threat of rate hikes are aimed at halting the deterioration of value in the pound and preventing a total collapse of the currency. That theory is speculative but plausible when analyzing the chart. Either way, whether the pound’s general weakness is driven by inflation concerns or the rising risks associated with a hard Brexit, the implications are stark.

What is equally evident, as shown below, is the laissez-faire attitude of the FTSE as opposed to the caution and reality being priced in by the currency markets. In Lehman’s case, the stock market was similarly complacent while the ten year Treasury yield dropped by nearly 2.00% from June 2007 to March 2008 (from a yield of 5.25% to 3.25%) on growing economic concerns and a flight-to-quality bid.

Data Courtesy: Bloomberg

A Familiar Problem

As discussed above, the Bank of England may find itself in a predicament where it is constrained from undertaking extreme measures due to inflation concerns or even being forced to tighten monetary policy despite an economic slowdown. Those actions would normally serve to support the pound. Further, if the prospect of a hard Brexit continues to take shape, capital flight out of the UK may overwhelm traditional factors. In efforts to prevent the disorderly movement of capital out of the country, the BoE may be required to hike interest rates substantially. Unlike the resistance of equity markets to bad news, the currency markets are more inclined, due to their size and much higher trading volume, to fairly reflect the dynamics of the economy and the central bank in a reasonable time frame.

Our perspective is not to presume a worst case scenario but to at least entertain and strategize for the range of possibilities. Equity markets, both in the UK and throughout the world, transfixed by the shell game of global central bankers’ interventionism, are clearly not properly assessing the probabilities and implications of a hard Brexit.

All things considered, the pound has rallied back to the high end of its post-Brexit range which seems to suggest the best outcome has been incorporated. If forced to act against inflation, the Bank of England will be hiking rates against a stagnant economy and a poor economic outlook.  This may provide support for the pound in the short term but it will certainly hurt an already anemic economy in the midst of Brexit uncertainty.

Summary

Timing markets is a fool’s errand. Technical and fundamental analysis allows for an assessment of the asymmetry of risks and potential rewards, but the degree of central bank interventionism is not quantifiable. With that premise in mind, we can evaluate different asset classes and their adherence to fundamentals while allowing a margin of error for the possibility of monetary intervention. After all, if central banks print money to inflate asset prices to create a wealth effect, some other asset should reveal the negative effects of conjuring currency in a fiat regime – namely the currency itself. In the short term, it may appear as though rising asset prices create new wealth, but over time, the reality is that the currency adjustments off-set some or all of the asset inflation.

Investors should take the time, while it is available, to consider the gravity of the disruptions a hard Brexit portends and look beyond high flying UK stocks to the more telling movement of the British pound. Like with Lehman and the global financial system in 2008, stocks may initially be blind to the obvious. Although decidedly not under the threats present during World War II, the British Government and the EU lack the leadership of that day and will likely need more than central banker propaganda to weather the economic storm ahead.

Keep calm and carry on, indeed.

http://WarMachines.com

Fed Officials Push Radical Change In Monetary Policy As Powell Takes Over

Oh no…with the Federal Reserve in a state of flux as one Chairman prepares to step down and another (shock horror, who is not an economist) takes over, some of his colleagues who think they’ve found the “Holy Grail” of monetary policy are agitating for change. And, dare we say it, hoping it will raise their own prestige no doubt. We are specifically referring to John Williams, President and CEO of the San Francisco Fed, but it’s not just him. What they have in their crosshairs is the Fed’s 2% inflation target. It’s too low. According to Bloomberg.

Federal Reserve officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy, hoping to seize a moment of economic calm and leadership change to prepare for the next storm. While the country is enjoying its third-longest expansion on record, inflation and interest rates are still low, meaning the central bank has little room to ease policy in a downturn before hitting zero again. With Jerome Powell nominated to take over as Fed chairman in February, influential officials including San Francisco Fed chief John Williams and the Chicago Fed’s Charles Evans have taken the lead in calling for reconsidering policy maker’s 2 percent inflation target.

It looks like they’ve got the backing of a recent Fed appointee (June 2017) as the report continues.

“It’s a good time given the shift in leadership,” Atlanta Fed President Raphael Bostic told reporters on Tuesday in Montgomery, Alabama. “The new guy comes in and they are able to really think about, how should this work, how do I think this should work, and is it compatible with where we’ve been and where we are trying to get to?”

The justification for the policy changes these Fed officials are advocating boils down to what Williams refers to as a “Low R-star World”, i.e. one where the natural rate of interest is very low.

The problem with what they have in mind is the Fed’s explicit 2% inflation target. However, it’s a relatively recent adoption, so Williams and Evans have to tread carefully, so as not to offend too many incumbents.

The Fed in 2012 officially settled on 2 percent inflation as an explicit target for the price stability half of its dual mandate from Congress. The other goal is maximum sustainable employment. The move formalized a policy they’d been following in practice for several years, and it was backed by careful logic: 2 percent is high enough to ensure that workers continue to get raises and to give the Fed some cushion against deflation. Other advanced economies aim for a similar level. Yet Fed officials, most loudly Williams, have been urging the policy-setting Federal Open Market Committee to revisit that approach. The reason? The target was settled at a time when officials thought they’d have no problem in lifting interest rates to 2 percent or higher without choking off growth. But fundamentals in the economy have changed since the crisis. Growth and productivity have been tepid. As a result, the so-called neutral level of interest rates — which neither speeds up or slows the economy – is very low by historic standards, leaving the Fed with less wiggle room.

What it boils down to is these senior Fed officials want to let the inflation genie out of the bottle just that little bit more…let the economy run “hot” for a while, without losing control, of course. Then they can cut rates more aggressively in the next downturn and “save us”.

Allowing prices to rise slightly higher would give the Fed more scope to ease in the next downturn. The federal funds rate is quoted in nominal terms, or not adjusted for inflation. So if neutral stands at 0.5 percent, in real terms, and prices are rising at a 3 percent pace, the Fed can get rates as high as 3.5 percent before policy would be restrictive. If inflation were only 2 percent, that level in nominal terms would be 2.5 percent.

Which sounds like a policy of less adherence to price stability, although we could be mistaken. Meanwhile, Williams is trying not to be too brazen and is advancing his ideas cautiously.

Williams told reporters in early November that he favors discussing a new framework now, though he doesn’t want to tie the talks to near-term strategy. “It would be optimal to have a decision around what’s the best framework that we should be using well before the next recession,” he said, because it will “take some time” for officials to hammer out such an important policy. Alternative approaches could include allowing prices to overshoot for the same amount of time they undershot — commonly called price-level targeting — or even raising the desired inflation goal to 3 percent.

There we have it, just more confirmation that central bankers are, at heart, inflation junkies. Yep…we knew it all along, of course, but it’s fascinating to watch them articulate it in an innocent manner. As Bloomberg informs us, yet another Fed Governor, Harker, is ready to overhaul policy when Powell sits in the Chairman’s chair.

“There’s a host of possible options, and I have not settled on any one of those yet,” but it merits a discussion “now,” Philadelphia Fed President Patrick Harker said in an interview with Bloomberg News earlier this month.

 

“This is a discussion we’re going to have to have within the Fed, and within the broad economic community."

 

There’s good reason to discuss the future of monetary policy now. The unemployment rate is low and growth is humming along steadily, and though inflation remains below target, officials expect it to pick up in coming months.

 

In this period of economic calm, economists can debate the merits of different approaches slowly and carefully. “Developing a new framework prior to the next zero-lower bound episode allows time for a shift in the nature of forward guidance — and communications more generally,” Evans said Tuesday in Frankfurt. The policies would then be better understood, better refined, and “therefore, likely be more effective,” he said.

So we need to prepare for a change in Fed policy and one that justifies a higher inflation target. Were they to achieve this target, it will obviously be bad news for the 80% of American’s whose incomes are already trailing the cost of living as we discussed.

But being stupid in an intellectual way is a defining characteristic of this generation of central bankers.

 

http://WarMachines.com

Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

Among Williams’ other suggestions include not only negative interest rates but also raising the inflation target – to 3%, 4% or more, in an attempt to crush debt by making life unbearable for the majority of the population – as it considers new monetary policy frameworks. Still, even the most dovish Fed lunatic has to admit that such strategies would have costs, including those that diverge greatly from the Fed’s current approach. Or maybe not: “price-level targeting, he said, is advantageous because it fits “relatively easily” into the current framework.”

Considering that for the better part of a decade the Fed prescribed lower rates and ZIRP as the cure to the moribund US economy, only to flip and then propose higher rates as the solution to all problems, it is not surprising that even the most insane proposals are currently being contemplated because they fit “relatively easily” into the current framework.

Additionally, confirming that the Fed has learned nothing at all, during a Q&A in San Francisco, Williams said that “negative interest rates need to be on the list” of potential tools the Fed could use in a severe recession. He also said that QE remains more effective in terms of cost-benefit, but “would not exclude that as an option if the circumstances warranted it.”

“If all of us get stuck at the lower bound” then “policy spillovers are far more negative,” Williams said of global economic interconnectedness. “I’m not pushing for” some “United Nations of policy.”

And, touching on our post from mid-September, in which we pointed out that the BOC was preparing to revising its mandate, Williams also said that “the Fed and all central banks should have Canada-like practice of revisiting inflation target every 5 years.”

Meanwhile, the idea of Fed targeting, or funding, “income” is hardly new: back in July, Deutsche Bank was the first institution to admit that the Fed has created “universal basic income for the rich”:

The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich. It is not difficult to see how disruptive unwind of stimulus could become. Clearly, in this context risk has become a binding constraint.

It is only “symmetric” that everyone else should also benefit from the Fed’s monetary generosity during the next recession. 

* * *

Finally, for those curious what will really happen after the next “great liquidity crisis”, JPM’s Marko Kolanovic laid out a comprehensive checklist one month ago. It predicted not only price targeting (i.e., stocks), but also negative income taxes, progressive corporate taxes, new taxes on tech companies, and, of course, hyperinflation. Here is the excerpt.

What will governments and central banks do in the scenario of a great liquidity crisis? If the standard rate cutting and bond purchases don’t suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other ‘out of the box’ solutions could include a negative income tax (one can call this ‘QE for labor’), progressive corporate tax, universal income and others. To address growing pressure on labor from AI, new taxes or settlements may be levied on Technology companies (for instance, they may be required to pick up the social tab for labor destruction brought by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While we think unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.

 

The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979.

Kolanovic’s warning may have sounded whimsical one month ago. Now, in light of Williams’ words, it appears that it may serve as a blueprint for what comes next.

http://WarMachines.com

The Fed Isn’t “Confused” About Inflation… It WANTS You In the Dark!

The Fed claims it’s “confused” as to why inflation remains so low.

The Fed isn’t confused at all. It intentionally measures inflation in ridiculous ways to guarantee that the “official number” remains nowhere near reality.

On top of this, we have factual evidence that Fed is in fact well aware that inflation is clocking in well above its 2% "target.”

Indeed, the New York Fed’s UIG inflation measure (which includes a “full data set,” unlike the ridiculous CPI which ignores most costs of living) records inflation between 2.25% and 3%.

-the UIG measures currently estimate trend CPI inflation to be in the 2.25% to 3.00% range, with both registering above the actual twelve-month change in the CPI.

Source: the New York Fed

So the New York Fed, the branch of the Fed that is in charge of market operations, is well aware that inflation is well over 2%.

It's not the only Central Bank is aware of this either. The Central Banks of China, Russia, and Germany also know inflation is in fact higher than the Fed claims… which is why ALL of them are loading up on Gold by the ton.

What do they see coming?

A $USD collapse like this:

Put simply, BIG INFLATION is THE BIG MONEY trend today. And smart investors will use it to generate literal fortunes.

Imagine if you'd prepared your portfolio for a collapse in Tech Stocks in 2000… or a collapse in banks in 2008? Imagine just how much money you could have made with the right investments.

THAT is the kind of potential we have today. And if you're not already taking steps to prepare for this, it's time to get a move on.

We just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay ou as it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

http://WarMachines.com

Goldman Reveals Its Top Trade Recommendations For 2018

It’s that time of the year again when with just a few weeks left in the year, Goldman unveils its top trade recommendations for the year ahead. And while Goldman’s Top trades for 2016 was an abysmal disaster, with the bank getting stopped out with a loss on virtually all trade recos within weeks after the infamous China crash in early 2016, its 2017 “top trade” recos did far better. Which brings us to Thursday morning, when Goldman just unveiled the first seven of its recommended Top Trades for 2018 which “represent some of the highest conviction market expressions of our economic outlook.”

Without further ado, here are the initial 7 trades (on which Goldman :

  • Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.
  • Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.
  • Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.
  • Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.
  • Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.
  • Top Trade #6: Own diversifed Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).
  • Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.

As Goldman’s Francesco Garzarelli writes, “these trades represent some of the highest conviction market expressions of the economic outlook we laid out in the latest Global Economics Analyst, as well as in our Top 10 Market Themes for 2018. Some of the key market themes reflected in our trade recommendations include:

  • Strong and synchronous global expansion. We forecast global n GDP growth of around 4% in both 2017 and 2018, suggesting that next year’s global economy will likely surprise on the upside of consensus expectations.
  • Relatively low recession risk. Given the low inflation and well-anchored inflation expectations across DM economies, we think central banks have little reason to risk ‘murdering’ this expansion with the kind of aggressive rate hikes that would have historically been warranted to fight the risk of inflation becoming entrenched.
  • But relatively high drawdown risk. Even if growth remains strong in the coming year, markets are still susceptible to temporary drawdowns, especially given the high level of valuations. We think the two most prominent risks to markets in 2018 are (1) pressures on US corporate margins from rising wages and 2) a swing in market psychology around the withdrawal of QE, which could lead to a faster re-pricing of interest rate markets than we assume.
  • More room to grow in EM.While most developed economies are currently growing well above potential, most emerging market economies still have room for growth to accelerate in 2018.

More from Goldman:

Our Top Trade recommendations reflect our Top Ten Market Themes for the year ahead. To capture the gradual normalization of the bond term premium and position for a more hawkish path of the Fed funds rate than the market currently expects, we recommend going short 10-year US Treasuries. Given our expectations of a ‘soggy Dollar’ in 2018, we think investors should position for a rotation into Euro area assets and continued Yield Curve Control from the BoJ by going long EUR/JPY. We expect EM growth to accelerate further in the coming year and suggest going long the EM growth cycle via the MSCI EM stock market index. At the same time, the EM credit cycle appears ‘younger and friendlier’ than the ageing US credit cycle, so we recommend going long the EMBI Global against US High-Yield credit. The combination of solid global growth and supportive domestic factors should help the Indonesian Rupiah, the Indian Rupee and Korean Won rally in 2018, while we expect the low-yielding Singaporean Dollar and Japanese Yen to underperform. Since the strong global demand environment should also help the commodity complex perform well but commodities as an investment carry poorly, we recommend going long BRL, CLP and PEN to gain diversified exposure to the commodities story.

And some more details on the individual trades:

Top Trade #1: Position for more Fed hikes and a rebuild of ‘term premium’ by shorting 10-year US Treasuries

Go short 10-year US Treasuries with a target of 3.0% and a stop at 2.0%.

We forecast that the yield on 10-year US Treasury Notes will head towards 3% next year, levels last seen before the decline in oil prices in 2014. By contrast, the market discounts that 10-year yields will be at 2.5% at the end of 2018, a meagre 20bp above spot levels. Our view builds on two main assumptions. First, QE and negative rate policies conducted by central banks in Europe and Japan have amplified the fall in  the term premium on bonds globally and have contributed to flatten the US yield curve this year – a central ingredient in our macro rates strategy for 2017. As a result of this, we think that US monetary conditions are too accommodative for the Fed’s comfort in light of the little spare capacity left in the jobs market. This will likely lead the FOMC to deliver policy rate hikes in excess of those discounted by the market (Exhibit 1). On our US Economists’ baseline projections, Dec 2018 Eurodollar futures, trading at an implied yield of 2.0%, will settle at 2.5%.

Second, we expect a normalization in the US bond term premium from the current exceptionally low levels over the coming quarters (Exhibit 2). This will reflect the compounding of two forces. One is an increase  in inflation uncertainty as the economic cycle continues to mature. The other reflects the interplay of the lower amount of Treasury bonds that the Fed will roll over (quantitative tightening, QT) and higher Treasury issuance. We expect these dynamics to come to the fore particularly in the second half of the year.

* * *

Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar

Go long EUR/JPY with a target of 140 and a stop at 130.

Although most economies are sharing in the upturn in global activity, there remains scope for divergence in capital flows and therefore FX performance. Among the major developed markets, we think this is particularly true for the Euro and Yen. We expect both currencies to head back to one twenty—1.20 for EUR and 120 for JPY—over the coming months. We therefore recommend that investors go long the cross, with a target of 140 and stop of 130 (Exhibit 3).

We interpreted the run-up in the Euro in 2017 as a kind of ‘short-covering’ rally. Euro area growth picked up, national politics trended in a favourable direction, and the ECB began to turn its attention away from monetary easing and towards the eventual normalisation in policy by tapering bond purchases. Against this backdrop, many investors seem to have decided that Euro shorts were no longer appropriate—especially given estimates of long-run ‘fair value’ for EUR/USD of around 1.30. Direct measures of investor positioning bear this out. For instance, net speculative Euro length in futures swung from a short of $9bn at the start of the year to a long of $12bn as of last week. These portfolio shifts seem to have more room to run: bond funds remain long USD in aggregate, and FX reserve managers have not started to  cover their substantial EUR underweight. Continued inflows into Euro area assets should support the EUR currency, even as interest rates remain low.

The opposite holds true for the Japanese Yen. Because of the Bank of Japan’s Yield Curve Control (YCC) policy, USD/JPY has remained highly correlated with yields on long-maturity US Treasuries (Exhibit 4). As a result of the recent general election—in which the LDP won another supermajority—a continuation of YCC appears very likely for the time being. Although the policy is beginning to bear fruit—in terms of improving price and wage trends—we suspect that Governor Kuroda (or his possible replacement) will judge these favourable signs as well short of what is needed to consider reversing course. Therefore, with global yields pushing higher on the back of solid growth, we think USD/JPY can again approach its cyclical highs.

* * *

Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index

Go long EM equities through the MSCI EM Index with a target at 1300 (+15%) and a stop at 1040 (-8%).

As we outline in our Top Themes for 2018, we expect strong and synchronous global growth to continue into 2018. We prefer to own growth exposure in emerging economies, which we think have more room to grow. When EM growth is above-trend and rising, equities typically outperform on a volatility-adjusted basis.

From an earnings perspective, we see much more scope for EM corporates to surprise to the upside, driving equity performance in 2018 (Exhibit 6). MSCI EM EPS have rebounded quite quickly from a six-year stagnation and, in local currency terms, EM earnings per share (EPS) has repaired the ‘damage’ of the 2010-2016 period. We expect MSCI EM EPS to rise another 10% in 2018, which should drive the bulk of the upside in this trade.

From a valuation perspective, EM equities are not cheap relative to their own history (they are currently trading in the 86th percentile of the historical P/E range), but they are cheap relative to US equities (38th percentile of historical relative P/E range), which should hopefully offer some cushion in a global risk-off event. We find that the relative valuation of EM to DM equity is largely influenced by the growth  differential between the two regions; and we forecast this differential to widen another 60bp next year, which in turn should drive EM valuations to expand relative to DM by around 3%. To be sure, a long-only EM equity trade carries significant ‘pullback risk’, especially given the current entry point. Accordingly, we have set a stop on the recommended trade at -8%, which provides enough buffer to accommodate for a shock similar to the EM equity sell-off around the US election. Although EM equities have had a good run in 2017, we do not view the asset class as over-owned. Indeed, the cumulative foreign flow into major EM equity markets is still tracking below historical averages.

* * *

Top Trade #4: Go long the inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation swaps

Go long EUR 5-year 5-year forward inflation with a target of 2.0% and a stop at 1.5%.

We recommend going long Euro area 5-year inflation 5-years forward (henceforth 5y-5y) through EUR inflation swaps, for an target of 2.0% – levels last seen in mid-2014 ahead of the fall in crude oil prices. The rationale for the trade is the following.

First, the risk premium on Euro area forward inflation is currently depressed, offering an attractive entry point. A low inflation risk premium can be inferred from the flat term structure of inflation swap yields. The difference between 5-year inflation, which is priced roughly in line with the expectations of our European Economists (Exhibit 7), and 5y-5y forward is near the lowest levels observed since the 2011 crisis.

Second, the inflation options market assigns high odds to Euro area headline inflation staying at or below 1% over the next 5 years. Against this backdrop, the ECB has reiterated its determination to keep monetary policy accommodative in order to encourage a rebuild of inflationary pressures. With the expansion in activity and job creation likely to continue, we expect the inflation risk premium to increase.

* * *

Top Trade #5: Position for ‘early vs. late’ cycle in EM vs. the US by going long the EMBI Global Index against short the US High Yield iBoxx Index

Go long EM USD credit through the EMBI Global against US High-Yield credit through the iBoxx USD Liquid High Yield Index, with a 1.5×1 notional ratio, indexed at inception to 100, with a total return target at 106 and a stop at 96.

The EM credit cycle is ‘younger and friendlier’ relative to an ageing US corporate credit cycle. With the improvement in macro fundamentals across EM, namely better current account balances, dis-inflation and FX reserve accumulation, we do not see a near-term risk of Dollar funding concerns. While EM credit spreads are not cheap per se, we see relative value against the US High-Yield market. In addition to the growing exposure of the latter to secularly challenged sectors, with the US cycle maturing and profit margins potentially eroding, we see more fundamental concerns in US High-Yield than in the EMBI (of which 70% of the constituents are sovereign bonds and the remainder in ‘quasi-sovereigns’).

Unlike most EM trades, long EM credit vs. US High-Yield has yet to fully recover from the sell-off following the US election. Since the ‘taper tantrum’, EM has generally outperformed with the exception of a few sharp risk-off events that had specific negative-EM implications (such as the sharp decline in oil prices and Russian recession in late 2014/early 2015, and the 2016 US presidential election). However, other risk- off periods, such as the Euro crisis in early 2011, saw EM credit outperform US high-yield.

The relative performance of EM vs. US High-Yield consistently tracks the EM-DM growth differential (Exhibit 10). We expect the general trend of EM outperformance to continue in a pro-risk environment and see the entry point as attractive, albeit admittedly slightly less so following the recent High-Yield sell-off. Finally, this trade is positive carry and should perform well if global spreads move sideways to tighter. We have set the stop at -4%, which coincides roughly with the bottom reached after the US election.

* * *

Top Trade #6: Own diversifed Asian growth, and the hedge the interest rate risk via FX relative value (long INR, IDR, KRW vs. short SGD and JPY)

Go long an equal-weighted basket of INR, IDR, KRW against an equal-weighted  basket of SGD and JPY, indexed at inception to 100, with a total-return target at 110 and stop at 95.

INR, IDR and KRW provide diversified exposure to the strong global growth we forecast in 2018 and specific idiosyncratic factors that should support their currencies in the year ahead. The combination of commodity exporting (IDR) and commodity importing (INR and KRW) currencies on the long leg of the recommended trade offers some protection against swings in commodity prices. By funding out of SGD and JPY, not only do we take advantage of their low yields, but JPY underperformance should also provide a hedge should the move higher in US yields lead to wobbles in the currencies where we recommend being long. The overall trade carries positively to the tune of about 4% over the year.

Country-specific factors in India, Indonesia and South Korea should boost their currencies, on top of the strong global growth environment we expect next year. Specifically:

India’s bank re-capitalization plan should impart a powerful positive impulse to investment in the coming year and should break the vicious cycle of higher non-performing loans, weaker bank balance sheets and slower credit growth. As the drags from GST implementation and de-monetization also fade, we expect growth to move from 6.2% in 2017 to 7.6% in calendar 2018. In addition to the three hikes we expect the Reserve Bank of India to deliver by Q2-2019, the high carry, FDI and equity inflows should also be supportive for the INR. We have moved our 12-month forecast for $/INR stronger to 62.

We continue to see Indonesia as a good carry market. As the drag on domestic consumption from the tax amnesty fades in 2018, we expect economic growth to move up to 5.8% in 2018 (from 5.2% in 2017), while the current account, inflation, and fiscal deficit should remain stable. We think Bank Indonesia is done easing and should move to hike rates by 50bp in H2-2018. We also expect Indonesia to be included in the Global Aggregate bond index, which could prompt one-off inflows worth US$5bn in Q1-2018 (vs. US$10bn bond inflows YTD in 2017). We have moved our 12-month forecast for $/IDR stronger to 13000. Finally, Indonesia, like India, has accumulated reserves over the past year that now stand at record high levels and should help mitigate volatility.

We expect the KRW to outperform other low-yielding Asian peers in 2018. The strong memory chip cycle should extend at least through H1-2018, while the government’s income-led growth policy provides a fiscal boost. Together with the boost from improving exports, this should allow the Bank of Korea to withdraw monetary accommodation in the face of rising financial stability concerns, with three policy rate hikes to 2.0% penciled in by the end of 2018. The thawing of China/South Korea relations and rebound in Chinese tourists should also help the travel balance. Overall, we expect the current account to remain stable at around 5% of GDP in 2018. Further deregulation in outbound capital flows could temper KRW strength over the medium term, but might not pass the National Assembly in the near future given  fragmentation in the legislative body. Our 12-month forecast for $/KRW is now stronger at 1060.

On the funding side, not only do SGD and JPY offer a low yield, we expect them to underperform in the year ahead. While we expect the Monetary Authority of Singapore to steepen its appreciation bias in October, we do not expect any significant SGD appreciation versus Asian peers given that the SGD is already trading on the strong side of the policy band. Meanwhile, we forecast USD/JPY at 120 in 12 months. With the BoJ controlling the yield curve as US rates move higher, JPY should continue to weaken, especially if US rates move higher than the forwards discount, as we expect.

* * *

Top Trade #7: Go long the global growth and non-oil commodity ‘beta’ through BRL, CLP, PEN vs. short USD

Go long a volatility-weighted basket of BRL, CLP and PEN (weights of 0.25, 0.25 and 0.5) against USD, indexed at inception to 100, with a total return target of 108 and a stop at 96.

The ongoing strength of global growth should continue to support a rally in most industrial metal prices. Our seventh Top Trade recommendation aims to capture this dynamic by going long the ‘growth and metals beta’. All three currencies on the long side have reliably responded to upswings in global trade and external demand over the past two decades. Moreover, each has performed particularly well in the pre-crisis decade, a period that also featured strong global growth and buoyant industrial metals prices. CLP offers direct exposure to a particularly encouraging story in copper, while BRL and PEN provide more varied metals exposures. The recommended trade has a positive carry of roughly 2.5% a year, and our 12-month forecasts are stronger than the forwards in all cases: we forecast USD/BRL at 3.10 in 12 months, USD/CLP at 605 in 12 months and USD/PEN at 3.15 in 12 months.

Beyond these global factors, our recommended Top Trade allows for diversified exposure to an encouraging Latin American growth recovery. Not only should growth in Brazil pick up as it recovers from a deep recession (and a recent BRL sell-off, creating an attractive entry-point), but BRL screens as strongly undervalued on our GSFEER currency model due to a combination of contained inflation and current account rebalancing, making BRL an attractive high carry currency. Meanwhile, PEN – the low-vol ‘tortoise’ of Andean FX – offers exposure to one of the most attractive valuation stories in the EM low- to mid-yielder space. Last but not least, CLP – the ‘hare’ of Andean FX – has moved quickly in 2017, so sends a somewhat less attractive valuation signal, but provides direct exposure to our most encouraging metals view, copper, and what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean election.

Finally, although it is designed for our global base case of strong growth, our Top Trade #7 can perform well in other external environments, potentially including a global growth disappointment. In particular, while BRL is a high-yielding and ‘equity-like’ currency, CLP and PEN are each lower-yielding and more ‘debt-like’: they have historically shown relatively resilient performance vs. the USD during periods of both declining growth and falling core rates.

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Futures Jump, Global Stocks Rebound From Longest Losing Streak Of The Year

After five consecutive daily losses on the MSCI world stock index and seven straight falls in Europe, there was finally a bounce, as investors returned to global equity markets in an optimistic mood on Thursday, sending US futures higher after several days of losses as global stocks rebounded following a Chinese commodity-driven rout. 

The House is poised to vote, and pass, on tax legislation although what happens in the Senate remains unclear. European shares rebounded for the first time in eight sessions, following Asian stocks higher as the global risk-off mood eased. The euro, Swiss franc and yen all weakened as the dollar edged higher. “After five or six days of steady selling you have got people coming back in looking for bargains,” said CMC Markets' Michael Hewson. “I think it’s temporary though. We haven’t had a significant sell off this year and the fact of the matter is that equity markets have done so much better than anyone dared to envisage.”

As Bloomberg echoes, "investors seem to be regaining their appetite for risk after several days of global declines in stocks and high-yield credit that had many questioning whether the selloff could become a rout."

Still, investor concern over the progress of a massive U.S. tax reform plan showed no sign of abating as two Republican lawmakers on Wednesday criticized the Senate’s latest proposal. U.S. President Donald Trump hit back, tweeting that “Tax cuts are getting close!”

“If we look at what the markets are focusing on, it’s still very much the tax cut debates in the U.S., and how much progress there’s going to be on this front,” Barclays' Mitul Kotecha told Reuters.

Indices in Tokyo, Shanghai and Hong Kong and Seoul all rallied overnight, while London, Frankfurt and Paris started 0.3-0.4% higher as cyclical stocks which had driven the sell-off made a comeback. In Japan the Topix index ended its longest losing streak in a year, rising 1% with technology stocks providing the biggest boost, and the Nikkei 225 advances 1.5%. The ASX (+0.2%) also managed to shake off its early losses, closing higher with the energy sector outperforming as consumer staples and utilities weighed. Chinese stocks edged lower despite a massive cash injection by the PBOC, while the Hang Seng moved higher. Hong Kong stocks rebounded from their worst day in four weeks, as insurers led by Ping An Insurance Group Co. jumped on optimism that rising bond yields will boost investment income. Tencent Holdings climbed after posting its fastest revenue growth in seven years.

China’s sovereign bonds finally rebounded, advancing after the central bank boosted cash injections by the most in 10 months, fueling speculation that the authorities are looking to stabilize sentiment after a debt selloff. Having flirted with 4% in recent days, the yield on 10-year government notes dropped 3 basis points to 3.95%; the 5-year yield fell 1 basis point to 3.95%. The 10-year yield surpassed 4% this week for the first time since 2014. The People’s Bank of China added a net 310 billion yuan ($47 billion) through reverse-repurchase agreements on Thursday, bringing this week’s open-market operation additions to 820 billion yuan, also the most since January.

European stocks bounce back from a seven-day rout – the longest losing streak of the year – that had erased almost 400 billion euros ($471 billion) from the value of the region’s benchmark. The Stoxx Europe 600 Index adds 0.7%, following gains in Asia and climbing from a two-month low. All national benchmarks in the region are in the green, except those in Italy and Greece. Most industry groups also rise, with automakers rebounding from an eight-day slump on data showing European car sales grew in October. Financial services firms and builders were among the biggest gainers in the broad advance of the Stoxx Europe 600 Index.

There was some relief too that oil prices had pulled out of what had been a near 5 percent drop and that upbeat U.S. data on Wednesday had helped the dollar halt the euro's sharp recent rise.

In currencies, the pound fluctuated as Brexit rhetoric rumbled on, and data showed U.K. retail sales barely rose in October. Concerns about Brexit continue to mount: an article in 'The Sun' newspaper, stated that UK PM May, could increase her divorce bill offer to the EU in December; deal would add GBP 20bln to the GBP 18bln said to already be on offer. Source reports indicate that EU is said to reject UK bid for `bespoke' trade deal, according to Politico. BoE's Carney states that the Bank will do whatever they can to support the UK economy during the Brexit transition period. Chancellor Hammond said to stick to fiscal rules and resist demands for spending surge in upcoming UK budget. Michael Gove is reportedly facing a Conservative party backlash as he is accused of using the cabinet to audition for UK Chancellor

The dollar index was slightly higher on the day at 93.828 having hit four- and five-week lows against the yen and euro. The euro was down around 14 ticks at $1.1760 retreating from a one-month top of $1.1860 on Wednesday. Havens underperformed on Thursday, with gold trading little changed, and the yen and Swiss franc among the worst-performing major currencies. The Swiss franc decreased 0.3 percent to $0.9918, the largest dip in more than two weeks.

Commodities largely stabilized as China’s central bank boosted the supply of cash in the system by the most since January, though oil eventually reversed a gain. Gold edged 0.1% lower to $1,277.29 an ounce. It reached $1,289.09 overnight, its highest since Oct. 20. Oil prices gained despite pressure after the U.S. government reported an unexpected increase in crude and gasoline stockpiles. They had lost ground to this week’s International Energy Agency (IEA) outlook for slower growth in global crude demand.

European government bonds took their cue from the U.S. benchmark, turning lower as the yield on 10-year Treasuries increased. Bond markets saw a broad rise in yields after mostly upbeat U.S. economic news on Wednesday had added to expectations the Federal Reserve will hike interest rates again next month as well as multiple times next year. Two-year Treasury yields US2YT=RR crept to fresh nine-year peaks in European trading, though significantly the U.S. yield curve remained at its flattest in a decade. European yields nudged higher too but the standout there was a fall in the premium investors demand to hold French debt over German peers to its lowest in over two years, almost to record lows.

Wal-Mart, Viacom, Best Buy and Applied Materials are among companies due to release results. Economic data include initial jobless claims, Philadelphia Fed Business Outlook.

Market Snapshot

  • S&P 500 futures up 0.4% to 2,574
  • STOXX Europe 600 up 0.7% to 384.61
  • MSCI Asia up 0.8% to 169.14
  • MSCI Asia ex Japan up 0.7% to 555.93
  • Nikkei up 1.5% to 22,351.12
  • Topix up 1% to 1,761.71
  • Hang Seng Index up 0.6% to 29,018.76
  • Shanghai Composite down 0.1% to 3,399.25
  • Sensex up 1% to 33,095.23
  • Australia S&P/ASX 200 up 0.2% to 5,943.51
  • Kospi up 0.7% to 2,534.79
  • German 10Y yield rose 1.3 bps to 0.389%
  • Euro down 0.1% to $1.1779
  • Brent Futures down 0.03% to $61.85/bbl
  • Italian 10Y yield rose 0.7 bps to 1.57%
  • Spanish 10Y yield rose 1.1 bps to 1.561%
  • Brent Futures down 0.03% to $61.85/bbl
  • Gold spot down 0.02% to $1,277.91
  • U.S. Dollar Index up 0.1% to 93.91

Top Overnight News

  • After a month of discussions, German Chancellor Angela Merkel faces a self-imposed end-of-week deadline to unlock coalition negotiations
  • British PM Theresa May saw some support from officials of her German counterpart Merkel
  • Manfred Weber, who leads Merkel’s Christian Democrats in the European Parliament and is a self-proclaimed skeptic on Brexit, changed his tone dramatically after meeting May saying the U.K. had a “credible” position and there was a “willingness to contribute to a positive outcome”
  • Sterling came under pressure after a Politico report said the EU’s Chief Brexit Negotiator Michel Barnier’s team flatly reject May’s bid for a “bespoke” trade deal
  • Fed officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy. With inflation and interest rates still low, the central bank has little room to ease policy in a downturn
  • U.S. Treasury Secretary Steven Mnuchin is trying to persuade businesses and the Republican faithful to get behind a proposed tax overhaul from the Trump administration that so far lacks broad public support
  • The tax plan has provisions that may affect coverage and increase medical expenses for millions of families
  • President Robert Mugabe’s refusal to publicly resign is stalling plans by Zimbabwe’s military to swiftly install a transitional government after seizing power on Wednesday
  • Tax overhaul update: President Donald Trump is scheduled to head to the House, rallying Republican members before vote on tax bill
  • German Chancellor Angela Merkel meets heads of her Christian Democratic-led bloc, Free Democrats and Green party to kick coalition talks into gear
  • Cisco Sees First Revenue Growth in Eight Quarters; Shares Up
  • Koch Brothers Are Said to Back Meredith Bid to Buy Time Inc.
  • Health Care for Millions at Risk as Tax Writers Look for Revenue
  • Cerberus’s Feinberg Switches Strategy to Shake Up German Banking
  • Mattel Drops on Report That It Rebuffed Approach From Hasbro
  • New SUVs at Peugeot, Ford Offset U.K. Drag on Europe Car Sales
  • Google Sued for Using ‘Bait and Switch’ to Hook Minority Hires
  • Santos Seen Luring More Bids After Rejecting $7.2 Billion Offer
  • AT&T’s Clash With America Movil Slows Nafta Telecom Talks
  • Mobileye’s $15 Billion Deal Masks Drop in Israel Tech M&A
  • Mugabe’s Refusal to Resign Is Said to Stall Zimbabwe Transition

In Asian markets, a modest uptick in US stock index futures helped the Nikkei 225 stem some of its recent losses, with financials and retailers leading the way; as a result, he Japanese blue-chip index closed up 1.5%. The ASX (+0.2%) also managed to shake off its early losses, last closing up, with the energy sector outperforming (although this was on the back of confirmation of a rebuffed Santos takeover offer) as consumer staples and utilities weighed. Chinese stocks edged lower, while the Hang Seng moved higher Treasuries operated in a narrow range throughout the APac session, while JGBs were relatively listless, with a solid 20-year auction the highlight of the session. Aussie bond yields moved to session highs in the wake of the aforementioned labour market release, where they consolidated.

In European markets, equities kicked off the session on the front-foot in a continuation of some of the sentiment seen overnight during Asia-Pac trade (Nikkei 225 +1.5%). Some slight underperformance has been observed in the FTSE 100 with gains capped by a slew of ex-dividends which have trimmed 14.56 points off the index. Notable ex-dividends include both of Royal Dutch Shell’s listings, with the oil-heavyweight subsequently hampering the energy sector as WTI and Brent crude have failed to make any meaningful recovery from Thursday’s losses. Elsewhere, the likes of Fiat Chrysler (+2.5%) and Volkswagen (+2.4%) have been giving a help hand by the latest EU new car registration data. In fixed income, a limited reaction to better than forecast UK consumption data, and clear reservations about retail activity over the key Xmas and New Year period based on bleaker signals from anecdotal surveys and non-ONS data. Hence, Gilts dipped to 124.72 (-15 ticks vs +8 ticks at best), while the Short Sterling strip reversed pre-data gains to stand flat to only 1 ticks adrift before stabilising again. In truth, core bonds were already on the retreat from early highs (ie Bunds down to 162.43 vs 162.71 at best) in what appears to be a broad  retracement within recent ranges rather than anything more meaningful.

 

In FX, GBP has once again been a key source of focus with GBP/USD hit early doors amid reports in Politico that the EU are leaning towards rejecting the UK’s request for a bespoke trade deal. However, sentiment saw a mild recovery after reports in the Sun suggested that PM May could be on the cusp of upping her Brexit settlement offer in an attempt to kick-start trade talks. The main data release of the session thus far came in the form of UK retail sales which painted a less dreary picture of the UK economy than some had feared, although gains were short-lived as Brexit remains the focus. Marginal sterling buying was seen in EUR/GBP, trading around session lows, helped by a stop hunt through yesterday’s lows. Cable too saw a bid later in the session, benefiting from the weaker USD. Elsewhere, EUR/USD is back below 1.1800 vs the USD after topping out just ahead of October’s 1.1880 high, and now in a fresh albeit higher range flanked by big option expiries between 1.1795-1.1800 (913mln) and 1.1815-25 (4.8bln). Another roller-coaster ride for the Antipodeans, with AUD choppy on mixed labour data (headline count miss, but jobless rate and full employment upbeat) and pivoting the 0.7600 handle vs the USD.

In the commodities complex, as mentioned above, WTI and Brent crude futures have failed to make any noteworthy recovery from the sell-off seen on Tuesday with energy newsflow particularly light during today’s session thus far with markets looking ahead to the November 30th OPEC meeting which is set to give nations the instruction to extend oil production cuts. In metals markets, gold prices have traded in a relatively similar manner with prices unable to be granted any reprieve from their latest tumble. Elsewhere, Nickel and Copper have been weighed on, sending prices to multi-week lows as concerns around Chinese growth prospects continue to linger.

Looking at the day ahead, weekly initial jobless claims, Philly Fed PMI for November, import price index for October, industrial production for October and NAHB housing market index for November will be released. The BoE Carney’s, Broadbent and Haldane will all participate at a public plenary session while the ECB’s Villeroy de Galhau and Constancio are due to speak, along with the Fed’s Williams, Mester and Kaplan.

US Event Calendar

  • 8:30am: U.S. Initial Jobless Claims, Nov. 11, est. 235k (prior 239k); Continuing Claims, Nov. 4, est. 1900k (prior 1901k)
  • 8:30am: U.S. Philadelphia Fed Business Outl, Nov., est. 24.6 (prior 27.9)
  • 8:30am: U.S. Import Price Index MoM, Oct., est. 0.4% (prior 0.7%); U.S. Export Price Index MoM, Oct., est. 0.4% (prior 0.8%);
  • 9:15am: U.S. Industrial Production MoM, Oct., est. 0.5% (prior 0.3%); Capacity Utilization, Oct., est. 76.3% (prior 76.0%)
  • 9:15am: U.S. Bloomberg Consumer Comfort, Nov. 12, no est. (prior 51.5); Economic Expectations, Nov., no est. (prior 47.5)

Central Bank speakers:

  • 9:10am: Fed’s Mester delivers keynote address at Cato Conference
  • 1:10pm: Fed’s Kaplan speaks to CFA society in Houston
  • 3:00pm: ECB’s Constancio speaks in Ottawa
  • 3:45pm: Fed’s Brainard delivers keynote at OFR FinTech Conference
  • 4:45pm: Fed’s Williams speaks at Asia Economic Policy Conference

DB's Jim Reid concludes the overnight wrap

There has been a lot of noise around the HY market in the past week or so as a combination of macro factors along with some notable earnings misses have weighed on the market. iTraxx Crossover and CDX HY have widened by around 25bps and 30bps respectively from their most recent tights, while the price level of the largest USD HY ETF (HYG US) is basically back to the same level as where it started the year, however this overstates the move in the US cash market and even more so in Europe. Looking in more detail at the cash market US HY has widened by around 60bps and EUR HY is 46bps wider from the  recent cycle tights only a few weeks back but both are still around 25bps and 100bps tighter on the year respectively.

In a broad historic context the recent moves hardly register but in the context of a year that has been headlined by extremely low levels of volatility they are certainly significant. For EUR HY there were two other periods where we saw some sort of correction this year. In March/April (ahead of the French elections) the index widened 27bps in 42 days and then in August/September (after the North Korean escalation) we saw a 29bps widening over 30 days. So the current 46bps of widening in just 12 days has been somewhat more aggressive than anything else we’ve seen this year.

Looking at similar data for the US we have also seen two previous corrections. In March spreads widened 61bps in 20 days and then in July/August we saw 45bps of widening in 15 days. So the current c.60bps widening over 22 days is actually of a similar magnitude to this year’s previous corrections. The moves look even more stark when we focus on single-Bs though. EUR single-Bs have widened by more than 100bps from the most recent tights, more than halving the YTD tightening we had seen. For USD single-Bs the recent widening (65bps) has actually reversed more than 80% of the YTD spread tightening we had seen to the recent tights.

The question from here is whether this recent back-up in spreads is simply going to lead to a fresh buying opportunity or whether it will lead to something more significant. Despite some of the recent profit warnings we think that it is more likely to be the former at the moment. But at the very least the pace of this turn around highlights how quickly market sentiment can change, especially when spreads are so tight. HY was looking very very stretched relative to IG in Europe and this corrects some of that. Overall it certainly provides us with some food for thought as we look to publish our 2018 outlook in the next 10 days.

Even though US HY has been one of the weaker markets of late there’s no doubt that the recent global equity sell off has struggled to gather momentum as the US session has progressed over the last week. Following through on this, Asia has been weak since the Nikkei sudden sell-off last week and Europe has followed with yesterday seeing the 7th successive daily fall in the Stoxx 600 (-0.49%) – the longest losing streak since October/November 2016. Meanwhile yesterday the US (S&P 500 -0.55%) again closed off the early session lows showing that this equity sell-off isn't really being US led. For the record since last Wednesday's close the S&P 500, Stoxx 600 and Nikkei are down -1.15%, -3.17% and -3.86% respectively which helps illustrate this.

Volatility has been on the way up though even in the US over this period. The VIX spiked to 14.51 intraday which was the highest since August 18th. It closed at 13.13 (+13%) which is still the highest since the same period. Meanwhile the VSTOXX index was up +2.25% and is now at the highest level since early September.

This morning in Asia, markets have stemmed losses and are trading higher. The Nikkei (+1.24%), Kospi (+0.52%), Hang Seng (+0.53%) and ASX 200 (+0.30%) are all up as we type. WTI oil is trading marginally higher and after the bell in the US, Cisco was up c6% after guiding to its first revenue gain in eight quarters.

On now to the big data of the yesterday and possibly the month. US Core CPI inflation surprised modestly to the upside in October, rising 0.225% in month-on-month terms (a firmer 0.2% print than DB expected). This raised the year-overyear rate to 1.8% (1.7% expected). The data provide additional evidence that the core inflation trend is firming after a string of very weak prints earlier this year. According to our economists, the three-month annualised change in core CPI inflation is now at 2.4%, the strongest since February 2017. We think inflation is turning a corner and regular consistent misses vs expectations will not be a feature of markets in 2018.

Staying in the US, the House’s version of the tax plan is reportedly on track for a vote on Thursday (local time). In terms of the Senate’s version, rhetoric appears to be heating up as the mark up process continues. The Democrats were reportedly not impressed with the last minute change to add in the repeal of the Obamacare individual mandate, to which Republican Senator Collins partly agrees on, noting that it “gravely complicated our efforts to combine tax reform and changes”, although she has not decided whether to vote against the bill or not. Elsewhere, Republican Senator Johnson has publicly confirmed that he is opposed to the revised GOP plan as it stands, in part as it does not do enough to help partnerships relative to the larger tax cuts for corporates.

Quickly recapping other markets performance from yesterday. Bond markets were firmer with core bond yields down 2-5bp (UST 10y -5bp; Bunds -2.1bp; Gilts -3.5bp) while peripherals underperformed with Portugal bonds leading the softness (+2.5bp). Key currencies were little changed, with US dollar index marginally higher, while Euro dipped -0.06% but Sterling rose 0.05%. In commodities, WTI oil fell another -0.70% (-3.2% for the week), in part following reports that Russia believes it’s too early to announce a potential extension of production cuts at OPEC’s meeting at end of the month. Notably, WTI is still up c18% from late August. Elsewhere, precious metals softened a little (Gold -0.16%; Silver -0.14%) and other base industrial metals were little changed (Copper -0.45%; Zinc -0.54%; Aluminium +0.36%).

Away from the markets, there were a deluge of Fed and ECB central bankers commentaries yesterday but overall contained minimal market moving information. In the details, the Fed’s Evans noted he was open-minded regarding policy action at the December FOMC ahead of discussions with fellow colleagues and sounded dovish on inflation, noting “I feel we are facing below target inflations” while reiterating the US labour market is “vibrant” and unemployment rate “could go below 4%”.

In Europe, the ECB’s Hansson was upbeat on the demand side of the economy and “feel more confident that inflation will eventually reach the levels consistent with our aim”. Elsewhere, the ECB’s Praet pointed to the importance of interest rates post QE, noting that “policy rates will eventually regain their status as the main instrument of policy, and our forward guidance will revert to a singular approach”. Finally, the ECB’s Coeure noted that it’s important for the ECB “to ensure that our own measures do not adversely affect the intermediation capacity of repo markets”.

Over in China yesterday, there were more signs that the government may tolerate slower economic growth in 2018. The Economic Daily reported that the deputy head of the Research Office of the State Council Ms Han has flagged that GDP growth at 6.3% in 2018-2020 would be sufficient to achieve the Party's 2020 growth target. As a reminder, our Chinese economists expect GDP growth to slow to 6.3% yoy by 1Q.

Finally, over in Zimbabwe, President Mugabe’s c40 years of power may be coming to an end with Bloomberg reporting the 93 year old was confined to his home, with military forces taking control of state owned  media outlets and sealing offthe parliament and central bank’s offices.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the core retail sales for October (ex-auto & gas) was in line at 0.3% mom, but with the prior reading upwardly revised by 0.1ppt. Elsewhere, the September business inventories was flat and in line for the month. Finally, the November empire manufacturing index fell from a c3 year high of 30.2 to a still solid reading of 19.4. After the recent economic data, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth has edged 0.1pp lower to 3.2% saar.

In the UK, the September unemployment rate was in line and steady at 4.3% – still at a 42 year low, while the average weekly earnings remains low but was slightly above expectations at 2.2% yoy (vs. 2.1% expected). Elsewhere, jobless claims (1.1k vs. 1.7k previous) and claimant count rate (2.3% vs. same as previous) were broadly similar to prior readings. The Eurozone’s September trade surplus widened to EUR$25bln (vs. EUR$21bln expected), while the final reading for France’s October CPI was unrevised at 0.1% mom and 1.2% yoy.

Looking at the day ahead, the final October CPI report for the Euro area will be out. UK retail sales data for October and Q3 employment data for France will also be released. In the US weekly initial jobless claims, Philly Fed PMI for November, import price index for October, industrial production for October and NAHB housing market index for November will be released. The BoE Carney’s, Broadbent and Haldane will all participate at a public plenary session while the ECB’s Villeroy de Galhau and Constancio are due to speak, along with the Fed’s Williams, Mester and Kaplan.

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Why Pound Volatility Is Here To Stay

By Vassilis Karamanis, an FX and rates strategist who writes for Bloomberg.

Brexit Ructions May Mean Sustained Pound Volatility: Macro View

This week’s spike in the volatility of the British pound could prove longer-lasting than the bouts of instability seen so far in 2017.

One-month implied volatility for GBP/USD is on course for the biggest weekly gain since January after Conservative Party lawmakers were seen willing to challenge May’s leadership and talk of a 60 billion-euro Brexit bill resurfaced.

On Wednesday, demand for low-delta options hit a three-month high. EU officials were said to be bracing for failure as both sides seek a breakthrough in negotiations before a crunch meeting next month.

The jump in pound swings is nothing new, though previous episodes were neither prolonged nor sustained. Traders tend to respond in a late fashion to political risks, and adverse market outcomes have been avoided in the end. Volatility has actually been in a steady downtrend since January, as forward guidance by the central bank made sure investors faced as few surprises as possible.

This time, however, BOE Governor Carney has stressed the importance of the divorce talks to monetary policy. And the turmoil in Westminster means the current impasse in negotiations may continue into 2018, making sure sterling remains very sensitive to Brexit headlines.

Investors may need to keep rolling over their long-volatility positions to stay hedged if a no-deal outcome is back in the cards.

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BoE Deputy Governor Gives Crazy Speech Warning Markets Have Underestimated Rate Rises

On 2 November 2017, the Bank of England raised rates for the first time in a decade and Sterling’s initial rise was promptly sold off by forex traders as we discussed.

The 7-2 vote by the Monetary Policy Committee was not the unanimous decision some had expected, while Cunliffe and Ramsden saw insufficient evidence that wage growth would pick up in line with the BoE’s projections from just over 2% to 3% in a year’s time. Ben Broadbent, MPC member, deputy governor and known to be a close confidant of Governor Carney, gave a speech today at the London School of Economics (LSE) in which he warned markets that Brexit issues didn’t necessarily mean that interest rates have to remain low.

Bloomberg reports that Broadbent stated that the Brexit impact on monetary policy depends on how it affects demand, supply and the exchange rate.

"There are feasible combinations of the three that might require looser policy, others that lead to tighter policy."

Which sounds alot like he doesn't know, although he stuck to the central bankers trusty tool, reassuring LSE students the Phillips Curve "still seems to have a slope".

According to the FT.

The deputy governor of the Bank of England has warned that financial markets have underestimated the chance of further interest rate rises. In a speech at the London School of Economics on Wednesday, Ben Broadbent said markets had placed too much emphasis on the idea that interest rates needed to be kept low in the face of Brexit uncertainty. The deputy governor said it was “uncertain” and “complex” to anticipate how Brexit would affect inflation. But he rejected the assertion that Brexit “necessarily implies low interest rates”.

 

“Even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to under-weight the possibility that (the) bank rate might actually go up this year,” he said.

 

The BoE’s Monetary Policy Committee announced its first interest rate rise in more than a decade earlier this month. But the central bank has struggled to convince financial markets that it is likely to raise rates further.

 

BoE officials were taken aback when sterling sold off on the day it announced the rate rise, and two-year gilt yields remain below the BoE base rate, suggesting markets are sceptical that the MPC will raise rates further while there is still considerable uncertainty around the UK’s economic future outside of the EU.

Broadbent acknowledged that there is a risk that Brexit uncertainty could adversely impact UK demand. However, he sees the potential for other factors, a reduction in trade, for example, which could crimp UK capacity and necessitate a rise in rates. While Broadbent’s thinking is flawed, and his barley field example plainly ridiculous, the FT continues.

Brexit-related uncertainty could weigh on demand and motivate the MPC to keep interest rates low to support the economy, but other factors could push the central bank to raise rates.

 

For example, if Brexit reduced the UK’s openness to trade, the country’s output capacity could suffer, which would require the BoE to raise rates to temper inflation.

 

“Economists often presume that changes in an economy’s underlying productivity occur only slowly,” Mr Broadbent said. However, he added: “A sharp reduction in the degree of openness (to trade) could have a more immediate impact. “A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees”. He said the challenge for monetary policymakers was that “reductions in supply can add inflationary pressure even as they lower aggregate (gross domestic product)”.

So, let’s consider Broadbent’s example…

The UK suffers a drop in aggregate demand due to a contraction in trade, the BoE raises rates in an over-leveraged economy to stem the inflation and…undoubtedly makes the contraction in GDP much worse. That makes no sense and is the kind of one dimensional thinking that we’ve had to put up with from central bankers. What’s worse is that Broadbent has specific responsibility for monetary policy and a c.v. as long as your arm – Cambridge, Harvard PhD, Fulbright Scholar, Columbia University, Goldman Sachs and UK Treasury.

It’s no wonder we are in such a mess with people like this pulling the levers of policy in the central banks. Crazy ideas aside, Broadbent and his BoE colleagues might be unhappy with market projections for the future path of interest rates, but they can hardly blame investors for being sceptical.

Which way are rates going, Ben?

 

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